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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 | |
---|---|---|---|---|---|---|---|---|---|---|
0.50 | 0.07% | 705.50 | 707.00 | 707.20 | 714.40 | 705.00 | 706.50 | 16,832,512 | 16:35:16 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
Offices-bank Holding Company | 65.91B | 23.53B | 1.2338 | 22.85 | 537.71B |
TIDMHSBA
RNS Number : 0414I
HSBC Holdings PLC
25 August 2016
Risk (continued)
Trading VaR, 99% 1 day
Foreign exchange and Interest Credit Portfolio commodity rate Equity spread diversification(11) Total $m $m $m $m $m $m Half-year to 30 Jun 2016 10.9 41.8 18.3 9.0 (27.7) 52.3 Average 11.0 40.2 23.2 17.5 (30.9) 61.0 Maximum 16.9 49.2 32.4 28.1 - 91.5 Minimum 6.5 31.8 15.2 9.0 - 44.0 ==================== Half-year to 30 Jun 2015 11.6 48.5 17.9 14.9 (35.8) 57.1 Average 15.3 49.9 20.5 16.3 (38.5) 63.5 Maximum 22.0 57.0 29.0 21.8 - 77.9 Minimum 9.3 40.4 15.2 9.9 - 51.3 ==================== Half-year to 31 Dec 2015 8.0 34.9 21.4 13.9 (24.9) 53.3 Average 14.1 42.2 18.6 15.0 (33.0) 56.9 Maximum 25.4 51.9 23.8 23.3 - 67.7 Minimum 6.3 32.6 11.9 9.8 - 47.5 ====================
For footnote, see page 87.
The risk not in VaR ('RNIV') framework captures risks from exposures in the HSBC trading book which are not captured well by the VaR model. The VaR-based RNIVs are included within the metrics for each asset class and the previously reported 30 June 2015 balances were restated to reflect this. The total trading VaR did not change whereas the individual VaR components and portfolio diversification did as the VaR-based RNIVs were added to each asset class.
Backtesting
There were two backtesting exceptions against hypothetical profit and loss for the Group in 1H16: a loss exception in February, driven by Libor against overnight index spread widening on long positions; and a profit exception in June, driven by significant devaluations in sterling and the euro against the US dollar resulting from the UK's referendum on EU membership.
Non-trading portfolios
Value at risk of the non-trading portfolios
Non-trading VaR of the Group includes contributions from all global businesses. There is no commodity risk in the non-trading portfolios. The VaR for non-trading activity at 30 June 2016 was slightly higher than at 31 December 2015 driven by an increase in non-trading interest rate VaR component and a decrease in diversification benefit, largely offset by a decrease in non-trading credit spread VaR component.
Non-trading VaR also includes the interest rate risk of non-trading financial instruments held in portfolios managed by Balance Sheet Management ('BSM'). The management of interest rate risk in the banking book is described further in 'Non-trading interest rate risk' below, including the role of BSM.
Non-trading VaR excludes the insurance operations which are discussed further on page 84.
The Group non-trading VaR for the half-year is shown in the table below.
Non-trading VaR, 99% 1 day
Interest Credit rate spread Portfolio diversification(11) Total $m $m $m $m Half-year to 30 Jun 2016 123.6 43.7 (29.6) 137.7 ============================= Average 125.1 59.0 (42.6) 141.5 ============================= Maximum 140.1 82.8 - 164.8 ============================= Minimum 100.2 43.7 - 123.3 ============================= Half-year to 30 Jun 2015 106.4 66.7 (45.3) 127.8 ============================= Average 86.6 61.7 (33.6) 114.7 ============================= Maximum 112.6 71.9 - 128.1 ============================= Minimum 70.5 54.3 - 91.5 ============================= Half-year to 31 Dec 2015 114.1 72.7 (54.0) 132.8 ============================= Average 107.8 69.7 (50.1) 127.4 ============================= Maximum 131.5 89.4 - 156.8 ============================= Minimum 89.6 52.1 - 103.5 =============================
For footnote, see page 87.
Non-trading VaR excludes equity risk on available-for-sale securities, structural foreign exchange risk and interest rate risk on fixed-rate securities issued by HSBC Holdings.
This section and the sections below describe the scope of HSBC's management of market risks in non-trading books.
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Interest rate risk in the banking book
Our policies regarding the management of interest rate risk in the banking book and the funds transfer pricing process are described on pages 215 and 207, respectively, of the Annual Report and Accounts 2015.
The component of the interest rate risk in the banking book outside of Balance Sheet Management or Global Markets that can be economically neutralised by fixed-rate government bonds or interest rate derivatives is transfer-priced to and managed by Balance Sheet Management. The banking book interest rate risk transferred to Balance Sheet Management is reflected in the Group's non-traded VaR measure.
The Group utilises sensitivity of net interest income to assess the overall level of interest rate risk in the banking book. This measure reflects both the structural banking book interest rate risk remaining after risk transfer to Balance Sheet Management and the banking book interest rate risk managed by Balance Sheet Management and Global Markets.
Third-party assets in Balance Sheet Management
Third-party assets in BSM increased by 12% during the first half of 2016. The movement in cash and balances at central banks, reverse repurchase agreements and financial investments were driven by Europe and America where increased commercial surplus funds were deployed into these assets.
Third-party assets in Balance Sheet Management
At ------------------ 30 Jun 31 Dec 2016 2015 $m $m Cash and balances at central banks 96,261 71,116 ==================================== Trading assets 2,159 639 ==================================== Loans and advances - to banks 40,461 42,059 ==================================== - to customers 2,958 2,773 ==================================== Reverse repurchase agreements 46,235 29,760 ==================================== Financial investments 350,438 335,543 ==================================== Other 4,095 4,277 ==================================== ------- ------- 542,607 486,167 ------- -------
Sensitivity of net interest income
The table below sets out the effect on our future net interest income ('NII') of an incremental 25 basis points parallel rise or fall in all yield curves worldwide at the beginning of each quarter during the 12 months from 1 July 2016.
The sensitivities shown represent the change in the base case projected NII that would be expected under the two rate scenarios assuming that all other non-interest rate risk variables remain constant, and there are no management actions. In deriving our base case net interest income projections, the repricing rate of assets and liabilities used is derived from current yield curves. The interest rate sensitivities are indicative and based on simplified scenarios.
Assuming no management response, a sequence of such rises ('up-shock scenario') would increase planned net interest income for the 12 months to 30 June 2017 by $1,373m (to 31 December 2016: $1,252m), while a sequence of such falls ('down-shock scenario') would decrease planned net interest income by $2,201m (to 31 December 2016: $2,258m).
The NII sensitivity of the Group can be split into three key components: the structural sensitivity arising from the four global businesses excluding BSM and Global Markets, the sensitivity of the funding of the trading book (Global Markets) and the sensitivity of BSM.
The structural sensitivity is positive in a rising rate environment and negative in a falling rate environment. The sensitivity of the funding of the trading book is negative in a rising rate environment and positive in a falling rate environment. The sensitivity of BSM depends on its position. Typically, assuming no management response, the sensitivity of BSM is negative in a rising rate environment and positive in a falling rate environment.
The NII sensitivity figures below also incorporate the effect of any interest rate behaviouralisation applied and the effect of any assumed repricing across products under the specific interest rate scenario. They do not incorporate the effect of any management decision to change the composition of HSBC's balance sheet.
The NII sensitivity in BSM arises from a combination of the techniques that BSM uses to mitigate the transferred interest rate risk and the methods it uses to optimise net revenues in line with its defined risk mandate. The figures in the table below do not incorporate the effect of any management decisions within BSM, but in reality it is likely that there would be some short-term adjustment in BSM positioning to offset the NII effects of the specific interest rate scenario where necessary.
The NII sensitivity arising from the funding of the trading book comprises the expense of funding trading assets, while the revenue from these trading assets is reported in net trading income. This leads to an asymmetry in the NII sensitivity figures which is cancelled out in our global business results, where we include both NII and net trading income. It is likely, therefore, that the overall effect on profit before tax of the funding of the trading book will be much less pronounced than is shown in the figures below.
The scenario sensitivities remained broadly unchanged in 1H16.
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Risk (continued)
Sensitivity of projected net interest income
Hong US Rest of Kong Rest of dollar Americas dollar Asia Sterling Euro bloc bloc bloc bloc bloc bloc Total $m $m $m $m $m $m $m Change in Jul 2016 to Jun 2017 projected net interest income arising from a shift in yield curves at the beginning of each quarter of: + 25 basis points 496 57 615 2 82 121 1,373 ================== - 25 basis points (779) (62) (817) (79) (442) (22) (2,201) ================== Change in Jan 2016 to Dec 2016 projected net interest income arising from a shift in yield curves at the beginning of each quarter of: + 25 basis points 410 72 217 369 135 49 1,252 ================== - 25 basis points (691) (74) (645) (290) (528) (30) (2,258) ================== Change in Jul 2015 to Jun 2016 projected net interest income arising from a shift in yield curves at the beginning of each quarter of: + 25 basis points 347 5 307 297 174 (103) 1,027 ================== - 25 basis points (470) (22) (580) (246) (565) (22) (1,905) ==================
Sensitivity of capital and reserves
Available-for-sale ('AFS') reserves are included as part of CET1 capital. We measure the potential downside risk to the CET1 ratio due to interest rate and credit spread risk in the AFS portfolio by the portfolio's stressed VaR, using a 99% confidence level and an assumed holding period of one quarter. At June 2016, the stressed VaR of the portfolio was $2.9bn.
We monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a monthly basis by
assessing the expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. These particular exposures form only a part of our overall interest rate exposures.
The table below describes the sensitivity of our cash flow hedge reported reserves to the stipulated movements in yield curves and the maximum and minimum month-end figures during the year. The sensitivities are indicative and based on simplified scenarios.
Sensitivity of cash flow hedging reported reserves to interest rate movements
Impact in the preceding 6 months -------------------------------------- Maximum Minimum $m $m $m At 30 Jun 2016 + 100 basis point parallel move in all yield curves (1,173) (1,235) (1,173) ===================================================== As a percentage of total shareholders' equity (0.6%) (0.6%) (0.6%) ===================================================== - 100 basis point parallel move in all yield curves 1,145 45 1,224 ===================================================== As a percentage of total shareholders' equity 0.6% 0.6% 0.6% ===================================================== At 30 Jun 2015 + 100 basis point parallel move in all yield curves (1,137) (1,259) (1,137) ===================================================== As a percentage of total shareholders' equity (0.6%) (0.7%) (0.6%) ===================================================== - 100 basis point parallel move in all yield curves 1,149 1,226 1,149 ===================================================== As a percentage of total shareholders' equity 0.6% 0.6% 0.6% ===================================================== At 31 Dec 2015 + 100 basis point parallel move in all yield curves (1,235) (1,259) (1,137) ===================================================== As a percentage of total shareholders' equity (0.7%) (0.7%) (0.6%) ===================================================== - 100 basis point parallel move in all yield curves 1,224 1,232 1,133 ===================================================== As a percentage of total shareholders' equity 0.7% 0.7% 0.6% =====================================================
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Additional market risk measures applicable only to the parent company
The principal tools used in the management of market risk are VaR for foreign exchange rate risk and the projected sensitivity of HSBC Holdings' NII to future changes in yield curves and interest rate gap repricing for interest rate risk.
Foreign exchange risk
Total foreign exchange VaR arising within HSBC Holdings in the first half of 2016 was as follows:
HSBC Holdings - foreign exchange VaR
Half-year to ------------------------ 30 Jun 30 Jun 31 Dec 2016 2015 2015 $m $m $m At period-end 56.3 47.1 45.6 =============== Average 49.2 38.0 45.7 =============== Maximum 58.2 47.1 46.8 =============== Minimum 44.6 32.9 44.1 ===============
The foreign exchange risk largely arises from loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the provider or the recipient and which are accounted for as financial assets. Changes in the carrying amount of these loans due to foreign exchange rate differences are taken directly to HSBC Holdings' income statement. These loans, and most of the associated foreign exchange exposures, are eliminated on consolidation.
Interest rate repricing gap table
The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VaR but is managed on a repricing gap basis. The interest rate repricing gap table below analyses the full-term structure of interest rate mismatches within HSBC Holdings' balance sheet.
Repricing gap analysis of HSBC Holdings
Up to 1 to 5 to More than Non-interest Total 1 year 5 years 10 years 10 years bearing $m $m $m $m $m $m Total assets 166,646 61,048 842 684 - 104,072 ======================== Total liabilities and equity (166,646) (3,804) (14,601) (18,664) (16,325) (113,252) ======================== Off-balance sheet items attracting interest rate sensitivity - (38,393) 13,989 16,123 8,281 - ======================== -------- ------- -------- -------- --------- ------------ Net interest rate risk gap at 30 Jun 2016 - 18,851 230 (1,857) (8,044) (9,180) ======================== -------- ------- -------- -------- --------- ------------ Cumulative interest rate risk gap - 18,851 19,081 17,224 9,180 - ======================== -------- ------- -------- -------- --------- ------------ Total assets 148,926 46,084 402 2,144 - 100,296 ======================== Total liabilities and equity (148,926) (2,345) (6,850) (10,104) (14,507) (115,120) ======================== Off-balance sheet items attracting interest rate sensitivity - (21,248) 5,351 9,222 5,763 912 ======================== -------- ------- -------- -------- --------- ------------ Net interest rate risk
gap at 30 Jun 2015 - 22,491 (1,097) 1,262 (8,744) (13,912) ======================== -------- ------- -------- -------- --------- ------------ Cumulative interest rate risk gap - 22,491 21,394 22,656 13,912 - ======================== -------- ------- -------- -------- --------- ------------ Total assets 150,194 45,888 388 1,136 - 102,782 ======================== Total liabilities and equity (150,194) (2,522) (6,613) (11,495) (13,332) (116,232) ======================== Off-balance sheet items attracting interest rate sensitivity - (22,748) 5,351 10,722 5,763 912 ======================== -------- ------- -------- -------- --------- ------------ Net interest rate risk gap at 31 Dec 2015 - 20,618 (874) 363 (7,569) (12,538) ======================== -------- ------- -------- -------- --------- ------------ Cumulative interest rate risk gap - 20,618 19,744 20,107 12,538 - ======================== -------- ------- -------- -------- --------- ------------
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Risk (continued)
Operational risk
Operational risk is the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people or systems, or external events.
There were no material changes to the policies and practices for the management of operational risk described in the Annual Report and Accounts 2015.
Activity to further enhance and embed our operational risk management framework ('ORMF') continued in 1H16.
Responsibility for minimising operational risk lies with HSBC's management and staff. All regional, global business, country, and functional staff are required to manage the operational risks of the business and activities for which they are responsible.
A diagrammatic representation of our ORMF is provided on page 176 of the Annual Report and Accounts 2015.
A summary of our current policies and practices regarding operational risk is provided in the Appendix to Risk on page 217 of the Annual Report and Accounts 2015 Appendix to Risk.
Operational risk profile in the first half of 2016
During 1H16, our operational risk profile continued to be driven mainly by compliance risks and we continued to see operational risk losses that relate to events from prior years (significant events are outlined in Notes 16 and 19 on the Financial Statements). A number of mitigating actions are being undertaken to prevent future conduct-related incidents.
Operational risk areas include:
-- Compliance with regulatory agreements and consent orders: Breach of the US deferred prosecution agreement ('DPA') may allow US authorities to prosecute HSBC with respect to matters covered thereunder. The work of the Monitor is discussed on page 60, and compliance risk is described below. -- Fraud risks: Losses continue to be at acceptable levels in most markets, but the introduction of new technologies and ways of banking mean we are subject to new types of fraud attacks. We have increased monitoring and enhanced detective controls to help mitigate these risks in accordance with our risk appetite. -- Information security risk: Like other banks, we face numerous cyber threats. These include denial of service attacks, in which hackers try to prevent our customers accessing our services online. We continue to strengthen internal security controls to prevent unauthorised access to our systems and network, and improve the controls and security to protect customers using digital channels. Strong engagement with our industry, government agencies and intelligence providers helps ensure we keep abreast of developments. -- Third-party risk management: HSBC is implementing a multi-year strategic plan to enhance its third-party risk management capability. We have defined a framework to provide a holistic view of third-party risks which will help enable the consistent risk assessment of any third-party service. Third-party engagement will be assessed against key criteria, combined with the associated control monitoring, testing and assurance throughout the relationship lifecycle.
Other operational risks are also monitored and managed through the use of the ORMF and governing policies.
Compliance risk
Compliance risk arises from activities subject to rules, regulations, Group policies and other formal standards relating to anti-money laundering ('AML'), counter-terrorist and proliferation financing, sanctions compliance, anti-bribery and corruption, conduct of business and other regulations.
A summary of our current policies and practices regarding compliance risk is provided on pages 217 and 218 of the Annual Report and Accounts 2015.
AML and sanctions
In 1H16, we continued to embed the procedures required to effect the AML and sanctions policies in our day-to-day business operations globally. This supports our ongoing effort to address the US DPA requirements. These actions are in line with our strategic target to implement the highest or most effective standards globally. The work of the Monitor, who was appointed to assess the effectiveness of our AML and sanctions compliance programme, is discussed on page 60 and our progress on implementing Global Standards is detailed on page 11.
Anti-bribery and corruption
We have introduced a strategic programme to address bribery and corruption risks. We are also embedding an enhanced global suite of policies to make clear to staff that employees or other associated persons or entities must not engage in or facilitate any form of bribery, directly or indirectly.
The anti-bribery and corruption programme emphasises the importance of consistent procedures to drive 'detect, deter and protect' principles, and help ensure they are incorporated into every aspect of our activities.
Conduct of business
We continue to recognise that delivering fair outcomes for our customers and upholding financial market integrity are critical to a sustainable business model. The global businesses are refining the range of measures, appropriate to their specific customer bases and markets, used to assess the ongoing effectiveness of the management of conduct, and enable action to be taken where potential conduct issues arise. The measures include information relating to the products we sell, sales quality, customer experience and market behaviour. Oversight of the management of conduct is being embedded within country, regional and global governance structures.
We continue to take steps to raise our standards of conduct. In 1H16, these included:
-- the launch of a new global mandatory training module, Embedding Good Conduct, building on training launched in 2015, to help ensure employees have a strong understanding of conduct and how it applies to them, and understand good conduct behaviours; -- enhanced values and behaviours-based components within employee recruitment and performance management processes; -- continued focus on improving the identification and treatment of potentially vulnerable customers;
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-- a review to further enhance delivery of products and services through digital channels; -- continued enhancement of, and investment in, our surveillance capabilities and the use of new technologies to strengthen our ability to detect suspicious trading activity and misconduct; and -- development of a conduct maturity model to assess the effectiveness of improvements we are making to customer outcomes and our financial markets activities.
Whistleblowing
We actively encourage our employees to raise concerns and escalate issues so they can be dealt with effectively. In most cases, individuals will raise their concerns with line management or Global Human Resources. However, where an individual believes that their normal reporting channels are unavailable or inappropriate, it is important that they have alternative channels available to them to raise concerns confidentially without fear of personal repercussions. This is referred to as 'whistleblowing'.
We operate a global whistleblowing platform, HSBC Confidential, which can be accessed by telephone, email, web and mail. We also maintain an external email address for concerns about accounting and internal financial controls or auditing matters (accountingdisclosures@hsbc.com). Matters raised are independently investigated by appropriate subject matter teams and details of investigations and outcomes including remedial action taken are reported to the Conduct & Values Committee. Matters raised in respect of audit, accounting and internal control over financial reporting are reported to the Group Audit Committee.
Reputational risk
Reputational risk is the risk of failure to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC itself, our employees or those with whom we are associated, that might cause stakeholders to form a negative view of the Group. This may have financial or non-financial effects, resulting in a loss of confidence or have other consequences.
The Global Head of Financial Crime Compliance and the Global Head of Regulatory Compliance are the risk stewards for reputational risk. The Reputational Risk and Client Selection sub-function is responsible for: setting policies to guide the Group's management of reputational risk; devising strategies to protect against reputational risk; and advising the global businesses and global functions to help them identify, assess and mitigate such risks where possible. For further details on the reputational risk policies and practices, see page 224 of the Annual Report and Accounts 2015.
We have zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and appropriately mitigated. There must be no barriers to open discussion and the escalation of issues that could affect the Group negatively. While there is a level of risk in every aspect of business activity, appropriate consideration of potential harm to HSBC's good name must be a part of all business decisions.
We continue to take steps to address the requirements of the US DPA and to enhance our AML, sanctions and other regulatory compliance frameworks. These measures should also serve over time to enhance our reputational risk management. For further details on the implementation of the Global Standards, see page 11 and 'Compliance risk', see above.
Risk management of insurance operations
The majority of the risks in our insurance business derive from manufacturing activities and can be categorised as financial risk and insurance risk. Financial risks include market risk, credit risk and liquidity risk. Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (HSBC).
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 2015.
A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture are provided on page 180 of the Annual Report and Accounts 2015.
Risk management of insurance manufacturing operations in the first half of 2016
We measure the risk profile of our insurance manufacturing businesses using an economic capital approach where assets and liabilities are measured on a market value basis. On this basis, there is a minimum economic capital requirement to ensure that there is a less than one in 200 chance of insolvency, given the risks the businesses are exposed to over the next year. The methodology for the economic capital calculation is largely aligned to the new pan-European Solvency II insurance capital regulations.
The sale of our Brazilian insurance operations completed on 1 July 2016. These operations are reported as part of the disposal group held for sale at 30 June 2016 and 31 December 2015.
The risk profile of our remaining life insurance manufacturing businesses did not change materially during 1H16. The increase in policyholder liabilities during the period to $79.4bn (31 December 2015: $76.0bn) is primarily a result of new premiums collected.
Asset and liability matching
A principal tool used to manage exposures to both financial and insurance risk, in particular for life insurance contracts, is asset and liability matching. In many markets in which we operate it is neither possible nor appropriate to follow a perfect asset and liability matching strategy. For long-dated non--linked contracts, in particular, this results in a duration mismatch between assets and liabilities. Portfolios are structured to support these projected liabilities, with limits set to control the duration mismatch.
The table on the next page shows the composition of assets and liabilities by contract type and demonstrates that there were sufficient assets to cover the liabilities to policyholders, in each case at 30 June 2016.
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Risk (continued)
Balance sheet of insurance manufacturing subsidiaries by type of contract
Insurance contracts Investment contracts ------------------------------------ ---------------------- Other With Unit- With Unit- assets and DPF linked Annuities Other(12) DPF(13) linked Other liabilities(14) Total Footnotes $m $m $m $m $m $m $m $m $m Financial assets 33,713 6,560 1,126 7,758 22,576 2,196 3,982 5,111 83,022 =============== - trading assets - - 2 - - - - - 2 =============== - financial assets designated at fair value 4,958 6,434 310 576 6,481 1,982 1,904 671 23,316 =============== - derivatives 107 - - 5 147 1 38 65 363 =============== - financial investments - HTM 15 24,308 - 436 2,936 - - 1,378 2,881 31,939 =============== - financial investments - AFS 15 1,867 - 325 4,081 13,984 - 22 1,379 21,658 =============== - other financial assets 16 2,473 126 53 160 1,964 213 640 115 5,744 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Reinsurance assets 419 313 - 1,004 - - - - 1,736 =============== PVIF 17 - - - - - - - 6,036 6,036 =============== Other assets and investment properties 890 1 21 104 864 11 22 5,777 7,690 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Total assets at 30 Jun 2016 35,022 6,874 1,147 8,866 23,440 2,207 4,004 16,924 98,484 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Liabilities under investment contracts: - - - - - 2,185 3,806 - 5,991 =============== - designated at fair value - - - - - 2,185 3,806 - 5,991 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Liabilities under insurance contracts 34,217 6,846 1,067 7,912 23,374 - - - 73,416 =============== Deferred tax 18 12 - - 35 - - - 1,128 1,175 =============== Other liabilities - - - 173 - - - 6,420 6,593 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Total liabilities 34,229 6,846 1,067 8,120 23,374 2,185 3,806 7,548 87,175 =============== Total equity - - - - - - - 11,309 11,309 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Total equities and liabilities at 30 Jun 2016 19 34,229 6,846 1,067 8,120 23,374 2,185 3,806 18,857 98,484 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------
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Insurance contracts Investment contracts ------------------------------------ ---------------------- Other assets With Unit- With Unit- and DPF linked Annuities Other(12) DPF(13) linked Other liabilities(14) Total Footnotes $m $m $m $m $m $m $m $m $m Financial assets 31,801 6,569 1,138 6,618 21,270 2,271 3,935 5,531 79,583 =============== - trading assets - - 2 - - - - - 2 =============== - financial assets designated at fair value 4,698 6,435 296 563 6,421 2,000 1,859 1,015 23,287 =============== - derivatives 49 - - 4 111 1 29 62 256 =============== - financial investments - HTM 15 22,840 - 468 2,334 - - 1,387 3,050 30,079 =============== - financial investments - AFS 15 1,743 - 312 3,685 13,334 - 23 1,233 20,330 =============== - other financial assets 16 2,471 134 60 32 1,854 270 637 171 5,629
=============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Reinsurance assets 202 264 - 951 - - - - 1,417 =============== PVIF 17 - - - - - - - 5,685 5,685 =============== Other assets and investment properties 838 1 11 105 888 6 23 4,576 6,448 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Total assets at 31 Dec 2015 32,841 6,834 1,149 7,674 22,608 2,277 3,958 15,792 93,133 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Liabilities under investment contracts: - - - - - 2,256 3,771 - 6,027 =============== - designated at fair value - - - - - 2,256 3,771 - 6,027 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Liabilities under insurance contracts: 32,414 6,791 1,082 7,042 22,609 - - - 69,938 =============== Deferred tax 18 11 - 11 3 - - - 1,056 1,081 =============== Other liabilities - - - - - - - 5,553 5,553 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Total liabilities 32,425 6,791 1,093 7,045 22,609 2,256 3,771 6,609 82,599 =============== Total equity - - - - - - - 10,534 10,534 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------ Total equity and liabilities at 31 Dec 2015 19 32,425 6,791 1,093 7,045 22,609 2,256 3,771 17,143 93,133 =============== ------ ------ --------- --------- ------- ------ ----- --------------- ------
For footnotes, see page 87.
Insurance risk
A principal risk we face is that, over time, the cost of the contract, including claims and benefits, may exceed the total amount of premiums and investment income received. In
respect of insurance risk, the cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, and lapse and surrender rates.
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Risk (continued)
Footnotes to Risk
Credit risk
1 The amount of loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of $49bn (31 December 2015: $59bn), reflecting the full take-up of loan commitments. The take-up of such offers is generally at low levels. 2 'Other commercial loans and advances' includes advances in respect of agriculture, transport, energy utilities and ABSs reclassified to 'Loans and advances'. 3 'Loans and advances to customers' includes asset-backed securities that have been externally rated as strong (30 June 2016: $392m; 31 December 2015: $504bn), good (30 June 2016: $65m; 31 December 2015: $95m), satisfactory (30 June 2016: $99m; 31 December 2015: $107m), sub-standard (30 June 2016: $19m; 31 December 2015: $19m) and impaired (30 June 2016: $64m; 31 December 2015: $73m). 4 Corporate and commercial includes commercial real estate renegotiated loans of $1,870m (31 December 2015: $2,134m) of which $442m (31 December 2015: $477m) were neither past due nor impaired, $19m (31 December 2015: $1m) were past due but not impaired and $1,409m (31 December 2015: $1,656m) were impaired. 5 Included within 'Exchange and other movements' is $1.1bn of impairment allowances reclassified to held for sale (31 December 2015: $2.1bn). 6 The charge for impairment losses as a percentage of average gross loans and advances to customers includes Brazil, which was classified as held for sale in 1H15. 7 'Currency translation adjustment' is the effect of translating the results of subsidiaries and associates for the previous period at the average rates of exchange applicable in the current period.
Liquidity and funding
8 The HSBC UK Liquidity Group shown comprises four legal entities; HSBC Bank plc (including all overseas branches, and SPEs consolidated by HSBC Bank plc for Financial Statement purposes), 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 UK PRA. 9 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. 10 The total shown for other principal HSBC operating entities represents the combined position of all the other operating entities overseen directly by the Risk Management Meeting of the Group Management Board.
Market risk
11 When VaR is calculated at a portfolio level, natural offsets in risk can occur when compared to 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.
Risk management of insurance operations
12 'Other' includes term assurance, credit life insurance, universal life insurance and remaining non-life insurance. 13 Although investment contracts with discretionary participation features ('DPF') are financial investments, HSBC continues to account for them as insurance contracts as required by IFRS 4. 14 'Other assets and liabilities' shows shareholder assets as well as assets and liabilities classified as held for sale. The majority of the assets for insurance businesses classified as held for sale are reported as 'Other assets and investment properties' and totalled $5.3bn at 30 June 2016 (31 December 2015: $4.1bn). The majority of these assets at 30 June 2016 were debt and equity securities and PVIF. All liabilities for insurance businesses classified as held for sale are reported in 'Other liabilities' and totalled $4.8bn at 30 June 2016 (31 December 2015: $3.7bn). The majority of these liabilities at 30 June 2016 were liabilities under insurance contracts and liabilities under investment contracts. 15 Financial investments held to maturity ('HTM') and available for sale ('AFS'). 16 Comprises mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities. 17 Present value of in-force long-term insurance contracts and investment contracts with DPF. 18 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF. 19 Does not include associated insurance company SABB Takaful Company or joint venture insurance company Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.
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Capital
Capital Capital overview 88 Risk-weighted assets 89 Capital 90 Leverage ratio 90 Regulatory disclosures 92 ============================
Our objective in managing Group capital is to maintain appropriate levels of capital to support our business strategy and meet regulatory and stress testing related requirements.
Capital highlights -- Our common equity tier 1 ('CET1') ratio(1) of 12.1% was up from 11.9% at the end of 2015. -- Our CET1 ratio(1) strengthened as we continued to generate capital from profit and implement our RWA initiatives, creating capacity for growth. -- Our leverage ratio remained strong at 5.1%.
We manage Group capital to ensure we exceed current regulatory requirements and respect the payment priority of our capital providers. Throughout 1H16, we complied with the UK Prudential Regulation Authority's ('PRA') regulatory capital adequacy requirements, including those relating to stress testing. We are well placed to meet our expected future capital requirements.
We continue to manage Group capital to meet a target for return on equity of more than 10%. This is modelled on a CET1 ratio (on an end point basis) in the range of 12% to 13%, which takes into account known and quantifiable end point CET1 requirements including a regulatory and management buffer of 1.0% to 2.0%. This buffer is based on our estimate of the additional CET1 we will need to hold to cover the new time-varying buffers and other factors. It will be kept under review as clarity in respect of future regulatory developments improves.
A summary of our policies and practices regarding capital management, measurement and allocation is provided on page 243 of the Annual Report and Accounts 2015.
Our CET1 capital decreased in 1H16 by $0.2bn to $130.7bn. We generated $1.5bn of capital through profits net of dividends and scrip, offset by foreign currency differences of $2.3bn.
Capital overview
Capital ratios
At ---------------- 30 Jun 31 Dec 2016 2015 Footnotes % % Transitional basis Common equity tier 1 ratio 1 12.1 11.9 ============================ Tier 1 ratio 14.1 13.9 ============================ Total capital ratio 17.3 17.2 ============================
For footnote, see page 100.
Total regulatory capital and risk-weighted assets
At ---------------------- 30 Jun 31 Dec 2016 2015 Footnotes $m $m Transitional basis Common equity tier 1 capital 1 130,670 130,863 ============================== Additional tier 1 capital 21,642 22,440 ============================== Tier 2 capital 34,481 36,530 ============================== --------- --------- Total regulatory capital 186,793 189,833 ============================== --------- --------- Risk-weighted assets 1,082,184 1,102,995 ==============================
For footnote, see page 100.
RWAs by risk type
RWAs Capital required(2) $bn $bn Credit risk 851.3 68.1 Counterparty credit risk 73.7 5.9 Market risk 41.8 3.3 Operational risk 115.4 9.2 ========================== At 30 Jun 2016 1,082.2 86.5 ==========================
For footnote, see page 100.
Leverage ratio
At ---------------------- 30 Jun 31 Dec 2016 2015 $bn $bn Leverage ratio exposure 2,788 2,794 Tier 1 capital (end point) 142 140 ============================= ------ ------ Leverage ratio 5.1% 5.0% Quarterly average: ============================ Leverage ratio exposure 2,819 ============================= Leverage ratio 5.1% =============================
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Capital (continued)
Risk-weighted assets
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 Footnotes $bn $bn $bn $bn $bn $bn $bn RWAs at 1 Jan 2016 306.4 437.8 59.4 185.0 71.9 42.5 1,103.0 =============== RWA movements RWA initiatives (15.8) (5.0) (1.1) (25.1) - (1.3) (48.3) =============== Foreign exchange movement (13.0) (1.7) (1.0) 1.8 4.6 - (9.3) Book size 3 14.6 (1.7) 0.5 4.2 0.5 0.6 18.7 Book quality 4.5 6.9 0.8 2.7 (0.1) - 14.8 =============== Model updates 0.3 - - (1.3) - - (1.0) - portfolios moving onto IRB approach (0.1) - - - - - (0.1) =============== - new/updated models 0.4 - - (1.3) - - (0.9) =============== ------ ----- ---- ------- ------- ------ ------- Methodology and policy 2.4 1.3 - 0.1 0.5 - 4.3 - internal updates 2.4 - - 0.1 0.5 - 3.0 - external updates - regulatory - 1.3 - - - - 1.3 =============== ------ ----- ---- ------- ------- ------ ------- Total RWA movement (7.0) (0.2) (0.8) (17.6) 5.5 (0.7) (20.8) =============== ------ ----- ---- ------- ------- ------ ------- RWAs at 30 Jun 2016 299.4 437.6 58.6 167.4 77.4 41.8 1,082.2 =============== ------ ----- ---- ------- ------- ------ -------
For footnote, see page 100.
RWA movement by global businesses by key driver
Credit risk, counterparty credit risk and operational risk ------------------------------------------------------------- US Principal run-off Total Market Total RBWM portfolio RBWM CMB GB&M GPB Other risk RWAs Footnotes $bn $bn $bn $bn $bn $bn $bn $bn $bn RWAs at 1 Jan 2016 150.1 39.5 189.6 421.0 398.4 19.3 32.2 42.5 1,103.0 =============== RWA movements ============== RWA initiatives (0.1) (12.3) (12.4) (11.3) (23.3) - - (1.3) (48.3) =============== Foreign exchange movement (0.5) - (0.5) (5.6) (2.7) (0.2) (0.3) - (9.3) Book size 3 0.7 - 0.7 3.5 12.2 (0.7) 2.4 0.6 18.7 Book quality (0.9) - (0.9) 5.9 9.5 0.1 0.2 - 14.8 Model updates (0.9) - (0.9) - (0.1) - - - (1.0) - portfolios moving onto IRB approach - - - - (0.1) - - - (0.1) - new/updated models (0.9) - (0.9) - - - - - (0.9) --------- --------- ----- ----- ----- ---- ----- ------ ------- Methodology and policy 0.5 - 0.5 1.3 1.6 - 0.9 - 4.3 - internal updates (0.8) - (0.8) 1.3 1.6 - 0.9 - 3.0 - external updates - regulatory 1.3 - 1.3 - - - - - 1.3 =============== --------- --------- ----- ----- ----- ---- ----- ------ ------- Total RWA movement (1.2) (12.3) (13.5) (6.2) (2.8) (0.8) 3.2 (0.7) (20.8) =============== --------- --------- ----- ----- ----- ---- ----- ------ ------- RWAs at 30 Jun 2016 148.9 27.2 176.1 414.8 395.6 18.5 35.4 41.8 1,082.2 =============== --------- --------- ----- ----- ----- ---- ----- ------ -------
For footnote, see page 100.
RWAs decreased in 1H16 by $20.8bn, of which $9.3bn was due to foreign currency translation differences. The decrease was primarily from RWA initiatives reducing RWAs by $48.3bn, partly offset by book size movements of $18.7bn, and a deterioration of credit quality and risk parameter movements that increased RWAs by $14.8bn. Comments below describe RWA movements excluding foreign currency translation differences.
RWA initiatives
The main drivers of these reductions were:
-- $19.3bn through the continued reduction in GB&M legacy credit and US run-off portfolios; and -- $29.0bn as a result of reduced exposures, refined calculations and process improvements.
Book size
Book size movements were principally from:
-- higher corporate lending in GB&M and CMB in Europe, Middle East and North Africa, and North America increasing RWAs by $7.1bn; and -- increased trade volumes and mark-to-market movements on derivatives and securities financing transactions increasing counterparty credit risk ('CCR') by $9.4bn.
Book quality
The main drivers for book quality movements were:
-- corporate and institution downgrades and changes in credit quality mix in Asia, North America and Europe, increasing RWAs by $14.6bn; and -- the downgrade of Brazil's and Egypt's internal credit rating, increasing RWAs by $2.0bn; partly offset by -- the upgrade of Argentina's sovereign rating, decreasing RWAs by $0.8bn.
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Capital
Source and application of total regulatory capital
Half-year to ------------ 30 Jun 2016 Footnotes $m Movement in total regulatory capital Opening common equity tier 1 capital 1 130,863 ============================================================================= Contribution to common equity tier 1 capital from profit for the period 5,388 ============================================================================= - consolidated profits attributable to shareholders of the parent company 6,912 ============================================================================= - removal of own credit spread net of tax (1,094) ============================================================================= - debit valuation adjustment (103) ============================================================================= - deconsolidation of insurance entities and special purpose entities (327) ============================================================================= ------------ Net dividends including foreseeable net dividends 4 (3,853) ============================================================================= - update for actual dividends and scrip take-up (413) ============================================================================= - first interim dividend net of scrip take-up (1,433) ============================================================================= - second interim dividend net of planned scrip (2,007) ============================================================================= ------------ Goodwill and intangible assets 786 ============================================================================= Ordinary shares issued 8 ============================================================================= Foreign currency translation differences (2,333) ============================================================================= Other, including regulatory adjustments (189) ============================================================================= ------------ Closing common equity tier 1 capital 1 130,670 ============================================================================= Opening additional tier 1 capital on a transitional basis 22,440 ============================================================================= Movement in additional tier 1 securities (205) ============================================================================= - new issuance net of redemptions (680) ============================================================================= - grandfathering adjustments 574 ============================================================================= - foreign currency translation and other differences (99) ============================================================================= ------------ Other, including regulatory adjustments (593) ============================================================================= ------------ Closing tier 1 capital on a transitional basis 152,312 ============================================================================= Opening tier 2 capital on a transitional basis 36,530 ============================================================================= Movement in tier 2 securities (2,020) ============================================================================= - new issuance net of redemptions 567 ============================================================================= - grandfathering adjustments (2,284) ============================================================================= - foreign currency translation and other differences (303) ============================================================================= ------------ Other, including regulatory adjustments (29) ============================================================================= ------------ Closing total regulatory capital on a transitional basis 186,793 ============================================================================= ------------
For footnotes, see page 100.
Leverage ratio
Summary reconciliation of accounting assets and leverage ratio exposures
At 30 Jun Ref* 2016 $bn 1 Total assets as per published financial statements 2,608 ================================================================================================== Adjustments for: ================================================================================================== - entities which are consolidated for accounting purposes but are outside the scope of regulatory 2 consolidation 116 ================================================================================================== 4 - derivative financial instruments (236) ================================================================================================== 5 - securities financing transactions 9 ================================================================================================== - off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet 6 exposures) 302 ================================================================================================== 7 - other (11) ================================================================================================== ------- 8 Total leverage ratio exposure 2,788 ================================================================================================== ------- * The references identify the lines prescribed in the European Banking Authority ('EBA') template which are applicable and where there is a value.
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Capital (continued)
Leverage ratio common disclosure
At 30 Jun 2016 Ref* $bn On-balance sheet exposures (excluding derivatives and securities financing transactions ('SFT')) On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including 1 collateral) 2,161 ======================================================================================= 2 (Asset amounts deducted in determining tier 1 capital) (34) ======================================================================================= 3 Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets) 2,127
======================================================================================= ---------------- Derivative exposures 4 Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin) 37 ======================================================================================= 5 Add-on amounts for potential future exposures associated with all derivatives transactions (mark-to-market method) 120 ======================================================================================= 6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs 5 ======================================================================================= (Deductions of receivables assets for cash variation margin provided in derivatives 7 transactions) (43) ======================================================================================= 8 (Exempted CCP leg of client-cleared trade exposures) (3) ======================================================================================= 9 Adjusted effective notional amount of written credit derivatives 238 ======================================================================================= (Adjusted effective notional offsets and add-on deductions for written credit 10 derivatives) (217) ======================================================================================= 11 Total derivative exposures 137 ======================================================================================= ---------------- Securities financing transaction exposures Gross SFT assets (with no recognition of netting), after adjusting for sales accounting 12 transactions 291 ======================================================================================= 13 (Netted amounts of cash payables and cash receivables of gross SFT assets) (78) ======================================================================================= 14 Counterparty credit risk exposure for SFT assets 9 ======================================================================================= 16 Total securities financing transaction exposures 222 ======================================================================================= ---------------- Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amount 900 ======================================================================================= 18 (Adjustments for conversion to credit equivalent amounts) (598) ======================================================================================= 19 Total off-balance sheet exposures 302 ======================================================================================= ---------------- Capital and total exposures 20 Tier 1 capital 142 ======================================================================================= 21 Total leverage ratio exposure 2,788 ======================================================================================= 22 Leverage ratio 5.1% ======================================================================================= EU-23 Choice on transitional arrangements for the definition of the capital measure Fully phased in ======================================================================================= * The references identify the lines prescribed in the EBA template which are applicable and where there is a value.
Split of on-balance sheet exposures (excluding derivatives and SFTs)
At 30 Jun Ref* 2016 $bn Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures) of EU-1 which: 2,161 ============================================================================================== EU-2 Trading book exposures 274 EU-3 Banking book exposures, of which: 1,887 EU-4 - covered bonds 1 EU-5 - exposures treated as sovereigns 568 - exposures to regional governments, multilateral development banks ('MDB'), international EU-6 organisations and public sector entities ('PSE') not treated as sovereigns 6 EU-7 - institutions 105 EU-8 - secured by mortgages of immovable properties 283 EU-9 - retail exposures 108 EU-10 - corporate 662 EU-11 - exposures in default 15 EU-12 - other exposures (e.g. equity, securitisations, and other non-credit obligation assets) 139 ============================================================================================== ------- * The references identify the lines prescribed in the EBA template which are applicable and where there is a value.
Our leverage ratio calculated on both the PRA and Capital Requirements Regulation ('CRR') bases was 5.1% at 30 June 2016. On the CRR basis, the leverage ratio was up from 5.0% at 31 December 2015 because of increased capital. The PRA basis was introduced on 1 January 2016.
At 30 June 2016, our PRA minimum leverage ratio requirement of 3% was supplemented with an additional leverage ratio buffer of 0.2% that translates to a value of $6.1bn, and a countercyclical leverage ratio buffer which results in no capital impact. We comfortably exceeded these leverage requirements.
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The risk of excessive leverage is managed as part of HSBC's global risk appetite framework and monitored using a leverage ratio metric within our Risk Appetite Statement ('RAS'). The RAS articulates the aggregate level and types of risk that HSBC is willing to accept in its business activities in order to achieve its strategic business objectives. The RAS is monitored via the risk appetite profile report, which includes comparisons of actual performance against the risk appetite
and tolerance thresholds assigned to each metric, to ensure that any excessive risk is highlighted, assessed and mitigated appropriately. The risk appetite profile report is presented monthly to the Group Risk Management Meeting of the Group Management Board and the Group Risk Committee. Our approach to risk appetite is described on page 102 of the Annual Report and Accounts 2015.
Regulatory disclosures
Regulatory developments
Throughout 1H16, there was a series of documents issued by the Basel Committee on Banking Supervision which proposed significant changes to the regulatory framework. The key publications proposed changes to:
-- the framework for credit risk capital requirements under both the internal model and standardised approaches; -- the operational risk framework; -- the credit valuation adjustment capital framework; -- the scope of consolidation to include entities giving rise to 'step-in risk'; and -- the leverage ratio exposure calculation and buffers.
The final impact of these and other proposals will depend on the outcome of the consultation processes and quantitative impact studies, and any changes would need to be
transposed into law before coming into effect. This includes the finalised changes that relate to the market risk, counterparty risk and securitisation regimes. In the UK, the Bank of England's Financial Policy Committee ('FPC') has indicated that there will be an offset with the PRA's Pillar 2 capital framework as a result of these changes but the full scope and size of this offset is currently uncertain.
The FPC also, in July 2016, decided to keep the UK countercyclical capital buffer requirement at 0% until at least June 2017, having previously planned to raise it to 0.5% in March 2017. Furthermore, the FPC recommended that the PRA buffer requirements reduce in line with this decision. The PRA did this with immediate effect.
As part of Recovery and Resolution frameworks, the international standard for Total Loss Absorbing Capacity was finalised by the Financial Stability Board. The Bank of England expects to implement this through the EU's Minimum Requirements for own funds and Eligible Liabilities framework, which it has consulted on but has yet to finalise.
Risk-weighted assets
RWAs by geographical region
North Latin Europe Asia MENA America America Total Footnotes $bn $bn $bn $bn $bn $bn IRB approach 181.7 199.7 19.9 117.4 15.0 533.7 - IRB advanced approach 162.8 199.7 10.0 117.4 15.0 504.9 - IRB foundation approach 18.9 - 9.9 - - 28.8 ------ ----- ---- -------- -------- ------- Standardised approach 46.1 175.1 31.1 20.0 45.3 317.6 ------ ----- ---- -------- -------- ------- Credit risk 227.8 374.8 51.0 137.4 60.3 851.3 Counterparty credit risk 36.7 15.7 1.4 15.9 4.0 73.7 Market risk 5 31.8 24.7 1.1 7.7 1.2 41.8 Operational risk 34.9 47.1 6.2 14.1 13.1 115.4 ============================= ------ ----- ---- -------- -------- ------- At 30 Jun 2016 331.2 462.3 59.7 175.1 78.6 1,082.2 ============================= ------ ----- ---- -------- -------- -------
For footnote, see page 100.
RWAs by global business
US Principal run-off Total RBWM portfolio RBWM CMB GB&M GPB Other Total Footnotes $bn $bn $bn $bn $bn $bn $bn $bn IRB approach 57.6 20.8 78.4 225.3 210.7 7.8 11.5 533.7 - IRB advanced approach 57.6 20.8 78.4 205.5 202.9 7.7 10.4 504.9 - IRB foundation approach - - - 19.8 7.8 0.1 1.1 28.8 ----- ----- ----- ---- ----- ------- Standardised approach 57.9 4.0 61.9 158.5 66.8 7.1 23.3 317.6 --------- --------- ----- ----- ----- ---- ----- ------- Credit risk 115.5 24.8 140.3 383.8 277.5 14.9 34.8 851.3 Counterparty credit risk - - - - 72.9 0.3 0.5 73.7 Market risk 5 - - - - 41.5 - 0.3 41.8 Operational risk 33.4 2.4 35.8 31.0 45.2 3.3 0.1 115.4 ============== --------- --------- ----- ----- ----- ---- ----- ------- At 30 Jun 2016 148.9 27.2 176.1 414.8 437.1 18.5 35.7 1,082.2 ============== --------- --------- ----- ----- ----- ---- ----- -------
For footnote, see page 100.
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Capital (continued)
RWA and Capital requirements for credit risk and information on risk exposures
Credit risk RWAs by exposure class
Exposure value RWAs Capital required(2) Footnotes $bn $bn $bn IRB advanced approach 1,493.7 504.9 40.4 =================================================== ----- Retail: - secured by mortgages on immovable property SME 2.9 0.6 - - secured by mortgages on immovable property non-SME 261.9 47.7 3.8 - qualifying revolving retail 65.3 15.1 1.2 - other SME 10.8 5.2 0.4 - other non-SME 45.2 10.7 0.9 Total retail 386.1 79.3 6.3 =================================================== Central governments and central banks 350.2 50.7 4.1 Institutions 77.1 19.0 1.5 Corporates 6 589.5 321.4 25.7 Securitisation positions 37.2 21.1 1.7 Non-credit obligation assets 53.6 13.4 1.1 -------------- ----- ------------------- IRB foundation approach 46.3 28.8 2.3 Central governments and central banks 0.1 0.1 - Institutions 0.3 0.1 - Corporates 45.9 28.6 2.3 -------------- ----- ------------------- Standardised approach 601.3 317.6 25.4 Central governments and central banks 223.4 19.9 1.6 Institutions 34.3 13.8 1.1 Corporates 212.8 195.9 15.6 Retail 43.4 31.9 2.6 Secured by mortgages on immovable property 43.1 15.3 1.2 Exposures in default 5.0 6.4 0.5 Regional governments or local authorities 2.6 0.8 0.1 Equity 7 6.8 12.0 1.0 Items associated with particularly high risk 4.5 6.8 0.5 Securitisation positions 0.8 0.7 0.1 Claims in the form of collective investment undertakings ('CIUs') 0.5 0.5 - Claims on institutions and corporates with a short-term credit assessment 0.1 - - International organisations 2.7 - - Multilateral development banks 0.2 - - =================================================== Other items 21.1 13.6 1.1 =================================================== -------------- ----- ------------------- At 30 Jun 2016 2,141.3 851.3 68.1 --------------------------------------------------- -------------- ----- -------------------
For footnotes, see page 100.
Counterparty credit risk RWAs by exposure class
Capital RWAs required(2) Footnotes $bn $bn IRB advanced approach 48.1 3.8 Central governments and central banks 2.8 0.2 Institutions 18.7 1.5 Corporates 26.6 2.1 ========================================= ---- ----------- IRB foundation approach 2.0 0.2 Corporates 2.0 0.2 ========================================= ---- ----------- Standardised approach 4.7 0.3 Institutions 0.4 - Corporates 4.3 0.3
========================================= ---- ----------- CVA advanced 8 3.5 0.3 CVA standardised 8 13.3 1.1 CCP standardised 2.1 0.2 ========================================= At 30 Jun 2016 73.7 5.9 ----------------------------------------- ---- -----------
For footnotes, see page 100.
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Market risk - RWAs and capital required
RWAs Capital required(2) $bn $bn Internal model based 35.8 2.8 ================================== ---- ------------------- VaR 6.9 0.6 Stressed VaR 9.6 0.7 Incremental risk charge 11.1 0.8 Other VaR and stressed VaR 8.2 0.7 ================================== ---- ------------------- Standardised approach 6.0 0.5 ================================== Interest rate position risk 2.4 0.2 Foreign exchange position risk 0.3 - Equity position risk 1.0 0.1 Securitisation positions 2.3 0.2 ================================== ---- ------------------- At 30 Jun 2016 41.8 3.3 ---------------------------------- ---- -------------------
For footnote, see page 100.
Wholesale IRB exposure - by obligor grade(9) - Central governments and central banks Average Mapped Exposure exposure Undrawn Average Average RWA external CRR PD range value value commit-ments PD(10) LGD(10) density(10) RWAs rating Footnotes % $bn $bn $bn % % % $bn Default risk 0.000 to Minimal 0.1 0.010 145.8 143.6 0.7 0.01 39.9 7 10.1 AAA 0.011 to AA+ to 1.1 0.028 116.3 112.6 0.7 0.02 45.0 6 7.5 AA 0.029 to AA- to 1.2 0.053 38.3 39.7 0.4 0.04 45.2 14 5.4 A+ ============= 0.054 to Low 2.1 0.095 13.1 11.5 0.1 0.07 45.0 28 3.7 A 0.096 to 2.2 0.169 10.4 11.0 0.2 0.13 45.0 30 3.1 A- ============= 0.170 to Satisfactory 3.1 0.285 4.5 4.2 - 0.22 44.5 38 1.7 BBB+ 0.286 to 3.2 0.483 0.4 3.3 - 0.37 45.0 50 0.2 BBB 0.484 to 3.3 0.740 12.5 8.8 - 0.63 45.0 70 8.7 BBB- ============= 0.741 to Fair 4.1 1.022 0.1 0.1 - 0.87 45.0 100 0.1 BB+ 1.023 to 4.2 1.407 1.0 1.0 0.1 1.20 45.0 90 0.9 BB 1.408 to 4.3 1.927 1.1 1.1 - 1.65 45.0 100 1.1 BB- ============= 1.928 to Moderate 5.1 2.620 1.8 3.6 0.9 2.25 45.0 111 2.0 BB- 2.621 to 5.2 3.579 3.6 1.6 - 3.05 45.0 117 4.2 B+ 3.580 to 5.3 4.914 1.1 1.0 - 4.20 45.0 136 1.5 B ============= 4.915 to Significant 6.1 6.718 - - - - - - - B 6.719 to 6.2 8.860 0.3 0.5 - 7.85 45.0 200 0.6 B- ============= 8.861 to High 7.1 11.402 - 0.3 - 10.00 45.0 - - CCC+ 11.403 to 7.2 15.000 - - - - - - - CCC+ ============= 15.001 Special to management 8.1 22.000 - - - - - - - CCC+ 22.001 to 8.2 50.000 - - - - - - - CCC+ 50.001 to 8.3 99.999 - - - - - - - CCC to C ============= Default 11 9/10 100.0 - - - - - - - Default ============= -------- -------- ------------ ---- At 30 Jun 2016 350.3 343.9 3.1 0.12 42.9 15 50.8 ============= -------- -------- ------------ ----
For footnotes, see page 100.
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Capital (continued)
Wholesale IRB exposure - by obligor grade(9) - Institutions Average Mapped PD Exposure exposure Undrawn Average Average RWA external CRR range value value commit-ments PD(10) LGD(10) density(10) RWAs rating Footnotes % $bn $bn $bn % % % $bn Default risk 0.000 to Minimal 0.1 0.010 0.8 1.8 0.1 0.03 45.7 13 0.1 AAA 0.011 to AA+ to 1.1 0.028 16.1 15.4 1.4 0.03 37.1 11 1.7 AA 0.029 to 1.2 0.053 27.5 31.3 3.8 0.04 40.8 13 3.5 AA- ============= 0.054 to Low 2.1 0.095 10.6 16.0 4.4 0.07 40.4 21 2.2 A+ to A 0.096 to 2.2 0.169 11.7 10.5 3.6 0.13 37.3 26 3.1 A- ============= 0.170 to Satisfactory 3.1 0.285 2.0 2.7 1.5 0.22 40.9 40 0.8 BBB+ 0.286 to 3.2 0.483 2.7 3.5 0.6 0.37 46.0 59 1.6 BBB 0.484 to 3.3 0.740 2.7 2.6 0.7 0.63 45.3 104 2.8 BBB- ============= 0.741 to Fair 4.1 1.022 2.2 1.2 0.7 0.87 43.7 91 2.0 BB+ 1.023 to 4.2 1.407 0.5 0.5 0.2 1.20 45.6 100 0.5 BB 1.408 to 4.3 1.927 0.2 0.2 0.1 1.65 46.4 100 0.2 BB- ============= 1.928 to Moderate 5.1 2.620 0.1 0.1 0.2 2.25 48.5 100 0.1 BB- 2.621 to 5.2 3.579 0.1 0.1 - 3.05 45.0 100 0.1 B+ 3.580
to 5.3 4.914 0.1 0.1 - 4.20 18.7 - - B ============= 4.915 to Significant 6.1 6.718 0.1 - - 5.75 45.5 100 0.1 B- 6.719 to 6.2 8.860 - - - - - - - B- ============= 8.861 to High 7.1 11.402 - - - 10.00 45.4 - 0.1 CCC+ 11.403 to 7.2 15.000 - - - - - - - CCC+ ============= 15.001 Special to management 8.1 22.000 - - - - - - - CCC 22.001 to CCC- to 8.2 50.000 - - 0.2 35.97 54.9 - 0.1 CC 50.001 to 8.3 99.999 - - - - - - - C ============= Default 11 9/10 100.0 - - - 100.00 45.0 - 0.1 Default ============= -------- -------- ------------ ---- At 30 Jun 2016 77.4 86.0 17.5 0.20 40.0 25 19.1 ============= -------- -------- ------------ ----
For footnotes, see page 100.
Wholesale IRB exposure - by obligor grade(9) - Corporates(12) Average Mapped PD Exposure exposure Undrawn Average Average RWA external CRR range value value commit-ments PD(10) LGD(10) density(10) RWAs rating (Footnotes) % $bn $bn $bn % % % $bn Default risk 0.000 to Minimal 0.1 0.010 - - - - - - - 0.011 to AAA to 1.1 0.028 19.4 14.8 13.8 0.03 27.5 12 2.4 AA 0.029 to 1.2 0.053 43.2 49.5 37.2 0.04 36.8 14 6.2 AA- ============= 0.054 to Low 2.1 0.095 63.8 64.8 57.0 0.07 40.3 22 14.0 A+ to A 0.096 to 2.2 0.169 74.3 80.0 65.6 0.13 39.3 31 23.0 A- ============= 0.170 to Satisfactory 3.1 0.285 75.0 76.6 61.9 0.22 39.3 40 30.2 BBB+ 0.286 to 3.2 0.483 69.5 72.9 52.7 0.37 39.4 51 35.3 BBB 0.484 to 3.3 0.740 65.6 69.4 43.9 0.63 36.3 60 39.4 BBB- ============= 0.741 to Fair 4.1 1.022 44.2 43.6 31.4 0.87 39.1 74 32.9 BB+ 1.023 to 4.2 1.407 33.6 35.4 22.6 1.20 39.8 85 28.3 BB 1.408 to 4.3 1.927 35.0 32.5 18.4 1.65 33.7 84 29.3 BB- ============= 1.928 to Moderate 5.1 2.620 27.7 27.4 15.8 2.24 35.5 92 25.6 BB- 2.621 to 5.2 3.579 12.8 12.5 8.9 3.06 36.8 106 13.6 B+ 3.580 to 5.3 4.914 10.7 11.4 8.2 4.14 38.4 118 12.6 B ============= 4.915 to Significant 6.1 6.718 7.6 6.8 6.8 5.73 37.8 130 9.9 B- 6.719 to 6.2 8.860 4.6 3.9 2.0 7.85 37.1 146 6.7 B- ============= 8.861 to High 7.1 11.402 2.9 2.6 1.3 10.01 36.6 155 4.5 CCC+ 11.403 to 7.2 15.000 0.8 1.0 0.5 13.00 31.8 150 1.2 CCC+ ============= 15.001 Special to management 8.1 22.000 1.8 1.2 1.2 19.00 32.6 178 3.2 CCC 22.001 to CCC- to 8.2 50.000 0.5 0.5 0.1 35.86 34.9 200 1.0 CC 50.001 to 8.3 99.999 0.3 0.3 0.1 75.00 41.4 133 0.4 C ============= Default 11 9/10 100.0 7.9 7.4 1.2 100.00 44.3 82 6.5 Default ============= -------- -------- ------------ ----- At 30 Jun 2016 601.2 614.5 450.6 2.28 37.9 54 326.2 ============= -------- -------- ------------ -----
For footnote, see page 100.
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Retail IRB exposure - by internal PD band
Average Exposure exposure Undrawn Average Average RWA PD range value value commit-ments PD(10) LGD(10) density(10) RWAs % $bn $bn $bn % % % $bn At 30 Jun 2016 Secured by mortgages on immovable property SME 0.000 to Band 1 0.483 0.6 0.6 - 0.16 12.7 - - ============ 0.484 to Band 2 1.022 0.5 0.5 0.1 0.76 19.5 20 0.1 ============ 1.023 to Band 3 4.914 1.2 1.3 - 2.29 19.8 25 0.3 ============ 4.915 to Band 4 8.860 0.3 0.2 - 6.76 22.4 33 0.1 ============ 8.861 to Band 5 15.000 0.1 0.1 - 11.02 27.8 - - ============ 15.001 to Band 6 50.000 0.1 0.1 - 24.62 20.5 100 0.1 ============ 50.001 to Band 7 100.000 0.1 0.2 - 100.00 18.7 - - ============ -------- -------- ------------ ---- 2.9 3.0 0.1 5.56 18.6 21 0.6 -------- -------- ------------ ---- Secured by mortgages on immovable property non-SME 0.000 to Band 1 0.483 206.9 210.2 16.2 0.12 15.4 8 15.8 ============ 0.484 to Band 2 1.022 22.0 23.2 1.0 0.71 21.3 26 5.7 ============ 1.023 to Band 3 4.914 20.4 22.4 0.7 1.94 25.0 55 11.3 ============ 4.915 to
Band 4 8.860 4.3 5.3 - 5.69 28.1 116 5.0 ============ 8.861 to Band 5 15.000 1.1 1.2 0.1 11.82 26.4 164 1.8 ============ 15.001 to Band 6 50.000 1.9 2.2 - 25.20 46.1 300 5.7 ============ 50.001 to Band 7 100.000 5.3 5.7 - 98.29 46.2 45 2.4 ============ -------- -------- ------------ ---- 261.9 270.2 18.0 2.63 17.8 18 47.7 -------- -------- ------------ ---- Qualifying revolving retail exposures 0.000 to Band 1 0.483 47.4 48.4 84.5 0.12 93.3 7 3.3 ============ 0.484 to Band 2 1.022 6.9 7.0 6.6 0.71 92.6 29 2.0 ============ 1.023 to Band 3 4.914 8.7 8.9 5.7 2.22 90.6 66 5.7 ============ 4.915 to Band 4 8.860 1.2 1.3 0.5 6.65 90.1 142 1.7 ============ 8.861 to Band 5 15.000 0.4 0.4 0.2 11.11 92.1 200 0.8 ============ 15.001 to Band 6 50.000 0.5 0.5 0.1 23.32 91.3 260 1.3 ============ 50.001 to Band 7 100.000 0.2 0.2 0.1 88.94 70.5 150 0.3 ============ -------- -------- ------------ ---- 65.3 66.7 97.7 1.16 92.7 23 15.1 -------- -------- ------------ ---- Other SME 0.000 to Band 1 0.483 1.3 1.5 0.8 0.29 60.6 23 0.3 ============ 0.484 to Band 2 1.022 1.9 2.0 0.8 0.75 50.6 37 0.7 ============ 1.023 to Band 3 4.914 5.0 5.3 1.3 2.57 52.7 56 2.8 ============ 4.915 to Band 4 8.860 1.2 1.2 0.3 6.62 49.2 58 0.7 ============ 8.861 to Band 5 15.000 0.4 0.5 0.1 10.81 58.4 100 0.4 ============ 15.001 to Band 6 50.000 0.3 0.2 - 25.47 60.1 100 0.3 ============ 50.001 to Band 7 100.000 0.7 0.8 0.1 99.72 38.8 - - ============ -------- -------- ------------ ---- 10.8 11.5 3.4 9.92 52.4 48 5.2 -------- -------- ------------ ---- Other non-SME 0.000 to Band 1 0.483 26.4 26.7 11.3 0.18 26.4 11 2.8 ============ 0.484 to Band 2 1.022 6.7 6.7 1.5 0.66 31.4 27 1.8 ============ 1.023 to Band 3 4.914 9.7 10.1 1.4 1.92 30.4 41 4.0 ============ 4.915 to Band 4 8.860 0.9 0.9 0.1 7.14 54.9 89 0.8 ============ 8.861 to Band 5 15.000 0.5 0.5 - 12.00 63.9 120 0.6 ============ 15.001 to Band 6 50.000 0.4 0.4 - 28.04 60.1 125 0.5 ============ 50.001 to Band 7 100.000 0.6 0.6 - 96.61 59.9 33 0.2 ============ -------- -------- ------------ ---- 45.2 45.9 14.3 2.36 29.6 24 10.7 -------- -------- ------------ ---- Total retail 0.000 to Band 1 0.483 282.6 287.4 112.8 0.13 29.7 8 22.2 ============ 0.484 to Band 2 1.022 38.0 39.4 10.0 0.70 37.4 27 10.3 ============ 1.023 to Band 3 4.914 45.0 48.0 9.1 2.07 41.8 54 24.1 ============ 4.915 to Band 4 8.860 7.9 8.9 0.9 6.18 43.8 105 8.3 ============ 8.861 to Band 5 15.000 2.5 2.7 0.4 11.53 49.9 144 3.6 ============ 15.001 to Band 6 50.000 3.2 3.4 0.1 25.23 55.4 247 7.9 ============ 50.001 to Band 7 100.000 6.9 7.5 0.2 98.00 47.0 42 2.9 ============ -------- -------- ------------ ---- 386.1 397.3 133.5 2.58 32.8 21 79.3 ==================== -------- -------- ------------ ----
For footnote, see page 100.
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Capital (continued)
Regulatory balance sheet
Regulatory and accounting consolidations
The basis of consolidation for the purpose of financial accounting under IFRSs, described in Note 1 on the Financial Statements, differs from that used for regulatory purposes as described below. The following table provides a reconciliation of the financial accounting balance sheet to the regulatory scope of consolidation.
Interests in banking associates are equity accounted in the financial accounting consolidation, whereas their exposures are proportionally consolidated for regulatory purposes by including our share of assets, liabilities, profit and loss, and RWAs in accordance with the PRA's application of Capital Requirements Directive IV ('CRD IV').
Subsidiaries engaged in insurance activities are excluded from the regulatory consolidation by excluding assets, liabilities and post-acquisition reserves, leaving the investment of these insurance subsidiaries to be recorded at cost and deducted from CET1 (subject to thresholds).
The regulatory consolidation also excludes special purpose entities ('SPEs') where significant risk has been transferred to third parties. Exposures to these SPEs are risk-weighted as securitisation positions for regulatory purposes.
Entities in respect of which the basis of consolidation for financial accounting purposes differs from that used for regulatory purposes can be found in table 5 of our Pillar 3 Disclosures 2015 document.
Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation
Accounting Deconsolidation Consolidation Regulatory balance of insurance/ of banking balance sheet other entities associates sheet Ref* $m $m $m $m Assets Cash and balances at central banks 128,272 (1) 26,726 154,997 ================================ Items in the course of collection from other banks 6,584 - 27 6,611 ================================ Hong Kong Government certificates of indebtedness 29,011 - - 29,011 ================================ Trading assets 280,295 (87) 3,049 283,257 ================================ Financial assets designated at fair value 23,901 (23,539) - 362 ================================ Derivatives 369,942 (175) 1,068 370,835 ================================ Loans and advances to banks 92,199 (2,894) 15,660 104,965 ================================ Loans and advances to customers 887,556 (5,116) 122,664 1,005,104 ================================ Of which: - impairment allowances on IRB portfolios h (6,026) - - (6,026) ========================= - impairment allowances on standardised portfolios (2,927) - (2,818) (5,745) ================================ -------------- --------------- -------------- --------------- Reverse repurchase agreements - non-trading 187,826 425 2,621 190,872 ================================ Financial investments 441,399 (54,824) 50,181 436,756 ================================ Assets held for sale 50,305 (5,291) - 45,014 ================================ Of which: - goodwill and intangible assets e 2,027 (268) - 1,759 =========================
- impairment allowances (2,220) - - (2,220) ================================ -------------- --------------- -------------- --------------- Of which: - IRB portfolios h (146) - - (146) ========================= - standardised portfolios (2,074) - - (2,074) ================================ -------------- --------------- -------------- --------------- Capital invested in insurance and other entities - 2,347 - 2,347 ================================ Current tax assets 714 (26) - 688 ================================ Prepayments, accrued income and other assets 60,569 (2,603) 9,560 67,526 ================================ Of which: - retirement benefit assets i 5,781 - - 5,781 ========================= Interests in associates and joint ventures 19,606 - (19,014) 592 ================================ Of which: - positive goodwill on acquisition e 574 - (560) 14 ========================= -------------- --------------- -------------- --------------- Goodwill and intangible assets e 24,053 (6,471) 616 18,198 ========================= Deferred tax assets f 5,917 163 491 6,571 ========================= Total assets at 30 Jun 2016 2,608,149 (98,092) 213,649 2,723,706 ================================ -------------- --------------- -------------- --------------- * The references (a) to (q) identify balance sheet components which are used in the calculation of regulatory capital on page 99.
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Accounting Deconsolidation Consolidation Regulatory balance of insurance/ of banking balance sheet other entities associates sheet Ref* $m $m $m $m Liabilities and equity Hong Kong currency notes in circulation 29,011 - - 29,011 =============================== Deposits by banks 69,900 (44) 48,095 117,951 =============================== Customer accounts 1,290,958 (43) 148,867 1,439,782 =============================== Repurchase agreements - non-trading 98,342 - - 98,342 =============================== Items in the course of transmission to other banks 7,461 - - 7,461 =============================== Trading liabilities 188,698 700 36 189,434 =============================== Financial liabilities designated at fair value 78,882 (6,025) - 72,857 =============================== Of which: - term subordinated debt included in tier 2 capital n,q 22,049 - - 22,049 ===================== - preferred securities included in tier 1 capital m 420 - - 420 ===================== ---------------- --------------- --------------- ---------------- Derivatives 368,414 277 1,041 369,732 Debt securities in issue 87,673 (6,560) 6,294 87,407 =============================== Liabilities of disposal groups held for sale 43,705 (4,765) 145 39,085 =============================== Current tax liabilities 1,569 (122) 457 1,904 =============================== Liabilities under insurance contracts 73,416 (73,416) - - =============================== Accruals, deferred income and other liabilities 42,057 2,177 5,869 50,103 =============================== Of which: - retirement benefit liabilities 3,064 (3) 51 3,112 =============================== ---------------- --------------- --------------- ---------------- Provisions 5,797 (19) - 5,778 =============================== Of which: - contingent liabilities and contractual commitments 256 - - 256 =============================== ---------------- --------------- --------------- ---------------- Of which: - credit-related provisions on IRB portfolios h 227 - - 227 ===================== - credit-related provisions on standardised portfolios 29 - - 29 =============================== ---------------- --------------- --------------- ---------------- Deferred tax liabilities 2,300 (991) 4 1,313 =============================== Subordinated liabilities 21,669 1 2,841 24,511 =============================== Of which: - preferred securities included in tier 1 capital k,m 1,832 - - 1,832 ===================== - perpetual subordinated debt included in tier 2 capital o 1,968 - - 1,968 ===================== - term subordinated debt included in tier 2 capital n,q 17,253 - - 17,253 ===================== ---------------- --------------- --------------- ---------------- o Total liabilities at 30 Jun 2016 2,409,852 (88,830) 213,649 2,534,671 =============================== ---------------- --------------- --------------- ---------------- Called up share capital a 9,906 (1,036) - 8,870 ===================== Share premium account a,k 12,772 (182) - 12,590 ===================== Other equity instruments j,k 17,110 2,972 - 20,082 ===================== Other reserves c,g 5,759 1,245 - 7,004 ===================== Retained earnings b,c 145,710 (11,275) - 134,435 ===================== ---------------- --------------- --------------- ---------------- Total shareholders' equity 191,257 (8,276) - 182,981 =============================== Non-controlling interests d,l,m,p 7,040 (986) - 6,054 ===================== Of which: - non-cumulative preference shares issued by subsidiaries included in tier 1 capital m 270 - - 270 ===================== ---------------- --------------- --------------- ---------------- Total equity at 30 Jun 2016 198,297 (9,262) - 189,035 =============================== ---------------- --------------- --------------- ---------------- Total liabilities and equity at 30 Jun 2016 2,608,149 (98,092) 213,649 2,723,706 =============================== ---------------- --------------- --------------- ---------------- * The references (a) to (q) identify balance sheet components which are used in the calculation of regulatory capital on page 99.
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Capital (continued)
Capital
Transitional own funds disclosure
At Final 30 Jun CRD IV Ref * Ref 2016 CRD IV prescribed residual amount text $m $m $m Common equity tier 1 ('CET1') capital: instruments and reserves Capital instruments and the related 1 share premium accounts 21,273 21,273 ====================================== Of which: ordinary shares a 21,273 21,273 ====================================== ------- --------------------------------- ------- 2 Retained earnings b 138,347 138,347 ====================================== 3 Accumulated other comprehensive income (and other reserves) c (2,066) (2,066) ====================================== 5 Minority interests (amount allowed in consolidated CET1) d 3,659 3,659 ====================================== 5a Independently reviewed interim net profits net of any foreseeable charge or dividend b 4,905 4,905 ====================================== ------- ------------------------------------ ------- 6 Common equity tier 1 capital before regulatory adjustments 166,118 166,118 ====================================== ------- ------------------------------------ ------- Common equity tier 1 capital: regulatory adjustments 7 Additional value adjustments (1,507) (1,507) ====================================== 8 Intangible assets (net of related deferred tax liability) e (20,086) (20,086) ====================================== 10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) f (1,475) (1,475) ====================================== 11 Fair value reserves related to gains or losses on cash flow hedges g (408) (408) ====================================== 12 Negative amounts resulting from the calculation of expected loss amounts h (5,073) (5,073) ====================================== 14 Gains or losses on liabilities at fair value resulting from changes in own credit standing (1,670) (1,670) ====================================== 15 Defined-benefit pension fund assets i (4,290) (4,290) ====================================== 16 Direct and indirect holdings of own CET1 instruments (939) (939) ====================================== 28 Total regulatory adjustments to common equity tier 1 (35,448) - (35,448) ====================================== ------- --------------------------------- ------- 29 Common equity tier 1 capital 130,670 - 130,670 ====================================== ------- --------------------------------- ------- Additional tier 1 ('AT1') capital: instruments 30 Capital instruments and the related share premium accounts 11,259 - 11,259 ====================================== 31 Of which: classified as equity under IFRSs j 11,259 - 11,259 ====================================== ------- --------------------------------- ------- 33 Amount of qualifying items and the related share premium accounts subject to phase out from AT1 k 7,946 (7,946) - ====================================== 34 Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties l,m 2,579 (2,403) 176 ====================================== 35 Of which: instruments issued by subsidiaries subject to phase out m 1,665 (1,665) - ====================================== ------- --------------------------------- ------- 36 Additional tier 1 capital before regulatory adjustments 21,784 (10,349) 11,435 ====================================== ------- --------------------------------- ------- Additional tier 1 capital: regulatory adjustments 37 Direct and indirect holdings of own AT1 instruments (60) (60) ====================================== 41b Residual amounts deducted from AT1 capital with regard to deduction from tier 2 ('T2') capital during the transitional period (82) 82 - ====================================== Of which: direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (82) 82 - ====================================== ------- --------------------------------- ------- 43 Total regulatory adjustments to additional tier 1 capital (142) 82 (60) ====================================== ------- --------------------------------- ------- 44 Additional tier 1 capital 21,642 (10,267) 11,375 ====================================== ------- --------------------------------- ------- 45 Tier 1 capital (T1 = CET1 + AT1) 152,312 (10,267) 142,045 ====================================== ------- --------------------------------- ------- Tier 2 capital: instruments and provisions 46 Capital instruments and the related share premium accounts n 16,840 16,840 ====================================== 47 Amount of qualifying items and the related share premium accounts subject to phase out from T2 o 5,695 (5,695 ) - ====================================== 48 Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in CET1 or AT1) issued by subsidiaries and held by third parties p,q 12,314 (12,262 ) 52 ====================================== ------- --------------------------------- ------- 49 Of which: instruments issued by subsidiaries subject to phase out q 12,283 (12,283 ) - ====================================== ------- --------------------------------- ------- 51 Tier 2 capital before regulatory adjustments 34,849 (17,957 ) 16,892 ====================================== ------- --------------------------------- -------
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At Final 30 Jun CRD IV Ref * Ref 2016 CRD IV prescribed residual amount text $m $m $m Tier 2 capital: regulatory adjustments Direct and indirect holdings of 52 own T2 instruments (40) (40) ================================ 55 Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions) (328) (82) (410) ================================ --------- --------------------------------- --------- 57 Total regulatory adjustments to tier 2 capital (368) (82) (450) --------- --------------------------------- --------- 58 Tier 2 capital 34,481 (18,039) 16,442 --------- --------------------------------- --------- 59 Total capital (TC = T1 + T2) 186,793 (28,306) 158,487 --------- --------------------------------- --------- 60 Total risk-weighted assets 1,082,184 - 1,082,184 --------- --------------------------------- --------- Capital ratios and buffers 61 Common equity tier 1(1) 12.1% 12.1% ================================ 62 Tier 1 14.1% 13.1% ================================ 63 Total capital 17.3% 14.6% ================================ Institution specific buffer 64 requirement 1.3% ================================ Of which: ================================ 65 - capital conservation buffer requirement 0.6% ================================ - countercyclical buffer 66 requirement 0.1% ================================ 67a - Global Systemically Important Institution ('G-SII') or Other Systemically Important Institution ('O-SII') buffer 0.6 % ================================ 68 Common equity tier 1 available to meet buffers 6.3 % Amounts below the threshold for deduction (before risk weighting) 72 Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions) 2,940 ================================ 73 Direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions) 3,461 ================================ 75 Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability) 7,605 Applicable caps on the inclusion of provisions in tier 2 77 Cap on inclusion of credit risk adjustments in T2 under standardised approach 4,030 ================================ 79 Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach 3,404 Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2013 and 1 Jan 2022) 82 Current cap on AT1 instruments subject to phase out arrangements 10,382 ================================ 83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) 201 ================================ 84 Current cap on T2 instruments subject to phase out arrangements 17,978 ================================ 85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) 5,501 ================================ * The references identify the lines prescribed in the EBA template which are applicable and where there is a value. The references (a) to (q) identify balance sheet components on page 97 which are used in the calculation of regulatory capital.
A list of the features of our capital instruments in accordance with Annex III of Commission Implementing Regulation 1423/2013 is published on our website with reference to
our balance sheet at 30 June 2016, along with the full terms and conditions.
Footnotes to Capital
1 Since 1 January 2015 the CRD IV transitional CET1 and end point CET1 capital ratios have been aligned for HSBC Holdings plc. 2 'Capital required' represents the Pillar 1 capital charge at 8% of RWAs. 3 Book size now includes market risk movements previously categorised as movements in risk levels. 4 This includes dividends on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity. 5 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group. 6 'Corporates' includes specialised lending exposures subject to a supervisory slotting approach of $34.2bn and RWAs of $23.8bn. 7 This includes investment in insurance companies which are risk weighted at 250%. 8 The RWA impact due to the CVA capital charge is calculated based on the exposures under the IRB and standardised approaches. No additional exposures are taken into account. 9 For a definition of obligor grade refer to our Capital and Risk Management Pillar 3 disclosures 2015, where a glossary of terms can be found. 10 Average PD, average LGD and RWA density percentages represent an exposure weighted average. 11 There is a requirement to hold additional capital for unexpected losses on defaulted exposures where LGD exceeds our best estimate of EL. As a result, in some cases RWAs arise for exposures in default. 12 Excludes specialised lending exposures subject to a supervisory slotting approach of $34.2bn and RWAs of $23.8bn.
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Financial Statements (unaudited)
Financial Statements
Consolidated income statement
for the half-year to 30 June 2016
Half-year to ------------------------------ 30 Jun 30 Jun 31 Dec 2016 2015 2015 Notes $m $m $m Interest income 23,011 24,019 23,170 ===================================================================== Interest expense (7,251) (7,575) (7,083) ===================================================================== ------- ------- ------- Net interest income 15,760 16,444 16,087 ===================================================================== Fee income 8,202 9,372 8,644 ===================================================================== Fee expense (1,616) (1,647) (1,664) ===================================================================== ------- ------- ------- Net fee income 6,586 7,725 6,980 ===================================================================== Trading income excluding net interest income 4,594 3,520 3,428 =====================================================================
Net interest income on trading activities 730 1,053 722 ===================================================================== ------- ------- ------- Net trading income 5,324 4,573 4,150 ===================================================================== Changes in fair value of long-term debt issued and related derivatives 270 1,324 (461) ===================================================================== Net income/(expense) from other financial instruments designated at fair value 291 1,342 (673) ===================================================================== ------- ------- ------- Net income/(expense) from financial instruments designated at fair value 561 2,666 (1,134) ===================================================================== Gains less losses from financial investments 965 1,874 194 ===================================================================== Dividend income 64 68 55 ===================================================================== Net insurance premium income 5,356 5,607 4,748 ===================================================================== Other operating income 644 836 219 ===================================================================== ------- ------- ------- Total operating income 35,260 39,793 31,299 ===================================================================== Net insurance claims and benefits paid and movement in liabilities to policyholders (5,790) (6,850) (4,442) ===================================================================== ------- ------- ------- Net operating income before loan impairment charges and other credit risk provisions 29,470 32,943 26,857 ===================================================================== Loan impairment charges and other credit risk provisions (2,366) (1,439) (2,282) ===================================================================== ------- ------- ------- Net operating income 27,104 31,504 24,575 ===================================================================== ------- ------- ------- Employee compensation and benefits (9,354) (10,041) (9,859) ===================================================================== General and administrative expenses (7,467) (8,129) (9,533) ===================================================================== Depreciation and impairment of property, plant and equipment (605) (604) (665) ===================================================================== Amortisation and impairment of intangible assets and goodwill (1,202) (413) (524) ===================================================================== ------- ------- ------- Total operating expenses (18,628) (19,187) (20,581) ===================================================================== ------- ------- ------- Operating profit 8,476 12,317 3,994 ===================================================================== Share of profit in associates and joint ventures 1,238 1,311 1,245 ===================================================================== ------- ------- ------- Profit before tax 9,714 13,628 5,239 ===================================================================== Tax expense (2,291) (2,907) (864) ===================================================================== ------- ------- ------- Profit for the period 7,423 10,721 4,375 ===================================================================== ------- ------- ------- Profit attributable to shareholders of the parent company 6,912 9,618 3,904 ===================================================================== Profit attributable to non-controlling interests 511 1,103 471 ===================================================================== $ $ $ Basic earnings per ordinary share 3 0.32 0.48 0.17 ===================================================================== Diluted earnings per ordinary share 3 0.32 0.48 0.17 =====================================================================
The accompanying notes on pages 107 to 138 form an integral part of these financial statements(1) .
For footnote, see page 106.
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Consolidated statement of comprehensive income
for the half-year to 30 June 2016
Half-year to ------------------------------ 30 Jun 30 Jun 31 Dec 2016 2015 2015 $m $m $m Profit for the period 7,423 10,721 4,375 ============================================================================ Other comprehensive income/(expense) Items that will be reclassified subsequently to profit or loss when specific conditions are met: Available-for-sale investments 1,010 (2,445) (627) ============================================================================ - fair value gains/(losses) 2,826 (355) (876) ============================================================================ - fair value gains reclassified to the income statement (1,228) (2,317) (120) ============================================================================ - amounts reclassified to the income statement in respect of impairment losses 24 2 125 ============================================================================ - income taxes (612) 225 244 ============================================================================ ------- ------- ------- Cash flow hedges 340 (150) 126 - fair value (losses)/gains (1,796) 341 363 ============================================================================ - fair value losses/(gains) reclassified to the income statement 2,242 (538) (167) ============================================================================ - income taxes (106) 47 (70) ============================================================================ ------- ------- ------- Share of other comprehensive (expense)/income of associates and joint ventures (1) 2 (11) - share for the period (1) 2 (11) ============================================================================ - reclassified to income statement on disposal - - - =========================================================================== ------- ------- ------- Exchange differences (2,713) (3,267) (7,678) - other exchange differences (2,619) (3,395) (7,717) ============================================================================ - income tax attributable to exchange differences (94) 128 39 ============================================================================ ------- ------- ------- Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit asset/liability 416 (1,680) 1,781 - before income taxes 533 (2,085) 2,215 ============================================================================
- income taxes (117) 405 (434) ============================================================================ ------- ------- ------- Other comprehensive expense for the period, net of tax (948) (7,540) (6,409) ============================================================================ ------- ------- ------- Total comprehensive income/(expense) for the period 6,475 3,181 (2,034) ============================================================================ ------- ------- ------- Attributable to: - shareholders of the parent company 6,010 2,856 (2,396) ============================================================================ - non-controlling interests 465 325 362 ============================================================================ ------- ------- ------- Total comprehensive income/(expense) for the period 6,475 3,181 (2,034) ============================================================================ ------- ------- -------
The accompanying notes on pages 107 to 138 form an integral part of these financial statements(1) .
For footnote, see page 106.
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Financial Statements (unaudited) (continued)
Consolidated balance sheet
at 30 June 2016
At ---------------------- 30 Jun 31 Dec 2016 2015 (Notes) $m $m Assets Cash and balances at central banks 128,272 98,934 ==================================================== Items in the course of collection from other banks 6,584 5,768 ==================================================== Hong Kong Government certificates of indebtedness 29,011 28,410 ==================================================== Trading assets (5) 280,295 224,837 ==================================================== Financial assets designated at fair value (8) 23,901 23,852 ==================================================== Derivatives (9) 369,942 288,476 ==================================================== Loans and advances to banks 92,199 90,401 ==================================================== Loans and advances to customers 887,556 924,454 ==================================================== Reverse repurchase agreements - non-trading 187,826 146,255 ==================================================== Financial investments (10) 441,399 428,955 ==================================================== Assets held for sale (11) 50,305 43,900 ==================================================== Prepayments, accrued income and other assets 60,569 54,398 ==================================================== Current tax assets 714 1,221 ==================================================== Interests in associates and joint ventures (13) 19,606 19,139 ==================================================== Goodwill and intangible assets 24,053 24,605 ==================================================== Deferred tax assets 5,917 6,051 ==================================================== --------- --------- Total assets 2,608,149 2,409,656 ==================================================== --------- --------- Liabilities and equity Liabilities Hong Kong currency notes in circulation 29,011 28,410 ==================================================== Deposits by banks 69,900 54,371 ==================================================== Customer accounts 1,290,958 1,289,586 ==================================================== Repurchase agreements - non-trading 98,342 80,400 ==================================================== Items in the course of transmission to other banks 7,461 5,638 ==================================================== Trading liabilities (14) 188,698 141,614 ==================================================== Financial liabilities designated at fair value 78,882 66,408 ==================================================== Derivatives (9) 368,414 281,071 ==================================================== Debt securities in issue 87,673 88,949 ==================================================== Liabilities of disposal groups held for sale (11) 43,705 36,840 ==================================================== Accruals, deferred income and other liabilities 42,057 38,116 ==================================================== Current tax liabilities 1,569 783 ==================================================== Liabilities under insurance contracts 73,416 69,938 ==================================================== Provisions (16) 5,797 5,552 ==================================================== Deferred tax liabilities (17) 2,300 1,760 ==================================================== Subordinated liabilities 21,669 22,702 ==================================================== --------- --------- Total liabilities 2,409,852 2,212,138 ==================================================== --------- --------- Equity Called up share capital 9,906 9,842 ==================================================== Share premium account 12,772 12,421 ==================================================== Other equity instruments 17,110 15,112 ==================================================== Other reserves 5,759 7,109 ==================================================== Retained earnings 145,710 143,976 ==================================================== --------- --------- Total shareholders' equity 191,257 188,460 ==================================================== Non-controlling interests 7,040 9,058 ==================================================== --------- --------- Total equity 198,297 197,518 ==================================================== --------- --------- Total liabilities and equity 2,608,149 2,409,656 ==================================================== --------- ---------
The accompanying notes on pages 107 to 138 form an integral part of these financial statements(1) .
For footnote, see page 106.
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Consolidated statement of cash flows
for the half-year to 30 June 2016
Half-year to --------------------------------- 30 Jun 30 Jun 31 Dec 2016 2015 2015 $m $m $m Cash flows from operating activities Profit before tax 9,714 13,628 5,239 ========================================================================= Adjustments for: - net gain from investing activities (1,034) (1,926) (9) ========================================================================= - share of profit in associates and joint ventures (1,238) (1,311) (1,245) ========================================================================= - other non-cash items included in profit before tax 5,817 4,522 6,243 ========================================================================= - change in operating assets 7,268 12,077 53,751 ========================================================================= - change in operating liabilities 59,093 (15,544) (91,218)
========================================================================= - elimination of exchange differences(2) (3,193) 3,951 14,357 ========================================================================= - dividends received from associates 619 770 109 ========================================================================= - contributions paid to defined benefit plans (340) (226) (438) ========================================================================= - tax paid (1,668) (1,351) (2,501) ========================================================================= -------- -------- -------- Net cash generated from/(used in) operating activities 75,038 14,590 (15,712) ========================================================================= -------- -------- -------- Cash flows from investing activities Purchase of financial investments (233,153) (211,669) (226,707) ========================================================================= Proceeds from the sale and maturity of financial investments 216,340 208,637 190,999 ========================================================================= Purchase of property, plant and equipment (429) (620) (732) ========================================================================= Proceeds from the sale of property, plant and equipment 40 56 47 ========================================================================= Net cash inflow from disposal of customer and loan portfolios 4,186 321 1,702 ========================================================================= Net purchase of intangible assets (395) (400) (554) ========================================================================= Net cash inflow from disposal of subsidiaries, businesses, associates and joint ventures 16 6 2 ========================================================================= Net cash used in investing activities (13,395) (3,669) (35,243) ========================================================================= -------- -------- -------- Cash flows from financing activities Issue of ordinary share capital 8 9 138 ========================================================================= Net (purchases)/sales of own shares for market-making and investment purposes (78) 139 192 ========================================================================= Issue of other equity instruments 1,998 2,459 1,120 ========================================================================= Redemption of preference shares and other equity instruments (1,825) (462) - ========================================================================= Subordinated loan capital issued 1,129 1,680 1,500 ========================================================================= Subordinated loan capital repaid (546) (778) (1,379) ========================================================================= Dividends paid to ordinary shareholders of the parent company (3,729) (1,834) (4,714) ========================================================================= Dividends paid to non-controlling interests (702) (386) (311) ========================================================================= Dividends paid to holders of other equity instruments (556) (428) (522) ========================================================================= Net cash generated (used in)/from financing activities (4,301) 399 (3,976) ========================================================================= -------- -------- -------- Net increase/(decrease) in cash and cash equivalents 57,342 11,320 (54,931) ========================================================================= -------- -------- -------- Cash and cash equivalents at the beginning of the period 243,863 301,301 308,792 ========================================================================= Exchange differences in respect of cash and cash equivalents (1,452) (3,829) (9,998) ========================================================================= -------- -------- -------- Cash and cash equivalents at the end of the period 299,753 308,792 243,863 ========================================================================= -------- -------- --------
The accompanying notes on pages 107 to 138 form an integral part of these financial statements(1) .
For footnote, see page 106.
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Consolidated statement of changes in equity
for the half-year to 30 June 2016
Other reserves ---------------------------------------------- Called Available- up Other for-sale Cash flow Foreign Total Non- share Share equity Retained fair value hedging exchange Merger share-holders' controlling Total capital premium instru-ments(3) earnings reserve(4) reserve(4) reserve(4) reserve equity interests(5) equity $m $m $m $m $m $m $m $m $m $m $m At 1 Jan 2016 9,842 12,421 15,112 143,976 (189) 34 (20,044) 27,308 188,460 9,058 197,518 ================================ Profit for the period - - - 6,912 - - - - 6,912 511 7,423 ================================ Other comprehensive income (net of tax) - - - 451 1,024 341 (2,718) - (902) (46) (948) ================================ - available-for-sale investments - - - - 1,024 - - - 1,024 (14) 1,010 ================================ - cash flow hedges - - - - - 341 - - 341 (1) 340 ================================ - remeasurement of defined benefit asset/liability - - - 452 - - - - 452 (36) 416 ================================ - share of other comprehensive income of associates & joint ventures - - - (1) - - - - (1) - (1) ================================ - exchange differences - - - - - - (2,718) - (2,718) 5 (2,713) ================================ ------- ------- --------------- -------- ---------- ---------- ---------- ------- -------------- ------------ ------- Total comprehensive income for the period - - - 7,363 1,024 341 (2,718) - 6,010 465 6,475 ================================ Shares issued under employee remuneration and share plans 32 383 - (407) - - - - 8 - 8 ================================ Shares issued in lieu of dividends and amounts arising thereon 32 (32) - 1,111 - - - - 1,111 - 1,111 ================================ Dividends to shareholders - - - (6,674) - - - - (6,674) (702) (7,376) ================================ Capital securities issued - - 1,998 - - - - - 1,998 - 1,998 ================================ Cost of share-based payment arrangements - - - 305 - - - - 305 - 305 ================================
Other movements - - - 36 3 - - - 39 (1,781) (1,742) ================================ ------- ------- --------------- -------- ---------- ---------- ---------- ------- -------------- ------------ ------- At 30 Jun 2016 9,906 12,772 17,110 145,710 838 375 (22,762) 27,308 191,257 7,040 198,297 ================================ ------- ------- --------------- -------- ---------- ---------- ---------- ------- -------------- ------------ ------- At 1 Jan 2015 9,609 11,918 11,532 137,144 2,143 58 (9,265) 27,308 190,447 9,531 199,978 ================================ Profit for the period - - - 9,618 - - - - 9,618 1,103 10,721 ================================ Other comprehensive income (net of tax) - - - (1,693) (1,735) (151) (3,183) - (6,762) (778) (7,540) ================================ -------- -------------- - available-for-sale investments - - - - (1,735) - - - (1,735) (710) (2,445) ================================ - cash flow hedges - - - - - (151) - - (151) 1 (150) ================================ - remeasurement of defined benefit asset/liability - - - (1,695) - - - - (1,695) 15 (1,680) ================================ - share of other comprehensive income of associates & joint ventures - - - 2 - - - - 2 - 2 ================================ - exchange differences - - - - - - (3,183) - (3,183) (84) (3,267) ================================ ------- ------- --------------- -------- ---------- ---------- ---------- ------- -------------- ------------ ------- Total comprehensive income for the period - - - 7,925 (1,735) (151) (3,183) - 2,856 325 3,181 ================================ Shares issued under employee remuneration and share plans 31 490 - (512) - - - - 9 - 9 ================================ Shares issued in lieu of dividends and amounts arising thereon 118 (118) - 2,242 - - - - 2,242 - 2,242 ================================ Dividends to shareholders - - - (6,224) - - - - (6,224) (432) (6,656) ================================ Capital securities issued - - 2,459 - - - - - 2,459 - 2,459 ================================ Cost of share-based payment arrangements - - - 444 - - - - 444 - 444 ================================ Other movements - - - 189 5 - - - 194 (469) (275) ================================ ------- ------- --------------- -------- ---------- ---------- ---------- ------- -------------- ------------ ------- At 30 Jun 2015 9,758 12,290 13,991 141,208 413 (93) (12,448) 27,308 192,427 8,955 201,382 ================================ ------- ------- --------------- -------- ---------- ---------- ---------- ------- -------------- ------------ -------
Consolidated statement of changes in equity for the half-year to 30 June 2016 (continued)
Other reserves ---------------------------------------------- Called Available- up for-sale Cash flow Foreign Total Non- share Share Other equity Retained fair value hedging exchange Merger share-holders' controlling Total capital premium instru-ments earnings reserve(4) reserve(4) reserve(4) reserve equity interests equity $m $m $m $m $m $m $m $m $m $m $m At 1 Jul 2015 9,758 12,290 13,991 141,208 413 (93) (12,448) 27,308 192,427 8,955 201,382 ================================ Profit for the period - - - 3,904 - - - - 3,904 471 4,375 ================================ Other comprehensive income (net of tax) - - - 1,766 (597) 127 (7,596) - (6,300) (109) (6,409) ================================ - available-for-sale investments - - - - (597) - - - (597) (30) (627) ================================ - cash flow hedges - - - - - 127 - - 127 (1) 126 ================================ - remeasurement of defined benefit asset/liability - - - 1,777 - - - - 1,777 4 1,781 ================================ - share of other comprehensive income of associates & joint ventures - - - (11) - - - - (11) - (11) ================================ - exchange differences - - - - - - (7,596) - (7,596) (82) (7,678) ================================ ------- ------- ------------ -------- ---------- ---------- ---------- ------- -------------- ----------- ------- Total comprehensive income for the period - - - 5,670 (597) 127 (7,596) - (2,396) 362 (2,034) ================================ Shares issued under employee remuneration and share plans 14 201 - (77) - - - - 138 - 138 ================================ Shares issued in lieu of dividends and amounts arising thereon 70 (70) - 920 - - - - 920 - 920 ================================ Dividends to shareholders - - - (4,436) - - - - (4,436) (265) (4,701) ================================ Capital securities issued - - 1,121 - - - - - 1,121 - 1,121 ================================ Cost of share-based payment arrangements - - - 313 - - - - 313 - 313 ================================ Other movements - - - 378 (5) - - - 373 6 379 ================================ ------- ------- ------------ -------- ---------- ---------- ---------- ------- -------------- ----------- ------- At 31 Dec 2015 9,842 12,421 15,112 143,976 (189) 34 (20,044) 27,308 188,460 9,058 197,518 ================================ ------- ------- ------------ -------- ---------- ---------- ---------- ------- -------------- ----------- -------
The accompanying notes on pages 107 to 138 form an integral part of these financial statements(1) .
Footnotes to financial statements
1 The tables 'Gross loans and advances to customers by industry sector and by geographical region' (see page 62) and 'Movement in impairment allowances on loans and advances to customers and banks' (see page 67) also form an integral part of these financial statements. 2 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense. 3 During June 2016, HSBC Holdings issued $2,000m of perpetual subordinated contingent convertible capital securities, after issuance costs of $6m and tax benefits of $4m, which are classified as equity under IFRSs. 4 At 30 June 2016, our operations in Brazil were classified as held for sale (see Note 11). The cumulative amounts of other reserves attributable to these operations were as follows: available-for-sale fair value reserve debit of $33m (30 June 2015: $65m debit; 31 December 2015: $176m debit), nil cash flow hedging reserve (30 June 2015: $29m debit; 31 December 2015: $34m credit) and foreign exchange reserve debit of $1.9bn (30 June 2015: $1.7bn debit; 31 December 2015: $2.6bn debit). 5 During the period HSBC USA Inc. and HSBC Finance Corporation redeemed all outstanding preferred securities at 31 December 2015 ($1,825m). Refer to Note 34 on pages 436 and 437 of the Annual Report and Accounts 2015 for further details of all preferred securities outstanding at 31 December 2015.
Notes on the Financial Statements (unaudited)
Notes on the Financial Statements ====================================================================================================================== Basis of preparation and significant 1 accounting policies 107 13 Interests in associates and joint ventures 123 ============================================= 2 Dividends 108 14 Trading liabilities 125 ============================================= ============================================= 3 Earnings per share 109 15 Maturity analysis of assets and liabilities 126 ============================================= ============================================= 4 Segmental analysis 109 16 Provisions 128 ============================================= ============================================= 5 Trading assets 110 17 Deferred tax 129 ============================================= ============================================= Fair values of financial instruments carried 18 Contingent liabilities, contractual 6 at fair value 111 commitments and Fair values of financial instruments not 7 carried at fair value 119 guarantees 129 ============================================= ============================================= 8 Financial assets designated at fair value 119 19 Legal proceedings and regulatory matters 130 ============================================= 9 Derivatives 120 20 Goodwill impairment 137 ============================================= 10 Financial investments 121 21 Transactions with related parties 138 ============================================= Assets held for sale and liabilities of 11 disposal groups held for 22 Events after the balance sheet date 138 ============================================= sale 122 23 Interim Report 2016 and statutory accounts 138 ==== ============================================= ============================================= Assets charged as security for liabilities 12 and collateral accepted as security for assets 123 ==== ============================================= 1 Basis of preparation and significant accounting policies --- ----------------------------------------------------------
(a) Compliance with International Financial Reporting Standards
The interim condensed consolidated financial statements of HSBC have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Conduct Authority and IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board ('IASB') and as endorsed by the EU. These financial statements should be read in conjunction with the Annual Report and Accounts 2015.
At 30 June 2016, there were no unendorsed standards effective for the half-year to 30 June 2016 affecting these financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC.
Standards applied during the half-year to 30 June 2016
There were no new standards applied during the half-year to 30 June 2016. During the period, HSBC applied a number of interpretations and amendments to standards which had an insignificant effect on these financial statements.
(b) Use of estimates and judgements
Management believes that HSBC's critical accounting estimates and judgements are those which relate to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, deferred tax assets, provisions for liabilities and interests in associates. There was no change in the current period to the critical accounting estimates and judgements applied in 2015, which are stated on pages 64 and 353 of the Annual Report and Accounts 2015.
(c) Composition of Group
There were no material changes in the composition of the HSBC Group in the half-year to 30 June 2016.
(d) Future accounting developments
Information on future accounting developments and their potential effect on the financial statements of HSBC are provided on pages 347 to 352 of the Annual Report and Accounts 2015. The IFRS 9 'Financial Instruments' Programme's focus continues to be on developing the impairment models and processes which are needed for the parallel run during 2017 in accordance with the project plan and finalising implementation of the more complex requirements. Until sufficient models have been developed and tested, we will not have a reliable understanding of the potential impact on the financial statements and any consequential effects on regulatory capital requirements.
(e) Going concern
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.
(f) Accounting policies
The accounting policies applied by HSBC for these interim condensed consolidated financial statements are consistent with those described on pages 347 to 469 of the Annual Report and Accounts 2015, as are the methods of computation.
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2 Dividends --- ----------------------------------------------------------
On 3 August 2016, the Directors declared a second interim dividend of $0.10 per ordinary share, in respect of the financial year ending 31 December 2016, a distribution of approximately $1,992m which will be payable on 28 September 2016. No liability is recognised in the financial statements in respect of this dividend.
Dividends paid to shareholders of HSBC Holdings plc
Half-year to --------------------------------------------------------------------- 30 Jun 2016 30 Jun 2015 31 Dec 2015 Settled Settled Settled Per in Per in Per in share Total scrip share Total scrip share Total scrip $ $m $m $ $m $m $ $m $m Dividends paid on ordinary shares In respect of previous year: - fourth interim dividend 0.21 4,137 408 0.20 3,845 2,011 - - - ================== In respect of current year: - first interim dividend 0.10 1,981 703 0.10 1,951 231 - - - ================== - second interim dividend - - - - - - 0.10 1,956 160 ================== - third interim dividend - - - - - - 0.10 1,958 760 ================== ----- ----- ------- ----- ----- ------- ----- ----- ------- Total 0.31 6,118 1,111 0.30 5,796 2,242 0.20 3,914 920 ================== ----- ----- ------- ----- ----- ------- ----- ----- ------- Total dividends on preference shares classified as equity (paid quarterly) 31.00 45 31.00 45 31.00 45 ==================
Total coupons on capital securities classified as equity
Half-year to ---------------------------------------------- 30 Jun 2016 30 Jun 2015 31 Dec 2015 First Per Total Total Total (Footnotes) call date security $m $m $m Perpetual subordinated capital securities (1) - $2,200m Apr 2013 $ 2.032 89 89 90 ======================= - $3,800m Dec 2015 $ 2.000 152 152 152 ======================= Perpetual subordinated contingent convertible securities (2) - $2,250m Sep 2024 $ 63.750 72 72 71 ======================= - $1,500m Jan 2020 $ 56.250 42 28 42 ======================= - EUR1,500m Sep 2022 EUR 52.500 44 42 44 ======================= - $2,450m Mar 2025 $ 63.750 78 - 78 ======================= - EUR1,000m Sep 2023 EUR 60.000 34 - - ======================= ----------- ----------- Total 511 383 477 ======================= ---------- ----------- ----------- 1 Discretionary coupons are paid quarterly on the perpetual subordinated capital securities, in denominations of $25 per security. 2 Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities, in denominations of 1,000 per security.
On 15 July 2016, HSBC paid a further coupon on the $2,200m subordinated capital securities of $0.508 per security, representing a total distribution of $45m. On 18 July 2016, HSBC paid a further coupon on the $1,500m subordinated contingent convertible securities, representing a total distribution of $42m. No liability is recognised in the financial statements in respect of these coupon payments.
In June 2016, HSBC issued $2,000m of contingent convertible securities issued at 6.875% which are classified as equity under IFRSs. Discretionary coupons are paid semi-annually on these contingent convertible securities and none were declared in 1H16.
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Notes on the Financial Statements (unaudited) (continued)
3 Earnings per share --- ----------------------------------------------------------
Profit attributable to ordinary shareholders of the parent company
Half-year to --------------------------------- 30 Jun 30 Jun 31 Dec 2016 2015 2015 $m $m $m Profit attributable to shareholders of the parent company 6,912 9,618 3,904 ==================================================================== Dividend payable on preference shares classified as equity (45) (45) (45) ==================================================================== Coupon payable on capital securities classified as equity (511) (383) (477) ==================================================================== -------- -------- -------- Profit attributable to ordinary shareholders of the parent company 6,356 9,190 3,382 ==================================================================== -------- -------- --------
Basic and diluted earnings per share
Half-year to 30 Jun 2016 Half-year to 30 Jun 2015 Half-year to 31 Dec 2015 -------------------------- -------------------------- ---------------------------- Amount Amount Amount Number per Number per Number per Profit of shares share Profit of shares share Profit of shares share (Footnotes) $m (millions) $ $m (millions) $ $m (millions) $ Basic (1) 6,356 19,672 0.32 9,190 19,249 0.48 3,382 19,380 0.17 ============ Effect of dilutive potential ordinary shares 68 68 137 ============ ------ ---------- ------ ---------- ------ ---------- Diluted (1) 6,356 19,740 0.32 9,190 19,317 0.48 3,382 19,517 0.17 ============ ------ ---------- ------ ---------- ------ ---------- 1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted). 4 Segmental analysis --- ----------------------------------------------------------
HSBC operates a matrix management structure which includes geographical regions and global businesses. HSBC considers that geographical operating segments represent the most appropriate information for users of the financial statements to best evaluate the nature and financial effects of HSBC's business activities and the economic environment in which it operates. HSBC's operating segments are Europe, Asia, Middle East and North Africa, North America, and Latin America.
North Latin Intra-HSBC Europe Asia MENA America America items Total (Footnotes) $m $m $m $m $m $m $m Net operating income (1) Half-year to 30 Jun 2016 Net operating income 11,122 11,752 1,334 3,952 2,925 (1,615) 29,470 ================= - external 10,602 10,795 1,340 3,778 2,955 - 29,470 ================= - inter-segment 520 957 (6) 174 (30) (1,615) - ================= ------ ------ ----- ------- ------- ---------- ------ Half-year to 30 Jun 2015 Net operating income 11,469 14,065 1,289 4,126 3,558 (1,564) 32,943 ================= - external 10,974 13,148 1,279 3,979 3,563 - 32,943 ================= - inter-segment 495 917 10 147 (5) (1,564) - ================= ------ ------ ----- ------- ------- ---------- ------ Half-year to 31 Dec 2015 Net operating income 9,589 11,238 1,276 3,531 3,034 (1,811) 26,857 ================= - external 8,804 10,329 1,280 3,407 3,037 - 26,857 ================= - inter-segment 785 909 (4) 124 (3) (1,811) - ================= ------ ------ ----- ------- ------- ---------- ------ Profit/(loss) before tax (2) Half-year to: 30 Jun 2016 1,579 7,155 985 50 (55) - 9,714 ================= 30 Jun 2015 2,205 9,400 901 690 432 - 13,628 ================= 31 Dec 2015 (1,562) 6,363 636 (76) (122) - 5,239 =================
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North Latin Intra-HSBC Europe Asia MENA America America items Total $m $m $m $m $m $m $m Balance sheet information At 30 Jun 2016 Total assets 1,251,513 946,998 58,802 438,658 93,067 (180,889) 2,608,149 =================== Total liabilities 1,193,445 866,283 49,171 399,682 82,160 (180,889) 2,409,852 =================== At 31 Dec 2015 Total assets 1,129,365 889,747 59,236 393,960 86,262 (148,914) 2,409,656 =================== Total liabilities 1,067,127 813,466 49,126 355,506 75,827 (148,914) 2,212,138 =================== 1 Net operating income before loan impairment charges and other credit risk provisions. 2 During the period the Group recognised an impairment of $800m relating to the goodwill of Global Private Banking - Europe. Further details are set out in Note 20. 5 Trading assets --- ---------------------------------------------------------- At
------------------ 30 Jun 31 Dec 2016 2015 Footnotes $m $m Treasury and other eligible bills 20,141 7,829 ============================================== Debt securities 111,201 99,038 ============================================== Equity securities 49,757 66,491 ============================================== ------- ------- Trading securities at fair value 181,099 173,358 ============================================== Loans and advances to banks 1 42,696 22,303 ============================================== Loans and advances to customers 1 56,500 29,176 ============================================== ------- ------- 280,295 224,837 ------- ------- 1 Loans and advances to banks and customers include settlement accounts, stock borrowing, reverse repos and other amounts.
Trading securities valued at fair value(1)
At ------------------ 30 Jun 31 Dec 2016 2015 Footnotes $m $m US Treasury and US Government agencies 2 21,049 14,833 ============================================== UK Government 11,681 10,177 ============================================== Hong Kong Government 10,757 6,495 ============================================== Other government 62,105 48,567 ============================================== Asset-backed securities 3 2,774 3,135 ============================================== Corporate debt and other securities 22,976 23,660 ============================================== Equity securities 49,757 66,491 ============================================== ------- ------- 181,099 173,358 ------- ------- 1 Included within these figures are debt securities issued by banks and other financial institutions of $14,873m (31 December 2015: $16,403m), of which $1,058m (31 December 2015: $1,034m) is guaranteed by various governments. 2 Includes securities that are supported by an explicit guarantee issued by the US Government. 3 Excludes asset-backed securities included under US Treasury and US Government agencies.
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Notes on the Financial Statements (unaudited) (continued)
6 Fair values of financial instruments carried at fair value --- ----------------------------------------------------------
The accounting policies, control framework and the hierarchy used to determine fair values at 30 June 2016 are consistent with those applied for the Annual Report and Accounts 2015.
Financial instruments carried at fair value and bases of valuation
Valuation techniques ----------------------------- Quoted Using With significant market observable unobservable price inputs inputs Level 1 Level 2 Level 3 Total $m $m $m $m Recurring fair value measurements At 30 Jun 2016 Assets Trading assets 140,031 133,762 6,502 280,295 =================================================== Financial assets designated at fair value 18,915 4,426 560 23,901 =================================================== Derivatives 2,229 364,564 3,149 369,942 =================================================== Financial investments: available for sale 274,115 118,184 3,945 396,244 =================================================== Liabilities Trading liabilities 49,850 134,201 4,647 188,698 =================================================== Financial liabilities designated at fair value 4,472 74,375 35 78,882 =================================================== Derivatives 2,992 363,260 2,162 368,414 =================================================== At 31 Dec 2015 Assets Trading assets 133,095 84,886 6,856 224,837 =================================================== Financial assets designated at fair value 18,947 4,431 474 23,852 =================================================== Derivatives 1,922 284,292 2,262 288,476 =================================================== Financial investments: available for sale 262,929 117,197 4,727 384,853 =================================================== Liabilities Trading liabilities 41,462 95,867 4,285 141,614 =================================================== Financial liabilities designated at fair value 5,260 61,145 3 66,408 =================================================== Derivatives 2,243 277,618 1,210 281,071 ===================================================
The increase in Level 2 trading assets and liabilities reflects an increase in settlement balances and cash collateral. The increase in Level 2 derivative assets and liabilities is driven by significant yield curve movements.
Transfers between Level 1 and Level 2 fair values
Assets Liabilities ------------------------------------------------ -------------------------------------- Designated Designated at fair at fair value value through through Available Held for profit or Held for profit or for sale trading loss Derivatives trading loss Derivatives $m $m $m $m $m $m $m At 30 Jun 2016 Transfers from Level 1 to Level 2 162 1,614 122 - 2,699 - - ============ Transfers from Level 2 to Level 1 1,314 - - - 341 - - ============ At 31 Dec 2015 Transfers from Level 1 to Level 2 - 67 - 56 1,563 857 100 ============ Transfers from Level 2 to Level 1 - 487 - 2 515 2 - ============
Fair value adjustments
Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. HSBC classifies fair value adjustments as either 'risk--related' or 'model-related'. The majority of these adjustments relate to GB&M. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.
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Global Banking and Markets fair value adjustments
At ---------------------- 30 Jun 31 Dec 2016 2015 $m $m Type of adjustment Risk-related 1,456 1,402 ============================================= - bid-offer 495 477 ============================================= - uncertainty 64 95 ============================================= - credit valuation adjustment 901 853 ============================================= - debit valuation adjustment (600) (465) ============================================= - funding fair value adjustment 593 442 ============================================= - other 3 - ============================================= -------- -------- Model-related (196) 97 ============================================= - model limitation (196) 92 ============================================= - other - 5 ============================================= -------- -------- Inception profit (Day 1 P&L reserves)(1) 84 97 ============================================= -------- -------- 1,344 1,596 -------- -------- 1 See Note 9 on the Financial Statements on page 120.
Fair value adjustments declined by $252m during 1H16. The most significant movement was a decline of $288m in respect of a model limitation adjustment relating to derivative discounting assumptions. This was driven by a tightening of the major currency spreads during the period.
A description of HSBC's risk-related and model-related adjustments is provided on pages 381 and 382 of the Annual Report and Accounts 2015.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3
Assets Liabilities --------------------------------------------------- ----------------------------------------- Held Held Available for At fair for At fair for sale trading value(1) Deriv-atives Total trading value(1) Deriv-atives Total $m $m $m $m $m $m $m $m $m Private equity including strategic investments 2,933 79 544 - 3,556 49 - - 49 ================ Asset-backed securities 782 719 - - 1,501 - - - - ================ Loans held for securitisation - 30 - - 30 - - - - ================ Structured notes - 4 - - 4 4,596 - - 4,596 ================ Derivatives with monolines - - - 223 223 - - - - ================ Other derivatives - - - 2,926 2,926 - - 2,162 2,162 ================ Other portfolios 230 5,670 16 - 5,916 2 35 - 37 ================ --------- ------- --------- ------------ ------ ------- --------- ------------ ----- At 30 Jun 2016 3,945 6,502 560 3,149 14,156 4,647 35 2,162 6,844 ================ --------- ------- --------- ------------ ------ ------- --------- ------------ ----- Private equity including strategic investments 3,443 55 453 - 3,951 35 - - 35 ================ Asset-backed securities 1,053 531 - - 1,584 - - - - ================ Loans held for securitisation - 30 - - 30 - - - - ================ Structured notes - 4 - - 4 4,250 - - 4,250 ================ Derivatives with monolines - - - 196 196 - - - - ================ Other derivatives - - - 2,066 2,066 - - 1,210 1,210 ================ Other portfolios 231 6,236 21 - 6,488 - 3 - 3 ================ --------- ------- --------- ------------ ------ ------- --------- ------------ ----- At 31 Dec 2015 4,727 6,856 474 2,262 14,319 4,285 3 1,210 5,498 ================ --------- ------- --------- ------------ ------ ------- --------- ------------ ----- 1 Designated at fair value through profit or loss.
The basis for determining the fair value of the financial instruments in the table above is explained on page 382 of the Annual Report and Accounts 2015.
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Notes on the Financial Statements (unaudited) (continued)
Movement in Level 3 financial instruments
Assets Liabilities ----------------------------------------------- ------------------------------------- Designated Designated at fair at fair value value Held through Held through Available for profit for profit for sale trading or loss Derivatives trading or loss Derivatives (Footnotes) $m $m $m $m $m $m $m At 1 Jan 2016 4,727 6,856 474 2,262 4,285 3 1,210 ====================== Total gains/(losses) recognised in profit or loss 37 136 23 1,188 294 - 1,071 ====================== - trading income/(expense) excluding net interest income - 136 - 1,188 294 - 1,071 ====================== - net income/(expense) from other financial instruments designated at fair value - - 23 - - - - ====================== - gains less losses from financial investments (28) - - - - - - ====================== - loan impairment charges and other credit risk provisions 65 - - - - - - ====================== --------- ------- ---------- ----------- ------- ---------- ----------- Total gains/(losses) recognised in other comprehensive income (1) 132 (309) 1 (200) (86) - (151) ====================== - available-for-sale investments: fair value gains 238 - - - - - - ====================== - cash flow hedges: fair value gains/(losses) - - - - - - - ===================== - exchange differences (106) (309) 1 (200) (86) - (151) ====================== --------- ------- ---------- ----------- ------- ---------- ----------- Purchases 160 187 84 - - - - ====================== New issuances - - - - 1,318 - - ====================== Sales (810) (1,176) (3) - (16) (1) - ====================== Settlements (88) (24) (18) - (660) - (186) ====================== Transfers out (572) (36) (1) (105) (504) - (107) ====================== Transfers in 359 868 - 4 16 33 325
====================== --------- ------- ---------- ----------- ------- ---------- ----------- At 30 Jun 2016 3,945 6,502 560 3,149 4,647 35 2,162 ====================== --------- ------- ---------- ----------- ------- ---------- ----------- Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 Jun 2016 65 27 20 1,090 212 - 65 ====================== - trading income/(expense) excluding net interest income - 27 - 1,090 212 - 65 ====================== - net income/(expense) from other financial instruments designated at fair value - - 20 - - - - ====================== - loan impairment recoveries and other credit risk provisions 65 - - - - - - ====================== --------- ------- ---------- ----------- ------- ---------- -----------
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Assets Liabilities ----------------------------------------------- ------------------------------------- Designated Designated at fair at fair value value Held through Held through Available for profit for profit for sale trading or loss Derivatives trading or loss Derivatives Footnotes $m $m $m $m $m $m $m At 1 Jan 2015 4,988 6,468 726 2,924 6,139 - 1,907 ====================== Total gains/(losses) recognised in profit or loss (17) (14) (19) 344 (223) (1) (467) ====================== - trading income/(expense) excluding net interest income - (14) - 344 (223) - (467) ====================== - net income/(expense) from other financial instruments designated at fair value - - (19) - - (1) - ====================== - gains less losses from financial investments (29) - - - - - - ====================== - loan impairment charges and other credit risk provisions 12 - - - - - - ====================== --------- ------- ---------- ----------- ------- ---------- ----------- Total gains/(losses) recognised in other comprehensive income 1 72 (6) (9) 5 (20) (1) 1 ====================== - available-for-sale investments: fair value gains 70 - - - - - - ====================== - cash flow hedges: fair value gains - - - - - - - ===================== - exchange differences 2 (6) (9) 5 (20) (1) 1 ====================== --------- ------- ---------- ----------- ------- ---------- ----------- Purchases 342 435 165 - - 9 - ====================== New issuances - - - - 863 - - ====================== Sales (420) (1,134) (46) - (10) (2) - ====================== Settlements (15) (90) (72) 43 (681) - 41 ====================== Transfers out (1,257) (31) (272) (312) (889) - (52) ====================== Transfers in 314 112 - 64 126 - 13 ====================== --------- ------- ---------- ----------- ------- ---------- ----------- At 30 Jun 2015 4,007 5,740 473 3,068 5,305 5 1,443 ====================== --------- ------- ---------- ----------- ------- ---------- -----------
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Notes on the Financial Statements (unaudited) (continued)
Movement in Level 3 financial instruments (continued)
Assets Liabilities ----------------------------------------------- ------------------------------------- Designated Designated at fair at fair value value Held through Held through Available for profit for profit for sale trading or loss Derivatives trading or loss Derivatives $m $m $m $m $m $m $m Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 Jun 2015 13 (6) 17 444 (24) (1) (459) ====================== - trading income/(expense) excluding net interest income - (6) - 444 (24) - (459) ====================== - net income/(expense) from other financial instruments designated at fair value - - 17 - - (1) - ====================== - loan impairment recoveries and other credit risk provisions 13 - - - - - - ====================== --------- ------- ---------- ----------- ------- ---------- ----------- At 1 Jul 2015 4,007 5,740 473 3,068 5,305 5 1,443 ====================== Total gains/(losses) recognised in profit or loss (17) 123 49 (249) (350) - 258 ====================== - trading income/(expense) excluding net interest income - 123 - (249) (350) - 258 ====================== - net income/(expense) from other financial instruments designated at fair value - - - - - - - ===================== - gains less losses from financial investments (240) - 49 - - - - ====================== - loan impairment charges and other credit risk provisions 223 - - - - - - ====================== --------- ------- ---------- ----------- ------- ---------- ----------- Total gains recognised in other comprehensive income(1) 154 (186) (2) (131) (98) - (65) ====================== - available-for-sale investments: fair value gains 323 - - - - - - ====================== - cash flow hedges: fair value gains - - - (4) - - - ====================== - exchange differences (169) (186) (2) (127) (98) - (65) ====================== --------- ------- ---------- ----------- ------- ---------- ----------- Purchases 252 1,310 85 - 2 - - ====================== New issuances - - - - 608 - - ====================== Sales (337) (72) (4) - (56) (2) - ====================== Settlements (17) (56) (63) (81) (579) - (282) ======================
Transfers out (214) (175) (64) (703) (854) - (231) ====================== Transfers in 899 172 - 358 307 - 87 ====================== --------- ------- ---------- ----------- ------- ---------- ----------- At 31 Dec 2015 4,727 6,856 474 2,262 4,285 3 1,210 ====================== --------- ------- ---------- ----------- ------- ---------- ----------- Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2015 222 (3) (5) (355) 408 - 726 - trading income/(expense) excluding net interest income - (3) - (355) 408 - 726 ====================== - net income/(expense) from other financial instruments designated at fair value - - (5) - - - - ====================== - loan impairment recoveries and other credit risk provisions 222 - - - - - - ====================== --------- ------- ---------- ----------- ------- ---------- ----------- 1 Included in 'Available-for-sale investments: fair value gains/(losses)' and 'Exchange differences' in the consolidated statement of comprehensive income.
Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period. Movements in available-for-sale assets are mainly driven by sales of private equity investments and the transfer out of Level 3 of legacy credit assets following greater price certainty. Sales in trading assets reflect sell-down of syndicated loans.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
The following table shows the sensitivity of Level 3 fair values to reasonably possible alternative assumptions:
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Sensitivity of fair values to reasonably possible alternative assumptions
Reflected in Reflected in other profit or loss comprehensive income ------------------------- --------------------------- Favourable Unfavourable Favourable Unfavourable changes changes changes changes Footnotes $m $m $m $m Derivatives, trading assets and trading liabilities 1 229 (257) - - ===================================== Financial assets and liabilities designated at fair value 28 (28) - - ===================================== Financial investments: available for sale 43 (33) 193 (207) ===================================== ---------- ------------ ---------- ------------ At 30 Jun 2016 300 (318) 193 (207) ===================================== ---------- ------------ ---------- ------------ Derivatives, trading assets and trading liabilities 1 255 (274) - - ===================================== Financial assets and liabilities designated at fair value 41 (42) - - ===================================== Financial investments: available for sale 33 (30) 222 (217) ===================================== ---------- ------------ ---------- ------------ At 30 Jun 2015 329 (346) 222 (217) ===================================== ---------- ------------ ---------- ------------ Derivatives, trading assets and trading liabilities 1 335 (215) - - ===================================== Financial assets and liabilities designated at fair value 24 (24) - - ===================================== Financial investments: available for sale 35 (30) 230 (243) ===================================== ---------- ------------ ---------- ------------ At 31 Dec 2015 394 (269) 230 (243) ===================================== ---------- ------------ ---------- ------------ 1 Derivatives, 'trading assets and trading liabilities' are presented as one category to reflect the manner in which these financial instruments are risk--managed.
The reduction in the effect of both favourable and unfavourable changes during the period reflects funding spread widening and increased pricing certainty, in particular in private equity.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
Reflected in Reflected in profit or loss other comprehensive income ------------------------- ------------------------------- Favourable Unfavourable Favourable Unfavourable changes changes changes changes $m $m $m $m Private equity including strategic investments 63 (63) 121 (140) ============================================ Asset-backed securities 26 (13) 54 (49) ============================================ Loans held for securitisation 1 (1) - - ============================================ Structured notes 12 (9) - - ============================================ Derivatives with monolines 7 (7) - - ============================================ Other derivatives 132 (164) - - ============================================ Other portfolios 59 (61) 18 (18) ============================================ ---------- ------------ ------------ -------------- At 30 Jun 2016 300 (318) 193 (207) ============================================ ---------- ------------ ------------ -------------- Private equity including strategic investments 79 (79) 171 (171) ============================================ Asset-backed securities 31 (9) 29 (24) ============================================ Loans held for securitisation 1 (1) - - ============================================ Structured notes 19 (14) - - ============================================ Derivatives with monolines 9 (9) - - ============================================ Other derivatives 117 (198) - - ============================================ Other portfolios 73 (36) 22 (22) ============================================ ---------- ------------ ------------ -------------- At 30 Jun 2015 329 (346) 222 (217) ============================================ ---------- ------------ ------------ -------------- Private equity including strategic investments 54 (53) 152 (171) ============================================ Asset-backed securities 18 (12) 57 (51) ============================================ Loans held for securitisation 1 (1) - - ============================================ Structured notes 15 (11) - - ============================================ Derivatives with monolines 11 (11) - - ============================================ Other derivatives 179 (87) - - ============================================
Other portfolios 116 (94) 21 (21) ============================================ ---------- ------------ ------------ -------------- At 31 Dec 2015 394 (269) 230 (243) ============================================ ---------- ------------ ------------ --------------
Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, the availability and reliability of observable proxies and historical data. When the available data are not amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.
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Notes on the Financial Statements (unaudited) (continued)
Key unobservable inputs to Level 3 financial instruments and inter-relationships
The table below lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs as at 30 June 2016. The core range of inputs is the estimated range within which 90% of the inputs fall.
There has been no change to the key unobservable inputs to Level 3 financial instruments and inter-relationships therein which are detailed on page 389 of the Annual Report and Accounts 2015.
Quantitative information about significant unobservable inputs in Level 3 valuations
Fair value ------------------- Key Full range of Core range of Assets Liabilities unobservable inputs inputs ----------------- ------------------ Valuation Footnotes $m $m technique inputs Lower Higher Lower Higher Private equity including strategic See investments 3,556 49 notes(3) See notes(3) n/a n/a n/a n/a ================== Asset-backed securities 1,501 - ================== Market Prepayment - CLO/CDO 1 371 - proxy rate 2% 7% 2% 7% Market - proxy Bid quotes 0 99 19 89 Market - other ABSs 1,130 - proxy Bid quotes 0 99 50 88 ================== ------ ----------- Loans held for securitisation 30 - ================== Structured notes 4 4,596 ================== Model - - equity-linked option Equity notes - 4,042 model volatility 12% 83% 18% 35% Model - option Equity model correlation 35% 94% 46% 83% Model - - fund-linked option Fund notes - 14 model volatility 7% 11% 7% 11% ================== Model - - FX-linked option FX notes - 149 model volatility 4% 30% 7% 19% ================== - other 4 391 ================== ------ ----------- Model - Derivatives with discounted Credit monolines 223 - cash flow spread 3% 3% 3% 3% ================== Other derivatives 2,926 2,162 ================== Interest rate derivatives: ------ ----------- Model - - securitisation discounted Prepayment swaps 399 981 cash flow rate 0.5% 90% 21% 74% ================== Model - - long-dated option IR swaptions 1,886 120 model volatility 5% 209% 16% 36% ================== - other 208 60 ================== ------ ----------- FX derivatives: Model - option FX - FX options 212 188 model volatility 0.5% 30% 7% 14% ================== - other 5 2 ================== ------ ----------- Equity derivatives: - long-dated Model - single stock option Equity options 134 178 model volatility 10% 97% 18% 36% ================== - other 47 306 ================== ------ ----------- Credit derivatives: - other 35 327 ================== ------ ----------- Other portfolios 5,916 37 ================== Model - - structured discounted Credit certificates 4,440 - cash flow volatility 2% 4% 2% 4% ================== - EM corporate debt 472 - Market proxy Bid quotes 99 127 110 126 Other 2 1,004 37 ================== ------ ----------- At 30 Jun 2016 14,156 6,844 ================== ------ ----------- 1 Collateralised loan obligation/collateralised debt obligation. 2 'Other' includes a range of smaller asset holdings. 3 See notes on page 389 of the Annual Report and Accounts 2015.
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Quantitative information about significant unobservable inputs in Level 3 valuations (continued)
Fair value ------------------- Key Assets Liabilities unobservable Full range of inputs Core range of inputs -------------------- -------------------- Valuation Footnotes $m $m technique inputs Lower Higher Lower Higher Private equity including strategic See investments 3,951 35 notes(3) See notes(3) n/a n/a n/a n/a ================== Asset-backed securities 1,584 - Market Prepayment - CLO/CDO 1 511 - proxy rate 1% 6% 1% 6% Market - proxy Bid quotes 3 147 54 117 Market - other ABSs 1,073 - proxy Bid quotes ================== ------ ----------- Loans held for securitisation 30 - ================== Structured notes 4 4,250 ================== Model - - equity-linked option Equity notes - 3,719 model volatility 12% 72% 19% 43% Model - option Equity
model correlation 35% 93% 43% 79% Model - - fund-linked option Fund notes - 13 model volatility 6% 8% 6% 8% Model - - FX-linked option FX notes - 166 model volatility 5% 35% 5% 20% ================== - other 4 352 ================== ------ ----------- Model - Derivatives with discounted Credit monolines 196 - cash flow spread 4% 4% 4% 4% ================== Other derivatives 2,066 1,210 ================== Interest rate derivatives: ------ ----------- Model - - securitisation discounted Prepayment swaps 250 455 cash flow rate 0% 90% 14% 71% ================== Model - - long-dated option IR swaptions 1,237 119 model volatility 3% 66% 20% 41% ================== - other 176 65 ================== ------ ----------- FX derivatives: Model - option FX - FX options 180 186 model volatility 0.5% 35% 5% 14% ================== - other 10 5 ================== ------ ----------- Equity derivatives: - long-dated Model - single stock option Equity options 135 191 model volatility 8% 104% 18% 44% ================== - other 39 170 ================== ------ ----------- Credit derivatives: - other 39 19 ================== ------ ----------- Other portfolios 6,488 3 ================== Model - - structured discounted Credit certificates 4,434 - cash flow volatility 2% 4% 2% 4% ================== - EM corporate Market debt 210 - proxy Bid quotes 70 124 100 123 Other 2 1,844 3 ================== ------ ----------- At 31 Dec 2015 14,319 5,498 ================== ------ ----------- 1 Collateralised loan obligation/collateralised debt obligation. 2 'Other' includes a range of smaller asset holdings. 3 See notes on page 389 of the Annual Report and Accounts 2015.
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Notes on the Financial Statements (unaudited) (continued)
7 Fair values of financial instruments not carried at fair value --- --------------------------------------------------------------
The basis for measuring the fair values of loans and advances to banks and customers, financial investments, deposits by banks, customer accounts, debt securities in issue, subordinated liabilities and non-trading repurchase and reverse repurchase agreements is explained on pages 391 and 392 of the Annual Report and Accounts 2015.
Fair values of financial instruments which are not carried at fair value on the balance sheet
At 30 Jun 2016 At 31 Dec 2015 -------------------- ---------------------- Carrying Fair Carrying Fair amount value Amount value $m $m $m $m Assets Loans and advances to banks 92,199 92,131 90,401 90,411 ============================================= Loans and advances to customers 887,556 886,637 924,454 922,469 ============================================= Reverse repurchase agreements - non-trading 187,826 187,869 146,255 146,266 ============================================= Financial investments: debt securities 45,155 47,744 44,102 45,258 ============================================= Liabilities Deposits by banks 69,900 69,907 54,371 54,371 ============================================= Customer accounts 1,290,958 1,292,378 1,289,586 1,289,789 ============================================= Repurchase agreements - non-trading 98,342 98,344 80,400 80,400 ============================================= Debt securities in issue 87,673 87,892 88,949 89,023 ============================================= Subordinated liabilities 21,669 23,455 22,702 24,993 =============================================
Other financial instruments not carried at fair value are typically short-term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value.
8 Financial assets designated at fair value --- ---------------------------------------------------------- At ------------------ 30 Jun 31 Dec 2016 2015 $m $m Treasury and other eligible bills 278 396 ============================================== Debt securities 4,390 4,341 ============================================== Equity securities 19,120 18,995 ============================================== ------- ------- Securities designated at fair value 23,788 23,732 ============================================== Loans and advances to banks and customers 113 120 ============================================== ------- ------- 23,901 23,852 ------- -------
Securities designated at fair value(1)
At ------------------ 30 Jun 31 Dec 2016 2015 $m $m US Treasury and US Government agencies 7 145 ================================================ UK Government 95 103 ================================================ Hong Kong Government 28 33 ================================================ Other government 1,084 1,020 ================================================ Asset-backed securities 36 25 ================================================ Corporate debt and other securities 3,418 3,411 ================================================ Equity securities 19,120 18,995 ================================================ ------- ------- 23,788 23,732 ------- ------- 1 Included within these figures are debt securities issued by banks and other financial institutions of $1,680m (31 December 2015: $1,536m), of which $29m (31 December 2015: $35m) are guaranteed by various governments.
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9 Derivatives --- ----------------------------------------------------------
Fair values of derivatives by product contract type held by HSBC
Assets Liabilities --------------------------- ----------------------------- Trading Hedging Total Trading Hedging Total $m $m $m $m $m $m Foreign exchange 116,357 614 116,971 118,450 2,359 120,809 ========================= Interest rate 378,397 2,332 380,729 366,415 6,885 373,300 ========================= Equities 8,569 - 8,569 9,726 - 9,726 ========================= Credit 5,359 - 5,359 6,049 - 6,049 ========================= Commodity and other 2,052 - 2,052 2,268 - 2,268 ========================= ------- ------- -------- ------- ------- -------- Gross total fair values 510,734 2,946 513,680 502,908 9,244 512,152 ========================= ------- ------- ------- ------- Offset (143,738) (143,738) ========================= -------- -------- At 30 Jun 2016 369,942 368,414 ========================= -------- -------- Foreign exchange 95,201 1,140 96,341 94,843 755 95,598 ========================= Interest rate 277,496 1,658 279,154 267,609 3,758 271,367 ========================= Equities 8,732 - 8,732 10,383 - 10,383 ========================= Credit 6,961 - 6,961 6,884 - 6,884 ========================= Commodity and other 3,148 - 3,148 2,699 - 2,699 ========================= ------- ------- -------- ------- ------- -------- Gross total fair values 391,538 2,798 394,336 382,418 4,513 386,931 ========================= ------- ------- ------- ------- Offset (105,860) (105,860) ========================= -------- -------- At 31 Dec 2015 288,476 281,071 ========================= -------- --------
Derivative assets and liabilities increased during 1H16, primarily driven by an increase in the fair value of interest rate derivatives as yield curves in major currencies declined. This resulted in the increase in gross fair values and corresponding increase in the offset amount.
Trading derivatives
The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for trading purposes by product type
At ------------------------ 30 Jun 31 Dec 2016 2015 $m $m Foreign exchange 6,040,629 5,658,030 =============================================== Interest rate 15,573,352 14,462,113 =============================================== Equities 487,893 501,834 =============================================== Credit 488,866 463,344 =============================================== Commodity and other 67,555 51,683 =============================================== ---------- ---------- 22,658,295 21,137,004 ---------- ----------
Credit derivatives
HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. The trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products.
The notional contract amount of credit derivatives of $489bn (31 December 2015: $463bn) consisted of protection bought of $251bn (31 December 2015: $237bn) and protection sold of $238bn (31 December 2015: $226bn).
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Notes on the Financial Statements (unaudited) (continued)
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:
Unamortised balance of derivatives valued using models with significant unobservable inputs
Half-year to ------------------------------ 30 Jun 30 Jun 31 Dec 2016 2015 2015 Footnotes $m $m $m Unamortised balance at beginning of period 97 114 117 =========================================================== Deferral on new transactions 67 118 78 =========================================================== Recognised in the income statement during the period: (74) (115) (92) =========================================================== - amortisation (38) (69) (52) =========================================================== - subsequent to unobservable inputs becoming observable (2) (1) (1) =========================================================== - maturity or termination, or offsetting derivative (34) (45) (39) =========================================================== ------- ------- ------- Exchange differences (6) - (6) =========================================================== ------- ------- ------- Unamortised balance at end of period 1 84 117 97 =========================================================== ------- ------- ------- 1 This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
The notional contract amounts of derivatives held for hedge accounting purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedging purposes by product type
At 30 Jun 2016 At 31 Dec 2015 --------------------- ----------------------- Cash flow Fair value Cash flow Fair value hedges hedges hedges hedges $m $m $m $m Foreign exchange 29,922 460 32,128 196 ================================== Interest rate 106,954 135,377 107,796 105,127 ================================== --------- ---------- --------- ---------- 136,876 135,837 139,924 105,323 --------- ---------- --------- ---------- 10 Financial investments --- ----------------------------------------------------------
Carrying amounts and fair values of financial investments
At 30 Jun 2016 At 31 Dec 2015 ----------------- ------------------- Carrying Fair Carrying Fair amount value amount value $m $m $m $m Treasury and other eligible bills 94,690 94,690 104,551 104,551 =================================== - available for sale 94,690 94,690 104,551 104,551 =================================== -------- ------- -------- ------- Debt securities 341,496 344,085 318,569 319,725 =================================== - available for sale 296,341 296,341 274,467 274,467 =================================== - held to maturity 45,155 47,744 44,102 45,258 =================================== -------- ------- -------- ------- Equity securities 5,213 5,213 5,835 5,835 =================================== - available for sale 5,213 5,213 5,835 5,835
=================================== -------- ------- ------- 441,399 443,988 428,955 430,111 -------- ------- -------- -------
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Financial investments at amortised cost and fair value
Amortised Fair cost(1) value(2) Footnotes $m $m US Treasury 54,177 56,194 =========================================== US Government agencies 3 18,800 19,088 =========================================== US Government sponsored entities 3 13,196 13,798 =========================================== UK Government 26,174 27,199 =========================================== Hong Kong Government 57,050 57,070 =========================================== Other government 146,812 149,562 =========================================== Asset-backed securities 4 12,095 11,243 =========================================== Corporate debt and other securities 100,748 104,621 =========================================== Equities 3,512 5,213 =========================================== --------- --------- At 30 Jun 2016 432,564 443,988 =========================================== --------- --------- US Treasury 61,585 61,779 =========================================== US Government agencies 3 22,910 22,843 =========================================== US Government sponsored entities 3 10,365 10,627 =========================================== UK Government 27,250 27,316 =========================================== Hong Kong Government 53,676 53,674 =========================================== Other government 141,329 143,370 =========================================== Asset-backed securities 4 14,239 13,375 =========================================== Corporate debt and other securities 89,860 91,292 =========================================== Equities 4,057 5,835 =========================================== --------- --------- At 31 Dec 2015 425,271 430,111 =========================================== --------- --------- 1 Represents the amortised cost or cost basis of the financial investment. 2 Included within the 'Fair value' figures are debt securities issued by banks and other financial institutions of $68bn (31 December 2015: $61bn), of which $20bn (31 December 2015: $18bn) are guaranteed by various governments. 3 Includes securities that are supported by an explicit guarantee issued by the US Government. 4 Excludes asset-backed securities included under US Government agencies and sponsored entities.
Maturities of investments in debt securities at their carrying amount
5 years or 10 years or 1 year less but over less but over Over or less 1 year 5 years 10 years Total $m $m $m $m $m Available for sale 66,345 144,929 45,498 39,569 296,341 ============================== Held to maturity 1,726 10,429 9,381 23,619 45,155 ============================== -------- -------------- -------------- --------- ------- At 30 Jun 2016 68,071 155,358 54,879 63,188 341,496 ============================== -------- -------------- -------------- --------- ------- Available for sale 61,664 131,023 42,140 39,640 274,467 ============================== Held to maturity 2,428 10,242 8,881 22,551 44,102 ============================== -------- -------------- -------------- --------- ------- At 31 Dec 2015 64,092 141,265 51,021 62,191 318,569 ============================== -------- -------------- -------------- --------- ------- 11 Assets held for sale and liabilities of disposal groups held for sale --- --------------------------------------------------------------------- At -------------------- 30 Jun 31 Dec 2016 2015 $m $m Disposal groups 48,899 41,715 Non-current assets held for sale 1,406 2,185 ============================================== -------- -------- Total assets held for sale 50,305 43,900 ============================================== -------- -------- Liabilities of disposal groups held for sale 43,705 36,840 ==============================================
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Notes on the Financial Statements (unaudited) (continued)
Disposal groups
Brazil
In 1H15, we announced the plan to sell our operations in Brazil. The resulting disposal group includes the assets and liabilities expected to be sold plus allocated goodwill of $1.3bn as set out in the table below. It is measured at its carrying amount at 30 June 2016 which is lower than its fair value less cost to sell.
The disposal group represents a foreign operation. Upon completion, the cumulative amount of associated exchange differences previously recognised in other comprehensive income will be reclassified to the income statement. At 30 June 2016, there was a cumulative loss of $1.9bn in the Group's foreign exchange reserve attributable to the Brazilian operations.
Subsequent to 30 June 2016, we completed the sale of our operations in Brazil to Banco Bradesco S.A. (1 July 2016) for cash consideration of $4.9bn. This resulted in a loss on disposal of $1.7bn which includes the reclassification of cumulative foreign exchange differences.
The major classes of assets and associated liabilities of disposal groups held for sale are as follows:
At 30 Jun 2016 ----------------------------------- Brazil Other Total Footnotes $m $m $m Assets of disposal groups held for sale Trading assets 157 - 157 ============================================================ Fair value of financial assets designated at fair value 4,056 - 4,056 ============================================================ Loans and advances to banks 5,332 - 5,332 ============================================================ Loans and advances to customers 19,203 582 19,785 ============================================================ Reverse repurchase agreements 3,209 - 3,209 ============================================================ Financial investments 6,726 - 6,726 ============================================================ Goodwill and intangible assets 1,819 54 1,873 ============================================================ Deferred tax asset 1 1,687 - 1,687 ============================================================ Prepayments, accrued income and other assets 6,073 1 6,074 ============================================================ ------------- -------- -------- Total assets 48,262 637 48,899 ============================================================ ------------- -------- -------- Liabilities of disposal groups held for sale Deposits by banks 1,863 - 1,863 ============================================================ Customer accounts 19,357 1,174 20,531 ============================================================ Debt securities in issue 8,908 - 8,908 ============================================================
Liabilities under insurance contracts 4,347 - 4,347 ============================================================ Accruals, deferred income and other liabilities 8,054 2 8,056 ============================================================ ------------- -------- -------- Total liabilities 42,529 1,176 43,705 ============================================================ ------------- -------- -------- Expected date of completion 1 July 2016 Various =========================================================== Operating segment Latin America Various =========================================================== Fair value of selected financial instruments which are not carried at fair value on the balance sheet Loans and advances to banks and customers 23,874 585 24,459 ============================================================ Customer accounts 19,056 1,173 20,229 ============================================================ 1 The recognition of deferred tax assets relies on an assessment of the probability and sufficiency of future taxable profits and future reversals of existing taxable temporary differences. In recognising the deferred tax asset management has critically assessed all available information, including sufficiency of future taxable profits using internal and external benchmarks, and historical performance. 12 Assets charged as security for liabilities and collateral accepted as security for assets --- -----------------------------------------------------------------------------------------
Information on financial assets pledged as security for liabilities and collateral accepted as security for assets is disclosed on pages 401 and 402 of the Annual Report and Accounts 2015. There was no material change in the relative amounts of assets charged as security for liabilities and collateral accepted as security for assets at 30 June 2016.
13 Interests in associates and joint ventures --- ----------------------------------------------------------
At 30 June 2016, the carrying amount of HSBC's interests in associates and joint ventures was $19.6bn (31 December 2015: $19.1bn).
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Principal associates of HSBC
At 30 Jun 2016 At 31 Dec 2015 ------------------- --------------------- Carrying Fair Carrying Fair amount value(1) amount value(1) $m $m $m $m Bank of Communications Co., Limited 15,408 8,872 15,344 9,940 The Saudi British Bank 3,177 3,250 3,021 3,957 ===================================== --------- -------- 18,585 12,122 18,365 13,897 -------- --------- -------- --------- 1 Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).
Bank of Communications Co., Limited
Impairment testing
At 30 June 2016, the fair value of HSBC's investment in Bank of Communications Co., Limited ('BoCom') had been below the carrying amount for approximately 50 months, apart from a short period in 2013 and briefly during 1H15. As a result, we performed an impairment test on the carrying amount of the investment in BoCom. The test confirmed that there was no impairment at 30 June 2016.
At 30 Jun 2016 At 31 Dec 2015 ------------------------ -------------------------- Carrying Fair Carrying Fair VIU value value VIU value value $bn $bn $bn $bn $bn $bn Bank of Communications Co., Limited 16.2 15.4 8.9 17.0 15.3 9.9 =====================================
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a value-in-use ('VIU') calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's estimates of earnings. Cash flows beyond the short to medium term are then extrapolated in perpetuity using a long-term growth rate. An imputed capital maintenance charge ('CMC') is calculated to reflect the expected regulatory capital requirements, and is deducted from forecast cash flows. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected regulatory capital requirements. Management judgement is required in estimating the future cash flows of BoCom.
Key assumptions in VIU calculation
Long-term growth rate: the growth rate used was 5% (31 December 2015: 5%) for periods after 2019 and does not exceed forecast GDP growth in mainland China.
Long-term asset growth rate: the growth rate used was 4% (31 December 2015: 4%) for periods after 2019 and this is the rate of growth required for an assumed 5% long-term growth rate in profit.
Discount rate: the discount rate of 13% (31 December 2015: 13%) is derived from a range of values obtained by applying a capital asset pricing model ('CAPM') calculation for BoCom, using market data. Management supplements this by comparing the rates derived from the CAPM with discount rates available from external sources, and HSBC's discount rate for evaluating investments in mainland China. The discount rate used was within the range of 10.1% to 15.0% (31 December 2015: 10.1% to 14.2%) indicated by the CAPM and external sources.
Loan impairment charge as a percentage of customer advances: the ratio used ranges from 0.76% to 0.83% (31 December 2015: 0.71% to 0.78%) in the short to medium term and is based on the forecasts disclosed by external analysts. For periods after 2019, the ratio used was 0.70% (31 December 2015: 0.70%), slightly higher than the historical average.
Risk-weighted assets as a percentage of total assets: the ratio used was 67% for all forecast periods (31 December 2015: 67%). This is consistent with the forecasts disclosed by external analysts.
Cost-income ratio: the ratio used was 41% (31 December 2015: 41%) in the short to medium term. The ratio was consistent with the short- to medium-term range forecasts of 40.2% to 42.4% (31 December 2015: 40.3% to 40.7%) disclosed by external analysts.
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Notes on the Financial Statements (unaudited) (continued)
The following changes to each key assumption on its own used in the VIU calculation would be necessary to reduce headroom to nil:
Key assumption Changes to key assumption to reduce headroom to nil ============================== =================================================== -- Decrease by 30 basis points Long-term growth rate =================================================== -- Increase by 31 basis points Long-term asset growth rate -- Increase by 38 basis points Discount rate -- Increase by 7 basis points Loan impairment charge as a percentage of customer advances -- Increase by 225 basis points Risk-weighted assets as a percentage of total assets ============================== =================================================== -- Increase by 132 basis points Cost-income ratio 14 Trading liabilities --- ---------------------------------------------------------- At ---------------------- 30 Jun 31 Dec 2016 2015 Footnotes $m $m Deposits by banks 1 38,521 27,054 ======================================================= Customer accounts 1, 2 62,805 40,208 ======================================================= Other debt securities in issue 3 31,860 30,525 ======================================================= Other liabilities - net short positions in securities 55,512 43,827 ======================================================= --------- --------- 188,698 141,614 --------- --------- 1 'Deposits by banks' and 'Customer accounts' include repos, settlement accounts, stock lending and other amounts. 2 Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation, a US Government agency, up to $250,000
per depositor. 3 'Other debt securities in issue' comprises structured notes issued by HSBC for which market risks are actively managed as part of trading portfolios.
At 30 June 2016, the cumulative amount of change in fair value attributable to changes in credit risk was a gain of $346m (31 December 2015: gain of $122m).
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15 Maturity analysis of assets and liabilities --- -------------------------------------------------------------------------------------------
HSBC
Maturity analysis of assets and liabilities
Due Due over Due Due over 6 over over 3 months 9 Due Due 1 month months but months over over but not but not not but 1 year 2 years Due more more more not but not but not not more than than than more more more Due than 3 6 9 than than 2 than 5 over 1 month months months months 1 year years years 5 years Total Footnotes $m $m $m $m $m $m $m $m $m Financial assets Cash and balances at central banks 128,272 - - - - - - - 128,272 ========================= Items in the course of collection from other banks 6,584 - - - - - - - 6,584 ========================= Hong Kong Government certificates of indebtedness 29,011 - - - - - - - 29,011 ========================= Trading assets 277,876 261 906 353 1 898 - - 280,295 ========================= Financial assets designated at fair value 245 88 520 149 170 967 2,442 19,320 23,901 ========================= Derivatives 367,166 19 50 94 84 365 1,089 1,075 369,942 ========================= Loans and advances to banks 61,768 11,054 5,552 2,738 1,895 5,513 2,333 1,346 92,199 ========================= Loans and advances to customers 171,009 64,540 49,377 30,743 33,016 78,342 199,297 261,232 887,556 ========================= Reverse repurchase agreements - non-trading 140,887 26,874 10,808 2,617 4,626 1,515 499 - 187,826 ========================= Financial investments 35,975 51,952 33,529 22,986 18,247 52,017 102,502 124,191 441,399 ========================= Assets held for sale 1 38,398 1 10 7 10 87 8 - 38,521 ========================= Accrued income and other financial assets 12,777 7,488 1,859 587 496 348 441 1,724 25,720 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Financial assets at 30 Jun 2016 1,269,968 162,277 102,611 60,274 58,545 140,052 308,611 408,888 2,511,226 ========================= Non-financial assets - - - - - - - 96,923 96,923 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Total assets at 30 Jun 2016 1,269,968 162,277 102,611 60,274 58,545 140,052 308,611 505,811 2,608,149 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Financial liabilities Hong Kong currency notes in circulation 29,011 - - - - - - - 29,011 ========================= Deposits by banks 59,052 1,694 806 1,799 1,612 315 3,701 921 69,900 ========================= Customer accounts 1,186,803 50,556 24,047 10,683 9,009 5,587 3,689 584 1,290,958 ========================= Repurchase agreements - non-trading 89,718 3,938 3,142 519 25 - 750 250 98,342 ========================= Items in the course of transmission to other banks 7,461 - - - - - - - 7,461 ========================= Trading liabilities 157,132 1,341 3,092 1,327 1,056 5,784 6,583 12,383 188,698 ========================= Financial liabilities designated at fair value 119 483 1,822 1,722 1,598 3,664 24,687 44,787 78,882 ========================= Derivatives 359,525 284 312 297 172 1,245 1,931 4,648 368,414 ========================= Debt securities in issue 16,161 12,604 9,389 6,624 5,796 11,609 22,247 3,243 87,673 ========================= Liabilities of disposal groups held for sale 1 37,987 27 - - - - - - 38,014 ========================= Accruals and other financial liabilities 16,256 6,881 2,064 1,380 696 818 1,542 609 30,246 ========================= Subordinated liabilities 11 - 11 77 159 2,394 4,889 14,128 21,669 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Financial liabilities at 30 Jun 2016 1,959,236 77,808 44,685 24,428 20,123 31,416 70,019 81,553 2,309,268 ========================= Non-financial liabilities - - - - - - - 100,584 100,584 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Total liabilities at 30 Jun 2016 1,959,236 77,808 44,685 24,428 20,123 31,416 70,019 182,137 2,409,852 ========================= --------- ------- ------- ------ ------ ------- ------- ------- ---------
Maturity analysis of assets and liabilities (continued)
Due Due Due Due over 6 over 9 Due Due over 1 over 3 months months over 1 over 2 month months but but year years Due but not but not not not but not but not not more more more more more more more Due than 1 than 3 than 6 than 9 than 1 than 2 than 5 over 5 month months months months year years years years Total Footnotes $m $m $m $m $m $m $m $m $m Financial assets Cash and balances at central banks 98,934 - - - - - - - 98,934 ========================= Items in the course of collection from other banks 5,768 - - - - - - - 5,768 ========================= Hong Kong Government certificates of indebtedness 28,410 - - - - - - - 28,410 ========================= Trading assets 224,691 34 - - - 112 - - 224,837 ========================= Financial assets designated at fair value 429 194 222 83 390 896 2,603 19,035 23,852 ========================= Derivatives 285,797 215 223 198 33 499 841 670 288,476 ========================= Loans and advances to banks 57,296 14,530 4,063 1,964 2,499 5,134 3,274 1,641 90,401 ========================= Loans and advances to customers 176,862 69,638 54,730 33,095 34,774 81,560 201,253 272,542 924,454 ========================= Reverse repurchase agreements - non-trading 110,478 21,978 7,220 2,786 580 2,985 228 - 146,255 ========================= Financial investments 35,104 59,098 36,897 19,102 17,293 48,634 94,549 118,278 428,955 ========================= Assets held for sale 1 15,816 2,628 2,544 1,218 2,611 4,675 6,365 4,422 40,279 ========================= Accrued income and other
financial assets 12,732 6,682 1,995 483 395 463 445 2,115 25,310 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Financial assets at 31 Dec 2015 1,052,317 174,997 107,894 58,929 58,575 144,958 309,558 418,703 2,325,931 ========================= Non-financial assets - - - - - - - 83,725 83,725 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Total assets at 31 Dec 2015 1,052,317 174,997 107,894 58,929 58,575 144,958 309,558 502,428 2,409,656 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Financial liabilities Hong Kong currency notes in circulation 28,410 - - - - - - - 28,410 ========================= Deposits by banks 46,693 2,225 1,049 325 116 712 3,182 69 54,371 ========================= Customer accounts 1,185,091 50,831 21,397 10,421 10,869 6,596 3,852 529 1,289,586 ========================= Repurchase agreements - non-trading 73,478 3,788 1,816 164 154 - 500 500 80,400 ========================= Items in the course of transmission to other banks 5,638 - - - - - - - 5,638 ========================= Trading liabilities 111,691 1,471 1,529 882 2,184 4,344 10,105 9,408 141,614 ========================= Financial liabilities designated at fair value 2,036 1,822 2,943 342 1,900 4,930 14,316 38,119 66,408 ========================= Derivatives 276,765 34 251 213 52 524 1,063 2,169 281,071 ========================= Debt securities in issue 16,536 9,326 16,295 5,542 1,365 10,754 22,866 6,265 88,949 ========================= Liabilities of disposal groups held for sale 1 20,350 1,416 1,548 1,344 1,246 5,050 1,484 115 32,553 ========================= Accruals and other financial liabilities 14,802 7,965 2,467 659 421 925 1,454 665 29,358 ========================= Subordinated liabilities - 401 - - 34 650 4,579 17,038 22,702 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Financial liabilities at 31 Dec 2015 1,781,490 79,279 49,295 19,892 18,341 34,485 63,401 74,877 2,121,060 ========================= Non-financial liabilities - - - - - - - 91,078 91,078 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- Total liabilities at 31 Dec 2015 1,781,490 79,279 49,295 19,892 18,341 34,485 63,401 165,955 2,212,138 ========================= --------- ------- ------- ------ ------ ------- ------- ------- --------- 1 The assets and liabilities of the disposal groups classified as held for sale are disclosed in Note 11. Where an agreed or expected closing date exists, the underlying contractual maturities of the related assets and liabilities are no longer relevant to HSBC and these assets and liabilities are classified in accordance with the closing date of the disposal transaction. For all other disposal groups, the assets and liabilities are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal. 16 Provisions --- ---------------------------------------------------------- Legal proceedings and Restructuring Contractual regulatory Customer Other costs commitments matters remediation provisions Total $m $m $m $m $m $m At 1 Jan 2016 463 240 3,174 1,340 335 5,552 ===================== Additional provisions/increase in provisions 128 65 799 114 93 1,199 ===================== Provisions utilised (96) - (180) (347) (54) (677) ===================== Amounts reversed (66) (57) (39) (15) (42) (219) ===================== Unwinding of discounts - - (2) - 4 2 ===================== Exchange differences and other movements (21) 8 33 (105) 25 (60) ===================== ------------- ----------- ----------- ----------- ---------- ------- At 30 Jun 2016 408 256 3,785 987 361 5,797 ===================== ------------- ----------- ----------- ----------- ---------- ------- At 1 January 2015 197 234 2,184 1,831 552 4,998 ===================== Additional provisions/increase in provisions 92 35 1,432 155 45 1,759 ===================== Provisions utilised (47) (1) (145) (450) (71) (714) ===================== Amounts reversed (13) (10) (86) (13) (50) (172) ===================== Unwinding of discounts - - 24 4 - 28 ===================== Exchange differences and other movements (34) (89) (441) (173) (37) (774) ===================== ------------- ----------- ----------- ----------- ---------- ------- At 30 Jun 2015 195 169 2,968 1,354 439 5,125 ===================== ------------- ----------- ----------- ----------- ---------- ------- At 1 Jul 2015 195 169 2,968 1,354 439 5,125 ===================== Additional provisions/increase in provisions 338 85 721 610 93 1,847 ===================== Provisions utilised (48) (1) (474) (406) (88) (1,017) ===================== Amounts reversed (16) (5) (9) (157) (83) (270) ===================== Unwinding of discounts - - 16 2 - 18 ===================== Exchange differences and other movements (6) (8) (48) (63) (26) (151) ===================== ------------- ----------- ----------- ----------- ---------- ------- At 31 Dec 2015 463 240 3,174 1,340 335 5,552 ===================== ------------- ----------- ----------- ----------- ---------- -------
Further details of 'Legal proceedings and regulatory matters' are set out in Note 19. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.
Further details of 'Customer remediation' are set out in this note. The term refers to activities (root cause analysis, customer contact, case reviews, decision making and redress calculations) carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action.
Payment Protection Insurance
At 30 June 2016, a provision of $720m (31 December 2015: $1,039m) was held relating to the estimated liability for redress in respect of the potential mis-selling of payment protection insurance ('PPI') policies in previous years. There has been no additional charge recorded in 1H16 for PPI.
Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amount to $4.6bn of which $3.9bn has been paid as at 30 June 2016.
The estimated liability for redress is calculated on the basis of the total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on historically observed redress per policy.
A total of 5.4m PPI policies have been sold by HSBC since 2000 which generated estimated gross written premiums of approximately $4.6bn and revenues of approximately $3.7bn at 1H16 average exchange rates. At 30 June 2016, the estimated total complaints expected to be received was two million, representing 36% of total policies sold. It is estimated that contact
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Notes on the Financial Statements (unaudited) (continued)
will be made with regard to 2.3m policies, representing 43% of total policies sold. This estimate includes inbound complaints as well as HSBC's proactive contact exercise on certain policies ('outbound contact').
The following table details the cumulative number of complaints received at 30 June 2016 and the number of claims expected in the future:
Future Footnotes Cumulative to 30 Jun 2016 expected Inbound complaints (000s of policies) 1 1,289 285 ========================================================= Outbound contact (000s of policies) 725 1 ========================================================= Response rate to outbound contact 42% 37% ========================================================= Average uphold rate per claim 2 75% 85% ========================================================= Average redress per claim ($) 2,824 2,873 ========================================================= Complaints to the Financial Ombudsman Service ('FOS') (000s of policies) 130 41 ========================================================= Average uphold rate per FOS complaint 40% 61% ========================================================= 1 Excludes invalid claims where the complainant has not held a PPI policy and FOS complaints. 2 Claims include inbound and responses to outbound contact, but exclude FOS complaints.
A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $199m. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately $12m.
Brazilian labour, civil and fiscal claims
Brazilian labour, civil and fiscal litigation provisions were $495m (31 December 2015: $363m) at 30 June 2016. Of these provisions, $229m (31 December 2015: $168m) was in respect of labour and overtime litigation claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels and the facts and circumstances of each individual case. These provisions form part of the Brazilian disposal group and were classified as 'held for sale' at 30 June 2016 (see Note 11).
17 Deferred tax --- ----------------------------------------------------------
Net deferred tax assets amounted to $3.6bn at 30 June 2016 (30 June 2015: $4.5bn; 31 December 2015: $4.3bn) and mainly relate to timing differences in the US.
18 Contingent liabilities, contractual commitments and guarantees --- -------------------------------------------------------------- At ------------------ 30 Jun 31 Dec 2016 2015 $m $m Guarantees and contingent liabilities Guarantees 86,375 85,855 ================================================================================= Other contingent liabilities 546 490 ================================================================================= ------- ------- 86,921 86,345 ------- ------- Commitments Documentary credits and short-term trade-related transactions 9,518 10,168 ================================================================================= Forward asset purchases and forward forward deposits placed 3,055 981 ================================================================================= Undrawn formal standby facilities, credit lines and other commitments to lend 655,037 655,281 ================================================================================= ------- ------- 667,610 666,430 ------- -------
The above table discloses the nominal principal amounts of commitments, guarantees and other contingent liabilities. Contingent liabilities arising from legal proceedings, regulatory and other matters against the Group are disclosed in Note 19. Nominal principal amounts represent the amounts at risk should contracts be fully drawn upon and clients default. As a significant proportion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.
Capital commitments
In addition to the commitments disclosed above, at 30 June 2016 HSBC had $402m (31 December 2015: $468m) of capital commitments contracted but not provided for and $36m (31 December 2015: $100m) of capital commitments authorised but not contracted for.
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19 Legal proceedings and regulatory matters --- ----------------------------------------------------------
HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 29 of the Annual Report and Accounts 2015. While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 30 June 2016 (see Note 16). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Securities litigation
Household International, Inc. ('Household International') and certain former officers were named as defendants in a securities class action lawsuit, Jaffe v. Household International, Inc., et al., filed in the US District Court for the Northern District of Illinois (the 'Illinois District Court') in August 2002. The complaint asserted claims under the US Securities Exchange Act and alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household International's Consumer Lending operations (some of which ultimately led to a 2002 settlement with 46 states and the District of Columbia) and certain accounting practices, as evidenced by an August 2002 restatement of previously reported consolidated financial statements. A class was certified on behalf of all persons who acquired and disposed of Household International common stock between July 1999 and October 2002.
In April 2009, a jury trial was decided partly in favour of the plaintiffs.
After a court-appointed claims administrator reported that 45,921 claims generated an allowed aggregate loss of approximately $2.2bn, the Illinois District Court entered a partial final judgement against the defendants in October 2013 in the amount of approximately $2.5bn (including pre-judgement interest). The defendants appealed the partial final judgement.
In addition, there were objections regarding approximately $625m in additional claims, prior to the imposition of pre-judgement interest, which remained pending before the Illinois District Court.
In May 2015, the US Court of Appeals for the Seventh Circuit reversed the partial final judgement of the Illinois District Court and remanded the case for a new trial on loss causation.
In June 2016, HSBC reached an agreement to pay $1.575bn to settle all claims. The court granted preliminary approval of the settlement, and HSBC made payment of the agreed settlement amount into an escrow account in July 2016. Final court approval is pending.
Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff ('Madoff') was arrested in December 2008 and later pleaded guilty to running a Ponzi scheme. His firm, Bernard L. Madoff Investment Securities LLC ('Madoff Securities'), is being liquidated in the US by a trustee (the 'Trustee').
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was $8.4bn, including fictitious profits reported by Madoff. Based on information available to HSBC, we have estimated that the funds' actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time HSBC serviced the funds totalled approximately $4bn. Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities' fraud.
US/UK litigation: The Trustee has brought lawsuits against various HSBC companies in the US Bankruptcy Court and in the English High Court, seeking recovery of transfers from Madoff Securities to HSBC in an amount not yet pleaded or determined. HSBC and other parties to the action have moved to dismiss the Trustee's US actions. The deadline by which the Trustee must serve HSBC with his English action has been extended to the end of the third quarter of 2016.
Alpha Prime Fund Ltd ('Alpha Prime') and Senator Fund SPC ('Senator'), co-defendants in one of the Trustee's US actions, have each brought cross-claims against certain HSBC defendants. HSBC has moved to dismiss those cross-claims.
Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, 'Fairfield') (in liquidation since July 2009) have brought lawsuits in the US and the British Virgin Islands ('BVI') against fund shareholders, including HSBC companies that acted as nominees for clients, seeking restitution of redemption payments. Fairfield's US actions are stayed pending the outcome of the action in the BVI (see below).
In December 2014, three additional actions were filed in the US. A purported class of direct investors in Madoff Securities asserted common law claims against various HSBC companies in the United States District Court for the Southern District of New York (the 'New York District Court'). Two investors in Hermes International Fund Limited ('Hermes') also asserted common law claims against various HSBC companies in the New York District Court. HSBC has moved to dismiss both actions. In addition, SPV Optimal SUS Ltd ('SPV OSUS'), the purported assignee of the Madoff-invested company, Optimal Strategic US Equity Ltd, filed a lawsuit in New York state court against various HSBC companies and others, seeking damages on various alleged grounds, including breach of fiduciary duty and breach of trust.
BVI litigation: Beginning in October 2009, liquidators for Fairfield ('Fairfield Liquidators') commenced lawsuits against fund shareholders, including HSBC companies that acted as nominees for clients, seeking recovery of redemption payments. In
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Notes on the Financial Statements (unaudited) (continued)
March 2016, the BVI court denied a motion brought by certain non-HSBC defendants challenging the Fairfield Liquidators' authorisation to pursue their US claims, which those defendants have appealed.
Bermuda litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (together, 'Kingate') brought an action against HSBC Bank Bermuda Limited ('HBBM') for recovery of funds held in Kingate's accounts, fees and dividends. This action is pending, but is not expected to move forward until the resolution of the Trustee's US actions against Kingate and HBBM.
Thema Fund Limited ('Thema') and Hermes each brought three actions in 2009. The first set of actions seeks recovery of funds in frozen accounts held at HSBC Institutional Trust Services (Bermuda) Limited. The second set of actions asserts liability against HSBC Institutional Trust Services (Bermuda) Limited in relation to claims for mistake, recovery of fees and damages for breach of contract. The third set of actions seeks return of fees from HBBM and HSBC Securities Services (Bermuda) Limited. The parties have agreed to a standstill in respect of all three sets of actions.
Cayman Islands litigation: In February 2013, Primeo Fund Limited ('Primeo') (in liquidation since April 2009) brought an action against HSBC Securities Services Luxembourg ('HSSL') and The Bank of Bermuda (Cayman), alleging breach of contract and breach of fiduciary duty, and claiming damages and equitable compensation. Trial is scheduled to begin in November 2016.
Luxembourg litigation: In April 2009, Herald Fund SPC ('Herald') (in liquidation since July 2013) brought an action against HSSL before the Luxembourg District Court, seeking restitution of cash and securities Herald purportedly lost because of Madoff Securities' fraud, or money damages. The Luxembourg District Court dismissed Herald's securities restitution claim, but reserved Herald's cash restitution claim and its claim for money damages. Herald has appealed this judgement.
In March 2010, Herald (Lux) SICAV ('Herald (Lux)') (in liquidation since April 2009) brought an action against HSSL before the Luxembourg District Court seeking restitution of securities, or the cash equivalent, or money damages. Herald (Lux) has also requested the restitution of fees paid to HSSL.
Alpha Prime and Senator have each brought an action against HSSL before the Luxembourg District Court, seeking the restitution of securities, or the cash equivalent, or money damages. Both matters have been temporarily suspended at the request of Alpha Prime and Senator, respectively. In April 2015, Senator commenced an action against the Luxembourg branch of HSBC Bank plc asserting identical claims before the Luxembourg District Court.
HSSL has also been named as a defendant in various actions by shareholders in Primeo Select Fund, Herald, Herald (Lux), and Hermes. Most of these actions have been dismissed, suspended or postponed.
Ireland litigation: In November 2013, Defender Limited brought an action against HSBC Institutional Trust Services (Ireland) Limited ('HTIE') and others, alleging breach of contract and claiming damages and indemnification for fund losses. A trial date has not yet been scheduled.
In May 2016, following a hearing on two preliminary issues, HTIE was successful in obtaining an order dismissing two remaining claims by purported shareholders in Thema International Fund plc.
SPV OSUS's action against HTIE and HSBC Securities Services (Ireland) Limited alleging breach of contract and claiming damages and indemnification for fund losses was dismissed in October 2015. SPV OSUS's appeal is scheduled for hearing in January 2017.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the proceedings have been brought. Based upon the information currently available, management's estimate of possible aggregate damages that might arise as a result of all claims in the various Madoff-related proceedings is up to or exceeding $800m, excluding costs and interest. Due to uncertainties and limitations of this estimate, the ultimate damages could differ significantly from this amount.
US mortgage-related investigations
In April 2011, HSBC Bank USA N.A. ('HSBC Bank USA') entered into a consent order with the Office of the Comptroller of the Currency ('OCC'), and HSBC Finance Corporation ('HSBC Finance') and HSBC North America Holdings Inc. ('HNAH') entered into a similar consent order with the Federal Reserve Board ('FRB') (together with the OCC order, the 'Servicing Consent Orders'). The Servicing Consent Orders require prescribed actions to address certain foreclosure practice deficiencies. The Servicing Consent Orders also required an independent foreclosure review which, pursuant to amendments to the Servicing Consent Orders in February 2013, ceased and was replaced by a settlement under which HSBC and 12 other participating servicers agreed to provide cash payments and other assistance to eligible borrowers. In June 2015, the OCC issued an amended consent order citing the failure of HSBC Bank USA to be in compliance with all requirements of the OCC order. A failure to satisfy all requirements of the OCC order may result in a variety of regulatory consequences for HSBC Bank USA, including the imposition of civil money penalties.
In February 2016, HSBC Bank USA, HSBC Finance, HSBC Mortgage Services Inc. and HNAH entered into an agreement with the US Department of Justice (the 'DoJ'), the US Department of Housing and Urban Development, the Consumer Financial Protection Bureau, other federal agencies (the 'Federal Parties') and the Attorneys General of 49 states and the District of Columbia (the 'State Parties') to resolve civil claims related to past residential mortgage loan origination and servicing practices (the 'National Mortgage Settlement Agreement'). In addition, in February 2016, the FRB announced the imposition against HSBC Finance and HNAH of a $131m civil money penalty in connection with the FRB's consent order of April 2011. Pursuant to the terms of the FRB's civil money penalty order, the penalty will be satisfied through the cash payments made to the Federal Parties and the consumer relief provided under the National Mortgage Settlement Agreement.
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The Servicing Consent Orders and the National Mortgage Settlement Agreement do not completely preclude other enforcement actions by regulatory, governmental or law enforcement agencies related to foreclosure and other mortgage servicing practices, including, but not limited to, matters relating to the securitisation of mortgages for investors, which could include the imposition of civil money penalties, criminal fines or other sanctions. In addition, these practices have in the past resulted in private litigation, and may result in further private litigation.
US mortgage securitisation activity and litigation
HSBC Bank USA was a sponsor or seller of loans used to facilitate whole loan securitisations underwritten by HSBC Securities (USA) Inc. ('HSI'). From 2005 to 2007, HSBC Bank USA purchased and sold $24bn of such loans to HSI, which were subsequently securitised and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $4.9bn as at 30 June 2016. In addition, HSBC Bank USA served as trustee on behalf of various mortgage securitisation trusts.
As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to a number of foreclosed homes as trustee on behalf of various mortgage securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws relating to property upkeep and tenants' rights. While HSBC believes and continues to maintain that these obligations and any related liabilities are those of the servicer of each trust, HSBC continues to receive significant adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of 'HSBC, as trustee'.
Beginning in June 2014, a number of lawsuits were filed in state and federal court in New York and Ohio against HSBC Bank USA as trustee of over 320 mortgage securitisation trusts. These lawsuits are brought on behalf of the trusts by a putative class of investors including, among others, BlackRock and PIMCO funds. The complaints allege that the trusts have sustained losses in collateral value of approximately $38bn. The lawsuits seek unspecified damages resulting from alleged breaches of the US Trust Indenture Act, breach of fiduciary duty, negligence, breach of contract and breach of the common law duty of trust. HSBC's motions to dismiss in several of these lawsuits were, for the most part, denied.
HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (an indirect subsidiary of HSBC Finance) ('Decision One') have been named as defendants in various mortgage loan repurchase actions brought by trustees of mortgage securitisation trusts. In the aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay compensatory damages, totalling at least $1bn. One of these actions has been scheduled for trial in September 2016.
HSBC Mortgage Corporation (USA) Inc. and Decision One have also been named as defendants in two separate actions filed by Residential Funding Company LLC ('RFC'), a mortgage loan purchase counterparty, seeking unspecified damages in connection with approximately 25,000 mortgage loans.
Since 2010, various HSBC entities have received subpoenas and requests for information from the DoJ and the Massachusetts state Attorney General seeking the production of documents and information regarding HSBC's involvement in specific private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. In November 2014, HNAH, on behalf of itself and various subsidiaries including, but not limited to, HSBC Bank USA, HSI Asset Securitization Corp., HSI, HSBC Mortgage Corporation (USA), HSBC Finance and Decision One, received a subpoena from the US Attorney's Office for the District of Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act ('FIRREA'), concerning the origination, financing, purchase, securitisation and servicing of subprime and non-subprime residential mortgages. Five non-HSBC banks have previously reported settlements with the DoJ of FIRREA and other mortgage-backed securities-related matters. HSBC is cooperating with the US authorities and is continuing to produce documents and information responsive to their requests.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact of these matters, which could be significant.
HSBC expects the focus on mortgage securitisations to continue and may be subject to additional claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market.
Anti-money laundering and sanctions-related matters
In October 2010, HSBC Bank USA entered into a consent order with the OCC, and HNAH entered into a consent order with the FRB (each an 'Order' and together, the 'Orders'). These Orders required improvements to establish an effective compliance risk management programme across HSBC's US businesses, including risk management related to the Bank Secrecy Act ('BSA') and AML compliance. HSBC Bank USA is not currently in compliance with the OCC Order. Steps are being taken to address the requirements of the Orders.
In December 2012, HSBC Holdings, HNAH and HSBC Bank USA entered into agreements with US and UK government agencies regarding past inadequate compliance with the BSA, AML and sanctions laws. Among those agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with, among others, the DoJ (the 'US DPA'); and HSBC Holdings consented to a cease-and-desist order, and HSBC Holdings and HNAH consented to a civil money penalty order with the FRB. HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions, as well as an undertaking with the UK FCA to comply with certain forward-looking AML and sanctions-related obligations. In addition, HSBC Bank USA entered into civil money penalty orders with the Financial Crimes Enforcement Network of the US Treasury Department and the OCC.
Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling $1.9bn to US authorities and undertook various further obligations, including, among others, to continue to cooperate fully with the DoJ in any and all investigations, not to commit any crime under US federal law subsequent to the signing of the agreement, and to retain an independent
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Notes on the Financial Statements (unaudited) (continued)
compliance monitor (the 'Monitor'). In January 2016, the Monitor delivered his second annual follow-up review report. Through his country-level reviews, the Monitor identified potential anti-money laundering and sanctions compliance issues that the DoJ and HSBC are reviewing further. Additionally, as discussed elsewhere in this Note, HSBC is the subject of other ongoing investigations and reviews by the DoJ. The potential consequences of breaching the US DPA, as well as the role of the Monitor and his second annual review, are discussed on pages 113 and 116 of the Annual Report and Accounts 2015.
HSBC Bank USA also entered into two consent orders with the OCC. These required HSBC Bank USA to correct the circumstances noted in the OCC's report and to adopt an enterprise-wide compliance programme, and imposed restrictions on acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, without the OCC's prior approval.
These settlements with US and UK authorities have led to private litigation, and do not preclude further private litigation related to HSBC's compliance with applicable BSA, AML and sanctions laws or other regulatory or law enforcement actions for BSA, AML, sanctions or other matters not covered by the various agreements.
In May 2014, a shareholder derivative action was filed by a shareholder of HSBC Holdings purportedly on behalf of HSBC Holdings, HSBC Bank USA, HNAH and HSBC USA Inc. (the 'Nominal Corporate Defendants') in New York state court against certain current and former directors and officers of those HSBC companies (the 'Individual Defendants'). The complaint alleges that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the US DPA. In November 2015, the New York state court granted the Nominal Corporate Defendants' motion to dismiss. The plaintiff has appealed that decision.
In July 2014, a claim was filed in the Ontario Superior Court of Justice against HSBC Holdings and a former employee purportedly on behalf of a class of persons who purchased HSBC common shares and American Depositary Shares between July 2006 and July 2012. The complaint, which seeks monetary damages of up to CA$20bn, alleges that the defendants made statutory and common law misrepresentations in documents released by HSBC Holdings and its wholly owned subsidiary, HSBC Bank Canada, relating to HSBC's compliance with BSA, AML, sanctions and other laws.
In November 2014, a complaint was filed in the US District Court for the Eastern District of New York on behalf of representatives of US persons alleged to have been killed or injured in Iraq between April 2004 and November 2011. The complaint was filed against HSBC Holdings, HSBC Bank plc, HSBC Bank USA and HSBC Bank Middle East, as well as other non-HSBC banks and the Islamic Republic of Iran. The plaintiffs allege that defendants violated the US Anti-Terrorism Act ('US ATA') by altering or falsifying payment messages involving Iran, Iranian parties and Iranian banks for transactions processed through the US. Defendants filed a motion to dismiss in May 2015.
In November 2015, a complaint was filed in the Illinois District Court on behalf of representatives of US persons alleged to have been killed or injured in terrorist attacks on three hotels in Amman, Jordan in 2005. The complaint was filed against HSBC Holdings, HSBC Bank USA, HNAH, HSI, HSBC Finance, HSBC USA Inc. and HSBC Bank Middle East, as well as a non-HSBC bank. The plaintiffs allege that the HSBC defendants violated the US ATA by failing to enforce due diligence methods to prevent its financial services from being used to support the terrorist attacks.
In February 2016, a complaint was filed in the US District Court for the Southern District of Texas by representatives of US persons alleged to have been killed or injured in Mexico by Mexican drug cartels. The complaint was filed against HSBC Holdings, HSBC Bank USA, HSBC México SA, and Grupo Financiero HSBC. The plaintiffs allege that defendants violated the US ATA by providing financial services to individuals and entities associated with the Mexican drug cartels. In June 2016, HSBC filed a motion to transfer the case to the New York District Court, and a motion to dismiss in respect of certain of the HSBC defendants.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these lawsuits, including the timing or any possible impact on HSBC, which could be significant.
Tax-related investigations
HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain HSBC companies and employees, including those associated with HSBC Private Bank (Suisse) SA ('HSBC Swiss Private Bank') and an HSBC company in India, acted appropriately in relation to certain customers who had US tax reporting obligations. In connection with these investigations, HSBC Swiss Private Bank, with due regard for Swiss law, has produced records and other documents to the DoJ. In August 2013, the DoJ informed HSBC Swiss Private Bank that it was not eligible for the 'Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks' since a formal investigation had previously been authorised.
In addition, various tax administration, regulatory and law enforcement authorities around the world, including in Belgium, France, Argentina and India, are conducting investigations and reviews of HSBC Swiss Private Bank and other HSBC companies in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation. HSBC Swiss Private Bank has been placed under formal criminal examination by magistrates in both Belgium and France. In April 2015, HSBC Holdings was informed that it has been placed under formal criminal investigation by the French magistrates in connection with the conduct of HSBC Swiss Private Bank in 2006 and 2007 for alleged tax offences, and a EUR1bn bail was imposed. HSBC Holdings appealed the magistrates' decision and, in June 2015, bail was reduced to EUR100m. The ultimate financial impact of this matter could differ significantly, however, from the bail amount of EUR100m. In March 2016, HSBC was informed that the French magistrates are of the view that they have completed their investigation with respect to HSBC Swiss Private Bank and HSBC Holdings, and have referred the matter to the public prosecutor for a recommendation on any potential charges to be brought.
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In November 2014, the Argentine tax authority initiated a criminal action against various individuals, including current and former HSBC employees. The criminal action includes allegations of tax evasion, conspiracy to launder undeclared funds and an unlawful association among HSBC Swiss Private Bank, HSBC Bank Argentina, HSBC Bank USA and certain HSBC employees, which allegedly enabled numerous HSBC customers to evade their Argentine tax obligations.
In February 2015, the Indian tax authority issued a summons and request for information to an HSBC company in India. In August 2015 and November 2015, HSBC companies received notices issued by two offices of the Indian tax authority, alleging that the Indian tax authority had sufficient evidence to initiate prosecution against HSBC Swiss Private Bank and its Dubai entity for abetting tax evasion of four different Indian individuals and/or families and requesting that the HSBC companies show why such prosecution should not be initiated.
HSBC is cooperating with the relevant authorities. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these investigations and reviews, which could be significant.
In light of the media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings.
Mossack Fonseca & Co.
HSBC has received requests for information from various regulatory and law enforcement authorities around the world concerning persons and entities believed to be linked to Mossack Fonseca & Co., a service provider of personal investment companies. HSBC is cooperating with the relevant authorities.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the UK, the US, the EU and Switzerland, are conducting investigations and reviews related to certain past submissions made by panel banks and the processes for making submissions in connection with the setting of Libor, Euribor and other benchmark interest rates. As certain HSBC companies are members of such panels, HSBC has been the subject of regulatory demands for information and is cooperating with those investigations and reviews.
In May 2014, HSBC received a Statement of Objections from the European Commission (the 'Commission'), alleging anti-competitive practices in connection with the pricing of euro interest rate derivatives. The Statement of Objections sets out the Commission's preliminary views and does not prejudge the final outcome of its investigation. HSBC responded to the Commission's Statement of Objections in March 2015, and a hearing before the Commission took place in June 2015. A decision by the Commission is pending.
US dollar Libor: Beginning in 2011, HSBC and other panel banks have been named as defendants in a number of private lawsuits filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including US antitrust and racketeering laws, the US Commodity Exchange Act ('US CEA'), and state law. The lawsuits include individual and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the New York District Court.
The New York District Court has issued decisions dismissing certain of the claims in response to motions filed by the defendants. Those decisions resulted in the dismissal of the plaintiffs' federal and state antitrust claims, racketeering claims, and unjust enrichment claims. Dismissal of certain of these claims was appealed to the US Court of Appeals for the Second Circuit, which reversed the New York District Court's dismissal of plaintiffs' antitrust claims in May 2016.
Euroyen Tokyo interbank offered rate ('Tibor') and/or Japanese yen Libor: In April 2012 and July 2015, HSBC and other panel banks were named as defendants in putative class actions filed in the New York District Court on behalf of persons who transacted in financial instruments allegedly related to the euroyen Tibor and/or Japanese yen Libor. The complaints allege, among other things, misconduct related to euroyen Tibor, although HSBC is not a member of the Japanese Bankers Association's euroyen Tibor panel, as well as Japanese yen Libor, in violation of US antitrust laws, the US CEA, and state law. In May 2016, HSBC reached an agreement in principle with plaintiffs to resolve both of these actions, subject to court approval. The court granted preliminary approval of the settlement in June 2016, and HSBC made payment of the agreed settlement amount into an escrow account. The final settlement approval hearing is scheduled for November 2016.
Euribor: In November 2013, HSBC and other panel banks were named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euro futures contracts and other financial instruments allegedly related to Euribor. The complaint alleges, among other things, misconduct related to Euribor in violation of US antitrust laws, the US CEA and state law. In May 2016, HSBC reached an agreement in principle with plaintiffs to resolve this action, subject to court approval.
Singapore Interbank Offered Rate ('SIBOR') and/or Singapore Swap Offer Rate ('SOR'): In July 2016, HSBC and other panel banks were named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in products related to SIBOR and/or SOR. The complaint alleges, among other things, misconduct related to SIBOR and/or SOR in violation of US antitrust and racketeering laws, and state law. This matter is at an early stage.
US dollar International Swaps and Derivatives Association fix ('ISDAfix'): In September 2014, HSBC and other panel banks were named as defendants in a number of putative class actions consolidated in the New York District Court on behalf of
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Notes on the Financial Statements (unaudited) (continued)
persons who transacted in interest rate derivatives or purchased or sold financial instruments that were either tied to ISDAfix rates or were executed shortly before, during, or after the time of the daily ISDAfix setting window. The consolidated complaint alleges, among other things, misconduct related to these activities in violation of US antitrust laws, the US CEA and state law. HSBC's motion to dismiss the complaint was denied in March 2016.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
Foreign exchange rate investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the US, the EU, Brazil and South Korea, are conducting investigations and reviews into trading by HSBC and others on the foreign exchange markets. HSBC is cooperating with these investigations and reviews.
In May 2015, the DoJ resolved its investigations with respect to five non-HSBC financial institutions, four of whom agreed to plead guilty to criminal charges of conspiring to manipulate prices in the foreign exchange spot market, and resulting in the imposition of criminal fines in the aggregate of more than $2.5bn. Additional penalties were imposed at the same time by the FRB and other banking regulators. HSBC was not a party to these resolutions, and investigations into HSBC by the DoJ, FRB and others around the world continue.
In late 2013 and early 2014, HSBC and other banks were named as defendants in various putative class actions consolidated in the New York District Court. The consolidated complaint alleged, among other things, that the defendants conspired to manipulate the WM/Reuters foreign exchange benchmark rates. In September 2015, HSBC reached an agreement with plaintiffs to resolve the consolidated action, subject to court approval. In December 2015, the court granted preliminary approval of the settlement, and HSBC made payment of the agreed settlement amount into an escrow account. The court has not yet set a date for the final approval hearing.
In June 2015, a putative class action was filed in the New York District Court making similar allegations on behalf of Employee Retirement Income Security Act of 1974 ('ERISA') plan participants, and another complaint was filed in the US District Court for the Northern District of California in May 2015. HSBC filed a motion to transfer the California action to New York, which was granted in November 2015.
In September 2015, two additional putative class actions making similar allegations under Canadian law were issued in Canada against various HSBC companies and other financial institutions.
As at 30 June 2016, HSBC has recognised a provision in the amount of $1.2bn. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from the amount provided.
Precious metals fix-related investigations and litigation
Various regulators and competition and law enforcement authorities, including in the US and the EU, are conducting investigations and reviews relating to HSBC's precious metals operations and trading. HSBC is cooperating with these investigations and reviews. In November 2014, the Antitrust Division and Criminal Fraud Section of the DoJ issued a document request to HSBC Holdings, seeking the voluntary production of certain documents in connection with a criminal investigation that the DoJ is conducting of alleged anti-competitive and manipulative conduct in precious metals trading. In January 2016, the Antitrust Division of the DoJ informed HSBC that it was closing its investigation; however, the Criminal Fraud Section's investigation remains ongoing.
Gold: Beginning in March 2014, numerous putative class actions were filed in the New York District Court and the US District Courts for the District of New Jersey and the Northern District of California, naming HSBC and other members of The London Gold Market Fixing Limited as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. Defendants moved to dismiss the consolidated action and a hearing took place in April 2016.
In December 2015, a putative class action under Canadian law was filed in the Ontario Superior Court of Justice against various HSBC companies and other financial institutions. Plaintiffs allege that, from January 2004 to March 2014, defendants conspired to manipulate the price of gold and gold-related investment instruments in violation of the Canadian Competition Act and common law.
Silver: Beginning in July 2014, numerous putative class actions were filed in the US District Courts for the Southern and Eastern Districts of New York, naming HSBC and other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 1999 to the present, defendants conspired to manipulate the price of silver and silver derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. Defendants moved to dismiss the consolidated action and a hearing took place in April 2016.
In April 2016, two putative class actions under Canadian law were filed in the Ontario and Quebec Superior Courts of Justice against various HSBC companies and other financial institutions. Plaintiffs in both actions allege that, from January 1999 to August 2014, defendants conspired to manipulate the price of silver and silver-related investment instruments in violation of the Canadian Competition Act and common law. These actions are at an early stage.
Platinum and palladium: Between late 2014 and early 2015, numerous putative class actions were filed in the New York District Court, naming HSBC and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The
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complaints allege that, from January 2008 to the present, defendants conspired to manipulate the price of platinum group metals ('PGM') and PGM-based financial products for their collective benefit in violation of US antitrust laws and the US CEA. Defendants have moved to dismiss the action.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
Credit default swap litigation
Various HSBC companies, among other financial institutions, ISDA, and Markit, were named as defendants in numerous putative class actions filed in the New York District Court and the Illinois District Court. The actions alleged that the defendants, violated US antitrust laws by, among other things, conspiring to restrict access to credit default swap pricing exchanges and block new entrants into the exchange market. The actions were subsequently consolidated in the New York District Court. In September 2015, the HSBC defendants reached an agreement with plaintiffs to resolve the consolidated action, and final court approval of that settlement was granted in April 2016.
Interest rate swap litigation
In February 2016, various HSBC companies, among others, were added as defendants to a pending putative class action filed in the New York District Court. The amended complaint, along with other complaints filed in the New York District Court and the Illinois District Court, alleged that the defendants violated US antitrust laws by, among other things, conspiring to boycott and eliminate various entities and practices that would have brought exchange trading to buy--side investors in the interest rate swaps marketplace. In June 2016, the actions were consolidated in the New York District Court. This matter is at an early stage.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Economic plans: HSBC Bank Brasil S.A.
In the mid-1980s and early 1990s, certain economic plans were introduced by the government of Brazil to reduce escalating inflation. The implementation of these plans adversely impacted savings account holders, thousands of which consequently commenced legal proceedings against financial institutions in Brazil, including HSBC Bank Brasil S.A. ('HSBC Brazil'), alleging, among other things, that savings account balances were adjusted by a different price index than that contractually agreed, which caused them a loss of income. Certain of these cases have reached the Brazilian Supreme Court. The Supreme Court has suspended all cases pending before lower courts until it delivers a final judgement on the constitutionality of the changes resulting from the economic plans. It is anticipated that the outcome of the Supreme Court's final judgement will set a precedent for all cases pending before the lower courts. Separately, the Brazilian Superior Civil Court is considering matters relating to, among other things, contractual and punitive interest rates to be applied to calculate any loss of income.
In July 2016, HSBC completed the sale of HSBC Brazil to Banco Bradesco S.A. (see Note 11).
Fédération Internationale de Football Association ('FIFA') related investigations
HSBC has received inquiries from the DoJ regarding its banking relationships with certain individuals and entities that are or may be associated with FIFA. The DoJ is investigating whether multiple financial institutions, including HSBC, permitted the processing of suspicious or otherwise improper transactions, or failed to observe applicable AML laws and regulations. HSBC is cooperating with the DoJ's investigation.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Hiring practices investigation
The US Securities and Exchange Commission (the 'SEC') is investigating multiple financial institutions, including HSBC, in relation to hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific. HSBC has received various requests for information and is cooperating with the SEC's investigation.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
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Notes on the Financial Statements (unaudited) (continued)
20 Goodwill impairment --- ----------------------------------------------------------
Impairment testing
As described on page 407 of the Annual Report and Accounts 2015, we test goodwill for impairment at 1 July each year and whenever there is an indication that goodwill may be impaired. At 30 June 2016, we reviewed the inputs used in our most recent impairment test in the light of current economic and market conditions, and identified indicators of impairment for two cash-generating units ('CGUs') disclosed as sensitive in the Annual Report and Accounts 2015.
The indicators related to the perceived increase in the cost of equity for UK and European banks following the UK electorate's vote to leave the European Union ('EU'), and current business performance, as well as the continued reshaping of our Global Private Banking business in Europe. As a result, impairment tests were performed for Global Private Banking - Europe and Global Banking and Markets - Europe at 30 June 2016. The key assumptions and the results of the tests are included in the disclosure below. There were no indicators of impairment in respect of our other CGUs.
The discount rates used for Global Private Banking - Europe and Global Banking and Markets - Europe include a 100bps uplift to reflect the increased risk in European markets following the UK's referendum on membership of the EU. Given the proximity of the referendum to the end of 1H16 and the subsequent market volatility, the adjustment represents management's judgement based on the latest available information, including the latest broker reports. Furthermore, the tests were based on recently updated internal forecasts, which include a preliminary assessment of the impact of the referendum result but may change. Finally, the structure of the Global Private Banking business continues to evolve and this could also impact future tests. All these factors could impact the headroom of these two CGUs in the future.
Impairment test results
Nominal growth rate Carrying Value in Headroom/ Discount beyond initial cash amount(1) use (impairment) rate flow projections Cash-generating unit $bn $bn $bn % % Global Private Banking - Europe 4.4 3.6 (0.8) 9.7 2.8 ========================= Global Banking and Markets - Europe 18.9 22.7 3.8 10.7 3.8 ========================= 1 Included in the carrying amounts of $4.4bn and $18.9bn is goodwill of $3.3bn and $2.6bn respectively.
As shown above, the Group's Global Private Banking - Europe goodwill balance was impaired by $752m. This is in addition to a $48m goodwill impairment charge recognised on certain Global Private Banking - Europe assets classified as held for sale. These amounts have been recognised in the income statement as an impairment loss within 'Amortisation and impairment of intangible assets and goodwill'. The previous value in use amounts for Global Banking and Markets - Europe and Global Private Banking - Europe are disclosed on page 410 of the Annual Report and Accounts 2015. Due to the impairment recognised, Global Private Banking - Europe had nil headroom at 30 June 2016 and therefore any negative movement in the current assumptions would result in the recognition of a further impairment.
Sensitivities of key assumptions in calculating VIU
At 30 June 2016, Global Banking and Markets - Europe was sensitive to reasonably possible changes in the key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the model. These include the external range of observable discount rates, historical performance against forecast, and risks attaching to the key assumptions underlying cash flow projections.
Reasonably possible changes in key assumptions
Cash-generating unit Input Key assumptions Reasonably possible Associated risks change Global Private Cash flow projections -- -- -- Banking - Europe Achievement of Challenges achieving A planned strategic strategic negative repositioning. repositioning. change in any assumption would result in an additional impairment. -- -- Level of assets under Lower than expected management. growth in assets under management. -- -- Return on assets. -- Level of interest rates. -- Cost savings from recent investment in new platforms. Discount rate -- -- Discount External rate evidence used arises is to a suggest reasonable that estimate the of rate a used suitable is market not rate appropriate for to the the profile business. of the business. Long-term growth -- -- rates Business Growth does not growth match GDP, or GDP will forecasts fall. reflect GDP growth rates in the long
term. Global Banking and Cash flow projections -- -- Markets - Europe Level of interest Cash flow projections rates. decrease by 20%.
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-- -- Recovery Lower than expected growth in of key markets. European markets over the forecast period. -- The impact of regulatory changes, including the ring fencing of the UK retail bank. Discount rate -- -- -- Discount External Discount rate increases by 100 rate evidence basis points. used arises is to a suggest reasonable that estimate the of rate a used suitable is market not rate appropriate for to the the profile business. of the business. Long-term growth rates -- -- -- Business Growth does not match GDP, or Real growth GDP forecasts fall. GDP will growth reflect does GDP not growth occur rates or in is the not long reflected term. in performance. ======== ====================== =========== =============================== ================================
The following table presents the change required to individual current assumptions for Global Banking and Markets - Europe to reduce headroom to nil (break even).
Changes to current assumptions to achieve nil headroom
Increase/(decrease) --------------------------------------- Discount Long-term rate Cash flow growth rate bps % bps Cash-generating unit Global Banking and Markets - Europe 139 (16.7) (177) ===================================== 21 Transactions with related parties --- ----------------------------------------------------------
There were no changes in the related party transactions described in the Annual Report and Accounts 2015 that have had a material effect on the financial position or performance of HSBC in the half-year to 30 June 2016. All related party transactions that took place in the half-year to 30 June 2016 were similar in nature to those disclosed in the Annual Report and Accounts 2015.
22 Events after the balance sheet date --- ----------------------------------------------------------
On 1 July 2016, we sold our operations in Brazil, comprising HSBC Bank Brasil S.A. - Banco Múltiplo and HSBC Serviços e Participações Ltda. (collectively 'HSBC Brazil'), to Banco Bradesco S.A. for cash consideration of $4.9bn and recognised a loss on disposal of $1.7bn. HSBC Brazil was classified as held for sale at 30 June 2016 (see Note 11).
On 3 August 2016, the Board approved a share buy-back programme of up to $2.5bn.
A second interim dividend for the financial year ending 31 December 2016 was declared by the Directors on 3 August 2016, as described in Note 2.
23 Interim Report 2016 and statutory accounts --- ----------------------------------------------------------
The information in this Interim Report 2016 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. This Interim Report 2016 was approved by the Board of Directors on 3 August 2016. The statutory accounts of HSBC Holdings for the year ended 31 December 2015 have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The Group's auditor, PricewaterhouseCoopers LLP ('PwC') has reported on those accounts. Its report was unqualified, did not include a reference to any matters to which PwC drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
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Statement of Directors' responsibilities
Statement of Directors' Responsibilities
The Directors(1) , who are required to prepare the financial statements on a going concern basis unless it is not appropriate, 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 EU; -- this Interim Report 2016 includes a fair review of the information required by: (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of: important events that have occurred during the first six months of the financial year ending 31 December 2016 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 (b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being: related party transactions that have taken place in the first six months of the financial year ending 31 December 2016 and that 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 2015 that could materially affect the financial position or performance of HSBC during the first six months of the financial year ending 31 December 2016.
On behalf of the Board
Douglas Flint
Group Chairman
3 August 2016
Phillip Ameen*, Kathleen Casey*, Laura Cha*, Henri de Castries*, Lord Evans of Weardale*, Joachim Faber*, Douglas Flint, Stuart Gulliver, Sam Laidlaw*, Irene Lee*, John Lipsky*, Rachel Lomax*, Iain Mackay, Heidi Miller*, Marc Moses, David Nish*, Jonathan Symonds*, Pauline van der Meer Mohr* and Paul Walsh*. * Independent non-executive Director.
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Independent Review Report by PricewaterhouseCoopers LLP to HSBC Holdings plc
Independent Review Report to HSBC Holdings plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed the condensed consolidated interim financial statements, defined below, in the interim financial report of HSBC Holdings plc for the six months ended 30 June 2016. Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
This conclusion is to be read in the context of what we say in the remainder of this report.
What we have reviewed
The condensed consolidated interim financial statements, which are prepared by HSBC Holdings plc, comprise:
-- the consolidated Balance Sheet as at 30 June 2016; -- the consolidated income statement and the consolidated statement of comprehensive income for the period then ended; -- the consolidated statement of cash flows for the period then ended; -- the consolidated statement of changes in equity for the period then ended; and -- the explanatory notes to the condensed consolidated interim financial statements.
As disclosed in Note 1, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
The condensed consolidated interim financial statements included in the interim financial report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
What a review of interim financial information involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated interim financial statements.
Responsibilities for the interim financial information and the review
Our responsibilities and those of the Directors
The interim financial report, including the condensed consolidated interim financial statements, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express to the company a conclusion on the condensed consolidated interim financial statements in the interim financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London, United Kingdom
3 August 2016
HSBC HOLDINGS PLC
140
Shareholder information
Shareholder information 1 Directors' interests 141 9 Final results 146 =========================================== ==== =================================================== 2 Employee share plans 144 10 Corporate governance 146 =========================================== ==== =================================================== 3 Notifiable interests in share capital 145 11 Changes in Directors' details 146 =========================================== ==== =================================================== 4 Dealings in HSBC Holdings listed securities 145 12 Going concern basis 147 =========================================== ==== =================================================== 5 First interim dividend for 2016 145 13 Telephone and online share dealing service 147 =========================================== ==== =================================================== 6 Second interim dividend for 2016 145 14 Stock symbols 147 =========================================== ==== =================================================== Copies of the Interim Report 2016 and shareholder 7 Proposed interim dividends for 2016 146 15 enquiries =========================================== 8 Earnings release 146 and communications 148 =========================================== ==== =================================================== 1 Directors' interests --- ----------------------------------------------------------
According to the register of Directors' interests maintained by HSBC Holdings pursuant to section 352 of the Securities and Futures Ordinance of Hong Kong, at 30 June 2016 the Directors of HSBC Holdings had the following interests, all beneficial unless otherwise stated, in the shares or debentures of HSBC and its associates:
Directors' interests - shares and debentures
At 30 Jun 2016 -------------------------------------------------------- Child Jointly At under 18 with 1 Jan Beneficial or another Total Footnotes 2016 owner spouse person Trustee interests(1) HSBC Holdings ordinary shares Phillip Ameen 3 5,000 5,000 - - - 5,000 Kathleen Casey 3 3,540 8,260 - - - 8,260 Laura Cha 5,200 5,200 - - - 5,200 Henri de Castries - 15,491 - - - 15,491 Lord Evans of Weardale 7,416 7,416 - - - 7,416 Joachim Faber 45,778 66,605 - - - 66,605 Douglas Flint 401,450 401,796 - - - 401,796 Stuart Gulliver 2,861,265 3,056,229 176,885 - - 3,233,114 ================ Sam Laidlaw 38,012 37,795 - - 1,416(2) 39,211 Irene Lee - 10,000 - - - 10,000 ================ John Lipsky 3 16,165 16,165 - - - 16,165 Rachel Lomax 18,900 18,900 - - - 18,900 Iain Mackay 223,872 370,489 - - - 370,489 Heidi Miller 3 3,695 3,815 - - - 3,815 Marc Moses 624,643 762,161 - - - 762,161 David Nish - - 50,000 - - 50,000 Jonathan Symonds 21,771 16,886 4,885 - - 21,771 Pauline van der Meer Mohr - 7,000 - - - 7,000 Paul Walsh - 5,000 - - - 5,000 ================ 1 Details of executive Directors' other interests in HSBC Holdings ordinary shares arising from the HSBC Holdings savings-related share option plans and the HSBC Share Plan 2011 are set out on the following pages. At 30 June 2016, the aggregate interests under the Securities and Futures Ordinance of Hong Kong in HSBC Holdings ordinary shares, including interests arising through employee share plans, were: Douglas Flint - 404,715; Stuart Gulliver - 6,330,295; Iain Mackay - 1,804,677; and Marc Moses - 2,489,059. Each Director's total interests represent less than 1% of the shares in issue. 2 Non-beneficial. 3 Interests in American Depositary Shares ('ADS'), which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.
HSBC HOLDINGS PLC
141
Savings-related share option plans and the HSBC Share Plan 2011
HSBC Holdings savings-related share option plans
HSBC Holdings ordinary shares ------------------------------- Held at Held at Exercisable 1 Jan 30 Jun ---------------------- Date of Exercise award price (GBP) from until 2016 2016 Douglas Flint 23 Sep 2014 5.1887 1 Nov 2019 1 May 2020 2,919 2,919 ==================== ============= ============ ========== ========== Iain Mackay 23 Sep 2014 5.1887 1 Nov 2017 1 May 2018 3,469 3,469 ==================== ============= ============ ========== ==========
There are no performance criteria conditional upon which the outstanding options are exercisable and there have been no variations to the terms and conditions since the awards were made. See page 144 for more details on the HSBC Holdings savings-related share option plans. The market value per ordinary share at 30 June 2016 was GBP4.66. The highest and lowest market values per ordinary share during the half-year to 30 June 2016 were GBP5.22 and GBP4.16. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the relevant date. Under the Securities and Futures Ordinance of Hong Kong, the options are categorised as unlisted physically settled equity derivatives.
Awards of Restricted Shares
HSBC Share Plan 2011
Vesting of Restricted Share awards is normally subject to the Director remaining an employee on the vesting date. The awards may vest at an earlier date in certain circumstances. Under the Securities and Futures Ordinance of Hong Kong, interests in Restricted Share awards are categorised as the interests of the beneficial owner.
HSBC Holdings ordinary shares ----------------------------------------------------- Awards made Awards vested Awards during during held the period to the period to Awards at 30 Jun 2016 30 Jun 2016 held at ---------------- ---------------- Year in which Date of awards 1 Jan Monetary Monetary 30 Jun award Footnotes may vest 2016 Number value Number value 2016(1) GBP000 GBP000 Stuart 11 Mar Gulliver 2013 2 2018 92,185 - - - - 95,205 10 Mar 2014 3 2015-2017 66,016 - - 34,340 153 33,871 2 Mar 2015 4 2016-2018 71,004 - - 24,210 110 49,154 29 Feb 2016 5 2016 - 45,897 211 45,897 211 - 29 Feb 2016 6 2017-2019 - 68,845 317 - - 71,099 ========= ======== ========= ========= Iain 11 Mar Mackay 2013 2 2018 63,730 - - - - 65,817 10 Mar 2014 3 2015-2017 38,671 - - 20,116 90 19,841 2 Mar 2015 4 2016-2018 47,717 - - 16,270 74 33,033 29 Feb 2016 5 2016 - 45,704 210 45,704 210 - 29 Feb 2016 6 2017-2019 - 68,556 315 - - 70,801 ========= ======== ========= ========= 11 Mar Marc Moses 2013 2 2018 61,917 - - - - 63,945 10 Mar 2014 3 2015-2017 38,668 - - 20,114 90 19,839 2 Mar 2015 4 2016-2018 56,893 - - 19,399 88 39,386 29 Feb 2016 5 2016 - 35,376 163 35,376 163 - 29 Feb 2016 6 2017-2019 - 53,065 244 - - 54,802 ========= ======== ========= ========= 1 Includes additional shares arising from scrip dividends. 2 Vesting of these awards is subject to satisfactory completion of the Deferred Prosecution Agreement with the US Department of Justice. 3 At the date of the award, 10 March 2014, the market value per share was GBP6.16. These deferred awards are subject to a six-month retention period upon vesting. On 10 March 2016, the second anniversary of the award, a further 33% of the award vested. On that date the market value per share was GBP4.46. The balance of the award will vest on the third anniversary of the award. 4 At the date of the award, 2 March 2015, the market value per share was GBP5.83. These deferred awards are subject to a six-month retention period upon vesting. On 14 March 2016, following the first anniversary of the award, 33% of the award vested. On that date the market value per share was GBP4.53. On the second anniversary of the award a further 33% of the award will vest and the balance will vest on the third anniversary of the award. 5 The non-deferred award vested immediately on 29 February 2016. The shares (net of tax) are subject to a six-month retention period. At the date of vesting, the market value per share was GBP4.60. 6 At the date of the award, 29 February 2016, the market value per share was GBP4.60. These deferred awards are subject to a six-month retention period upon vesting. On the first anniversary of the award 33% of the award will vest, a further 33% of the award will vest on the second anniversary and the balance will vest on the third anniversary of the award.
HSBC HOLDINGS PLC
142
Shareholder information (continued)
Conditional awards under the Group Performance Share Plan
HSBC Share Plan 2011
The Group Performance Share Plan ('GPSP') is a long-term incentive plan governed by the rules of the HSBC Share Plan 2011. Vesting of GPSP awards is normally subject to the Director remaining an employee on the vesting date. Any shares (net of tax) which the Director becomes entitled to on the vesting date are subject to a retention requirement until cessation of employment. Under the Securities and Futures Ordinance of Hong Kong, interests in awards are categorised as beneficial.
HSBC Holdings ordinary shares -------------------------------------------------------- Awards made Awards vested during during Awards the period to the period to Awards held at 30 Jun 2016 30 Jun 2016 held at ----------------- ----------------- Year in which awards Date of may 1 Jan Monetary Monetary 30 Jun award Footnotes vest 2016 Number value Number value 2016(1) GBP000 GBP000 Stuart 23 Jun Gulliver 2011 2 2016 482,292 - - 498,322 2,257 - 12 Mar 2012 2017 818,298 - - - - 845,098 11 Mar 2013 2018 472,750 - - - - 488,234 10 Mar 2014 2019 657,621 - - - - 679,159 2 Mar 2015 2020 387,638 - - - - 400,334 29 Feb 2016 3 2021 - 421,232 1,938 - - 435,027 ======== ========= ========= ====== 23 Jun Iain Mackay 2011 2 2016 134,836 - - 139,318 631 - 12 Mar 2012 2017 152,748 - - - - 157,751 11 Mar 2013 2018 220,617 - - - - 227,842 10 Mar 2014 2019 385,215 - - - - 397,831 2 Mar 2015 2020 207,632 - - - - 214,432 29 Feb 2016 3 2021 - 235,654 1,084 - - 243,371 ======== ========= ========= ====== 23 Jun Marc Moses 2011 2 2016 125,190 - - 129,351 586 - 12 Mar 2012 2017 425,514 - - - - 439,450 11 Mar
2013 2018 245,829 - - - - 253,881 10 Mar 2014 2019 385,177 - - - - 397,792 2 Mar 2015 2020 207,632 - - - - 214,432 29 Feb 2016 3 2021 - 235,654 1,084 - - 243,371 ======== ========= ========= ====== 1 Includes additional shares arising from scrip dividends. 2 On 15 March 2016, the deferred awards granted in 2011 vested. On that date the market value per share was GBP4.53. 3 At the date of award, 29 February 2016, the market value per share was GBP4.60.
No Directors held any short position (as defined in the Securities and Futures Ordinance of Hong Kong) in the shares or debentures of HSBC Holdings and its associated corporations. Save as stated above, none of the Directors had an interest in any shares or debentures of HSBC Holdings or any associates at the beginning or at the end of the period, and none of the Directors or members of their immediate families were awarded or exercised any right to subscribe for any shares or debentures in any HSBC corporation during the period. Since 30 June 2016, the interests of each of the following Directors have increased by the number of HSBC Holdings ordinary shares shown against their name:
Increase in Directors' interests since 30 June 2016
HSBC Holdings ordinary shares Footnotes Beneficial owner Kathleen Casey 130 1, 2 =================================================== Henri de Castries 244 2 =================================================== Douglas Flint 108 3 Stuart Gulliver 48,938 4 Sam Laidlaw 597 2 Iain Mackay 22,607 4 Heidi Miller 60 1, 2 Marc Moses 27,286 4 Paul Walsh 79 2 =================================================== 1 Comprises interests in ADSs, which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares. 2 Additional shares arising from scrip dividends. 3 Comprises the acquisition of shares in the HSBC Holdings UK Share Incentive Plan through regular monthly contributions (30 shares) and the automatic reinvestment of dividend income on shares held in the HSBC Holdings UK Share Incentive Plan (78 shares). 4 Comprises scrip dividend on Restricted Share awards and GPSP awards granted under the HSBC Share Plan 2011.
HSBC HOLDINGS PLC
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2 Employee share plans --- ----------------------------------------------------------
Share options and discretionary awards of shares are granted under HSBC share plans to help align the interests of employees with those of shareholders. The following are particulars of outstanding options, including those held by employees working under employment contracts that are regarded as 'continuous contracts' for the purposes of the Hong Kong Employment Ordinance. The options were granted for nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services, or in excess of the individual limit for each share plan. No options were cancelled by HSBC during the period.
A summary, for each plan, of the total number of options which were granted, exercised or lapsed during the period is shown in the following tables. Particulars of options held by Directors of HSBC Holdings are set out on page 141. Further details required to be disclosed pursuant to Chapter 17 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited are available on our website at www.hsbc.com, and on the website of The Stock Exchange of Hong Kong Limited at www.hkex.com.hk. Copies may be obtained upon request from the Group Company Secretary, 8 Canada Square, London E14 5HQ.
All-employee share plans
The HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International are all-employee share plans under which eligible employees have been granted options to acquire HSBC Holdings ordinary shares. There will be no further grant of options under the HSBC Holdings Savings-Related Share Option Plan: International; the final grant was in 2012. The HSBC International Employee Share Purchase Plan was introduced in 2013 and now includes employees based in 25 jurisdictions.
For options granted under the HSBC Holdings Savings-Related Option Plan, employees make contributions of up to GBP500 each month over a period of three or five years which may be used within six months following the third or fifth anniversary of the commencement of the relevant savings contract, at the employee's election, to exercise the options. Alternatively, the employee may elect to have the savings, plus (where applicable) any interest or bonus, repaid in cash. In the case of redundancy, retirement including on grounds of injury or ill health, the transfer of the employing business to another party, or a change of control of the employing company, options may be exercised before completion of the relevant savings contract. In certain circumstances, the exercise period of options granted under the all-employee share plans may be extended, for example, on the death of a participant the executors may exercise the option up to six months beyond the normal exercise period.
The terms set out in the preceding paragraph also applied to options granted up to April 2012 under the HSBC Holdings Savings-Related Share Option Plan: International with the exception that contributions were capped at the equivalent of GBP250.
Under the HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International the option exercise price has been determined by reference to the average market value of the ordinary shares on the five business days immediately preceding the invitation date, then applying a discount of 20%. Where applicable, the US dollar, Hong Kong dollar and euro exercise prices were converted from the sterling exercise price at the applicable exchange rate on the working day preceding the relevant invitation date. The HSBC Holdings Savings-Related Share Option Plan will terminate on 23 May 2025 unless the Directors resolve to terminate the plan at an earlier date.
HSBC Holdings All-employee Share Option Plans
HSBC Holdings ordinary shares ------------------------------------------------------------------------------------ Dates of award Exercise price Exercisable ----------------------- ------------------------ ----------------------------- Granted At At in Exercised Lapsed in 30 Jun from to from to from to Footnotes 1 Jan 2016 period in period period 2016 Savings-Related Share Option Plan 1 22 Sep (GBP) (GBP) 21 Apr 2010 2015 4.0472 5.4738 1 Aug 2015 30 April 2021 71,709,819 - 951,619 8,930,274 61,827,926 =========== ====== ========= ========= ========== ============= Savings-Related Share Option Plan: International 2 21 Apr 24 Apr (GBP) (GBP) 31 Jan 2010 2012 4.4621 5.4573 1 Aug 2014 2018 1,130,991 - 333,065 258,887 539,039 =========== ====== ========= ========= ========== ============= 21 Apr 24 Apr ($) ($) 31 Jan 2010 2012 7.1456 8.2094 1 Aug 2014 2018 665,445 - 13,569 415,504 236,372 =========== ====== ========= ========= ========== ============= 21 Apr 24 Apr (EUR) (EUR) 31 Jan 2010 2012 5.3532 6.0657 1 Aug 2015 2018 153,610 - 23,777 19,553 110,280 =========== ====== ========= ========= ========== ============= 21 Apr 24 Apr (HK$) (HK$) 1 Aug 31 Jan
2010 2012 55.4701 63.9864 2015 2018 1,114,830 - 60,141 505,889 548,800 =========== ====== ========= ========= ========== ============= 1 The weighted average closing price of the shares immediately before the dates on which options were exercised was GBP4.79. 2 The weighted average closing price of the shares immediately before the dates on which options were exercised was GBP4.91.
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Shareholder information (continued)
3 Notifiable interests in share capital --- ----------------------------------------------------------
At 30 June 2016, HSBC Holdings had received the following notification of major holdings of voting rights pursuant to the requirements of Rule 5 of the Disclosure Guidance and Transparency Rules:
-- BlackRock, Inc. gave notice on 24 May 2016 that on 23 May 2016 it had an indirect interest in HSBC Holdings ordinary shares of 1,141,129,047; qualifying financial instruments with 19,267,029 voting rights that may be acquired if the instruments are exercised or converted; and financial instruments with similar economic effect to qualifying financial instruments which refer to 7,029,186 voting rights, each representing 5.75%, 0.09% and 0.03%, respectively, of the total voting rights at that date.
At 30 June 2016, as recorded in the register maintained by HSBC Holdings pursuant to section 336 of the Securities and Futures Ordinance of Hong Kong:
-- JPMorgan Chase & Co. gave notice on 25 May 2016 that on 23 May 2016 it had the following interests in HSBC Holdings ordinary shares: a long position of 930,672,268 shares; a short position of 159,394,496 shares; and a lending pool of 536,945,956 shares, each representing 4.69%, 0.80% and 2.71%, respectively, of the ordinary shares in issue at that date. Since 30 June 2016, JPMorgan Chase & Co. gave notice on 6 July 2016 that on 1 July 2016 it had the following interests in HSBC Holdings ordinary shares: a long position of 972,489,499 shares; a short position of 224,324,049 shares; and a lending pool of 509,817,402 shares, each representing 4.90%, 1.13% and 2.57%, respectively, of the ordinary shares in issue at that date. -- BlackRock, Inc. gave notice on 23 May 2016 that on 19 May 2016 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,285,704,498 shares and a short position of 5,613,912 representing 6.49% and 0.03%, respectively, of the ordinary shares in issue at that date. 4 Dealings in HSBC Holdings listed securities --- ----------------------------------------------------------
Except for dealings as intermediaries by subsidiaries of HSBC Holdings, neither HSBC Holdings nor any of its subsidiaries purchased, sold or redeemed any of its securities listed on the Stock Exchange of Hong Kong Limited during the half-year ended 30 June 2016.
5 First interim dividend for 2016 --- ----------------------------------------------------------
The first interim dividend for 2016 of $0.10 per ordinary share was paid on 6 July 2016.
6 Second interim dividend for 2016 --- ----------------------------------------------------------
On 3 August 2016, the Directors declared a second interim dividend for 2016 of $0.10 per ordinary share. It will be payable on 28 September 2016 to holders of record on 12 August 2016 on the Principal Register in the United Kingdom, and the Hong Kong and Bermuda Overseas Branch Registers. The dividend will be payable in US dollars, sterling or Hong Kong dollars, or a combination of these currencies, at the forward exchange rates quoted by HSBC Bank plc in London at or about 11.00am on 19 September 2016. A scrip dividend will also be offered. Particulars of these arrangements will be sent to shareholders on or about 25 August 2016 and elections must be received by 14 September 2016.
The dividend will be payable on ordinary shares held through Euroclear France, the settlement and central depositary system for Euronext Paris, on 28 September 2016 to the holders of record on 12 August 2016. The dividend will be payable by Euroclear France in euros, at the forward exchange rate quoted by HSBC France on 19 September 2016, or as a scrip dividend. Particulars of these arrangements will be announced through Euronext Paris on 5 August 2016, 19 August 2016 and 19 September 2016.
The dividend will be payable on American Depositary Shares ('ADS'), each of which represents five ordinary shares, on 28 September 2016 to holders of record on 12 August 2016. The dividend of $0.50 per ADS will be payable by the depositary in US dollars or as a scrip dividend of new ADSs. Elections must be received by the depositary on or before 9 September 2016. Alternatively, the cash dividend may be invested in additional ADSs by participants in the dividend reinvestment plan operated by the depositary.
Ordinary shares will be quoted ex-dividend in London, Hong Kong, Paris and Bermuda on 11 August 2016. The ADSs will be quoted ex-dividend in New York on 10 August 2016.
Any person who has acquired ordinary shares registered on the Principal Register in the United Kingdom, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register but who has not lodged the share transfer with the Principal Registrar, the Hong Kong or Bermuda Branch Registrar should do so before 4.00pm local time on 12 August 2016 in order to receive the dividend.
Ordinary shares may not be removed from or transferred to the Principal Register in the United Kingdom, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 12 August 2016. Any person wishing to remove ordinary shares to or from each register must do so before 4.00pm local time on 11 August 2016.
Transfers of ADSs must be lodged with the depositary by 12 noon on 12 August 2016 in order to receive the dividend.
HSBC HOLDINGS PLC
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7 Proposed interim dividends for 2016 --- ----------------------------------------------------------
The Board has adopted a policy of paying quarterly dividends on the ordinary shares, under which it is intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. The proposed timetables for dividends payable on the ordinary shares in respect of 2016 that have not yet been declared are as follows:
Third interim Fourth interim Footnotes dividend for 2016 dividend for 2016 Announcement 3 Oct 2016 21 Feb 2017 ADSs quoted ex-dividend in New York 19 Oct 2016 22 Feb 2017 Shares quoted ex-dividend in London, Hong Kong, Paris and Bermuda 20 Oct 2016 23 Feb 2017 Record date in London, Hong Kong, New York, Paris and Bermuda 1 21 Oct 2016 24 Feb 2017 Payment date 6 Dec 2016 6 Apr 2017 =============================================================== 1 Removals from or transfers to the Principal Register in the United Kingdom, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register will not be permitted on these dates. 8 Earnings release --- ----------------------------------------------------------
An earnings release for the three-month period ending 30 September 2016 is expected to be issued on 7 November 2016.
9 Final results --- ----------------------------------------------------------
The results for the year to 31 December 2016 are expected to be announced on 21 February 2017.
10 Corporate governance --- ----------------------------------------------------------
Throughout the six months to 30 June 2016, HSBC Holdings has complied with the applicable code provisions of: The UK Corporate Governance Code issued by the Financial Reporting Council in September 2014; and the Hong Kong Corporate Governance Code set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited(1) . The UK Corporate Governance Code is available at www.frc.org.uk and the Hong Kong Corporate Governance Code is available at www.hkex.com.hk.
The Board has adopted a dealing code for transactions in HSBC Group securities by Directors ('Code for Dealing in HSBC Group Securities'). For the period under review, this code met the requirements of the FCA Listing Rules and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, save that The Stock Exchange of Hong Kong Limited has granted certain waivers from strict compliance with the Rules which take into account accepted practices in the UK, particularly in respect of employee share plans.
Following specific enquiry, each Director has confirmed that he or she has complied with the Code for Dealing throughout the period. All Directors have been routinely reminded of their obligations under the Code for Dealing in HSBC Group Securities.
There have been no material changes to the information disclosed in the Annual Report and Accounts 2015 in respect of the remuneration of employees, remuneration policies, bonus and share option plans and training schemes. Details of the number of employees are provided on page 28.
1 The Group Risk Committee is responsible for the oversight of internal control (other than internal controls over financial reporting) and risk management systems (Hong Kong Corporate Governance Code provision C.3.3 paragraphs (f), (g) and (h)). In the absence of the Group Risk Committee, these matters would be the responsibility of the Group Audit Committee. 11 Changes in Directors' details --- ----------------------------------------------------------
Changes in Directors' details since the date of the Annual Report and Accounts 2015 which are required to be disclosed pursuant to Rule 13.51(2) and Rule 13.51B(1) of the Hong Kong Listing Rules are set out below.
David Nish, 56
Independent non-executive Director
Appointed to the Board: 1 May 2016.
Member of the Group Audit Committee since 1 May 2016.
Skills and experience: David served as Chief Executive Officer of Standard Life plc between 2010 and 2015, having joined as Group Finance Director in 2006. David led the investment in technology, the complementary acquisitions and the disposal of the group's Canadian operations. Other former appointments include Group Finance Director of Scottish Power plc and partner of Price Waterhouse. He is a qualified chartered accountant.
Current appointments include: A non-executive director of Vodafone Group plc, London Stock Exchange Group plc, UK Green Investment Bank plc and Zurich Insurance Group.
HSBC HOLDINGS PLC
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Shareholder information (continued)
Henri de Castries
Henri de Castries will step down from his position as Chairman and CEO of AXA from 1 September 2016.
Douglas Flint
Mentor at Chairman Mentors International (CMi) since the end of May 2016.
Sam Laidlaw
Chair of the Saïd Business School's Business Advisory Council and a member of its School Board since 27 June 2016.
Rachel Lomax
Member of the Group Audit Committee until 20 April 2016.
Pauline van der Meer Mohr
Member of the Group Nomination Committee since 22 April 2016.
Paul Walsh
Member of the Group Nomination Committee since 1 May 2016.
Irene Lee
Member of the Risk Committee and Chairman of the Audit Committee for The Hongkong and Shanghai Banking Corporation Limited since 18 April 2016.
Rona Fairhead and Sir Simon Robertson retired from the Board at the conclusion of the HSBC Holdings AGM on 22 April 2016.
12 Going concern basis --- ----------------------------------------------------------
As mentioned in Note 1 Basis of preparation on page 107, the financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.
In particular, HSBC's principal activities, business and operating models, strategic direction and top and emerging risks are addressed in the 'Overview' section; a financial summary, including a review of the consolidated income statement and consolidated balance sheet, is provided in the 'Interim Management Report' section; HSBC's objectives, policies and processes for managing credit, liquidity and market risk are described in the 'Risk' section of the Annual Report and Accounts 2015; and HSBC's approach to capital management and allocation is described in the 'Capital' section of the Annual Report and Accounts 2015.
13 Telephone and online share dealing service --- ----------------------------------------------------------
For shareholders on the Principal Register who are resident in the UK, with a UK postal address, and who hold an HSBC Bank plc personal current account, the HSBC InvestDirect share dealing service is available for buying and selling HSBC Holdings ordinary shares. Details are available from: HSBC InvestDirect, Forum 1, Parkway, Whiteley PO15 7PA; or UK telephone: 03456 080848, or from an overseas telephone: +44 (0) 1226 261090; or website: www.hsbc.co.uk/shares.
14 Stock symbols --- ----------------------------------------------------------
HSBC Holdings plc ordinary shares trade under the following stock symbols:
London Stock Exchange HSBA
Hong Kong Stock Exchange 5
New York Stock Exchange (ADSs) HSBC
Euronext Paris HSB
Bermuda Stock Exchange HSBC.BH
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15 Copies of the Interim Report 2016 and shareholder enquiries and communications --- ------------------------------------------------------------------------------
Further copies of the Interim Report 2016 may be obtained from External Affairs, HSBC Holdings plc, 8 Canada Square, London E14 5HQ, United Kingdom; from Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong; or from Investor Relations, HSBC North America, 1421 West Shure Drive, Suite 100, Arlington Heights, Illinois 60004. The Interim Report 2016 may also be downloaded from the HSBC website, www.hsbc.com.
Shareholders may at any time choose to receive corporate communications in printed form or to receive notifications of their availability on HSBC's website. To receive future notifications of the availability of a corporate communication on HSBC's website by email, or to revoke or amend an instruction to receive such notifications by email, go to www.hsbc.com/ecomms. If you provide an email address to receive electronic communications from HSBC, we will also send notifications of your dividend entitlements by email. If you received a notification of the availability of this document on HSBC's website and would like to receive a printed copy of it or, if you would like to receive future corporate communications in printed form, please write or send an email (quoting your shareholder reference number) to the appropriate Registrar at the address given below. Printed copies will be provided without charge.
Any enquiries relating to your shareholdings on the share register, for example transfers of shares, change of name or address, lost share certificates or dividend cheques, should be sent to the Registrar at the address given below. The Registrar offers an online facility, Investor Centre, which enables shareholders to manage their shareholding electronically.
Principal Register Hong Kong Overseas Branch Register Bermuda Overseas Branch Register Computershare Investor Services PLC Computershare Hong Kong Investor Investor Relations Team The Pavilions Services Limited HSBC Bank Bermuda Limited Bridgwater Road Rooms 1712-1716, 17th Floor 6 Front Street Bristol BS99 6ZZ Hopewell Centre Hamilton HM 11 United Kingdom 183 Queen's Road East Bermuda Hong Kong Telephone: +44 (0) 370 702 0137 Telephone: +852 2862 8555 Telephone: +1 441 299 6737 Email via website: Email: Email: hbbm.shareholder.services@hsbc.bm www.investorcentre.co.uk/contactus hsbc.ecom@computershare.com.hk Investor Centre: Investor Centre: Investor Centre: www.investorcentre.co.uk/bm www.investorcentre.co.uk www.investorcentre.com/hk
Any enquiries relating to ADSs should be sent to the depositary at:
The Bank of New York Mellon Telephone (US): +1 877 283 5786 Depositary Receipts Telephone (international): +1 201 680 6825 PO Box 30170 Email: shrrelations@bnymellon.com College Station, TX 77842-3170 Website: www.computershare.com/us/contact/pages/default.aspx USA
Any enquiries relating to shares held through Euroclear France, the settlement and central depositary system for NYSE Euronext Paris, should be sent to the paying agent:
HSBC France Telephone: +33 1 40 70 22 56 103, avenue des Champs Elysées Email: ost-agence-des-titres-hsbc-reims.hbfr-do@hsbc.fr 75419 Paris Cedex 08 Website: www.hsbc.fr France
A Chinese translation of this and future documents may be obtained on request from the Registrar. Please also contact the Registrar if you have received a Chinese translation of this document and do not wish to receive such translations in future.
Persons whose shares are held on their behalf by another person may have been nominated to receive communications from HSBC pursuant to section 146 of the UK Companies Act 2006 ('nominated person'). The main point of contact for a nominated person remains the registered shareholder (for example your stockbroker, investment manager, custodian or other person who manages the investment on your behalf). Any changes or queries relating to a nominated person's personal details and holding (including any administration thereof) must continue to be directed to the registered shareholder and not HSBC's Registrar. The only exception is where HSBC, in exercising one of its powers under the UK Companies Act 2006, writes to nominated persons directly for a response.
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Shareholder information (continued)
Cautionary statement regarding forward-looking statements
This Interim Report 2016 contains certain forward-looking statements with respect to HSBC's financial condition, results of operations and business.
Statements that are not historical facts, including statements about HSBC's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'targets', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.
Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC's Directors, officers or employees to third parties, including financial analysts.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:
-- Changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks' policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status of public or private defined benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we serve. -- Changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities;
initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms.
-- Factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; our success in addressing operational, legal and regulatory, and litigation challenges, notably compliance with the US DPA; and the other risks and uncertainties we identify in 'top and emerging risks' on pages 16 and 17.
Certain defined terms
Unless the context requires otherwise, 'HSBC Holdings' means HSBC Holdings plc and 'HSBC', the 'Group', 'we', 'us' and 'our' refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. When used in the terms 'shareholders' equity' and 'total shareholders' equity', 'shareholders' means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations '$m' and '$bn' represent millions and billions (thousands of millions) of US dollars, respectively.
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Abbreviations
Abbreviation Brief description 1H15 First half of 2015 1H16 First half of 2016 1Q15 First quarter of 2015 1Q16 First quarter of 2016 2H15 Second half of 2015 2Q15 Second quarter of 2015 2Q16 Second quarter of 2016 A ABS Asset-backed security ADS American Depositary Share AFS Available for sale AIEA Average interest-earning assets AML Anti-money laundering ARM Adjustable-rate mortgage AT1 Additional tier 1 B Basel Committee Basel Committee on Banking Supervision Basel III Basel Committee's reforms to strengthen global capital and liquidity rules Bps Basis points. One basis point is equal to one hundredth of a percentage point BoCom Bank of Communications Co., Limited, one of China's largest banks BRRD Bank Recovery and Resolution Directive (EU) BSA Bank Secrecy Act (US) BSM Balance Sheet Management BVI British Virgin Islands C CA$ Canadian dollars CAPM Capital asset pricing model CCAR Federal Reserve Comprehensive Capital Analysis and Review CCB Capital conservation buffer CCP Central counterparty CCR Counterparty credit risk CCyB Countercyclical capital buffer CEA Commodity Exchange Act (US) CET1 Common equity tier 1 CGUs Cash-generating units CIUs Collective investment undertakings CMB Commercial Banking, a global business CMC Capital maintenance charge CML Consumer and Mortgage Lending (US) CRD Capital Requirements Directive CRR Capital Requirements Regulation CRS Card and Retail Services CVA Credit valuation adjustment D DFAST Dodd-Frank Act Stress Testing DoJ Department of Justice (US) DPA Deferred prosecution agreement (US) DPF Discretionary participation feature of insurance and investment contracts DVA Debit value adjustment E EBA European Banking Authority EU European Union Euribor European Interbank Offered Rate F FCA Financial Conduct Authority (UK)
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Shareholder information (continued)
FOS Financial Ombudsman Service FPC Financial Policy Committee (UK) FRB Federal Reserve Board (US) FTE Full-time equivalent staff FuM Funds under management G GB&M Global Banking and Markets, a global business GDP Gross domestic product GLCM Global Liquidity and Cash Management GPB Global Private Banking, a global business GPSP Group Performance Share Plan Group HSBC Holdings together with its subsidiary undertakings G-SIB Global systemically important bank G-SII Global systemically important institution GTRF Global Trade and Receivables Finance H HK$ Hong Kong dollar HNAH HSBC North America Holdings Inc. Hong Kong Hong Kong Special Administrative Region of the People's Republic of China HQLA High-quality liquid assets HSBC HSBC Holdings together with its subsidiary undertakings HSBC Bank HSBC Bank plc HSBC Bank Middle East HSBC Bank Middle East Limited HSBC Bank USA HSBC Bank USA, N.A., HSBC's retail bank in the US HSBC Colombia HSBC Bank (Colombia) S.A. HSBC Finance HSBC Finance Corporation, the US consumer finance company (formerly Household International, Inc.) HSBC France HSBC's French banking subsidiary, formerly CCF S.A. HSBC Holdings HSBC Holdings plc, the parent company of HSBC HSBC USA The sub-group, HSBC USA Inc and HSBC Bank USA, consolidated for liquidity purposes HSI HSBC Securities (USA) Inc. HSSL HSBC Securities Services (Luxembourg) HTIE HSBC Institutional Trust Services (Ireland) Limited HTM Held to maturity I IAS International Accounting Standards IASB International Accounting Standards Board IFRSs International Financial Reporting Standards ILAA Individual liquidity adequacy assessment
ILR Inherent liquidity risk Industrial Bank Industrial Bank Co. Limited, a national joint-stock bank in mainland China in which Hang Seng Bank Limited has a shareholding Investor Update The Investor Update in June 2015 IRB Internal ratings-based ISDA International Swaps and Derivatives Association L LCR Liquidity coverage ratio LFRF Liquidity and funding risk management framework LGD Loss given default Libor London Interbank Offered Rate LICs Loan impairment charges and other credit risk provisions LTV Loan to value M Madoff Securities Bernard L Madoff Investment Securities LLC Mainland China People's Republic of China excluding Hong Kong and Macau MBS US mortgage-backed security MDB Multilateral development banks MENA Middle East and North Africa MREL EU minimum requirements for own funds and eligible liabilities
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N NII Net interest income NSFR Net stable funding ratio O OCC Office of the Comptroller of the Currency (US) ORMF Operational risk management framework O-SII Other systemically important institution P PBT Profit before tax PPI Payment protection insurance product PRA Prudential Regulation Authority (UK) Premier HSBC Premier, HSBC's premium personal global banking service PSE Public sector entities PVIF Present value of in-force long-term insurance business and long-term investment contracts with DPF PwC PricewaterhouseCoopers LLP and its network of firms Q QIS Quantitative impact study R RAS Risk Appetite Statement RBWM Retail Banking and Wealth Management, a global business Repo Sale and repurchase transaction Reverse repo Security purchased under commitments to sell RMB Renminbi RMBS Residential mortgage-backed securities RNIV Risk not in VaR RoE Return on equity RoRWA Return on average risk-weighted assets RQFII Renminbi qualified foreign institutional investor RTS Regulatory technical standards RWAs Risk-weighted assets S ServCo group Separately incorporated group of service companies planned in response to UK ring-fencing proposals SFT Securities financing transactions SPE Special purpose entity T T1 Tier 1 T2 Tier 2 The Hongkong and Shanghai Banking Corporation The Hongkong and Shanghai Banking Corporation Limited, the founding member of HSBC TLAC Total loss absorbing capacity U UAE United Arab Emirates UK United Kingdom US United States of America US DPA Five-year deferred prosecution agreement with the Department of Justice and others (US) US run-off portfolio Includes the run-off CML residential mortgage loan portfolio of HSBC Finance on an IFRSs management basis V VaR Value at risk VIU Value in use
Glossary
Terminology used in this Interim Report is consistent with that used in our Annual Report and Accounts 2015, and Capital and Risk Management Pillar 3 disclosures 2015, where a glossary of terms can be found.
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Shareholder information (continued)
Index
A
Abbreviations 150
Accounting
future developments 107
policies 107
Adjusted jaws 15
Adjusted performance 13, 18
Adjusted results 13
Anti-bribery and corruption 83
Anti-money laundering
investigations 132
sanctions 83
Areas of special interest 60
Asia
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 47, 50, 73
cost efficiency ratios 47
customer accounts 47
impaired loans 72
impairment allowances/charges 66, 67
loans and advances 47, 62, 69, 70
net operating income 109
profit before tax 47, 50, 109
renegotiated loans 65
risk-weighted assets 46
snapshot 5
staff numbers 47
Asset-backed securities 74
Assets
by geographical region 46
by global business 35, 43
charged as security 123
held for sale 43, 63, 122
maturity analysis 126
movement in 32
risk-weighted 2
total 2, 31, 103
trading 110
Associates and joint ventures (income from) 14, 30, 123
adjusted/reported reconciliation 53, 56
Auditor's review report 140
B
Backtesting 79
Balance sheet
consolidated 31, 103
data 43
insurance manufacturing subsidiaries 85
movement 32
Balance Sheet Management 80
Bank of Communications 124
Basis of preparation 35, 46, 107
Brazil 20, 123
Brazilian labour and fiscal claims 129, 136
C
Capital
commitments 129
management 88
overview 88
ratios 88
regulatory 32, 88
source and application of regulatory capital 90
subordinated loan 33
total regulatory 88
transitional own funds disclosure 99
Cash flows
consolidated statement 104
Cautionary statement regarding forward-looking statements 149
Client assets 41
Collateral 123
Combined customer lending and deposits 32
Commercial Banking 38
adjusted/reported reconciliation 56
cost efficiency ratios 30
management view 37
snapshot 4
Commitments 129
Compliance risk 83
Compliance with IFRSs 107
Composition of Group (changes in) 107
Conduct of business 83
Contents 1
Contingent liabilities, contractual commitments and guarantees 129
Copies of the Interim Report 148
Corporate governance 146
Counterparty risk 93
Credit default swap regulatory investigation and litigation 136
Credit quality 63
Credit risk 61
risk-weighted assets 89
Customer accounts
by country 33
by global business 43
Customer lending and deposits (combined) 32
D
Dealings in HSBC Holdings shares 145
Deferred tax 129
Defined terms 149
Derivatives 120
by product contract type 120
credit 120
hedging instruments 121
trading 120
Directors
Board changes 7
changes in details 146
interests 141
responsibility statement 139
Disposal groups 123
Dividends 108, 145, 146
E
Earnings per share 101, 109
Earnings release 146
Equity 2, 31, 103, 105
movement in 32
return on 15
Estimates and judgements 107
Europe
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 47, 50, 73
cost efficiency ratios 47
customer accounts 47
impaired loans 72
impairment allowances/charges 66, 67
loans and advances 47, 62, 69, 70
net operating income 109
profit before tax 47, 50, 109
renegotiated loans 65
risk-weighted assets 46
snapshot 5
staff numbers 47
Events after the balance sheet date 138
F
Fair values
adjustments 111
movements 113
of derivatives 120
of financial instruments at fair value 111
of financial instruments not at fair value 119
significant unobservable assumptions 115
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valuation bases 112
Fee income (net) 21
'FIFA' related investigations 136
Final results 146
Financial assets
designated at fair value 119
Financial crime compliance 84
Financial highlights 2
Financial instruments
at fair value 111
credit quality 63
net income from 23
not at fair value 119
Financial investments 121
Financial overview 12
Financial summary 18
Footnotes 59, 87, 100, 106
Forbearance 64
Foreign currency translation differences 18
Foreign exchange rates 32
investigations and litigation 136
Funding sources 77
Funds under management 52
G
Gains less losses from financial investments 24
significant items and currency translation 24
Geographical regions 46
Global Banking and Markets 39
adjusted/reported reconciliation 56
client-facing 39
cost efficiency ratios 30
fair value adjustments 111
management view 40
risk-weighted assets 10
snapshot 4
Global businesses 35
Global Private Banking 41
adjusted/reported reconciliation 56
cost efficiency ratios 30
snapshot 4
Global Standards 11
Glossary 152
Going concern 107, 147
Goodwill impairment 137
Group Chairman's Statement 6
Group Chief Executive's Review 8
Group performance by income and expense item 20
Guangdong loans 10
H
Held for sale 43, 63, 122
Highlights 2
Hiring practices investigation 136
HSBC Finance 70
HSBC Bank USA 70
HSBC Holdings 82
I
Impairment
allowances and charges 66, 69
by geographical region 66
charges and other credit risk provisions 27
constant currency/reported profit 72
impaired loans 64, 71, 72
Income from financial instruments designated at fair value (net) 23
Income statement
consolidated 19, 101
Information security 83
Insurance
asset and liability matching 84
balance sheet by type of contract 85
claims and benefits paid and movement in liabilities to
policyholders (net) 26
net insurance premium income 24
risk 86
Interest-earning assets 20
Interest expense 21
Interest income (net) 20
sensitivity 80
significant items and currency translation 20
Interest rate swap litigation 136
Interim Report 2016 138
L
Latin America
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 49, 50, 73
cost efficiency ratios 49
customer accounts 49
impaired loans 72
impairment allowances/charges 66
loans and advances 49, 62, 69, 70
net operating income 109
profit before tax 49, 50, 109
renegotiated loans 65
risk-weighted assets 44
snapshot 5
staff numbers 49
Legal proceedings 130
Leverage ratio 90
Liabilities
maturity analysis 126
movement in 32
total 31, 103
trading 125
Libor investigation 134
Liquidity and funding 75
depositor concentration 76
liquid assets 76
liquidity coverage ratio 75
management 75
net stable funding ratio 76
risk management framework 75
term funding 76
Loans and advances
by country/region 62, 73
by credit quality 63
by global business 43
by industry sector 62, 71
exposure 62
held for sale 43
impaired 64, 72
personal lending 70
renegotiated 64
wholesale lending 69
Loan impairment charges and other credit risk provisions 19, 27, 66
adjusted 14
adjusted/reported reconciliation 53, 56
on held for sale 63
M
Madoff 130
Margin 20
Market risk 78
measures applicable to parent 82
Middle East and North Africa
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 48, 50, 73
cost efficiency ratios 48
customer accounts 48
impaired loans 72
impairment allowances/charges 66
loans and advances 48, 62, 69, 70
net operating income 109
profit before tax 48, 50, 109
renegotiated loans 65
risk-weighted assets 46
snapshot 5
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Shareholder information (continued)
staff numbers 48
Monitor 60
Mortgage-related investigations (US) 131
Mortgage securitisation activity (US) 132
Mossack Fonseca & Co. 134
N
NAFTA area revenues 10
Non-GAAP measures 18
Non-trading portfolios 79
North America
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 48, 50, 73
cost efficiency ratios 48
customer accounts 48
impaired loans 72
impairment allowances/charges 66, 67
loans and advances 48, 62, 69, 70
net operating income 109
profit before tax 48, 50, 109
renegotiated loans 65
risk-weighted assets 46
snapshot 5
staff numbers 48
Notifiable interests in share capital 145
O
Oil and gas 61
Operating expenses 28
adjusted/reported reconciliation 53, 56
by geographical region 47 to 49
by global business 36 to 42
costs-to-achieve 28
change-the-bank 28
run-the-bank 28
significant items and currency translation 29
Operating income (other) 25
significant items and currency translation 25
Operational risk 83
'Other' segment 42
adjusted/reported reconciliation 56
Outlook 7, 9
P
Payment protection insurance 128
Performance
adjusted 13, 18
highlights 2
management 34
reported 12
Personal lending 70
Precious metals litigation 135
Preferred securities 32
Profit before tax
adjusted 2, 3, 9, 13
adjusted/reported reconciliation 53, 56
attributable 19, 101
by country 50
by geographical region 46, 47 to 49
by global business 35 to 41, 42
consolidated 101
reported 2, 3, 12
Provisions 128
PVIF 25
R
Ratios
capital (total) 88
common equity tier 1 2, 88
core tier 1 ratio 88
cost efficiency 30, 47 to 49
customer advances to customer accounts 32
earnings per share 101
leverage 90
LICs to advances 14
return on average risk-weighted assets 3, 34
return on equity 3, 15
shareholders' equity to total assets 31
Regulatory
balance sheet 97
capital 88
developments 96
disclosures 92
policy 7
risks 60
source and application 90
stress testing 60
Related parties 138
Reported results 12
Reputational risk 84
Responsibility statement 139
Retail Banking and Wealth Management 36
adjusted/reported reconciliation 56
cost efficiency ratios 30
management view 37
Principal RBWM 37
snapshot 4
Revenue
adjusted/reported reconciliation 13, 14, 53, 56
by geographical region 46 to 49
by global business 35 to 45
items (significant) 53 to 58
Review of performance 6, 8
Risks
compliance 83
counterparty credit risk 93
credit 61, 89
data management 17
economic outlook 17
foreign exchange 82
fraud 83
geopolitical 17
information security 83
insurance operations 84
interest rate repricing gap 82
liquidity and funding 75
managing risk 16
market 78
model 17
interest rate risk in the banking book 80
operational 83
regulatory 60
reputational 84
third parties 17, 83
top and emerging 16
Risk-weighted assets 2, 3, 34, 89
adjusted/reported reconciliation 34
by geographical region 46, 92
by global business 35, 92
S
Securities litigation 130
Securitisation 74
Segmental analysis 109
Sensitivity of capital and reserves 81
Sensitivity of fair values 116
Sensitivity of net interest income 80
Share capital 32
Share capital - notifiable interests 145
Shareholder enquiries 148
Share option plans
Directors' interests 141
employee share plans 144
Significant items 18, 53
Snapshot
Global business 4
Regional 5
Spread 20
Staff numbers 28
Statement of changes in equity (consolidated) 105
Statement of comprehensive income (consolidated) 102
Stock symbols 147
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Strategic actions 10
Strategy 10
Stress testing 60
T
Targets 11, 15
Tax 19, 30, 104
US tax-related investigations 133
Telephone and online share-dealing service 147
Trading
assets 110
derivatives 120
income (net) 22
significant items and currency translation 23
liabilities 125
portfolios 78
U
UK Referendum on EU membership 7, 60
V
Value at risk 78, 79, 82
W
Whistleblowing 84
Wholesale lending 69
Y
Yield 20
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This document comprises the Interim Report 2016 to shareholders and information contained herein has been filed on Form 6-K with the US Securities and Exchange Commission for HSBC Holdings plc and its subsidiary and associated undertakings.
HSBC HOLDINGS PLC
Incorporated in England with limited liability. Registered in England: number 617987
REGISTERED OFFICE AND GROUP HEAD OFFICE
8 Canada Square, London E14 5HQ, United Kingdom
Web: www.hsbc.com
(c) Copyright HSBC Holdings plc 2016
All rights reserved
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Holdings plc.
Published by Group Finance, HSBC Holdings plc, London
Designed by Addison Group, London (cover and 'Overview' section) and by Group Finance, HSBC Holdings plc, London (rest of the Interim Report)
Printed by Global Publishing Services, HSBC Bank plc, London; and by Global Publishing Services, The Hongkong and Shanghai Banking Corporation Limited, Hong Kong.
Photography
Cover, inside front cover to page 1, page 16: Getty Images
Group Chairman and Group Chief Executive by Charles Best
This information is provided by RNS
The company news service from the London Stock Exchange
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