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| Name | Symbol | Market | Type |
|---|---|---|---|
| Hsbc Frn Var3 | LSE:57HB | London | Medium Term Loan |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
From Dec 2022 to Dec 2024
TIDM57HB
RNS Number : 5826S
Hongkong & Shanghai Banking Corp Ld
10 March 2023
10 March 2023
The Hongkong and Shanghai Banking Corporation Limited
2022 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 2022 Annual Report and Accounts for the year ended 31 December 2022.
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 2022
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Contents
Page
Certain defined terms 1
------------------------------------------ ----
Cautionary statement regarding 1
forward-looking statements
------------------------------------------ ----
Chinese translation 1
------------------------------------------ ----
Financial Highlights 2
------------------------------------------ ----
Report of the Directors 3
------------------------------------------ ----
Environmental, Social and Governance 9
Review
------------------------------------------ ----
Financial Review 16
------------------------------------------ ----
Risk 20
------------------------------------------ ----
Statement of Directors' Responsibilities 75
------------------------------------------ ----
Independent Auditor's Report 76
------------------------------------------ ----
Consolidated Financial Statements
------------------------------------------ ----
Consolidated income statement 79
------------------------------------------ ----
Consolidated statement of comprehensive
income 80
------------------------------------------ ----
Consolidated balance sheet 81
------------------------------------------ ----
Consolidated statement of cash
flows 82
------------------------------------------ ----
Consolidated statement of changes
in equity 83
------------------------------------------ ----
Notes on the Consolidated Financial
Statements
------------------------------------------ ----
Basis of preparation and significant
1 accounting policies 85
--- ------------------------------------- ----
2 Operating profit 95
--- ------------------------------------- ----
3 Insurance business 97
--- ------------------------------------- ----
Employee compensation and
4 benefits 98
--- ------------------------------------- ----
5 Tax 101
--- ------------------------------------- ----
6 Dividends 102
--- ------------------------------------- ----
7 Trading assets 103
--- ------------------------------------- ----
8 Derivatives 103
--- ------------------------------------- ----
Financial assets designated
and otherwise mandatorily
measured at fair value through
9 profit or loss 106
--- ------------------------------------- ----
10 Loans and advances to customers 106
--- ------------------------------------- ----
11 Financial investments 107
--- ------------------------------------- ----
Assets pledged, assets transferred
12 and collateral received 108
--- ------------------------------------- ----
13 Investments in subsidiaries 109
--- ------------------------------------- ----
Interests in associates and
14 joint ventures 109
--- ------------------------------------- ----
15 Goodwill and intangible assets 112
--- ------------------------------------- ----
16 Property, plant and equipment 113
--- ------------------------------------- ----
Prepayments, accrued income
17 and other assets 114
--- ------------------------------------- ----
18 Customer accounts 115
--- ------------------------------------- ----
19 Trading liabilities 115
--- ------------------------------------- ----
Financial liabilities designated
20 at fair value 115
--- ------------------------------------- ----
21 Debt securities in issue 115
--- ------------------------------------- ----
Accruals and deferred income,
22 other liabilities and provisions 115
--- ------------------------------------- ----
23 Subordinated liabilities 116
--- ------------------------------------- ----
24 Share capital 116
--- ------------------------------------- ----
25 Other equity instruments 117
--- ------------------------------------- ----
Maturity analysis of assets
26 and liabilities 117
--- ------------------------------------- ----
Analysis of cash flows payable
under financial liabilities
27 by remaining contractual maturities 120
--- ------------------------------------- ----
Contingent liabilities, contractual
28 commitments and guarantees 121
--- ------------------------------------- ----
29 Other commitments 121
--- ------------------------------------- ----
Offsetting of financial assets
30 and financial liabilities 121
--- ------------------------------------- ----
31 Segmental analysis 123
--- ------------------------------------- ----
32 Related party transactions 124
--- ------------------------------------- ----
Fair values of financial instruments
33 carried at fair value 127
--- ------------------------------------- ----
Fair values of financial instruments
34 not carried at fair value 133
--- ------------------------------------- ----
35 Structured entities 134
--- ------------------------------------- ----
Bank balance sheet and statement
36 of changes in equity 136
--- ------------------------------------- ----
37 Business acquisitions 138
--- ------------------------------------- ----
Legal proceedings and regulatory
38 matters 138
--- ------------------------------------- ----
39 Ultimate holding company 139
--- ------------------------------------- ----
Events after the balance sheet
40 date 139
--- ------------------------------------- ----
41 Approval of financial statements 139
--- ------------------------------------- ----
Additional information 140
------------------------------------------ ----
Certain defined terms
This document comprises the Annual Report and Accounts 2022 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.
Please see page 140 for the additional cautionary statement regarding environmental, social and governance, as well as climate-related data, metrics and forward-looking statements.
Chinese translation
A Chinese translation of the Annual Report and Accounts 2022 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
2022 2021
HK$m HK$m
------------------------------------------------------ -------------------------- ----------------------------
For the year
------------------------------------------------------ -------------------------- ----------------------------
Net operating income before change in expected credit
losses and other credit impairment charges 205,692 178,658
------------------------------------------------------ -------------------------- ----------------------------
Profit before tax 97,611 86,563
------------------------------------------------------ -------------------------- ----------------------------
Profit attributable to shareholders 78,245 67,348
------------------------------------------------------ -------------------------- ----------------------------
At the year-end
------------------------------------------------------ -------------------------- ----------------------------
Total shareholders' equity 875,320 856,809
------------------------------------------------------ -------------------------- ----------------------------
Total equity 941,263 923,511
------------------------------------------------------ -------------------------- ----------------------------
Total capital(1) 607,312 590,478
------------------------------------------------------ -------------------------- ----------------------------
Customer accounts 6,113,709 6,177,182
------------------------------------------------------ -------------------------- ----------------------------
Total assets 10,324,152 9,903,393
------------------------------------------------------ -------------------------- ----------------------------
Ratios % %
------------------------------------------------------ -------------------------- ----------------------------
Return on average ordinary shareholders' equity 9.3 8.0
------------------------------------------------------ -------------------------- ----------------------------
Post-tax return on average total assets 0.8 0.7
------------------------------------------------------ -------------------------- ----------------------------
Cost efficiency ratio 53.7 58.7
------------------------------------------------------ -------------------------- ----------------------------
Net interest margin 1.67 1.37
------------------------------------------------------ -------------------------- ----------------------------
Advances-to-deposits ratio 60.6 62.2
------------------------------------------------------ -------------------------- ----------------------------
Capital ratios
------------------------------------------------------ -------------------------- ----------------------------
Common equity tier 1 capital 15.3 15.4
------------------------------------------------------ -------------------------- ----------------------------
Tier 1 capital 16.9 16.8
------------------------------------------------------ -------------------------- ----------------------------
Total capital 18.8 18.7
------------------------------------------------------ -------------------------- ----------------------------
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 Asian markets. By increasing investment in our people and technology, we will further grow our top tier Asia Wealth Management business, while maintaining our distinct position as the leading international bank for our corporate and commercial clients. We remain focused on connecting Asian markets to each other and the world through HSBC's global network, supporting the ongoing transition to a low-carbon economy with Sustainable Finance, continually streamlining our organisation to realise greater operating efficiencies, and improving service for our domestic, regional, and global clients through our technology, talent, and 157 years of experience in the region.
Consolidated Financial Statements
The consolidated financial statements of the group are set out on pages 79 to 139.
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 2022 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 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 (since June 2021) 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, 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. He was non-executive Chairman of HSBC Bank Middle East Limited from 2011 to 2021. He was non-executive Chairman and a Director of Octopus Holdings Limited, Octopus Cards Limited and Octopus Cards Client Funds Limited from 2016 until the end of 2022. ------------------------------------------- David Yi Chien LIAO Co-Chief Executive Officer (since June 2021) He is also a member of the Group Executive Committee of HSBC Holdings plc and 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 June 2021) He is also a member of the Group Executive Committee of HSBC Holdings
plc and an executive Director of
HSBC Bank Malaysia Berhad. 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.
-------------------------------------------
Sonia Chi Man CHENG
Independent non-executive Director
(since November 2020)
She is also the Chief Executive
Officer of Rosewood Hotel Group.
She is the Vice-Chairman and executive
Director of Chow Tai Fook Jewellery
Group Limited, an executive Director
of New World Development Company
Limited and a Director of New World
China Land Limited. She holds a
Bachelor of Arts with a field of
concentration in Applied Mathematics
from Harvard University.
-------------------------------------------
Yiu Kwan CHOI
Independent non-executive Director
(since October 2017)
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 an independent non-executive
Director of HSBC Bank (China) Company
Limited from December 2016 to December
2022. 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.
-------------------------------------------
Andrea Lisa DELLA MATTEA
Independent non-executive Director
(since 11 March 2022)
She is also the Asia Pacific President
of Microsoft Operations Pte Ltd.
She holds a Bachelor of Engineering
and an Honorary Doctor of Engineering
from James Cook University of North
Queensland, Australia.
She has previously held senior leadership
roles at Insight Enterprises, Inc
from 2007 to 2017, including Asia
Pacific Managing Director, and at
Software Spectrum Inc from 1996
to 2006.
-------------------------------------------
Rajnish KUMAR
Independent non-executive Director
(since August 2021)
He is also non-executive Chairman
of Resilient Innovations Pvt. Ltd.,
an independent non-executive Director
of Larsen & Toubro Infotech Limited
and Ambuja Cements Limited, an advisor
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 advisor 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. He is an Associate
of the Indian Institute of Bankers.
He was previously Chairman of the
State Bank of India until he retired
in October 2020.
-------------------------------------------
Beau Khoon Chen KUOK
Independent non-executive Director
(since August 2020)
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
a non-executive Director of Wilmar
International Limited.
-------------------------------------------
Irene Yun-lien LEE
Independent non-executive Director
(since October 2013)
She is also executive Chairman of
Hysan Development Company Limited.
She is also independent non-executive
Chairman of Hang Seng Bank Limited
and an independent non-executive
Director of Alibaba Group Holding
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.
She was an independent non-executive
Director of HSBC Holdings plc from
2015 to 2022.
-------------------------------------------
Victor Tzar Kuoi LI
Non-executive Director (since May
1992)
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 in Civil Engineering
and a Master of Science in Civil
Engineering, both received from
Stanford University; and a Doctor
of Laws, honoris causa (LL.D.) from
The University of Western Ontario.
-------------------------------------------
Annabelle Yu LONG
Independent non-executive Director
(since 17 August 2022)
She is also the Founding and Managing
Partner of BAI Capital Fund I, L.P.
and a Group Management Committee
Member of Bertelsmann SE & Co. KGaA.
She is an independent Director of
Tapestry Inc., LexinFintech Holdings
Ltd., Nio Inc. and Linmon Media
Limited. She holds a Master in Business
Administration from Stanford Graduate
School of Business, United States
and a Bachelor of Science in Electrical
Engineering from University of Electronic
Science and Technology, China.
-------------------------------------------
Kevin Anthony WESTLEY, BBS
Independent non-executive Director
(since September 2016)
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 Wardley Limited) until his
retirement in 2000 and subsequently
acted as an advisor to the Bank
and the Group in Hong Kong. He was
an independent non-executive Director
of the Bank from 2013 to 2015 and
rejoined the Board in September
2016.
===========================================
During the year, Andrea Lisa Della Mattea and Annabelle Yu Long were appointed independent non-executive Directors with effect from 11 March and 17 August 2022 respectively. At the conclusion of the 2022 Annual General Meeting ('AGM') held on 1 June 2022, Graham John Bradley, Christopher Wai Chee Cheng and Francis Sock Ping Yeoh stepped down as Directors. Ewen James Stevenson stepped down as Director with effect from 25 October 2022. 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 2022 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.
From 2022 to incentivise sustainable long-term performance and alignment with shareholder interests, Senior Management of Holdings plc including the Co-Chief Executives of the Bank are eligible to receive Long-Term Incentive (LTI) Share Award. These awards which have been made to executive Directors of Holdings plc are subject to three-year forward-looking performance measures and a seven-year vesting period with a one-year post-vesting retention period, which is not accelerated on departure. The weighted average holding period of an LTI award within HSBC is therefore six years, in excess of the five-year holding period typically implemented by FTSE-listed companies. When the individual ceases employment, if they are treated as a good leaver under our policy, any LTI awards granted will continue to be released over a period of up to eight years, subject to the outcome of performance conditions. For more details on the operation of the plan, please refer to HSBC Holdings plc annual report and accounts.
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, 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. Peter Wong in his former capacity as executive Director in 2021 received a 2021 performance year variable pay award in March 2022 to which part of the award was made in share-linked instruments of HSBC Holding plc.
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$439m (2021: HK$380m).
Compliance with the Banking (Disclosure) Rules
The Directors are of the view that the Annual Report and Accounts 2022 and Banking Disclosure Statements 2022 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 the membership of the Bank's Nomination Committee does not comprise 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 operates in accordance 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 Subsidiary Accountability Framework, which was refreshed in 2022, 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; one other non-executive Director; and eight 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 eight 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. 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 policies 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 heads of Global Businesses and Global Functions and country/territory Chief Executive Officers in Asia-Pacific report to the co-Chief Executive Officers.
Role profiles for the Chairman and co-Chief Executive Officers were approved by the Board in May 2021.
Deputy Chairman
The role of the 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 also involves maintaining external relationships with key stakeholders and communicating their views to the Board.
The role profile for the Deputy Chairman was approved by the Board in April 2021.
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 co-Chairmen of the Executive Committee and the Chairman 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.
The Board and each Board committee have terms of reference to document their responsibilities and governance procedures. The key roles of the Board 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); 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); Luanne Lim (Chief Executive Officer, Hong Kong); Amanda Murphy (Head of Commercial Banking, Southeast Asia and South Asia); Susan Sayers (Regional General Counsel, Asia-Pacific); Antony Shaw (Chief Executive Officer, Australia); Omar Siddiq (Chief Executive Officer, Malaysia); 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: Astor Law (Head of Global Internal Audit, Asia-Pacific) and Jessica Lee (Regional Head of Communications, Asia-Pacific). The Committee met ten times in 2022. 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 recovery and resolution planning activities, and the oversight of treasury sustainability related matters in support of the Group's sustainability objectives.
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 2022.
Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer and is a formal governance forum 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, the Chief Executive Officer of Hang Seng Bank Limited, the Head of Wholesale Credit and Market Risk, Asia-Pacific and other senior executives of the Bank most of whom are members of the Executive Committee. The Risk Management Meeting met six times in 2022.
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), Yiu Kwan Choi, David Eldon, Rajnish Kumar and Irene Lee. Except for David Eldon, who is a non-executive Director, all members are independent non-executive Directors. The Committee met four times in 2022.
The Audit Committee monitors the integrity of the Consolidated Financial Statements, banking disclosure 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 Yiu Kwan Choi (Chairman of the Committee), Sonia Cheng, David Eldon, Rajnish Kumar, Irene Lee, Annabelle Long and Kevin Westley. Except for David Eldon, who is a non-executive Director, all members are independent non-executive Directors. The Committee met four times in 2022.
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 certain 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, and undertakes an annual review of the time commitment and any potential conflicts of interests of each Director. The Committee also reviews the board succession plans of certain subsidiaries of the Bank and considers and endorses appointments to boards of directors of specified subsidiaries.
The current members of the Committee are Beau Kuok (Chairman of the Committee), Peter Wong (Chairman of the Board), David Eldon (Deputy Chairman of the Board) and Kevin Westley. Beau Kuok and Kevin Westley are independent non-executive Directors and Peter Wong and David Eldon are non-executive Directors. The Committee met seven times in 2022.
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 two times in 2022.
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 current members of the Committee, all being independent non-executive Directors, are Irene Lee (Chairman of the Committee), Beau Kuok and Sonia Cheng.
The Committee met six times in 2022. The following is a summary of the Committee's key activities during 2022:
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 2021/2022 performance year pay review
matters
* Reviewed remuneration framework effectiveness
* Received updates on notable events and regulatory and
corporate governance matters
* Reviewed and approved 2022 Material Risk Taker
('MRT') identification approaches and outcomes
* Reviewed attrition data and plans to address area of
concerns
* Approved 2022 remuneration related regulatory
submissions
------------------------------------------------------------
* Senior Management includes the Co-Chief Executives 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 framework is underpinned by our Group's Remuneration Strategy and principles aims to competitively reward long-term sustainable performance. Our goal is to attract, motivate and retain the very best people, regardless of gender, ethnicity, age, disability or any other factor unrelated to performance or experience. This supports the long-term interests of our stakeholders, which includes the customers and the communities we serve, our shareholders and our regulators.
Our approach to performance and pay in 2022 for the broader workforce was 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 towards an individual's ethnicity, gender, age, or any other characteristic and making sure employees are fairly rewarded and recognized. 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. As such, subject to local law, employee receive a behavior rating as well as a performance rating. Analytical reviews were also completed to ensure there is a clear differentiation across both performance and behavior ratings;
-- Supporting a culture of continuous feedback through manager and employee empowerment. Focusing to obtain feedback from colleagues to learn what was going well, learn and improve from experience and discover the skills and behavior colleagues need to grow; and
-- Delivering a balanced, simple and transparent total reward package that supports employee well-being.More details of the Bank's remuneration strategy are contained within the Annual Report and Accounts 2022 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 2021 was commissioned externally to Deloitte LLP and the results were approved by the Remuneration Committee in April 2022. 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 recovery plans that are designed to outline credible actions that could be implemented in the event of stress in order to restore capital and its business to a stable and sustainable condition. The Bank typically submits recovery plan on an annual basis to the HKMA and submits local recovery plans to other host regulators where local requirements are in place. The Bank's recovery plans are continually re-appraised to meet regulatory and internal feedback, and this involves stress testing and 'fire drill' tests.
Resolution
In general terms, 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 recovery action could be taken that would result in the institution recovering.
In view of HSBC Group's corporate structure, which comprises a group of locally regulated operating banks, the preferred resolution strategy for the HSBC Group, as confirmed by its regulators, is multiple point of entry ('MPE') bail-in strategy. This provides flexibility for HSBC Group to be resolved either (i) through a bail-in at the HSBC Holdings plc level, which enables the recapitalisation of operating bank subsidiaries in the HSBC Group (as required) while restructuring actions are undertaken, with the HSBC Group remaining together; or (ii) at a local subsidiary level pursuant to the application of statutory resolution powers by local resolution authorities.
The group is part of the HSBC Group-wide Resolvability Assessment Framework ('RAF') implementation along with continued efforts to work bilaterally 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 group is already compliant with HKMA issued Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements - Banking Sector) Rules ('LAC Rules'), and in the process to comply with new policies on Operational Continuity in Resolution ('OCIR-1'), Financial Institutions (Resolution) (Contractual Recognition of Suspension of Termination Rights - Banking Sector) Rules ('Stay Rules') and Liquidity and Funding in Resolution ('LFIR-1') within the regulatory timeline.
As part of the RAF issued by the Bank of England ('BoE') and Prudential Regulation Authority ('PRA') which places the onus on firms to demonstrate their own resolvability, HSBC Group, including the group was required to have capabilities as of 1 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 RAF requires HSBC Group to prepare a report on the assessment of its preparedness for resolution, which must be submitted to the PRA on a biennial basis. HSBC Group submitted its first such report to the BoE in October 2021 summarising the progress in terms of BoE's RAF, followed by an additional addendum in February 2022. On 10 June 2022 HSBC Group made its first public disclosure on its resolvability, which summarised the key findings from its RAF self-assessment. Alongside this report, the BoE publicly disclosed its own assessment of HSBC Group's resolvability. Certain shortcomings and areas of further enhancement were identified under the first RAF cycle and HSBC Group, including the group is currently addressing these to ensure it meets the objectives of the RAF. Regular engagement with the BoE and PRA will continue as HSBC Group prepares for the second RAF cycle, whereby the Group's next Self-assessment is due in 2023.
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
21 February 2023
Environmental, Social and Governance (unaudited)
The Group is on a journey to incorporate environmental, social and governance ('ESG') principles throughout the organisation, and has taken significant steps to embed sustainability into its purpose and corporate strategy.
Approach to ESG Reporting
The information set out in the ESG Review, taken together with other information relating to ESG issues included in the Annual Report and Accounts 2022, provides key ESG information and data relevant to the group's operations for the year ended 31 December 2022. The data is compiled for the financial year 1 January to 31 December 2022 unless otherwise specified. Measurement techniques and calculations are explained next to data tables where necessary. The group is guided by the Group's consideration of material ESG topics. For Group's material ESG topics and how they decide what to measure, see the Group's Annual Report and Accounts 2022.
The group has considered its 'comply or explain' obligation under the Hong Kong Monetary Authority's ('HKMA') Supervisory Policy Manual ('SPM') GS-1 on Climate Risk Management issued in December 2021. The group has made disclosures consistent with the Task Force on Climate-related Financial Disclosures ('TCFD') Recommendations and Recommended Disclosures, issued in July 2017 and its updated guidance in October 2021, in this Annual Report and Accounts save for certain items, which are described on pages 12 to 15. Further details have been included in this section and the Risk Review section on pages 61 to 64. Our TCFD disclosures are highlighted with the following symbol: TCFD
How ESG is governed TCFD
The Board takes overall responsibility for ESG and approved the climate strategy in 2022, overseeing executive management in developing the approach, execution and associated reporting. The group's developments in relation to its strategies was reviewed through Board discussions at six meetings in 2022. In addition, Board members received a training on global and regional developments in climate and sustainability, as part of their ongoing development. The 2022 annual incentive scorecards of the Co-CEOs of Asia-Pacific and most of the Executive Committee members include outcomes linked to realisation of different ESG metrics such as customer satisfaction, employee sentiment, carbon reduction and sustainable finance measures. Governance structures exist to ensure executive oversight of the group's progress in ESG performance, including involvement of the group Risk Committee ('RC'). The RC reviews the effectiveness of the group's conduct framework, which is designed to deliver fair outcomes for customers, and to preserve the orderly and transparent operation of financial markets, as well as to oversee and advise the Board on risk-related matters, including both financial and non-financial risks. In addition, the Executive Committee reviews an ESG dashboard including key metrics such as sustainable finance and own operations emissions on a quarterly basis.
The group Sustainability Committee and the group Climate Risk Oversight Forum ('CROF') are governance forums established in Asia-Pacific to support the Group's climate ambition. The group Sustainability Committee, chaired by the Co-CEOs of Asia-Pacific, oversees the group's contribution to the Group's climate plan, which was announced in October 2020. This includes overseeing delivery across Asia-Pacific of the Group's ambition to provide and facilitate a share of the global target of between US$750bn and US$1tn of sustainable finance and investment for its customers in Asia-Pacific in their transition to net zero and a sustainable future by 2030. The group CROF is a sub-committee of the Risk Management Meeting. These committees, forums and meetings govern the group's performance in Asia-Pacific and provide oversight of all risk activities relating to the group's approach to climate and nature related risk management.
The group's ESG governance approach is expected to continue to develop, in line with its evolving approach to ESG matters and stakeholder expectations.
Environmental - Transition to net zero TCFD
One of the Group's strategic pillars is to support the transition to a net zero global economy. The Group's ambition is to align its financed emissions to the Paris Agreement goal to achieve net zero by 2050 or sooner. The Paris Agreement aims to limit the rise in global temperatures to well below 2degC, preferably to 1.5degC, above pre-industrial levels.
The transition to net zero is one of the biggest challenges for our generation. Success will require governments, customers and finance providers to work together. The Group's global footprint means that many of its clients operate in high-emitting sectors and regions that face the greatest challenge in reducing emissions. This means that the Group's transition will be challenging but is an opportunity to make an impact.
The Group recognises that to achieve its climate ambition it needs to be transparent on the opportunities, challenges, related risks and progress it makes. To deliver on the ambition, it requires enhanced processes and controls, and new sources of data. The Group continues to invest in climate resources and skills, and develop its business management process to integrate climate impacts. Until systems, processes, controls and governance are enhanced, certain aspects of the Group's reporting will rely on manual sourcing and categorisation of data. In 2023, the Group will continue to review its approach to disclosures. Reporting will need to evolve to keep pace with market developments.
Explaining scope 1, 2 and 3 emissions
To measure and manage the group's greenhouse gas emissions, the group follows the Greenhouse Gas Protocol global framework, which identifies three scopes of emissions. Scope 1 represents the direct emissions the group creates. Scope 2 represents the indirect emissions resulting from the use of electricity and energy to run a business. Scope 3 represents indirect emissions attributed to upstream and downstream activities taking place to provide services to customers. The group's upstream activities include business travel and emissions from its supply chain including transport, distribution and waste. The group's downstream activities include those related to investments and financed emissions.
Under the protocol, scope 3 emissions are broken down into 15 categories. The group provides reporting emissions data in relation to business travel (category 6), an upstream activity. More information in relation to the group's greenhouse gas emissions is set out on page 10.
Supporting customers through net zero transition TCFD
The group's ability to steer financing for the transformation of businesses and infrastructure will be key in helping to enable the transition to a net zero global economy. The group, as a financial institution, has a critical role to play in facilitating the transition to net zero. The most significant contribution the group can make is by mobilising finance to support its customers to enable decarbonisation in the real economy.
Given the Group's global presence and relationships with clients across industries and client groups, it recognises the role it can play to encourage the global transition to net zero. The Board endorsed a climate strategy, which includes the 'transition to net zero' strategic pillar and key enablers to support its implementation, also highlights the Board's continued role in overseeing the implementation of the Group's strategic climate objectives in Asia-Pacific. For details of the Group's climate strategy, please refer to https://www.hsbc.com/who-we-are/our-climate-strategy.
Mobilising sustainable finance and investments
The group's sustainable finance ambition has contributed to sustainable infrastructure and energy systems, promoted decarbonisation efforts across the real economy, and enhanced investor capital through sustainable investment. The group continues to identify financing and investing opportunities and prioritizes the themes necessary to support the net-zero transition. These opportunities look to direct capital, financing solutions and resource allocation towards the themes which will maximize climate and commercial impact at scale. They are designed to support clients in their transition journey and to address financing needs to accelerate the infrastructure, technologies, and new business models critical for industries to transition to net zero. The group offers a broad suite of sustainable finance capabilities across its global businesses, enabling customers to manage risk and pursue ESG-related opportunities.
In 2022, the group continued to expand the horizons of sustainable finance, channeling capital to enable emissions reduction in the real economy. An example is the US$5bn Greater Bay Area ('GBA') Sustainable Finance Scheme to support business of all sizes, including manufacturing and real estate, to transition to low carbon operations in the GBA. In addition, the group initiated green mortgage offerings to retail customers in mainland China, Hong Kong and India.
The Group was recognised by Euromoney as the Best Bank for Sustainable Finance in Asia for the fifth time in 2022. It also secured the Asia-Pacific Triple A: Sustainable Infrastructure Awards 2022 for Export Credit Agency Coordinator Bank of the Year, Asia-Pacific Loan Market Association for Green and Sustainability advisor of the year, and FinanceAsia for Best Sustainable Bank in Hong Kong.
The group's sustainable finance and investment progress is set out below, with detailed definitions available in the Group's Sustainable Finance and Investment Data Dictionary (see www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre). Green finance taxonomies are not consistent globally, and evolving taxonomies and practices could result in revisions in the Group's sustainable finance reporting going forward. The Group recognises that there can be differing views of external stakeholders in relation to these evolving taxonomies, and will seek to align to enhanced industry standards as they are further developed.
Sustainable finance summary - Asia-Pacific(1)
2022
HK$m
----------------------------------- --------------------------
Balance sheet-related transactions
provided 126,845
----------------------------------- --------------------------
Capital markets/advisory
(facilitated) 45,301
----------------------------------- --------------------------
Total contribution 172,146
----------------------------------- --------------------------
1 This table has been prepared in accordance with the Group's Sustainable Finance and Investment Data Dictionary 2022, which includes green, social and sustainability activities. The amounts provided and facilitated include: the limits agreed for balance sheet-related transactions provided, the proportional share of facilitated capital markets/advisory activities.
Working with customers
The Group's net zero ambition is underpinned by its relationships with customers. The Group is setting targets on a sector by sector basis that are consistent with net zero outcomes by 2050. In assessing financed emissions, the Group focuses on those parts of the sector that are most material in terms of greenhouse gas emissions, and where it believes engagement and climate action have the greatest potential to effect change, taking into account industry and scientific guidance. In 2021, the Group defined targets for the oil and gas, and power and utilities sectors to be achieved by 2030. The group will continue to request and assess relevant client transition plans, and to unlock transition solutions for its portfolio of customers. The group considers reporting and emissions disclosure, level of ambition and targets set, detail of plans to achieve targets and evidence of activities to achieve objectives.
Our approach to our own operations TCFD
Part of the Group's ambition to be a net zero bank is to achieve net zero carbon emissions in its operations and supply chain by 2030 or earlier.
The Group has three elements to its strategy: reduce, replace and remove. The first focus is to reduce carbon emissions from consumption, and then subsequently replace remaining emissions with low-carbon alternatives in line with the Paris Agreement. Finally, the Group plans to remove the remaining emissions that cannot be reduced or replaced by procuring, in accordance with prevailing regulatory requirements, high-quality offsets at a later stage.
In October 2020, the Group announced its ambition to reduce energy consumption by 50% by 2030 against a 2019 baseline. This will be achieved by optimising the utilisation of the Group's real estate portfolio, and strategically reducing office space and data centres. In addition, the Group is adopting new technologies and emerging products to make its spaces more energy efficient.
As part of the Group's ambition to achieve 100% renewable power across its operations by 2030, it continues to look for opportunities to procure green energy in each of its markets. A key challenge remains the limited opportunity to pursue power purchase agreements or green tariffs in key markets.
Business travel and employee commuting
The group's travel emissions were relatively low in 2022, with international travel restrictions in key markets limiting business travel. The Group is closely managing the gradual resumption of travel through internal reporting and review of emissions, and through the introduction of internal carbon budgets, in line with its aim to halve travel emissions by 2030, compared with pre-pandemic levels. With hybrid working embedded across the group, technology has reduced to some extent the need to travel to meet with colleagues and customers face to face.
The group reports its emissions following the Greenhouse Gas Protocol, which incorporates the scope 2 market-based emissions methodology. The group reports greenhouse gas emissions resulting from the energy used in its buildings and employees' business travel. Due to the nature of the group's primary business, carbon dioxide is the main type of greenhouse gas applicable to its operations. While the amount is immaterial, the group's current reporting also incorporates methane and nitrous oxide for completeness. The group does not report employee home working emissions in its scope 1 and 2 performance data. The environmental data for the group's own operations is based on a 12-month period to 30 September each year.
In 2022, the group collected data on energy use and business travel for its own operations in 12 markets across the region, which accounted for approximately 87% of its full-time equivalent employees ('FTEs').
Greenhouse gas emissions in tonnes
CO(2) e(1,2)
2022
------------------------------- -----------------------
Scope 1 - direct 915
------------------------------- -----------------------
Scope 2 - indirect 104,162
------------------------------- -----------------------
Scope 3 - indirect (upstream
activities - business travel) 11,120
------------------------------- -----------------------
Total 116,197
------------------------------- -----------------------
Greenhouse gas emissions
in tonnes CO(2) e per FTE 2.16
------------------------------- -----------------------
1 The data of the group's operations in some countries and territories where it has operational control and a small presence may have not been included due to the data collection challenges.
2 CO(2) e refers to carbon dioxide equivalent.
Engaging with supply chain
As the majority of the Group's emissions are within its supply chain, it is recognised that it cannot achieve the net zero goal without its suppliers joining the journey. In 2020, the Group began a three-year process of encouraging its largest suppliers to make their own carbon commitments, and to disclose their emissions via the CDP (formerly Carbon Disclosure Project) supply chain programme. The Group will continue to engage with its supply chain through CDP and direct supplier discussions on how they can further support the Group's transition to net zero.
Approach to climate risk TCFD
Managing risk for stakeholders
Climate risk relates to the financial and non-financial impacts that may arise from climate change and the move to a greener economy. The group manages climate risk across all its businesses and is taking into account climate considerations in its risk taxonomy in line with the Group-wide risk management framework. The group's most material exposure to climate risk relates to corporate and retail client financing activity within its banking portfolio, and in its responsibilities in relation to asset ownership by its insurance and asset management businesses.
In the table below, the group sets out its duties to its stakeholders in the three most material roles. For further details of the group's approach to climate risk, see Climate risks on page 61.
Banking Asset management Insurance
The group manages the The group's asset management The group's insurance
climate risk in its banking operations' investment operations consider climate
portfolios through its solutions are increasingly risk in their portfolio
risk appetite and policies considering both physical of assets.
for financial and non-financial and transition risks.
risks.
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Climate Risk
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This helps the group A key approach to managing HSBC Life has established
to identify opportunities climate risk is by engaging an evolving ESG programme
to support its customers, with investees on topics to meet changing external
while continuing to meet related to climate change. expectations and customer
stakeholder expectations. demands.
Banking
The group's banking business is well positioned to support its customers to manage their own climate risk through financing. For wholesale customers, the group uses a transition and physical risk questionnaire as part of its transition and physical risk framework to understand their climate strategies and risk. The Group has set out a suite of policies to guide the management of climate risk, including the recently updated energy policy and thermal coal phase-out policy (see page 62). Climate scenario analysis is used as a risk assessment tool to provide insights on the long-term effects of transition and physical risks across the Group's corporate and retail banking portfolios, as well as its own operations.
Asset management
When assessing the impact of climate-related risk to its portfolios, the group's asset management operations are increasingly considering both physical and transition risks. As a result, ESG and climate analysis is integrated into the group's assessment of the risks faced by investees throughout the investment decision-making process. Investment teams use portfolio management tools to assess, examine and determine the level of potential ESG risks that could impact the current and future value of issuers.
In September 2022, the Group's asset management operations published their thermal coal phase-out policy, which will not hold listed securities of issuers with more than de minimis revenue exposure to thermal coal in its actively managed portfolios beyond 2030 for EU and OECD markets, and 2040 for all other markets.
One of the key approaches for the group's asset management operations to manage climate risk is to engage with the companies in which they invest. The HSBC Asset Management Stewardship Plan outlines their approach to engaging with issuers, including on the topic of climate change.
Insurance
The group's insurance operations updated their sustainability policy in 2022 to align with the Group's thermal coal phase-out policy. An ESG policy on corporate underwriting was also introduced. Risk appetite was reviewed with respect to ESG risks, and ESG standards were embedded into insurance product development processes and operational capabilities.
Insights from scenario analysis TCFD
Introduction
Scenario analysis supports the Group's strategy by assessing its position under a range of climate scenarios. This helps to build the Group's awareness of climate change and future planning including in the context of evolving regulatory requirements.
Following the first Group-wide climate change scenario analysis and the pilot climate risk stress test for Hong Kong Monetary Authority, the Group has performed stress tests for a number of regulators in Asia-Pacific including the Monetary Authority of Singapore in 2022.
The Group's scenario analysis considers separately:
-- transition risk arising from the process of moving to a net zero economy, including changes in policy, technology, customer behaviour and stakeholder perception, which could each impact borrowers' operating income, financing requirements and asset values; and
-- physical risk arising from the increased frequency and severity of weather events, such as hurricanes and floods, or chronic shifts in weather patterns, which could impact property values and repair costs and lead to business interruptions.
The Group will continue to enhance its climate scenario analysis to enable a more comprehensive understanding of climate headwinds, risks and opportunities that will support its strategic planning and actions.
Our climate scenarios
In 2022, the Group undertook its internal climate scenario analysis exercise using four bespoke scenarios that were designed to articulate a view of the range of potential outcomes for global climate change between the 2022 and 2050-time period.
These internal scenarios were formed with reference to external publicly available climate scenarios, including those produced by the Network for Greening the Financial System, the Intergovernmental Panel on Climate Change and the International Energy Agency. The Group adapted these scenarios by incorporating its unique climate risks and vulnerabilities to which the organisation and customers across different global businesses and geographies are exposed. This resulted in the following four scenarios:
-- Net Zero scenario, which aligns with the Group's net zero strategy and is consistent with the Paris Agreement;
-- Current Commitments scenario, which assumes that climate action is limited to the current governmental commitments and pledges;
-- Downside Transition Risk scenario, which assumes that climate action is delayed until 2030, but will be rapid enough to limit global temperature by the end of the century; and
-- Downside Physical Risk scenario, which assumes climate action is limited to current governmental policies, leading to extreme global warming.
The group follows the Group's four scenarios, which reflect different levels of physical and transition risks, underpinned by various assumptions of governmental climate policy changes, macroeconomic factors and technological developments.
Developments in climate science, data, methodology, and scenario analysis techniques will help further enhance the approach in the future.
Analysing the outputs of the climate scenario analysis
Climate scenario analysis allows the Group to model how different potential climate pathways may affect its customers and portfolios, particularly in respect of credit losses. Climate-related losses could be expected within sectors with higher carbon emitting activities due to the possibility of carbon reduction policies. These carbon reduction policies will help to dictate the pace of the transition to net zero and will vary by geography and sector. Customers' climate transition plans will help to mitigate the group's climate and credit risks.
In terms of physical risk, the Group assessed perils that could impact the value of properties in selected entities, including tropical cyclones and related storm surges. The defaults within the retail mortgage portfolio are expected to remain low through to 2050 in Hong Kong due to buildings being designed to withstand high wind speeds and investment into sea defences. Similarly, losses in Singapore were low in all the scenarios due to its geographical location and strong sea defences.
The analysis generated insights of the underlying drivers of risk and how the group can navigate through this complex and evolving landscape. The group explored strategic responses to the results of the climate scenario analysis, which allow it to identify and prioritise the sectors and sub-sectors that require the greatest support to transition. This also allows the group to test the impact of actions that can support customers' transition and its net zero ambition.
Use of outputs and next steps
Climate scenario analysis informs the Group's strategy and supports how opportunities are captured while minimising risks, and enabling the Group to navigate through the climate transition. The Group will continue to enhance its capabilities in relation to climate scenario analysis and use the results for decision making, particularly in respect of strategy, client engagement and risk appetite.
Social matters
The Group aims to play an active role in opening up a world of opportunity for its customers, colleagues and communities as it brings the benefits of connectivity and the global economy to more people around the world.
To achieve its purpose and deliver its strategy in a way that is sustainable, the Group is guided by its values: we value difference; we succeed together; we take responsibility; and we get it done.
Human rights
Details of the Group's commitment to respecting human rights are set out in the Group's Statement on Human Rights, which is available on www.hsbc.com/our-approach/measuring-our-impact.
Anti-bribery and corruption policy
The Group requires compliance with all applicable anti-bribery and corruption laws in all markets and jurisdictions in which it operates. These include, but are not limited to, the UK Bribery Act, the US Foreign Corrupt Practices Act, the Hong Kong Prevention of Bribery Ordinance and France's 'Sapin II' law. The Group has 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 its commitment to ethical behaviours and conduct as part of the environmental, social and corporate governance approach.
Task Force on Climate-related Financial Disclosures ('TCFD') index table TCFD
The table below sets out the 11 TCFD recommendations and summarises where additional information can be found.
Where the group has not included climate-related financial disclosures consistent with all of the TCFD recommendations and recommended disclosures, the reasons for this and steps being undertaken are set out accordingly. The group will continue to develop and refine its reporting and disclosures on ESG matters in line with the group's obligations under the HKMA SPM GS-1.
With respect to the group's obligations under HKMA SPM GS-1 as part of considering what to measure and publicly report, the group performs an assessment to ascertain the appropriate level of detail to be included in the TCFD that is set out in its Annual Report and Accounts. The assessment takes into account factors such as the level of the group's exposure to climate-related risks and opportunities, the scope and objectives of its climate-related strategy, transitional challenges, and the nature, size and complexity of its business.
Governance
------------------- -------------------------------------------------------- -------
a) Describe the Board's oversight of climate-related risks and opportunities
Process, frequency The Board takes overall responsibility for ESG. Page 9
and training The group's developments in relation to its strategies
was reviewed through Board discussions at six
meetings in 2022. In addition, Board members received
a training on global and regional developments
in climate and sustainability, as part of their
ongoing development.
The Board is updated on wider topics in relation
to the evolving climate agenda as appropriate.
------------------- -------------------------------------------------------- -------
Sub-committee The group RC receives regular updates on the climate Page 62
accountability, risk profile, top and emerging climate risks,
processes and and climate risk programme.
frequency
------------------- -------------------------------------------------------- -------
Examples of the The Board approved the climate strategy in 2022, Page 62
Board and relevant overseeing executive management in developing Page 9
Board committees the approach, execution, financial planning and
taking climate associated reporting.
into account The 2022 annual incentive scorecards of the Co-CEOs
of Asia-Pacific and of most of the Executive Committee
members include outcomes linked to the realisation
of different ESG metrics such as customer satisfaction,
employee sentiment, carbon reduction and sustainable
finance measures.
------------------- -------------------------------------------------------- -------
b) Describe management's role in assessing and managing climate-related
risks and opportunities
--------------------------------------------------------------------------------------
Task Force on Climate-related Financial Disclosures ' TCFD ' (continued)
Who manages climate-related The group Sustainability Committee, chaired by Page 9
risks and opportunities the Co-CEOs of Asia-Pacific, oversees the delivery
of the Group's climate plan announced in October
2020 in Asia-Pacific.
The group CROF oversees all risk activities relating
to climate risk management and escalation of climate
risks.
--------------------------- ----------------------------------------------------------- --------
How management The Co-CEOs of Asia-Pacific reported to the Board Page 9
reports to the six times on ESG and climate matters during 2022.
Board
--------------------------- ----------------------------------------------------------- --------
Processes used The Executive Committee reviews an ESG dashboard Page 9
to inform management including key metrics such as sustainable finance
and own operations emissions on a quarterly basis.
--------------------------- ----------------------------------------------------------- --------
Strategy
--------------------------- ----------------------------------------------------------- --------
a) Describe the climate-related risks and opportunities the organisation
has identified over the short, medium and long term
--------------------------------------------------------------------------------------------------
Processes used For wholesale customers in the six high climate Page 62
to determine material transition risk sectors, the group rolled out Page 63
risks and opportunities the transition and physical risk questionnaire
to assess and improve its understanding of the
impact of climate changes on certain customers'
business models. Relationship managers worked
with customers to record questionnaire responses,
which also help to identify potential business
opportunities to support customers' transition.
The Group completed a detailed asset-level analysis
of the retail mortgage business in Hong Kong,
Singapore and Australia which represent three
of the group's largest residential mortgage portfolios
in Asia-Pacific.
--------------------------- ----------------------------------------------------------- --------
Relevant short, The group continues to contribute to the Group's Page 10
medium, and long ambitions to achieve net zero in its financed Page 11
term time horizons emissions by 2050, in its own operations and supply
chain by 2030, and to provide and facilitate a
share of the global target of between US$750bn
and US$1tn of sustainable finance and investment
for its customers in Asia-Pacific in their transition
to net zero and a sustainable future by 2030.
The group aligns with the Group's definition of
short, medium, and long term time horizon: short
term up to 2025; medium term between 2026 to 2035;
and long term between 2036 to 2050.
The group is part of the Group's climate scenario
analysis exercise and formed part of the Group's
result of the expected credit losses and physical
risk impacts on the Group's premises between the
2022 and 2050 time period. For details, see the
Group's Annual Report and Account 2022.
--------------------------- ----------------------------------------------------------- --------
Transition or Transition or physical climate-related risk, together Page 61
physical climate-related with greenwashing risk exist across the Group's Page 10
issues identified risk taxonomy.
The group is supporting its customers in their
transition through its sustainable finance and
investment ambition. The Group's sustainable finance
and investment data dictionary includes a detailed
definition of contributing activities.
--------------------------- ----------------------------------------------------------- --------
Risks and opportunities Scenario analysis supports the group's risks and Page 11
by sector and/or opportunities under a range of climate scenarios. page 63
geography It helps to build the group's awareness of the
impact of climate change and future planning.
The Group completed a detailed asset-level analysis
of the retail mortgage business in Hong Kong,
Singapore and Australia, which represent three
of the group's largest residential mortgage portfolios
in Asia-Pacific.
The group does not currently fully disclose the
impacts of transition and physical risk quantitatively
by sector/geography, due to transitional challenges
including data limitations and evolving science
and methodologies. The group is working to address
these challenges in the medium term.
--------------------------- ----------------------------------------------------------- --------
Concentrations The Group has identified six sectors where wholesale Page 62
of credit exposure credit customers have the highest climate risk,
to carbon-related based on their carbon emissions. These are automotive,
assets (supplemental chemicals, construction and building materials,
guidance for banks) metals and mining, oil and gas, and power and
utilities. The group internally reports its exposure
to the six high transition risk sectors in the
wholesale portfolio, and will further enhance
its disclosure as more data becomes available.
--------------------------- ----------------------------------------------------------- --------
Climate-related The group's material exposure to climate risk Page 11
risks in lending relates to corporate and retail client financing
and other financial activity within its banking portfolio, and in
intermediary business its responsibilities in relation to asset ownership
activities (supplemental by its insurance and asset management businesses.
guidance for banks)
--------------------------- ----------------------------------------------------------- --------
b) Describe the impact of climate-related risks and opportunities on
the organisation's businesses, strategy and financial planning
--------------------------------------------------------------------------------------------------
Impact on strategy, Transition to net zero represents one of the Group's Page 9
business, and four strategic pillars. The Group aims to be net
financial planning zero in its operations and supply chain by 2030
and in financed emissions by 2050.
The group does not currently fully disclose the
impacts of climate-related issues on financial
planning, and particularly the impact of climate-related
issues on its financial performance (for example,
revenues and costs) and financial position (for
example, assets and liabilities), acquisitions/divestments
or access to capital, in each case due to lack
of data and systems for compiling the relevant
financial impacts. In 2022, the group incorporated
certain aspects of sustainable finance and financed
emissions within its financial planning process.
This will be further enhanced in the medium term
as more data is available.
--------------------------- ----------------------------------------------------------- --------
Impact on products The group supports the Group's ambition in helping Page 9
and services its customers' transition to net zero and a sustainable
future through providing and facilitating a share
of the global target of between US$750bn and US$1tn
of sustainable finance and investment for its
customers in Asia-Pacific by 2030.
--------------------------- ----------------------------------------------------------- --------
Impact on supply The group has started working with its largest Page 10
chain and/or value suppliers to encourage them to make their own
chain carbon commitments, and to disclose their emissions.
The Group's third-party risk management process
incorporates climate-related risks.
Impact on operations The group is developing a deeper understanding Page 63
of the risks to which its properties are subject,
and necessary mitigants to ensure ongoing operational
resilience.
--------------------------- ----------------------------------------------------------- --------
Task Force on Climate-related Financial Disclosures ' TCFD ' (continued)
Impact on adaptation The Group announced its ambition to achieve 100% Page 10
and mitigation renewable power across its operations by 2030,
activities and continues to look for opportunities to procure
green energy. The Group regularly reviews and
enhances its building selection process and global
engineering standards to help ensure they reflect
the potential impacts of climate change.
------------------------- ------------------------------------------------------------ -------
Impact on operations The group is developing a deeper understanding Page 63
of the risks to which its properties are subject,
and necessary mitigants to ensure ongoing operational
resilience.
------------------------- ------------------------------------------------------------ -------
Impact on investment The Group is working with the World Resources
in research and Institute and World Wide Fund For Nature, focusing
development its collective efforts on climate-related innovation,
nature-based solutions and energy efficiency initiatives
in Asia-Pacific.
------------------------- ------------------------------------------------------------ -------
Transition plan The Group has committed to publish its own climate
to a low-carbon transition plan in 2023. The plan will outline,
economy in one place, not only the Group's commitments,
targets and approach to net zero across the sectors
and markets that it serves, but also how the Group
is transforming to embed net zero and help finance
the transition. The group will be guided by this
transition plan once published.
------------------------- ------------------------------------------------------------ -------
c) Describe the resilience of the organisation's strategy, taking into
consideration different climate-related scenarios, including a 2degC
or lower scenario
------------------------------------------------------------------------------------------------
Embedding climate In 2022, the Group enhanced the approach to analysing Page 11
into scenario climate scenarios and delivered the internal climate
analysis scenario analysis ('ICSA') exercise applying four
bespoke climate scenarios: Net Zero, Current Commitments,
Downside Transition Risk, and Downside Physical
Risk. The four scenarios used in the Group's ICSA
exercise were designed to articulate the Group's
view of the range of potential outcomes for global
climate change between the 2022 and 2050- time
period. The relevant assumptions are detailed
in Group Annual Report and Accounts 2022.
------------------------- ------------------------------------------------------------ -------
Key drivers of The ICSA scenarios reflect different levels of Page 11
performance and physical and transition risk and, underpinned
how these have by various assumptions of governmental climate
been taken into policy changes, macroeconomic factors and technological
account developments.
------------------------- ------------------------------------------------------------ -------
Scenarios used The ICSA scenarios reflect external publicly available Page 11
and how they factored climate scenarios, including those produced by
in government the Network for Greening the Financial System,
policies the Intergovernmental Panel on Climate Change
and the International Energy Agency.
------------------------- ------------------------------------------------------------ -------
How our strategies The Group will continue to enhance its capabilities Page 12
may change and for climate scenario analysis and use the results
adapt for decision making, particularly in respect of
strategy, client engagement and risk appetite.
------------------------- ------------------------------------------------------------ -------
Risk management
------------------------- ------------------------------------------------------------ -------
a) Describe the organisation's processes for identifying and assessing
climate-related risks
Traditional banking The Group's approach to identifying and assessing Page 61
risk types considered climate-related risks is initially focused on
understanding physical and transition impacts
across five priority risk types: wholesale credit
risk, retail credit risk, resilience risk, regulatory
compliance risk and reputational risk.
------------------------- ------------------------------------------------------------ -------
Process For wholesale customers, the group uses a transition Page 11
and physical risk questionnaire as part of its
transition and physical risk framework to understand
their climate strategies and risk. Climate scenario
analysis is used as a risk assessment tool to
provide insights on the long-term effects of transition
and physical risks across the Group's corporate
and retail banking portfolios, as well as its
own operations.
The group does not currently fully disclose the
detailed impacts of transition and physical risk,
due to transitional challenges including data
limitations and evolving science and methodologies.
------------------------- ------------------------------------------------------------ -------
Integration into The Group is integrating climate risk into the Page 62
policies and procedures policies, processes and controls across many of
its global businesses and functions, and will
continue to enhance these as its climate risk
management capabilities mature. In 2022, the Group
has published its updated energy policy, covering
oil and gas, power and utilities, hydrogen, renewables,
nuclear and biomass sectors, as well as updating
its thermal coal phase-out policy after its initial
publication in 2021.
------------------------- ------------------------------------------------------------ -------
Consider climate-related In 2022, the Group broadened its climate risk Page 64
risks in traditional approach to include all risk types (including
banking industry treasury risk and traded risk) in its risk taxonomy.
risk categories
(supplementary
guidance for banks)
------------------------- ------------------------------------------------------------ -------
b) Describe the organisation's processes for managing climate-related
risks
------------------------------------------------------------------------------------------------
Process and how The group Risk Management Meeting and group RC Page 62
we make decisions receive regular updates on the climate risk profile,
and the top and emerging climate risks.
The group's initial risk appetite has focused
on the oversight and management of climate risks
across the five priority risk types, including
exposure to high transition risk sectors in its
wholesale portfolio and physical risk exposures
in retail portfolio. These metrics have been implemented
at group level and locally where appropriate.
The group continues to review its risk appetite
regularly to capture the material climate risks
and will enhance its metrics over time.
------------------------- ------------------------------------------------------------ -------
c) Describe how processes for identifying, assessing and managing climate-related
risks are integrated into the organisation's overall risk management
framework
------------------------------------------------------------------------------------------------
How we have aligned The group's approach to climate risk management Page 61
and integrated is aligned to the Group-wide risk management framework
our approach and three lines of defence model.
------------------------- ------------------------------------------------------------ -------
How we take into The group's dedicated climate risk programme drives Page 62
account interconnections the development of its climate risk management
between entities, capabilities, taking into account relevant interconnections
functions within the group's businesses, functions and entities.
------------------------- ------------------------------------------------------------ -------
Metrics and targets
------------------------- ------------------------------------------------------------ -------
a) Disclose the metrics used by the organisation to assess climate-related
risk and opportunities in line with its strategy and risk management
process
Task Force on Climate-related Financial Disclosures ' TCFD ' (continued)
Metrics used to The group monitors wholesale loan exposure to Page 62
assess the impact the Group's six highest climate risk sectors.
of climate-related In 2022, the group developed new climate risk
risks on our loan metrics to assess the impact of physical risk
portfolio on its retail mortgage portfolio in Hong Kong,
as detailed on page 63.
The group's climate risk management information
dashboard incorporates key climate risk metrics,
and is reported to the group CROF.
----------------------- ------------------------------------------------------------------------------------ -------
Metrics used to The Group tracks its net zero progress using multiple Page 9
assess progress metrics, tailoring methodologies to the specific
against opportunities measures. The group contributes to the Group's
energy consumption, water consumption, waste management,
and land use. For details, see the Group's Annual
Report and Account 2022 and ESG Data Pack.
The group disclosed its contribution in 2022 to
the Group's sustainable finance ambition of providing
and facilitating a share of the global target
of between US$750bn to US$1tn for its customers
in Asia-Pacific.
The group does not currently fully disclose the
proportion of revenue or proportion of assets,
capital deployment or other business activities
aligned with climate-related opportunities, including
revenue from products and services, internal carbon
prices, forward-looking metrics consistent with
its business or strategic planning time horizons.
In relation to sustainable finance revenue and
assets, the Group is disclosing certain elements.
The group expects climate related metrics to be
further integrated into financial planning and
forecasting as data and system limitations are
addressed.
----------------------- ------------------------------------------------------------------------------------ -------
Board or senior The 2022 annual incentive scorecards of the Co-CEOs Page 9
management incentives of Asia-Pacific and most of the Executive Committee
members include outcomes linked to the realisation
of different ESG metrics such as customer satisfaction,
employee sentiment, carbon reduction and sustainable
finance measures.
----------------------- ------------------------------------------------------------------------------------ -------
Metrics used to The group does not fully disclose metrics used
assess the impact to assess the impact of physical and transition
of climate risk climate-related risks on retail lending, wholesale
on lending and lending and other business activities (specifically
financial intermediary credit exposure, equity and debt holdings, or
business (supplemental trading positions, each broken down by industry,
guidance for banks) geography, credit quality, average tenor). This
is due to data and system limitations which the
group is working to address.
b) Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse
gas emissions and the related risks
----------------------------------------------------------------------------------------------------------------------
GHG emissions In relation to financed emissions, the Group has
for lending and disclosed on-balance sheet financed emissions
financial intermediary for certain sectors. The Group does not fully
business (supplemental disclose financed emissions data. Further disclosure
guidance for Banks) on scope 3 financed emissions and related risks
in relation to customers is reliant on the Group's
customers publicly disclosing their carbon emissions
and related risks.
The Group's approach to disclosure of financed
emissions can be found on:
www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.
----------------------- ------------------------------------------------------------------------------------ -------
c) Describe the targets used by the organisation to manage climate-related
risks and opportunities and performance against targets
----------------------------------------------------------------------------------------------------------------------
Details of targets The Group's ambition is to achieve net zero financed
set and whether emissions by 2050 or sooner, and has set interim
they are absolute 2030 targets for on-balance sheet financed emissions
or intensity b for certain sectors. The Group aims to support
its customers' transition to net zero through
providing and facilitating a share of the global
target of between US$750bn and US$1tn of sustainable
finance and investment for its customers in Asia-Pacific
by 2030. In addition, the Group targets to achieve
net zero carbon emissions in its operations and
supply chain by 2030 or sooner. In addition to
the above mentioned, the group contributes to
the Group's other ambitions such as land use,
waste management, energy consumption and percentage
of renewable electricity sourced. For details
of Group's ambitions, please refer to the Group's
Annual Report and Accounts 2022.
The group does not currently disclose its targets
used to measure and manage physical and transition
risk, or capital deployment, or climate-related
opportunities due to transitional challenges such
as data and system limitations which the group
is working to address in the medium term.
Taking into account the nature of its business,
the group does not consider water usage to be
a material target for its business and, therefore,
the group has not included a target in this year's
disclosure.
----------------------- ------------------------------------------------------------------------------------ -------
Financial Review
Results for 2022
(Unaudited)
Profit before tax for 2022 reported by The Hongkong and Shanghai Banking Corporation Limited ('the Bank') and its subsidiaries (together 'the group') increased by HK$11,048m, or 13%, to HK$97,611m.
(Audited)
Wealth
and Markets
Personal Commercial Global and Securities Corporate Other
Banking Banking Banking Services Centre(1) (GBM-other) Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Year ended 31 Dec 2022
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Net interest income/(expense) 71,397 43,087 18,703 4,370 (12,718) 2,013 126,852
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Net fee income/(expense) 17,895 9,727 5,086 3,701 247 (56) 36,600
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Net income/(expense) from
financial instruments measured
at fair value through profit
or loss (9,603) 3,728 (110) 22,372 11,079 345 27,811
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Gains less losses from financial
investments (34) 64 - - - 17 47
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Net insurance premium
income/(expense) 76,848 3,997 - - (430) - 80,415
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Other operating income/(expense) 2,329 (189) 369 1,208 315 (251) 3,781
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Total operating income/(expense) 158,832 60,414 24,048 31,651 (1,507) 2,068 275,506
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Net insurance claims and
benefits paid and movement
in liabilities to policyholders (66,206) (3,968) - - 360 - (69,814)
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Net operating income/(expense)
before change in expected
credit losses and other credit
impairment charges 92,626 56,446 24,048 31,651 (1,147) 2,068 205,692
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
- of which: external 76,344 58,916 26,413 40,870 (8,191) 11,340 205,692
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
inter-segment 16,282 (2,470) (2,365) (9,219) 7,044 (9,272) -
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Change in expected credit
losses and other credit
impairment
charges (1,326) (11,953) (3,070) 22 1 (39) (16,365)
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Net operating income/(expense) 91,300 44,493 20,978 31,673 (1,146) 2,029 189,327
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Operating expenses (52,773) (20,972) (10,513) (13,897) (9,521) (2,832) (110,508)
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Operating profit/(loss) 38,527 23,521 10,465 17,776 (10,667) (803) 78,819
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Share of profit in associates
and joint ventures 140 - - - 18,652 - 18,792
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Profit/(loss) before tax 38,667 23,521 10,465 17,776 7,985 (803) 97,611
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Balance sheet data at 31
Dec 2022
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Loans and advances to customers
(net) 1,536,664 1,231,972 880,581 40,563 1,403 13,966 3,705,149
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Customer accounts 3,443,694 1,665,463 805,600 195,775 11 3,166 6,113,709
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Year ended 31 Dec 2021
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Net interest income/(expense) 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/(expense) 202 39 237 1,113 599 (157) 2,033
--------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
Total operating income/(expense) 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/(expense)
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/(expense) 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/(loss) 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 --------------------------------- ------------------------ ----------------------- ----------------------- ----------------------- ------------------------ ------------------------ ----------------------
1 Includes inter-segment elimination.
Financial Review
The commentary in this financial review compares the group's financial performance for the year ended 31 December 2022 with the year ended 31 December 2021.
Results Commentary
(Unaudited)
The group reported profit before tax of HK$97,611m, an increase of HK$11,048m, or 13%. Net operating income before change in expected credit losses and other credit impairment charges increased by HK$27,034m, or 15%, primarily driven by higher net interest income. Operating expenses increased by HK$5,632m, or 5%, from investment in technology.
Net interest income increased by HK$28,739m, or 29%. Excluding the unfavourable foreign exchange impact, net interest income increased by HK$30,715m, or 32%, primarily driven by Hong Kong with wider customer deposit spreads and higher reinvestment yields as market interest rates increased, coupled with balance sheet growth. Net interest income in Singapore also increased, reflecting the favourable impact of the higher market interest rates.
Net fee income decreased by HK$8,696m, or 19%. Excluding the unfavourable foreign exchange impact, net fee income decreased by HK$7,928m, or 18%, driven by Wealth and Personal Banking ('WPB') in Hong Kong with lower transaction volumes resulting in decreases in unit trust income and brokerage income, coupled with lower funds under management fees reflecting the unfavourable market performance. To a lesser extent, net fee income in Markets and Securities Services ('MSS') also decreased, mainly from lower global custody and securities brokerage fees coupled with a drop in underwriting fees.
Net income from financial instruments measured at fair value through profit or loss decreased by HK$18,064m, or 39%.
Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss decreased by HK$31,374m, mainly in Hong Kong and driven from losses on the equity portfolio held to support insurance and investment contracts, due to unfavourable equity market performance. To the extent that these losses 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 increased by HK$13,315m, or 47%, most notably in Hong Kong from higher gains on derivatives principally benefitting from rising interest rates, partly offset by lower equity trading income attributable to unfavourable market conditions. Mainland China also increased due to the favourable movement on foreign currency position held locally.
Net insurance premium income increased by HK$18,693m, or 30%, driven from higher sales volumes mainly in Hong Kong, and in Singapore with the acquisition of AXA Insurance Pte Limited ('AXA Singapore') during 2022.
Other operating income increased by HK$1,748m, or 86%, driven by the favourable movement in the present value of in-force long-term insurance business ('PVIF') of HK$1,038m, reflecting increases in Hong Kong from the value of new business written and the one-off gain from a pricing update for policyholder funds held on deposit to reflect the cost of provision of these services. This was partly offset by adverse assumption changes and experience variances in Hong Kong and Singapore, primarily due to interest rates movements.
The net movement in PVIF was partly offset by a corresponding movement in 'Net insurance claims and benefits paid and movement in liabilities to policyholders' to the extent gains or losses are attributable to the policy holders.
The overall increase also included a gain of HK$665m on completion of our acquisition of AXA Singapore.
Net insurance claims and benefits paid and movement in liabilities to policyholders decreased by HK$6,234m, or 8%, primarily due to a decline in returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risk, mainly in Hong Kong. This decrease was partially offset by higher sales volumes in Hong Kong.
Change in expected credit losses and other credit impairment charges increased by HK$9,826m, or 150%, notably in Commercial Banking ('CMB') and to a lesser extent in Global Banking ('GB'), mainly reflecting increases in allowances relating to exposures to the mainland China commercial real estate ('CRE') sector.
Total operating expenses increased by HK$5,632m, or 5%. Excluding the favourable foreign exchange impact, operating expenses increased by HK$7,459m, or 7%, reflecting an increase in investment in technology, including our digital capabilities to support business growth. Employee compensation and benefits also increased, mainly from higher performance-related pay and wage inflation.
Share of profit in associates and joint ventures decreased by HK$528m, or 3%. Excluding the unfavourable foreign exchange impact, the share of profit in associates and joint ventures increased by HK$32m, mainly from Bank of Communications Co., Limited.
Net interest income
(Unaudited)
2022 2021
HK$m HK$m
--------------------------------- ------------------------ ----------------------------
Net interest income 126,852 98,113
--------------------------------- ------------------------ ----------------------------
Average interest-earning assets 7,589,538 7,173,973
--------------------------------- ------------------------ ----------------------------
% %
--------------------------------- ------------------------ ----------------------------
Net interest spread 1.55 1.32
--------------------------------- ------------------------ ----------------------------
Contribution from net free funds 0.12 0.05
--------------------------------- ------------------------ ----------------------------
Net interest margin 1.67 1.37
--------------------------------- ------------------------ ----------------------------
Net interest income ('NII') increased by HK$28,739m, or 29%. Excluding the unfavourable foreign exchange impact, net interest income increased by HK$30,715m, or 32%, primarily driven by Hong Kong with wider customer deposit spreads and higher reinvestment yields as market interest rates increased, coupled with balance sheet growth. Net interest income in Singapore also increased, reflecting the favourable impact of the higher market interest rates.
Average interest-earning assets increased by HK$416bn, or 6%, driven by Hong Kong, from growth in financial investments and reverse repurchase agreements.
Net interest margin ('NIM') increased by 30 basis points ('bps'), with increases noted across the region, including Hong Kong, Singapore and Malaysia with higher market interest rates compared to the prior year.
As a result, the NIM at the Bank's operations in Hong Kong increased by 34 bps to 1.09%, and at Hang Seng Bank, the NIM increased by 30 bps to 1.89%.
Insurance manufacturing
(Unaudited)
The following table shows the results of our insurance manufacturing operations by income statement line item, and separately the insurance distribution income earned by the group's bank channels.
Results of insurance manufacturing operations and insurance distribution
income earned by the group's bank channels
2022 2021
HK$m HK$m
--------------------------------------------------- -------------------------------- -------------------------------
Insurance manufacturing operations(1)
--------------------------------------------------- -------------------------------- -------------------------------
Net interest income 17,701 16,527
--------------------------------------------------- -------------------------------- -------------------------------
Net fee expense (4,272) (3,617)
--------------------------------------------------- -------------------------------- -------------------------------
Net income/(expense) from financial instruments
measured
at fair value (14,599) 18,036
--------------------------------------------------- -------------------------------- -------------------------------
Net insurance premium income 80,839 62,135
--------------------------------------------------- -------------------------------- -------------------------------
Change in present value of in-force long-term
insurance
business (256) (1,294)
--------------------------------------------------- -------------------------------- -------------------------------
Other operating income 887 719
--------------------------------------------------- -------------------------------- -------------------------------
Total operating income 80,300 92,506
--------------------------------------------------- -------------------------------- -------------------------------
Net insurance claims and benefits paid and movement
in liabilities to policyholders (70,170) (76,361)
--------------------------------------------------- -------------------------------- -------------------------------
Net operating income before change in expected
credit
losses and other credit impairment charges 10,130 16,145
--------------------------------------------------- -------------------------------- -------------------------------
Change in expected credit losses and other credit
impairment
charges (36) (216)
--------------------------------------------------- -------------------------------- -------------------------------
Net operating income 10,094 15,929
--------------------------------------------------- -------------------------------- -------------------------------
Total operating expenses (5,798) (3,464)
--------------------------------------------------- -------------------------------- -------------------------------
Operating profit 4,296 12,465
--------------------------------------------------- -------------------------------- -------------------------------
Share of profit in associates and joint ventures 139 137
--------------------------------------------------- -------------------------------- -------------------------------
Profit before tax 4,435 12,602
--------------------------------------------------- -------------------------------- -------------------------------
Annualised new business premiums of insurance
manufacturing
operations 15,420 19,136
--------------------------------------------------- -------------------------------- -------------------------------
Distribution income earned by the group's bank
channels 4,437 4,135
--------------------------------------------------- -------------------------------- -------------------------------
1 The results presented for insurance manufacturing operations are shown before elimination of intercompany transactions with the group's non-insurance operations.
1
Insurance manufacturing
Profit before tax from insurance manufacturing operations decreased by HK$8,167m, or 65%, driven by unfavourable equity markets in the year compared to favourable markets in 2021, partially offset by higher new business volumes.
NII increased by 7% 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 decreased, mainly from losses on the equity portfolio held to support insurance and investment contracts in Hong Kong, due to the unfavourable equity markets.
Net insurance premium income increased from higher sales volumes mainly in Hong Kong which included a higher proportion of single premium business in its product mix, and in Singapore following the acquisition of AXA Singapore during 2022.
The favourable movement of HK$1,038m in PVIF compared to 2021 reflected increases in Hong Kong from the value of new business written and the one-off gain from a pricing update for policyholder funds held on deposit to reflect the cost of provision of these services. This was partly offset by the adverse assumption changes and experience variances in Hong Kong and Singapore, primarily due to interest rates movements.
To the extent losses are attributable to policyholders, there is an offsetting movement reported under '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$6,191m, or 8%, primarily due to a decline in returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risk, mainly in Hong Kong. This was partially offset by higher new business volumes in Hong Kong.
Annualised new business premiums ('ANP') decreased by HK$3,716m, or 19%, mainly in Hong Kong due to a change in product mix towards single premium new business, partially offset by higher ANP from business growth in mainland China and the inclusion of the results of AXA Singapore.
Balance sheet commentary compared with 31 December 2021
(Unaudited)
The consolidated balance sheet as at 31 December 2022 is set out in the Consolidated Financial Statements.
Gross loans and advances to customers decreased by HK$128bn, or 3%. Excluding the unfavourable foreign exchange translation effects of HK$90bn, gross loans and advances to customers decreased by HK$38bn. This was driven by a decrease in corporate and commercial lending of HK$88bn, primarily in Hong Kong, partly offset by increases in Australia, Japan and mainland China. The residential mortgage book increased by HK$35bn, mainly in Hong Kong and Australia, coupled with increases in lending to non-bank financial institutions of HK$29bn mainly in Korea, Hong Kong and India.
Total gross impaired loans and advances as a percentage of gross loans and advances stood at 1.69% at the end of 2022 (2021: 1.11%). The change in expected credit losses as a percentage of average gross customer advances was 0.40% for 2022 (2021: 0.18%), reflecting the impact of the deterioration in quality in the mainland China CRE portfolio.
Interests in associates and joint ventures
At 31 December 2022, 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 set out 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. Impairment, if determined, would be recognised in the income statement. The impact on group's common equity tier 1 ratio is expected to be minimal in the event of an impairment, as the adverse impact on common equity tier 1 capital from the impairment would be partly offset by the favourable impact from a lower carrying amount. 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 decreased by HK$63bn, or 1%, to HK$6,114bn. Excluding the unfavourable foreign exchange translation effects of HK$110bn, customer deposits increased by HK$47bn. The advances-to-deposits ratio was 60.6% at the end of the year (2021: 62.2%).
Shareholders' equity grew by HK$19bn to HK$875bn at
31 December 2022, mainly reflecting the current year's profit, net of dividend payments, coupled with the issuance of new ordinary shares and additional tier 1 capital instruments. These were partly offset by a decrease in foreign exchange reserves due to depreciation of various foreign currencies against the Hong Kong dollar.
Risk Our approach to risk
(Unaudited)
Our risk appetite
We recognise the importance of a strong culture, which refers to our shared attitudes, beliefs, values and standards that shape behaviours including those 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 risks, 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 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.
-- We consider and, where appropriate, mitigate reputational risk that may arise from our business activities and decisions.
-- We monitor non-financial risk exposure against risk appetite, including inadequate or failed internal processes, people and systems, or events that impact our customers or can lead to sub-optimal returns to shareholders, censure, or reputational damage.
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 banking 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 regularly 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 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 any 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 material banking 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 22.
The implementation of our business strategy 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 effective 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 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 actively review and enhance our risk management framework and 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 and Compliance 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 Executive Board-delegated risk management authority.
Officers
group Chief Financial
Officer * Overseeing the implementation of risk appetite and
group Chief Compliance the risk management framework.
Officer
group Head of Internal
Audit * Forward-looking assessment of the risk environment,
Chief Executive Officer analysing possible risk impacts and taking
of Hang Seng Bank Limited appropriate action.
All other group Executive
Committee members
* 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 and Compliance function
The group's Risk sub-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 sub-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 sub-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 and 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 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 sub-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.
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 analysis 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 required by 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 2022
We actively manage the risks related to macroeconomic uncertainties including inflation, fiscal and monetary policy, the Russia-Ukraine war, broader geopolitical uncertainties, the continued risks resulting from the Covid-19 pandemic, as well as other key risks described in this section.
In addition, we enhanced our risk management in the following areas:
-- We continued to improve our risk governance decision making, particularly with regard to the governance of treasury risk to ensure senior executives have appropriate oversight and visibility of macroeconomic trends around inflation and interest rates.
-- We adapted our interest rate risk management strategy as market and official interest rates increased in reaction to inflationary pressures.
-- We began a process of enhancement of our country credit risk management framework in order to strengthen our control of risk tolerance and appetite at a country level.
-- We continued to develop our approach to emerging risk identification and management, including the use of forward-looking indicators to support our analysis.
-- We enhanced our enterprise risk reporting processes to place a greater focus on our emerging risks, including by capturing the materiality, oversight and individual monitoring of these risks.
-- We further strengthened our third-party risk policy and processes to improve control and oversight of our material third parties to maintain our operational resilience, and to meet new and evolving regulatory requirements.
-- We made progress with our comprehensive regulatory reporting programme to strengthen our global processes, improve consistency, and enhance controls.
-- We have progressed with the simplification and reshaping of initiatives to ensure the we have a sustainable cost base, a resilient control environment and the skills and capabilities to support the global businesses.
-- We continued to embed, the governance and oversight around model adjustments and related processes for HKFRS 9 models and Sarbanes-Oxley controls.
-- We commenced a programme to enhance our framework for managing the risks associated with machine learning and artificial intelligence ('AI').
-- Through our dedicated climate risk programme, we continued to embed climate considerations throughout the organisation, including updating the scope of our programme to cover all risk types, expanding the scope of climate related training and developing new climate risk metrics to monitor and manage exposures, and the development of our internal climate scenario exercise.
-- We continued to improve the effectiveness of our financial crime controls, deploying advanced analytics capabilities into new markets. We are refreshing our financial crime policies, ensuring they remain up-to-date and address changing and emerging risks. We continue to monitor regulatory changes.
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. We update our top and emerging risks as necessary.
Our current top and emerging risks are as follows:
Externally driven
Geopolitical and macroeconomic risks
(Unaudited)
The Russia-Ukraine war has had far-reaching geopolitical and economic implications. The group is monitoring the impacts of the war and continues to respond to the extensive sanctions and trade restrictions that have been imposed, noting the challenges that arise in implementing the complex, novel and ambiguous aspects of certain of these sanctions. Sanctions were targeted against numerous Russian government officials and politically exposed individuals. Russia has implemented certain countermeasures in response. Further sanctions and counter sanctions in connection with Russia may adversely affect the group, its customers and the markets in which the group operates by creating regulatory, reputational and market risks.
Global commodity markets have been significantly impacted by the Russia-Ukraine war and localised Covid-19 outbreaks, leading to continued supply chain disruptions. This has resulted in product shortages appearing across several regions, and increased prices for both energy and non-energy commodities, such as food. We do not expect these to ease significantly in the near term. In turn, this has had a significant impact on global inflation.
Rising global inflation has prompted central banks to tighten monetary policy. The combined pressure of inflation and interest rate rises may lead to pressures on customers and their ability to repay debt. During 2022, the US Federal Reserve Board ('FRB') delivered a cumulative 425 basis points ('bps') increase in the Federal Funds rate. The Hong Kong dollar ('HKD') exchange rate peg against the US dollar means that HKD interest rates are expected to rise in line with respective US rates, yet HKD interbank rates lagged increases in US dollar interest rates during 2022 as the supply of local currency remained strong. The spread between the two is expected to narrow as the Hong Kong Aggregate Balance, a gauge of local interbank liquidity, fell below the HKD 100 billion mark. Interest-rate futures suggest an expectation that the FRB will ease monetary policy slightly beyond the six-month horizon. However, should central banks remain on a trajectory of continued monetary tightening, a realignment of market expectations could cause turbulence in financial asset prices.
We continue to monitor our risk profile closely in the context of uncertainty over global macroeconomic policies. Higher inflation and interest rate expectations around the world, and the resulting economic uncertainty, have had an impact on ECL. Our Central scenario used to calculate credit impairment assumes low growth and a higher inflation environment across many of our key markets. However, there is a high degree of risk and uncertainty associated with economic forecasts in the current environment. The degree of uncertainty varies by market, depending on exposure to commodity price increases, supply chain constraints, the monetary policy response to inflation and the public health policy response to the Covid-19 pandemic. As a result, our Central scenario for impairment has not been assigned an equal likelihood of occurrence across our key markets.
For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 37 .
Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.
The US-China relationship remains complex, with 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. These include the freezing of assets of government officials, and the implementation of investment and import/export restrictions targeting certain Chinese companies.
There is a continued risk of additional sanctions being imposed by the US and other governments in relation to human rights and other issues with China, and this could create a more complex operating environment for the group and its customers.
China has in turn announced a number of its own sanctions and trade restrictions that target, or provide authority to target, foreign individuals and companies. China has also promulgated laws that provide a legal framework for imposing further sanctions and export restrictions.
These and any future measures and countermeasures that may be taken by the US, China and other countries may affect the group, its customers, and the markets in which 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 dialogue with our regulators in various jurisdictions on the impact of legal and regulatory obligations on our business and customers.
Expanding data privacy, national security and cybersecurity laws in a number of markets could pose potential challenges to intra-group data sharing. These developments could increase financial institutions' compliance burdens in respect of cross-border transfers of personal information, and degrade our enterprise-wide financial crime risk management capabilities.
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 being taken 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 continue to manage sanctions and trade restrictions through the use of, and enhancements to, our existing controls.
-- We have taken steps, where necessary, to enhance physical security in geographical areas deemed to be at high risk from terrorism and military conflicts.
Technology and cyber security risk
(Unaudited)
We operate an extensive and complex technology landscape, which must remain resilient in order to support customers, the group and markets in the region. Risks arise where technology is not understood, maintained, or developed appropriately. Together with other organisations, we continue to operate in an increasingly hostile cyber threat environment. These threats include potential unauthorised access to customer accounts, attacks on our systems or those of our third-party suppliers and require ongoing investment in business and technical controls to defend against them.
Mitigating actions
-- We continue to invest in transforming how software solutions are developed, delivered and maintained. We invest both to improve system resilience and test service continuity. We continue to ensure security is built into our software development life cycle and improve our testing processes and tools.
-- We continue to upgrade our IT systems, simplify our service provision and replace older IT infrastructure and publications.
-- We continually evaluate threat levels for the most prevalent cyber-attack types and their potential outcomes. To further protect the group and our customers and help ensure the safe expansion of our global businesses, we continue to 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 markets to help ensure appropriate visibility and governance of the risk and mitigating actions.
-- The Group participates globally in industry bodies and working groups to collaborate on tactics employed by cyber-crime groups and to collaborate in defending, detecting and preventing cyber-attacks on financial organisations.
Financial crime risk
(Unaudited)
Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime which continues to evolve. Challenges include managing conflicting laws and approaches to legal and regulatory regimes, and implementing the unprecedented volume and diverse set of sanctions notably as a result of the Russia-Ukraine war.
Amid rising inflation and increasing cost of living pressures, we face increasing regulatory expectations with respect to increases in internal and external fraud and the abuse of vulnerable customers.
The digitisation of financial services continues to have an impact on the payments ecosystem, including new market entrants and payment mechanisms, not all of which are subject to the same level of regulatory scrutiny or regulations as financial institutions. This presents ongoing challenges in terms of maintaining required levels of payment transparency, notably where financial institutions serve as intermediaries. Developments around digital assets and currencies have continued at pace, with an increasing regulatory and enforcement focus.
Expectations with respect to the intersection of ESG issues and financial crime as our organisation, customers and suppliers transition to net zero, continue to increase, focused on potential 'greenwashing', human rights issues and environmental crimes. In addition, climate change itself could heighten risks linked to vulnerable migrant populations in countries where financial crime is already more prevalent.
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 continue to manage sanctions and trade restrictions through the use of, and enhancements to, our existing controls.
-- We are strengthening our fraud 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, as well as risks associated with direct and indirect exposure to digital assets and currencies, in an effort to ensure our financial crime controls remain appropriate.
-- We are assessing our existing policies and control framework in an effort 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.
Ibor transition
(Unaudited)
Interbank offered rates ('Ibors') have previously been used extensively to set interest rates on different types of financial transactions and for valuation purposes, risk measurement and performance benchmarking.
The publication of sterling, Swiss franc, euro and Japanese yen (JPY) London interbank offered rate ('Libor') interest rate benchmarks, as well as Euro Overnight Index Average ('Eonia'), ceased from the end of 2021. Our Ibor transition programme, which is tasked with the development of near risk-free replacement rate ('RFR') products and the transition of legacy Ibor products, has continued to support the transition of a limited number of remaining contracts in sterling and JPY Libor, which were published using a 'synthetic' interest rate methodology during 2022. Following the publication of 'synthetic' JPY Libor after 31 December 2022, and the announcements by the Financial Conduct Authority ('FCA') in September and November 2022 that 'synthetic' sterling Libor rates will cease to be published on 31 March 2023 or 31 March 2024, depending on setting, we have or are prepared to transition or remediate the remaining few contracts outstanding as at 31 December 2022 in advance of these dates.
For the cessation of the publication of US dollar Libor and other regional rates demising at dates ('demising regional rates') from 30 June 2023, we have implemented the majority of required processes, technology and RFR product capabilities in preparation for upcoming market events, and continue to transition outstanding legacy contracts through the first half of 2023. We have completed the transition of the majority of our uncommitted lending facilities and continue to make steady progress with the transition of the outstanding legacy committed lending facilities. Transition of our derivatives portfolio is progressing well with most clients reliant on industry mechanisms to transition to RFRs. For the limited number of bilateral derivatives trades where an alternative transition path is required, client engagement is continuing. For certain products and contracts, including bonds and syndicated loans, we remain reliant on the continued support of agents and third parties, but we continue to progress those contracts requiring transition. We will continue to monitor contracts that may be potentially more challenging to transition and need to rely upon legislative solutions. Additionally, following the FCA's consultation in November 2022 proposing that US dollar Libor is to be published using a 'synthetic' methodology for a defined period, we will continue to work with our clients to support them through the transition of their products if transition is not completed by 30 June 2023.
For the group's own debt securities issuances, we continue to have non-capital loss absorbing capacity ('LAC') instruments in US dollar and JPY where the terms provide for an Ibor benchmark to be used to reset the coupon rate if the group chooses not to redeem them on their call dates, the earliest of which is July 2023. We remain mindful of the various factors that impact on the Ibor remediation strategy for our non-capital LAC instruments, including but not limited to timescales for cessation of relevant Ibor rates, constraints relating to the governing law of outstanding instruments, the potential relevance of legislative solutions and industry best practice guidance.
For US dollar Libor, demising regional rates and other demising Ibors, we continue to be exposed to, and actively monitor, risks including:
-- regulatory compliance and conduct risks, as the transition of legacy contracts to RFRs or alternative rates, or sales of products referencing RFRs, may not deliver fair client outcomes;
--
resilience and operational risks, as changes to manual and automated processes, made in support of new RFR methodologies, and the transition of large volumes of Ibor contracts may lead to operational issues;
-- legal risks, as issues arising from the use of legislative solutions and from legacy contracts that the group is unable to transition may result in unintended or unfavourable outcomes for clients and market participants, which could potentially increase the risk of disputes;
-- model risk, as there is a risk that changes to our models to replace Ibor-related data, adversely affect the accuracy of model outputs; and
-- market risk, because as a result of differences in Libor and RFRs interest rates, we are exposed to basis risk resulting from the asymmetric adoption of rates across assets, liabilities and products.
We will monitor these risks through the remainder of the transition of legacy contracts, with a focus on fair client outcomes. The level of risk is diminishing in line with our process implementation and continued transition of contracts. Throughout 2023, we continue to be committed to engaging with our clients and investors to complete an orderly transition of contracts that reference the remaining demising Ibors.
Mitigating actions
-- The Group's 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.
-- We have dedicated teams in place to support the transition.
-- We have actively transitioned legacy contracts and ceased new issuance of Libor and demising regional rate based contracts, other than those allowed under regulatory exemptions, with implementation of 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) represent 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
--------------------------------------------------------------------------------------------------------------------------------
USD Libor JPY Libor Sibor GBP Libor Others(1)
At 31 Dec 2022 HK$m HK$m HK$m HK$m HK$m
--------------- ------------------ -------------------------- -------------------------- -------------------------- ------------------------
Non-derivative
financial
assets(2) 172,370 - 30,338 938 4,474
--------------- ------------------ -------------------------- -------------------------- -------------------------- ------------------------
Non-derivative
financial
liabilities 120,096 9,192 - - 264
--------------- ------------------ -------------------------- -------------------------- -------------------------- ------------------------
Derivative
notional
contract
amount 8,506,925 - - - 435,263
--------------- ------------------ -------------------------- -------------------------- -------------------------- ------------------------
At 31 Dec 2021
--------------- -------------------- ----------------------- -------------------------- -------------------------- --------------------------
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
--------------- -------------------- ----------------------- -------------------------- -------------------------- --------------------------
1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (Euro Libor, Swiss franc Libor, Mumbai Interbank Forward Offer Rate ('MIFOR'), SGD Swap Offer Rate ('SOR') and Thai baht Interest Rate Fixing ('THBFIX')). Announcements were made by regulators during 2022 on the cessation of the Canadian dollar offered rate ('CDOR') and Mexican Interbank equilibrium interest rate ('TIIE'), which will eventually transition to the Canadian overnight repo rate average ('CORRA') and a new Mexican overnight fall-back rate respectively. Therefore, CDOR and TIIE are included in the current period.
2 Gross carrying amount excluding allowances for expected credit losses.
The amounts in the above table relate to the group's main operating entities where the group has material exposures impacted by Ibor reform including Hong Kong, Singapore, Thailand, Australia, India and Japan. The amounts 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.
--
Environmental, social and governance risk
(Unaudited)
We are subject to financial and non-financial risks associated with environmental, social and governance ('ESG') related matters. Our current areas of focus are climate risk, nature-related risks and human rights risks. These can impact us both directly and indirectly through our business activities and relationships. For details on how we govern ESG, see page 9.
Focus on climate-related risk continued to increase during 2022, 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.
We could face direct impact, owing to the increase in frequency and severity of weather events and chronic shifts in weather patterns, which could affect our ability to conduct our day-to-day operations.
Our customers may find that their business models fail to align to a net zero economy or face disruption to their operations or deterioration to their assets as a result of extreme weather.
We face increased reputational, legal and regulatory risk as we make progress towards our net zero ambition, with stakeholders likely to place greater focus on our actions such as the development of climate-related policies, our disclosures and financing and investment decisions relating to our ambition.
We will face additional risks if we are perceived to mislead stakeholders in respect of our climate strategy, the climate impact of a product or service, or the commitments of our customers. Climate risk may also impact model risk, as the uncertain impacts of climate change and data and methodology limitations present challenges to creating reliable and accurate model outputs.
We also face reporting risk in relation to our climate disclosures, as any data, methodologies and standards we have used may evolve over time in line with market practice, regulation or owing to developments in climate science. The use of inaccurate/incomplete data and models could result in sub optimal decision making. Any changes could result in revisions to our internal frameworks and reported data, and could mean that reported figures are not reconcilable or comparable year on year. We may also have to reevaluate our progress towards our climate-related targets in future and this could result in reputational, legal and regulatory risks.
There is increasing evidence that a number of nature-related risks beyond climate change, which include risks that can be represented more broadly by impact and dependence 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, ecosystem degradation arising from economic activity 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 the group and our customers. We 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 be transparent about their efforts to identify and respond to the risk of negative human rights impacts arising from their business activities and relationships.
Mitigating actions
-- We continue to deepen our understanding of the drivers of climate risk. A dedicated Climate Risk Oversight Forum is responsible for shaping and overseeing our approach and providing support in managing climate risk. For further details on the group's ESG governance structure, see page 9.
-- The Group climate risk programme continues to support 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 management.
-- In December, the Group published our updated energy policy, covering the oil and gas, power and utilities and hydrogen sectors, as well as expanded our thermal coal phase-out policy, in which we committed to not provide new finance or advisory services specifically for the conversion of existing coal-to-gas-fired power plants, or new metallurgical coal mines (see page 11).
-- Climate stress tests and scenarios are being used to further improve our understanding of our risk exposures for use in risk management and business decision making.
-- In 2022, building on an earlier review which had identified modern slavery and discrimination as priority human rights issues, the Group conducted the first comprehensive review to refresh our salient human rights issues, which are the human rights at risk of the most severe negative impact through our business activities and relationships. The review identified five salient human rights issues, including the right to decent work and the right to equality and freedom from discrimination, amongst others. The Group incorporated additional human rights elements into our existing procurement processes and supplier code of conduct, and will continue to develop our in-house capability on human rights. For further details refer to ESG review on page 9.
-- In 2021, the Group joined several industry working groups dedicated to helping assess and manage nature-related risks, such as the Taskforce on Nature-Related Financial Disclosure ('TNFD'). In 2022, the Group's asset management business also published its biodiversity policy to publicly explain how the Group's analysts address nature-related issues.
-- We continue to engage with our customers 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.
For further details on our approach to climate risk management, see 'Climate Risk' on page 61.
For further details on ESG risk management, see 'Financial crime risk environment' on page 24 .
Our ESG review can be found on page 9.
Digitalisation and technological advances
(Unaudited)
Developments in technology and changes to regulations are enabling new entrants to the industry. This challenges the group to continue innovating and taking advantage of new digital capabilities so that we improve how we serve our customers, drive efficiency and adapt our products to attract and retain customers. As a result, we may need to increase our investment in our business to adapt or develop products and services to respond to our customer evolving needs. We also need to ensure that new digital capabilities do not weaken our resilience.
Mitigating actions
-- We continue to monitor this emerging risk, as well as the advances in technology, and changes in customer behaviours to understand how these changes may impact our business.
-- We assess new technologies to develop appropriate controls and maintain resilience.
-- We closely monitor and assess financial crime and the impact on payment transparency and architecture.
Internally driven
Risks associated with workforce capability, capacity and environmental factors with potential impact on growth
(Unaudited)
Our global businesses and functions in all of our markets are exposed to risks associated with workforce capacity challenges, including challenges to retain, develop and attract high-performing employees in key labour markets, and compliance with employment laws and regulations. Changed working arrangements, and the residual impact of local Covid-19 restrictions and health concerns during the pandemic have also affected employee mental health and well-being.
Mitigating actions
-- We promote a diverse and inclusive workforce and provide active health and well-being support. We continue to build our speak-up culture through active campaigns.
-- We monitor the size and shape of our workforce and levels of employee attrition, and each business and function have workforce plans in place to ensure effective hiring and forecasting to meet business demands.
-- 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 the group 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.
Risks arising from the receipt of services from third parties
(Unaudited)
We use third parties to provide a range of goods and services. Risks arising from the use of third party providers and their supply chain may be harder to identify. 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 support our customers and meet regulatory expectations.
Mitigating actions
-- We continue to monitor the effectiveness of the controls operated by our third-party through obtaining third-party control reports. We have made further enhancements to our framework to ensure risks associated with these arrangements are understood and managed effectively by our global businesses, global functions and regions.
-- We continue to enhance the effective management of our intra-group arrangements as we have for external third-party arrangements using the same control standards.
-- We are implementing the changes required by the new regulations as defined by our regulators.
Model risk
(Unaudited)
Model risk arises whenever business decision making includes reliance on models. We use models in both financial and non-financial contexts, as well as in a range of business applications such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Assessing model performance is a continuous undertaking. Models can need redevelopment as market conditions change. Significant increases in global inflation and interest rates have impacted the reliability and accuracy of both credit and traded risk models, such as the value at risk model and HKFRS 17 models.
We continued to prioritise the redevelopment of internal ratings-based ('IRB') and internal model methods ('IMM') models, in relation to counterparty credit, as part of the IRB repair and Basel III programmes with a key focus on enhancing the quality of data used as model inputs. A number of these models have been submitted to the UK's Prudential Regulation Authority ('PRA'), the Hong Kong Monetary Authority ('HKMA') and other key regulators for feedback and approval is in progress. Some IMM and internal model approach ('IMA') models have been approved for use, and feedback has been received for some IRB models. Climate risk modelling is a key focus for the group as HSBC's commitment to sustainability has become a critical part of the group's strategy.
Model risk remains a key area of focus as regulatory scrutiny in this space remains strong with local regulatory exams taking place in many jurisdictions and further developments in policy expected from many regulators, including the PRA and HKMA.
Mitigating actions
-- We have continued to embed the enhanced monitoring, review and challenge of loss model performance through our Model Risk Management sub-function as part of a broader quarterly process to determine loss levels. The Model Risk Management team aims to provide strong and effective review and challenge of any future redevelopment of these models.
-- Model Risk Management works closely with businesses to ensure that IRB/IMM/IMA models in development meet risk management, pricing and capital management needs. Global Internal Audit provides assurance over the risk management framework for models.
-- Additional assurance work is performed by the model risk governance teams, which act as second lines of defence. The teams test whether controls implemented by model users comply with model risk policy and if model risk standards are adequate.
-- The group engagement strategy was rolled out to enhance the understanding of model inventory, model limitations and risk controls across the region. Targeted briefing sessions were conducted to strengthen the awareness of models used and the engagement between the model user community and model developing areas.
-- Models using advanced machine learning techniques are validated and monitored to ensure that risks that are determined by the algorithms have adequate oversight and review. A framework to manage the range of risks that are generated by these advanced techniques is being developed that recognises the multi-disciplinary nature of these risks.
Data risk
(Unaudited)
We use multiple systems and growing quantities of data to support our customers. Risk arises if data is incorrect, unavailable, misused, or 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 239 guidelines '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 proactively monitor the quality, availability and security of data that supports our customers and internal processes. We work towards resolving any identified data issues in a timely manner.
-- We have made improvements to our data policies. We are implementing an updated control framework (including trusted sources, data flows, and data quality) to enhance the end-to-end management of data risk.
-- The Group has established a global data utility and continue to simplify and unify data management activities across the Group.
-- We protect customer data through 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 AI.
-- We educate our employees on data risk and data management. We delivered regular global mandatory training on how to protect and manage data appropriately.
Change execution risk
(Unaudited)
We have continued 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
-- In 2022, we added change execution risk to our risk taxonomy and control library, so that it could be defined, managed, reported and overseen in the same way as our other material risks.
-- The Group Transformation Oversight Executive Committee oversees the prioritisation, strategic alignment and management of execution risk for all change portfolios and initiatives.
Areas of special interest
(Unaudited)
During 2022, 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 macroeconomic outlook.
Risks related to Covid-19
Covid-19 remains a risk to our customers and organisation. However, the policy for broad lockdowns and public health restrictions has been eased following successful vaccine rollouts, and as societies have adapted. Countries continue to differ to a degree in their approach, although China has recently reversed many restrictions on activity and mobility.
In most countries, high vaccination rates and acquired population immunity have reduced the public health risks and the need for restrictions. In mainland China and Hong Kong, however, adherence to more stringent public health restrictions had adverse economic implications through much of 2022. Government imposed lockdowns of major cities in mainland China and restrictions on travel, adversely affected global tourism and supply chains.
With the relaxation of restrictions in December 2022, the prospect of a sustained recovery has emerged, given the opportunity for the persistent disruptions to activity to abate and for travel and tourism to resume. Such a recovery would have global implications given the size of the Chinese economy. Recovery in China raises the prospect of stronger global growth, although that could also lead to renewed inflationary pressures as demand for commodities and other goods rises. There are still short term risks, however, as the recent surge in infections may dampen confidence and activity, while there are also fears that the surge in infections risks giving opportunity for the emergence of a new variant of the virus.
We continue to monitor the situation closely, and given the continuing uncertainties related to the post-pandemic landscape, additional mitigating actions may be required.
Mainland China real estate sector
The policy measures issued in the latter part of 2022 have increased liquidity and the supply of credit to the mainland China real estate sector. Recovery in the underlying domestic residential demand and improved customer sentiment will be necessary to support the ongoing health of the sector. We continue to monitor the situation closely, notably the risk of further idiosyncratic real estate defaults and associated impact on market, investor and consumer sentiment.
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 Credit risk arises Credit risk is:
the principally from * measured as the amount that could be lost if a
risk of direct lending, customer or counterparty fails to make repayments;
financial trade finance and
loss if a leasing business,
customer but also from certain * monitored using various internal risk management
or counterparty other products such measures and within limits approved by individuals
fails as guarantees and within a framework of delegated authorities; and
to meet an derivatives.
obligation
under a * managed through a robust risk control framework,
contract. which outlines clear and consistent policies,
principles and guidance for risk managers.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Treasury risk
Treasury risk Treasury risk arises Treasury risk is:
is the from changes to * measured through risk appetite and more granular
risk of having the respective resources limits, set to provide an early warning of increasing
insufficient and risk profiles risk, minimum ratios of relevant regulatory metrics,
capital, driven by customer and metrics to monitor the key risk drivers impacting
liquidity behaviour, management treasury resources;
or funding decisions, or the
resources external environment.
to meet * monitored and projected against appetites and by
financial using operating plans based on strategic objectives
obligations and together with stress and scenario testing; and
satisfy
regulatory
requirements, * managed through control of resources in conjunction
including the with risk profiles, strategic objectives and cash
risk flows.
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.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Market risk
Market risk is Exposure to market Market risk is:
the risk is separated * measured using sensitivities, value at risk ('VaR')
risk of adverse into two portfolios: and stress testing, giving a detailed picture of
financial trading portfolios potential gains and losses for a range of market
impact on and non-trading movements and scenarios, as well as tail risks over
trading portfolios. specified time horizons;
activities Market risk for
arising non-trading portfolios
from changes in is discussed in * monitored using VaR, stress testing and other
market the Treasury risk measures; and
parameters such section on page
as 53.
interest rates, Market risk exposures * managed using risk limits approved by the Board for
foreign arising from our the group and the various global businesses.
exchange rates, insurance operations
asset are discussed on
prices, page 67.
volatilities,
correlations
and credit
spreads.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Climate risk
Climate risk Climate risk is Climate risk is:
relates likely to materialise * measured using a variety of risk appetite metrics and
to the through: Key Management Indicators, which assess the impact of
financial and * physical risk, which arises from the increased climate risk across the risk taxonomy;
non-financial frequency and severity of weather events;
impacts
that may arise * monitored using stress testing; and
as * transition risk, which arises from the process o
a f
result of moving to a low-carbon economy; and * managed through adherence to risk appetite thresholds
climate and via specific policies.
change and the
move * greenwashing risk, which arises from the act of
to a greener knowingly or unknowingly misleading stakeholders
economy. regarding our strategy relating to climate, the
climate impact/benefit of a produce or service,
or
the climate commitments or performance of our
customers.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Resilience risk
Resilience risk Resilience risk Resilience risk is:
is arises from failures * measured through a range of metrics with defined
the risk of or inadequacies maximum acceptable impact tolerances, and against our
sustained in processes, people, agreed risk appetite;
and significant systems or external
business events.
disruption, * monitored through oversight of enterprise processes,
execution, risks, controls and strategic change programmes; and
delivery or
physical
security or * managed by continual monitoring and thematic reviews.
safety
events, causing
the
inability to
provide
critical
services
to our
customers,
affiliates and
counterparties.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Description of risks - banking operations (continued)
(Audited)
Regulatory compliance risk
Regulatory Regulatory compliance Regulatory compliance risk is:
compliance risk arises from * measured by reference to risk appetite, identified
risk is the the failure to observe metrics, incident assessments, regulatory feedback
risk associated the relevant laws, and the judgement and assessment of our regulatory
with breaching codes, rules and compliance teams;
our regulations and
duty to clients can manifest itself
and in poor market or * monitored against the first line of defence risk and
other customer outcomes control assessments, the results of the monitoring
counterparties, and lead to fines, and control assurance activities of the second line
inappropriate penalties and reputational of defence functions, and the results of internal and
market damage to our business. external audits and regulatory inspections; and
conduct and
breaching
related * managed by establishing and communicating appropriate
financial policies and procedures, training employees in them,
services and monitoring activity to help ensure their
regulatory observance. Proactive risk control and/or remediation
standards. work is undertaken where required.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Financial crime risk
Financial crime Financial crime Financial crime risk is:
risk risk arises from * measured by reference to risk appetite, identified
is the risk day-to-day banking metrics, incident assessments, regulatory feedback
that HSBC's operations involving and the judgement and assessment of our financial
products and customers, third crime risk teams;
services parties and employees.
will be
exploited * monitored against the first line of defence risk and
for criminal control assessments, the results of the monitoring
activity. and control assurance activities of the second line
This includes of defence functions, and the results of internal and
fraud, external audits and regulatory inspections; and
bribery and
corruption,
tax evasion, * managed by establishing and communicating appropriate
sanctions policies and procedures, training employees in them
and export and monitoring activity to help ensure their
control observance. Proactive risk control and/or remediation
violations, work is undertaken where required.
money
laundering,
terrorist
financing and
proliferation
financing.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Model risk
Model risk is Model risk arises Model risk is:
the in both financial * measured by reference to model performance tracking
risk of and non-financial and the output of detailed technical reviews, with
inappropriate contexts whenever key metrics including model review statuses and
or incorrect business decision findings; business making includes decisions reliance on models. arising * monitored against model risk appetite statements, from the use of insight from the independent review function, models feedback from internal and external audits, and that have been regulatory reviews; and inadequately designed, implemented * managed by creating and communicating appropriate or used, or policies, procedures and guidance, training that the colleagues in their application, and supervising model does not their adoption to ensure operational effectiveness. perform in line with expectations and predictions. --------------- ------------------------------------------------------ -----------------------------------------------------------
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 many of the same risks as our banking operations, and these are covered by the group's risk management processes. However, 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, risk 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 The cost of claims Insurance risk is: risk is and benefits can * measured in terms of life insurance liabilities and the risk be influenced by economic capital allocated to insurance underwriting that, over many factors, including risk; time, the mortality and morbidity cost of experience, as well insurance as lapse and surrender * monitored through a framework of approved limits and policies rates. 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 2022
(Unaudited)
We made need based changes to the policies and practices for the management of credit risk in 2022 to manage evolving situations. We continued to apply the requirements of HKFRS 9 'Financial Instruments' within the Credit Risk sub-function. For certain retail portfolios we enhanced the significant increase in credit risk ('SICR') approach to capture relative movements in PD since origination.
For our retail portfolios, we adopted the European Banking Authority 'Guidelines on the application of definition of default' during 2022 and, for our wholesale portfolios, these guidelines were adopted during 2021. Adoption of these guidelines did not have a material impact on our portfolios and comparative disclosures have not been restated.
We actively managed the risks related to macroeconomic uncertainties, including inflation, fiscal and monetary policy, the Russia-Ukraine war, broader geopolitical uncertainties, and the continued risks resulting from the Covid-19 pandemic and developments in the mainland China CRE sector.
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 and Compliance 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 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 ('ECL') 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. The key site and group approvals at the group Impairment Committee are subsequently reported to the global business impairment committee for final approval of the Group's ECL for the period.
Required members of the group Impairment Committee are the group's Chief Risk Officer, Chief Credit Officer, Wealth and Personal Banking Chief Risk Officer, as well as the group's Chief Financial Officer and 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. As such, 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)
A 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 Other
debt debt
securities securities Wholesale lending
and bills and bills and derivatives Retail lending
--------------- --------------- ----------------------- -----------------------
12-month
Basel
probability 12 month
External External Internal of Internal probability-
credit credit credit default credit weighted
rating rating rating % rating PD %
-------------------------- --------------- --------------- --------- ------------ -------- -------------
Quality classification(1,
2)
-------------------------- --------------- --------------- --------- ------------ -------- -------------
Strong BBB and A- and CRR 1 to 0 - 0.169 Band 1 0.000 -
above above CRR 2 and 2 0.500
-------------------------- --------------- --------------- --------- ------------ -------- -------------
Good BBB- to BBB+ to CRR 3 0.170 Band 3 0.501 -
BB BBB- - 0.740 1.500
-------------------------- --------------- --------------- --------- ------------ -------- -------------
BB- to BB+ to CRR 4 to 0.741 Band 4 1.501 -
Satisfactory B and unrated B and unrated CRR 5 - 4.914 and 5 20.000
-------------------------- --------------- --------------- --------- ------------ -------- -------------
Sub-standard B- to B- to CRR 6 to 4.915 Band 6 20.001
C C CRR 8 - 99.999 - 99.999
-------------------------- --------------- --------------- --------- ------------ -------- -------------
CRR 9 to
Credit impaired Default Default CRR 10 100 Band 7 100
-------------------------- --------------- --------------- --------- ------------ -------- -------------
1 Customer risk rating ('CRR').
2 12-month Point-in-time ('PIT') Probability of Default ('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.
=========================================================================
Forborne loans and forbearance
(Audited)
Forbearance measures consist of concessions towards an obligor that is experiencing or is about to experience difficulties in meeting its financial commitments.
We continue to class loans as forborne when we modify the contractual payment terms due to having significant concerns about the borrowers' ability to meet contractual payments when they were due.
In 2022, we expanded our definition of forborne to capture non-payment-related concessions, such as covenant waivers. For our wholesale portfolio, we began identifying non-payment-related concessions in 2021 when our internal policies were changed. For our retail portfolios, we began identifying them during 2022.
For details of our policy on derecognised renegotiated loans, see Note 1.2(i) on the financial statements.
Credit quality of forborne loans
(Unaudited)
For wholesale lending, where payment-related forbearance measures result in a diminished financial obligation, or if there are other indicators of impairment, the loan will be classified as credit impaired if it is not already so classified. All facilities with a customer, including loans that have not been modified, are considered credit impaired following the identification of a payment-related forborne loan. For retail lending, where a material concession has been granted, the loan will be classified as credit impaired. In isolation, non-payment forbearance measures may not result in the loan being classified as credit impaired unless combined with other indicators of credit impairment. These are classed as performing forborne loans for both wholesale and retail lending.
Wholesale and retail lending forborne 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. Any forborne loans not considered credit impaired will remain forborne for a minimum of two years from the date that credit impairment no longer applies. For wholesale and retail lending, any forbearance measures granted on a loan already classed as forborne results in the customer being classed as credit impaired.
Forborne loans and recognition of expected credit losses
(Audited)
Forborne loans expected credit loss assessments reflect the higher rates of losses typically experienced with these types of loans such that they are in stage 2 and stage 3. The higher rates are more pronounced in unsecured retail lending requiring further segmentation. For wholesale lending, forborne 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 forborne loans.
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)
2022 2021
--------------------------------------------------- ----------------------------------------------------
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 3,745,113 (39,964) 3,872,956 (32,017)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
Loans and
advances to
banks 519,068 (44) 432,286 (39)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
Other
financial
assets
measured at
amortised
cost 2,768,171 (681) 2,114,301 (639)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
- cash and
balances at
central banks 232,748 (8) 276,857 -
--------------
- items in the
course of
collection
from
other banks 28,557 - 21,632 -
--------------
- Hong Kong
Government
certificates
of
indebtedness 341,354 - 332,044 -
--------------
- reverse
repurchase
agreements -
non-trading 927,976 - 803,775 -
--------------
- financial
investments 975,174 (465) 502,997 (433)
--------------
- prepayments,
accrued
income and
other
assets(2) 262,362 (208) 176,996 (206)
-------------- --------------------- ---------------------------- -----------------------
Amounts due
from Group
companies 129,357 - 99,604 -
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
Total gross
carrying
amount
on-balance
sheet 7,161,709 (40,689) 6,519,147 (32,695)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
Loans and
other credit
related
commitments 1,892,401 (864) 1,826,335 (580)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
Financial
guarantee 35,646 (63) 34,302 (44)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
Total nominal
amount
off-balance
sheet(3) 1,928,047 (927) 1,860,637 (624)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
9,089,756 (41,616) 8,379,784 (33,319)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
Allowance Allowance
Fair for for
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) 1,239,527 (344) 1,541,909 (121)
-------------- --------------------- ---------------------------- ----------------------- ---------------------------
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 81, 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 3,219,645 462,083 62,763 622 3,745,113 (2,755) (11,200) (25,818) (191) (39,964) 0.1 2.4 41.1 30.7 1.1 -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- -------- - personal 1,448,675 68,001 8,708 - 1,525,384 (1,080) (2,830) (1,459) - (5,369) 0.1 4.2 16.8 - 0.4 -------------------------------- - corporate(2) 1,492,792 370,199 53,141 620 1,916,752 (1,414) (8,045) (24,351) (189) (33,999) 0.1 2.2 45.8 30.5 1.8 -------------------------------- * financial institutions(3) 278,178 23,883 914 2 302,977 (261) (325) (8) (2) (596) 0.1 1.4 0.9 100.0 0.2 -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- Loans and advances to banks 516,934 2,134 - - 519,068 (39) (5) - - (44) 0.0 0.2 - - 0.0 -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- -------- Other financial assets 2,739,060 28,646 464 1 2,768,171 (391) (231) (59) - (681) 0.0 0.8 12.7 - 0.0 -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- -------- Loan and other credit-related commitments 1,821,355 65,288 5,758 - 1,892,401 (427) (397) (40) - (864) 0.0 0.6 0.7 - 0.0 -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- -------- * personal 1,321,908 22,721 4,940 - 1,349,569 (18) (1) - - (19) 0.0 0.0 - - 0.0 -------------------------------- * corporate(2) 383,717 39,191 818 - 423,726 (394) (389) (40) - (823) 0.1 1.0 4.9 - 0.2 -------------------------------- * financial institutions(3) 115,730 3,376 - - 119,106 (15) (7) - - (22) 0.0 0.2 - - 0.0 -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- Financial guarantee 30,738 4,840 68 - 35,646 (18) (17) (28) - (63) 0.1 0.4 41.2 - 0.2 -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- -------- - personal 4,176 6 1 - 4,183 - - - - - - - - - - -------------------------------- - corporate(2) 24,093 4,483 67 - 28,643 (18) (17) (28) - (63) 0.1 0.4 41.8 - 0.2 -------------------------------- * financial institutions(3) 2,469 351 - - 2,820 - - - - - - - - - - -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- At 31 Dec 2022 8,327,732 562,991 69,053 623 8,960,399 (3,630) (11,850) (25,945) (191) (41,616) 0.0 2.1 37.6 30.7 0.5 -------------------------------- --------------- ----------------- -------------- ----------- --------------- ------------ ------------------------------- ------------------------------- ----------- ------------------------------- ------------ ------------ ------------ ---------- --------
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 of of of
which: which: which: which: which: which: which: which: which:
1 1
30 to 30 to 30
Stage 1 to 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 2022
-------------------------------------- -------------------------- ---------- ---------------- ------------------- ------------------------------- ------------ --------------- ---------------- ----------- ----------- ----------- ---------------
Loans and advances
to customers
at amortised
cost 462,083 450,189 8,816 3,078 (11,200) (10,645) (198) (357) 2.4 2.4 2.2 11.6
-------------------------------------- -------------------------- ---------- ---------------- ------------------- ------------------------------- ------------ --------------- ---------------- ----------- ----------- ----------- ---------------
* personal 68,001 58,182 7,202 2,617 (2,830) (2,308) (172) (350) 4.2 4.0 2.4 13.4
--------------------------------------
* corporate and commercial 370,199 368,249 1,491 459 (8,045) (8,012) (26) (7) 2.2 2.2 1.7 1.5
--------------------------------------
* non-bank financial institutions 23,883 23,758 123 2 (325) (325) - - 1.4 1.4 - -
-------------------------------------- -------------------------- ---------- ---------------- ------------------- ------------------------------- ------------ --------------- ---------------- ----------- ----------- -----------
1 Days past due ('DPD').
2 The DPD 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 3,349,434 480,632 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.
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 1 1
to 30 to 30 to 30
Stage 29 and Stage 29 and Stage 29 and
2 Up-to-date DPD(1,2) > DPD(1,2) 2 Up-to-date DPD(1,2) > DPD(1,2) 2 Up-to-date DPD > 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 DPD 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 and is net of allowance for ECL. 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 residential 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 49-52.
Maximum exposure to credit risk before collateral held or other credit
enhancements
(Audited)
-------------------------- ----------------------------
2022 2021
HK$m HK$m
--------------------------------------------------- -------------------------- ----------------------------
Cash and balances at central banks 232,739 276,857
--------------------------------------------------- -------------------------- ----------------------------
Items in the course of collection from other banks 28,557 21,632
--------------------------------------------------- -------------------------- ----------------------------
Hong Kong Government certificates of indebtedness 341,354 332,044
--------------------------------------------------- -------------------------- ----------------------------
Trading assets 435,358 478,030
--------------------------------------------------- -------------------------- ----------------------------
Derivatives 502,771 365,167
--------------------------------------------------- -------------------------- ---------------------------- Financial assets designated at fair value 39,495 33,274 --------------------------------------------------- -------------------------- ---------------------------- Reverse repurchase agreements - non-trading 927,976 803,775 --------------------------------------------------- -------------------------- ---------------------------- Loans and advances to banks 519,024 432,247 --------------------------------------------------- -------------------------- ---------------------------- Loans and advances to customers 3,705,149 3,840,939 --------------------------------------------------- -------------------------- ---------------------------- Financial investments 2,214,236 2,044,473 --------------------------------------------------- -------------------------- ---------------------------- Amounts due from Group companies 140,546 112,719 --------------------------------------------------- -------------------------- ---------------------------- Other assets 267,972 180,757 --------------------------------------------------- -------------------------- ---------------------------- Total on-balance sheet exposure to credit risk 9,355,177 8,921,914 --------------------------------------------------- -------------------------- ---------------------------- Total off-balance sheet 3,587,491 3,506,253 --------------------------------------------------- -------------------------- ---------------------------- Financial guarantees and other similar contracts 396,491 377,487 --------------------------------------------------- -------------------------- ---------------------------- Loan and other credit-related exposure 3,191,000 3,128,766 --------------------------------------------------- -------------------------- ---------------------------- At 31 Dec 12,942,668 12,428,167 --------------------------------------------------- -------------------------- ----------------------------
Total exposure to credit risk remained broadly unchanged in 2022 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)
Amid a deterioration in the economic and geopolitical environment, management judgements and estimates continued to be subject to a high degree of uncertainty in relation to assessing economic scenarios for impairment allowances in 2022.
Inflation, economic contraction and high interest rates combined with an unstable geopolitical environment and the effects of global supply chain disruption contributed to elevated levels of uncertainty during the year.
At 31 December 2022, as a result of this uncertainty, additional stage 1 and 2 allowances have been recognised; while management judgement and estimates continue to reflect a degree of caution both in the selection of economic scenarios and their weightings, and in the use of management judgemental adjustments, described in more detail below.
The recognition and measurement of ECL involve 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 global 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 HSBC's top and emerging risks.
Three of the scenarios are drawn from consensus forecasts and distributional estimates. The Central scenario is deemed the 'most likely' scenario, 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 consensus Downside and the consensus Upside scenarios are each constructed to be consistent with a 10% probability. The Downside 2 is constructed with 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. However, management may depart from this probability-based scenario weighting approach when the economic outlook is determined to be particularly uncertain and risks are elevated.
In light of ongoing risks, management deviated from this probability weighting in all markets in the fourth quarter of 2022.
Description of economic scenarios
The economic assumptions presented in this section have been formed by HSBC with reference to external forecasts and estimates, specifically for the purpose of calculating ECL.
Global economic growth is slowing and economic forecasts for our main markets deteriorated in the fourth quarter. In North America and Europe, high inflation and rising interest rates are reducing real household incomes and raising business costs, dampening consumption and investment and lowering growth expectations. The effects of higher interest rate expectations and lower growth are also evident in asset price expectations and house prices forecasts, in particular, have been lowered significantly.
In Asia, economic forecasts have also been lowered, with expectations for Hong Kong and mainland China trimmed following weaker than expected third quarter GDP growth and mainland China's adherence to stringent pandemic-related public health policy response. That policy saw an abrupt reversal during December, but amid a very high degree of uncertainty, to both the upside and downside, forecasts are slow to adjust. The increased uncertainty caused by the lifting of restrictions has been reflected in management's assessment of scenario probabilities.
Economic forecasts remain subject to a high degree of uncertainty. In the fourth quarter, risks to the economic outlook included the persistence of inflation and the consequences that has for monetary policy. Rapid changes to public policy also increased forecast uncertainty. In Asia, the removal of Chinese public health restrictions is a key source of potential upside risk, but with significant near term uncertainty relating to the surge of infection. This policy change could also have global implications.
Geopolitical risks also remain significant and include the possibility of a prolonged and escalating Russia-Ukraine war, and continued differences between the US and other countries with China over a range of economic and strategic issues.
The scenarios used to calculate ECL in the Annual Report and Accounts 2022 are described below.
The consensus Central scenario
HSBC's Central scenario reflects a low growth and higher inflation environment across many of our key markets. The scenario features an initial period of below-trend GDP growth in most of our main markets as higher inflation and tighter monetary policy causes a squeeze on business margins and households' real disposable income. Growth returns to its long term expected trend in later years as central banks bring inflation back to target.
There are two exceptions: in Hong Kong and mainland China, GDP growth is expected to be stronger in 2023 relative to 2022 following several quarters of negative GDP growth and the suspension of Covid-19 restrictions.
Our Central scenario assumes that inflation peaked in most of our key markets at the end of 2022 but remains high through 2023 before moderating as energy prices stabilise and supply chain disruptions abate. Central banks are expected to keep raising interest rates until midway through 2023. Inflation is forecast to revert to target in most markets, by early 2024.
Global GDP is expected to grow by 1.6% in 2023 in the Central scenario and the average rate of global GDP growth is 2.5% over the five-year forecast period. This is below 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 in European and North American markets continues to weaken. Most major economies are forecast to grow in 2023, but at very low rates. Hong Kong and mainland China are expected to see a recovery in activity from 2022 as Covid19 restrictions are lifted.
-- In most markets, unemployment rises moderately from historic lows as economic activity slows. Labour markets remain fairly tight across our key markets.
-- Inflation is expected to remain elevated across many of our key markets driven by energy and food prices. Inflation is subsequently expected to converge back towards central banks target rate over the next two years of the forecast.
-- Policy interest rates in key markets will continue to rise in the near term but at a slower pace. Interest rates will stay elevated but start to ease as inflation returns to target.
-- The West Texas Intermediate oil price is forecast to average $72 per barrel over the projection period.
The Central scenario was first created with forecasts available in November, and reviewed continuously until late December. Probability weights assigned to the Central scenario vary from 55% to 70% and reflect relative differences in risk and uncertainty across markets.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario.
Central scenario 2023-2027
Hong Mainland
Kong China
% %
------------------------ ------ --------
GDP growth rate (annual
average rate)
------------------------ ------ --------
2023 2.7 4.6
------------------------ ------ --------
2024 3.0 4.8
------------------------ ------ --------
2025 2.7 4.7
------------------------ ------ --------
5 Year average 2.7 4.6
------------------------ ------ --------
Unemployment rate
(annual average rate)
------------------------ ------ --------
2023 3.7 5.2
------------------------ ------ --------
2024 3.5 5.1
------------------------ ------ --------
2025 3.4 5.0
------------------------ ------ --------
5 Year average 3.4 5.0
------------------------ ------ --------
House price growth
(annual average rate)
------------------------ ------ --------
2023 (10.0) (0.1)
------------------------ ------ --------
2024 (3.0) 2.9
------------------------ ------ --------
2025 1.7 3.5
------------------------ ------ --------
5 Year average (1.0) 2.9
------------------------ ------ --------
Inflation rate (annual
average rate)
------------------------ ------ --------
2023 2.1 2.4
------------------------ ------ --------
2024 2.1 2.2
------------------------ ------ --------
2025 2.0 2.2
------------------------ ------ --------
5 Year average 2.1 2.2
------------------------ ------ --------
Probability 55.0 55.0
------------------------ ------ --------
The consensus Upside scenario
Compared with the Central scenario, the consensus Upside scenario features stronger economic activity in the near term, before converging to long-run trend expectations. It also incorporates a faster pace of disinflation than incorporated in the Central scenario.
The scenario is consistent with a number of key upside risk themes. These include faster resolution of supply chain issues; a rapid conclusion to the Russia-Ukraine war; de-escalation of tensions between the US and China; and relaxation of Covid-19 policies in Asia.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario.
Consensus Upside scenario 'best
outcome'
Hong Mainland
Kong China
% %
------------------------ -------------------------- --------------------------
GDP growth rate (annual
average rate) 9.0 (3Q23) 10.3 (2Q23)
------------------------ -------------------------- --------------------------
Unemployment rate
(annual average rate) 3.0 (4Q23) 4.7 (3Q24)
------------------------ -------------------------- --------------------------
House price growth
(annual average rate) 1.4 (4Q24) 6.9 (4Q24)
------------------------ -------------------------- --------------------------
Inflation rate (annual (0.1)
average rate) (4Q23) 0.8 (4Q23)
------------------------ -------------------------- --------------------------
Probability 20.0 20.0
------------------------ -------------------------- --------------------------
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. For inflation, lower inflation is interpreted as the 'best' outcome.
Downside scenarios
Downside scenarios explore the intensification and crystallisation of a number of key economic and financial risks.
High inflation and a stronger monetary policy response have become key concerns for global growth. In the downside scenarios, supply chain disruptions intensify, exacerbated by an escalation in the spread of Covid-19 and rising geopolitical tensions drive inflation higher.
There also remains a risk that energy and food prices rise further due to the Russia-Ukraine war, exacerbating global inflation and further pressuring household budgets and firm costs.
The risk of inflation expectations becoming detached from Central bank targets also remains a risk. A wage-price spiral triggered by higher inflation and pandemic related labour supply shortages across could put sustained upward pressure on wages, aggravating cost pressures and the squeeze on household real incomes and corporate margins. In turn, it raises the risk of a more forceful policy response from central banks, a steeper trajectory for interest rates and ultimately, deep economic recession.
The risks relating to Covid-19 are centred on the emergence of a new variant with greater vaccine resistance that necessitates the imposition of stringent public health policies. In Asia, despite the re-opening of China in December, management of Covid-19 remains a key source of uncertainty, with the rapid spread of the virus posing a heightened risk of a new variant emerging.
The geopolitical environment also present risks, including:
-- a prolonged Russia-Ukraine war with escalation beyond Ukraine's borders; and
-- continued differences between the US and other countries with China, which could affect sentiment and restrict global economic activity.
The consensus Downside scenario
In the consensus Downside scenario, economic activity is considerably weaker compared with the Central scenario. In this scenario, GDP growth weakens below the Central scenario, unemployment rates rise and asset prices fall. The scenario features a temporary supply side shock that keeps inflation higher than the baseline, before the effects of weaker demand begin to dominate leading to a fall in commodity prices and to lower inflation.
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
% %
------------------------ ======================== ===========================
GDP growth rate (annual (2.2) (1.2)
average rate) (4Q23) (4Q23)
------------------------ ======================== ===========================
Unemployment rate
(annual average rate) 5.2 (3Q24) 5.9 (4Q23)
------------------------ ------------------------ ---------------------------
House price growth (14.9) (1.9)
(annual average rate) (2Q23) (1Q23)
------------------------ ------------------------ ---------------------------
Inflation rate (annual
average rate) (min) 0.3 (4Q24) 0.7 (4Q24)
------------------------ ------------------------ ---------------------------
Inflation rate (annual
average rate) (max) 3.7 (4Q23) 4.0 (4Q23)
------------------------ ------------------------ ---------------------------
Probability 20.0 20.0
------------------------ ------------------------ ---------------------------
Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, for example lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. Due to the nature of the shock to inflation in the downside scenarios, both the lowest and the highest point is shown in the tables.
Downside 2 scenario
The Downside 2 scenario features a deep global recession and reflects managements view of the tail of the economic distribution. It incorporates the crystallisation of a number of risks simultaneously, including further escalation of the Russia-Ukraine war, worsening of supply chain disruptions and the emergence of a vaccine-resistant Covid-19 variant that necessitates a stringent public health policy response globally.
This scenario features an initial supply-side shock that pushes up inflation and interest rates higher. This impulse is expected to prove short lived as a large downside demand pressures causes commodity prices to correct sharply and global price inflation to fall as a severe and prolonged recession takes hold.
The following table describes key macroeconomic variables and the probabilities assigned in the Downside 2 scenario.
Downside 2 scenario 'worst outcome'
Hong Mainland
Kong China
% %
------------------------ ---------------------------- ----------------------------
GDP growth rate (annual (9.2) (6.9)
average rate) (4Q23) (4Q23)
------------------------ ---------------------------- ----------------------------
Unemployment rate
(annual average rate) 5.8 (1Q24) 6.8 (4Q24)
------------------------ ---------------------------- ----------------------------
House price growth (18.2) (18.5)
(annual average rate) (1Q24) (4Q23)
------------------------ ---------------------------- ----------------------------
Inflation rate (annual
average rate) (min) 0.6 (4Q24) 1.0 (4Q24)
------------------------ ---------------------------- ----------------------------
Inflation rate (annual
average rate) (max) 4.3 (4Q23) 4.6 (4Q23)
------------------------ ---------------------------- ----------------------------
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 the first two years of the scenario. Due to the nature of the shock to inflation in the downside scenarios, both the lowest and the highest point is shown in the tables.
Scenario weighting
In reviewing the economic conjuncture, the level of risk and uncertainty, 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.
Key consideration in the fourth quarter around uncertainty attached to the Central scenario projections focused on:
-- the progression of the Covid-19 pandemic in Asian countries and announcement of removal of Covid-19 measures and travel restrictions in mainland China and Hong Kong;
-- further tightening of monetary policy and impact on borrowing costs in interest rate sensitive sectors, such as housing;
-- the risks to gas supply security in Europe and subsequent impact on inflation and commodity prices and growth; and
-- The ongoing risks to global supply chains.
In mainland China and Hong Kong, the announcement of relaxation of Covid-19 measures and travel restrictions has led to increased uncertainty around the Central scenario projection. It was managements view that easing of policy could increase risks to the upside in the form of increased spending and travel. However, the continuing risks to the downside were also acknowledged given the incipient surge in Covid-19 infections and the potential for a new variant. This led management to assign a combined weighting of 75% to the consensus Upside and Central scenarios in both markets.
Critical accounting estimates and judgements
The calculation of ECL under HKFRS 9 involves significant judgements, assumptions and estimates. The level of estimation uncertainty and judgement has remained elevated since 31 December 2021, including judgements relating to:
-- the selection and weighting of economic scenarios, given rapidly changing economic conditions and a wide distribution of economic forecasts. There is judgement in making assumptions about the effects of inflation and interest, global growth, supply chain disruption; and
-- estimating the economic effects of those scenarios on ECL, particularly as the historical relationship between macroeconomic variables and defaults might not reflect the dynamics of current macroeconomic conditions.
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 2022, and management judgemental adjustments were still required to support modelled outcomes.
We have developed 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 approach.
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.
This includes refining model inputs and outputs and using adjustments to ECL based on management judgement and higher-level quantitative analysis for impacts that are difficult to model.
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 section 'Credit risk management' on page 31). 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.
The drivers of management judgemental adjustments continue to evolve with the economic environment, and as new risks emerge.
At 31 December 2022, management judgement adjustments reduced by HK$1bn compared with 31 December 2021. Adjustments related to Covid-19 and for sector specific risks were reduced as scenarios and modelled outcomes better reflected management expectations at 31 December 2022.
Management judgemental adjustments made in estimating the scenario-weighted reported ECL at 31 December 2022 are set out in the following table.
Management judgemental adjustments
to ECL
as at 31 December 2022(1)
Retail Wholesale Total
HK$bn HK$bn HK$bn
Banks, sovereigns
government entities
and low-risk counterparties(2) (0.2) 0.2 -
--------------------------------- ------------------- ------------------ -------------------
Corporate lending
adjustments 3.1 3.1
Retail lending Inflation-related
adjustments 0.1 0.1
--------------------------------- ------------------- ------------------ -------------------
Other macroeconomic-related
adjustments 0.4 0.4
--------------------------------- ------------------- ------------------ -------------------
Pandemic-related
economic recovery
adjustments - -
--------------------------------- ------------------- ------------------ -------------------
Other retail lending
adjustments 0.3 0.3
--------------------------------- ------------------- ------------------ -------------------
Total 0.6 3.3 3.9
--------------------------------- ------------------- ------------------ -------------------
Management judgemental adjustments
to ECL
as at 31 December 2021(1)
Retail Wholesale Total
HK$bn HK$bn HK$bn
--------------------------------- ------------------- ------------------- -------------------
Banks, sovereigns,
government entities
and low-risk counterparties)(2) 0.1 (0.2) (0.1)
--------------------------------- ------------------- ------------------- -------------------
Corporate lending
adjustments 4.1 4.1
Retail lending inflation-related
adjustments - -
--------------------------------- ------------------- ------------------- -------------------
Other macroeconomic-related
adjustments(3) (0.4) (0.4)
--------------------------------- ------------------- ------------------- -------------------
Pandemic-related
economic recovery
adjustments 0.6 0.6
--------------------------------- ------------------- ------------------- -------------------
Other retail lending
adjustments(3) 0.7 0.7
--------------------------------- ------------------- ------------------- -------------------
Total 1.0 3.9 4.9
--------------------------------- ------------------- ------------------- -------------------
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 2022 were an increase of ECL of HK$3.3bn for the wholesale portfolio and an increase to ECL of HK$0.6bn for the retail portfolio.
At 31 December 2022, wholesale management judgemental adjustments were an ECL increase of HK$3.3bn (31 December 2021: HK$3.9bn increase).
-- Adjustments to corporate exposures increased ECL by HK$3.1bn (31 December 2021: HK$4.1bn increase). These principally reflected the outcome of management judgements for high-risk and vulnerable sectors in some of our key markets. This was supported by credit experts' input, portfolio risk metrics, short- to medium-term risks under each scenario, model performance, quantitative analyses and benchmarks. Considerations include risk of individual exposures under different macroeconomic scenarios and sub-sector analyses. The largest increase in ECL was observed in the real estate sector, including material adjustments to reflect the uncertainty of the higher-risk Chinese commercial real estate exposures, booked in Hong Kong.
At 31 December 2022, retail management judgemental adjustments were an ECL increase of HK$0.6bn (31 December 2021: HK$1.0bn increase):
-- Retail lending Inflation-related adjustments increased ECL by HK$0.1bn (31 December 2021: HK$0.0bn). These adjustments addressed where increasing inflation and interest rates were not fully captured by the modelled output.
-- Other macroeconomic-related adjustments increased ECL by HK$0.4bn (31 December 2021: HK$0.4bn decrease). These adjustments were primarily in relation to country-specific risks related to future macroeconomic conditions.
-- Other retail lending adjustments increased ECL by HK$0.3bn (31 December 2021: $0.7bn increase), reflecting all other data and model and judgemental adjustments.
-- Material pandemic-related economic recovery adjustments were removed during the year as scenarios stabilized.
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 (stage 3) obligors. It is generally impracticable to separate the effect of macroeconomic factors in individual assessments of obligors in default. The measurement of stage 3 ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios, and loans to defaulted obligors are a small portion of the overall wholesale lending exposure, even if representing the majority of the allowance for ECL. Therefore, the sensitivity analysis to macroeconomic scenarios does not capture the residual estimation risk arising from wholesale stage 3 exposures.
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. 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 risks relative with the consensus scenarios for the period end.
Wholesale analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Hong Mainland
Kong China
-------------------------- --------------------- ---------------------
ECL coverage of financial
instruments
subject to significant
measurement
uncertainty at 31
December 2022(2) HK$m HK$m
-------------------------- --------------------- ---------------------
Reported ECL 7,211 2,302
-------------------------- --------------------- ---------------------
Consensus scenarios
ECL
-------------------------- --------------------- ---------------------
Central scenario 6,386 1,887
-------------------------- --------------------- ---------------------
Upside scenario 4,616 1,123
-------------------------- --------------------- ---------------------
Downside scenario 10,252 3,235
-------------------------- --------------------- ---------------------
Alternative (Downside
2) scenario ECL 16,852 9,572
-------------------------- --------------------- ---------------------
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Mainland
Hong Kong China
---------------------------- ----------------------- -------------------------
ECL coverage of financial
instruments subject
to significant measurement
uncertainty at 31 December
2021(2) HK$m HK$m
---------------------------- ----------------------- -------------------------
Reported ECL 5,981 1,162
---------------------------- ----------------------- -------------------------
Consensus scenarios
---------------------------- ----------------------- -------------------------
Central scenario 5,085 881
---------------------------- ----------------------- -------------------------
Upside scenario 3,712 281
---------------------------- ----------------------- -------------------------
Downside scenario 7,674 1,684
---------------------------- ----------------------- -------------------------
Alternative scenarios 14,575 6,286
---------------------------- ----------------------- -------------------------
1 Excludes ECL and financial instruments relating to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios.
2 Includes off-balance sheet financial instruments that are subject to significant measurement uncertainty.
At 31 December 2022, the most significant level of ECL sensitivity related to the judgements over the mainland China offshore commercial real estate portfolio booked in Hong Kong.
Retail analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Alternative
(Downside
Reported Central Upside Downside 2) scenario
ECL Scenario Scenario Scenario ECL
--------------- ------------- ------------- ----------- -------------- ----------------
ECL coverage
of loans
and advances
to customers HK$m HK$m HK$m HK$m HK$m
--------------- ------------- ------------- ----------- -------------- ----------------
At 31 December
2022(2)
--------------- ------------- ------------- ----------- -------------- ----------------
Hong Kong 2,702 2,406 1,985 4,037 6,014
--------------- ------------- ------------- ----------- -------------- ----------------
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Alternative
(Downside
Reported Central Upside Downside 2) scenario
ECL Scenario Scenario Scenario ECL
--------------- ------------- ------------- ----------- -------------- ----------------
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
--------------- ------------- ------------- ----------- -------------- ----------------
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.
At 31 December 2022, Hong Kong mortgages had low levels of reported ECL due to the credit quality of the portfolio. Credit cards and other unsecured lending are more sensitive to economic forecasts, and therefore reflected the highest level of ECL sensitivity during 2022.
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 reflect only the opening and closing position of the financial instrument.
The transfers of financial instruments represent the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL.
The net remeasurement of ECL arising from stage transfers represents the increase or decrease due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying customer risk rating ('CRR')/probability of default ('PD') movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the 'changes in risk parameters - credit quality' line item.
Changes in 'New financial assets originated or purchased', 'assets derecognised (including final repayments)' and 'changes to risk parameters - further lending/repayments' represent the impact from volume movements within the group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers, including
loan commitments and financial guarantees
(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 2022 5,589,480 (2,916) 529,597 (9,737) 41,639 (19,693) 1,558 (334) 6,162,274 (32,680)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Transfers of
financial
instruments: (246,807) (1,899) 204,008 7,046 42,799 (5,147) - - - -
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
- transfers from
stage 1 to stage
2 (725,814) 1,072 725,814 (1,072) - - - - - -
------------------
- transfers from
stage 2 to stage
1 483,955 (2,759) (483,955) 2,759 - - - - - -
------------------
- transfers to
stage 3 (7,041) 10 (39,526) 5,591 46,567 (5,601) - - - -
------------------
- transfers from
stage 3 2,093 (222) 1,675 (232) (3,768) 454 - - - -
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ----------------------------------
Net remeasurement
of ECL arising
from transfer
of stage - 1,391 - (1,645) - (400) - - - (654)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
New financial
assets originated
and purchased 1,854,004 (1,209) - - - - 200 (18) 1,854,204 (1,227)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Assets
derecognised
(including final
repayments) (1,180,100) 224 (186,273) 653 (6,023) 1,220 (764) - (1,373,160) 2,097
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Changes to risk
parameters -
further
lending/repayment (303,451) 80 9,824 701 (1,357) 768 (294) 20 (295,278) 1,569
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Changes in risk
parameters -
credit
quality - 1,099 - (8,822) - (10,412) - 214 - (17,921)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Changes to model
used for ECL
calculation - (31) - 11 - (12) - - - (32)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Assets written
off - - - - (7,215) 7,215 (78) 78 (7,293) 7,293
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Credit-related
modifications
that resulted
in derecognition - - - - (241) 60 - - (241) 60
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Foreign exchange (126,786) 32 (22,811) 180 (1,024) 526 1 (1) (150,620) 737
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Others 4 (13) - (5) 3 (9) - (150) 7 (177)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
At 31 Dec 2022 5,586,344 (3,242) 534,345 (11,618) 68,581 (25,884) 623 (191) 6,189,893 (40,935)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
ECL income
statement
charge for the
year (16,168)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Recoveries 880
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Others (543)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
Total ECL income
statement charge
for the year (15,831)
------------------ ---------------------------------- ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- -------------------- ---------------------------------- ------------------
At 31 Dec 2022 Year ended
31 Dec 2022
------------------------------------------------------------------------------------ ------------------------------------------------
Gross carrying/nominal Allowance
amount for ECL ECL charge
HK$m HK$m HK$m
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
As above 6,189,893 (40,935) (15,831)
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Other financial 2,768,171 (681) (110)
assets measured
at amortised
cost
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Non-trading 2,335 - -
reverse
repurchase
agreement
commitments
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Performance and
other
guarantees not
considered for
HKFRS 9 N/A N/A (81)
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Amounts due from 129,357 - -
Group companies
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Summary of
financial
instruments to
which the
impairment
requirements in
HKFRS 9 are
applied/Summary
consolidated
income
statement 9,089,756 (41,616) (16,022)
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Debt instruments 1,239,527 (344) (343)
measured at
FVOCI
---------------- --------------------------------------- ------------------------------------------- ------------------------------------------------
Total allowance N/A (41,960) (16,365)
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 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
---------------- ---------------------------------------- ------------------------------------------- ---------------------------------------------
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 32.
Distribution of financial instruments by credit quality at 31 December
2022
(Audited)
Gross carrying/notional amount
--------------------------------------------------------------------------------------------------------------------------------------------
Allowance
Credit for
Strong Good Satisfactory Sub-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 2,093,077 773,808 737,137 77,706 63,385 3,745,113 (39,964) 3,705,149
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
- personal 1,290,517 144,757 76,102 5,300 8,708 1,525,384 (5,369) 1,520,015
--------------
- corporate
and
commercial 641,317 545,533 604,724 71,417 53,761 1,916,752 (33,999) 1,882,753
--------------
- non-bank
financial
institutions 161,243 83,518 56,311 989 916 302,977 (596) 302,381
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------
Loans and
advances
to banks 504,751 9,461 1,368 3,488 - 519,068 (44) 519,024
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Cash and
balances at
central banks 226,479 6,047 222 - - 232,748 (8) 232,740
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Items in the
course
of collection
from
other banks 28,557 - - - - 28,557 - 28,557
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Hong Kong
Government
certificates
of
indebtedness 341,354 - - - - 341,354 - 341,354
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Reverse
repurchase
agreements -
non-trading 503,956 132,390 291,608 - 22 927,976 - 927,976
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Financial
investments
held at
amortised
cost 856,621 109,105 9,446 2 - 975,174 (465) 974,709
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Prepayments,
accrued
income and
other assets 169,517 57,958 33,648 796 443 262,362 (208) 262,154
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Debt
instruments
measured
at fair value
through
other
comprehensive
income(1) 1,192,017 52,361 17,234 1,030 39 1,262,681 (344) 1,262,337
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Out-of-scope
for HKFRS
9 impairment - -
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Trading assets 335,477 65,188 32,910 788 999 435,362 - 435,362
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Other
financial
assets
designated
and otherwise
mandatorily
measured
at fair value
through
profit or
loss 30,724 3,166 1,050 - - 34,940 - 34,940
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Derivatives 269,923 52,467 11,351 823 5 334,569 - 334,569
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Total gross
carrying
amount
on-balance
sheet 6,552,453 1,261,951 1,135,974 84,633 64,893 9,099,904 (41,033) 9,058,871
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Percentage of
total
credit
quality 72% 14% 12% 1% 1% 100%
-------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ---------------------- Loan and other credit related commitments 1,924,469 744,111 484,054 29,892 7,934 3,190,460 (864) 3,189,596 -------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ---------------------- Financial guarantee and similar contracts 171,761 133,701 62,022 5,459 553 373,496 (293) 373,203 -------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ---------------------- Total nominal off-balance sheet amount 2,096,230 877,812 546,076 35,351 8,487 3,563,956 (1,157) 3,562,799 -------------- ---------------- ---------------------- ---------------------- ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
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
2021 (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 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 to which the impairment requirements
in HKFRS 9 are applied, by credit quality and stage
allocation
(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
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
Loans and
advances to
banks 504,751 9,461 1,368 3,488 - 519,068 (44) 519,024
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
- stage 1 503,622 8,731 1,338 3,243 - 516,934 (39) 516,895
---------------
- stage 2 1,129 730 30 245 - 2,134 (5) 2,129
---------------
- stage 3 - - - - - - - -
---------------
- POCI - - - - - - - -
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
Loans and
advances to
customers at
amortised
cost 2,093,077 773,808 737,137 77,706 63,385 3,745,113 (39,964) 3,705,149
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
- stage 1 2,062,100 656,962 489,798 10,785 - 3,219,645 (2,755) 3,216,890
---------------
- stage 2 30,977 116,846 247,339 66,921 - 462,083 (11,200) 450,883
---------------
- stage 3 - - - - 62,763 62,763 (25,818) 36,945
---------------
- POCI - - - - 622 622 (191) 431
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
Other financial
assets
measured at
amortised
cost 2,126,484 305,500 334,924 798 465 2,768,171 (681) 2,767,490
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
- stage 1 2,120,755 289,904 328,161 240 - 2,739,060 (391) 2,738,669
---------------
- stage 2 5,729 15,596 6,763 558 - 28,646 (231) 28,415
---------------
- stage 3 - - - - 464 464 (59) 405
---------------
- POCI - - - - 1 1 - 1
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
Loan and other
credit-related
commitments 1,421,125 312,185 142,824 10,509 5,758 1,892,401 (864) 1,891,537
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
- stage 1 1,414,708 284,689 116,144 5,814 - 1,821,355 (427) 1,820,928
---------------
- stage 2 6,417 27,496 26,680 4,695 - 65,288 (397) 64,891
---------------
- stage 3 - - - - 5,758 5,758 (40) 5,718
---------------
- POCI - - - - - - - -
--------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
Financial
guarantees 14,274 11,643 8,649 1,012 68 35,646 (63) 35,583 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- - stage 1 13,938 9,994 6,627 179 - 30,738 (18) 30,720 --------------- - stage 2 336 1,649 2,022 833 - 4,840 (17) 4,823 --------------- - stage 3 - - - - 68 68 (28) 40 --------------- - POCI - - - - - - - - --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- At 31 Dec 2022 6,159,711 1,412,597 1,224,902 93,513 69,676 8,960,399 (41,616) 8,918,783 Debt instruments at FVOCI(1) --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- - stage 1 1,191,560 52,146 17,178 - - 1,260,884 (67) 1,260,817 --------------- - stage 2 457 215 56 1,030 - 1,758 (277) 1,481 --------------- - stage 3 - - - - 39 39 - 39 --------------- - POCI - - - - - - - - --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- At 31 Dec 2022 1,192,017 52,361 17,234 1,030 39 1,262,681 (344) 1,262,337 --------------- -------------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
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 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.
Mainland China commercial real estate
The following table presents the group's exposure to borrowers classified in the CRE sector where the ultimate parent is based in mainland China, as well as all CRE exposures booked on mainland China balance sheets. The exposures at 31 December 2022 are split by country/territory and credit quality including allowances for ECL by stage.
Mainland China CRE exposure
At 31 Dec 2022
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Hong Kong Mainland Rest of Total
China Asia-Pacific
(audited)(1) (audited)(1) (unaudited)(1) (unaudited)(1)
HK$m HK$m HK$m HK$m
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
Loans and
advances to
customers(2) 71,148 44,843 3,570 119,561
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
Guarantees 1,957 5,884 268 8,109
issued and
others(3)
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
Total 73,105 50,727 3,838 127,670
mainland
China CRE
exposure
Distribution of mainland
China CRE exposure by credit
quality
----------------------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- Strong 11,105 16,510 638 28,253
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- Good 5,431 8,475 2,543 16,449
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- 9,896 17,521 168 27,585
Satisfactory
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- 22,509 6,072 349 28,930
Sub-standard
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- Credit 24,164 2,149 140 26,453
Impaired
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
73,105 50,727 3,838 127,670
Allowance for ECL by credit
quality
----------------------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- Strong - (39) - (39)
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- Good (2) (60) (5) (67)
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- (153) (637) (3) (793)
Satisfactory
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- (3,570) (326) (14) (3,910)
Sub-standard
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
- Credit (9,884) (816) - (10,700)
Impaired
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
(13,609) (1,878) (22) (15,509)
---------------------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
Allowance for ECL
----------------------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
ECL Stage 1 (6) (69) (4) (79)
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
ECL Stage 2 (3,719) (993) (18) (4,730)
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
ECL Stage 3 (9,884) (816) - (10,700)
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
(13,609) (1,878) (22) (15,509)
---------------------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
ECL coverage 18.6 3.7 0.6 12.1
%
------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------------------
At 31 Dec 2021
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Hong Kong
(restated)(4) Mainland China Rest of Asia-Pacific Total
(audited)(1) (audited)(1) (unaudited)(1) (unaudited)(1)
HK$m HK$m HK$m HK$m
Loans and
advances to
customers(2) 89,646 53,116 658 143,420
--------------------------------------------
Guarantees 1,207 18,533 127 19,867
issued and
others(3)
--------------------------------------------
Total 90,853 71,649 785 163,287
mainland
China CRE
exposure
--------------------------------------------
Distribution of mainland
China CRE exposure by credit
quality
- Strong 27,630 30,141 239 58,010
--------------------------------------------
- Good 20,681 18,357 - 39,038
--------------------------------------------
- 26,384 22,263 546 49,193
Satisfactory
--------------------------------------------
- 12,245 94 - 12,339
Sub-standard
--------------------------------------------
- Credit 3,913 794 - 4,707
Impaired
--------------------------------------------
90,853 71,649 785 163,287
--------------------------------------------
Allowance for ECL by credit
quality
- Strong (116) (53) - (169)
--------------------------------------------
- Good (292) (78) - (370)
--------------------------------------------
- (849) (154) (15) (1,018)
Satisfactory
--------------------------------------------
- (2,320) (8) - (2,328)
Sub-standard
--------------------------------------------
- Credit (794) (86) - (880)
Impaired
--------------------------------------------
(4,371) (379) (15) (4,765)
--------------------------------------------
Allowance for ECL
ECL Stage 1 (17) (84) (4) (105)
--------------------------------------------
ECL Stage 2 (3,560) (209) (11) (3,780)
--------------------------------------------
ECL Stage 3 (794) (86) - (880)
--------------------------------------------
(4,371) (379) (15) (4,765)
--------------------------------------------
ECL coverage 4.8 0.5 1.9 2.9
%
--------------------------------------------
1 Disclosures in respect of mainland China CRE exposures in Hong Kong and mainland China form part of the scope of the audit of the group's Annual Report. Amounts disclosed for mainland China CRE exposures elsewhere in the group have not been audited but are provided for completeness.
2 Amounts represent gross carrying amount. 3 Amounts represent nominal amount for guarantees and other contingent liabilities.
4 Comparative balances have been restated to reflect an exposure re-classification from "guarantees and others" to "loans and advances to customers", which better reflects the nature of product.
(Unaudited)
CRE financing refers to lending that focuses on commercial development and investment in real estate and covers commercial, residential and industrial assets. CRE financing can also be provided to a corporate or financial entity for the purchase or financing of a property which supports the overall operations of the business.
The exposures in the table are related to companies whose primary activities are focused on residential, commercial and mixed-use real estate activities. Lending is generally focused on tier 1 and 2 cities.
The exposures in the table above had 57% (31 December 2021: 89%) of exposure booked with a credit quality of 'satisfactory' or above. This deterioration reflects increased funding risks and weaker sales performance for a number of our customers over the period.
Facilities booked in Hong Kong are exposures which represent relatively higher risk within the mainland China CRE portfolio. This portfolio had 36% (31 December 2021: 82%) of exposure booked with a credit quality of 'satisfactory' or above, reflecting sustained credit deterioration in this book over the course of the year. At 31 December 2022, the group had allowances for ECL of HK$13,609m (31 December 2021: HK$4,371m) held against mainland China CRE exposures booked in Hong Kong.
Over one third of the unimpaired exposure in the Hong Kong portfolio reflects lending to state owned enterprises, and much of the remaining is to relatively strong privately owned enterprises. This is reflected in the relatively low ECL allowance in this part of the portfolio.
Regulatory and policy developments in the latter part of 2022 appear to have stabilised the sector. Sustained liquidity support and improved domestic residential demand will be necessary to support a recovery.
The group has additional exposures to mainland China CRE as a result of lending to multinational corporates which is not incorporated in the table above.
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.
Collateral and other credit enhancements
(Audited)
Although collateral can be an important mitigant of credit risk, it is the group's 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)
2022 2021
Gross Gross
carrying/ carrying/
nominal ECL nominal ECL
amount coverage amount coverage
HK$m % HK$m %
----------------------------
Stage 1
---------------------------- ---------
Fully collateralised 1,147,024 0.0 1,201,044 0.0
----------------------------
LTV ratio:
- less than 70% 918,527 0.0 1,004,531 0.0
- 71% to 90% 147,785 0.0 169,824 0.0
- 91% to 100% 80,712 0.0 26,689 0.0
----------------------------
Partially collateralised (A): 50,317 0.0 256 0.0
----------------------------
- collateral value on A 48,009 242
----------------------------
Total 1,197,341 0.0 1,201,300 0.0
----------------------------
Stage 2
Fully collateralised 33,972 0.2 23,758 0.4
----------------------------
LTV ratio:
- less than 70% 24,401 0.1 20,691 0.3
- 71% to 90% 8,730 0.4 2,860 1.0
- 91% to 100% 841 0.5 207 2.4
----------------------------
Partially collateralised (B): 425 0.7 28 3.6
----------------------------
- collateral value on B 401 23
----------------------------
Total 34,397 0.2 23,786 0.4
----------------------------
Stage 3
Fully collateralised 5,696 4.3 5,113 5.2
----------------------------
LTV ratio:
- less than 70% 3,935 3.6 4,153 4.5
- 71% to 90% 1,270 5.6 827 7.7
- 91% to 100% 491 6.3 133 14.3
----------------------------
Partially collateralised (C): 113 40.7 104 29.8
----------------------------
- collateral value on C 95 91
----------------------------
Total 5,809 5.0 5,217 5.7
----------------------------
At 31 Dec 1,237,547 0.0 1,230,303 0.0
----------------------------
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)
2022 2021
Gross Gross
carrying carrying/
nominal ECL nominal ECL
amount coverage amount coverage
HK$m % HK$m %
----------------------------- -----------------------------
Stage 1
Not
collateralised 240,133 0.0 268,397 0.0
----------------------------- -----------------------------
Fully
collateralised 263,119 0.1 315,939 0.1
----------------------------- -----------------------------
Partially
collateralised
(A): 13,898 0.1 14,260 0.1
----------------------------- -----------------------------
- collateral
value on A 7,292 7,790
-----------------------------
Total 517,150 0.1 598,596 0.0
----------------------------- -----------------------------
Stage 2
Not
collateralised 51,128 7.7 68,871 5.8
----------------------------- -----------------------------
Fully
collateralised 85,421 1.9 69,438 0.7
----------------------------- -----------------------------
Partially
collateralised
(B): 7,941 2.0 7,626 2.2
----------------------------- -----------------------------
- collateral
value on B 4,692 3,159
-----------------------------
Total 144,490 4.0 145,935 3.2
----------------------------- -----------------------------
Stage 3
Not
collateralised 16,725 57.2 1,541 35.8
----------------------------- -----------------------------
Fully
collateralised 8,724 11.1 3,085 11.3
----------------------------- -----------------------------
Partially
collateralised
(C): 982 36.2 21 33.3
----------------------------- -----------------------------
- collateral
value on C 697 14
-----------------------------
Total 26,431 41.2 4,647 19.5
----------------------------- -----------------------------
POCI
Not - - - -
collateralised
----------------------------- -----------------------------
Fully - - 764 -
collateralised
----------------------------- -----------------------------
Partially 145 - - -
collateralised
(D):
----------------------------- -----------------------------
- collateral 65 -
value on D
-----------------------------
Total 145 - 764 -
----------------------------- -----------------------------
At 31 Dec 688,216 2.5 749,942 0.8
----------------------------- -----------------------------
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)
2022 2021
Gross Gross
carrying/ carrying/
nominal nominal
amount ECL coverage amount ECL coverage
HK$m % HK$m %
------------------------- -------------------------- --------------------------- ---------------------------
Stage 1
------------------------- -------------------------- --------------------------- ---------------------------
Not
collateralised 2,155,095 0.1 2,044,385 0.0
------------------------- -------------------------- ---------------------------
Fully
collateralised 379,471 0.1 431,547 0.1
------------------------- -------------------------- --------------------------- ---------------------------
Partially
collateralised
(A): 246,654 0.1 262,118 0.0
------------------------- -------------------------- ---------------------------
- collateral
value on A 97,058 108,645
------------------------- ---------------------------
Total 2,781,220 0.1 2,738,050 0.0
------------------------- -------------------------- ---------------------------
Stage 2
Not
collateralised 314,140 0.5 314,470 0.4
------------------------- -------------------------- --------------------------- ---------------------------
Fully
collateralised 128,648 1.0 113,991 0.7
------------------------- -------------------------- --------------------------- ---------------------------
Partially
collateralised
(B): 55,804 0.6 37,862 0.4
------------------------- -------------------------- --------------------------- ---------------------------
- collateral
value on B 22,737 15,205
------------------------- ---------------------------
Total 498,592 0.6 466,323 0.4
------------------------- -------------------------- --------------------------- ---------------------------
Stage 3
Not
collateralised 14,373 68.2 17,171 80.2
------------------------- -------------------------- --------------------------- ---------------------------
Fully
collateralised 5,689 7.2 2,551 17.3
------------------------- -------------------------- --------------------------- ---------------------------
Partially
collateralised
(C): 8,956 37.0 7,621 36.8
------------------------- -------------------------- --------------------------- ---------------------------
- collateral
value on C 4,480 4,102
------------------------- ---------------------------
Total 29,018 46.6 27,343 62.2
------------------------- -------------------------- --------------------------- ---------------------------
POCI
Not
collateralised 138 1.4 351 47.6
------------------------- -------------------------- --------------------------- ---------------------------
Fully
collateralised 183 92.9 442 37.8
------------------------- -------------------------- --------------------------- ---------------------------
Partially
collateralised
(D): 156 12.2 - -
------------------------- -------------------------- --------------------------- ---------------------------
- collateral 125 -
value on D
------------------------- ---------------------------
Total 477 40.0 793 42.1
------------------------- -------------------------- --------------------------- ---------------------------
At 31 Dec 3,309,307 0.6 3,232,509 0.6
------------------------- -------------------------- --------------------------- ---------------------------
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 to our 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 2022
(Unaudited)
-- We continued to build our second line of defence capabilities, providing independent oversight of treasury activities across capital risk, liquidity and funding risk, interest rate risk in the banking book ('IRRBB') and recovery and resolution planning in Asia-Pacific sites during 2022.
-- The Board approved risk appetite for IRRBB for the group was further enhanced in 2022 to include NII sensitivity metric to monitor impact of 100bps interest rate shock on forecasted earnings of the Bank over next 1 year against the Board approved Risk Appetite.
-- During the periods of high market volatility in the first half of 2022, we enhanced monitoring and forecasting of our capital positions. The mark-to-market movement in financial instruments that impacted our capital ratio arose from the portfolio of high-quality liquid assets ('HQLA') held by our Markets Treasury for liquidity risk management and as economic hedges of net interest income. This portfolio was largely accounted for at fair value through other comprehensive income ('FVOCI'), together with any hedge derivative held to offset the duration risk of the assets. During the year, we took steps to reduce the duration risk of this portfolio to minimise the capital impact from higher interest rates. As a result of these measures, the hold-to-collect-and-sell stressed value at risk ('VaR') exposure reduced from -HK$10.bn at the end of 2021 to -HK$3.7bn at the end of 2022.
-- We implemented a new hold-to-collect business model, which will involve our portfolio of hold-to-collect assets forming a material part of our liquid asset buffer as well as a hedge to our structural interest rate risk. This will allow more flexibility in managing the hold-to-collect-and-sell portfolio to optimise returns from market movements while safeguarding the group capital and future earnings.
Governance and structure
(Unaudited)
The Board approves the policy and risk appetite for capital risk, liquidity and funding risk, and IRRBB. It is supported and advised by the Risk Committee ('RC').
The Global Treasury sub-function manages capital, liquidity and funding risk and structural foreign exchange 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 sub-function ('TRM') and the Risk Management Meeting ('RMM').
The Global Treasury sub-function also manages interest rate risk in the banking book, maintaining the transfer pricing framework and informing the regional 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 sub-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. Regulatory capital and economic capital are the two primary measures used 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, performance and planning, and the findings arising from stress testing. Our assessment of capital adequacy is driven by an assessment of risks that include credit, market, operational, pension, insurance, structural foreign exchange and interest rate risk in the banking book. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach for climate risk management.
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. Banking subsidiaries prepare ICAAPs in line with global guidance, while considering their local regulatory regimes to determine their own risk appetites and ratios.
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. Capital and Risk-Weighted Assets ('RWAs') are monitored and managed against the plan, with capital forecasts reported to relevant governance committees. 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 our capital management objectives, 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 collective investment scheme exposures, the group uses the look-through approach and mandate-based approach to calculate the risk-weighted amount. 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 (counterparty credit risk) approach to calculate its default risk exposures for derivatives, and the comprehensive approach for securities financing transactions. For market risk, the group uses an internal models method approach ('IMM') 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 IMM 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 group issued various capital and LAC instruments in order to operate above required levels, including buffers.
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 2022, 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/territory basis and is built up during periods of excess credit growth to protect against future losses. The CCyB for Hong Kong and the list of D-SIB are regularly reviewed and last announced by the HKMA on 8 February 2023 and 30 December 2022 respectively. In its latest announcement, the HKMA maintained the CCyB for Hong Kong at 1.0% and 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 exposures (both on-balance sheet and off-balance sheet).
At
31 Dec 31 Dec
2022 2021
% %
-------------------------------- --------------------------------
Leverage ratio 5.9 5.8
------------------------ -------------------------------- --------------------------------
Capital and leverage
ratio exposure measure HK$m HK$m
--------------------------------
Tier 1 capital 545,572 530,701
------------------------ -------------------------------- --------------------------------
Total exposure measure 9,301,363 9,192,814
------------------------ -------------------------------- --------------------------------
The increase in the leverage ratio from 31 December 2021 to
31 December 2022 was mainly due to the increase in Tier 1 capital, partly offset by the rise in the exposure measure.
Further details regarding the group's leverage position can be viewed in the Banking Disclosure Statement at 31 December 2022, which will be available in the Regulatory Disclosure Section of our website: www.hsbc.com.hk.
Capital adequacy at 31 December 2022
(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 2022. 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 2022, the effect of this regulatory reserve requirement is to reduce the amount of reserves which can be distributed to shareholders by HK$16,413m (31 December 2021: HK$18,587m).
We closely monitor and consider future regulatory change and continue to evaluate the impact upon our capital requirements of regulatory developments. This includes the Basel III Reforms package, which is currently scheduled for implementation by the HKMA no earlier than 1 January 2024. We continue to participate in consultations and monitor progress on the implementation. Based on the results of the latest HKMA consultations, we foresee a positive impact on our capital ratios on initial application. The risk-weighted asset ('RWA') output floor under the Basel III Reforms will commence once implemented, with an expected five-year transitional provision. Any impact from the output floor would be towards the end of the transition period. We are expecting the issuance of final rules in 2023 which will enable us to better estimate the impact.
Capital ratios
(Unaudited)
At
31 Dec 31 Dec
2022 2021
% %
--------------------------
Common equity tier
1 ('CET1') capital
ratio 15.3 15.4
--------------------------
Tier 1 capital ratio 16.9 16.8
--------------------------
Total capital ratio 18.8 18.7
--------------------------
Risk-weighted assets by risk type
(Unaudited)
At
31 Dec 31 Dec
2022 2021
HK$m HK$m
------------------------
Credit risk 2,589,633 2,497,803
------------------------
Counterparty credit
risk 133,290 148,188
------------------------
Market risk 160,533 172,831
------------------------
Operational risk 337,004 337,731
------------------------
Sovereign concentration 1,708 -
risk
------------------------
Total 3,222,168 3,156,553
------------------------
Risk-weighted assets by reportable
segments
(Unaudited)
At
31 Dec 31 Dec
2022 2021
HK$m HK$m
-----------------------
Wealth and Personal
Banking 640,626 621,757
-----------------------
Commercial Banking 1,209,888 1,157,241
-----------------------
Global Banking 562,404 566,587
-----------------------
Markets and Securities
Services 410,401 410,599
-----------------------
Corporate Centre 338,254 334,450
-----------------------
Other (GBM-other) 60,595 65,919
-----------------------
Total 3,222,168 3,156,553
-----------------------
Capital base
(Unaudited)
The following table sets out the composition of the group's capital base under Basel III at 31 December 2022.
Capital base
(Unaudited)
At
31 Dec 31 Dec
2022 2021
HK$m HK$m
----------------------------------------------- ---------------------------------- ---------------------------------
Common equity tier 1 ('CET1') capital
----------------------------------------------- ---------------------------------- ---------------------------------
Shareholders' equity 727,880 714,139
----------------------------------------------- ---------------------------------- ---------------------------------
- shareholders' equity per balance sheet 875,320 856,809
-----------------------------------------------
- revaluation reserve capitalisation issue (1,454) (1,454)
-----------------------------------------------
- other equity instruments (52,386) (44,615)
-----------------------------------------------
- unconsolidated subsidiaries (93,600) (96,601)
-----------------------------------------------
Non-controlling interests 30,106 28,730
----------------------------------------------- ---------------------------------- ---------------------------------
- non-controlling interests per balance sheet 65,943 66,702
-----------------------------------------------
- non-controlling interests in unconsolidated
subsidiaries (11,365) (11,800)
-----------------------------------------------
- surplus non-controlling interests disallowed
in CET1 (24,472) (26,172)
-----------------------------------------------
Regulatory deductions to CET1 capital (266,424) (258,215)
----------------------------------------------- ---------------------------------- ---------------------------------
- valuation adjustments (2,376) (1,834)
-----------------------------------------------
- goodwill and intangible assets (32,064) (28,883)
-----------------------------------------------
- deferred tax assets net of deferred tax
liabilities (3,688) (3,353)
-----------------------------------------------
- cash flow hedging reserve 233 (60)
-----------------------------------------------
- changes in own credit risk on fair valued
liabilities (3,494) 1,322
-----------------------------------------------
- defined benefit pension fund assets (27) (18)
-----------------------------------------------
- significant Loss-absorbing capacity ('LAC')
investments
in unconsolidated financial sector entities (140,987) (139,239)
-----------------------------------------------
- property revaluation reserves(1) (67,608) (67,563)
-----------------------------------------------
- regulatory reserve (16,413) (18,587)
-----------------------------------------------
Total CET1 capital 491,562 484,654
----------------------------------------------- ---------------------------------- ---------------------------------
Additional tier 1 ('AT1') capital
-----------------------------------------------
Total AT1 capital before regulatory deductions 54,019 46,073
----------------------------------------------- ---------------------------------- ---------------------------------
- perpetual subordinated loans 52,386 44,615
-----------------------------------------------
- allowable non-controlling interests in AT1
capital 1,633 1,458
-----------------------------------------------
Regulatory deductions to AT1 capital (9) (26)
----------------------------------------------- ---------------------------------- ---------------------------------
- significant LAC investments in unconsolidated financial sector entities (9) (26) ----------------------------------------------- Total AT1 capital 54,010 46,047 ----------------------------------------------- ---------------------------------- --------------------------------- Total tier 1 capital 545,572 530,701 ----------------------------------------------- ---------------------------------- --------------------------------- Tier 2 capital ----------------------------------------------- ---------------------------------- Total tier 2 capital before regulatory deductions 68,118 67,802 ----------------------------------------------- ---------------------------------- --------------------------------- - perpetual subordinated debt(2) - 3,119 ----------------------------------------------- - term subordinated debt 19,505 14,972 ----------------------------------------------- - property revaluation reserves(1) 31,078 31,057 ----------------------------------------------- - impairment allowances and regulatory reserve eligible for inclusion in tier 2 capital 16,008 17,471 ----------------------------------------------- - allowable non-controlling interests in tier 2 capital 1,527 1,183 ----------------------------------------------- Regulatory deductions to tier 2 capital (6,378) (8,025) ----------------------------------------------- ---------------------------------- --------------------------------- - significant LAC investments in unconsolidated financial sector entities (6,378) (8,025) ----------------------------------------------- Total tier 2 capital 61,740 59,777 ----------------------------------------------- ---------------------------------- --------------------------------- Total capital 607,312 590,478 ----------------------------------------------- ---------------------------------- ---------------------------------
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 has been 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 2022.
Non-trading book foreign exchange exposures
Structural foreign exchange exposures
(Unaudited)
A Structural foreign exchange exposure arises from the capital invested or net assets in a foreign operation together with any associated hedging. A foreign operation is defined as a subsidiary, associate, joint arrangement or branch, the activities of which are conducted in a currency other than that of the reporting entity. An entity's functional reporting 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 foreign operation.
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 greater than 10% of the total net structural foreign currency exposures:
Local Currency HK$ equivalent
(m) (m)
At 31 Dec 2022
Renminbi 241,134 272,709
US dollars 10,891 84,902
At 31 Dec 2021
Renminbi 221,207 271,421
US dollars 10,224 79,731
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 Global Treasury sub-function within an agreed limit framework.
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 aim 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 and funding risk. 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 operating entity. Liquidity and funding risk 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 sub-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 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 risk appetite measures are the liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'). An internal liquidity metric ('ILM') is used to supplement these regulatory 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 requirement; -- a legal entity depositor concentration limit; -- cumulative term funding maturity concentrations limit; -- liquidity metrics to monitor minimum 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, customer savings deposits payable on demand or at short notice and term deposits. 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
(Unaudited)
Group policy requires all operating entities to monitor material single currency ILM and 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 International Swaps and Derivatives Association ('ISDA') compliant credit support annex ('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 2022
(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
2022 2021
% %
------------------ -------------------
Average LCR 157.8 154.3
------------------ -------------------
The average LCR increased by 3.5 percentage points from 154.3% for the quarter ended 31 December 2021 to 157.8% for the quarter ended 31 December 2022.
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
2022 2021
HK$m HK$m
---------------- ------------------
Level 1 assets 1,744,471 1,767,933
---------------- ------------------
Level 2A assets 80,348 79,368
---------------- ------------------
Level 2B assets 61,184 64,106
---------------- ------------------
Total 1,886,003 1,911,407
---------------- ------------------
The NSFR of the group for the period are as follows:
Quarter ended
31 Dec 31 Dec
2022 2021
% %
------------------ -------------------
Net stable funding ratio 152.3 151.9
------------------ -------------------
The NSFR increased by 0.4 percentage points from 151.9% for the quarter ended 31 December 2021 to 152.3% for the quarter ended 31 December 2022.
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)
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities, specifically loans, deposits and financial instruments that are not held for trading intent or in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to the Global Treasury sub-function. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Global Treasury sub-function cannot economically hedge is not transferred and will remain within the global business where the risks originate.
The Global Treasury sub-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; and -- hold-to-collect-and-sell value at risk.
Net interest income sensitivity
A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income ('NII') under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level, where entities calculate both one-year and five-year NII sensitivities across a range of interest rate scenarios.
NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure. The exception to this is where the size of the balances or repricing is deemed interest rate sensitive, for example, early prepayment of mortgages. These sensitivity calculations do not incorporate actions that would be taken by Markets Treasury or in the business that originates the risk to mitigate the effect of interest rate movements.
The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable.
Economic value of equity sensitivity
Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity holders under a managed run-off scenario. This equates to the current book value of equity plus the present value of future NII in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources.
Further details of HSBC's risk management of interest rate risk in the banking book can be found in the Pillar 3 Disclosures at 31 December 2022.
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.
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);
-- a change in interest rate expectations, causing an increase in the value of plan liabilities; and
-- plan members living longer than expected (known as longevity risk).
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, including the review of de-risking opportunities. 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 of adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads.
Market risk management
Key developments in 2022
(Unaudited)
There were no material changes to our policies and practices for the management of market risk in 2022.
Governance and structure
(Unaudited)
The following diagram summarises the main business areas where trading market risks reside, and the market risk measures used to monitor and limit exposures.
Trading risk
* Foreign exchange and commodities
* Interest rates
* Credit spreads
* Equities
GBM
Value at risk | Sensitivity
| Stress Testing
.
The objective of our risk management policies and measurement techniques 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 for management, or to separate books managed under the supervision of the local ALCO. The Traded Risk sub-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, value at risk ('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. 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 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 hypothetical loss back-testing exceptions, together with a number of other indicators, are used to assess model performance and to consider whether enhanced internal monitoring of a VaR model is required.
We back-test our VaR at set levels of our group entity hierarchy.
Market risk in 2022
(Unaudited)
During 2022, financial markets were driven by concerns over high inflation and recession risks, against the backdrop of the Russia-Ukraine conflict and continued Covid-19 pandemic restrictions in Asia. Throughout the year, major central banks tightened their monetary policies at a faster pace than previously anticipated in order to counter rising inflation. As a result, bond markets sold off sharply and bond yields rose to multi-year highs. Equity valuations saw pronounced volatility and fell across most market sectors due to recession risks and tighter liquidity conditions. Foreign exchange markets were largely dominated by a strong US dollar, as a result of global geopolitical instability and the relatively fast pace of monetary tightening by the US Federal Reserve. Investors sentiment remained fragile in credit markets, with credit spreads in investment-grade and high-yield debt benchmarks reaching their widest levels since the start of the Covid-19 pandemic. The Chinese property sector was underperforming in 2022, continuing the wave of defaults and debt restructuring from 2021.
We continued to manage market risk prudently during 2022. Sensitivity exposures and VaR remained within appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits, including stress and scenario analysis.
Trading portfolios
(Audited)
Value at risk of the trading portfolios
Trading VaR was predominantly generated by the Markets and Securities Services business. Trading VaR was higher as at 31 December 2022 compared to 31 December 2021, mainly driven by increase in VaR exposed to interest rate risk and foreign exchange risk, partially offset by reduction in VaR from equity risk and credit spread risk.
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 2022
Year end 95 195 48 18 (154) 202
Average 55 172 55 24 208
Maximum 99 272 98 42 357
At 31
Dec 2021
Year end 36 135 60 31 (74) 188
Average 49 158 77 34 177
Maximum 78 218 108 62 241
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. Climate risk (unaudited) TCFD
Overview
Climate risk relates to the financial and non-financial impacts that may arise as a result of climate change. Climate risk can materialise through:
-- physical risk, which arises from the increased frequency and severity of weather events, such as typhoons and floods, or chronic shifts in weather patterns;
-- transition risk, which arises from the process of moving to a low-carbon economy, including changes in government or public policy, technology and end-demand; and
-- greenwashing risk, which arises from the act of knowingly or unknowingly misleading stakeholders regarding the group's strategy relating to climate, the climate impact/benefits of a product or service, or the climate commitments or performance of its customers.
Approach and policy
The group is affected by climate risks either directly or indirectly through its relationships with its customers, resulting in both financial and non-financial impacts.
The group may face direct exposure to the physical impacts of climate change, which could negatively affect its day-to-day operations. Any detrimental impact to its customers from climate risk could negatively impact the group either through credit losses on its loan book or losses on trading assets. The group may also be impacted by reputational concerns related to the climate action or inaction of its customers. In addition, if the group is perceived to mislead stakeholders on its business activities or if it is perceived to fail to achieve its stated net zero ambitions, it could face greenwashing risk resulting in significant regulatory and legal risks.
The group has integrated climate risk into its existing risk taxonomy, and incorporated it within the risk management framework through the policies and controls for existing risks where appropriate.
The group's climate risk approach is aligned to the Group-wide risk management framework and three lines of defence model, which sets out how the group identifies, assesses, and manages its risks. This approach ensures the group and senior management have visibility and oversight of the group's key climate risks.
The first line of defence has ultimate accountability for managing climate risk in line with risk appetite and owns the related controls.
The second line of defence sets policies and minimum control standards, provides subject matter expertise and reviews and challenges to first line activities to ensure actions relating to climate are appropriate. Risk Stewards in the existing risk taxonomy are responsible for the oversight of climate risk impacts on their risk types.
The third line of defence provides independent assurance to management that climate risk management, governance and control processes are designed and operating effectively.
The group's approach to managing climate risk is currently focused on understanding physical and transition impacts across five priority risk types: wholesale credit risk, retail credit risk, resilience risk, regulatory compliance risk and reputational risk.
On climate risk impact assessment, the group rely on the Group's high-level materiality rating on how climate risk may impact risk types within the Group's taxonomy over a 12-month horizon, and how the level of risk may increase over longer time horizons. However, the group observes that the pace of transition in Asia-Pacific varies market by market.
The group considers greenwashing to be an important risk that is likely to increase over time, as the group looks to develop capabilities and products to achieve its net zero ambition, and work with its clients to help them transition to a low-carbon economy. To reflect this, the group's climate risk approach has been updated to include greenwashing risk, and guidance has been provided to the first and second lines of defence on the key risk indicators, and how it should be managed.
The tables below provide an overview of the climate risk drivers considered within the Group's climate risk framework. Primary risk drivers refer to risk drivers aligned to the Financial Stability Board's TCFD, which sets a framework to help public companies and other organisations disclose climate-related risks and opportunities. Thematic risk drivers are bespoke to the group's internal climate risk framework.
The following table provides an overview of the physical and transition climate risk drivers.
Physical Acute Increased frequency and severity
of weather events causing disruption
to business operations
Chronic Longer-term shifts in climate
patterns (e.g. sustained higher
temperatures) that may cause sea
level rise or chronic heat waves
Transition Policy Mandates on, and regulation of,
and legal 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 demand from
(market) individuals and corporates
Reputational Increased scrutiny following a * Decreased real estate values
change in stakeholder perceptions
and expectations of climate-related
action or inaction * Decreased household income and wealth
* Increased costs of legal and compliance
* Increased public scrutiny
* Decreased profitability
* Lower asset performance
The table below provides an overview of the drivers of greenwashing risk, which is considered to be a thematic risk driver within the Group's framework.
Greenwashing Firm Failure to be accurate and transparent in communicating
the group's progress against its net zero ambition
Product Not taking steps to ensure the group's 'green' and 'sustainable'
products are developed and marketed appropriately
Client Failing to check the group's products are being used
for 'green' and 'sustainable' business activity and
assessing the credibility of its customers' climate
commitments and/or progress against key performance
indicators
Climate risk management (unaudited)
Key developments in 2022
The group's dedicated climate risk programme continues to support the development of its climate risk management capabilities. The key developments in 2022 included:
-- The Board approved the group climate strategy. -- The Group updated its climate risk approach to include all risk types in its risk taxonomy.
-- The group provided a climate-related training for the Board, and expanded training to employees covering additional role-specific topics, as well as increasing the availability of training to the wider workforce.
-- The group developed new climate risk metrics to assess the impact of physical risk on the group's retail mortgage portfolio in Hong Kong.
-- The Group enhanced its transition and physical risk questionnaire and scoring tool, which helps the group to assess and improve its understanding of the impact of transition and physical risk on its customers' business models, and used them for certain corporate clients in high climate transition risk sectors.
-- The Group developed its first internal climate scenario exercise, where it used bespoke scenarios that were designed to articulate a view of the range of potential outcomes for global climate change. For further details of the internal climate scenario analysis, see page 11.
Governance and structure
The Board takes overall responsibility for the group's climate strategy, overseeing executive management in developing the execution and associated reporting.
The group Chief Risk Officer is responsible for the management of climate-related risks, including responsibility for governance, risk management, stress testing and scenario analysis.
The group CROF oversees all risk activities relating to climate risk management and escalation of climate risks.
The group Risk Management Meeting and the group Risk Committee receive regular updates on the climate risk profile, top and emerging climate risks, and progress of the climate risk programme.
A working group was established to coordinate the regional implementation of climate risk-related enhancements across the Compliance sub-function.
Risk appetite
The group's climate risk appetite supports the oversight and management of the financial and non-financial risks from climate change, and supports the business to deliver its climate ambition in a safe and sustainable way. The group's initial risk appetite focuses on the oversight and management of climate risks across the five priority areas, including exposure to high transition risk sectors in its wholesale portfolio and physical risk exposures in its retail portfolio. These metrics have been implemented at group level and locally where appropriate. The group continues to review its risk appetite regularly to capture the most material climate risks and will enhance its metrics over time.
Policies, processes and controls
The group is integrating climate risk into the policies, processes and controls across many areas of its organisations, and the group will continue to update these as its climate risk management capabilities mature over time.
In 2022, the group incorporated climate considerations into new money request processes for its wholesale business. The group also continued to enhance its climate risk scoring tool, which will enable the group to assess its customers' exposures to climate risk.
The Group also published and updated the energy policy, covering oil and gas, power and utilities, hydrogen, renewables, nuclear and biomass sectors and it updated the thermal coal phase-out policy after its initial publication in 2021.
Wholesale credit risk
Identification and assessment
The Group has identified six sectors where its wholesale credit customers have the highest climate risk, based on their carbon emissions. These are automotive, chemicals, construction and building materials, metals and mining, oil and gas, and power and utilities. In these sectors, the Group has a transition and physical risk questionnaire to help assess and improve its understanding of the impact of climate changes on its customers' business models and any related transition strategies. Relationship managers work with customers to record questionnaire responses, which also help to identify potential business opportunities to support customers' transition. The questionnaire is also being completed for the Group's largest customers in the agriculture, industrials, real estate and transportation sectors.
The Group intends to continue increasing the scope of the questionnaire in 2023 by including more customers.
Management
In 2022, the Group updated its credit policy to require relationship managers to comment on climate risk factors in credit applications for new money requests. The Group continues to use a climate risk scoring tool, which provides a climate risk score for each customer based on the questionnaire responses. The climate risk score is used to inform portfolio level management decisions and is made available to relationship management and credit risk managements teams. The scoring tool will be enhanced and refined over time as more data becomes available.
In 2023, the Group aims to further embed climate risk considerations in its credit risk management processes.
Aggregation and reporting
The group internally reports its exposure and RWAs to the six high transition risk sectors in the wholesale portfolio. The group also reports the proportion of questionnaire responses that have a board policy or management plan for transition risk. These are included as part of the regular risk profile paper presented at the group CROF which is held quarterly.
Retail credit risk
Identification and assessment
The Group continues to improve its identification and assessment of climate risk within its retail mortgage portfolio, with increased investments in physical risk data and enhancements to its internal risk assessment capabilities. The Group prioritised applying these improvements to its largest mortgage markets to understand its physical risk exposure based on centrally available data. The Group has also started to identify and monitor potential physical risk in the remainder of its mortgage markets, using locally available data.
In 2022, the Group undertook a stress test exercise for Singapore at the behest of the Monetary Authority of Singapore. In addition, a Group-wide internal climate stress testing exercise was undertaken to further its understanding and assessment of the potential impact of physical risk to its mortgage portfolios. The Group completed a detailed asset-level analysis for Hong Kong, Singapore and Australia which represent three of the group's largest residential mortgage portfolios in Asia-Pacific.
Management
The Group continues to review and update its retail credit risk management policies and processes to further embed climate risk, whilst also monitoring local regulatory developments to ensure compliance.
Aggregation and reporting
The Group manages and monitors the integration of climate risk across Wealth and Personal Banking through the CROF.
The Group assesses the progress of the implementation of its strategic climate risk plans and ensures that operational processes and risk management frameworks are updated as its data and understanding of climate risk evolves.
How we are starting to measure climate risk
In 2022, the group implemented physical risk exposure assessment across mortgage portfolios in Asia-Pacific. For Hong Kong and Singapore, the assessment is based on property level peril data.
For other markets, locally relevant data sources were used to identify properties or areas with potentially heightened climate risk. These climate risk exposure metrics are in the early stages of development and the underlying data and methodologies may require refinement in the future, although they provide an indicative view.
Resilience risk
Identification and assessment
The group's Operational and Resilience Risk sub-function is responsible for overseeing the identification and assessment of physical and transition climate risks that may impact on its operational and resilience capabilities.
The group is developing a deeper understanding of the risks to which its properties are subject, and assess the mitigants to ensure ongoing operational resilience.
Management
Operational and Resilience Risk policies are reviewed and enhanced periodically so they remain relevant to evolving risks, including those linked to climate change. The capability of our colleagues is enhanced through training, periodic communications and dedicated guidance.
Aggregation and reporting
With its ambition to achieve net zero in its own operations, the Group is particularly focused on developing measures to facilitate proactive risk management and assess progress against this strategic target.
Operational and Resilience Risk is represented at the group's CROF.
Regulatory compliance risk
Identification and assessment
The Compliance sub-function continues to prioritise the identification and assessment of compliance risks that may arise from climate risk.
Throughout 2022, focus remained on greenwashing, particularly with regard to the development and ongoing governance of new, changed or withdrawn climate and ESG products and services, and ensuring sales practices and marketing materials were clear, fair and not misleading.
To support the ongoing management and mitigation of greenwashing, the Compliance sub-function worked across all business lines to enhance the group's product controls. This improved the group's ability to identify, assess and manage product-related greenwashing risks throughout the product governance lifecycle. Examples of ongoing enhancements include:
-- integrating the consideration and mitigation of climate and ESG risks within the group's existing product governance framework;
-- enhancing the group's product templates and forms to ensure climate risk is actively considered and documented by the business within product review and creation; and
-- clarifying and improving product governance policies, associated guidance and key governance terms of reference to ensure new climate and ESG products, as well as climate- and ESG-related amendments to existing products, comply with both internal and external standards, and are subject to robust governance.
Management
The Group policies continue to set the Group-wide standards that are required to manage the risk of breaches of its regulatory duty to customers, including those related to climate risk, ensuring fair customer outcomes are achieved. The Group's product and customer lifecycle policies have been enhanced to ensure they take climate into consideration. They are reviewed on a periodic basis to ensure they remain relevant and up to date.
The Compliance sub-function continues to focus on improving the capability of colleagues through training, communications and dedicated guidance, with a particular focus on ensuring colleagues remain up to date with changes in the evolving regulatory landscape.
Aggregation and reporting
The Compliance sub-function continues to operate an ESG and Climate Risk Working Group at a Group level to track and monitor the integration and embedding of climate risk within the management of regulatory compliance risks. The working group also continues to monitor ongoing regulatory and legislative changes across the ESG and climate risk agenda. In Asia-Pacific, a working group was established in February 2022 to coordinate the regional implementation of climate risk-related enhancements across the Compliance sub-function.
The Group has continued to develop its key climate risk-related metrics and indicators, aligned to the broader focus on regulatory compliance risks, to continually improve its risk monitoring capability. This has included the development of a climate-specific risk profile, which is produced at a Group level and regularly disseminated and reviewed at regional level, alongside the introduction and improvement of existing metrics and indicators.
The Compliance sub-function continues to be represented at the Group's and the group's CROF.
Reputational risk
Identification and assessment
The Group implements sustainability risk policies, including the Equator Principles as part of its broader reputational risk framework. The Group focuses on sensitive sectors that may have a high adverse impact on people or the environment, and in which the Group has a significant number of customers. A key area of focus is high-carbon emission sectors, which include oil and gas, power generation, mining, agricultural commodities and forestry. In 2022, the Group published an updated energy policy, covering oil and gas, power and utilities, hydrogen, renewables, nuclear and biomass. It has also updated its thermal coal phase-out policy after its initial publication in 2021.
Management
As the primary point of contact for customers, the group's relationship managers are responsible for checking that customers meet policies aimed at reducing carbon emissions. The group's network in Asia-Pacific of more than 20 sustainability risk managers provides local policy support and expertise to relationship managers. A regional Sustainability Risk team provides a higher level of guidance and is responsible for the oversight of policy compliance and implementation over wholesale banking activities.
Aggregation and reporting
The Sustainability Risk Oversight Forum provides a group-wide forum for senior members of the group's Risk, Compliance and global business management to support the management of sustainability risks. 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.
For the latest report, see: www.hsbc.com/who-we-are/our-climate-strategy/sustainability-risk/equator-principles.
Other risks
The following section outlines key developments that the Group made to embed climate considerations within other risk types in its risk taxonomy. All risk taxonomies, including those not referenced below, are assessed to determine the potential materiality of the impact of climate risk on their risk framework.
Treasury risk
The Group established a treasury risk-specific climate risk governance forum to provide oversight over climate-related topics that may impact Treasury. The plan in 2023 is to update relevant treasury risk policies to strengthen its climate risk guidance and requirements pertaining to treasury risk.
Traded risk
The Group established a climate stress testing-focused working group to coordinate the implementation of climate stress testing, and support the delivery of internal climate scenario analysis.
Resilience risk
(Unaudited)
Overview
Resilience risk is the risk of sustained and significant business disruption, execution, delivery or physical security or safety events, causing the inability to provide critical services to our customers, affiliates, and counterparties. Resilience risk arises from failures or inadequacies in processes, people, systems or external events.
Resilience risk management
Key developments in 2022
The Operational and Resilience Risk sub-function provides robust Risk Steward oversight of the management of resilience risk by the group businesses, functions and legal entities. This includes effective and timely independent challenge and expert advice. During the year, we carried out a number of initiatives to keep pace with geopolitical, regulatory and technology changes and to strengthen the management of resilience risk:
-- We focused on enhancing our understanding of our risk and control environment, by updating our risk taxonomy and control libraries, and refreshing risk and control assessments.
-- We implemented heightened monitoring and reporting of cyber, third party, business continuity and payment/sanctions risks resulting from the Russia/Ukraine war, and enhanced controls and key processes where needed.
-- We provided analysis and easy-to-access risk and control information and metrics to enable management to focus on non-financial risks in their decision-making and appetite setting.
-- We further strengthened our non-financial risk governance and senior leadership, and improved our coverage and Risk Steward Oversight for data privacy and change execution.
We prioritise our efforts on material risks and areas undergoing strategic growth, aligning our location strategy to this need.
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 nine sub-risk types related to: failure to manage third parties; technology and cybersecurity; transaction processing; failure to protect people and places from physical malevolent acts; business interruption and incident risk; data risk; change execution risk; building unavailability; and workplace safety.
Risk appetite and key escalations for resilience risk are reported to the group Risk Management Meeting, chaired by the group Chief Risk Officer, with an escalation path to the Group Risk Non-Financial Risk Management Board (NFRMB), chaired by the Group Chief Risk and Compliance Officer.
Key risk management processes
Operational resilience is our ability to anticipate, prevent, adapt, respond to, recover and learn from operational disruption while minimising customer and market impact. Resilience is determined by assessing whether we are able to continue to provide our most important services, within an agreed level. This is achieved via day-to-day oversight, periodic and ongoing assurance, such as deep dive reviews and controls testing, which may result in challenges being raised to the business by Risk Stewards. Further challenge is also raised in the form of quarterly Risk Steward opinion papers to formal governance. We accept we will not be able to prevent all disruption but we prioritise investment to continually improve the response and recovery strategies for our most important business services.
Regulatory compliance risk
(Unaudited)
Overview
Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct and breaching related financial services regulatory standards. Regulatory compliance risk arises from the failure to observe relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business.
Regulatory compliance risk management
Key developments in 2022
The dedicated programme to embed our updated purpose-led conduct approach has concluded. Work to map applicable regulations to our risks and controls continues in 2023 alongside adoption of new tools to support enterprise-wide horizon scanning for new regulatory obligations and to manage our regulatory reporting inventories. Climate risk has been integrated into regulatory compliance policies and processes, with enhancements made to the product governance framework and controls in order to ensure the effective consideration of climate and in particular Greenwashing risks.
Governance and structure
The group Chief Compliance Officer reports to the Group Head of Risk and Compliance and group Co-Chief Executive at an entity level. They attend the RMM and the Risk Committee. The structure of the Compliance sub-function is substantively unchanged and the Group Regulatory Conduct capability and Group Financial Crime capability both continue to work closely with the Country/Markets Chief Compliance Officers and their respective teams to help them identify and manage regulatory and financial crime compliance risks across the region. They also work together, and with all relevant stakeholders, to ensure we achieve good conduct outcomes and provide enterprise-wide support on the Compliance risk agenda in collaboration with the Risk sub-function.
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 risk. It also devises the required frameworks, support processes and tools to protect against regulatory compliance risks. The Group capability 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. The Group's regulatory compliance risk policies are regularly reviewed. Global Policies and Procedures require the prompt identification and escalation of actual or potential regulatory breaches, and relevant reportable events are escalated to the RMM and the Risk Committee, as appropriate.
Financial crime risk
(Unaudited)
Overview
Financial crime risk is the risk that HSBC's products and services will be exploited for criminal activity. This includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing. Financial crime risk arises from day-to-day banking operations involving customers, third parties and employees.
Financial crime risk management
Key developments in 2022
We regularly review the effectiveness of our financial crime risk management framework, which includes consideration of the complex and dynamic nature of sanctions compliance risk. In 2022, we adapted our policies, procedures and controls to respond to the unprecedented volume and diverse set of sanctions and trade restrictions imposed against Russia following its invasion of Ukraine.
We also continued to make progress with several key financial crime risk management initiatives, including:
-- We enhanced our screening and non-screening controls to aid the identification of potential sanctions risk related to Russia, as well as risk arising from export control restrictions.
-- We deployed a key component of our intelligence-led, dynamic risk assessment capabilities for customer account monitoring in Singapore for Wealth and Private Banking (WPB) and Commercial Banking (CMB).
-- We reconfigured our transaction screening capability in readiness for the global change to payment systems formatting under ISO20022 requirements, and enhanced transaction screening capabilities by implementing automated alert discounting.
-- We to strengthened the first party lending fraud framework, reviewed and published an updated fraud policy and associated control library, and continued to develop fraud detection tools.
Governance and structure
The structure of the Financial Crime sub-function remained substantively unchanged in 2022, although we continued to review the effectiveness of our governance framework to manage financial crime risk. The group Head of Financial Crime and group Money Laundering Reporting Officer reports to the group Chief Compliance Officer, while the group Risk Committee retains oversight of matters relating to fraud, bribery and corruption, tax evasion, sanctions and export control breaches, money laundering, terrorist financing and proliferation financing.
Key risk management processes
We will not tolerate knowingly conducting business with individuals or entities believed to be engaged in criminal activity. We require everybody in HSBC to play their role in maintaining effective systems and controls to prevent and detect financial crime. Where we believe we have identified suspected criminal activity or vulnerabilities in our control framework, we will take appropriate mitigating action.
We manage financial crime risk because it is the right thing to do to protect our customers, shareholders, staff, the communities in which we operate, as well as the integrity of the financial system on which we all rely. We operate in a highly regulated industry in which these same policy goals are codified in laws and regulations. We are committed to complying with the law and regulation of all the markets in which we operate and applying a consistently high financial crime standard globally.
We continue to 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, improved our investigative and monitoring capabilities through technology deployments, as well as developed 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 and we participate in numerous public-private partnerships and information-sharing initiatives around the world. In 2022, our focus remained on measures to improve the overall effectiveness of the global financial crime framework, notably by providing input into legislative and regulatory reform activities. We did this by contributing to the development of responses to consultation papers focused on how financial crime risk management frameworks can deliver more effective outcomes in detecting and deterring criminal activity, including tackling evolving criminal behaviour such as fraud. Through our work with the Wolfsberg Group and the Institute of International Finance, we supported the efforts of the global standard setter, the Financial Action Task Force, on
the use of technology and data pooling to advance information sharing, as well as their work to strengthen beneficial ownership standards. In addition, we participated in a number of public events related to tackling forestry crimes, wildlife trafficking and human trafficking.
Independent Reviews
In August 2022, the Board of Governors of the Federal Reserve System terminated the 2012 cease-and-decist order, with immediate effect. The order was the final regulatory enforcement action that HSBC entered into in 2012. In June 2021, the UK Financial Conduct Authority (FCA) had already determined that no further Skilled Person work was required under section 166 of the Financial Services and Markets Act. The Group Risk Committee retains oversight of matters relating to financial crime, including any remaining remedial activity not yet completed as part of previous recommendations.
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.
Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models.
Key developments i n 2022
In 2022, we continued to make improvements in our model risk management processes amid regulatory changes in model requirements.
Initiatives during the year included:
-- Redeveloped, independently validated and submitted our models to the PRA and HKMA in response to regulatory capital changes, including the internal ratings-based ('IRB') approach for credit risk, internal model method ('IMM') for counterparty credit risk and internal model approach ('IMA') for market risk. These new models have been built to enhanced standards using improved data as a result of investment in processes and systems.
-- Redeveloped and validated models impacted by the changes to the alternative rate setting mechanisms due to the IBOR transition.
-- Embedded changes to our control framework for our Sarbanes-Oxley models. These changes were made to address control weaknesses that emerged as a result of significant increases in adjustments and overlays that were applied to compensate for the impact of the Covid-19 pandemic, and the subsequent volatility due to the effects of the rise in global interest rates on the ECL models.
-- Businesses and Functions continued to be more involved in the development and management of models, and hiring colleagues with strong model risk skills. Enhanced focus was also placed on key model risk drivers such as data quality and model methodology.
-- Enhanced the reporting that supports the model risk appetite measures, to support our Businesses and Functions in managing model risk more effectively.
-- Rolled out our HBAP regional engagement strategy in response to the growing maturity of model risk management and demand, and enhanced the awareness of model inventory, model limitations and risk controls across the Region.
-- Conducted targeted briefing sessions across the Region to strengthen the awareness of models used and the engagement between the model user community and model developing areas.
-- Continued the transformation of the Model Risk Management team, with further enhancements to the independent model validation processes, including new systems and working practises.
-- Climate Risk, HKFRS 17 Insurance models and models using advanced analytics and machine learning, have become critical areas of focus that will grow in importance in 2023 and beyond. The model risk teams were enhanced with specialist skills to manage the increased model risk in these areas.
Governance
The group Model Risk Committee (MRC) provides oversight of models used in HBAP and focuses on local delivery and requirements. The Committee is chaired by the group's Chief Risk Officer and the Regional Heads of Businesses, senior executives from Risk, Finance and Compliance 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 and the group Risk Committee on a regular basis through the use of the risk map, risk appetite 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. 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, insurance salesforces, 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, although the proportion of sales through other sources such as independent financial advisers, tied agents and digital is increasing.
For the insurance 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. These arrangements are generally structured with our exclusive strategic partners and earn the group a combination of commissions, fees and a share of profits.
Insurance products are sold predominantly by WPB and CMB through our branches and direct channels.
Insurance manufacturing operations risk management
Key developments in 2022
(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, which have not changed materially over 2022. There has been continued market volatility observed over 2022 across interest rates, equity markets and foreign exchange rates. This has been predominantly driven by geopolitical factors and wider inflationary concerns. One area of key risk management focus over 2022 was the implementation of the new accounting standard, HKFRS 17 Insurance Contracts. Given the fundamental nature of the impact of the accounting standard on insurance accounting, this presents additional financial reporting and model risks for the group. Another area of focus has been the acquisition early in 2022 of an insurance business in Singapore and the subsequent integration of that business into the group's risk management framework.
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 sub-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') which are produced by all material entities.
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; and
-- We design new products to mitigate market risk, such as changing the investment return sharing portion between policyholders and the shareholder.
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.
Risk appetite buffers are set to ensure that the operations are able to remain solvent, allowing for business-as-usual volatility and extreme but plausible stress events. In certain cases, entities use reinsurance to manage capital risk.
Liquidity risk is relatively minor for the insurance business. It 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 to third party reinsurers to keep risks within risk appetite, reduce volatility and improve capital efficiency; and
-- oversight of expense and reserving risks by entity Financial Reporting Committees.
Insurance manufacturing operations risk in 2022
Measurement
(Unaudited)
The tables below show the composition of assets and liabilities by contract type. 89% (2021: 91%) 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 2022
Financial assets 702,897 34,632 43,822 781,351
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 183,423 33,533 1,569 218,525
- derivatives 1,322 - 12 1,334
- financial investments measured at amortised
cost 482,271 328 37,177 519,776
- financial investments measured at fair
value through other comprehensive income 5,977 - 734 6,711
- other financial assets(1) 29,904 771 4,330 35,005
Reinsurance assets 35,320 17 - 35,337
PVIF(2) - - 65,537 65,537
Other assets and investment properties 14,564 9 6,370 20,943
Total assets 752,781 34,658 115,729 903,168
Liabilities under investment contracts
designated at fair value 25,693 7,338 - 33,031
Liabilities under insurance contracts 679,567 21,299 700,866
Deferred tax(3) 559 - 10,665 11,224
Other liabilities - - 38,942 38,942
Total liabilities 705,819 28,637 49,607 784,063
Total equity - - 119,105 119,105
Total equity and liabilities 705,819 28,637 168,712 903,168
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
------------------------------ ------------------------------ ------------------------------ ---------------------------
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 Present Value of In-force ('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 2022 31 Dec 2021
Effect
on profit Effect Effect Effect
after on total on profit on total
tax equity after tax equity
HK$m HK$m HK$m HK$m
------------------------------ ------------------------------ ------------------------------- -------------------------------
+100 basis
points
parallel
shift in
yield curves (1,079) (1,872) (1,257) (2,036)
------------------------------ ------------------------------ ------------------------------- -------------------------------
-100 basis
points
parallel
shift in
yield curves 698 1,490 1,201 1,980
------------------------------ ------------------------------ ------------------------------- -------------------------------
10% increase
in equity
prices 2,438 2,438 2,388 2,388
------------------------------ ------------------------------ ------------------------------- -------------------------------
10% decrease
in equity
prices (2,647) (2,647) (2,426) (2,426)
------------------------------ ------------------------------ ------------------------------- -------------------------------
10% increase
in USD
exchange
rate
compared
to all
currencies 767 767 635 635
------------------------------ ------------------------------ ------------------------------- -------------------------------
10% decrease
in USD
exchange
rate
compared
to all
currencies (767) (767) (635) (635)
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 69.
The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'strong' or 'good' (as defined on page 32), with 100% of the exposure being neither past due nor impaired (2021: 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 44. 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. Liquidity risk may be able to be shared with policyholders for products with DPF.
The following table shows the expected undiscounted cash flows for insurance liabilities at 31 December 2022.
The profile of the expected maturity of insurance contracts at 31 December 2022 remained comparable with 2021.
The remaining contractual maturity of investment contract liabilities is included in the table on page 118.
Expected maturity of insurance contract liabilities
(Audited)
Expected cash flows (undiscounted)
Within 1-5 years 5-15 Over Total
1 year years 15 years
HK$m HK$m HK$m HK$m HK$m
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
At 31 Dec
2022
Non-linked
insurance
contracts 55,359 198,209 348,404 940,565 1,542,537
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
Unit-linked 4,865 10,047 11,978 4,898 31,788
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
60,224 208,256 360,382 945,463 1,574,325
-------------------------- ------------------------ ------------------------ -------------------------- ------------------------
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
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. Lapse risk exposure on products with premium financing has increased over the year as rising interest rates have led to an increase in the cost of financing for customers.
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 69 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 2021.
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. 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.
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 because these entities have smaller portfolios over which to spread costs.
Sensitivity analysis
(Audited)
2022 2021
HK$m HK$m
---------------------------
Effect on profit after tax and total equity at 31 Dec
10% increase in mortality and/or morbidity rates (561) (637)
---------------------------
10% decrease in mortality and/or morbidity rates 569 650
---------------------------
10% increase in lapse rates (549) (606)
---------------------------
10% decrease in lapse rates 535 680
---------------------------
10% increase in expense rates (372) (368)
---------------------------
10% decrease in expense rates 372 359
---------------------------
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 74-78, 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 3-8 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
21 February 2023
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 79 to 139, comprise:
-- the consolidated balance sheet as at 31 December 2022; -- 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 2022, 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 2022, 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
-- Disclosure of the impact of adoption of HKFRS 17, Insurance contracts
Allowances for expected credit losses on loans and advances to customers
At 31 December 2022, the group recorded We tested controls in place over
allowances for expected credit losses the methodologies, their application,
('ECL') on loans and advances to significant assumptions and data
customers of HK$40.0bn. used to determine the ECL on loans
The determination of the ECL on non-credit-impaired and advances to customers. These
loans and advances to customers requires included controls over:
the use of complex credit risk methodologies * Model development, validation and monitoring;
that are applied in models using
the group's historic experience of
the correlations between defaults * Approval of economic scenarios;
and losses, borrower creditworthiness,
segmentation of customers or portfolios
and economic conditions. * Approval of the probability weightings assigned to
It also requires the determination economic scenarios;
of assumptions which involve estimation
uncertainty. The assumptions used
for ECL that we focused on for non-credit-impaired * Assigning customer risk ratings;
loans and advances to customers included
those with greater levels of management
judgement and for which variations * Approval of management judgemental adjustments; and
have the most significant impact
on ECL on loans and advances to customers.
Specifically, these included economic * Review of input and assumptions applied in estimating
scenarios and their likelihood, as the recoverability of credit-impaired wholesale
well as customer risk ratings. Likewise, exposures.
there is inherent uncertainty with
the consensus economic forecast data
from external economists. We performed substantive audit procedures
Impacts from the Covid-19 infection over the compliance of ECL methodologies
rates in Asia, particularly in mainland with the requirements of HKFRS 9.
China, ongoing developments related We engaged professionals with experience
to the mainland China commercial in ECL modelling to assess the appropriateness
real estate sector, the geopolitical of changes to models during the year,
landscape and certain other current and for a sample of those models,
macroeconomic conditions impact the independently reperformed the modelling
inherent risk and estimation uncertainty for certain aspects of the ECL calculation.
involved in determining the ECL on We also assessed the appropriateness
loans and advances to customers. of methodologies and related models
Management judgemental adjustments that did not change during the year.
to ECL on non-credit- impaired loans We further performed the following
and advances to customers therefore to assess the significant assumptions
continue to be made. This includes and data:
judgemental adjustments to the ECL * We challenged the appropriateness of the significant
for unsecured offshore mainland China assumptions;
Commercial Real Estate exposures.
The above ongoing developments have
also resulted in significant credit-impaired * We involved our economic experts in assessing the
corporate exposures related to the reasonableness of the severity and likelihood of
unsecured offshore mainland China certain economic scenarios;
Commercial Real Estate sector. The
assumptions with the most significant
impact here are those applied in * We tested a sample of customer risk ratings assigned
estimating the recoverability of to wholesale exposures;
these exposures.
* We tested a sample of critical data used to determine
ECL; and
* We have independently assessed other significant
assumptions and obtained corroborating evidence.
For a sample of management judgemental
adjustments and credit-impaired wholesale
exposures, we challenged the appropriateness
of these and assessed the ECL determined.
We further considered whether the
judgements made in selecting the
significant assumptions, as well
as determining the management judgemental
adjustments and credit-impaired wholesale
exposures, would give rise to indicators
of possible management bias.
We assessed the adequacy of the disclosures
in relation to ECL on loans and advances
to customers 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,
giving consideration to the current
macroeconomic conditions. This included
economic scenarios and their likelihood,
management judgemental adjustments
made to derive the ECL on loans and
advances to customers, and future
recoverability of certain significant
credit-impaired wholesale exposures.
We further discussed certain 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 31-52
Note 1.2 (i) on the consolidated financial statements: Basis of preparation
and significant accounting policies - Summary of significant accounting
policies - Impairment of amortised cost and FVOCI financial assets,
page 90-93
Note 2 (e) on the consolidated financial statements: Operating profit
- Change in expected credit losses and other credit impairment charges,
page 97
Note 10 on the consolidated financial statements: Loans and advances
to customers, page 106-107
Impairment assessment of investment in associate - Bank of Communications
Co., Limited ('BoCom')
At 31 December 2022, 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$118.8bn and its application used to determine
lower than the carrying value ('CV') the VIU. We assessed the appropriateness
of HK$182.3bn. This is an indicator of the methodology used, its application,
of potential impairment. An impairment and the mathematical accuracy of
test was performed by management, the calculations. In respect of the
with supporting sensitivity analysis, significant assumptions, we performed
using a value in use ('VIU') model. the following:
The VIU was HK$0.7bn in excess of * Challenged the appropriateness of the significant
the CV. On this basis, no impairment assumptions and, where relevant, their
was recorded. interrelationships;
The methodology applied in the VIU
model is dependent on various assumptions,
both short term and long term in * Obtained corroborating evidence for data supporting
nature. These assumptions, which significant assumptions which as relevant included
are subject to estimation uncertainty, past experience, external market information,
are derived from a combination of third-party sources including analyst reports,
management's judgement, analysts' information from BoCom management and historical
forecasts, market data or other relevant publicly available BoCom financial information;
information.
The assumptions that we focused our
audit on were those with greater * Determined a reasonable range for the discount rate
levels of management judgement and assumption, with the assistance of our valuation
subjectivity, and for which variations experts, and compared it to the discount rate used by
had the most significant impact on management; and
the VIU. Specifically, these included
the discount rate, operating income
growth rate, long-term profit and * Assessed whether the judgements made in selecting the
asset growth rates, cost-income ratio, significant assumptions would give rise to indicators
expected credit losses as a percentage of possible management bias.
of customer advances, long-term effective
tax rate, capital requirements -
capital adequacy ratio, capital requirements We observed meetings between management
- tier 1 capital adequacy ratio and and BoCom management, held specifically
risk-weighted assets as a percentage to identify facts and circumstances
of total assets. 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 - Summary of significant accounting
policies - Consolidation and related policies, page 87
Note 14 on the consolidated financial statements: Interests in associates
and joint ventures, page 109-112
The present value of in-force long-term insurance business ('PVIF')
and liabilities under non-linked life insurance contracts
At 31 December 2022, the group has We tested controls in place over
recorded an asset for PVIF of HK$65.5bn the methodologies, their application,
and liabilities under non-linked significant assumptions and data
life insurance contracts of HK$679.5bn. 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
their application in models; and
* results aggregation and analysis processes.
With the assistance of our actuarial
experts, we performed the following
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 judgements
made in selecting 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 67-72
Note 1.2 (j) on the consolidated financial statements: Basis of preparation
and significant accounting policies - Summary of significant accounting
policies - Insurance contracts, page 93-94
Note 3 on the consolidated financial statements: Insurance business,
page 97-98
Note 15 on the consolidated financial statements: Goodwill and intangible
assets, page 112-113
Disclosure of the impact of adoption of HKFRS 17, Insurance Contracts
HKFRS 17 'Insurance contracts' sets We tested controls in place over
out the requirements that an entity accounting policies, methodologies,
should apply in accounting for insurance their application, significant assumptions
contracts it issues, reinsurance and data used in determining the
contracts it holds and investment estimated reduction of the opening
contracts with discretionary participating group equity as at 1 January 2022
features it issues. The group will disclosed. Specifically, these included
adopt the standard retrospectively controls over:
from 1 January 2023, with comparatives * Selection and approval of the accounting policies;
restated from 1 January 2022. As
part of the transition to HKFRS 17,
the group intends to apply the option * Policy data reconciliations from the policyholder
under HKFRS 9 to re-designate holdings administration systems to the actuarial valuation
of financial assets held to support models;
insurance liabilities currently measured
at amortised cost, to fair value
under HKFRS 9. The group has estimated * Assumption setting; and
and disclosed that the adoption will
reduce the opening group equity as
at 1 January 2022 by HK$75.4bn. In * Review and determination of methodologies used, and
the consolidated financial statements their application in the models, including model
it is disclosed that this estimate development, validation and monitoring.
is based on accounting policies,
assumptions, judgements and estimation
techniques that remain subject to With the assistance of our actuarial
change. professionals, we performed the following
This is a new and complex standard substantive audit procedures to assess
and determining the impact as at the accounting policies, methodologies,
1 January 2022 requires judgement their application, significant assumptions,
and interpretation in its implementation. data and disclosures:
This includes the selection of accounting * We assessed the adherence of the accounting policies
policies and the use of complex actuarial with the requirements in HKFRS 17;
methodologies that are applied in
models and overlay adjustments to
models. The selection and application * We assessed the appropriateness of the methodologies
of appropriate methodology requires used, their application in models and overlay
significant professional judgement. adjustments to models and the mathematical accuracy
It also requires the determination of the calculations;
of assumptions which involve estimation
uncertainty.
* We challenged the appropriateness of the judgements
made in selecting 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 risk to
indicators of susceptibility to management bias;
* We performed substantive audit procedures over
critical data used to ensure these are relevant and
reliable;
* We performed substantive audit procedures over the
re-designation of financial assets held to support
insurance liabilities; and
* We assessed the adequacy of the disclosures in the
context of the applicable financial reporting
framework.
Status updates were provided during
the year. We discussed the appropriateness
of the accounting policies, methodologies,
their application, significant assumptions
and the disclosures related to the
impact of the coming adoption of
HKFRS 17 with the Audit Committee.
Perspectives were also shared on
the control environment over the
disclosures of the impact of adopting
HKFRS 17.
Note 1.1 (b) on the consolidated financial statements: Basis of preparation
and significant accounting policies - Basis of preparation - Future
accounting developments, page 85-86
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 2022, Banking Disclosure Statement as at 31 December 2022 and List of the directors of the Bank's subsidiary undertakings (during the period from 1 January 2022 to 21 February 2023) 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, Environmental, Social and Governance Review, Financial Review, Risk, Statement of Directors' Responsibilities and Additional information sections of the Annual Report and Accounts 2022 prior to the date of this auditor's report. The remaining other information, including Banking Disclosure Statement as at 31 December 2022 and List of the directors of the Bank's subsidiary undertakings (during the period from 1 January 2022 to 21 February 2023), 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.
PricewaterhouseCooperss
Certified Public Accountants
Hong Kong, 21 February 2023
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