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| Name | Symbol | Market | Type |
|---|---|---|---|
| Hsbc Frn Var3 | LSE:57HB | London | Medium Term Loan |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
From Dec 2019 to Dec 2024
TIDM57HB
RNS Number : 8978H
Hongkong & Shanghai Banking Corp Ld
05 August 2019
The Hongkong and Shanghai Banking Corporation Limited 2019 Interim Report
In fulfilment of its obligations under section 6.3.5(1) of the Disclosure Guidance and Transparency Rules, The Hongkong and Shanghai Banking Corporation Limited (the "Company") hereby releases the unedited full text of its 2019 Interim Report for the six months ended 30 June 2019.
The document is now available on the Company's website, https://www.hsbc.com.hk/legal/regulatory-disclosures
A copy of the above document has been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility via the National Storage Mechanism which is located at http://www.morningstar.co.uk/uk/NSM.
The Hongkong and Shanghai Banking Corporation Limited
Interim Report 2019
Hot Features
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Contents
Page
Certain defined terms 1
-------------------------------------------
Cautionary statement regarding
forward-looking statements 1
-------------------------------------------
Chinese translation 1
-------------------------------------------
Additional information 1
------------------------------------------- ----
Highlights 2
-------------------------------------------
Financial review 3
-------------------------------------------
Risk 9
-------------------------------------------
Capital 10
-------------------------------------------
Statement of Directors' responsibilities 12
-------------------------------------------
Independent review report by
PricewaterhouseCoopers 13
-------------------------------------------
Interim condensed consolidated
financial statements 14
-------------------------------------------
Consolidated income statement 14
-------------------------------------------
Consolidated statement of comprehensive
income 15
-------------------------------------------
Consolidated balance sheet 16
-------------------------------------------
Consolidated statement of cash
flows 17
-------------------------------------------
Consolidated statement of changes
in equity 18
-------------------------------------------
Notes on the Interim condensed
consolidated financial statements 20
Basis of preparation and significant
1 accounting policies 20
2 Dividends 21
---- ------------------------------------- ----
3 Loans and advances to customers 22
----
4 Financial investments 22
----
Interests in associates and
5 joint ventures 23
6 Customer accounts 25
---- ------------------------------------- ----
Fair values of financial instruments
7 carried at fair value 25
---- ------------------------------------- ----
Fair values of financial instruments
8 not carried at fair value 26
Contingent liabilities, contractual
9 commitments and guarantees 26
10 Segmental analysis 27
---- ------------------------------------- ----
11 Related party transactions 27
----
Legal proceedings and regulatory
12 matters 27
---- ------------------------------------- ----
Interim Report 2019 and statutory
13 accounts 29
14 Ultimate holding company 29
---- ------------------------------------- ----
Certain defined terms
This document comprises the
Interim Report 2019
for The Hongkong and Shanghai Banking Corporation Limited ('the Bank') and its subsidiaries (together 'the group'). References to 'HSBC', 'the Group' or 'the HSBC Group' within this document mean HSBC Holdings plc together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. The abbreviations 'HK$m' and 'HK$bn' represent millions and billions (thousands of millions) of Hong Kong dollars respectively.
Cautionary statement regarding forward- looking statements
This Interim Report 2019 contains certain forward-looking statements with respect to the financial condition, results of operations and business of the group.
Statements that are not historical facts, including statements about the group's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. The Hongkong and Shanghai Banking Corporation Limited makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statement.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement.
Chinese translation
A Chinese translation of the Interim Report 2019 is available upon request from: Communications (Asia), Level 32, HSBC Main Building, 1 Queen's Road Central, Hong Kong. The report is also available, in English and Chinese, on the Bank's website at www.hsbc.com.hk.
Additional information
The Banking Disclosure Statement at 30 June 2019, which is prepared in accordance with the Banking (Disclosure) Rules made under section 60A of the Banking Ordinance, will be published on our website at www.hsbc.com.hk.
Highlights Financial highlights -- Profit before tax up 3% to HK$72,867m (HK$71,013m in the first half of 2018). -- Attributable profit up 3% to HK$55,489m (HK$53,759m in the first half of 2018). -- Return on average ordinary shareholders' equity of 14.8% (15.8% in the first half of 2018). -- Total assets up 5% to HK$8,673bn (HK$8,263bn at the end of 2018).
-- Common equity tier 1 ratio of 16.6% (16.5% at the end of 2018), total capital ratio of 20.3% (19.8% at the end of 2018).
-- Cost efficiency ratio of 40.7% (40.4% for the first half of 2018). Chairman
On 5 August 2019, John Flint stepped down as Chairman of The Hongkong and Shanghai Banking Corporation Limited and as a Director of the Bank.
Media enquiries to: Patrick Humphris Telephone no: + 852 2822 2052
Vinh Tran Telephone no: + 852 2822 4924
Financial review
Consolidated income statement by global business(1)
Retail
Banking Global Global
and Wealth Commercial Banking Private Corporate
Management Banking and Markets Banking Centre(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
Half-year to 30 Jun 2019
Net interest income 33,236 21,438 12,582 1,458 (4,125) 64,589
----------
Net fee income 9,824 5,404 4,927 1,392 42 21,589
---------- --------- ----------- ------- --------- ---------
Net income from financial
instruments
held for trading or managed
on a fair value basis 664 1,339 8,836 624 6,986 18,449
---------- --------- ----------- ------- --------- ---------
Net income/(expense) from assets
and liabilities of insurance
businesses, including related
derivatives, measured at fair
value through profit or loss 8,812 (65) - - (17) 8,730
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Changes in fair value of other
financial instruments measured
at fair value 12 15 75 (55) 53 100
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Gains less losses from financial
investments 22 2 - - 335 359
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Dividend income - - 8 - 135 143
Net insurance premium
income/(expense) 32,975 3,224 - - (13) 36,186
Other operating income 7,115 302 393 54 314 8,178
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Total operating income 92,660 31,659 26,821 3,473 3,710 158,323
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Net insurance claims and
benefits
paid and movement in
liabilities
to policyholders (43,011) (3,125) - - - (46,136)
Net operating income before
change in expected credit
losses
and other credit impairment
charges 49,649 28,534 26,821 3,473 3,710 112,187
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Change in expected credit losses
and other credit impairment
charges (857) (975) (201) 8 (14) (2,039)
Net operating income 48,792 27,559 26,620 3,481 3,696 110,148
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Operating expenses (20,442) (9,205) (11,620) (1,959) (2,458) (45,684)
Operating profit 28,350 18,354 15,000 1,522 1,238 64,464
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Share of profit in associates
and joint ventures 282 - - - 8,121 8,403
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Profit before tax 28,632 18,354 15,000 1,522 9,359 72,867
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Balance at 30 Jun 2019
Loans and advances to customers
(net) 1,209,577 1,275,924 1,048,439 163,016 1,533 3,698,489
Customer accounts 2,818,644 1,290,543 987,427 189,607 3,352 5,289,573
--------------------------------- ---------- --------- ----------- ------- --------- ---------
Half-year to 30 Jun 2018
--------------------------------------- ----------
Net interest income 29,795 18,445 10,518 1,304 1,289 61,351
Net fee income 11,945 5,702 5,316 1,405 54 24,422
Net income from financial instruments
held for trading or managed
on a fair value basis 952 1,492 10,291 515 2,119 15,369
Net income/(expense) from assets
and liabilities of insurance
businesses, including related
derivatives, measured at fair
value through profit or loss (751) (92) - - 220 (623)
--------------------------------------- --------- --------- --------- ------- ------ ---------
Changes in fair value of other
financial instruments measured
at fair value 9 7 (19) (14) (31) (48)
---------------------------------------
Gains less losses from financial
investments - (5) 70 - 225 290
--------- --------- --------- ------- ------ ---------
Dividend income - - - - 8 8
Net insurance premium income/(expense) 30,288 2,621 - - (51) 32,858
Other operating income 3,102 429 470 37 1,132 5,170
--------- --------- --------- ------- ------ ---------
Total operating income 75,340 28,599 26,646 3,247 4,965 138,797
--------------------------------------- --------- --------- --------- ------- ------ ---------
Net insurance claims and benefits
paid and movement in liabilities
to policyholders (30,263) (2,307) - - - (32,570)
Net operating income before
change in expected credit losses
and other credit impairment
charges 45,077 26,292 26,646 3,247 4,965 106,227
--------------------------------------- --------- --------- --------- ------- ------ ---------
Change in expected credit losses
and other credit impairment
charges (1,083) 36 119 - 19 (909)
---------------------------------------
Net operating income 43,994 26,328 26,765 3,247 4,984 105,318
--------------------------------------- --------- --------- --------- ------- ------ ---------
Operating expenses (19,065) (8,964) (11,100) (1,717) (2,036) (42,882)
Operating profit 24,929 17,364 15,665 1,530 2,948 62,436
--------------------------------------- --------- --------- --------- ------- ------ ---------
Share of profit in associates
and joint ventures 131 - - - 8,446 8,577
--------- --------- --------- ------- ------ ---------
Profit before tax 25,060 17,364 15,665 1,530 11,394 71,013
--------------------------------------- --------- --------- --------- ------- ------ ---------
Balance at 30 Jun 2018
---------------------------------------
Loans and advances to customers
(net) 1,101,006 1,218,349 1,046,631 129,083 1,848 3,496,917
Customer accounts 2,711,008 1,314,607 914,346 177,065 35,498 5,152,524
--------------------------------------- --------- --------- --------- ------- ------ ---------
1 The financial information included in this table forms part of the Interim condensed consolidated financial statements, which have been reviewed by PricewaterhouseCoopers.
2 Includes inter-segment elimination. Financial review
All commentary in this financial review compares the first half of 2019 results with the first half of 2018 unless otherwise stated.
Result commentary
The group reported profit before tax of HK$72,867m, an increase of HK$1,854m, or 3%.
Net interest income increased by HK$3,238m, or 5%, with increases across all global businesses and mainly in Hong Kong, primarily from growth in loans and advances to customers and from improved deposit spreads. The increase was dampened by the impact of higher funding costs as market interest rates increased, and a change in customer deposit mix in the higher interest rate environment.
Net fee income decreased by HK$2,833m, or 12%, with decreases across all global businesses but mainly in RBWM from lower securities brokerage, unit trust, and funds under management fees due to lower turnover from equity market activities in Hong Kong in the first half of 2019.
Net income from financial instruments held for trading or managed on a fair value basis increased by HK$3,080m, or 20%, driven by higher income from Rates and Credit trading, revaluation gains on funding swaps and subordinated liabilities raised to meet the 'Total Loss-absorbing Capacity' requirements. These were partly offset by the unfavourable valuation adjustment on derivative contracts, coupled with lower income from equities and foreign exchange trading.
Net income from assets and liabilities of insurance business, including related derivatives, measured at fair value through profit or loss increased by HK$9,353m, driven by revaluation gains in Hong Kong on equities held to back insurance liabilities from favourable equity market performance in the first half of 2019. To the extent that these gains are attributable to policyholders, the gains are offset by a corresponding movement in 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.
Net insurance premium income increased by HK$3,328m, or 10%, driven by higher new business sales and renewals. This was largely offset by a corresponding movement in 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.
Other operating income increased by HK$3,008m, or 58%, driven by the favourable movement in the present value of in-force insurance business, mainly in Hong Kong. This was partly offset by a corresponding movement in 'Net insurance claims and benefits paid and movement in liabilities to policyholders'. Recoveries from fellow group companies decreased due to a change in the cost recharge mechanism following the transfer of shared services and operations to HSBC Global Services (Hong Kong) Limited ('ServCo'), with a corresponding decrease in operating expenses.
Net insurance claims and benefits paid and movement in liabilities to policyholders increased by HK$13,566m, or 42%, reflecting higher investment returns to policyholders from the favourable equity market performance in the first half of 2019, higher claims from business growth and the favourable movement in the present value of in-force insurance business.
Change in expected credit losses and other credit risk provisions increased by HK$1,130m, or 124%, mainly driven by CMB in Hong Kong and mainland China across various industry sectors, reflecting portfolio growth as well as increased provision in light of the increasingly complex economic outlook.
Total operating expenses increased by HK$2,802m, or 7%, with increases across all global businesses. The increase was driven by higher IT and staff costs to support growth initiatives, wage inflation and higher management charges from ServCo following the transfer of over 8,300 employees to ServCo in the first half of this year. Depreciation charge also increased due to a change in valuation base of certain properties from cost to fair value following the implementation of HKFRS 16. These increases were partly offset by the non-recurrence of customer remediation in the prior year, release of a provision in relation to a tax matter in Indonesia, and from a change in the cost recharge mechanism from fellow group companies as mentioned above.
Share of profit in associates and joint ventures decreased by HK$174m, or 2%, driven by an unfavourable foreign exchange impact. Excluding this impact, share of profit in associates and joint ventures increased by HK$341m, mainly from Bank of Communications Co., Limited, and Canara HSBC Oriental Life Insurance.
Net interest income
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
Net interest income 64,589 61,351
---------
Average interest-earning assets 6,437,120 6,082,122
---------
% %
Net interest spread 1.86 1.93
--------- ---------
Contribution from net free funds 0.16 0.10
--------- ---------
Net interest margin 2.02 2.03
---------------------------------- --------- ---------
Net interest income ('NII') increased by HK$3,238m, or 5%, driven by Hong Kong from growth in loans and advances to customers, coupled with improved deposit spreads. The increase was dampened by the impact of higher funding costs as market interest rates increased, and a change in customer deposit mix in the higher interest rate environment. The increase in Hong Kong was partly offset by decreases in mainland China, Australia and Taiwan.
Average interest-earning assets increased by HK$355bn, or 6%, driven by Hong Kong mainly from an increase in loans and advances to customers, notably in corporate term lending and residential mortgages. Increases were also noted in Singapore and Australia, driven by growth in customer advances.
Net interest margin decreased by one basis point, driven collectively by mainland China, Australia and Taiwan, largely offset by Hong Kong.
In Hong Kong, the net interest margin for the Bank increased by four basis points, primarily from improved customer deposit spreads and higher reinvestment yields on financial investments as interest rates increased. These increases were partly offset by reduced lending spreads and an increase in financial liabilities to meet the 'Total Loss-absorbing Capacity' requirements.
At Hang Seng Bank, the net interest margin increased by five basis points, mainly from improved customer deposit spreads and higher contribution from net free funds as market interest rates increased, partly offset by reduced lending spreads, notably in corporate and commercial term lending.
In mainland China, the decrease in net interest margin was driven by higher cost of funds on customer deposits and more debt securities issued to support business growth, coupled with lower reinvestment yields from financial investments due to ample liquidity in the market.
In Australia and Taiwan, the drop in net interest margin was mainly due to higher cost of funds following interest rate increases in the prior year.
Net fee income
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
Account services 1,374 1,447
-------------------------------- ------ ------
Funds under management 3,526 3,871
------ ------
Cards 4,218 4,087
------ ------
Credit facilities 1,842 1,804
------ ------
Broking income 1,926 2,915
------ ------
Imports/exports 1,656 1,855
------ ------
Unit trusts 3,812 4,279
------ ------
Underwriting 803 659
------ ------
Remittances 1,435 1,592
------ ------
Global custody 1,870 2,010
------ ------
Insurance agency commission(1) 959 1,014
------ ------
Other 3,810 4,023
------ ------
Fee income 27,231 29,556
-------------------------------- ------ ------
Fee expense (5,642) (5,134)
-------------------------------- ------ ------
Net fee income 21,589 24,422
-------------------------------- ------ ------
1 Re-insurance fees (previously reported under 'insurance agency commission') were reclassified under 'Other' to align with the Group's presentation. Comparatives have been re-presented to conform to the current year's presentation.
Net income from financial instruments measured at fair value
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
Net income/(expense) arising on:
-----------------------------------------------------------
Trading activities 21,716 16,150
----------------------------------------------------------- ------ ------
Other trading income - hedging ineffectiveness on fair
value hedges 3 (113)
----------------------------------------------------------- ------ ------
Fair value movement on non-qualifying hedges (86) (128)
----------------------------------------------------------- ------ ------
Other instruments designated at fair value and related
derivatives (3,184) (540)
------ ------
Net income from financial instruments held for trading
or managed on a fair value basis(1) 18,449 15,369
Financial assets held to meet liabilities under insurance
and investment contracts 10,081 (769)
----------------------------------------------------------- ------ ------
Liabilities to customers under investment contracts (1,351) 146
----------------------------------------------------------- ------ ------
Net income/(expense) from assets and liabilities of
insurance businesses, including related derivatives,
measured at fair value through profit or loss 8,730 (623)
Changes in fair value of other financial instruments
measured at fair value(2) 100 (48)
----------------------------------------------------------- ------ ------
Net income from financial instruments measured at fair
value 27,279 14,698
----------------------------------------------------------- ------ ------
1 The presentation has been updated to align with the presentation in the Annual Report and Accounts 2018.
Comparatives have been re-presented to conform to the current year's presentation.
2 Changes in fair value of other financial instruments measured at fair value included change in fair value of long-term debt issued and related derivatives, and changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss.
Other operating income
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
Movement in present value of in-force long-term insurance
business 6,610 2,745
-------
Gains on investment properties 308 182
Gains/(losses) on disposal of property, plant and equipment,
and assets held for sale 6 (20)
Other 1,254 2,263
Other operating income 8,178 5,170
-------------------------------------------------------------- ------- -----
In 2019, the group transferred shared services and operations to ServCo which provides functional support services to the group. As a result of the transfer, costs incurred relating to services provided to fellow companies are reflected in the financial statements of ServCo instead of the group, and so are recoveries on these costs. This resulted in lower other operating income as well as lower operating expenses for the group.
Insurance business
Summary income statement of insurance manufacturing operations
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
--------
Insurance manufacturing operations
--------
Net interest income 7,122 6,645
-------
Net fee expense (2,606) (1,798)
-------
Net income/(expense) from financial instruments measured
at fair value 8,339 (1,204)
-------
Net insurance premium income 36,212 32,893
-------
Change in present value of in-force long-term insurance
business 6,610 2,745
-------
Other operating income 227 128
-------
Total operating income 55,904 39,409
-------------------------------------------------------------- ------- -------
Net insurance claims and benefits paid and movement in
liabilities to policyholders (46,136) (32,570)
-------
Net operating income before change in expected credit
losses and other credit impairment charges 9,768 6,839
Change in expected credit losses and other credit impairment
charges (19) 19
Net operating income 9,749 6,858
Total operating expenses (1,018) (1,016)
Operating profit 8,731 5,842
Share of profit in associates and joint ventures 282 131
------- -------
Profit before tax 9,013 5,973
-------------------------------------------------------------- ------- -------
Distribution income earned by banking operations(1) 3,394 3,306
-------------------------------------------------------------- ------- -------
1 Distribution income earned by banking operations are presented separately. Comparatives have been re-presented accordingly.
Profit before tax from the insurance manufacturing business increased by HK$3,040m, or 51%, driven by the favourable equity market performance in the first half of 2019.
Net interest income increased by 7% as net premium inflows from new business and renewals increased fixed income assets held to back insurance liabilities.
Net income from financial instruments measured at fair value increased significantly, driven by revaluation gains in Hong Kong on equities held to back insurance liabilities.
Net insurance premium income increased, mainly in Hong Kong due to higher new business sales and renewals.
The favourable movement in the present value of in-force long-term insurance business ('PVIF') was driven by Hong Kong, from the update of the valuation interest rates applied to insurance liabilities and the value of new business written in the period increased.
To the extent that the above gains or losses are attributable to policyholders, there is an offsetting movement reported under 'Net insurance claims and benefits paid and movement in liabilities to policyholders.
Change in expected credit losses and other credit impairment charges
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
Change in expected credit losses
Loans and advances to banks and customers 1,923 845
-------------------------------------------------------------- ------
- new allowances net of allowance releases 2,381 1,313
- recoveries of amounts previously written off (458) (469)
- modification losses and other movements - 1
-------------------------------------------------------------- ------
Loan commitments and guarantees 45 90
-------------------------------------------------------------- ------
Other financial assets 71 (26)
-------------------------------------------------------------- ------
Change in expected credit losses and other credit impairment
charges 2,039 909
-------------------------------------------------------------- ------ -----
Change in expected credit losses as a percentage of average gross customer advances was 0.11% for the first half of 2019 (first half of 2018: 0.05%).
Operating expenses
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
Employee compensation and benefits 19,615 20,858
-------
General and administrative expenses 20,859 18,840
-------
Depreciation of property, plant and equipment 4,040 2,336
-------
Amortisation and impairment of intangible assets 1,170 848
-------
Operating expenses 45,684 42,882
-------------------------------------------------- ------- ------
In the first half of 2019, over 8,300 employees performing shared services and operations in Hong Kong were transferred from the group to ServCo as part of recovery and resolution planning to provide services to the group. The transfer resulted in a decrease in 'employee compensation and benefits' and an increase in 'general and administrative expenses', reflecting the management charge for the services provided which included a mark-up on the expenses incurred. Excluding the impact from the employee transfers, employee compensation and benefits increased, reflecting wage inflation as well as new hires, mainly in Hong Kong, mainland China and Singapore, to support business growth.
General and administrative expenses increased by HK$2,019m, or 11%, compared with the first half of 2018, largely due to the management charge on services and operations provided by ServCo as mentioned above, coupled with higher spend to support growth initiatives. These increases were partly offset by lower rental expenses on premises and equipment following the implementation of HKFRS 16 'Leases' (with a corresponding increase in amortisation of right-of-use ('ROU') of assets), the non-recurrence of customer remediation in the prior year, release of a provision in relation to a tax matter in Indonesia, and from a change in the cost recharge mechanism from fellow group companies as mentioned previously.
Depreciation charges on property, plant and equipment increased by HK$1,704m, or 73%, compared with the first half of 2018, driven by ROU of assets following the implementation of HKFRS 16 as mentioned above, and from a change in valuation base of certain properties which were previously reported as operating leases and held at cost, now reclassified to 'Property, plant and equipment' and measured at fair value.
Share of profit in associates and joint ventures
At 30 June 2019, an impairment review on the group's investment in Bank of Communications Co., Limited ('BoCom') was carried out and it was concluded that the investment was not impaired based on our value-in-use calculation (see note 5 on the Financial Statements for further details). As discussed in that note, in future periods, the value in use may increase or decrease depending on the effect of changes to model inputs. It is expected that the carrying amount will increase due to retained profits earned by BoCom. At the point where the carrying amount exceeds the value in use, impairment would be recognised. The group would continue to recognise its share of BoCom's profit or loss, but the carrying amount would be reduced to equal the value in use, with a corresponding reduction in income. An impairment review would continue to be performed at each subsequent reporting period, with the carrying amount and income adjusted accordingly.
Risk Principal risks and uncertainties
The group continuously monitors and identifies risks. Our principal risks are credit risk, liquidity and funding risk, market risk, operational risk, regulatory compliance risk, financial crime risk, reputational risk, pension risk, sustainability risk and insurance risk. There is no material change expected in the principal risks for the remaining six months of the financial year despite increased uncertainties arising from the tensions between the US and China, which has dampened investor and business confidence and may continue to impact global trade sentiment. A description of principal risks and a summary of our current policies and practices regarding the management of risk is set out in the 'Risk' section of the Annual Report and Accounts 2018.
Key developments in the first half of 2019
There were no material changes to the policies and practices for the management of risk, as described in the Annual Report and Accounts 2018, in the first half of 2019 except for the following:
-- We continued to strengthen our approach to managing operational risk, as set out in the Operational Risk Management Framework. The framework sets out our governance and appetite. It provides a single view of non-financial risks that matter the most and associated controls. It incorporates a risk management system to enable active risk management.
-- We continued to strengthen our management of conduct and embed conduct considerations as a key part of risk management across the group. We continued to promote and encourage good conduct through our people's behaviour and decision making to deliver fair outcomes for customers and preserve market integrity.
-- The Global Standards programme continued to integrate the final elements of our capabilities for anti-money laundering and sanctions into our day-to-day operations throughout the first half of 2019. We continue to enhance our financial crime risk management capabilities and the effectiveness of our financial crime controls. We are maintaining our investment in the next generation of tools to fight financial crime through the application of advanced analytics and artificial intelligence.
Update on the nature of our Ibor risks
The impact of the replacement of interbank offered rates ('Ibors') with alternative risk-free rates on our products and services remains a key area of focus. The programme to coordinate our transition activities is significant in terms of scale and complexity and will impact all global businesses and jurisdictions as well as multiple products, currencies, systems and processes. In addition to the consequent execution risks, the process of adopting new reference rates exposes the group to a wide range of material conduct, operational and financial risks. We continue to engage with industry participants, the official sector and our clients to support an orderly transition and the mitigation of the risks resulting from the transition.
Capital
The following tables show the capital ratios, risk-weighted assets ('RWAs') and capital base on a consolidated basis, in accordance with the Banking (Capital) Rules:
Capital ratios and RWAs
At
30 Jun 31 Dec
2019 2018
% %
Capital ratios
Common equity tier 1 ('CET1') ratio 16.6 16.5
---------
Tier 1 ratio 18.2 17.8
---------
Total capital ratio 20.3 19.8
---------
HK$m HK$m
RWAs 2,897,902 2,813,912
------------------------------------- --------- ---------
The following table sets out the composition of the group's capital base under Basel III at 30 June 2019. The position at 30 June 2019 benefits from transitional arrangements which will be phased out.
Capital base
At
30 Jun 31 Dec
2019 2018
HK$m HK$m
------------------------------------------------------------ --------- -----------
Common equity tier 1 ('CET1') capital
Shareholders' equity 675,729 645,810
-------- --------
- shareholders' equity per balance sheet 796,737 752,758
- revaluation reserve capitalisation issue (1,454) (1,454)
- other equity instruments (44,615) (35,879)
- unconsolidated subsidiaries (74,939) (69,615)
Non-controlling interests 27,309 26,034
- non-controlling interests per balance sheet 62,321 60,162
- non-controlling interests in unconsolidated subsidiaries (9,816) (9,316)
- surplus non-controlling interests disallowed in CET1 (25,196) (24,812)
Regulatory deductions to CET1 capital (222,428) (208,070)
- valuation adjustments (1,646) (1,599)
- goodwill and intangible assets (18,109) (17,215)
- deferred tax assets net of deferred tax liabilities (2,030) (2,378)
- cash flow hedging reserve 55 63
- changes in own credit risk on fair valued liabilities 779 (198)
- defined benefit pension fund assets (29) (24)
- significant Loss-absorbing capacity ('LAC') investments
in unconsolidated financial sector entities (101,179) (99,407)
- property revaluation reserves(1) (75,717) (60,429)
- regulatory reserve (24,552) (26,883)
Total CET1 capital 480,610 463,774
------------------------------------------------------------ -------- --------
Additional tier 1 ('AT1') capital
Total AT1 capital before regulatory deductions 45,694 37,729
- perpetual subordinated loans 44,615 35,879
- allowable non-controlling interests in AT1 capital 1,079 1,850
Regulatory deductions to AT1 capital (7) -
- significant LAC investments in unconsolidated financial
sector entities (7) -
------------------------------------------------------------
Total AT1 capital 45,687 37,729
------------------------------------------------------------ -------- --------
Total tier 1 capital 526,297 501,503
------------------------------------------------------------ -------- --------
Tier 2 capital
------------------------------------------------------------ --------- -----------
Total tier 2 capital before regulatory deductions 69,210 61,178
- perpetual subordinated debt 3,123 3,133
- term subordinated debt 14,596 13,944
- property revaluation reserves(1) 34,727 27,847
- impairment allowances and regulatory reserve eligible
for inclusion in tier 2 capital 16,764 16,254
Regulatory deductions to tier 2 capital (6,158) (5,501)
- significant LAC investments in unconsolidated financial
sector entities (6,158) (5,501)
Total tier 2 capital 63,052 55,677
------------------------------------------------------------ -------- --------
Total capital 589,349 557,180
------------------------------------------------------------ -------- --------
1 Includes the revaluation surplus on investment properties which is reported as part of retained earnings and adjustments made in accordance with the Banking (Capital) Rules issued by the HKMA.
The following table shows the pro-forma Basel III end point basis position once all transitional arrangements have been phased out. It should be noted that the pro-forma Basel III end point basis position takes no account of, for example, any future profits or management actions. In addition, the current regulations or their application may change before full implementation.
Reconciliation of regulatory capital from transitional basis to a pro-forma
Basel III end point basis
At
30 Jun 31 Dec
2019 2018
HK$m HK$m
CET1 capital on a transitional and end point basis 480,610 463,774
AT1 capital on a transitional and end point basis 45,687 37,729
----------------------------------------------------------- -------- -------
Tier 2 capital on a transitional basis 63,052 55,677
Grandfathered instruments: (3,123) (3,133)
--------
- perpetual subordinated debt (3,123) (3,133)
--------
Tier 2 capital end point basis 59,929 52,544
----------------------------------------------------------- -------- -------
We closely monitor and consider future regulatory change and continue to evaluate the impact upon our capital requirements of regulatory developments. This includes the Basel III reforms package, over which there remains a significant degree of uncertainty due to the number of national discretions within Basel's reforms. It remains premature to provide details of an impact although we currently anticipate the potential for an increase in RWAs.
Statement of Directors' responsibilities
The Directors, the names of whom are set out below, confirm to the best of their knowledge that:
-- the Interim condensed consolidated financial statements have been prepared in accordance with Hong Kong Accounting Standard ('HKAS') 34 'Interim Financial Reporting'; and
-- the Interim Report includes a fair review of the information required by DTR 4.2.7R of the Disclosure Guidance and Transparency Rules sourcebook issued by the UK Financial Conduct Authority, being an indication of important events that have occurred during the first six months of the financial year ending 31 December 2019 and their impact on the Interim condensed consolidated financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year.
Peter Tung Shun Wong (Deputy Chairman & Chief Executive)
Laura May Lung Cha*, GBM (Deputy Chairman)
Zia Mody* (Deputy Chairman)
Graham John Bradley*
Louisa Wai Wan Cheang
Dr Christopher Wai Chee Cheng*, GBS, OBE
Dr Raymond Kuo Fung Ch'ien*, GBS, CBE
Yiu Kwan Choi*
Irene Yun-lien Lee*
Jennifer Xinzhe Li*
Victor Tzar Kuoi Li(#)
Bin Hwee Quek (née Chua)*, PBM, BBM, JP
Kevin Anthony Westley*, BBS
Tan Sri Dr Francis Sock Ping Yeoh*, CBE
* independent non-executive Director
(#) non-executive Director
On behalf of the Board
Peter Wong
Deputy Chairman
5 August 2019
Independent review report by PricewaterhouseCoopers Report on the Interim condensed consolidated financial statements to the Board of Directors of The Hongkong and Shanghai Banking Corporation Limited
Introduction
We have reviewed the Interim condensed consolidated financial statements set out on pages 14 to 29, which comprise the consolidated balance sheet of The Hongkong and Shanghai Banking Corporation Limited (the 'Bank') and its subsidiaries (together, the 'group') as at 30 June 2019 and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the six-month period then ended, and a summary of significant accounting policies and other explanatory notes(1) . The directors of the Bank are responsible for the preparation and presentation of the Interim condensed consolidated financial statements in accordance with Hong Kong Accounting Standard 34 'Interim Financial Reporting' issued by the Hong Kong Institute of Certified Public Accountants and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. Our responsibility is to express a conclusion on the Interim condensed consolidated financial statements based on our review and to report our conclusion solely to you, as a body, in accordance with our agreed terms of engagement and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
1 As described in Note 10 on the Interim condensed consolidated financial statements, required disclosure of the table 'Consolidated income statement by global business' has been presented elsewhere in the Interim Report 2019 rather than in the notes on the Interim condensed consolidated financial statements. This is cross-referenced from the Interim condensed consolidated financial statements and is identified as reviewed.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the United Kingdom's Auditing Practices Board. A review of Interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the Interim condensed consolidated financial statements of the group are not prepared, in all material respects, in accordance with Hong Kong Accounting Standard 34 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong
5 August 2019
Interim condensed consolidated financial statements
Consolidated income statement
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
Net interest income 64,589 61,351
---------------------------------------------------------------
* interest income 95,534 79,476
- interest expense (30,945) (18,125)
------- -------
Net fee income 21,589 24,422
--------------------------------------------------------------- ------- -------
- fee income 27,231 29,556
* fee expense (5,642) (5,134)
--------------------------------------------------------------- ------- -------
Net income from financial instruments held for trading
or managed on a fair value basis 18,449 15,369
--------------------------------------------------------------- ------- -------
Net income/(expense) from assets and liabilities of insurance
businesses, including related derivatives, measured at
fair value through profit or loss 8,730 (623)
Changes in fair value of other financial instruments measured
at fair value 100 (48)
---------------------------------------------------------------
Gains less losses from financial investments 359 290
Dividend income 143 8
Net insurance premium income 36,186 32,858
Other operating income 8,178 5,170
Total operating income 158,323 138,797
--------------------------------------------------------------- ------- -------
Net insurance claims and benefits paid and movement in
liabilities to policyholders (46,136) (32,570)
Net operating income before change in expected credit
losses and other credit impairment charges 112,187 106,227
--------------------------------------------------------------- ------- -------
Change in expected credit losses and other credit impairment
charges (2,039) (909)
--------------------------------------------------------------- ------- -------
Net operating income 110,148 105,318
--------------------------------------------------------------- ------- -------
Employee compensation and benefits (19,615) (20,858)
---------------------------------------------------------------
General and administrative expenses (20,859) (18,840)
---------------------------------------------------------------
Depreciation of property, plant and equipment (4,040) (2,336)
---------------------------------------------------------------
Amortisation and impairment of intangible assets (1,170) (848)
--------------------------------------------------------------- ------- -------
Total operating expenses (45,684) (42,882)
--------------------------------------------------------------- ------- -------
Operating profit 64,464 62,436
--------------------------------------------------------------- ------- -------
Share of profit in associates and joint ventures 8,403 8,577
Profit before tax 72,867 71,013
--------------------------------------------------------------- ------- -------
Tax expense (12,266) (12,495)
Profit for the period 60,601 58,518
--------------------------------------------------------------- ------- -------
Profit attributable to shareholders of the parent company 55,489 53,759
Profit attributable to non-controlling interests 5,112 4,759
--------------------------------------------------------------- ------- -------
Consolidated statement of comprehensive income
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
Profit for the period 60,601 58,518
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit
or loss when specific conditions are met:
---------
Debt instruments at fair value through other comprehensive
income 1,485 80
--------------------------------------------------------------
- fair value gains/(losses) 6,864 (2,455)
--------------------------------------------------------------
- fair value (gains)/losses transferred to the income
statement on disposal (4,965) 2,440
--------------------------------------------------------------
- expected credit recoveries/(losses) recognised in the
income statement 23 (4)
--------------------------------------------------------------
- income taxes (437) 99
------ ------
Cash flow hedges (10) (273)
--------------------------------------------------------------
- fair value gains/(losses) 192 (632)
--------------------------------------------------------------
- fair value (gains)/losses reclassified to the income
statement (206) 293
--------------------------------------------------------------
- income taxes 4 66
Share of other comprehensive income/(expense) of associates
and joint venture 207 (571)
Exchange differences (725) (8,233)
Items that will not be reclassified subsequently to profit
or loss:
Property revaluation 3,307 3,492
-------------------------------------------------------------- ------ ------
- fair value gains 3,972 4,162
- income taxes (665) (670)
Equity instruments designated at fair value through other
comprehensive income 2,059 (324)
-------------------------------------------------------------- ------ ------
- fair value gains/(losses) 2,063 (319)
- income taxes (4) (5)
Changes in fair value of financial liabilities designated
at fair value upon initial recognition arising from changes
in own credit risk (809) (820)
-------------------------------------------------------------- ------ ------
- before income taxes (969) (978)
--------------------------------------------------------------
- income taxes 160 158
-------------------------------------------------------------- ------ ------
Remeasurement of defined benefit asset/liability (295) 105
-------------------------------------------------------------- ------ ------
- before income taxes (351) 134
- income taxes 56 (29)
------ ------
Other comprehensive income/(expense) for the period, net
of tax 5,219 (6,544)
Total comprehensive income for the period 65,820 51,974
-------------------------------------------------------------- ------ ------
Attributable to:
- shareholders of the parent company 59,880 47,169
- non-controlling interests 5,940 4,805
-------------------------------------------------------------- ------ ------
Total comprehensive income for the period 65,820 51,974
-------------------------------------------------------------- ------ ------
Consolidated balance sheet
At
30 Jun 31 Dec
2019 2018
Notes HK$m HK$m
------------------------------------------------------- ------ --------- -----------
Assets
Cash and sight balances at central banks 232,828 205,660
---------
Items in the course of collection from other banks 44,311 25,380
--------- ---------
Hong Kong Government certificates of indebtedness 284,964 280,854
-------------------------------------------------------
Trading assets 614,685 558,838
Derivatives 298,197 292,869
------------------------------------------------------- ------ ---------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 148,061 132,859
------------------------------------------------------- ------ ---------
Reverse repurchase agreements - non-trading 393,760 406,327
------------------------------------------------------- ------ ---------
Placings with and advances to banks 418,935 338,151
---------
Loans and advances to customers 3 3,698,489 3,528,702
Financial investments 4 1,783,190 1,871,026
------
Amounts due from Group companies 96,905 70,455
---------
Interests in associates and joint ventures 5 145,933 142,885
------------------------------------------------------- ------ ---------
Goodwill and intangible assets 72,898 65,104
------------------------------------------------------- ------ ---------
Property, plant and equipment 138,485 112,080
---------
Deferred tax assets 1,969 2,315
------------------------------------------------------- ------ ---------
Prepayments, accrued income and other assets 299,183 229,949
------ ---------
Total assets 8,672,793 8,263,454
------------------------------------------------------- ------ --------- ---------
Liabilities
Hong Kong currency notes in circulation 284,964 280,854
Items in the course of transmission to other banks 52,386 33,806
------------------------------------------------------- ------ --------- ---------
Repurchase agreements - non-trading 141,685 70,279
Deposits by banks 220,156 164,664
Customer accounts 6 5,289,573 5,207,666
------
Trading liabilities 81,600 81,194
Derivatives 308,835 295,553
------------------------------------------------------- ------ --------- ---------
Financial liabilities designated at fair value 173,152 161,143
Debt securities in issue 90,959 58,236
Retirement benefit liabilities 3,173 3,369
Amounts due to Group companies 365,506 396,487
Accruals and deferred income, other liabilities and
provisions 257,330 196,665
------------------------------------------------------- ------ --------- ---------
Liabilities under insurance contracts 502,127 468,589
Current tax liabilities 9,044 3,337
------------------------------------------------------- ------ --------- ---------
Deferred tax liabilities 29,079 24,513
------------------------------------------------------- ------ --------- ---------
Subordinated liabilities 4,068 4,081
Preference shares 98 98
------------------------------------------------------- ------ --------- ---------
Total liabilities 7,813,735 7,450,534
------------------------------------------------------- ------ --------- ---------
Equity
------------------------------------------------------- ------
Share capital 172,335 172,335
Other equity instruments 44,615 35,879
------
Other reserves 135,287 114,949
Retained earnings 444,500 429,595
Total shareholders' equity 796,737 752,758
------------------------------------------------------- ------ --------- ---------
Non-controlling interests 62,321 60,162
------------------------------------------------------- ------ --------- ---------
Total equity 859,058 812,920
------------------------------------------------------- ------ --------- ---------
Total liabilities and equity 8,672,793 8,263,454
------------------------------------------------------- ------ --------- ---------
Consolidated statement of cash flows
Half-year to
30 Jun 30 Jun
2019 2018
Restated(3)
HK$m HK$m
-------------------------------------------------------------- --------- -------------
Profit before tax 72,867 71,013
-------- ----------
Adjustments for non-cash items:
--------- -------------
Depreciation and amortisation 5,210 3,191
-------- ----------
Net gain from investing activities (673) (452)
-------- ----------
Share of profits in associates and joint ventures (8,403) (8,577)
-------- ----------
Loss on disposal of subsidiaries, businesses, associates
and joint ventures 13 2
-------- ----------
Change in expected credit losses gross of recoveries and
other credit impairment charges 2,039 909
-------------------------------------------------------------- -------- ----------
Provisions 19 116
-------- ----------
Share-based payment expense 409 562
-------- ----------
Other non-cash items included in profit before tax (6,314) (2,366)
-------- ----------
Change in operating assets (293,035) (213,391)
-------- ----------
Change in operating liabilities 325,976 243,292
-------- ----------
Elimination of exchange differences 953 5,984
-------------------------------------------------------------- -------- ----------
Dividends received from associates 84 84
-------- ----------
Contributions paid to defined benefit plans (176) (272)
-------- ----------
Tax paid (4,922) (3,597)
-------- ----------
Net cash from operating activities 94,047 96,498
-------------------------------------------------------------- -------- ----------
Purchase of financial investments (457,815) (481,624)
Proceeds from the sale and maturity of financial investments 372,990 437,335
-------------------------------------------------------------- -------- ----------
Purchase of property, plant and equipment (1,421) (1,167)
-------- ----------
Proceeds from sale of property, plant and equipment and
assets held for sale 1,824 17
-------------------------------------------------------------- -------- ----------
Proceeds from disposal of customer loan portfolios 1,066 798
-------- ----------
Net investment in intangible assets (2,321) (1,944)
-------- ----------
Net cash inflow on sale of subsidiaries 299 -
-------------------------------------------------------------- -------- ----------
Net cash from investing activities (85,378) (46,585)
-------------------------------------------------------------- -------- ----------
Issue of other equity instruments 8,617 -
--------
Subordinated loan capital issued(1) - 67,052
--------
Subordinated loan capital repaid(1) - (39,118)
--------
Dividends paid to shareholders of the parent company and
non-controlling interests (41,802) (29,745)
--------
Net cash from financing activities (33,185) (1,811)
--------
Net increase/(decrease) in cash and cash equivalents (24,516) 48,102
-------------------------------------------------------------- -------- ----------
Cash and cash equivalents at 1 Jan 721,609 718,038
--------
Exchange differences in respect of cash and cash equivalents 2,798 (1,938)
--------
Cash and cash equivalents at 30 Jun(2) 699,891 764,202
-------------------------------------------------------------- -------- ----------
Interest received in the first half of 2019 was HK$94,234m (first half of 2018: HK$78,572m), interest paid in the first half of 2019 was
HK$29,218m (first half of 2018: HK$17,384m) and dividends received in the first half of 2019 were HK$135m (first half of 2018:
HK$20m).
1 Changes in subordinated liabilities (including those issued to Group companies) during the period included amounts from repayment and re-issuance with no cash movement, and non-cash changes from foreign exchange loss (HK$359m) and fair value loss after hedging (HK$120m).
2 The amount of cash and cash equivalents that are subject to exchange control and regulatory restrictions amounted to HK$102,325m at 30 June 2019 (at 30 June 2018: HK$127,961m).
3 The comparatives for cash and cash equivalents are restated due to certain cash and cash equivalents balances not being previously identified for disclosure. The impact of the restatement is to increase 'cash and cash equivalents' by HK$74.3bn, with an increase in 'net cash from operating activities' by HK$79.5bn and a reduction in 'net cash from investing activities' by HK$5.2bn.
Consolidated statement of changes in equity
Half-year to 30 Jun 2019
Other reserves
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital instru-ments earnings reserve reserve reserve reserve Other(1) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ------- -------------- -------- ------------- ----------- --------- -------- -------- -------- ------------- ----------
At 31 Dec 2018 172,335 35,879 429,595 57,914 2,953 (99) (24,649) 78,830 752,758 60,162 812,920
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Impact on transition
to HKFRS 16 - - - 13,483 - - - - 13,483 - 13,483
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
At 1 Jan 2019 172,335 35,879 429,595 71,397 2,953 (99) (24,649) 78,830 766,241 60,162 826,403
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Profit for the
period - - 55,489 - - - - - 55,489 5,112 60,601
Other comprehensive
income/(expense)
(net of tax) - - (1,079) 3,014 3,213 (36) (713) (8) 4,391 828 5,219
* debt instruments at fair value through other
comprehensive income - - - - 1,462 - - - 1,462 23 1,485
-----------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - 1,536 - - - 1,536 523 2,059
-----------------------------------------------------------
* cash flow hedges - - - - - (36) - - (36) 26 (10)
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (810) - - - - - (810) 1 (809)
-----------------------------------------------------------
* property revaluation - - - 3,014 - - - - 3,014 293 3,307
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (269) - - - - - (269) (26) (295)
-----------------------------------------------------------
* share of other comprehensive income/(expense) of
associates and joint ventures - - - - 215 - - (8) 207 - 207
-----------------------------------------------------------
* exchange differences - - - - - - (713) - (713) (12) (725)
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- -------
Total comprehensive
income/(expense)
for the period - - 54,410 3,014 3,213 (36) (713) (8) 59,880 5,940 65,820
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Other equity instruments
issued(2) - 44,615 - - - - - - 44,615 - 44,615
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Other equity instruments
repaid(2) - (35,879) - - - - - - (35,879) - (35,879)
------- --------- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Dividends paid(3) - - (38,183) - - - - - (38,183) (3,619) (41,802)
------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- -------
Movement in respect
of share-based
payment arrangements - - (75) - - - - 68 (7) - (7)
------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Transfers and
other movements(5) - - (1,247) (1,355) - - - 2,672 70 (162) (92)
----------------------------------------------------------- ------- --------- --- ------- -------- ------- ----- ------- ------- ------- -------- -------
At 30 Jun 2019 172,335 44,615 444,500 73,056 6,166 (135) (25,362) 81,562 796,737 62,321 859,058
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Half-year to 30 Jun 2018
-----------------------------------------------------------
At 31 Dec 2017 151,360 14,737 406,966 58,381 6,825 (197) (6,948) 65,356 696,480 56,506 752,986
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Impact on transition
to HKFRS 9 - - (7,478) - (4,512) - - - (11,990) (323) (12,313)
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- -------
At 1 Jan 2018 151,360 14,737 399,488 58,381 2,313 (197) (6,948) 65,356 684,490 56,183 740,673
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Profit for the
period - - 53,759 - - - - - 53,759 4,759 58,518
Other comprehensive
income/(expense)
(net of tax) - - (680) 3,142 (675) (250) (8,117) (10) (6,590) 46 (6,544)
* debt instruments at fair value through other
comprehensive income - - - - 34 - - - 34 46 80
* equity instruments designated at fair value through
other comprehensive income - - - - (151) - - - (151) (173) (324)
-----------------------------------------------------------
* cash flow hedges - - - - - (250) - - (250) (23) (273)
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (816) - - - - - (816) (4) (820)
-----------------------------------------------------------
* property revaluation - - - 3,142 - - - - 3,142 350 3,492
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 139 - - - - - 139 (34) 105
-----------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (3) - (558) - - (10) (571) - (571)
-----------------------------------------------------------
* exchange differences - - - - - - (8,117) - (8,117) (116) (8,233)
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- -------
Total comprehensive
income/(expense)
for the period - - 53,079 3,142 (675) (250) (8,117) (10) 47,169 4,805 51,974
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Dividends paid - - (26,559) - - - - - (26,559) (3,186) (29,745)
------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- -------
Movement in respect
of share-based
payment arrangements - - (146) - - - - 69 (77) - (77)
------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Transfers and
other movements(5) - - (1,892) (664) - - - 2,633 77 - 77
----------------------------------------------------------- ------- --------- --- ------- -------- ------- ----- ------- ------- ------- -------- --- -------
At 30 Jun 2018 151,360 14,737 423,970 60,859 1,638 (447) (15,065) 68,048 705,100 57,802 762,902
----------------------------------------------------------- ------- --------- --- ------- -------- --- ------- ----- ------- ------- ------- -------- --- -------
Consolidated statement of changes in equity (continued)
Half-year to 31 Dec 2018
Other reserves
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital instruments earnings reserve reserve reserve reserve Other(1) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ------- ----------- -------- ------------- ----------- --------- -------- -------- -------- ------------- ----------
At 1 Jul 2018 151,360 14,737 423,970 60,859 1,638 (447) (15,065) 68,048 705,100 57,802 762,902
----------------------------------------------------------- ------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
Profit for the
period - - 49,254 - - - - - 49,254 4,344 53,598
Other comprehensive
income/(expense)
(net of tax) - - (210) 4,908 903 348 (9,584) 8 (3,627) 20 (3,607)
* debt instruments at fair value through other
comprehensive income - - - - 700 - - - 700 46 746
* equity instruments designated at fair value through
other comprehensive income - - - - (216) - - - (216) (41) (257)
-----------------------------------------------------------
* cash flow hedges - - - - - 348 - - 348 56 404
-----------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 619 - - - - - 619 2 621
-----------------------------------------------------------
* property revaluation - - - 4,908 - - - - 4,908 426 5,334
-----------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (827) - - - - - (827) (188) (1,015)
-----------------------------------------------------------
* share of other comprehensive expense of associates
and joint ventures - - (2) - 419 - - 8 425 - 425
-----------------------------------------------------------
* exchange differences - - - - - - (9,584) - (9,584) (281) (9,865)
----------------------------------------------------------- ------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- -------
Total comprehensive
income/(expense)
for the period - - 49,044 4,908 903 348 (9,584) 8 45,627 4,364 49,991
----------------------------------------------------------- ------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
Other equity instruments
issued(2) - 21,142 - - - - - - 21,142 - 21,142
------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
Dividends paid(3) - - (20,881) - - - - - (20,881) (1,882) (22,763)
------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- -------
Movement in respect
of share-based
payment arrangements - - (88) - - - - 177 89 10 99
------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
Transfers and
other movements(4,5,6) 20,975 - (22,450) (7,853) 412 - - 10,597 1,681 (132) 1,549
----------------------------------------------------------- ------- ----------- ------- -------- ------ --- ----- ------- -------- ------- -------- -------
At 31 Dec 2018 172,335 35,879 429,595 57,914 2,953 (99) (24,649) 78,830 752,758 60,162 812,920 ----------------------------------------------------------- ------- ----------- ------- -------- --- ------ --- ----- ------- -------- ------- -------- --- -------
1 The other reserves mainly comprise share of associates' other reserves, purchase premium arising from transfer of business from fellow subsidiaries, property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.
2 In the first half of 2019, there were US$1,100m additional tier 1 capital instruments issued (2018: US$2,700m). In addition, US$4,600m of additional tier 1 capital instruments were repaid and re-issued in the first half of 2019 with no actual cash movement (nil in 2018).
3 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
4 Ordinary share capital includes preference shares which have been redeemed or bought back via payment out of distributable profits in previous years.
5 The movement from retained earnings to other reserves includes the relevant transfers in associates according to local regulatory requirements.
6 The movement from property revaluation reserve to other reserves in the second half of 2018 included HK$7,169m relating to transfer of properties to a fellow subsidiary of the Group as part of the Recovery and Resolution Plan as set out in the Report of Directors in the Annual Report and Accounts 2018.
Notes on the Interim condensed consolidated financial statements
1 Basis of preparation and significant accounting policies
---------------------------------------------------------
(a) Compliance with Hong Kong Financial Reporting Standards
The Interim condensed consolidated financial statements of the group have been prepared in accordance with HKAS 34 'Interim Financial Reporting' as issued by the Hong Kong Institute of Certified Public Accountants ('HKICPA'). These financial statements should be read in conjunction with the Annual Report and Accounts 2018.
Standards applied during the half-year to 30 June 2019
HKFRS 16
On 1 January 2019, the group adopted the requirements of HKFRS 16 and recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' in accordance with HKAS 17 'Leases'. These liabilities were measured at the present value of the remaining lease payments, discounted at the lessee's incremental borrowing rate as at 1 January 2019. The associated right- of-use ('ROU') assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments or provisions for onerous leases recognised on balance sheet at 31 December 2018. In addition, the following practical expedients permitted by the standard were applied:
-- Reliance was placed on previous assessments on whether leases were onerous;
-- Operating leases with a remaining lease term of less than 12 months as at 1 January 2019 were treated as short-term leases; and
-- Initial direct costs were not included in the measurement of ROU assets for leases previously accounted for as operating leases.
The differences between HKAS 17 and HKFRS 16 are summarised in the table below:
Leases were classified as Leases are recognised as an ROU asset and
either finance or operating a corresponding liability at the date at
leases. Payments made under which the leased asset is made available
operating leases were charged for use. Lease payments are allocated between
to profit or loss on a straight-line the liability and finance cost. The finance
basis over the period of the cost is charged to profit or loss over the
lease. lease term so as to produce a constant period
rate of interest on the remaining balance
of the liability. The ROU asset is depreciated
over the shorter of the ROU asset's useful
economic life and the lease term on a straight-line
basis.
In determining lease term, the group considers
all facts and circumstances that create
an economic incentive to exercise an extension
option or not exercise a termination option
over the planning horizon of five years.
In general, it is not expected that the
discount rate implicit in the lease is available
so the lessee's incremental borrowing rate
is used. This is the rate that the lessee
would have to pay to borrow the funds necessary
to obtain an asset of a similar value in
a similar economic environment with similar
terms and conditions. The rates are determined
for each economic environment in which the
group operates by adjusting swap rates with
funding spreads (own credit spread) and
cross-currency basis where appropriate.
-------------------------------------- -----------------------------------------------------
The group adopted the requirements of HKFRS 16 retrospectively, with the cumulative effect of initially applying the standard recognised as an adjustment to the opening balance of retained earnings at that date. Comparatives were not restated. In relation to the operating leases that were under HKAS 17 'Leases', the adoption of the standard increased assets by HK$9.2bn reported under 'Property, plant and equipment' and increased lease liabilities by the same amount reported under 'Accruals and deferred income, other liabilities and provisions' with no effect on net assets or retained earnings.
In addition, as a consequence of HKFRS 16, properties previously reported under 'Prepayments, accrued income and other assets' as operating leases and held at cost were reclassified to 'Property, plant and equipment' and measured at fair value. The implementation increased 'Property, plant and equipment' by HK$16.3bn and increased deferred tax liabilities by HK$2.7bn, with the net impact taken to the 'Property Revaluation Reserve'.
The overall impact of the above is to increase 'Property, plant and equipment' by HK$25.5bn, increase 'Accruals and deferred income, other liabilities and provisions' by HK$9.2bn, increase 'Deferred tax liabilities' by HK$2.7bn, increase 'Property Revaluation Reserve' by HK$13.5bn and decrease 'Prepayments, accrued income and other assets' by HK$136m.
(b) Use of estimates and judgements
Management believes that the group's critical accounting estimates and judgements are those which relate to impairment of financial instruments, the valuation of financial instruments, deferred tax assets, provisions for liabilities and interests in associates. There were no other changes in the current period to the critical accounting estimates and judgements applied in 2019, which are stated in note 1 of the Annual Report and Accounts 2018.
(c) Composition of group
There were no material changes in the composition of the group in the half-year to 30 June 2019.
(d) Future accounting developments
HKFRS 17 'Insurance Contracts' was issued in January 2018 and sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. HKFRS 17 is currently effective from 1 January 2021. However, the HKICPA is consulting on delaying the mandatory implementation date by one year and may make additional changes to the standard. The group is in the process of implementing HKFRS 17. Industry practice and interpretation of the standard is still developing and there may be changes to implementation decisions as practice evolves, therefore the likely impact of its implementation remains uncertain.
(e) Going concern
The 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.
(f) Accounting policies
Except as described above, the accounting policies applied by the group for the Interim condensed consolidated financial statements are consistent with those described in note 1 of the Annual Report and Accounts 2018, as are the methods of computation.
2 Dividends
----------
Half-year to
30 Jun 2019 30 Jun 2018
HK$ per HK$ per
share HK$m share HK$m
Ordinary dividends paid
* fourth interim dividend in respect of the previous
financial year approved and paid during the half-year 0.47 21,958 0.36 16,559
- first interim dividend paid 0.32 14,963 0.22 10,000
-------------------------------------------------------------- ------- ------ ------- ------
Total 0.79 36,921 0.58 26,559
-------------------------------------------------------------- ------- ------ ------- ------
On 22 July 2019, the Directors declared a second interim dividend in respect of the half-year ended 30 June 2019 of HK$0.32 per ordinary share (HK$14,963m) (half-year ended 30 June 2018 of HK$0.22 per ordinary share (HK$10,000m)). This distribution was paid on 30 July 2019. No liability is recognised in the Interim condensed consolidated financial statements in respect of this dividend.
Distributions on other equity instruments
Half-year to
30 Jun 30 Jun
2019 2018
HK$m HK$m
US$1,900m Floating rate perpetual subordinated loans
(interest rate at one year US dollar LIBOR plus 3.84%)(1) 497 -
------------------------------------------------------------- ------------ ------
US$1,400m Floating rate perpetual subordinated loans
(interest rate at three months US dollar LIBOR plus
3.51%)(1,2) 373 -
------------------------------------------------------------- ------------ ------
US$600m Floating rate perpetual subordinated loan (interest
rate at three months US dollar LIBOR plus 3.62%)(1,2) 178 -
------------------------------------------------------------- ------------ ------
US$700m Floating rate perpetual subordinated loan (interest
rate at three months US dollar LIBOR plus 4.98%)(1,2) 214 -
------------------------------------------------------------- ------------ ------
Total 1,262 -
------------------------------------------------------------- ------------ ------
1 These subordinated loans were early repaid in the first half of 2019 and distributions were made on repayment.
2 These subordinated loans were issued in the second half of 2018.
3 Loans and advances to customers
--------------------------------
At
30 Jun 31 Dec
2019 2018
HK$m HK$m
Gross loans and advances to customers 3,714,568 3,545,258
Expected credit loss allowances (16,079) (16,556)
---------
3,698,489 3,528,702
--------------------------------------- --------- ---------
The following table provides an analysis of loans and advances to customers by industry sector based on the Statistical Classification of economic activities in the European Community ('NACE') codes.
Analysis of gross loans and advances to customers
At
30 Jun 31 Dec
2019 2018
HK$m HK$m
--------------------------------- --------- -----------
Residential mortgages 998,656 937,666
Credit card advances 89,887 93,200
Other personal 281,320 236,133
--------------------------------- ---------
Total personal 1,369,863 1,266,999
--------------------------------- --------- ---------
Real estate 663,912 626,120
Wholesale and retail trade 438,585 433,734
Manufacturing 439,884 424,813
Transportation and storage 85,985 95,773
Other 475,216 484,186
--------- ---------
Total corporate and commercial 2,103,582 2,064,626
--------------------------------- --------- ---------
Non-bank financial institutions 241,123 213,633
3,714,568 3,545,258
--------------------------------- --------- ---------
By geography(1)
--------------------------------- --------- -----------
Hong Kong 2,384,808 2,282,909
--------------------------------- --------- ---------
Rest of Asia Pacific 1,329,760 1,262,349
--------------------------------- --------- ---------
1 The geographical information shown above has been classified by the location of the principal operations of the subsidiary and by the location of the branch responsible for advancing the funds.
Gross loans and advances to customers increased by HK$169bn, or 5%, which included unfavourable foreign exchange translation effects of HK$2bn. Excluding this impact, the underlying increase of HK$171bn was driven by an increase in residential mortgages of
HK$63bn, mainly in Hong Kong and Australia, coupled with an increase in other personal lending of HK$45bn mainly in Hong Kong and Singapore. Corporate and commercial lending also increased by HK$39bn, mainly in mainland China and Singapore.
4 Financial investments
----------------------
At
30 Jun 31 Dec
2019 2018
HK$m HK$m
Financial investments measured at fair value through
other comprehensive income 1,359,254 1,503,625
--------- ---------
- treasury and other eligible bills 480,497 660,871
- debt securities 870,856 836,896
- equity securities 7,901 5,858
---------
Debt instruments measured at amortised cost 423,936 367,401
--------- ---------
- treasury and other eligible bills 2,395 3,624
- debt securities 421,541 363,777
--------- ---------
1,783,190 1,871,026
------------------------------------------------------ --------- ---------
5 Interests in associates and joint ventures
-------------------------------------------
Bank of Communications Co., Limited ('BoCom')
The group's investment in BoCom is classified as an associate. Significant influence in BoCom was established via representation on BoCom's Board of Directors and participation in a Technical Cooperation and Exchange Programme ('TCEP'). Under the TCEP, a number of HSBC staff have been seconded to assist in the maintenance of BoCom's financial and operating policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28 whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group's share of BoCom's net assets. An impairment test is required if there is any indication of impairment.
Impairment testing
At 30 June 2019, the fair value of the group's investment in BoCom had been below the carrying amount for approximately 86 months. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment at 30 June 2019 as the recoverable amount as determined by a value-in-use ('VIU') calculation was higher than the carrying value.
At
30 Jun 2019 31 Dec 2018
Carrying Fair Carrying Fair
VIU value value VIU value value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
----- -------- --------
BoCom 158.0 142.4 83.8 141.3 139.6 86.1
------- ----- -------- ------ ----- -------- ------
The increase in VIU for the first half of 2019 was principally driven by BoCom's actual performance exceeding earlier forecasts and upward revisions to management's best estimates of BoCom's future earnings.
In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are described below and are based on factors observed at period-end. The factors that could result in a change in the VIU and an impairment include a short-term under-performance by BoCom, a change in regulatory capital requirements, or an increase in uncertainty regarding the future performance of BoCom resulting in a downgrade of the future asset growth or profitability. An increase in the discount rate as a result of an increase in the risk premium or risk-free rates could also result in a reduction of VIU and an impairment. At the point where the carrying value exceeds the VIU, impairment would be recognised.
If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's best estimates of future earnings available to ordinary shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best estimate. There are two main components to the VIU calculation. The first component is management's best estimate of BoCom's earnings which is based on explicit forecasts over the short to medium term. This results in forecast earnings growth that is lower than recent historical actual growth and also reflects the uncertainty arising from the current economic outlook. Earnings beyond the short to medium term are then extrapolated in perpetuity using a long-term growth rate to derive a terminal value, which comprises the majority of the VIU. The second component is the capital maintenance charge ('CMC') which is management's forecast of the earnings that need to be withheld in order for BoCom to meet regulatory capital requirements over the forecast period (i.e. CMC is deducted when arriving at management's estimate of future earnings available to ordinary shareholders). The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected minimum regulatory capital requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other factors (including qualitative factors) to ensure that the inputs to the VIU calculation remain appropriate.
Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in accordance with the requirements of HKAS 36:
-- Long-term profit growth rate: 3% (31 December 2018: 3%) for periods after 2022, which does not exceed forecast GDP growth in mainland China and is consistent with forecasts by external analysts.
-- Long-term asset growth rate: 3% (31 December 2018: 3%) for periods after 2022, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%.
-- Discount rate: 11.82% (31 December 2018: 11.82%) which is based on a Capital Asset Pricing Model ('CAPM') calculation for BoCom, using market data. Management also compares the rate derived from the CAPM with discount rates from external sources. The discount rate used is within the range of 10.3% to 14.3% (31 December 2018: 10.4% to 15.0%) indicated by external sources.
-- Expected credit losses as a percentage of customer advances: ranges from 0.88% to 0.94% (31 December 2018: 0.73% to 0.79%) in the short to medium term and reflect increases due to the US-China trade tensions. For periods after 2022, the ratio is 0.70% (31 December 2018: 0.70%) which is slightly higher than the historical average.
-- Risk-weighted assets as a percentage of total assets: 61% (31 December 2018: 62%) for all forecast periods. This is slightly higher than BoCom's actual results and the forecasts disclosed by external analysts.
-- Cost-income ratio: ranges from 38.1% to 38.9% (31 December 2018: 38.7% to 39.0%) in the short to medium term. This is slightly higher than the forecasts disclosed by external analysts.
-- Effective tax rate: ranges from 13.9% to 22.0% (31 December 2018: 13.8% to 22.3%) in the short to medium term reflecting an expected increase towards the long-term assumption. For periods after 2022, the rate is 22.5% (31 December 2018: 22.5%) which is slightly higher than the historical average.
-- Capital requirements: Capital adequacy ratio: 11.5% (31 December 2018: 11.5%) and Tier 1 capital adequacy ratio: 9.5% (31 December 2018: 9.5%), based on the minimum regulatory requirements.
The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:
* Long-term profit growth rate * Decrease by 83 basis points
* Long-term asset growth rate * Increase by 71 basis points
* Discount rate * Increase by 102 basis points
* Expected credit losses as a percentage of customer * Increase by 14 basis points
advances
* Increase by 499 basis points
* Risk-weighted assets as a percentage of total assets
* Increase by 315 basis points
* Cost-income ratio
* Increase by 727 basis points
* Long-term effective tax rate
* Increase by 94 basis points
* Capital requirements - capital adequacy ratio
* Increase by 169 basis points
* Capital requirements - tier 1 capital adequacy ratio
------------------------------------------------------------ ------------------------------------
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 30 June 2019
Long-term profit growth rate - - 158.0 -50 (9.7) 148.3
--------------- ------ ----- -------------- ------- -----
Long-term asset growth rate -50 9.5 167.5 - - 158.0
--------------- ------ ----- -------------- ------- -----
Discount rate -72 13.4 171.4 +38 (6.2) 151.8
--------------- ------ ----- -------------- ------- -----
2019 to 2019 to
2022: 0.90% 2022: 0.95%
Expected credit losses as a 2023 onwards: 2023 onwards:
percentage of customer advances 0.69% 1.2 159.2 0.79% (8.9) 149.1
----------------------------------- --------------- ------ ----- -------------- ------- -----
Risk-weighted assets as a
percentage
of total assets -125 3.6 161.6 +150 (4.6) 153.4
--------------- ------ ----- -------------- ------- -----
Cost-income ratio -190 10.3 168.3 - - 158.0
--------------- ------ ----- -------------- ------- -----
Long-term effective tax rate -345 7.4 165.4 +250 (5.4) 152.6
----------------------------------- --------------- ------ ----- -------------- ------- -----
Earnings in short to medium
term - compound annual growth
rate(1) +102 7.5 165.5 -272 (13.7) 144.3
----------------------------------- --------------- ------ ----- -------------- ------- -----
Capital requirements - capital
adequacy ratio - - 158.0 +273 (48.8) 109.2
----------------------------------- --------------- ------ ----- -------------- ------- -----
Capital requirements - tier
1 capital adequacy ratio - - 158.0 +273 (35.3) 122.7
----------------------------------- --------------- ------ ----- -------------- ------- -----
At 31 December 2018
Long-term profit growth rate +100 20.2 161.5 -10 (1.7) 139.6
---------------
Long-term asset growth rate -10 2.0 143.3 +100 (21.7) 119.6
--------------
Discount rate -142 25.4 166.7 +28 (4.0) 137.3
--------------
2018 to 2018 to
2022: 0.70% 2022: 0.83%
Expected credit losses as a 2023 onwards: 2023 onwards:
percentage of customer advances 0.65% 7.0 148.3 0.77% (7.9) 133.4
----------------------------------- ------
Risk-weighted assets as a
percentage
of total assets -140 4.1 145.4 +80 (2.3) 139.0
Cost-income ratio -160 8.8 150.1 +200 (10.9) 130.4
--------------- ------ ----- -------------- ------- -----
Long-term effective tax rate -280 5.3 146.6 +250 (4.6) 136.7
--------------- ------ ----- -------------- ------- -----
Earnings in short to medium
term - compound annual growth
rate(1,2) +204 8.1 149.4 -366 (14.2) 127.1
----------------------------------- --------------- ------ ----- -------------- ------- -----
Capital requirements - capital
adequacy ratio - - 141.3 +258 (39.4) 101.9
--------------- ------ ----- -------------- ------- -----
Capital requirements - tier
1 capital adequacy ratio - - 141.3 +243 (25.2) 116.1
----------------------------------- --------------- ------ ----- -------------- ------- -----
1 Based on management's explicit forecasts over the short to medium term.
2 Comparatives on 31 December 2018 have been updated to align with the 2019 approach to describe the impact of the change in isolation.
Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is HK$136.7bn to HK$166.4bn (31 December 2018: HK$121.4bn to HK$153.5bn). The range is based on the favourable/unfavourable change in the earnings in the short-to medium-term and long-term expected credit losses as a percentage of customer advances as set out in the table above. All other long-term assumptions, the discount rate and the basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU.
6 Customer accounts
------------------
Customer accounts by country
At
30 Jun 31 Dec
2019 2018
HK$m HK$m
Hong Kong 3,810,364 3,797,807
---------
Singapore 360,998 331,479
---------------- --------- ---------
Mainland China 354,599 358,026
---------------- ---------
Australia 173,022 161,726
---------
India 122,290 111,297
---------------- ---------
Malaysia 109,202 108,899
---------------- ---------
Taiwan 106,803 106,537
---------
Indonesia 34,953 29,843
---------
Other 217,342 202,052
---------------- --------- ---------
5,289,573 5,207,666
---------------- --------- ---------
7 Fair values of financial instruments carried at fair value
-----------------------------------------------------------
The accounting policies, control framework and hierarchy used to determine fair values at 30 June 2019 are consistent with those applied for the Annual Report and Accounts 2018.
The following table provides an analysis of financial instruments carried at fair value and bases of valuation.
Fair value hierarchy
Level Level Level Third-party Inter-
1 2 3 total company(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
---------
At 30 Jun 2019
-------------------------------------
Assets
--------- ------- ------ ----------- ----------- -----------
Trading assets(1) 431,245 183,398 42 614,685 - 614,685
--------- ------- ------ ----------- ----------- ---------
Derivatives 2,344 223,039 538 225,921 72,276 298,197
--------- ------- ------ ----------- ----------- ---------
Financial assets designated
and otherwise mandatorily measured
at fair value through profit
or loss 86,251 35,598 26,212 148,061 - 148,061
--------- ------- ------ ----------- ----------- ---------
Financial investments 1,005,154 349,221 4,879 1,359,254 - 1,359,254
--------- ------- ------ ----------- ----------- ---------
Liabilities
--------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 70,695 10,905 - 81,600 - 81,600
--------- ------- ------ ----------- ----------- ---------
Derivatives 2,756 226,084 1,652 230,492 78,343 308,835
--------- ------- ------ ----------- ----------- ---------
Financial liabilities designated
at fair value(1) - 151,108 22,044 173,152 - 173,152
------------------------------------- --------- ------- ------ ----------- ----------- ---------
At 31 Dec 2018
-------------------------------------
Assets
-------------------------------------
Trading assets(1) 395,769 162,841 228 558,838 - 558,838
Derivatives 3,219 209,450 1,206 213,875 78,994 292,869
Financial assets designated
and otherwise mandatorily measured
at fair value through profit
or loss 75,105 36,599 21,155 132,859 - 132,859
Financial investments 1,146,426 352,490 4,709 1,503,625 - 1,503,625
------------------------------------- --------- ------- ------ ----------- ----------- ---------
Liabilities
--------- ------- ------ ----------- ----------- -----------
Trading liabilities(1) 74,376 6,818 - 81,194 - 81,194
--------- ------- ------ ----------- ----------- ---------
Derivatives 3,348 220,043 1,842 225,233 70,320 295,553
Financial liabilities designated
at fair value(1) - 139,782 21,361 161,143 - 161,143
------------------------------------- --------- ------- ------ ----------- ----------- ---------
1 Amounts with HSBC Group entities are not reflected here.
2 Derivatives balances with HSBC Group entities are largely under 'Level 2'.
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
Designated
and otherwise
mandatorily
measured Designated
Financial Trading at fair Trading at fair
investments assets value Derivatives liabilities value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------
At 30 Jun
2019
--------------
Transfers
from Level
1 to Level 2 4,673 1,410 - - 126 - -
------------- ----------- ------------ ---------- -----------
Transfers
from Level
2 to Level 1 14,348 7,570 1,268 - 532 - -
-------------- ------------ ------- ------------- ----------- ------------ ---------- -----------
At 31 Dec 2018
----------------------
Transfers from Level
1 to Level 2 9,955 1,389 --349 --
------- ------ ---
Transfers from Level
2 to Level 1 121,667 18,109 --376 --
---------------------- ------- ------ ---
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of Levels of the fair value hierarchy are primarily attributable to changes in observability of valuation inputs and price transparency.
Movements in Level 3 financial instruments
There were no material transfers from/to Levels 1 and 2 as a result of change in observability of valuation inputs, settlement, nor gains/loss recognised in the income statement/other comprehensive income during the first half of 2019 in relation to financial instruments carried at fair value in Level 3 (1H 2018: immaterial). The increase in Level 3 assets was mainly due to the purchase of financial assets of HK$5,252m (1H 2018: HK$7,428m) to support growth in insurance business.
8 Fair values of financial instruments not carried at fair value
---------------------------------------------------------------
Fair values of financial instruments not carried at fair value and
bases of valuation
At
30 Jun 2019 31 Dec 2018
Carrying Carrying
amount Fair value amount Fair value
HK$m HK$m HK$m HK$m
--------- ---------- --------- ------------
Assets
Reverse repurchase agreements - non-trading 393,760 394,215 406,327 406,784
--------------------------------------------- ---------- --------- ----------
Placings with and advances to banks 418,935 418,875 338,151 337,974
Loans and advances to customers 3,698,489 3,697,003 3,528,702 3,525,759
--------------------------------------------- --------- ----------
Financial investments - at amortised cost 423,936 444,915 367,401 365,379
--------------------------------------------- --------- ---------- --------- ----------
Liabilities
Repurchase agreements - non-trading 141,685 141,671 70,279 70,282
--------------------------------------------- --------- ---------- --------- ----------
Deposits by banks 220,156 220,130 164,664 164,662
---------------------------------------------
Customer accounts 5,289,573 5,289,715 5,207,666 5,207,871
--------------------------------------------- --------- ---------- --------- ----------
Debt securities in issue 90,959 91,605 58,236 58,808
---------------------------------------------
Subordinated liabilities 4,068 3,908 4,081 3,879
--------------------------------------------- --------- ---------- --------- ----------
Preference shares 98 98 98 98
--------------------------------------------- --------- ---------- --------- ----------
Other financial instruments not carried at fair value are typically short-term in nature or re-priced to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. Details of how the fair values of financial instruments that are not carried at fair value on the balance sheet are calculated can be found in note 36 of the Annual Report and Accounts 2018.
9 Contingent liabilities, contractual commitments and guarantees
---------------------------------------------------------------
At
30 Jun 31 Dec
2019 2018
HK$m HK$m
---------------------------------------------------------- -----------
Contingent liabilities and financial guarantee contracts 307,523 295,645
---------------------------------------------------------- ---------
Commitments 2,638,858 2,563,208
---------------------------------------------------------- ---------
2,946,381 2,858,853
---------------------------------------------------------- --------- ---------
The above table discloses the nominal principal amounts of commitments (excluding capital commitments), guarantees and other contingent liabilities, which represents the amounts at risk should contracts be fully drawn upon and clients default. The amount of commitments shown above reflects, where relevant, the expected level of take-up of pre-approved facilities. As a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.
Contingent liabilities at 30 June 2019 included amounts in relation to legal and regulatory matters as set out in note 12.
10 Segmental analysis --- -------------------
The global businesses are considered our reportable segments under HKFRS 8. The basis of identifying segments and measuring segmental results is set out in note 33 'Segmental Analysis' of the Annual Report and Accounts 2018. There have been no material changes to the reportable segments since 31 December 2018.
Financial performance by global business is set out in the Financial Review on page 3, which forms part of the Interim condensed consolidated financial statements.
Geographical regions
Rest of Intra-segment
Hong Kong Asia-Pacific elimination Total
HK$m HK$m HK$m HK$m
Half-year to 30 Jun 2019
--------------------------
Total operating income 116,843 41,728 (248) 158,323
--------- ------------- ------------ ---------
Profit before tax 47,964 24,903 - 72,867
--------- ------------- ------------ ---------
Total assets 6,203,675 3,125,360 (656,242) 8,672,793
--------- ------------- ------------ ---------
Total liabilities 5,716,131 2,753,846 (656,242) 7,813,735
-------------------------- --------- ------------- ------------ ---------
Half-year to 30 Jun 2018
--------------------------
Total operating income 101,609 38,532 (1,344) 138,797
Profit before tax 45,916 25,097 - 71,013
Total assets 5,967,744 2,990,353 (719,230) 8,238,867
Total liabilities 5,576,965 2,618,230 (719,230) 7,475,965
-------------------------- --------- ------------- ------------ ---------
11 Related party transactions
--- ---------------------------
During the first half of 2019, over 8,300 employees performing shared services in Hong Kong have been transferred from the group to a separate service company, HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the Group set up in Hong Kong as part of recovery and resolution planning to provide functional support services to the group. There were no changes to employment terms and conditions or pension benefits as a result of these transfers. The group recognises a management charge for the services provided by ServCo, which is reported under 'General and administrative expenses'. In the first half of 2019, ServCo has recharged HK$7,382m (first half of 2018 : HK$495m) to the group in relation to the remuneration and other costs associated with the transfer of relevant employees and assets to ServCo.
As at 30 June 2019, the group has completed the restructuring of its internal regulatory capital and loss-absorbing capacity ('LAC')-eligible debt and equity instruments such that they are all held by its immediate parent, HSBC Asia Holdings Limited, in order to comply with the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements - Banking Sector) Rules which came into operation on 14 December 2018.
Except for the above, all related party transactions that took place in the half-year to 30 June 2019 were similar in nature to those disclosed in the Annual Report and Accounts 2018. There were no changes in the related party transactions as described in the Annual Report and Accounts 2018 that have had a material effect on the financial position or performance of the group in the half-year to
30 June 2019.
12 Legal proceedings and regulatory matters --- -----------------------------------------
The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, the Bank considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in note 1.2(n) of the Annual Report and Accounts 2018. While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 30 June 2019. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Anti-money laundering and sanctions-related matters
In December 2012, among other agreements, HSBC Holdings plc agreed to an undertaking with the UK Financial Conduct Authority ('FCA') and consented to a cease-and-desist order with the US Federal Reserve Board ('FRB'), both of which contained certain forward-looking anti-money laundering ('AML') and sanctions-related obligations. HSBC also agreed to retain an independent compliance monitor (who is, for FCA purposes, a 'Skilled Person' under section 166 of the Financial Services and Markets Act and, for FRB purposes, an 'Independent Consultant') to produce periodic assessments of the Group's AML and sanctions compliance programme (the 'Skilled Person/Independent Consultant'). In December 2012, HSBC Holdings plc also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions. The Skilled Person/Independent Consultant will continue to conduct country reviews and provide periodic reports for a period of time at the FCA's and FRB's discretion.
Through the Skilled Person/Independent Consultant's country-level reviews, as well as internal reviews conducted by HSBC, certain potential AML and sanctions compliance issues have been identified that HSBC is reviewing further with the FRB, FCA and/or OFAC. The Financial Crimes Enforcement Network of the US Treasury Department as well as the Civil Division of the US Attorney's Office for the Southern District of New York are investigating the collection and transmittal of third-party originator information in certain payments instructed over HSBC's proprietary payment systems. HSBC is cooperating with all of these investigations.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
Tax investigations
The Bank continues to cooperate with the relevant US and other authorities, including with respect to clients of the Bank in India who may have had US tax reporting obligations.
In addition, various tax administration, regulatory and law enforcement authorities around the world, including in India, are conducting investigations and reviews of HSBC Private Bank (Suisse) SA and other HSBC companies in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation. In February 2015, the Indian tax authority issued a summons and request for information to the Bank in India.
The Bank and other HSBC companies are cooperating with these ongoing investigation. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these investigations and reviews, which could be significant.
In light of the media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings.
Singapore Interbank Offered Rate ('Sibor'), Singapore Swap Offer Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW')
In July and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York District Court on behalf of persons who transacted in products related to the Sibor, SOR and BBSW benchmark rates. The complaints allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law.
In the Sibor/SOR litigation, following a decision on the defendants' motion to dismiss in October 2018, the claims against a number of HSBC entities were dismissed, and the Bank remains the only HSBC defendant in this action. In October 2018, the Bank filed a motion for reconsideration of the decision based on the issue of personal jurisdiction; this motion was denied in April 2019. Also in October 2018, the plaintiff filed a third amended complaint, naming only the Sibor panel members, including the Bank, as defendants; the court dismissed the third amended complaint in its entirety in July 2019.
In the BBSW litigation, in November 2018, the court dismissed all foreign defendants including all the HSBC entities, on personal jurisdiction grounds. In April 2019, the plaintiff filed an amended complaint, which the defendants have moved to dismiss.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
United States Bankruptcy Court for the Southern District of New York litigation
In June 2018, a claim was issued against the Bank in the United States Bankruptcy Court for the Southern District of New York by the Chapter 11 Trustee of CFG Peru Investments Pte. Ltd. (Singapore) (the 'Trustee Complaint'). The Trustee Complaint makes allegations under the Peruvian Civil Code, Hong Kong and U.S. common law and the Bankruptcy Code concerning the Bank's alleged conduct in commencing the winding-up proceedings and pursuing the appointment of joint provisional liquidators for affiliates of CFG Peru Investments Pte. Ltd. The Trustee is seeking damages and equitable subordination or disallowance of the Bank's Chapter 11 claims in a related bankruptcy proceeding.
The Bank is seeking to dismiss the Trustee Complaint. Based on the facts currently known, it is not practicable at this time to predict the resolution of this matter, including the timing or any possible impact, which could be significant.
Foreign exchange rate investigations
In January 2018, HSBC Holdings plc entered into a three-year deferred prosecution agreement with the Criminal Division of the
US Department of Justice ('DoJ') (the 'FX DPA'), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. This concluded the DoJ's investigation into HSBC's historical foreign exchange activities. Under the terms of the FX DPA, HSBC has a number of ongoing obligations, including implementing enhancements to its internal controls and procedures in its Global Markets business, which will be the subject of annual reports to the DoJ. In addition, HSBC agreed to pay a financial penalty and restitution.
There are many factors that may affect the range of outcomes and the resulting financial impact of this matter, which could be significant.
13 Interim Report 2019 and statutory accounts --- -------------------------------------------
The information in this Interim Report 2019 is unaudited and does not constitute statutory accounts. The Interim Report 2019 was approved by the Board of Directors on 5 August 2019. The Bank's statutory annual consolidated accounts for the year ended 31 December 2018 have been delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The auditor has reported on those financial statements in their report dated 19 February 2019. The auditor's report was unqualified; did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying its report; and did not contain a statement under sections 406(2), 407(2) or (3) of the Hong Kong Companies Ordinance (Cap. 622).
14 Ultimate holding company --- -------------------------
The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc, which is incorporated in England.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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(END) Dow Jones Newswires
August 05, 2019 05:54 ET (09:54 GMT)
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