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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 Jul 2021 to Jul 2024
TIDM57HB
RNS Number : 5020E
Hongkong & Shanghai Banking Corp Ld
11 March 2022
Consolidated Financial Statements Consolidated income statement
for the year ended 31 December
Hot Features
Premium
2021 2020
Notes HK$m HK$m
------------------------------------------------------- ----- -------------------------- -------------------------
Net interest income 2a 98,113 111,513
------------------------------------------------------- ----- -------------------------- -------------------------
- interest income 121,382 147,376
------------------------------------------------------- -----
- interest expense (23,269) (35,863)
------------------------------------------------------- ----- --------------------------
Net fee income 2b 45,296 41,670
------------------------------------------------------- ----- -------------------------- -------------------------
- fee income 57,819 52,370
------------------------------------------------------- -----
- fee expense (12,523) (10,700)
------------------------------------------------------- ----- --------------------------
Net income from financial instruments held for trading
or managed on a fair value basis 2c 28,359 32,172
------------------------------------------------------- ----- -------------------------- -------------------------
Net income from assets and liabilities of insurance
businesses, including related derivatives, measured
at fair value through profit or loss 2c 18,180 13,128
------------------------------------------------------- ----- -------------------------- -------------------------
Changes in fair value of designated debts issued and
related derivatives 2c (639) (171)
------------------------------------------------------- ----- -------------------------- -------------------------
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit
or loss 2c (25) 138
------------------------------------------------------- ----- -------------------------- -------------------------
Gains less losses from financial investments 1,667 1,624
------------------------------------------------------- ----- -------------------------- -------------------------
Net insurance premium income 3 61,722 61,563
------------------------------------------------------- ----- -------------------------- -------------------------
Other operating income 2d 2,033 5,612
------------------------------------------------------- ----- -------------------------- -------------------------
Total operating income 254,706 267,249
------------------------------------------------------- ----- -------------------------- -------------------------
Net insurance claims and benefits paid and movement
in liabilities to policyholders 3 (76,048) (77,911)
------------------------------------------------------- ----- -------------------------- -------------------------
Net operating income before change in expected credit
losses and other credit impairment charges 178,658 189,338
------------------------------------------------------- ----- -------------------------- -------------------------
Change in expected credit losses and other credit
impairment charges 2e (6,539) (17,719)
------------------------------------------------------- ----- -------------------------- -------------------------
Net operating income 172,119 171,619
------------------------------------------------------- ----- -------------------------- -------------------------
Employee compensation and benefits 4 (39,261) (36,183)
------------------------------------------------------- ----- -------------------------- -------------------------
General and administrative expenses 2f (52,327) (46,304)
------------------------------------------------------- ----- -------------------------- -------------------------
Depreciation and impairment of property, plant and
equipment 2g (8,891) (9,405)
------------------------------------------------------- ----- -------------------------- -------------------------
Amortisation and impairment of intangible assets (4,397) (3,936)
------------------------------------------------------- ----- -------------------------- -------------------------
Total operating expenses (104,876) (95,828)
------------------------------------------------------- ----- -------------------------- -------------------------
Operating profit 67,243 75,791
------------------------------------------------------- ----- -------------------------- -------------------------
Share of profit in associates and joint ventures 19,320 14,405
------------------------------------------------------- ----- -------------------------- -------------------------
Profit before tax 86,563 90,196
------------------------------------------------------- ----- -------------------------- -------------------------
Tax expense 5 (14,015) (14,505)
------------------------------------------------------- ----- -------------------------- -------------------------
Profit for the year 72,548 75,691
------------------------------------------------------- ----- -------------------------- -------------------------
Attributable to:
------------------------------------------------------- ----- -------------------------- -------------------------
* ordinary shareholders of the parent company 64,633 66,997
------------------------------------------------------- ----- -------------------------- -------------------------
* other equity holders 2,715 2,450
------------------------------------------------------- ----- -------------------------- -------------------------
* non-controlling interests 5,200 6,244
------------------------------------------------------- ----- -------------------------- -------------------------
Profit for the year 72,548 75,691
------------------------------------------------------- ----- -------------------------- -------------------------
Consolidated statement of comprehensive income
for the year ended 31 December
2021 2020
HK$m HK$m
---------------------------------------------------------- ---------------------------- ----------------------------
Profit for the year 72,548 75,691
---------------------------------------------------------- ---------------------------- ----------------------------
Other comprehensive income/(expense)
---------------------------------------------------------- ---------------------------- ----------------------------
Items that will be reclassified subsequently to profit
or loss when specific conditions are met:
---------------------------------------------------------- ---------------------------- ----------------------------
Debt instruments at fair value through other comprehensive
income (4,009) 2,238
---------------------------------------------------------- ---------------------------- ----------------------------
- fair value gains/(losses) (3,907) 4,642
---------------------------------------------------------- - fair value gains transferred to the income statement (1,276) (1,648) ---------------------------------------------------------- - expected credit (recoveries)/losses recognised in the income statement (17) 112 ---------------------------------------------------------- - income taxes 1,191 (868) ---------------------------------------------------------- ---------------------------- Cash flow hedges (700) 969 ---------------------------------------------------------- ---------------------------- ---------------------------- - fair value gains/(losses) 7,038 (4,393) ---------------------------------------------------------- - fair value (gains)/losses reclassified to the income statement (7,850) 5,551 ---------------------------------------------------------- - income taxes 112 (189) ---------------------------------------------------------- ---------------------------- Share of other comprehensive income/(expense) of associates and joint ventures 596 (726) ---------------------------------------------------------- ---------------------------- ---------------------------- Exchange differences 3,973 17,891 ---------------------------------------------------------- ---------------------------- ---------------------------- Items that will not be reclassified subsequently to profit or loss: ---------------------------------------------------------- ---------------------------- ---------------------------- Property revaluation 4,771 (5,774) ---------------------------------------------------------- ---------------------------- ---------------------------- - fair value gains/(losses) 5,643 (6,914) ---------------------------------------------------------- - income taxes (872) 1,140 ---------------------------------------------------------- ---------------------------- Equity instruments designated at fair value through other comprehensive income (3,480) 1,647 ---------------------------------------------------------- ---------------------------- ---------------------------- - fair value gains/(losses) (3,478) 1,654 ---------------------------------------------------------- - income taxes (2) (7) ---------------------------------------------------------- ---------------------------- Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk 522 257 ---------------------------------------------------------- ---------------------------- ---------------------------- - before income taxes 631 320 ---------------------------------------------------------- - income taxes (109) (63) ---------------------------------------------------------- ---------------------------- Remeasurement of defined benefit asset/liability 724 (315) ---------------------------------------------------------- ---------------------------- ---------------------------- - before income taxes 885 (384) ---------------------------------------------------------- - income taxes (161) 69 ---------------------------------------------------------- ---------------------------- Other comprehensive income for the year, net of tax 2,397 16,187 ---------------------------------------------------------- ---------------------------- ---------------------------- Total comprehensive income for the year 74,945 91,878 ---------------------------------------------------------- ---------------------------- ---------------------------- Attributable to: ---------------------------------------------------------- ---------------------------- ---------------------------- - ordinary shareholders of the parent company 67,148 82,738 ---------------------------------------------------------- ---------------------------- ---------------------------- - other equity holders 2,715 2,450 ---------------------------------------------------------- ---------------------------- ---------------------------- - non-controlling interests 5,082 6,690 ---------------------------------------------------------- ---------------------------- ---------------------------- Total comprehensive income for the year 74,945 91,878 ---------------------------------------------------------- ---------------------------- ---------------------------- Consolidated balance sheet
at 31 December
2021 2020
Notes HK$m HK$m
------------------------------------------------------ ----- --------------------- -----------------------
Assets
------------------------------------------------------ ----- --------------------- -----------------------
Cash and balances at central banks 276,857 347,999
------------------------------------------------------ ----- --------------------- -----------------------
Items in the course of collection from other banks 21,632 21,943
------------------------------------------------------ ----- --------------------- -----------------------
Hong Kong Government certificates of indebtedness 332,044 313,404
------------------------------------------------------ ----- --------------------- -----------------------
Trading assets 7 777,450 600,414
------------------------------------------------------ ----- --------------------- -----------------------
Derivatives 8 365,167 422,945
------------------------------------------------------ ----- --------------------- -----------------------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 9 202,399 178,960
------------------------------------------------------ ----- --------------------- -----------------------
Reverse repurchase agreements - non-trading 803,775 520,344
------------------------------------------------------ ----- --------------------- -----------------------
Loans and advances to banks 432,247 403,884
------------------------------------------------------ ----- --------------------- -----------------------
Loans and advances to customers 10 3,840,939 3,668,681
------------------------------------------------------ ----- --------------------- -----------------------
Financial investments 11 2,051,575 2,175,432
------------------------------------------------------ ----- --------------------- -----------------------
Amounts due from Group companies 32 112,719 83,203
------------------------------------------------------ ----- --------------------- -----------------------
Interests in associates and joint ventures 14 188,485 168,754
------------------------------------------------------ ----- --------------------- -----------------------
Goodwill and intangible assets 15 95,181 89,968
------------------------------------------------------ ----- --------------------- -----------------------
Property, plant and equipment 16 129,827 128,537
------------------------------------------------------ ----- --------------------- ----------------------- Deferred tax assets 5 3,353 3,325 ------------------------------------------------------ ----- --------------------- ----------------------- Prepayments, accrued income and other assets 17 269,743 288,610 ------------------------------------------------------ ----- --------------------- ----------------------- Total assets 9,903,393 9,416,403 ------------------------------------------------------ ----- --------------------- ----------------------- Liabilities ------------------------------------------------------ ----- --------------------- ----------------------- Hong Kong currency notes in circulation 332,044 313,404 ------------------------------------------------------ ----- --------------------- ----------------------- Items in the course of transmission to other banks 25,701 25,699 ------------------------------------------------------ ----- --------------------- ----------------------- Repurchase agreements - non-trading 255,374 136,157 ------------------------------------------------------ ----- --------------------- ----------------------- Deposits by banks 280,310 248,628 ------------------------------------------------------ ----- --------------------- ----------------------- Customer accounts 18 6,177,182 5,911,396 ------------------------------------------------------ ----- --------------------- ----------------------- Trading liabilities 19 92,723 60,812 ------------------------------------------------------ ----- --------------------- ----------------------- Derivatives 8 355,791 428,211 ------------------------------------------------------ ----- --------------------- ----------------------- Financial liabilities designated at fair value 20 138,965 167,013 ------------------------------------------------------ ----- --------------------- ----------------------- Debt securities in issue 21 67,364 79,419 ------------------------------------------------------ ----- --------------------- ----------------------- Retirement benefit liabilities 4 1,890 2,701 ------------------------------------------------------ ----- --------------------- ----------------------- Amounts due to Group companies 32 356,233 296,308 ------------------------------------------------------ ----- --------------------- ----------------------- Accruals and deferred income, other liabilities and provisions 22 219,206 215,987 ------------------------------------------------------ ----- --------------------- ----------------------- Liabilities under insurance contracts 3 638,145 581,406 ------------------------------------------------------ ----- --------------------- ----------------------- Current tax liabilities 2,378 2,669 ------------------------------------------------------ ----- --------------------- ----------------------- Deferred tax liabilities 5 32,522 30,997 ------------------------------------------------------ ----- --------------------- ----------------------- Subordinated liabilities 23 4,054 4,065 ------------------------------------------------------ ----- --------------------- ----------------------- Total liabilities 8,979,882 8,504,872 ------------------------------------------------------ ----- --------------------- ----------------------- Equity ------------------------------------------------------ ----- --------------------- ----------------------- Share capital 24 172,335 172,335 ------------------------------------------------------ ----- --------------------- ----------------------- Other equity instruments 25 44,615 44,615 ------------------------------------------------------ ----- --------------------- ----------------------- Other reserves 151,804 149,500 ------------------------------------------------------ ----- --------------------- ----------------------- Retained earnings 488,055 478,903 ------------------------------------------------------ ----- --------------------- ----------------------- Total shareholders' equity 856,809 845,353 ------------------------------------------------------ ----- --------------------- ----------------------- Non-controlling interests 66,702 66,178 ------------------------------------------------------ ----- --------------------- ----------------------- Total equity 923,511 911,531 ------------------------------------------------------ ----- --------------------- ----------------------- Total liabilities and equity 9,903,393 9,416,403 ------------------------------------------------------ ----- --------------------- ----------------------- Consolidated statement of cash flows
for the year ended 31 December
2021 2020
HK$m HK$m
------------------------------------------------------------ ---------------------------- --------------------------
Profit before tax 86,563 90,196
------------------------------------------------------------ ---------------------------- --------------------------
Adjustments for non-cash items:
------------------------------------------------------------ ---------------------------- --------------------------
Depreciation and amortisation 13,288 13,341
------------------------------------------------------------ ---------------------------- --------------------------
Net gain from investing activities (1,890) (567)
------------------------------------------------------------ ---------------------------- --------------------------
Share of profits in associates and joint ventures (19,320) (14,405)
------------------------------------------------------------ ---------------------------- --------------------------
(Gain)/Loss on disposal of subsidiaries, businesses,
associates
and joint ventures (4) 70
------------------------------------------------------------ ---------------------------- --------------------------
Change in expected credit losses gross of recoveries and
other credit impairment charges 7,549 18,452
------------------------------------------------------------ ---------------------------- --------------------------
Provisions 607 114
------------------------------------------------------------ ---------------------------- --------------------------
Share-based payment expense 913 735
------------------------------------------------------------ ---------------------------- --------------------------
Other non-cash items included in profit before tax 5,416 (3,896)
------------------------------------------------------------ ---------------------------- --------------------------
Elimination of exchange differences 8,024 (22,323)
------------------------------------------------------------ ---------------------------- --------------------------
Changes in operating assets and liabilities
------------------------------------------------------------ ---------------------------- --------------------------
Change in net trading securities and derivatives (159,767) (10,696)
------------------------------------------------------------ ---------------------------- --------------------------
Change in loans and advances to banks and customers (172,484) 11,959 ------------------------------------------------------------ ---------------------------- -------------------------- Change in reverse repurchase agreements - non-trading (174,643) (60,741) ------------------------------------------------------------ ---------------------------- -------------------------- Change in financial assets designated and otherwise mandatorily measured at fair value through profit or loss (23,439) (25,449) ------------------------------------------------------------ ---------------------------- -------------------------- Change in other assets 43,706 (119,373) ------------------------------------------------------------ ---------------------------- -------------------------- Change in deposits by banks and customer accounts 297,468 547,781 ------------------------------------------------------------ ---------------------------- -------------------------- Change in repurchase agreements - non-trading 119,217 29,761 ------------------------------------------------------------ ---------------------------- -------------------------- Change in debt securities in issue (12,055) (27,514) ------------------------------------------------------------ ---------------------------- -------------------------- Change in financial liabilities designated at fair value (28,048) 6,722 ------------------------------------------------------------ ---------------------------- -------------------------- Change in other liabilities 129,710 42,517 ------------------------------------------------------------ ---------------------------- -------------------------- Dividends received from associates 5,525 5,053 ------------------------------------------------------------ ---------------------------- -------------------------- Contributions paid to defined benefit plans (356) (602) ------------------------------------------------------------ ---------------------------- -------------------------- Tax paid (12,648) (25,466) ------------------------------------------------------------ ---------------------------- -------------------------- Net cash from operating activities 113,332 455,669 ------------------------------------------------------------ ---------------------------- -------------------------- Purchase of financial investments (1,233,472) (875,648) ------------------------------------------------------------ ---------------------------- -------------------------- Proceeds from the sale and maturity of financial investments 1,193,780 823,410 ------------------------------------------------------------ ---------------------------- -------------------------- Purchase of property, plant and equipment (2,718) (3,768) ------------------------------------------------------------ ---------------------------- -------------------------- Proceeds from sale of property, plant and equipment and assets held for sale 96 72 ------------------------------------------------------------ ---------------------------- -------------------------- Proceeds from disposal of customer loan portfolios 2,267 6,284 ------------------------------------------------------------ ---------------------------- -------------------------- Net investment in intangible assets (10,835) (7,331) ------------------------------------------------------------ ---------------------------- -------------------------- Net cash inflow on sale of subsidiaries - 69 ------------------------------------------------------------ ---------------------------- -------------------------- Net cash outflow on purchase of subsidiaries (13) - ------------------------------------------------------------ ---------------------------- -------------------------- Net cash from investing activities (50,895) (56,912) ------------------------------------------------------------ ---------------------------- -------------------------- Subordinated loan capital issued(1) 57,764 - ------------------------------------------------------------ ---------------------------- -------------------------- Subordinated loan capital repaid(1) (24,102) - ------------------------------------------------------------ ---------------------------- -------------------------- Dividends paid to shareholders of the parent company and non-controlling interests (63,523) (59,121) ------------------------------------------------------------ ---------------------------- -------------------------- Net cash from financing activities (29,861) (59,121) ------------------------------------------------------------ ---------------------------- -------------------------- Net increase in cash and cash equivalents 32,576 339,636 ------------------------------------------------------------ ---------------------------- -------------------------- Cash and cash equivalents at 1 Jan 1,047,807 677,664 ------------------------------------------------------------ ---------------------------- -------------------------- Exchange differences in respect of cash and cash equivalents (25,299) 30,507 ------------------------------------------------------------ ---------------------------- -------------------------- Cash and cash equivalents at 31 Dec(2) 1,055,084 1,047,807 ------------------------------------------------------------ ---------------------------- -------------------------- Cash and cash equivalents comprise ------------------------------------------------------------ ---------------------------- -------------------------- - cash and balances at central banks 276,857 347,999 ------------------------------------------------------------ ---------------------------- -------------------------- - items in the course of collection from other banks 21,632 21,943 ------------------------------------------------------------ ---------------------------- -------------------------- - loans and advances to banks of one month or less 326,691 286,356 ------------------------------------------------------------ ---------------------------- -------------------------- - net settlement accounts and cash collateral 34,580 43,570 ------------------------------------------------------------ ---------------------------- -------------------------- - reverse repurchase agreements with banks of one month or less 306,241 186,599 ------------------------------------------------------------ ---------------------------- -------------------------- - treasury bills, other bills and certificates of deposit less than three months 114,784 187,039 ------------------------------------------------------------ ---------------------------- -------------------------- - less: items in the course of transmission to other banks (25,701) (25,699) ------------------------------------------------------------ ---------------------------- -------------------------- Cash and cash equivalents at 31 Dec(2) 1,055,084 1,047,807 ------------------------------------------------------------ ---------------------------- --------------------------
Interest received was HK$133,964m (2020: HK$160,120m), interest paid was HK$26,553m (2020: HK$46,104m) and dividends received were HK$5,592m (2020: HK$3,946m).
1 Changes in subordinated liabilities (including those issued to group companies) during the year included amounts from issuance and repayments as presented above, and non-cash changes from foreign exchange loss of HK$494m in 2021 (2020: exchange gain of HK$303m) and fair value loss after hedging of HK$7,768m in 2021 (2020: HK$8,261m gain). These balances are presented under 'Amounts due to Group companies' in the consolidated balance sheet.
2 At 31 December 2021 HK$128,756m (2020: HK$149,565m) was not available for use by the group, of which HK$67,340m (2020: HK$71,049m) related to mandatory deposits at Central banks.
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves
------------------------------------------------------------------------------------
Other Financial Cash Total
equity Property assets flow Foreign share- Non-
Share instru- Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital(1) ments earnings reserve reserve reserve reserve Other(2) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
At 1 Jan 2021 172,335 44,615 478,903 63,793 9,883 772 (10,688) 85,740 845,353 66,178 911,531
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
Profit for the year - - 67,348 - - - - - 67,348 5,200 72,548
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
Other comprehensive
income/(expense)
(net of tax) - - 1,160 4,359 (5,992) (619) 3,558 49 2,515 (118) 2,397
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
* debt instruments at fair value through other
comprehensive income - - - - (3,775) - - - (3,775) (234) (4,009)
------------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - (2,737) - - - (2,737) (743) (3,480)
------------------------------------------------------------
* cash flow hedges - - - - - (619) - - (619) (81) (700)
------------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 521 - - - - - 521 1 522
------------------------------------------------------------
* property revaluation - - - 4,359 - - - - 4,359 412 4,771
------------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 612 - - - - - 612 112 724
------------------------------------------------------------
* share of other comprehensive income of associates and
joint ventures - - 27 - 520 - - 49 596 - 596
------------------------------------------------------------
* exchange differences - - - - - - 3,558 - 3,558 415 3,973
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- ---------------------
Total comprehensive
income/(expense)
for the year - - 68,508 4,359 (5,992) (619) 3,558 49 69,863 5,082 74,945
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
Dividends paid(3) - - (59,105) - - - - - (59,105) (4,418) (63,523)
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
Movement in respect
of share-based payment
arrangements - - 131 - - - - (173) (42) (2) (44)
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
Transfers and other
movements(4) - - (382) (3,162) (22) - - 4,306 740 (138) 602
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
At 31 Dec 2021 172,335 44,615 488,055 64,990 3,869 153 (7,130) 89,922 856,809 66,702 923,511
------------------------------------------------------------ ---------------- -------------- ---------------- -------------------- ---------------- ------------ ---------------- ------------ ---------------- --------------------- ----------------
Consolidated statement of changes in equity (continued)
for the year ended 31 December
Other reserves
-----------------------------------------------------------------------------------------
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital(1) instruments earnings reserve reserve reserve reserve Other(2) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
At 1 Jan 2020 172,335 44,615 464,629 72,013 6,959 (104) (28,118) 82,349 814,678 64,603 879,281
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
Profit for the
year - - 69,447 - - - - - 69,447 6,244 75,691
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
Other comprehensive
income/(expense)
(net of tax) - - (98) (5,286) 2,921 876 17,430 (102) 15,741 446 16,187
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
* debt instruments at fair value through other
comprehensive income - - - - 2,203 - - - 2,203 35 2,238
----------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - 1,299 - - - 1,299 348 1,647
----------------------------------------------------------
* cash flow hedges - - - - - 876 - - 876 93 969
----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 257 - - - - - 257 - 257
----------------------------------------------------------
* property revaluation - - - (5,286) - - - - (5,286) (488) (5,774)
----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (312) - - - - - (312) (3) (315)
----------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (43) - (581) - - (102) (726) - (726)
----------------------------------------------------------
* exchange differences - - - - - - 17,430 - 17,430 461 17,891
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- ---------------------
Total comprehensive
income/(expense)
for the year - - 69,349 (5,286) 2,921 876 17,430 (102) 85,188 6,690 91,878
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
Dividends paid(3) - - (54,268) - - - - - (54,268) (4,853) (59,121)
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
Movement in respect
of share-based
payment arrangements - - 120 - - - - 213 333 12 345
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
Transfers and
other movements(4) - - (927) (2,934) 3 - - 3,280 (578) (274) (852)
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
At 31 Dec 2020 172,335 44,615 478,903 63,793 9,883 772 (10,688) 85,740 845,353 66,178 911,531
---------------------------------------------------------- ---------------- ------------------- ----------------- ------------------- ---------------------- ------------ ---------------- ------------ --------------- --------------------- ---------------
1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous years.
2 The other reserves mainly comprise share of associates' other reserves, purchase premium arising from transfer of business from fellow subsidiaries, property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.
3 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
4 The movements include transfers from retained earnings to other reserves in associates according to local regulatory requirements, and from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.
4
Notes on the Consolidated Financial Statements 1 Basis of preparation and significant accounting policies -------------------------------------------------------- 1.1 Basis of preparation (a) Compliance with Hong Kong Financial Reporting Standards
The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited ('the Bank') and its subsidiaries (together 'the group') have been prepared in accordance with Hong Kong Financial Reporting Standards ('HKFRSs') as issued by the Hong Kong Institute of Certified Public Accountants ('HKICPA') and accounting principles generally accepted in Hong Kong. These consolidated financial statements also comply with the requirements of the Hong Kong Companies Ordinance (Cap. 622) which are applicable to the preparation of the financial statements.
Standards adopted during the year ended 31 December 2021
There were no new accounting standards or interpretations that had a significant effect on the group in 2021. Accounting policies have been consistently applied to all the years presented, unless otherwise stated.
(b) Future accounting developments
Minor amendments to HKFRSs
The HKICPA has published a number of minor amendments to HKFRSs which are effective from 1 January 2022 and 1 January 2023. The group expects they will have an insignificant effect, when adopted, on the Consolidated Financial Statements.
New HKFRSs
HKFRS 17 'Insurance Contracts'
HKFRS 17 'Insurance Contracts' was issued in January 2018, with amendments to the standard issued in October 2020. The standard sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. Following the amendments, HKFRS 17 is effective from 1 January 2023. The group is in the process of implementing HKFRS 17. Industry practice and interpretation of the standard are still developing. Therefore, the likely financial impact of its implementation remains uncertain. However, we have the following expectations as to the impact compared with the group's current accounting policy for insurance contracts, which is set out in Note 1.2(j) below:
-- Under HKFRS 17, there will be no present value of in-force business ('PVIF') asset recognised. Instead the estimated future profit will be included in the measurement of the insurance contract liability as the contractual service margin ('CSM'), representing unearned profit, and this will be gradually recognised in revenue as services are provided over the duration of the insurance contract. While the profit over the life of an individual contract will be unchanged, its emergence will be later under HKFRS 17. The removal of the PVIF asset and the recognition of CSM, which is a liability, will reduce equity. The PVIF asset will be eliminated to equity on transition, together with other adjustments to assets and liabilities to reflect HKFRS 17 measurement requirements and any consequential amendments to financial assets in the scope of HKFRS 9.
-- HKFRS 17 requires increased use of current market values in the measurement of insurance liabilities. Changes in market conditions for certain products measured under the general measurement approach are immediately recognised in profit or loss, while changes in market conditions for other products measured under the variable fee approach are included in the measurement of CSM.
-- In accordance with HKFRS 17, directly attributable costs will be incorporated in the CSM and recognised in the results of insurance services as a reduction in reported revenue, as profit is recognised over the duration of insurance contracts. Costs that are not directly attributable will remain in operating expenses. This will result in a reduction in reported operating expenses compared with the current accounting policy.
-- We intend to provide an update on the likely financial impacts on our insurance business in later 2022 financial reports, when we expect that this will be reasonably estimable.
(c) Foreign currencies
Items included in each of the group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The group's consolidated financial statements are presented in Hong Kong dollars.
Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured at historical cost which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income ('OCI') or in the income statement depending on where the gain or loss on the underlying item is recognised.
In the Consolidated Financial Statements, the assets, liabilities and results of foreign operations whose functional currency is not Hong Kong dollars are translated into the group's presentation currency at the rate of exchange at the balance sheet date, while their results are translated into Hong Kong dollars at the average rates of exchange for the reporting period. Exchange differences arising are recognised in OCI. On disposal of a foreign operation, exchange differences previously recognised in OCI are reclassified to the income statement.
(d) Presentation of information
Certain disclosures required by HKFRSs have been included in the sections marked as ('Audited') in this Annual Report and Accounts as follows:
-- Consolidated income statement and balance sheet data by reportable segments are included in the 'Financial Review' on page 10 as specified as 'Audited'.
-- Disclosures on 'Financial instruments impacted by IBOR reform' are included in the 'Top and Emerging Risks' section on page 20 as specified as 'Audited'.
-- Disclosures concerning the nature and extent of risks relating to banking and insurance activities are included in the 'Risk' section on pages 29 to 59 and pages 62 to 66 as specified as 'Audited'.
-- Capital disclosures are included in the 'Treasury Risk' section on pages 51 to 54 as specified as 'Audited'.
In accordance with the group's policy to provide disclosures that help investors and other stakeholders understand the group's performance, financial position and changes to them, the information provided in the Risk section goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements. In addition, the group assesses good practice recommendations issued from time to time by relevant regulators and standard setters and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.
(e) Critical accounting estimates and judgements
The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted as the critical accounting estimates and judgements in Note 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management's estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of the Consolidated Financial Statements. Management's selection of the group's accounting policies that contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved.
(f) Segmental analysis
The group's chief operating decision-maker is the Executive Committee, which operates as a general management committee under the direct authority of the Board. Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Committee.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the group's accounting policies. Segmental income and expenses include transfers between segments and these transfers are conducted at arm's length. Shared costs are included in segments on the basis of the actual recharges made.
(g) Going concern
The Consolidated Financial Statements are prepared on a going concern basis, as the Directors are satisfied that the group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the uncertainty that the global Covid-19 pandemic has had on the group's operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity.
1.2 Summary of significant accounting policies (a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, the group consolidates when it holds, directly or indirectly, the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal.
Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. This election is made for each business combination.
The Bank's investments in subsidiaries are stated at cost less impairment losses.
Goodwill
Goodwill is allocated to cash-generating units ('CGU') for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is performed at least once a year, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.
Interests in associates
The group classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint arrangements, as associates.
Investments in associates are recognised using the equity method. The attributable share of the results and reserves of associates is included in the consolidated financial statements of the group based on either financial statements made up to 31 December or amounts adjusted for any material transactions or events occurring between the date the financial statements are available and
31 December.
Investments in associates are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisitions of interests in associates is not tested separately for impairment but is assessed as part of the carrying amount of the investment.
Critical accounting estimates and judgements
The most significant critical accounting estimates relate to the assessment
of impairment of our investment in Bank of Communications Co. Limited
('BoCom'), which involves estimations of value in use.
* The VIU calculation uses discounted cash flow
projections based on management's best estimates of
future earnings available to ordinary shareholders
prepared in accordance with HKAS 36.
* Key assumptions are used in estimating BoCom's value
in use, the sensitivity of the value in use
calculations to different assumptions and a
sensitivity analysis that shows the changes in key
assumptions that would reduce the excess of value in
use over the carrying amount (the 'headroom') to nil
are described in Note 14.
===========================================================================
(b) Income and expenses
Operating income
Interest income and expense
Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value are recognised in 'Interest income' and 'Interest expense' in the income statement using the effective interest method. However, as an exception to this, interest on debt instruments issued by the group for funding purposes that are designated under the fair value option to reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.
Interest on credit impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Non-interest income and expense
The group generates fee income from services provided at a fixed price over time, such as account service and card fees, or when the group delivers a specific transaction at a point in time such as broking services and import/export services. With the exception of certain fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and the group's performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee income is generally earned from short term contracts with payment terms that do not include a significant financing component.
The group acts as principal in the majority of contracts with customers, with the exception of broking services. For brokerage trades where the group acts as an agent in the transaction it recognises broking income net of fees payable to other parties in the arrangement.
The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement.
Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities.
Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:
-- 'Net income from financial instruments held for trading or managed on a fair value basis'. This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss.
-- 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss'. This includes interest income, interest expense and dividend income in respect of financial assets and liabilities measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately identifiable from other trading derivatives.
-- 'Changes in fair value of designated debt instruments and related derivatives'. Interest paid on debt instruments and interest cash flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch.
-- 'Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss'. This includes interest on instruments that fail the solely payments of principal and interest ('SPPI') test. See (d) below.
The accounting policies for insurance premium income are disclosed in Note 1.2(j).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, the group recognises the difference as a trading gain or loss at inception ('a day 1 gain or loss'). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or the group enters into an offsetting transaction.
The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the Consolidated Financial Statements, unless they satisfy the HKFRSs offsetting criteria.
Critical accounting estimates and judgements
The majority of valuation techniques employ only observable market
data. However, certain financial instruments are classified on the
basis of valuation techniques that feature one or more significant
market inputs that are unobservable, and for them, the measurement
of fair value is more judgemental.
=======================================================================================================================
* An instrument in its entirety is classified as valued * Details on the group's level 3 financial instruments
using significant unobservable inputs if, in the and the sensitivity of their valuation to the effect
opinion of management, a significant proportion of of applying reasonable possible alternative
the instrument's inception profit or greater than 5% assumptions in determining their fair value are set
of the instrument's valuation is driven by out in Note 33.
unobservable inputs.
* 'Unobservable' in this context means that there is
little or no current market data available from which
to determine the price at which an arm's length
transaction would be likely to occur. It generally
does not mean that there is no data available at all
upon which to base a determination of fair value
(consensus pricing data may, for example, be used).
=========================================================== ==========================================================
(d) Financial instruments measured at amortised cost
Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs.
The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. When the group intends to hold the loan, the loan commitment is included in the impairment calculations set out below.
Non-trading reverse repurchase, repurchase and similar agreements
When debt securities are sold subject to a commitment to repurchase them at a predetermined price ('repos'), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell ('reverse repos') are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price, or between the purchase and resale price, is treated as interest and recognised in net interest income over the life of the agreement.
Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo agreements.
(e) Financial assets measured at fair value through other comprehensive income ('FVOCI')
Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at FVOCI. These comprise primarily debt securities. They are recognised on the trade date when the group enters into contractual arrangements to purchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in OCI until the assets are sold. Upon disposal, the cumulative gains or losses in OCI are recognised in the income statement as 'Gains less losses from financial instruments'. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in the income statement.
(f) Equity securities measured at fair value with fair value movements presented in OCI
The equity securities for which fair value movements are shown in OCI are business facilitation and other similar investments where the group holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are not transferred to the income statement. Dividend income is recognised in the income statement.
(g) Financial instruments designated at fair value through profit or loss
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below and are so designated irrevocably at inception:
-- The use of the designation removes or significantly reduces an accounting mismatch.
-- A group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.
-- The financial liability contains one or more non-closely related embedded derivatives.
Designated financial assets are recognised when the group enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when the rights to the cash flows expire or are transferred.
Designated financial liabilities are recognised when the group enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in 'Net income from financial instruments held for trading or managed on a fair value basis' or 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss' except for the effect of changes in the liabilities' credit risk which is presented in OCI, unless that treatment would create or enlarge an accounting mismatch in profit or loss.
Under the above criterion, the main classes of financial instruments designated by the group are:
-- Debt instruments for funding purposes that are designated to reduce an accounting mismatch. The interest and/or foreign exchange exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy.
-- Financial assets and financial liabilities under unit-linked and non-linked investment contracts. A contract under which the group does not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with discretionary participation features ('DPF'), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise be measured at either fair value through OCI or amortised cost. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in the same line.
-- Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance evaluated on a fair value basis.
(h) Derivatives
Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.
Where the derivatives are managed with debt securities issued by the group that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.
Hedge accounting
When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses these derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments is recognised in OCI and the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income statement within 'Net income from financial instruments held for trading or managed on a fair value basis'. The accumulated gains and losses recognised in OCI are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in OCI remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in OCI is immediately reclassified to the income statement.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.
(i) Impairment of amortised cost and FVOCI financial assets
Expected credit losses ('ECL') are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months (or less, where the remaining life is less than 12 months) ('12-month ECL'). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where 12-month ECL is recognised are considered to be 'stage 1'; financial assets that are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit-impaired are in 'stage 3'. Purchased or originated credit-impaired financial assets ('POCI') are treated differently as set out below.
Credit-impaired (stage 3)
The group determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to pay such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and
-- the loan is otherwise considered to be in default.
If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit-impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired.
Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL allowance.
Write-off
Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Renegotiation
Loans are identified as renegotiated and classified as credit-impaired when we modify the contractual payment terms due to significant credit distress of the borrower. Renegotiated loans remain classified as credit-impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity or derecognition.
A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms or if the terms of an existing agreement are modified such that the renegotiated loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances are considered to be POCI and will continue to be disclosed as renegotiated loans.
Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any evidence of being credit-impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, over the minimum observation period, and there are no other indicators of impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.
Loan modifications other than renegotiated loans
Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that the group's rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates and no payment-related concession has been provided. Mandatory and general offer loan modifications that are not borrower-specific, for example market-wide customer relief programmes, have not been classified as renegotiated loans and generally have not resulted in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy. Changes made to these financial instruments that are economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change of the interest rate benchmark.
Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale.
However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when
30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and included on a watch or worry list are included in stage 2.
For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default ('PD') which encompasses a wide range of information including the obligor's customer risk rating ('CRR'), macroeconomic condition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure of significance varies depending on the credit quality at origination as follows:
0.1-1.2 15bps ------- ----- 2.1-3.3 30bps ------- -----
For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates.
For loans originated prior to the implementation of HKFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle ('TTC') PDs and TTC migration probabilities, consistent with the instrument's underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration based thresholds as set out in the table below:
0.1 5 notches ------- --------- 1.1-4.2 4 notches ------- --------- 4.3-5.1 3 notches ------- --------- 5.2-7.1 2 notches ------- --------- 7.2-8.2 1 notch ------- --------- 8.3 0 notch ------- ---------
Further information about the 23-grade scale used for CRR can be found on page 30.
For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.
For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores which incorporates all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies loans with a PD higher than would be expected from loans that are performing as originally expected and higher than what would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.
Unimpaired and without significant increase in credit risk - (stage 1)
ECL resulting from default events that are possible within the next 12 months is recognised for financial instruments that remain in
stage 1.
Purchased or originated credit-impaired ('POCI')
Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes the recognition of a new financial instrument following a renegotiation where concessions have been granted for economic or contractual reasons relating to the borrower's financial difficulty that otherwise would not have been considered. The amount of change-in-lifetime ECL is recognised in income statement until the POCI is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.
Movement between stages
Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are not POCI will continue to be in stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that are assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.
Measurement of ECL
The assessment of credit risk, and the estimation of ECL, are unbiased and probability-weighted, and incorporate all available information that is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.
In general, the group calculates ECL using three main components, a probability of default, a loss given default ('LGD') and the exposure at default ('EAD').
The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively.
The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money.
The group makes use of the Basel II IRB framework where possible, with recalibration to meet the differing HKFRS 9 requirements as set out in the following table:
PD
* Through the cycle (represents long-run average PD * Point in time (based on current conditions, adjusted
throughout a full economic cycle) to take into account estimates of future conditions
that will impact PD)
* The definition of default includes a backstop of 90+
days past due * Default backstop of 90+ days past due for all
portfolios
----- ---------------------------------------------------------- -----------------------------------------------------------
EAD
* Cannot be lower than current balance. * Amortisation captured for term products
----- ---------------------------------------------------------- -----------------------------------------------------------
LGD
* Downturn LGD (consistent losses expected to be * Expected LGD (based on estimate of loss given default
suffered during a severe but plausible economic including the expected impact of future economic
downturn) conditions such as changes in value of collateral)
* Regulatory floors may apply to mitigate risk of * No floors
underestimating downturn LGD due to lack of
historical data
* Discounted using the original effective interest rate
of the loan
* Discounted using cost of capital
* Only costs associated with obtaining/selling
* All collection costs included collateral included
----- ---------------------------------------------------------- -----------------------------------------------------------
Other
* Discounted back from point of default to balance
sheet date
----- ---------------------------------------------------------- -----------------------------------------------------------
While 12-month PDs are re-calibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life.
The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on the credit risk officer's estimates as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on the estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by the group and the judgement of the credit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to the most likely outcome.
Period over which ECL is measured
ECL is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which the group is exposed to credit risk. For wholesale overdrafts, credit risk management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of the next substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility. However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit the group's exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period the group remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
Forward-looking economic inputs
The group applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of its view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional/ alternative scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on pages 35 to 39.
Critical accounting estimates and judgements
The calculation of the group's ECL under HKFRS 9 requires the group
to make a number of judgements, assumptions and estimates. The most
significant are set out below:
======================================================================================================================
* Defining what is considered to be a significant * The sections 'Measurement uncertainty and sensitivity
increase in credit risk analysis of ECL estimates' marked as audited from
pages 35 to 39, set out the assumptions used in
determining ECL and provide an indication of the
* Determining the lifetime and point of initial sensitivity of the result to the application of
recognition of overdrafts and credit cards different weightings being applied to different
economic assumptions.
* Selecting and calibrating the PD, LGD and EAD model
s,
which support the calculations, including making
reasonable and supportable judgements about how
models react to current and future economic
conditions
* Selecting model inputs and economic forecasts,
including determining whether sufficient and
appropriately weighted economic forecasts are
incorporated to calculate unbiased expected loss
* Making management adjustments to account for late
breaking events, model and data limitations and
deficiencies, and expert credit judgements
========================================================= ===========================================================
(j) Insurance contracts
A contract is classified as an insurance contract where the group accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. In addition, the group issues investment contracts with discretionary participation features ('DPF') which are also accounted for as insurance contracts as required by HKFRS 4 'Insurance Contracts'.
Net insurance premium income
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they relate.
Net insurance claims and benefits paid and movements in liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
Future profit participation on insurance contracts with DPF
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and management's expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by the contractual terms, regulation, or past distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by
HKFRS 4. The group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability.
In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or OCI, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.
Liabilities under insurance contracts and Present value of in-force long-term insurance business
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by reference to the value of the relevant underlying funds or indices.
The group recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term and in-force at the balance sheet date, as an asset. The PVIF asset is presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in 'Other operating income' on a gross of tax basis.
Critical accounting estimates and judgements
The valuation of the PVIF and insurance contract liabilities are dependent
on economic assumptions (e.g. future investment returns) and non-economic
assumptions (e.g. related to policyholder behaviour or demographics).
========================================================================================================================
* The PVIF asset represents the value of the equity * The assumptions are reassessed at each reporting date
holders' interest in the issuing insurance companies' and changes in the estimates which affect the value
profits expected to emerge from these contracts of PVIF and Insurance contract liabilities are
written at the balance sheet date. It is determined reflected in the income statement. More information
by discounting those expected future profits using is included in Note 15 for PVIF and Note 3 for
appropriate assumptions in assessing factors such as Liabilities under insurance contracts.
future mortality, lapse rates, investment returns and
levels of expenses, and a risk discount rate that
reflects the risk premium attributable to the * The sections marked as audited on pages 62 to 66,
respective contracts. The PVIF incorporates 'Insurance manufacturing operations risk management'
allowances for both non-market risk and the value of provide an indication of the sensitivity of the
financial options and guarantees. result to the application of different weightings
being applied to different economic and non-economic
assumptions.
* Insurance contract liabilities are set in accordance
with local actuarial principles in each market,
aligned with local regulatory measurement frameworks.
Core judgements made in applying these frameworks
include demographic and behavioural assumptions,
expense assumptions and investment return
assumptions.
=========================================================== ===========================================================
(k) Property
Land and buildings
Land and buildings held for own use are carried at their revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment losses.
Revaluations are performed by professional qualified valuers, on a market basis, with sufficient regularity to ensure that the net carrying amount does not differ materially from the fair value. Surpluses arising on revaluation are credited firstly to the income statement, to the extent of any deficits arising on revaluation previously charged to the income statement in respect of the same land and buildings, and are thereafter taken to the 'Property revaluation reserve'. Deficits arising on revaluation are first set off against any previous revaluation surpluses included in the 'Property revaluation reserve' in respect of the same land and buildings, and are thereafter recognised in the income statement.
Leasehold land and buildings are depreciated on a straight-line basis over the shorter of the unexpired terms of the leases or the remaining useful lives.
The Government of Hong Kong owns all the land in Hong Kong and permits its use under leasehold arrangements. Similar arrangements exist in mainland China. The group accounts for its interests in own use leasehold land and land use rights in accordance with HKFRS 16 but discloses these as owned assets when the right of use are considered sufficient to constitute control.
Investment properties
The group holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties are included on balance sheet at fair value with changes in fair value being recognised in the income statement.
(l) Employee compensation and benefits
Post-employment benefit plans
The group operates a number of pension schemes including defined benefit and defined contribution, and post-employment benefit schemes.
Payments to defined contribution schemes are charged as an expense as the employees render service.
Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.
Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets excluding interest and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.
(m) Tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in OCI or directly in equity, in which case the tax is recognised in the same statement as the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled.
Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.
(n) Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.
Contingent liabilities and guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to legal proceedings or regulatory matters, are not recognised in the Consolidated Financial Statements but are disclosed unless the probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable.
The Bank has issued financial guarantees and similar contracts to other group entities. The group elects to account for certain guarantees as insurance contracts in the Bank's financial statements, in which case they are measured and recognised as insurance liabilities. This election is made on a contract-by-contract basis, and is irrevocable.
(o) Impairment of non-financial assets
Software under development is tested for impairment at least annually. Other non-financial assets such as property, plant and equipment, intangible assets (excluding goodwill) and right-of-use assets are tested for impairment at the individual asset level when there is indication of impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition, impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be the principal operating legal entities and branches divided in a similar manner as the group's operating segments.
Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying value of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs.
When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. This impairment is not allocated to financial assets within a CGU.
Impairment loss recognised in prior periods for non-financial assets is reversed when there has been a change in the estimate used to determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior periods.
2 Operating profit
----------------
(a) Net interest income
Net interest income includes:
2021 2020
HK$m HK$m
-------------------------------------------------------------- ------------------------ -------------------------
Interest income recognised on impaired financial assets 315 220
-------------------------------------------------------------- ------------------------ -------------------------
Interest income recognised on financial assets measured
at amortised cost 106,916 127,178
-------------------------------------------------------------- ------------------------ -------------------------
Interest income recognised on financial assets measured
at FVOCI 14,461 20,167
-------------------------------------------------------------- ------------------------ -------------------------
Interest expense on financial instruments, excluding interest
on financial liabilities held for trading or designated
or otherwise mandatorily measured at fair value (20,907) (33,135)
-------------------------------------------------------------- ------------------------ -------------------------
(b) Net fee income
Net fee income by reportable
segments
-------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Wealth
and Markets
Personal Commercial Global and Securities Corporate
Banking(1) Banking(1) Banking(1,2) Services(2) Centre(3) Other (GBM-other)(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Account services 809 929 367 70 - - 2,175
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Funds under
management 5,927 639 16 2,028 - - 8,610
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Cards 7,559 207 40 - - - 7,806
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Credit
facilities 409 1,371 1,304 62 - - 3,146
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Broking income 5,477 69 - 869 - - 6,415
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Imports/exports - 2,462 594 - - - 3,056
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Unit trusts 7,373 176 1 - - - 7,550
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Underwriting 1 1 869 683 - - 1,554
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Remittances 255 1,843 715 - - - 2,813
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Global custody 976 50 47 3,414 - - 4,487
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Insurance agency
commission 1,326 114 1 - - - 1,441
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Other 2,329 2,675 2,497 3,413 (2,156) 8 8,766
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Fee income 32,441 10,536 6,451 10,539 (2,156) 8 57,819
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Fee expense (8,614) (708) (705) (4,809) 2,399 (86) (12,523)
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Year ended 31
Dec 2021 23,827 9,828 5,746 5,730 243 (78) 45,296
---------------- -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- -------------------------------- --------------------------
Net fee income by reportable segments (continued)
Wealth
and Markets
Personal Commercial Global and Securities Corporate
Banking(1) Banking(1) Banking(1,2) Services(2) Centre(3) Other (GBM-other)(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ----------------------------
Account services 864 864 297 62 3 8 2,098
---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Funds under management 5,071 677 8 1,788 - - 7,544 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Cards 6,732 171 35 - 1 - 6,939 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Credit facilities 349 1,347 1,175 - - - 2,871 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Broking income 5,473 58 - 682 - - 6,213 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Imports/exports - 2,176 755 - 1 - 2,932 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Unit trusts 5,991 142 1 - - - 6,134 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Underwriting 1 1 838 683 (12) - 1,511 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Remittances 290 1,630 697 - (18) - 2,599 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Global custody 942 53 70 2,928 - - 3,993 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Insurance agency commission 1,308 107 1 - - - 1,416 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Other 2,312 2,363 2,288 3,263 (2,121) 15 8,120 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Fee income 29,333 9,589 6,165 9,406 (2,146) 23 52,370 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Fee expense (7,159) (587) (783) (4,433) 2,308 (46) (10,700) ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ---------------------------- Year ended 31 Dec 2020 22,174 9,002 5,382 4,973 162 (23) 41,670 ---------------- --------------------------------- --------------------------------- --------------------------------- ------------------------------- --------------------------------- --------------------------------- ----------------------------
1 In 2021, the cards acquiring business has been transferred from Commercial Banking ('CMB') and Global Banking ('GB') to Wealth and Personal Banking ('WPB') to align with the business model. Comparatives have been re-presented to conform to the current year's presentation.
2 In the second half of 2021, the reportable segments have been changed to reflect the change in the management of the Global Banking and Markets ('GBM') business, with the splitting out of GB and Markets and Securities Services ('MSS') as separate reportable segments, whilst GBM-Other (previously reported within GBM) is now reported under 'Other (GBM-other)'. Comparatives have been re-presented to conform to the current year's presentation. Further details on the change in reportable segments are set out in Note 31 'Segmental analysis' in the Consolidated Financial Statements.
3 Includes inter-segment elimination.
Net fee income includes:
2021 2020
HK$m HK$m
------------------------------------------------------------ ------------------------- ---------------------------
Fees earned on financial assets that are not at fair
value through profit and loss (other than amounts included
in determining the effective interest rate) 9,742 9,373
------------------------------------------------------------ ------------------------- ---------------------------
- fee income 15,173 13,850
------------------------------------------------------------
- fee expense (5,431) (4,477)
------------------------------------------------------------ -------------------------
Fee earned on trust and other fiduciary activities 11,242 9,745
------------------------------------------------------------ ------------------------- ---------------------------
- fee income 12,801 11,012
------------------------------------------------------------
- fee expense (1,559) (1,267)
------------------------------------------------------------ -------------------------
(c) Net income from financial instruments measured at fair value through profit or loss
2021 2020
HK$m HK$m
--------------------------------------------------------- ----------------------------- ----------------------------
Net income/(expense) arising on:
--------------------------------------------------------- ----------------------------- ----------------------------
Net trading activities 29,888 35,141
--------------------------------------------------------- ----------------------------- ----------------------------
Other instruments managed on a fair value basis (1,529) (2,969)
--------------------------------------------------------- ----------------------------- ----------------------------
Net income from financial instruments held for trading
or managed on a fair value basis 28,359 32,172
--------------------------------------------------------- ----------------------------- ----------------------------
Financial assets held to meet liabilities under insurance
and investment contracts 17,837 15,873
--------------------------------------------------------- ----------------------------- ----------------------------
Liabilities to customers under investment contracts 343 (2,745)
--------------------------------------------------------- ----------------------------- ----------------------------
Net income from assets and liabilities of insurance
businesses, including related derivatives, measured
at fair value through profit or loss 18,180 13,128
--------------------------------------------------------- ----------------------------- ----------------------------
Change in fair value of designated debt issued and
related
derivatives(1) (639) (171)
--------------------------------------------------------- ----------------------------- ----------------------------
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss (25) 138
--------------------------------------------------------- ----------------------------- ----------------------------
Year ended 31 Dec 45,875 45,267
--------------------------------------------------------- ----------------------------- ----------------------------
1 Includes debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting mismatch.
(d) Other operating income
2021 2020
HK$m HK$m
------------------------------------------------------ ------------------------------ ------------------------------
Movement in present value of in-force insurance
business (1,294) 3,840
------------------------------------------------------ ------------------------------ ------------------------------
Gains/(losses) on investment properties 277 (996)
------------------------------------------------------ ------------------------------ ------------------------------
Losses on disposal of property, plant and equipment
and assets held for sale (54) (61)
------------------------------------------------------ ------------------------------ ------------------------------
Gains/(losses) on disposal of subsidiaries, associates
and business portfolios 4 (70)
------------------------------------------------------ ------------------------------ ------------------------------
Rental income from investment properties 393 370
------------------------------------------------------ ------------------------------ ------------------------------
Dividend income 198 165
------------------------------------------------------ ------------------------------ ------------------------------
Other 2,509 2,364
------------------------------------------------------ ------------------------------ ------------------------------
Year ended 31 Dec 2,033 5,612
------------------------------------------------------ ------------------------------ ------------------------------
There was a gain on disposal of loans and receivables of HK$77m in the year (2020: loss of HK$52m). There was a loss on disposal of financial liabilities measured at amortised cost of HK$136m in the year (2020: nil).
(e) Change in expected credit losses and other credit impairment charges
Change in expected credit losses and other credit impairment charges
arising from the following asset categories:
2021 2020
HK$m HK$m
----------------------------------------------- --------------------------- ----------------------------
Loans and advances to banks and customers 7,055 16,509
----------------------------------------------- --------------------------- ----------------------------
- new allowances net of allowance releases 8,065 17,242
-----------------------------------------------
- recoveries of amounts previously written off (1,010) (733)
----------------------------------------------- ---------------------------
Loan commitments and guarantees (683) 654
----------------------------------------------- --------------------------- ----------------------------
Other financial assets 167 556
----------------------------------------------- --------------------------- ----------------------------
Year ended 31 Dec 6,539 17,719
----------------------------------------------- --------------------------- ----------------------------
Change in expected credit losses as a percentage of average gross customer advances was 0.18% for 2021 (2020: 0.44%).
(f) General and administrative expenses
2021 2020
HK$m HK$m
----------------------------------- --------------------- -----------------------
Premises and equipment 2,867 2,804
----------------------------------- ---------------------
Marketing and advertising expenses 2,417 1,959
----------------------------------- --------------------- -----------------------
Other administrative expenses(1) 47,043 41,541
----------------------------------- --------------------- -----------------------
Year ended 31 Dec 52,327 46,304
----------------------------------- --------------------- -----------------------
1 Include recharges from fellow group entities. Further details are set out in Note 32.
Included in operating expenses were direct operating expenses of HK$37m (2020: HK$31m) arising from investment properties that generated rental income in the year. Direct operating expenses arising from investment properties that did not generate rental income amounted to HK$4m (2020: HK$3m).
(g) Depreciation and impairment of property, plant and equipment
2021 2020
HK$m HK$m
------------------------------------ --------------------- -----------------------
Owned property, plant and equipment 6,019 6,059
------------------------------------ --------------------- -----------------------
Other right-of-use assets 2,872 3,346
------------------------------------ --------------------- -----------------------
Year ended 31 Dec 8,891 9,405
------------------------------------ --------------------- -----------------------
(h) Auditors' remuneration
Auditors' remuneration amounted to HK$152m (2020: HK$163m).
3 Insurance business
------------------
Net insurance premium Income
------------------------ --------------------------- ------------------------
Non-linked
insurance Unit-linked Total
HK$m HK$m HK$m
------------------------------------- ------------------------ --------------------------- ------------------------
Gross insurance premium income 62,937 2,398 65,335
------------------------------------- ------------------------ --------------------------- ------------------------
Reinsurers' share of gross insurance
premium income (3,594) (19) (3,613)
------------------------------------- ------------------------ --------------------------- ------------------------
Year ended 31 Dec 2021 59,343 2,379 61,722
------------------------------------- ------------------------ --------------------------- ------------------------
Gross insurance premium income 61,979 1,693 63,672
------------------------------------- ------------------------ --------------------------- ------------------------
Reinsurers' share of gross insurance
premium income (2,091) (18) (2,109)
------------------------------------- ------------------------ --------------------------- ------------------------
Year ended 31 Dec 2020 59,888 1,675 61,563
------------------------------------- ------------------------ --------------------------- ------------------------
Net insurance claims and benefits paid and movement in liabilities
to policyholders
Non-linked
insurance Unit-linked Total
HK$m HK$m HK$m
----------------------------------- ------------------------- --------------------------- -------------------------
Gross claims and benefits paid and
movement in
liabilities to policyholders 78,159 1,898 80,057
----------------------------------- ------------------------- --------------------------- -------------------------
- claims, benefits and surrenders
paid 18,573 6,735 25,308
-----------------------------------
- movement in liabilities 59,586 (4,837) 54,749
----------------------------------- ------------------------- ---------------------------
Reinsurers' share of claims and
benefits paid and
movement in liabilities (4,013) 4 (4,009)
----------------------------------- ------------------------- --------------------------- -------------------------
- claims, benefits and surrenders
paid (2,048) (39) (2,087)
-----------------------------------
- movement in liabilities (1,965) 43 (1,922)
----------------------------------- ------------------------- ---------------------------
Year ended 31 Dec 2021 74,146 1,902 76,048
----------------------------------- ------------------------- --------------------------- -------------------------
Gross claims and benefits paid and
movement in
liabilities to policyholders 74,810 5,594 80,404
----------------------------------- ------------------------- --------------------------- -------------------------
- claims, benefits and surrenders
paid 25,876 5,990 31,866
-----------------------------------
- movement in liabilities 48,934 (396) 48,538
----------------------------------- ------------------------- ---------------------------
Reinsurers' share of claims and
benefits paid and
movement in liabilities (2,459) (34) (2,493)
----------------------------------- ------------------------- --------------------------- -------------------------
- claims, benefits and surrenders
paid (2,773) (50) (2,823)
-----------------------------------
- movement in liabilities 314 16 330
----------------------------------- ------------------------- ---------------------------
Year ended 31 Dec 2020 72,351 5,560 77,911
----------------------------------- ------------------------- --------------------------- -------------------------
Liabilities under insurance contracts
2021 2020
--------------------------------------------------------------------------------- ----------------------------------------------------------------------------------
Reinsurers' Reinsurers'
Gross share(2) Net Gross share(2) Net
HK$m HK$m HK$m HK$m HK$m HK$m
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
Non-linked insurance
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
At 1 Jan 547,058 (25,361) 521,697 494,181 (26,247) 467,934
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
Claims and benefits
paid (18,573) 2,048 (16,525) (25,876) 2,773 (23,103)
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
Increase/(decrease)
in liabilities
to policyholders 78,159 (4,013) 74,146 74,810 (2,459) 72,351
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
Exchange differences
and other
movements(1) 1,856 (35) 1,821 3,943 572 4,515
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
At 31 Dec 608,500 (27,361) 581,139 547,058 (25,361) 521,697
Unit-linked
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
At 1 Jan 34,348 (4) 34,344 34,579 (35) 34,544
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
Claims and benefits
paid (6,735) 39 (6,696) (5,990) 50 (5,940)
-------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
Increase/(decrease)
in liabilities
to policyholders 1,898 4 1,902 5,594 (34) 5,560 -------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- ------------------------- Exchange differences and other movements(1) 134 (44) 90 165 15 180 -------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- ------------------------- At 31 Dec 29,645 (5) 29,640 34,348 (4) 34,344 Total liabilities to policyholders 638,145 (27,366) 610,779 581,406 (25,365) 556,041 -------------------- ------------------------ ---------------------------- ------------------------- ------------------------- ---------------------------- -------------------------
1 'Exchange differences and other movements' includes movements in liabilities arising from net unrealised investment gains recognised in other comprehensive income.
2 Amounts recoverable from reinsurance of liabilities under insurance contracts are included in the consolidated balance sheet in 'Prepayment, accrued income and other assets'.
The key factors contributing to the movement in liabilities to policyholders included movements in the market value of assets supporting policyholder liabilities, death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders.
4 Employee compensation and benefits
----------------------------------
2021 2020
HK$m HK$m
------------------------------------- --------------------------- ----------------------------
Wages and salaries(1) 35,736 33,367
------------------------------------- --------------------------- ----------------------------
Social security costs 1,344 893
------------------------------------- --------------------------- ----------------------------
Post-employment benefits 2,181 1,923
------------------------------------- --------------------------- ----------------------------
- defined contribution pension plans 1,651 1,528
-------------------------------------
- defined benefit pension plans 530 395
------------------------------------- ---------------------------
Year ended 31 Dec 39,261 36,183
------------------------------------- --------------------------- ----------------------------
1 'Wages and salaries' includes the effect of share-based payments arrangements of HK$951m (2020: HK$694m).
Post-employment benefit plans
The group operates a number of post-employment benefit plans for its employees. Some of these plans are defined benefit plans, of which the largest plan is The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (the 'Principal Plan').
The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and the discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Present
value of
Fair value defined Net defined
of benefit benefit
plan assets obligations liability
HK$m HK$m HK$m
--------------------- ------------------------------- -------------------------------- -------------------------------
At 1 Jan 2021 10,453 (13,140) (2,687)
--------------------- ------------------------------- -------------------------------- -------------------------------
Service cost - (475) (475)
--------------------- ------------------------------- -------------------------------- -------------------------------
- current service
cost - (492) (492)
---------------------
- past service cost
and gains/(losses)
from
settlements - 17 17
--------------------- ------------------------------- --------------------------------
Net interest
income/(expense) on
the net defined
benefit
asset/(liability) 79 (125) (46)
--------------------- ------------------------------- -------------------------------- -------------------------------
Re-measurement
effects recognised
in other
comprehensive
income 500 385 885
--------------------- ------------------------------- -------------------------------- -------------------------------
- return on plan
assets (excluding
interest
income) 500 - 500
---------------------
- actuarial gains - 385 385
--------------------- ------------------------------- --------------------------------
Contributions by the
group 356 - 356
--------------------- ------------------------------- -------------------------------- -------------------------------
Benefits paid (1,340) 1,407 67
--------------------- ------------------------------- -------------------------------- -------------------------------
Exchange differences
and other movements 27 3 30
--------------------- ------------------------------- -------------------------------- -------------------------------
At 31 Dec 2021 10,075 (11,945) (1,870)
--------------------- ------------------------------- -------------------------------- -------------------------------
Retirement benefit
liabilities
recognised on
the balance sheet (1,890)
--------------------- ------------------------------- -------------------------------- -------------------------------
Retirement benefit
assets recognised on
the
balance sheet
(within 'Prepayment,
accrued income
and other assets') 20
--------------------- ------------------------------- -------------------------------- -------------------------------
At 1 Jan 2020 10,302 (12,848) (2,546)
--------------------- --------------------------------- -------------------------------- --------------------------------
Service cost - (318) (318)
--------------------- --------------------------------- -------------------------------- --------------------------------
- current service
cost - (492) (492)
---------------------
- past service cost
and gains/(losses)
from
settlements - 174 174
--------------------- --------------------------------- --------------------------------
Net interest income/
(expense) on the net
defined
benefit
asset/(liability) 202 (263) (61)
--------------------- --------------------------------- -------------------------------- --------------------------------
Re-measurement
effects recognised
in other
comprehensive
income 446 (830) (384)
--------------------- --------------------------------- -------------------------------- --------------------------------
- return on plan
assets (excluding
interest
income) 446 - 446
---------------------
- actuarial losses - (830) (830)
--------------------- --------------------------------- --------------------------------
Contributions by the
group 602 - 602
--------------------- --------------------------------- -------------------------------- --------------------------------
Benefits paid (1,097) 1,153 56
--------------------- --------------------------------- -------------------------------- --------------------------------
Exchange differences
and other movements (2) (34) (36)
--------------------- --------------------------------- -------------------------------- --------------------------------
At 31 Dec 2020 10,453 (13,140) (2,687)
--------------------- --------------------------------- -------------------------------- --------------------------------
Retirement benefit
liabilities
recognised on
the balance sheet (2,701)
--------------------- --------------------------------- -------------------------------- --------------------------------
Retirement benefit
assets recognised on
the
balance sheet
(within 'Prepayment,
accrued income
and other assets') 14
--------------------- --------------------------------- -------------------------------- --------------------------------
Fair value of plan assets by asset classes
At 31 Dec 2021 At 31 Dec 2020
------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------
Quoted Quoted
market market
price in price in
active Thereof active Thereof
Value market HSBC Value market HSBC
HK$m HK$m HK$m HK$m HK$m HK$m
------------ ------------------------------ ------------------------------ -------------------------------- ------------------------------- ------------------------------- --------------------------------
Fair value
of plan
assets 10,075 10,075 257 10,453 10,453 219
------------ ------------------------------ ------------------------------ -------------------------------- ------------------------------- ------------------------------- --------------------------------
- equities 1,232 1,232 - 1,547 1,547 -
------------
- bonds 5,676 5,676 - 5,562 5,562 -
------------
-
alternative
investments 2,490 2,490 - 2,838 2,838 -
------------
- other(1) 677 677 257 506 506 219
------------ ------------------------------ ------------------------------ -------------------------------- ------------------------------- -------------------------------
1 Other mainly consists of cash and cash deposits.
The Principal Plan
In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme ('LSRBS'), the Principal Plan, covers employees of the group and HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the Group set up in Hong Kong as part of the recovery and resolution planning to provide functional support services to the group, as well as certain other local employees of the Group. The Principal Plan comprises a funded defined benefit scheme (which provides a lump sum benefit on retirement and is now closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees, and the group has been providing defined contribution plans to all new employees. Since the defined benefit scheme of the Principal Plan is a final salary lump sum scheme, its exposure to longevity risk and interest rate risk is limited compared to a scheme that provides annuity payments.
The Principal Plan is a funded plan with assets which are held in trust funds separate from the group. The investment strategy of the defined benefit scheme of the Principal Plan is to hold the majority of assets in fixed income investments, with a smaller portion in equities. The target asset allocation for the portfolio is as follows: Fixed income investments 75% and Equity 25%. Each investment manager has been assigned a benchmark applicable to their respective asset class. The actuarial funding valuation of the Principal Plan is conducted at least on a triennial basis in accordance with the local practice and regulations. The actuarial assumptions used to conduct the actuarial funding valuation of the Principal Plan vary according to the economic conditions.
The trustee, which is a subsidiary of the Bank, assumes the overall responsibility for the Principal Plan and the group has established a management committee and a number of sub-committees to broaden the governance and manage the concomitant issues.
Both the group and ServCo participate in the Principal Plan that shares risks between the entities which are under common control of the Group. As agreed between the group and ServCo, the net defined benefit cost of the defined benefit scheme of the Principal Plan shall be charged separately. Details on the defined benefit scheme of the Principal Plan are disclosed below.
Net asset/(liability) under the defined benefit scheme of the Principal
Plan
Included within Included within
the group ServCo
------------------------------------------------------------------ ------------------------------------------------------------------
Present Present
value value
Fair of Net Fair of Net
value defined defined value defined defined
of plan benefit benefit of plan benefit benefit
assets obligations liability assets obligations liability
HK$m HK$m HK$m HK$m HK$m HK$m
------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ----------------------
At 1 Jan 2021 4,486 (5,330) (844) 4,288 (5,001) (713) ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- Service cost - (179) (179) - (171) (171) ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- - current service cost - (179) (179) - (171) (171) ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- Net interest income/(expense) on the net defined benefit asset/(liability) 22 (26) (4) 21 (24) (3) ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- Re-measurement effects recognised in other comprehensive income 265 118 383 250 240 490 ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- - return on plan assets (excluding interest income) 265 - 265 250 - 250 ------------------ - actuarial gains - 118 118 - 240 240 ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- Contributions 166 - 166 149 - 149 ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- Benefits paid (585) 585 - (682) 682 - ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- Exchange differences and other movements 70 (83) (13) (81) 83 2 ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- At 31 Dec 2021 4,424 (4,915) (491) 3,945 (4,191) (246) ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- Retirement benefit liabilities recognised on the balance sheet (491) (246) ------------------ -------------------- -------------------- ---------------------- -------------------- -------------------- ---------------------- At 1 Jan 2020 4,654 (5,252) (598) 4,445 (4,960) (515) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ---------------------- Service cost - (182) (182) - (175) (175) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ---------------------- * current service cost - (182) (182) - (175) (175) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- Net interest income/ (expense) on the net defined benefit asset/(liability) 80 (89) (9) 76 (84) (8) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ---------------------- Re-measurement effects recognised in other comprehensive income 114 (325) (211) 110 (297) (187) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ---------------------- * return on plan assets (excluding interest income) 114 - 114 110 - 110 -------------------------------------------------------- * actuarial losses - (325) (325) - (297) (297) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- Contributions 183 - 183 174 - 174 -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ---------------------- Benefits paid (549) 549 - (484) 484 - -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ---------------------- Exchange differences and other movements 4 (31) (27) (33) 31 (2) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ---------------------- At 31 Dec 2020 4,486 (5,330) (844) 4,288 (5,001) (713) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ---------------------- Retirement benefit liabilities recognised on the balance sheet (844) (713) -------------------------------------------------------- ---------------------- --------------------- ---------------------- --------------------- --------------------- ----------------------
The group expects to make HK$160m of contributions to the defined benefit scheme of the Principal Plan and ServCo expects to make HK$136m contributions to the defined benefit scheme of the Principal Plan during 2022. This is determined separately by the group and ServCo by reference to the actuarial funding valuation carried out by the Principal Plan's local actuary.
Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate for the five years thereafter, are as follows:
Benefits expected to be paid from the defined benefit scheme of the
Principal Plan(1)
2022 2023 2024 2025 2026 2027-2031
As HK$m HK$m HK$m HK$m HK$m HK$m
reported
by:
--------- ------------------------------ ------------------------------ ---------------------- ------------------------------ ------------------------------ ----------------------------
- The
group 381 467 383 362 396 1,896
--------- ------------------------------ ------------------------------ ---------------------- ------------------------------ ------------------------------ ----------------------------
- ServCo 286 284 333 365 287 1,785 --------- ------------------------------ ------------------------------ ---------------------- ------------------------------ ------------------------------ ----------------------------
1 The duration of the defined benefit obligation is seven years for the Principal Plan under the disclosure assumptions adopted (2020: seven years).
Fair value of plan assets of the defined benefit scheme of the Principal
Plan by asset classes
At 31 Dec 2021 At 31 Dec 2020
---------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------
Quoted Quoted
market market
price in price in
active Thereof active Thereof
Value market HSBC Value market HSBC
HK$m HK$m HK$m HK$m HK$m HK$m
------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- --------------------------------
Fair value
of plan
assets 8,369 8,369 76 8,775 8,775 124
------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------- ------------------------------- --------------------------------
- equities 1,839 1,839 - 2,448 2,448 -
------------
- bonds 4,731 4,731 - 4,537 4,537 -
------------
-
alternative
investments 1,723 1,723 - 1,676 1,676 -
------------
- other(1) 76 76 76 114 114 124
------------ -------------------------------- -------------------------------- -------------------------------- ------------------------------- -------------------------------
1 Other mainly consists of cash and cash deposits.
The Principal Plan's key actuarial financial assumptions
The group and ServCo determine the discount rate to be applied to the defined benefit scheme's obligations in consultation with the Principal Plan's local actuary, on the basis of the current average yields of Hong Kong Government bonds and Hong Kong Exchange Fund Notes, with maturities consistent with that of the defined benefit obligations.
The key actuarial assumptions used to calculate the group's obligations for the defined benefit scheme of the Principal Plan for the year, and used as the basis for measuring the expenses were as follows:
Key
actuarial
assumptions
for the
defined
benefit
scheme of
the
Principal
Plan
---------------------------------------------------- --------------------------------------------------
Rate of pay
Discount rate increase
% p.a. % p.a.
------------ ---------------------------------------------------- --------------------------------------------------
At 31 Dec
2021 1.30 3.00
------------ ---------------------------------------------------- --------------------------------------------------
2% p.a. for
2020 and 2021
At 31 Dec and 3% p.a.
2020 0.50 thereafter
------------ ---------------------------------------------------- --------------------------------------------------
Actuarial assumption sensitivities
The discount rate and rate of pay increase are sensitive to changes in market conditions arising during the reporting period. The following table shows the financial impact of assumption changes on the defined benefit scheme of the Principal Plan at year end:
The effect of changes in key assumptions on the defined benefit scheme
of the Principal Plan
Impact on HSBC Group Hong
Kong Local Staff Retirement
Benefit Scheme obligation
------------------------------------------------------------------------------------------------------
Financial impact Financial impact
of increase of decrease
-------------------------------------------------- --------------------------------------------------
2021 2020 2021 2020
HK$m HK$m HK$m HK$m
Discount rate -
increase/decrease
of 0.25% (158) (180) 162 185
------------------ ------------------------ ------------------------ ------------------------ ------------------------
Pay -
increase/decrease
of 0.25% 160 182 (157) (178)
------------------ ------------------------ ------------------------ ------------------------ ------------------------
Directors' emoluments
The aggregate emoluments of the Directors of the Bank disclosed pursuant to section 4 of the Companies (Disclosure of Information about Benefits of Directors) Regulation were HK$131m (2020: HK$106m). This comprises fees (which represent the aggregate emoluments paid to or receivable by directors in respect of their services as a director) of HK$30m (2020: HK$26m) and other emoluments of HK$101m (2020: HK$80m) which includes contributions to pension schemes of HK$1m (2020: nil). Non-cash benefits which are included in other emoluments mainly relate to share-based payment awards, and the provision of housing and furnishing.
Details on loans to directors are set out in Note 32.
5 Tax ---
The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2020: 16.5%) on the profits for the year assessable in Hong Kong. Overseas branches and subsidiaries have similarly provided for tax in the countries in which they operate at the appropriate rates of tax in force in 2021. Deferred taxation is provided for in accordance with the group's accounting policy in Note 1.2(m).
Tax expense
2021 2020
HK$m HK$m
------------------------------------------------------- --------------------------- --------------------------
Current tax 12,489 14,279
------------------------------------------------------- --------------------------- --------------------------
- Hong Kong taxation - on current year profit 5,719 7,316
-------------------------------------------------------
- Hong Kong taxation - adjustments in respect of prior
years (158) (457) ------------------------------------------------------- - overseas taxation - on current year profit 7,151 7,668 ------------------------------------------------------- - overseas taxation - adjustments in respect of prior years (223) (248) ------------------------------------------------------- --------------------------- Deferred tax 1,526 226 ------------------------------------------------------- --------------------------- -------------------------- - origination and reversal of temporary differences 1,209 (414) ------------------------------------------------------- - effect of changes in tax rates 9 36 ------------------------------------------------------- - adjustments in respect of prior years 308 604 ------------------------------------------------------- --------------------------- Year ended 31 Dec 14,015 14,505 ------------------------------------------------------- --------------------------- --------------------------
Tax reconciliation
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the applicable tax rates in the countries concerned as follows:
Reconciliation between taxation charge and accounting profit at applicable
tax rates
2021 2020
HK$m HK$m
-------------------------------------------------------- --------------------------- ----------------------------
Profit before tax 86,563 90,196
-------------------------------------------------------- --------------------------- ----------------------------
Notional tax on profit before tax, calculated at the
rates applicable to profits in the countries concerned 17,463 18,058
-------------------------------------------------------- --------------------------- ----------------------------
Effects of profits in associates and joint ventures (3,186) (2,523)
-------------------------------------------------------- --------------------------- ----------------------------
Non-taxable income and gains (3,181) (3,291)
-------------------------------------------------------- --------------------------- ----------------------------
Local taxes and overseas withholding taxes 2,695 2,270
-------------------------------------------------------- --------------------------- ----------------------------
Permanent disallowables 577 523
-------------------------------------------------------- --------------------------- ----------------------------
Others (353) (532)
-------------------------------------------------------- --------------------------- ----------------------------
Year ended 31 Dec 14,015 14,505
-------------------------------------------------------- --------------------------- ----------------------------
Movements of deferred tax assets and liabilities
Impairment
Accelerated allowance
capital Insurance Expense on financial Revaluation
allowances business provisions instruments of properties Other(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
Assets 102 - 1,294 2,676 - 3,088 7,160
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
Liabilities (358) (10,662) - - (14,645) (9,167) (34,832)
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
At 1 Jan 2021 (256) (10,662) 1,294 2,676 (14,645) (6,079) (27,672)
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
Exchange and
other
adjustments (6) 2 (42) (75) (1) (11) (133)
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
Charge/(credit)
to income
statement (142) 232 286 80 524 (2,506) (1,526)
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
Charge/(credit)
to other
comprehensive
income - - 1 (1) (863) 1,025 162
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
At 31 Dec 2021 (404) (10,428) 1,539 2,680 (14,985) (7,571) (29,169)
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
Assets(1) 176 - 1,557 2,680 - 2,106 6,519
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
Liabilities(1) (580) (10,428) (18) - (14,985) (9,677) (35,688)
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------- ----------------------------- ---------------------------
Assets 183 - 1,290 1,478 - 2,280 5,231
---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ---------------------------- Liabilities (332) (10,140) - - (16,462) (6,007) (32,941) ---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ---------------------------- At 1 Jan 2020 (149) (10,140) 1,290 1,478 (16,462) (3,727) (27,710) ---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ---------------------------- Exchange and other adjustments 6 (19) 81 23 (52) 73 112 ---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ---------------------------- Charge/(credit) to income statement (113) (503) (63) 1,176 729 (1,452) (226) ---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ---------------------------- Charge/(credit) to other comprehensive income - - (14) (1) 1,140 (973) 152 ---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ---------------------------- At 31 Dec 2020 (256) (10,662) 1,294 2,676 (14,645) (6,079) (27,672) ---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ---------------------------- Assets(1) 102 - 1,294 2,676 - 3,088 7,160 ---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ---------------------------- Liabilities(1) (358) (10,662) - - (14,645) (9,167) (34,832) ---------------- ------------------------------- ------------------------------ ------------------------------ ------------------------------- ------------------------------ ----------------------------- ----------------------------
1 After netting off balances within countries, the balances as disclosed in the Consolidated Financial Statements are as follows: deferred tax assets HK$3,353m (2020: HK$3,325m); and deferred tax liabilities HK$32,522m (2020: HK$30,997m).
2 Other included deferred tax of HK$5,523m (2020: HK$4,295m) provided in respect of distributable reserves or post-acquisition reserves of associates that, on distribution or sale, would attract withholding tax.
The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$3,130m (2020: HK$3,969m). Of this amount, HK$733m (2020: HK$1,917m) has no expiry date and the remaining will expire within 10 years.
Deferred tax is not recognised in respect of the group's investments in subsidiaries and branches where remittance or other realisation is not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise.
6 Dividends
---------
Dividends to shareholders of the parent company
2021 2020
HK$ per HK$m HK$ per HK$m
share share
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
Dividends paid on ordinary shares
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
In respect of previous year:
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
* fourth interim dividend 0.47 21,665 0.58 27,026
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
In respect of current year:
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
- first interim dividend paid 0.26 12,211 0.13 5,814
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
- second interim dividend paid 0.24 11,153 0.19 8,915
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
* third interim dividend paid 0.24 11,361 0.22 10,063
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
Total 1.21 56,390 1.12 51,818
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
Distributions on other equity
instruments 2,715 2,450
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
Dividends to shareholders 59,105 54,268
---------------------------------- ------------------------------ ---------------------------- ------------------------------- -----------------------------
On 15 February 2022, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2021 of HK$0.23 per ordinary share (HK$10,584m) (2020: HK$0.47 per ordinary share (HK$21,665m)). No liability was recorded in the financial statements in respect of the fourth interim dividend for 2021.
Total coupons on other equity instruments
2021 2020
HK$m HK$m
----------------------------------------------------- ------------------------------ -------------------------------
US$900m Fixed rate perpetual subordinated loan
(interest
rate fixed at 6.510%)(1) 456 454
----------------------------------------------------- ------------------------------ -------------------------------
US$900m Fixed rate perpetual subordinated loan
(interest
rate fixed at 6.030%)(1) 422 420
----------------------------------------------------- ------------------------------ -------------------------------
US$1,000m Fixed rate perpetual subordinated loan
(interest
rate fixed at 6.090%)(1) 474 370 ----------------------------------------------------- ------------------------------ ------------------------------- US$1,200m Fixed rate perpetual subordinated loan (interest rate fixed at 6.172%)(1) 576 445 ----------------------------------------------------- ------------------------------ ------------------------------- US$600m Fixed rate perpetual subordinated loan (interest rate fixed at 5.910%)(1) 275 249 ----------------------------------------------------- ------------------------------ ------------------------------- US$1,100m Fixed rate perpetual subordinated loan (interest rate fixed at 6.000%)(1) 512 512 ----------------------------------------------------- ------------------------------ ------------------------------- Total 2,715 2,450 ----------------------------------------------------- ------------------------------ -------------------------------
1 These subordinated loans were issued in May and June 2019 and discretionary coupons are paid annually.
7 Trading assets
--------------
2021 2020
HK$m HK$m
---------------------------------- -------------------------- ----------------------------
Treasury and other eligible bills 132,104 113,668
---------------------------------- -------------------------- ----------------------------
Debt securities 274,508 265,255
---------------------------------- -------------------------- ----------------------------
Equity securities 299,420 166,385
---------------------------------- -------------------------- ----------------------------
Other(1) 71,418 55,106
---------------------------------- -------------------------- ----------------------------
At 31 Dec 777,450 600,414
---------------------------------- -------------------------- ----------------------------
1 'Other' includes reverse repos, stock borrowing, term lending and other accounts with banks and customers.
8 Derivatives
-----------
Notional contract amounts and fair values of derivatives by product
contract type
Notional contract Fair value - Assets Fair value - Liabilities
amount
------------------------------------------------ ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Trading Hedging Trading Hedging Total Trading Hedging Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Foreign
Exchange 17,721,333 74,732 155,110 3,401 158,511 150,034 523 150,557
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Interest
rate 30,392,783 218,885 368,523 4,321 372,844 372,342 1,406 373,748
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Equity 845,058 - 18,611 - 18,611 14,800 - 14,800
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Credit 413,340 - 3,446 - 3,446 4,437 - 4,437
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Commodity
and
other 146,377 - 1,884 - 1,884 2,378 - 2,378
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Gross
total 49,518,891 293,617 547,574 7,722 555,296 543,991 1,929 545,920
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Offset (190,129) (190,129)
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
At 31 Dec
2021 365,167 355,791
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Foreign
Exchange 18,274,306 100,371 238,746 232 238,978 261,792 2,625 264,417
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Interest
rate 26,906,526 304,554 357,195 6,099 363,294 327,675 6,718 334,393
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Equity 591,614 - 13,810 - 13,810 19,072 - 19,072
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Credit 553,790 - 5,381 - 5,381 5,955 - 5,955
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Commodity
and
other 115,673 - 2,138 - 2,138 5,030 - 5,030
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
Gross
total 46,441,909 404,925 617,270 6,331 623,601 619,524 9,343 628,867
---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- ----------------------- Offset (200,656) (200,656) ---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- ----------------------- At 31 Dec 2020 422,945 428,211 ---------- -------------------- -------------------------- ----------------------- -------------------------- ----------------------- ----------------------- -------------------------- -----------------------
The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.
Use of derivatives
The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risk arising from client business, and to manage and hedge the group's own risks. Derivatives (except for derivatives which are designated as effective hedging instruments) are held for trading. Within the held for trading classification are two types of derivative instruments: those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments designated at fair value. These activities are described more fully below.
The group's derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to ensure that they remain within acceptable risk levels. When entering into derivative transactions, the group employs the same credit risk management framework to assess and approve potential credit exposures that it uses for traditional lending.
Trading derivatives
Most of the group's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.
Derivatives valued using models with unobservable inputs
Any initial gain or loss on financial instruments where the valuation is dependent on unobservable parameters is deferred over the life of the contract or until the instrument is redeemed, transferred or sold or the fair value becomes observable. All derivatives that are part of qualifying hedging relationships have valuations based on observable market parameters.
The aggregate unobservable inception profit yet to be recognised in the income statement is immaterial.
Hedge accounting derivatives
The group applies hedge accounting to manage the following risks: interest rate and foreign exchange. The group uses derivatives (principally interest rate and currency swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables the group to optimise its overall costs of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities. The accounting treatment of hedging transactions varies according to the nature of the instrument hedged and the type of hedging transaction. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, or cash flow hedges.
Fair value hedges
The group enters into to fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value due to movements in market interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss, including debt securities held and issued.
Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fair value of derivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items and hedging instruments.
For some debt securities held, the group manages interest rate risk in a dynamic risk management strategy. The assets in scope of this strategy are high quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements.
The interest rate risk of the group's fixed rate debt securities issued is managed in a non-dynamic risk management strategy.
Cash flow hedges
The group's cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign-currency basis.
The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuances of non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.
The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes in foreign exchange market rates with cross-currency swaps; these are considered non-dynamic hedges.
Interest rate benchmark reform
At 31 December 2021, HK$99,608m (2020: HK$192,048m) of the notional amounts of interest rate derivatives designated in hedge accounting relationships do not represent the extent of the risk exposure managed by the group but they are expected to be directly affected by market-wide Ibors reform and in scope of HKFRS Interest Rate Benchmark Reform Phase 1 amendments.
Further details regarding the impact of the market-wide benchmarks reform is set out in the 'Top and emerging risks' section on page 20 as specified as 'Audited'.
9 Financial assets designated and otherwise mandatorily measured at
fair value through profit or loss
-----------------------------------------------------------------
2021 2020
------------------------------------------------------------------------------ --------------------------------------------------------------------------------
Mandatorily Mandatorily
Designated measured Designated measured
at fair at fair at fair at fair
value value Total value value Total
HK$m HK$m HK$m HK$m HK$m HK$m
----------- -------------------------- ------------------------ ------------------------ -------------------------- ------------------------- -------------------------
Treasury
and other
eligible
bills - 241 241 94 200 294
----------- -------------------------- ------------------------ ------------------------ -------------------------- ------------------------- -------------------------
Debt
securities 12,847 11,066 23,913 14,400 8,455 22,855
----------- -------------------------- ------------------------ ------------------------ -------------------------- ------------------------- -------------------------
Equity
securities - 169,125 169,125 - 143,815 143,815
----------- -------------------------- ------------------------ ------------------------ -------------------------- ------------------------- -------------------------
Other(1) - 9,120 9,120 - 11,996 11,996
----------- -------------------------- ------------------------ ------------------------ -------------------------- ------------------------- -------------------------
At 31 Dec 12,847 189,552 202,399 14,494 164,466 178,960
----------- -------------------------- ------------------------ ------------------------ -------------------------- ------------------------- -------------------------
1 'Other' includes loans and advance to banks and customers, and default fund contribution.
10 Loans and advances to customers
-------------------------------
2021 2020
HK$m HK$m
-------------------------------------- --------------------------- -----------------------------
Gross loans and advances to customers 3,872,956 3,697,568
-------------------------------------- --------------------------- -----------------------------
Expected credit loss allowances (32,017) (28,887)
-------------------------------------- --------------------------- -----------------------------
At 31 Dec 3,840,939 3,668,681
-------------------------------------- --------------------------- -----------------------------
The following table provides an analysis of gross loans and advances to customers by industry sector based on the Statistical Classification of economic activities in the European Community ('NACE').
Analysis of gross loans and advances to customers
2021 2020
HK$m HK$m
-------------------------------- -------------------------- ----------------------------
Residential mortgages 1,167,487 1,097,760
-------------------------------- -------------------------- ----------------------------
Credit card advances 89,005 86,735
-------------------------------- -------------------------- ----------------------------
Other personal 275,819 267,852
-------------------------------- -------------------------- ----------------------------
Total personal 1,532,311 1,452,347
-------------------------------- -------------------------- ----------------------------
Real estate 635,217 638,560
-------------------------------- -------------------------- ----------------------------
Wholesale and retail trade 428,785 394,624
-------------------------------- -------------------------- ----------------------------
Manufacturing 410,033 379,853
-------------------------------- -------------------------- ----------------------------
Transportation and storage 111,388 97,204
-------------------------------- -------------------------- ----------------------------
Other 471,988 489,737
-------------------------------- -------------------------- ----------------------------
Total corporate and commercial 2,057,411 1,999,978
-------------------------------- -------------------------- ----------------------------
Non-bank financial institutions 283,234 245,243
-------------------------------- -------------------------- ----------------------------
At 31 Dec 3,872,956 3,697,568
-------------------------------- -------------------------- ----------------------------
By geography(1)
-------------------------------- -------------------------- ----------------------------
Hong Kong 2,447,799 2,357,375
-------------------------------- -------------------------- ----------------------------
Rest of Asia Pacific 1,425,157 1,340,193
-------------------------------- -------------------------- ----------------------------
1 The geographical information shown above is classified by the location of the principal operations of the subsidiary or the branch responsible for advancing the funds.
Finance lease receivables and hire purchase contracts
The group leases a variety of assets to third parties under finance leases. At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income. Loans and advances to customers include receivables under finance leases and hire purchase contracts having the characteristics of finance leases.
Net investment in finance leases and hire purchase contracts
2021 2020
---------------------------------------------------------------------- ---------------------------------------------------------------------------
Total Total
future Unearned future Unearned
minimum finance Present minimum finance Present
payments income value payments income value
HK$m HK$m HK$m HK$m HK$m HK$m
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
Amounts
receivable
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
- within
one year 4,205 (1,213) 2,992 3,715 (811) 2,904
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
- one to
two years 3,543 (1,051) 2,492 3,439 (678) 2,761
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
- two to
three
years 2,757 (912) 1,845 2,717 (554) 2,163
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
- three to
four years 2,357 (762) 1,595 2,135 (475) 1,660
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
- four to
five years 2,200 (647) 1,553 1,913 (415) 1,498
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
- after
five years 22,133 (3,203) 18,930 22,186 (3,014) 19,172
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
37,195 (7,788) 29,407 36,105 (5,947) 30,158
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
Expected
credit
loss
allowances (378) (392)
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
At 31 Dec 29,029 29,766
----------- -------------------- ----------------------- ----------------------- ----------------------- ------------------------ ------------------------
11 Financial investments
---------------------
2021 2020
HK$m HK$m
----------------------------------------------------- ---------------------------- -----------------------------
Financial investments measured at fair value through
other comprehensive income 1,549,011 1,700,406
----------------------------------------------------- ---------------------------- -----------------------------
- treasury and other eligible bills 653,245 790,627
-----------------------------------------------------
- debt securities 888,664 899,193
-----------------------------------------------------
- equity securities 7,102 10,586
----------------------------------------------------- ----------------------------
Debt instruments measured at amortised cost 502,564 475,026
----------------------------------------------------- ---------------------------- -----------------------------
- treasury and other eligible bills 6,900 4,443
-----------------------------------------------------
- debt securities 495,664 470,583
----------------------------------------------------- ----------------------------
At 31 Dec 2,051,575 2,175,432
----------------------------------------------------- ---------------------------- -----------------------------
Equity instruments measured at fair value through other
comprehensive income
------------------------------- ----------------------------------
2021 2020
------------------------------------------------------------------ -------------------------------------------------------------------
Dividends Dividends
Fair value recognised Fair value recognised
Type of HK$m HK$m HK$m HK$m
equity
instruments
------------- ------------------------------ ---------------------------------- ------------------------------- ----------------------------------
Business
facilitation 6,540 189 9,826 157
------------- ------------------------------ ---------------------------------- ------------------------------- ----------------------------------
Investments
required by
central
institutions 420 3 413 3
------------- ------------------------------ ---------------------------------- ------------------------------- ----------------------------------
Others 142 6 347 6
------------- ------------------------------ ---------------------------------- ------------------------------- ----------------------------------
At 31 Dec 7,102 198 10,586 166
------------- ------------------------------ ---------------------------------- ------------------------------- ----------------------------------
12 Assets pledged, assets transferred and collateral received
----------------------------------------------------------
Assets pledged
Financial assets pledged to secure liabilities
2021 2020
HK$m HK$m
--------------------------------------------- ---------------------------- -----------------------------
Treasury bills and other eligible securities 57,631 46,846
--------------------------------------------- ---------------------------- -----------------------------
Loans and advances to banks 3,211 1,830
--------------------------------------------- ---------------------------- -----------------------------
Loans and advances to customers 30,975 28,307
--------------------------------------------- ---------------------------- -----------------------------
Debt securities 134,747 76,913
--------------------------------------------- ---------------------------- -----------------------------
Equity securities 47,453 17,608
--------------------------------------------- ---------------------------- -----------------------------
Cash collateral included in other assets 75,951 86,240
--------------------------------------------- ---------------------------- -----------------------------
Assets pledged at 31 Dec 349,968 257,744
--------------------------------------------- ---------------------------- -----------------------------
Amount of liabilities secured 275,815 210,185
--------------------------------------------- ---------------------------- -----------------------------
The table above shows assets where a charge has been granted to secure liabilities on a legal and contractual basis. These transactions are conducted under terms that are usual and customary to collateralised transactions including repurchase agreements, securities lending, derivative margining, and include assets pledged to cover short positions and to facilitate settlement processes with clearing houses as well as swaps of equity and debt securities. The group places both cash and non-cash collateral in relation to derivative transactions.
Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates of indebtedness are held.
Financial assets pledged as collateral which the counterparty has the right to sell or repledge was HK$85,162m (2020: HK$30,386m).
Assets transferred
Transferred financial assets not qualifying for full derecognition
and associated financial liabilities
2021 2020
---------------------------------------------------------- ---------------------------------------------------------------
Carrying amount Carrying amount
of: of:
---------------------------------------------------------- ---------------------------------------------------------------
Transferred Associated Transferred Associated
assets liabilities assets liabilities
HK$m HK$m HK$m HK$m
----------- -------------------------- ------------------------------ ---------------------------- ---------------------------------
Repurchase
agreements 135,994 124,663 85,715 77,322
----------- -------------------------- ------------------------------ ---------------------------- ---------------------------------
Securities
lending
agreements 44,171 282 18,946 35
----------- -------------------------- ------------------------------ ---------------------------- ---------------------------------
180,165 124,945 104,661 77,357
----------- -------------------------- ------------------------------ ---------------------------- ---------------------------------
The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to be recognised in full while a related liability, reflecting the group's obligation to repurchase the assets for a fixed price at a future date, is also recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral received is not recognised on the balance sheet. The group is unable to use, sell or pledge the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged assets.
Collateral received
Assets accepted as collateral relate primarily to standard securities borrowing, reverse repurchase agreements, swaps of securities and derivative margining. The group is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard securities borrowing, reverse repurchase agreements and derivative margining.
Fair value of collateral accepted as security for assets
2021 2020
HK$m HK$m
------------------------------------------------------- ------------------------ --------------------------
Fair value of collateral permitted to sell or repledge
in the absence of default 1,134,296 709,091
------------------------------------------------------- ------------------------ --------------------------
Fair value of collateral actually sold or repledged 377,117 128,783
------------------------------------------------------- ------------------------ --------------------------
13 Investments in subsidiaries
---------------------------
Main subsidiaries of the Bank
The group's
interest in
issued share
capital/registered
Principal or charter
Place of incorporation activity capital
------------------------------------- ----------------------- ---------------- -------------------
Hang Seng Bank Limited Hong Kong Banking 62.14%
------------------------------------- ----------------------- ---------------- -------------------
People's Republic
HSBC Bank (China) Company Limited of China Banking 100%
------------------------------------- ----------------------- ---------------- -------------------
HSBC Bank Malaysia Berhad Malaysia Banking 100%
------------------------------------- ----------------------- ---------------- -------------------
HSBC Bank Australia Limited(1) Australia Banking 100%
------------------------------------- ----------------------- ---------------- -------------------
HSBC Bank (Taiwan) Limited(1) Taiwan Banking 100%
------------------------------------- ----------------------- ---------------- -------------------
HSBC Bank (Singapore) Limited Singapore Banking 100%
------------------------------------- ----------------------- ---------------- -------------------
Retirement
benefits and
HSBC Life (International) Limited(1) Bermuda life insurance 100%
------------------------------------- ----------------------- ---------------- -------------------
1 Held indirectly.
All the above subsidiaries are included in the group's consolidated financial statements. All these subsidiaries make their financial statements up to 31 December.
The principal places of business are the same as the places of incorporation except for HSBC Life (International) Limited which operates mainly in Hong Kong.
The proportion of voting rights held is the same as the proportion of ownership interest held.
The main subsidiaries are regulated banking and insurance entities in the Asia-Pacific region and, as such, are required to maintain certain minimum levels of capital and liquid assets to support their operations. The effect of these regulatory requirements is to limit the extent to which the subsidiaries may transfer funds to the Bank in the form of repayment of shareholder loans or cash dividends.
Subsidiary with significant non-controlling interest
2021 2020
HK$m HK$m
------------------------------- -----------------------------
Hang Seng Bank Limited
------------------------------------------------------ ------------------------------- -----------------------------
Proportion of ownership interests and voting rights
held by non-controlling interests 37.86% 37.86%
Profit attributable to non-controlling interests 5,272 6,300
------------------------------------------------------ ------------------------------- -----------------------------
Accumulated non-controlling interests of the
subsidiary 65,431 64,975
------------------------------------------------------ ------------------------------- -----------------------------
Dividends paid to non-controlling interests 4,415 4,849
------------------------------------------------------ ------------------------------- -----------------------------
Summarised financial information (before intra-group
eliminations):
------------------------------------------------------ ------------------------------- -----------------------------
- total assets 1,820,185 1,759,787
------------------------------------------------------ ------------------------------- -----------------------------
- total liabilities 1,635,769 1,576,592
------------------------------------------------------ ------------------------------- -----------------------------
- net operating income before change in expected
credit
losses and other credit impairment charges 33,265 35,433
------------------------------------------------------ ------------------------------- -----------------------------
- profit for the year 13,946 16,670
------------------------------------------------------
- other comprehensive income/(expense) for the year (357) 1,079
------------------------------------------------------ -------------------------------
- total comprehensive income for the year 13,589 17,749
------------------------------------------------------ ------------------------------- -----------------------------
14 Interests in associates and joint ventures
------------------------------------------
Associates
2021 2020
HK$m HK$m
-------------------- --------------------------------- ---------------------------------
Share of net assets 184,402 164,767
-------------------- --------------------------------- ---------------------------------
Goodwill 4,141 4,011
-------------------- --------------------------------- ---------------------------------
Impairment (58) (24)
-------------------- --------------------------------- ---------------------------------
At 31 Dec 188,485 168,754
-------------------- --------------------------------- ---------------------------------
The above balance represented the group's interests in associates.
Principal associate
The group's interest
in issued share
Place of incorporation capital
-------------------------------- ----------------------- --------------------
People's Republic
Bank of Communications Co., Ltd of China 19.03%
-------------------------------- ----------------------- --------------------
Bank of Communications Co., Ltd. is listed on recognised stock exchanges. The fair value represents valuation based on the quoted market price of the shares held (Level 1 in the fair value hierarchy) and amounted to HK$66,579m at 31 December 2021
(2020: HK$57,815m).
Bank of Communications Co., Ltd ('BoCom')
The group's investment in BoCom is classified as an associate. Significant influence in BoCom was established with consideration of all relevant factors, including representation on BoCom's Board of Directors and participation in a Resource and Experience Sharing agreement ('RES'). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom's financial and operating policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28, whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group's share of BoCom's net assets. An impairment test is required if there is any indication of impairment.
Impairment testing
At 31 December 2021, the fair value of the group's investment in BoCom had been below the carrying amount for approximately ten years. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment at.
31 December 2021 as the recoverable amount as determined by a value-in-use ('VIU') calculation was higher than the carrying value.
At
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
31 Dec 2021 31 Dec 2020
------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
VIU value value VIU value value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
------ ---------------------------- ---------------------------- ------------------------------ ----------------------------- ----------------------------- -------------------------------
BoCom 193.0 184.8 66.6 169.3 165.4 57.8
------ ---------------------------- ---------------------------- ------------------------------ ----------------------------- ----------------------------- -------------------------------
Compared with 31 December 2020, the extent to which the VIU exceeds the carrying value ('headroom') increased by HK$4.3bn. The increase in headroom was principally due to the impact on the VIU from BoCom's actual performance, which was better than earlier estimates, revisions to management's best estimates of BoCom's future earnings in the short to medium term, and the net impact of revisions to certain long-term assumptions.
In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are described below and are based on factors observed at period-end. The factors that could result in a change in the VIU and an impairment include a short-term underperformance by BoCom, a change in regulatory capital requirements or an increase in uncertainty regarding the future performance of BoCom resulting in a downgrade of the forecast of future asset growth or profitability. An increase in the discount rate could also result in a reduction of VIU and an impairment. At the point where the carrying value exceeds the VIU, impairment would be recognised.
If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's best estimates of future earnings available to ordinary shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best estimate. There are two main components to the VIU calculation. The first component is management's best estimate of BoCom's earnings, which is based on explicit forecasts over the short to medium term. This results in forecast earnings growth that is lower than recent historical actual growth and also reflects the uncertainty arising from the current economic outlook. Reflecting management's intent to continue to retain its investment, earnings beyond the short to medium term are then extrapolated into perpetuity using a long-term growth rate to derive a terminal value, which comprises the majority of the VIU. The second component is the capital maintenance charge ('CMC'), which is management's forecast of the earnings that need to be withheld in order for BoCom to meet capital requirements over the forecast period, meaning that CMC is deducted when arriving at management's estimate of future earnings available to ordinary shareholders. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets and the expected capital requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other qualitative factors, to ensure that the inputs to the VIU calculation remain appropriate.
Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in accordance with the requirements of HKAS 36:
-- Long-term profit growth rate: 3% (2020: 3%) for periods after 2025, which does not exceed forecast GDP growth in mainland China and is consistent with forecasts by external analysts.
-- Long-term asset growth rate: 3% (2020: 3%) for periods after 2025, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%.
-- Discount rate: 10.03% (2020: 11.37%) based on a capital asset pricing model ('CAPM'), using market data. The discount rate used is within the range of 8.7% to 10.1% (2020 equivalent range: 10.9% to 11.9%) indicated by the CAPM. The lower rate reflects the impact of a relative reduction in the volatility of Chinese banks equity prices and a decrease in mainland China's credit risk due to its relatively quick recovery from the impact of the Covid-19 outbreak. While the CAPM range sits at the lower end of the range adopted by selected external analysts of 9.9% to 13.5% (2020: 10.3% to 15.0%), we continue to regard the CAPM range as the most appropriate basis for determining this assumption.
-- Expected credit losses as a percentage of customer advances ('ECLs'): ranges from 0.98% to 1.12% (2020: 0.98% to 1.22%) in the short to medium term, reflecting reported credit experience through the ongoing Covid-19 outbreak in mainland China followed by an expected reversion to recent historical levels. For periods after 2025, the ratio is 0.97% (2020: 0.88%), which is higher than BoCom's average ECLs in recent years prior to the Covid-19 outbreak.
-- Risk-weighted assets as a percentage of total assets: ranges from 61.0% to 62.4% (2020: 61.0% to 62.0%) in the short to medium term, reflecting reductions that may arise from a subsequent lowering of ECLs and a continuation of the trend of strong retail loan growth. For periods after 2025, the ratio is 61.0% (2020: 61.0%). These rates are similar to BoCom's actual results in recent years and forecasts disclosed by external analysts.
-- Operating income growth rate: ranges from 5.1% to 6.2% (2020: 3.5% to 6.7%) in the short to medium term, and is lower than BoCom's actual results in recent years and the forecasts disclosed by external analysts, reflecting BoCom's most recent actual results, global trade tensions and industry developments in mainland China.
-- Cost-income ratio: ranges from 35.5% to 36.1% (2020: 36.3% to 36.8%) in the short to medium term. These ratios are similar to BoCom's actual results in recent years and forecasts disclosed by external analysts.
-- Effective tax rate ('ETR'): ranges from 6.8% to 15.0% (2020: 7.8% to 16.5%) in the short to medium term, reflecting BoCom's actual results and an expected increase towards the long-term assumption through the forecast period. For periods after 2025, the rate is 15.0% (2020: 16.8%), which is higher than the recent historical average, and aligned to the minimum tax rate as proposed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
-- Capital requirements: capital adequacy ratio ('CAR') of 12.5% (2020: 11.5%) and tier 1 capital adequacy ratio of 9.5% (2020: 9.5%), based on BoCom's capital risk appetite and capital requirements respectively. The CAR assumption was updated to 12.5% from 11.5% following the approval of BoCom's capital management plan in March 2021.
The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:
* Long-term profit growth rate
* Decrease by 26 basis points
* Long-term asset growth rate
* Increase by 22 basis points
* Discount rate
* Increase by 34 basis points
* Expected credit losses as a percentage of customer
advances * Increase by 4 basis points
* Risk-weighted assets as a percentage of total assets * Increase by 183 basis points
* Operating income growth rate * Decrease by 37 basis points
* Cost-income ratio * Increase by 102 basis points
* Long-term effective tax rate * Increase by 301 basis points
* Capital requirements - capital adequacy ratio * Increase by 37 basis points
* Capital requirements - tier 1 capital adequacy ratio * Increase by 193 basis points
----------------------------------------------------------- -----------------------------------
The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of the VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur at the same time. The selected rates of reasonably possible changes to key assumptions are largely based on external analysts' forecasts which can change period to period.
Favourable change Unfavourable change
-------------------------------------------------------- -------------------------------------------------------------
Increase Decrease
in VIU VIU in VIU VIU
bps HK$bn HK$bn bps HK$bn HK$bn
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
At 31 December 2021
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Long-term profit growth
rate(1) +87 33.1 226.1 -69 (20.5) 172.5
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Long-term asset growth
rate(1) -69 22.9 215.9 +87 (36.2) 156.8
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Discount rate(2) -133 42.2 235.2 +207 (40.8) 152.2
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
2021 to 2021 to 2025:
2025: 103 121
Expected credit losses as
a percentage of customer 2026 onwards: 2026 onwards:
advances 91 11.9 204.9 105 (21.0) 172.0
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Risk-weighted assets as a
percentage of total
assets -111 2.2 195.2 +280 (15.8) 177.2
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Operating income growth
rate +37 8.2 201.2 -58 (13.6) 179.4
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Cost-income ratio -152 13.6 206.6 +174 (12.7) 180.3
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Long-term effective tax
rate -104 2.9 195.9 +1000 (27.4) 165.6
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Capital requirements -
capital
adequacy ratio - - 193.0 +325 (77.6) 115.4
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Capital requirements -
tier
1 capital adequacy ratio - - 193.0 +364 (50.0) 143.0
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
At 31 December 2020
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Long-term profit growth
rate(1) - - 169.3 -50 (10.0) 159.3
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Long-term asset growth
rate(1) -50 11.0 180.3 - - 169.3
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Discount rate -47 9.4 178.7 +53 (9.3) 160.0
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
2020 to 2020 to 2024:
2024: 96 122
Expected credit losses as
a percentage of customer 2025 onwards: 2025 onwards:
advances 76 17.7 187.0 95 (16.5) 152.8
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Risk-weighted assets as a
percentage of total
assets -40 0.4 169.7 +166 (6.7) 162.6
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Operating income growth
rate +2 0.9 170.2 -69 (11.8) 157.5
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Cost-income ratio -149 9.9 179.2 +120 (9.6) 159.7
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Long-term effective tax
rate -316 6.9 176.2 +820 (17.7) 151.6
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Capital requirements -
capital
adequacy ratio - - 169.3 +297 (61.0) 108.3
-------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
Capital requirements -
tier
1 capital adequacy ratio - - 169.3 +263 (41.5) 127.8 -------------------------- -------------- ---------------------- ---------------- -------------- ----------------------- --------------------
1 The reasonably possible ranges of the long-term profit growth rate and long-term asset growth rate assumptions reflect the close relationship between these assumptions, which would result in offsetting changes to each assumption.
2 The unfavourable change in the reasonably possible ranges of the discount rate assumption reflects the impact of adopting the average of the rates adopted by selected external analysts.
Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is HK$148.3bn to HK$228.4bn (2020 equivalent range: HK$133.4bn to HK$199.1bn). The range is based on impacts set out in the table above arising from the favourable/unfavourable change in the earnings in the short to medium term, the long-term expected credit losses as a percentage of customer advances and a 50bps increase/decrease in the discount rate. The discount rate has been included this year reflecting the relative materiality of movements in this assumption. All other long-term assumptions, and the basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU.
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2021, the group included the associate's results on the basis of financial statements made up for the 12 months to 30 September 2021, but taking into account the financial effect of significant transactions or events in the period from 1 October 2021 to 31 December 2021.
Selected balance sheet information of BoCom
------------------------ --------------------------
At 30 Sep
----------------------------------------------------
2021 2020
HK$m HK$m
------------------------------------------------------------- ------------------------ --------------------------
Cash and balances at central banks 960,732 945,836
------------------------------------------------------------- ------------------------ --------------------------
Loans and advances to banks and other financial institutions 771,522 832,226
------------------------------------------------------------- ------------------------ --------------------------
Loans and advances to customers 7,751,362 6,751,280
------------------------------------------------------------- ------------------------ --------------------------
Other financial assets 4,223,488 3,941,375
------------------------------------------------------------- ------------------------ --------------------------
Other assets 375,073 349,120
------------------------------------------------------------- ------------------------ --------------------------
Total assets 14,082,177 12,819,837
------------------------------------------------------------- ------------------------ --------------------------
Deposits by banks and other financial institutions 2,238,612 2,122,220
------------------------------------------------------------- ------------------------ --------------------------
Customer accounts 8,572,625 7,852,322
------------------------------------------------------------- ------------------------ --------------------------
Other financial liabilities 1,779,110 1,605,846
------------------------------------------------------------- ------------------------ --------------------------
Other liabilities 312,486 241,177
------------------------------------------------------------- ------------------------ --------------------------
Total liabilities 12,902,833 11,821,565
------------------------------------------------------------- ------------------------ --------------------------
Total equity 1,179,344 998,272
------------------------------------------------------------- ------------------------ --------------------------
Reconciliation of BoCom's net assets to carrying amount in the group's
consolidated financial statements
At 30 Sep
------------------------------------------------------------
2021 2020
HK$m HK$m
--------------------------------------------------- ---------------------------- ------------------------------
The group's share of ordinary shareholders' equity 180,738 161,433
--------------------------------------------------- ---------------------------- ------------------------------
Goodwill 4,044 3,912
--------------------------------------------------- ---------------------------- ------------------------------
Carrying amount 184,782 165,345
--------------------------------------------------- ---------------------------- ------------------------------
Selected income statement information of BoCom
For the 12 months
ended 30 Sep
------------------------------------------------------------
2021 2020
HK$m HK$m
--------------------------------------------------- ---------------------------- ------------------------------
Net interest income 191,076 170,586
--------------------------------------------------- ---------------------------- ------------------------------
Net fee and commission income 55,735 49,624
--------------------------------------------------- ---------------------------- ------------------------------
Change in expected credit losses (75,402) (75,220)
--------------------------------------------------- ---------------------------- ------------------------------
Depreciation and amortisation (17,851) (16,069)
--------------------------------------------------- ---------------------------- ------------------------------
Tax expense (8,119) (6,656)
--------------------------------------------------- ---------------------------- ------------------------------
- profit for the year 110,370 79,585
---------------------------------------------------
- other comprehensive income (2,861) (5,965)
--------------------------------------------------- ----------------------------
Total comprehensive income 107,509 73,620
--------------------------------------------------- ---------------------------- ------------------------------
Dividends received from BoCom 5,386 4,907
--------------------------------------------------- ---------------------------- ------------------------------
Using the latest period for which BoCom has disclosed this information (at 30 June 2021), the group's share of associates' contingent liabilities was HK$432,259m (2020: HK$356,609m).
15 Goodwill and intangible assets
------------------------------
Goodwill and intangible assets include goodwill arising on business combinations, the present value of in-force long-term insurance business, and other intangible assets.
2021 2020
HK$m HK$m
------------------------------------------------------- ------------------------ --------------------------
Goodwill 7,116 7,109
------------------------------------------------------- ------------------------ --------------------------
Present value of in-force long-term insurance business 63,765 65,052
------------------------------------------------------- ------------------------ --------------------------
Other intangible assets(1) 24,300 17,807
------------------------------------------------------- ------------------------ --------------------------
At 31 Dec 95,181 89,968
------------------------------------------------------- ------------------------ --------------------------
1 Included within other intangible assets is internally generated software with a net carrying value of HK$21,670m (2020: HK$15,283m). During the year, capitalisation of internally generated software was HK$10,681m (2020: HK$7,241m), amortisation charge was HK$4,115m (2020: HK$3,233m) and impairment charge was HK$184m (2020: HK$603m).
The present value of in-force long-term insurance business
When calculating the present value of in-force long term ('PVIF') insurance business, expected cash flows are projected after adjusting for a variety of assumptions made by each insurance operation to reflect local market conditions and management's judgement of future trends, and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology). Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.
Actuarial Control Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. All changes to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by the Actuarial Control Committee.
Movements in PVIF
2021 2020
HK$m HK$m
------------------------------------------------------ ------------------------------ ------------------------------
At 1 Jan 65,052 61,075
------------------------------------------------------ ------------------------------ ------------------------------
Changes in PVIF of long-term insurance business (1,294) 3,840
------------------------------------------------------ ------------------------------ ------------------------------
- value of new business written during the year 7,381 5,360
------------------------------------------------------
- expected return(1) (5,950) (6,743)
------------------------------------------------------
- assumption changes and experience variances (see
below) (2,873) 5,268
------------------------------------------------------
- other adjustments 148 (45)
------------------------------------------------------ ------------------------------
Exchange differences and other 7 137
------------------------------------------------------ ------------------------------ ------------------------------
At 31 Dec 63,765 65,052
------------------------------------------------------ ------------------------------ ------------------------------
1 'Expected return' represents the unwinding of the discount rate and reversal of expected cash flows for the period.
Assumption changes and experience variances
Included within this line item are:
-- HK$440m (2020: HK$1,022m), directly offsetting interest rate-driven changes to the valuation of liabilities under insurance contracts.
-- HK$(2,519)m (2020: HK$1,916m), reflecting the future expected sharing of returns with policyholders on contracts with discretionary participation features ('DPF'), to the extent this sharing is not already included in liabilities under insurance contracts.
-- HK$(794)m (2020: HK$2,330m), driven by other assumptions changes and experience variances.
Key assumptions used in the computation of PVIF for the main life insurance operations
Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed market movements. The following are the key long-term assumptions used in the computation of PVIF for Hong Kong insurance entities, being the main life insurance operations:
2021 2020
% %
------------------------------------ ---- ----
Weighted average risk free rate 1.40 0.71
------------------------------------ ---- ----
Weighted average risk discount rate 5.20 4.96
------------------------------------ ---- ----
Expense inflation 3.00 3.00
------------------------------------ ---- ----
Sensitivity to changes in economic assumptions
The group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances for risks not reflected in the best-estimate cash flow modelling. Where the insurance operations provide options and guarantees to policyholders, the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit addition to the technical provisions required by regulators. See page 65 for further details of these guarantees and the impact of changes in economic assumptions on our insurance manufacturing subsidiaries.
Sensitivity to changes in non-economic assumptions
Policyholder liabilities and PVIF are determined by reference to non-economic assumptions, including mortality and/or morbidity, lapse rates and expense rates. See page 66 for further details on the impact of changes in non-economic assumptions on our insurance manufacturing operations.
16 Property, plant and equipment
-----------------------------
2021 2020
HK$m HK$m
--------------------------------------- ------------------------ --------------------------
Owned property, plant and equipment(1) 121,072 118,747
--------------------------------------- ------------------------ --------------------------
Other right-of-use assets 8,755 9,790
--------------------------------------- ------------------------ --------------------------
At 31 Dec 129,827 128,537
--------------------------------------- ------------------------ --------------------------
1 Included leasehold land and buildings of HK$110,458m (2020: HK$108,320m) for which the right of use are considered sufficient to constitute control. They are therefore presented as owned assets.
Movement in owned property, plant and equipment
------------------------
2021 2020
--------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------
Land Land
and Investment and Investment
buildings properties Equipment Total buildings properties Equipment Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------
Cost or valuation
------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ At 1 Jan 100,791 13,167 15,266 129,224 111,473 13,335 16,922 141,730 ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Exchange and other adjustments (67) 16 (112) (163) 453 31 365 849 ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Additions 667 2 2,049 2,718 770 635 2,363 3,768 ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Disposals (58) - (1,456) (1,514) (12) - (4,384) (4,396) ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Transfers - - - - - - - - ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Elimination of accumulated depreciation on revalued land and buildings (4,633) - - (4,633) (4,737) - - (4,737) ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Surplus/(deficit) on revaluation 5,643 277 - 5,920 (6,914) (996) - (7,910) ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Reclassifications 24 3 - 27 (242) 162 - (80) ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ At 31 Dec 102,367 13,465 15,747 131,579 100,791 13,167 15,266 129,224 Accumulated depreciation ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ At 1 Jan 90 - 10,387 10,477 84 - 13,043 13,127 ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Exchange and other adjustments 30 - (46) (16) 10 - 305 315 ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Charge for the year 4,645 - 1,374 6,019 4,734 - 1,325 6,059 ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Disposals (45) - (1,295) (1,340) (1) - (4,286) (4,287) ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Transfers - - - - - - - - ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Elimination of accumulated depreciation on revalued land and buildings (4,633) - - (4,633) (4,737) - - (4,737) ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ At 31 Dec 87 - 10,420 10,507 90 - 10,387 10,477 ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------ Net book value at 31 Dec 102,280 13,465 5,327 121,072 100,701 13,167 4,879 118,747 ------------------ ----------------------- ------------------------ ----------------------- ----------------------- ------------------------- ----------------------- ---------------------- ------------------------
The carrying amount of land and buildings, had they been stated at cost less accumulated depreciation, would have been as follows:
2021 2020
HK$m HK$m
----------------------------------- ----------------------- ------------------------
Cost less accumulated depreciation 17,121 17,085
----------------------------------- ----------------------- ------------------------
Valuation of land and buildings and investment properties
The group's land and buildings and investment properties were revalued as at 31 December 2021. The basis of valuation for land and buildings and investment properties was open market value. The resultant values are Level 3 in the fair value hierarchy. The fair values for land and buildings are determined by using a direct comparison approach which values the properties in their respective existing states and uses, assuming sale with immediate vacant possession and by making reference to comparable sales evidence. The valuations take into account the characteristics of the properties (unobservable inputs) which include the location, size, shape, view, floor level, year of completion and other factors collectively. The premium or discount applied to the characteristics of the properties is within minus 20% and plus 20%. In determining the open market value of investment properties, expected future cash flows have been discounted to their present values. The net book value of 'Land and buildings' includes HK$6,854m (2020: HK$7,189m) in respect of properties which were valued using the depreciated replacement cost method.
Valuation of land and buildings and investment properties in Hong Kong, Macau and mainland China were largely carried out by Cushman & Wakefield Limited, who have recent experience in the location and type of properties and who are members of the Hong Kong Institute of Surveyors. This represents 92% by value of the group's properties subject to valuation. Other properties were valued by different independent professionally qualified valuers.
17 Prepayments, accrued income and other assets
--------------------------------------------
2021 2020
HK$m HK$m
--------------------------------------------------------- ---------------------------- -----------------------------
Prepayments and accrued income 24,986 24,301
--------------------------------------------------------- ---------------------------- -----------------------------
Bullion 52,986 61,269
--------------------------------------------------------- ---------------------------- -----------------------------
Acceptances and endorsements 55,789 46,705
--------------------------------------------------------- ---------------------------- -----------------------------
Reinsurers' share of liabilities under insurance
contracts
(Note 3) 27,366 25,365
--------------------------------------------------------- ---------------------------- -----------------------------
Current tax assets 2,674 2,783
--------------------------------------------------------- ---------------------------- -----------------------------
Settlement accounts 24,577 33,796
--------------------------------------------------------- ---------------------------- -----------------------------
Cash collateral and margin receivables 44,177 58,584
--------------------------------------------------------- ---------------------------- -----------------------------
Other assets 37,188 35,807
--------------------------------------------------------- ---------------------------- -----------------------------
At 31 Dec 269,743 288,610
--------------------------------------------------------- ---------------------------- -----------------------------
Prepayments, accrued income and other assets included HK$180,757m (2020: HK$197,362m) of financial assets, the majority of which were measured at amortised cost.
18 Customer accounts
-----------------
Customer accounts by country/territory
2021 2020
HK$m HK$m
--------------- -------------------------- ----------------------------
Hong Kong 4,284,719 4,120,955
--------------- -------------------------- ----------------------------
Mainland China 462,187 440,608
--------------- -------------------------- ----------------------------
Singapore 448,976 427,537
--------------- -------------------------- ----------------------------
Australia 220,233 227,072
--------------- -------------------------- ----------------------------
India 191,116 156,615
--------------- -------------------------- ----------------------------
Malaysia 128,673 124,036
--------------- -------------------------- ----------------------------
Taiwan 120,744 124,375
--------------- -------------------------- ----------------------------
Indonesia 46,938 40,304
--------------- -------------------------- ----------------------------
Other 273,596 249,894
--------------- -------------------------- ----------------------------
At 31 Dec 6,177,182 5,911,396
--------------- -------------------------- ----------------------------
19 Trading liabilities
-------------------
2021 2020
HK$m HK$m
---------------------------------- ---------------------------- -------------------------------
Deposits by banks(1) 1,005 222
---------------------------------- ---------------------------- -------------------------------
Customer accounts(1) 6,091 835
---------------------------------- ---------------------------- -------------------------------
Net short positions in securities 85,627 59,755
---------------------------------- ---------------------------- -------------------------------
At 31 Dec 92,723 60,812
---------------------------------- ---------------------------- -------------------------------
1 'Deposits by banks' and 'Customer accounts' include repos, stock lending and other amounts.
20 Financial liabilities designated at fair value
----------------------------------------------
2021 2020
HK$m HK$m
---------------------------------------------------- ----------------------- ------------------------
Deposits by banks and customer accounts 59,611 77,822
---------------------------------------------------- ----------------------- ------------------------
Debt securities in issue 43,928 49,673
---------------------------------------------------- ----------------------- ------------------------
Liabilities to customers under investment contracts 35,426 39,518
---------------------------------------------------- ----------------------- ------------------------
At 31 Dec 138,965 167,013
---------------------------------------------------- ----------------------- ------------------------
The carrying amount of financial liabilities designated at fair value was HK$1,385m lower than the contractual amount at maturity (2020: HK$735m higher). The cumulative loss in fair value attributable to changes in credit risk was HK$62m (2020: HK$25m).
21 Debt securities in issue
------------------------
2021 2020
HK$m HK$m
------------------------------------------------------- ----------------------- -------------------------
Bonds and medium-term notes 79,852 94,894
------------------------------------------------------- ----------------------- -------------------------
Other debt securities in issue 31,440 34,198
------------------------------------------------------- ----------------------- -------------------------
Total debt securities in issue 111,292 129,092
------------------------------------------------------- ----------------------- -------------------------
Included within:
------------------------------------------------------- ----------------------- -------------------------
- financial liabilities designated at fair value (Note
20) (43,928) (49,673)
------------------------------------------------------- ----------------------- -------------------------
At 31 Dec 67,364 79,419
------------------------------------------------------- ----------------------- -------------------------
22 Accruals and deferred income, other liabilities and provisions
--------------------------------------------------------------
2021 2020
HK$m HK$m
--------------------------------------------------- --------------------- -----------------------
Accruals and deferred income 23,020 21,588
--------------------------------------------------- --------------------- ----------------------- Acceptances and endorsements 55,824 46,775 --------------------------------------------------- --------------------- ----------------------- Settlement accounts 26,158 30,056 --------------------------------------------------- --------------------- ----------------------- Cash collateral and margin payables 53,541 60,714 --------------------------------------------------- --------------------- ----------------------- Share-based payment liability to HSBC Holdings plc 1,431 1,124 --------------------------------------------------- --------------------- ----------------------- Lease liabilities 9,165 10,057 --------------------------------------------------- --------------------- ----------------------- Other liabilities(1) 48,668 43,881 --------------------------------------------------- --------------------- ----------------------- Provisions for liabilities and charges 1,399 1,792 --------------------------------------------------- --------------------- ----------------------- At 31 Dec 219,206 215,987 --------------------------------------------------- --------------------- -----------------------
1 Mainly includes marginal deposit on letter of credit and credit card settlement account.
Accruals and deferred income, other liabilities and provisions included HK$209,441m (2020: HK$207,899m) of financial liabilities which were measured at amortised cost.
Movement in provisions
-------------------------- ---------------------------- --------------------------
Restructuring
costs Other Total
Provisions (excluding HK$m HK$m HK$m
contractual commitments)
-------------------------------- -------------------------- ---------------------------- --------------------------
At 31 Dec 2020 116 419 535
-------------------------------- -------------------------- ---------------------------- --------------------------
Additions 357 333 690
-------------------------------- -------------------------- ---------------------------- --------------------------
Amounts utilised (309) (258) (567)
-------------------------------- -------------------------- ---------------------------- --------------------------
Unused amounts reversed (59) (24) (83)
-------------------------------- -------------------------- ---------------------------- --------------------------
Exchange and other movements 43 (4) 39
-------------------------------- -------------------------- ---------------------------- --------------------------
At 31 Dec 2021 148 466 614
-------------------------------- -------------------------- ---------------------------- --------------------------
Contractual commitments(1)
-------------------------------- -------------------------- ---------------------------- --------------------------
At 31 Dec 2020 1,257
-------------------------------- -------------------------- ---------------------------- --------------------------
Net change in expected credit
loss provision and
other movements (472)
-------------------------------- -------------------------- ---------------------------- --------------------------
At 31 Dec 2021 785
-------------------------------- -------------------------- ---------------------------- --------------------------
Total Provisions at 31 Dec 2021 1,399
-------------------------------- -------------------------- ---------------------------- --------------------------
At 31 Dec 2019 208 812 1,020
-------------------------------- ---------------------------- -------------------------- --------------------------
Additions 222 296 518
-------------------------------- ---------------------------- -------------------------- --------------------------
Amounts utilised (269) (356) (625)
-------------------------------- ---------------------------- -------------------------- --------------------------
Unused amounts reversed (42) (361) (403)
-------------------------------- ---------------------------- -------------------------- --------------------------
Exchange and other movements (3) 28 25
-------------------------------- ---------------------------- -------------------------- --------------------------
At 31 Dec 2020 116 419 535
-------------------------------- ---------------------------- -------------------------- --------------------------
Contractual commitments
-------------------------------- ---------------------------- -------------------------- --------------------------
At 31 Dec 2019 776
-------------------------------- ---------------------------- -------------------------- --------------------------
Net change in expected credit
loss provision and
other movements 481
-------------------------------- ---------------------------- -------------------------- --------------------------
At 31 Dec 2019 1,257
-------------------------------- ---------------------------- -------------------------- --------------------------
Total Provisions at 31 Dec 2020 1,792
-------------------------------- ---------------------------- -------------------------- --------------------------
1 Contractual commitments include provisions for contingent liabilities measured under HKFRS 9 'Financial Instruments' in respect of financial guarantees and expected credit loss provisions in relation to off-balance sheet guarantees and commitments.
23 Subordinated liabilities
------------------------
Subordinated liabilities issued to third parties measured at amortised cost consist of undated primary capital notes and other loan capital having an original term to maturity of five years or more. Subordinated liabilities issued to Group entities are not included in the table below.
2021 2020
HK$m HK$m
-------- ------------------------------------------- ------------------------------ -------------------------------
US$400m Undated floating rate primary capital notes 3,119 3,101
-------- ------------------------------------------- ------------------------------ -------------------------------
Fixed rate (5.050%) subordinated bonds due
2027,
MYR500m callable from 2022(1) 935 964
-------- ------------------------------------------- ------------------------------ -------------------------------
At 31
Dec 4,054 4,065
----------------------------------------------------- ------------------------------ -------------------------------
1 The interest rate on the MYR500m 5.05% callable subordinated bonds due 2027 will increase by 1% from November 2022.
24 Share capital
-------------
2021 2020
HK$m HK$m
-------------------------------- -------------------------- ----------------------------
Paid up share capital in HK$ 116,103 116,103
-------------------------------- -------------------------- ----------------------------
Paid up share capital in US$(1) 56,232 56,232
-------------------------------- -------------------------- ----------------------------
At 31 Dec 172,335 172,335
-------------------------------- -------------------------- ----------------------------
Ordinary shares issued and fully paid
2021 2020
HK$m Number HK$m Number
---- ----------------------------------------- ------------------------------- ------------------------------------------ ----------------------------------
At
31
Dec 172,335 46,440,991,798 172,335 46,440,991,798
---- ----------------------------------------- ------------------------------- ------------------------------------------ ----------------------------------
1 Paid up share capital in US$ represents preference shares which were redeemed or bought back via payment out of distributable profits and for which the amount was transferred from retained earnings to share capital in accordance with the requirements of the Companies Ordinance.
There were no new ordinary shares issued in 2021 (2020: nil). The holder of the ordinary shares is entitled to receive dividends as declared from time to time, rank equally with regard to the Bank's residual assets and are entitled to one vote per share at shareholder meetings of the Bank.
25 Other equity instruments
------------------------
Other equity instruments comprise additional tier 1 capital instruments in issue which are accounted for as equity.
2021 2020
HK$m HK$m
--------------------------------------------------------- ---------------------------- -----------------------------
US$1,000m Fixed rate perpetual subordinated loan,
callable
from Mar 2025(1) 7,834 7,834
--------------------------------------------------------- ---------------------------- -----------------------------
US$900m Fixed rate perpetual subordinated loan, callable
from Sep 2026(2) 7,063 7,063
--------------------------------------------------------- ---------------------------- -----------------------------
US$700m Fixed rate perpetual subordinated loan, callable
from Mar 2025(3) 5,467 5,467
--------------------------------------------------------- ---------------------------- -----------------------------
US$500m Fixed rate perpetual subordinated loan, callable
from Mar 2025(3) 3,905 3,905
--------------------------------------------------------- ---------------------------- -----------------------------
US$600m Fixed rate perpetual subordinated loan, callable
from May 2027(4) 4,685 4,685
--------------------------------------------------------- ---------------------------- -----------------------------
US$900m Fixed rate perpetual subordinated loan, callable
from Sep 2024(5) 7,044 7,044
--------------------------------------------------------- ---------------------------- -----------------------------
US$1,100m Fixed rate perpetual subordinated loan,
callable
from Jun 2024(6) 8,617 8,617
--------------------------------------------------------- ---------------------------- -----------------------------
At 31 Dec 44,615 44,615
--------------------------------------------------------- ---------------------------- -----------------------------
1 Interest rate fixed at 6.090%.
2 Interest rate fixed at 6.510%.
3 Interest rate fixed at 6.172%.
4 Interest rate fixed at 5.910%.
5 Interest rate fixed at 6.030%.
6 Interest rate fixed at 6.000%.
The additional tier 1 capital instruments are perpetual subordinated loans on which coupon payments may be cancelled at the sole discretion of the Bank. The subordinated loans will be written down at the point of non-viability on the occurrence of a trigger event as defined in the Banking (Capital) Rules. They rank higher than ordinary shares in the event of a wind-up.
26 Maturity analysis of assets and liabilities
-------------------------------------------
The following tables provide an analysis of consolidated total assets and liabilities by residual contractual maturity at the balance sheet date. These balances are included in the maturity analysis as follows:
-- Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are included in the 'Due not more than 1 month' time bucket, because trading balances are typically held for short periods of time.
-- Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over 5 years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the 'Due over 5 years' time bucket.
-- Non-financial assets and liabilities with no contractual maturity are included in the 'Due over 5 years' time bucket.
-- Liabilities under insurance contracts are irrespective of contractual maturity included in the 'Due over 5 years' time bucket in the maturity table provided below. An analysis of the expected maturity of liabilities under insurance contracts based on undiscounted cash flows is provided on page 65. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are included in the 'Due over 5 years' time bucket, however, such contracts are subject to surrender and transfer options by the policyholders.
Maturity analysis of assets and liabilities
Due
Due Due Due Due over
over over over over 1 year Due over
1 month 3 months 6 months 9 months but 2 years
but but but but not but
Due not not not not not more not more
more more more more more than than
than than than than than 2 5 Due over
1 month 3 months 6 months 9 months 1 year years years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Financial
assets
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Cash and
balances
at central
banks 276,857 - - - - - - - 276,857 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Items in the course of collection from other banks 21,632 - - - - - - - 21,632 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Hong Kong Government certificates of indebtedness 332,044 - - - - - - - 332,044 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Trading assets 768,376 7,082 208 431 - 815 538 - 777,450 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Derivatives 361,447 1,079 466 769 131 441 713 121 365,167 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 5,880 172 1,636 884 1,561 3,781 11,244 177,241 202,399 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Reverse repurchase agreements - non-trading 528,832 223,041 34,435 5,081 1,865 9,384 1,137 - 803,775 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Loans and advances to banks 277,060 80,547 20,767 7,667 7,532 20,248 17,908 518 432,247 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Loans and advances to customers 605,216 402,921 312,336 177,577 171,989 410,594 731,226 1,029,080 3,840,939 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Financial investments 247,163 405,109 187,038 107,329 118,029 232,350 307,753 446,804 2,051,575 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Amounts due from Group companies 84,688 1,302 1,189 2,227 2,441 6,138 5,857 17 103,859 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Accrued income and other financial assets 119,499 31,449 19,062 3,708 2,034 805 750 3,450 180,757 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Financial assets at 31 Dec 2021 3,628,694 1,152,702 577,137 305,673 305,582 684,556 1,077,126 1,657,231 9,388,701 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Non-financial assets - - - - - - - 514,692 514,692 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Total assets at 31 Dec 2021 3,628,694 1,152,702 577,137 305,673 305,582 684,556 1,077,126 2,171,923 9,903,393 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Financial liabilities --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Hong Kong currency notes in circulation 332,044 - - - - - - - 332,044 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Items in the course of transmission to other banks 25,701 - - - - - - - 25,701 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Repurchase agreements - non-trading 231,463 4,713 368 - 1,104 7,570 2,904 7,252 255,374 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Deposits by banks 269,405 2,140 6,780 1,019 526 440 - - 280,310 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Customer accounts 5,722,470 272,462 88,483 34,813 32,417 11,792 14,741 4 6,177,182 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ---------------- Trading liabilities 92,723 - - - - - - - 92,723 --------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Derivatives 354,567 304 74 212 79 241 274 40 355,791
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Financial
liabilities
designated at
fair
value 32,086 21,849 11,059 4,967 5,574 8,789 18,899 35,742 138,965
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Debt securities
in
issue 4,304 5,509 17,363 12,374 3,963 9,320 12,324 2,207 67,364
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Amounts due to
Group
companies 114,388 17,504 1,401 222 223 21,699 66,205 134,534 356,176
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Accruals and
other
financial
liabilities 124,346 40,286 24,070 5,135 3,820 4,802 5,197 1,785 209,441
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Subordinated
liabilities(1) - - - - - - - 4,054 4,054
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Total financial
liabilities
at 31 Dec 2021 7,303,497 364,767 149,598 58,742 47,706 64,653 120,544 185,618 8,295,125
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Non-financial
liabilities - - - - - - - 684,757 684,757
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Total
liabilities
at 31 Dec 2021 7,303,497 364,767 149,598 58,742 47,706 64,653 120,544 870,375 8,979,882
--------------- -------------------- -------------------------------- ------------------- ------------------- ------------------- ------------------- -------------------- ---------------------- ----------------
Maturity analysis of assets and liabilities (continued)
Due Due Due Due Due Due
over over over over over over
1 month 3 months 6 months 9 months 1 year 2 years
Due but but but but but but
not not not not not not not
more more more more more more more Due
than1 than than than than than than over
month 3 months 6 months 9 months 1 year 2 years 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Financial
assets
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Cash and
balances at
central banks 347,999 - - - - - - - 347,999
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Items in the
course
of collection
from
other banks 21,943 - - - - - - - 21,943
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Hong Kong
Government
certificates
of
indebtedness 313,404 - - - - - - - 313,404
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Trading assets 594,141 4,561 476 431 - 805 - - 600,414
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Derivatives 422,692 23 16 13 26 101 74 - 422,945
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through profit
or loss 7,318 1,240 1,334 1,214 1,033 4,648 11,967 150,206 178,960
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Reverse
repurchase
agreements -
non-trading 372,199 113,000 19,150 2,869 1,000 4,143 7,983 - 520,344
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Loans and
advances
to banks 239,097 81,318 22,587 19,576 16,278 8,792 15,186 1,050 403,884
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
Loans and
advances
to customers 641,990 313,288 277,385 180,152 159,612 411,350 693,898 991,006 3,668,681
--------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Financial investments 248,651 488,129 251,982 75,127 127,736 218,219 330,863 434,725 2,175,432 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Amounts due from Group companies 72,856 3,741 464 2 - 3,814 2,326 - 83,203 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Accrued income and other financial assets 140,788 30,145 16,209 2,754 1,748 797 431 4,490 197,362 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Financial assets at 31 Dec 2020 3,423,078 1,035,445 589,603 282,138 307,433 652,669 1,062,728 1,581,477 8,934,571 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Non-financial assets - - - - - - - 481,832 481,832 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Total assets at 31 Dec 2020 3,423,078 1,035,445 589,603 282,138 307,433 652,669 1,062,728 2,063,309 9,416,403 Financial liabilities --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Hong Kong currency notes in circulation 313,404 - - - - - - - 313,404 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Items in the course of transmission to other banks 25,699 - - - - - - - 25,699 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Repurchase agreements - non-trading 109,062 4,816 - 1,187 5,223 - 8,024 7,845 136,157 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Deposits by banks 237,905 3,157 2,782 3,621 76 1,087 - - 248,628 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Customer accounts 5,396,286 332,854 89,287 39,727 27,186 18,676 7,376 4 5,911,396 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Trading liabilities 60,812 - - - - - - - 60,812 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Derivatives 421,829 1,566 1,207 176 404 1,281 1,436 312 428,211 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Financial liabilities designated at fair value 40,325 28,300 11,481 7,517 7,176 8,930 17,024 46,260 167,013 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Debt securities in issue 5,056 11,234 12,556 13,611 3,991 16,025 14,374 2,572 79,419 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Amounts due to Group companies 78,046 20,135 766 33 332 24,397 55,860 116,705 296,274 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Accruals and other financial liabilities 128,880 37,418 20,038 3,326 4,565 4,516 5,357 3,799 207,899 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Subordinated liabilities(1) - - - - - - - 4,065 4,065 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Financial liabilities at 31 Dec 2020 6,817,304 439,480 138,117 69,198 48,953 74,912 109,451 181,562 7,878,977 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Non-financial liabilities - - - - - - - 625,895 625,895 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ---------------- Total liabilities at 31 Dec 2020 6,817,304 439,480 138,117 69,198 48,953 74,912 109,451 807,457 8,504,872 --------------- ------------------- ------------------- ------------------- --------------------- ------------------- ------------------- ------------------- --------------------- ----------------
1 The maturity for subordinated liabilities is based on the earliest date on which the group is required to pay, i.e. the callable date.
27 Analysis of cash flows payable under financial liabilities by remaining
contractual maturities
-----------------------------------------------------------------------
Due over
1 month
Due not but not Due between Due between
more than more than 3 and 1 and Due after
1 month 3 months 12 months 5 years 5 years Total
HK$m HK$m HK$m HK$m HK$m HK$m
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
At 31 Dec 2021
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Hong Kong
currency notes
in
circulation 332,044 - - - - 332,044
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Items in the
course of
transmission
to other banks 25,701 - - - - 25,701
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Repurchase
agreements -
non-trading 231,531 4,714 1,517 10,530 7,289 255,581
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Deposits by
banks 269,681 2,140 8,341 451 - 280,613
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Customer
accounts 5,723,441 273,282 157,735 28,638 4 6,183,100
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Trading
liabilities 92,723 - - - - 92,723
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Derivatives 354,584 416 384 621 40 356,045
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Financial
liabilities
designated
at fair value 33,288 22,323 21,903 28,536 35,768 141,818
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Debt securities
in issue 4,336 5,667 34,629 22,632 2,370 69,634
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Amounts due to
Group
companies 113,944 19,523 7,301 108,035 147,000 395,803
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Other financial
liabilities 123,460 39,607 31,486 10,630 1,854 207,037
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Subordinated
liabilities - 15 44 236 4,207 4,502
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
7,304,733 367,687 263,340 210,309 198,532 8,344,601
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Loan and other
credit-related
commitments 2,945,560 - - - - 2,945,560
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Financial
guarantees 41,843 - - - - 41,843
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
10,292,136 367,687 263,340 210,309 198,532 11,332,004
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Proportion of
cash flows
payable
in period 91% 3% 2% 2% 2%
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
At 31 Dec 2020
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Hong Kong
currency notes
in
circulation 313,404 - - - - 313,404
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Items in the
course of
transmission
to other banks 25,699 - - - - 25,699
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Repurchase
agreements -
non-trading 109,090 4,818 6,602 8,076 7,885 136,471
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Deposits by
banks 238,153 3,263 6,630 1,238 - 249,284
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Customer
accounts 5,397,993 333,682 158,267 28,007 16 5,917,965
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Trading
liabilities 60,812 - - - - 60,812
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Derivatives 421,811 1,462 1,561 2,840 312 427,986
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Financial
liabilities
designated
at fair value 40,602 29,077 26,457 26,549 46,371 169,056
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Debt securities
in issue 5,121 11,445 31,445 31,699 2,686 82,396
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Amounts due to
Group
companies 78,063 21,920 5,873 97,021 122,569 325,446
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Other financial
liabilities 127,644 36,648 26,098 9,208 3,792 203,390
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Subordinated
liabilities - 16 47 249 5,225 5,537
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
6,818,392 442,331 262,980 204,887 188,856 7,917,446
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Loan and other
credit-related
commitments 2,815,447 - - 136 - 2,815,583
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Financial
guarantees 39,923 - - - - 39,923
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
9,673,762 442,331 262,980 205,023 188,856 10,772,952
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
Proportion of
cash flows
payable
in period 90% 4% 2% 2% 2%
--------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- -----------------------
The balances in the above tables incorporate all cash flows relating to principal and future coupon payments on an undiscounted basis. Trading liabilities and trading derivatives have been included in the 'On demand' time bucket as they are typically held for short periods of time. The undiscounted cash flows payable under hedging derivative liabilities are classified according to their contractual maturity. Investment contract liabilities have been included in financial liabilities designated at fair value, whereby the policyholders have the options to surrender or transfer at any time, and are reported in the 'Due after 5 years' time bucket. A maturity analysis prepared on the basis of the earliest possible contractual repayment date (assuming that all surrender and transfer options are exercised) would result in all investment contracts being presented as falling due within one year or less. The undiscounted cash flows potentially payable under loan commitments and financial guarantee contracts are classified on the basis of the earliest date they can be called. Cash flows payable in respect of customer accounts are primarily contractually repayable on demand or at short notice.
28 Contingent liabilities, contractual commitments and guarantees
--------------------------------------------------------------
2021 2020
HK$m HK$m
------------------------------------------------------- ---------------------------- -----------------------------
Guarantees and contingent liabilities:
------------------------------------------------------- ---------------------------- -----------------------------
- financial guarantees(1) 41,843 39,923
------------------------------------------------------- ---------------------------- -----------------------------
- performance and other guarantees(2) 335,849 286,139
------------------------------------------------------- ---------------------------- -----------------------------
- other contingent liabilities 1,751 3,644
------------------------------------------------------- ---------------------------- -----------------------------
At 31 Dec 379,443 329,706
------------------------------------------------------- ---------------------------- -----------------------------
Commitments(3) :
------------------------------------------------------- ---------------------------- -----------------------------
- documentary credits and short-term trade-related
transactions 32,284 29,581
------------------------------------------------------- ---------------------------- -----------------------------
- forward asset purchases and forward forward deposits
placed 40,745 38,246
------------------------------------------------------- ---------------------------- -----------------------------
- undrawn formal standby facilities, credit lines and
other commitments to lend 2,872,531 2,747,756
------------------------------------------------------- ---------------------------- -----------------------------
At 31 Dec 2,945,560 2,815,583
------------------------------------------------------- ---------------------------- -----------------------------
1 Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
2 Performance and other guarantees include re-insurance letters of credit related to particular transactions, trade-related letters of credit issued without provision for the issuing entity to retain title to the underlying shipment, performance bonds, bid bonds, standby letters of credit and other transaction-related guarantees.
3 Includes HK$1,826,335m of commitments at 31 December 2021 (2020: HK$1,725,963m) to which the impairment requirements in HKFRS 9 are applied where the group has become party to an irrevocable commitment.
The above table discloses the nominal principal amounts of commitments (excluding other commitments as disclosed in Note 29), guarantees and other contingent liabilities, which represent the amounts at risk should contracts be fully drawn upon and clients default. The amount of the commitments shown above reflects, where relevant, the expected level of take-up of pre-approved facilities. As a significant proportion of guarantees and commitments are expected to expire without being drawn upon, the total of the nominal principal amounts is not representative of future liquidity requirements.
It also reflects the group's maximum exposure under a large number of individual guarantee undertakings. The risks and exposures from guarantees are captured and managed in accordance with HSBC's overall credit risk management policies and procedures. Guarantees are subject to an annual credit review process.
Other contingent liabilities at 31 December 2021 included amounts in relation to legal and regulatory matters as set out in
Note 37.
29 Other commitments
-----------------
Capital commitments
At 31 December 2021, capital commitments, mainly related to the commitment for purchase of properties, were HK$4,826m
(2020: HK$8,531m).
30 Offsetting of financial assets and financial liabilities
--------------------------------------------------------
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously ('the offset criteria').
The 'Amounts not set off in the balance sheet' include transactions where:
-- the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right to set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and
-- in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-cash collateral has been received/pledged.
For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains appropriate.
Offsetting of financial assets and financial liabilities
Amounts subject to enforceable netting
arrangements
--------------------------------------------------------------------------------------------------------------------------------------------------------------
Amounts not offset in
the
balance sheet
Amounts
Net amounts not subject
reported to enforceable
in the netting Balance
Gross Amounts balance Financial Non-cash Cash Net arrange- sheet
amounts offset sheet instruments collateral collateral amount ments(1) total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
At 31 Dec 2021
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Financial
assets(2)
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Derivatives 524,603 (190,129) 334,474 (267,072) (12,886) (36,005) 18,511 30,693 365,167
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Reverse repos,
stock
borrowing and
similar
agreements
classified
as: 867,597 (71,412) 796,185 - (794,195) (749) 1,241 90,247 886,432
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
- trading
assets 60,417 (79) 60,338 - (59,771) (552) 15 7,393 67,731
---------------
- non-trading
assets(4) 807,180 (71,333) 735,847 - (734,424) (197) 1,226 82,854 818,701
1,392,200 (261,541) 1,130,659 (267,072) (807,081) (36,754) 19,752 120,940 1,251,599
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Financial
liabilities(3)
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Derivatives 516,525 (190,129) 326,396 (267,072) (10,552) (27,837) 20,935 29,395 355,791
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Repos, stock
lending
and similar
agreements
classified as: 330,366 (71,412) 258,954 - (258,523) (3) 428 68,664 327,618
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
- trading
liabilities 6,807 (79) 6,728 - (6,721) - 7 - 6,728
---------------
- non-trading
liabilities(5) 323,559 (71,333) 252,226 - (251,802) (3) 421 68,664 320,890
846,891 (261,541) 585,350 (267,072) (269,075) (27,840) 21,363 98,059 683,409
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
At 31 Dec 2020
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Financial
assets(2)
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Derivatives 583,241 (200,656) 382,585 (290,517) (11,009) (45,001) 36,058 40,360 422,945
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Reverse repos,
stock
borrowing and
similar
agreements
classified
as: 532,974 (19,276) 513,698 - (513,476) (166) 56 61,715 575,413
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
- trading
assets 46,922 - 46,922 - (46,892) - 30 4,680 51,602
---------------
- non-trading
assets(4) 486,052 (19,276) 466,776 - (466,584) (166) 26 57,035 523,811
1,116,215 (219,932) 896,283 (290,517) (524,485) (45,167) 36,114 102,075 998,358
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Financial
liabilities(3)
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Derivatives 584,214 (200,656) 383,558 (290,517) (15,977) (47,483) 29,581 44,653 428,211
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
Repos, stock
lending
and similar
agreements
classified as: 146,768 (19,276) 127,492 - (127,281) (21) 190 51,205 178,697
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
- trading
liabilities 1,605 - 1,605 - (1,595) - 10 - 1,605
---------------
- non-trading
liabilities(5) 145,163 (19,276) 125,887 - (125,686) (21) 180 51,205 177,092
730,982 (219,932) 511,050 (290,517) (143,258) (47,504) 29,771 95,858 606,908
--------------- -------------------------------- ------------------- ------------------- ---------------------- ---------------- ------------------ -------------------- ------------------------ -----------------
1 These exposures continue to be secured by financial collateral, but the group may not have sought or been able to obtain a legal opinion evidencing enforceability of the offsetting right.
2 Amounts presented in the balance sheet included balances due from Group companies of HK$167,054m (2020: HK$79,027m).
3 Amounts presented in the balance sheet included balances due to Group companies of HK$217,572m (2020: HK$129,230m).
4 Amounts presented in the balance sheet included reverse repos with third parties of HK$803,775m (2020: HK$520,344m).
5 Amounts presented in the balance sheet included repos with third parties of HK$255,374m (2020: HK$136,157m).
31 Segmental analysis
------------------
The Executive Committee ('EXCO') is considered the Chief Operating Decision Maker ('CODM') for the purpose of identifying the group's operating segments. Operating segment results are assessed by the CODM on the basis of performance measured in accordance with HKFRSs. Although the CODM reviews information on a number of bases, business performance is assessed and capital resources are allocated by operating segments, and the segmental analysis is presented based on reportable segments as assessed under HKFRS 8 'Operating Segments'.
Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expenses. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to operational business lines and geographical regions. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs which are not allocated to other operating segments are included in the 'Corporate Centre'.
Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-group elimination items for the operating segments are presented in the Corporate Centre.
Change in operating and reportable segments
Effective from the second half of 2021, the operating and reportable segments have been changed to reflect the change in management of the Global Banking and Markets business, with the splitting out of Global Banking, Markets and Securities Services and Global Banking and Markets - Other as separate operating segments following realignments within our internal reporting to the CODM. Global Banking and Markets and Securities Services are separate reportable segments. Global Banking and Markets - Other, which mainly comprises of business activities which are jointly managed by GB and MSS, is reported under 'Other (GBM-other)'. Comparatives have been re-presented to conform to the current year's presentation.
Our global businesses and reportable segments
The group provides a comprehensive range of banking and related financial services to our customers in our global businesses: Wealth and Personal Banking ('WPB'), Commercial Banking ('CMB') and Global Banking and Markets ('GBM'). The products and services offered to customers are organised by these global businesses.
-- WPB provides a full range of retail banking and wealth products to our customers from personal banking to ultra high net worth individuals. Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services. We also provide wealth management services, including insurance and investment products, global asset management services, investment management and Private Wealth Solutions for customers with more sophisticated and international requirements.
-- CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its customers access to products and services offered by other global businesses, such as GBM, which include foreign exchange products, raising capital on debt and equity markets and advisory services.
-- GBM comprises of two separate reportable segments: Global Banking ('GB') and Markets and Securities Services ('MSS'). GB provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services. MSS provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.
-- Corporate Centre includes strategic investments such as our investment in BoCom, Central Treasury revenue, and costs which are not allocated to global businesses, mainly in relation to investments in technology.
Performance by reportable segments is presented in the 'Financial Review' on page 10 as specified as 'Audited'.
Information by geographical region
Rest of Intra-segment
Hong Kong Asia-Pacific elimination Total
HK$m HK$m HK$m HK$m
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
For the year ended
31 Dec 2021
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Total operating
income 174,859 79,067 780 254,706
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Profit before tax 41,043 45,520 - 86,563
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
At 31 Dec 2021
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Total assets 7,035,497 3,696,064 (828,168) 9,903,393
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Total liabilities 6,559,271 3,248,779 (828,168) 8,979,882
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Credit commitments
and contingent
liabilities
(contract amounts) 1,792,675 1,532,328 - 3,325,003
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
For the year ended
31 Dec 2020
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Total operating
income 190,128 76,955 166 267,249
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Profit before tax 57,937 32,259 - 90,196
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
At 31 Dec 2020
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Total assets 6,636,693 3,487,821 (708,111) 9,416,403
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Total liabilities 6,141,296 3,071,687 (708,111) 8,504,872
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Credit commitments
and contingent
liabilities
(contract amounts) 1,727,502 1,417,787 - 3,145,289
------------------- ---------------------------- ---------------------------- -------------------------------- ----------------------------
Information by country/territory
Revenue(1) Non-current assets(2)
----------------------------------------------------------- -----------------------------------------------------------
For the year ended At 31 Dec
31 Dec
----------------------------------------------------------- -----------------------------------------------------------
2021 2020 2021 2020
HK$m HK$m HK$m HK$m
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Hong Kong 106,966 120,873 134,400 126,286
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Mainland
China 19,381 16,974 196,477 176,462
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Australia 7,351 6,665 1,837 2,229
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
India 10,614 10,296 2,534 2,241
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Indonesia 3,242 3,649 3,584 3,701
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Malaysia 5,174 5,415 2,022 1,932
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Singapore 10,671 9,924 2,933 3,040
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Taiwan 3,124 2,932 2,802 2,687
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Other 12,135 12,610 3,140 3,627
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
Total 178,658 189,338 349,729 322,205
---------- ---------------------------- ----------------------------- ---------------------------- -----------------------------
1 Revenue (defined as 'Net operating income before change in expected credit losses and other impairment charges') is attributable to countries based on the location of the principal operations of the branch, subsidiary, associate or joint venture.
2 Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures and certain other assets.
2
32 Related party transactions
--------------------------
The group's related parties include the parent, fellow subsidiaries, associates, joint ventures, post-employment benefit plans for the group's employees, Key Management Personnel ('KMP') as defined by HKAS 24, close family members of KMP and entities that are controlled or jointly controlled by KMP or their close family members.
Particulars of transactions with related parties are set out below.
(a) Inter-company
The group is wholly owned by HSBC Asia Holdings Limited, which in turn is a wholly-owned subsidiary of HSBC Holdings plc (incorporated in England).
The group entered into transactions with its fellow subsidiaries in the normal course of business, including the acceptance and placement of interbank deposits, correspondent banking transactions and off-balance sheet transactions. The Bank also acted as agent for the distribution of retail investment funds for fellow subsidiaries and paid professional fees for services provided by fellow subsidiaries.
The group shared the costs of certain IT projects and also used certain processing services of fellow subsidiaries. These costs are reported under 'General and administrative expenses - other administrative expenses in the income statement.
The aggregate amount of income and expenses arising from these transactions during the year and the balances of amounts due to and from the relevant parties at the year end were as follows:
2021 2020
---------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------
Immediate Ultimate Immediate Ultimate
holding holding Fellow holding holding Fellow
company company subsidiaries company company subsidiaries
HK$m HK$m HK$m HK$m HK$m HK$m
------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- -------------------------------
Income and expenses for the year ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Interest income - - 220 - - 480 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Interest expense(1) 6,773 (651) (286) 6,489 (339) 39 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Fee income - - 2,538 - - 2,744 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Fee expense - 1 1,428 - - 1,272 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Net income from financial instruments held for trading or managed on a fair value basis - 1 (19) - 2 18 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Net insurance - - - premium income - - 249 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Other operating income - 129 1,770 - 787 916 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Net insurance claims and benefits paid and movement in liabilities to policyholders - - (179) - - - ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- General and administrative expenses(2) - (141) 47,842 - 5,270 33,632 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- At 31 Dec ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Assets 9 1,147 260,256 - 2,707 157,916 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- - trading assets(3) - 22 4,232 - 14 159 ------------------- - derivative assets - 989 147,704 - 2,488 74,932 ------------------- - other assets(3,6) 9 136 108,320 - 205 82,825 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- Liabilities 223,565 1,069 283,630 198,211 3,676 182,145 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- - trading liabilities(3) - - 25 - 11 572 ------------------- - financial liabilities designated at fair value(3,4) 175,655 - 7 131,370 - 8 ------------------- - derivative liabilities - 18 152,013 - - 87,724 ------------------- - other liabilities(3,6) 1,388 980 131,585 1,448 3,593 93,841 ------------------- - subordinated liabilities(3,5,6) 46,522 71 - 65,393 72 - ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- Guarantees - - 22,815 - - 19,907 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- ------------------------------- Commitments - - 2,076 - - 2,189 ------------------- ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------- ------------------------------- -------------------------------
1 The amount includes interest expenses on debt instruments issued by the group for funding purposes that are designated under the fair value option to reduce an accounting mismatch, and interest expenses/(income) on derivatives managed in conjunction with those debt instruments. Comparatives have been re-presented to conform to the current year's presentation.
2 This includes reimbursement of amount from ultimate holding company in accordance to the billing arrangement of the Group.
3 These balances are presented under 'Amounts due from/to Group companies' in the consolidated balance sheet.
4 The balance at 31 December 2021 included subordinated liabilities of HK$175,655m to meet Total Loss Absorbing Capacity ('TLAC') requirements (2020: HK$131,370m). During the year, there were repayment of HK$4,437m and issuance of HK$54,460m (2020: no movement).The carrying amount of financial liabilities designated at fair value was HK$7,211m higher than the contractual amount at maturity (2020: HK$12,518m). The cumulative loss in fair value attributable to changes in credit risk was HK$1,815m (2020: HK$2,490m). The balances are largely under Level 2.
5 The balance at 31 December 2021 included subordinated liabilities of HK$46,522m to meet TLAC requirements (2020: HK$65,393m).During the year, there were repayment of HK$19,665m and issuance of HK$3,304m (2020: no movement).
6 The fair value hierarchy of assets and liabilities at amortised cost are under level 2 and the fair value has no material difference with carrying value.
The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.
(b) Share option and share award schemes
The group participates in various share option and share plans operated by HSBC whereby share options or shares of HSBC are granted to employees of the group. The group recognises an expense in respect of these share options and share awards. The cost borne by the ultimate holding company in respect of share options is treated as a capital contribution and is recorded within 'Other reserves'. In respect of share awards, the group recognises a liability to the ultimate holding company over the vesting period. This liability is measured at the fair value of the shares at each reporting date, with changes since the award dates adjusted through the capital contribution account within 'Other reserves'. The balances of the capital contribution and the liability at 31 December 2021 amounted to HK$3,436m and HK$1,431m respectively (2020: HK$3,609m and HK$1,124m respectively).
(c) Post-employment benefit plans
At 31 December 2021, HK$9.2bn (2020: HK$9.3bn) of the group's post-employment plan assets were under management by group companies, earning management fees of HK$65m in 2021 (2020: HK$59m). At 31 December 2021, the group's post-employment benefit plans had placed deposits of HK$783m (2020: HK$641m) with its banking subsidiaries, earning interest payable to the schemes of HK$0.5m (2020: HK$0.2m). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with third-party counterparties.
(d) Associates and joint ventures
The group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details of interests in associates and joint ventures are set out in Note 14.
The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful information to represent the amount of transactions and outstanding balances during the year.
Transactions and balances during the year with associates and joint
ventures
2021 2020
---------------------------------------------------------- ----------------------------------------------------------------------
Highest Highest
balance Balance balance Balance
during at during at
the year 31 December the year 31 December
HK$m HK$m HK$m HK$m
--------------- ---------------------------- ---------------------------- ---------------------------------- ----------------------------------
Amounts due
from
associates -
unsubordinated 35,304 32,663 33,577 22,811
--------------- ---------------------------- ---------------------------- ---------------------------------- ----------------------------------
Amounts due to
associates 26,490 8,348 42,377 17,263
--------------- ---------------------------- ---------------------------- ---------------------------------- ----------------------------------
Commitments 4,722 1,479 1 1
--------------- ---------------------------- ---------------------------- ---------------------------------- ----------------------------------
The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with third--party counterparties.
(e) Key Management Personnel
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Board of Directors and Group Executive Committee members of HSBC Holdings plc.
Compensation of Key Management Personnel
2021 2020
HK$m HK$m
--------------------------------------- ---------------------------------- ----------------------------------
Salaries and other short-term benefits 314 315
--------------------------------------- ---------------------------------- ----------------------------------
Post employment benefits 9 9
--------------------------------------- ---------------------------------- ----------------------------------
Termination benefits 5 4
--------------------------------------- ---------------------------------- ----------------------------------
Share-based payments 123 103
--------------------------------------- ---------------------------------- ----------------------------------
Total 451 431
--------------------------------------- ---------------------------------- ----------------------------------
Transactions, arrangements and agreements involving Key Management
Personnel
2021 2020
HK$m HK$m
------------------------------------------ ---------------------------- -----------------------------
During the year
------------------------------------------ ---------------------------- -----------------------------
Highest average assets(1) 107,317 100,834
------------------------------------------ ---------------------------- -----------------------------
Highest average liabilities(1) 71,516 71,488
------------------------------------------ ---------------------------- -----------------------------
Contribution to group's profit before tax 1,510 1,733
------------------------------------------ ---------------------------- -----------------------------
At the year end
------------------------------------------ ---------------------------- -----------------------------
Guarantees 13,263 12,452
------------------------------------------ ---------------------------- -----------------------------
Commitments 13,624 16,701
------------------------------------------ ---------------------------- -----------------------------
1 The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during the year.
Transactions, arrangements and agreements are entered into by the group with companies that may be controlled by Key Management Personnel of the group and their immediate relatives. These transactions are primarily loans and deposits, and were entered into in the ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with persons or companies of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features. Change in expected credit losses recognised for the year, and expected credit loss allowances against balances outstanding at the end of the year, in respect of Key Management Personnel were insignificant (2020: insignificant).
On 8 October 2019, the group acted as Joint Global Co-ordinator and Underwriter on aggregated EUR4.25bn and GBP800m Senior Note issuances for CK Hutchison Group Telecom Finance S.A. in 6 tranches, with tenors of 4 to 15 years and coupon rates of 0.375% to 2.625%. CK Hutchison Group Telecom Finance S.A. is a wholly-owned subsidiary of an associated body corporate (CK Hutchison Holdings Limited) of Mr Victor Li, a non-executive Director of the Bank.
(f) Loans to directors
Directors are defined as the Directors of the Bank, its ultimate holding company, HSBC Holdings plc and intermediate holding companies. Loans to directors also include loans to companies that are controlled by, and entities that are connected with these directors. Particulars of loans to directors disclosed pursuant to section 17 of the Companies (Disclosure of Information about Benefits of Directors) Regulation are as follows:
Aggregate amount Maximum aggregate
outstanding at amount outstanding
31 Dec during the year
-------------------------------------------------------------------- --------------------------------------------------------------------
2021 2020 2021 2020
HK$m HK$m HK$m HK$m
------------- -------------------------------- ---------------------------------- -------------------------------- ----------------------------------
By the Bank 3,755 2,690 3,967 4,291
------------- -------------------------------- ---------------------------------- -------------------------------- ----------------------------------
By
subsidiaries 13 4 14 9
------------- -------------------------------- ---------------------------------- -------------------------------- ----------------------------------
3,768 2,694 3,981 4,300
------------- -------------------------------- ---------------------------------- -------------------------------- ----------------------------------
These amounts include principal and interest, and the maximum liability that may be incurred under guarantees.
33 Fair values of financial instruments carried at fair value
----------------------------------------------------------
Control framework
Fair values are subject to a control framework designed to ensure that they are either determined, or validated, by a function independent of the risk taker.
Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. For inactive markets, the group sources alternative market information, with greater weight given to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument comparability, consistency of data sources, underlying data accuracy and timing of prices.
Fair value of investment funds are sourced from the underlying fund managers which are based upon an assessment of the underlying investees' financial positions, results, risk profile and prospects.
For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.
The majority of financial instruments measured at fair value are in MSS and Insurance. The group's fair value governance structure comprises its Finance function and Valuation Committees. Finance is responsible for establishing procedures governing valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the group's relevant Valuation Committees, which consist of independent support functions. Within MSS and Insurance, these Committees are overseen by the Group's Valuation Committee Review Group and the Group Insurance Valuation and Impairment Committee respectively. These two Group Committees considers all material subjective valuations.
Financial liabilities measured at fair value
In certain circumstances, the group records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to the group's liabilities. The change in fair value of issued debt securities attributable to the group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The difference in the valuations is attributable to the group's own credit spread. This methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments are included within 'Financial liabilities designated at fair value' and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which the group issues structured notes.
Gains and losses arising from changes in the credit spread of liabilities issued by the group reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.
Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:
-- Level 1 - valuation technique using quoted market price: financial instruments with quoted prices for identical instruments in active markets that the group can access at the measurement date.
-- Level 2 - valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.
-- Level 3 - valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.
--
Financial instruments carried at fair value and bases of valuation
Fair Value Hierarchy
----------------------------------------------------------------------------------------
Level Level Level Third-party Inter-
1 2 3 total company(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
At 31 Dec 2021
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Assets
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Trading
assets(1) 537,816 236,388 3,246 777,450 - 777,450
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Derivatives 440 212,740 3,294 216,474 148,693 365,167
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through profit
or loss 93,544 34,203 74,652 202,399 - 202,399
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Financial
investments 1,153,521 391,816 3,674 1,549,011 - 1,549,011
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Liabilities
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Trading
liabilities(1) 73,647 19,076 - 92,723 - 92,723
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Derivatives 963 200,667 2,130 203,760 152,031 355,791
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Financial
liabilities
designated
at fair
value(1) - 118,516 20,449 138,965 - 138,965
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
At 31 Dec 2020
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Assets
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Trading
assets(1) 403,730 195,447 1,237 600,414 - 600,414
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Derivatives 2,140 342,357 1,028 345,525 77,420 422,945
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through profit
or loss 97,590 31,836 49,534 178,960 - 178,960
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Financial
investments 1,315,696 378,075 6,635 1,700,406 - 1,700,406
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Liabilities
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Trading
liabilities(1) 52,504 8,308 - 60,812 - 60,812
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Derivatives 2,015 334,934 3,538 340,487 87,724 428,211
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
Financial
liabilities
designated
at fair
value(1) - 146,529 20,484 167,013 - 167,013
--------------- ----------------------------- -------------------------- ----------------------------- ------------------------ ----------------------------- ------------------------
1 Amounts with HSBC Group entities are not reflected here.
2 Derivatives balances with HSBC Group entities are largely under 'Level 2'.
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
-------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------
Designated
and otherwise
mandatorily
measured Designated
Financial Trading at fair Trading at fair
investments assets value Derivatives liabilities value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
---------- --------------------- -------------------- ----------------------- ---------------------------- ------------------------- -------------------------- --------------------------
At 31 Dec
2021
---------- --------------------- -------------------- ----------------------- ---------------------------- ------------------------- -------------------------- --------------------------
Transfers
from
Level
1 to
Level 2 57,471 29,852 1,970 802 1,012 - 1,652
---------- --------------------- -------------------- ----------------------- ---------------------------- ------------------------- -------------------------- --------------------------
Transfers
from
Level
2 to
Level 1 36,073 20,948 1,679 - 3,452 - -
---------- --------------------- -------------------- ----------------------- ---------------------------- ------------------------- -------------------------- --------------------------
At 31 Dec
2020
---------- --------------------- -------------------- ----------------------- ---------------------------- ------------------------- -------------------------- --------------------------
Transfers
from
Level
1 to
Level 2 31,809 20,534 1,901 - 236 - -
---------- --------------------- -------------------- ----------------------- ---------------------------- ------------------------- -------------------------- --------------------------
Transfers
from
Level
2 to
Level 1 37,387 26,796 1,860 5 191 - -
---------- --------------------- -------------------- ----------------------- ---------------------------- ------------------------- -------------------------- --------------------------
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each Group's quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to changes in observability of valuation inputs and price transparency.
Fair value adjustments
Fair value adjustments are adopted when the group determines there are additional factors considered by market participants that are not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement, such as when models are enhanced and therefore fair value adjustments may no longer be required.
Bid-offer
HKFRS 13 requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of, or unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for uncertain parameters and/or model assumptions, than those used in the group's valuation model.
Credit valuation adjustment ('CVA') and debit valuation adjustment ('DVA')
The CVA is an adjustment to the valuation of over-the-counter ('OTC') derivative contracts to reflect the possibility that the counterparty may default and the group may not receive the full market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that the group may default, and that the group may not pay the full market value of the transactions.
The group calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not netted across group entities.
The group calculates the CVA by applying the probability of default ('PD') of the counterparty, conditional on the non-default of the group, to the group's expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, the group calculates the DVA by applying the PD of the group, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to the group and multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure.
For most products the group uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty.
The methodologies do not, in general, account for 'wrong-way risk' which arises when the underlying value of the derivative prior to any CVA is positively correlated to the PD of the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation.
Funding fair value adjustment ('FFVA')
The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available and is adjusted for events that may terminate the exposure, such as the default of the group or the counterparty. The FFVA and DVA are calculated independently.
Model limitation
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics. In these circumstances, model limitation adjustments are adopted.
Inception profit (Day 1 profit or loss reserves)
Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs.
Effects of changes in significant unobservable assumptions to reasonably possible alternatives
The key unobservable inputs to Level 3 financial instruments include volatility and correlation for structured notes and deposits valued using option models, bid quotes for corporate bonds valued using approaches that take into account market comparables, and multiple items for private equity and related investments. In the absence of an active market, the fair value of private equity and strategic investments is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors, as well as by reference to market valuations for similar entities quoted in an active market, or the price at which similar companies have changed ownership. The change in fair values due to changes in reasonably possible alternative assumptions for these unobservable inputs is not significant.
Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, the availability and reliability of observable proxies and historical data. When the available data is not amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval. The sensitivity of Level 3 fair values to reasonably possible alternative assumptions is not significant.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique
with significant unobservable inputs - Level 3
Assets Liabilities
------------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------
Designated
and otherwise
mandatorily
measured
at fair
value
through Designated
Financial Trading profit at fair
investments assets or loss Derivatives Total value Derivatives Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Private
equity and
related
investments 3,121 4 74,295 - 77,420 - - -
---------------------- ---------------------- ---------------------- ----------------------
Structured
notes - - - - - 20,449 - 20,449
------------ ---------------------- ---------------------- ---------------------- ----------------------
Others 553 3,242 357 3,294 7,446 - 2,130 2,130
------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
At 31 Dec
2021 3,674 3,246 74,652 3,294 84,866 20,449 2,130 22,579
------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Private
equity and
related
investments 6,167 - 49,274 - 55,441 - - -
Structured
notes - - - - - 20,484 - 20,484 Others 468 1,237 260 1,028 2,993 - 3,538 3,538 ------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- At 31 Dec 2020 6,635 1,237 49,534 1,028 58,434 20,484 3,538 24,022 ------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Private equity and related investments
The fair value of a private equity investment (including private equity, infrastructure and private credit, primarily held to support our Insurance business, and strategic investments) is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; the price at which similar companies have changed ownership; or from published net asset values ('NAVs') received. If necessary, adjustments are made to the NAV of funds to obtain the best estimate of fair value.
Structured notes
The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.
Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates.
Derivatives
OTC derivative valuation models calculate the present value of expected future cash flows, based upon 'no arbitrage' principles. For many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
Assets Liabilities
------------------------------------------------------------------------------------------------------- -------------------------------------------------
Designated
and otherwise
mandatorily
measured
at fair
value
through Designated
Financial Trading profit at fair
investments assets or loss Derivatives value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
At 1 Jan 2021 6,635 1,237 49,534 1,028 20,484 3,538
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
Total gains/(losses) recognised
in profit or loss (7) (2,211) 11,700 4,002 (3,207) 3,082
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
* net income/(losses) from financial instruments held
for trading or managed on a fair value basis - (2,211) - 4,002 - 3,082
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 11,700 - (3,207) -
-----------------------------------------------------------
* gains less losses from financial investments at fair
value through other comprehensive income (7) - - - - -
Total gains recognised in other
comprehensive income ('OCI') (3,013) 10 11 18 386 23
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
- financial investments: fair
value (losses) (3,002) - - - (3) -
- exchange differences (11) 10 11 18 389 23
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------
Purchases 1,383 5,082 22,232 - - -
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
New issuances - - - - 9,196 -
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
Sales (35) (561) (6) - - -
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
Settlements (1,289) (87) (7,898) (1,247) (7,165) (4,060)
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
Transfers out - (691) (921) (614) (2,895) (878)
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
Transfers in - 467 - 107 3,650 425
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
At 31 Dec 2021 3,674 3,246 74,652 3,294 20,449 2,130
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
Unrealised gains/(losses) recognised
in profit or loss relating to
assets and liabilities held at
31 Dec 2021 - (2,278) 11,236 2,686 113 (34)
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------ -----------------------
* net income/(losses) from financial instruments held
for trading or managed on a fair value basis - (2,278) - 2,686 - (34)
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 11,236 - 113 -
----------------------------------------------------------- ------------------------ ----------------------- ---------------------------- ---------------------- ------------------------
At 1 Jan 2020 5,622 557 32,291 833 20,571 2,422
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
Total gains/(losses) recognised
in profit or loss - 43 3,205 2,627 (2,113) 3,401
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
* net income from financial instruments held for
trading or managed on a fair value basis - 43 - 2,627 - 3,401
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 3,205 - (2,113) -
-----------------------------------------------------------
* gains less losses from financial investments at fair
value through other comprehensive income - - - - - -
Total gains/(losses) recognised
in other comprehensive income ('OCI') 1,529 (2) (6) 6 857 -
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
- financial investments: fair value
gains/(losses) 1,485 - - - (24) -
-----------------------------------------------------------
- exchange differences 44 (2) (6) 6 881 -
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------
Purchases 554 852 16,714 - - -
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
New issuances - - - - 6,468 -
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
Sales - (335) - - - -
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
Settlements (1,070) - (2,484) (1,244) (3,896) (1,620)
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
Transfers out - (266) (189) (1,216) (2,735) (1,070)
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
Transfers in - 388 3 22 1,332 405
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
At 31 Dec 2020 6,635 1,237 49,534 1,028 20,484 3,538
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
Unrealised gains/(losses) recognised
in profit or loss relating to assets
and liabilities held at 31 Dec
2020 - 5 2,741 587 (13) (1,838)
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------ -----------------------
* net income/(losses) from financial instruments held
for trading or managed on a fair value basis - 5 - 587 - (1,838)
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 2,741 - (13) -
----------------------------------------------------------- ----------------------- ------------------------- ------------------------- ------------------------- ------------------------
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each Group's quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Sensitivity of fair values to reasonably possible alternative assumptions
2021 2020
-------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------
Reflected in Reflected in Reflected in Reflected in
profit or loss OCI profit or loss OCI
------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------
Un- Un- Un- Un-
Favourable favourable Favourable favourable Favourable favourable Favourable favourable
changes changes changes changes changes changes changes changes
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
Derivatives,
trading
assets and
trading
liabilities(1) 158 (162) - - 211 (211) - -
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
Financial
assets and
liabilities
designated
and otherwise
mandatorily
measured at
fair value
through profit
or
loss 3,741 (3,742) - - 2,478 (2,478) - -
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
Financial
investments - - 157 (157) - - 309 (309)
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
At 31 Dec 3,899 (3,904) 157 (157) 2,689 (2,689) 309 (309)
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
1 'Derivatives, trading assets and trading liabilities' are presented as one category to reflect the manner in which these instruments are risk-managed.
The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.
Key unobservable inputs to Level 3 financial instruments
The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31 December 2021.
Quantitative information about significant unobservable inputs in Level
3 valuations
Fair value 2021 2020
---------------------------------- ---------------- -------------
Full range Full range
Assets Liabilities of inputs of inputs
-------------- --------------- ---------------- -------------
HK$m HK$m Key Lower Higher Lower Higher
Valuation unobservable
techniques inputs
---------------- ---------------- ---------------- -------------- --------------- ------- ------- ----- ------
Private equity
and
related
investments 77,420 - See below See below
---------------- ---------------- ---------------- -------------- --------------- ------- ------- ----- ------
Structured notes - 20,449
---------------- ---------------- ---------------- -------------- --------------- ------- ------- ----- ------
- equity-linked Model - Option Equity 6 90
notes - 15,517 model volatility % % 6% 72%
---------------- -------------- --------------- ------- ------- ----- ------
Model - Option Equity 22 97
model correlation % % 39% 88%
---------------- -------------- --------------- ------- ------- ----- ------
- FX-linked Model - Option 2 36
notes - 4,733 model FX volatility % % 3% 36%
---------------- -------------- --------------- ------- ------- ----- ------
- other - 199
---------------- ----- ------
Others(1) 7,446 2,130
---------------- ---------------- ---------------- -------------- --------------- ------- ------- ----- ------
At 31 Dec 2021 84,866 22,579
---------------- ---------------- ---------------- -------------- --------------- ------- ------- ----- ------
1 'Others' includes a range of smaller asset holdings.
Private equity and related investments
Given the bespoke nature of the analysis in respect of each holding, it is not practical to quote a range of key unobservable inputs.
Volatility
Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price.
Correlation
Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one. It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.
Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, group's trade prices, proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market price pair.
Inter-relationships between key unobservable inputs
Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events. Furthermore, the effect of changing market variables on the group's portfolio will depend on the group's net risk position in respect of each variable.
34 Fair values of financial instruments not carried at fair value
--------------------------------------------------------------
Fair values of financial instruments not carried at fair value and
bases of valuation
Fair Value Hierarchy
------------------------------------------------------------------------------------
Quoted Significant
market Observable unobservable
price inputs inputs
Carrying Level Level Level
amount 1 2 3 Total
HK$m HK$m HK$m HK$m HK$m
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
At 31 Dec 2021
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Assets(1)
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Reverse
repurchase
agreements -
non-trading 803,775 - 802,881 947 803,828
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Loans and
advances to
banks 432,247 - 424,175 8,356 432,531
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Loans and
advances to
customers 3,840,939 - 65,268 3,765,148 3,830,416
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Financial
investments -
at amortised
cost 502,564 89,050 449,284 2,142 540,476
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Liabilities(1)
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Repurchase
agreements -
non-trading 255,374 - 255,366 - 255,366
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Deposits by
banks 280,310 - 280,408 - 280,408
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Customer
accounts 6,177,182 - 6,177,676 - 6,177,676
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Debt securities
in issue 67,364 - 67,842 - 67,842
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Subordinated
liabilities 4,054 - 3,864 - 3,864
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
At 31 Dec 2020
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Assets(1)
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Reverse
repurchase
agreements -
non-trading 520,344 - 518,295 2,106 520,401
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Loans and
advances to
banks 403,884 - 393,953 10,374 404,327
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Loans and
advances to
customers 3,668,681 - 61,885 3,588,431 3,650,316
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Financial
investments -
at amortised
cost 475,025 81,912 450,962 2,012 534,886
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Liabilities(1)
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Repurchase
agreements -
non-trading 136,157 - 136,157 - 136,157
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Deposits by
banks 248,628 - 248,629 - 248,629
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Customer
accounts 5,911,396 - 5,911,813 - 5,911,813
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Debt securities
in issue 79,419 - 80,066 - 80,066
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
Subordinated
liabilities 4,065 - 3,749 - 3,749
--------------- ------------------------- --------------------------- ------------------------- ---------------------------- -------------------------
1 Amounts with HSBC Group entities are not reflected here. Further details are set out in Note 32.
The fair values above are stated at a specific date and may be significantly different from the amounts which will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to the group as a going concern.
Other financial instruments not carried at fair value are typically short term in nature or re-priced to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness, Hong Kong currency notes in circulation, other financial assets and other financial liabilities, all of which are measured at amortised cost.
Valuation
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It does not reflect the economic benefits and costs that the group expects to flow from an instrument's cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies.
Repurchase and reverse repurchase agreements - non-trading
Fair values approximate carrying amounts as these balances are generally short dated.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that the group believes are consistent with those that would be used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans.
The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.
Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.
Deposits by banks and customer accounts
The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.
35 Structured entities
-------------------
The group is involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets, conduits and investment funds, established either by the group or a third party.
Consolidated structured entities
The group uses consolidated structured entities to securitise customer loans and advances it originates to diversify its sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by the group to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. The group's transactions with these entities are not significant.
Unconsolidated structured entities
The term 'unconsolidated structured entities' refers to all structured entities not controlled by the group. The group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.
Nature and risks associated with the group's interests in unconsolidated
structured entities
HSBC Non-HSBC
managed managed
Securitisations funds funds Other Total
Total asset values of the entities
(HK$bn)
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
0-4 65 65 114 21 265
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
4-15 11 37 130 - 178
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
15-39 - 15 91 - 106
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
39-196 - 1 50 - 51
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
196+ - 1 3 - 4
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
Number of entities at 31 Dec 2021 76 119 388 21 604
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
Total assets in relation to the
group's interests in the unconsolidated
structured entities 35,225 32,223 86,044 10,140 163,632
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
- trading assets - 1,041 - 432 1,473
-----------------------------------------------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss - 31,182 86,044 - 117,226
-----------------------------------------------------------
- derivatives - - - - -
-----------------------------------------------------------
- loans and advances to customers 35,225 - - 9,625 44,850
-----------------------------------------------------------
- financial investments - - - - -
-----------------------------------------------------------
- other assets - - - 83 83
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------
Total liabilities in relation
to the group's interests in the
unconsolidated structured entities - - - 60 60
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
- derivatives - - - 60 60
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
Other off balance sheet commitments 402 6,999 26,246 5,939 39,586
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
The group's maximum exposure at
31 Dec 2021 35,627 39,222 112,290 16,019 203,158
----------------------------------------------------------- ---------------------------- ------------------------------- ------------------------------- ------------------------------ -------------------------------
Nature and risks associated with the group's interests in unconsolidated
structured entities (continued)
HSBC Non-HSBC
managed managed
Securitisations funds funds Other Total
Total asset values of the entities
(HK$bn)
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
0-4 52 62 104 25 243
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
4-15 9 34 107 1 151
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
15-39 - 18 56 - 74
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
39-196 - 3 46 - 49
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
196+ - 1 5 - 6
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Number of entities at 31 Dec 2020 61 118 318 26 523
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Total assets in relation to the
group's interests in the unconsolidated
structured entities 26,808 26,476 71,481 8,521 133,286
----------------------------------------------------------- -------------------------------
- trading assets 204 1,653 - - 1,857
-----------------------------------------------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss - 24,823 71,481 - 96,304
- derivatives - - - - -
- loans and advances to customers 26,604 - - 8,218 34,822
- financial investments - - - - -
- other assets - - - 303 303
-------------------------------
Total liabilities in relation
to the group's interests in the
unconsolidated structured entities - - - 56 56
----------------------------------------------------------- -------------------------------
- derivatives - - - 56 56
-------------------------------
Other off balance sheet commitments 539 3,822 23,024 7,137 34,522
----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
The group's maximum exposure at 31 Dec 2020 27,347 30,298 94,505 15,602 167,752 ----------------------------------------------------------- ------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
The maximum exposure to loss from the group's interests in unconsolidated structured entities represents the maximum loss it could incur as a result of its involvement with these entities regardless of the probability of the loss being incurred.
-- For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential future losses.
-- For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value of these interests at the balance sheet reporting date.
The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate the group's exposure to loss.
Securitisations
The group has interests in unconsolidated securitisation vehicles through holding notes issued by these entities.
HSBC managed funds
The group establishes and manages money market funds and non-money market investment funds to provide customers with investment opportunities. The group, as fund manager, may be entitled to receive management and performance fees based on the assets under management. The group may also retain units in these funds.
Non-HSBC managed funds
The group purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs.
Other
The group has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to the interest disclosed above, the group enters into derivative contracts, reverse repos and stock borrowing transactions with structured entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management solutions.
Structured entities sponsored by the group
The amount of assets transferred to and income received from such sponsored entities during 2021 and 2020 were not significant.
36 Bank balance sheet and statement of changes in equity
-----------------------------------------------------
Bank balance sheet at 31 December 2021
2021 2020
HK$m HK$m
--------------------------------------------------------------- ------------------------ -------------------------
Assets
--------------------------------------------------------------- ------------------------ -------------------------
Cash and balances at central banks 203,988 291,071
--------------------------------------------------------------- ------------------------ -------------------------
Items in the course of collection from other banks 17,825 16,836
--------------------------------------------------------------- ------------------------ -------------------------
Hong Kong Government certificates of indebtedness 332,044 313,404
--------------------------------------------------------------- ------------------------ -------------------------
Trading assets 647,625 486,764
--------------------------------------------------------------- ------------------------ -------------------------
Derivatives 346,937 396,126
--------------------------------------------------------------- ------------------------ -------------------------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 3,246 5,945
--------------------------------------------------------------- ------------------------ -------------------------
Reverse repurchase agreements - non-trading 488,312 299,876
--------------------------------------------------------------- ------------------------ -------------------------
Loans and advances to banks 230,592 243,107
--------------------------------------------------------------- ------------------------ -------------------------
Loans and advances to customers 1,984,297 1,928,622
--------------------------------------------------------------- ------------------------ -------------------------
Financial investments 893,848 950,866
--------------------------------------------------------------- ------------------------ -------------------------
Amounts due from Group companies 544,587 400,073
--------------------------------------------------------------- ------------------------ -------------------------
Investments in subsidiaries 101,535 95,241
--------------------------------------------------------------- ------------------------ -------------------------
Interests in associates and joint ventures 39,830 39,830
--------------------------------------------------------------- ------------------------ -------------------------
Goodwill and intangible assets 19,226 14,009
--------------------------------------------------------------- ------------------------ -------------------------
Property, plant and equipment 72,312 71,523
--------------------------------------------------------------- ------------------------ -------------------------
Deferred tax assets 1,275 1,266
--------------------------------------------------------------- ------------------------ -------------------------
Prepayments, accrued income and other assets 145,729 165,667
--------------------------------------------------------------- ------------------------ -------------------------
Total assets 6,073,208 5,720,226
--------------------------------------------------------------- ------------------------ -------------------------
Liabilities
--------------------------------------------------------------- ------------------------ -------------------------
Hong Kong currency notes in circulation 332,044 313,404
--------------------------------------------------------------- ------------------------ -------------------------
Items in the course of transmission to other banks 19,101 18,404
--------------------------------------------------------------- ------------------------ -------------------------
Repurchase agreements - non-trading 175,476 73,606
--------------------------------------------------------------- ------------------------ -------------------------
Deposits by banks 224,650 194,778
--------------------------------------------------------------- ------------------------ -------------------------
Customer accounts 3,816,715 3,610,409
--------------------------------------------------------------- ------------------------ -------------------------
Trading liabilities 46,585 29,039
--------------------------------------------------------------- ------------------------ -------------------------
Derivatives 337,010 396,212
--------------------------------------------------------------- ------------------------ -------------------------
Financial liabilities designated at fair value 36,397 41,507
--------------------------------------------------------------- ------------------------ -------------------------
Debt securities in issue 25,393 29,452
--------------------------------------------------------------- ------------------------ -------------------------
Retirement benefit liabilities 1,098 1,574
--------------------------------------------------------------- ------------------------ -------------------------
Amounts due to Group companies 482,995 413,865
--------------------------------------------------------------- ------------------------ ------------------------- Accruals and deferred income, other liabilities and provisions 120,846 121,091 --------------------------------------------------------------- ------------------------ ------------------------- Current tax liabilities 481 616 --------------------------------------------------------------- ------------------------ ------------------------- Deferred tax liabilities 9,339 9,192 --------------------------------------------------------------- ------------------------ ------------------------- Subordinated liabilities 3,119 3,101 --------------------------------------------------------------- ------------------------ ------------------------- Total liabilities 5,631,249 5,256,250 --------------------------------------------------------------- ------------------------ ------------------------- Equity --------------------------------------------------------------- ------------------------ ------------------------- Share capital 172,335 172,335 --------------------------------------------------------------- ------------------------ ------------------------- Other equity instruments 44,615 44,615 --------------------------------------------------------------- ------------------------ ------------------------- Other reserves 19,218 25,726 --------------------------------------------------------------- ------------------------ ------------------------- Retained earnings 205,791 221,300 --------------------------------------------------------------- ------------------------ ------------------------- Total equity 441,959 463,976 --------------------------------------------------------------- ------------------------ ------------------------- Total equity and liabilities 6,073,208 5,720,226 --------------------------------------------------------------- ------------------------ -------------------------
Bank statement of changes in equity for the year ended 31 December 2021
Other reserves
Financial Cash
Other Property assets flow Foreign
Share equity Retained revaluation at FVOCI hedge exchange Total
capital(1) instruments earnings reserve reserve reserve reserve Other(2) equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
At 1 Jan 2021 172,335 44,615 221,300 35,196 6,364 605 (12,679) (3,760) 463,976
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
Profit for the year - - 40,815 - - - - - 40,815
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
Other comprehensive
income/(expense) (net
of tax) - - 912 3,453 (4,834) (542) (2,690) - (3,701)
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
* debt instruments at fair value through other
comprehensive income - - - - (3,289) - - - (3,289)
* equity instruments designated at fair value through
other comprehensive income - - - - (1,545) - - - (1,545)
- cash flow hedges - - - - - (542) - - (542)
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 524 - - - - - 524
- property revaluation - - - 3,453 - - - - 3,453
* remeasurement of defined benefit asset/liability - - 388 - - - - - 388
- exchange differences - - - - - - (2,690) - (2,690)
----------------------
Total comprehensive
income/(expense) for
the year - - 41,727 3,453 (4,834) (542) (2,690) - 37,114
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
Dividends paid(3) - - (59,105) - - - - - (59,105)
Movement in respect
of share-based payment
arrangements - - 115 - - - - (140) (25)
Transfers and other
movements(4) - - 1,754 (1,749) (6) - - - (1)
At 31 Dec 2021 172,335 44,615 205,791 36,900 1,524 63 (15,369) (3,900) 441,959
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
At 1 Jan 2020 172,335 44,615 223,538 40,976 3,504 (119) (13,327) (3,933) 467,589
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
Profit for the year - - 50,414 - - - - - 50,414
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
Other comprehensive
income/(expense) (net
of tax) - - 2 (4,255) 2,860 724 648 - (21)
* debt instruments at fair value through other
comprehensive income - - - - 2,149 - - - 2,149
* equity instruments designated at fair value through
other comprehensive income - - - - 711 - - - 711
- cash flow hedges - - - - - 724 - - 724
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 306 - - - - - 306
- property revaluation - - - (4,255) - - - - (4,255)
* remeasurement of defined benefit asset/liability - - (304) - - - - - (304)
- exchange differences - - - - - - 648 - 648
------------------- -------------------
Total comprehensive
income/(expense) for
the year - - 50,416 (4,255) 2,860 724 648 - 50,393
------------------- -------------------
Dividends paid(3) - - (54,268) - - - - - (54,268)
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
Movement in respect
of share-based payment
arrangements - - 103 - - - - 173 276
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
Transfers and other
movements(4) - - 1,511 (1,525) - - - - (14)
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
At 31 Dec 2020 172,335 44,615 221,300 35,196 6,364 605 (12,679) (3,760) 463,976
---------------------- ---------------------- -------------------- ---------------------- -------------------- ------------------- ------------------- ----------------------
1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous years.
2 The other reserves mainly comprise purchase premium arising from transfer of business from fellow subsidiaries, property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.
3 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
4 The movements include transfers from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.
4
37 Legal proceedings and regulatory matters
----------------------------------------
The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, the group considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 1.2(n). While the outcomes of legal proceedings and regulatory matters are inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 31 December 2021. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Anti-money laundering and sanctions-related matters
In December 2012, HSBC Holdings plc ('HSBC Holdings') entered into a number of agreements, including an undertaking with the UK Financial Services Authority (replaced with a Direction issued by the UK Financial Conduct Authority ('FCA') in 2013 and again in 2020) as well as a cease-and-desist order with the US Federal Reserve Board ('FRB'), both of which contained certain forward-looking anti-money laundering ('AML') and sanctions-related obligations. Over the past several years, HSBC has retained a Skilled Person under section 166 of the Financial Services and Markets Act and an Independent Consultant, under the FRB cease-and-desist order to produce periodic assessments of the Group's AML and sanctions compliance programme. The Skilled Person completed its engagement in the second quarter of 2021, and the FCA has determined that no further Skilled Person work is required. Separately, the Independent Consultant continues to work pursuant to the FRB cease-and-desist order.
Based on the facts currently known, it is not practicable to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
Singapore Interbank Offered Rate ('Sibor'), Singapore Swap Offer Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW')
In July and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York District Court on behalf of persons who transacted in products related to the Sibor, SOR and BBSW benchmark rates. The complaints allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law.
In the Sibor/SOR litigation, in October 2021, the Bank reached a settlement in principle with the plaintiffs to resolve this action. The settlement remains subject to court approval.
In the BBSW litigation, in November 2018, the court dismissed all foreign defendants, including all HSBC entities, on personal jurisdiction grounds. In April 2019, the plaintiffs filed an amended complaint, which the defendants moved to dismiss. In February 2020, the court again dismissed the plaintiffs' amended complaint against all HSBC entities.
There are many factors that may affect the range of outcomes, and the resulting financial impact of these matters, which could be significant.
Foreign exchange-related investigations
In January 2018, following the conclusion of the US Department of Justice's ('DoJ') investigation into HSBC's historical foreign exchange activities, HSBC Holdings entered into a three-year deferred prosecution agreement with the Criminal Division of the DoJ (the 'FX DPA'), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. In January 2021, the FX DPA expired and, in August 2021, the charges deferred by the FX DPA were dismissed.
Other regulatory investigations, reviews and litigation
The Bank and/or certain of its affiliates are subject to a number of other investigations and reviews by various regulators and competition and law enforcement authorities, as well as litigation, in connection with various matters relating to the firm's businesses and operations, including investigations by tax administration, regulatory and law enforcement authorities in India and elsewhere in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
38 Ultimate holding company
------------------------
The ultimate holding company of the Bank is HSBC Holdings plc, which is incorporated in England.
The largest group in which the accounts of the Bank are consolidated is that headed by HSBC Holdings plc. The consolidated accounts of HSBC Holdings plc are available to the public on the HSBC Group's website at www.hsbc.com or may be obtained from 8 Canada Square, London E14 5HQ, United Kingdom.
39 Events after the balance sheet date
-----------------------------------
The following recently announced acquisitions form part of our strategy to grow our insurance business, helping to deliver on our strategic priority to become a market leader in Asian wealth management.
-- On 11 February 2022, following the completion of all regulatory approvals, HSBC Insurance (Asia-Pacific) Holdings Ltd, a wholly-owned subsidiary of the group, acquired 100% of the issued share capital of AXA Insurance Pte Limited for HK$4.1bn, subject to adjustment for closing items. This will be reflected in our 2022 results by which time determination of the initial acquisition accounting will have been completed.
-- On 30 December 2021, HSBC Insurance (Asia) Limited, a wholly-owned subsidiary of the group, received approval from the China Banking and Insurance Regulatory Commission to acquire the remaining 50% equity interest in HSBC Life Insurance Company Limited (HSBC Life China). Completion is expected to occur during the first half of 2022. Headquartered in Shanghai, HSBC Life China offers a comprehensive range of insurance solutions covering annuity, whole life, critical illness and unit-linked insurance products and in 2021 reported gross written premiums of approximately HK$3.0bn (2020: HK$2.2bn).
-- On 28 January 2022, HSBC Insurance (Asia-Pacific) Holdings Limited notified the shareholders of Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited ('CHOICe') of its intention to increase its shareholding in CHOICe up to 49%. The group currently has a 26% shareholding which is accounted for as an associate. Any increase in shareholding is subject to agreement with other shareholders in CHOICe, as well as internal and regulatory approvals. Established in 2008, CHOICe is a life insurance company based in India with reported gross written premiums of approximately HK$5.4bn for the year to 31 March 2021 (31 March 2020: HK$4.1bn).
--
40 Approval of financial statements
--------------------------------
The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on 22 February 2022.
(c) The Hongkong and Shanghai Banking Corporation Limited 2021 Printed by Asia One Printing Limited, Hong Kong, on Nautilus SuperWhite board and paper using vegetable oil-based inks. Made in Austria, the paper comprises 100% de-inked post-consumer waste. Pulps used are totally chlorine-free. The FSC(TM) recycled label means that the materials used for this product come from recycled material certified in accordance with the rules of the Forest Stewardship Council(R).
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March 11, 2022 04:51 ET (09:51 GMT)
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