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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 : 0008S
Hongkong & Shanghai Banking Corp Ld
12 March 2021
Consolidated Financial Statements Consolidated income statement
for the year ended 31 December
Hot Features
Premium
2020 2019
Notes HK$m HK$m
------------------------------------------------------- ----- -------- ----------
Net interest income 2a 111,513 130,903
------------------------------------------------------- ----- -------- --------
- interest income 147,376 191,322
------------------------------------------------------- -----
- interest expense (35,863) (60,419)
------------------------------------------------------- ----- -------- --------
Net fee income 2b 41,670 41,505
------------------------------------------------------- ----- -------- --------
- fee income 52,370 53,099
------------------------------------------------------- -----
- fee expense (10,700) (11,594)
------------------------------------------------------- ----- --------
Net income from financial instruments held for trading
or managed on a fair value basis 2c 32,172 36,388
------------------------------------------------------- ----- -------- --------
Net income from assets and liabilities of insurance
businesses, including related derivatives, measured
at fair value through profit or loss 2c 13,128 14,257
------------------------------------------------------- ----- -------- --------
Changes in fair value of designated debts issued and
related derivatives 2c (171) (305)
------------------------------------------------------- ----- -------- --------
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit
or loss 2c 138 118
------------------------------------------------------- ----- -------- --------
Gains less losses from financial investments 1,624 638
------------------------------------------------------- ----- -------- --------
Net insurance premium income 3 61,563 60,275
------------------------------------------------------- ----- -------- --------
Other operating income 2d 5,612 15,758
------------------------------------------------------- ----- -------- --------
Total operating income 267,249 299,537
------------------------------------------------------- ----- -------- --------
Net insurance claims and benefits paid and movement
in liabilities to policyholders 3 (77,911) (80,156)
------------------------------------------------------- ----- -------- --------
Net operating income before change in expected credit
losses and other credit impairment charges 189,338 219,381
------------------------------------------------------- ----- -------- --------
Change in expected credit losses and other credit
impairment charges 2e (17,719) (5,672)
------------------------------------------------------- ----- -------- --------
Net operating income 171,619 213,709
------------------------------------------------------- ----- -------- --------
Employee compensation and benefits 4 (36,183) (38,048)
------------------------------------------------------- ----- -------- --------
General and administrative expenses 2f (46,304) (44,769)
------------------------------------------------------- ----- -------- --------
Depreciation and impairment of property, plant and
equipment 2g (9,405) (8,230)
------------------------------------------------------- ----- -------- --------
Amortisation and impairment of intangible assets (3,936) (2,447)
------------------------------------------------------- ----- -------- --------
Total operating expenses (95,828) (93,494)
------------------------------------------------------- ----- -------- --------
Operating profit 75,791 120,215
------------------------------------------------------- ----- -------- --------
Share of profit in associates and joint ventures 14,405 16,218
------------------------------------------------------- ----- -------- --------
Profit before tax 90,196 136,433
------------------------------------------------------- ----- -------- --------
Tax expense 5 (14,505) (21,393)
------------------------------------------------------- ----- -------- --------
Profit for the year 75,691 115,040
------------------------------------------------------- ----- -------- --------
Attributable to:
------------------------------------------------------- ----- -------- ----------
* ordinary shareholders of the parent company 66,997 104,200
------------------------------------------------------- ----- -------- --------
* other equity holders 2,450 1,522
------------------------------------------------------- ----- -------- --------
* non-controlling interests 6,244 9,318
------------------------------------------------------- ----- -------- --------
Profit for the year 75,691 115,040
------------------------------------------------------- ----- -------- --------
Consolidated statement of comprehensive income
for the year ended 31 December
2020 2019
HK$m HK$m
------------------------------------------------------------- ------- ---------
Profit for the year 75,691 115,040
------------------------------------------------------------- ------- -------
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 2,238 1,674
------------------------------------------------------------- ------- -------
- fair value gains 4,642 2,782
-------------------------------------------------------------
- fair value gains transferred to the income statement (1,648) (606)
-------------------------------------------------------------
- expected credit losses recognised in the income statement 112 23
-------------------------------------------------------------
- income taxes (868) (525)
------------------------------------------------------------- ------- -------
Cash flow hedges 969 5
------------------------------------------------------------- ------- -------
- fair value gains/(losses) (4,393) 681
-------------------------------------------------------------
- fair value (gains)/losses reclassified to the income
statement 5,551 (673)
-------------------------------------------------------------
- income taxes (189) (3)
------------------------------------------------------------- ------- -------
Share of other comprehensive income/(expense) of associates
and joint ventures (726) 167
------------------------------------------------------------- ------- -------
Exchange differences 17,891 (3,606)
------------------------------------------------------------- ------- -------
Items that will not be reclassified subsequently to profit
or loss:
------------------------------------------------------------- ------- ---------
Property revaluation (5,774) 3,673
------------------------------------------------------------- ------- -------
- fair value gains/(losses) (6,914) 4,426
-------------------------------------------------------------
- income taxes 1,140 (753)
------------------------------------------------------------- ------- -------
Equity instruments designated at fair value through other
comprehensive income 1,647 2,854
------------------------------------------------------------- ------- -------
- fair value gains 1,654 2,859
-------------------------------------------------------------
- income taxes (7) (5)
------------------------------------------------------------- ------- ------- Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk 257 (2,060) ------------------------------------------------------------- ------- ------- - before income taxes 320 (2,467) ------------------------------------------------------------- - income taxes (63) 407 ------------------------------------------------------------- ------- ------- Remeasurement of defined benefit asset/liability (315) 192 ------------------------------------------------------------- ------- ------- - before income taxes (384) 245 ------------------------------------------------------------- - income taxes 69 (53) ------------------------------------------------------------- ------- ------- Other comprehensive income for the year, net of tax 16,187 2,899 ------------------------------------------------------------- ------- ------- Total comprehensive income for the year 91,878 117,939 ------------------------------------------------------------- ------- ------- Attributable to: ------------------------------------------------------------- ------- --------- - ordinary shareholders of the parent company 82,738 106,187 ------------------------------------------------------------- ------- ------- - other equity holders 2,450 1,522 ------------------------------------------------------------- ------- ------- - non-controlling interests 6,690 10,230 ------------------------------------------------------------- ------- ------- Total comprehensive income for the year 91,878 117,939 ------------------------------------------------------------- ------- ------- Consolidated balance sheet
at 31 December
2020 2019
Notes HK$m HK$m
------------------------------------------------------ ----- --------- -----------
Assets
------------------------------------------------------ ----- --------- -----------
Cash and balances at central banks 347,999 202,746
------------------------------------------------------ ----- --------- ---------
Items in the course of collection from other banks 21,943 21,140
------------------------------------------------------ ----- --------- ---------
Hong Kong Government certificates of indebtedness 313,404 298,944
------------------------------------------------------ ----- --------- ---------
Trading assets 7 600,414 622,761
------------------------------------------------------ ----- --------- ---------
Derivatives 8 422,945 280,642
------------------------------------------------------ ----- --------- ---------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 9 178,960 153,511
------------------------------------------------------ ----- --------- ---------
Reverse repurchase agreements - non-trading 520,344 422,333
------------------------------------------------------ ----- --------- ---------
Loans and advances to banks 403,884 328,905
------------------------------------------------------ ----- --------- ---------
Loans and advances to customers 10 3,668,681 3,720,875
------------------------------------------------------ ----- --------- ---------
Financial investments 11 2,175,432 1,900,298
------------------------------------------------------ ----- --------- ---------
Amounts due from Group companies 32 83,203 87,632
------------------------------------------------------ ----- --------- ---------
Interests in associates and joint ventures 14 168,754 151,917
------------------------------------------------------ ----- --------- ---------
Goodwill and intangible assets 15 89,968 81,643
------------------------------------------------------ ----- --------- ---------
Property, plant and equipment 16 128,537 137,930
------------------------------------------------------ ----- --------- ---------
Deferred tax assets 5 3,325 2,179
------------------------------------------------------ ----- --------- ---------
Prepayments, accrued income and other assets 17 288,610 248,258
------------------------------------------------------ ----- --------- ---------
Total assets 9,416,403 8,661,714
------------------------------------------------------ ----- --------- ---------
Liabilities
------------------------------------------------------ ----- --------- -----------
Hong Kong currency notes in circulation 313,404 298,944
------------------------------------------------------ ----- --------- ---------
Items in the course of transmission to other banks 25,699 25,576
------------------------------------------------------ ----- --------- ---------
Repurchase agreements - non-trading 136,157 106,396
------------------------------------------------------ ----- --------- ---------
Deposits by banks 248,628 179,819
------------------------------------------------------ ----- --------- ---------
Customer accounts 18 5,911,396 5,432,424
------------------------------------------------------ ----- --------- ---------
Trading liabilities 19 60,812 87,532
------------------------------------------------------ ----- --------- ---------
Derivatives 8 428,211 292,231
------------------------------------------------------ ----- --------- ---------
Financial liabilities designated at fair value 20 167,013 160,291
------------------------------------------------------ ----- --------- ---------
Debt securities in issue 21 79,419 106,933
------------------------------------------------------ ----- --------- ---------
Retirement benefit liabilities 4 2,701 2,595
------------------------------------------------------ ----- --------- ---------
Amounts due to Group companies 32 296,308 311,111
------------------------------------------------------ ----- --------- ---------
Accruals and deferred income, other liabilities and
provisions 22 215,987 203,252
------------------------------------------------------ ----- --------- ---------
Liabilities under insurance contracts 3 581,406 528,760
------------------------------------------------------ ----- --------- ---------
Current tax liabilities 2,669 12,614
------------------------------------------------------ ----- --------- ---------
Deferred tax liabilities 5 30,997 29,889
------------------------------------------------------ ----- --------- ---------
Subordinated liabilities 23 4,065 4,066
------------------------------------------------------ ----- --------- ---------
Total liabilities 8,504,872 7,782,433
------------------------------------------------------ ----- --------- ---------
Equity
------------------------------------------------------ ----- --------- -----------
Share capital 24 172,335 172,335
------------------------------------------------------ ----- --------- ---------
Other equity instruments 25 44,615 44,615
------------------------------------------------------ ----- --------- ---------
Other reserves 149,500 133,099
------------------------------------------------------ ----- --------- ---------
Retained earnings 478,903 464,629
------------------------------------------------------ ----- --------- ---------
Total shareholders' equity 845,353 814,678
------------------------------------------------------ ----- --------- ---------
Non-controlling interests 66,178 64,603
------------------------------------------------------ ----- --------- ---------
Total equity 911,531 879,281
------------------------------------------------------ ----- --------- ---------
Total liabilities and equity 9,416,403 8,661,714
------------------------------------------------------ ----- --------- ---------
Consolidated statement of cash flows
for the year ended 31 December
2020 2019
HK$m HK$m
---------------------------------------------------------------- --------- -----------
Profit before tax 90,196 136,433
---------------------------------------------------------------- --------- ---------
Adjustments for non-cash items:
---------------------------------------------------------------- --------- -----------
Depreciation and amortisation 13,341 10,677
---------------------------------------------------------------- --------- ---------
Net gain from investing activities (567) (790)
---------------------------------------------------------------- --------- ---------
Share of profits in associates and joint ventures (14,405) (16,218)
---------------------------------------------------------------- --------- ---------
Loss on disposal of subsidiaries, businesses, associates
and joint ventures 70 14
---------------------------------------------------------------- --------- ---------
Change in expected credit losses gross of recoveries and
other credit impairment charges 18,452 6,535
---------------------------------------------------------------- --------- ---------
Provisions 114 568
---------------------------------------------------------------- --------- ---------
Share-based payment expense 735 878
---------------------------------------------------------------- --------- ---------
Other non-cash items included in profit before tax (3,896) (16,869)
---------------------------------------------------------------- --------- ---------
Elimination of exchange differences (22,323) 4,819
---------------------------------------------------------------- --------- ---------
Changes in operating assets and liabilities
---------------------------------------------------------------- --------- -----------
Change in net trading securities and derivatives (10,696) (78,600)
---------------------------------------------------------------- --------- ---------
Change in loans and advances to banks and customers 11,959 (189,346)
---------------------------------------------------------------- --------- ---------
Change in reverse repurchase agreements - non-trading (60,741) (33,521)
---------------------------------------------------------------- --------- ---------
Change in financial assets designated and otherwise mandatorily
measured at fair value through profit or loss (25,449) (20,652)
---------------------------------------------------------------- --------- ---------
Change in other assets (119,373) 6,146
---------------------------------------------------------------- --------- ---------
Change in deposits by banks and customer accounts 547,781 239,913
---------------------------------------------------------------- --------- ---------
Change in repurchase agreements - non-trading 29,761 36,117
---------------------------------------------------------------- --------- ---------
Change in debt securities in issue (27,514) 48,697
---------------------------------------------------------------- --------- ---------
Change in financial liabilities designated at fair value 6,722 (852)
---------------------------------------------------------------- --------- ---------
Change in other liabilities 42,517 (28,243)
---------------------------------------------------------------- --------- ---------
Dividends received from associates 5,053 4,962
---------------------------------------------------------------- --------- ---------
Contributions paid to defined benefit plans (602) (391)
---------------------------------------------------------------- --------- ---------
Tax paid (25,466) (9,420)
---------------------------------------------------------------- --------- ---------
Net cash from operating activities 455,669 100,857
---------------------------------------------------------------- --------- ---------
Purchase of financial investments (875,648) (836,492)
---------------------------------------------------------------- --------- ---------
Proceeds from the sale and maturity of financial investments 823,410 762,125
---------------------------------------------------------------- --------- ---------
Purchase of property, plant and equipment (3,768) (3,334)
---------------------------------------------------------------- --------- ---------
Proceeds from sale of property, plant and equipment and
assets held for sale 72 1,828
---------------------------------------------------------------- --------- ---------
Proceeds from disposal of customer loan portfolios 6,284 2,057
---------------------------------------------------------------- --------- ---------
Net investment in intangible assets (7,331) (6,019)
---------------------------------------------------------------- --------- ---------
Net cash inflow on sale of subsidiaries 69 299
---------------------------------------------------------------- --------- ---------
Net cash from investing activities (56,912) (79,536)
---------------------------------------------------------------- --------- ---------
Issue of ordinary share capital and other equity instruments - 8,617
---------------------------------------------------------------- --------- ---------
Dividends paid to shareholders of the parent company and
non-controlling interests (59,121) (74,015)
---------------------------------------------------------------- --------- ---------
Net cash from financing activities (59,121) (65,398)
---------------------------------------------------------------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 339,636 (44,077)
---------------------------------------------------------------- --------- ---------
Cash and cash equivalents at 1 Jan(2) 677,664 721,609
---------------------------------------------------------------- --------- ---------
Exchange differences in respect of cash and cash equivalents 30,507 132
---------------------------------------------------------------- --------- ---------
Cash and cash equivalents at 31 Dec(3) 1,047,807 677,664
---------------------------------------------------------------- --------- ---------
Cash and cash equivalents comprise
---------------------------------------------------------------- --------- -----------
- cash and balances at central banks 347,999 202,746
---------------------------------------------------------------- --------- ---------
- items in the course of collection from other banks 21,943 21,140
---------------------------------------------------------------- --------- ---------
- loans and advances to banks of one month or less 286,356 217,879
---------------------------------------------------------------- --------- ---------
- net settlement accounts and cash collateral 43,570 18,706
---------------------------------------------------------------- --------- ---------
- reverse repurchase agreements with banks of one month
or less 186,599 155,587
---------------------------------------------------------------- --------- ---------
- treasury bills, other bills and certificates of deposit
less than three months 187,039 87,182
---------------------------------------------------------------- --------- ---------
- less: items in the course of transmission to other banks (25,699) (25,576)
---------------------------------------------------------------- --------- ---------
Cash and cash equivalents at 31 Dec(3) 1,047,807 677,664
---------------------------------------------------------------- --------- ---------
Interest received was HK$160,120m (2019: HK$195,528m), interest paid was HK$46,104m (2019: HK$62,557m) and dividends received were HK$3,946m (2019: HK$5,410m).
1 During 2019, the change in subordinated liabilities included amounts from repayment of HK$92,384m and re-issuance of HK$92,343m to Group companies with no cash movement. Changes in subordinated liabilities included non-cash changes from foreign exchange gain of HK$303m in 2020 (2019: exchange loss of HK$1,012m) and fair value gain after hedging of HK$8,261m (2019: HK$9,736m). There is no change in subordinated loan capital during 2020.
2 From the fourth quarter of 2019, settlement accounts with bank counterparties of one month or less are included on a net basis to align with Group's presentation. Comparatives have not been re-presented.
3 At 31 December 2020 HK$149,565m (2019: HK$110,076m) was not available for use by the group, of which HK$71,049m (2019:HK$66,943m) related to mandatory deposits at Central banks.
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves
---------------------------------------------------
Other Financial Cash Total
equity Property assets flow Foreign share- Non-
Share instru- Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital(1) ments earnings reserve reserve reserve reserve Other(2) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- ----------
At 1 Jan 2020 172,335 44,615 464,629 72,013 6,959 (104) (28,118) 82,349 814,678 64,603 879,281
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
Profit for the year - - 69,447 - - - - - 69,447 6,244 75,691
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
Other comprehensive
income/(expense)
(net of tax) - - (98) (5,286) 2,921 876 17,430 (102) 15,741 446 16,187
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
* debt instruments at fair value through other
comprehensive income - - - - 2,203 - - - 2,203 35 2,238
----------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - 1,299 - - - 1,299 348 1,647
----------------------------------------------------------
* cash flow hedges - - - - - 876 - - 876 93 969
==========================================================
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 257 - - - - - 257 - 257
==========================================================
* property revaluation - - - (5,286) - - - - (5,286) (488) (5,774)
----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (312) - - - - - (312) (3) (315)
----------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (43) - (581) - - (102) (726) - (726)
----------------------------------------------------------
* exchange differences - - - - - - 17,430 - 17,430 461 17,891
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
Total comprehensive
income/(expense)
for the year - - 69,349 (5,286) 2,921 876 17,430 (102) 85,188 6,690 91,878
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
Dividends paid(4) - - (54,268) - - - - - (54,268) (4,853) (59,121)
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
Movement in respect
of share-based payment
arrangements - - 120 - - - - 213 333 12 345
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
Transfers and other
movements(5) - - (927) (2,934) 3 - - 3,280 (578) (274) (852)
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
At 31 Dec 2020 172,335 44,615 478,903 63,793 9,883 772 (10,688) 85,740 845,353 66,178 911,531
---------------------------------------------------------- ---------- ------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
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(1) instruments earnings reserve reserve reserve reserve Other(2) 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(3) - 44,615 - - - - - - 44,615 - 44,615
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
Other equity instruments
repaid(3) - (35,879) - - - - - - (35,879) - (35,879)
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
Dividends paid(4) - - (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(5) - - (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
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- -------- ----------- --------
1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous years.
2 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.
3 In 2019, there were US$1,100m additional tier 1 capital instruments issued. In addition, US$4,600m of additional tier 1 capital instruments were repaid and reissued in 2019 with no actual cash movement.
4 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
5 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.
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. 'Interest Rate Benchmark Reform - Phase 2' which amends HKFRS 9, HKAS 39 'Financial Instruments', HKFRS 7 'Financial Instruments,' HKFRS 4 'Insurance Contracts and HKFRS 16 'Leases' has been early adopted as set out below. 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 2020
Interest Rate Benchmark Reform - Phase 2
Interest Rate Benchmark Reform Phase 2: Amendments to HKFRS 9, HKAS 39, HKFRS 7, HKFRS 4 and HKFRS 16 issued in October 2020 represents the second phase of the project on the effects of interest rate benchmark reform, addressing issues affecting financial statements when changes are made to contractual cash flows and hedging relationships as a result of the reform.
Under these amendments, changes made to a financial instrument measured at other than fair value through profit or loss that are economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change in the interest rate benchmark. In addition, hedge accounting will not be discontinued solely because of the replacement of the interest rate benchmark if the hedge meets other hedge accounting criteria.
These amendments apply from 1 January 2021 with early adoption permitted. The group has adopted the amendments from 1 January 2020 and has made the additional disclosures as required by the amendments.
Other changes
In addition, the group has adopted a number of interpretations and amendments to standards, which have had an insignificant effect on the consolidated financial statements of the group.
(b) Future accounting developments
Minor amendments to HKFRSs
The HKICPA has not published any minor amendments effective from 1 January 2021 that are applicable to the group. However, the HKICPA has published a number of minor amendments to HKFRSs which are effective from 1 January 2022 and 1 January 2023. The group expects they will have an insignificant effect, when adopted, on the Consolidated Financial Statements.
New HKFRSs
HKFRS 17 'Insurance Contracts'
HKFRS 17 'Insurance Contracts' was issued in January 2018, with amendments to the standard issued in October 2020. The standard sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. Following the amendments, HKFRS 17 is effective from 1 January 2023. The group is in the process of implementing HKFRS 17. Industry practice and interpretation of the standard are still developing. Therefore, the likely numerical impact of its implementation remains uncertain. However, we have the following expectations as to the impact compared with the group's current accounting policy for insurance contracts, which is set out in Note 1.2(j) below:
-- Under HKFRS 17, there will be no PVIF asset recognised; rather the estimated future profit will be included in the measurement of the Insurance contract liability as the contractual service margin ('CSM') and gradually recognised in revenue as services are provided over the duration of the insurance contract. The PVIF asset will be eliminated to equity on transition, together with other adjustments to assets and liabilities to reflect HKFRS 17 measurement requirements and any consequential amendments to financial assets in the scope of HKFRS 9;
-- HKFRS 17 requires increased use of current market values in the measurement of insurance liabilities. Depending on the measurement model, changes in market conditions for certain products (measured under the General Measurement Approach) are immediately recognised in the income statement, whilst for other products (measured under the Variable Fee Approach), they will be included in the measurement of CSM;
-- In accordance with HKFRS 17, directly attributable costs will be included in the results of insurance services as profit is recognised over the duration of insurance contracts and costs that are not directly attributable will remain in operating expenses. This will result in a reduction in operating expenses compared to the current accounting policy.
(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 ('OCI') 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 rate of exchange at the balance sheet date, while their results are translated into Hong Kong dollars at the average rates of exchange for the reporting period. Exchange differences arising are recognised in OCI. On disposal of a foreign operation, exchange differences previously recognised in OCI 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 10 as specified as 'Audited'.
-- Disclosures on 'Financial instruments impacted by IBOR reform' are included in the 'Top and Emerging Risks' section on pages 20 to 21 as specified as 'Audited'.
-- Disclosures concerning the nature and extent of risks relating to banking and insurance activities are included in the 'Risk' section on pages 25 to 55 and pages 59 to 63 as specified as 'Audited'.
-- Capital disclosures are included in the 'Treasury Risk' section on pages 49 to 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 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. 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 Statements are prepared on a going concern basis, as the Directors are satisfied that the group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the increasing uncertainty that the global Covid-19 outbreak has had on the group's operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity.
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 once a year, 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 is 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 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 are 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.
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(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 an 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.
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* 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 33.
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).
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(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 OCI until the assets are sold. Upon disposal, the cumulative gains or losses in OCI 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 the income statement.
(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 the income statement. Dividend income is recognised in the income statement.
(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 OCI 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 that 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 through profit or loss. 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 not part of fair value designated relationships, if 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 uses these derivatives or, where allowed, other non-derivative hedging instruments in 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 and 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 OCI and 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 OCI are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in OCI 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 OCI 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 other than renegotiated loans
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. Mandatory and general offer loan modifications that are not borrower-specific, for example market-wide customer relief programmes, have not been classified as renegotiated loans and generally have not resulted in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy.
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, which are 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 27.
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 is 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 income statement 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
ECL 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 pages 33 to 37.
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:
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* defining what is considered to be a significant * The sections marked as audited on pages 33 to 37,
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 models
,
which support the calculations, including making
reasonable and supportable judgements about how
models react to current and future economic
conditions; and
* selecting model inputs and economic forecasts,
including determining whether sufficient and
appropriately weighted economic forecasts are
incorporated to calculate unbiased expected loss.
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(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.
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 OCI, 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.
Liabilities under insurance contracts and Present value of in-force long-term insurance business
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.
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 and insurance contract liabilities are 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 and Insurance contract liabilities are
written at the balance sheet date. It is determined reflected in the income statement. More information
by discounting those expected future profits using is included in Note 15 for PVIF and Note 3 for
appropriate assumptions in assessing factors such as Liabilities under insurance contracts.
future mortality, lapse rates and levels of expenses,
and a risk discount rate that reflects the risk
premium attributable to the respective contracts. The * The sections marked as audited on pages 59 to 63,
PVIF incorporates allowances for both non-market risk 'Insurance manufacturing operations risk management'
and the value of financial options and guarantees. provide an indication of the sensitivity of the
result to the application of different weightings
being applied to different economic and non-economic
* Insurance contract liabilities are set in accordance assumptions.
with local actuarial principles in each market,
aligned with local regulatory measurement frameworks.
Core judgements made in applying these frameworks
include demographic and behavioural assumptions,
expense assumptions and investment return
assumptions.
=========================================================== ===========================================================
(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 OCI. 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 OCI 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.
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.
(o) Impairment of non-financial assets
Software under development is tested for impairment at least annually. Other non-financial assets such as property, plant and equipment, intangible assets (excluding goodwill) and right-of-use assets are tested for impairment at the individual asset level when there is indication of impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition, impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be the principal operating legal entities and branches divided by global business.
Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying value of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs.
When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. This impairment is not allocated to financial assets within a CGU.
Impairment loss recognised in prior periods for non-financial assets is reversed when there has been a change in the estimate used to determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior periods.
2 Operating profit
----------------
(a) Net interest income
Net interest income includes:
2020 2019
HK$m HK$m
-------------------------------------------------------------- -------- ----------
Interest income recognised on impaired financial assets 220 309
-------------------------------------------------------------- -------- --------
Interest income recognised on financial assets measured
at amortised cost 127,178 160,387
-------------------------------------------------------------- -------- --------
Interest income recognised on financial assets measured
at FVOCI 20,167 30,974
-------------------------------------------------------------- -------- --------
Interest expense on financial instruments, excluding interest
on financial liabilities held for trading or designated
or otherwise mandatorily measured at fair value (33,135) (56,493)
-------------------------------------------------------------- -------- --------
(b) Net fee income
Net fee income by global business(1)
--------- ---------- -------- ---------- ----------
Wealth Global
and Banking
Personal Commercial and Corporate
Banking Banking Markets Centre(2) Total
HK$m HK$m HK$m HK$m HK$m
------------------------------------- --------- ---------- -------- ---------- ----------
Account services 864 864 367 3 2,098
------------------------------------- --------- ---------- -------- ---------- --------
Funds under management 5,071 677 1,796 - 7,544
------------------------------------- --------- ---------- -------- ---------- --------
Cards 5,564 1,291 83 1 6,939
------------------------------------- --------- ---------- -------- ---------- --------
Credit facilities 349 1,347 1,175 - 2,871
------------------------------------- --------- ---------- -------- ---------- --------
Broking income 5,473 58 682 - 6,213
------------------------------------- --------- ---------- -------- ---------- --------
Imports/exports - 2,176 755 1 2,932
------------------------------------- --------- ---------- -------- ---------- --------
Unit trusts 5,991 142 1 - 6,134
------------------------------------- --------- ---------- -------- ---------- --------
Underwriting 1 1 1,521 (12) 1,511
------------------------------------- --------- ---------- -------- ---------- --------
Remittances 290 1,630 697 (18) 2,599
------------------------------------- --------- ---------- -------- ---------- --------
Global custody 942 53 2,998 - 3,993
------------------------------------- --------- ---------- -------- ---------- --------
Insurance agency commission 1,308 107 1 - 1,416
------------------------------------- --------- ---------- -------- ---------- --------
Other 2,312 2,363 5,566 (2,121) 8,120
------------------------------------- --------- ---------- -------- ---------- --------
Fee income 28,165 10,709 15,642 (2,146) 52,370
------------------------------------- --------- ---------- -------- ---------- --------
Fee expense (6,139) (1,607) (5,262) 2,308 (10,700)
------------------------------------- --------- ---------- -------- ---------- --------
Year ended 31 Dec 2020 22,026 9,102 10,380 162 41,670 ------------------------------------- --------- ---------- -------- ---------- -------- Account services 1,304 893 340 1 2,538 ---------------------------- ------- ------- ------- ------- -------- Funds under management 4,874 646 1,694 1 7,215 ---------------------------- ------- ------- ------- ------- -------- Cards 6,755 1,726 85 1 8,567 ---------------------------- ------- ------- ------- ------- -------- Credit facilities 232 1,693 1,367 1 3,293 ---------------------------- ------- ------- ------- ------- -------- Broking income 2,821 43 696 - 3,560 ---------------------------- ------- ------- ------- ------- -------- Imports/exports - 2,590 690 - 3,280 ---------------------------- ------- ------- ------- ------- -------- Unit trusts 6,992 158 - - 7,150 ---------------------------- ------- ------- ------- ------- -------- Underwriting 3 2 1,559 (9) 1,555 ---------------------------- ------- ------- ------- ------- -------- Remittances 287 1,945 665 (14) 2,883 ---------------------------- ------- ------- ------- ------- -------- Global custody 755 51 2,936 - 3,742 ---------------------------- ------- ------- ------- ------- -------- Insurance agency commission 1,602 131 2 - 1,735 ---------------------------- ------- ------- ------- ------- -------- Other 2,530 2,148 5,297 (2,394) 7,581 ---------------------------- ------- ------- ------- ------- -------- Fee income 28,155 12,026 15,331 (2,413) 53,099 ---------------------------- ------- ------- ------- ------- -------- Fee expense (6,682) (2,076) (5,366) 2,530 (11,594) ---------------------------- ------- ------- ------- ------- -------- Year ended 31 Dec 2019 21,473 9,950 9,965 117 41,505 ---------------------------- ------- ------- ------- ------- --------
1 Effective from 2020, the reportable segments have been changed to reflect the merging of Retail Banking and Wealth Management and Global Private Banking to form Wealth and Personal Banking ('WPB'), and the re-allocation of Balance Sheet Management from Corporate Centre to the global businesses. Comparatives have been re-presented to conform to the current year's presentation. Further details on the change in reportable segments are set out in note 31 'Segmental analysis' on the consolidated financial statements.
2 Includes inter-segment elimination.
Net fee income includes:
2020 2019
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) 9,373 11,400
------------------------------------------------------------ ------- -------
- fee income 13,850 16,324
------------------------------------------------------------
- fee expense (4,477) (4,924)
------------------------------------------------------------ ------- -------
Fee earned on trust and other fiduciary activities 9,745 9,234
------------------------------------------------------------ ------- -------
- fee income 11,012 10,421
------------------------------------------------------------ ------- -------
- fee expense (1,267) (1,187)
------------------------------------------------------------ ------- -------
(c) Net income from financial instruments measured at fair value through profit or loss
2020 2019
HK$m HK$m
----------------------------------------------------------- ------- ---------
Net income/(expense) arising on:
----------------------------------------------------------- ------- ---------
Net trading activities 35,141 42,813
----------------------------------------------------------- ------- -------
Other instruments managed on a fair value basis (2,969) (6,425)
----------------------------------------------------------- ------- -------
Net income from financial instruments held for trading
or managed on a fair value basis 32,172 36,388
----------------------------------------------------------- ------- -------
Financial assets held to meet liabilities under insurance
and investment contracts 15,873 16,245
----------------------------------------------------------- ------- -------
Liabilities to customers under investment contracts (2,745) (1,988)
----------------------------------------------------------- ------- -------
Net income from assets and liabilities of insurance
businesses, including related derivatives, measured
at fair value through profit or loss 13,128 14,257
----------------------------------------------------------- ------- -------
Change in fair value of designated debt issued and related
derivatives(1) (171) (305)
----------------------------------------------------------- ------- -------
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss 138 118
----------------------------------------------------------- ------- -------
Year ended 31 Dec 45,267 50,458
----------------------------------------------------------- ------- -------
1 Includes debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting mismatch.
(d) Other operating income
2020 2019
HK$m HK$m
------------------------------------------------------------ ----- --------
Movement in present value of in-force insurance business 3,840 12,546
------------------------------------------------------------ ----- ------
Gains/(losses) on investment properties (996) 154
------------------------------------------------------------ ----- ------
Losses on disposal of property, plant and equipment
and assets held for sale (61) (2)
------------------------------------------------------------ ----- ------
Losses on disposal of subsidiaries, associates and business
portfolios (70) (14)
------------------------------------------------------------ ----- ------
Rental income from investment properties 370 423
------------------------------------------------------------ ----- ------
Dividend income 165 161
------------------------------------------------------------ ----- ------
Other 2,364 2,490
------------------------------------------------------------ ----- ------
Year ended 31 Dec 5,612 15,758
------------------------------------------------------------ ----- ------
There was a loss on disposal of loans and receivables of HK$52m in the year (2019: loss of HK$3m). There were no gains or losses on disposal of financial liabilities measured at amortised cost in the year (2019: nil).
(e) Change in expected credit losses and other credit impairment charges
2020 2019
HK$m HK$m
----------------------------------------------- ------ -------
Loans and advances to banks and customers 16,509 5,420
----------------------------------------------- ------ -----
- new allowances net of allowance releases 17,242 6,283
-----------------------------------------------
- recoveries of amounts previously written off (733) (863)
----------------------------------------------- ------ -----
Loan commitments and guarantees 654 95
----------------------------------------------- ------ -----
Other financial assets 556 157
----------------------------------------------- ------ -----
Year ended 31 Dec 17,719 5,672
----------------------------------------------- ------ -----
Change in expected credit losses as a percentage of average gross customer advances was 0.44% for 2020 (2019: 0.15%).
(f) General and administrative expenses
2020 2019
HK$m HK$m
----------------------------------- ------ --------
Premises and equipment 2,804 3,246
----------------------------------- ------ ------
Marketing and advertising expenses 1,959 2,815
----------------------------------- ------ ------
Other administrative expenses(1) 41,541 38,708
----------------------------------- ------ ------
Year ended 31 Dec 46,304 44,769
----------------------------------- ------ ------
1 Include intercompany expenses. Further details are set out in Note 32.
Included in operating expenses were direct operating expenses of HK$31m (2019: HK$34m) 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$3m (2019: HK$2m).
(g) Depreciation and impairment of property, plant and equipment
2020 2019
HK$m HK$m
------------------------------------ ----- -------
Owned property, plant and equipment 6,059 5,620
------------------------------------ ----- -----
Other right-of-use assets 3,346 2,610
------------------------------------ ----- -----
Year ended 31 Dec 9,405 8,230
------------------------------------ ----- -----
(h) Auditors' remuneration
Auditors' remuneration amounted to HK$163m (2019: 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 61,979 1,693 63,672
---------------------------------------------------- ---------- ----------- --------
Reinsurers' share of gross insurance premium income (2,091) (18) (2,109)
---------------------------------------------------- ---------- ----------- --------
Year ended 31 Dec 2020 59,888 1,675 61,563
---------------------------------------------------- ---------- ----------- --------
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
---------------------------------------------------- ---------- ----------- --------
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 74,810 5,594 80,404
-------------------------------------------------- ---------- ----------- --------
- claims, benefits and surrenders paid 25,876 5,990 31,866
--------------------------------------------------
- movement in liabilities 48,934 (396) 48,538
-------------------------------------------------- ---------- ----------- --------
Reinsurers' share of claims and benefits paid and
movement in liabilities (2,459) (34) (2,493)
-------------------------------------------------- ---------- ----------- --------
- claims, benefits and surrenders paid (2,773) (50) (2,823)
--------------------------------------------------
- movement in liabilities 314 16 330
-------------------------------------------------- ---------- ----------- --------
Year ended 31 Dec 2020 72,351 5,560 77,911
-------------------------------------------------- ---------- ----------- --------
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
-------------------------------------------------- ---------- ----------- --------
Liabilities under insurance contracts
2020 2019
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 1 Jan 494,181 (26,247) 467,934 433,668 (17,758) 415,910
----------------------------------- -------- ----------- -------- -------- ----------- --------
Claims and benefits paid (25,876) 2,773 (23,103) (26,960) 2,658 (24,302)
----------------------------------- -------- ----------- -------- -------- ----------- --------
Increase/(decrease) in liabilities
to policyholders 74,810 (2,459) 72,351 84,921 (10,677) 74,244
----------------------------------- -------- ----------- -------- -------- ----------- --------
Exchange differences and other
movements(1) 3,943 572 4,515 2,552 (470) 2,082
----------------------------------- -------- ----------- -------- -------- ----------- --------
At 31 Dec 547,058 (25,361) 521,697 494,181 (26,247) 467,934
Unit-linked
----------------------------------- -------- ----------- -------- -------- ----------- ----------
At 1 Jan 34,579 (35) 34,544 34,921 (34) 34,887
----------------------------------- -------- ----------- -------- -------- ----------- --------
Claims and benefits paid (5,990) 50 (5,940) (6,095) 107 (5,988)
----------------------------------- -------- ----------- -------- -------- ----------- --------
Increase/(decrease) in liabilities
to policyholders 5,594 (34) 5,560 5,910 2 5,912
----------------------------------- -------- ----------- -------- -------- ----------- --------
Exchange differences and other
movements(1) 165 15 180 (157) (110) (267)
----------------------------------- -------- ----------- -------- -------- ----------- --------
At 31 Dec 34,348 (4) 34,344 34,579 (35) 34,544
Total liabilities to policyholders 581,406 (25,365) 556,041 528,760 (26,282) 502,478
----------------------------------- -------- ----------- -------- -------- ----------- --------
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
----------------------------------
2020 2019
HK$m HK$m
------------------------------------- ------ --------
Wages and salaries(1) 33,367 34,674
------------------------------------- ------ ------
Social security costs 893 1,264
------------------------------------- ------ ------
Post-employment benefits 1,923 2,110
------------------------------------- ------ ------
- defined contribution pension plans 1,528 1,516
-------------------------------------
- defined benefit pension plans 395 594
------------------------------------- ------ ------
Year ended 31 Dec 36,183 38,048
------------------------------------- ------ ------
1 'Wages and salaries' includes the effect of share-based payments arrangements of HK$694m (2019: HK$882m).
Post-employment benefit plans
The group operates a number of post-employment benefit plans for its employees. Some of these plans are defined benefit plans, of which the largest plan is The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (the 'Principal Plan').
The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and the discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Present
value of
Fair value defined Net defined
of benefit benefit
plan assets obligations liability
HK$m HK$m HK$m
--------------------------------------------------------- ------------ ------------ -------------
At 1 Jan 2020 10,302 (12,848) (2,546)
--------------------------------------------------------- ------------ ------------ -----------
Service cost - (318) (318)
--------------------------------------------------------- ------------ ------------ -----------
- current service cost - (492) (492)
---------------------------------------------------------
- past service cost and gains/(losses) from
settlements - 174 174
--------------------------------------------------------- ------------ ------------ -----------
Net interest income/(expense) on the net defined
benefit asset/(liability) 202 (263) (61)
--------------------------------------------------------- ------------ ------------ -----------
Re-measurement effects recognised in other comprehensive
income 446 (830) (384)
--------------------------------------------------------- ------------ ------------ -----------
- return on plan assets (excluding interest
income) 446 - 446
---------------------------------------------------------
- actuarial losses - (830) (830)
--------------------------------------------------------- ------------ ------------ -----------
Contributions by the group 602 - 602
--------------------------------------------------------- ------------ ------------ -----------
Benefits paid (1,097) 1,153 56
--------------------------------------------------------- ------------ ------------ -----------
Exchange differences and other movements (2) (34) (36)
--------------------------------------------------------- ------------ ------------ -----------
At 31 Dec 2020 10,453 (13,140) (2,687)
--------------------------------------------------------- ------------ ------------ -----------
Retirement benefit liabilities recognised on
the balance sheet (2,701)
--------------------------------------------------------- ------------ ------------ -----------
Retirement benefit assets recognised on the
balance sheet (within 'Prepayment, accrued income
and other assets') 14
--------------------------------------------------------- ------------ ------------ -----------
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
--------------------------------------------------------- ------- -------- -------
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 2020 At 31 Dec 2019
Quoted Quoted
market market
price price
in active Thereof in 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 10,453 10,453 219 10,302 10,302 177
----------------------------- ------ ---------- ------- ------ ---------- -------
- equities 1,547 1,547 - 1,354 1,354 -
-----------------------------
- bonds 5,562 5,562 - 6,034 6,034 -
-----------------------------
- alternative investments(1) 2,838 2,838 - 2,391 2,391
-----------------------------
- other(2) 506 506 219 523 523 177
----------------------------- ------ ---------- ------- ------ ---------- -------
1 Alternative investments included HK$1,722m previously reported under 'equities', and HK$669m reported under 'other'. Comparatives have been re-presented to conform to the current year's presentation.
2 Other mainly consists of cash and cash deposits.
The Principal Plan
In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme ('LSRBS'), the Principal Plan, covers employees of the group 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.
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
the group ServCo
Present Present
Fair value Fair value
value of Net value of Net
of defined defined of defined defined
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 2020 4,654 (5,252) (598) 4,445 (4,960) (515)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
Service cost - (182) (182) - (175) (175)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
- current service cost - (182) (182) - (175) (175)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
Net interest income/(expense) on the
net defined benefit
asset/(liability) 80 (89) (9) 76 (84) (8)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
Re-measurement effects recognised
in other comprehensive income 114 (325) (211) 110 (297) (187)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
- return on plan assets (excluding
interest income) 114 - 114 110 - 110
------------------------------------
- actuarial losses - (325) (325) - (297) (297)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
Contributions 183 - 183 174 - 174
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
Benefits paid (549) 549 - (484) 484 -
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
Exchange differences and other
movements 4 (31) (27) (33) 31 (2)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
At 31 Dec 2020 4,486 (5,330) (844) 4,288 (5,001) (713)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
Retirement benefit liabilities
recognised
on the balance sheet (844) (713)
------------------------------------ ------- ------------ ---------- ------- ------------ ----------
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 gains - (255) (255) - (168) (168)
-------------------------------------------------------- ------- ------- ------- ----- ------- -----
Contributions 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)
-------------------------------------------------------- ------- ------- ------- ----- ------- -----
1 Other movements in 2019 included the impact from transfer of employees from the group to ServCo.
The group expects to make HK$175m of contributions to the defined benefit scheme of the Principal Plan and ServCo expects to make HK$162m contributions to the defined benefit scheme of the Principal Plan during 2021. This is determined separately by the group and ServCo by reference to the actuarial funding valuation carried out by the Principal Plan's local actuary.
Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate for the five years thereafter, are as follows:
Benefits expected to be paid from the defined benefit scheme of the Principal
Plan(1)
2021 2022 2023 2024 2025 2025-2030
As reported by: HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------- ------- ------- ------ ------ ------ -------------
- The group 413 547 508 426 411 1,874
----------------------------------- ------- ------- ------ ------ ------ -----------
- ServCo 323 524 350 394 417 1,885
----------------------------------- ------- ------- ------ ------ ------ -----------
1 The duration of the defined benefit obligation is seven years for the Principal Plan under the disclosure assumptions adopted (2019: seven years).
Fair value of plan assets of the defined benefit scheme of the Principal
Plan by asset classes
At 31 Dec 2020 At 31 Dec 2019
Quoted Quoted
market market
price price
in active Thereof in active Thereof
Value market HSBC Value market HSBC
HK$m HK$m HK$m HK$m HK$m HK$m
---------------------------------------- ------- ---------- ------- ------ ---------- ---------
Fair value of plan
assets 8,775 8,775 124 9,099 9,099 66
---------------------------------------- ------- ---------- ------- ------ ---------- -------
- equities 2,448 2,448 - 2,228 2,228 -
----------------------------------------
- bonds 4,537 4,537 - 5,433 5,433 -
----------------------------------------
- alternative investments(1) 1,676 1,676 - 1,311 1,311
----------------------------------------
- other(2) 114 114 124 127 127 66
---------------------------------------- ------- ---------- ------- ------ ---------- -------
1 Alternative investments included HK$1,311m reported under 'other'. Comparatives have been re-presented to conform to the current year's presentation.
2 Other mainly consists of cash and cash deposits.
The Principal Plan's key actuarial financial assumptions
The group and ServCo determine 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 pay Mortality
rate increase table
% p.a. % p.a.
-------------------------------- --------- ------------------- -------------------------
2% p.a. for
2020 and
2021 and
At 31 Dec 2020 0.50 3% p.a. thereafter HKLT 2019(1)
-------------------------------- --------- ------------------- -------------------------
At 31 Dec 2019 1.75 3.00 HKLT 2018(2)
-------------------------------- --------- ------------------- -------------------------
1 HKLT 2019 - Hong Kong Life Tables 2019.
2 HKLT 2018 - Hong Kong Life Tables 2018.
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
-------------------- --------------------
2020 2019 2020 2019
HK$m HK$m HK$m HK$m
Discount rate - increase/decrease of 0.25% (180) (173) 185 178
------------------------------------------------- --------- --------- -------- --------
Pay - increase/decrease of 0.25% 182 183 (178) (178)
------------------------------------------------- --------- --------- -------- --------
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$106m (2019: HK$110m). This comprises fees of HK$26m (2019: HK$17m) and other emoluments of HK$80m (2019: HK$93m) there is nil contributions to pension schemes for 2020 (2019: 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. Comparatives for 'fees' and 'other emoluments' had been re-presented as HK$6m of fees paid to non-executive directors' were reported as 'other emoluments' in 2019.
DetailsonloanstodirectorsaresetoutinNote32. 5 Tax
The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2019: 16.5%) on the profits for the year assessable in Hong Kong. Overseas branches and subsidiaries have similarly provided for tax in the countries in which they operate at the appropriate rates of tax in force in 2020. Deferred taxation is provided for in accordance with the group's accounting policy in Note 1.2(m).
Tax expense
2020 2019
HK$m HK$m
------------------------------------------------------- ------ --------
Current tax 14,279 19,461
------------------------------------------------------- ------ ------
- Hong Kong taxation - on current year profit 7,316 11,058
-------------------------------------------------------
- Hong Kong taxation - adjustments in respect of prior
years (457) (7)
-------------------------------------------------------
- overseas taxation - on current year profit 7,668 8,813
-------------------------------------------------------
- overseas taxation - adjustments in respect of prior
years (248) (403)
------------------------------------------------------- ------ ------
Deferred tax 226 1,932
------------------------------------------------------- ------ ------
- origination and reversal of temporary differences (414) 1,975
-------------------------------------------------------
- effect of changes in tax rates 36 -
-------------------------------------------------------
- adjustments in respect of prior years 604 (43)
------------------------------------------------------- ------ ------
Year ended 31 Dec 14,505 21,393
------------------------------------------------------- ------ ------
Tax reconciliation
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the applicable tax rates in the countries concerned as follows:
Reconciliation between taxation charge and accounting profit at applicable
tax rates
2020 2019
HK$m HK$m
------------------------------------------------------------ -------- ---------
Profit before tax 90,196 136,433
------------------------------------------------------------ -------- -------
Notional tax on profit before tax, calculated at the
rates applicable to profits in the countries concerned 18,058 25,855
------------------------------------------------------------ -------- -------
Effects of profits in associates and joint ventures (2,523) (2,676)
------------------------------------------------------------ -------- -------
Non-taxable income and gains (3,291) (3,969)
------------------------------------------------------------ -------- -------
Local taxes and overseas withholding taxes 2,270 2,503
------------------------------------------------------------ -------- -------
Permanent disallowables 523 606
------------------------------------------------------------ -------- -------
Others (532) (926)
------------------------------------------------------------ -------- -------
Year ended 31 Dec 14,505 21,393
------------------------------------------------------------ -------- -------
Movements of deferred tax assets and liabilities
Impairment
Accelerated allowance
capital Insurance Expense on financial Revaluation
allowances business provisions instruments of properties Other Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
----------------- ----------- --------- ----------- ------------- -------------- ------- ----------
Assets 183 - 1,290 1,478 - 2,280 5,231
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
Liabilities (332) (10,140) - - (16,462) (6,007) (32,941)
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
At 1 Jan 2020 (149) (10,140) 1,290 1,478 (16,462) (3,727) (27,710)
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
Exchange and
other
adjustments 6 (19) 81 23 (52) 73 112
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
Charge/(credit)
to income
statement (113) (503) (63) 1,176 729 (1,452) (226)
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
Charge/(credit)
to other
comprehensive
income - - (14) (1) 1,140 (973) 152
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
At 31 Dec 2020 (256) (10,662) 1,294 2,676 (14,645) (6,079) (27,672)
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
Assets(1) 102 - 1,294 2,676 - 3,088 7,160
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
Liabilities(1) (358) (10,662) - - (14,645) (9,167) (34,832)
----------------- ----------- --------- ----------- ------------- -------------- ------- --------
Assets 111 - 1,419 1,314 - 1,870 4,714
------------------------ ----- -------- ----- ----- -------- ------- --------
Liabilities (583) (8,057) - - (13,673) (4,599) (26,912)
------------------------ ----- -------- ----- ----- -------- ------- --------
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)
------------------------ ----- -------- ----- ----- -------- ------- --------
1 After netting off balances within countries, the balances as disclosed in the Consolidated Financial Statements are as follows: deferred tax assets HK$3,325m (2019: HK$2,179m); and deferred tax liabilities HK$30,997m (2019: HK$29,889m).
The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$3,969m (2019: HK$3,497m). Of this amount, HK$1,917m (2019: HK$1,939m) has no expiry date and the remaining will expire within 10 years.
Deferred tax of HK$4,295m (2019: HK$3,197m) has been provided in respect of distributable reserves or post-acquisition reserves of associates that, on distribution or sale, would attract withholding tax.
Deferred tax is not recognised in respect of the group's investments in subsidiaries and branches where remittance or other realisation is not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise.
6 Dividends
---------
Dividends to shareholders of the parent company
2020 2019
HK$ per HK$m HK$ per HK$m
share share
------------------------------------------ ------- ------ ------- --------
Dividends paid on ordinary shares
------------------------------------------ ------- ------ ------- --------
In respect of previous year:
------------------------------------------ ------- ------ ------- --------
* fourth interim dividend 0.58 27,026 0.47 21,958
------------------------------------------ ------- ------ ------- ------
In respect of current year:
------------------------------------------ ------- ------ ------- --------
- first interim dividend paid 0.13 5,814 0.32 14,963
------------------------------------------ ------- ------ ------- ------
- second interim dividend paid 0.19 8,915 0.32 14,963
------------------------------------------ ------- ------ ------- ------
* third interim dividend paid 0.22 10,063 0.32 14,963
------------------------------------------ ------- ------ ------- ------
Total 1.12 51,818 1.43 66,847
------------------------------------------ ------- ------ ------- ------
Distributions on other equity instruments 2,450 1,522
------------------------------------------ ------- ------ ------- ------
Dividends to shareholders 54,268 68,369
------------------------------------------ ------- ------ ------- ------
The Directors have declared a fourth interim dividend in respect of the financial year ended 31 December 2020 of HK$0.47 per ordinary share (HK$21,665m) (2019: HK$0.58 per ordinary share (HK$27,026m)).
Total coupons on capital securities classified as equity
2020 2019
HK$m HK$m
------------------------------------------------------------ ----- -------
US$1,900m Floating rate perpetual subordinated loans
(interest rate at one year US dollar LIBOR plus 3.840%)(1) - 497
------------------------------------------------------------ ----- -----
US$1,400m Floating rate perpetual subordinated loans
(interest rate at three months US dollar LIBOR plus
3.510%)(1) - 373
------------------------------------------------------------ ----- -----
US$600m Floating rate perpetual subordinated loan (interest
rate at three months US dollar LIBOR plus 3.620%)(1) - 178
------------------------------------------------------------ ----- -----
US$700m Floating rate perpetual subordinated loan (interest
rate at three months US dollar LIBOR plus 4.980%)(1) - 214
------------------------------------------------------------ ----- -----
US$900m Fixed rate perpetual subordinated loan (interest
rate fixed at 6.510%)(2) 454 150
------------------------------------------------------------ ----- -----
US$900m Fixed rate perpetual subordinated loan (interest
rate fixed at 6.030%)(2) 420 110
------------------------------------------------------------ ----- -----
US$1,000m Fixed rate perpetual subordinated loan (interest
rate fixed at 6.090%)(2) 370 -
------------------------------------------------------------ ----- -----
US$1,200m Fixed rate perpetual subordinated loan (interest
rate fixed at 6.172%)(2) 445 -
------------------------------------------------------------ ----- -----
US$600m Fixed rate perpetual subordinated loan (interest
rate fixed at 5.910%)(2) 249 -
------------------------------------------------------------ ----- -----
US$1,100m Fixed rate perpetual subordinated loan (interest
rate fixed at 6.000%)(2) 512 -
------------------------------------------------------------ ----- -----
Total 2,450 1,522
------------------------------------------------------------ ----- -----
1 These subordinated loans were early repaid in the first half of 2019 and distributions were made on repayment.
2 These subordinated loans were issued in May and June 2019 and discretionary coupons are paid annually.
7 Trading assets
--------------
2020 2019
HK$m HK$m
---------------------------------- ------- ---------
Treasury and other eligible bills 113,668 131,967
---------------------------------- ------- -------
Debt securities 265,255 281,555
---------------------------------- ------- -------
Equity securities 166,385 177,463
---------------------------------- ------- -------
Other(1) 55,106 31,776
---------------------------------- ------- -------
At 31 Dec 600,414 622,761
---------------------------------- ------- -------
1 'Other' includes reverse repos, stock borrowing and other accounts with banks and customers.
8 Derivatives
----------------- ---------------------------------------------------------------------------------
Notional contract amounts and fair values of derivatives by product contract
type
Notional contract Fair value - Assets Fair value - Liabilities
amount
Trading Hedging Trading Hedging Total Trading Hedging Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------ ---------- ------- ------- ------- --------- --------- ------- ------------
Foreign Exchange 18,274,306 100,371 238,746 232 238,978 261,792 2,625 264,417
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
Interest rate 26,906,526 304,554 357,195 6,099 363,294 327,675 6,718 334,393
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
Equity 591,614 - 13,810 - 13,810 19,072 - 19,072
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
Credit 553,790 - 5,381 - 5,381 5,955 - 5,955
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
Commodity and
other 115,673 - 2,138 - 2,138 5,030 - 5,030
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
Gross total 46,441,909 404,925 617,270 6,331 623,601 619,524 9,343 628,867
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
Offset (200,656) (200,656)
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
At 31 Dec 2020 422,945 428,211
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
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
------------------ ---------- ------- ------- ------- --------- --------- ------- ----------
The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.
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 its overall costs 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
At 31 December 2020, HK$192,048m (2019: HK$252,443m) of the notional amounts of interest rate derivatives designated in hedge accounting relationships represent the extent of the risk exposure managed by the group that is directly affected by market-wide Ibors reform. The group has also designated hedge accounting relationships which involve cross currency swaps, although the amount is not significant.
Further details regarding the impact of the market-wide benchmarks reform is set out in the 'Top and emerging risks' section on pages 20 to 21 as specified as 'Audited'.
9 Financial assets designated and otherwise mandatorily measured at
fair value through profit or loss
-----------------------------------------------------------------
2020 2019
Mandatorily Mandatorily
Designated measured Designated measured
at fair at fair at fair at fair
value value Total value value Total
HK$m HK$m HK$m HK$m HK$m HK$m
---------------------------- ---------- ----------- ------- ---------- ----------- ---------
Treasury and other eligible
bills 94 200 294 - 234 234
---------------------------- ---------- ----------- ------- ---------- ----------- -------
Debt securities 14,400 8,455 22,855 13,350 6,733 20,083
---------------------------- ---------- ----------- ------- ---------- ----------- -------
Equity securities - 143,815 143,815 - 120,047 120,047
---------------------------- ---------- ----------- ------- ---------- ----------- -------
Other(1) - 11,996 11,996 - 13,147 13,147
---------------------------- ---------- ----------- ------- ---------- ----------- -------
At 31 Dec 14,494 164,466 178,960 13,350 140,161 153,511
---------------------------- ---------- ----------- ------- ---------- ----------- -------
1 'Other' primarily includes loans and advance to banks and customers.
10 Loans and advances to customers
-------------------------------
2020 2019
HK$m HK$m
-------------------------------------- --------- -----------
Gross loans and advances to customers 3,697,568 3,738,269
-------------------------------------- --------- ---------
Expected credit loss allowances (28,887) (17,394)
-------------------------------------- --------- ---------
At 31 Dec 3,668,681 3,720,875
-------------------------------------- --------- ---------
The following table provides an analysis of gross loans and advances to customers by industry sector based on the Statistical Classification of economic activities in the European Community ('NACE').
Analysis of gross loans and advances to customers
2020 2019
HK$m HK$m
-------------------------------- --------- -----------
Residential mortgages 1,097,760 1,027,087
-------------------------------- --------- ---------
Credit card advances 86,735 94,582
-------------------------------- --------- ---------
Other personal 267,852 281,087
-------------------------------- --------- ---------
Total personal 1,452,347 1,402,756
-------------------------------- --------- ---------
Real estate 638,560 666,380
-------------------------------- --------- ---------
Wholesale and retail trade 394,624 418,669
-------------------------------- --------- ---------
Manufacturing 379,853 418,822
-------------------------------- --------- ---------
Transportation and storage 97,204 86,912
-------------------------------- --------- ---------
Other 489,737 494,416
-------------------------------- --------- ---------
Total corporate and commercial 1,999,978 2,085,199
-------------------------------- --------- ---------
Non-bank financial institutions 245,243 250,314
-------------------------------- --------- ---------
At 31 Dec 3,697,568 3,738,269
-------------------------------- --------- ---------
By geography(1)
-------------------------------- --------- -----------
Hong Kong 2,357,375 2,399,867
-------------------------------- --------- ---------
Rest of Asia Pacific 1,340,193 1,338,402
-------------------------------- --------- ---------
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
2020 2019
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$m
-------------------------------- --------- -------- ------- --------- -------- ---------
Amounts receivable
-------------------------------- --------- -------- ------- --------- -------- ---------
- within one year 3,715 (811) 2,904 3,214 (639) 2,575
-------------------------------- --------- -------- ------- --------- -------- -------
- one to two years 3,439 (678) 2,761 2,955 (572) 2,383
-------------------------------- --------- -------- ------- --------- -------- -------
- two to three years 2,717 (554) 2,163 2,593 (529) 2,064
-------------------------------- --------- -------- ------- --------- -------- -------
- three to four years 2,135 (475) 1,660 2,204 (496) 1,708
-------------------------------- --------- -------- ------- --------- -------- -------
- four to five years 1,913 (415) 1,498 1,936 (464) 1,472
-------------------------------- --------- -------- ------- --------- -------- -------
- after five years 22,186 (3,014) 19,172 23,195 (3,567) 19,628
-------------------------------- --------- -------- ------- --------- -------- -------
36,105 (5,947) 30,158 36,097 (6,267) 29,830
-------------------------------- --------- -------- ------- --------- -------- -------
Expected credit loss allowances (392) (175)
-------------------------------- --------- -------- ------- --------- -------- -------
At 31 Dec 29,766 29,655
-------------------------------- --------- -------- ------- --------- -------- -------
11 Financial investments
---------------------
2020 2019
HK$m HK$m
----------------------------------------------------- --------- -----------
Financial investments measured at fair value through
other comprehensive income 1,700,406 1,465,998
----------------------------------------------------- --------- ---------
- treasury and other eligible bills 790,627 606,738
-----------------------------------------------------
- debt securities 899,193 850,623
-----------------------------------------------------
- equity securities 10,586 8,637
----------------------------------------------------- --------- ---------
Debt instruments measured at amortised cost 475,026 434,300
----------------------------------------------------- --------- ---------
- treasury and other eligible bills 4,443 5,049
-----------------------------------------------------
- debt securities 470,583 429,251
----------------------------------------------------- --------- ---------
At 31 Dec 2,175,432 1,900,298
----------------------------------------------------- --------- ---------
Equity instruments measured at fair value through other
comprehensive income
---------- -------------
2020 2019
Dividends Dividends
Fair value recognised Fair value recognised
Type of equity instruments HK$m HK$m HK$m HK$m
----------------------------------------------- ---------- ----------- ---------- -------------
Business facilitation 9,826 157 7,906 141
----------------------------------------------- ---------- ----------- ---------- -----------
Investments required by central institutions 413 3 376 7
----------------------------------------------- ---------- ----------- ---------- -----------
Others 347 6 355 5
----------------------------------------------- ---------- ----------- ---------- -----------
At 31 Dec 10,586 166 8,637 153
----------------------------------------------- ---------- ----------- ---------- -----------
12 Assets pledged, assets transferred and collateral received
----------------------------------------------------------
Assets pledged
Financial assets pledged to secure liabilities
2020 2019
HK$m HK$m
--------------------------------------------- ------- ---------
Treasury bills and other eligible securities 46,846 88,365
--------------------------------------------- ------- -------
Loans and advances to banks 1,830 228
--------------------------------------------- ------- -------
Loans and advances to customers 28,307 12,806
--------------------------------------------- ------- -------
Debt securities 76,913 76,019
--------------------------------------------- ------- -------
Equity securities 17,608 11,648
--------------------------------------------- ------- -------
Other 86,240 52,473
--------------------------------------------- ------- -------
Assets pledged at 31 Dec 257,744 241,539
--------------------------------------------- ------- -------
Amount of liabilities secured 210,185 208,436
--------------------------------------------- ------- -------
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 repurchase agreements, securities lending, derivative margining, and include assets pledged to cover short positions and to facilitate settlement processes with clearing houses as well as swaps of equity and debt securities. HSBC places both cash and non-cash collateral in relation to derivative transactions.
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$30,386m (2019: HK$63,194m).
Assets transferred
Transferred financial assets not qualifying for full derecognition and
associated financial liabilities
2020 2019
Carrying amount Carrying amount
of: of:
Transferred Associated Transferred Associated
assets liabilities assets liabilities
HK$m HK$m HK$m HK$m
-------------------------------------- ------------ ------------ ----------- --------------
Repurchase agreements 85,715 77,322 98,929 94,296
-------------------------------------- ------------ ------------ ----------- ------------
Securities lending agreements 18,946 35 15,270 114
-------------------------------------- ------------ ------------ ----------- ------------
104,661 77,357 114,199 94,410
-------------------------------------- ------------ ------------ ----------- ------------
The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to be recognised in full while a related liability, reflecting the group's obligation to repurchase the assets for a fixed price at a future date, is also recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral received is not recognised on the balance sheet. The group is unable to use, sell or pledge the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged assets.
Collateral received
Assets accepted as collateral relate primarily to standard securities borrowing, reverse repurchase agreements, swaps of securities and derivative margining. The group is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard securities borrowing, reverse repurchase agreements and derivative margining.
Fair value of collateral accepted as security for assets
2020 2019
HK$m HK$m
------------------------------------------------------- ------- ---------
Fair value of collateral permitted to sell or repledge
in the absence of default 709,091 556,634
------------------------------------------------------- ------- -------
Fair value of collateral actually sold or repledged 128,783 95,154
------------------------------------------------------- ------- -------
13 Investments in subsidiaries
---------------------------
Main subsidiaries of the Bank
The group's
interest in
issued share
capital/registered
Principal or charter
Place of incorporation 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
2020 2019
Hang Seng Bank Limited
-------------------------------------------------------- --------- -----------
Proportion of ownership interests and voting rights
held by non-controlling interests 37.86% 37.86%
-------------------------------------------------------- --------- -----------
HK$m HK$m
-------------------------------------------------------- --------- -----------
Profit attributable to non-controlling interests 6,300 9,386
-------------------------------------------------------- --------- ---------
Accumulated non-controlling interests of the subsidiary 64,975 63,363
-------------------------------------------------------- --------- ---------
Dividends paid to non-controlling interests 4,849 5,646
-------------------------------------------------------- --------- ---------
Summarised financial information (before intra-group
eliminations):
-------------------------------------------------------- --------- -----------
- total assets 1,759,787 1,676,721
-------------------------------------------------------- --------- ---------
- total liabilities 1,576,592 1,497,804
-------------------------------------------------------- --------- ---------
- net operating income before change in expected credit
losses and other credit impairment charges 35,433 43,549
-------------------------------------------------------- --------- ---------
- profit for the year 16,670 24,822
--------------------------------------------------------
- other comprehensive income for the year 1,079 2,376
-------------------------------------------------------- --------- ---------
- total comprehensive income for the year 17,749 27,198
-------------------------------------------------------- --------- ---------
14 Interests in associates and joint ventures
------------------------------------------
Associates
2020 2019
HK$m HK$m
-------------------- ------- ---------
Share of net assets 164,767 148,154
-------------------- ------- -------
Goodwill 4,011 3,787
-------------------- ------- -------
Impairment (24) (24)
-------------------- ------- -------
At 31 Dec 168,754 151,917
-------------------- ------- -------
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., Ltd 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$57,815m at 31 December 2020
(2019: HK$78,311m).
Bank of Communications Co., Ltd ('BoCom')
The group's investment in BoCom is classified as an associate. Significant influence in BoCom was established with consideration of all relevant factors, including representation on BoCom's Board of Directors and participation in a Resource and Experience Sharing agreement ('RES'). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom's financial and operating policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28 whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group's share of BoCom's net assets. An impairment test is required if there is any indication of impairment.
Impairment testing
At 31 December 2020, the fair value of the group's investment in BoCom had been below the carrying amount for approximately nine years. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment at 31 December 2020 as the recoverable amount as determined by a value-in-use ('VIU') calculation was higher than the carrying value.
At
------------------------------------------------
31 Dec 2020 31 Dec 2019
Carrying Fair Carrying Fair
VIU value value VIU value value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
------ ----- -------- ------ ----- -------- ------
BoCom 169.3 165.4 57.8 167.8 148.4 78.3
------ ----- -------- ------ ----- -------- ------
Compared with 31 December 2019, the extent to which the VIU exceeds the carrying value ('headroom') has decreased by HK$15.5bn. The reduction in headroom was principally due to the impact on the VIU from BoCom's actual performance, which was lower than earlier forecasts due to the impact of the Covid-19 outbreak and the disruption to global economic activity, downward revisions to management's best estimates of BoCom's future earnings in the short to medium term, and the net impact of revisions to certain long term assumptions. Both the VIU and the CV increased due to the impact of foreign exchange movements.
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 forecast of 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 into 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% (2019: 3%) for periods after 2024, which does not exceed forecast GDP growth in mainland China and is consistent with forecasts by external analysts.
-- Long-term asset growth rate: 3% (2019: 3%) for periods after 2024, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%.
-- Discount rate: 11.37% (2019: 11.24%) which is based on a Capital Asset Pricing Model ('CAPM') calculation for BoCom, using market data. Management also compares the rate derived from the CAPM with discount rates from external sources. The discount rate used is within the range of 10.3% to 15.0% (2019: 10.0% to 15.0%) indicated by external sources. The increased rate reflects the net impact of updates to certain components of CAPM due to elevated levels of risk arising from the impact of the Covid-19 outbreak and the disruption to global economic activity.
-- Expected credit losses as a percentage of customer advances ('ECLs'): ranges from 0.98% to 1.22% (2019: 0.95%) in the short to medium term, reflecting increases due to the Covid-19 outbreak and BoCom's actual results. For periods after 2024, the ratio is 0.88% (2019: 0.76%), which is slightly higher than BoCom's average ECLs in recent years. This ratio was increased to reflect trends in BoCom's actual results in recent years of increasing ECLs and of changes to BoCom's loan portfolio.
-- Risk-weighted assets as a percentage of total assets: ranges from 61% to 62% (2019: 61%) in the short to medium term, reflecting increases that may arise from higher ECLs in the short term, followed by reductions that may arise from a subsequent lowering of ECLs and a continuation of the trend of strong retail loan growth. For periods after 2024, the ratio is 61% (2019: 61%). These rates are similar to BoCom's actual results in recent years and are slightly below forecasts disclosed by external analysts.
-- Operating income growth rate: ranges from 3.5% to 6.7% (2019: 4.9% to 9.4%) in the short to medium term, and are lower than BoCom's actual results in recent years and the forecasts disclosed by external analysts, reflecting economic pressures from the Covid-19 outbreak, global trade tensions and industry developments in mainland China.
-- Cost-income ratio: ranges from 36.3% to 36.8% (2019: 37.1% to 38.8%) in the short to medium term. These ratios are similar to BoCom's actual results in recent years and slightly higher than forecasts disclosed by external analysts.
-- Effective tax rate ('ETR'): ranges from 7.8% to 16.5% (2019: 12.0% to 17.0%) in the short to medium term reflecting BoCom's actual results and an expected increase towards the long-term assumption through the forecast period. For periods after 2024, the rate is 16.8% (2019: 22.5%), which is higher than the recent historical average. This rate was reduced on expectations of a lower ETR in the long term, reflecting BoCom's actual results in recent years and forecast financial asset composition, and forecasts disclosed by external analysts.
-- Capital requirements: Capital adequacy ratio: 11.5% (2019: 11.5%) and Tier 1 capital adequacy ratio: 9.5% (2019: 9.5%), based on the minimum regulatory requirements.
The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:
* Long-term profit growth rate
* Decrease by 19 basis points
* Long-term asset growth rate
* Increase by 17 basis points
* Discount rate
* Increase by 22 basis points
* Expected credit losses as a percentage of customer
advances * Increase by 3 basis points
* Risk-weighted assets as a percentage of total assets * Increase by 115 basis points
* Operating income growth rate * Decrease by 24 basis points
* Cost-income ratio * Increase by 66 basis points
* Long-term effective tax rate * Increase by 183 basis points
* Capital requirements - capital adequacy ratio * Increase by 22 basis points
* Capital requirements - tier 1 capital adequacy ratio * Increase by 86 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 2020
------------------------------- --------------- ---------- --------- --------------- ---------- ---------
Long-term profit growth rate - - 169.3 -50 (10.0) 159.3
------------------------------- --------------- ------ ----- --------------- ------ -----
Long-term asset growth rate -50 11.0 180.3 - - 169.3
------------------------------- --------------- ------ ----- --------------- ------ -----
Discount rate -47 9.4 178.7 +53 (9.3) 160.0
------------------------------- --------------- ------ ----- --------------- ------ -----
2020 to 2020 to
2024: 96 2024: 122
Expected credit losses as
a percentage of customer 2025 onwards: 2025 onwards:
advances 76 17.7 187.0 95 (16.5) 152.8
------------------------------- --------------- ------ ----- --------------- ------ -----
Risk-weighted assets as a
percentage of total assets -40 0.4 169.7 +166 (6.7) 162.6
------------------------------- --------------- ------ ----- --------------- ------ -----
Operating income growth rate +2 0.9 170.2 -69 (11.8) 157.5
------------------------------- --------------- ------ ----- --------------- ------ -----
Cost-income ratio -149 9.9 179.2 +120 (9.6) 159.7
------------------------------- --------------- ------ ----- --------------- ------ -----
Long-term effective tax rate -316 6.9 176.2 +820 (17.7) 151.6
------------------------------- --------------- ------ ----- --------------- ------ -----
Capital requirements - capital
adequacy ratio - - 169.3 +297 (61.0) 108.3
------------------------------- --------------- ------ ----- --------------- ------ -----
Capital requirements - tier
1 capital adequacy ratio - - 169.3 +263 (41.5) 127.8
------------------------------- --------------- ------ ----- --------------- ------ -----
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 percentage of customer 2024 onwards: 2024 onwards:
advances 70 7.5 175.3 81 (9.4) 158.4
------------------------------- --------------- ------ ----- --------------- ------ -----
Risk-weighted assets as a
percentage of total assets -96 2.9 170.7 +12 (0.4) 167.4
------------------------------- --------------- ------ ----- --------------- ------ -----
Operating income growth rate +14 1.9 169.7 -102 (14.1) 153.7
------------------------------- --------------- ------ ----- --------------- ------ -----
Cost-income ratio -175 7.7 175.5 +95 (9.4) 158.4
------------------------------- --------------- ------ ----- --------------- ------ -----
Long-term effective tax rate -352 7.8 175.6 +250 (5.6) 162.2
------------------------------- --------------- ------ ----- --------------- ------ -----
Capital requirements - capital
adequacy ratio - - 167.8 +337 (64.1) 103.7
------------------------------- --------------- ------ ----- --------------- ------ -----
Capital requirements - tier
1 capital adequacy ratio - - 167.8 +322 (47.2) 120.6
------------------------------- --------------- ------ ----- --------------- ------ -----
Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is HK$140.9bn to HK$187.9bn (2019: HK$144.3bn to HK$177.2bn). The range is based on the favourable/unfavourable change in the earnings in the short to medium term, and long-term expected credit losses as a percentage of customer advances as set out in the table above. All other long-term assumptions, the discount rate and the basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU.
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2020, the group included the associate's results on the basis of financial statements made up for the 12 months to 30 September 2020, but taking into account the financial effect of significant transactions or events in the period from 1 October 2019 to 31 December 2020.
Selected balance sheet information of BoCom
---------- ------------
At 30 Sep
------------------------
2020 2019
HK$m HK$m
------------------------------------------------------------- ---------- ------------
Cash and balances at central banks 945,836 874,238
------------------------------------------------------------- ---------- ----------
Loans and advances to banks and other financial institutions 832,226 841,420
------------------------------------------------------------- ---------- ----------
Loans and advances to customers 6,751,280 5,689,981
------------------------------------------------------------- ---------- ----------
Other financial assets 3,941,375 3,394,004
------------------------------------------------------------- ---------- ----------
Other assets 349,120 315,310
------------------------------------------------------------- ---------- ----------
Total assets 12,819,837 11,114,953
------------------------------------------------------------- ---------- ----------
Deposits by banks and other financial institutions 2,122,220 2,262,654
------------------------------------------------------------- ---------- ----------
Customer accounts 7,852,322 6,765,782
------------------------------------------------------------- ---------- ----------
Other financial liabilities 1,605,846 1,026,377
------------------------------------------------------------- ---------- ----------
Other liabilities 241,177 179,723
------------------------------------------------------------- ---------- ----------
Total liabilities 11,821,565 10,234,536
------------------------------------------------------------- ---------- ----------
Total equity 998,272 880,417
------------------------------------------------------------- ---------- ----------
Reconciliation of BoCom's net assets to carrying amount in the group's
consolidated financial statements
At 30 Sep
---------------------
2020 2019
HK$m HK$m
------------------------------------------------------- --------- ----------
The group's share of ordinary shareholders' equity 161,433 144,727
------------------------------------------------------- --------- --------
Goodwill 3,912 3,687
------------------------------------------------------- --------- --------
Carrying amount 165,345 148,414
------------------------------------------------------- --------- --------
Selected income statement information of BoCom
For the 12 months
ended 30 Sep
---------------------
2020 2019
HK$m HK$m
------------------------------------------------------- --------- ----------
Net interest income 170,586 161,079
------------------------------------------------------- --------- --------
Net fee and commission income 49,624 50,233
------------------------------------------------------- --------- --------
Change in expected credit losses (75,220) (58,603)
------------------------------------------------------- --------- --------
Depreciation and amortisation (16,069) (15,152)
------------------------------------------------------- --------- --------
Tax expense (6,656) (12,822)
------------------------------------------------------- --------- --------
- profit for the year 79,585 87,556
-------------------------------------------------------
- other comprehensive income (5,965) 2,470
------------------------------------------------------- --------- --------
Total comprehensive income 73,620 90,026
------------------------------------------------------- --------- --------
Dividends received from BoCom 4,907 4,810
------------------------------------------------------- --------- --------
At 31 December 2020, the group's share of associates' contingent liabilities was HK$356,609m (2019: HK$305,291m).
15 Goodwill and intangible assets
------------------------------
Goodwill and intangible assets include goodwill arising on business combinations, the present value of in-force long-term insurance business, and other intangible assets.
2020 2019
HK$m HK$m
------------------------------------------------------- ------ --------
Goodwill 7,109 6,315
------------------------------------------------------- ------ ------
Present value of in-force long-term insurance business 65,052 61,075
------------------------------------------------------- ------ ------
Other intangible assets(1) 17,807 14,253
------------------------------------------------------- ------ ------
At 31 Dec 89,968 81,643
------------------------------------------------------- ------ ------
1 Included within other intangible assets is internally generated software with a net carrying value of HK$15,283m (2019: HK$11,851m). During the year, capitalisation of internally generated software was HK$7,241m (2019: HK$6,219m), amortisation charge was HK$3,233m (2019: HK$2,264m) and impairment charge was HK$603m (2019: HK$103m).
The present value of in-force long-term insurance business
When calculating the present value of in-force long term ('PVIF') insurance business, expected cash flows are projected after adjusting for a variety of assumptions made by each insurance operation to reflect local market conditions and management's judgement of future trends, and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology). Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.
Actuarial Control Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. All changes to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by the Actuarial Control Committee.
Movements in PVIF
2020 2019
HK$m HK$m
---------------------------------------------------------- ------- ---------
At 1 Jan 61,075 48,522
---------------------------------------------------------- ------- -------
Changes in PVIF of long-term insurance business 3,840 12,546
---------------------------------------------------------- ------- -------
- value of new business written during the year 5,360 8,779
----------------------------------------------------------
- expected return(1) (6,743) (5,531)
----------------------------------------------------------
- assumption changes and experience variances (see below) 5,268 9,386
----------------------------------------------------------
- other adjustments (45) (88)
---------------------------------------------------------- ------- -------
Exchange differences and other 137 7
---------------------------------------------------------- ------- -------
At 31 Dec 65,052 61,075
---------------------------------------------------------- ------- -------
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$1,022m (2019: HK$8,829m), directly offsetting interest rate-driven changes to the valuation of liabilities under insurance contracts.
-- HK$1,916m (2019: HK$282m), 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$2,330m (2019: HK$275m), driven by other assumptions changes and experience variances.
Key assumptions used in the computation of PVIF for the main life insurance operations
Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed market movements. The following are the key long-term assumptions used in the computation of PVIF for Hong Kong insurance entities, being the main life insurance operations:
2020 2019
% %
------------------------------------ ---- ----
Weighted average risk free rate 0.71 1.84
------------------------------------ ---- ----
Weighted average risk discount rate 4.96 5.44
------------------------------------ ---- ----
Expense inflation 3.00 3.00
------------------------------------ ---- ----
Sensitivity to changes in economic assumptions
The group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances for risks not reflected in the best-estimate cash flow modelling. Where the insurance operations provide options and guarantees to policyholders, the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit addition to the technical provisions required by regulators. See page 62 for further details of these guarantees and the impact of changes in economic assumptions on our insurance manufacturing subsidiaries.
Sensitivity to changes in non-economic assumptions
Policyholder liabilities and PVIF are determined by reference to non-economic assumptions, including mortality and/or morbidity, lapse rates and expense rates. See page 63 for further details on the impact of changes in non-economic assumptions on our insurance manufacturing operations.
16 Property, plant and equipment
-----------------------------
2020 2019
HK$m HK$m
--------------------------------------- ------- ---------
Owned property, plant and equipment(1) 118,747 128,603
--------------------------------------- ------- -------
Other right-of-use assets 9,790 9,327
--------------------------------------- ------- -------
At 31 Dec 128,537 137,930
--------------------------------------- ------- -------
1 Included leasehold land and buildings of HK$108,320m (2019: HK$119,264m) for which the right of use are considered sufficient to constitute control. They are therefore presented as owned assets.
Movement in owned property, plant and equipment
---------
2020 2019
Land Land
and Investment and Investment
buildings properties Equipment Total buildings properties Equipment Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------ --------- ---------- --------- ------- --------- ---------- --------- ---------
Cost or valuation
------------------ --------- ---------- --------- ------- --------- ---------- --------- ---------
At 31 Dec of prior
year 111,473 13,335 16,922 141,730 94,037 12,875 22,728 129,640
------------------ --------- ---------- --------- ------- --------- ---------- --------- -------
Impact on
transition
to HKFRS 16 - - - - 16,284 - - 16,284
------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- At 1 Jan 111,473 13,335 16,922 141,730 110,321 12,875 22,728 145,924 ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Exchange and other adjustments 453 31 365 849 (119) (12) (152) (283) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Additions 770 635 2,363 3,768 1,034 447 1,853 3,334 ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Disposals (12) - (4,384) (4,396) (2) - (903) (905) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Transfers(1) - - - - - - (6,604) (6,604) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Elimination of accumulated depreciation on revalued land and buildings (4,737) - - (4,737) (4,306) - - (4,306) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- (Deficit) / surplus on revaluation (6,914) (996) - (7,910) 4,426 154 - 4,580 ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Reclassifications (242) 162 - (80) 119 (129) - (10) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- At 31 Dec 100,791 13,167 15,266 129,224 111,473 13,335 16,922 141,730 Accumulated depreciation ------------------ --------- ---------- --------- ------- --------- ---------- --------- --------- At 1 Jan 84 - 13,043 13,127 73 - 17,487 17,560 ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Exchange and other adjustments 10 - 305 315 6 - (56) (50) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Charge for the year 4,734 - 1,325 6,059 4,312 - 1,308 5,620 ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Disposals (1) - (4,286) (4,287) (1) - (874) (875) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Transfers(1) - - - - - - (4,822) (4,822) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Elimination of accumulated depreciation on revalued land and buildings (4,737) - - (4,737) (4,306) - - (4,306) ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- At 31 Dec 90 - 10,387 10,477 84 - 13,043 13,127 ------------------ --------- ---------- --------- ------- --------- ---------- --------- ------- Net book value at 31 Dec 100,701 13,167 4,879 118,747 111,389 13,335 3,879 128,603 ------------------ --------- ---------- --------- ------- --------- ---------- --------- -------
1 In 2019, certain equipment was transferred to a fellow subsidiary as part of the Recovery and Resolution Plan. The balance represented the carrying value of this equipment 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:
2020 2019
HK$m HK$m
----------------------------------- ------ --------
Cost less accumulated depreciation 17,085 16,895
----------------------------------- ------ ------
Valuation of land and buildings and investment properties
The group's land and buildings and investment properties were revalued as at 31 December 2020. 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$7,189m (2019: HK$7,859m) in respect of properties which were valued using the depreciated replacement cost method.
Valuation of land and buildings and investment properties in Hong Kong, Macau and mainland China were largely carried out by Cushman & Wakefield Limited, who have recent experience in the location and type of properties and who are members of the Hong Kong Institute of Surveyors. This represents 92% by value of the group's properties subject to valuation. Other properties were valued by different independent professionally qualified valuers.
17 Prepayments, accrued income and other assets
--------------------------------------------
2020 2019
HK$m HK$m
----------------------------------------------------------- ------- ---------
Prepayments and accrued income 24,301 28,326
----------------------------------------------------------- ------- -------
Bullion 61,269 53,163
----------------------------------------------------------- ------- -------
Acceptances and endorsements 46,705 47,302
----------------------------------------------------------- ------- -------
Reinsurers' share of liabilities under insurance contracts
(Note 3) 25,365 26,282
----------------------------------------------------------- ------- -------
Current tax assets 2,783 1,521
----------------------------------------------------------- ------- -------
Settlement accounts 33,796 27,289
----------------------------------------------------------- ------- -------
Cash collateral and margin receivables 58,584 35,824
----------------------------------------------------------- ------- -------
Other assets 35,807 28,551
----------------------------------------------------------- ------- -------
At 31 Dec 288,610 248,258
----------------------------------------------------------- ------- -------
Prepayments, accrued income and other assets included HK$197,362m (2019: HK$165,497m) of financial assets, the majority of which were measured at amortised cost.
18 Customer accounts
-----------------
Customer accounts by country/territory
2020 2019
HK$m HK$m
------------------ ----------- ------------
Hong Kong 4,120,955 3,894,175
------------------ ----------- ----------
Mainland China 440,608 376,390
------------------ ----------- ----------
Singapore 427,537 378,303
------------------ ----------- ----------
Australia 227,072 180,637
------------------ ----------- ----------
India 156,615 116,330
------------------ ----------- ----------
Malaysia 124,036 113,907
------------------ ----------- ----------
Taiwan 124,375 114,250
------------------ ----------- ----------
Indonesia 40,304 36,861
------------------ ----------- ----------
Other 249,894 221,571
------------------ ----------- ----------
At 31 Dec 5,911,396 5,432,424
------------------ ----------- ----------
19 Trading liabilities
-------------------
2020 2019
HK$m HK$m
---------------------------------- ------ --------
Deposits by banks(1) 222 159
---------------------------------- ------ ------
Customer accounts(1) 835 1,150
---------------------------------- ------ ------
Net short positions in securities 59,755 86,223
---------------------------------- ------ ------
At 31 Dec 60,812 87,532
---------------------------------- ------ ------
1 'Deposits by banks' and 'Customer accounts' include repos, stock lending and other amounts.
20 Financial liabilities designated at fair value
----------------------------------------------
2020 2019
HK$m HK$m
---------------------------------------------------- ------- ---------
Deposits by banks and customer accounts 77,822 74,761
---------------------------------------------------- ------- -------
Debt securities in issue 49,673 48,506
---------------------------------------------------- ------- -------
Liabilities to customers under investment contracts 39,518 37,024
---------------------------------------------------- ------- -------
At 31 Dec 167,013 160,291
---------------------------------------------------- ------- -------
The carrying amount of financial liabilities designated at fair value was HK$735m higher than the contractual amount at maturity (2019: HK$1,216m higher). The cumulative loss in fair value attributable to changes in credit risk was HK$25m (2019: HK$6m).
21 Debt securities in issue
------------------------
2020 2019
HK$m HK$m
------------------------------------------------------- -------- ----------
Bonds and medium-term notes 94,894 90,365
------------------------------------------------------- -------- --------
Other debt securities in issue 34,198 65,074
------------------------------------------------------- -------- --------
Total debt securities in issue 129,092 155,439
------------------------------------------------------- -------- --------
Included within:
------------------------------------------------------- -------- ----------
- financial liabilities designated at fair value (Note
20) (49,673) (48,506)
------------------------------------------------------- -------- --------
At 31 Dec 79,419 106,933
------------------------------------------------------- -------- --------
22 Accruals and deferred income, other liabilities and provisions
--- --------------------------------------------------------------
2020 2019
HK$m HK$m
--------------------------------------------------- ------- ---------
Accruals and deferred income 21,588 25,600
--------------------------------------------------- ------- -------
Acceptances and endorsements 46,775 47,355
--------------------------------------------------- ------- -------
Settlement accounts 30,056 35,807
--------------------------------------------------- ------- -------
Cash collateral and margin payables 60,714 40,299
--------------------------------------------------- ------- -------
Share-based payment liability to HSBC Holdings plc 1,124 1,417
--------------------------------------------------- ------- -------
Lease liabilities 10,057 9,291
--------------------------------------------------- ------- -------
Other liabilities 43,881 41,687
--------------------------------------------------- ------- -------
Provisions for liabilities and charges 1,792 1,796
--------------------------------------------------- ------- -------
At 31 Dec 215,987 203,252
--------------------------------------------------- ------- -------
Accruals and deferred income, other liabilities and provisions included HK$207,899m (2019: HK$195,122m) of financial liabilities which were measured at amortised cost.
Movement in provisions
------------- ----- -------
Restructuring
costs Other Total
Provisions (excluding contractual commitments) HK$m HK$m HK$m
------------------------------------------------- ------------- ----- -------
At 31 Dec 2019 208 812 1,020
------------------------------------------------- ------------- ----- -----
Additions 222 296 518
------------------------------------------------- ------------- ----- -----
Amounts utilised (269) (356) (625)
------------------------------------------------- ------------- ----- -----
Unused amounts reversed (42) (361) (403)
------------------------------------------------- ------------- ----- -----
Exchange and other movements (3) 28 25
------------------------------------------------- ------------- ----- -----
At 31 Dec 2020 116 419 535
------------------------------------------------- ------------- ----- -----
Contractual commitments(1)
------------------------------------------------- ------------- ----- -------
At 31 Dec 2019 776
------------------------------------------------- ------------- ----- -----
Net change in expected credit loss provision and
other movements 481
------------------------------------------------- ------------- ----- -----
At 31 Dec 2020 1,257
------------------------------------------------- ------------- ----- -----
Total Provisions at 31 Dec 2020 1,792
------------------------------------------------- ------------- ----- -----
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 2018 776
------------------------------------------------- ----- ----- -----
Total Provisions at 31 Dec 2019 1,796
------------------------------------------------- ----- ----- -----
1 Contractual commitments include provisions for contingent liabilities measured under HKFRS 9 'Financial Instruments' in respect of financial guarantees and expected credit loss provisions in relation to off-balance sheet guarantees and commitments.
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.
2020 2019
HK$m HK$m
-------- ------------------------------------------------- ----- -------
US$400m Undated floating rate primary capital notes 3,101 3,114
-------- ------------------------------------------------- ----- -----
Fixed rate (5.050%) subordinated bonds due 2027,
MYR500m callable from 2022(1) 964 952
-------- ------------------------------------------------- ----- -----
At 31
Dec 4,065 4,066
----------------------------------------------------------- ----- -----
1 The interest rate on the MYR500m 5.05% callable subordinated bonds due 2027 will increase by 1% from November 2022.
24 Share capital
-------------
2020 2019
HK$m HK$m
-------------------------------- ------- ---------
Paid up share capital in HK$ 116,103 116,103
-------------------------------- ------- -------
Paid up share capital in US$(1) 56,232 56,232
-------------------------------- ------- -------
At 31 Dec 172,335 172,335
-------------------------------- ------- -------
Ordinary shares issued and fully paid
2020 2019
HK$m Number HK$m Number
---------- ------- -------------- ------- ----------------
At 31 Dec 172,335 46,440,991,798 172,335 46,440,991,798
---------- ------- -------------- ------- --------------
1 Paid up share capital in US$ 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 2020 (2019: 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.
25 Other equity instruments
------------------------
Other equity instruments comprise additional tier 1 capital instruments in issue which are accounted for as equity.
2020 2019
HK$m HK$m
----------------------------------------------------------- ------ --------
US$1,000m Fixed rate perpetual subordinated loan, callable
from Mar 2025(1) 7,834 7,834
----------------------------------------------------------- ------ ------
US$900m Fixed rate perpetual subordinated loan, callable
from Sep 2026(2) 7,063 7,063
----------------------------------------------------------- ------ ------
US$700m Fixed rate perpetual subordinated loan, callable
from Mar 2025(3) 5,467 5,467
----------------------------------------------------------- ------ ------
US$500m Fixed rate perpetual subordinated loan, callable
from Mar 2025(3) 3,905 3,905
----------------------------------------------------------- ------ ------
US$600m Fixed rate perpetual subordinated loan, callable
from May 2027(4) 4,685 4,685
----------------------------------------------------------- ------ ------
US$900m Fixed rate perpetual subordinated loan, callable
from Sep 2024(5) 7,044 7,044
----------------------------------------------------------- ------ ------
US$1,100m Fixed rate perpetual subordinated loan, callable
from Jun 2024(6) 8,617 8,617
----------------------------------------------------------- ------ ------
At 31 Dec 44,615 44,615
----------------------------------------------------------- ------ ------
1 Interest rate fixed at 6.090%.
2 Interest rate fixed at 6.510%.
3 Interest rate fixed at 6.172%.
4 Interest rate fixed at 5.910%.
5 Interest rate fixed at 6.030%.
6 Interest rate fixed at 6.000%.
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.
26 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
over over Due Due Due
Due 3 6 over over over
over months months 9 1 year 2 years
1 month but but months but but
Due but not not but not not
not not more more not more more
more more than than more than than Due
than than 6 9 than 2 5 over
1 month 3 months months months 1 year years 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 347,999 - - - - - - - 347,999
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Items in the
course
of collection
from
other banks 21,943 - - - - - - - 21,943
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Hong Kong
Government
certificates
of
indebtedness 313,404 - - - - - - - 313,404
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Trading assets 594,141 4,561 476 431 - 805 - - 600,414
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Derivatives 422,692 23 16 13 26 101 74 - 422,945
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through profit
or
loss 7,318 1,240 1,334 1,214 1,033 4,648 11,967 150,206 178,960
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Reverse
repurchase
agreements -
non-trading 372,199 113,000 19,150 2,869 1,000 4,143 7,983 - 520,344
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Loans and
advances
to banks 239,097 81,318 22,587 19,576 16,278 8,792 15,186 1,050 403,884
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Loans and
advances
to customers 641,990 313,288 277,385 180,152 159,612 411,350 693,898 991,006 3,668,681
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Financial
investments 248,651 488,129 251,982 75,127 127,736 218,219 330,863 434,725 2,175,432
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Amounts due
from Group
companies 72,856 3,741 464 2 - 3,814 2,326 - 83,203
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Accrued income
and
other
financial
assets 140,788 30,145 16,209 2,754 1,748 797 431 4,490 197,362
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Financial
assets at
31 Dec 2020 3,423,078 1,035,445 589,603 282,138 307,433 652,669 1,062,728 1,581,477 8,934,571
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Non-financial
assets - - - - - - - 481,832 481,832
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Total assets at
31
Dec 2020 3,423,078 1,035,445 589,603 282,138 307,433 652,669 1,062,728 2,063,309 9,416,403
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Financial
liabilities
--------------- --------- --------- ------- ------- ------- ------- --------- --------- -----------
Hong Kong
currency
notes in
circulation 313,404 - - - - - - - 313,404
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Items in the
course
of
transmission
to
other banks 25,699 - - - - - - - 25,699
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Repurchase
agreements
- non-trading 109,062 4,816 - 1,187 5,223 - 8,024 7,845 136,157
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Deposits by
banks 237,905 3,157 2,782 3,621 76 1,087 - - 248,628
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Customer
accounts 5,396,286 332,854 89,287 39,727 27,186 18,676 7,376 4 5,911,396
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Trading
liabilities 60,812 - - - - - - - 60,812
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Derivatives 421,829 1,566 1,207 176 404 1,281 1,436 312 428,211
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Financial
liabilities
designated at
fair
value 40,325 28,300 11,481 7,517 7,176 8,930 17,024 46,260 167,013
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Debt securities
in
issue 5,056 11,234 12,556 13,611 3,991 16,025 14,374 2,572 79,419
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Amounts due to
Group
companies 78,046 20,135 766 33 332 24,397 55,860 116,705 296,274
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Accruals and
other
financial
liabilities 128,880 37,418 20,038 3,326 4,565 4,516 5,357 3,799 207,899
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Subordinated
liabilities(1) - - - - - - - 4,065 4,065
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Total financial
liabilities
at 31 Dec 2020 6,817,304 439,480 138,117 69,198 48,953 74,912 109,451 181,562 7,878,977
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Non-financial
liabilities - - - - - - - 625,895 625,895
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
Total
liabilities
at 31 Dec 2020 6,817,304 439,480 138,117 69,198 48,953 74,912 109,451 807,457 8,504,872
--------------- --------- --------- ------- ------- ------- ------- --------- --------- ---------
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 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 --------------- --------- ------- ------- ------- ------- ------- --------- --------- --------- 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 --------------- --------- ------- ------- ------- ------- ------- --------- --------- ---------
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.
27 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 2020
--------------------------------- ---------- ---------- ----------- ----------- --------- ------------
Hong Kong currency notes in
circulation 313,404 - - - - 313,404
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Items in the course of
transmission
to other banks 25,699 - - - - 25,699
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Repurchase agreements -
non-trading 109,090 4,818 6,602 8,076 7,885 136,471
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Deposits by banks 238,153 3,263 6,630 1,238 - 249,284
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Customer accounts 5,397,993 333,682 158,267 28,007 16 5,917,965
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Trading liabilities 60,812 - - - - 60,812
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Derivatives 421,811 1,462 1,561 2,840 312 427,986
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Financial liabilities designated
at fair value 40,602 29,077 26,457 26,549 46,371 169,056
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Debt securities in issue 5,121 11,445 31,445 31,699 2,686 82,396
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Amounts due to Group companies 78,063 21,920 5,873 97,021 122,569 325,446
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Other financial liabilities 127,644 36,648 26,098 9,208 3,792 203,390
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Subordinated liabilities - 16 47 249 5,225 5,537
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
6,818,392 442,331 262,980 204,887 188,856 7,917,446
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Loan and other credit-related
commitments 2,815,447 - - 136 - 2,815,583
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Financial guarantees 39,923 - - - - 39,923
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
9,673,762 442,331 262,980 205,023 188,856 10,772,952
--------------------------------- ---------- ---------- ----------- ----------- --------- ----------
Proportion of cash flows payable
in period 90% 4% 2% 2% 2%
--------------------------------- ---------- ---------- ----------- ----------- --------- ------------
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%
--------------------------------- ---------- ---------- ----------- ----------- --------- ------------
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.
28 Contingent liabilities, contractual commitments and guarantees
--------------------------------------------------------------
2020 2019
HK$m HK$m
------------------------------------------------------- --------- -----------
Guarantees and contingent liabilities:
------------------------------------------------------- --------- -----------
- financial guarantees(1) 39,923 49,199
------------------------------------------------------- --------- ---------
- performance and other guarantees(2) 286,139 266,272
------------------------------------------------------- --------- ---------
- other contingent liabilities 3,644 3,299
------------------------------------------------------- --------- ---------
At 31 Dec 329,706 318,770
------------------------------------------------------- --------- ---------
Commitments(3) :
------------------------------------------------------- --------- -----------
- documentary credits and short-term trade-related
transactions 29,581 22,455
------------------------------------------------------- --------- ---------
- forward asset purchases and forward forward deposits
placed 38,246 30,268
------------------------------------------------------- --------- ---------
- undrawn formal standby facilities, credit lines and
other commitments to lend 2,747,756 2,697,609
------------------------------------------------------- --------- ---------
At 31 Dec 2,815,583 2,750,332
------------------------------------------------------- --------- ---------
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.
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$1,725,963m of commitments at 31 December 2020 (2019: HK$1,630,005m) 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 proportion of guarantees and commitments are 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 2020 included provisions made in relation to legal and regulatory matters as set out in
Note 37.
29 Other commitments
-----------------
Capital commitments
At 31 December 2020, capital commitments, mainly related to the commitment for purchase of premises, were HK$8,531m
(2019: HK$7,413m).
30 Offsetting of financial assets and financial liabilities
--------------------------------------------------------
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously ('the offset criteria').
The 'Amounts not set off in the balance sheet' include transactions where:
-- the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right to set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and
-- in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-cash collateral has been received/pledged.
For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains appropriate.
Offsetting of financial assets and financial liabilities
Amounts subject to enforceable netting
arrangements
---------------------------------------------------------------------------
Amounts not offset
in the
balance sheet
-------------------------------------------
Net
amounts Amounts
reported not subject
in the to enforceable Balance
Gross Amounts balance Financial Non-cash Cash Net netting sheet
amounts offset sheet instruments collateral collateral amount arrangements(1) total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- ---------
At 31 Dec 2020
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- ---------
Financial
assets(2)
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- ---------
Derivatives 583,241 (200,656) 382,585 (290,517) (11,009) (45,001) 36,058 40,360 422,945
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- -------
Reverse repos,
stock
borrowing and
similar
agreements
classified
as: 532,974 (19,276) 513,698 - (513,476) (166) 56 61,715 575,413
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- -------
- trading
assets 46,922 - 46,922 - (46,892) - 30 4,680 51,602
---------------
- non-trading
assets 486,052 (19,276) 466,776 - (466,584) (166) 26 57,035 523,811
1,116,215 (219,932) 896,283 (290,517) (524,485) (45,167) 36,114 102,075 998,358
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- -------
Financial
liabilities(3)
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- ---------
Derivatives 584,214 (200,656) 383,558 (290,517) (15,977) (47,483) 29,581 44,653 428,211
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- -------
Repos, stock
lending
and similar
agreements
classified as: 146,768 (19,276) 127,492 - (127,281) (21) 190 51,205 178,697
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- -------
- trading
liabilities 1,605 - 1,605 - (1,595) - 10 - 1,605
---------------
- non-trading
liabilities 145,163 (19,276) 125,887 - (125,686) (21) 180 51,205 177,092
730,982 (219,932) 511,050 (290,517) (143,258) (47,504) 29,771 95,858 606,908
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- -------
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
--------------- --------- --------- -------- ----------- ---------- ---------- ------ --------------- -------
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$79,027m (2019: HK$85,124m).
3 Amounts presented in the balance sheet included balances due to Group companies of HK$129,230m (2019: HK$133,693m).
31 Segmental analysis
------------------
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.
Change in reportable segments
Effective from 2020, we made the following realignments within our internal reporting to the CODM:
-- We simplified our matrix organisational structure by combining Global Private Banking and Retail Banking and Wealth Management to form Wealth and Personal Banking.
-- We reallocated our reporting of Balance Sheet Management from Corporate Centre to the global businesses.
Comparative data have been re-presented accordingly.
Our global businesses
The group provides a comprehensive range of banking and related financial services to our customers in our three global businesses. The products and services offered to customers are organised by these global businesses.
-- Wealth and Personal Banking ('WPB') provides a full range of retail banking and wealth products to our customers from personal banking to ultra high net worth individuals. Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services. We also provide wealth management services, including insurance and investment products, global asset management services, investment management and Private Wealth Solutions for customers with more sophisticated and international requirements.
-- Commercial Banking ('CMB') offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its customers access to products and services offered by other global businesses, such as Global Banking and Markets, which include foreign exchange products, raising capital on debt and equity markets and advisory services.
-- Global Banking and Markets ('GBM') provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.
Performance by global business is presented in the 'Financial Review' on page 10 as specified as 'Audited'.
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 2020
---------------------------------------------- --------- ------------- ------------- -----------
Total operating income 190,128 76,955 166 267,249
---------------------------------------------- --------- ------------- ------------- ---------
Profit before tax 57,937 32,259 - 90,196
---------------------------------------------- --------- ------------- ------------- ---------
At 31 Dec 2020
---------------------------------------------- --------- ------------- ------------- -----------
Total assets 6,636,693 3,487,821 (708,111) 9,416,403
---------------------------------------------- --------- ------------- ------------- ---------
Total liabilities 6,141,296 3,071,687 (708,111) 8,504,872
---------------------------------------------- --------- ------------- ------------- ---------
Credit commitments and contingent liabilities
(contract amounts) 1,727,502 1,417,787 - 3,145,289
---------------------------------------------- --------- ------------- ------------- ---------
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
---------------------------------------------- --------- ------------- ------------- ---------
Information by country/territory
Revenue(1) Non-current assets(2)
For the year ended At 31 Dec
31 Dec
-------------------- -------------------------
2020 2019 2020 2019
HK$m HK$m HK$m HK$m
--------------- --------- --------- ----------- ------------
Hong Kong 120,873 147,456 126,286 132,935
--------------- --------- --------- ----------- ----------
Mainland China 16,974 18,153 176,462 158,215
--------------- --------- --------- ----------- ----------
Australia 6,665 7,337 2,229 2,130
--------------- --------- --------- ----------- ----------
India 10,296 9,339 2,241 2,339
--------------- --------- --------- ----------- ----------
Indonesia 3,649 3,701 3,701 3,932
--------------- --------- --------- ----------- ----------
Malaysia 5,415 6,107 1,932 1,820
--------------- --------- --------- ----------- ----------
Singapore 9,924 10,776 3,040 2,820
--------------- --------- --------- ----------- ----------
Taiwan 2,932 3,064 2,687 2,802
--------------- --------- --------- ----------- ----------
Other 12,610 13,448 3,627 3,421
--------------- --------- --------- ----------- ----------
Total 189,338 219,381 322,205 310,414
--------------- --------- --------- ----------- ----------
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.
1
32 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).
For the year ended 31 December 2020, the group recognised a management charge of HK$14,846m (2019: HK$15,718m) for the services provided by HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the Group set up in Hong Kong as part of recovery and resolution planning to provide functional support services to the group. These costs are reported under 'General and administrative expenses', mainly in relation to the remuneration and other costs associated with employees and assets transferred to ServCo.
The group entered into transactions with its fellow subsidiaries in the normal course of business, including the acceptance and placement of interbank deposits, correspondent banking transactions and off-balance sheet transactions. The activities were on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.
The group shared the costs of certain IT projects with its fellow subsidiaries and also used certain processing services of fellow subsidiaries. The Bank also acted as agent for the distribution of retail investment funds for fellow subsidiaries and paid professional fees for services provided by fellow subsidiaries. These transactions and services are priced on an arm's length basis.
The aggregate amount of income and expenses arising from these transactions during the year and the balances of amounts due to and from the relevant parties at the year end were as follows:
2020 2019
Immediate Ultimate Immediate Ultimate
holding holding Fellow holding holding Fellow
company company subsidiaries company company subsidiaries
HK$m HK$m HK$m HK$m HK$m HK$m
---------------------------------- --------- -------- ------------- --------- -------- ---------------
Income and expenses for
the year
---------------------------------- --------- -------- ------------- --------- -------- ---------------
Interest income - 339 480 1 6 1,450
---------------------------------- --------- -------- ------------- --------- -------- -------------
Interest expense 6,489 - 39 3,678 3,967 2,022
---------------------------------- --------- -------- ------------- --------- -------- -------------
Fee income - - 2,744 - - 2,383
---------------------------------- --------- -------- ------------- --------- -------- -------------
Fee expense - - 1,272 - - 1,296
---------------------------------- --------- -------- ------------- --------- -------- -------------
Net income from financial
instruments held for
trading or managed on
a fair value basis - 2 18 - 2 152
---------------------------------- --------- -------- ------------- --------- -------- -------------
Other operating income - 787 916 - 976 773
---------------------------------- --------- -------- ------------- --------- -------- -------------
Other operating expenses(1) - 5,270 33,632 - 3,846 31,657
---------------------------------- --------- -------- ------------- --------- -------- -------------
At 31 Dec
---------------------------------- --------- -------- ------------- --------- -------- ---------------
Assets - 2,707 157,916 - 823 151,094
---------------------------------- --------- -------- ------------- --------- -------- -------------
- trading assets(2) - 14 159 - 67 1,989
----------------------------------
- derivative assets - 2,488 74,932 - 633 63,652
----------------------------------
- other assets(2.5) - 205 82,825 - 123 85,453
---------------------------------- --------- -------- ------------- --------- -------- -------------
Liabilities 198,211 3,676 182,145 189,690 1,290 187,550
---------------------------------- --------- -------- ------------- --------- -------- -------------
- trading liabilities(2) - 11 572 - - 622
----------------------------------
- financial liabilities
designated at fair value(2,3) 131,370 - 8 126,237 - 9
----------------------------------
- derivative liabilities - - 87,724 - - 67,419
----------------------------------
- other liabilities(2,5) 1,448 3,593 93,841 1,492 1,221 119,500
---------------------------------- - subordinated liabilities(2,4,5) 65,393 72 - 61,961 69 - ---------------------------------- --------- -------- ------------- --------- -------- ------------- Guarantees - - 19,907 - - 19,179 ---------------------------------- --------- -------- ------------- --------- -------- ------------- Commitments - - 2,189 - - 2,388 ---------------------------------- --------- -------- ------------- --------- -------- -------------
1 In 2020, payments of HK$137m (2019: HK$428m) were made for software costs which were capitalised as intangible assets in the balance sheet of the group.
2 These balances are presented under 'Amounts due from/to Group companies' in the consolidated balance sheet.
3 The balance at 31 December 2020 included subordinated liabilities of HK$131,370m to meet Total Loss Absorbing Capacity ('TLAC') requirements (2019 HK$126,237m). The carrying amount of financial liabilities designated at fair value was HK$12,518m higher than the contractual amount at maturity (2019: HK$7,482m). The cumulative loss in fair value attributable to changes in credit risk was HK$2,490m (2019: HK$2,313m). The balances are largely under Level 2.
4 The balance at 31 December 2020 included subordinated liabilities of HK$65,393m to meet TLAC requirements (2019: HK$61,961m).
5 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 2020 amounted to HK$3,609m and HK$1,124m respectively (2019: HK$3,396m and HK$1,417m respectively).
(c) Post-employment benefit plans
At 31 December 2020, HK$9.3bn (2019: HK$9.1bn) of the group's post-employment plan assets were under management by group companies, earning management fees of HK$59m in 2020 (2019: HK$22m). At 31 December 2020, the group's post-employment benefit plans had placed deposits of HK$641m (2019: HK$581m) with its banking subsidiaries, earning interest payable to the schemes of HK$0.2m (2019: HK$2.6m). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with third-party counterparties.
(d) Associates and joint ventures
The group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details of interests in associates and joint ventures are set out in Note 14.
The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful information to represent the amount of transactions and outstanding balances during the year.
Transactions and balances during the year with associates and joint ventures
2020 2019
Highest Highest
balance Balance balance Balance
during at during at
the year 31 December the year 31 December
HK$m HK$m HK$m HK$m
--------------------------------------------------- --------- ------------ --------- --------------
Amounts due from associates - unsubordinated 33,577 22,811 34,813 16,001
--------------------------------------------------- --------- ------------ --------- ------------
Amounts due to associates 42,377 17,263 19,602 4,016
--------------------------------------------------- --------- ------------ --------- ------------
Commitments 1 1 1 1
--------------------------------------------------- --------- ------------ --------- ------------
The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with third--party counterparties.
(e) Key Management Personnel
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Board of Directors and Group Managing Directors of HSBC Holdings plc.
Compensation of Key Management Personnel
2020 2019
HK$m HK$m
--------------------------------------- ---- ------
Salaries and other short-term benefits 315 336
--------------------------------------- ---- ----
Post employment benefits 9 9
--------------------------------------- ---- ----
Termination benefits 4 1
--------------------------------------- ---- ----
Share-based payments 103 104
--------------------------------------- ---- ----
Total 431 450
--------------------------------------- ---- ----
Transactions, arrangements and agreements involving Key Management Personnel
2020 2019
HK$m HK$m
----------------------------------------------------------- ---------- ----------
During the year
----------------------------------------------------------- ---------- ----------
Highest average assets(1) 100,834 48,944
----------------------------------------------------------- ---------- --------
Highest average liabilities(1) 71,488 47,211
----------------------------------------------------------- ---------- --------
Contribution to group's profit before tax 1,733 1,144
----------------------------------------------------------- ---------- --------
At the year end
----------------------------------------------------------- ---------- ----------
Guarantees(2) 12,452 8,052
----------------------------------------------------------- ---------- --------
Commitments(2) 16,701 5,235
----------------------------------------------------------- ---------- --------
1 The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during the year.
2 Comparatives have been re-presented to incorporate certain balances previously not included.
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 (2019: insignificant).
On 8 October 2019, the group 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
------------------ -----------------------
2020 2019 2020 2019
HK$m HK$m HK$m HK$m
---------------- -------- -------- ---------- -----------
By the Bank(1) 2,690 4,101 4,291 4,301
---------------- -------- -------- ---------- ---------
By subsidiaries 4 6 9 8
---------------- -------- -------- ---------- ---------
2,694 4,107 4,300 4,309
---------------- -------- -------- ---------- ---------
1 Comparatives have been re-presented to exclude certain balances previously included.
These amounts include principal and interest, and the maximum liability that may be incurred under guarantees.
33 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 GBM and Insurance. The group'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 relevant Valuation Committees, which consist of independent support functions. Within GBM and Insurance, these Committees are overseen by the Group's Valuation Committee Review Group and the Group Insurance Valuation and Impairment Committee respectively. These two Group Committees considers all material subjective valuations.
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 2020
--------------------------------- --------- ------- ------ ----------- ----------- -----------
Assets
--------------------------------- --------- ------- ------ ----------- ----------- -----------
Trading assets(1) 403,730 195,447 1,237 600,414 - 600,414
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Derivatives 2,140 342,357 1,028 345,525 77,420 422,945
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Financial assets designated
and otherwise mandatorily
measured at fair value
through profit or loss 97,590 31,836 49,534 178,960 - 178,960
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Financial investments 1,315,696 378,075 6,635 1,700,406 - 1,700,406
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Liabilities
--------------------------------- --------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 52,504 8,308 - 60,812 - 60,812
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Derivatives 2,015 334,934 3,538 340,487 87,724 428,211
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Financial liabilities designated
at fair value(1) - 146,529 20,484 167,013 - 167,013
--------------------------------- --------- ------- ------ ----------- ----------- ---------
At 31 Dec 2019
--------------------------------- --------- ------- ------ ----------- ----------- -----------
Assets
--------------------------------- --------- ------- ------ ----------- ----------- -----------
Trading assets(1) 426,072 196,132 557 622,761 - 622,761
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Derivatives 2,282 213,242 833 216,357 64,285 280,642
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Financial assets designated
and otherwise mandatorily
measured at fair value
through profit or loss 89,152 32,068 32,291 153,511 - 153,511
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Financial investments 1,096,572 363,804 5,622 1,465,998 - 1,465,998
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Liabilities
--------------------------------- --------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 78,111 9,421 - 87,532 - 87,532
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Derivatives 2,892 219,498 2,422 224,812 67,419 292,231
--------------------------------- --------- ------- ------ ----------- ----------- ---------
Financial liabilities designated
at fair value(1) - 139,720 20,571 160,291 - 160,291
--------------------------------- --------- ------- ------ ----------- ----------- ---------
1 Amounts with HSBC Group entities are not reflected here.
2 Derivatives balances with HSBC Group entities are largely under 'Level 2'.
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
Designated
and otherwise
mandatorily
measured Designated
Financial Trading at fair Trading at fair
investments assets value Derivatives liabilities value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
-------------- ------------ ------- ------------- ----------- ------------ ---------- -------------
At 31 Dec 2020
-------------- ------------ ------- ------------- ----------- ------------ ---------- -------------
Transfers from
Level
1 to Level 2 31,809 20,534 1,901 - 236 - -
-------------- ------------ ------- ------------- ----------- ------------ ---------- -----------
Transfers from
Level
2 to Level 1 37,387 26,796 1,860 5 191 - -
-------------- ------------ ------- ------------- ----------- ------------ ---------- -----------
At 31 Dec 2019
-------------- ------------ ------- ------------- ----------- ------------ ---------- -------------
Transfers from
Level
1 to Level 2 32,281 9,198 - - 131 - -
-------------- ------------ ------- ------------- ----------- ------------ ---------- -----------
Transfers from
Level
2 to Level 1 16,872 15,069 2,359 - 599 - -
-------------- ------------ ------- ------------- ----------- ------------ ---------- -----------
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each Group's 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 (2019: immaterial). The increase in Level 3 assets was mainly due to the purchase of private equity fund and other alternative investments of HK$16,715m (2019: HK$11,463m) 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.
34 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 2020
------------------------------------- --------- ------- ---------- ------------- -----------
Assets
------------------------------------- --------- ------- ---------- ------------- -----------
Reverse repurchase agreements -
non-trading 520,344 - 518,295 2,106 520,401
------------------------------------- --------- ------- ---------- ------------- ---------
Loans and advances to banks 403,884 - 393,953 10,374 404,327
------------------------------------- --------- ------- ---------- ------------- ---------
Loans and advances to customers 3,668,681 - 61,885 3,588,431 3,650,316
------------------------------------- --------- ------- ---------- ------------- ---------
Financial investments - at amortised
cost 475,025 81,912 450,962 2,012 534,886
------------------------------------- --------- ------- ---------- ------------- ---------
Liabilities
------------------------------------- --------- ------- ---------- ------------- -----------
Repurchase agreements - non-trading 136,157 - 136,157 - 136,157
------------------------------------- --------- ------- ---------- ------------- ---------
Deposits by banks 248,628 - 248,629 - 248,629
------------------------------------- --------- ------- ---------- ------------- ---------
Customer accounts 5,911,396 - 5,911,813 - 5,911,813
------------------------------------- --------- ------- ---------- ------------- ---------
Debt securities in issue 79,419 - 80,066 - 80,066
------------------------------------- --------- ------- ---------- ------------- ---------
Subordinated liabilities(1) 4,065 - 3,749 - 3,749
------------------------------------- --------- ------- ---------- ------------- ---------
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
------------------------------------- --------- ------- ---------- ------------- ---------
1 As at 31 December 2020, fair value of subordinated liabilities was reported under 'Level 2 - Observable inputs'. HK$2,999m of the balance was previously included under 'Level 3 - Significant unobservable input'. Comparatives have not been re-presented.
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.
35 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 52 62 104 25 243
----------------------------------------------------------- --------------- -------- -------- ------ -------
4-15 9 34 107 1 151
----------------------------------------------------------- --------------- -------- -------- ------ -------
15-39 - 18 56 - 74
----------------------------------------------------------- --------------- -------- -------- ------ -------
39-196 - 3 46 - 49
----------------------------------------------------------- --------------- -------- -------- ------ -------
196+ - 1 5 - 6
----------------------------------------------------------- --------------- -------- -------- ------ -------
Number of entities at 31 Dec 2020 61 118 318 26 523
----------------------------------------------------------- --------------- -------- -------- ------ -------
HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ----------------- ---------- ---------- -------- ---------
Total assets in relation to the
group's interests in the unconsolidated
structured entities 26,808 26,476 71,481 8,521 133,286
----------------------------------------------------------- --------------- -------- -------- ------ -------
- trading assets 204 1,653 - - 1,857
-----------------------------------------------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss - 24,823 71,481 - 96,304
-----------------------------------------------------------
- derivatives - - - - -
-----------------------------------------------------------
- loans and advances to customers 26,604 - - 8,218 34,822
-----------------------------------------------------------
- financial investments - - - - -
-----------------------------------------------------------
- other assets - - - 303 303
----------------------------------------------------------- --------------- -------- -------- ------ -------
Total liabilities in relation
to the group's interests in the
unconsolidated structured entities - - - 56 56
----------------------------------------------------------- =============== ======== ======== ====== =======
- derivatives - - - 56 56
----------------------------------------------------------- --------------- -------- -------- ------ -------
Other off balance sheet commitments 539 3,822 23,024 7,137 34,522
----------------------------------------------------------- --------------- -------- -------- ------ -------
The group's maximum exposure at
31 Dec 2020 27,347 30,298 94,505 15,602 167,752
----------------------------------------------------------- --------------- -------- -------- ------ -------
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 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
----------------------------------------------------------- --------------- -------- -------- ------ -------
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.
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 2020 and 2019 were not significant.
36 Bank balance sheet and statement of changes in equity
-----------------------------------------------------
Bank balance sheet at 31 December 2020
2020 2019
HK$m HK$m
--------------------------------------------------------------- --------- -----------
Assets
--------------------------------------------------------------- --------- -----------
Cash and balances at central banks 291,071 156,273
--------------------------------------------------------------- --------- ---------
Items in the course of collection from other banks 16,836 15,437
--------------------------------------------------------------- --------- ---------
Hong Kong Government certificates of indebtedness 313,404 298,944
--------------------------------------------------------------- --------- ---------
Trading assets 486,764 496,660
--------------------------------------------------------------- --------- ---------
Derivatives 396,126 267,018
--------------------------------------------------------------- --------- ---------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 5,945 7,087
--------------------------------------------------------------- --------- ---------
Reverse repurchase agreements - non-trading 299,876 235,823
--------------------------------------------------------------- --------- ---------
Loans and advances to banks 243,107 184,429
--------------------------------------------------------------- --------- ---------
Loans and advances to customers 1,928,622 2,024,194
--------------------------------------------------------------- --------- ---------
Financial investments 950,866 830,648
--------------------------------------------------------------- --------- ---------
Amounts due from Group companies 400,073 332,865
--------------------------------------------------------------- --------- ---------
Investments in subsidiaries 95,241 93,355
--------------------------------------------------------------- --------- ---------
Interests in associates and joint ventures 39,830 39,830
--------------------------------------------------------------- --------- ---------
Goodwill and intangible assets 14,009 11,242
--------------------------------------------------------------- --------- ---------
Property, plant and equipment 71,523 79,208
--------------------------------------------------------------- --------- ---------
Deferred tax assets 1,266 819
--------------------------------------------------------------- --------- ---------
Prepayments, accrued income and other assets 165,667 131,368
--------------------------------------------------------------- --------- ---------
Total assets 5,720,226 5,205,200
--------------------------------------------------------------- --------- ---------
Liabilities
--------------------------------------------------------------- --------- -----------
Hong Kong currency notes in circulation 313,404 298,944
--------------------------------------------------------------- --------- ---------
Items in the course of transmission to other banks 18,404 17,878
--------------------------------------------------------------- --------- ---------
Repurchase agreements - non-trading 73,606 61,793
--------------------------------------------------------------- --------- ---------
Deposits by banks 194,778 129,703
--------------------------------------------------------------- --------- ---------
Customer accounts 3,610,409 3,287,463
--------------------------------------------------------------- --------- ---------
Trading liabilities 29,039 49,399
--------------------------------------------------------------- --------- ---------
Derivatives 396,212 277,421
--------------------------------------------------------------- --------- ---------
Financial liabilities designated at fair value 41,507 44,748
--------------------------------------------------------------- --------- ---------
Debt securities in issue 29,452 53,584
--------------------------------------------------------------- --------- ---------
Retirement benefit liabilities 1,574 1,426
--------------------------------------------------------------- --------- ---------
Amounts due to Group companies 413,865 384,490
--------------------------------------------------------------- --------- ---------
Accruals and deferred income, other liabilities and provisions 121,091 110,893
--------------------------------------------------------------- --------- ---------
Current tax liabilities 616 7,556
--------------------------------------------------------------- --------- ---------
Deferred tax liabilities 9,192 9,199
--------------------------------------------------------------- --------- ---------
Subordinated liabilities 3,101 3,114
--------------------------------------------------------------- --------- ---------
Total liabilities 5,256,250 4,737,611
--------------------------------------------------------------- --------- ---------
Equity
--------------------------------------------------------------- --------- -----------
Share capital 172,335 172,335
--------------------------------------------------------------- --------- ---------
Other equity instruments 44,615 44,615
--------------------------------------------------------------- --------- ---------
Other reserves 25,726 27,101
--------------------------------------------------------------- --------- ---------
Retained earnings 221,300 223,538
--------------------------------------------------------------- --------- ---------
Total equity 463,976 467,589
--------------------------------------------------------------- --------- ---------
Total equity and liabilities 5,720,226 5,205,200
--------------------------------------------------------------- --------- ---------
Bank statement of changes in equity for the year ended 31 December 2020
Other reserves
---------------------------------------------------
Financial Cash
Other Property assets flow Foreign
Share equity Retained revaluation at FVOCI hedge exchange Total
capital(1) instruments earnings reserve reserve reserve reserve Other(2) equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 1 Jan 2020 172,335 44,615 223,538 40,976 3,504 (119) (13,327) (3,933) 467,589
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
Profit for the year - - 50,414 - - - - - 50,414
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
Other comprehensive
income/(expense) (net
of tax) - - 2 (4,255) 2,860 724 648 - (21)
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
* debt instruments at fair value through other
comprehensive income - - - - 2,149 - - - 2,149
----------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - 711 - - - 711
----------------------------------------------------------
- cash flow hedges - - - - - 724 - - 724
----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 306 - - - - - 306
----------------------------------------------------------
- property revaluation - - - (4,255) - - - - (4,255)
----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (304) - - - - - (304)
----------------------------------------------------------
- exchange differences - - - - - - 648 - 648
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
Total comprehensive
income/(expense) for
the year - - 50,416 (4,255) 2,860 724 648 - 50,393
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
Dividends paid(4) - - (54,268) - - - - - (54,268)
========================================================== ========== =========== ======== =========== ========= ======= ======== ======== ========
Movement in respect
of share-based payment
arrangements - - 103 - - - - 173 276
========================================================== ========== =========== ======== =========== ========= ======= ======== ======== ========
Transfers and other
movements(5) - - 1,511 (1,525) - - - - (14)
========================================================== ========== =========== ======== =========== ========= ======= ======== ======== ========
At 31 Dec 2020 172,335 44,615 221,300 35,196 6,364 605 (12,679) (3,760) 463,976
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
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(3) - 44,615 - - - - - - 44,615
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
Other equity instruments
repaid(3) - (35,879) - - - - - - (35,879)
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
Dividends paid(4) - - (68,369) - - - - - (68,369)
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
Movement in respect
of share-based payment
arrangements - - (30) - - - - 227 197
---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- -------- Transfers and other movements(5) - - 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 ---------------------------------------------------------- ---------- ----------- -------- ----------- --------- ------- -------- -------- --------
1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous years.
2 The other reserves mainly comprise 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.
3 In 2019, there were US$1,100m additional tier 1 capital instruments issued. In addition, US$4,600m of additional tier 1 capital instruments were repaid and reissued in 2019 with no actual cash movement.
4 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
5 The movements include transfers from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.
1
37 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 2020. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Anti-money laundering and sanctions-related matters
In December 2012, HSBC Holdings plc ('HSBC Holdings') entered into a number of agreements, including an undertaking with the UK Financial Services Authority (replaced with a Direction issued by the UK Financial Conduct Authority ('FCA') in 2013 and again in 2020) as well as 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 was, 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. In 2020, HSBC's engagement with the independent compliance monitor, acting in his roles as both Skilled Person and Independent Consultant, concluded. The role of FCA Skilled Person was assigned to a new individual in the second quarter of 2020. Separately, a new FRB Independent Consultant will be appointed pursuant to the cease-and-desist order.
Based on the facts currently known, it is not practicable at this time for the group to predict the resolution of these matters, including the timing or any possible impact on the group, which could be significant.
Singapore Interbank Offered Rate ('Sibor'), Singapore Swap Offer Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW')
In July and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York District Court on behalf of persons who transacted in products related to the Sibor, SOR and BBSW benchmark rates. The complaints allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law.
In the Sibor/SOR litigation, following a decision on the defendants' motion to dismiss in October 2018, the claims against a number of HSBC entities were dismissed, and the Bank remained as the only HSBC defendant in this action. In October 2018, the Bank filed a motion for reconsideration of the decision based on the issue of personal jurisdiction. This motion was denied in April 2019. Also in October 2018, the plaintiffs filed a third amended complaint, naming only the Sibor panel members, including the Bank, as defendants. The court dismissed the third amended complaint in its entirety in July 2019 against all defendants. In August 2019, the plaintiffs filed an appeal to the Second Circuit Court of Appeals, which remains pending.
In the BBSW litigation, in November 2018, the court dismissed all foreign defendants, including all the HSBC entities, on personal jurisdiction grounds. In April 2019, the plaintiffs filed an amended complaint, which the defendants moved to dismiss. In February 2020, the court again dismissed the plaintiffs' amended complaint against all the HSBC entities.
Based on the facts currently known, it is not practicable at this time for the Bank to predict the resolution of these matters, including the timing or any possible impact on the Bank, 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 for the Bank to predict the resolution of this matter, including the timing or any possible impact on the Bank, which could be significant.
Foreign exchange-related investigations
In January 2021, HSBC Holdings exited its 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. HSBC Holdings entered into the FX DPA in January 2018, following the conclusion of the DoJ's investigation into HSBC's historical foreign exchange activities. Under the terms of the FX DPA, the DoJ is expected to file a motion to dismiss the charges deferred by the FX DPA in due course.
Based on the facts currently known, it is not practicable at this time for the group to predict the resolution of these matters, including the timing or any possible impact on the group, which could be significant.
Other regulatory investigations, reviews and litigation
The Bank and/or certain of its affiliates are subject to a number of other investigations and reviews by various regulators and competition and law enforcement authorities, as well as litigation, in connection with various matters relating to the firm's businesses and operations, including investigations by tax administration, and regulatory and law enforcement authorities in India and elsewhere in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.
Based on the facts currently known, it is not practicable at this time for the group to predict the resolution of these matters, including the timing or any possible impact on the group, which could be significant.
38 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.
39 Events after the balance sheet date
-----------------------------------
There have been no events after the balance sheet date that would require disclosure in the consolidated financial statements.
40 Approval of financial statements
--------------------------------
The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on 23 February 2021.
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