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| Name | Symbol | Market | Type |
|---|---|---|---|
| Hsbc Frn Var3 | LSE:57HB | London | Medium Term Loan |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
From Dec 2019 to Dec 2024
TIDM57HB
RNS Number : 9160F
Hongkong & Shanghai Banking Corp Ld
13 March 2020
Consolidated Financial Statements Consolidated income statement
for the year ended 31 December
Hot Features
Premium
2019 2018
Notes HK$m HK$m
Net interest income 2a 130,903 126,463
-------------------------------------------------------- ------ -------
* interest income 191,322 170,065
- interest expense (60,419) (43,602)
------- -------
Net fee income 2b 41,505 44,231
-------------------------------------------------------- ------ ------- -------
- fee income 53,099 54,585
* fee expense (11,594) (10,354)
-------------------------------------------------------- ------ ------- -------
Net income from financial instruments held for trading
or managed on a fair value basis 2c 36,388 32,070
-------------------------------------------------------- ------ ------- -------
Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives,
measured at fair value through profit or loss 2c 14,257 (5,561)
-------------------------------------------------------- ------ ------- -------
Changes in fair value of designated debts issued and
related derivatives(1) 2c (305) (327)
-------------------------------------------------------- ------ ------- -------
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit
or loss 2c 118 (217)
-------------------------------------------------------- ------ ------- -------
Gains less losses from financial investments 638 501
-------
Net insurance premium income 3 60,275 60,678
------- -------
Other operating income 2d 15,758 10,470
Total operating income 299,537 268,308
-------------------------------------------------------- ------ ------- -------
Net insurance claims and benefits paid and movement
in liabilities to policyholders 3 (80,156) (57,839)
-------------------------------------------------------- ------ ------- -------
Net operating income before change in expected credit
losses and other credit impairment charges 219,381 210,469
-------------------------------------------------------- ------ ------- -------
Change in expected credit losses and other credit
impairment charges 2e (5,672) (4,720)
-------------------------------------------------------- ------ ------- -------
Net operating income 213,709 205,749
-------------------------------------------------------- ------ ------- -------
Employee compensation and benefits 4 (38,048) (40,793)
General and administrative expenses 2f (44,769) (39,989)
Depreciation and impairment of property, plant and
equipment 2g (8,230) (4,686)
Amortisation and impairment of intangible assets (2,447) (1,956)
-------------------------------------------------------- ------ ------- -------
Total operating expenses (93,494) (87,424)
Operating profit 120,215 118,325
-------------------------------------------------------- ------ ------- -------
Share of profit in associates and joint ventures 16,218 16,258
-------
Profit before tax 136,433 134,583
-------------------------------------------------------- ------ ------- -------
Tax expense 5 (21,393) (22,467)
-------
Profit for the year 115,040 112,116
-------------------------------------------------------- ------ -------
Attributable to:
-------------------------------------------------------- ------ -------- ----------
* ordinary shareholders of the parent company 104,200 102,132
------- -------
* other equity holders 1,522 881
-------------------------------------------------------- ------ ------- -------
* non-controlling interests 9,318 9,103
-------------------------------------------------------- ------ ------- -------
Profit for the year 115,040 112,116
-------------------------------------------------------- ------ ------- -------
1 The definition has been updated to include debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting mismatch, previously reported under 'Net income from financial instruments held for trading and managed on a fair value basis'. Comparatives have been re-presented to conform to current year's presentation.
Consolidated statement of comprehensive income
for the year ended 31 December
2019 2018
HK$m HK$m
-------------------------------------------------------------- -------- ----------
Profit for the year 115,040 112,116
-------------------------------------------------------------- ------- -------
Other comprehensive income/(expense)
-------- ----------
Items that will be reclassified subsequently to profit
or loss when specific conditions are met:
-------- ----------
Debt instruments at fair value through other comprehensive
income 1,674 826
--------------------------------------------------------------
- fair value gains 2,782 908
--------------------------------------------------------------
- fair value (gains)/losses transferred to the income
statement (606) 142
--------------------------------------------------------------
- expected credit recoveries/(losses) recognised in the
income statement 23 (9)
--------------------------------------------------------------
- income taxes (525) (215)
--------------------------------------------------------------
Cash flow hedges 5 131
--------------------------------------------------------------
- fair value gains 681 1,264
--------------------------------------------------------------
- fair value gains reclassified to the income statement (673) (1,125)
--------------------------------------------------------------
- income taxes (3) (8)
-------------------------------------------------------------- ------- -------
Share of other comprehensive income/(expense) of associates
and joint ventures 167 (146)
------- -------
Exchange differences (3,606) (18,098)
-------------------------------------------------------------- -------
Items that will not be reclassified subsequently to profit
or loss:
Property revaluation 3,673 8,826
-------
- fair value gains 4,426 10,626
- income taxes (753) (1,800)
-------------------------------------------------------------- ------- -------
Equity instruments designated at fair value through other
comprehensive income 2,854 (581)
-------------------------------------------------------------- ------- -------
- fair value gains/(losses) 2,859 (576)
--------------------------------------------------------------
- income taxes (5) (5)
-------------------------------------------------------------- ------- -------
Changes in fair value of financial liabilities designated
at fair value upon initial recognition arising from changes
in own credit risk (2,060) (199)
-------------------------------------------------------------- ------- -------
- before income taxes (2,467) (241)
--------------------------------------------------------------
- income taxes 407 42
-------------------------------------------------------------- ------- -------
Remeasurement of defined benefit asset/liability 192 (910)
- before income taxes 245 (1,091)
- income taxes (53) 181
------- -------
Other comprehensive income/(expense) for the year, net
of tax 2,899 (10,151)
-------------------------------------------------------------- ------- -------
Total comprehensive income for the year 117,939 101,965
-------------------------------------------------------------- ------- -------
Attributable to:
- ordinary shareholders of the parent company 106,187 91,915
--------------------------------------------------------------
* other equity holders 1,522 881
-------------------------------------------------------------- ------- -------
- non-controlling interests 10,230 9,169
-------------------------------------------------------------- ------- -------
Total comprehensive income for the year 117,939 101,965
-------------------------------------------------------------- ------- -------
Consolidated balance sheet
at 31 December
2019 2018
Notes HK$m HK$m
------------------------------------------------------- ------ --------- -----------
Assets
Cash and balances at central banks 202,746 205,660
---------
Items in the course of collection from other banks 21,140 25,380
--------- ---------
Hong Kong Government certificates of indebtedness 298,944 280,854
-------------------------------------------------------
Trading assets 7 622,761 558,838
---------
Derivatives 8 280,642 292,869
------------------------------------------------------- ------ --------- ---------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 9 153,511 132,859
------------------------------------------------------- ------ --------- ---------
Reverse repurchase agreements - non-trading 422,333 406,327
------------------------------------------------------- ------ --------- ---------
Loans and advances to banks 328,905 338,151
---------
Loans and advances to customers 10 3,720,875 3,528,702
---------
Financial investments 11 1,900,298 1,871,026
------ ---------
Amounts due from Group companies 33 87,632 70,455
--------- ---------
Interests in associates and joint ventures 14 151,917 142,885
------------------------------------------------------- ------ --------- ---------
Goodwill and intangible assets 15 81,643 65,104
------------------------------------------------------- ------ --------- ---------
Property, plant and equipment 16 137,930 112,080
---------
Deferred tax assets 5 2,179 2,315
------------------------------------------------------- ------ --------- ---------
Prepayments, accrued income and other assets 17 248,258 229,949
------
Total assets 8,661,714 8,263,454
------------------------------------------------------- ------ --------- ---------
Liabilities
Hong Kong currency notes in circulation 298,944 280,854
Items in the course of transmission to other banks 25,576 33,806
------------------------------------------------------- ------ --------- ---------
Repurchase agreements - non-trading 106,396 70,279
Deposits by banks 179,819 164,664
---------
Customer accounts 18 5,432,424 5,207,666
------ ---------
Trading liabilities 19 87,532 81,194
---------
Derivatives 8 292,231 295,553
------------------------------------------------------- ------ --------- ---------
Financial liabilities designated at fair value 20 160,291 161,143
---------
Debt securities in issue 21 106,933 58,236
---------
Retirement benefit liabilities 4 2,595 3,369
Amounts due to Group companies 33 311,111 396,487
Accruals and deferred income, other liabilities and
provisions 22 203,252 196,665
------------------------------------------------------- ------ --------- ---------
Liabilities under insurance contracts 3 528,760 468,589
---------
Current tax liabilities 12,614 3,337
------------------------------------------------------- ------ --------- ---------
Deferred tax liabilities 5 29,889 24,513
------------------------------------------------------- ------ --------- ---------
Subordinated liabilities 23 4,066 4,081
---------
Preference shares 24 - 98
------------------------------------------------------- ------ --------- ---------
Total liabilities 7,782,433 7,450,534
------------------------------------------------------- ------ --------- ---------
Equity
------------------------------------------------------- ------
Share capital 25 172,335 172,335
---------
Other equity instruments 26 44,615 35,879
------ ---------
Other reserves 133,099 114,949
Retained earnings 464,629 429,595
---------
Total shareholders' equity 814,678 752,758
Non-controlling interests 64,603 60,162
------------------------------------------------------- ------ --------- ---------
Total equity 879,281 812,920
Total liabilities and equity 8,661,714 8,263,454
------------------------------------------------------- ------ --------- ---------
Consolidated statement of cash flows
for the year ended 31 December
2019 2018
HK$m HK$m
----------------------------------------------------------------- --------- -----------
Profit before tax 136,433 134,583
--------
Adjustments for non-cash items:
--------- -----------
Depreciation and amortisation(1) 10,677 6,657
-------- --------
Net gain from investing activities (790) (1,071)
-------- --------
Share of profits in associates and joint ventures (16,218) (16,258)
-------- --------
(Gain)/loss on disposal of subsidiaries, businesses, associates
and joint ventures 14 (38)
-------- --------
Change in expected credit losses gross of recoveries and
other credit impairment charges 6,535 4,720
----------------------------------------------------------------- -------- --------
Provisions 568 51
-------- --------
Share-based payment expense 878 881
-------- --------
Other non-cash items included in profit before tax (16,869) (3,861)
-------- --------
Elimination of exchange differences 4,819 15,723
-------- --------
Changes in operating assets and liabilities
--------- -----------
Change in net trading securities and derivatives (78,600) (65,937)
-------- --------
Change in loans and advances to banks and customers (189,346) (299,137)
-------- --------
Change in reverse repurchase agreements - non-trading (33,521) (61,887)
----------------------------------------------------------------- -------- --------
Change in financial assets designated and otherwise mandatorily
measured at fair value through profit or loss (20,652) 1,176
-------- --------
Change in other assets 6,146 113,636
-------- --------
Change in deposits by banks and customer accounts 239,913 71,688
-------- --------
Change in repurchase agreements - non-trading 36,117 23,109
-------- --------
Change in debt securities in issue 48,697 19,842
-------- --------
Change in financial liabilities designated at fair value (852) (8,605)
-------- --------
Change in other liabilities (28,243) 166,634
-------- --------
Dividends received from associates 4,962 4,948
-------- --------
Contributions paid to defined benefit plans (391) (576)
-------- --------
Tax paid (9,420) (18,216)
-------- --------
Net cash from operating activities 100,857 88,062
----------------------------------------------------------------- -------- --------
Purchase of financial investments (836,492) (822,067)
Proceeds from the sale and maturity of financial investments 762,125 756,630
----------------------------------------------------------------- -------- --------
Purchase of property, plant and equipment (3,334) (1,646)
-------- --------
Proceeds from sale of property, plant and equipment and
assets held for sale 1,828 11,820
----------------------------------------------------------------- -------- --------
Proceeds from disposal of customer loan portfolios 2,057 2,542
-------- --------
Net investment in intangible assets (6,019) (4,691)
-------- --------
Net cash inflow on sale of subsidiaries 299 -
-------- --------
Net cash from investing activities (79,536) (57,412)
----------------------------------------------------------------- -------- --------
Issue of ordinary share capital and other equity instruments 8,617 21,142
--------
Redemption of preference shares and other equity instruments - (20,975)
--------
Subordinated loan capital issued(2) - 79,834
--------
Subordinated loan capital repaid(2) - (42,986)
--------
Dividends paid to shareholders of the parent company and
non-controlling interests (74,015) (52,508)
--------
Net cash from financing activities (65,398) (15,493)
--------
Net increase/(decrease) in cash and cash equivalents (44,077) 15,157
----------------------------------------------------------------- -------- --------
Cash and cash equivalents at 1 Jan(3) 721,609 718,038
--------
Exchange differences in respect of cash and cash equivalents 132 (11,586)
--------
Cash and cash equivalents at 31 Dec(3,4) 677,664 721,609
----------------------------------------------------------------- --------
Cash and cash equivalents comprise
---------
- cash and balances at central banks 202,746 205,660
--------
- items in the course of collection from other banks 21,140 25,380
--------
- loans and advances to banks of one month or less 217,879 179,952
--------
- net settlement accounts and cash collateral 18,706 -
----------------------------------------------------------------- -------- --------
- reverse repurchase agreements with banks of one month
or less 155,587 165,654
--------
- treasury bills, other bills and certificates of deposit
less than three months 87,182 178,769
--------
- less: items in the course of transmission to other banks (25,576) (33,806)
----------------------------------------------------------------- -------- --------
Cash and cash equivalents at 31 Dec(3,4) 677,664 721,609
----------------------------------------------------------------- -------- --------
Interest received was HK$195,528m (2018: HK$166,441m), interest paid was HK$62,557m (2018: HK$41,583m) and dividends received were HK$5,410m (2018: HK$178m).
1 The impact on right-of-use assets has been recognised from 1 January 2019 following the adoption of HKFRS 16. Comparatives have not been restated.
2 Changes in subordinated liabilities (including those issued to Group companies) during the year included amounts from repayment and re-issuance with no cash movement, and non-cash changes from foreign exchange losses
(HK$1,012m) and fair value gain after hedging (HK$9,736m).
3 In 2019, the group included settlement accounts with bank counterparties of one month or less on a net basis. Comparatives have not been re-presented.
4 At 31 December 2019 HK$110,076m (2018: HK$122,899m) was not available for use by the group, of which HK$66,943m (2018: HK$71,783m) related to mandatory deposits at Central banks.
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital instruments earnings reserve reserve reserve reserve Other(1) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
-----------------------------------------------------------
At 31 Dec 2018 172,335 35,879 429,595 57,914 2,953 (99) (24,649) 78,830 752,758 60,162 812,920
----------------------------------------------------------- ------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
Impact on transition
to HKFRS 16 - - - 13,483 - - - - 13,483 - 13,483
----------------------------------------------------------- ------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
At 1 Jan 2019 172,335 35,879 429,595 71,397 2,953 (99) (24,649) 78,830 766,241 60,162 826,403
----------------------------------------------------------- ------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
Profit for the year - - 105,722 - - - - - 105,722 9,318 115,040
------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
Other comprehensive
income/(expense)
(net of tax) - - (1,949) 3,395 4,006 (5) (3,469) 9 1,987 912 2,899
* debt instruments at fair value through other
comprehensive income - - - - 1,676 - - - 1,676 (2) 1,674
* equity instruments designated at fair value through
other comprehensive income - - - - 2,169 - - - 2,169 685 2,854
-----------------------------------------------------------
* cash flow hedges - - - - - (5) - - (5) 10 5
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (2,058) - - - - - (2,058) (2) (2,060)
-----------------------------------------------------------
* property revaluation - - - 3,395 - - - - 3,395 278 3,673
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 112 - - - - - 112 80 192
-----------------------------------------------------------
* share of other comprehensive income/(expense) of
associates and joint ventures - - (3) - 161 - - 9 167 - 167
-----------------------------------------------------------
* exchange differences - - - - - - (3,469) - (3,469) (137) (3,606)
----------------------------------------------------------- ------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- -------
Total comprehensive
income/(expense)
for the year - - 103,773 3,395 4,006 (5) (3,469) 9 107,709 10,230 117,939
----------------------------------------------------------- ------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
Other equity instruments
issued(2) - 44,615 - - - - - - 44,615 - 44,615
----------------------------------------------------------- ------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
Other equity instruments
repaid(2) - (35,879) - - - - - - (35,879) - (35,879)
----------------------------------------------------------- ------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
Dividends paid(3) - - (68,369) - - - - - (68,369) (5,646) (74,015)
------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- -------
Movement in respect
of share-based payment
arrangements - - (42) - - - - 249 207 2 209
------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
Transfers and other
movements(4) - - (328) (2,779) - - - 3,261 154 (145) 9
----------------------------------------------------------- ------- --------- ------- -------- --------- ----- ------- -------- ------- -------- -------
At 31 Dec 2019 172,335 44,615 464,629 72,013 6,959 (104) (28,118) 82,349 814,678 64,603 879,281
----------------------------------------------------------- ------- --------- ------- -------- --- --------- ----- ------- -------- ------- -------- --- -------
Consolidated statement of changes in equity (continued)
for the year ended 31 December
Other reserves
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital instruments earnings reserve reserve(7) reserve reserve Other(1) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
-----------------------------------------------------------
At 31 Dec 2017(7) 151,360 14,737 406,966 58,381 6,825 (197) (6,948) 65,356 696,480 56,506 752,986
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Impact on transition
to HKFRS 9 - - (7,478) - (4,512) - - - (11,990) (323) (12,313)
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- ----- ------- ------- ------- -------- -------
At 1 Jan 2018 151,360 14,737 399,488 58,381 2,313 (197) (6,948) 65,356 684,490 56,183 740,673
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Profit for the
year - - 103,013 - - - - - 103,013 9,103 112,116
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Other comprehensive
income/(expense)
(net of tax) - - (890) 8,050 228 98 (17,701) (2) (10,217) 66 (10,151)
* debt instruments at fair value through other
comprehensive income - - - - 734 - - - 734 92 826
* equity instruments designated at fair value through
other comprehensive income - - - - (367) - - - (367) (214) (581)
-----------------------------------------------------------
* cash flow hedges - - - - - 98 - - 98 33 131
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (197) - - - - - (197) (2) (199)
-----------------------------------------------------------
* property revaluation - - - 8,050 - - - - 8,050 776 8,826
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (688) - - - - - (688) (222) (910)
-----------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (5) - (139) - - (2) (146) - (146)
-----------------------------------------------------------
* exchange differences - - - - - - (17,701) - (17,701) (397) (18,098)
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- -------
Total comprehensive
income/(expense)
for the year - - 102,123 8,050 228 98 (17,701) (2) 92,796 9,169 101,965
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Other equity instruments
issued(2) - 21,142 - - - - - - 21,142 - 21,142
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Dividends paid(3) - - (47,440) - - - - - (47,440) (5,068) (52,508)
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- -------
Movement in respect
of share-based
payment arrangements - - (234) - - - - 246 12 10 22
------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
Transfers and
other movements(4,5,6) 20,975 - (24,342) (8,517) 412 - - 13,230 1,758 (132) 1,626
----------------------------------------------------------- ------- ----------- ------- -------- ------- --- ----- ------- ------- ------- -------- -------
At 31 Dec 2018 172,335 35,879 429,595 57,914 2,953 (99) (24,649) 78,830 752,758 60,162 812,920
----------------------------------------------------------- ------- ----------- ------- -------- --- ------- --- ----- ------- ------- ------- -------- --- -------
1 The other reserves mainly comprise share of associates' other reserves, purchase premium arising from transfer of business from fellow subsidiaries, property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.
2 In 2019, there were US$1,100m additional tier 1 capital instruments issued (2018: US$2,700m). In addition, US$4,600m of additional tier 1 capital instruments were repaid and reissued in 2019 with no actual cash movement (2018: nil).
3 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
4 The movements include transfers from retained earnings to other reserves in associates according to local regulatory requirements, and from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.
5 Ordinary share capital includes preference shares which have been redeemed or bought back via payment out of distributable profits in previous years. In 2018, the Bank redeemed HK$20,975m of preference shares and made a transfer from retained earnings to share capital.
6 The movement from property revaluation reserve to other reserves in 2018 included HK$7,169m relating to transfer of properties to a fellow subsidiary as part of the Recovery and Resolution Plan as set out in the Report of the Directors.
7 The balance at 31 December 2017 represents the HKAS 39 Available-for-sale fair value reserve as at 31 December 2017.
Notes on the Consolidated Financial Statements
1 Basis of preparation and significant accounting policies
---------------------------------------------------------
1.1 Basis of preparation
(a) Compliance with Hong Kong Financial Reporting Standards
The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited ('the Bank') and its subsidiaries (together 'the group') have been prepared in accordance with Hong Kong Financial Reporting Standards ('HKFRSs') as issued by the Hong Kong Institute of Certified Public Accountants ('HKICPA') and accounting principles generally accepted in Hong Kong. These consolidated financial statements also comply with the requirements of the Hong Kong Companies Ordinance (Cap. 622) which are applicable to the preparation of the financial statements.
Standards adopted during the year ended 31 December 2019
HKFRS 16 'Leases'
On 1 January 2019, the group adopted the requirements of HKFRS 16 and recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' in accordance with HKAS 17 'Leases'. These liabilities were measured at the present value of the remaining lease payments, discounted at the lessee's incremental borrowing rate as at 1 January 2019. The associated right- of-use ('ROU') assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments or provisions for onerous leases recognised on balance sheet at 31 December 2018. In addition, the following practical expedients permitted by the standard were applied:
-- Reliance was placed on previous assessments on whether leases were onerous;
-- Operating leases with a remaining lease term of less than 12 months as at 1 January 2019 were treated as short-term leases; and
-- Initial direct costs were not included in the measurement of ROU assets for leases previously accounted for as operating leases.
The differences between HKAS 17 and HKFRS 16 are summarised in the table below:
HKAS 17 HKFRS 16
Leases were classified as Leases are recognised as an ROU asset and
either finance or operating a corresponding liability at the date at
leases. Payments made under which the leased asset is made available
operating leases were charged for use. Lease payments are allocated between
to profit or loss on a straight-line the liability and finance cost. The finance
basis over the period of the cost is charged to profit or loss over the
lease. lease term so as to produce a constant period
rate of interest on the remaining balance
of the liability. The ROU asset is depreciated
over the shorter of the ROU asset's useful
economic life and the lease term on a straight-line
basis.
In determining lease term, the group considers
all facts and circumstances that create
an economic incentive to exercise an extension
option or not exercise a termination option
over the planning horizon of five years.
In general, it is not expected that the
discount rate implicit in the lease is available
so the lessee's incremental borrowing rate
is used. This is the rate that the lessee
would have to pay to borrow the funds necessary
to obtain an asset of a similar value in
a similar economic environment with similar
terms and conditions. The rates are determined
for each economic environment in which the
group operates by adjusting swap rates with
funding spreads (own credit spread) and
cross-currency basis where appropriate.
-------------------------------------- -----------------------------------------------------
The group adopted the requirements of HKFRS 16 retrospectively, with the cumulative effect of initially applying the standard recognised as an adjustment to the opening balance of retained earnings at that date. Comparatives were not restated. In relation to the operating leases that were under HKAS 17 'Leases', the adoption of the standard increased assets by HK$9.2bn reported under 'Property, plant and equipment' and increased lease liabilities by the same amount reported under 'Accruals and deferred income, other liabilities and provisions' with no effect on net assets or retained earnings.
In addition, as a consequence of HKFRS 16, properties previously reported under 'Prepayments, accrued income and other assets' as operating leases and held at cost were reclassified to 'Property, plant and equipment' and measured at fair value. The implementation increased 'Property, plant and equipment' by HK$16.3bn and increased deferred tax liabilities by HK$2.7bn, with the net impact taken to the 'Property Revaluation Reserve'.
The overall impact of the above is to increase 'Property, plant and equipment' by HK$25.5bn, increase 'Accruals and deferred income, other liabilities and provisions' by HK$9.2bn, increase 'Deferred tax liabilities' by HK$2.7bn, increase 'Property Revaluation Reserve' by HK$13.5bn and decrease 'Prepayments, accrued income and other assets' by HK$136m.
Interest Rate Benchmark Reform: Amendments to HKFRS 9 and HKAS 39 'Financial Instruments'
Amendments to HKFRS 9 and HKAS 39 issued in November 2019 modify specific hedge accounting requirements so that entities apply those hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows of the hedging instrument are based is not altered as a result of interest rate benchmark reform. These amendments replace the need for specific judgements to determine whether certain hedge accounting relationships that hedge the variability of cash flows or interest rate risk exposures for periods after the interest rate benchmarks are expected to be reformed or replaced continue to qualify for hedge accounting as at 31 December 2019. For example, in the context of cash flow hedging, the amendments require the interest rate benchmark on which the hedged cash flows are based, or on which the cash flows of the hedging instrument are based, to be assumed to be unaltered over the period of the documented hedge relationship, while uncertainty over the interest rate benchmark reform exists. The HKICPA is expected to provide further guidance on the implication for hedge accounting during the reform process and after the reform uncertainty is resolved.
These amendments apply from 1 January 2020 with early adoption permitted. The group has adopted the amendments that apply to HKAS 39 from 1 January 2019 and has made the additional disclosures as required by the amendments. Further information is included in note 8.
(b) Future accounting developments
Minor amendments to HKFRSs
The HKICPA has published a number of minor amendments to HKFRSs which are effective from 1 January 2020. The group expects they will have an insignificant effect, when adopted, on the Consolidated Financial Statements.
Major new HKFRSs
HKFRS 17 'Insurance Contracts'
HKFRS 17 'Insurance Contracts' was issued in January 2018 and sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. HKFRS 17 is currently effective from 1 January 2021. However, the HKICPA is considering delaying the mandatory implementation date by one year and may make additional changes to the standard. The group is in the process of implementing HKFRS 17. Industry practice and interpretation of the standard is still developing and there may be changes to it, therefore the likely impact of its implementation remains uncertain.
(c) Foreign currencies
Items included in each of the group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The group's consolidated financial statements are presented in Hong Kong dollars.
Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured at historical cost which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is recognised.
In the Consolidated Financial Statements, the assets, liabilities and results of foreign operations whose functional currency is not Hong Kong dollars are translated into the group's presentation currency at the reporting date. Exchange differences arising are recognised in other comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement.
(d) Presentation of information
Certain disclosures required by HKFRSs have been included in the sections marked as ('Audited') in this Annual Report and Accounts as follows:
-- Consolidated income statement and balance sheet data by global business are included in the 'Financial Review' on page 8.
-- Disclosures concerning the nature and extent of risks relating to banking and insurance activities are included in the 'Risk' section on pages 20 to 43 and pages 46 to 50 as specified as 'Audited'.
-- Capital disclosures are included in the 'Capital' section on page 51 as specified as 'Audited'.
In accordance with the group's policy to provide disclosures that help investors and other stakeholders understand the group's performance, financial position and changes to them, the information provided in the Risk section and the Capital section goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements. In addition, the group assesses good practice recommendations issued from time to time by relevant regulators and standard setters and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.
(e) Critical accounting estimates and judgements
The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted as the critical accounting estimates and judgements in note 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management's estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of the Consolidated Financial Statements. Management's selection of the group's accounting policies that contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved.
(f) Segmental analysis
The group's chief operating decision-maker is the Executive Committee which operates as a general management committee under the direct authority of the Board and operating segments are reported in a manner consistent with the internal reporting provided to the Executive Committee.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the group's accounting policies. Segmental income and expenses include transfers between segments and these transfers are conducted at arm's length. Shared costs are included in segments on the basis of the actual recharges made.
(g) Going concern
The Consolidated Financial Satements are prepared on a going concern basis, as the Directors are satisfied that the group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.
1.2 Summary of significant accounting policies (a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, the group consolidates when it holds, directly or indirectly, the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal.
Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. This election is made for each business combination.
The Bank's investments in subsidiaries are stated at cost less impairment losses.
Goodwill
Goodwill is allocated to cash-generating units ('CGU') for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is performed at least annually, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.
Interests in associates
The group classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint arrangements, as associates.
Investments in associates are recognised using the equity method. The attributable share of the results and reserves of associates are included in the consolidated financial statements of the group based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and 31 December.
Investments in associates are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisitions of interests in associates is not tested separately for impairment but is assessed as part of the carrying amount of the investment.
Critical accounting estimates and judgements
The most significant critical accounting judgements and estimates relate
to the assessment of impairment of our investment in Bank of Communications
Co. Limited ('BoCom'), which involves estimations of value in use:
* Management's best estimate of BoCom's earnings are
based on management's explicit forecasts over the
short to medium term and the capital maintenance
charge which is management's forecast of the earnings
that need to be withheld in order for BoCom to meet
regulatory requirements over the forecast period,
both of which are subject to uncertain factors
* Key assumptions used in estimating BoCom's value in
use, the sensitivity of the value in use calculations
to different assumptions and a sensitivity analysis
that shows the changes in key assumptions that would
reduce the excess of value in use over the carrying
amount (the 'headroom') to nil are described in note
14
=============================================================================
(b) Income and expenses
Operating income
Interest income and expense
Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value are recognised in 'Interest income' and 'Interest expense' in the income statement using the effective interest method. However, as an exception to this, interest on debt instruments issued by the group for funding purposes that are designated under the fair value option to reduce accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.
Interest on credit impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Non-interest income and expense
The group generates fee income from services provided at a fixed price over time, such as account service and card fees, or when the group delivers a specific transaction at a point in time such as broking services and import/export services. With the exception of certain fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and the group's performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee income is generally earned from short term contracts with payment terms that do not include a significant financing component.
The group acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades the group acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement.
The group recognises fees earned on transaction-based arrangements at a point in time when we have fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement.
Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities.
Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:
-- 'Net income from financial instruments held for trading or managed on a fair value basis'. This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss.
-- 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss'. This includes interest income, interest expense and dividend income in respect of financial assets and liabilities measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately identifiable from other trading derivatives.
-- 'Changes in fair value of designated debt instruments and related derivatives'. Interest paid on debt instruments and interest cash flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch.
-- 'Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss'. This includes interest on instruments that fail the solely payments of principal and interest ('SPPI') test. See (d) below.
The accounting policies for insurance premium income are disclosed in note 1.2(j).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, the group recognises the difference as a trading gain or loss at inception ('a day 1 gain or loss'). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or the group enters into an offsetting transaction.
The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the Consolidated Financial Statements, unless they satisfy the HKFRSs offsetting criteria.
Critical accounting estimates and judgements
The majority of valuation techniques employ only observable market
data. However, certain financial instruments are classified on the
basis of valuation techniques that feature one or more significant
market inputs that are unobservable, and for them, the measurement
of fair value is more judgemental:
Judgements Estimates
============================================================ ===========================================================
* An instrument in its entirety is classified as valued * Details on the group's level 3 financial instruments
using significant unobservable inputs if, in the are set out in note 34
opinion of management, a significant proportion of
the instrument's inception profit or greater than 5%
of the instrument's valuation is driven by
unobservable inputs
* 'Unobservable' in this context means that there is
little or no current market data available from which
to determine the price at which an arm's length
transaction would be likely to occur. It generally
does not mean that there is no data available at all
upon which to base a determination of fair value
(consensus pricing data may, for example, be used)
============================================================ ===========================================================
(d) Financial instruments measured at amortised cost
Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include, most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs. If the initial fair value is lower than the cash amount advanced, such as in the case of some leveraged finance and syndicated lending activities, the difference is deferred and recognised over the life of the loan through the recognition of interest income.
The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. When the group intends to hold the loan, the loan commitment is included in the impairment calculations set out below.
Non-trading reverse repurchase, repurchase and similar agreements
When debt securities are sold subject to a commitment to repurchase them at a predetermined price ('repos'), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell ('reverse repos') are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement.
Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo agreements.
(e) Financial assets measured at fair value through other comprehensive income ('FVOCI')
Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at FVOCI. These comprise primarily debt securities. They are recognised on the trade date when the group enters into contractual arrangements to purchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income statement as 'Gains less losses from financial instruments'. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in profit or loss.
(f) Equity securities measured at fair value with fair value movements presented in OCI
The equity securities for which fair value movements are shown in OCI are business facilitation and other similar investments where the group holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are not transferred to profit or loss. Dividend income is recognised in profit or loss.
(g) Financial instruments designated at fair value through profit or loss
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below and are so designated irrevocably at inception:
-- the use of the designation removes or significantly reduces an accounting mismatch;
-- when a group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; and
-- where the financial liability contains one or more non-closely related embedded derivatives.
Designated financial assets are recognised when the group enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when the rights to the cash flows expire or are transferred.
Designated financial liabilities are recognised when the group enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in 'Net income from financial instruments held for trading or managed on a fair value basis' or 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss' except for the effect of changes in the liabilities' credit risk which is presented in OCI, unless that treatment would create or enlarge an accounting mismatch in profit or loss.
Under the above criterion, the main classes of financial instruments designated by the group are:
-- Debt instruments for funding purposes that are designated to reduce an accounting mismatch.
The interest and/or foreign exchange exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy.
-- Financial assets and financial liabilities under unit-linked and non-linked investment contracts.
A contract under which the group does not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with discretionary participation features ('DPF'), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise be measured at either fair value through other comprehensive income or amortised cost. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in the same line.
-- Financial liabilities which contain both deposit and derivative components: These financial liabilities are managed and their performance evaluated on a fair value basis.
(h) Derivatives
Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value, with changes in fair value generally recorded in the income statement. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.
Where the derivatives are managed with debt securities issued by the group that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.
Hedge accounting
When derivatives are held for risk management purposes, they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group enters into fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued; the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments is recognised in other comprehensive income; the ineffective portion
of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately
in the income statement within 'Net income from financial instruments held for trading or managed on a fair value basis'. The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. In hedges of forecast transactions that result in recognition of a non-financial asset or liability, previous gains and losses recognised in other comprehensive income are included in the initial measurement of the asset or liability. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.
(i) Impairment of amortised cost and FVOCI financial assets
Expected credit losses ('ECL') are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months (or less, where the remaining life is less than 12 months) ('12-month ECL'). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where 12-month ECL is recognised are considered to be 'stage 1'; financial assets that are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit-impaired are in 'stage 3'. Purchased or originated credit-impaired financial assets ('POCI') are treated differently as set out below.
Credit-impaired (stage 3)
The group determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to pay such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and
-- the loan is otherwise considered to be in default.
If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit-impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired.
Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL allowance.
Write-off
Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Renegotiation
Loans are identified as renegotiated and classified as credit-impaired when we modify the contractual payment terms due to significant credit distress of the borrower. Renegotiated loans remain classified as credit-impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity or derecognition.
A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms or if the terms of an existing agreement are modified such that the renegotiated loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances are considered to be POCI and will continue to be disclosed as renegotiated loans.
Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any evidence of being credit-impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, over the minimum observation period, and there are no other indicators of impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.
Loan modifications that are not credit-impaired
Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that the group's rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates and no payment-related concession has been provided.
Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale.
However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when
30 days past due. In addition, wholesale loans that are individually assessed, typically corporate and commercial customers, and included on a watch or worry list are included in stage 2.
For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default ('PD') which encompasses a wide range of information including the obligor's customer risk rating ('CRR'), macroeconomic condition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure of significance varies depending on the credit quality at origination as follows:
0.1-1.2 15bps 2.1-3.3 30bps -------- ------
For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates.
For loans originated prior to the implementation of HKFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle ('TTC') PDs and TTC migration probabilities, consistent with the instrument's underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration based thresholds as set out in the table below:
0.1 5 notches
-------- ----------
1.1-4.2 4 notches
-------- ----------
4.3-5.1 3 notches
-------- ----------
5.2-7.1 2 notches
----------
7.2-8.2 1 notch
-------- ----------
8.3 0 notch
-------- ----------
Further information about the 23-grade scale used for CRR can be found on page 23.
For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.
For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores which incorporates all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies loans with a PD higher than would be expected from loans that are performing as originally expected and higher than what would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.
Unimpaired and without significant increase in credit risk - (stage 1)
ECL resulting from default events that are possible within the next 12 months ('12-month ECL') are recognised for financial instruments that remain in stage 1.
Purchased or originated credit-impaired ('POCI')
Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes the recognition of a new financial instrument following a renegotiation where concessions have been granted for economic or contractual reasons relating to the borrower's financial difficulty that otherwise would not have been considered. The amount of change-in-lifetime ECL is recognised in profit or loss until the POCI is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.
Movement between stages
Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are not POCI will continue to be in stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that are assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.
Measurement of ECL
The assessment of credit risk, and the estimation of ECL, are unbiased and probability-weighted, and incorporate all available information that is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.
In general, the group calculates ECL using three main components, a probability of default, a loss given default ('LGD') and the exposure at default ('EAD').
The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively.
The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money.
The group leverages the Basel II IRB framework where possible, with recalibration to meet the differing HKFRS 9 requirements as set out in the following table:
PD
* Through the cycle (represents long-run average PD * Point in time (based on current conditions, adjusted
throughout a full economic cycle) to take into account estimates of future conditions
that will impact PD)
* The definition of default includes a backstop of 90+
days past due * Default backstop of 90+ days past due for all
portfolios
------------------------------------------------------------
EAD
* Cannot be lower than current balance * Amortisation captured for term products
------ ----------------------------------------------------------- ------------------------------------------------------------
LGD
* Downturn LGD (consistent losses expected to be * Expected LGD (based on estimate of loss given default
suffered during a severe but plausible economic including the expected impact of future economic
downturn) conditions such as changes in value of collateral)
* Regulatory floors may apply to mitigate risk of * No floors
underestimating downturn LGD due to lack of
historical data
* Discounted using the original effective interest rate
of the loan
* Discounted using cost of capital
* Only costs associated with obtaining/selling
* All collection costs included collateral included
------ ----------------------------------------------------------- ------------------------------------------------------------
Other
* Discounted back from point of default to balance
sheet date
------ ----------------------------------------------------------- ------------------------------------------------------------
While 12-month PDs are re-calibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life.
The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on the credit risk officer's estimates as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on the estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by the group and the judgement of the credit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to the most likely outcome.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which the group is exposed to credit risk. For wholesale overdrafts, credit risk management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of the next substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility. However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit the group's exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period the group remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
Forward-looking economic inputs
The group applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of our view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 27.
Critical accounting estimates and judgements
The calculation of the group's ECL under HKFRS 9 requires the group
to make a number of judgements, assumptions and estimates. The most
significant are set out below:
* Defining what is considered to be a significant * The sections marked as audited on pages 27 to 30,
increase in credit risk 'Measurement uncertainty and sensitivity analysis of
ECL estimates' set out the assumptions used in
determining ECL and provide an indication of the
* Determining the lifetime and point of initial sensitivity of the result to the application of
recognition of overdrafts and credit cards different weightings being applied to different
economic assumptions
* Selecting and calibrating the PD, LGD and EAD mode
ls,
which support the calculations, including making
reasonable and supportable judgements about how
models react to current and future economic
conditions
* Selecting model inputs and economic forecasts,
including determining whether sufficient and
appropriately weighted economic forecasts are
incorporated to calculate unbiased expected loss
========================================================= ===========================================================
(j) Insurance contracts
A contract is classified as an insurance contract where the group accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. In addition, the group issues investment contracts with discretionary participation features ('DPF') which are also accounted for as insurance contracts as required by HKFRS 4 'Insurance Contracts'.
Net insurance premium income
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they relate.
Net insurance claims and benefits paid and movements in liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by reference to the value of the relevant underlying funds or indices.
Future profit participation on insurance contracts with DPF
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and management's expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by the contractual terms, regulation, or past distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by
HKFRS 4. The group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability.
In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
The group recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term and in-force at the balance sheet date, as an asset. The PVIF asset is presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in 'Other operating income' on a gross of tax basis.
Critical accounting estimates and judgements
The valuation of the PVIF is dependent on economic assumptions (e.g.
future investment returns) and non-economic assumptions (e.g. related
to policyholder behaviour or demographics
* The PVIF asset represents the value of the equity * The assumptions are reassessed at each reporting date
holders' interest in the issuing insurance companies' and changes in the estimates which affect the value
profits expected to emerge from these contracts of PVIF are reflected in the income statement. More
written at the balance sheet date. It is determined information is included in note 15.
by discounting those expected future profits using
appropriate assumptions in assessing factors such as
future mortality, lapse rates and levels of expenses,
and a risk discount rate that reflects the risk
premium attributable to the respective contracts. The
PVIF incorporates allowances for both non-market risk
and the value of financial options and guarantees.
============================================================ ============================================================
(k) Property
Land and buildings
Land and buildings held for own use are carried at their revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses.
Revaluations are performed by professional qualified valuers, on a market basis, with sufficient regularity to ensure that the net carrying amount does not differ materially from the fair value. Surpluses arising on revaluation are credited firstly to the income statement, to the extent of any deficits arising on revaluation previously charged to the income statement in respect of the same land and buildings, and are thereafter taken to the 'Property revaluation reserve'. Deficits arising on revaluation are first set off against any previous revaluation surpluses included in the 'Property revaluation reserve' in respect of the same land and buildings, and are thereafter recognised in the income statement.
Leasehold land and buildings are depreciated over the shorter of the unexpired terms of the leases or the remaining useful lives.
The Government of Hong Kong owns all the land in Hong Kong and permits its use under leasehold arrangements. Similar arrangements exist in mainland China. The group accounts for its interests in own use leasehold land and land use rights in accordance with HKFRS 16 but discloses these as owned assets when the right of use are considered sufficient to constitute control.
Investment properties
The group holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties are included on balance sheet at fair value with changes in fair value being recognised in the income statement.
(l) Employee compensation and benefits
Post-employment benefit plans
The group operates a number of pension schemes including defined benefit and defined contribution, and post-employment benefit schemes.
Payments to defined contribution schemes are charged as an expense as the employees render service.
Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.
Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets excluding interest and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.
(m) Tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same statement as the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled.
Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.
(n) Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.
Critical accounting estimates and judgements
The recognition and measurement of provisions requires the group to
make a number of judgements, assumptions and estimates. The most significant
are set out below:
* Determining whether a present obligation exists. * Provisions for legal proceedings and regulatory
Professional advice is taken on the assessment of matters remain very sensitive to the assumptions used
litigation, property (including onerous contracts) in the estimate. There could be a wider range of
and similar obligations. possible outcomes for any pending legal proceedings,
investigations or inquiries. As a result, it is often
not practicable to quantify a range of possible
* Provisions for legal proceedings and regulatory outcomes for individual matters. It is also not
matters typically require a higher degree of practicable to meaningfully quantify ranges of
judgement than other types of provisions. When potential outcomes in aggregate for these types of
matters are at an early stage, accounting judgements provisions because of the diverse nature and
can be difficult because of the high degree of circumstances of such matters and the wide range of
uncertainty associated with determining whether a uncertainties involved.
present obligation exists, and estimating the
probability and amount of any outflows that may
arise. As matters progress, management and legal * Provisions for customer remediation also require
advisers evaluate on an ongoing basis whether significant levels of estimation. The amounts of
provisions should be recognised, revising previous provisions recognised depend on a number of different
estimates as appropriate. At more advanced stages, it assumptions, such as the volume of inbound complaints
is typically easier to make estimates around a better ,
defined set of possible outcomes. the projected period of inbound complaint volumes,
the decay rate of complaint volumes, the populations
identified as systemically mis-sold and the number of
policies per customer complaint.
============================================================ ============================================================
Contingent liabilities, contractual commitments and guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to legal proceedings or regulatory matters, are not recognised in the Consolidated Financial Statements but are disclosed unless the probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable.
The Bank has issued financial guarantees and similar contracts to other group entities. The group elects to account for certain guarantees as insurance contracts in the Bank's financial statements, in which case they are measured and recognised as insurance liabilities. This election is made on a contract-by-contract basis, and is irrevocable.
2 Operating profit
-----------------
(a) Net interest income
Net interest income includes:
2019 2018
HK$m HK$m
Interest income recognised on impaired financial assets 309 276
------- -------
Interest income recognised on financial assets measured
at amortised cost 160,387 143,709
--------------------------------------------------------------- ------- -------
Interest income recognised on financial assets measured
at FVOCI 30,974 26,412
--------------------------------------------------------------- ------- -------
Interest expense on financial instruments, excluding interest
on financial liabilities held for trading or designated
or otherwise mandatorily measured at fair value (56,493) (41,259)
--------------------------------------------------------------- ------- -------
(b) Net fee income
Net fee income by global
business
Retail
Banking Global
and Banking Global
Wealth Commercial and Private Corporate
Management Banking Markets Banking Centre(1) Total
HK$m HK$m HK$m HK$m HK$m HK$m
Account services 1,281 893 340 23 1 2,538
----------------------------- ---------- --------- ------- ------- --------- -------
Funds under management 3,779 646 1,694 1,095 1 7,215
---------- --------- ------- ------- --------- -------
Cards 6,755 1,726 85 - 1 8,567
---------- --------- ------- ------- --------- -------
Credit facilities 223 1,693 1,367 9 1 3,293
---------- --------- ------- ------- --------- -------
Broking income 2,441 43 696 380 - 3,560
---------- --------- ------- ------- --------- -------
Imports/exports - 2,590 690 - - 3,280
---------- --------- ------- ------- --------- -------
Unit trusts 6,318 158 - 674 - 7,150
---------- --------- ------- ------- --------- -------
Underwriting 2 2 1,557 - (6) 1,555
---------- --------- ------- ------- --------- -------
Remittances 284 1,945 665 3 (14) 2,883
---------- --------- ------- ------- --------- -------
Global custody 657 51 2,936 98 - 3,742
---------- --------- ------- ------- --------- -------
Insurance agency commission 1,463 131 2 139 - 1,735
---------- --------- ------- ------- --------- -------
Other 1,758 2,145 5,294 761 (2,377) 7,581
---------- --------- ------- --------- -------
Fee income 24,961 12,023 15,326 3,182 (2,393) 53,099
----------------------------- ---------- --------- ------- ------- --------- -------
Fee expense (6,314) (2,063) (5,349) (343) 2,475 (11,594)
----------------------------- ---------- --------- ------- ------- --------- -------
Year ended 31 Dec 2019 18,647 9,960 9,977 2,839 82 41,505
----------------------------- ---------- --------- ------- ------- --------- -------
Account services 1,434 979 337 55 3 2,808
----------------------------- ------ ------ ------ ----- ------ -------
Funds under management 4,122 724 1,749 910 1 7,506
------ ------ ------ ----- ------ -------
Cards 6,552 1,788 74 - - 8,414
------ ------ ------ ----- ------ -------
Credit facilities 242 1,568 1,360 9 1 3,180
------ ------ ------ ----- ------ -------
Broking income 3,397 73 702 507 - 4,679
------ ------ ------ ----- ------ -------
Imports/exports - 2,909 723 - - 3,632
------ ------ ------ ----- ------ -------
Unit trusts 6,381 172 - 558 (4) 7,107
------ ------ ------ ----- ------ -------
Underwriting 5 3 1,111 - (7) 1,112
------ ------ ------ ----- ------ -------
Remittances 333 2,183 625 3 (6) 3,138
------ ------ ------ ----- ------ -------
Global custody 713 51 3,025 95 (18) 3,866
------ ------ ------ ----- ------ -------
Insurance agency commission 1,510 142 4 94 (9) 1,741
------ ------ ------ ----- ------ -------
Other 1,816 2,020 5,087 719 (2,240) 7,402
------ ------ ------ ------ -------
Fee income 26,505 12,612 14,797 2,950 (2,279) 54,585
----------------------------- ------ ------ ------ ----- ------ -------
Fee expense (5,418) (2,014) (5,003) (300) 2,381 (10,354)
----------------------------- ------ ------ ------ ----- ------ -------
Year ended 31 Dec 2018 21,087 10,598 9,794 2,650 102 44,231
----------------------------- ------ ------ ------ ----- ------ -------
1 Includes inter-segment elimination.
Net fee income includes:
2019 2018
HK$m HK$m
Fees earned on financial assets that are not at fair
value through profit and loss (other than amounts included
in determining the effective interest rate) 11,400 11,583
------------------------------------------------------------- ------ ------
- fee income 16,324 16,368
-------------------------------------------------------------
- fee expense (4,924) (4,785)
------ ------
Fee earned on trust and other fiduciary activities 9,234 9,653
------
- fee income 10,421 10,787
-------------------------------------------------------------
- fee expense (1,187) (1,134)
------------------------------------------------------------- ------ ------
(c) Net income from financial instruments measured at fair value through profit or loss
2019 2018
HK$m HK$m
Net income/(expense) arising on:
-----------------------------------------------------------
Net trading activities 42,813 32,583
----------------------------------------------------------- ------ ------
Other instruments managed on a fair value basis (6,425) (513)
------ ------
Net income from financial instruments held for trading
or managed on a fair value basis 36,388 32,070
----------------------------------------------------------- ------ ------
Financial assets held to meet liabilities under insurance
and investment contracts 16,245 (6,104)
----------------------------------------------------------- ------
Liabilities to customers under investment contracts (1,988) 543
----------------------------------------------------------- ------ ------
Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives,
measured at fair value through profit or loss 14,257 (5,561) ----------------------------------------------------------- ------ ------ Changes in fair value of designated debts issued and related derivatives(1) (305) (327) ----------------------------------------------------------- ------ ------ Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss 118 (217) ----------------------------------------------------------- ------ ------ Year ended 31 Dec 50,458 25,965 ----------------------------------------------------------- ------ ------
1 The definition has been updated to include debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting mismatch, previously reported as 'Net trading activities' under 'Net income from financial instruments held for trading and managed on a fair value basis'. Comparatives have been re-presented to conform to the current year's presentation.
(d) Other operating income
2019 2018
HK$m HK$m
Movement in present value of in-force insurance business 12,546 4,629
------ ------
Gains on investment properties 154 639
------ ------
Losses on disposal of property, plant and equipment
and assets held for sale (2) (69)
---------------------------------------------------------- ------ ------
Gains/(losses) on disposal of subsidiaries, associates
and business portfolios (14) 38
------ ------
Rental income from investment properties 423 416
---------------------------------------------------------- ------ ------
Dividend income 161 164
---------------------------------------------------------- ------ ------
Other(1) 2,490 4,653
---------------------------------------------------------- ------ ------
Year ended 31 Dec 15,758 10,470
---------------------------------------------------------- ------ ------
1 In 2019, the group transferred shared services and operations to a separate service company, HSBC Global Services (Hong Kong) Limited ('ServCo'), a fellow subsidiary which provides functional support services to the group. As a result of the transfer, costs incurred relating to services provided to fellow group companies are reflected in the financial statements of ServCo instead of the group, and so are recoveries on these costs.
There was a loss on disposal of loans and receivables of HK$3m in the year (2018: loss of HK$5m). There were no gains or losses on disposal of financial liabilities measured at amortised cost in the year (2018: nil).
(e) Change in expected credit losses and other credit impairment charges
2019 2018
HK$m HK$m
Loans and advances to banks and customers 5,420 4,611
------------------------------------------------ -----
- new allowances net of allowance releases 6,283 5,551
- recoveries of amounts previously written off (863) (940)
Loan commitments and guarantees 95 123
------------------------------------------------ -----
Other financial assets 157 (14)
------------------------------------------------ ----- -----
Year ended 31 Dec 5,672 4,720
------------------------------------------------ ----- -----
Change in expected credit losses as a percentage of average gross customer advances was 0.15% for 2019 (2018: 0.13%).
(f) General and administrative expenses
2019 2018
HK$m HK$m
Premises and equipment 3,246 8,208
------ ------
- rental expenses 794 4,134
-----------------------------------------
- other premises and equipment expenses 2,452 4,074
----------------------------------------- ------ ------
Marketing and advertising expenses 2,815 2,940
----------------------------------------- ------ ------
Other administrative expenses(1) 38,708 28,841
----------------------------------------- ------ ------
Year ended 31 Dec 44,769 39,989
----------------------------------------- ------ ------
1 In 2019, over 8,500 employees performing shared services and operations in Hong Kong were transferred from the group to ServCo as part of recovery and resolution planning to provide services to the group. The group recognises management charges for the services provided by ServCo, which is reported under 'general administrative expenses'. For further details, please refer to note 33 'Related party transactions'.
Included in operating expenses were direct operating expenses of HK$34m (2018: HK$35m) arising from investment properties that generated rental income in the year. Direct operating expenses arising from investment properties that did not generate rental income amounted to HK$2m (2018: HK$3m).
(g) Depreciation and impairment of property, plant and equipment
2019 2018
HK$m HK$m
Owned property, plant and equipment 5,620 4,686
----- -----
Other right-of-use assets(1) 2,610 N/A
------------------------------------- -----
Year ended 31 Dec 8,230 4,686
------------------------------------- ----- -----
1 The impact on right-of-use assets has been recognised from 1 January 2019 following the adoption of HKFRS 16. Comparatives have not been restated.
(h) Auditors' remuneration
Auditors' remuneration amounted to HK$125m (2018: HK$125m).
3 Insurance business
-------------------
Net insurance premium Income
Non-linked
insurance Unit-linked Total
HK$m HK$m HK$m
---------- ----------- ----------
Gross insurance premium income 69,719 1,381 71,100
--------- ---------- -------
Reinsurers' share of gross insurance premium income (10,798) (27) (10,825)
-----------------------------------------------------
Year ended 31 Dec 2019 58,921 1,354 60,275
----------------------------------------------------- --------- ---------- -------
Gross insurance premium income 63,462 1,586 65,048
Reinsurers' share of gross insurance premium income (4,349) (21) (4,370)
----------------------------------------------------- --------- ---------- -------
Year ended 31 Dec 2018 59,113 1,565 60,678
----------------------------------------------------- --------- ---------- -------
Net insurance claims and benefits paid and movement in liabilities
to policyholders
Non-linked
insurance Unit-linked Total
HK$m HK$m HK$m
---------- ----------- ----------
Gross claims and benefits paid and movement in
liabilities to policyholders 84,921 5,910 90,831
- claims, benefits and surrenders paid 26,960 6,095 33,055
- movement in liabilities 57,961 (185) 57,776
--------- ---------- -------
Reinsurers' share of claims and benefits paid and
movement in liabilities (10,677) 2 (10,675)
- claims, benefits and surrenders paid (2,658) (107) (2,765)
- movement in liabilities (8,019) 109 (7,910)
--------- ---------- -------
Year ended 31 Dec 2019 74,244 5,912 80,156
--------------------------------------------------- --------- ---------- -------
Gross claims and benefits paid and movement in
liabilities to policyholders 65,002 (3,080) 61,922
- claims, benefits and surrenders paid 27,086 7,598 34,684
- movement in liabilities 37,916 (10,678) 27,238
Reinsurers' share of claims and benefits paid and
movement in liabilities (4,155) 72 (4,083)
- claims, benefits and surrenders paid (1,930) (1,394) (3,324)
- movement in liabilities (2,225) 1,466 (759)
Year ended 31 Dec 2018 60,847 (3,008) 57,839
--------------------------------------------------- --------- ---------- -------
Liabilities under insurance contracts
2019 2018
Reinsurers' Reinsurers'
Gross share(2) Net Gross share(2) Net
HK$m HK$m HK$m HK$m HK$m HK$m
-------- ----------- --------
Non-linked insurance
At 31 Dec 433,668 (17,758) 415,910 391,348 (15,624) 375,724
------- ---------- -------
Impact on transition to HKFRS
9 N/A N/A N/A (535) - (535)
-------- ----------- -------- ----------
At 1 Jan 433,668 (17,758) 415,910 390,813 (15,624) 375,189
------------------------------------ ------- ---------- ------- ------- ---------- -------
Claims and benefits paid (26,960) 2,658 (24,302) (27,086) 1,930 (25,156)
------- ---------- -------
Increase/(decrease) in liabilities
to policyholders 84,921 (10,677) 74,244 65,002 (4,155) 60,847
------- ---------- -------
Exchange differences and other
movements(1) 2,552 (470) 2,082 4,939 91 5,030
------------------------------------ ------- ---------- ------- ------- ---------- -------
At 31 Dec 494,181 (26,247) 467,934 433,668 (17,758) 415,910
------------------------------------ ------- ---------- ------- ------- ---------- -------
Unit-linked
At 1 Jan 34,921 (34) 34,887 46,669 (110) 46,559
------- ---------- -------
Claims and benefits paid (6,095) 107 (5,988) (7,598) 1,394 (6,204)
------------------------------------
Increase/(decrease) in liabilities
to policyholders 5,910 2 5,912 (3,080) 72 (3,008)
------------------------------------
Exchange differences and other
movements(1) (157) (110) (267) (1,070) (1,390) (2,460)
------------------------------------
At 31 Dec 34,579 (35) 34,544 34,921 (34) 34,887
------------------------------------ ------- ---------- ------- ------- ---------- -------
Total liabilities to policyholders 528,760 (26,282) 502,478 468,589 (17,792) 450,797
------------------------------------ ------- ---------- ------- ------- ---------- -------
1 'Exchange differences and other movements' includes movements in liabilities arising from net unrealised investment gains recognised in other comprehensive income.
2 Amounts recoverable from reinsurance of liabilities under insurance contracts are included in the consolidated balance sheet in 'Prepayment, accrued income and other assets'.
The key factors contributing to the movement in liabilities to policyholders included movements in the market value of assets supporting policyholder liabilities, death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders.
4 Employee compensation and benefits
-----------------------------------
2019 2018
HK$m HK$m
Wages and salaries(1) 34,674 36,972
------
Social security costs 1,264 1,249
------ ------
Post-employment benefits 2,110 2,572
------
- defined contribution pension plans 1,516 1,804
- defined benefit pension plans 594 768
------
Year ended 31 Dec(2) 38,048 40,793
-------------------------------------- ------ ------
1 'Wages and salaries' includes the effect of share-based payments arrangements of HK$882m (2018: HK$968m).
2 In 2019, over 8,500 employees performing shared services and operations in Hong Kong were transferred from the group to ServCo as part of recovery and resolution planning to provide services to the group. The group recognises management charges for the services provided by ServCo, which is reported under 'general administrative expenses'. For further details, please refer to note 33 'Related party transactions'.
Post-employment benefit plans
The group operates a number of post-employment benefit plans for its employees. 'Pension risk management' in the Risk section contains details of the policies and practices associated with these benefit plans. Some of these plans are defined benefit plans, of which the largest plan is The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (the 'Principal Plan').
The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and the discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Present
value of
Fair value defined Net defined
of plan benefit benefit
assets obligations liability
HK$m HK$m HK$m
------------ -------------
At 1 Jan 2019 13,856 (17,197) (3,341)
--------- ----------- ----------
Service cost - (511) (511)
---------------------------------------------------------- --------- ----------- ----------
* current service cost - (511) (511)
---------------------------------------------------------- --------- ----------- ----------
Net interest income/(expense) on the net defined
benefit asset/(liability) 206 (274) (68)
--------- ----------- ----------
Re-measurement effects recognised in other comprehensive
income 927 (682) 245
--------- ----------- ----------
* return on plan assets (excluding interest income) 927 - 927
* actuarial losses - (682) (682)
---------------------------------------------------------- --------- ----------- ----------
Contributions by the group 391 - 391
--------- ----------- ----------
Benefits paid (1,290) 1,376 86
---------------------------------------------------------- --------- ----------- ----------
Exchange differences and other movements(1) (3,788) 4,440 652
---------------------------------------------------------- --------- ----------- ----------
At 31 Dec 2019 10,302 (12,848) (2,546)
---------------------------------------------------------- --------- ----------- ----------
Retirement benefit liabilities recognised on
the balance sheet (2,595)
----------------------------------------------------------
Retirement benefit assets recognised on the
balance sheet (within 'Prepayment, accrued income
and other assets') 49
---------------------------------------------------------- ---------- ------------ ----------
At 1 Jan 2018 15,167 (17,308) (2,141)
------ ------- ------
Service cost - (697) (697)
-------------------------------------------------------------- ------ ------- ------
* current service cost - (684) (684)
--------------------------------------------------------------
* past service cost and gains/(losses) from settlements - (13) (13)
-------------------------------------------------------------- ------ ------- ------
Net interest income/(expense) on the net defined
benefit asset/(liability) 289 (338) (49)
------ ------- ------
Re-measurement effects recognised in other comprehensive
income (692) (399) (1,091)
------ ------- ------
* return on plan assets (excluding interest income) (692) - (692)
* actuarial losses - (399) (399)
-------------------------------------------------------------- ------ ------- ------
Contributions by the group 576 - 576
------ ------- ------
Benefits paid (1,404) 1,471 67
-------------------------------------------------------------- ------ ------- ------
Exchange differences and other movements(1) (80) 74 (6)
-------------------------------------------------------------- ------ ------- ------
At 31 Dec 2018 13,856 (17,197) (3,341)
-------------------------------------------------------------- ------ ------- ------
Retirement benefit liabilities recognised on
the balance sheet (3,369)
--------------------------------------------------------------
Retirement benefit assets recognised on the
balance sheet (within 'Prepayment, accrued income
and other assets') 28
-------------------------------------------------------------- ------- -------- ------
1 Other movements in 2019 included the impact from transfer of employees from the group to HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the Group.
Fair value of plan assets by asset classes
At 31 Dec 2019 At 31 Dec 2018
Quoted Quoted
market market
price in price in
active Thereof active Thereof
Value market HSBC Value market HSBC
HK$m HK$m HK$m HK$m HK$m HK$m
Fair value of plan
assets 10,302 10,302 177 13,856 13,856 454
------ --------- -------
- equities 3,076 3,076 - 3,519 3,519 -
- bonds 6,034 6,034 - 7,380 7,380 -
- other(1) 1,192 1,192 177 2,957 2,957 454
-------------------- ------ --------- ------- ------ --------- -------
1 Other mainly consists of alternative investments (previously included within equities and bonds) and cash and cash deposits. Comparatives have been re-presented to conform to current year's presentation.
The Principal Plan
In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme ('LSRBS'), the Principal Plan, covers employees of the Bank and HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the Group set up in Hong Kong as part of the recovery and resolution planning to provide functional support services to the group, as well as certain other local employees of the Group. The Principal Plan comprises a funded defined benefit scheme (which provides a lump sum benefit on retirement and is now closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees, and the group has been providing defined contribution plans to all new employees. Since the defined benefit scheme of the Principal Plan is a final salary lump sum scheme, its exposure to longevity risk and interest rate risk is limited compared to a scheme that provides annuity payments.
The Principal Plan is a funded plan with assets which are held in trust funds separate from the group. The investment strategy of the defined benefit scheme of the Principal Plan is to hold the majority of assets in fixed income investments, with a smaller portion in equities. The target asset allocation for the portfolio has been updated in December 2019 to: Fixed income investments 75% and Equity 25% following an update to the investment strategy to de-risk the investment portfolio. Each investment manager has been assigned a benchmark applicable to their respective asset class. The actuarial funding valuation of the Principal Plan is conducted at least on a triennial basis in accordance with the local practice and regulations. The actuarial assumptions used to conduct the actuarial funding valuation of the Principal Plan vary according to the economic conditions.
The trustee, which is a subsidiary of the Bank, assumes the overall responsibility for the Principal Plan and the group has established a management committee and a number of sub-committees to broaden the governance and manage the concomitant issues.
During 2019, over 1,400 employees covered under the defined benefit scheme of the Principal Plan were transferred from the group to ServCo as part of the recovery and resolution planning. There were no changes to employment terms and conditions or retirement benefits as a result of these transfers. Both the group and ServCo participate in the Principal Plan that shares risks between the entities which are under common control of the Group. As agreed between the group and ServCo, the net defined benefit cost of the defined benefit scheme of the Principal Plan shall be charged separately. Details on the defined benefit scheme of the Principal Plan are disclosed below.
Net asset/(liability) under the defined benefit scheme of the Principal
Plan
Included within Included within
HBAP ServCo
Present Fair Present
Fair value value value
value of defined Net defined of of defined Net defined
of plan benefit benefit plan benefit benefit
assets obligations liability assets obligations liability
HK$m HK$m HK$m HK$m HK$m HK$m
------- ------------- ----------- ------ ------------- -----------
At 1 Jan 2019 8,402 (9,749) (1,347) 478 (618) (140)
---------------------------------------------------------
Service cost - (194) (194) - (182) (182)
---------------------------------------------------------
* current service cost - (194) (194) - (182) (182)
--------------------------------------------------------- ------ -------- ----- -----
Net interest income/(expense) on the
net defined benefit asset/(liability) 68 (80) (12) 63 (73) (10)
------ -------- ------- ----- -------- ----- ---
Re-measurement effects recognised
in other comprehensive income 390 (255) 135 416 (168) 248
------ -------- ------- ----- -------- ----- ----
* return on plan assets (excluding interest income) 390 - 390 416 - 416
* actuarial losses - (255) (255) - (168) (168)
--------------------------------------------------------- ------ -------- ------- ----- -------- ----- ---
Contributions by the group 198 - 198 184 - 184
------ -------- --- ------- ----- -------- --- ----- ----
Benefits paid (637) 637 - (460) 460 -
--------------------------------------------------------- ------ -------- --- ------- ----- -------- --- ----- ----
Exchange differences and other movements(1) (3,767) 4,389 622 3,764 (4,379) (615)
--------------------------------------------------------- ------ -------- --- ------- ----- -------- ----- ---
At 31 Dec 2019 4,654 (5,252) (598) 4,445 (4,960) (515)
--------------------------------------------------------- ------ -------- ------- ----- -------- ----- ---
Retirement benefit liabilities recognised
on the balance sheet (598) (515)
--------------------------------------------------------- ------- ------------- ------- ------ ------------- ----- ---
At 1 Jan 2018 9,094 (10,096) (1,002) 510 (640) (130)
----- ------- ------ --- ---- ----
Service cost - (372) (372) - (25) (25)
---------------------------------------------------------- ----- ------- ------ --- ---- ----
* current service cost - (372) (372) - (25) (25)
---------------------------------------------------------- ----- ------- ------ --- ---- ----
Net interest income/ (expense) on
the net defined benefit asset/(liability) 153 (167) (14) 9 (11) (2)
----- ------- ------ --- ---- ----
Re-measurement effects recognised
in other comprehensive income (386) 70 (316) (22) 17 (5)
----- ------- ------ --- ---- ----
* return on plan assets (excluding interest income) (386) - (386) (22) - (22)
* actuarial gains - 70 70 - 17 17
---------------------------------------------------------- ----- ------- ------ --- ---- ----
Contributions by the group 373 - 373 23 - 23
----- ------- ------ --- ---- ----
Benefits paid (832) 832 - (42) 42 -
---------------------------------------------------------- ----- ------- ------ --- ---- ----
Exchange differences and other movements - (16) (16) - (1) (1)
---------------------------------------------------------- ----- ------- ------ --- ---- ----
At 31 Dec 2018 8,402 (9,749) (1,347) 478 (618) (140)
---------------------------------------------------------- ----- ------- ------ --- ---- ----
Retirement benefit liabilities recognised
on the balance sheet (1,347) (140)
---------------------------------------------------------- ------ -------- ------ ---- ----- ----
1 Other movements in 2019 included the impact from transfer of employees from the group to ServCo.
The group expects to make HK$402m of contributions to the defined benefit scheme of the Principal Plan during 2020, which is determined separately for the group and ServCo by reference to the actuarial funding valuation carried out by the Principal Plan's local actuary.
Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate for the five years thereafter, are as follows:
Benefits expected to be paid from the defined benefit scheme of the
Principal Plan(1)
2020 2021 2022 2023 2024 2025-2029
As reported by: HK$m HK$m HK$m HK$m HK$m HK$m
- HBAP 377 650 545 507 438 1,926
-------------------------------- ------ ------ ------ ----- ----- ---------
- ServCo 332 475 546 366 411 1,987
-------------------------------- ------ ------ ------ ----- ----- ---------
1 The duration of the defined benefit obligation is seven years for the Principal Plan under the disclosure assumptions adopted (2018: seven years).
Fair value of plan assets of the defined benefit scheme of the Principal
Plan by asset classes
At 31 Dec 2019 At 31 Dec 2018
Quoted Quoted
market market
price in price in
active Thereof active Thereof
Value market HSBC Value market HSBC
HK$m HK$m HK$m HK$m HK$m HK$m
Fair value of plan
assets 9,099 9,099 66 8,880 8,880 348
--------- --------- -------
- equities 2,228 2,228 - 2,234 2,234 -
- bonds 5,433 5,433 - 4,228 4,228 -
- other(1) 1,438 1,438 66 2,418 2,418 348
--------------------------------- --------- --------- ------- -------- --------- -------
1 Other mainly consists of alternative investments and cash and cash deposits.
The Principal Plan's key actuarial financial assumptions
The group determines the discount rate to be applied to the defined benefit scheme's obligations in consultation with the Principal Plan's local actuary, on the basis of the current average yields of Hong Kong Government bonds and Hong Kong Exchange Fund Notes, with maturities consistent with that of the defined benefit obligations.
The key actuarial assumptions used to calculate the group's obligations for the defined benefit scheme of the Principal Plan for the year, and used as the basis for measuring the expenses were as follows:
Key actuarial assumptions for the defined benefit scheme of the Principal
Plan
Discount Rate of Mortality
rate pay increase table
% p.a. % p.a.
At 31 Dec 2019 1.75 3.00 HKLT 2018(1)
--------- ------------- -------------------------
At 31 Dec 2018 1.95 3.00 HKLT 2017(2)
--------------------------------- --------- ------------- -------------------------
1 HKLT 2018 - Hong Kong Life Tables 2018.
2 HKLT 2017 - Hong Kong Life Tables 2017.
Actuarial assumption sensitivities
The discount rate and rate of pay increase are sensitive to changes in market conditions arising during the reporting period. The following table shows the financial impact of assumption changes on the defined benefit scheme of the Principal Plan at year end:
The effect of changes in key assumptions on the defined benefit scheme
of the Principal Plan
Impact on HSBC Group Hong
Kong Local Staff Retirement
Benefit Scheme obligation
Financial impact Financial impact
of increase of decrease
2019 2018 2019 2018
HK$m HK$m HK$m HK$m
--------------- ------ ----------- ----------
Discount rate - increase/decrease of 0.25% (173) (179) 178 185
--------- --- ----- -------
Pay - increase/decrease of 0.25% 183 189 (178) (184)
-------------------------------------------------- --------- ---- ----- ------- -------
Directors' emoluments
The aggregate emoluments of the Directors of the Bank disclosed pursuant to section 4 of the Companies (Disclosure of Information about Benefits of Directors) Regulation were HK$110m (2018: HK$115m). This comprises fees of HK$11m (2018: HK$10m) and other emoluments of HK$99m (2018: HK$105m) which includes contributions to pension schemes of HK$1m (2018: HK$1m). Non-cash benefits which are included in other emoluments mainly relate to share-based payment awards, and the provision of housing and furnishing. Details on loans to directors are set out in note 33.
5 Tax
----
The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2018: 16.5%) on the profits for the year assessable in Hong Kong. Overseas branches and subsidiaries have similarly provided for tax in the countries in which they operate at the appropriate rates of tax in force in 2019. Deferred taxation is provided for in accordance with the group's accounting policy in note 1.2(m).
Tax expense
2019 2018
HK$m HK$m
Current tax 19,461 20,413
------ ------
- Hong Kong taxation - on current year profit 11,058 12,155
- Hong Kong taxation - adjustments in respect of prior
years (7) (11)
- overseas taxation - on current year profit 8,813 8,471
- overseas taxation - adjustments in respect of prior
years (403) (202)
------ ------
Deferred tax 1,932 2,054
------ ------
- origination and reversal of temporary differences 1,975 1,938
- effect of changes in tax rates - 62
- adjustments in respect of prior years (43) 54
------ ------
Year ended 31 Dec 21,393 22,467
-------------------------------------------------------- ------ ------
Tax reconciliation
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the applicable tax rates in the countries concerned as follows:
Reconciliation between taxation charge and accounting profit at applicable
tax rates
2019 2018
HK$m HK$m
Profit before tax 136,433 134,583
Notional tax on profit before tax, calculated at the
rates applicable to profits in the countries concerned 25,855 25,232
Effects of profits in associates and joint ventures (2,676) (2,683)
Non-taxable income and gains (3,969) (3,412)
Local taxes and overseas withholding taxes 2,503 1,470
Permanent disallowables 606 1,132
Others (926) 728
Year ended 31 Dec 21,393 22,467
------------------------------------------------------------ ------- -------
Movements of deferred tax assets and liabilities
Impairment
Accelerated allowance
capital Insurance Expense on financial Revaluation
allowances business provisions instruments of properties Other Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2018 (472) (8,057) 1,419 1,314 (13,673) (2,729) (22,198)
----------------- --------- -------- ---------- ----------- ------------- ------ -------
Impact on
transition
to HKFRS 16 - - - - (2,664) - (2,664)
At 1 Jan 2019 (472) (8,057) 1,419 1,314 (16,337) (2,729) (24,862)
----------------- --------- -------- ---------- ----------- ------------- ------ -------
Exchange and
other
adjustments (1) - 7 (107) 25 118 42
Charge/(credit)
to income
statement 324 (2,083) (138) 271 603 (909) (1,932)
-----------------
Charge/(credit)
to other
comprehensive
income - - 2 - (753) (207) (958)
-----------------
At 31 Dec 2019 (149) (10,140) 1,290 1,478 (16,462) (3,727) (27,710)
----------------- --------- -------- ---------- ----------- ------------- ------ -------
Assets(1) 183 - 1,290 1,478 - 2,280 5,231
Liabilities(1) (332) (10,140) - - (16,462) (6,007) (32,941)
----------------- --------- -------- ---------- ----------- ------------- ------ -------
At 31 Dec 2017 (658) (7,417) 1,296 491 (13,667) (2,281) (22,236)
------------------------- ---- ------ ----- ----- ------- ------ -------
Impact on transition
to HKFRS 9 (2) 103 (2) 873 - 1,321 2,293
------------------------- ---- ------ ----- ----- ------- ------ -------
At 1 Jan 2018 (660) (7,314) 1,294 1,364 (13,667) (960) (19,943)
------------------------- ---- ------ ----- ----- ------- ------ -------
Exchange and other
adjustments 3 27 (60) 117 1,484 51 1,622
Charge/(credit)
to income statement 185 (770) 185 (167) 310 (1,797) (2,054)
Charge/(credit)
to other comprehensive
income - - - - (1,800) (23) (1,823)
At 31 Dec 2018 (472) (8,057) 1,419 1,314 (13,673) (2,729) (22,198)
------------------------- ---- ------ ----- ----- ------- ------ -------
Assets(1) 111 - 1,419 1,314 - 1,870 4,714
Liabilities(1) (583) (8,057) - - (13,673) (4,599) (26,912)
------------------------- ---- ------ ----- ----- ------- ------ -------
1 After netting off balances within countries, the balances as disclosed in the Consolidated Financial Statements are as follows: deferred tax assets HK$2,179m (2018: HK$2,315m); and deferred tax liabilities HK$29,889m (2018: HK$24,513m).
The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$3,497m (2018: HK$3,626m). Of this amount, HK$1,939m (2018: HK$1,950m) has no expiry date and the remaining will expire within 10 years.
Deferred tax of HK$3,197m (2018: HK$2,261m) has been provided in respect of distributable reserves or post-acquisition reserves of associates that, on distribution or sale, would attract withholding tax.
Deferred tax is not recognised in respect of the group's investments in subsidiaries and branches where remittance or other realisation is not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise.
6 Dividends
----------
Dividends to shareholders of the parent company
2019 2018
HK$ per HK$ per
share HK$m share HK$m
Dividends paid on ordinary shares
In respect of previous year:
------------------------------------------- ------- ------ ------- --------
* fourth interim dividend 0.47 21,958 0.36 16,559
------------------------------------------- ------- ------ ------- ------
In respect of current year:
- first interim dividend paid 0.32 14,963 0.22 10,000
------------------------------------------- ------- ------ ------- ------
- second interim dividend paid 0.32 14,963 0.22 10,000
------- ------ ------- ------
- third interim dividend paid 0.32 14,963 0.22 10,000
------- ------ ------- ------
Total 1.43 66,847 1.02 46,559
------------------------------------------- ------- ------ ------- ------
Distributions on other equity instruments 1,522 881
Dividends to shareholders 68,369 47,440
------------------------------------------- ------- ------ ------- ------
The Directors have declared a fourth interim dividend in respect of the financial year ended 31 December 2019 of HK$0.58 per ordinary share (HK$27,026m) (2018: HK$0.47 per ordinary share (HK$21,958m)).
Total coupons on capital securities classified as equity
2019 2018
HK$m HK$m
US$1,900m Floating rate perpetual subordinated loans
(interest rate at one year US dollar LIBOR plus 3.84%)(1) 497 881
------------------------------------------------------------- ----- ----
US$1,400m Floating rate perpetual subordinated loans
(interest rate at three months US dollar LIBOR plus
3.51%)(1) 373 -
------------------------------------------------------------- ----- ----
US$600m Floating rate perpetual subordinated loan (interest
rate at three months US dollar LIBOR plus 3.62%)(1) 178 -
------------------------------------------------------------- ----- ----
US$700m Floating rate perpetual subordinated loan (interest rate at three months US dollar LIBOR plus 4.98%)(1) 214 - ------------------------------------------------------------- ----- US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.51%)(2) 150 - ------------------------------------------------------------- ----- ---- US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.03%)(2) 110 - ------------------------------------------------------------- ----- ---- Total 1,522 881 ------------------------------------------------------------- ----- ----
1 These subordinated loans were early repaid in the first half of 2019 and distributions were made on repayment.
2 These subordinated loans were issued in May and June 2019.
7 Trading assets
---------------
2019 2018
HK$m HK$m
Treasury and other eligible bills 131,967 140,050
Debt securities 281,555 283,506
Equity securities 177,463 119,475
Other(1) 31,776 15,807
At 31 Dec 622,761 558,838
----------------------------------- ------- -------
1 'Other' includes reverse repos, stock borrowing and other accounts with banks and customers.
8 Derivatives
------------
Notional contract amounts and fair values of derivatives by product
contract type
Notional contract
amount Fair value - Assets Fair value - Liabilities
Trading Hedging Trading Hedging Total Trading Hedging Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------- --------- -------
Foreign Exchange 20,494,866 75,324 150,019 800 150,819 164,831 279 165,110
Interest rate 30,656,367 342,609 236,110 3,436 239,546 226,951 3,495 230,446
Equity 657,760 - 13,666 - 13,666 17,751 - 17,751
Credit 664,590 - 6,500 - 6,500 7,170 - 7,170
Commodity and
other 140,553 - 2,983 - 2,983 4,626 - 4,626
Gross total 52,614,136 417,933 409,278 4,236 413,514 421,329 3,774 425,103
------------------ ----------- ------- ------- ------- -------- --------- ------- ---------
Offset (132,872) (132,872)
At 31 Dec 2019 280,642 292,231
------------------ ----------- ------- ------- ------- -------- --------- ------- ---------
Foreign Exchange 21,492,856 91,274 187,746 909 188,655 186,776 1,529 188,305
-------
Interest rate 32,926,700 365,130 196,720 2,924 199,644 197,904 2,790 200,694
Equity 574,411 - 17,302 - 17,302 18,619 - 18,619
---------
Credit 926,082 - 5,967 - 5,967 5,904 - 5,904
---------
Commodity and
other 112,386 - 1,710 - 1,710 2,440 - 2,440
------- ------- ---------
Gross total 56,032,435 456,404 409,445 3,833 413,278 411,643 4,319 415,962
------------------ ----------- ------- ------- ------- -------- --------- ------- ---------
Offset (120,409) (120,409)
At 31 Dec 2018 292,869 295,553
------------------ ----------- ------- ------- ------- -------- --------- ------- ---------
Use of derivatives
The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risk arising from client business, and to manage and hedge the group's own risks. Derivatives (except for derivatives which are designated as effective hedging instruments) are held for trading. Within the held for trading classification are two types of derivative instruments: those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments designated at fair value. These activities are described more fully below.
The group's derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to ensure that they remain within acceptable risk levels. When entering into derivative transactions, the group employs the same credit risk management framework to assess and approve potential credit exposures that it uses for traditional lending.
Trading derivatives
Most of the group's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.
Derivatives valued using models with unobservable inputs
Any initial gain or loss on financial instruments where the valuation is dependent on unobservable parameters is deferred over the life of the contract or until the instrument is redeemed, transferred or sold or the fair value becomes observable. All derivatives that are part of qualifying hedging relationships have valuations based on observable market parameters.
The aggregate unobservable inception profit yet to be recognised in the income statement is immaterial.
Hedge accounting derivatives
The group applies hedge accounting to manage the following risks: interest rate, foreign exchange and net investment in foreign operations. The group uses derivatives (principally interest rate and currency swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables the group to optimise the overall costs to the group of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities. The accounting treatment of hedging transactions varies according to the nature of the instrument hedged and the type of hedging transaction. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges, or hedges of net investments in foreign operations.
Fair value hedges
The group enters into to fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value due to movements in market interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss, including debt securities held and issued.
Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fair value of derivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items and hedging instruments.
For some debt securities held, the group manages interest rate risk in a dynamic risk management strategy. The assets in scope of this strategy are high quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements.
The interest rate risk of the group's fixed rate debt securities issued is managed in a non-dynamic risk management strategy.
Cash flow hedges
The group's cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign-currency basis.
The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuances of non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.
The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes in foreign exchange market rates with cross-currency swaps; these are considered non-dynamic hedges.
Interest rate benchmark reform: Amendments to HKFRS 9 and HKAS 39 'Financial Instruments'
Following the request received by the Financial Stability Board from the G20, a fundamental review and reform of the major interest rate benchmarks is under way across the world's largest financial markets. This reform was not contemplated when HKAS 39 was published, and consequently, the International Accounting Standards Board has published a set of temporary exceptions from applying specific hedge accounting requirements to provide clarification on how the standard should be applied in these circumstances.
Amendments to HKFRS 9 and HKAS 39 were issued in November 2019 and modify specific hedge accounting requirements. Under these temporary exceptions, Inter-Bank Offered Rates ('IBORs') are assumed to continue unaltered for the purposes of hedge accounting until such time as the uncertainty is resolved.
The application of this set of temporary exceptions is mandatory for accounting periods starting on or after 1 January 2020, but early adoption is permitted and the group has elected to apply these exceptions for the year ended 31 December 2019. Significant judgement will be required in determining when uncertainty is expected to be resolved and therefore when the temporary exceptions will cease to apply. However, at 31 December 2019, the uncertainty continued to exist and so the temporary exceptions apply to all of the group's hedge accounting relationships that reference benchmarks subject to reform or replacement.
The group has cash flow and fair value hedge accounting relationships that are exposed to different IBORs, predominantly US dollar Libor. Derivatives, loans, bonds, and other financial instruments designated in relationships referencing these benchmarks will transition to new risk-free rates ('RFRs') in different ways and at different times. External progress on the transition to RFRs is being monitored, with the objective of ensuring a smooth transition for the group's hedge accounting relationships. The specific issues arising will vary with the details of each hedging relationship, but may arise due to the transition of existing products included in the designation, a change in expected volumes of products to be issued, a change in contractual terms of new products issued, or a combination of these factors. Some hedges may need to be de-designated and new relationships entered into, while others may survive the market-wide benchmarks reform.
The hedge accounting relationships that are affected by the adoption of the temporary exceptions hedge items presented in the balance sheet as 'Financial investments', 'Loans and advances to customers', 'Debt securities in issue', and 'Deposits by banks'.
At 31 December 2019, HK$252,443 million of the notional amounts of interest rate derivatives designated in hedge accounting relationships represent the extent of the risk exposure managed by the group that is directly affected by market-wide benchmarks reform and impacted by the temporary exceptions. The group has also designated hedge accounting relationships which involve cross currency swaps, although the amount is not significant.
The notional contract amounts of interest rate derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Risks and governance regarding the impact of the market-wide benchmarks reform is set out in the Risk section of the Annual Report and Accounts 2019.
9 Financial assets designated and otherwise mandatorily measured at
fair value through profit
or loss
------------------------------------------------------------------
2019 2018
Mandatorily Mandatorily
Designated measured Designated measured
at fair at fair at fair at fair
value value Total value value Total
HK$m HK$m HK$m HK$m HK$m HK$m
----------
Treasury and other eligible
bills - 234 234 107 220 327
-----------
Debt securities 13,350 6,733 20,083 13,380 6,134 19,514
-----------
Equity securities - 120,047 120,047 - 99,836 99,836
----------------------------- -----------
Other(1) - 13,147 13,147 - 13,182 13,182
----------------------------- ---------- ----------- ------- ---------- ----------- -------
At 31 Dec 13,350 140,161 153,511 13,487 119,372 132,859
----------------------------- ---------- ----------- ------- ---------- ----------- -------
1 'Other' primarily includes loans and advance to banks and customers.
10 Loans and advances to customers
--- --------------------------------
2019 2018
HK$m HK$m
Gross loans and advances to customers 3,738,269 3,545,258
Expected credit loss allowances (17,394) (16,556)
---------
At 31 Dec 3,720,875 3,528,702
--------------------------------------- --------- ---------
The following table provides an analysis of gross loans and advances to customers by industry sector based on the Statistical Classification of economic activities in the European Community ('NACE').
Analysis of gross loans and advances to customers
2019 2018
HK$m HK$m
--------------------------------- --------- -----------
Residential mortgages 1,027,087 937,666
Credit card advances 94,582 93,200
Other personal 281,087 236,133
--------------------------------- ---------
Total personal 1,402,756 1,266,999
--------------------------------- --------- ---------
Real estate 666,380 626,120
Wholesale and retail trade 418,669 433,734
Manufacturing 418,822 424,813
Transportation and storage 86,912 95,773
Other 494,416 484,186
--------- ---------
Total corporate and commercial 2,085,199 2,064,626
--------------------------------- --------- ---------
Non-bank financial institutions 250,314 213,633
--------------------------------- --------- ---------
At 31 Dec 3,738,269 3,545,258
--------------------------------- --------- ---------
By geography(1)
--------------------------------- --------- -----------
Hong Kong 2,399,867 2,282,909
--------------------------------- --------- ---------
Rest of Asia Pacific 1,338,402 1,262,349
--------------------------------- --------- ---------
1 The geographical information shown above is classified by the location of the principal operations of the subsidiary or the branch responsible for advancing the funds.
Finance lease receivables and hire purchase contracts
The group leases a variety of assets to third parties under finance leases. At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income. Loans and advances to customers include receivables under finance leases and hire purchase contracts having the characteristics of finance leases.
Net investment in finance leases and hire purchase contracts
2019 2018
Total Total
future Unearned future Unearned
minimum finance Present minimum finance Present
payments income value payments income value
HK$m HK$m HK$m HK$m HK$m HK$m
Amounts receivable
- within one year 3,214 (639) 2,575 2,990 (640) 2,350
- after one year but within
five years N/A N/A N/A 8,622 (2,097) 6,525
-------- -------
- one to two years 2,955 (572) 2,383 N/A N/A N/A
--------------------------------- --------- ------- ------ --------- -------- ---------
- two to three years 2,593 (529) 2,064 N/A N/A N/A
--------------------------------- --------- ------- ------ --------- -------- ---------
- three to four years 2,204 (496) 1,708 N/A N/A N/A
--------------------------------- --------- ------- ------ --------- -------- ---------
- four to five years 1,936 (464) 1,472 N/A N/A N/A
--------------------------------- --------- ------- ------ --------- -------- ---------
- after five years 23,195 (3,567) 19,628 23,346 (3,819) 19,527
--------------------------------- --------- ------- ------ --------- ------- ------
36,097 (6,267) 29,830 34,958 (6,556) 28,402
--------------------------------- --------- ------- ------ --------- ------- ------
Expected credit loss allowances (175) (117)
At 31 Dec 29,655 28,285
--------------------------------- --------- -------- ------ --------- -------- ------
11 Financial investments
--- ----------------------
2019 2018
HK$m HK$m
Financial investments measured at fair value through
other comprehensive income 1,465,998 1,503,625
--------- ---------
- treasury and other eligible bills 606,738 660,871
- debt securities 850,623 836,896
- equity securities 8,637 5,858
------------------------------------------------------ ---------
Debt instruments measured at amortised cost 434,300 367,401
--------- ---------
- treasury and other eligible bills 5,049 3,624
- debt securities 429,251 363,777
------------------------------------------------------ --------- ---------
At 31 Dec 1,900,298 1,871,026
------------------------------------------------------ --------- ---------
Equity instruments measured at fair value through other
comprehensive income
---------- -------------
2019 2018
Dividends Dividends
Fair value recognised Fair value recognised
Type of equity instruments HK$m HK$m HK$m HK$m
---------- ----------- ---------- -------------
Business facilitation 7,906 141 5,137 155
Investments required by central institutions 376 7 356 3
---------- ----------- ---------- -----------
Others 355 5 365 5
------------------------------------------------- ---------- ----------- ---------- -----------
At 31 Dec 8,637 153 5,858 163
------------------------------------------------- ---------- ----------- ---------- -----------
12 Assets pledged, assets transferred and collateral received
--- -----------------------------------------------------------
Assets pledged
Financial assets pledged to secure liabilities
2019 2018
HK$m HK$m
Treasury bills and other eligible securities 88,365 66,706
Loans and advances to banks 228 893
Loans and advances to customers 12,806 15,813
Debt securities 76,019 65,784
Equity securities 11,648 3,894
Other 52,473 42,598
Assets pledged at 31 Dec 241,539 195,688
---------------------------------------------- ------- -------
Amount of liabilities secured 208,436 162,036
---------------------------------------------- ------- -------
The table above shows assets where a charge has been granted to secure liabilities on a legal and contractual basis. These transactions are conducted under terms that are usual and customary to collateralised transactions including sale and repurchase agreements, securities lending, derivative margining, and include assets pledged to cover short positions and to facilitate settlement processes with clearing houses.
Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates of indebtedness are held.
Financial assets pledged as collateral which the counterparty has the right to sell or repledge was HK$63,194m (2018: HK$54,953m).
Assets transferred
Transferred financial assets not qualifying for full derecognition
and associated financial liabilities
2019 2018
-------------------------- ---------------------------
Carrying amount Carrying amount
of: of:
Transferred Associated Transferred Associated
assets liabilities assets liabilities
HK$m HK$m HK$m HK$m
Repurchase agreements 98,929 94,296 70,492 59,118
Securities lending agreements 15,270 114 6,702 870
114,199 94,410 77,194 59,988
-------------------------------------- ------------ ------------ ----------- ------------
The financial assets shown above include amounts transferred to third parties that do not qualify for derecognition, notably debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements. As the substance of these transactions is secured borrowings, the collateral assets continue to be recognised in full and the related liabilities, reflecting the group's obligation to repurchase the transferred assets for a fixed price at a future date, are also recognised on the balance sheet. As a result of these transactions, the group is unable to use, sell or pledge the transferred assets for the duration of the transactions. The group remains exposed to interest rate risk, credit risk and market risk on these pledged instruments. The counterparty's recourse is not limited to the transferred assets.
Collateral received
Assets accepted as collateral relate primarily to standard securities lending, reverse repurchase agreements and derivative margining. These transactions are conducted under terms that are usual and customary to standard securities lending, reverse repurchase agreements and derivative margining.
Fair value of collateral accepted as security for assets
2019 2018
HK$m HK$m
Fair value of collateral permitted to sell or repledge
in the absence of default 556,634 512,242
Fair value of collateral actually sold or repledged 95,154 112,832
-------------------------------------------------------- ------- -------
13 Investments in subsidiaries
--- ----------------------------
Main subsidiaries of the Bank
The group's
interest in
issued share
capital/registered
or charter
Place of incorporation Principal activity capital
Hang Seng Bank Limited Hong Kong Banking 62.14%
-------------- ----
People's Republic
HSBC Bank (China) Company Limited of China Banking 100%
-------------- ----
HSBC Bank Malaysia Berhad Malaysia Banking 100%
-------------- ----
HSBC Bank Australia Limited(1) Australia Banking 100%
-------------- ----
HSBC Bank (Taiwan) Limited(1) Taiwan Banking 100%
-------------- ----
HSBC Bank (Singapore) Limited Singapore Banking 100%
-------------- ----
Retirement
benefits and
HSBC Life (International) Limited(1) Bermuda life insurance 100%
-------------------------------------- ----------------------- ------------------- -------------- ----
1 Held indirectly.
All the above subsidiaries are included in the group's consolidated financial statements. All these subsidiaries make their financial statements up to 31 December.
The principal places of business are the same as the places of incorporation except for HSBC Life (International) Limited which operates mainly in Hong Kong.
The proportion of voting rights held is the same as the proportion of ownership interest held.
The main subsidiaries are regulated banking and insurance entities in the Asia-Pacific region and, as such, are required to maintain certain minimum levels of capital and liquid assets to support their operations. The effect of these regulatory requirements is to limit the extent to which the subsidiaries may transfer funds to the Bank in the form of repayment of shareholder loans or cash dividends.
Subsidiary with significant non-controlling interest
2019 2018
--------------------------------------------------------- --------- -----------
Hang Seng Bank Limited
Proportion of ownership interests and voting rights
held by non-controlling interests 37.86% 37.86%
HK$m HK$m
Profit attributable to non-controlling interests 9,386 9,144
Accumulated non-controlling interests of the subsidiary 63,363 58,750
Dividends paid to non-controlling interests 5,646 5,066
Summarised financial information (before intra-group
eliminations):
- total assets 1,676,721 1,571,297
- total liabilities 1,497,804 1,409,190
- net operating income before change in expected credit
losses and other credit impairment charges 43,549 41,493
- profit for the year 24,822 24,188
- other comprehensive income for the year 2,376 400
--------- ---------
- total comprehensive income for the year 27,198 24,588
--------------------------------------------------------- --------- ---------
14 Interests in associates and joint ventures
--- -------------------------------------------
Associates
2019 2018
HK$m HK$m
Share of net assets 148,154 139,052
-------
Goodwill 3,787 3,857
Impairment (24) (24)
--------------------- ------- -------
At 31 Dec 151,917 142,885
--------------------- ------- -------
The above balance represented the group's interests in associates.
Principal associate
The group's interest
in issued share
Place of incorporation capital
People's Republic
Bank of Communications Co., Limited of China 19.03%
------------------------------------- ------------------------ --------------------
Bank of Communications Co., Ltd. is listed on recognised stock exchanges. The fair value represents valuation based on the quoted market price of the shares held (Level 1 in the fair value hierarchy) and amounted to HK$78,311m at 31 December 2019
(2018: HK$86,086m).
Bank of Communications Co., Limited ('BoCom')
The group's investment in BoCom is classified as an associate. Significant influence in BoCom was established via representation on BoCom's Board of Directors and participation in a Technical Cooperation and Exchange Programme ('TCEP'). Under the TCEP, a number of HSBC staff have been seconded to assist in the maintenance of BoCom's financial and operating policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28 whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group's share of BoCom's net assets. An impairment test is required if there is any indication of impairment.
Impairment testing
At 31 December 2019, the fair value of the group's investment in BoCom had been below the carrying amount for approximately eight years. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment at 31 December 2019 as the recoverable amount as determined by a value-in-use ('VIU') calculation was higher than the carrying value.
At
31 Dec 2019 31 Dec 2018
Carrying Fair Carrying Fair
VIU value value VIU value value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
----- -------- ------
BoCom 167.8 148.4 78.3 141.3 139.6 86.1
------- ----- -------- ------ ----- -------- ------
In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are described below and are based on factors observed at period-end. The factors that could result in a change in the VIU and an impairment include a short-term under-performance by BoCom, a change in regulatory capital requirements, or an increase in uncertainty regarding the future performance of BoCom resulting in a downgrade of the future asset growth or profitability. An increase in the discount rate as a result of an increase in the risk premium or risk-free rates could also result in a reduction of VIU and an impairment. At the point where the carrying value exceeds the VIU, impairment would be recognised.
If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's best estimates of future earnings available to ordinary shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best estimate. There are two main components to the VIU calculation. The first component is management's best estimate of BoCom's earnings which is based on explicit forecasts over the short to medium term. This results in forecast earnings growth that is lower than recent historical actual growth and also reflects the uncertainty arising from the current economic outlook. Earnings beyond the short to medium term are then extrapolated in perpetuity using a long-term growth rate to derive a terminal value, which comprises the majority of the VIU. The second component is the capital maintenance charge ('CMC') which is management's forecast of the earnings that need to be withheld in order for BoCom to meet regulatory capital requirements over the forecast period (i.e. CMC is deducted when arriving at management's estimate of future earnings available to ordinary shareholders). The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected minimum regulatory capital requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other factors (including qualitative factors) to ensure that the inputs to the VIU calculation remain appropriate.
Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in accordance with the requirements of HKAS 36:
-- Long-term profit growth rate: 3% (2018: 3%) for periods after 2023, which does not exceed forecast GDP growth in mainland China and is consistent with forecasts by external analysts.
-- Long-term asset growth rate: 3% (2018: 3%) for periods after 2023, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%.
-- Discount rate: 11.24% (2018: 11.82%) which is based on a Capital Asset Pricing Model ('CAPM') calculation for BoCom, using market data. Management also compares the rate derived from the CAPM with discount rates from external sources. The discount rate used is within the range of 10.0% to 15.0% (2018: 10.4% to 15.0%) indicated by external sources.
-- Expected credit losses as a percentage of customer advances: 0.95% (2018: ranges from 0.73% to 0.79%) in the short to medium term and reflect increases due to the US-China trade tensions and BoCom's actual results. For periods after 2023, the ratio is 0.76% (2018: 0.70%). This ratio was increased to provide greater weighting to the most recent data points and analyst forecasts.
-- Risk-weighted assets as a percentage of total assets: 61% (2018: 62%) for all forecast periods. This is consistent with BoCom's actual results and slightly higher than the forecasts disclosed by external analysts.
-- Cost - income ratio: ranges from 37.1% to 38.8% (2018: 38.7% to 39.0%) in the short to medium term. This is slightly above BoCom's actual results in recent years and within the range of forecasts disclosed by external analysts.
-- Effective tax rate: ranges from 12.0% to 17.0% (2018: 13.8% to 22.3%) in the short to medium term reflecting BoCom's actual results and an expected increase towards the long-term assumption. For periods after 2023, the rate is 22.5% (2018: 22.5%) which is slightly higher than the historical average.
-- Capital requirements: Capital adequacy ratio: 11.5% (2018: 11.5%) and Tier 1 capital adequacy ratio: 9.5% (2018: 9.5%), based on the minimum regulatory requirements.
The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:
* Long-term profit growth rate
* Decrease by 96 basis points
* Long-term asset growth rate
* Increase by 78 basis points
* Discount rate
* Increase by 118 basis points
* Expected credit losses as a percentage of customer
advances * Increase by 15 basis points
* Risk-weighted assets as a percentage of total assets * Increase by 607 basis points
* Cost-income ratio * Increase by 363 basis points
* Long-term effective tax rate * Increase by 875 basis points
* Capital requirements - capital adequacy ratio * Increase by 114 basis points
* Capital requirements - tier 1 capital adequacy ratio * Increase by 187 basis points
------------------------------------------------------------ ------------------------------------
The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of the VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur at the same time. The selected rates of reasonably possible changes to key assumptions are largely based on external analysts' forecasts which can change period to period.
Favourable change Unfavourable change
Increase Decrease
in VIU VIU in VIU VIU
bps HK$bn HK$bn bps HK$bn HK$bn
At 31 December 2019
Long-term profit growth rate - - 167.8 -50 (10.6) 157.2
--------------- ------ ----- --------------- ------- -----
Long-term asset growth rate -50 10.6 178.4 - - 167.8
--------------- ------ ----- --------------- ------- -----
Discount rate -54 10.9 178.7 +56 (9.9) 157.9
--------------- ------ ----- --------------- ------- -----
2019 to 2019 to
2023: 90 2023: 108
Expected credit losses as a 2024 onwards: 2024 onwards:
percentage of customer advances 70 7.5 175.3 81 (9.4) 158.4
-------------------------------------- --------------- ------ ----- --------------- ------- -----
Risk-weighted assets as a percentage
of total assets -96 2.9 170.7 +12 (0.4) 167.4
--------------- ------ ----- --------------- ------- -----
Cost-income ratio -175 7.7 175.5 +95 (9.4) 158.4
--------------- ------ ----- --------------- ------- -----
Long-term effective tax rate -352 7.8 175.6 +250 (5.6) 162.2
-------------------------------------- --------------- ------ ----- --------------- ------- -----
Earnings in short to medium
term - compound annual growth
rate (1) +107 3.8 171.6 -346 (18.9) 148.9
-------------------------------------- --------------- ------ ----- --------------- ------- -----
Capital requirements - capital
adequacy ratio - - 167.8 +337 (64.1) 103.7
-------------------------------------- --------------- ------ ----- --------------- ------- -----
Capital requirements - tier
1 capital adequacy ratio - - 167.8 +322 (47.2) 120.6
-------------------------------------- --------------- ------ ----- --------------- ------- -----
At 31 December 2018
Long-term profit growth rate +100 20.2 161.5 -10 (1.7) 139.6
---------------
Long-term asset growth rate -10 2.0 143.3 +100 (21.7) 119.6
---------------
Discount rate -142 25.4 166.7 +28 (4.0) 137.3
---------------
2018 to 2018 to
2022: 70 2022: 83
Expected credit losses as a 2023 onwards: 2023 onwards:
percentage of customer advances 65 7.0 148.3 77 (7.9) 133.4
-------------------------------------- ------
Risk-weighted assets as a percentage
of total assets -140 4.1 145.4 +80 (2.3) 139.0
Cost-income ratio -160 8.8 150.1 +200 (10.9) 130.4
--------------- ------ ----- --------------- ------- -----
Long-term effective tax rate -280 5.3 146.6 +250 (4.6) 136.7
--------------- ------ ----- --------------- ------- -----
Earnings in short to medium
term - compound annual growth
rate (1,2) +204 8.1 149.4 -366 (14.2) 127.1
-------------------------------------- --------------- ------ ----- --------------- ------- -----
Capital requirements - capital
adequacy ratio - - 141.3 +258 (39.4) 101.9
--------------- ------ ----- --------------- ------- -----
Capital requirements - tier
1 capital adequacy ratio - - 141.3 +243 (25.2) 116.1
-------------------------------------- --------------- ------ ----- --------------- ------- -----
1 Based on management's explicit forecasts over the short to medium term.
2 Comparatives on 31 December 2018 have been updated to align with the 2019 approach to describe the impact of the change in isolation.
Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is HK$144.3bn to HK$177.2bn (2018: HK$121.4bn to HK$153.5bn). The range is based on the favourable/unfavourable change in the earnings in the short to medium term and long-term expected credit losses as a percentage of customer advances as set out in the table above. All other long-term assumptions, the discount rate and the basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU.
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2019, the group included the associate's results on the basis of financial statements made up for the 12 months to 30 September 2019, but taking into account the financial effect of significant transactions or events in the period from 1 October 2019 to 31 December 2019.
Selected balance sheet information of BoCom
---------- ------------
At 30 Sep
2019 2018
HK$m HK$m
----------
Cash and balances at central banks 874,238 982,268
Loans and advances to banks and other financial institutions 841,420 806,561
Loans and advances to customers 5,689,981 5,380,339
Other financial assets 3,394,004 3,196,602
Other assets 315,310 332,795
Total assets 11,114,953 10,698,565
-------------------------------------------------------------- ---------- ---------- Deposits by banks and other financial institutions 2,262,654 2,384,086 Customer accounts 6,765,782 6,497,116 Other financial liabilities 1,026,377 743,278 Other liabilities 179,723 284,560 Total liabilities 10,234,536 9,909,040 -------------------------------------------------------------- ---------- ---------- Total equity(1) 880,417 789,525 -------------------------------------------------------------- ---------- ----------
1 Due to the adoption of HKFRS 16, the equity balance of BoCom as at 1 January 2019 was reduced by HK$709m.
Reconciliation of BoCom's net assets to carrying amount in the group's
consolidated financial statements
At 30 Sep
2019 2018
HK$m HK$m
------------ ----------
The group's share of ordinary shareholders' equity 144,727 135,871
Goodwill 3,687 3,753
Carrying amount 148,414 139,624
-------------------------------------------------------- -------- -------
Selected income statement information of BoCom
For the 12 months
ended 30 Sep
2019 2018
HK$m HK$m
Net interest income 161,079 151,223
Net fee and commission income 50,233 48,949
Change in expected credit losses (58,603) (43,907)
Depreciation and amortisation (15,152) (6,012)
Tax expense (12,822) (12,178)
- profit for the year 87,556 87,122
- other comprehensive income 2,470 1,490
Total comprehensive income 90,026 88,612
-------------------------------------------------------- -------- -------
Dividends received from BoCom 4,810 4,792
-------------------------------------------------------- -------- -------
At 31 December 2019, the group's share of associates' contingent liabilities was HK$305,291m (2018: HK$319,469m).
15 Goodwill and intangible assets --- -------------------------------
Goodwill and intangible assets include goodwill arising on business combinations, the present value of in-force long-term insurance business, and other intangible assets.
2019 2018
HK$m HK$m
Goodwill 6,315 5,932
Present value of in-force long-term insurance business 61,075 48,522
Other intangible assets(1) 14,253 10,650
-------------------------------------------------------- ------ ------
At 31 Dec 81,643 65,104
-------------------------------------------------------- ------ ------
1 Included within other intangible assets is internally generated software with a net carrying value of HK$11,851m (2018: HK$8,010m). During the year, capitalisation of internally generated software was HK$6,219m (2018: HK$4,499m) and amortisation was HK$2,264m (2018: HK$1,566m).
The present value of in-force long-term insurance business
When calculating the present value of in-force long term ('PVIF') insurance business, expected cash flows are projected after adjusting for a variety of assumptions made by each insurance operation to reflect local market conditions and management's judgement of future trends, and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology). Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.
Actuarial Control Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. All changes to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by the Actuarial Control Committee.
Movements in PVIF
2019 2018
HK$m HK$m
As at 31 Dec 48,522 44,621
Impact on transition to HKFRS 9 N/A (616)
----------------------------------------------------------- ------- ------
At 1 Jan 48,522 44,005
----------------------------------------------------------- ------ ------
Changes in PVIF of long-term insurance business 12,546 4,629
----------------------------------------------------------- ------ ------
- value of new business written during the year 8,779 8,138
- expected return(1) (5,531) (4,650)
- assumption changes and experience variances (see below) 9,386 1,153
- other adjustments (88) (12)
----------------------------------------------------------- ------ ------
Exchange differences and other 7 (112)
----------------------------------------------------------- ------ ------
At 31 Dec 61,075 48,522
----------------------------------------------------------- ------ ------
1 'Expected return' represents the unwinding of the discount rate and reversal of expected cash flows for the period.
Assumption changes and experience variances
Included within this line item are:
-- HK$8,829m (2018: HK$(439)m), directly offsetting regulatory-driven changes to the valuation of liabilities under insurance contracts.
-- HK$282m (2018: HK$3,566m), reflecting the future expected sharing of returns with policyholders on contracts with discretionary participation features ('DPF'), to the extent this sharing is not already included in liabilities under insurance contracts.
-- HK$275m (2018: HK$(1,974)m), driven by other assumptions changes and experience variances.
Key assumptions used in the computation of PVIF for the main life insurance operations
Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed market movements. The following are the key long-term assumptions used in the computation of PVIF for Hong Kong insurance entities, being the main life insurance operations:
2019 2018
% %
Weighted average risk free rate 1.84 2.29
----
Weighted average risk discount rate 5.44 5.90
----
Expense inflation 3.00 3.00
------------------------------------- ---- ----
Sensitivity to changes in economic assumptions
The group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances for risks not reflected in the best-estimate cash flow modelling. Where the insurance operations provide options and guarantees to policyholders, the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit addition to the technical provisions required by regulators. See page 49 for further details of these guarantees and the impact of changes in economic assumptions on our insurance manufacturing subsidiaries.
Sensitivity to changes in non-economic assumptions
Policyholder liabilities and PVIF are determined by reference to non-economic assumptions, including mortality and/or morbidity, lapse rates and expense rates. See page 50 for further details on the impact of changes in non-economic assumptions on our insurance manufacturing operations.
16 Property, plant and equipment
--- ------------------------------
2019 2018
HK$m HK$m
Owned property, plant and equipment(1) 128,603 112,080
---------------------------------------- ------- -------
Other right-of-use assets(2) 9,327 N/A
---------------------------------------- ------- ---------
At 31 Dec 137,930 112,080
---------------------------------------- ------- -------
1 Included leasehold land and buildings of HK$119,264m for which the rights of use are considered sufficient to constitute control. They are therefore presented as owned assets.
2 The group adopted the requirements of HKFRS 16 on 1 January 2019 and recognised lease liabilities and the associated right-of-use assets in relation to leases which had previously been classified as 'operating leases' in accordance with HKAS 17 'Leases'.
Movement in owned property, plant and equipment
----------
2019 2018
Land Land
and Investment and Investment
buildings properties Equipment Total buildings properties Equipment Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
Cost or valuation
At 31 Dec of prior
year 94,037 12,875 22,728 129,640 97,619 12,617 22,617 132,853
-------- -------- -------- ------- -------- --------- -------- -------
Impact on
transition
to HKFRS 16 16,284 - - 16,284 N/A N/A N/A N/A
------------------- -------- -------- -------- ------- ---------- --------- ----------
At 1 Jan 110,321 12,875 22,728 145,924 97,619 12,617 22,617 132,853
------------------- -------- -------- -------- ------- -------- --------- -------- -------
Exchange and other
adjustments (119) (12) (152) (283) (497) 1 (342) (838)
-------- -------- -------- -------
Additions 1,034 447 1,853 3,334 271 278 1,097 1,646
-------- -------- -------- -------
Disposals (2) - (903) (905) (361) - (644) (1,005)
-------- -------- -------- ------- ---------
Transfers(1) - - (6,604) (6,604) (11,126) (464) - (11,590)
-------- -------- -------- ------- --------- -------- -------
Elimination of
accumulated
depreciation on
revalued
land and
buildings (4,306) - - (4,306) (2,613) - - (2,613)
-------- -------- -------- ------- --------- -------- -------
Surplus on
revaluation 4,426 154 - 4,580 10,626 639 - 11,265
-------- -------- -------- ------- -------- -------
Reclassifications 119 (129) - (10) 118 (196) - (78)
-------- -------- -------- ------- -------- -------
At 31 Dec 111,473 13,335 16,922 141,730 94,037 12,875 22,728 129,640
------------------- -------- -------- -------- ------- -------- --------- -------- -------
Accumulated
depreciation
At 1 Jan 73 - 17,487 17,560 210 - 16,307 16,517
-------- -------- -------- ------- ---------
Exchange and other
adjustments 6 - (56) (50) (2) - (251) (253)
-------- -------- -------- ------- ---------
Charge for the
year 4,312 - 1,308 5,620 2,643 - 2,043 4,686
-------- -------- -------- ------- ---------
Disposals (1) - (874) (875) (165) - (612) (777)
------------------- -------- -------- -------- ------- -------- --------- -------- -------
Transfers(1) - - (4,822) (4,822) N/A N/A N/A N/A
------------------- -------- -------- -------- ------- --------- ---------- --------- ----------
Elimination of
accumulated
depreciation on
revalued
land and
buildings (4,306) - - (4,306) (2,613) - - (2,613)
-------- -------- -------- ------- --------- -------- -------
At 31 Dec 84 - 13,043 13,127 73 - 17,487 17,560
------------------- -------- -------- -------- ------- -------- --------- -------- -------
Net book value at
31
Dec 111,389 13,335 3,879 128,603 93,964 12,875 5,241 112,080
------------------- -------- -------- -------- ------- -------- --------- -------- -------
1 In both 2018 and 2019, certain properties and equipment have been transferred to a fellow subsidiary as part of the Recovery and Resolution Plan as set out in the Report of the Directors. The balance represented the carrying value of these properties on the date of transfer.
The carrying amount of land and buildings, had they been stated at cost less accumulated depreciation, would have been as follows:
2019 2018
HK$m HK$m
Cost less accumulated depreciation 16,895 16,281
------------------------------------ ------ ------
Valuation of land and buildings and investment properties
The group's land and buildings and investment properties were revalued as at 31 December 2019. The basis of valuation for land and buildings and investment properties was open market value. The resultant values are Level 3 in the fair value hierarchy. The fair values for land and buildings are determined by using a direct comparison approach which values the properties in their respective existing states and uses, assuming sale with immediate vacant possession and by making reference to comparable sales evidence. The valuations take into account the characteristics of the properties (unobservable inputs) which include the location, size, shape, view, floor level, year of completion and other factors collectively. The premium or discount applied to the characteristics of the properties is within minus 20% and plus 20%. In determining the open market value of investment properties, expected future cash flows have been discounted to their present values. The net book value of 'Land and buildings' includes HK$7,859m (2018: HK$8,374m) in respect of properties which were valued using the depreciated replacement cost method.
Valuation of land and buildings and investment properties in Hong Kong, Macau and mainland China were largely carried out by Cushman & Wakefield Limited, who have recent experience in the location and type of properties and who are members of the Hong Kong Institute of Surveyors. This represents 93% by value of the group's properties subject to valuation. Other properties were valued by different independent professionally qualified valuers.
17 Prepayments, accrued income and other assets
--- ---------------------------------------------
2019 2018
HK$m HK$m
Prepayments and accrued income 28,326 27,897
-------
Bullion 53,163 50,058
-------
Acceptances and endorsements 47,302 44,401
-------
Reinsurers' share of liabilities under insurance contracts
(note 3) 26,282 17,792
-------
Current tax assets 1,521 1,517
-------
Settlement accounts 27,289 23,683
Cash collateral and margin receivables 35,824 30,378
-------
Other assets 28,551 34,223
-------
At 31 Dec 248,258 229,949
------------------------------------------------------------ ------- -------
Prepayments, accrued income and other assets included HK$165,497m (2018: HK$159,483m) of financial assets, the majority of which were measured at amortised cost.
18 Customer accounts
--- ------------------
Customer accounts by country/territory
2019 2018
HK$m HK$m
Hong Kong 3,894,175 3,797,807
Mainland China 376,390 358,026
-------------------
Singapore 378,303 331,479
-------------------
Australia 180,637 161,726
India 116,330 111,297
-------------------
Malaysia 113,907 108,899
-------------------
Taiwan 114,250 106,537
Indonesia 36,861 29,843
Other 221,571 202,052
------------------- ----------- ----------
At 31 Dec 5,432,424 5,207,666
------------------- ----------- ----------
19 Trading liabilities
--- --------------------
2019 2018
HK$m HK$m
Deposits by banks(1) 159 1,162
----------------------------------- ------ ------
Customer accounts(1) 1,150 773
----------------------------------- ------ ------
Net short positions in securities 86,223 79,259
----------------------------------- ------ ------
At 31 Dec 87,532 81,194
----------------------------------- ------ ------
1 'Deposits by banks' and 'Customer accounts' include repos, stock lending and other amounts.
20 Financial liabilities designated at fair value
--- -----------------------------------------------
2019 2018
HK$m HK$m
Deposits by banks and customer accounts 74,761 82,136
----------------------------------------------------- ------- -------
Debt securities in issue 48,506 42,369
-------
Liabilities to customers under investment contracts 37,024 36,638
At 31 Dec 160,291 161,143
----------------------------------------------------- ------- -------
The carrying amount of financial liabilities designated at fair value was HK$1,216m higher than the contractual amount at maturity (2018: HK$2,232m lower). The cumulative loss in fair value attributable to changes in credit risk was HK$6m loss (2018: HK$177m gain).
21 Debt securities in issue
--- -------------------------
2019 2018
HK$m HK$m
Bonds and medium-term note 90,365 75,980
-------
Other debt securities in issue 65,074 24,625
-------
Total debt securities in issue 155,439 100,605
-------------------------------------------------------- ------- -------
Included within:
-------------------------------------------------------- -------- ----------
- financial liabilities designated at fair value (note
20) (48,506) (42,369)
-------------------------------------------------------- ------- -------
At 31 Dec 106,933 58,236
-------------------------------------------------------- ------- -------
22 Accruals and deferred income, other liabilities and provisions
--- ---------------------------------------------------------------
2019 2018
HK$m HK$m
-------
Accruals and deferred income 25,600 26,932
-------
Acceptances and endorsements 47,355 44,438
---------------------------------------------------- ------- -------
Settlement accounts 35,807 37,833
-------
Cash collateral and margin payables 40,299 36,613
-------
Share-based payment liability to HSBC Holdings plc 1,417 1,923
---------------------------------------------------- ------- -------
Lease liabilities 9,291 N/A
-------
Other liabilities 41,687 47,521
-------
Provisions for liabilities and charges 1,796 1,405
-------
At 31 Dec 203,252 196,665
---------------------------------------------------- ------- -------
Accruals and deferred income, other liabilities and provisions included HK$195,122m (2018: HK$184,221m) of financial liabilities which were measured at amortised cost.
Movement in provisions
Restructuring
costs Other Total
Provisions (excluding contractual commitments) HK$m HK$m HK$m
-------------------------------------------------- --------------- ----- --------
At 31 Dec 2018 74 640 714
Additions 563 383 946
Amounts utilised (402) (85) (487)
Unused amounts reversed (29) (254) (283)
Exchange and other movements 2 128 130
At 31 Dec 2019 208 812 1,020
-------------------------------------------------- ----------- ---- -----
Contractual commitments
At 31 Dec 2018 691
Net change in expected credit loss provision and
other movements 85
At 31 Dec 2019 776
-------------------------------------------------- --------------- ----- -----
Total Provisions at 31 Dec 2019 1,796
-------------------------------------------------- --------------- ----- -----
At 31 Dec 2017 192 380 572
Additions 11 469 480
Amounts utilised (97) (91) (188)
Unused amounts reversed (37) (83) (120)
Exchange and other movements 5 (35) (30)
At 31 Dec 2018 74 640 714
-------------------------------------------------- --- --- -----
Contractual commitments(1)
-------------------------------------------------- ---- ---- --------
At 31 Dec 2017 54
-------------------------------------------------- ---- ---- -----
Impact on transition to HKFRS 9 487
-------------------------------------------------- ---- ---- -----
Net change in expected credit loss provision and
other movements 150
-------------------------------------------------- ---- ---- -----
At 31 Dec 2018 691
-------------------------------------------------- ---- ---- -----
Total Provisions at 31 Dec 2018 1,405
-------------------------------------------------- ---- ---- -----
1 The contractual commitments provision at 31 December 2017 represented HKAS 37 provisions on off-balance sheet loan commitments and guarantees, for which expected credit losses are provided following transition to HKFRS 9 on 1 January 2018.
23 Subordinated liabilities --- -------------------------
Subordinated liabilities issued to third parties measured at amortised cost consist of undated primary capital notes and other loan capital having an original term to maturity of five years or more. Subordinated liabilities issued to Group entities are not included in the below.
2019 2018
HK$m HK$m
----- -------
US$400m Undated floating rate primary capital notes 3,114 3,133
Fixed rate (5.05%) subordinated bonds due 2027,
MYR500m callable from 2022(1) 952 948
-----
At 31
Dec 4,066 4,081
------------------------------------------------------------ ----- -----
1 The interest rate on the MYR500m 5.05% callable subordinated bonds due 2027 will increase by 1% from November 2022.
24 Preference shares
--- ------------------
Irredeemable preference shares, issued and fully paid
2019 2018
HK$m HK$m
----
At 1 Jan 98 21,037
---
Converted / bought back during the year (96) (20,975)
------------------------------------------- --- -------
Exchange and other movements (2) 36
--- -------
At 31 Dec - 98
------------------------------------------- --- -------
At the beginning of the year, there was INR870m (2018: INR870m) of authorised preference share capital, comprising 8.7m compulsorily convertible preference shares ('CCPS') of INR100 each in the share capital of a subsidiary, HSBC InvestDirect Securities (India) Private Limited ('HSBC InvestDirect'). The CCPS were issued and fully paid in 2009 at a nominal value of INR100 each. During the year, all CCPS were converted into fully paid equity shares of HSBC InvestDirect at par.
25 Share capital
--- --------------
2019 2018
HK$m HK$m
-------
Paid up share capital in HK$ 116,103 116,103
------- -------
Paid up share capital in US$(1) 56,232 56,232
At 31 Dec 172,335 172,335
--------------------------------- ------- -------
Ordinary shares issued and fully paid
2019 2018
HK$m Number HK$m Number
---------------------------------------- -------
At 1 Jan 172,335 46,440,991,798 151,360 46,440,991,798
------- --------------
Redemption / bought back of preference
shares - - 20,975 -
---------------------------------------- ------- -------------- ------- --------------
At 31 Dec 172,335 46,440,991,798 172,335 46,440,991,798
---------------------------------------- ------- -------------- ------- --------------
1 Paid up share capital in US$ represents preference shares which were redeemed or bought back via payment out of distributable profits and for which the amount was transferred from retained earnings to share capital in accordance with the requirements of the Companies Ordinance.
There were no new ordinary shares issued in 2019 (2018: nil). The holder of the ordinary shares is entitled to receive dividends as declared from time to time, rank equally with regard to the Bank's residual assets and are entitled to one vote per share at shareholder meetings of the Bank.
26 Other equity instruments --- -------------------------
Other equity instruments comprise additional tier 1 capital instruments in issue which are accounted for as equity.
2019 2018
HK$m HK$m
US$1,000m Floating rate perpetual subordinated loan,
callable from Dec 2019(1) - 7,756
------------------------------------------------------------ ------ ------
US$900m Floating rate perpetual subordinated loan,
callable from Dec 2019(1) - 6,981
------------------------------------------------------------ ------ ------
US$900m Floating rate perpetual subordinated loan,
callable from Nov 2023(1) - 7,048
------------------------------------------------------------ ------ ------
US$500m Floating rate perpetual subordinated loan,
callable from Nov 2023(1) - 3,915
------------------------------------------------------------ ------ ------
US$700m Floating rate perpetual subordinated loan,
callable from Dec 2023(1) - 5,481
------------------------------------------------------------ ------ ------
US$600m Floating rate perpetual subordinated loan,
callable from Nov 2024(1) - 4,698
------------------------------------------------------------ ------ ------
US$1,000m Fixed rate perpetual subordinated loan, callable
from Mar 2025(2) 7,834 -
------------------------------------------------------------ ------ ------
US$900m Fixed rate perpetual subordinated loan, callable
from Sep 2026(3) 7,063 -
------------------------------------------------------------ ------ ------
US$700m Fixed rate perpetual subordinated loan, callable
from Mar 2025(4) 5,467 -
------------------------------------------------------------ ------ ------
US$500m Fixed rate perpetual subordinated loan, callable
from Mar 2025(4) 3,905 -
------------------------------------------------------------ ------ ------
US$600m Fixed rate perpetual subordinated loan, callable
from May 2027(5) 4,685 -
------------------------------------------------------------ ------ ------
US$900m Fixed rate perpetual subordinated loan, callable
from Sep 2024(6) 7,044 -
------------------------------------------------------------ ------ ------
US$1,100m Fixed rate perpetual subordinated loan, callable
from Jun 2024(7) 8,617 -
------------------------------------------------------------ ------ ------
At 31 Dec 44,615 35,879
------------------------------------------------------------ ------ ------
1 These subordinated loans were early repaid in the first half of 2019
2 Interest rate fixed at 6.09%
3 Interest rate fixed at 6.51%
4 Interest rate fixed at 6.172%
5 Interest rate fixed at 5.91%
6 Interest rate fixed at 6.03%
7 Interest rate fixed at 6%
The additional tier 1 capital instruments are perpetual subordinated loans on which coupon payments may be cancelled at the sole discretion of the Bank. The subordinated loans will be written down at the point of non-viability on the occurrence of a trigger event as defined in the Banking (Capital) Rules. They rank higher than ordinary shares in the event of a wind-up.
27 Maturity analysis of assets and liabilities --- --------------------------------------------
The following table provides an analysis of consolidated total assets and liabilities by residual contractual maturity at the balance sheet date. These balances are included in the maturity analysis as follows:
-- Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are included in the 'Due not more than 1 month' time bucket, because trading balances are typically held for short periods of time.
-- Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over 5 years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the 'Due over 5 years' time bucket.
-- Non-financial assets and liabilities with no contractual maturity are included in the 'Due over 5 years' time bucket.
-- Liabilities under insurance contracts are included in the 'Due over 5 years' time bucket. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are included in the 'Due over 5 years' time bucket, however, such contracts are subject to surrender and transfer options by the policyholders.
Maturity analysis of assets and liabilities
Due Due
Due over over Due
over 3 6 over Due
1 month months months 9 over
but but but months 1 year Due over
not not not but but 2 years
Due not more more more not not but not
more than than than more more more
than1 3 6 9 than than than Due over
month months months months 1 year 2 years 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- ------- ------- ------- ------- ------- --------- --------- -----------
Financial
assets
Cash and
balances
at central
banks 202,746 - - - - - - - 202,746
Items in the
course
of collection
from
other banks 21,140 - - - - - - - 21,140
--------- ------- ------- ------- ------- ------- --------- ---------
Hong Kong
Government
certificates
of
indebtedness 298,944 - - - - - - - 298,944
Trading assets 618,856 2,253 1,219 - - 433 - - 622,761
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Derivatives 279,698 115 96 28 81 324 300 - 280,642
Financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through profit
or
loss 8,883 393 1,330 938 706 4,605 10,273 126,383 153,511
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Reverse
repurchase
agreements -
non-trading 260,716 97,168 32,322 6,856 11,772 9,624 3,875 - 422,333
Loans and
advances
to banks 180,357 46,565 23,409 19,174 15,502 30,018 10,097 3,783 328,905
Loans and
advances
to customers 643,208 356,953 285,049 144,180 141,465 404,131 795,421 950,468 3,720,875
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Financial
investments 201,596 406,723 186,055 70,922 89,852 197,506 310,398 437,246 1,900,298
Amounts due
from Group
companies 79,091 3,043 1,318 79 - - 3,911 190 87,632
Accrued income
and
other
financial
assets 108,167 30,046 15,491 3,935 1,947 1,265 572 4,074 165,497
Financial
assets at
31 Dec 2019 2,903,402 943,259 546,289 246,112 261,325 647,906 1,134,847 1,522,144 8,205,284
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Non-financial
assets - - - - - - - 456,430 456,430
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Total assets at
31
Dec 2019 2,903,402 943,259 546,289 246,112 261,325 647,906 1,134,847 1,978,574 8,661,714
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Financial
liabilities
---------------- --------- ------- ------- ------- ------- ------- --------- --------- -----------
Hong Kong
currency
notes in
circulation 298,944 - - - - - - - 298,944
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Items in the
course
of
transmission
to
other banks 25,576 - - - - - - - 25,576
Repurchase
agreements
- non-trading 90,565 3,131 2,713 1,566 447 - - 7,974 106,396
---------------- ------- ------- ------- ------- ------- --------- ---------
Deposits by
banks 169,344 8,474 1,888 30 5 52 26 - 179,819
Customer
accounts 4,657,422 467,294 190,460 45,681 42,479 18,388 10,700 - 5,432,424
Trading
liabilities 87,532 - - - - - - - 87,532
Derivatives 290,808 113 15 41 73 339 662 180 292,231
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Financial
liabilities
designated at
fair
value 38,524 24,493 12,173 4,833 4,694 18,962 12,703 43,909 160,291
Debt securities
in
issue 5,113 31,769 18,816 5,614 7,757 17,038 17,640 3,186 106,933
Amounts due to
Group
companies 88,108 32,414 246 37 118 35 79,308 110,808 311,074
------- ------- ------- ------- ------- --------- --------- ---------
Accruals and
other
financial
liabilities 114,974 38,591 18,130 5,573 4,846 3,704 4,626 4,678 195,122
---------------- ------- --------- --------- ---------
Subordinated
liabilities(1) - - - - - - - 4,066 4,066
Preference
shares - - - - - - - - -
Total financial
liabilities
at 31 Dec 2019 5,866,910 606,279 244,441 63,375 60,419 58,518 125,665 174,801 7,200,408
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Non-financial
liabilities - - - - - - - 582,025 582,025
----------------
Total
liabilities
at 31 Dec 2019 5,866,910 606,279 244,441 63,375 60,419 58,518 125,665 756,826 7,782,433
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Maturity analysis of assets and liabilities (continued)
Due Due
Due over over Due
over 3 6 over Due Due
1 month months months 9 over over
but but but months 1 year 2 years
Due not not not but but but
not more more more not not not
more than than than more more more Due
than1 3 6 9 than than than over
month months months months 1 year 2 years 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------- ------- ------- ------- ------- ------- --------- --------- -----------
Financial
assets
Cash and
balances at
central banks 205,660 - - - - - - - 205,660
---------
Items in the
course
of collection
from
other banks 25,380 - - - - - - - 25,380
--------- ------- ------- ------- ------- ------- --------- ---------
Hong Kong
Government
certificates
of
indebtedness 280,854 - - - - - - - 280,854
---------
Trading assets 554,886 1,359 1,723 - - 870 - - 558,838
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Derivatives 291,515 83 117 247 17 324 318 248 292,869
-------
Financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through profit
or loss 9,308 24 1,108 615 1,121 3,839 11,210 105,634 132,859
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Reverse
repurchase
agreements -
non-trading 250,550 87,939 15,059 4,326 7,771 37,682 3,000 - 406,327
-------
Loans and
advances
to banks 177,476 56,118 17,869 11,374 19,247 22,912 26,835 6,320 338,151
-------
Loans and
advances
to customers 638,718 323,164 268,711 159,123 145,495 350,859 767,323 875,309 3,528,702
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Financial
investments 235,488 409,356 185,205 84,225 75,210 218,508 297,627 365,407 1,871,026
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Amounts due
from Group
companies 63,150 6,477 649 28 - 2 149 - 70,455
-------
Accrued income
and
other
financial
assets 102,461 33,492 14,830 2,189 1,178 1,071 584 3,678 159,483
Financial
assets at
31 Dec 2018 2,835,446 918,012 505,271 262,127 250,039 636,067 1,107,046 1,356,596 7,870,604
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Non-financial
assets - - - - - - - 392,850 392,850
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Total assets at
31
Dec 2018 2,835,446 918,012 505,271 262,127 250,039 636,067 1,107,046 1,749,446 8,263,454
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Financial
liabilities
Hong Kong
currency
notes in
circulation 280,854 - - - - - - - 280,854
--------- ------- ------- ------- ------- ------- --------- ---------
Items in the
course
of
transmission
to
other banks 33,806 - - - - - - - 33,806
--------- ------- ------- ------- ------- ------- --------- --------- ---------
Repurchase
agreements
- non-trading 63,273 723 1,159 4,555 569 - - - 70,279
---------------- ------- ------- ------- ------- --------- ---------
Deposits by
banks 154,915 2,415 3,923 2,018 1,260 53 80 - 164,664
--------- ------- -------
Customer
accounts 4,547,352 342,264 150,739 72,992 61,663 16,011 16,570 75 5,207,666
------- ---------
Trading
liabilities 81,194 - - - - - - - 81,194
-------
Derivatives 294,112 304 157 250 207 209 314 - 295,553
--------- ------- ------- ------- ------- -------
Financial
liabilities
designated at
fair
value 22,524 23,447 21,021 7,873 10,014 18,541 18,314 39,409 161,143
------- ------- ------- ------- ------- --------- --------- ---------
Debt securities
in
issue 2,631 6,287 9,810 859 519 15,913 19,053 3,164 58,236
------- --------- --------- ---------
Amounts due to
Group
companies 120,904 93,361 1,299 50 27 15 77,508 103,323 396,487
-------
Accruals and
other
financial
liabilities 115,539 40,894 16,241 3,542 4,423 1,718 1,154 710 184,221
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Subordinated
liabilities(1) - - - - - - 948 3,133 4,081
--------- ------- ------- ------- ------- ------- --------- ---------
Preference
shares - - - - - - - 98 98
Financial
liabilities
at 31 Dec 2018 5,717,104 509,695 204,349 92,139 78,682 52,460 133,941 149,912 6,938,282
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Non-financial
liabilities - - - - - - - 512,252 512,252
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
Total
liabilities at
31 Dec 2018 5,717,104 509,695 204,349 92,139 78,682 52,460 133,941 662,164 7,450,534
---------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
1 The maturity for subordinated liabilities is based on the earliest date on which the group is required to pay, i.e. the callable date.
28 Analysis of cash flows payable under financial liabilities by remaining
contractual
maturities
--- ------------------------------------------------------------------------
Due over
1 month
Due not but not Due between Due between
more than more than 3 and 1 and Due after
1 month 3 months 12 months 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m
---------- ---------- ----------- ----------- --------- ------------
At 31 Dec 2019
Hong Kong currency notes in
circulation 298,944 - - - - 298,944
----------
Items in the course of
transmission
to other banks 25,576 - - - - 25,576
----------
Repurchase agreements -
non-trading 90,675 3,131 4,857 - 8,068 106,731
---------- ---------- ----------- ----------- --------- ----------
Deposits by banks 169,744 8,474 1,960 84 - 180,262
---------- ---------- ----------- ----------- --------- ----------
Customer accounts 4,664,306 467,294 283,081 31,564 - 5,446,245
---------- ---------- ----------- ----------- --------- ----------
Trading liabilities 87,532 - - - - 87,532
---------- ---------- ----------- ----------- --------- ----------
Derivatives 290,016 113 2 846 180 291,157
---------- ---------- ----------- ----------- --------- ----------
Financial liabilities designated
at fair value 39,636 24,493 22,589 32,873 44,188 163,779
---------- ---------- ----------- ----------- --------- ----------
Debt securities in issue 5,418 31,769 33,538 36,214 3,892 110,831
---------- ---------- ----------- ----------- --------- ----------
Amounts due to Group companies 98,361 32,414 5,344 100,805 126,697 363,621
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Other financial liabilities 109,482 38,591 25,715 8,313 4,756 186,857
---------- ---------- ----------- ----------- --------- ----------
Subordinated liabilities 29 - 86 457 5,789 6,361
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
5,879,719 606,279 377,172 211,156 193,570 7,267,896
Loan and other credit-related
commitments 2,750,332 - - - - 2,750,332
----------
Financial guarantees 49,199 - - - - 49,199
----------
8,679,250 606,279 377,172 211,156 193,570 10,067,427
Proportion of cash flows payable
in period 86% 6% 4% 2% 2%
--------------------------------- ---------- ---------- ----------- ----------- --------- ------------
At 31 Dec 2018
Hong Kong currency notes in
circulation 280,854 - - - - 280,854
Items in the course of
transmission
to other banks 33,806 - - - - 33,806
----------
Repurchase agreements -
non-trading 63,360 723 6,464 - - 70,547
---------- ----------
Deposits by banks 155,763 2,415 7,221 137 - 165,536
Customer accounts 4,552,138 342,264 289,185 34,197 80 5,217,864
Trading liabilities 81,194 - - - - 81,194
Derivatives 294,448 304 403 1,754 - 296,909
Financial liabilities designated
at fair value 23,410 23,447 40,498 39,723 39,474 166,552
Debt securities in issue 3,042 6,287 12,028 37,140 3,521 62,018
Amounts due to Group companies 121,089 93,361 885 88,418 137,417 441,170
Other financial liabilities 109,254 40,894 22,377 2,850 1,194 176,569
Subordinated liabilities 22 - 65 1,294 3,995 5,376
Preference shares - - 98 - - 98
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
5,718,380 509,695 379,224 205,513 185,681 6,998,493
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Loan and other credit-related
commitments 2,562,972 - 237 - - 2,563,209
----------
Financial guarantees 57,964 - - - - 57,964
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
8,339,316 509,695 379,461 205,513 185,681 9,619,666
Proportion of cash flows payable
in period 87% 5% 4% 2% 2%
--------------------------------- ---------- ---------- ----------- ----------- --------- ------------
The balances in the above tables incorporate all cash flows relating to principal and future coupon payments on an undiscounted basis (except for trading liabilities and trading derivatives). Trading liabilities and trading derivatives have been included in the 'On demand' time bucket as they are typically held for short periods of time. The undiscounted cash flows payable under hedging derivative liabilities are classified according to their contractual maturity. Investment contract liabilities have been included in financial liabilities designated at fair value, whereby the policyholders have the options to surrender or transfer at any time, and are reported in the 'Due after 5 years' time bucket. A maturity analysis prepared on the basis of the earliest possible contractual repayment date (assuming that all surrender and transfer options are exercised) would result in all investment contracts being presented as falling due within one year or less. The undiscounted cash flows potentially payable under loan commitments and financial guarantee contracts are classified on the basis of the earliest date they can be called. Cash flows payable in respect of customer accounts are primarily contractually repayable on demand or at short notice.
29 Contingent liabilities, contractual commitments and guarantees
--- ---------------------------------------------------------------
2019 2018
HK$m HK$m
-------------------------------------------------------- --------- -----------
Guarantees and contingent liabilities
- financial guarantees(1) 49,199 57,964
---------
- performance & other guarantees(2) 266,272 234,265
---------
- other contingent liabilities 3,299 3,416
---------
At 31 Dec 318,770 295,645
-------------------------------------------------------- --------- ---------
Commitments(3) :
- documentary credits and short-term trade-related
transactions 22,455 23,258
---------
- forward asset purchases and forward forward deposits
placed 30,268 14,087
-------------------------------------------------------- ---------
- undrawn formal standby facilities, credit lines and
other commitments to lend 2,697,609 2,525,863
--------------------------------------------------------
At 31 Dec 2,750,332 2,563,208
-------------------------------------------------------- --------- ---------
1 Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. The amounts in the above table are nominal principal amounts.
2 Performance and other guarantees include re-insurance letters of credit related to particular transactions, trade-related letters of credit issued without provision for the issuing entity to retain title to the underlying shipment, performance bonds, bid bonds, standby letters of credit and other transaction-related guarantees.
3 Includes HK$1,630,005m of commitments at 31 December 2019 (2018: HK$1,490,711m) to which the impairment requirements in HKFRS 9 are applied where the group has become party to an irrevocable commitment.
The above table discloses the nominal principal amounts of commitments (excluding capital commitments), guarantees and other contingent liabilities, which represent the amounts at risk should contracts be fully drawn upon and clients default. The amount of the commitments shown above reflects, where relevant, the expected level of take-up of pre-approved facilities. As a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not representative of future liquidity requirements.
It also reflects the group's maximum exposure under a large number of individual guarantee undertakings. The risks and exposures from guarantees are captured and managed in accordance with HSBC's overall credit risk management policies and procedures. Guarantees are subject to an annual credit review process.
Other contingent liabilities at 31 December 2019 included provisions made in relation to legal and regulatory matters as set out in
note 38.
30 Other commitments --- ------------------
Capital commitments
At 31 December 2019, capital commitments, mainly related to the commitment for purchase of premises, were HK$7,413m
(2018: HK$7,912m).
31 Offsetting of financial assets and financial liabilities --- ---------------------------------------------------------
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously ('the offset criteria').
The 'Amounts not set off in the balance sheet' include transactions where:
-- the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right to set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and
-- in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-cash collateral has been received/pledged.
For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains appropriate.
Offsetting of financial assets and financial liabilities
Amounts subject to enforceable netting
arrangements
Amounts not offset in
the
balance sheet
Net
amounts Amounts
reported not subject
in the to enforceable Balance
Gross Amounts balance Financial Non-cash Cash Net netting sheet
amounts offset sheet instruments collateral collateral amount arrangements(1) total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------- --------- -------- ------------- ---------- ------------ ------ --------------- ---------
At 31 Dec 2019
Financial
assets(2)
Derivatives 384,173 (132,872) 251,301 (213,466) (8,155) (15,070) 14,610 29,341 280,642
Reverse repos,
stock
borrowing and
similar
agreements
classified
as: 470,307 (17,667) 452,640 - (451,866) (125) 649 20,387 473,027
------- -------- -------- --------- --------- -------- ------ --------------- -------
- trading
assets 28,779 (90) 28,689 - (28,680) - 9 - 28,689
- non-trading
assets 441,528 (17,577) 423,951 - (423,186) (125) 640 20,387 444,338
------- -------- -------- --------- --------- -------- ------ --------------- -------
854,480 (150,539) 703,941 (213,466) (460,021) (15,195) 15,259 49,728 753,669
---------------- ------- -------- -------- --------- --------- -------- ------ --------------- -------
Financial
liabilities(3)
Derivatives 396,052 (132,872) 263,180 (213,466) (13,444) (14,238) 22,032 29,051 292,231
------- -------- -------- --------- --------- -------- ------ --------------- -------
Repos, stock
lending
and similar
agreements
classified as: 148,626 (17,667) 130,959 - (130,399) (37) 523 43,022 173,981
- trading
liabilities 1,978 (90) 1,888 - (1,823) - 65 - 1,888
- non-trading
liabilities 146,648 (17,577) 129,071 - (128,576) (37) 458 43,022 172,093
------- -------- -------- --------- --------- -------- ------ --------------- -------
544,678 (150,539) 394,139 (213,466) (143,843) (14,275) 22,555 72,073 466,212
---------------- ------- -------- -------- --------- --------- -------- ------ --------------- -------
At 31 Dec 2018
------- --------- --------
Financial
assets(2)
------- --------- --------
Derivatives 380,939 (120,409) 260,530 (208,893) (5,637) (31,801) 14,199 32,339 292,869
Reverse repos,
stock
borrowing and
similar
agreements
classified
as: 444,711 (31,283) 413,428 - (413,374) (42) 12 29,862 443,290
- trading assets 23,112 - 23,112 - (23,100) - 12 - 23,112
- non-trading
assets 421,599 (31,283) 390,316 - (390,274) (42) - 29,862 420,178
825,650 (151,692) 673,958 (208,893) (419,011) (31,843) 14,211 62,201 736,159
----------------
Financial
liabilities(3)
Derivatives 391,064 (120,409) 270,655 (208,893) (9,558) (18,754) 33,450 24,898 295,553
Repos, stock
lending
and similar
agreements
classified as: 146,026 (31,283) 114,743 - (114,548) (4) 191 26,560 141,303
- trading
liabilities 2,023 - 2,023 - (2,007) - 16 - 2,023
- non-trading
liabilities 144,003 (31,283) 112,720 - (112,541) (4) 175 26,560 139,280
537,090 (151,692) 385,398 (208,893) (124,106) (18,758) 33,641 51,458 436,856
----------------
1 These exposures continue to be secured by financial collateral, but the group may not have sought or been able to obtain a legal opinion evidencing enforceability of the offsetting right.
2 Amounts presented in the balance sheet included balances due from Group companies of HK$85,124m (2018: HK$103,358m).
3 Amounts presented in the balance sheet included balances due to Group companies of HK$133,693m (2018: HK$139,410m).
32 Segmental analysis --- -------------------
The group's Executive Committee ('EXCO') reviews operating activities on a number of bases, including by global business and by countries. Global businesses are our reportable segments under HKFRS 8 'Operating Segments'.
Basis of preparation
The Executive Committee ('EXCO') is considered the Chief Operating Decision Maker ('CODM') for the purpose of identifying the group's reportable segments. Global business results are assessed by the CODM on the basis of performance measured in accordance with HKFRSs. Although the CODM reviews information on a number of bases, business performance is assessed and capital resources are allocated by global business, and the segmental analysis is presented on that basis. The global businesses are therefore considered our reportable segments under HKFRS 8 'Operating Segments'.
Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expenses. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to operational business lines and geographical regions. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs which are not allocated to global businesses are included in the 'Corporate Centre'.
Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-group elimination items for the global businesses are presented in the Corporate Centre.
Our global businesses
The group provides a comprehensive range of banking and related financial services to its customers in its four global businesses. The products and services offered to customers are organised by these global businesses.
-- Retail Banking and Wealth Management ('RBWM') offers a broad range of products and services to meet the personal banking and wealth management needs of individual customers. Typically, customer offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment products, global asset management services and financial planning services).
-- Commercial Banking ('CMB') offers a broad range of products and services to serve the needs of our commercial customers, including small- and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its customers access to products and services offered by other global businesses, for example Global Banking and Markets ('GB&M'), which include foreign exchange products, raising capital on debt and equity markets and advisory services.
-- GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.
-- Global Private Banking ('GPB') provides a range of services to high net worth individuals and families with complex and international needs within the Group's priority markets.
-- The Corporate Centre was established to align certain functions of the group. The Corporate Centre includes Balance Sheet Management, certain interests in associates and joint ventures, as well as the results of our financing operations and central support costs with associated recoveries.
Performance by global business is presented in the 'Financial Review' section.
Information by geographical region
Rest of Intra-segment
Hong Kong Asia-Pacific elimination Total
HK$m HK$m HK$m HK$m
For the year ended 31 Dec 2019
Total operating income 218,525 81,030 (18) 299,537
Profit before tax 88,957 47,476 - 136,433
At 31 Dec 2019
Total assets 6,221,486 3,155,935 (715,707) 8,661,714
Total liabilities 5,724,204 2,773,936 (715,707) 7,782,433
----------------------------------------------- --------- ------------- ------------ ---------
Credit commitments and contingent liabilities
(contract amounts) 1,705,308 1,363,794 - 3,069,102
----------------------------------------------- --------- ------------- ------------ ---------
For the year ended 31 Dec 2018
Total operating income 195,249 75,297 (2,238) 268,308
Profit before tax 88,017 46,566 - 134,583
At 31 Dec 2018
Total assets 6,036,854 2,939,955 (713,355) 8,263,454
Total liabilities 5,590,770 2,573,119 (713,355) 7,450,534
-----------------------------------------------
Credit commitments and contingent liabilities
(contract amounts) 1,584,981 1,273,872 - 2,858,853
----------------------------------------------- --------- ------------- ------------- ---------
Information by country/territory
Revenue(1) Non-current assets(2)
--------------------- --------------------------
For the year ended
31 Dec At 31 Dec
2019 2018 2019 2018
HK$m HK$m HK$m HK$m
Hong Kong 147,456 142,665 132,935 110,125
----------
Mainland China 18,153 17,653 158,215 147,444
---------- -----------
Australia 7,337 7,658 2,130 825
----------
India 9,339 7,880 2,339 1,934
----------
Indonesia 3,701 3,702 3,932 3,566
----------
Malaysia 6,107 6,330 1,820 962
----------
Singapore 10,776 10,053 2,820 1,415
----------
Taiwan 3,064 3,509 2,802 2,201
----------
Other 13,448 11,019 3,421 3,075
---------- --------- ----------- -----------
Total 219,381 210,469 310,414 271,547
---------- --------- ----------- -----------
1 Revenue (defined as 'Net operating income before change in expected credit losses and other impairment charges') is attributable to countries based on the location of the principal operations of the branch, subsidiary, associate or joint venture.
2 Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures and certain other assets.
33 Related party transactions --- ---------------------------
The group's related parties include the parent, fellow subsidiaries, associates, joint ventures, post-employment benefit plans for the group's employees, Key Management Personnel ('KMP') as defined by HKAS 24, close family members of KMP and entities that are controlled or jointly controlled by KMP or their close family members.
Particulars of transactions with related parties are set out below.
(a) Inter-company
The group is wholly owned by HSBC Asia Holdings Limited, which in turn is a wholly-owned subsidiary of HSBC Holdings plc (incorporated in England).
During 2019, over 8,500 employees performing shared services in Hong Kong have been transferred from the group to a separate service company, HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the Group set up in Hong Kong as part of recovery and resolution planning to provide functional support services to the group. There were no changes to employment terms and conditions or pension benefits as a result of these transfers. For the year ended 31 December 2019, the group recognised a management charge of HK$15,718m for the services provided by ServCo, which is reported under 'General and administrative expenses' (2018: HK$1,098m), mainly in relation to the remuneration and other costs associated with employees and assets transferred to ServCo.
During the year, the Bank has completed the restructuring of its internal regulatory capital and loss-absorbing capacity ('LAC')-eligible debt and equity instruments such that they are all held by its immediate parent, HSBC Asia Holdings Limited, in order to comply with
the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements - Banking Sector) Rules which came into operation on
14 December 2018.
The group entered into transactions with its fellow subsidiaries in the normal course of business, including the acceptance and placement of interbank deposits, correspondent banking transactions and off-balance sheet transactions. The activities were on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.
The group shared the costs of certain IT projects with its fellow subsidiaries and also used certain processing services of fellow subsidiaries. The Bank also acted as agent for the distribution of retail investment funds for fellow subsidiaries and paid professional fees for services provided by fellow subsidiaries. These transactions and services are priced on an arm's length basis.
The aggregate amount of income and expenses arising from these transactions during the year and the balances of amounts due to and from the relevant parties at the year end were as follows:
2019 2018
Immediate Ultimate Immediate Ultimate
holding holding Fellow holding holding Fellow
company company subsidiaries company company subsidiaries
HK$m HK$m HK$m HK$m HK$m HK$m
Income and expenses for
the year
Interest income 1 6 1,450 - - 1,220
---------
Interest expense(1) 3,678 3,967 2,022 1,563 5,545 1,681
--------
Fee income - - 2,383 - 43 2,547
Fee expense - - 1,296 - - 1,153
Net income from financial
instruments held for
trading or managed on
a fair value basis - 2 152 - 5 1,289
--------- -------- -------------
Other operating income - 976 773 - 1,348 2,531
Other operating expenses(2) - 3,846 31,657 - 3,405 13,682
--------- -------- ------------- --------- -------- -------------
At 31 Dec
Assets - 823 151,094 - 327 149,122
- trading assets(3) - 67 1,989 - 123 11,586
- derivative assets - 633 63,652 - - 78,994
- other assets(3,6) - 123 85,453 - 204 58,542
Liabilities 189,690 1,290 187,550 - 254,547 212,358
- trading liabilities(3) - - 622 - 15 97
- financial liabilities
designated at fair value(3,4) 126,237 - 9 - 87,065 298
- derivative liabilities - - 67,419 - - 70,320
- other liabilities(3,6) 1,492 1,221 119,500 - 96,000 120,551
- subordinated liabilities(3,5,6) 61,961 69 - - 71,467 20,994
- preference shares - - - - - 98
--------- -------- ------------- ---------
Guarantees - - 19,179 - - 17,763
-------------
Commitments - - 2,388 - - 14,319
--------- -------- ------------- --------- -------- -------------
1 Interest expense included distribution on preference shares and interest on subordinated liabilities.
2 In 2019, payments of HK$428m (2018: HK$459m) were made for software costs which were capitalised as intangible assets in the balance sheet of the group.
3 These balances are presented under 'Amounts due from/to Group companies' in the consolidated balance sheet.
4 The balance at 31 December 2019 included subordinated liabilities of HK$126,237m to meet Total Loss Absorbing Capacity ('TLAC') requirements (2018: HK$87,065m). The carrying amount of financial liabilities designated at fair value was HK$7,482m higher than the contractual amount at maturity (2018: HK$1,289m). The cumulative loss in fair value attributable to changes in credit risk was HK$2,313m (2018: HK$310m). The balances are largely under Level 2.
5 The balance at 31 December 2019 included subordinated liabilities of HK$61,961m to meet TLAC requirements (2018: HK$78,450m).
6 The fair value hierarchy of assets and liabilities at amortised cost are under level 2 and the fair value has no material difference with carrying value.
(b) Share option and share award schemes
The group participates in various share option and share plans operated by HSBC whereby share options or shares of HSBC are granted to employees of the group. The group recognises an expense in respect of these share options and share awards. The cost borne by the ultimate holding company in respect of share options is treated as a capital contribution and is recorded within 'Other reserves'. In respect of share awards, the group recognises a liability to the ultimate holding company over the vesting period. This liability is measured at the fair value of the shares at each reporting date, with changes since the award dates adjusted through the capital contribution account within 'Other reserves'. The balances of the capital contribution and the liability at 31 December 2019 amounted to HK$3,396m and HK$1,417m respectively (2018: HK$3,147m and HK$1,923m respectively).
(c) Post-employment benefit plans
At 31 December 2019, HK$9.1bn (2018: HK$12.3bn) of the group's post-employment plan assets were under management by group companies, earning management fees of HK$22m in 2019 (2018: HK$29m). At 31 December 2019, the group's post-employment benefit plans had placed deposits of HK$581m (2018: HK$486m) with its banking subsidiaries, earning interest payable to the schemes of HK$3m (2018: HK$2m). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with third-party counterparties.
(d) Associates and joint ventures
The group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details of interests in associates and joint ventures are set out in note 14.
The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful information to represent the amount of transactions and outstanding balances during the year.
Transactions and balances during the year with associates and joint
ventures
2019 2018
Highest Highest
balance Balance balance Balance
during at during at
the year 31 December the year 31 December
HK$m HK$m HK$m HK$m
Amounts due from associates - unsubordinated 34,813 16,001 30,411 23,487
--------- ------------
Amounts due to associates 19,602 4,016 15,821 2,141
--------- ------------
Commitments 1 1 1 1
---------------------------------------------- --------- ------------ --------- ------------
The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with third -- party counterparties.
(e) Key Management Personnel
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Board of Directors and Group Managing Directors of HSBC Holdings plc.
Compensation of Key Management Personnel
2019 2018
HK$m HK$m
Salaries and other short-term benefits 336 337
Post employment benefits 9 10
Termination benefits 1 -
---------------------------------------- ---- ----
Share-based payments 104 92
---------------------------------------- ---- ----
Total 450 439
---------------------------------------- ---- ----
Transactions, arrangements and agreements involving Key Management
Personnel
2019 2018
HK$m HK$m
------------------------------------------------------ ------- ---------
During the year
Highest average assets(1) 48,944 47,132
------- -------
Highest average liabilities(1) 47,211 48,251
------- -------
Contribution to group's profit before tax 1,144 936
-------
At the year end
Guarantees 7,177 7,060
-------
Commitments 5,275 3,841
------------------------------------------------------ ------- -------
1 The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during the year.
Transactions, arrangements and agreements are entered into by the group with companies that may be controlled by Key Management Personnel of the group and their immediate relatives. These transactions are primarily loans and deposits, and were entered into in the ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with persons or companies of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.
Change in expected credit losses recognised for the year, and expected credit loss allowances against balances outstanding at the end of the year, in respect of Key Management Personnel were insignificant (2018: insignificant).
On 8 October 2019, HBAP acted as Joint Global Co-ordinator and Underwriter on aggregated EUR4.25bn and GBP800m Senior Note issuances for CK Hutchison Group Telecom Finance S.A. in 6 tranches, with tenors of 4 to 15 years and coupon rates of 0.375% to 2.625%. CK Hutchison Group Telecom Finance S.A. is a wholly-owned subsidiary of an associated body corporate (CK Hutchison Holdings Limited) of Mr Victor Li, a non-executive Director of the Bank.
(f) Loans to directors
Directors are defined as the Directors of the Bank, its ultimate holding company, HSBC Holdings plc and intermediate holding companies. Loans to directors also include loans to companies that are controlled by, and entities that are connected with these directors. Particulars of loans to directors disclosed pursuant to section 17 of the Companies (Disclosure of Information about Benefits of Directors) Regulation are as follows:
Aggregate amount Maximum aggregate
outstanding at amount outstanding
31 Dec during the year
2019 2018 2019 2018
HK$m HK$m HK$m HK$m
By the Bank(1) 4,530 1,231 4,730 8,360
By subsidiaries 6 8 8 10
----------------- -------- ----------
4,536 1,239 4,738 8,370
----------------- -------- -------- ---------- ---------
1 Comparatives have been re-presented to include certain balances previously not included.
These amounts include principal and interest, and the maximum liability that may be incurred under guarantees.
34 Fair values of financial instruments carried at fair value --- -----------------------------------------------------------
Control framework
Fair values are subject to a control framework designed to ensure that they are either determined, or validated, by a function independent of the risk taker.
Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. For inactive markets, the group sources alternative market information, with greater weight given to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument comparability, consistency of data sources, underlying data accuracy and timing of prices.
Fair value of investment funds are sourced from the underlying fund managers which are based upon an assessment of the underlying investees' financial positions, results, risk profile and prospects.
For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.
The majority of financial instruments measured at fair value are in GB&M. GB&M's fair value governance structure comprises its Finance function and Valuation Committees. Finance is responsible for establishing procedures governing valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the group's Valuation Committees, which consist of independent support functions. Within GB&M, these Committees are overseen by the Group's Valuation Committee Review Group, which considers all material subjective valuations. The insurance business also holds portfolios of financial instruments for which the valuations are subjective and an Investment Valuation Committee oversees those fair values.
Financial liabilities measured at fair value
In certain circumstances, the group records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to the group's liabilities. The change in fair value of issued debt securities attributable to the group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The difference in the valuations is attributable to the group's own credit spread. This methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments are included within 'Financial liabilities designated at fair value' and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which the group issues structured notes.
Gains and losses arising from changes in the credit spread of liabilities issued by the group reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.
Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:
-- Level 1 - valuation technique using quoted market price: financial instruments with quoted prices for identical instruments in active markets that the group can access at the measurement date.
-- Level 2 - valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.
-- Level 3 - valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.
Financial instruments carried at fair value and bases of valuation
Fair Value Hierarchy
Level Level Level Third-party Inter-
1 2 3 total company(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
---------
At 31 Dec 2019
Assets
--------- ------- ------ ----------- ----------- -----------
Trading assets(1) 426,072 196,132 557 622,761 - 622,761
--------- ------- ------ ----------- ----------- ---------
Derivatives 2,282 213,242 833 216,357 64,285 280,642
--------- ------- ------ ----------- ----------- ---------
Financial assets designated
and otherwise mandatorily
measured at fair value
through profit or loss 89,152 32,068 32,291 153,511 - 153,511
--------- ------- ------ ----------- ----------- ---------
Financial investments 1,096,572 363,804 5,622 1,465,998 - 1,465,998
-----------
Liabilities
--------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 78,111 9,421 - 87,532 - 87,532
--------- ------- ------ ----------- ----------- ---------
Derivatives 2,892 219,498 2,422 224,812 67,419 292,231
--------- ------- ------ ----------- ----------- ---------
Financial liabilities designated
at fair value(1) - 139,720 20,571 160,291 - 160,291
--------- ------- ------ ----------- ----------- ---------
At 31 Dec 2018
Assets
Trading assets(1) 395,769 162,841 228 558,838 - 558,838
Derivatives 3,219 209,450 1,206 213,875 78,994 292,869
Financial assets designated
and otherwise mandatorily
measured at fair value
through profit or loss 75,105 36,599 21,155 132,859 - 132,859
Financial investments 1,146,426 352,490 4,709 1,503,625 - 1,503,625
Liabilities
--------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 74,376 6,818 - 81,194 - 81,194
Derivatives 3,348 220,043 1,842 225,233 70,320 295,553
Financial liabilities designated
at fair value(1) - 139,782 21,361 161,143 - 161,143
1 Amounts with HSBC Group entities are not reflected here.
2 Derivatives balances with HSBC Group entities are largely under 'Level 2'.
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
Designated
and otherwise
mandatorily
measured Designated
Financial Trading at fair Trading at fair
investments assets value Derivatives liabilities value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------
At 31 Dec
2019
Transfers
from Level
1 to Level 2 32,281 9,198 - - 131 - -
------------ ------- ------------- ----------- ------------ ---------- -----------
Transfers
from Level
2 to Level 1 16,872 15,069 2,359 - 599 - -
-------------- ------------ ------- ------------- ----------- ------------ ---------- -----------
At 31 Dec
2018
Transfers
from Level
1 to Level 2 9,955 1,389 - - 349 - -
------------ ------------- ----------- ------------ ---------- -----------
Transfers
from Level
2 to Level 1 121,667 18,109 - - 376 - -
-------------- ------------ ------------- ----------- ------------ ---------- -----------
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to changes in observability of valuation inputs and price transparency.
Movements in Level 3 financial instruments
There were no material transfers between Level 3 and Level 1 or Level 2 as a result of change in observability of valuation inputs, settlement, nor material gains/loss recognised in the income statement/other comprehensive income during the year in relation to financial instruments carried at fair value in Level 3 (2018: immaterial). The increase in Level 3 assets was mainly due to the purchase of private equity fund and other alternative investments of HK$11,463m (2018: HK$12,200m) to back policyholder liabilities to support growth in the insurance business.
Fair value adjustments
Fair value adjustments are adopted when the group determines there are additional factors considered by market participants that are not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement, such as when models are enhanced and therefore fair value adjustments may no longer be required.
Bid-offer
HKFRS 13 requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of, or unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for uncertain parameters and/or model assumptions, than those used in the group's valuation model.
Credit valuation adjustment ('CVA') and debit valuation adjustment ('DVA')
The CVA is an adjustment to the valuation of over-the-counter ('OTC') derivative contracts to reflect the possibility that the counterparty may default and the group may not receive the full market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that the group may default, and that the group may not pay the full market value of the transactions.
The group calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not netted across group entities.
The group calculates the CVA by applying the probability of default ('PD') of the counterparty, conditional on the non-default of the group, to the group's expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, the group calculates the DVA by applying the PD of the group, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to the group and multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure.
For most products the group uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty.
The methodologies do not, in general, account for 'wrong-way risk' which arises when the underlying value of the derivative prior to any CVA is positively correlated to the PD of the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation.
Funding fair value adjustment ('FFVA')
The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available and is adjusted for events that may terminate the exposure, such as the default of the group or the counterparty. The FFVA and DVA are calculated independently.
Model limitation
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics. In these circumstances, model limitation adjustments are adopted.
Inception profit (Day 1 profit or loss reserves)
Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs.
Effects of changes in significant unobservable assumptions to reasonably possible alternatives
The key unobservable inputs to Level 3 financial instruments include volatility and correlation for structured notes and deposits valued using option models, bid quotes for corporate bonds valued using approaches that take into account market comparables, and multiple items for private equity and strategic investments. In the absence of an active market, the fair value of private equity and strategic investments is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors, as well as by reference to market valuations for similar entities quoted in an active market, or the price at which similar companies have changed ownership. The change in fair values due to changes in reasonably possible alternative assumptions for these unobservable inputs is not significant.
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 is not amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval. The sensitivity of Level 3 fair values to reasonably possible alternative assumptions is not significant.
35 Fair values of financial instruments not carried at fair value
--- ---------------------------------------------------------------
Fair values of financial instruments not carried at fair value and
bases of valuation
Fair Value Hierarchy
Quoted Significant
market Observable unobservable
price inputs inputs
Carrying Level Level Level
amount 1 2 3 Total
HK$m HK$m HK$m HK$m HK$m
At 31 Dec 2019
Assets
Reverse repurchase agreements -
non-trading 422,333 - 417,294 5,385 422,679
Loans and advances to banks 328,905 - 323,304 5,501 328,805
Loans and advances to customers 3,720,875 - 56,475 3,654,716 3,711,191
Financial investments - at amortised
cost 434,300 77,108 382,368 356 459,832
Liabilities
Repurchase agreements - non-trading 106,396 - 106,398 - 106,398
Deposits by banks 179,819 - 179,823 - 179,823
Customer accounts 5,432,424 - 5,432,803 - 5,432,803
Debt securities in issue 106,933 - 107,641 - 107,641
Subordinated liabilities 4,066 - 952 2,999 3,951
At 31 Dec 2018
Assets
Reverse repurchase agreements -
non-trading 406,327 - 396,061 10,723 406,784
Loans and advances to banks 338,151 - 322,443 15,531 337,974
Loans and advances to customers 3,528,702 - 52,262 3,473,497 3,525,759
Financial investments - at amortised
cost 367,401 8,543 356,836 - 365,379
Liabilities
Repurchase agreements - non-trading 70,279 - 70,282 - 70,282
Deposits by banks 164,664 - 164,662 - 164,662
Customer accounts 5,207,666 - 5,207,871 - 5,207,871
Debt securities in issue 58,236 - 58,808 - 58,808
Subordinated liabilities 4,081 - 960 2,919 3,879
Preference shares 98 - - 98 98
The fair values above are stated at a specific date and may be significantly different from the amounts which will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to the group as a going concern.
Other financial instruments not carried at fair value are typically short term in nature or re-priced to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost.
Valuation
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It does not reflect the economic benefits and costs that the group expects to flow from an instrument's cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies.
Repurchase and reverse repurchase agreements - non-trading
Fair values approximate carrying amounts as these balances are generally short dated.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that the group believes are consistent with those that would be used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans.
The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.
Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.
Deposits by banks and customer accounts
The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.
36 Structured entities --- --------------------
The group is involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets, conduits and investment funds, established either by the group or a third party.
Consolidated structured entities
The group uses consolidated structured entities to securitise customer loans and advances it originates to diversify its sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by the group to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. The group's transactions with these entities are not significant.
Unconsolidated structured entities
The term 'unconsolidated structured entities' refers to all structured entities not controlled by the group. The group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.
Nature and risks associated with the group's interests in unconsolidated
structured entities
HSBC Non-HSBC
managed managed
Securitisations funds funds Other Total
Total asset values of the entities
(HK$bn)
0-4 58 47 95 40 240
4-15 8 25 89 2 124
15-39 - 6 41 - 47
39-196 - 1 26 - 27
196+ - 1 4 - 5
Number of entities at 31 Dec 2019 66 80 255 42 443
---------------
HK$m HK$m HK$m HK$m HK$m
-----------------
Total assets in relation to the
group's interests in the unconsolidated
structured entities 27,636 24,258 50,241 13,140 115,275
* trading assets - 774 - - 774
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss - 23,484 50,241 - 73,725
* derivatives - - - - -
* loans and advances to customers 27,636 - - 12,742 40,378
* financial investments - - - - -
* other assets - - - 398 398
Total liabilities in relation
to the group's interests in the
unconsolidated structured entities - - - - -
---------------
Other off balance sheet commitments 857 1,797 14,664 3,958 21,276
---------------
The group's maximum exposure at
31 Dec 2019 28,493 26,055 64,905 17,098 136,551
---------------
Nature and risks associated with the group's interests in unconsolidated
structured entities (continued)
HSBC Non-HSBC
managed managed
Securitisations funds funds Other Total
Total asset values of the entities
(HK$bn)
0-4 38 39 97 36 210
4-15 7 18 84 1 110
15-39 1 4 38 - 43
39-196 - 1 21 - 22
196+ - 1 5 - 6
Number of entities at 31 Dec 2018 46 63 245 37 391
---------------
HK$m HK$m HK$m HK$m HK$m
-----------------
Total assets in relation to the
group's interests in the unconsolidated
structured entities 17,907 20,540 40,101 15,598 94,146
* trading assets - 76 - - 76
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss - 19,292 40,101 - 59,393
* derivatives - - - - -
* loans and advances to customers 17,907 - - 15,253 33,160
* financial investments - 1,172 - - 1,172
* other assets - - - 345 345
Total liabilities in relation
to the group's interests in the
unconsolidated structured entities - - - - -
Other off balance sheet commitments 19 - 8,905 6,877 15,801
---------------
The group's maximum exposure at
31 Dec 2018 17,926 20,540 49,006 22,475 109,947
---------------
The maximum exposure to loss from the group's interests in unconsolidated structured entities represents the maximum loss it could incur as a result of its involvement with these entities regardless of the probability of the loss being incurred.
-- For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential future losses.
-- For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value of these interests at the balance sheet reporting date.
The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate the group's exposure to loss.
Securitisations
The group has interests in unconsolidated securitisation vehicles through holding notes issued by these entities.
HSBC managed funds
The group establishes and manages money market funds and non-money market investment funds to provide customers with investment opportunities. The group, as fund manager, may be entitled to receive management and performance fees based on the assets under management. The group may also retain units in these funds.
Non-HSBC managed funds
The group purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs. In addition to entities, asset and liability classes disclosed above, the group enters into derivative contracts with non-HSBC managed funds.
Other
The group has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to the interest disclosed above, the group enters into derivative contracts, reverse repos and stock borrowing transactions with structured entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management solutions.
Structured entities sponsored by the group
The amount of assets transferred to and income received from such sponsored entities during 2019 and 2018 were not significant.
37 Bank balance sheet and statement of changes in equity --- ------------------------------------------------------
Bank balance sheet at 31 December 2019
2019 2018
HK$m HK$m
--------- -----------
Assets
Cash and balances at central banks 156,273 147,447
---------
Items in the course of collection from other banks 15,437 18,021
Hong Kong Government certificates of indebtedness 298,944 280,854
Trading assets 496,660 439,155
Derivatives 267,018 276,558
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 7,087 6,298
Reverse repurchase agreements - non-trading 235,823 243,203
Loans and advances to banks 184,429 159,636
Loans and advances to customers 2,024,194 1,947,307
Financial investments 830,648 866,566
Amounts due from Group companies 332,865 347,652
Investments in subsidiaries 93,355 88,169
Interests in associates and joint ventures 39,830 39,830
Goodwill and intangible assets 11,242 8,419
Property, plant and equipment 79,208 75,897
----------------------------------------------------------------
Deferred tax assets 819 682
Prepayments, accrued income and other assets 131,368 130,057
---------------------------------------------------------------- --------- ---------
Total assets 5,205,200 5,075,751
---------------------------------------------------------------- --------- ---------
Liabilities
Hong Kong currency notes in circulation 298,944 280,854
---------
Items in the course of transmission to other banks 17,878 22,786
---------
Repurchase agreements - non-trading 61,793 55,142
---------
Deposits by banks 129,703 121,618
---------
Customer accounts 3,287,463 3,186,542
---------
Trading liabilities 49,399 47,491
---------
Derivatives 277,421 279,056
---------
Financial liabilities designated at fair value 44,748 42,545
---------
Debt securities in issue 53,584 41,398
---------
Retirement benefit liabilities 1,426 2,085
---------
Amounts due to Group companies 384,490 439,262
---------
Accruals and deferred income, other liabilities and provisions 110,893 98,983
---------
Current tax liabilities 7,556 1,600
---------
Deferred tax liabilities 9,199 8,836
---------
Subordinated liabilities 3,114 3,133
---------------------------------------------------------------- --------- ---------
Total liabilities 4,737,611 4,631,331
---------------------------------------------------------------- --------- ---------
Equity
Share capital 172,335 172,335
---------
Other equity instruments 44,615 35,879
---------
Other reserves 27,101 23,346
---------
Retained earnings 223,538 212,860
---------------------------------------------------------------- --------- ---------
Total equity 467,589 444,420
Total equity and liabilities 5,205,200 5,075,751
---------------------------------------------------------------- --------- ---------
Bank statement of changes in equity for the year ended 31 December 2019
Other reserves
Financial Cash
Other Property assets flow Foreign
Share equity Retained revaluation at FVOCI hedge exchange Total
capital instruments earnings reserve reserve(7) reserve reserve Other(1) equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------- ------------- -------- ------------- ------------ --------- -------- ----------
At 1 Jan 2019 172,335 35,879 212,860 39,506 1,037 (84) (12,846) (4,267) 444,420
Profit for the year - - 79,694 - - - - - 79,694
Other comprehensive
income/(expense) (net
of tax) - - (1,993) 2,836 2,467 (35) (481) - 2,794
* debt instruments at fair value through other
comprehensive income - - - - 1,438 - - - 1,438
* equity instruments designated at fair value through
other comprehensive income - - - - 1,029 - - - 1,029
* cash flow hedges - - - - - (35) - - (35)
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (2,007) - - - - - (2,007)
* property revaluation - - - 2,836 - - - - 2,836
* remeasurement of defined benefit asset/liability - - 14 - - - - - 14
* exchange differences - - - - - - (481) - (481)
------- --------- ------- -------- --- ------- --- ----- -------
Total comprehensive
income/(expense) for
the year - - 77,701 2,836 2,467 (35) (481) - 82,488
--- --- ----- -------
Other equity instruments
issued(2) - 44,615 - - - - - - 44,615
------- --------- ------- -------- --- ------- --- ----- -------
Other equity instruments
repaid(2) - (35,879) - - - - - - (35,879)
------- --------- ------- -------- --- ------- --- ----- -------
Dividends paid(3) - - (68,369) - - - - - (68,369)
------- --------- ------- -------- --- ------- --- ----- -------
Movement in respect
of share-based payment
arrangements - - (30) - - - - 227 197
Transfers and other
movements - - 1,376 (1,366) - - - 107 117
------- --------- ------- -------- ------- --- ----- -------
At 31 Dec 2019 172,335 44,615 223,538 40,976 3,504 (119) (13,327) (3,933) 467,589
------- --------- ------- -------- --- ------- --- ----- -------
At 31 Dec 2017(7) 151,360 14,737 205,582 39,799 1,688 (118) (9,473) (13,041) 390,534
Impact on transition
to HKFRS 9 - - (896) - (356) - - - (1,252)
At 1 Jan 2018 151,360 14,737 204,686 39,799 1,332 (118) (9,473) (13,041) 389,282
--- ---
Profit for the year - - 75,742 - - - - - 75,742
--------- --------
Other comprehensive
income/(expense) (net
of tax) - - (535) 8,410 (295) 34 (3,373) - 4,241
* debt instruments at fair value through other
comprehensive income - - - - (261) - - - (261)
* equity instruments designated at fair value through
other comprehensive income - - - - (34) - - - (34)
* cash flow hedges - - - - - 34 - - 34
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (208) - - - - - (208)
* property revaluation - - - 8,410 - - - - 8,410
* remeasurement of defined benefit asset/liability - - (327) - - - - - (327)
* exchange differences - - - - - - (3,373) - (3,373)
Total comprehensive
income/(expense) for
the year - - 75,207 8,410 (295) 34 (3,373) - 79,983
Other equity instruments
issued(2) - 21,142 - - - - - - 21,142
------- --------- --------
Dividends paid(3) - - (47,440) - - - - - (47,440)
------- --------- --------
Movement in respect
of share-based payment
arrangements - - (213) - - - - 215 2
Transfers and other
movements(4,6) 20,975 - (19,380) (8,703) - - - 8,559 1,451
---------
At 31 Dec 2018 172,335 35,879 212,860 39,506 1,037 (84) (12,846) (4,267) 444,420
--- ---
For footnotes, please refer to page 65.
38 Legal proceedings and regulatory matters --- -----------------------------------------
The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, the Bank considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in note 1.2(n). While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 31 December 2019. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Anti-money laundering and sanctions-related matters
In December 2012, among other agreements, HSBC Holdings plc agreed to an undertaking with the UK Financial Services Authority, which was replaced by a Direction issued by the UK Financial Conduct Authority ('FCA') in 2013, and consented to a cease-and-desist order with the US Federal Reserve Board ('FRB'), both of which contained certain forward-looking anti-money laundering ('AML') and sanctions-related obligations. HSBC also agreed to retain an independent compliance monitor (who is, for FCA purposes, a 'Skilled Person' under section 166 of the Financial Services and Markets Act and, for FRB purposes, an 'Independent Consultant') to produce periodic assessments of the Group's AML and sanctions compliance programme (the 'Skilled Person/Independent Consultant'). In December 2012, HSBC Holdings plc also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions. Reflective of HSBC's significant progress in strengthening its financial crime risk management capabilities, HSBC's engagement with the current Skilled Person will be terminated and a new Skilled Person with a narrower mandate will be appointed to assess the remaining areas that require further work in order for HSBC to transition fully to business-as-usual financial crime risk management. The Independent Consultant will continue to carry out an annual OFAC compliance review at the FRB's discretion.
Through the Skilled Person/Independent Consultant's prior reviews, as well as internal reviews conducted by HSBC, certain potential AML and sanctions compliance issues have been identified that HSBC is reviewing further with the FRB, FCA and/or OFAC. The Financial Crimes Enforcement Network of the US Treasury Department as well as the Civil Division of the US Attorney's Office for the Southern District of New York are investigating the collection and transmittal of third-party originator information in certain payments instructed over HSBC's proprietary payment systems. HSBC is cooperating with all of these investigations.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
Tax-related investigations
Various tax administration, regulatory and law enforcement authorities around the world have been conducting investigations and reviews of HSBC companies in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.
HSBC continues to cooperate with tax-related investigations by tax administration, regulatory or law enforcement authorities. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these ongoing matters, including the timing or any possible impact on HSBC.
Singapore Interbank Offered Rate ('Sibor'), Singapore Swap Offer Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW')
In July and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York District Court on behalf of persons who transacted in products related to the Sibor, SOR and BBSW benchmark rates. The complaints allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law.
In the Sibor/SOR litigation, following a decision on the defendants' motion to dismiss in October 2018, the claims against a number of HSBC entities were dismissed, and the Bank remained as the only HSBC defendant in this action. In October 2018, the Bank filed a motion for reconsideration of the decision based on the issue of personal jurisdiction; this motion was denied in April 2019. Also in October 2018, the plaintiffs filed a third amended complaint, naming only the Sibor panel members, including the Bank, as defendants; the court dismissed the third amended complaint in its entirety in July 2019 against all defendants. In August 2019, the plaintiffs filed an appeal to the Second Circuit Court of Appeals, which remains pending.
In the BBSW litigation, in November 2018, the court dismissed all foreign defendants, including all the HSBC entities, on personal jurisdiction grounds. In April 2019, the plaintiffs filed an amended complaint, which the defendants have moved to dismiss.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
United States Bankruptcy Court for the Southern District of New York litigation
In June 2018, a claim was issued against the Bank in the United States Bankruptcy Court for the Southern District of New York by the Chapter 11 Trustee of CFG Peru Investments Pte. Ltd. (Singapore) (the 'Trustee Complaint'). The Trustee Complaint makes allegations under the Peruvian Civil Code, Hong Kong and U.S. common law and the Bankruptcy Code concerning the Bank's alleged conduct in commencing the winding-up proceedings and pursuing the appointment of joint provisional liquidators for affiliates of CFG Peru Investments Pte. Ltd. The Trustee is seeking damages and equitable subordination or disallowance of the Bank's Chapter 11 claims in a related bankruptcy proceeding.
The Bank is seeking to dismiss the Trustee Complaint. Based on the facts currently known, it is not practicable at this time to predict the resolution of this matter, including the timing or any possible impact, which could be significant.
Foreign exchange rate investigations
In January 2018, HSBC Holdings plc entered into a three-year deferred prosecution agreement with the Criminal Division of the
US Department of Justice ('DoJ') (the 'FX DPA'), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. This concluded the DoJ's investigation into HSBC's historical foreign exchange activities. Under the terms of the FX DPA, HSBC has a number of ongoing obligations, including implementing enhancements to its internal controls and procedures in its Global Markets business, which will be the subject of annual reports to the DoJ. In addition, HSBC agreed to pay a financial penalty and restitution.
There are many factors that may affect the range of outcomes, and the resulting financial impact of this matter, which could be significant.
39 Ultimate holding company --- -------------------------
The ultimate holding company of the Bank is HSBC Holdings plc, which is incorporated in England.
The largest group in which the accounts of the Bank are consolidated is that headed by HSBC Holdings plc. The consolidated accounts of HSBC Holdings plc are available to the public on the HSBC Group's website at www.hsbc.com or may be obtained from 8 Canada Square, London E14 5HQ, United Kingdom.
40 Events after the balance sheet date --- ------------------------------------
The Directors of the Group approved a 2020 business update after 31 December 2019, setting out a plan that aims to reallocate capital to areas that can deliver stronger returns, to reduce costs across the Group, and to simplify the business. One change as part of this plan is a change to the global businesses that form the group's reportable segments as described in note 32. The existing Retail Banking & Wealth Management and Global Private Banking global businesses will be merged to create one new global business, Wealth and Personal Banking, which will become a reportable segment during 2020.
The ECL at 31 December 2019 was estimated based on a range of forecast economic conditions as at that date. Since early January 2020, the coronavirus outbreak has spread across mainland China and beyond, causing disruption to business and economic activity. The impact on GDP and other key indicators will be considered when determining the severity and likelihood of downside economic scenarios that will be used to estimate ECL under HKFRS 9 in 2020.
41 Approval of financial statements --- ---------------------------------
The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on 18 February 2020.
(c) The Hongkong and Shanghai Banking Corporation Limited 2020 Printed by Asia One Printing Limited, Hong Kong, on Nautilus SuperWhite board and paper using vegetable oil-based inks. Made in Austria, the paper comprises 100% de-inked post-consumer waste. Pulps used are totally chlorine-free. The FSC(TM) recycled label means that the materials used for this product come from recycled material certified in accordance with the rules of the Forest Stewardship Council(R).
The Hongkong and Shanghai Banking Corporation Limited
HSBC Main Building
1 Queen's Road Central, Hong Kong
Telephone: (852) 2822 1111
Facsimile: (852) 2810 1112
www.hsbc.com.hk
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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