We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
| 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 Nov 2021 to Nov 2024
TIDM57HB
RNS Number : 5018E
Hongkong & Shanghai Banking Corp Ld
11 March 2022
11 March 2022
The Hongkong and Shanghai Banking Corporation Limited
2021 Annual Report and Accounts
In fulfilment of its obligations under sections 4.1.3 and 6.3.5(1) of the Disclosure Guidance and Transparency Rules, The Hongkong and Shanghai Banking Corporation Limited (the "Company") hereby releases the unedited full text of its 2021 Annual Report and Accounts for the year ended 31 December 2021.
The document is now available on the Company's website at: https://www.hsbc.com.hk/legal/regulatory-disclosures .
The document has also been submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
The Hongkong and Shanghai Banking Corporation Limited
Annual Report and Accounts 2021
Hot Features
Premium
Contents
Page
Certain defined terms 1
------------------------------------------ ----
Cautionary statement regarding
forward-looking statements 1
------------------------------------------ ----
Chinese translation 1
------------------------------------------ ----
Financial Highlights 2
------------------------------------------ ----
Report of the Directors 3
------------------------------------------ ----
Financial Review 10
------------------------------------------ ----
Risk 14
------------------------------------------ ----
Statement of Directors' Responsibilities 67
------------------------------------------ ----
Independent Auditor's Report 68
------------------------------------------ ----
Consolidated Financial Statements
------------------------------------------ ----
Consolidated income statement 73
------------------------------------------ ----
Consolidated statement of comprehensive
income 74
------------------------------------------ ----
Consolidated balance sheet 75
------------------------------------------ ----
Consolidated statement of cash
flows 76
------------------------------------------ ----
Consolidated statement of changes
in equity 77
------------------------------------------ ----
Notes on the Consolidated Financial
Statements
------------------------------------------ ----
Basis of preparation and significant
1 accounting policies 79
--- ------------------------------------- ----
2 Operating profit 89
--- ------------------------------------- ----
3 Insurance business 92
--- ------------------------------------- ----
Employee compensation and
4 benefits 93
--- ------------------------------------- ----
5 Tax 96
--- ------------------------------------- ----
6 Dividends 97
--- ------------------------------------- ----
7 Trading assets 97
--- ------------------------------------- ----
8 Derivatives 98
--- ------------------------------------- ----
Financial assets designated
and otherwise mandatorily
measured at fair value through
9 profit or loss 99
--- ------------------------------------- ----
10 Loans and advances to customers 99
--- ------------------------------------- ----
11 Financial investments 100
--- ------------------------------------- ----
Assets pledged, assets transferred
12 and collateral received 101
--- ------------------------------------- ----
13 Investments in subsidiaries 102
--- ------------------------------------- ----
Interests in associates and
14 joint ventures 102
--- ------------------------------------- ----
15 Goodwill and intangible assets 105
--- ------------------------------------- ----
16 Property, plant and equipment 106
--- ------------------------------------- ----
Prepayments, accrued income
17 and other assets 107
--- ------------------------------------- ----
18 Customer accounts 108
--- ------------------------------------- ----
19 Trading liabilities 108
--- ------------------------------------- ----
Financial liabilities designated
20 at fair value 108
--- ------------------------------------- ----
21 Debt securities in issue 108
--- ------------------------------------- ----
Accruals and deferred income,
22 other liabilities and provisions 108
--- ------------------------------------- ----
23 Subordinated liabilities 109
--- ------------------------------------- ----
24 Share capital 109
--- ------------------------------------- ----
25 Other equity instruments 110
--- ------------------------------------- ----
Maturity analysis of assets
26 and liabilities 110
--- ------------------------------------- ----
Analysis of cash flows payable
under financial liabilities
27 by remaining contractual maturities 113
--- ------------------------------------- ----
Contingent liabilities, contractual
28 commitments and guarantees 114
--- ------------------------------------- ----
29 Other commitments 114
--- ------------------------------------- ----
Offsetting of financial assets
30 and financial liabilities 114
--- ------------------------------------- ----
31 Segmental analysis 115
--- ------------------------------------- ----
32 Related party transactions 117
--- ------------------------------------- ----
Fair values of financial instruments
33 carried at fair value 119
--- ------------------------------------- ----
Fair values of financial instruments
34 not carried at fair value 125
--- ------------------------------------- ----
35 Structured entities 126
--- ------------------------------------- ----
Bank balance sheet and statement
36 of changes in equity 128
--- ------------------------------------- ----
Legal proceedings and regulatory
37 matters 130
--- ------------------------------------- ----
38 Ultimate holding company 130
--- ------------------------------------- ----
Events after the balance sheet
39 date 131
--- ------------------------------------- ----
40 Approval of financial statements 131
--- ------------------------------------- ----
Certain defined terms
This document comprises the Annual Report and Accounts 2021 for The Hongkong and Shanghai Banking Corporation Limited ('the Bank') and its subsidiaries (together 'the group'). References to 'HSBC', 'the Group' or 'the HSBC Group' within this document mean HSBC Holdings plc together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. The abbreviations 'HK$m' and 'HK$bn' represent millions and billions (thousands of millions) of Hong Kong dollars respectively.
Cautionary statement regarding forward-looking statements
This Annual Report and Accounts contains certain forward-looking statements with respect to the financial condition, results of operations and business of the group.
Statements that are not historical facts, including statements about the Bank's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made, and it should not be assumed that they have been revised or updated in the light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement.
Chinese translation
A Chinese translation of the Annual Report and Accounts 2021 is available upon request from: Communications (Asia), Level 32, HSBC Main Building, 1 Queen's Road Central, Hong Kong. The report is also available, in English and Chinese, on the Bank's website at www.hsbc.com.hk.
Financial Highlights
2021 2020
HK$m HK$m
------------------------------------------------------ -------------------------- ----------------------------
For the year
------------------------------------------------------ -------------------------- ----------------------------
Net operating income before change in expected credit
losses and other credit impairment charges 178,658 189,338
------------------------------------------------------ -------------------------- ----------------------------
Profit before tax 86,563 90,196
------------------------------------------------------ -------------------------- ----------------------------
Profit attributable to shareholders 67,348 69,447
------------------------------------------------------ -------------------------- ----------------------------
At the year-end
------------------------------------------------------ -------------------------- ----------------------------
Total shareholders' equity 856,809 845,353
------------------------------------------------------ -------------------------- ----------------------------
Total equity 923,511 911,531
------------------------------------------------------ -------------------------- ----------------------------
Total capital(1) 590,478 614,545
------------------------------------------------------ -------------------------- ----------------------------
Customer accounts 6,177,182 5,911,396
------------------------------------------------------ -------------------------- ----------------------------
Total assets 9,903,393 9,416,403
------------------------------------------------------ -------------------------- ----------------------------
Ratios %%
------------------------------------------------------ -------------------------- ---------------------------
Return on average ordinary shareholders' equity 8.0 8.6
------------------------------------------------------ -------------------------- ----------------------------
Post-tax return on average total assets 0.7 0.8
------------------------------------------------------ -------------------------- ----------------------------
Cost efficiency ratio 58.7 50.6
------------------------------------------------------ -------------------------- ----------------------------
Net interest margin 1.37 1.62
------------------------------------------------------ -------------------------- ----------------------------
Advances-to-deposits ratio 62.2 62.1
------------------------------------------------------ -------------------------- ----------------------------
Capital ratios
------------------------------------------------------ -------------------------- ----------------------------
Common equity tier 1 capital 15.4 17.2
------------------------------------------------------ -------------------------- ----------------------------
Tier 1 capital 16.8 18.8
------------------------------------------------------ -------------------------- ----------------------------
Total capital 18.7 20.8
------------------------------------------------------ -------------------------- ----------------------------
1 Capital is calculated in accordance with the Banking (Capital) Rules issued by the Hong Kong Monetary Authority ('HKMA') under section 97C(1) of the Banking Ordinance.
Established in Hong Kong and Shanghai in 1865, The Hongkong and Shanghai Banking Corporation Limited is the founding member of the HSBC Group - one of the world's largest banking and financial services organisations. It is the largest bank incorporated in Hong Kong and one of Hong Kong's three note-issuing banks. It is a wholly-owned subsidiary of HSBC Holdings plc, the holding company of the HSBC Group, which has an international network covering Europe, Asia, the Middle East and North Africa, North America and Latin America.
The Hongkong and Shanghai Banking Corporation Limited
Incorporated in the Hong Kong SAR with limited liability
Registered Office and Head Office: HSBC Main Building, 1 Queen's Road Central, Hong Kong
Telephone: (852) 2822 1111 Web: www.hsbc.com.hk. Report of the Directors
Principal Activities
The group provides a comprehensive range of domestic and international banking and related financial services, principally in the Asia-Pacific region.
Asia Strategy
Asia's growth story remains at the heart of HSBC's future. Based on the region's strong and sustained underlying fundamentals of economic growth, trade, and wealth creation, HSBC's strategy in the region remains aligned to the biggest opportunities to create further shareholder value. We are well positioned to further extend the strengths of our leading Hong Kong franchise across the Greater Bay Area, and in other key growth markets, including India and Southeast Asia. By increasing investment in our people and technology, we will further grow our leading Asian Wealth Management business, while maintaining our distinct position as the leading international bank for our corporate and commercial clients. We remain focused on connecting Asia to the world through HSBC's global network, supporting the
ongoing transition to a low-carbon economy as a Sustainable Finance leader, continually streamlining our organisation to realise greater operating efficiencies, and improving service for our domestic, regional, and global clients through our technology, talent, and 156 years of experience in the region.
Consolidated Financial Statements
The consolidated financial statements of the group are set out on pages 73 to 131.
Subordinated Liabilities, Share Capital and Other Equity Instruments
Details on subordinated liabilities issued by the group are set out in Notes 23 and 32. Details on share capital and other equity instruments of the Bank are set out in Notes 24 and 25 on the Consolidated Financial Statements.
Dividends
The interim dividends paid in respect of 2021 are set out in Note 6 on the Consolidated Financial Statements.
Directors
The Directors at the date of this report are set out below:
Peter Tung Shun Wong, GBS, JP Non-executive Chairman (since 7 June 2021) He is also an advisor to the Group Chairman and the Group Chief Executive of HSBC Holdings plc, and Chairman and a non-executive Director of HSBC Bank (China) Company Limited. He holds a Bachelor of Arts, a Master of Business Administration and a Master of Science from Indiana University. Before his retirement as an HSBC employee in June 2021, he was an executive Director, Chief Executive and Deputy Chairman of the Bank. He was also a non-executive Director of Hang Seng Bank Limited. ------------------------------------------- David Gordon Eldon, GBS, CBE, JP Non-executive Deputy Chairman (Director since 4 June 2021; Deputy Chairman since 7 June 2021) He is also non-executive Chairman and a Director of Octopus Holdings Limited, Octopus Cards Limited and Octopus Cards Client Funds Limited. He holds an Honorary Doctor of Business Administration from City University of Hong Kong and is a Fellow of the UK Chartered Institute of Bankers and the Hong Kong Institute of Bankers. Before his retirement as an HSBC employee in 2005 after 37 years of service, he was an executive Director, Chief Executive Officer and Chairman of the Bank. He was also non-executive Chairman of Hang Seng Bank Limited and a Director of HSBC Holdings plc. ------------------------------------------- David Yi Chien Liao Co-Chief Executive Officer (since 7 June 2021) He is also a member of the Group Executive Committee of HSBC Holdings plc. He is also a non-executive Director of Hang Seng Bank Limited and Bank of Communications Co., Ltd. He holds a Bachelor of Arts (major in Japanese and Economics) from the University of London. He has previously held a number of senior positions within the Group, including the Head of Global Banking Coverage for Asia-Pacific and a Director and Chief Executive Officer of HSBC Bank (China) Company Limited. ------------------------------------------- Surendranath Ravi Rosha Co-Chief Executive Officer (since 7 June 2021) He is also a member of the Group Executive Committee of HSBC Holdings plc and a non-executive Director of HSBC Bank Australia Limited.
He holds a Bachelor of Commerce
from Sydenham College of Commerce
& Economics, Bombay University and
a Master of Business Administration
from the Indian Institute of Management,
Ahmedabad.
He has previously held a number
of senior positions within the Group,
including the Chief Executive Officer
of HSBC India and Regional Head
of Financial Institutions Group,
Asia-Pacific.
-------------------------------------------
Graham John Bradley
Independent non-executive Director
He is also non-executive Chairman
and a Director of Volt Bank Limited,
Volt Corporation Limited, United
Malt Group Limited and Shine Justice
Ltd.; and Chairman and a Director
of EnergyAustralia Holdings Limited,
Infrastructure New South Wales and
Virgin Australia International Holdings
Limited. He holds a Bachelor of
Arts and a Bachelor of Laws (Hons
I) from Sydney University and a
Master of Laws from Harvard University.
He was non-executive Chairman and
a Director of HSBC Bank Australia
Limited from 2004 to 2020. Before
this, he was Managing Director and
Chief Executive Officer of Perpetual
Limited from 1995 until his retirement
in 2003.
-------------------------------------------
Dr Christopher Wai Chee Cheng, GBS,
OBE
Independent non-executive Director
He is also Chairman of Wing Tai
Properties Limited; and an independent
non-executive Director of NWS Holdings
Ltd. and Eagle Asset Management
(CP) Limited. He holds a Bachelor
of Business Administration from
University of Notre Dame; a Master
of Business Administration from
Columbia University; a Doctorate
in Social Sciences honoris causa
from The University of Hong Kong;
and an Honorary Degree of Doctor
of Business Administration from
The Hong Kong Polytechnic University.
-------------------------------------------
Sonia Chi Man Cheng
Independent non-executive Director
She is also the Chief Executive
Officer of Rosewood Hotel Group.
She is also an executive Director
of New World Development Company
Limited and Chow Tai Fook Jewellery
Group Limited; and a Director of
New World China Land Limited. She
holds a Bachelor of Arts degree
with a field of concentration in
Applied Mathematics from Harvard
University.
-------------------------------------------
Yiu Kwan Choi
Independent non-executive Director
He is also an independent non-executive
Director of HSBC Bank (China) Company
Limited. He holds a higher certificate
in Accountancy from The Hong Kong
Polytechnic University and is a
fellow member of The Hong Kong Institute
of Bankers.
He was Deputy Chief Executive of
the Hong Kong Monetary Authority
('HKMA') in charge of Banking Supervision
when he retired in January 2010.
Before this, he was Deputy Chief
Executive of the HKMA in charge
of Monetary Policy and Reserves
Management from June 2005 to August
2007 and held various senior positions
in the HKMA including Executive
Director (Banking Supervision),
Head of Administration, and Head
of Banking Policy from 1993 to 2005.
-------------------------------------------
Rajnish Kumar
Independent non-executive Director
(since 26 August 2021)
He is also non-executive Chairman
of Resilient Innovations Pvt. Ltd.;
an independent Director of Larsen
& Toubro Infotech Limited; an adviser
to Kotak Investment Advisors Ltd.;
a Director of Lighthouse Communities
Foundation; and a member of the
Board of Governors of the Management
Development Institute in India.
He is also a senior adviser to Baring
Private Equity Asia Pte Ltd. in
Singapore. He holds a Master of
Science in Physics from Meerut University
and a Post Graduate Certificate
in Business Management from XLRI
Jamshedpur in India, and is a Certified
Associate of the Indian Institute
of Bankers.
He was formerly Chairman of the
State Bank of India until he retired
in October 2020.
-------------------------------------------
Beau Khoon Chen Kuok
Independent non-executive Director
He is also Chairman and Managing
Director of Kerry Group Limited.
He holds a Bachelor of Economics
from Monash University. He was previously
Chairman and Chief Executive Officer
of Shangri-La Asia Limited; Chairman
of Kerry Properties Limited; and
Non-Executive Director of Wilmar
International Limited.
-------------------------------------------
Irene Yun-lien Lee
Independent non-executive Director
She is also an independent non-executive
Director of HSBC Holdings plc and
independent non-executive Chairman
of the Board of Hang Seng Bank Limited.
She is also executive Chairman of
Hysan Development Company Limited.
She holds a Bachelor of Arts (Distinction)
in History of Art from Smith College,
Northampton, Massachusetts, USA.
She is also a member of the Honourable
Society of Gray's Inn, UK and a
Barrister-at-Law in England and
Wales.
-------------------------------------------
Victor Tzar Kuoi Li
Non-executive Director
He is also Chairman and Managing
Director of CK Asset Holdings Limited;
Chairman and a Group Co-Managing
Director of CK Hutchison Holdings
Limited; Chairman of CK Infrastructure
Holdings Limited and CK Life Sciences
Int'l., (Holdings) Inc.; a non-executive
Director of Power Assets Holdings
Limited and HK Electric Investments
Manager Limited; and a non-executive
Director and Deputy Chairman of
HK Electric Investments Limited.
He is also Deputy Chairman of Li
Ka Shing Foundation Limited, Li
Ka Shing (Global) Foundation and
Member Deputy Chairman of Li Ka
Shing (Canada) Foundation. He holds
a Bachelor of Science degree in
Civil Engineering, a Master of Science
degree in Civil Engineering, both
received from Stanford University;
and a degree of Doctor of Laws,
honoris causa (LL.D.) from The University
of Western Ontario.
-------------------------------------------
Ewen James Stevenson
Non-executive Director (since 5
October 2021)
He is also the Group Chief Financial
Officer and an executive Director
of HSBC Holdings plc. He holds a
Bachelor of Commerce and Administration
and a Bachelor of Law from Victoria
University of Wellington, New Zealand.
He was Chief Financial Officer of
Royal Bank of Scotland Group plc
from 2014 to 2018. He held a number
of roles at Credit Suisse, including
co-Head of the Europe, the Middle
East and Africa Investment Banking
Division and co-Head of the Global
Financial Institutions Group.
-------------------------------------------
Kevin Anthony Westley, BBS
Independent non-executive Director
He is also an independent non-executive
Director of Fu Tak Iam Foundation
Limited and a member of the investment
committee of the West Kowloon Cultural
District Authority. He holds a Bachelor
of Arts (Hons) from the University
of London (LSE) and is a Fellow
of the Institute of Chartered Accountants
in England and Wales.
He was Chairman (from 1996) and
Chief Executive (from 1992) of HSBC
Investment Bank Asia Limited (formerly
named as Wardley Limited) until
his retirement in 2000 and subsequently
acted as an advisor to the Bank
and the Group in Hong Kong.
-------------------------------------------
Tan Sri (Sir) Francis Sock Ping
Yeoh, KBE, CBE
Independent non-executive Director
He is also executive Chairman of
YTL Corporation Berhad, YTL Land
& Development Berhad, YTL Power
International Berhad, YTL Cement
Berhad, Malayan Cement Berhad and
YTL E-Solutions Berhad. He holds
a Bachelor of Science (Hons) in
Civil Engineering and an Honorary
Doctorate of Engineering from the
University of Kingston.
===========================================
During the year, David Gordon Eldon was appointed as a non-executive Director with effect from 4 June 2021. At the conclusion of the 2021 Annual General Meeting ('AGM') held on 7 June 2021: Laura May Lung Cha, Jennifer Xinzhe Li, Zia Mody and Bin Hwee Quek (née Chua) stepped down as Directors; Peter Tung Shun Wong, the former Deputy Chairman and Chief Executive, was re-designated as a non-executive Director and was appointed Chairman; David Gordon Eldon was appointed as Deputy Chairman; and David Yi Chien Liao and Surendranath Ravi Rosha were appointed as executive Directors and co-Chief Executive Officers. Rajnish Kumar was appointed as an independent non-executive Director with effect from 26 August 2021. Ewen James Stevenson was appointed as a non-executive Director with effect from 5 October 2021. Save for the above, all the Directors served throughout the year.
A list of the directors of the Bank's subsidiary undertakings (consolidated in the financial statements) during the period from
1 January 2021 to the date of this report will be available on the Bank's website www.hsbc.com.hk/legal/regulatory-disclosures/.
Secretary
Paul Stafford is the Corporation Secretary.
Permitted Indemnity Provision
The Bank's Articles of Association provide that the Directors and other officers of the Bank shall be indemnified out of the Bank's assets against any liability incurred by them or any of them as the holder of any such office or appointment to a person other than the Bank or an associated company of the Bank in connection with any negligence, default, breach of duty or breach of trust in relation to the Bank or associated company. In addition, the Bank's ultimate holding company, HSBC Holdings plc, has maintained directors' and officers' liability insurance providing appropriate cover for the directors and officers within the Group, including the Directors of the Bank and its subsidiaries.
Directors' Interests in Transactions, Arrangements or Contracts
Save as disclosed in Note 32 on the Consolidated Financial Statements, no transactions, arrangements or contracts that were significant in relation to the Bank's business and in which a Director or his or her connected entities had, directly or indirectly, a material interest were entered into by or subsisted with the Bank, its holding companies, its subsidiaries or subsidiaries of its holding companies during the year.
Directors' Rights to Acquire Shares or Debentures
To help align the interests of employees with shareholders, executive Directors of the Bank and HSBC Holdings plc are eligible to be granted conditional awards over ordinary shares in HSBC Holdings plc by that company (being the ultimate holding company) under the HSBC Share Plan 2011 and the HSBC International Employee Share Purchase Plan.
Executive Directors of the Bank and HSBC Holdings plc are eligible to receive an annual incentive award based on the outcome of the performance measures (financial and non-financial) set out in their annual performance scorecard. Annual incentive awards are normally delivered in cash and/or shares, and these generally have a deferral rate of 60% or 40% if the annual incentive award is below GBP500,000. The period over which annual incentive awards would be deferred is determined in accordance with the requirements of the Prudential Regulation Authority ('PRA') Remuneration Rules, i.e. seven years for Senior Managers (individuals in PRA and Financial Conduct Authority ('FCA') designated Senior Management Functions), five years for Risk Managers, and four years for other Material Risk Takers ('MRTs'). From January 2017 onwards, all share awards granted to MRTs are subject to a minimum retention period of one year as opposed to six months previously. However, for certain individuals whose variable pay awards will be deferred for at least five years and who are not considered to be members of senior management, their retention period may be kept at six months.
All unvested deferred awards made under the HSBC Share Plan 2011 are subject to the application of malus, i.e. the cancellation and reduction of unvested deferred awards. All paid or vested variable pay awards made to identified staff and MRTs will be subject to clawback for a period of seven years from the date of award. For Senior Managers, this may be extended to 10 years in the event of an ongoing internal or regulatory investigation at the end of the seven-year period.
Executive Directors and other senior executives of HSBC Holdings plc are subject to Group minimum shareholding requirements. Individuals are given five years from 2014 or (if later) their appointment to build up the recommended levels of shareholding. HSBC operates an anti-hedging policy for Group, sectorial and local MRTs including executive Directors in accordance with the PRA Rules, who are required to certify each year via the Bank's Global Personal Account Dealing system that they have not entered into any personal hedging strategies in relation to their holdings of HSBC shares as part of the Global Personal Account Dealing Certification.
The HSBC International Employee Share Purchase Plan is an employee share purchase plan offered to employees in Hong Kong since 2013 and has been extended to further countries in the HSBC Group from 2014. For every three shares in HSBC Holdings plc purchased by an employee ('Investment Shares'), a conditional award to acquire one share is granted ('Matching Shares'). The employee becomes entitled to the Matching Shares subject to continued employment with HSBC and retention of the Investment Shares until the third anniversary of the start of the relevant plan year. HSBC Holdings Savings-Related Share Option Plan (UK) is an all employee share plan under which eligible employees may be granted options to acquire HSBC Holdings ordinary shares. Employees may make monthly contributions, up to a maximum defined limit, over a period of three or five years and shares are exercisable within six months following either the third or fifth anniversary of the commencement. The exercise price is set at a 20% discount to the market value immediately preceding the date of invitation.
During the year, Peter Wong, Ewen Stevenson, Surendra Rosha and David Liao acquired or were awarded shares of HSBC Holdings plc under the terms of the HSBC Share Plan 2011.
Apart from these arrangements, at no time during the year was the Bank, its holding companies, its subsidiaries or any fellow subsidiaries a party to any arrangements to enable the Directors to acquire benefits by means of the acquisition of shares in or debentures of the Bank or any other body corporate.
Donations
Donations made by the Bank and its subsidiaries during the year amounted to HK$380m (2020: HK$345m).
Compliance with the Banking (Disclosure) Rules
The Directors are of the view that the Annual Report and Accounts 2021 and Banking Disclosure Statements 2021 fully comply with the Banking (Disclosure) Rules made under section 60A of the Banking Ordinance and the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements - Banking Sector) Rules ('LAC Rules') made under section 19(1) of the Financial Institutions (Resolution) Ordinance ('FIRO').
Auditor
The Consolidated Financial Statements have been audited by PricewaterhouseCoopers ('PwC'). A resolution to reappoint PwC as auditor of the Bank will be proposed at the forthcoming AGM.
Corporate Governance
The Bank is committed to high standards of corporate governance. As an Authorised Institution, the Bank is subject to and complies with the HKMA Supervisory Policy Manual CG-1 'Corporate Governance of Locally Incorporated Authorised Institutions' ('SPM CG-1') except that following Board and Committee changes on.
7 June 2021 the membership of the Bank's Nomination Committee has not comprised a majority of independent non-executive Directors. The Bank's Nomination Committee currently comprises an equal number of independent non-executive Directors and non-executive Directors.
As a principal subsidiary of the HSBC Group, the Bank complies with the Group's subsidiary accountability framework including its responsibility for overseeing the implementation of the framework for all Group companies in Asia-Pacific. The principles of the subsidiary accountability framework, which were refreshed in 2021, set out high-level principles to promote effective governance and improve communications and connectivity between HSBC Holding plc and its subsidiaries.
Board of Directors
The Board, led by the Chairman, provides entrepreneurial leadership of the Bank within a framework of prudent and effective controls which enables risks to be assessed and managed. The Board is collectively responsible for the long-term success of the Bank and delivery of sustainable value to shareholders. The Board sets the strategy and risk appetite for the group and approves capital and operating plans presented by management for the achievement of the strategic objectives it has set.
Directors
The Bank has a unitary Board. The authority of each Director is exercised in Board meetings where the Board acts collectively. As at the date of this report, the Board comprises: the non-executive Chairman; the non-executive Deputy Chairman; two executive Directors who are the co-Chief Executive Officers; two other non-executive Directors; and nine independent non-executive Directors.
Independent non-executive Directors
Independent non-executive Directors do not participate in the daily business management of the Bank. They bring an external perspective, constructively challenge and help develop proposals on strategy, scrutinise the performance of management in meeting agreed goals and objectives, and monitor the risk profile and reporting of performance of the Bank. The independent non-executive Directors bring experience from a number of industries and business sectors, including the leadership of large complex multinational enterprises. The Board has determined that there are nine independent non-executive Directors. In making this determination, it was agreed that there are no relationships or circumstances likely to affect the judgement of the independent non-executive Directors, with any relationships or circumstances that could appear to do so not considered to be material.
Chairman and co-Chief Executive Officers
The roles of the Chairman and co-Chief Executive Officers are separate and held respectively by an experienced non-executive Director and two full-time employees of the HSBC Group. There is a clear division of responsibilities between leading the Board and the executive responsibility for running the Bank's business.
The Chairman provides leadership to the Board in promoting the overall effectiveness of the Bank, in particular the development of strategy and monitoring of the execution and delivery of Board approved strategies and plans by the co-Chief Executive Officers and management. The Chairman's role includes promoting an open and inclusive culture on the Board to facilitate open and critical discussion and challenge and leading the Board in setting an appropriate 'tone from the top' and in the oversight of the Bank's corporate culture. The Chairman also leads an annual evaluation of the performance of the Board, its Committees and individual Directors, including contributing to consideration of succession planning of the Board, its Committees and senior executive management. The role also involves maintaining external relationships with key stakeholders and communicating their views to the Board.
The co-Chief Executive Officers are responsible for ensuring implementation of the strategy and policy as established by the Board and the day-to-day running of operations. The co-Chief Executive Officers are co-Chairmen of the Executive Committee. The Asia-Pacific heads of Global Businesses and Global Functions report to the co-Chief Executive Officers.
Deputy Chairman
The role of the non-executive Deputy Chairman is to deputise formally for the Chairman of the Board in his absence and support the Chairman in the exercise of his responsibilities. The Deputy Chairman also acts as an intermediary for other non-executive Directors when necessary and leads the non-executive directors in the annual performance evaluation of the Chairman and in ensuring a clear division of responsibility between the Chairman and co-Chief Executive Officers. The role involves maintaining external relationships with key stakeholders and communicating their views to the Board.
Board Committees
The Board has established various committees consisting of Directors and senior management. The committees include the Executive Committee, Audit Committee, Risk Committee, Nomination Committee, Remuneration Committee and Chairman's Committee. The Chairmen of the Executive Committee and of each Board committee that includes independent non-executive Directors report to each subsequent Board meeting on the relevant committee's proceedings.
The Board has also established an Asset, Liability and Capital Management Committee and a Risk Management Meeting. The Executive Committee has the delegated authority to approve any changes in the membership and terms of reference of the Asset, Liability and Capital Management Committee and the Risk Management Meeting.
To align with the revised Group Financial Crime Risk Governance Framework, the former Financial Crime Risk Management Committee was demised and its responsibility to oversee financial crime risks was integrated into the Risk Management Meeting in the first quarter of 2021.
The Board and each Board committee have terms of reference to document their responsibilities and governance procedures. The key roles of the committees are described in the paragraphs below.
Executive Committee
The Executive Committee is responsible for the exercise of all of the powers, authorities and discretions of the Board in so far as they concern the management, operations and day-to-day running of the group, in accordance with such policies and directions as the Board may from time to time determine, with power to sub-delegate. A schedule of items that require the approval of the Board is maintained.
The Bank's co-Chief Executive Officers, David Liao and Surendranath Rosha, are co-Chairmen of the Committee. The current members of the Committee are: Justin Chan (Head of Markets & Securities Services, Greater China); Hitendra Dave (Chief Executive Officer, India); Frank Fang (Head of Commercial Banking, Hong Kong); Philip Fellowes (Chief of Staff, Asia-Pacific); Darren Furnarello (Chief Compliance Officer, Asia-Pacific); David Grimme (Chief Operating Officer, Asia-Pacific); Martin Haythorne (Chief Risk Officer, Asia-Pacific); Gregory Hingston (Chief Executive Officer, HSBC Global Insurance and Partnerships and Interim Head of Wealth and Personal Banking, South Asia); Ming Lau (Chief Financial Officer, Asia-Pacific and Global Commercial Banking); Stuart Lea (Head of Global Banking, South-Asia); Kaber Mclean (Chief Executive Officer Australia); Stuart Milne (Chief Executive Officer Malaysia); Amanda Murphy (Head of Commercial Banking, Southeast Asia and South Asia); Susan Sayers (Regional General Counsel, Asia-Pacific); Monish Tahilramani (Global Head of Markets & Securities Services Emerging Markets, Japan, Australia); David Thomas (Regional Head of Human Resources, Asia-Pacific); Mark Wang (President and Chief Executive Officer China) and Kee Joo Wong (Chief Executive Officer, Singapore). Paul Stafford (Corporation Secretary) is the Committee Secretary. In attendance are: Daisuke Kitamura (Interim Head of Global Banking, North-Asia); Astor Law (Head of Global Internal Audit, Asia-Pacific); Jessica Lee (Regional Head of Communications Asia-Pacific); Luanne Lim (Interim Chief Executive Officer, Hong Kong) and Philip Miller (Deputy Corporation Secretary). The Committee met eleven times in 2021. In between Committee meetings, there were periodic 'check-in' sessions held by the Committee Co-Chairmen with members to discuss urgent or important matters and to support effective communication.
Asset, Liability and Capital Management Committee
The Asset, Liability and Capital Management Committee ('ALCO') is chaired by the Chief Financial Officer and is an advisory committee to provide recommendations and advice to support the Chief Financial Officer's individual accountability for the efficient management of the Bank's assets, liabilities and capital within the constraints of liquidity and funding ratios, capital ratios, and key balance sheet risks such as interest rate risk, market risk and equity risk. The Committee also has responsibilities for the Bank's resolution planning activities.
The Committee consists of Ming Lau (Chief Financial Officer, Asia-Pacific and Global Commercial Banking), David Liao and Surendranath Rosha (co-Chief Executive Officers), the Regional Treasurer, Asia Pacific, the Regional Head of Asset and Liability Management, Asia-Pacific, the Regional Head of Capital Management, Asia-Pacific, the Head of Markets Treasury, Asia-Pacific, and other senior executives of the Bank most of whom are members of the Executive Committee. The Committee met ten times in 2021.
Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer and is a formal governance committee established to support the Chief Risk Officer's individual accountability for the oversight of enterprise risk and provide recommendations and advice to the Chief Risk Officer on enterprise-wide management of all risks, including key policies and frameworks for the management of risk within the Bank. The Risk Management Meeting consists of Martin Haythorne (Chief Risk Officer, Asia-Pacific), David Liao and Surendranath Rosha (co-Chief Executive Officers), the Head of Global Internal Audit, Asia-Pacific and other senior executives of the Bank most of whom are members of the Executive Committee. The Risk Management Meeting met ten times in 2021.
Audit Committee
The Audit Committee has non-executive responsibility for oversight of and advice to the Board on matters relating to financial reporting and internal financial controls. The current members of the Committee are Kevin Westley (Chairman of the Committee), Graham Bradley, Yiu Kwan Choi, David Eldon, Rajnish Kumar and Irene Lee. Except David Eldon who is a non-executive Director, all members are independent non-executive Directors. The Committee met four times in 2021.
The Audit Committee monitors the integrity of the Consolidated Financial Statements and disclosures relating to financial performance, the effectiveness of the internal audit function and the external audit process, and the effectiveness of internal financial control systems. The Committee reviews the adequacy of resources and expertise as well as succession planning for the finance function. It reviews, and considers changes to, the Bank's accounting policies. The Committee advises the Board on the appointment, re-appointment, or removal of the external auditor and reviews and monitors the external auditor's independence and objectivity. The Committee reviews matters escalated for its attention by subsidiaries' audit committees and receives minutes of meetings of the ALCO.
Risk Committee
The Risk Committee has non-executive responsibility for oversight of and advice to the Board on risk-related matters impacting the Bank and its subsidiaries, including risk governance and internal control systems (other than internal controls over financial reporting). The current members of the Committee are Graham Bradley (Chairman of the Committee), Christopher Cheng, Sonia Cheng, Yiu Kwan Choi, David Eldon, Rajnish Kumar, Irene Lee and Kevin Westley. Except David Eldon who is a non-executive Director, all members are independent non-executive Directors. The Committee met five times in 2021. All of the Bank's activities involve, to varying degrees, the identification, assessment, monitoring and management of risk or combinations of risks. The Board, advised by the Risk Committee, requires and encourages a strong risk culture which shapes the Bank's attitude to risk. The Bank's risk governance is supported by the Group's risk management framework which provides a clear policy of risk ownership and accountability of all staff for identifying, assessing and managing risks within the scope of their assigned responsibilities. This personal accountability, reinforced by clear and consistent employee communication on risk that sets the tone from senior leadership, the governance structure, mandatory learning and remuneration policy, helps to foster a disciplined and constructive culture of risk management and control throughout the group.
The Board and the Risk Committee oversee the maintenance and development of a strong risk management framework by continually monitoring the risk environment, top and emerging risks facing the group and mitigating actions planned and taken. The Risk Committee reviews the Group risk management policies and procedures at least annually and advises the Board if these are appropriate for the circumstances of the Bank. It also reviews local risk management policies at least annually, and approves or recommends any changes to the Board for approval.
The Committee reviews any revisions to the group's risk appetite statement twice a year and recommends any proposed changes to the Board for approval. The Committee reviews management's assessment of risk against the risk appetite statement and provides scrutiny of management's proposed mitigating actions. The Committee monitors the risk profiles for all of the risk categories within the group's business. The Committee also monitors the effectiveness of the Bank's risk management and internal controls other than those over financial reporting. Regular reports from the Risk Management Meeting are also presented at each Risk Committee meeting to report on the ongoing monitoring, assessment and management of the risk environment and the effectiveness of the risk management framework. The Committee reviews matters escalated for its attention by subsidiaries' risk committees and receives minutes of meetings of the Risk Management Meeting.
Nomination Committee
The Nomination Committee is responsible for leading the process for Board appointments and for identifying and approving, or nominating for the approval of the Board, candidates for appointment to the Board and certain senior management roles. Appointments to the Board and certain senior management roles are subject to the approval of the HKMA. The Committee considers plans for orderly succession to the Board and the appropriate balance of skills, knowledge and experience on the Board. The Committee also reviews the board succession plans of certain subsidiaries of the Bank and considers and endorses appointments to boards of directors of those subsidiaries.
The current members of the Committee are Christopher Cheng (Chairman of the Committee), Peter Wong (Chairman of the Board), David Eldon (Deputy Chairman of the Board) and Beau Kuok. Christopher Cheng and Beau Kuok are independent non-executive Directors and Peter Wong and David Eldon are non-executive Directors. The Committee met eight times in 2021.
A rigorous selection process, overseen by the Nomination Committee and based upon agreed requirements using an external search consultancy when appropriate, is followed in relation to the appointment of non-executive Directors. Before recommending an appointment of a Director to the Board, the Committee evaluates the Board composition including the balance of skills, knowledge and experience, as well as diversity and the role and capabilities required. In identifying suitable Board candidates, the Committee considers candidates' backgrounds, knowledge and experience to promote diversity of views, and takes into account the required time commitment and any potential conflicts of interest.
Chairman's Committee
The Chairman's Committee acts on behalf of the Board either in accordance with authority delegated by the Board from time to time or as specifically set out within its terms of reference. The Committee meets with such frequency and at such times as it may determine and can implement previously agreed strategic decisions by the full Board, approve specified matters subject to their prior review by the full Board, and act exceptionally on urgent matters within its terms of reference.
The current members of the Committee comprise the Chairman of the Board, the Deputy Chairman of the Board, the co-Chief Executive Officers and the Chairmen of the Audit and Risk Committees. The Committee met three times in 2021.
Remuneration Committee
The Group Remuneration Committee is responsible for setting the principles, parameters and governance framework for the Group's remuneration strategy applicable to all Group employees, which is adopted by the Bank. The Remuneration Committee of the Bank is responsible for the oversight of matters related to remuneration impacting the Bank and its subsidiaries, in particular, overseeing the implementation and operation of the Group's remuneration strategy and satisfying itself that the remuneration framework complies with local laws, rules or regulations; is in line with the risk appetite, business strategy, culture and values, and long-term interests of the Bank; and is appropriate to attract, retain and motivate employees to support the success of the Bank. The Committee annually reviews the effectiveness and compliance of the Group's remuneration strategy as adopted by the Bank alongside the submission of the Bank's HKMA Supervisory Policy Manual CG-5 'Guideline on a Sound Remuneration System' Self-Assessment as conducted by Deloitte LLP. The current members of the Committee, all being independent non-executive Directors, are Irene Lee (Chairman of the Committee), Christopher Cheng, Beau Kuok, Sonia Cheng and Francis Yeoh. The Committee met eight times in 2021.The following is a summary of the Committee's key activities during 2021:
Details of the Committee's key activities
* Reviewed and approved senior management's
remuneration and pay proposals
* Reviewed and approved the performance scorecards for
the Co-Chief Executive and Executive Committee
members of the Bank
* Approved 2020/2021 performance year pay review
matters
* Reviewed remuneration framework effectiveness
* Received updates on notable events and regulatory and
corporate governance matters
* Reviewed and approved 2021 Material Risk Taker
('MRT') identification approaches and outcomes
* Reviewed attrition data and plans to address area of
concerns
* Approved 2021 remuneration related regulatory
submissions
------------------------------------------------------------
* Senior Management includes the Chief Executive of the Bank, Chief Executive of Hang Seng Bank Limited, Executive Committee members, Alternate Chief Executives and Managers as registered with HKMA.
Remuneration Strategy
Our performance and pay strategy underpinned by our Group's Remuneration Strategy and principles aims to competitively reward long-term sustainable performance. We aim to do this by attracting, motivating and retaining the very best people, regardless of gender, ethnicity, age, disability or any other factor unrelated to performance or experience.
The strategy supports the long-term interests of our stakeholders, which includes the customers and the communities we serve, our shareholders and our regulators. The strategy is underpinned by the below principles designed to support a fair and appropriate pay and performance approach, whilst recognizing the need for flexibility in a hybrid workplace. These include:
-- Ensuring that the decisions made are fair, appropriate and free from bias. Managers are encouraged to challenge their assessment by questioning whether they were objective and based on facts;
-- Rewarding and recognizing our people for sustainable performance and values aligned behavior upholding our refreshed purpose and values. As such, subject to local law, employee receive a behavior rating as well as a performance rating to ensure performance is assessed not only on what is achieved, but also on how it is achieved;
-- Supporting a culture of continuous feedback through manager and employee empowerment and creating a culture where employees can fulfil their potential, gain new skills and develop their careers for the future;
-- To deliver a balanced, simple and transparent total reward package that supports employee well-being; and
-- Compliance with relevant regulation across all of our countries and territories.
More details of the Bank's remuneration strategy are contained within the Annual Report and Accounts 2021 of HSBC Holdings plc.
The Bank as an authorised institution under the Banking Ordinance is required by HKMA Supervisory Policy Manual CG-5 'Guideline on a Sound Remuneration System' ('the Guideline') to assess whether their existing remuneration systems and policy are in line with the principles in the Guideline, independently of management and at least annually. The annual review for 2020 was commissioned externally to Deloitte LLP and the results were approved by the Remuneration Committee in April 2021. The review confirmed that the Bank's remuneration strategy as adopted from the Group is consistent with the principles set out in the Guideline.
Recovery and Resolution Planning
The group is subject to recovery and resolution requirements in many of the jurisdictions in which it operates.
Recovery
The group maintains creditable and executable recovery plans that are designed to present clear and tested strategies and recovery actions to restore capital to a stable and viable position, thus lowering the probability of failure. The Bank typically submits recovery plans on an annual basis to the HKMA and to other regulators that have implemented recovery planning requirements. The Bank's recovery plans are continually re-appraised, and this involves stress testing and 'fire drill' tests.
Resolution
Resolution refers to the exercise of statutory powers where a financial institution and/or its parent or other group company is deemed by its regulators to be failing, or likely to fail and it is not reasonably likely that action could be taken that would result in the institution recovering.
The group continues to engage with the HKMA and the other principal Asian regulators in addressing any identified impediments to resolvability of the group, ensuring resolvability capabilities being developed are in line with the local requirements and regulatory expectations.
The Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements-Banking Sector) Rules ('LAC Rules') require the group to have sufficient loss-absorbing capacity ('LAC') which can be written down or converted into equity at an intermediate holding company in Hong Kong to recapitalise the group as a whole in the event of failure. HSBC Asia Holdings Limited, a wholly-owned subsidiary of HSBC Holdings plc and the intermediate holding company of the group, is designated as the resolution entity for the group, where adequate LAC has to be available in a form that will be bailed-in at the point of resolution.
As part of the Resolvability Assessment Framework ('RAF') issued by the Bank of England and Prudential Regulation Authority ('PRA') which places the onus on firms to demonstrate their own resolvability, HSBC Group is required to have capabilities as of.
1st January 2022 to achieve the resolvability outcomes: (i) have adequate resources in resolution; (ii) be able to continue business through resolution and restructuring; and (iii) be able to co-ordinate its resolution and communicate effectively with stakeholders. The group is part of the HSBC Group-wide RAF implementation. The RAF requires HSBC to prepare a report on the HSBC Group's assessment of its preparedness for resolution, which must be submitted to the PRA on a biennial basis. HSBC submitted its first such report to the PRA in October 2021 and will publish a public summary of the report in June 2022. The BoE will similarly publish a statement concerning the resolvability of HSBC at the same time. Environmental, Social and Governance
We are committed to building a business for the long term, developing relationships that last. We maintain high standards of governance and meet our responsibilities to society.
Environmental matters
Continuing our Sustainable Finance leadership in Asia
As part of the Group's Climate Strategy, the Group has committed to align its business to net-zero by 2050. In the fourth quarter of 2020, the Group announced an ambitious plan to prioritise financing and investment that supports the transition to a net zero global economy - this reinforces our global sustainable finance commitments made in 2017. In early 2021, the Group proposed a Climate Resolution on actions to take in connection with our ambition to align our provision of finance with a net zero outcome by 2050, and has published our thermal-coal phase-out policy as well as an update on our approach to financed emissions in December 2021.
Our net zero ambition represents a material step up in our support for customers as we collectively work towards building a thriving low carbon economy. We have made strong progress in undertaking greater sustainable finance business in Asia. In 2021, the group was awarded 'Asia's Best Bank of Sustainable Finance' by Euromoney for the fourth consecutive year since award inception. Throughout the year, we continued to expand our sustainable finance market leadership, product and service offerings across our Commercial Banking ('CMB'), Wealth and Personal Banking ('WPB'), Global Banking ('GB') and Markets and Securities Services ('MSS') businesses.
GB and MSS's ESG Solutions Unit continues to lead the business's effort in providing advice, expertise and financing ideas to clients in Asia and around the world. We have fronted the building of the Asian market on Sustainability Linked Loans ('SLLs') and Green Loans. We have continued our leadership in the Green/ Social/Sustainable and Sustainability-Linked issuances space, and have arranged the world's first government Global Medium Term Note Programme dedicated to green bond issuances and the first 30-year green bond being issued by an Asian government for the HKSAR Government, the first ever transition bonds issuance aligned to the ICMA Climate Transition Finance Handbook, as well as ASEAN's first green SRI Sukuk through HSBC Amanah.
In CMB, we have expanded SLL and Sustainable/Green Trade Facilities to clients in Asia. We have launched a SLL Programme to support corporates in the services sector in Hong Kong by encouraging and linking environmental and social performance targets through the financing product, and have arranged numerous SLLs across Asian markets. We have also developed green liability product solutions in Asia, namely green deposits for our corporate clients in Hong Kong, Thailand and India.
In WPB, we continue to support clients' sustainable aspirations by embedding ESG across client engagement and investment solutions. We focus on product development, thought leadership, developing an ESG culture and embedding ESG throughout the business. We offer a comprehensive suite of sustainable investment products to help clients to fulfil their sustainability preferences while delivering financial goals. These include ESG funds, green, social and sustainability bonds, structured products and green certificate of deposits.
More information about our assessment of climate risk can be found in 'Areas of special interest' on pages 23 to 26.
Employee matters
We are opening up a world of opportunity for our colleagues through building an inclusive organisation that values difference, takes responsibility, and seeks different perspectives for the overall benefit of our customers.
We want to encourage a dynamic culture where our colleagues can expect to be treated with dignity and respect. We are an organisation that takes action where we find behaviours that fall short of this aspiration. We monitor our progress through metrics that we value and have benchmarked against peers.
Listening to our colleagues is critical to the business we conduct, and is reflected in our purpose and values, which were established through an enterprise-wide engagement activity.
We continue to seek innovative ways that encourage and provide opportunities for our people to speak up. We recognise that at times people may not feel comfortable speaking up through the usual channels. HSBC Confidential is our global whistleblowing channel, open to colleagues past and present as an anonymous channel through which they can raise concerns confidentially at their discretion.
Social matters
We have a responsibility to invest in the long-term prosperity of the communities where we operate. We recognise that technology is developing at a rapid pace and that a range of new and different skills are now needed to succeed in the workplace. For this reason, much of our focus is on programmes that develop employability and financial capability. We also back initiatives that support responsible business, and contribute to disaster relief efforts based on need. More details on customer relief programmes can be found on pages 46 to 47.
Human rights
Our commitment to respecting human rights, principally as they apply to our employees, our suppliers and through our financial services lending, is aligned to that of the Group, the details of which are set out in the HSBC's Statement on Human Rights, which is available on www.hsbc.com/our-approach/measuring-our-impact.
Anti-corruption and anti-bribery
We require compliance with all applicable anti-bribery and corruption laws in all markets and jurisdictions in which we operate. We have a global anti-bribery and corruption policy, which gives practical effect to these laws and regulations, but also requires compliance with the spirit of laws and regulations to demonstrate our commitment to ethical behaviours and conduct as part of our environmental, social and corporate governance.
Business Review
The Bank is exempt from the requirement to prepare a business review under section 388(3) of the Companies Ordinance Cap. 622 since it is an indirect wholly-owned subsidiary of HSBC Holdings plc.
On behalf of the Board
Peter Wong, Chairman
22 February 2022
Financial Review Results for 2021
(Unaudited)
Profit before tax for 2021 reported by The Hongkong and Shanghai Banking Corporation Limited ('the Bank') and its subsidiaries (together 'the group') decreased by HK$3,633m, or 4%, to HK$86,563m.
Consolidated income statement and balance sheet data by reportable
segments
(Audited)
Wealth
and Markets
Personal Commercial Global and Securities Corporate Other
Banking(1) Banking(1) Banking(1,2) Services(2) Centre(3) (GBM-other)(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Year ended 31 Dec 2021
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net interest income 50,632 29,106 15,070 3,497 (2,640) 2,448 98,113
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net fee income/(expense) 23,827 9,828 5,746 5,730 243 (78) 45,296
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net income from financial
instruments measured at fair
value through profit or loss 22,195 3,551 39 19,363 214 513 45,875
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Gains less losses from financial
investments 956 368 - - - 343 1,667
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net insurance premium
income/(expense) 58,645 3,499 - - (422) - 61,722
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Other operating income 202 39 237 1,113 599 (157) 2,033
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Total operating income 156,457 46,391 21,092 29,703 (2,006) 3,069 254,706
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net insurance claims and
benefits paid and movement
in liabilities to policyholders (72,658) (3,743) - - 353 - (76,048)
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net operating income before
change in expected credit
losses and other credit
impairment
charges 83,799 42,648 21,092 29,703 (1,653) 3,069 178,658
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
- of which: external 80,570 43,398 20,539 29,644 (2,284) 6,791 178,658
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
inter-segment 3,229 (750) 553 59 631 (3,722) -
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Change in expected credit
losses and other credit
impairment
charges (1,224) (3,295) (2,013) (10) (6) 9 (6,539)
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net operating income 82,575 39,353 19,079 29,693 (1,659) 3,078 172,119
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Operating expenses (49,429) (20,839) (10,152) (14,629) (7,332) (2,495) (104,876)
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Operating profit 33,146 18,514 8,927 15,064 (8,991) 583 67,243
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Share of profit in associates
and joint ventures 137 - - - 19,183 - 19,320
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Profit before tax 33,283 18,514 8,927 15,064 10,192 583 86,563
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Balance sheet data at 31
Dec 2021
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Loans and advances to customers
(net) 1,544,449 1,315,961 927,542 49,887 1,540 1,560 3,840,939
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Customer accounts 3,407,789 1,659,464 891,994 211,621 28 6,286 6,177,182
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Year ended 31 Dec 2020
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net interest income 59,783 34,192 16,993 3,389 (5,357) 2,513 111,513
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net fee income/(expense) 22,174 9,002 5,382 4,973 162 (23) 41,670
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net income from financial
instruments measured at fair
value through profit or loss 18,927 2,985 (140) 20,544 2,067 884 45,267
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Gains less losses from financial
investments 772 450 - - (15) 417 1,624
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net insurance premium
income/(expense) 58,261 3,627 - - (325) - 61,563
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Other operating income 5,056 66 303 1,250 (372) (691) 5,612
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Total operating income 164,973 50,322 22,538 30,156 (3,840) 3,100 267,249
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net insurance claims and
benefits paid and movement
in liabilities to policyholders (74,394) (3,700) - - 183 - (77,911)
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net operating income before
change in expected credit
losses and other credit
impairment
charges 90,579 46,622 22,538 30,156 (3,657) 3,100 189,338
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
- of which: external 77,669 49,975 25,868 33,633 (4,711) 6,904 189,338
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
inter-segment 12,910 (3,353) (3,330) (3,477) 1,054 (3,804) -
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Change in expected credit
losses and other credit
impairment
charges (4,441) (12,145) (1,089) (16) (5) (23) (17,719)
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Net operating income 86,138 34,477 21,449 30,140 (3,662) 3,077 171,619
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Operating expenses (47,292) (19,391) (9,261) (12,317) (5,132) (2,435) (95,828)
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Operating profit 38,846 15,086 12,188 17,823 (8,794) 642 75,791
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Share of profit in associates
and joint ventures 6 - - - 14,399 - 14,405
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Profit before tax 38,852 15,086 12,188 17,823 5,605 642 90,196
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Balance sheet data at 31
Dec 2020
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Loans and advances to customers
(net) 1,463,558 1,206,857 966,765 24,998 3,402 3,101 3,668,681
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
Customer accounts 3,333,360 1,472,646 899,564 204,431 449 946 5,911,396
--------------------------------- -------------------------- ----------------------- ---------------------- ----------------------- ------------------------- ------------------------ ----------------------
1 In 2021, the cards acquiring business has been transferred from Commercial Banking ('CMB') and Global Banking ('GB') to Wealth and Personal Banking ('WPB') to align with the business model. Comparatives have been re-presented to conform to the current year's presentation.
2 In the second half of 2021, the reportable segments have been changed to reflect the change in the management of the Global Banking and Markets ('GBM') business, with the splitting out of GB and Markets and Securities Services ('MSS') as separate reportable segments, whilst GBM-Other (previously reported within GBM) is now reported under 'Other (GBM-other)'. 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' in the Annual Report and Accounts 2021.
3 Includes inter-segment elimination. Financial Review
Effective from the second half of 2021, the operating segment of GBM has been expanded into Global Banking ('GB'), Markets and Securities Services ('MSS') and Global Banking and Markets - Other ('GBM-other') to reflect changes to both the management structure and internal reporting to the Chief Operating Decision Maker to execute the Group's GBM strategy in Asia. GB and MSS are separate reportable segments. GBM-other, which mainly comprises of business activities which are jointly managed by GB and MSS, is reported under 'Other (GBM-other)'. MSS includes revenues for products and services sold to GB clients that are not necessarily reflected on a shared basis in the GB segment. MSS and GB comprise certain costs and cost allocations that are split for internal reporting purposes but are shared in nature and not wholly directly attributable to any one segment. GBM-other mainly comprises of distinct business activities that are jointly managed by GB and MSS. The new reporting structure does not change the Group's management of its global GBM strategy.
The commentary that follows compares the group's financial performance for the year ended 2021 with 2020.
Results Commentary
(Unaudited)
The group reported profit before tax of HK$86,563m, a decrease of HK$3,633m, or 4%. Net operating income before change in expected credit losses and other credit risk provisions decreased by HK$10,680m, or 6%, driven by lower net interest income, while operating expenses increased by HK$9,048m, or 9%, from investments in technology and our wealth businesses. As a result, the cost efficiency ratio increased from 50.6% in 2020 to 58.7% in 2021.
Net interest income decreased by HK$13,400m, or 12%. Excluding the favourable foreign exchange impact, net interest income decreased by HK$15,010m, or 13%, driven by Hong Kong primarily due to narrower customer deposit spreads and lower reinvestment yields as market interest rates decreased, partly offset by balance sheet growth. Net interest income in India and Malaysia also decreased, reflecting the same impact from the lower interest rate environment.
Net fee income increased by HK$3,626m, or 9%. Excluding the favourable foreign exchange impact, net fee income increased by HK$3,114m, or 7%, driven by WPB in Hong Kong from an increase in unit trust income due to an increase in sales volumes, coupled with higher funds under management fees due to increased fund size, reflecting improved market sentiment compared to 2020. Net fee income in MSS also increased, mainly from higher global custody and securities brokerage fees due to increased equities turnover, coupled with higher funds under management fees. To a lesser extent, an increase was also noted in CMB, mainly from higher trade-related fees as global trade volumes recovered during 2021, coupled with higher remittance fees as customer activity increased.
Net income from financial instruments measured at fair value through profit or loss increased by HK$608m, or 1%.
Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss increased by HK$5,052m, or 38%, mainly in WPB in Hong Kong, driven by higher revaluation gains on the equity portfolio held to support insurance and investment contracts due to improved market conditions. To the extent that these gains are attributable to policyholders, there is an offsetting movement reported under 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.
Net income from financial instruments held for trading or managed on a fair value basis decreased by HK$3,813m, or 12%, driven by Hong Kong from lower trading income in Global Debt Markets, Global Foreign Exchange and Securities Financing businesses, partly offset by higher Equities trading income. The decrease was partly offset by an increase in mainland China from the favourable movement in foreign exchange translation of balance sheet exposures and from the favourable revaluation on structured deposits.
Net insurance premium income increased by HK$159m, remained flat. Gross insurance premium income increased by 3%, mainly in Singapore and mainland China, reflecting higher sales volumes, largely offset by increased reinsurance arrangements in Hong Kong.
Other operating income decreased by HK$3,579m, or 64%, driven by the unfavourable movement in the present value of in-force long-term insurance business ('PVIF'), partly offset by the non-recurrence of revaluation losses on investment properties in Hong Kong in 2020.
The unfavourable movement in PVIF reflected adverse assumption changes and experience variances in Hong Kong and Singapore, primarily due to interest rates movements, partly offset by an increase in the value of new business written, mainly in Hong Kong.
The movement in PVIF was partly offset by a corresponding movement in 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.
Net insurance claims and benefits paid and movement in liabilities to policyholders decreased by HK$1,863m, or 2%, driven by the unfavourable movement in PVIF, partly offset by higher investment returns to policyholders due to the more favourable equity market performance compared with the prior year.
Change in expected credit losses and other credit risk provisions decreased by HK$11,180m, or 63%, notably in CMB, mainly reflecting the non-recurrence of charges in relation to the unfavourable forward economic outlook as impacted by Coronavirus Disease 2019 ('Covid-19') in 2020, and also from lower specific charges due to the non-recurrence of a significant charge in the prior year. A decrease was also noted in WPB, reflecting the same impact from the forward economic outlook update in the prior year. The decreases in CMB and WPB were partly offset by an increase in GB, mainly due to an increase in allowance relating to mainland China's commercial real estate sector.
Total operating expenses increased by HK$9,048m, or 9%. Excluding the unfavourable foreign exchange impact, operating expenses increased by HK$7,719m, or 8%, reflecting an increase in investments in technology, including investments in our digital capabilities, and in our Asia wealth business. Employee compensation and benefits also increased, mainly from higher performance-related pay and wage inflation, partly offset by lower average headcount across the region.
Share of profit in associates and joint ventures increased by HK$4,915m, or 34%. Excluding the favourable foreign exchange impact, the share of profit in associates and joint ventures increased by HK$3,857m, or 25%, mainly from Bank of Communications Co., Limited.
Net interest income
(Unaudited)
2021 2020
HK$m HK$m
--------------------------------- -------------------------- --------------------------
Net interest income 98,113 111,513
--------------------------------- -------------------------- --------------------------
Average interest-earning assets 7,173,973 6,882,970
--------------------------------- -------------------------- --------------------------
%%
--------------------------------- -------------------------- -------------------------
Net interest spread 1.32 1.53
--------------------------------- -------------------------- --------------------------
Contribution from net free funds 0.05 0.09
--------------------------------- -------------------------- --------------------------
Net interest margin 1.37 1.62
--------------------------------- -------------------------- --------------------------
Net interest income ('NII') decreased by HK$13,400m, or 12%. Excluding the favourable foreign exchange impact, net interest income decreased by HK$15,010m, or 13%, driven by Hong Kong primarily due to narrower customer deposit spreads and lower reinvestment yields as market interest rates decreased, partly offset by balance sheet growth. To a lesser extent, net interest income in India and Malaysia also decreased.
Average interest-earning assets increased by HK$291bn, or 4%, driven by Hong Kong, mainland China and India, mainly reflecting growth in the commercial surplus as customer deposits increased.
Net interest margin ('NIM') dropped by 25 basis points ('bps'), with decreases noted across the region, primarily in Hong Kong and mainland China, as market interest rates decreased significantly compared to the prior year. This resulted in narrower customer deposit spreads and lower reinvestment yields. The increase in commercial surplus, which was primarily deployed into reverse repurchase agreements and other short-term funds, also contributed to lower yields.
Insurance manufacturing
(Unaudited)
The following table shows the results of our insurance manufacturing operations by income statement line item, and separately the insurance distribution income earned by the group's bank channels.
Results of insurance manufacturing operations and insurance distribution
income earned by the group's bank channels
2021 2020
HK$m HK$m
------------------------------------------------- ------------------------------- ----------------------------------
Insurance manufacturing operations(1)
------------------------------------------------- ------------------------------- ----------------------------------
Net interest income 16,527 15,654
------------------------------------------------- ------------------------------- ----------------------------------
Net fee expense (3,617) (2,923)
------------------------------------------------- ------------------------------- ----------------------------------
Net income from financial instruments measured at
fair
value 18,036 13,812
------------------------------------------------- ------------------------------- ----------------------------------
Net insurance premium income 62,135 61,874
------------------------------------------------- ------------------------------- ----------------------------------
Change in present value of in-force long-term
insurance
business (1,294) 3,840
------------------------------------------------- ------------------------------- ----------------------------------
Other operating income/(expense) 719 (364)
------------------------------------------------- ------------------------------- ----------------------------------
Total operating income 92,506 91,893
------------------------------------------------- ------------------------------- ----------------------------------
Net insurance claims and benefits paid and
movement
in liabilities to policyholders (76,361) (78,093)
------------------------------------------------- ------------------------------- ----------------------------------
Net operating income before change in expected
credit
losses and other credit impairment charges 16,145 13,800 ------------------------------------------------- ------------------------------- ---------------------------------- Change in expected credit losses and other credit impairment charges (216) (440) ------------------------------------------------- ------------------------------- ---------------------------------- Net operating income 15,929 13,360 ------------------------------------------------- ------------------------------- ---------------------------------- Total operating expenses (3,464) (2,595) ------------------------------------------------- ------------------------------- ---------------------------------- Operating profit 12,465 10,765 ------------------------------------------------- ------------------------------- ---------------------------------- Share of profit in associates and joint ventures 137 6 ------------------------------------------------- ------------------------------- ---------------------------------- Profit before tax 12,602 10,771 ------------------------------------------------- ------------------------------- ---------------------------------- Annualised new business premiums of insurance manufacturing operations 19,136 15,749 ------------------------------------------------- ------------------------------- ---------------------------------- Distribution income earned by the group's bank channels 4,135 4,092 ------------------------------------------------- ------------------------------- ----------------------------------
1 The results presented for insurance manufacturing operations are shown before elimination of intercompany transactions with the group's non-insurance operations.
Insurance manufacturing
Profit before tax from the insurance manufacturing operations increased by HK$1,831m, or 17%, driven by more favourable equity markets compared to 2020, together with higher new business volumes.
Net interest income increased by 6% from growth in invested funds, reflecting net new business and renewal premium inflows on life insurance contracts.
Net income from financial instruments measured at fair value increased, mainly from gains on the equity portfolio held to support insurance and investment contracts in Hong Kong, due to more favourable equity market performance.
Net insurance premium income increased from higher sales volumes mainly in Singapore and mainland China, partly offset by increased reinsurance arrangements in Hong Kong.
The unfavourable movement in PVIF reflected adverse assumption changes and experience variances in Hong Kong and Singapore primarily due to interest rates movements, partly offset by an increase in the value of new business written, mainly in Hong Kong.
To the extent that the above gains or losses are attributable to policyholders, there is an offsetting movement reported under 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.
Annualised new business premiums increased by HK$3,387m, or 22%, mainly in Hong Kong reflecting new business initiatives, product launches and marketing promotions to support domestic sales. New business levels in 2020 were impacted by the onset of Covid-19.
Balance sheet commentary compared with 31 December 2020
(Unaudited)
The consolidated balance sheet at 31 December 2021 is set out in the Consolidated Financial Statements.
Gross loans and advances to customers increased by HK$175bn, or 5%. Excluding the unfavourable foreign exchange translation effects of HK$13bn, gross loans and advances to customers increased by HK$188bn, driven by an increase in residential mortgages of HK$77bn, mainly in Hong Kong and Australia. In addition, corporate and commercial lending and non-bank financial institution lending increased by HK$62bn and HK$37bn respectively, mainly in Hong Kong, mainland China and India.
Overall credit quality remained strong, with total gross impaired loans and advances as a percentage of gross loans and advances standing at 1.11% at the end of 2021 (2020: 0.99%). The change in expected credit losses as a percentage of average gross customer advances was 0.18% for 2021 (2020: 0.44%).
Interests in associates and joint ventures
At 31 December 2021, an impairment review on the group's investment in Bank of Communications Co., Ltd ('BoCom') was carried out and it was concluded that the investment was not impaired based on our value-in-use calculation (see Note 14 on the Consolidated Financial Statements for further details). As discussed in that note, in future periods, the value in use may increase or decrease depending on the effect of changes to model inputs. It is expected that the carrying amount will continue to increase due to retained profits earned by BoCom. At the point where the carrying amount exceeds the value in use, impairment would be recognised. The group would continue to recognise its share of BoCom's profit or loss, but the carrying amount would be reduced to equal the value in use, with a corresponding reduction in the income statement. An impairment review would continue to be performed at each subsequent reporting period, with the carrying amount and income adjusted accordingly.
Customer deposits rose by HK$266bn, or 4%, to HK$6,177bn. The advances-to-deposits ratio was 62.2% at the end of the year (2020: 62.1%).
Shareholders' equity grew by HK$11bn to HK$857bn at
31 December 2021, mainly reflecting the current year's profit, net of dividend payments.
Risk Our approach to risk
(Unaudited)
Our risk appetite
We recognise the importance of a strong culture, which refers to our shared attitudes, values and standards that shape behaviours related to risk awareness, risk taking and risk management. All our people are responsible for the management of risk, with the ultimate accountability residing with the Board.
We seek to build our business for the long term by balancing social, environmental and economic considerations in the decisions we make. Our strategic priorities are underpinned by our endeavour to operate in a sustainable way. This helps us to carry out our social responsibility and manage the risk profile of the business. We are committed to managing and mitigating climate-related risks, both physical and transition, and continue to incorporate consideration of these into how we manage and oversee risks internally and with our customers.
The following principles guide the group's overarching appetite for risk and determine how our businesses and risks are managed.
Financial position
-- We aim to maintain a strong capital position, defined by regulatory and internal capital ratios.
-- We carry out liquidity and funding management for each operating entity, on a stand-alone basis.
Operating model
-- We seek to generate returns in line with our risk appetite and strong risk management capability.
-- We aim to deliver sustainable and diversified earnings and consistent returns for shareholders.
Business practice
-- We have zero tolerance for any of our people knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and/or mitigated.
-- We have no appetite for deliberately or knowingly causing detriment to consumers, or incurring a breach of the letter or spirit of regulatory requirements.
-- We have no appetite for inappropriate market conduct by any member of staff or by any group business.
-- We are committed to managing the climate risks that have an impact on our financial position, and delivering on our net zero ambition.
Enterprise-wide application
Our risk appetite encapsulates the consideration of financial and non-financial risks. We define financial risk as the risk of a financial loss as a result of business activities. We actively take these types of risks to maximise shareholder value and profits. Non-financial risk is the risk to achieving our strategy or objectives as the result of failed internal processes, people and systems or from external events.
Our risk appetite is expressed in both quantitative and qualitative terms and applied at the global business level and to material operating entities. It continues to evolve and expand its scope as part of our regular review process.
The Board reviews and approves the group's risk appetite twice a year to make sure it remains fit for purpose. The group's risk appetite is considered, developed and enhanced through:
-- an alignment with our strategy, purpose, values and customer needs; -- trends highlighted in other group risk reports; -- communication with risk stewards on the developing risk landscape; -- strength of our capital, liquidity and balance sheet; -- compliance with applicable laws and regulations;
-- effectiveness of the applicable control environment to mitigate risk, informed by risk ratings from risk control assessments;
-- functionality, capacity and resilience of available systems to manage risk; and -- the level of available staff with the required competencies to manage risks.
We formally articulate our risk appetite through our risk appetite statement ('RAS'), which is approved by the Board on the recommendation of the group Risk Committee ('RC'). Setting out our risk appetite ensures that we agree a suitable level of risk for our strategy. In this way, risk appetite informs our financial planning process and helps senior management to allocate capital to business activities, services and products.
The RAS consists of qualitative statements and quantitative metrics, covering financial and non-financial risks. It is applied to the development of business line strategies, strategic and business planning, and remuneration. At a group level, performance against the RAS is reported to the group Risk Management Meeting ('RMM') alongside key risk indicators to support targeted insight and discussion on breaches of risk appetite and associated mitigating actions. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture.
Most global businesses and strategically important entities are required to have their own RAS, which is monitored to help ensure it remains aligned with the group's RAS. Each RAS and business activity is guided and underpinned by qualitative principles and/or quantitative metrics.
Risk management
We recognise that the primary role of risk management is to protect our customers, business, colleagues, shareholders and the communities that we serve, while ensuring we are able to support our strategy and provide sustainable growth. This is supported through our three lines of defence model described on page 16.
The implementation of our business strategy, which include a major transformation programme, remains a key focus. As we implement change initiatives, we actively manage the execution risks. We also perform periodic risk assessments, including against strategies to help ensure retention of key personnel for our continued safe operation.
We aim to use a comprehensive risk management approach across the organisation and across all risk types, underpinned by the group's culture and values. This is outlined in our risk management framework, including the key principles, policies and practices that we employ in managing material risks, both financial and non-financial.
The framework fosters continual monitoring, promotes risk awareness and encourages a sound operational and strategic decision making and escalation process. It also supports a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities, with clear accountabilities. We continue to actively review and develop our risk management framework and enhance our approach to managing risk, through our activities with regard to: people and capabilities; governance; reporting and management information; credit risk management models; and data.
Our risk management framework
The following diagram and descriptions summarise key aspects of the risk management framework, including governance, structure, risk management tools and our culture, which together help align employee behaviour with risk appetite.
Key components of our risk management framework
Risk governance Non-executive risk governance The Board approves the group's
risk appetite, plans and performance
targets. It sets the 'tone from
the top' and is advised by the
group's Risk Committee.
Executive risk governance Our executive risk governance structure
is responsible for the enterprise-wide
management of all risks, including
key policies and frameworks for
the management of risk within the
group.
Roles and Three lines of defence Our 'three lines of defence' model
responsibilities model defines roles and responsibilities
for risk management. An independent
Risk function helps ensure the
necessary balance in risk/return
decisions.
Processes Risk appetite The group has processes in place
and tools to identify/assess, monitor, manage
and report risks to help ensure
we remain within our risk appetite.
Enterprise-wide risk management
tools
Active risk management:
identification/assessment,
monitoring, management
and reporting
Internal Policies and procedures Policies and procedures define
controls the minimum requirements for the
controls required to manage our
risks.
-----------------
Control activities Operational and resilience risk
management defines minimum standards
and processes for managing operational
risks and internal controls.
Systems and infrastructure The group has systems and/or processes
that support the identification,
capture and exchange of information
to support risk management activities.
----------------- -------------------------------------------- ---------------------------------------
Risk governance
The Board has ultimate responsibility for the effective management of risk and approves our risk appetite. It is advised on risk-related matters by the RC.
The group's Chief Risk Officer, supported by the RMM, holds executive accountability for the ongoing monitoring, assessment and management of the risk environment and the effectiveness of the risk management framework.
The management of regulatory compliance risk and financial crime risk resides with the group's Chief Compliance Officer. Oversight is maintained by the group's Chief Risk Officer, in line with his enterprise risk oversight responsibilities, through the RMM.
Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. All our people have a role to play in risk management. These roles are defined using the three lines of defence model, which takes into account the group's business and functional structures as described in the following commentary, 'Our responsibilities'.
We use a defined executive risk governance structure to help ensure there is appropriate oversight and accountability of risk, which facilitates reporting and escalation to the RMM. This structure is summarised in the following table.
Governance structure for the management of risk
Risk Management group Chief Risk Officer
Meeting of group General Counsel * Supporting the group Chief Risk Officer in exercising
the group group Co-Chief Executives Board-delegated risk management authority.
group Chief Financial
Officer
group heads of global * Overseeing the implementation of risk appetite and
business and global the risk management framework.
functions
* Forward-looking assessment of the risk environment,
analysing possible risk impacts and taking
appropriate action.
* Monitoring all categories of risk and determining
appropriate mitigating action.
* Promoting a supportive group culture in relation to
risk management and conduct.
-------------------- -------------------------- ------------------------------------------------------------
Global business/Site Global business/Site
risk management Chief Risk Officer * Supporting the Chief Risk Officer in exercising
meetings Global business/Site Board-delegated risk management authority.
Chief Executive
Global business/Site
Chief Financial Officer * Forward-looking assessment of the risk environment,
Global business/Site analysing the possible risk impact and taking
heads of global functions appropriate action.
* Implementation of risk appetite and the risk
management framework.
* Monitoring all categories of risk and determining
appropriate mitigating actions.
* Embedding a supportive culture in relation to risk
management and controls.
-------------------- -------------------------- ------------------------------------------------------------
The Board committees with responsibility for oversight of risk-related matters are set out on page 6.
Our responsibilities
All our people are responsible for identifying and managing risk within the scope of their roles. Roles are defined using the three lines of defence model, which takes into account our business and functional structures as described below.
Three lines of defence
To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment.
The model underpins our approach to risk management by clarifying responsibility and encouraging collaboration, as well as enabling efficient coordination of risk and control activities.
The three lines of defence are summarised below:
-- The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing them in line with risk appetite, and ensuring that the right controls and assessments are in place to mitigate them.
-- The second line of defence challenges the first line of defence on effective risk management, and provides advice and guidance in relation to the risk.
-- The third line of defence is our Global Internal Audit function, which provides independent assurance that our risk management approach and processes are designed and operating effectively.
Risk function
The group's Risk function, headed by the group's Chief Risk Officer, is responsible for the group's risk management framework. This responsibility includes establishing and monitoring of risk profiles, and identifying and managing forward-looking risk. The group's Risk function is made up of sub-functions covering all risks to our business. Forming part of the second line of defence, the group's Risk function is independent from the global businesses, including sales and trading functions, to provide challenge, appropriate oversight and balance in risk/return decisions.
Responsibility for minimising both financial and non-financial risk lies with our people. They are required to manage the risks of the business and operational activities for which they are responsible. We maintain adequate oversight of our risks through our various specialist risk stewards as well as the collective accountability held by our Chief Risk Officers at sites and global businesses.
We have continued to strengthen the control environment and our approach to the management of non-financial risk, as broadly set out in our risk management framework. The management of non-financial risk focuses on governance and risk appetite, and provides a single view of the non-financial risks that matter the most and the associated controls. It incorporates a risk management system designed to enable the active management of non-financial risk. Our ongoing focus is on simplifying our approach to non-financial risk management, while driving more effective oversight and better end-to-end identification and management of non-financial risks. This is overseen by the Operational and Resilience Risk function, headed by the group Head of Operational and Resilience Risk.
Stress testing and recovery planning
The group operates a wide-ranging stress testing programme that is a key part of our risk management and capital and liquidity planning. Stress testing provides management with key insights into the impact of severely adverse events on the group, and provides confidence to regulators on the group's financial stability.
Our stress testing programme assesses our capital and liquidity strength through a rigorous examination of our resilience to external shocks. As well as undertaking regulatory-driven stress tests, we conduct our own internal stress tests, in order to understand the nature and level of all material risks, quantify the impact of such risks and develop plausible business-as-usual mitigating actions.
Many of our regulators - including the Hong Kong Monetary Authority ('HKMA') - use stress testing as a prudential regulatory tool, and the group has focused significant governance and resources to meet their requirements.
Internal stress tests
Our internal capital assessment uses a range of stress scenarios that explore risks identified by management. They include potential adverse macroeconomic, geopolitical and operational risk events, as well as other potential events that are specific to the group.
The selection of stress scenarios is based upon the output of our identified top and emerging risks and our risk appetite. Stress testing analysis helps management understand the nature and extent of vulnerabilities to which the group is exposed. Using this information, management decides whether risks can or should be mitigated through management actions or, if they were to crystallise, be absorbed through capital and liquidity. This in turn informs decisions about preferred capital and liquidity levels and allocations.
In addition to the group-wide stress testing scenarios, each major subsidiary and branch conducts regular macroeconomic and event-driven scenario analyses specific to its region. They also participate, as required, in the regulatory stress testing programmes of the jurisdictions in which they operate, and the stress tests of the HKMA. Global functions and businesses also perform bespoke stress testing to inform their assessment of risks to potential scenarios.
We also conduct reverse stress tests each year at a group level and, where required, at subsidiary entity level to understand potential extreme conditions that would make our business model non-viable. Reverse stress testing identifies potential stresses and vulnerabilities we might face, and helps inform early warning triggers, management actions and contingency plans designed to mitigate risks.
The group stress testing programme is overseen by the RC and results are reported, where appropriate, to the RMM and RC.
Recovery and resolution plans
Recovery and resolution plans form part of the integral framework safeguarding the group's financial stability. The group's recovery plan, together with stress testing, helps us understand the likely outcomes of adverse business or economic conditions and in the identification of mitigating actions.
Key developments in 2021
In 2021, it was announced that Mark McKeown was retiring from his role of the group's Chief Risk Officer in late October 2021. Martin Haythorne, who was the Global Head of Wholesale Credit and Lending, has been appointed as the group's Chief Risk Officer with effect from 2 August 2021.
We continued to actively manage the risks resulting from the Covid-19 pandemic and its impacts on our customers and operations during 2021, as well as other key risks described in this section.
In addition, we enhanced our risk management in the following areas:
-- We streamlined the articulation of our risk appetite framework, providing further clarity on how risk appetite interacts with strategic planning and recovery planning processes.
-- We continued to simplify our approach to non-financial risk management, with the implementation of more effective oversight tools and techniques to improve end-to-end identification and management of these risks.
-- We accelerated the transformation of our approach to managing financial risks across the businesses and risk functions, including initiatives to enhance portfolio monitoring and analytics, credit risk management, traded risk management, treasury risk management and models used to manage financial risks.
-- We are progressing with a comprehensive regulatory reporting programme to strengthen our global processes, improve consistency, and enhance controls.
-- We launched an enhanced approach to Conduct for all colleagues, businesses and geographies, establishing the outcomes to be achieved for customers and markets in all risk disciplines, operations and technologies and integrating it into our approach to culture and our risk management arrangements.
-- We continued to enhance our approach to portfolio risk management, through clearly defined roles and responsibilities, and improving our data and management information reporting capabilities.
-- We established a dedicated Climate Risk Oversight Forum to oversee our approach to climate risk. Globally, the Group has appointed a Group Head of Climate Risk in support of our climate change strategy and to oversee the development of our climate risk management capabilities. We leveraged on the Group climate risk programme, which continues to drive the delivery of our enhanced climate risk management approach.
We continued to improve the effectiveness of our financial crime controls with a targeted update of our fraud controls. We refreshed our financial crime policies, ensuring they remained up-to-date and addressed changing and emerging risks, and we continued to meet our regulatory obligations Top and emerging risks
(Unaudited)
We use a top and emerging risks process to provide a forward-looking view of issues with the potential to threaten the execution of our strategy or operations over the medium to long term.
We proactively assess the internal and external risk environment, as well as review the themes identified across our region and global businesses, for any risks that may require global escalation, updating our top and emerging risks as necessary.
Our current top and emerging risks are as follows:
Externally driven
Geopolitical and macroeconomic risks
(Unaudited)
Our operations and portfolios are exposed to risks associated with political instability, civil unrest and military conflict, which could lead to disruption of our operations, physical risk to our staff and/or physical damage to our assets.
Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.
The Covid-19 pandemic brought supply chain issues into focus, with shortages appearing across several regions and products throughout 2020 and 2021, and it is not expected that these issues will ease significantly before mid-2022.
The pandemic has also heightened geopolitical tensions, which could have implications for the group and its customers.
The group will increasingly need to consider potential regulatory, reputational and market risks arising from the evolving geopolitical landscape. In 2021, there was an escalation of tensions between China and the US, and increasingly extending to the UK, the EU, India and other countries.
The US-China relationship in particular remains complex, with divisions over a number of critical issues. The US, the UK, the EU, Canada and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies, and the US continues to develop its approach to perceived strategic competition with China.
Certain US measures are particularly relevant. The US Hong Kong Autonomy Act authorises secondary sanctions against non-US financial institutions found to be knowingly conduct significant transactions with individuals and entities that are determined by the US to have undermined Hong Kong's autonomy. In addition, the US has imposed restrictions on US persons' ability to buy or sell certain publicly traded securities of certain Chinese companies linked to China's defence and related material or surveillance sectors.
There are also increasing discussions between the US and other governments on multilateral efforts to address certain issues with China, which are likely to create a more complex operating environment for the group and its customers. Notably, with its traditional allies including the EU, UK, and Canada, the US has increasingly instituted sanctions in response to allegations of human rights abuses in Xinjiang.
China in turn has announced a number of its own sanctions and trade restrictions that target foreign individuals and companies. These have been imposed mainly against certain public officials associated with the implementation of foreign sanctions against China. China has promulgated new laws that provide a legal framework for imposing further sanctions and export restrictions, including a law prohibiting the implementation of, or compliance with, foreign sanctions against China and which also creates a private right of action in the Chinese courts for damages caused by third parties implementing foreign sanctions or other discriminatory measures. These and any future measures and countermeasures that may be taken by the US, China and other countries may affect the group, its customers, and the markets in which we operate.
As the geopolitical landscape evolves, compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional compliance, reputational and political risks for the group. We maintain an open dialogue with our regulators on the impact of legal and regulatory obligations on our business and customers.
Expanding data privacy and cybersecurity laws in a number of markets could pose potential challenges to intra-group data sharing. These developments could increase financial institutions' compliance burdens in respect of cross-border transfers of personal information.
Monetary and fiscal policies in developed markets will likely remain broadly accommodative for some time owing to uncertainty over the economic outlook. However, rising global inflation - partly on the back of higher energy prices - is putting pressure on central banks to tighten monetary policy. The US Federal Reserve Board began tapering its asset purchases from November 2021 and financial markets currently expect it to raise the Federal Funds rate over the next year. The European Central Bank is on course to end its extraordinary asset purchase programme in March 2022.
Persistent supply issues or further increases in energy prices - for instance as a result of escalation in the Russia-Ukraine crisis - could keep inflation high and force central banks to tighten monetary policies faster than currently envisaged. Conversely, monetary policy tightening may be constrained by the emergence and spread of new Covid-19 variants that dampen economic recovery. We continue to monitor our risk profile closely in the context of uncertainty over monetary policies.
Market concerns remain about repercussions for the Chinese domestic economy from the recent instability in the commercial real estate sector. Such repercussions may occur directly through financial exposures to the Chinese commercial real estate sector, or indirectly through the effect of a slowdown in economic activity in China and in the supply chain to the real estate sector. While at 31 December 2021 we had no direct credit exposure to developers classified as falling within the 'red' category of the 'three red lines' framework used by the Chinese government in its governance of the real estate sector, deteriorating operating performance and challenging liquidity conditions were more broadly seen across the sector. We continue to monitor the situation closely, including potential indirect impacts, and seek to take mitigating actions as required.
The global economic recovery in 2021 eased financial difficulties for some of our customers, which contributed to a reduction in ECL charges.
For further details on customer relief programmes, see pages 46 to 47.
Mitigating actions
-- We closely monitor geopolitical and economic developments in key markets and sectors and undertake scenario analysis where appropriate. This helps us to take portfolio actions where necessary, including enhanced monitoring, amending our risk appetite and/or reducing limits and exposures.
-- We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions to rebalance exposures and manage risk appetite where necessary.
-- We regularly review key portfolios to help ensure that individual customer or portfolio risks are understood and our ability to manage the level of facilities offered through any downturn is appropriate.
-- We have taken steps to enhance physical security in those geographical areas deemed to be at high risk from terrorism and military conflicts.
Environmental, social and governance risk
(Unaudited)
We are subject to financial and non-financial risks associated with environmental, social and governance ('ESG') risk. Our main ESG risks are climate risk, nature-related risks and human rights risks. These can impact us both directly and indirectly through our customers.
Climate-related risk increased over 2021, owing to the pace and volume of policy and regulatory changes globally particularly on climate risk management, stress testing and scenario analysis and disclosures. If we fail to meet evolving regulatory expectations or requirements on climate risk management, this could have regulatory compliance and reputational impacts for the group.
We face increased reputational, legal and regulatory risks as we make progress towards our net zero ambition, with stakeholders likely to place a greater focus on our actions such as the development of climate-related policies, our disclosures and investment decisions relating to our ambition. To track and report on progress towards achieving our ambition, we rely on internal and external data, guided by certain industry standards. While emissions reporting has improved over time, data remain of limited quality and consistency. Methodologies we have used may develop over time in line with market practice and regulation as well as owing to developments in climate science. Any developments in data and methodologies could result in revisions, meaning that reported figures may not be reconcilable or comparable year-on-year. We may also have to re-evaluate our progress towards our climate-related targets in future and this could result in reputational, legal and regulatory risks.
Climate risk will also have an impact on model risk, as models play an important role in risk management and the financial reporting of climate-related risks. The uncertain impacts of climate change and data limitations, present challenges to creating reliable and accurate model outputs.
We could also face increased resilience, retail credit and wholesale credit risks owing to the increase in frequency and severity of weather events and chronic shifts in weather patterns. These risks could impact our own critical operations resulting in customer detriment and operational losses for HSBC. Our customers' operations and assets could also be affected, reducing their ability to afford mortgage or loan repayments, leading to credit risk impacts for the group.
There is increasing evidence that a number of nature-related risks beyond climate change - which include risks that can be represented more broadly by the economic dependency on nature - can and will have significant economic impact. These risks arise when the provision of natural services - such as water availability, air quality, and soil quality - is compromised by overpopulation, urban development, natural habitat and ecosystem loss, and other environmental stresses beyond climate change. They can show themselves in various ways, including through macroeconomic, market, credit, reputational, legal and regulatory risks, for both HSBC and its customers. In 2021, we added nature-related risks as a new emerging risk driver, under the umbrella theme of ESG Risks and continue to engage with investors, regulators and customers on nature-related risks to evolve our approach and understand best practice risk mitigation.
Regulation and disclosure requirements in relation to human rights, and to Modern Slavery in particular, are increasing. Businesses are expected to explain more about their efforts to identify and respond to the risk of negative human rights impacts arising from the actions of their employees, suppliers, customers and those in whom they invest.
Mitigating actions
-- We continue to deepen our understanding of the drivers of climate risk as well as manage our exposure. We have established a dedicated Climate Risk Oversight Forum for overseeing our approach and providing support in managing climate risk.
-- Our climate risk programme continues to accelerate the development of our climate risk management capabilities across four key pillars - governance and risk appetite, risk management, stress testing and scenario analysis, and disclosures. We are also enhancing our approach to greenwashing risk.
-- In December 2021, the Group published our Thermal Coal Phase-Out Policy committing to phase out the financing of coal-fired power and thermal coal mining in EU/OECD markets by end 2030, and globally by end 2040. The policy helps us chart the path to net zero and is a component of our approach towards managing the climate risk of our lending portfolio.
-- We have started to incorporate the outcomes and insights from the Bank of England's Climate Biennial Exploratory Scenario and HKMA Climate Risk Stress Test into climate risk management.
-- We are undertaking training and adding additional roles with specialist skills to manage climate-related risks.
-- We have delivered climate risk training to our legal entity boards and wider target audiences.
-- With the help of external stakeholders, we continued to review and improve our approach to human rights issues, following the UN Guiding Principles on Business and Human Rights.
-- In 2021, the Group joined several industry working groups dedicated to helping us assess and manage nature-related risks, such as the Taskforce on Nature-Related Financial Disclosure ('TNFD'). The Group's asset management business also published its biodiversity policy to publicly explain how our analysts address nature-related issues.
-- We continue to engage with our customers, investors and regulators proactively on the management of ESG risks. The Group also engages with initiatives, including the Climate Financial Risk Forum, Equator Principles, Taskforce on Climate-related Financial Disclosures and CDP (formerly the Carbon Disclosure Project) to drive best practice for climate risk management.
Ibor transition
(Unaudited)
Interbank offered rates ('Ibors') have historically been used extensively to set interest rates on different types of financial transactions and for valuation purposes, risk measurement and performance benchmarking.
Following the UK's Financial Conduct Authority ('FCA') announcement in July 2017 that it would no longer continue to persuade or require panel banks to submit rates for the London interbank offered rate ('Libor') after 2021, we have been actively working to transition legacy contracts from Ibors and meet client needs for products linked to new near risk-free replacement rates ('RFRs') or alternative reference rates. In March 2021, in accordance with the 2017 FCA announcement, ICE Benchmark Administration Limited ('IBA') announced that it would cease publication of 26 of the 35 main Libor currency interest rate benchmark settings from the end of 2021, but that the most widely used US dollar Libor settings would cease from 30 June 2023. As a result, our focus during 2021 was on the transition of legacy contracts referencing the Euro Overnight Index average ('Eonia') and the Libor settings that demised from the end of 2021.
During 2021, we continued the development of IT and RFR product capabilities, implemented supporting operational processes, and engaged with our clients to discuss options for the transition of their legacy contracts. The successful implementation of new processes and controls, as well as the transition of contracts away from Ibors, reduced the heightened financial and non-financial risks to which we were exposed. However, while all but exceptional new Libor contract issuance ceased during 2021, and from the end of 2021 for US dollar, we remain exposed to risks, including from a small population of so-called 'tough legacy' contracts, which reference Ibors that demised from the end of 2021, and have not been able to be transitioned to a new rate or do not have clear fallback language in place, and from legacy contracts that reference US dollar Libor and other regional rates demising at later dates ('demising regional rates'), which are expected to demise from June 2023.
Financial risks have been largely mitigated as a result of the implementation of model and pricing changes. However, differences in US dollar Libor and its replacement RFR, Secured Overnight Funding Rate ('SOFR'), create a basis risk in the trading book and banking book due to the asymmetric adoption of SOFR across assets, liabilities and products that we need to actively manage through appropriate financial hedging. Such basis risk is also created for other demising regional rates. Additionally, the comparatively limited use of SOFR in financial markets to date could result in insufficient liquidity to transition legacy US dollar contracts during 2022. This could potentially delay transition of some US dollar contracts into 2023, compressing the amount of time for transition, which could lead to heightened operational and conduct related risks as a result.
Additional non-financial risks, including financial reporting risks relating to potential mis-statements due to the complexity in applying accounting reliefs relating to amendments of legacy contracts and legal risk continue to exist.
These risks are present in different degrees across our product offering.
Transition legacy contracts
During 2021, we either successfully transitioned or confirmed appropriate fallback for over 99% of legacy Ibor contracts in sterling, Swiss franc, euro and Japanese yen Libor interest rates, as well as Eonia, with only a very small proportion of 'tough legacy' contracts remaining. Our approach to transition 'tough legacy' and US dollar Libor and other demising regional rates legacy contracts will differ by product and business area, but will be based on the lessons learned from the successful transition of contracts during 2021. We will continue to communicate with our clients and investors in a structured manner and be client led in the timing and nature of the transition.
For derivatives, all of our sterling, Swiss franc, euro and Japanese yen Libor interest rate exposure at year-end has rates determined by fallback mechanisms, or had no further such rate fixings post year end. We anticipate our US dollar Libor and demising regional rates exposures will continue to reduce through 2022 as a result of contract maturities, active transition and the cessation of new US dollar Libor issuance and that of demising regional rates. We will continue to look to actively reduce our US dollar and demising regional rates exposures by transitioning trades ahead of the demise date of 30 June 2023, by working with our clients to determine their needs and alternative approaches. Additionally, we are working with market participants, including clearing houses, to ensure we are able to transition contracts as the US dollar Libor and demising regional rates cessation dates approach.
For our loan book, over 90% of our reported exposure at the end of 2021 relates to sterling, Swiss franc, euro and Japanese yen Libor interest rate contracts that required no further client negotiation. The remaining exposure relates to a small number of 'tough legacy' contracts where discussions with our clients and other market participants, for syndicated transactions, have continued in early 2022, and this has led to further transitions being completed. Contracts that are unable to transition prior to their first interest payment date in 2022 are expected to use an alternative rate determined by the contractual language and governing law. For the remaining demising Ibors, notably US dollar Libor and demising regional rates, we have implemented new products and processes and updated our systems in readiness for transition. Global Banking, Commercial Banking and Global Private Banking have begun to engage with clients who have upcoming contract maturities with a view to refinancing using an appropriate replacement rate. Further communications and outreach to customers with US dollar Libor and demising regional rates contracts with later maturities will occur in due course.
For the group's non-derivative financial liabilities at 31 December 2021, there were three Japanese Yen Total Loss Absorbing Capacity ('TLAC') instruments at fixed to floating rate where the JPY Libor benchmark will be used to reset the coupon rate if the bank chooses not to redeem these instruments on the respective call date, or dates, for each series. The interest rate for these instruments is currently at fixed rate and the earliest call date before the coupon rate reset among these instruments is in September 2023.
We remain mindful of the various factors that impact on Ibor remediation strategy for our regulatory capital and TLAC instruments, including - but not limited to - timescales for cessation of relevant Ibor rates, constraints relating to the governing law of outstanding instruments, and the potential relevance of legislative solutions. We remain committed in seeking to remediate or mitigate relevant risks relating to Ibor-demise, as appropriate, on our outstanding regulatory capital and TLAC instruments before the relevant calculation, which may occur post-cessation of the relevant Ibor rate or rates.
Where we hold bonds issued by other institutions, we have remained dependent on the issuer's agents to engage in the transition process, although analysis will be undertaken of the issuers in US dollar Libor and other demising regional rate bonds to reduce our exposure, as occurred through 2021.
The completion of an orderly transition from the remaining Ibors, notably US dollar Libor and other demising regional rates, continues to be our programme's key objective through 2022 and 2023, with the aim of putting systems and processes in place to help achieve this.
Mitigating actions
-- Our global Ibor transition programme, which is overseen by the Group Chief Risk and Compliance Officer, will continue to deliver IT and operational processes to meet its objectives.
-- We carry out extensive training, communication and client engagement to facilitate appropriate selection of new rates and products and we have dedicated teams in place to support the transition.
-- We actively transition legacy contracts and ceased new issuance of Libor and demising regional rate based contracts, in line with regulatory expectations and with associated monitoring and controls.
-- We assess, monitor and dynamically manage risks arising from Ibor transition, and implement specific mitigating controls when required.
-- We continue to actively engage with regulatory and industry bodies to mitigate risks relating to 'tough legacy' contracts.
Financial instruments impacted by Ibor reform
(Audited)
Amendments to HKFRSs issued in October 2020 (Interest Rate Benchmark Reform Phase 2) 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 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. Instead, they 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.
Financial instruments yet to transition
to alternative benchmarks, by main
(Audited) benchmark
-----------------------------------------------------------------------------------------------------------------------------
Japanese
USD Libor Yen Libor Sibor GBP Libor Others(1)
At 31 Dec 2021 HK$m HK$m HK$m HK$m HK$m
--------------- ------------------ --------------------- -------------------------- -------------------------- --------------------------
Non-derivative
financial
assets(2) 206,508 2,846 56,291 22,197 4,779
--------------- ------------------ --------------------- -------------------------- -------------------------- --------------------------
Non-derivative
financial
liabilities 147,198 10,930 - - -
--------------- ------------------ --------------------- -------------------------- -------------------------- --------------------------
Derivative
notional
contract
amount 8,547,665 798,921 - 88,218 715,439
--------------- ------------------ --------------------- -------------------------- -------------------------- --------------------------
At 31 Dec 2020
--------------- -------------------- ----------------------- -------------------------- -------------------------- -----------------------
Non-derivative
financial
assets(2) 253,239 2,688 63,100 33,797 15,724
--------------- -------------------- ----------------------- -------------------------- -------------------------- -----------------------
Non-derivative
financial
liabilities 119,269 12,192 - - 4,125
--------------- -------------------- ----------------------- -------------------------- -------------------------- -----------------------
Derivative
notional
contract
amount 6,252,168 3,281,539 299 82,902 1,383,582
--------------- -------------------- ----------------------- -------------------------- -------------------------- -----------------------
1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (Euro Libor, Swiss Franc Libor, Eonia, SGD Swap Offer Rate ('SOR') and Thai Baht Interest Rate Fixing ('THBFIX')).
2 Gross carrying amount excluding allowances for expected credit losses.
The amounts in the above table relate to the group's main operating entities(1) and provide an indication of the extent of the group's exposure to the Ibor benchmarks which are due to be replaced. Amounts are in respect of financial instruments that:
-- contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark;
-- have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and
-- are recognised on the group's consolidated balance sheet.
1 Entities where we have material exposures impacted by Ibor reform in countries/territories comprising of Hong Kong, Singapore, Thailand, Australia and Japan.
In March 2021, the administrator of Libor, IBA, announced that the publication date of most US dollar Libor tenors is extended from 31 December 2021 to 30 June 2023. Publication of one-week and two-month tenors will cease after 31 December 2021. This change, together with the extended publication dates of Sibor, SOR and THBFIX, reduce the amounts presented at 31 December 2021 in the above table as some financial instruments included at
31 December 2020 will reach their contractual maturity date prior to the extended publication dates. Comparative data have not been re-presented.
For further details on our approach to Ibor transition, see 'Top and emerging risks - Ibor transition' (unaudited) above.
Financial crime risk environment
(Unaudited)
Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. The financial crime threats we face have continued to evolve, often in tandem with broader geopolitical, socioeconomic and technological shifts in our markets, leading to challenges such as managing conflicting laws and approaches to legal and regulatory regimes.
Financial crime risk evolved during the Covid-19 pandemic, notably with the manifestation of fraud risks linked to the economic slowdown and the resulting deployment of government relief measures. The accelerated digitisation of financial services has fostered significant changes to the payments ecosystem, including a multiplicity of providers and new payment mechanisms, not all of which are subject to the same level of regulatory scrutiny or regulations as financial institutions. This is presenting increasing challenges to the industry in terms of maintaining required levels of transparency, notably where institutions serve as intermediaries. Developments around digital assets and currencies, notably the role of stablecoins and central bank digital currencies, have continued at pace, with an increasing regulatory and enforcement focus on financial crimes linked to these types of assets.
Expectations with respect to intersection of ESG issues and financial crime as our organisation, customers and suppliers transition to net zero, are increasing, not least with respect to potential 'greenwashing'. Companies also face as a heightened regulatory focus on both human rights issues and environmental crimes, from a financial crime perspective. We also continue to face increasing challenges presented by national data privacy requirements, which may affect our ability to manage financial crime risks holistically and effectively.
Mitigating actions
-- We are strengthening our fraud and surveillance controls, and investing in next generation capabilities to fight financial crime through the application of advanced analytics and artificial intelligence.
-- We are looking at the impact of a rapidly changing payments ecosystem to ensure our financial crime controls remain appropriate for changes in customer behaviour and gaps in regulatory coverage, including the development of procedures and controls to manage the risks associated with direct and indirect exposure to digital assets and currencies.
-- We are assessing our existing policies and control framework to ensure that developments in the ESG space are considered and the risks mitigated.
-- We work with jurisdictions and relevant international bodies to address data privacy challenges through international standards, guidance, and legislation to help enable effective management of financial crime risk.
-- We work closely with our regulators and engage in public-private partnerships, playing an active role in shaping the industry's financial crime controls for the future, notably with respect to the enhanced, and transparent, use of technology.
Regulatory compliance risk environment including conduct
(Unaudited)
We keep abreast of the emerging regulatory compliance and conduct agenda, which currently include, but are not limited to: ESG matters; operational resilience; how digital and technology changes, including payments, are impacting financial institutions; how we are ensuring good customer outcomes, including addressing customer vulnerabilities; regulatory reporting; and employee compliance. We monitor regulatory developments closely and engage with regulators, as appropriate, to help ensure new regulatory requirements are implemented effectively and in a timely way.
Mitigating actions
-- We monitor for regulatory developments to understand the evolving regulatory landscape and respond with changes in a timely way.
-- We engage, wherever possible, with governments and regulators to make a positive contribution to regulations and ensure that new requirements are considered properly and can be implemented effectively.
-- We hold regular meetings with relevant authorities to discuss strategic contingency plans, including those arising from geopolitical issues.
-- We launched our simplified conduct approach to align to our new purpose and values, in particular the value 'we take responsibility'.
Cyber threat and unauthorised access to systems
(Unaudited)
Together with other organisations, we continue to operate in an increasingly hostile cyber threat environment, which requires ongoing investment in business and technical controls to defend against these threats.
Key threats include unauthorised access to online customer accounts, advanced malware attacks, attacks on our third-party suppliers, and security vulnerabilities being exploited.
Mitigating actions
-- We continually evaluate threat levels for the most prevalent attack types and their potential outcomes. To further protect the group and our customers and help ensure the safe expansion of our global business lines, we strengthen our controls to reduce the likelihood and impact of advanced malware, data leakage, exposure through third parties and security vulnerabilities.
-- We continue to enhance our cybersecurity capabilities, including Cloud security, identity and access management, metrics and data analytics, and third-party security reviews. An important part of our defence strategy is ensuring our colleagues remain aware of cybersecurity issues and know how to report incidents.
-- We report and review cyber risk and control effectiveness at executive and non-executive Board level. We also report across our global businesses, functions and regions to help ensure appropriate visibility and governance of the risk and mitigating actions.
-- The Group participates globally in several industry bodies and working groups to share information about tactics employed by cyber-crime groups and to collaborate in fighting, detecting and preventing cyber-attacks on financial organisations.
Digitalisation and technological advances
(Unaudited)
Developments in technology and changes in regulation are enabling new entrants to the industry. This challenges the group to continue to innovate and optimise in order to take advantage of new digital capabilities to best serve our customers.
Mitigating actions
-- We continue to monitor this emerging risk, as well as the advances in technology to understand how changes may impact our customers and business.
-- We closely monitor and assess impacts to financial crime and the impact on payment transparency and architecture.
Internally driven
Data management
(Unaudited)
We use a large number of systems and growing quantities of data to support our customers. Risk arises if data is incorrect, unavailable, or misused, or if the privacy of our customers and colleagues are unprotected. Along with other banks and financial institutions, we need to meet external regulatory obligations and laws that cover data, such as the Basel Committee on Banking Supervision's guidelines 239 'Principles for effective risk data aggregation and risk reporting' and the General Data Protection Regulation ('GDPR').
Mitigating actions
-- Through our global data management framework, we monitor proactively the quality, availability and security of data that supports our customers and internal processes. We resolve any identified data issues in a timely manner.
-- We have made improvements to our data policies and are implementing an updated control framework to enhance the end-to-end management of data risk by our global businesses, global functions and markets.
-- We protect customer data via our data privacy framework, which establishes practices, design principles and guidelines that enable us to demonstrate compliance with data privacy laws and regulations.
-- We continue to modernise our data and analytics infrastructure through investments in Cloud technology, data visualisation, machine learning and artificial intelligence.
-- We delivered global mandatory training on the importance of protecting data and managing data appropriately.
IT systems infrastructure and resilience
(Unaudited)
We operate an extensive technology landscape, which must remain resilient in order to support customers, the organisation and markets globally. Technology risks arise where technology is not understood, maintained and development of technology is not controlled.
Mitigating actions
-- We continue to invest in transforming how software solutions are developed, delivered and maintained. We concentrate on improving system resilience and service continuity testing. We continue to ensure security is built into our software development life cycle and improved our testing processes and tools.
-- We continue to upgrade many of our IT systems, simplify our service provision and replace older IT infrastructure and applications. These enhancements supported global improvements in service availability during 2021 for both our customers and colleagues.
Risks arising from the receipt of services from third parties
(Unaudited)
We use third parties to provide a range of services, in common with other financial service providers. Risks arising from the use of third party service providers and their supply chain are less transparent. It is critical that we ensure we have appropriate risk management policies, processes and practices over the selection, governance and oversight of third parties and their supply chain, particularly for key activities that could affect our operational resilience. Any deficiency in the management of risks associated with our third parties could affect our ability to meet customer, strategic or regulatory expectations.
Mitigating actions
-- We have enhanced our control framework for external supplier arrangements to ensure the risks associated with third-party arrangements are understood and managed effectively by our global businesses, global functions and markets.
-- We have applied the same control standards to intra-group arrangements as we have for external third party arrangements to ensure we are managing them effectively.
-- We are implementing the changes required by the new global third-party risk policy to comply with new regulations as defined by our regulators.
Risks associated with workforce capability, capacity and environmental factors with potential impact on growth
(Unaudited)
Our success in delivering our strategic priorities and managing the regulatory environment proactively depends on the development and retention of our leadership and high-performing employees. A very competitive employment market will continue to test our ability to attract and retain talent. Changed working arrangements, local Covid-19 restrictions and health concerns during the pandemic have also impacted employee mental health and well-being.
Mitigating actions
-- We have put in place measures to help support our people so they are able to work safely during the Covid-19 pandemic. While our approach to workplace recovery around the world is consistent, the measures we take in different locations are specific to their environment.
-- We promote a diverse and inclusive workforce and provide active support across a wide range of health and well-being activities. We continue to build our speak-up culture through active campaigns.
-- We monitor people risks that could arise due to organisational restructuring, helping to ensure we manage redundancies sensitively and support impacted employees. We encourage our people leaders to focus on talent retention at all levels, with an empathetic mindset and approach, while ensuring the whole proposition of working at HSBC is well understood.
-- Our Future Skills curriculum helps provide critical skills that will enable employees and HSBC to be successful in the future.
-- We continue to develop succession plans for key management roles, with actions agreed and reviewed on a regular basis by the group Executive Committee.
Change execution risk
(Unaudited)
We have continued our increased investment in strategic change to support the delivery of our strategic priorities and regulatory commitments. This requires change to be executed safely and efficiently.
Mitigating actions
-- A Global Transformation Programme is progressing with the delivery of strategic change commitments made in February 2020 to restructure our business, reallocate capital into higher growth and higher return businesses and markets, and to simplify our organisation to improve operational resilience and reduce costs.
-- The remit of the Transformation Oversight Executive Committee established in 2020 to oversee the Global Transformation Programme was expanded in 2021 to oversee the prioritisation, strategic alignment and management of execution risk for all change portfolios and initiatives.
-- We continue to work to strengthen our change management practices to deliver sustainable change, increased adoption of Agile ways of working and a more consistent standard of delivery. The Transformation Oversight Executive Committee oversees the continued embedding of our improved Group-wide change framework released in May 2021, which sets out the mandatory principles and standards relating to leading and delivering change.
--
Areas of special interest
(Unaudited)
During 2021, a number of areas were identified and considered as part of our top and emerging risks because of the effect they may have on the group. While considered under the themes captured under top and emerging risks, in this section we have placed a particular focus on the Covid-19 pandemic and climate-related risks.
Risks related to Covid-19
Despite the successful roll-out of vaccines around the world, the Covid-19 pandemic and its effect on the global economy have continued to impact our customers and organisation. The global vaccination roll-out in 2021 helped reduce the social and economic impact of the Covid-19 pandemic, although there has been significant divergence in the speed at which vaccines have been deployed around the world. Most developed countries have now vaccinated a large proportion of their populations, but many less developed countries have struggled to secure supplies and are at an earlier stage of their roll-out. By the end of 2021, high vaccination rates had ensured that many Covid-19-related restrictions on activity in developed markets had been lifted and travel constraints were easing. However, the emergence of the Omicron variant in late 2021 demonstrated the continued risk new variants pose.
The pandemic necessitated governments to respond at unprecedented levels to protect public health, and to support local economies and livelihoods. The resulting government support measures and restrictions created additional challenges, given the rapid pace of change and significant operational demands. Renewed outbreaks, particularly those resulting from the emergence of variants of the virus, emphasise the ongoing threat of Covid-19 and could result in further tightening of government restrictions. There remains a divergence in approach taken by countries to the level of restrictions on activity and travel. Such diverging approaches to future pandemic waves could prolong or worsen supply chain and international travel disruptions.
We continue to support our personal and business customers through market-specific measures initiated during the Covid-19 pandemic, and by supporting national government schemes that focus on the parts of the economy most impacted by the pandemic. For further details of our customer relief programmes, see pages 46 to 47.
The rapid introduction and varying nature of the government support schemes introduced throughout the Covid-19 pandemic has led to increased operational risks, including complex conduct considerations, increased reputational risk and increased risk of fraud. These risks are likely to be heightened further as and when those remaining government support schemes are unwound. These events have also led to increased litigation risk.
The impact of the pandemic on the long-term prospects of businesses in the most vulnerable sectors of the economy - such as retail, hospitality, travel and commercial real estate - remains uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. In addition, in times of stress, fraudulent activity is often more prevalent, leading to potentially significant credit or operational losses.
As economic conditions improve, and government support measures come to an end, there is a risk that the outputs of HKFRS 9 models may have a tendency to underestimate loan losses. To help mitigate this risk, model outputs and management adjustments are closely monitored and independently reviewed at the group and country level for reliability and appropriateness.
Despite the ongoing economic recovery, significant uncertainties remain in assessing the duration and impact of the Covid-19 pandemic, including whether any subsequent outbreaks result in a reimposition of government restrictions. There is a risk that economic activity remains below pre-pandemic levels for a prolonged period increasing inequality across markets, and it will likely be some time before societies return to pre-pandemic levels of social interactions. As a result, there may still be a requirement for additional mitigating actions including further use of adjustments, overlays and model redevelopment.
Governments and central banks in major economies have deployed extensive measures to support their local populations. This is expected to reverse partially in 2022. Central banks in certain markets are expected to raise interest rates, but such increases are expected to be gradual and monetary policy is expected to remain accommodative overall. Policy tightening in emerging markets has already begun in order to counteract rising inflation and the risk of capital outflows. Some governments are also expected to reduce the level of fiscal support they offer households and business as the appetite for broad lockdowns and public health restrictions decreases. Government debt has risen in many economies, and is expected to remain high into the medium term. High government debt burdens have raised fiscal vulnerabilities, increasing the sensitivity of debt service costs to interest rate increases and potentially reducing the fiscal space available to address future economic downturns.
Our Central scenario used to calculate impairment assumes that economic activity will continue to recover through 2022, surpassing peak pre-pandemic levels of GDP in all our key markets. It is assumed that the private sector growth accelerates, ensuring strong recovery is sustained even as pandemic-related fiscal support is withdrawn. However, there is a high degree of uncertainty associated with economic forecasts in the current environment and there are significant risks to our Central scenario. The degree of uncertainty varies by market, driven by territory-specific trends in the evolution of the pandemic and associated policy responses. As a result, our Central scenario for impairment has not been assigned an equal likelihood of occurrence across our key markets. For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on pages 35 to 39.
We continue to monitor the situation closely, and given the novel and prolonged nature of the pandemic, additional mitigating actions may be required.
Climate-related risks
Climate change can have an impact across HSBC's risk taxonomy through both transition and physical channels. Transition risk can arise from the move to a low-carbon economy, such as through policy, regulatory and technological changes. Physical risk can arise through increasing severity and/or frequency of severe weather or other climatic events, such as rising sea levels and flooding. These have the potential to cause both idiosyncratic and systemic risks, resulting in potential financial and non-financial impacts for HSBC. Financial impacts could materialise if transition and physical risks impact the ability of our customers to repay their loans. Non-financial impacts could materialise if our own assets or operations are impacted by extreme weather or chronic changes in weather patterns, or as a result of business decisions to achieve our climate ambition.
How climate change is impacting our customers
Climate change could impact our customers in two main ways. Firstly, customer business models may fail to align to a low-carbon economy, which could mean that new climate-related regulation would have a material impact on their business. Secondly, extreme weather events or chronic changes in weather patterns may damage our customers' assets leaving them unable to operate their business or live in their home.
One of the most valuable ways we can help our customers navigate the transition challenges and to become more resilient to the physical impacts of climate change is through financing and investment. To do this effectively, we must understand the risks they are facing.
The table below summarises the key categories of transition, physical risk, with examples of how our customers might be affected financially by climate change and the shift to a low-carbon economy.
Transition Policy Mandates on, and
and legal regulation of,
existing products
and services
Litigation from
parties who have
suffered from the
effects of climate
change.
---------- ------------ ------------------------
Technology Replacement of
existing products
with lower emission
options.
---------- ------------ ------------------------
End-demand Changing consumer
(market) behaviour.
---------- ------------ ------------------------
Reputational Increased scrutiny
following a change
in stakeholder
perceptions of
climate-related
action or inaction.
---------- ------------ ------------------------
Physical Acute Increased frequency
and severity of
weather events.
---------- ------------ ------------------------
Chronic Changes in precipitation
patterns
Rising temperatures.
---------- ------------ ------------------------
Integrating climate risk into enterprise-wide risk management
Our approach to climate risk management is aligned to our Group-wide risk management framework and three lines of defence model, which sets out how we identify, assess and manage our risks. This approach ensures the Board and senior management have visibility and oversight of our key climate risks.
Climate risk appetite
Our climate risk appetite metrics aim to support the oversight and management of the financial and non-financial risks from climate change, meet regulatory expectations and support the business to deliver our climate ambition in a safe and sustainable way. Our measures are focused on the oversight and management of our key climate risks - wholesale credit risk, retail credit risk, reputational risk, resilience risk and regulatory compliance risk. Our future ambition for our climate risk appetite is to:
-- adapt the risk appetite metrics to incorporate forward looking transition plans and net zero commitments;
-- expand metrics to consider other financial and non-financial risks; and -- use enhanced scenario analysis capabilities.
Climate risk policies, processes and controls
We have also integrated climate risk into the supporting policies, processes and controls for our key climate risks. We have updated our policy on product management, and developed the first version of a climate risk scoring tool for our corporate portfolios. In addition, we published and started to implement our new Thermal Coal Phase-out Policy.
Climate risk governance and reporting
Our key climate risks are reported and governed through our climate risk governance structure. Our Climate Risk Oversight Forum is responsible for the oversight, management and escalation of climate risks across the group. Our Climate Risk management information dashboard includes metrics relating to our key climate risks, and is reported to the Climate Risk Oversight Forum. In addition, our key wholesale credit exposures are included as part of our broader ESG management information dashboard, which is presented to the group Executive Committee each quarter. The group RMM and the RC receive scheduled updates on climate risk, and receive regular updates on our climate risk appetite and top and emerging climate risks.
To ensure climate risk is appropriately managed and governed, climate related measures covering risk responsibilities relating to the four pillars of governance, risk management, stress testing and scenario analysis and disclosures were included in the group Chief Risk Officer's scorecard in 2021.
Climate risk programme
Our dedicated programme continues to accelerate the development of our climate risk management capabilities. The key achievements in 2021 include:
-- We delivered tailored training sessions to our legal entity boards.
-- We delivered training to colleagues across the three lines of defence so they can understand climate risk as part of their role. and we also included an introduction to our climate ambition in our global mandatory training.
-- We developed our climate risk scoring tool for corporate customers for use in priority regions, which builds on our corporate transition questionnaire.
-- We have continued to develop our stress test and scenario analysis capabilities, including model development and delivered regulatory climate stress tests. These are being used to further improve our understanding of our risk exposures for use in risk management and business decision making.
We will continue to enhance our climate risk management capabilities throughout 2022. This will include the further roll-out of training, refinement of our risk appetite, enhancement of our climate risk scoring tool and increasing the availability and quality of data so that new metrics can be developed.
How climate risk can impact HSBC
Below, we provide detail on how climate risk impacts to our customers might manifest across our key climate risks, and the potential time frames involved using the Task Force on Climate-related Financial Disclosures four main drivers of transition climate risk - policy and legal, technology, end-demand (market) and reputational - and two physical risk drivers - acute and chronic.
Non-financial
Financial risks risks
------------------------------- --------------------------------------- ------------------------
Strategic Regulatory
Wholesale Retail risk Resilience compliance
Risk type credit credit (reputational) risk risk
------------------------------- --------- ----------- --------------- ---------- ------------
All term Medium-long All term All term Short-medium
Timescale(1) periods term periods periods term
------------------------------- --------- ----------- --------------- ---------- ------------
Transition risk drivers
------------------------------- --------- ----------- --------------- ---------- ------------
- Policy and legal l l l
------------------------------- --------- ----------- --------------- ---------- ------------
- Technology l
------------------------------- --------- ----------- --------------- ---------- ------------
- End-demand (market) l
------------------------------- --------- ----------- --------------- ---------- ------------
- Reputational l l l
------------------------------- --------- ----------- --------------- ---------- ------------
Physical risk drivers
------------------------------- --------- ----------- --------------- ---------- ------------
- Acute - increased frequency l l l
and severity of weather events
------------------------------- --------- ----------- --------------- ---------- ------------
- Chronic - changes in weather l l
patterns
------------------------------- --------- ----------- --------------- ---------- ------------
1 Short term: less than one year; medium term: period to 2030; long term: period to 2050.
Wholesale credit risk
Identification and assessment
We have identified six key sectors where our wholesale credit customers have the highest climate risk, based on their carbon emissions. These are oil and gas, building and construction, chemicals, automotive, power and utilities, and metals and mining.
We continue to roll out our transition and physical risk questionnaire to our largest customers in high-risk sectors, with the addition of four more sectors: agriculture, manufacturing, real estate and transportation. The questionnaires will help us to assess and improve our understanding of the impact of climate change on our customers' business models and any related transition strategies. It also helps us to identify potential business opportunities to support the transition. In 2022, we intend to increase the scope of the questionnaire by adding more countries and territories to the scope.
Management
In 2021 we developed a scoring tool, which provides a climate risk score for each customer based on questionnaire responses. The climate risk score will then be used in portfolio level management information to assess and compare clients. The scoring tool will be enhanced and refined over time as more data becomes available. The results of the tool have been provided to business and risk management teams. During 2021, we also performed a climate-related stress test. In 2022 we aim to further embed climate risk considerations in our credit risk management processes.
Aggregation and reporting
We currently report our transition risk exposure and RWAs consumed by the six high risk sectors in the wholesale portfolio. We also report the proportion of questionnaire responses that reported either having a board policy or management plan for transition risk.
We will continue to report these metrics in 2022 and will aim to cascade these measures to global businesses and to provide insight on the climate risk profile of our portfolio and customers.
Retail credit risk
Identification and assessment
We manage retail credit risk under a framework of controls that enable the identification and assessment of credit risk, across the retail portfolio.
In 2021, we completed a Group-wide climate scenario analysis stress testing exercise. This enabled us to enhance our understanding and assess the impact of physical risk to our mortgage portfolio under three potential future climate scenarios, with a focus on Hong Kong.
Understanding the impact of future climate risk relies heavily upon the availability of quality data, as well as on the evolution of climate risk modelling expertise. As this matures, we plan to expand our approach to additional markets.
Management
We are focusing on embedding climate risk into retail risk management, prioritising exposure in the largest residential mortgage portfolios.
We continue to update our risk management framework and policy to reflect lessons learnt.
Aggregation and reporting
We manage and monitor the integration of climate risk across Wealth and Personal Banking ('WPB') through the RMM.
We have also developed and are implementing metrics to support active risk management, which will be tracked and monitored through relevant Credit Risk meetings.
Reputational risk
Identification and assessment
We implement sustainability risk policies, including the Equator Principles as part of our broader reputational risk framework. We focus on sensitive sectors that may have a high adverse impact on people or the environment, and in which we have a significant number of customers. A key area of focus is high-carbon sectors, which include power generation, mining, agricultural commodities and forestry. During 2021, the Group published its thermal coal phase-out policy.
Management
As the primary point of contact for our customers, our relationship managers are responsible for checking that our customers meet policies aimed at reducing carbon impacts. The Group's global network of more than 75 sustainability risk managers provides local policy support and expertise to relationship managers. A central Sustainability Risk team provides a higher level of guidance and is responsible for the oversight of policy compliance and implementation over wholesale banking activity. During 2021, we introduced a refreshed assurance framework, which took a risk-based approach focusing on higher risks.
Aggregation and reporting
The Group's Sustainability Risk Oversight Forum provides a Group-wide forum for senior members of our Global Risk and Compliance team and global businesses affected by sustainability risk. It also oversees the development and implementation of sustainability risk policies. Cases involving complex sustainability risk issues related to customers, transactions or third parties are managed through the reputational risk and client selection governance process. The Group reports annually on its implementation of the Equator Principles and the corporate loans, project-related bridge loans and advisory mandates completed under the principles. With the introduction of Equator Principles IV, a training programme was delivered to raise the awareness of the changes and obligations therein.
Regulatory compliance risk
Identification and assessment
Compliance continues to prioritise the identification and assessment of compliance risks that may arise from increased focus more generally on climate risk. Although not an exhaustive list, key Regulatory Compliance risks under consideration include those related to product management, mis-selling, marketing, conflicts of interest and regulatory change.
An area of particular focus is the risk of greenwashing. We regard greenwashing as the act of knowingly or unknowingly misleading stakeholders regarding our climate strategy, the climate impact/benefits of a product or service or regarding the climate commitments of our customers. For the Compliance function, product-based greenwashing is a key area of focus. When considering product-based greenwashing, we seek to:
-- effectively and consistently consider climate risk factors in the development and ongoing governance of new, changed or withdrawn products and services through the enhancement of existing risk management frameworks utilised within the Group's operating entities and lines of business, enabling climate risks to be identified and assessed in a timely manner;
-- ensure that climate-related products and services offered to customers are appropriately designed and that related sales practices and marketing materials are clear, fair and not misleading; and
-- develop climate-related products and services consistent with the evolving expectations of the Group's regulators and other relevant authorities.
Management
We continue to develop our compliance policies and underlying measurement capability to enhance the management of climate risks in line with our climate ambitions and risk appetite.
As such, we have integrated and are continuing to enhance climate risk considerations within our product and customer life-cycle policies. This includes specific climate risk requirements relating to new product approvals and ongoing product management. Our policies set the minimum standards that are required to manage the risk of breaches of our regulatory duty to customers, including those related to climate risk, ensuring fair customer outcomes are achieved.
In addition, we have placed significant focus this year on supporting and improving the capability of our Compliance colleagues through specific climate risk training, communications and guidance materials to ensure the robust identification, assessment and management of climate risks.
Aggregation and reporting
We continue to operate an ESG and Climate Risk Working Group at Group level. This working group tracks and monitors the integration and embedding of climate risk within the management of Regulatory Compliance risks and controls more generally, and monitors ongoing regulatory and legislative changes across the sustainability and climate risk agenda.
We have also developed and implemented climate risk metrics and indicators aligned to wider Regulatory Compliance risks. .
The Compliance function is also represented at the group's Climate Risk Oversight Forum.
Resilience risk
Identification and assessment
Our assessment of climate risk identified building unavailability, workplace safety, information technology and cybersecurity risk, transaction processing risk, and third-party risk, as the key risks facing our operational resilience.
We are currently working with industry partners to repeat and extend the 2020 stress testing, given developments in industry understanding of climate risk. We will continue to work with our partners to identify and assess emerging climate risks.
Management
In 2021, we reviewed existing policies, processes and controls, which were then revised as required. This work will continue in subsequent years.
Identification of new tooling, both internally and through collaboration with business partners, for the management of climate risk is ongoing with new tooling being introduced as appropriate.
Our stress test results will continue to inform our approach to climate risk management.
Aggregation and reporting
Our exposure to climate risk will continue to be aggregated and reported to the Non-Financial Risk Management Board and other relevant formal governance forums.
Our material banking risks
(Unaudited)
The material risk types associated with our banking and insurance manufacturing operations are described in the following tables:
Description of risks - banking operations
Credit risk
Credit risk is the Credit risk arises Credit risk is:
risk of financial principally from * measured as the amount that could be lost if a
loss if a customer direct lending, customer or counterparty fails to make repayments;
or counterparty fails trade finance and
to meet an obligation leasing business,
under a contract. but also from certain * monitored using various internal risk management
other products such measures and within limits approved by individuals
as guarantees and within a framework of delegated authorities; and
derivatives.
* managed through a robust risk control framework,
which outlines clear and consistent policies,
principles and guidance for risk managers.
----------------------------- -------------------------- -----------------------------------------------------------
Treasury risk
Treasury risk is the Treasury risk arises Treasury risk is:
risk of having insufficient from changes to * measured through risk appetite and more granular
capital, liquidity the respective resources limits, set to provide an early warning of increasing
or funding resources and risk profiles risk, minimum ratios of relevant regulatory metrics,
to meet financial driven by customer and metrics to monitor the key risk drivers impacting
obligations and satisfy behaviour, management treasury resources;
regulatory requirements, decisions, or pension
including the risk plan fiduciary decisions.
of adverse impact It also arises from * monitored and projected against appetites and by
on earnings or capital the external environment, using operating plans based on strategic objectives
due to structural including changes together with stress and scenario testing; and
foreign exchange exposures to market parameters
and changes in market such as interest
interest rates, together rates or foreign * managed through control of resources in conjunction
with pension and insurance exchange rates, with risk profiles, strategic objectives and cash
risk. together with updates flows.
to the regulatory
requirements.
----------------------------- -------------------------- -----------------------------------------------------------
Market risk
Market risk is the Exposure to market Market risk is:
risk of adverse financial risk is separated * measured using sensitivities, value at risk ('VaR')
impact on trading into two portfolios: and stress testing, giving a detailed picture of
activities arising trading and non-trading. potential gains and losses for a range of market
from changes in market Market risk exposures movements and scenarios, as well as tail risks over
parameters such as arising from our specified time horizons;
interest rates, foreign insurance operations
exchange rates, asset are discussed on
prices, volatilities, the following page. * monitored using value at risk, stress testing and
correlations and credit other measures; and
spreads.
* managed using risk limits approved by the Board for
the group and the various global businesses.
----------------------------- -------------------------- -----------------------------------------------------------
Resilience risk
Resilience risk is Resilience risk Resilience risk is:
the risk that we are arises from failures * measured through a range of metrics with defined
unable to provide or inadequacies maximum acceptable impact tolerances, and against our
critical services in processes, people, agreed risk appetite;
to our customers, systems or external
affiliates and counterparties events.
as a result of sustained * monitored through oversight of enterprise processes,
and significant operational risks, controls and strategic change programmes; and
disruption.
* managed by continual monitoring and thematic reviews.
----------------------------- -------------------------- -----------------------------------------------------------
Regulatory compliance risk
Regulatory compliance Regulatory compliance Regulatory compliance risk is:
risk is the risk associated risk arises from * measured by reference to risk appetite, identified
with breaching our the risks associated metrics, incident assessments, regulatory feedback
duty to clients and with breaching our and the judgement and assessment of our regulatory
other counterparties, duty to our customers, compliance teams;
inappropriate market inappropriate market
conduct and breaching conduct and breaching
related financial other regulatory * monitored against the first line of defence risk and
services regulatory requirements. control assessments, the results of the monitoring
standards. and control assurance activities of the second line
of defence functions, and the results of internal and
external audits and regulatory inspections; and
* managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to help ensure their
observance. Proactive risk control and/or remediation
work is undertaken where required.
----------------------------- -------------------------- -----------------------------------------------------------
Description of risks - banking operations (continued)
Financial crime risk
Financial crime risk Financial crime Financial crime risk is:
is the risk of knowingly risk arises from * measured by reference to risk appetite, identified
or unknowingly helping day-to-day banking metrics, incident assessments, regulatory feedback
parties to commit operations involving and the judgement and assessment of our financial
or to further illegal customers, third crime risk teams;
activity through HSBC, parties and employees.
including money laundering, Exceptional circumstances
fraud, bribery and which impact day * monitored against the first line of defence risk and
corruption, tax evasion, to day operations control assessments, the results of the monitoring
sanctions breaches, may additionally and control assurance activities of the second line
and increase financial of defence functions, and the results of internal and
terrorist and proliferation crime risk. external audits and regulatory inspections; and
financing.
* managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to help ensure their
observance. Proactive risk control and/or remediation
work is undertaken where required.
---------------------------- -------------------------- ------------------------------------------------------------
Model risk
Model risk is the Model risk arises Model risk is:
potential for adverse in both financial * measured by reference to model performance tracking
consequences from and non-financial and the output of detailed technical reviews, with
business decisions contexts whenever key metrics including model review statuses and
arising from the use business decision findings;
of models that have making includes
been inadequately reliance on models.
designed, implemented * monitored against model risk appetite statements,
or used or that model insight from the independent review function,
does not perform in feedback from internal and external audits, and
line with expectations regulatory reviews; and
and predictions.
* managed by creating and communicating appropriate
policies, procedures and guidance, training
colleagues in their application, and supervising
their adoption to ensure operational effectiveness.
---------------------------- -------------------------- ------------------------------------------------------------
Our insurance manufacturing subsidiaries are regulated separately from our banking operations. Risks in the insurance entities are managed using methodologies and processes that are subject to oversight at group level. Our insurance operations are also subject
to some of the same risks as our banking operations, and these are covered by the group's risk management processes. There are specific risks inherent to the insurance operations as noted below.
Description of risks - insurance manufacturing operations Financial risk For insurance Exposure to financial Financial risk is: entities, risks arises from: * measured (i) for credit risk, in terms of economic financial * market risk affecting the fair values of financial capital and the amount that could be lost if a risk includes assets or their future cash flows; counterparty fails to make repayments; (ii) for the risk of market risk, in terms of economic capital, internal not being metrics and fluctuations in key financial variables;
able to match * credit risk; and and (iii) for liquidity risk, in terms of internal liabilities metrics including stressed operational cash flow arising under projections; insurance * liquidity risk of entities being unable to make contracts payments to policyholders as they fall due. with * monitored through a framework of approved limits and appropriate delegated authorities; and investments and that the expected * managed through a robust risk control framework, sharing which outlines clear and consistent policies, of financial principles and guidance. This includes using product performance design, asset liability matching and bonus rates. with policyholders under certain contracts is not possible. ------------- ---------------------------------------------------------- ----------------------------------------------------------- Insurance risk Insurance Insurance risk is: risk is * The cost of claims and benefits can be influenced by * measured in terms of life insurance liabilities and the risk many factors, including mortality and morbidity economic capital allocated to insurance underwriting that, over experience, as well as lapse and surrender rates. risk; time, the cost of insurance * monitored through a framework of approved limits and policies delegated authorities; and written, including claims and * managed through a robust risk control framework which benefits, outlines clear and consistent policies, principles may exceed and guidance. This includes using product design, the total underwriting, reinsurance and claims-handling amount of procedures. premiums and investment income received. ------------- ---------------------------------------------------------- ----------------------------------------------------------- Credit risk
Overview
(Audited)
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products, such as guarantees and credit derivatives.
Credit risk management
Key developments in 2021
(Unaudited)
There were no material changes to the policies and practices for the management of credit risk in 2021. We continued to apply the requirements of HKFRS 9 'Financial Instruments' within the Credit Risk sub-function.
Due to the Covid-19 pandemic and its continued effects on the global economy, we provided short-term support to customers through market-specific measures under the current credit policy framework. We have also implemented the guidance provided by regulators on managing the credit portfolio as required throughout the course of the customer relief life cycle.
The extent of our support depends on the degree of country-specific government support measures, restrictions, associated policy responses, and the effects of new Covid-19 variants.
The majority of the customer relief programmes that we provided during the Covid-19 pandemic ended by 31 December 2021 and will not be reassessed under the revised definition of default. For further details of market-specific measures to support our personal and business customers, see pages 46 to 47.
In 2022, we will adopt the EBA 'Guidelines on the application of definition of default . There is expected to be no material impact on our retail and wholesale portfolios.
Governance and structure
(Unaudited)
We have established credit risk management and related HKFRS 9 processes throughout the group. We continue to assess the impact of economic developments in key markets on specific customers, customer segments or portfolios. As credit conditions change, we take mitigating action, including the revision of risk appetites or limits and tenors, as appropriate. In addition, we continue to evaluate the terms under which we provide credit facilities within the context of individual customer requirements, the quality of the relationship, local regulatory requirements, market practices and our local market position.
Credit risk sub-function
(Audited)
Credit approval authorities are delegated by the Board to the group Co-Chief Executives together with the authority to sub-delegate them. The Credit Risk sub-function in Global Risk is responsible for the key policies and processes for managing credit risk, which include formulating group credit policies and risk rating frameworks, guiding the group's appetite for credit risk exposures, undertaking independent reviews and objective assessment of credit risk, and monitoring performance and management of portfolios.
The principal objectives of our credit risk management are:
-- to maintain across HSBC a strong culture of responsible lending, and robust risk policies and control frameworks;
-- to both partner and challenge our businesses in defining, implementing and continually re-evaluating our risk appetite under actual and scenario conditions; and
-- to ensure there is independent, expert scrutiny of credit risks, their causes and their mitigation.
Key risk management processes
HKFRS 9 'Financial Instruments' process
(Unaudited)
The HKFRS 9 process comprises three main areas: modelling and data; implementation; and governance.
Modelling and data
(Unaudited)
We have established HKFRS 9 modelling and data processes in various geographies, which are subject to internal model risk governance including independent review of significant model developments.
Implementation
(Unaudited)
A centralised impairment engine performs the expected credit losses calculation using data, which is subject to a number of validation checks and enhancements, from a variety of client, finance and risk systems. Where possible, these checks and processes are performed in a globally consistent and centralised manner.
Governance
(Unaudited)
Management review forums are established in key sites and at group level in order to review and approve the impairment results. Management review forums have representatives from Credit Risk and Finance, and the group's ECL is approved by the group's Chief Risk Officer and Chief Financial Officer in the forum. Other key members of the management review forums are the group heads of Wholesale Credit and Wealth and Personal Banking Risk, as well as the group head of Loan Management Unit and the group financial controller. The key site and group level approvals are subsequently reported up to the global business impairment committee for final approval of the Group's ECL for the period. Required members of the committee are the global heads of Wholesale Credit, Market Risk, and Wealth and Personal Banking Risk, as well as the relevant Global business Chief Financial Officer and the Global Financial controller.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of counterparties or exposures that have comparable economic characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or industry sectors so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. We use a number of controls and measures to minimise undue concentration of exposure in our portfolios across industries, countries and global businesses. These include portfolio and counterparty limits, approval and review controls, and stress testing.
Credit quality of financial instruments
(Audited)
Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the group to support the calculation of our minimum credit regulatory capital requirement. The five credit quality classifications encompass a range of granular internal credit rating grades assigned to wholesale and retail customers, and the external ratings attributed by external agencies to debt securities.
For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related customer risk rating ('CRR') to external credit rating.
Wholesale lending
(Unaudited)
The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default ('PD'). All corporate customers are rated using the 10 or 23-grade scale, depending on the degree of sophistication of the Basel approach adopted for the exposure.
Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by
the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and may vary over time.
Retail lending
(Unaudited)
Retail lending credit quality is based on a 12-month point-in-time probability-weighted PD.
Credit quality classification
(Unaudited)
Sovereign
debt Other debt
securities securities Wholesale lending
and bills and bills and derivatives Retail lending
----------------------- -----------------------
12-month
Basel
probability 12 month
External External Internal of Internal probability-
credit credit credit default credit weighted
rating rating rating % rating PD %
-------------------------- --------------- --------------- --------- ------------ -------- -------------
Quality classification(1,
2)
-------------------------- --------------- --------------- --------- ------------ -------- -------------
Strong BBB and A- and CRR 1 to 0 - 0.169 Band 1 0.000 -
above above CRR 2 and 2 0.500
-------------------------- --------------- --------------- --------- ------------ -------- -------------
Good BBB- to BBB+ to CRR 3 0.170 - Band 3 0.501 -
BB BBB- 0.740 1.500
-------------------------- --------------- --------------- --------- ------------ -------- -------------
BB- to BB+ to CRR 4 to 0.741 - Band 4 1.501 -
Satisfactory B and unrated B and unrated CRR 5 4.914 and 5 20.000
-------------------------- --------------- --------------- --------- ------------ -------- -------------
Sub-standard B- to C B- to C CRR 6 to 4.915 - Band 6 20.001 -
CRR 8 99.999 99.999
-------------------------- --------------- --------------- --------- ------------ -------- -------------
CRR 9 to
Credit impaired Default Default CRR 10 100 Band 7 100
-------------------------- --------------- --------------- --------- ------------ -------- -------------
1 Customer risk rating ('CRR').
2 12-month PIT PD.
Quality classification definitions
'Strong' exposures demonstrate a strong capacity to meet financial
commitments, with negligible or low probability of default and/or low
levels of expected loss.
'Good' exposures require closer monitoring and demonstrate a good
capacity to meet financial commitments, with low default risk.
'Satisfactory' exposures require closer monitoring and demonstrate
an average-to-fair capacity to meet financial commitments, with moderate
default risk.
'Sub-standard' exposures require varying degrees of special attention
and default risk is of greater concern.
'Credit-impaired' exposures have been assessed as described in Note
1.2(i) on the Consolidated Financial Statements.
=========================================================================
Renegotiated loans and forbearance
(Audited)
'Forbearance' describes concessions made on the contractual terms of a loan in response to an obligor's financial difficulties.
A loan is classed as 'renegotiated' when we modify the contractual payment terms on concessionary terms because we have significant concerns about the borrowers' ability to meet contractual payments when due. Non-payment-related concessions (e.g. covenant waivers), while potential indicators of impairment, do not trigger identification as renegotiated loans under our existing disclosures.
Loans that have been identified as renegotiated retain this designation until maturity or derecognition under our existing disclosures.
For details of our policy on derecognised renegotiated loans, see Note 1.2(i) on the financial statements.
Credit quality of renegotiated loans
(Unaudited)
On execution of a renegotiation, a loan will also be classified as credit impaired if it is not already so classified. In wholesale lending, all facilities with a customer, including loans that have not been modified, are considered credit impaired following the identification of a renegotiated loan under our existing disclosures.
Wholesale renegotiated loans are classified as credit-impaired 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. Personal renegotiated loans generally remain credit impaired until repayment, write-off or derecognition.
Renegotiated loans and recognition of expected credit losses
(Audited)
For retail lending, unsecured renegotiated loans are generally segmented from other parts of the loan portfolio. Renegotiated expected credit loss assessments reflect the higher rates of losses typically encountered with renegotiated loans. For wholesale lending, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessments. The individual impairment assessment takes into account the higher risk of the future non-payment inherent in renegotiated loans.
Customer Relief Programmes and renegotiated loans
(Unaudited)
In response to the Covid-19 pandemic, governments and regulators around the world encouraged a range of customer relief programmes including payment deferrals. In determining whether a customer is experiencing financial difficulty for the purposes of identifying renegotiated loans a payment deferral requested under such schemes, or an extension thereof, is not automatically determined to be evidence of financial difficulty and would therefore not automatically trigger identification as renegotiated loans. Rather, information provided by payment deferrals is considered in the context of other reasonable and supportable information. The HKFRS 9 treatment of customer relief programmes is explained on pages 46 to 47.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances and financial investments, see Note 1.2(i) on the financial statements.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and advances, see Note 1.2(i) on the financial statements.
Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due. The standard period runs until the end of the month in which the account becomes 180 days contractually delinquent. However, in exceptional circumstances to achieve a fair customer outcome and in line with regulatory expectations, they may be extended further.
For secured facilities, write-off should occur upon repossession of collateral, receipt of proceeds via settlement, or determination that recovery of the collateral will not be pursued.
Any secured assets maintained on the balance sheet beyond 60 months of consecutive delinquency-driven default require additional monitoring and review to assess the prospect of recovery.
There are exceptions in a few countries and territories where local regulation or legislation constrains earlier write-off, or where the realisation of collateral for secured real estate lending takes more time. Write-off, either partially or in full, may be earlier when there is no reasonable expectation of further recovery, for example, in the event of a bankruptcy or equivalent legal proceedings. Collection procedures may continue after write-off.
Summary of credit risk
The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in HKFRS 9 are applied and the associated allowance for expected credit losses ('ECL').
Summary of financial instruments to which the impairment requirements
in HKFRS 9 are applied
(Audited)
2021 2020
-------------------------------------------------- -----------------------------------------------------
Gross Gross
carrying/ Allowance carrying/ Allowance
nominal for nominal for
amount ECL(1) amount ECL(1)
At 31 Dec HK$m HK$m HK$m HK$m
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Loans and
advances to
customers at
amortised
cost 3,872,956 (32,017) 3,697,568 (28,887)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Loans and
advances to
banks 432,286 (39) 403,908 (24)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Other
financial
assets
measured at
amortised
cost 2,114,301 (639) 1,869,268 (713)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
- cash and
balances at
central banks 276,857 - 347,999 -
--------------
- items in the
course of
collection
from
other banks 21,632 - 21,943 -
--------------
- Hong Kong
Government
certificates
of
indebtedness 332,044 - 313,404 -
--------------
- reverse
repurchase
agreements -
non-trading 803,775 - 520,344 -
--------------
- financial
investments 502,997 (433) 475,553 (527)
--------------
- prepayments,
accrued
income and
other
assets(2) 176,996 (206) 190,025 (186)
-------------- --------------------- --------------------------- -----------------------
Amounts due
from Group
companies 99,604 - 82,849 -
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Total gross
carrying
amount
on-balance
sheet 6,519,147 (32,695) 6,053,593 (29,624)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Loans and
other credit
related
commitments 1,826,335 (580) 1,725,963 (825)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Financial
guarantee 34,302 (44) 32,358 (124)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Total nominal
amount
off-balance
sheet(3) 1,860,637 (624) 1,758,321 (949)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
8,379,784 (33,319) 7,811,914 (30,573)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Allowance Allowance
for for
Fair value ECL Fair value ECL
HK$m HK$m HK$m HK$m
-------------- --------------------- --------------------------- ----------------------- ----------------------------
At 31 Dec
-------------- --------------------- --------------------------- ----------------------- ----------------------------
Debt
instruments
measured at
Fair Value
through Other
Comprehensive
Income
('FVOCI')(4) 1,541,909 (121) 1,689,820 (167)
-------------- --------------------- --------------------------- ----------------------- ----------------------------
1 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.
2 Includes only those financial instruments that are subject to the impairment requirements of HKFRS 9. 'Prepayments, accrued income and other assets', as presented within the consolidated balance sheet on page 75, which includes both financial and non-financial assets.
3 Represents the maximum amount at risk should the contracts be fully drawn upon and client defaults.
4 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the consolidated income statement.
The following table provides an overview of the group's credit risk by stage and industry, and the associated ECL coverage. The financial assets recorded in each stage have the following characteristics:
-- Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime ECL is recognised.
-- Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised.
-- POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime ECL is recognised.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector
(Audited)
Gross carrying/nominal
amount(1) Allowance for ECL ECL coverage %
------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ --------------------------------------------------------------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
-------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- --------
Loans
and advances
to customers 3,349,434 480,632 41,332 1,558 3,872,956 (2,603) (9,426) (19,654) (334) (32,017) 0.1 2.0 47.6 21.4 0.8
-------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- --------
- personal 1,461,358 60,795 10,158 - 1,532,311 (1,236) (2,965) (1,765) - (5,966) 0.1 4.9 17.4 - 0.4
--------------------------------
- corporate(2) 1,626,514 398,273 31,068 1,556 2,057,411 (1,131) (6,384) (17,859) (332) (25,706) 0.1 1.6 57.5 21.3 1.2
--------------------------------
* financial institutions(3) 261,562 21,564 106 2 283,234 (236) (77) (30) (2) (345) 0.1 0.4 28.3 100.0 0.1
-------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ----------
Loans
and advances
to banks 431,079 1,207 - - 432,286 (36) (3) - - (39) 0.0 0.2 - - 0.0
-------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- -------- Other financial assets 2,092,847 21,164 289 1 2,114,301 (482) (140) (17) - (639) 0.0 0.7 5.9 - 0.0 -------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- -------- Loan and other credit-related commitments 1,782,353 43,711 271 - 1,826,335 (260) (295) (25) - (580) 0.0 0.7 9.2 - 0.0 -------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- -------- * personal 1,245,694 6,976 154 - 1,252,824 - - - - - - - - - - -------------------------------- * corporate(2) 417,349 30,978 117 - 448,444 (247) (288) (25) - (560) 0.1 0.9 21.4 - 0.1 -------------------------------- * financial institutions(3) 119,310 5,757 - - 125,067 (13) (7) - - (20) 0.0 0.1 - - 0.0 -------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- Financial guarantee 30,214 4,048 40 - 34,302 (14) (14) (16) - (44) 0.0 0.3 40.0 - 0.1 -------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- -------- - personal 4,000 - 1 - 4,001 (1) - (1) - (2) 0.0 - 100.0 - 0.0 -------------------------------- - corporate(2) 22,995 4,011 39 - 27,045 (13) (14) (15) - (42) 0.1 0.3 38.5 - 0.2 -------------------------------- * financial institutions(3) 3,219 37 - - 3,256 - - - - - - - - - - -------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- At 31 Dec 2021 7,685,927 550,762 41,932 1,559 8,280,180 (3,395) (9,878) (19,712) (334) (33,319) 0.0 1.8 47.0 21.4 0.4 -------------------------------- --------------- ---------------- -------------- ----------- --------------- --------------- -------------- ------------------------------- ------------ ---------------- ------------ ------------ ------------ ---------- --------
The above table does not include balances due from Group companies.
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Includes corporate and commercial. 3 Includes non-bank financial institutions.
Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets by those less than 30 and greater than 30 days past due and therefore presents those amounts classified as stage 2 due to ageing (30 DPD) and those identified at an earlier stage (less than 30 DPD).
Stage 2 days past due analysis for loans and advances to customers
(Audited)
------------------------------------------------------------------------------- ------------------------------------------------------------------ ------------------------------------------------------
Gross carrying amount Allowance for ECL ECL coverage %
of of of of of of
which: which: which: of which: of which: of which: which: which: which:
1 to 30 1 to 30
Stage 1 to 30 and Stage 29 and Stage 29 and
2 Up-to-date 29 DPD(1,2) > DPD(1,2) 2 Up-to-date DPD(1,2) > DPD(1,2) 2 Up-to-date DPD > DPD
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % %
-------------------------------------- -------------------------- ---------- ------------------- ------------------ ------------- --------------- --------------- ----------------- ----------- ----------- ----------- ---------------
At 31 Dec 2021
-------------------------------------- -------------------------- ---------- ------------------- ------------------ ------------- --------------- --------------- ----------------- ----------- ----------- ----------- ---------------
Loans and advances
to customers
at amortised
cost 480,632 471,298 6,788 2,546 (9,426) (8,862) (226) (338) 2.0 1.9 3.3 13.3
-------------------------------------- -------------------------- ---------- ------------------- ------------------ ------------- --------------- --------------- ----------------- ----------- ----------- ----------- ---------------
* personal 60,795 53,316 5,048 2,431 (2,965) (2,460) (173) (332) 4.9 4.6 3.4 13.7
--------------------------------------
* corporate and commercial 398,273 396,420 1,738 115 (6,384) (6,325) (53) (6) 1.6 1.6 3.0 5.2
--------------------------------------
* non-bank financial institutions 21,564 21,562 2 - (77) (77) - - 0.4 0.4 - -
-------------------------------------- -------------------------- ---------- ------------------- ------------------ ------------- --------------- --------------- ----------------- ----------- ----------- -----------
1 Days past due ('DPD').
2 The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector
(continued)
(Audited)
----------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------------------------
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(1)
----------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------------------------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ ----------- ------------
Loans
and advances
to customers 3,150,921 510,040 35,752 855 3,697,568 (4,393) (6,438) (17,694) (362) (28,887) 0.1 1.3 49.5 42.3 0.8
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ ----------- ------------
* personal 1,381,495 61,790 9,062 - 1,452,347 (1,809) (3,463) (1,872) - (7,144) 0.1 5.6 20.7 - 0.5
--------------------------------
* corporate(2) 1,580,976 391,635 26,514 853 1,999,978 (2,428) (2,897) (15,763) (360) (21,448) 0.2 0.7 59.5 42.2 1.1
--------------------------------
* financial institutions(3) 188,450 56,615 176 2 245,243 (156) (78) (59) (2) (295) 0.1 0.1 33.5 100.0 0.1
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ -----------
Loans
and advances
to banks 401,256 2,652 - - 403,908 (19) (5) - - (24) 0.0 0.2 - - 0.0
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ ----------- ------------
Other
financial
assets 1,854,154 14,834 279 1 1,869,268 (452) (221) (40) - (713) 0.0 1.5 14.3 - 0.0
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ ----------- ------------
Loan and
other
credit-related
commitments 1,677,242 48,538 183 - 1,725,963 (514) (281) (30) - (825) 0.0 0.6 16.4 - 0.0
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ ----------- ------------
* personal 1,205,969 6,129 79 - 1,212,177 (1) - - - (1) 0.0 - - - 0.0
--------------------------------
* corporate(2) 388,833 34,095 104 - 423,032 (492) (266) (30) - (788) 0.1 0.8 28.8 - 0.2
--------------------------------
* financial institutions(3) 82,440 8,314 - - 90,754 (21) (15) - - (36) 0.0 0.2 - - 0.0
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ -----------
Financial
guarantee 25,786 6,522 50 - 32,358 (51) (56) (17) - (124) 0.2 0.9 34.0 - 0.4
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ ----------- ------------
* personal 4,043 2 6 - 4,051 - - (1) - (1) - - 16.7 - 0.0
--------------------------------
* corporate(2) 20,737 6,241 44 - 27,022 (51) (56) (16) - (123) 0.2 0.9 36.4 - 0.5
--------------------------------
* financial institutions(3) 1,006 279 - - 1,285 - - - - - - - - - -
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ -----------
At 31
Dec 2020 7,109,359 582,586 36,264 856 7,729,065 (5,429) (7,001) (17,781) (362) (30,573) 0.1 1.2 49.0 42.3 0.4
-------------------------------- ---------------- ------------------ -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ----------- ------------ ------------ ----------- ------------
The above table does not include balances due from Group companies.
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Includes corporate and commercial. 3 Includes non-bank financial institutions.
Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets by those less than 30 and greater than 30 days past due and therefore presents those amounts classified as stage 2 due to ageing (30 DPD) and those identified at an earlier stage (less than 30 DPD).
Stage 2 days past due analysis for loans and advances to customers
(continued)
(Audited)
----------------------------------------------------- ------------------------------------------------------------------ -------------------------------------------------
Gross carrying amount Allowance for ECL ECL coverage %
of of of of of of of of of
which: which: which: which: which: which: which: which: which:
1 to 30 1 to 30 1 to 30
Stage 29 and Stage 29 and Stage 29 and
2 Up-to-date DPD(1,2) > DPD(1,2) 2 Up-to-date DPD(1,2) > DPD(1,2) 2 Up-to-date DPD > DPD
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % %
-------------------------------------- --------- ---------- -------------- -------------- --------------- --------------- --------------- --------------- ---------- ---------- ---------- -------------
At 31 Dec 2020
-------------------------------------- --------- ---------- -------------- -------------- --------------- --------------- --------------- --------------- ---------- ---------- ---------- -------------
Loans and advances
to customers at
amortised cost 510,040 499,567 6,590 3,883 (6,438) (5,505) (268) (665) 1.3 1.1 4.1 17.1
-------------------------------------- --------- ---------- -------------- -------------- --------------- --------------- --------------- --------------- ---------- ---------- ---------- -------------
* personal 61,790 53,063 5,311 3,416 (3,463) (2,642) (204) (617) 5.6 5.0 3.8 18.1
--------------------------------------
* corporate and commercial 391,635 389,941 1,227 467 (2,897) (2,785) (64) (48) 0.7 0.7 5.2 10.3
--------------------------------------
* non-bank financial institutions 56,615 56,563 52 - (78) (78) - - 0.1 0.1 - -
-------------------------------------- --------- ---------- -------------- -------------- --------------- --------------- --------------- --------------- ---------- ---------- ----------
1 Days past due ('DPD').
2 The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.
Credit exposure
Maximum exposure to credit risk
(Audited)
This section provides information on the maximum exposure to credit risk associated with balance sheet items as well as loan and other credit-related commitments.
'Maximum exposure to credit risk' table The following table presents our maximum exposure to credit risk before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net exposure to credit risk, and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount; for financial guarantees and other guarantees granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of the committed facilities. ========================================================================
Other credit risk mitigants
There are arrangements in place that reduce our maximum exposure to credit risk. These include a charge over collateral on borrowers' specific assets, such as properties, collateral held in the form of financial instruments that are not held on the balance sheet and short positions in securities. In addition, for financial assets held as part of linked insurance/investment contracts the risk is predominantly borne by the policyholder.
Collateral available to mitigate credit risk is disclosed in the Collateral section on pages 47-50.
Maximum exposure to credit risk before collateral held or other credit
enhancements
(Audited)
-------------------------- ----------------------------
2021 2020
HK$m HK$m
--------------------------------------------------- -------------------------- ----------------------------
Cash and balances at central banks 276,857 347,999
--------------------------------------------------- -------------------------- ----------------------------
Items in the course of collection from other banks 21,632 21,943
--------------------------------------------------- -------------------------- ----------------------------
Hong Kong Government certificates of indebtedness 332,044 313,404
--------------------------------------------------- -------------------------- ----------------------------
Trading assets 478,030 434,029
--------------------------------------------------- -------------------------- ----------------------------
Derivatives 365,167 422,945
--------------------------------------------------- -------------------------- ----------------------------
Financial assets designated at fair value 33,274 35,145
--------------------------------------------------- -------------------------- ----------------------------
Reverse repurchase agreements - non-trading 803,775 520,344
--------------------------------------------------- -------------------------- ----------------------------
Loans and advances to banks 432,247 403,884
--------------------------------------------------- -------------------------- ----------------------------
Loans and advances to customers 3,840,939 3,668,681
--------------------------------------------------- -------------------------- ----------------------------
Financial investments 2,044,473 2,164,846
--------------------------------------------------- -------------------------- ----------------------------
Amounts due from Group companies 112,719 83,203
--------------------------------------------------- -------------------------- ----------------------------
Other assets 180,757 197,362
--------------------------------------------------- -------------------------- ----------------------------
Total on-balance sheet exposure to credit risk 8,921,914 8,613,785
--------------------------------------------------- -------------------------- ----------------------------
Total off-balance sheet 3,506,253 3,326,935
--------------------------------------------------- -------------------------- ----------------------------
Financial guarantees and other similar contracts 377,487 325,631
--------------------------------------------------- -------------------------- ----------------------------
Loan and other credit-related exposure 3,128,766 3,001,304
--------------------------------------------------- -------------------------- ----------------------------
At 31 Dec 12,428,167 11,940,720 --------------------------------------------------- -------------------------- ----------------------------
Total exposure to credit risk remained broadly unchanged in 2021 with loans and advances continuing to be the largest element.
Credit deterioration of financial instruments
(Audited)
A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2, stage 3 (credit impaired) and POCI financial instruments can be found in Note 1.2(i) on the Consolidated Financial Statements.
Measurement uncertainty and sensitivity analysis of ECL estimates
(Audited)
Despite a broad recovery in economic conditions during 2021, ECL estimates continue to be subject to a high degree of uncertainty, and management judgements and estimates continued to reflect a degree of caution, both in the selection of economic scenarios and their weightings, and through management judgemental adjustments.
The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions to credit risk models to estimate future credit losses, and probability-weight the results to determine an unbiased ECL estimate. Management judgemental adjustments are used to address late-breaking events, data and model limitations, model deficiencies and expert credit judgements.
Methodology
Four economic scenarios are used to capture the current economic environment and to articulate management's view of the range of potential outcomes. Scenarios produced to calculate ECL are aligned to the group's top and emerging risks.
In the second quarter of 2020, to ensure that the severe risks associated with the pandemic were appropriately captured, management added a fourth, more severe, scenario to use in the measurement of ECL. Starting in the fourth quarter of 2021, HSBC's methodology has been adjusted so that the use of four scenarios, of which two are downside scenarios, is the standard approach to ECL calculation.
Three of these scenarios are drawn from consensus forecasts and distributional estimates. The Central scenario is deemed the 'most likely' outcome, and usually attracts the largest probability weighting, while the outer scenarios represent the tails of the distribution which are less likely to occur. The Central scenario is created using the average of a panel of external forecasters. Consensus Upside and Downside scenarios are created with reference to distributions for select markets that capture forecasters' views of the entire range of outcomes. In the later years of the scenarios, projections revert to long-term consensus trend expectations. In the consensus outer scenarios, reversion to trend expectations is done mechanically with reference to historically observed quarterly changes in the values of macroeconomic variables.
The fourth scenario, Downside 2, is designed to represent management's view of severe downside risks. It is a globally consistent, narrative driven, scenario that explores more extreme economic outcomes than those captured by the consensus scenarios. In this scenario, variables do not, by design, revert to long-term trend expectations. They may instead explore alternative states of equilibrium, where economic activity moves permanently away from past trends.
The two consensus, 'Upside' and 'Downside' scenarios are constructed to be consistent with a 10% probability and the Downside 2 to a 5% probability. The Central Scenario is assigned the remaining 75%. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances. Management may, however, depart from this probability based scenario weighting approach when the economic outlook is determined to be more uncertain and risks are elevated.
Description of Consensus Economic Scenarios
The economic assumptions presented in this section have been formed internally with reference to external forecasts specifically for the purpose of calculating ECL.
The global economy experienced a recovery in 2021, following an unprecedented contraction in 2020. Restrictions to mobility and travel eased across certain markets, aided by the successful roll-out of vaccination programmes. The emergence of new variants that potentially reduce the efficacy of vaccines remains a risk.
Economic forecasts remain subject to a high degree of uncertainty. Risks to the economic outlook are dominated by the progression of the pandemic, vaccine roll-out and the public policy response. Geopolitical risks also remain significant and include continued differences between the US and other countries with China over a range of economic and strategic defence issues.
The key markets covered in the scenarios include Hong Kong and mainland China, and the scenarios used to calculate ECL in the Annual Report and Accounts 2021 are described below.
The consensus Central scenario
HSBC's Central scenario features a continued recovery in economic growth in 2022 as activity and employment gradually return to the levels reached prior to the outbreak of Covid-19.
Our Central scenario assumes that the stringent restrictions on activity, imposed across several countries and territories in 2020 and 2021 are not repeated. The new viral strain that emerged late in 2021, Omicron, has only a limited impact on the recovery, according to this scenario. Consumer spending and business investment, supported by elevated levels of private sector savings, are expected to drive the economic recovery as fiscal and monetary policy support recedes.
Regional differences in the speed of economic recovery in the Central scenario reflect differences in the progression of the pandemic, roll-out of vaccination programmes, national level restrictions imposed and scale of support measures. Global GDP is expected to grow by 4.2% in 2022 in the Central scenario and the average rate of global GDP growth is 3.1% over the five-year forecast period. This exceeds the average growth rate over the five-year period prior to the onset of the pandemic.
The key features of our Central scenario are:
-- Economic activity continues its recovery, growing at a moderate rate in 2022. GDP growth in our key markets has recovered to pre-pandemic levels.
-- Unemployment in mainland China has recovered to pre-pandemic levels. In Hong Kong, unemployment declines to levels only slightly higher than existed pre-pandemic.
-- Covid related fiscal spending recedes in 2022 as fewer restrictions on activity allow fiscal support to be withdrawn. Deficits remain high in several countries as they embark on multi-year investment programmes to support recovery, productivity growth and climate transition.
-- Inflation across many of our key markets remains elevated through 2022. Supply-driven price pressures persist through the first half of 2022 before gradually easing. In subsequent years, inflation quickly converges back towards central bank target rates.
-- Policy interest rates in key markets rise gradually over our projection period, in line with economic recovery.
-- The West Texas Intermediate oil price is forecast to average US$62 per barrel over the projection period.
In the longer term, growth reverts back towards similar levels that existed prior to the pandemic, suggesting that the damage to long-term economic prospects is expected to be minimal. The Central scenario was first created with forecasts available in November, and subsequently updated in December. Probability weights assigned to the Central scenario vary from 70% to 80% and reflect relative differences in uncertainty across markets.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario.
Central scenario 2022-2026
Mainland
Hong Kong China
% %
------------------------ --------- --------
GDP growth rate (annual
average rate)
------------------------ --------- --------
2022 3.1 5.3
------------------------ --------- --------
2023 2.9 5.4
------------------------ --------- --------
2024 2.6 5.1
------------------------ --------- --------
5 Year average 2.7 5.1
------------------------ --------- --------
Unemployment rate
(annual average rate)
------------------------ --------- --------
2022 4.1 3.8
------------------------ --------- --------
2023 3.6 3.7
------------------------ --------- --------
2024 3.5 3.8
------------------------ --------- --------
5 Year average 3.6 3.8
------------------------ --------- --------
House price growth
(annual average rate)
------------------------ --------- --------
2022 3.4 0.3
------------------------ --------- --------
2023 2.4 4.7
------------------------ --------- --------
2024 2.0 4.9
------------------------ --------- --------
5 Year average 2.6 3.5
------------------------ --------- --------
Short term interest
rate (annual average
rate)
------------------------ --------- --------
2022 0.5 3.1
------------------------ --------- --------
2023 1.1 3.2
------------------------ --------- --------
2024 1.6 3.4
------------------------ --------- --------
5 Year average 1.4 3.4
------------------------ --------- --------
Probability 70.0 80.0
------------------------ --------- --------
The consensus Upside scenario
Compared with the Central scenario, the consensus Upside scenario features a faster recovery in economic activity during the first two years, before converging to long-run trend expectations.
The scenario is consistent with a number of key upside risk themes. These include the orderly and rapid global abatement of Covid-19 via successful containment and ongoing vaccine efficacy; de-escalation of tensions between the US and China and continued fiscal and monetary support.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario.
Consensus Upside scenario best outcome
Mainland
Hong Kong China
% %
-------------------- ---------------------------- ----------------------------
GDP growth rate 10.3 (4Q22) 11.8 (4Q22)
-------------------- ---------------------------- ----------------------------
Unemployment rate 2.7 (4Q23) 3.5 (1Q23)
-------------------- ---------------------------- ----------------------------
House price growth 11.9 (4Q22) 8.2 (4Q22)
-------------------- ---------------------------- ----------------------------
Short-term interest
rate 0.6 (1Q22) 3.2 (1Q22)
-------------------- ---------------------------- ----------------------------
Probability 5.0 5.0
-------------------- ---------------------------- ----------------------------
Note: Extreme point in the consensus Upside is 'best outcome' in the scenario, for example the highest GDP growth and the lowest unemployment rate etc, in first two years of the scenario.
Downside scenarios
The progress of the pandemic and the ongoing public policy response continues to be a key source of risk. Downside scenarios assume that new strains of the virus result in an acceleration in infection rates and increased pressure on public health services, necessitating restrictions on activity. The reimposition of such restrictions could be assumed to have damaging effect on consumer and business confidence.
Government fiscal programmes in advanced economies in 2020 and 2021 were supported by accommodative actions taken by central banks. These measures have provided households and firms with significant support. An inability or unwillingness to continue with such support or the untimely withdrawal of support present a downside risk to growth.
While Covid-19 and related risks dominate the economic outlook, geopolitical risks also present a threat. These risks include:
-- continued differences between the US and other countries with China, which could affect sentiment and restrict global economic activity; and
-- the re-emergence of social unrest in Hong Kong.
The consensus Downside Scenario
In the consensus Downside scenario, the economic recovery is considerably weaker compared with the Central scenario. GDP growth is expected to be lower, unemployment rates rise moderately and asset and commodity prices fall, before gradually recovering towards their long-run trend expectations. The scenario is consistent with the key downside risks articulated above. Further outbreaks of Covid-19, coupled with delays in vaccination programmes, lead to longer-lasting restrictions on economic activity in this scenario. Other global risks also increase and drive increased risk-aversion in asset markets.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Downside scenario.
Consensus Downside scenario worst
outcome
Hong Mainland
Kong China
% %
-------------------- ==================== ====================
(1.0)
GDP growth rate (4Q22) 2.3 (4Q22)
-------------------- ==================== ====================
Unemployment rate 5.6 (2Q22) 4.0 (2Q22)
-------------------- -------------------- --------------------
(7.9) (3.7)
House price growth (4Q22) (2Q22)
-------------------- -------------------- --------------------
Short-term interest
rate 0.4 (1Q22) 2.9 (1Q22)
==================== ==================== ====================
Probability 20.0 10.0
==================== ==================== ====================
Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, i.e. lowest GDP growth, highest unemployment rate etc, in first two years of the scenario.
Downside 2 scenario
The Downside 2 scenario features a deep global recession. In this scenario, new Covid-19 variants emerge that cause infections to rise sharply in 2022, resulting in setbacks to vaccination programmes and the rapid imposition of restrictions on mobility and travel across some countries. The scenario also assumes governments and central banks are unable to significantly increase fiscal and monetary support, which results in abrupt corrections in labour and asset markets.
The following table describes key macroeconomic variables and the probabilities assigned in the Downside 2 scenario.
Downside 2 scenario worst outcome
Hong Mainland
Kong China
% %
-------------------- ----------------------- -----------------------
(8.2) (4.8)
GDP growth rate (4Q22) (4Q22)
-------------------- ----------------------- -----------------------
Unemployment rate 6.1 (4Q22) 5.4 (4Q23)
-------------------- ----------------------- -----------------------
(17.7) (24.8)
House price growth (4Q22) (4Q22)
-------------------- ----------------------- -----------------------
Short-term interest
rate 1.3 (2Q22) 4.0 (2Q22)
-------------------- ----------------------- -----------------------
Probability 5.0 5.0
-------------------- ----------------------- -----------------------
Note: Extreme point in the Downside 2 is 'worst outcome' in the scenario, for example lowest GDP growth and the highest unemployment rate, in first two years of the scenario.
Scenario weighting
In reviewing the economic conjuncture, the level of uncertainty and risks, management has considered both global and country-specific factors. This has led management to assign scenario probabilities that are tailored to its view of uncertainty in individual markets.
To inform its view, management have considered the progression of the virus in individual markets, the efficacy of vaccine roll-outs, the degree of current and expected future government support and connectivity with other countries. Management has also been guided by the policy response and economic performance through the pandemic, as well as the evidence that economies have adapted as the virus has progressed.
A key consideration in the fourth quarter was the emergence of the new variant, Omicron. The virulence and severity of the new strain, in addition to the continued efficacy of vaccines against it, was unknown when the variant first first emerged. Management therefore determined that uncertainty attached to forecasts has increased and sought to reflect this in scenario weightings.
China's significant capacity to extend policy support to the economy and manage through Covid related disruptions, led management to conclude that the outlook for mainland China was the least uncertain of our key markets. The Central scenario was given an 80% probability while a total of 15% has been assigned to the two Downside scenarios. In Hong Kong, the combination of recurrent outbreaks and the other risks outlined above, led management to assign a 25% weight to the two Downside scenarios.
Critical accounting estimates and judgements
The calculation of ECL under HKFRS 9 involves significant judgements, assumptions and estimates. Despite a general recovery in economic conditions during 2021, the level of estimation uncertainty and judgement has remained high during 2021 as a result of the ongoing economic effects of the Covid-19 pandemic and other sources of economic instability, including significant judgements relating to:
-- the selection and weighting of economic scenarios, given rapidly changing economic conditions in an unprecedented manner, uncertainty as to the effect of government and central bank support measures designed to alleviate adverse economic impacts, and a wider distribution of economic forecasts than before the pandemic. The key judgements are the length of time over which the economic effects of the pandemic will occur and the speed and shape of recovery. The main factors include the effectiveness of pandemic containment measures, the pace of roll-out and effectiveness of vaccines, and the emergence of new variants of the virus, plus a range of geopolitical uncertainties, which together represent a high degree of estimation uncertainty, particularly in assessing Downside scenarios;
-- estimating the economic effects of those scenarios on ECL, where there is no observable historical trend that can be reflected in the models that will accurately represent the effects of the economic changes of the severity and speed brought about by the Covid-19 pandemic and recovery from those conditions. Modelled assumptions and linkages between economic factors and credit losses may underestimate or overestimate ECL in these conditions, and there is significant uncertainty in the estimation of parameters such as collateral values and loss severity; and
-- the identification of customers experiencing significant increases in credit risk and credit impairment, particularly where those customers have accepted payment deferrals and other reliefs designed to address short-term liquidity issues given muted default experience to date. The use of segmentation techniques for indicators of significant increases in credit risk involves significant estimation uncertainty.
How economic scenarios are reflected in of ECL calculations
Models are used to reflect economic scenarios on ECL estimates. As described above, modelled assumptions and linkages based on historical information could not alone produce relevant information under the conditions experienced in 2021, and judgemental adjustments were still required to support modelled outcomes.
We have developed a globally consistent methodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail credit risk. These standard approaches are described below, followed by the management judgemental adjustments made, including those to reflect the circumstances experienced in 2021.
For our wholesale portfolios, a global methodology is used for the estimation of the term structure of probability of default ('PD') and loss given default ('LGD'). For PDs, we consider the correlation of forward economic guidance to default rates for a particular industry in a country. For LGD calculations we consider the correlation of forward economic guidance to collateral values and realisation rates for a particular country and industry. PDs and LGDs are estimated for the entire term structure of each instrument.
For impaired loans, LGD estimates take into account independent recovery valuations provided by external consultants where available, or internal forecasts corresponding to anticipated economic conditions and individual company conditions. In estimating the ECL on impaired loans that are individually considered not to be significant, we incorporate forward economic guidance proportionate to the probability-weighted outcome and the Central scenario outcome for non-stage 3 populations.
For our retail portfolios, the impact of economic scenarios on PD is modelled at a portfolio level. Historical relationships between observed default rates and macroeconomic variables are integrated into HKFRS 9 ECL estimates by using economic response models. The impact of these scenarios on PD is modelled over a period equal to the remaining maturity of the underlying asset or assets. The impact on LGD is modelled for mortgage portfolios by forecasting future loan-to-value ('LTV') profiles for the remaining maturity of the asset by using national level forecasts of the house price index and applying the corresponding LGD expectation.
These models are based largely on historical observations and correlations with default rates. Management judgemental adjustments are described below.
Management judgemental adjustments
In the context of HKFRS 9, management judgemental adjustments are short-term increases or decreases to the ECL at either a customer, segment or portfolio level to account for late-breaking events, model and data limitations and deficiencies, and expert credit judgement applied following management review and challenge.
At 31 December 2021, management judgements were applied to reflect credit risk dynamics not captured by our models. The drivers of the management judgemental adjustments reflect the changing economic outlook and evolving risks across our geographies.
Where the macroeconomic and portfolio risk outlook continues to improve, supported by low levels of observed defaults, adjustments initially taken to reflect increased risk expectations have been retired or reduced.
However, other adjustments have increased where modelled outcomes are overly sensitive and not aligned to observed changes in the risk of the underlying portfolios during the pandemic, or where sector-specific risks are not adequately captured.
The effect of management judgmental adjustments are considered for balances and ECL when determining whether or not a significant increase in credit risk has occurred and are attributed or allocated to a stage as appropriate. This is in accordance with the internal adjustments framework.
Management judgmental adjustments are reviewed under the governance process for HKFRS 9 (as detailed in the unaudited section 'Credit risk management' on page 29). Review and challenge focuses on the rationale and quantum of the adjustments with further review by the second line of defence where significant. For some management judgemental adjustments, internal frameworks establish the conditions under which these adjustments should no longer be required and as such are considered as part of the governance process. This internal governance process allows management judgemental adjustments to be reviewed regularly and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate.
Management judgemental adjustments made in estimating the scenario-weighted reported ECL at 31 December 2021 are set out in the following table. The table includes adjustments in relation to data and model limitations, including those driven by late-breaking events and sector specific risks and as a result of the regular process of model development and implementation.
Management judgemental adjustments
to ECL
as at 31 December 2021(1)
Retail Wholesale Total
HK$bn HK$bn HK$bn
Low-risk counterparties
(banks, sovereigns
and government entities)(2) 0.1 (0.2) (0.1)
----------------------------- ------------------- ------------------- -------------------
Corporate lending
adjustments 4.1 4.1
Retail model default
suppression adjustments - -
----------------------------- ------------------- ------------------- -------------------
Macroeconomic-related
adjustments (0.4) (0.4)
----------------------------- ------------------- ------------------- -------------------
Pandemic-related
economic recovery
adjustments 0.6 0.6
----------------------------- ------------------- ------------------- -------------------
Other retail lending
adjustments 0.7 0.7
----------------------------- ------------------- ------------------- -------------------
Total 1.0 3.9 4.9
----------------------------- ------------------- ------------------- -------------------
Management judgemental adjustments
to ECL
as at 31 December 2020(1)
Retail Wholesale Total
HK$bn HK$bn HK$bn
----------------------------- ------------------- ------------------- -------------------
Low-risk counterparties
(banks, sovereigns
and government entities)(2) 0.2 - 0.2
----------------------------- ------------------- ------------------- -------------------
Corporate lending
adjustments 3.0 3.0
-----------------------------
Retail model default
suppression adjustments 1.3 1.3
----------------------------- ------------------- ------------------- -------------------
Macroeconomic-related
adjustments(3) 0.9 0.9
----------------------------- ------------------- ------------------- -------------------
Pandemic-related
economic recovery
adjustments - -
----------------------------- ------------------- ------------------- -------------------
Other retail lending
adjustments(3) 0.3 0.3
----------------------------- ------------------- ------------------- -------------------
Total 2.7 3.0 5.7
----------------------------- ------------------- ------------------- -------------------
1 Management judgemental adjustments presented in the table reflect increases in ECL.
2 Low-risk counterparties for Retail is comprised of adjustments relating to WPB Insurance only.
3 Retail lending probability of default adjustments are reported under 'Macroeconomic-related adjustments' and 'Other retail lending adjustments'. Comparatives are re-presented to conform to the current year's presentation.
Management judgemental adjustments at 31 December 2021 were an increase to ECL of HK$3.9bn for the wholesale portfolio and an increase to ECL of HK$1bn for the retail portfolio.
During 2021, management judgemental adjustments reflected an evolving macroeconomic outlook and the relationship of the modelled ECL to this outlook and to late-breaking and sector specific risks.
At 31 December 2021, wholesale management judgemental adjustments were an ECL increase of HK$0.9bn mainly from increase in Corporate lending adjustment by HK$1.2bn. These principally reflected the outcome of management judgements for high-risk and vulnerable sectors in some of our key markets, supported by credit experts' input, portfolio risk metrics, quantitative analyses and benchmarks. Considerations include risk of individual exposures under different macroeconomic scenarios and comparison of key risk metrics to pre-pandemic levels, resulting in either releases or increases to ECL in each geography.
The increase in adjustment impact relative to 31 December 2020 was mostly driven by management judgements as a result of the effect of further improvement of macroeconomic scenarios on modelled outcomes and increased dislocation of modelled outcomes to management expectations for high-risk sectors, mainly for real estate sector. The adjustment for real estate was recommended focusing on the uncertainty for the higher risk China commercial real estate offshore exposures booked in Hong Kong on account of tightening liquidity and increased refinancing risks, resulting in the downgrade of some previously highly-rated borrowers. The increase management adjustment for real estate sector was partly offset by adjustment releases in other sectors resulted from improvement in industry outlook and portfolio quality.
At 31 December 2021, retail management judgemental adjustments were an ECL increase of HK$1.0bn (31 December 2020: HK$2.7bn increase):
-- Pandemic-related economic recovery adjustments increased ECL by HK$0.6bn (31 December 2020: HK$0) to adjust for the effects of the volatile pace of recovery from the pandemic. This is where in management's judgement, supported by quantitative analyses of portfolio and economic metrics, modelled outcomes are overly sensitive given the limited observed deterioration in the underlying portfolio during the pandemic.
-- Other retail lending adjustments increased ECL by HK$0.7bn (31 December 2020: HK$0.3bn) and macroeconomic-related adjustments decreased ECL by HK$0.4bn (31 December 2020: HK$0.9bn increase). These were primarily to address areas such as model recalibration and redevelopment, customer relief and data limitations. -- All retail model default suppression adjustments were removed in 2021.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against the economic forecasts as part of the ECL governance process by recalculating the ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of a significant increase in credit risk and the measurement of the resulting ECL.
The ECL calculated for the Upside and Downside scenarios should not be taken to represent the lower and upper limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating ECL for loans at the balance sheet date.
There is a particularly high degree of estimation uncertainty in numbers representing more severe risk scenarios when assigned a 100% weighting.
For wholesale credit risk exposures, the sensitivity analysis excludes ECL and financial instruments related to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios. Therefore, it is impracticable to separate the effect of macroeconomic factors in individual assessments. When compared with the performing portfolio, the defaulted obligors represent a significantly smaller portion of the wholesale exposures, even if accounting for the larger portion of the allowance for ECL.
For retail credit risk exposures, the sensitivity analysis includes ECL for loans and advances to customers related to defaulted obligors. This is because the retail ECL for secured mortgage portfolios including loans in all stages is sensitive to macroeconomic variables.
Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated inclusive of management judgemental adjustments, as appropriate to each scenario. The results tables exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared to personal and wholesale lending presented in other credit risk tables. Additionally in both the wholesale and retail analysis, the comparative period results for additional and alternative Downside scenarios are not directly comparable to the current period, because they reflect different risk profiles relative with the Consensus scenarios for the period end.
Wholesale analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Mainland
Hong Kong China
---------------------------- --------------------- ------------------------
ECL coverage of financial
instruments
subject to significant
measurement
uncertainty at 31 December
2021(2) HK$m HK$m
---------------------------- --------------------- ------------------------
Reported ECL 5,981 1,162
---------------------------- --------------------- ------------------------
Consensus scenarios
ECL
---------------------------- --------------------- ------------------------
Central scenario 5,085 881
---------------------------- --------------------- ------------------------
Upside scenario 3,712 281
---------------------------- --------------------- ------------------------
Downside scenario 7,674 1,684
---------------------------- --------------------- ------------------------
Alternative (Downside
2) scenario ECL 14,575 6,286
---------------------------- --------------------- ------------------------
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Mainland
Hong Kong China
---------------------------- ----------------------- -------------------------
ECL coverage of financial
instruments subject
to significant measurement
uncertainty at 31 December
2020(2) HK$m HK$m
---------------------------- ----------------------- -------------------------
Reported ECL 3,675 897
---------------------------- ----------------------- -------------------------
Consensus scenarios
---------------------------- ----------------------- -------------------------
Central scenario 3,009 718
---------------------------- ----------------------- -------------------------
Upside scenario 1,638 217
---------------------------- ----------------------- -------------------------
Downside scenario 5,208 1,954
---------------------------- ----------------------- -------------------------
Alternative scenarios 10,568 8,979
---------------------------- ----------------------- -------------------------
1 Excludes ECL and financial instruments relating to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios.
2 Includes off-balance sheet financial instruments that are subject to significant measurement uncertainty.
At 31 December 2021, the most significant level of ECL sensitivity related to the judgements over the China offshore real estate portfolio booked in Hong Kong.
Retail analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Reported Central Upside Downside Alternative
ECL Scenario Scenario Scenario Scenarios
--------------- ------------- ------------- ----------- -------------- ----------------
ECL coverage
of loans
and advances
to customers HK$m HK$m HK$m HK$m HK$m
--------------- ------------- ------------- ----------- -------------- ----------------
At 31 December
2021(2)
--------------- ------------- ------------- ----------- -------------- ----------------
Hong Kong 2,554 2,395 1,884 2,802 4,198
--------------- ------------- ------------- ----------- -------------- ----------------
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Reported Central Upside Downside Alternative
ECL Scenario Scenario Scenario Scenarios
--------------- ------------- ------------- ----------- -------------- ----------------
ECL coverage
of loans
and advances
to customers HK$m HK$m HK$m HK$m HK$m
--------------- ------------- ------------- ----------- -------------- ----------------
At 31 December
2020(2)
--------------- ------------- ------------- ----------- -------------- ----------------
Hong Kong 2,959 2,822 2,711 3,043 4,153 --------------- ------------- ------------- ----------- -------------- ---------------- 1 ECL sensitivities exclude portfolios using less complex modelling approaches.
2 ECL sensitivity includes only on-balance sheet financial instruments to which HKFRS 9 impairment requirements are applied.
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees
(Unaudited)
The following disclosure provides a reconciliation by stage of the group's gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees. Movements are calculated on a quarterly basis and therefore fully capture stage movements between quarters. If movements were calculated on a year-to-date basis they would only reflect the opening and closing position of the financial instrument.
The transfers of financial instruments represents the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL.
The net remeasurement of ECL arising from stage transfers represents the increase or decrease due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying customer risk rating ('CRR')/probability of default ('PD') movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the 'changes in risk parameters - credit quality' line item.
Changes in 'New financial assets originated or purchased', 'assets derecognised (including final repayments)' and 'changes to risk parameters - further lending/repayments' represent the impact from volume movements within the group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers, including
loan commitments and financial guarantees
(Audited)
--------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ---------------------------------------- ------------------------------------------ ------------------------------------------ ------------------------------------------
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
At 1 Jan 2021 5,254,097 (4,978) 567,753 (6,781) 35,984 (17,739) 855 (362) 5,858,689 (29,860)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Transfers of
financial
instruments: (82,216) (1,758) 62,505 3,758 19,711 (2,000) - - - -
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
- transfers from
stage 1 to stage
2 (790,973) 1,689 790,973 (1,689) - - - - - -
------------------
- transfers from
stage 2 to stage
1 716,431 (3,412) (716,431) 3,412 - - - - - -
------------------
- transfers to
stage 3 (9,067) 104 (14,911) 2,238 23,978 (2,342) - - - -
------------------
- transfers from
stage 3 1,393 (139) 2,874 (203) (4,267) 342 - - - -
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------
Net remeasurement
of ECL arising
from transfer
of stage - 1,686 - (2,347) - (107) - - - (768)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
New financial
assets originated
and purchased 1,621,239 (1,183) - - - - 973 - 1,622,212 (1,183)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Assets
derecognised
(including final
repayments) (1,086,986) 314 (120,885) 674 (5,745) 1,165 (9) - (1,213,625) 2,153
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Changes to risk
parameters -
further
lending/repayment (93,466) 1,078 19,540 87 (2,332) 998 (263) 25 (76,521) 2,188
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Changes in risk
parameters -
credit
quality - 2,078 - (4,768) - (6,612) - 49 - (9,253)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Changes to model
used for ECL
calculation - (126) - (377) - 7 - - - (496)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Assets written
off - - - - (4,531) 4,531 - - (4,531) 4,531
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Credit-related
modifications
that resulted
in derecognition - - - - (973) - - - (973) -
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Foreign exchange (23,231) (28) 684 18 (478) 65 2 (1) (23,023) 54
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Others 43 1 - (1) 3 (1) - (45) 46 (46)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
At 31 Dec 2021 5,589,480 (2,916) 529,597 (9,737) 41,639 (19,693) 1,558 (334) 6,162,274 (32,680)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
ECL income
statement
charge for the
year (7,359)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Recoveries 1,011
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Others (169)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
Total ECL income
statement charge
for the year (6,517)
------------------ --------------------- -------------------- ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- --------------------- -------------------
At 31 Dec 2021 Year ended
31 Dec 2021
------------------------------------------------------------------------------------ ------------------------------------------------
Gross carrying/nominal Allowance
amount for ECL ECL charge
HK$m HK$m HK$m
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
As above 6,162,274 (32,680) (6,517)
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Other financial 2,114,301 (639) (184)
assets measured
at amortised
cost
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Non-trading 3,605 - -
reverse
repurchase
agreement
commitments
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Performance and
other
guarantees not
considered for
HKFRS 9 N/A N/A 145
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Amounts due from 99,604 - -
Group companies
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Summary of
financial
instruments to
which the
impairment
requirements in
HKFRS 9 are
applied/Summary
consolidated
income
statement 8,379,784 (33,319) (6,556)
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Debt instruments 1,541,909 (121) 17
measured at
FVOCI
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Total allowance N/A (33,440) (6,539)
for ECL/total
income
statement ECL
charge for the
year
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers, including
loan commitments and financial guarantees (continued)
(Audited)
----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Stage 1 Stage 2 Stage 3 POCI Total
--------------------------------------------- ---------------------------------------- ------------------------------------------- -------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
At 1 Jan 2020 5,383,650 (3,839) 331,701 (4,874) 16,775 (9,032) 1,152 (300) 5,733,278 (18,045)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Transfers of financial
instruments: (288,695) (2,585) 259,962 4,322 28,733 (1,737) - - - -
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
- transfers from
stage 1 to stage
2 (975,023) 2,504 975,023 (2,504) - - - - - -
----------------------------------------
* transfers from stage 2 to stage 1 702,624 (5,130) (702,624) 5,130 - - - - - -
----------------------------------------
- transfers to
stage 3 (17,478) 95 (14,362) 1,821 31,840 (1,916) - - - -
----------------------------------------
- transfers from
stage 3 1,182 (54) 1,925 (125) (3,107) 179 - - - -
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- -----------------------
Net remeasurement
of ECL arising
from transfer
of stage - 1,978 - (2,598) - (5,702) - - - (6,322)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
New financial
assets originated
and purchased 1,422,036 (1,743) - - - - 2 - 1,422,038 (1,743)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Assets derecognised
(including final
repayments) (1,093,254) 320 (182,195) 687 (4,244) 1,357 - - (1,279,693) 2,364
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Changes to risk
parameters - further
lending/repayment (235,616) (1,037) 140,675 4 41 606 (293) 10 (95,193) (417)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Changes in risk
parameters - credit
quality - 1,501 - (6,709) - (9,339) - (71) - (14,618)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Changes to model
used for ECL calculation - 489 - 2,626 - 26 - - - 3,141
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Assets written
off - - - - (6,064) 6,058 - - (6,064) 6,058
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Credit-related
modifications
that resulted
in derecognition - - - - (4) 2 - - (4) 2
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Foreign exchange 65,974 (67) 17,610 (237) 744 14 (6) (1) 84,322 (291)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Others 2 5 - (2) 3 8 - - 5 11
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
At 31 Dec 2020 5,254,097 (4,978) 567,753 (6,781) 35,984 (17,739) 855 (362) 5,858,689 (29,860)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
ECL income statement
charge for the
year (17,595)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Recoveries 733
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Others (154)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
Total ECL income
statement charge
for the year (17,016)
---------------------------------------- ----------------------- -------------------- ------------------ -------------------- --------------------- -------------------- --------------------- --------------------- ----------------------- --------------------
At 31 Dec 2020 Year ended
31 Dec 2020
------------------------------------------------------------------------------------- --------------------------------------------
Gross carrying/nominal Allowance
amount for ECL ECL charge
HK$m HK$m HK$m
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
As above 5,858,689 (29,860) (17,016)
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
Other financial 1,869,268 (713) (452)
assets measured
at amortised
cost
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
Non-trading 1,108 - -
reverse
repurchase
agreement
commitments
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
Performance and
other
guarantees not
considered for
HKFRS 9 N/A N/A (147)
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
Amounts due from 82,849 - -
Group companies
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
Summary of
financial
instruments to
which
the impairment
requirements in
HKFRS
9 are
applied/Summary
consolidated
income
statement 7,811,914 (30,573) (17,615)
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
Debt instruments 1,689,820 (167) (104)
measured at
FVOCI
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
Total allowance N/A (30,740) (17,719)
for ECL/total
income
statement ECL
charge for the
year
---------------- ---------------------------------------- ------------------------------------------- --------------------------------------------
Credit quality
Credit quality of financial instruments
(Audited)
We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a point-in-time assessment of the probability of default of financial instruments, whereas stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition. Accordingly, for non-credit-impaired financial instruments, there is no direct relationship between the credit quality assessment and stages 1 and 2, though typically the lower credit quality bands exhibit a higher proportion in stage 2.
The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and retail lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the table on page 30 (unaudited).
Distribution of financial instruments by credit quality at 31 December
2021
(Audited)
Gross carrying/notional amount
----------------------------------------------------------------------------------------------------------------------------------------
Credit Allowance
Strong Good Satisfactory Sub-standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
-------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ----------------------
In-scope for
HKFRS
9 impairment
-------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ----------------------
Loans and
advances
to customers
held at
amortised
cost 2,076,114 876,388 838,222 39,342 42,890 3,872,956 (32,017) 3,840,939
-------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ----------------------
- personal 1,290,946 136,390 91,809 3,008 10,158 1,532,311 (5,966) 1,526,345
--------------
- corporate
and
commercial 648,930 653,853 685,887 36,117 32,624 2,057,411 (25,706) 2,031,705
--------------
- non-bank
financial
institutions 136,238 86,145 60,526 217 108 283,234 (345) 282,889
-------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ----------------------
Loans and
advances
to banks 423,839 5,750 2,611 86 - 432,286 (39) 432,247
-------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ----------------------
Cash and
balances at
central banks 269,108 7,663 86 - - 276,857 - 276,857
-------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ----------------------
Items in the
course
of collection
from
other banks 21,632 - - - - 21,632 - 21,632 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Hong Kong Government certificates of indebtedness 332,044 - - - - 332,044 - 332,044 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Reverse repurchase agreements - non-trading 530,900 144,373 128,502 - - 803,775 - 803,775 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Financial investments held at amortised cost 406,588 88,765 7,644 - - 502,997 (433) 502,564 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Prepayments, accrued income and other assets 95,520 45,945 34,642 599 290 176,996 (206) 176,790 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Debt instruments measured at fair value through other comprehensive income(1) 1,438,300 72,697 30,085 - - 1,541,082 (121) 1,540,961 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Out-of-scope for HKFRS 9 impairment - - -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Trading assets 389,531 65,272 21,676 518 1,033 478,030 - 478,030 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 25,738 2,386 900 - - 29,024 - 29,024 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Derivatives 161,471 49,735 5,222 45 - 216,473 - 216,473 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Total gross carrying amount on-balance sheet 6,170,785 1,358,974 1,069,590 40,590 44,213 8,684,152 (32,816) 8,651,336 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Percentage of total credit quality 71% 16% 12% -% 1% 100% -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Loan and other credit related commitments 1,732,590 699,474 491,037 19,400 983 2,943,484 (580) 2,942,904 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Financial guarantee and similar contracts 135,199 151,565 64,012 3,647 456 354,879 (204) 354,675 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ---------------------- Total nominal off-balance sheet amount 1,867,789 851,039 555,049 23,047 1,439 3,298,363 (784) 3,297,579 -------------- ---------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------- ----------------------
The above table does not include balances due from Group companies.
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.
Distribution of financial instruments by credit quality at 31 December
2020 (continued)
(Audited)
Gross carrying/notional amount
Allowance
Sub- Credit for
Strong Good Satisfactory standard impaired Total ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
-------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ----------------------
In-scope for
HKFRS
9 impairment
-------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ----------------------
Loans and
advances
to customers
held at
amortised
cost 1,926,557 861,848 832,072 40,484 36,607 3,697,568 (28,887) 3,668,681
-------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ----------------------
- personal 1,220,972 146,492 70,098 5,723 9,062 1,452,347 (7,144) 1,445,203
--------------
- corporate
and
commercial 604,310 631,415 702,801 34,085 27,367 1,999,978 (21,448) 1,978,530
--------------
- non-bank
financial
institutions 101,275 83,941 59,173 676 178 245,243 (295) 244,948
-------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- -----------------------
Loans and
advances
to banks 393,732 8,441 1,650 85 - 403,908 (24) 403,884
-------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Cash and balances at central banks 338,968 8,332 699 - - 347,999 - 347,999 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Items in the course of collection from other banks 21,943 - - - - 21,943 - 21,943 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Hong Kong Government certificates of indebtedness 313,404 - - - - 313,404 - 313,404 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Reverse repurchase agreements - non-trading 315,534 135,842 68,968 - - 520,344 - 520,344 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Financial investments held at amortised cost 389,024 75,792 10,737 - - 475,553 (527) 475,026 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Prepayments, accrued income and other assets 100,460 46,003 42,535 747 280 190,025 (186) 189,839 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Debt instruments measured at fair value through other comprehensive income(1) 1,579,022 69,909 30,197 - - 1,679,128 (167) 1,678,961 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Out-of-scope for HKFRS 9 impairment - - -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Trading assets 360,104 47,456 24,962 1,507 - 434,029 - 434,029 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 23,285 6,068 2,197 - - 31,550 - 31,550 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Derivatives 258,643 75,131 11,431 318 2 345,525 - 345,525 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Total gross carrying amount on-balance sheet 6,020,676 1,334,822 1,025,448 43,141 36,889 8,460,976 (29,791) 8,431,185 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Percentage of total credit quality 71% 16% 12% 1% 0% 100% -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Loan and other credit related commitments 1,627,804 704,123 464,521 14,968 1,978 2,813,394 (825) 2,812,569 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Financial guarantee and similar contracts 101,381 121,415 78,434 4,046 879 306,155 (432) 305,723 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ---------------------- Total nominal off-balance sheet amount 1,729,185 825,538 542,955 19,014 2,857 3,119,549 (1,257) 3,118,292 -------------- ------------------ ---------------------- --------------------- ----------------------- ------------------------ ---------------------- ----------------------- ----------------------
The above table does not include balances due from Group companies.
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.
Distribution of financial instruments to which the impairment requirements
in HKFRS 9 are applied, by credit quality and stage
allocation
(Audited)
---------------------------------------------------------------------------------------------------------------------------------------- ---------------------- ----------------------
Gross carrying/notional amount
----------------------------------------------------------------------------------------------------------------------------------------
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
Loans and
advances to
banks 423,839 5,750 2,611 86 - 432,286 (39) 432,247
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
- stage 1 423,561 5,241 2,244 33 - 431,079 (36) 431,043
---------------
- stage 2 278 509 367 53 - 1,207 (3) 1,204
---------------
- stage 3 - - - - - - - - --------------- - POCI - - - - - - - - --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- Loans and advances to customers at amortised cost 2,076,114 876,388 838,222 39,342 42,890 3,872,956 (32,017) 3,840,939 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- - stage 1 2,034,725 732,858 577,785 4,066 - 3,349,434 (2,603) 3,346,831 --------------- - stage 2 41,389 143,530 260,437 35,276 - 480,632 (9,426) 471,206 --------------- - stage 3 - - - - 41,332 41,332 (19,654) 21,678 --------------- - POCI - - - - 1,558 1,558 (334) 1,224 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- Other financial assets measured at amortised cost 1,655,792 286,746 170,874 599 290 2,114,301 (639) 2,113,662 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- - stage 1 1,651,199 278,343 163,190 115 - 2,092,847 (482) 2,092,365 --------------- - stage 2 4,593 8,403 7,684 484 - 21,164 (140) 21,024 --------------- - stage 3 - - - - 289 289 (17) 272 --------------- - POCI - - - - 1 1 - 1 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- Loan and other credit-related commitments 1,347,783 311,803 162,448 4,030 271 1,826,335 (580) 1,825,755 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- - stage 1 1,344,540 297,202 138,722 1,889 - 1,782,353 (260) 1,782,093 --------------- - stage 2 3,243 14,601 23,726 2,141 - 43,711 (295) 43,416 --------------- - stage 3 - - - - 271 271 (25) 246 --------------- - POCI - - - - - - - - --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- Financial guarantees 11,350 12,188 9,883 841 40 34,302 (44) 34,258 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- - stage 1 11,127 10,890 8,038 159 - 30,214 (14) 30,200 --------------- - stage 2 223 1,298 1,845 682 - 4,048 (14) 4,034 --------------- - stage 3 - - - - 40 40 (16) 24 --------------- - POCI - - - - - - - - --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- At 31 Dec 2021 5,514,878 1,492,875 1,184,038 44,898 43,491 8,280,180 (33,319) 8,246,861 Debt instruments at FVOCI(1) --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- - stage 1 1,438,161 72,697 30,085 - - 1,540,943 (121) 1,540,822 --------------- - stage 2 139 - - - - 139 - 139 --------------- - stage 3 - - - - - - - - --------------- - POCI - - - - - - - - --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- At 31 Dec 2021 1,438,300 72,697 30,085 - - 1,541,082 (121) 1,540,961 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
The above table does not include balances due from Group companies.
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.
Distribution of financial instruments to which the impairment requirements
in HKFRS 9 are applied, by credit quality and stage
allocation (continued)
(Audited)
----------------------------------------------------------------------------------------------------------------------------------------- ----------------------- ----------------------
Gross carrying/notional amount
-----------------------------------------------------------------------------------------------------------------------------------------
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- ---------------------- Loans and advances to banks 393,732 8,441 1,650 85 - 403,908 (24) 403,884 --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- ---------------------- - stage 1 392,766 7,082 1,408 - - 401,256 (19) 401,237 --------------- - stage 2 966 1,359 242 85 - 2,652 (5) 2,647 --------------- - stage 3 - - - - - - - - --------------- - POCI - - - - - - - - --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- Loans and advances to customers at amortised cost 1,926,557 861,848 832,072 40,484 36,607 3,697,568 (28,887) 3,668,681 --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- ---------------------- - stage 1 1,907,066 697,619 541,177 5,059 - 3,150,921 (4,393) 3,146,528 --------------- - stage 2 19,491 164,229 290,895 35,425 - 510,040 (6,438) 503,602 --------------- - stage 3 - - - - 35,752 35,752 (17,694) 18,058 --------------- - POCI - - - - 855 855 (362) 493 --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- Other financial assets measured at amortised cost 1,479,334 265,966 122,941 747 280 1,869,268 (713) 1,868,555 --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- ---------------------- - stage 1 1,475,066 263,384 115,572 132 - 1,854,154 (452) 1,853,702 --------------- - stage 2 4,268 2,582 7,369 615 - 14,834 (221) 14,613 --------------- - stage 3 - - - - 279 279 (40) 239 --------------- - POCI - - - - 1 1 - 1 --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- Loan and other credit-related commitments 1,270,557 328,523 122,817 3,883 183 1,725,963 (825) 1,725,138 --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- ---------------------- - stage 1 1,269,249 307,836 98,578 1,579 - 1,677,242 (514) 1,676,728 --------------- - stage 2 1,308 20,687 24,239 2,304 - 48,538 (281) 48,257 --------------- - stage 3 - - - - 183 183 (30) 153 --------------- - POCI - - - - - - - - --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- Financial guarantees 7,694 12,634 10,896 1,084 50 32,358 (124) 32,234 --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- ---------------------- - stage 1 7,272 11,095 7,374 45 - 25,786 (51) 25,735 --------------- - stage 2 422 1,539 3,522 1,039 - 6,522 (56) 6,466 --------------- - stage 3 - - - - 50 50 (17) 33 --------------- - POCI - - - - - - - - --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- At 31 Dec 2020 5,077,874 1,477,412 1,090,376 46,283 37,120 7,729,065 (30,573) 7,698,492 Debt instruments at FVOCI(1) --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- ---------------------- - stage 1 1,578,971 69,886 30,197 - - 1,679,054 (167) 1,678,887 --------------- - stage 2 50 24 - - - 74 - 74 --------------- - stage 3 - - - - - - - - --------------- - POCI - - - - - - - - --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- At 31 Dec 2020 1,579,021 69,910 30,197 - - 1,679,128 (167) 1,678,961 --------------- --------------------- ------------------- ---------------------- --------------------- ---------------------- ---------------------- ----------------------- ----------------------
The above table does not include balances due from Group companies.
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.
Mainland China commercial real estate
(Unaudited)
The following table presents the
group's total exposure to mainland
China commercial real estate ('CRE')
at 31 December 2021, by country/territory
and credit quality. Mainland China
reported real estate exposures comprise
exposures booked in mainland China
and offshore where the ultimate
parent and beneficial owner is based
in mainland China, and all exposures
booked on mainland China balance
sheets.Mainland China CRE exposure
Rest
Hong Mainland of
Kong China Asia-Pacific Total
-------------------- ---------- --------------- ------------- -----------
HK$m HK$m HK$m HK$m
-------------------- ---------- --------------- ------------- -----------
Loans and advances
to customers(1) 77,229 53,116 658 131,003
-------------------- ---------- --------------- ------------- -----------
Guarantees issued
and others(2) 13,624 18,533 127 32,284
-------------------- ---------- --------------- ------------- -----------
Total mainland
China CRE exposure
at 31 Dec 2021 90,853 71,649 785 163,287
-------------------- ---------- --------------- ------------- -----------
Distribution of
mainland China
CRE exposure by
credit quality
-------------------- ---------- --------------- ------------- -----------
- Strong 27,630 30,141 239 58,010
-------------------- ---------- --------------- ------------- -----------
- Good 20,681 18,357 - 39,038
-------------------- ---------- --------------- ------------- -----------
- Satisfactory 26,384 22,263 546 49,193
-------------------- ---------- --------------- ------------- -----------
- Sub-standard 12,245 94 - 12,339
-------------------- ---------- --------------- ------------- -----------
- Impaired 3,913 794 - 4,707
-------------------- ---------- --------------- ------------- -----------
At 31 Dec 2021 90,853 71,649 785 163,287
-------------------- ---------- --------------- ------------- -----------
Allowance for
ECL 4,371 379 15 4,765
-------------------- ---------- --------------- ------------- -----------
1 Amounts represent gross carrying amount.
2 Amounts represent nominal amount.
At 31 December 2021, the group had no direct credit exposure to developers in the 'red' category of the Chinese government's 'three red lines' framework. The group's exposures related to companies whose primary activities are focused on residential, commercial and mixed-use real estate activities. Lending is generally focused on tier 1 and 2 cities.
Booked in Hong Kong are higher risk exposures to a combination of state and privately owned enterprises. This portfolio had 89% of exposure booked with a credit quality of 'satisfactory' or above, but had a higher degree of uncertainty due to tightening liquidity and increased refinancing risks. In addition, offshore exposures are typically higher risk than onshore exposures. At 31 December 2021, the group had allowances for ECL of HK$4,371m held against mainland China commercial real estate exposures booked in Hong Kong. We will continue to monitor the prevailing situation closely.
Credit-impaired loans
(Audited)
We determine 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.
Customer relief programmes
(Unaudited)
In response to the Covid-19 outbreak, governments and regulators across Asia-Pacific have introduced a number of support measures for both personal and wholesale customers in market-wide schemes. The following table presents the number of personal accounts/wholesale customers and the associated drawn loan values of customers under these schemes and HSBC-specific measures for major markets at 31 December 2021. When schemes expire, accounts and customers and their associated drawn balances are no longer reported under relief regardless of their repayment status. In relation to personal lending, the majority of relief measures, including payment holidays, relate to existing lending, while in wholesale lending the relief measures comprise payment holidays, refinancing of existing facilities and new lending under government-backed schemes.
At 31 December 2021, the gross carrying value of loans to personal customers under relief was HK$10.5bn (31 December 2020: HK$19.9bn). The decrease in personal customer relief during the year was driven by customers exiting relief measures. The gross carrying value of loans to wholesale customers under relief was HK$67.3bn (31 December 2020: HK$91.8bn). We continue to monitor the recoverability of loans granted under customer relief programs, including loans to a small number of customers that were subsequently found to be ineligible for such relief. The ongoing performance of such loans remains an area of uncertainty at 31 December 2021.
Personal
lending
-------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
31 Dec 2021 31 Dec 2020
---------------------------------------------------------------- -------------------------------------------------------------------
Hong Other Hong Other
Kong markets(1) Total Kong markets(1) Total
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Market-wide
schemes
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
accounts in
mortgage
customer
relief 000s - 8 8 - 6 6
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
value of
accounts in
mortgage
customer
relief HK$m - 5,284 5,284 - 7,518 7,518
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
accounts in
other
personal
lending
customer
relief 000s - 33 33 - 37 37
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
value of
accounts in
other
personal
lending
customer
relief HK$m - 4,455 4,455 - 2,818 2,818
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
HSBC-specific
measures
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
accounts in
mortgage
customer
relief 000s - - - 3 - 3
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
value of
accounts in
mortgage
customer
relief HK$m 448 23 471 8,713 128 8,841
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
accounts in
other
personal
lending
customer
relief 000s - 2 2 1 5 6
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
value of
accounts in
other
personal
lending
customer
relief HK$m 267 35 302 582 196 778
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Total personal
lending under
market-wide
schemes and
HSBC-specific
measures
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
accounts in
mortgage
customer
relief 000s - 8 8 3 6 9
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
value of
accounts in
mortgage
customer
relief HK$m 448 5,307 5,755 8,713 7,646 16,359
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
accounts in
other
personal
lending
customer
relief 000s - 35 35 1 42 43
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
value of
accounts in
other
personal
lending
customer
relief HK$m 267 4,490 4,757 582 3,014 3,596
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Market-wide
schemes and
HSBC-specific
measures -
mortgage
relief as a
proportion of
total
mortgages % 0.1 1.3 0.5 1.2 2.0 1.5
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Market-wide
schemes and
HSBC-specific
measures -
other
personal
lending
relief as a
proportion of
total
other
personal
lending loans
and
advance % 0.1 4.2 1.3 0.2 2.7 1.0
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Wholesale
lending
-------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
31 Dec 2021 31 Dec 2020
---------------------------------------------------------------- -------------------------------------------------------------------
Hong Other Hong Other
Kong markets Total Kong markets Total
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Market-wide
schemes
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
customers
under
market-wide
measures 000s 1 1 2 3 - 3
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
value of
customers
under
market-wide
schemes HK$m 22,671 5,152 27,823 82,356 5,178 87,534
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
HSBC-specific
measures
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
customers
under
HSBC-specific
measures 000s 5 1 6 - - -
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
value of
customers
under
HSBC-specific
measures HK$m 35,958 3,497 39,455 1 4,295 4,296
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Total
wholesale
lending under
market-wide
schemes and
HSBC-specific
measures
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of
customers 000s 6 2 8 3 - 3
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Drawn loan
values HK$m 58,629 8,649 67,278 82,357 9,473 91,830
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Market-wide
schemes and
HSBC-specific
measures as a
proportion of
total
wholesale
lending loans
and advances % 4.1 0.9 2.9 5.9 1.1 4.1
-------------- ---- -------------------- -------------------- -------------------- --------------------- --------------------- ---------------------
Number of accounts/customers below 500 is rounded to zero in the above table.
1 Other markets in personal lending mainly represent Malaysia and Singapore.
The initial granting of customer relief does not automatically trigger a migration to stage 2 or 3. However, information provided by payment deferrals is considered in the context of other reasonable and supportable information. This forms part of the overall assessment for significant increase in credit risk and for credit impairment, to identify loans for which lifetime ECL is appropriate. An extension in payment deferral does not automatically result in stage 2 or stage 3. The key accounting and credit risk judgement to ascertain whether a significant increase in credit risk has occurred is whether the economic effects of Covid-19 on the customer are likely to be temporary over the lifetime of the loan, and do not indicate that a concession is being made in respect of financial difficulty that would be consistent with stage 3.
The following narratives provides further details on the major relief programmes offered in Hong Kong and Malaysia.
Wholesale lending
Given the persistence of the Covid-19 pandemic around the world and the severity of the ensuing impact on the global and local economy, HKMA - together with the Banking Sector SME Lending Coordination Mechanism - announced on 21 September 2021 that the Pre-approved Principal Payment Holiday Scheme would be extended for another six months until April 2022. HKMA and the coordination mechanism agreed that all principal payments of loans falling due between November 2021 and April 2022 by eligible corporate customers would be deferred by another six months except for repayments of trade loans, which would be deferred by 90 days.
Personal lending
Hong Kong
Mortgages
Customer relief granted on Hong Kong mortgages consists of deferred principal repayment of up to 12 months. This relief programme was available to existing HSBC mortgage loan customers who had a good repayment record during the six months prior to application. The scheme has now been closed to applications.
Malaysia
The Malaysian government has since April 2020 mandated several targeted relief assistance for customers impacted by Covid-19. The programs mainly comprised 6-month payment moratorium for unemployed or a reduction in monthly payment corresponding to reduction in income. The active relief takers in the portfolio comprises enrolments into the targeted relief assistance rolled out from 7 July 2021 where eligibility criteria was relaxed. The latest mandated relief assistance rolled out since 15 November 2021 is targeted at the lower income segment, requires documentary proof of unemployment or income reduction and a notification to the credit bureau. Repeated enrolments are allowed.
Collateral and other credit enhancements
(Audited)
Although collateral can be an important mitigant of credit risk, it is the group's general practice to lend on the basis of the customer's ability to meet their obligations out of cash flow resources rather than placing primary reliance on collateral and other credit risk enhancements. Depending on the customer's standing and the type of product, facilities may be provided without any collateral or other credit enhancements. For other lending, a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of default, the bank may utilise the collateral as a source of repayment.
Depending on its form, collateral can have a significant financial effect in mitigating our exposure to credit risk. Where there is sufficient collateral, an expected credit loss is not recognised. This is the case for reverse repurchase agreements and for certain loans and advances to customers where the loan to value ('LTV') is very low.
Mitigants may include a charge on borrowers' specific assets, such as real estate or financial instruments. Other credit risk mitigants include short positions in securities and financial assets held as part of linked insurance/investment contracts where the risk is predominantly borne by the policyholder. Additionally, risk may be managed by employing other types of collateral and credit risk enhancements, such as second charges, other liens and unsupported guarantees. Guarantees are normally taken from corporates and export credit agencies. Corporates would normally provide guarantees as part of a parent/subsidiary relationship and span a number of credit grades. The export credit agencies will normally be investment grade.
Certain credit mitigants are used strategically in portfolio management activities. While single name concentrations arise in portfolios managed by Global Banking and Corporate Banking, it is only in Global Banking that their size requires the use of portfolio level credit mitigants. Across Global Banking, risk limits and utilisations, maturity profiles and risk quality are monitored and managed proactively. This process is key to the setting of risk appetite for these larger, more complex, geographically distributed customer groups. While the principal form of risk management continues to be at the point of exposure origination, through the lending decision-making process, Global Banking also utilises loan sales and credit default swap ('CDS') hedges to manage concentrations and reduce risk. These transactions are the responsibility of a dedicated Global Banking portfolio management team. Hedging activity is carried out within agreed credit parameters, and is subject to market risk limits and a robust governance structure. Where applicable, CDSs are entered into directly with a central clearing house counterparty. Otherwise, our exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings.
CDS mitigants are held at portfolio level and are not reported in the presentation below.
Collateral on loans and advances
(Audited)
The collateral measured in the following tables consists of fixed first charges on real estate, and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis; no adjustment has been made to the collateral for any expected costs of recovery. Marketable securities are measured at their fair value.
Other types of collateral such as unsupported guarantees and floating charges over the assets of a customer's business are not measured in the following tables. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes.
The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. When collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral.
For credit-impaired loans, the collateral values cannot be directly compared with impairment allowances recognised. The LTV figures use open market values with no adjustments.
Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral.
Personal lending
(Unaudited)
The following table provides a quantification of the value of fixed charges we hold over specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and where the collateral is cash or can be realised by sale in an established market. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit from other forms of credit mitigants.
Residential mortgages including loan commitments by level of collateral
(Audited)
-------------------------------------- ------------------------------------------------------
2021 2020
-------------------------------------- ------------------------------------------------------
Gross Gross
carrying/ carrying/
nominal ECL nominal ECL
amount coverage amount coverage
HK$m % HK$m %
---------------------- --------------------------- --------- --------------------------- -------------------------
Stage 1
---------------------- --------------------------- --------- --------------------------- -------------------------
Fully collateralised 1,201,044 0.0 1,124,513 0.0
---------------------- --------------------------- --------- --------------------------- -------------------------
LTV ratio:
---------------------- --------------------------- --------- --------------------------- -------------------------
- less than 70% 1,004,531 0.0 940,033 0.0
----------------------
- 71% to 90% 169,824 0.0 148,242 0.0
----------------------
- 91% to 100% 26,689 0.0 36,238 0.0
---------------------- --------------------------- --------- ---------------------------
Partially
collateralised (A): 256 0.0 2,852 0.0
---------------------- --------------------------- --------- --------------------------- -------------------------
- collateral value on
A 242 2,762
---------------------- --------------------------- --------- --------------------------- -------------------------
Total 1,201,300 0.0 1,127,365 0.0
---------------------- --------------------------- --------- --------------------------- -------------------------
Stage 2
---------------------- --------------------------- --------- --------------------------- -------------------------
Fully collateralised 23,758 0.4 26,554 0.6
---------------------- --------------------------- --------- --------------------------- -------------------------
LTV ratio:
---------------------- --------------------------- --------- --------------------------- -------------------------
- less than 70% 20,691 0.3 22,045 0.4
----------------------
- 71% to 90% 2,860 1.0 4,059 1.4
----------------------
- 91% to 100% 207 2.4 450 2.0
---------------------- --------------------------- --------- ---------------------------
Partially
collateralised (B): 28 3.6 116 3.4
---------------------- --------------------------- --------- --------------------------- -------------------------
- collateral value on
B 23 111
---------------------- --------------------------- --------- --------------------------- -------------------------
Total 23,786 0.4 26,670 0.6
---------------------- --------------------------- --------- --------------------------- -------------------------
Stage 3
---------------------- --------------------------- --------- --------------------------- -------------------------
Fully collateralised 5,113 5.2 4,556 6.4
---------------------- --------------------------- --------- --------------------------- -------------------------
LTV ratio:
---------------------- --------------------------- --------- --------------------------- ------------------------- - less than 70% 4,153 4.5 3,185 4.7 ---------------------- - 71% to 90% 827 7.7 1,245 8.8 ---------------------- - 91% to 100% 133 14.3 126 25.4 ---------------------- --------------------------- --------- --------------------------- Partially collateralised (C): 104 29.8 119 52.1 ---------------------- --------------------------- --------- --------------------------- ------------------------- - collateral value on C 91 103 ---------------------- --------------------------- --------- --------------------------- ------------------------- Total 5,217 5.7 4,675 7.5 ---------------------- --------------------------- --------- --------------------------- ------------------------- At 31 Dec 1,230,303 0.0 1,158,710 0.1 ---------------------- --------------------------- --------- --------------------------- -------------------------
Other personal lending
(Unaudited)
Other personal lending consists primarily of personal loans, overdrafts and credit cards, all of which are generally unsecured, except lending to private banking customers which are generally secured.
Commercial real estate loans and advances
(Unaudited)
The value of commercial real estate collateral is determined by using a combination of external and internal valuations and physical inspections. For commercial real estate, where the facility exceeds regulatory threshold requirements, group policy requires an independent review of the valuation at least every three years, or more frequently as the need arises. In Hong Kong, market practice is typically for lending to major property companies to be either secured by guarantees or unsecured.
Commercial real estate loans and advances including loan commitments
by level of collateral
(Audited)
------------------------------------------------------------ ------------------------------------------------------------
2021 2020
------------------------------------------------------------ ------------------------------------------------------------
Gross Gross
carrying carrying/
nominal ECL nominal ECL
amount coverage amount coverage
HK$m % HK$m %
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Stage 1
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Not
collateralised 268,397 0.0 303,890 0.0
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Fully
collateralised 315,939 0.1 321,650 0.1
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Partially
collateralised
(A): 14,260 0.1 20,941 0.3
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
- collateral
value on A 7,790 12,163
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Total 598,596 0.0 646,481 0.1
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Stage 2
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Not
collateralised 68,871 5.8 23,644 0.1
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Fully
collateralised 69,438 0.7 73,991 0.6
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Partially
collateralised
(B): 7,626 2.2 3,092 1.3
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
- collateral
value on B 3,159 1,315
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Total 145,935 3.2 100,727 0.5
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Stage 3
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Not
collateralised 1,541 35.8 - -
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Fully
collateralised 3,085 11.3 298 6.4
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Partially
collateralised
(C): 21 33.3 - -
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
- collateral 14 -
value on C
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Total 4,647 19.5 298 6.4
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
POCI
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Not - - - -
collateralised
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Fully 764 - - -
collateralised
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Partially - - - -
collateralised
(D):
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
- collateral - -
value on D
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Total 764 - - -
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
At 31 Dec 749,942 0.8 747,506 0.1
--------------- ----------------------------- ----------------------------- ----------------------------- -----------------------------
Other corporate, commercial and non-bank financial institutions lending
(Unaudited)
Other corporate, commercial and financial (non-bank) loans are analysed separately in the following table. For financing activities in other corporate and commercial lending, collateral value is not strongly correlated to principal repayment performance.
Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them.
Accordingly, the following table reports values only for customers with CRR 8-10, recognising that these loans and advances generally have valuations that are comparatively recent.
Other corporate, commercial and non-bank financial institutions loans
and advances including loan commitments by level of collateral
(Audited)
-------------------------------------------------------- --------------------------------------------------------
2021 2020
-------------------------------------------------------- --------------------------------------------------------
Gross Gross
carrying/ carrying/
nominal nominal
amount ECL coverage amount ECL coverage
HK$m % HK$m %
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Stage 1
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Not
collateralised 2,044,385 0.0 1,918,586 0.1
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Fully
collateralised 431,547 0.1 398,232 0.1
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Partially
collateralised
(A): 262,118 0.0 242,375 0.1
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
- collateral
value on A 108,645 103,582
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Total 2,738,050 0.0 2,559,193 0.1
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Stage 2
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Not
collateralised 314,470 0.4 294,547 0.4
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Fully
collateralised 113,991 0.7 129,799 0.9
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Partially
collateralised
(B): 37,862 0.4 40,104 1.1
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
- collateral
value on B 15,205 19,214
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Total 466,323 0.4 464,450 0.6
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Stage 3
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Not
collateralised 17,171 80.2 16,948 75.1
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Fully
collateralised 2,551 17.3 3,555 18.4
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Partially
collateralised
(C): 7,621 36.8 7,753 31.8
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
- collateral
value on C 4,102 4,171
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Total 27,343 62.2 28,256 56.1
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
POCI
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Not
collateralised 351 47.6 506 36.4
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Fully
collateralised 442 37.8 348 51.4
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Partially - - - -
collateralised
(D):
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
- collateral - -
value on D
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Total 793 42.1 854 42.5
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
At 31 Dec 3,232,509 0.6 3,052,753 0.7
--------------- --------------------------- --------------------------- --------------------------- ---------------------------
Other credit risk exposures
(Unaudited)
In addition to collateralised lending described above, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are summarised below:
-- Some securities issued by governments, banks and other financial institutions may benefit from additional credit enhancements provided by government guarantees that cover the assets.
-- Debt securities issued by banks and financial institutions include asset-backed securities ('ABSs') and similar instruments, which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of credit default swap ('CDS') protection.
-- The group's maximum exposure to credit risk includes financial guarantees and similar contracts granted, as well as loan and other credit-related commitments. Depending on the terms of the arrangement, we may use additional credit mitigation if a guarantee is called upon or a loan commitment is drawn and subsequently defaults.
Derivatives
(Unaudited)
We participate in transactions exposing us to counterparty credit risk. Counterparty credit risk is the risk of financial loss if the counterparty to a transaction defaults before satisfactorily settling it. It arises principally from over-the-counter ('OTC') derivatives and securities financing transactions and is calculated in both the trading and non-trading books. Transactions vary in value by reference to a market factor such as an interest rate, exchange rate or asset price.
The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit value adjustment ('CVA').
Treasury Risk
Overview
(Unaudited)
Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural foreign exchange exposures and changes in market interest rates, together with pension and insurance risk.
Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment.
Approach and policy
(Unaudited)
The main objective in the management of treasury risk is to maintain appropriate levels of capital, liquidity, funding, foreign exchange and market risk to support business strategy, and meet regulatory and stress testing-related requirements.
The approach to treasury management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital and liquidity base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory requirements at all times.
Our policy is underpinned by our risk management framework, our internal capital adequacy assessment process ('ICAAP') and our internal liquidity adequacy assessment process ('ILAAP'). The risk framework incorporates a number of measures aligned to our assessment of risks for both internal and regulatory purposes.
Treasury risk management
Key developments in 2021
(Unaudited)
-- We continued to roll out second line of defence for liquidity, capital and interest rate risk in the banking book ('IRRBB') in Asia-Pacific sites during 2021.
-- An internal liquidity metric ('ILM') was introduced during 2021 for all Asia-Pacific sites to supplement the Liquidity Coverage Ratio ('LCR') and Net Stable Funding Ratio ('NSFR') metrics.
-- We enhanced our risk management of structural foreign exchange ('SFX') risk. We hedge structural foreign exchange positions where it is capital efficient to do so, and subject to approved limits.
-- A first line team was created within the Global Treasury function to be accountable for monitoring and managing the financial risk and capital implications of the Group's employee defined benefit pension plans. This change creates clearer delineation of the roles and responsibilities of the first and second lines of defence.
Governance and structure
(Unaudited)
The Board approves the policy and risk appetite for Liquidity and Capital. It is supported and advised by the Risk Committee ('RC').
The Global Treasury function actively manages capital and liquidity risk on an on-going basis and provides support to the Asset and Liability Management Committee ('ALCO'), and is overseen by the Treasury Risk Management function and the Risk Management Meeting ('RMM'). Global Treasury also manages SFX risk, including implementing hedging strategies approved by Chief Financial Officer, supported by ALCO, and treasury risk.
The Global Treasury function further manages interest rate risk in the non-trading banking book, maintaining the transfer pricing framework and informing the ALCO and local ALCOs of the group and site's overall banking book interest rate exposure. Banking book interest rate positions may be transferred to be managed by the Global Treasury business, within the market risk limits approved by the RMM.
Pension risk is managed through a network of local governance forums. The regional Pension Risk Management Meeting oversees all pension plans sponsored by HSBC in Asia-Pacific, and is chaired by the Regional Head of Traded and Treasury Risk Management.
The Treasury Risk Management function carries out independent review, challenge and assurance of the appropriateness of the risk management activities undertaken by Global Treasury. Internal Audit provides independent assurance that risk is managed effectively.
Capital risk
Capital management
(Audited)
Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment in which we operate.
It is our objective to maintain a strong capital base to support the risks inherent in our business, to invest in accordance with our strategy and to meet regulatory capital requirements at all times. To achieve this, our policy is to hold capital in a range of different forms and all capital raising is agreed with major subsidiaries as part of their individual and the group's capital management processes.
The policy on capital management is underpinned by a capital management framework and our ICAAP. The framework incorporates key capital risk appetites for CET1, Tier1, Total Capital, Loss Absorbing Capacity ('LAC') and Leverage Ratio, which enables us to manage our capital in a consistent manner. The framework defines regulatory capital and economic capital as the two primary measures for the management and control of capital.
Capital measures:
-- regulatory capital is the capital which we are required to hold in accordance with the rules established by regulators; and
-- economic capital is the internally calculated capital requirement to support risks to which we are exposed and forms a core part of the ICAAP.
ICAAP is an assessment of the group's capital position, outlining both regulatory and internal capital resources and requirements resulting from our business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pension, insurance, structural foreign exchange, interest rate risk in the banking book. The group's ICAAP supports the determination of the capital risk appetite and target ratios, as well as enables the assessment and determination of capital requirements by regulators.
Our capital management process is articulated in our annual capital plan which is approved by the Board. The plan is drawn up with the objective of maintaining both an appropriate amount of capital and an optimal mix between the different components of capital. Each subsidiary manages its own capital to support its planned business growth and meet its local regulatory requirements within the context of the approved annual group capital plan. In accordance with the Capital Management Framework, capital generated by subsidiaries in excess of planned requirements is returned to the Bank, normally by way of dividends.
The Bank is the primary provider of capital to its subsidiaries and these investments are substantially funded by the Bank's own capital issuance and profit retention. As part of its capital management process, the Bank seeks to maintain a prudent balance between the composition of its capital and that of its investment in subsidiaries.
The principal forms of capital are included in the following balances on the consolidated balance sheet: share capital, other equity instruments, retained earnings, other reserves and subordinated liabilities.
Regulatory capital requirements
(Audited)
The Hong Kong Monetary Authority ('HKMA') supervises the group on both a consolidated and solo-consolidated basis and therefore receives information on the capital adequacy of, and sets capital requirements for, the group as a whole and on a solo-consolidated basis. Individual banking subsidiaries and branches are directly regulated by their local banking supervisors, who set and monitor their capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.
The group uses the advanced internal ratings-based approach to calculate its credit risk for the majority of its non-securitisation exposures. For securitisation exposures, the group uses the securitisation internal ratings-based approach, securitisation external ratings-based approach, securitisation standardised approach or securitisation fall-back approach to determine credit risk for its banking book securitisation exposures. For counterparty credit risk, the group uses both the standardised (counterparty credit risk) approach and the internal models approach to calculate its default risk exposures for derivatives, and the comprehensive approach for SFTs. For market risk, the group uses an internal models approach to calculate its general market risk for the risk categories of interest rate and foreign exchange (including gold) exposures, and equity exposures. The group also uses an internal models approach to calculate its market risk in respect of specific risk for interest rate exposures and equity exposures. The group uses the standardised (market risk) approach for calculating other market risk positions, as well as trading book securitisation exposures, and the standardised (operational risk) approach to calculate its operational risk.
During the year, the individual entities within the group and the group itself complied with all of the capital requirements of the HKMA.
Basel III
(Unaudited)
The Basel III capital rules set out the minimum CET1 capital requirement of 4.5% and total capital requirement of 8%. At
31 December 2021, the capital buffers applicable to the group include the Capital Conservation Buffer ('CCB'), the Countercyclical Capital Buffer ('CCyB') and the Higher Loss Absorbency ('HLA') requirement for Domestic Systemically Important Banks ('D-SIB'). The CCB is 2.5% and is designed to ensure banks build up capital outside periods of stress. The CCyB is set on an individual country basis and is built up during periods of excess credit growth to protect against future losses. On
28 October 2021, the HKMA maintained the CCyB for Hong Kong at 1.0%. On 24 December 2021, the HKMA maintained the D-SIB designation as well as HLA requirement at 2.5% for the group.
The group is classified as a material subsidiary under the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements - Banking Sector) Rules ('LAC Rules') and therefore is subject to the LAC requirements to maintain its internal LAC risk-weighted ratio and the internal LAC leverage ratio at or above specified minimums.
Leverage ratio
(Unaudited)
Basel III introduces a simple non risk-based leverage ratio as a complementary measure to the risk-based capital requirements. It aims to constrain the build-up of excess leverage in the banking sector, introducing additional safeguards against model risk and measurement errors. The ratio is a volume-based measure calculated as tier 1 capital divided by total on- and off-balance sheet exposures.
At
------------------------------------------------------------------
31 Dec 31 Dec
2021 2020
% %
------------------------ -------------------------------- --------------------------------
Leverage ratio 5.8 6.4
------------------------ -------------------------------- --------------------------------
Capital and leverage
ratio exposure measure HK$m HK$m
------------------------ -------------------------------- --------------------------------
Tier 1 capital 530,701 555,553
------------------------ -------------------------------- --------------------------------
Total exposure measure 9,192,814 8,705,672
------------------------ -------------------------------- --------------------------------
The decrease in the leverage ratio from 31 December 2020 to
31 December 2021 was mainly due to the rise in the exposure measure and the decrease in Tier 1 capital.
Further details regarding the group's leverage position can be viewed in the Banking Disclosure Statement 2021, which will be available in the Regulatory Disclosure Section of our website: www.hsbc.com.hk.
Capital adequacy at 31 December 2021
(Unaudited)
The following tables show the capital ratios, RWAs and capital base as contained in the 'Capital Adequacy Ratio' return submitted to the HKMA on a consolidated basis under the requirements of section 3C(1) of the Banking (Capital) Rules.
The basis of consolidation for financial accounting purposes is described in Note 1 on the Consolidated Financial Statements and differs from that used for regulatory purposes. Further information on the regulatory consolidation basis and a full reconciliation between the group's accounting and regulatory balance sheets can be viewed in the Banking Disclosure Statement 2021. Subsidiaries not included in the group's consolidation for regulatory purposes are securities and insurance companies and the capital invested by the group in these subsidiaries is deducted from regulatory capital, subject to threshold.
The Bank and its banking subsidiaries maintain regulatory reserves to satisfy the provisions of the Banking Ordinance and local regulatory requirements for prudential supervision purposes. At
31 December 2021, the effect of this requirement is to reduce the amount of reserves which can be distributed to shareholders by HK$18,587m (31 December 2020: HK$18,063m).
We closely monitor and consider future regulatory change and continue to evaluate the impact upon our capital requirements of regulatory developments. This includes the Basel III Reforms package, which is currently scheduled for implementation by the HKMA starting from 1 July 2023. We will continue to participate in consultations and monitor progress on the implementation. Based on the results of latest HKMA consultations, we foresee a mild positive impact on our capital ratios on initial application. The RWA output floor under the Basel III Reforms will commence once implemented, with a five-year transitional provision. Any impact from the output floor would be towards the end of the transition period. We are expecting the issuance of draft rules in 2022 which will enable us to better estimate the impact.
Capital ratios
(Unaudited)
At
-------------------------------------------------------
31 Dec 31 Dec
2021 2020
% %
-------------------------- ---------------------------
Common equity tier
1 ('CET1') capital
ratio 15.4 17.2
-------------------------- ---------------------------
Tier 1 capital ratio 16.8 18.8
-------------------------- ---------------------------
Total capital ratio 18.7 20.8
Risk-weighted assets by risk type
(Unaudited)
At
----------------------------------------------
31 Dec 31 Dec
2021 2020
HK$m HK$m
--------------------- -----------------------
Credit risk 2,497,803 2,378,821
--------------------- -----------------------
Counterparty credit
risk 148,188 113,650
--------------------- -----------------------
Market risk 172,831 107,661
--------------------- -----------------------
Operational risk 337,731 356,861
--------------------- -----------------------
Total 3,156,553 2,956,993
--------------------- -----------------------
Risk-weighted assets by reportable
segments
(Unaudited)
At
-------------------------------------------------
31 Dec 31 Dec
2021 2020
HK$m HK$m
----------------------- ------------------------
Wealth and Personal
Banking 621,757 583,078
----------------------- ------------------------
Commercial Banking 1,157,241 1,072,171
----------------------- ------------------------
Global Banking 566,587 561,332
----------------------- ------------------------
Markets and Securities
Services 410,599 322,828
----------------------- ------------------------
Corporate Centre 334,450 356,801
----------------------- ------------------------
Other (GBM-other) 65,919 60,783
----------------------- ------------------------
Total 3,156,553 2,956,993
----------------------- ------------------------
Capital base
(Unaudited)
The following table sets out the composition of the group's capital base under Basel III at 31 December 2021.
Capital base
(Unaudited)
At
--------------------------------------------------------------------
31 Dec 31 Dec
2021 2020
HK$m HK$m
------------------------------------------------ --------------------------------- ---------------------------------
Common equity tier 1 ('CET1') capital
------------------------------------------------ --------------------------------- ---------------------------------
Shareholders' equity 714,139 712,119
------------------------------------------------ --------------------------------- ---------------------------------
- shareholders' equity per balance sheet 856,809 845,353
------------------------------------------------
- revaluation reserve capitalisation issue (1,454) (1,454)
------------------------------------------------
- other equity instruments (44,615) (44,615)
------------------------------------------------
- unconsolidated subsidiaries (96,601) (87,165)
------------------------------------------------
Non-controlling interests 28,730 27,907
------------------------------------------------ --------------------------------- ---------------------------------
- non-controlling interests per balance sheet 66,702 66,178
------------------------------------------------
- non-controlling interests in unconsolidated
subsidiaries (11,800) (10,801)
------------------------------------------------
- surplus non-controlling interests disallowed
in CET1 (26,172) (27,470)
------------------------------------------------
Regulatory deductions to CET1 capital (258,215) (230,574)
------------------------------------------------ --------------------------------- ---------------------------------
- valuation adjustments (1,834) (1,648)
------------------------------------------------
- goodwill and intangible assets (28,883) (23,276)
------------------------------------------------
- deferred tax assets net of deferred tax
liabilities (3,353) (3,273)
------------------------------------------------
- cash flow hedging reserve (60) (33)
------------------------------------------------
- changes in own credit risk on fair valued
liabilities 1,322 1,814
------------------------------------------------
- defined benefit pension fund assets (18) (12)
------------------------------------------------
- significant Loss-absorbing capacity ('LAC')
investments
in unconsolidated financial sector entities (139,239) (119,868)
------------------------------------------------
- property revaluation reserves(1) (67,563) (66,215)
------------------------------------------------
- regulatory reserve (18,587) (18,063)
------------------------------------------------
Total CET1 capital 484,654 509,452
------------------------------------------------ --------------------------------- ---------------------------------
Additional tier 1 ('AT1') capital
------------------------------------------------
Total AT1 capital before regulatory deductions 46,073 46,101
------------------------------------------------ --------------------------------- ---------------------------------
- perpetual subordinated loans 44,615 44,615
------------------------------------------------
- allowable non-controlling interests in AT1
capital 1,458 1,486
------------------------------------------------
Regulatory deductions to AT1 capital (26) -
------------------------------------------------ --------------------------------- ---------------------------------
- significant LAC investments in unconsolidated (26) -
financial
sector entities
------------------------------------------------
Total AT1 capital 46,047 46,101
------------------------------------------------ --------------------------------- ---------------------------------
Total tier 1 capital 530,701 555,553
------------------------------------------------ --------------------------------- ---------------------------------
Tier 2 capital
------------------------------------------------ ---------------------------------
Total tier 2 capital before regulatory
deductions 67,802 66,717
------------------------------------------------ --------------------------------- ---------------------------------
- perpetual subordinated debt(2) 3,119 3,101
------------------------------------------------
- term subordinated debt 14,972 15,698
------------------------------------------------
- property revaluation reserves(1) 31,057 30,451
------------------------------------------------
- impairment allowances and regulatory reserve
eligible
for inclusion in tier 2 capital 17,471 16,451
------------------------------------------------
- allowable non-controlling interests in tier 2
capital 1,183 1,016
------------------------------------------------
Regulatory deductions to tier 2 capital (8,025) (7,725)
------------------------------------------------ --------------------------------- ---------------------------------
- significant LAC investments in unconsolidated
financial
sector entities (8,025) (7,725)
------------------------------------------------
Total tier 2 capital 59,777 58,992
------------------------------------------------ --------------------------------- ---------------------------------
Total capital 590,478 614,545
------------------------------------------------ --------------------------------- ---------------------------------
1 Includes the revaluation surplus on investment properties which is reported as part of retained earnings and adjustments made in accordance with the Banking (Capital) Rules issued by the HKMA.
2 This Tier 2 capital instrument is grandfathered under Basel III and will be phased out in full after 31 December 2021.
A detailed breakdown of the group's CET1 capital, AT1 capital, Tier 2 capital and regulatory deductions can be viewed in the Banking Disclosure Statement 2021.
Non-trading book foreign exchange exposures
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent net assets or capital investments in subsidiaries, branches, joint arrangements or associates, the functional currencies of which are currencies other than the Hong Kong dollar. An entity's functional currency is normally that of the primary economic environment in which the entity operates.
Exchange differences on structural exposures are recognised in other comprehensive income ('OCI'). The group uses Hong Kong dollar as our presentation currency in our consolidated financial statements. Therefore, our consolidated balance sheet is affected by exchange differences between Hong Kong dollar and all the non-Hong Kong dollar functional currencies of underlying subsidiaries.
Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates.
We hedge structural foreign exchange positions where it is capital efficient to do so, and subject to approved limits. Hedging positions are monitored and rebalanced periodically to manage RWA or downside risks associated with group's foreign currency investments.
The group had the following net structural foreign currency exposures that were not less than 10% of the total net structural foreign currency exposures:
LCYm HK$m equivalent
---------------
At 31 Dec 2021
--------------- -------------------------- --------------------------
Renminbi 221,207 271,421
--------------- -------------------------- --------------------------
US dollars 10,224 79,731
--------------- -------------------------- --------------------------
At 31 Dec 2020
--------------- -------------------------- --------------------------
Renminbi 210,707 250,116
--------------- -------------------------- --------------------------
Transactional foreign exchange exposures
(Unaudited)
Transactional foreign exchange exposures arise from transactions in the banking book generating profit and loss or OCI reserves in a currency other than the reporting currency of the operating entity. Transactional foreign exchange exposure generated through profit and loss is periodically transferred to Markets and Securities Services and managed within limits with the exception of limited residual foreign exchange exposure arising from timing differences or for other reasons. Transactional foreign exchange exposure generated through OCI reserves is managed by the Markets Treasury business within a limit framework to be agreed in the first half of 2022.
Liquidity and funding risk
Overview
(Audited)
Liquidity risk is the risk that we do not have sufficient financial resources to meet our obligations as they fall due. Liquidity risk arises from mismatches in the timing of cash flows.
Funding risk is the risk that we cannot raise funding or can only do so at excessive cost.
The group has comprehensive policies, metrics and controls, which aims to allow us to withstand severe but plausible liquidity stresses. The group manages liquidity and funding risk at an operating entity level to make sure that obligations can be met in the jurisdiction where they fall due, generally without reliance on other parts of the group.
Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through the Internal Liquidity Adequacy Assessment Process ('ILAAP'), which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively in each major entity. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the Group's policies and controls.
Framework
(Unaudited)
Global Treasury function is responsible for the application of policies and controls at a local operating entity level. The elements of liquidity and funding risk management framework are underpinned by a robust governance framework, with the two major elements being:
-- Asset and Liability Management Committees ('ALCOs') at the group and entity level; and
-- annual internal liquidity adequacy assessment process ('ILAAP') used to validate risk tolerance and set risk appetite.
All operating entities are required to prepare an ILAAP document at appropriate frequency. Compliance with liquidity and funding requirements is monitored and reported to ALCO, RMM and Executive Committee on a regular basis.
Liquidity and Funding Risk management processes include:
-- maintaining compliance with relevant regulatory requirements of the operating entity;
-- projecting cash flows under various stress scenarios and considering the level of liquid assets necessary in relation thereto;
-- monitoring liquidity and funding ratios against internal and regulatory requirements; -- maintaining a diverse range of funding sources with adequate back-up facilities; -- managing the concentration and profile of term funding; -- managing contingent liquidity commitment exposures within pre-determined limits; -- maintaining debt financing plans;
-- monitoring of depositor concentration in order to avoid undue reliance on large individual depositors and ensuring a satisfactory overall funding mix; and
-- maintaining liquidity and funding contingency plans. These plans identify early indicators of stress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crises, while minimising adverse long-term implications for the business.
Management of liquidity and funding risk
(Audited)
Funding and liquidity plans form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'). An internal liquidity metric ('ILM') was introduced in January 2021 to supplement the LCR and NSFR metrics. An appropriate funding and liquidity profile is managed through a wider set of measures:
-- a minimum LCR requirement; -- a minimum NSFR requirement or other appropriate metric; -- an ILM; -- a legal entity depositor concentration limit; -- cumulative term funding maturity concentrations limit; -- a minimum LCR requirement by currency; -- intra-day liquidity; -- the application of liquidity funds transfer pricing; and -- forward-looking funding assessments.
Sources of funding
(Unaudited)
Our primary sources of funding are customer current accounts and customer savings deposits payable on demand or at short notice. We issue wholesale securities (secured and unsecured) to supplement our customer deposits and change the currency mix, maturity profile or location of our liabilities.
Currency mismatch in the LCR
(Unaudited)
Group policy requires all operating entities to monitor material single currency LCR. Limits are set to ensure that outflows can be met, given assumptions on stressed capacity in the FX swap markets.
Additional collateral obligations
(Unaudited)
Under the terms of our current collateral obligations of derivative contracts (which are ISDA compliant CSA contracts), the additional collateral required to post in the event of one-notch and two-notch downgrade in credit ratings is immaterial.
Liquidity and funding risk in 2021
(Unaudited)
The group is required to calculate its LCR and NSFR on a consolidated basis in accordance with rule 11(1) of The Banking (Liquidity) Rules ('BLR'), and is required to maintain both LCR and NSFR of not less than 100%.
The average LCR of the group for the period are as follows:
Quarter ended
31 Dec 31 Dec
2021 2020
% %
------------------ -------------------
Average LCR 154.3 172.1
------------ ------------------ -------------------
The liquidity position of the group remained strong in 2021. The average LCR decreased by 17.8 percentage points from 172.1% for the quarter ended 31 December 2020 to 154.3% for the quarter ended 31 December 2021, mainly as a result of an increase in customer loans and other securities.
The majority of high quality liquid assets ('HQLA') included in the LCR are Level 1 assets as defined in the BLR, which consist mainly of government debt securities.
The total weighted amount of HQLA of the group for the period are as follows:
Weighted amount
(average value)
at quarter
ended
31 Dec 31 Dec
2021 2020
HK$m HK$m
---------------- ------------------
Level 1 assets 1,767,933 1,870,016
---------------- ---------------- ------------------
Level 2A assets 79,368 78,515
---------------- ---------------- ------------------
Level 2B assets 64,106 34,468
---------------- ---------------- ------------------
Total 1,911,407 1,982,999
---------------- ---------------- ------------------
The NSFR of the group for the period are as follows:
Quarter ended
31 Dec 31 Dec
2021 2020
% %
------------------ -------------------
Net stable funding ratio 151.9 159.3
------------------------- ------------------ -------------------
The funding position of the group remained robust in 2021, highlighting a surplus of stable funding relative to the required stable funding requirement. The NSFR decreased by 7.4 percentage points from 159.3% for the quarter ended.
31 December 2020 to 151.9% for the quarter ended 31 December 2021, mainly as a result of an increase in customer loans and other securities.
Interdependent assets and liabilities included in the group's NSFR are certificates of indebtedness held and legal tender notes issued.
Interest Rate Risk in the Banking Book
(Unaudited)
Measurement of interest rate risk in the banking book processes
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities, specifically loans, deposits and financial instruments that are not held for trading intent or held in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to the Markets Treasury business. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Markets Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate.
The Global Treasury function uses a number of measures to monitor and control interest rate risk in the banking book, including:
-- net interest income sensitivity; and -- economic value of equity sensitivity.
Net interest income sensitivity
A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income ('NII') under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level by local ALCOs, where entities calculate both one-year and five-year NII sensitivities across a range of interest rate scenarios.
NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure. The exception to this is where the size of the balances or repricing is deemed interest rate sensitive, for example, non-interest-bearing current account migration and fixed-rate loan early prepayment. These sensitivity calculations do not incorporate actions that would be taken by Markets Treasury or in the business that originates the risk to mitigate the effect of interest rate movements.
The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable.
Economic value of equity sensitivity
Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity holders under a managed run-off scenario. This equates to the current book value of equity plus the present value of future NII in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources.
Pension Risk
(Unaudited)
Our global pensions strategy is to move from defined benefit to defined contribution plans, where local law allows and it is considered competitive to do so. We will continue to review and enhance our risk appetite metrics to assist the internal monitoring of our de-risking programmes.
In defined contribution pension plans, the contributions that HSBC is required to make are known, while the ultimate pension benefit will vary, typically with investment returns achieved by investment choices made by the employee. While the market risk to HSBC of defined contribution plans is low, the group is still exposed to operational and reputational risk.
In defined benefit pension plans, the level of pension benefit is known. Therefore, the level of contributions required by HSBC will vary due to a number of risks, including:
-- investments delivering a return below that required to provide the projected plan benefits;
-- the prevailing economic environment leading to corporate failures, thus triggering write-downs in asset values (both equity and debt); and
-- a change in interest rate expectations, causing an increase in the value of plan liabilities.
Pension risk is assessed using an economic capital model that takes into account potential variations in these factors. The impact of these variations on both pension assets and pension liabilities is assessed using a 1-in-200-year stress test. Scenario analysis and other stress tests are also used to support pension risk management. To fund the benefits associated with defined benefit plans, sponsoring group companies make regular contributions in accordance with advice from actuaries and in consultation with the plan's fiduciaries where relevant. These contributions are normally set to ensure that there are sufficient funds to meet the cost of the accruing benefits for the future service of active members. However, higher contributions are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution rates are typically revised annually or once every three years, depending on the plan.
The defined benefit plans invest contributions in a range of investments designed to limit the risk of assets failing to meet a plan's liabilities. Any changes in expected returns from the investments may also change future contribution requirements. In pursuit of these long-term objectives, an overall target allocation is established between asset classes of the defined benefit plan. In addition, each permitted asset class has its own benchmarks, such as stock-market indices. The target allocations are reviewed regularly, typically once every three to five years, and more frequently if required by local legislation or circumstances. The process generally involves an asset and liability review.
Market Risk
Overview
(Unaudited)
Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios. Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios.
Market risk management
Key developments in 2021
(Unaudited)
There were no material changes to our policies and practices for the management of market risk in 2021.
Governance and structure
(Unaudited)
The following diagram summarises the main business areas where trading and non-trading market risks reside, and the market risk measures used to monitor and limit exposures.
Trading risk Non-trading risk
* Foreign exchange and commodities * Foreign exchange
* Interest rates * Interest rates(1)
* Credit spreads * Credit spreads
* Equities
MSS and GBM MSS, GB, GBM
Other Other, ALCM
CMB and WPB
VaR | Sensitivity VaR | Sensitivity
| Stress Testing | Stress Testing
1 The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the group value at risk.
.
Where appropriate, we apply similar risk management policies and measurement techniques to both trading and non-trading portfolios. Our objective is to manage and control market risk exposures to optimise return on risk while maintaining a market profile consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by the group's Board of Directors. These limits are allocated across business lines and to the Group's legal entities. The group has an independent market risk management and control sub-function, which is responsible for measuring, monitoring and reporting market risk exposures against limits on a daily basis. Each operating entity is required to assess the market risks arising in its business and to transfer them either to its local Markets and Securities Services or Market Treasury unit for management, or to separate books managed under the supervision of the local ALCO. The Traded Risk function enforces the controls around trading in permissible instruments approved for each site as well as changes that follow completion of the new product approval process. Trading Risk also restricts trading in the more complex derivatives products to offices with appropriate levels of product expertise and robust control systems.
Key risk management processes
Monitoring and limiting market risk exposures
(Audited)
Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite.
We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, VaR and stress testing.
Sensitivity analysis
(Unaudited)
Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates and equity prices. We use sensitivity measures to monitor the market risk positions within each risk type. Granular sensitivity limits are set for trading desks with consideration of market liquidity, customer demand and capital constraints, among other factors.
Value at risk
(Audited)
VaR is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and calculated for all trading positions regardless of how we capitalise them. In addition, we calculate VaR for non-trading portfolios to have a complete picture of risk. Where we do not calculate VaR explicitly, we use alternative tools as summarised in the 'Stress testing' section below.
Our models are predominantly based on historical simulation that incorporates the following features:
-- historical market rates and prices, which are calculated with reference to foreign exchange rates, commodity prices, interest rates, equity prices and the associated volatilities;
-- potential market movements that are calculated with reference to data from the past two years; and
-- calculations to a 99% confidence level and using a one-day holding period.
The models also incorporate the effect of option features on the underlying exposures. The nature of the VaR models means that an increase in observed market volatility will lead to an increase in VaR without any changes in the underlying positions.
VaR model limitations
(Audited)
Although a valuable guide to risk, VaR is used with awareness of its limitations. For example:
-- the use of historical data as a proxy for estimating future market moves may not encompass all potential market events, particularly those that are extreme in nature.
-- the use of a one-day holding period for risk management purposes of trading and non-trading books assumes that this short period is sufficient to hedge or liquidate all positions.
-- the use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence.
-- VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not reflect intra-day exposures.
Risk not in VaR framework
(Unaudited)
The risks not in VaR ('RNIV') framework captures and capitalises material market risks that are not adequately covered in the VaR model.
Risk factors are reviewed on a regular basis and are either incorporated directly in the VaR models, where possible, or quantified through either the VaR-based RNIV approach or a stress test approach within the RNIV framework. While VaR-based RNIVs are calculated by using historical scenarios, stress-type RNIVs are estimated on the basis of stress scenarios whose severity is calibrated to be in line with the capital adequacy requirements. The outcome of the VaR-based RNIV approach is included in the overall VaR calculation but excluded from the VaR measure used for regulatory back-testing. In addition, the stressed VaR measure also includes risk factors considered in the VaR-based RNIV approach. Stress-type RNIVs include a de-peg risk measure to capture risk to pegged and heavily-managed currencies.
Stress testing
(Unaudited)
Stress testing is an important procedure that is integrated into our market risk management framework to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be much greater than those predicted by VaR modelling.
Stress testing is implemented at legal entity, regional and overall Group levels. A set of scenarios is used consistently across all regions within the Group. The risk appetite around potential stress losses for the Group is set and monitored against a referral limit.
Market risk reverse stress tests are designed to identify vulnerabilities in our portfolios by looking for scenarios that lead to loss levels considered severe for the relevant portfolio. These scenarios may be quite local or idiosyncratic in nature, and complement the systematic top-down stress testing.
Stress testing and reverse stress testing provide senior management with insights regarding the 'tail risk' beyond VaR, for which our appetite is limited.
Trading portfolios
(Audited)
Trading portfolios comprise positions held for client servicing and market-making, with the intention of short-term resale and/or to hedge risks resulting from such positions.
Back-testing
(Audited)
We routinely validate the accuracy of our VaR models by back-testing the VaR metric against both actual and hypothetical profit and loss. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenue of intra-day transactions.
The number of back-testing exceptions is used to gauge how well the models are performing. We consider enhanced internal monitoring of a VaR model if more than five profit exceptions or more than five loss exceptions occur in a 250-day period.
We back-test our VaR at set levels of our Group entity hierarchy.
Market risk in 2021
(Unaudited)
Financial markets were resilient in 2021. During the first half of the year, the rollout of Covid vaccination programmes, loose financial conditions and continued fiscal support contributed to a gradual reopening of major economies. Concerns of rising inflationary pressures were mainly interpreted as transitory. Whilst the path of monetary policies remained uncertain, central banks continued to provide liquidity. This supported risk assets valuations, while volatility in most asset classes remained subdued. In the second half of 2021, amid the emergence of new Covid variants, global equities reached further record highs, as investors focused on global economic resilience and corporate earnings. Yields followed a downward trend for most of 3Q-21, before reversing in the final weeks of the year, when markets began pricing a faster pace of interest rate rise in some of the major economies, due to persistently elevated inflation and the expectation of a tighter monetary policies. Credit markets remained strong, with credit benchmark indices for investment-grade and high-yield debt close to pre-pandemic levels. Nevertheless a wave of volatility and uncertainty in the Chinese property sector due to liquidity crunch resulting numerous rating downgrades and defaults during the second half of 2021.
We continued to manage market risk prudently during 2021. Sensitivity exposures and VaR remained within appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits, including stress and scenario analysis.
Trading portfolios
(Audited)
Value at risk of the trading portfolios
Trading VaR was predominantly generated by Markets and Securities Services business. Interest rate risks from market-making activities were the main drivers of trading VaR. Total trading VaR was higher as at 31 December 2021 compared to.31 December 2020 mainly due to the reduction in portfolio diversification across different asset class VaR.
The trading VaR for the year is shown in the table below
Trading value at risk, 99% 1 day(1)
(Audited)
Foreign
exchange
and Interest Credit Portfolio
commodity rate Equity spread diversification(2) Total(3)
HK$m HK$m HK$m HK$m HK$m HK$m
At 31
Dec 2021
Year end 36 135 60 31 (74) 188
Average 49 158 77 34 177
Maximum 78 218 108 62 241
At 31
Dec 2020
Year end 50 130 62 45 (143) 144
Average 48 140 62 49 172
Maximum 96 250 118 106 251
1 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
3 The total VaR is non-additive across risk types due to diversification effects. Resilience risk
(Unaudited)
Overview
Resilience risk is the risk that we are unable to provide critical services to our customers, affiliates and counterparties, as a result of sustained and significant operational disruption. Resilience risk arises from failures or inadequacies in processes, people, systems or external events.
Resilience risk management
Key developments in 2021
The Operational and Resilience Risk sub-function provides robust non-financial risk steward oversight of the management of risk by the Group businesses, functions and legal entities. It also provides effective and timely independent challenge. During the year we carried out a number of initiatives to strengthen the management of non-financial risks:
-- We developed a more robust understanding of our risk and control environment, by updating our material risk taxonomy and control libraries, and refreshing material risk and control assessments.
-- We further strengthened our non-financial risk governance and senior leadership focus.
-- We created a consolidated view of all risk issues across the Group enabling better senior management focus, read across on material control issues and intervention as required.
-- We improved how we provide better analysis and reporting of non-financial risks, with more risk practitioners having access to a wider range of management information on their risks and controls.
-- We increased the capability of risk stewards to allow for effective stewardship to be in place across the Group.
-- We strengthened read across of issues and near misses by implementing a Group-wide harmonized approach across businesses, functions and regions.
-- We enhanced risk management oversight across our most material change initiatives to support growth in our strategic transformation in 2021.
We prioritise our efforts on material risks and areas undergoing strategic growth, aligning our location strategy to this need. We also remotely provide oversight and stewardship, including support of chief risk officers, in territories where we have no physical presence.
Governance and structure
The Operational and Resilience Risk target operating model provides a globally consistent view across resilience risks, strengthening our risk management oversight while operating effectively as part of a simplified non-financial risk structure. We view resilience risk across seven risk types related to: third parties and supply chains; information, technology and cybersecurity; payments and manual processing; physical security; business interruption and contingency risk; building unavailability; and workplace safety.
The principal senior management meeting for operational and resilience risk governance is the Non-Financial Risk Management Board, chaired by the Group Chief Risk and Compliance Officer, with an escalation path to the Group Risk Management Meeting.
Key risk management processes
Operational resilience is our ability to anticipate, prevent, adapt, respond to, recover and learn from internal or external disruption, protecting customers, the markets we operate in and economic stability. Resilience is determined by assessing whether we are able to continue to provide our most important services, within an agreed level. We accept we will not be able to prevent all disruption, we prioritise investment to continually improve the response and recovery strategies for our most important business services.
Business operations continuity
Business Continuity, in response to the Covid 19 pandemic, remains in place across a number of locations where the Group operates, allowing the majority of service level agreements to be maintained. There were no significant impacts to service delivery in locations where the Group operates.
Regulatory compliance risk
(Unaudited)
Overview
Regulatory compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice, which as a consequence incur fines and penalties and suffer damage to our business.
Regulatory compliance risk arises from the risks associated with breaching our duty to our customers and inappropriate market conduct, as well as breaching regulatory licensing, permissions and rules.
Regulatory compliance risk management
Key developments in 2021
We have continued to embed the structural changes made in the prior year to our wider approach to Compliance Risk Management. The integration of the Risk and Compliance functions in May 2021 brought together two complementary functions which will strengthen the Regulatory Conduct mandate and our capability to drive ever greater standards in regard to conduct of our business.
In June 2021, we also announced HSBC's new purpose-led approach to conduct. As part of this, we took the opportunity to align and simplify our approach, making conduct easier to understand and showing how it fulfils our value: 'we take responsibility'.
Governance and structure
Following the creation of the Group Regulatory Conduct capability in May 2020, we have continued to evolve our structure in response to the ever-changing business and industry needs. In March 2021, a new Regulatory Conduct Strategic Delivery and Analytics team was created to drive the Regulatory Conduct strategic priorities, and provides oversight of Regulatory Conduct sponsored projects.
The Regulatory Conduct capability continues to work closely with the Chief Compliance Officers and their respective teams to help them identify and manage regulatory compliance risks across the Bank. They also work together to ensure good conduct outcomes and provide enterprise-wide support on the regulatory agenda.
Key risk management processes
The Group Regulatory Conduct capability is responsible for setting global policies, standards and risk appetite to guide the Group's management of regulatory compliance. It also devises clear frameworks and support processes to protect against regulatory compliance risks. The capability at the Group level provides oversight, review and challenge to the local Chief Compliance Officers and their teams to help them identify, assess and mitigate regulatory compliance risks, where required. Global policies are reviewed regularly and procedures are in place for prompt identification and escalation of actual or potential regulatory breach. Relevant reportable events are escalated to the RMM and the Risk Committee, as appropriate.
Conduct of business
Our new simplified Conduct Approach, which was launched in June 2021, guides us to do the right thing and to recognise the real impact we have for our customers and the financial markets in which we operate. It complements our Purpose and Values, setting outcomes to be achieved for our customers and markets. It recognises cultural and behavioural drivers of good conduct outcomes and applies across all risk disciplines, operational processes and technologies.
During 2021:
-- We understood and serviced our customers' ongoing needs and continued to champion a strong conduct and customer-focused culture. This was demonstrated through providing support to our customers facing financial difficulties as a result of the prolonged impacts of the pandemic and the resulting uncertainty in trading conditions.
-- We began the integration of climate risk into the Group's risk management approach to recognise the importance of strengthened controls and oversight for our related activities.
-- We operated resiliently and securely to avoid harm to our customers and markets by continuing to embed conduct within our business line processes and through our Non- Financial and Financial Risk Steward activities.
-- We continued our focus on culture and behaviours as a driver of good conduct outcomes.
-- We placed a particular focus on the importance of well-being and collaborative working as we continued to adapt to changing working practices as the pace of change resulting from the pandemic varied across our markets.
-- We continued to emphasise and worked to create an environment in which employees are encouraged and feel safe to speak up.
-- We delivered our annual global mandatory training course on conduct to reinforce the importance of conduct for all colleagues.
The Board continues to maintain oversight of conduct matters through the Risk Committee. Financial crime risk
(Unaudited)
Overview
Financial crime risk is the risk of knowingly or unknowingly helping parties to commit or to further potentially illegal activity through HSBC, including money laundering, fraud, bribery and corruption, tax evasion, sanctions breaches, and terrorist and proliferation financing.
Financial crime risk management
Key developments in 2021
We consistently review the effectiveness of our financial crime risk management framework, which includes consideration of geopolitical and wider economic factors, and 2021 was no exception. We continued to support the Business in navigating the complex and dynamic nature of geopolitics as it relates to sanctions and export control risk. A key focus area in this regard relates to the array of new regulations and designations in 2021 and in alignment with our policy, which is to comply with all applicable sanctions regulations in the jurisdictions in which we operate.
We also continued to progress several key financial crime risk management initiatives, including:
-- We deployed a key component of our intelligence-led, dynamic risk assessment capabilities for customer account monitoring in one of our home markets, and undertook important enhancements to our traditional transaction monitoring systems.
-- We strengthened our anti-fraud capabilities, notably with respect to the early identification of first party lending fraud and the identification of new strategic detection tools.
-- We continued to develop leading-edge surveillance technology and capabilities to identify potential market abuse, including testing machine learning capabilities to detect unauthorised trading.
-- We invested in the use of artificial intelligence (AI) and advanced analytics techniques to manage financial crime risk, notably new automated capabilities in name and transaction screening.
-- We implemented a market leading gifts and entertainment recording and approval system, which, in combination with an expenses reconciliation tool, allows us to manage our gifts and entertainment risk consistently and effectively.
Governance and structure
We have continued to review the effectiveness of our governance framework to manage financial crime risk. The framework aims to enable us to comply with the letter and the spirit of all applicable financial crime laws and regulations, as well as our own standards, values and policies relating to financial crime risks.
In 2021, the Risk and Compliance functions were integrated at Group level, allowing us to make better use of a broader range of perspectives from other risk disciplines.
Key risk management processes
We assess the effectiveness of our end-to-end financial crime risk management framework on an ongoing basis and invest in enhancing our operational control capabilities and technology solutions to deter and detect criminal activity. We have simplified our framework by streamlining and de-duplicating policy requirements. We also strengthened our financial crime risk taxonomy and control libraries, improving our investigative and monitoring capabilities through technology deployments, as well as developing more targeted metrics. We have also enhanced governance and reporting.
We are committed to working in partnership with the wider industry and the public sector in managing financial crime risk, protecting the integrity of the financial system and the communities we serve. We participate in numerous public-private partnerships and information-sharing initiatives around the world also supporting national governments and international standard setters' reform activity. In 2021, there was a particular focus on reform activity in Singapore where we are active participants in a key initiative undertaken by the Monetary Authority of Singapore, known as Project Cosmic, which establishes a framework to enable financial institutions to share information with each other when certain financial crime risk concerns have been identified. We took part in a number of roundtables organised by the Financial Action Task Force, the global money laundering and terrorist financing watchdog, supporting its strategic review. We also supported its work on digitisation and beneficial ownership registers. These align with our objectives of promoting a public policy and regulatory environment that embraces the use of technology in building the future financial crime framework to ensure our bank is more resilient and secure, while enabling benefits for customers.
Skilled Person/Independent Consultant
In December 2012, 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 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 was appointed in the second quarter of 2021 pursuant to the cease-and-desist order.
The new Skilled Person issued his final report in June 2021, concluding his review. The 2021 FCA Firm Evaluation Letter confirmed that there is no requirement for a further Skilled Person review. The new Independent Consultant carried out the eighth annual review for the FRB and issued his report in November 2021. In accordance with the Direction issued by the FCA to HSBC Holdings in 2020, the Group Risk Committee retains oversight of matters relating to anti-money laundering, sanctions, terrorist financing and proliferation financing. Throughout 2021, the Group Risk Committee received regular updates on the Skilled Person's and the Independent Consultant's reviews.
Model risk
(Unaudited)
Overview
Model risk is the risk of inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions.
Key developments in 2021
In 2021, we continued to make improvements in our model risk management processes, amid regulatory changes in model requirements. Initiatives during the year included:
-- Re-development, validation, and submission of critical Internal Rating Based ('IRB') Approach models for credit risk, Internal Model Method ('IMM') for counterparty credit risk and Internal Model Approach ('IMA') models for market risk, to the HKMA in response to regulatory capital changes. These new models have been built to enhance standards using improved data as a result of investment in processes and systems.
-- Redeveloped and validated models impacted by changes to alternative rate setting mechanisms due to IBOR transition.
-- Further enhancements to our control framework for our Sarbannes-Oxley were made to address the control weaknesses that emerged as a result of significant increases in model adjustments and overlays that were applied to compensate for the impact of COVID-19 on models and to introduce a requirement for second line to approve material models prior to use.
-- Model owners in Business and Functions continued to embed the requirements included in the Model Risk Policy and Standards introduced in 2020. On-going training on model risk continued to be delivered to front line teams to improve their awareness of model risk and their adherence to the governance framework.
-- New Model Risk Appetite measures were rolled out in HBAP, aligned across the Bank. The new measures are more forward looking and helped Businesses and Functions manage model risk more effectively.
-- There has been greater level of involvement by Businesses and Functions in the development and management of models. This included hiring of staff with strong model risk skills and enhanced focus on key model risk drivers such as data quality and model methodology.
-- The transformation of the Model Risk Management team continued with changes to the model validation processes including new system and process. Key hires were made during the year to strengthen oversight and expertise within the Function. Also, changes to the Model Inventory system provided Businesses and Functions improved functionality and more detailed information related to model risk.
-- HBAP regional engagement strategy has been established in response to the growing maturity of model risk management and demand across the Region.
-- Models related to climate risk and models using advanced analytics and machine learning became a critical area of focus and would grow in importance in 2022 and beyond. In response, qualified specialist skills were added to the model risk teams to manage the increased model risk in these areas.
Governance
The governance structure implemented in 2020 is fully operational. The HBAP Model Risk Committee (MRC) established in 2021 provides oversight of models used in HBAP. The Committee is chaired by the HBAP Chief Risk Officer and the Regional Heads of Businesses participate in these meetings. Authorised sub-forums operating under the remit of the HBAP MRC, oversee model risk management activities based on associated model categories.
Key risk management processes
A variety of modelling approaches, including regression, simulation, sampling, machine learning and judgemental scorecards for a range of business applications were used. These activities include customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting.
Our model risk management policies and procedures were regularly reviewed, and required the First Line of Defence to demonstrate comprehensive and effective controls based on a library of model risk controls provided by Model Risk Management.
Model Risk Management also reports on model risk to senior management on a regular basis through the use of the risk map, risk appetite metrics and regular key updates.
The effectiveness of these processes, including the Regional model oversight committee structure, were regularly reviewed to ensure clarity in authority, coverage and escalations and that appropriate understanding and ownership of model risk continued to be embedded in the Businesses and Functions.
Insurance manufacturing operations risk
Overview
(Unaudited)
The key risks for our insurance manufacturing operations are market risks, in particular interest rate and equity, credit risks and insurance underwriting and operational risks. These have a direct impact on the financial results and capital positions of the insurance operations. Liquidity risk, whilst significant in other parts of the group, is relatively minor for our insurance operations.
HSBC's Insurance business
(Unaudited)
We sell insurance products through a range of channels including our branches, direct channels and third-party distributors. The majority of sales are through an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship.
The insurance contracts we sell relate to the underlying needs of our customers, which we can identify from our point-of-sale contacts and customer knowledge. For the products we manufacture, the majority of sales are of savings, universal life and protection contracts.
We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the group.
We have life insurance manufacturing operations in Hong Kong, Singapore and mainland China. We also have a life insurance manufacturing associate in India.
Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a small number of leading external insurance companies in order to provide insurance products to our customers through our banking network and direct channels. These arrangements are generally structured with our exclusive strategic partners and earn the group a combination of commissions, fees and a share of profits. We distribute insurance products in all of our geographical regions
Insurance products are sold through all global businesses, but predominantly by WPB and CMB through our branches and direct channels.
Insurance manufacturing operations risk management
Key developments in 2021
(Unaudited)
The insurance manufacturing subsidiaries follow the group's risk management framework. In addition, there are specific policies and practices relating to the risk management of insurance contracts. There were no material changes to these policies and practices over 2021, although enhancements were made to the product pricing and profitability framework to allow for the transition to HKFRS 17.
Governance and structure
(Unaudited)
Insurance risks are managed to a defined risk appetite, which is aligned to the group's risk appetite and risk management framework, including the group's 'Three lines of defence' model. The Global Insurance Risk Management Meeting oversees the risk and control framework for insurance business in the group.
The monitoring of the risks within our insurance operations is carried out by Insurance Risk teams. The Bank's risk stewardship functions support the Insurance Risk teams in their respective areas of expertise.
Stress and scenario testing
(Unaudited)
Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and Group-wide regulatory stress tests, as well as internally developed stress and scenario tests, including Group internal stress test exercises. The results of these stress tests and the adequacy of management action plans to mitigate these risks are considered in the group ICAAP and the entities' regulatory Own Risk and Solvency Assessments ('ORSAs').
Key risk management processes
Market risk
(Audited)
All our insurance manufacturing subsidiaries have market risk mandates that specify the investment instruments in which they are permitted to invest and the maximum quantum of market risk that they may retain. They manage market risk by using, among others, some or all of the techniques listed below, depending on the nature of the contracts written:
-- We are able to adjust bonus rates to manage the liabilities to policyholders for products with discretionary participating features ('DPF'). The effect is that a significant portion of the market risk is borne by the policyholder.
-- We use asset and liability matching where asset portfolios are structured to support projected liability cash flows. The group manages its assets using an approach that considers asset quality, diversification, cash flow matching, liquidity, volatility and target investment return. We use models to assess the effect of a range of future scenarios on the values of financial assets and associated liabilities, and ALCOs employ the outcomes in determining how best to structure asset holdings to support liabilities.
-- We use derivatives to protect against adverse market movements.
-- We design new products to mitigate market risk, such as changing the investment return sharing portion between policyholders and the shareholder.
-- We exit, to the extent possible, investment portfolios whose risk is considered unacceptable.
Credit risk
(Audited)
Our insurance manufacturing subsidiaries also have credit risk mandates and limits within which they are permitted to operate, which consider the credit risk exposure, quality and performance of their investment portfolios. Our assessment of the creditworthiness of issuers and counterparties is based primarily upon internationally recognised credit ratings and other publicly available information.
Stress testing is performed on investment credit exposures using credit spread sensitivities and default probabilities.
We use a number of tools to manage and monitor credit risk. These include a credit report containing a watch-list of investments with current credit concerns, primarily investments that may be at risk of future impairment or where high concentrations to counterparties are present in the investment portfolio. Sensitivities to credit spread risk are assessed and monitored regularly.
Capital and liquidity risk
(Audited)
Capital risk for our insurance manufacturing subsidiaries is assessed in the ICAAP based on their financial capacity to support the risks to which they are exposed. Capital adequacy is assessed on both the group's economic capital basis, and the relevant local insurance regulatory basis. The group's economic capital basis is largely aligned to European Solvency II regulations, other than in Hong Kong where this is based on the emerging Hong Kong Risk Based Capital regulations.
Risk appetite buffers are set to ensure that the operations are able to remain solvent on both bases, allowing for business-as-usual volatility and extreme but plausible stress events.
Liquidity risk is managed by cash flow matching and maintaining sufficient cash resources, investing in high credit-quality investments with deep and liquid markets, monitoring investment concentrations and restricting them where appropriate, and establishing committed contingency borrowing facilities.
Insurance manufacturing subsidiaries complete quarterly liquidity risk reports and an annual review of the liquidity risks to which they are exposed.
Insurance underwriting risk
(Unaudited)
Our insurance manufacturing subsidiaries primarily use the following frameworks and processes to manage and mitigate insurance underwriting risks:
-- a formal approval process for launching new products or making changes to products;
-- a product pricing and profitability framework which requires initial and ongoing assessment of the adequacy of premiums charged on new insurance contracts to meet the risks associated with them;
-- a framework for customer underwriting;
-- reinsurance which cedes risks above our appetite thresholds to third party reinsurer thereby limiting our exposure; and
-- oversight of expense and reserving risks by entity Actuarial Control Committees.
Insurance manufacturing operations risk in 2021
Measurement
(Unaudited)
The tables below show the composition of assets and liabilities by contract type. 91% (2020: 92%) of both assets and liabilities are derived from Hong Kong.
Balance sheet of insurance manufacturing subsidiaries by type of
contract
(Audited)
------------------------------ ------------------------------ ------------------------------ --------------------------
Shareholders'
assets
Non-linked Unit-linked and liabilities Total
HK$m HK$m HK$m HK$m
------------------------------ ------------------------------ ------------------------------ --------------------------
At 31 Dec 2021
------------------------------ ------------------------------ ------------------------------ --------------------------
Financial
assets 637,317 37,382 46,971 721,670
------------------------------ ------------------------------ ------------------------------ --------------------------
- financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through
profit or
loss 160,555 35,906 457 196,918
- derivatives 631 6 3 640
- financial
investments
measured at
amortised
cost 432,733 479 37,734 470,946
- financial
investments
measured at
fair value
through other
comprehensive
income 5,780 - 592 6,372
- other
financial
assets(1) 37,618 991 8,185 46,794
------------------------------ ------------------------------ ------------------------------
Reinsurance
assets 28,874 6 - 28,880
------------------------------ ------------------------------ ------------------------------ --------------------------
PVIF(2) - - 63,765 63,765
------------------------------ ------------------------------ ------------------------------ --------------------------
Other assets
and
investment
properties 13,626 4 5,304 18,934
------------------------------ ------------------------------ ------------------------------ --------------------------
Total assets 679,817 37,392 116,040 833,249
------------------------------ ------------------------------ ------------------------------ --------------------------
Liabilities
under
investment
contracts
designated at
fair value 28,397 7,030 - 35,427
------------------------------ ------------------------------ ------------------------------ --------------------------
Liabilities
under
insurance
contracts 608,590 29,645 - 638,235
------------------------------ ------------------------------ ------------------------------ --------------------------
Deferred
tax(3) 9 - 10,579 10,588
------------------------------ ------------------------------ ------------------------------ --------------------------
Other
liabilities - - 35,269 35,269
------------------------------ ------------------------------ ------------------------------ --------------------------
Total
liabilities 636,996 36,675 45,848 719,519
------------------------------ ------------------------------ ------------------------------ --------------------------
Total equity - - 113,730 113,730
------------------------------ ------------------------------ ------------------------------ --------------------------
Total equity
and
liabilities 636,996 36,675 159,578 833,249
------------------------------ ------------------------------ ------------------------------ --------------------------
At 31 Dec 2020
------------------------------ ------------------------------ ------------------------------ --------------------------
Financial
assets 577,666 42,621 40,776 661,063
------------------------------ ------------------------------ ------------------------------ --------------------------
- financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through
profit or
loss 129,597 41,366 384 171,347
- derivatives 1,323 20 3 1,346
- financial
investments
measured at
amortised
cost 410,169 222 34,824 445,215
- financial
investments
measured at
fair value
through other
comprehensive
income 4,971 - 502 5,473
- other
financial
assets(1) 31,606 1,013 5,063 37,682
------------------------------ ------------------------------ ------------------------------
Reinsurance
assets 27,299 6 - 27,305
------------------------------ ------------------------------ ------------------------------ --------------------------
PVIF(2) - - 65,052 65,052
------------------------------ ------------------------------ ------------------------------ --------------------------
Other assets
and
investment
properties 13,422 1 4,652 18,075
------------------------------ ------------------------------ ------------------------------ --------------------------
Total assets 618,387 42,628 110,480 771,495
------------------------------ ------------------------------ ------------------------------ --------------------------
Liabilities
under
investment
contracts
designated at
fair value 31,786 7,732 - 39,518
------------------------------ ------------------------------ ------------------------------ --------------------------
Liabilities
under
insurance
contracts 547,128 34,348 - 581,476
------------------------------ ------------------------------ ------------------------------ --------------------------
Deferred
tax(3) 9 - 10,436 10,445
------------------------------ ------------------------------ ------------------------------ --------------------------
Other
liabilities - - 37,220 37,220
------------------------------ ------------------------------ ------------------------------ --------------------------
Total
liabilities 578,923 42,080 47,656 668,659
------------------------------ ------------------------------ ------------------------------ --------------------------
Total equity - - 102,836 102,836
------------------------------ ------------------------------ ------------------------------ --------------------------
Total equity
and
liabilities 578,923 42,080 150,492 771,495
------------------------------ ------------------------------ ------------------------------ --------------------------
1 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
2 Present value of in-force long-term insurance business. 3 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
4 Balance sheet of insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance operations.
Key risk types
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting capital or profit. Market factors include interest rates, equity and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with discretionary participating features ('DPF'). These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in fixed interest assets, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns.
DPF products expose the group to the risk of variation in asset returns, which will impact our participation in the investment performance. In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by the group. Reserves are held against the cost of such guarantees.
The cost of such guarantees is accounted for as a deduction from the present value of in-force 'PVIF' asset, unless the cost of such guarantees is already explicitly allowed for within the insurance contracts liabilities.
For unit-linked contracts, market risk is substantially borne by the policyholders, but some market risk exposure typically remains as fees earned are related to the market value of the linked assets.
Sensitivities
(Unaudited)
Where appropriate, the effects of the sensitivity tests on profit after tax and total equity incorporate the impact of the stress on the PVIF. The relationship between the profit and total equity and the risk factors is non-linear; therefore the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not symmetrical on the upside and downside. The sensitivities reflect the established risk sharing mechanism with policyholders for
participating products, and are stated before allowance for management actions which may mitigate the effect of changes in the market environment. The sensitivities presented allow for adverse changes in policyholders' behaviour that may arise in response to changes in market rates.
The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the year and the total equity of our insurance manufacturing subsidiaries.
The differences between the impacts on profit after tax and equity are driven by the changes in value of the bonds measured at fair value through other comprehensive income, which are only accounted for in equity.
Sensitivity of the group's insurance manufacturing subsidiaries to
market risk factors
(Audited)
31 Dec 2021 31 Dec 2020
------------------------------------------------------------------
Effect Effect Effect Effect
on profit on total on profit on total
after tax equity after tax equity
HK$m HK$m HK$m HK$m
------------------------------- ------------------------------- -------------------------------- --------------------------------
+100 basis
points
parallel
shift in
yield curves (1,257) (2,036) (1,673) (2,283)
------------------------------- ------------------------------- -------------------------------- --------------------------------
-100 basis
points
parallel
shift in
yield curves 1,201 1,980 1,613 2,223
------------------------------- ------------------------------- -------------------------------- --------------------------------
10% increase
in equity
prices 2,388 2,388 2,167 2,167
------------------------------- ------------------------------- -------------------------------- --------------------------------
10% decrease
in equity
prices (2,426) (2,426) (2,183) (2,183)
------------------------------- ------------------------------- -------------------------------- --------------------------------
10% increase
in USD
exchange
rate
compared
to all
currencies 635 635 673 673
------------------------------- ------------------------------- -------------------------------- --------------------------------
10% decrease
in USD
exchange
rate
compared
to all
currencies (635) (635) (673) (673)
------------------------------- ------------------------------- -------------------------------- --------------------------------
Credit risk
(Audited)
Description and exposure
Credit risk is the risk of financial loss if a customer or counterparty fails to meet their obligation under a contract. It arises in two main areas for our insurance manufacturers:
-- risk associated with credit spread volatility and default by debt security counterparties after investing premiums to generate a return for policyholders and shareholders; and
-- risk of default by reinsurance counterparties and non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of these items are shown in the table on page 64.
The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'strong' or 'good' (as defined on page 30), with 100% of the exposure being neither past due nor impaired (2020: 100%).
Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholders. Therefore our exposure is primarily related to liabilities under non-linked insurance and investment contracts and shareholders' funds. The credit quality of insurance financial assets is included in the table on page 42. The risk associated with credit spread volatility is to a large extent mitigated by holding debt securities to maturity, and sharing a degree of credit spread experience with policyholders.
Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though solvent, either does not have sufficient financial resources available to meet its obligations when they fall due, or can secure them only at excessive cost.
The following table shows the expected undiscounted cash flows for insurance liabilities at 31 December 2021. The liquidity risk exposure is wholly borne by the policyholders in the case of unit-linked business and is shared with the policyholders for
non-linked insurance.
The profile of the expected maturity of insurance contracts at 31 December 2021 remained comparable with 2020.
The remaining contractual maturity of investment contract liabilities is included in the table on page 111.
Expected maturity of insurance contract liabilities
(Audited)
Expected cash flows (undiscounted)
Within 1-5 years 5-15 years Over 15 Total
1 year years
HK$m HK$m HK$m HK$m HK$m
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
At 31 Dec
2021
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
Non-linked
insurance
contracts 53,098 187,589 324,654 662,058 1,227,399
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
Unit-linked 8,073 14,353 14,852 8,115 45,393
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
61,171 201,942 339,506 670,173 1,272,792
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
At 31 Dec
2020
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
Non-linked
insurance
contracts 47,444 168,811 311,975 517,761 1,045,991
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
Unit-linked 8,558 18,308 14,708 9,162 50,736
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
56,002 187,119 326,683 526,923 1,096,727
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
Insurance underwriting risk
Description and exposure
(Unaudited)
Insurance underwriting risk is the risk of loss through adverse experience, in either timing or amount, of insurance underwriting parameters (non-economic assumptions). These parameters include mortality, morbidity, longevity, lapses and expense rates.
The principal risk we face is that, over time, the cost of the contract, including claims and benefits may exceed the total amount of premiums and investment income received.
The table on page 64 analyses our life insurance risk exposures by type of contract.
The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2020.
Sensitivities
(Audited)
The table below shows the sensitivity of profit and total equity to reasonably possible changes in non-economic assumptions across all our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in mortality or morbidity depends on the type of business being written.
Sensitivity to lapse rates depends on the type of contracts being written. For a portfolio of term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. We are most sensitive to a change in lapse rates on unit-linked and universal life contracts.
Expense rate risk is the exposure to a change in the allocated cost of administering insurance contracts. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative effect on our profits. The risk is generally greater for Singapore and mainland China than for Hong Kong.
Sensitivity analysis
(Audited)
2021 2020
HK$m HK$m
--------------------------- ----------------------------
Effect on profit after tax and total equity at 31 Dec
--------------------------- ----------------------------
10% increase in mortality and/or morbidity rates (637) (613)
--------------------------- ----------------------------
10% decrease in mortality and/or morbidity rates 650 629
--------------------------- ----------------------------
10% increase in lapse rates (606) (575)
--------------------------- ----------------------------
10% decrease in lapse rates 680 676
--------------------------- ----------------------------
10% increase in expense rates (368) (352)
--------------------------- ----------------------------
10% decrease in expense rates 359 360
--------------------------- ----------------------------
Statement of Directors' Responsibilities
The following statement, which should be read in conjunction with the Auditor's statement of their responsibilities set out in their report on pages 68-72, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the Auditor in relation to the Consolidated Financial Statements.
The Directors of The Hongkong and Shanghai Banking Corporation Limited ('the Bank') are responsible for the preparation of the Bank's Annual Report and Accounts, which contains the Consolidated Financial Statements of the Bank and its subsidiaries (together 'the group'), in accordance with applicable law and regulations.
The Hong Kong Companies Ordinance requires the Directors to prepare for each financial year the consolidated financial statements for the group and the balance sheet for the Bank.
The Directors are responsible for ensuring adequate accounting records are kept that are sufficient to show and explain the group's transactions, such that the group's consolidated financial statements give a true and fair view.
The Directors are responsible for preparing the consolidated financial statements that give a true and fair view and are in accordance with Hong Kong Financial Reporting Standards ('HKFRSs') issued by the Hong Kong Institute of Certified Public Accountants. The Directors have elected to prepare the Bank's balance sheet on the same basis.
The Directors as at the date of this report, whose names and functions are set out in the 'Report of the Directors' on pages 3-9 of this Annual Report and Accounts, confirm to the best of their knowledge that:
-- the Consolidated Financial Statements, which have been prepared in accordance with HKFRSs and in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the group; and
-- the management report represented by the Financial Review, the Risk and Capital Reports includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that the group faces.
On behalf of the Board
Peter Wong
Chairman
22 February 2022
Independent Auditor's Report To the Shareholder of The Hongkong and Shanghai Banking Corporation Limited (incorporated in Hong Kong with limited liability)
Opinion
What we have audited
The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited (the 'Bank') and its subsidiaries (the 'group'), which are set out on pages 73 to 131, comprise:
-- the consolidated balance sheet as at 31 December 2021; -- the consolidated income statement for the year then ended; -- the consolidated statement of comprehensive income for the year then ended; -- the consolidated statement of changes in equity for the year then ended; -- the consolidated statement of cash flows for the year then ended; and
-- the notes(1) on the consolidated financial statements, which include significant accounting policies and other explanatory information.
1 Certain required disclosures as described in Note 1.1(d) on the consolidated financial statements have been presented elsewhere in the Annual Report and Accounts 2021, rather than in the notes on the consolidated financial statements. These are cross-referenced from the consolidated financial statements and are identified as audited.
Our opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the group as at
31 December 2021, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards ('HKFRSs') issued by the Hong Kong Institute of Certified Public Accountants ('HKICPA') and have been properly prepared in compliance with the Hong Kong Companies Ordinance.
Basis for Opinion
We conducted our audit in accordance with Hong Kong Standards on Auditing ('HKSAs') issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the group in accordance with the HKICPA's Code of Ethics for Professional Accountants ('the Code'), and we have fulfilled our other ethical responsibilities in accordance with the Code.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matters identified in our audit are summarised as follows:
-- Allowances for expected credit losses on loans and advances to customers
-- Impairment assessment of investment in associate - Bank of Communications Co., Limited ('BoCom')
-- The present value of in-force long-term insurance business ('PVIF') and liabilities under non-linked life insurance contracts
Allowances for expected credit losses on loans and advances to customers
At 31 December 2021, the group recorded to customers made in the consolidated
allowances for expected credit losses financial statements in the context
('ECL') on loans and advances to of the applicable We tested controls
customers of HK$32.0bn. in place over the methodologies,
The determination of the ECL on loans their application, significant assumptions
and advances to customers requires and data used to determine the ECL
the use of complex credit risk methodologies on loans and advances to customers.
that are applied in models using These included controls over:
the group's historic experience of * Model development, validation and monitoring;
the correlations between defaults
and losses, borrower creditworthiness,
segmentation of customers or portfolios * Approval of economic scenarios;
and economic conditions.
It also requires the determination
of assumptions which involve estimation * Approval of the probability weightings assigned to
uncertainty. The assumptions that economic scenarios;
we focused our audit on include those
with greater levels of management
judgement and for which variations * Assigning customer risk ratings;
have the most significant impact
on ECL on loans and advances to customers.
Specifically, these included economic * Approval of management judgemental adjustments; and
scenarios and their likelihood, as
well as customer risk ratings. Likewise,
there is inherent uncertainty with * Review of input and assumptions applied in estimating
the consensus economic forecast data the recoverability of credit-impaired wholesale
from external economists as well exposures.
as the prospects of future recoverability
of credit impaired wholesale exposures.
The progression of the Covid-19 pandemic We performed substantive audit procedures
and other current macroeconomic conditions over the compliance of ECL methodologies
impact the inherent risk and estimation with the requirements of HKFRS 9.
uncertainty involved in determining We engaged professionals with experience
the ECL on loans and advances to in ECL modelling to assess the appropriateness
customers. of changes to models during the year,
Management judgemental adjustments and for a sample of those models,
to ECL on loans and advances to customers independently reperformed the modelling
therefore continue to be made. This for certain aspects of the ECL calculation.
includes judgemental adjustments We also assessed the appropriateness
to the ECL for certain wholesale of methodologies and related models
sectors, as well as adjustments related that did not change during the year.
to the retail portfolio. We further performed the following
to assess the significant assumptions
and data:
* We challenged the appropriateness of the significant
assumptions;
* We involved our economic experts in assessing the
reasonableness of the severity and likelihood of
certain economic scenarios;
* We tested a sample of customer risk ratings assigned
to wholesale exposures; and
* We have independently assessed other significant
assumptions and obtained corroborating evidence.
For a sample of management judgemental
adjustments, we challenged the appropriateness
of these and assessed the ECL determined.
We further considered whether the
judgements made in selecting the
significant assumptions and determining
the management judgemental adjustments
would give rise to indicators of
possible management bias.
We assessed the adequacy of the disclosures
in relation to ECL on loans and advances
financial reporting framework.
We discussed the appropriateness
of the methodologies, their application,
significant assumptions and related
disclosures with the Audit Committee,
giving consideration to the current
macroeconomic conditions. This included
management judgemental adjustments
made to derive the ECL on loans and
advances to customers. We further
discussed the governance and controls
over the process in determining ECL
on loans and advances to customers.
Risk: Credit Risk, as cross-referenced from the consolidated financial
statements (only information identified as audited), page 29-50
Note 1.2 (i) on the consolidated financial statements: Basis of preparation
and significant accounting policies - Impairment of amortised cost
and FVOCI financial assets, page 83-86
Note 2 (e) on the consolidated financial statements: Operating profit
- Change in expected credit losses and other credit impairment charges,
page 91
Note 10 on the consolidated financial statements: Loans and advances
to customers, page 99
Impairment assessment of investment in associate - Bank of Communications
Co., Limited ('BoCom')
At 31 December 2021, the fair value We tested controls in place over
of the investment in BoCom, based significant assumptions, the methodology
on the share price, was HK$118.2bn and its application used to determine
lower than the carrying value ('CV') the VIU. We assessed the appropriateness
of HK$184.8bn. This is an indicator of the methodology used, its application,
of potential impairment. An impairment and the mathematical accuracy of
test was performed, with supporting the calculations. In respect of the
sensitivity analysis, using a value significant assumptions, we performed
in use ('VIU') model. The VIU was the following:
HK$8.2bn in excess of the CV. On * Challenged the appropriateness of the significant
this basis, no impairment was recorded. assumptions and, where relevant, their
The methodology applied in the VIU interrelationships;
model is dependent on various assumptions,
both short term and long term in
nature. These assumptions, which * Obtained corroborating evidence for data supporting
are subject to estimation uncertainty, significant assumptions that may include historic
are derived from a combination of experience, external market information, third-party
management's judgement, analysts' sources including analyst reports, information from
forecasts, market data or other relevant BoCom management and historical publicly available
information. BoCom financial information;
The assumptions that we focused our
audit on were those with greater
levels of management judgement and * Determined a reasonable range for the discount rate
subjectivity, and for which variations assumption, with the assistance of our valuation
had the most significant impact on experts, and compared it to the discount rate used by
the VIU. Specifically, these included management; and
the discount rate, operating income
growth rate, long-term profit and
asset growth rates, cost-income ratio, * Assessed whether the judgements made in selecting the
expected credit losses, effective significant assumptions give rise to indicators of
tax rates, and capital requirements possible management bias.
(including Capital Adequacy Ratio,
Tier 1 Capital Adequacy ratio and
risk-weighted assets as a percentage We observed the meetings in March,
of total assets). May, September and November 2021
between management and BoCom management,
held specifically to identify facts
and circumstances impacting significant
assumptions relevant to the determination
of the VIU.
Representations were obtained from
the Bank that assumptions used were
consistent with information currently
available to the Bank.
We assessed the adequacy of the disclosures
in relation to BoCom made in the
consolidated financial statements
in the context of the applicable
financial reporting framework.
We discussed the appropriateness
of the methodology, its application
and significant assumptions with
the Audit Committee. We also discussed
the disclosures made in relation
to BoCom, including the use of sensitivity
analysis to explain estimation uncertainty
and the changes in certain assumptions
that would result in the VIU being
equal to the CV.
Note 1.2 (a) on the consolidated financial statements: Basis of preparation
and significant accounting policies - Consolidated and related policies,
page 80-81
Note 14 on the consolidated financial statements: Interests in associates
and joint ventures, page 102-105
The present value of in-force long-term insurance business ('PVIF')
and liabilities under non-linked life insurance contracts
At 31 December 2021, the group has We tested controls in place over
recorded an asset for PVIF of HK$63.8bn the methodologies, their application,
and liabilities under non-linked significant assumptions and data
life insurance contracts of HK$608.5bn. for PVIF asset and the liabilities
The determination of these balances under non-linked life insurance contracts.
requires the use of complex actuarial Specifically, these included controls
methodologies that are applied in over:
models and involves judgement about * policy data reconciliations from the policyholder
future outcomes. Specifically, judgement administration system to the actuarial valuation
is required in deriving the economic system;
and non-economic assumptions. These
assumptions are subject to estimation
uncertainty, both for PVIF asset * assumptions setting;
and the liabilities under non-linked
life insurance contracts.
* review and determination of methodologies used, and
its application in models; and
* results aggregation and analysis processes.
With the assistance of our actuarial
experts, we performed the following
additional audit procedures to assess
the methodologies used, their application,
significant assumptions, data and
disclosures:
* We assessed the appropriateness of the methodologies
used, their application and the mathematical accuracy
of the calculations;
* We challenged the appropriateness of the significant
assumptions and, where relevant, their
interrelationships. We have independently assessed
these assumptions and obtained relevant corroborating
evidence. We further considered whether the
judgements made in selecting the significant
assumptions would give rise to indicators of possible
management bias;
* We performed substantive audit procedures over
critical data used in the determination of these
balances to ensure these are relevant and reliable;
and
* We assessed the adequacy of the disclosures in
relation to the asset for PVIF and liabilities under
non-linked life insurance contracts made in the
consolidated financial statements in the context of
the applicable financial reporting framework.
We discussed the appropriateness
of the methodologies, their application,
significant assumptions and related
disclosures with the Audit Committee.
In relation to assumptions, we focused
on those for which variations had
the most significant impact on the
valuation of PVIF and liabilities
under non- linked life insurance
contracts carrying value.
Risk: Insurance manufacturing operations risk, as cross-referenced
from the consolidated financial statements (only information identified
as audited), page 62-66
Note 1.2 (j) on the consolidated financial statements: Basis for preparation
and significant accounting policies - Insurance contracts, page 87
Note 3 on the consolidated financial statements: Insurance business,
page 92
Note 15 on the consolidated financial statements: Goodwill and intangible
assets, page 105-106
Other Information
The directors of the Bank are responsible for the other information. The other information comprises all of the information included in the Annual Report and Accounts 2021, Banking Disclosure Statement as at 31 December 2021 and List of the directors of the Bank's subsidiary undertakings (during the period from 1 January 2021 to 22 February 2022) other than the consolidated financial statements and our auditor's report thereon. We have obtained some of the other information including Certain defined terms, Cautionary statement regarding forward-looking statements, Chinese translation, Financial Highlights, Report of the Directors, Financial Review, Risk and Statement of Directors' Responsibilities sections of the Annual Report and Accounts 2021 prior to the date of this auditor's report. The remaining other information, including Banking Disclosure Statement as at 31 December 2021 and List of the directors of the Bank's subsidiary undertakings (during the period from 1 January 2021 to 22 February 2022), is expected to be made available to us after that date. The other information does not include the specific information presented therein that is identified as being an integral part of the consolidated financial statements and, therefore, covered by our audit opinion on the consolidated financial statements.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
When we read the remaining other information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the Audit Committee and take appropriate action considering our legal rights and obligations.
Responsibilities of Directors and the Audit Committee for the Consolidated Financial Statements
The directors of the Bank are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.
The Audit Committee is responsible for overseeing the group's financial reporting process.
Auditor's Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. We report our opinion solely to you, as a body, in accordance with Section 405 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
-- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control.
-- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
-- Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern.
-- Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
-- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.
From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor's report is Lars Christian Jordy Nielsen.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 22 February 2022
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy.
END
ACSBKDBBCBKKOND
(END) Dow Jones Newswires
March 11, 2022 04:51 ET (09:51 GMT)
1 Year Hsbc Frn Var3 Chart |
1 Month Hsbc Frn Var3 Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
