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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 2021 to Dec 2024
TIDM57HB
RNS Number : 4263V
Hongkong & Shanghai Banking Corp Ld
09 August 2022
9 August 2022
The Hongkong and Shanghai Banking Corporation Limited
2022 Interim Report
In fulfilment of its obligations under sections 4.2.2, 6.3.3(2) and 6.3.5(1) of the Disclosure Guidance and Transparency Rules , The Hongkong and Shanghai Banking Corporation Limited (the "Company") hereby releases the unedited full text of its 2022 Interim Report for the half-year ended 30 June 2022.
The document is now available on the Company's website at: https://www.hsbc.com.hk/legal/regulatory-disclosures
The document has also been submitted to the National Storage Mechanism and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The Hongkong and Shanghai Banking
Corporation Limited
Interim Report 2022
Hot Features
Premium
Contents
Page
Certain defined terms 1
------------------------------------------ ----
Cautionary statement regarding 1
forward-looking statements
------------------------------------------ ----
Chinese translation 1
------------------------------------------ ----
Additional information 1
------------------------------------------ ----
Financial highlights 2
------------------------------------------ ----
Financial review 3
------------------------------------------ ----
Risk 7
Statement of Directors' responsibilities 24
------------------------------------------ ----
Independent review report by
PricewaterhouseCoopers 25
------------------------------------------ ----
Interim condensed consolidated
financial statements 26
------------------------------------------ ----
Consolidated income statement 26
------------------------------------------ ----
Consolidated statement of comprehensive
income 27
------------------------------------------ ----
Consolidated balance sheet 28
------------------------------------------ ----
Consolidated statement of cash
flows 29
------------------------------------------ ----
Consolidated statement of changes
in equity 30
------------------------------------------ ----
Notes on the Interim condensed
consolidated financial statements 32
------------------------------------------ ----
Basis of preparation and significant
1 accounting policies 32
--- ------------------------------------- ----
2 Dividends 33
--- ------------------------------------- ----
3 Loans and advances to customers 33
--- ------------------------------------- ----
4 Financial investments 34
--- ------------------------------------- ----
Interests in associates and
5 joint ventures 34
--- ------------------------------------- ----
6 Customer accounts 36
--- ------------------------------------- ----
Fair values of financial instruments
7 carried at fair value 37
--- ------------------------------------- ----
Fair values of financial instruments
8 not carried at fair value 40
--- ------------------------------------- ----
Contingent liabilities, contractual
9 commitments and guarantees 40
--- ------------------------------------- ----
10 Segmental analysis 41
--- ------------------------------------- ----
11 Related party transactions 42
--- ------------------------------------- ----
12 Business acquisitions 42
--- ------------------------------------- ----
Legal proceedings and regulatory
13 matters 42
--- ------------------------------------- ----
Interim Report 2022 and statutory
14 accounts 43
--- ------------------------------------- ----
15 Ultimate holding company 43
--- ------------------------------------- ----
Certain defined terms
This document comprises the Interim Report 2022 for The Hongkong and Shanghai Banking Corporation Limited ('the Bank') and its subsidiaries (together 'the group'). References to 'HSBC', 'the Group' or 'the HSBC Group' within this document mean HSBC Holdings plc together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. The abbreviations 'HK$m' and 'HK$bn' represent millions and billions (thousands of millions) of Hong Kong dollars respectively.
Cautionary statement regarding forward-looking statements
This Interim Report 2022 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 2022 is available upon request from: Communications (Asia), Level 32, HSBC Main Building, 1 Queen's Road Central, Hong Kong. The report is also available, in English and Chinese, on the Bank's website at www.hsbc.com.hk.
Additional information
The Banking Disclosure Statement at 30 June 2022, which is prepared in accordance with the Banking (Disclosure) Rules made under section 60A of the Banking Ordinance and the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements - Banking Sector) Rules made under section 19(1) of the Financial Institutions (Resolution) Ordinance, will be published on our website at www.hsbc.com.hk.
Financial highlights -- Profit before tax down 12% to HK$44,393m (HK$50,507m in the first half of 2021). -- Attributable profit down 11% to HK$35,095m (HK$39,382m in the first half of 2021). -- Return on average ordinary shareholders' equity of 8.3% (9.4% in the first half of 2021). -- Total assets up 5% to HK$10,356bn (HK$9,903bn at the end of 2021).
-- Common equity tier 1 ratio of 14.4% (15.4% at the end of 2021), total capital ratio of 17.9% (18.7% at the end of 2021).
-- Cost efficiency ratio of 58.7% (55.2% for the first half of 2021).
Media enquiries to : Brian Rhoads Telephone no: + 852 2288 5066
Vinh Tran Telephone no: + 852 2822 4924
Financial review
Consolidated income statement and balance sheet data by reportable
segments(1)
Wealth Markets
and Personal Commercial Global and Securities Corporate Other
Banking Banking Banking(2) Services(2) Centre(3) (GBM -other)(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Half-year to 30 Jun
2022
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Net interest income/(expense) 27,388 16,868 8,029 1,909 (2,107) 1,166 53,253
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Net fee income/(expense) 9,506 5,221 2,667 2,151 150 (55) 19,640
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Net income/(expense)
from financial instruments
measured at fair value
through profit or loss (8,935) 1,701 (23) 11,828 1,994 273 6,838
Gains less losses from
financial investments (64) (58) - - - (110) (232)
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Net insurance premium
income/(expense) 45,448 2,816 - - (205) - 48,059
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Other operating income 6,842 71 110 565 83 - 7,671
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Total operating
income/(expense) 80,185 26,619 10,783 16,453 (85) 1,274 135,229
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Net insurance claims
and benefits paid and
movement in liabilities
to policyholders (40,496) (2,930) - - 170 - (43,256)
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Net operating income
before change in expected
credit losses and other
credit impairment charges 39,689 23,689 10,783 16,453 85 1,274 91,973
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
- of which: external 37,349 24,209 10,612 17,400 (1,477) 3,880 91,973
-------------------------------
inter-segment 2,340 (520) 171 (947) 1,562 (2,606) -
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Change in expected credit
losses and other credit
impairment charges (618) (3,099) (419) 16 - (24) (4,144)
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Net operating income 39,071 20,590 10,364 16,469 85 1,250 87,829
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Operating expenses (25,712) (10,469) (5,251) (7,342) (3,987) (1,250) (54,011)
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Operating profit/(loss) 13,359 10,121 5,113 9,127 (3,902) - 33,818
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Share of profit in associates
and joint ventures 31 - - - 10,544 - 10,575
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Profit before tax 13,390 10,121 5,113 9,127 6,642 - 44,393
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Balance sheet data
at 30 Jun 2022
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Loans and advances to
customers (net) 1,552,732 1,333,797 914,045 48,029 1,460 14,736 3,864,799
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Customer accounts 3,432,308 1,637,900 834,008 208,583 27 840 6,113,666
------------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------
Half-year to 30 Jun
2021
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Net interest income/(expense) 25,392 14,387 7,419 1,599 (1,298) 1,242 48,741
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Net fee income/(expense) 12,978 5,108 2,857 2,973 105 (16) 24,005
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Net income from financial
instruments measured
at fair value through
profit or loss 15,268 1,839 31 10,794 224 287 28,443
Gains less losses from
financial investments 609 237 - - - 287 1,133
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Net insurance premium
income/(expense) 29,996 2,435 - - (201) - 32,230
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Other operating income/(expense) (717) (53) 83 541 38 (72) (180)
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Total operating income/(expense) 83,526 23,953 10,390 15,907 (1,132) 1,728 134,372
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Net insurance claims
and benefits paid and
movement in liabilities
to policyholders (39,271) (2,404) - - 155 - (41,520)
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Net operating income/(expense)
before change in expected
credit losses and other
credit impairment charges 44,255 21,549 10,390 15,907 (977) 1,728 92,852
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
- of which: external 42,334 21,937 10,191 15,907 (1,135) 3,618 92,852
---------------------------------
inter-segment 1,921 (388) 199 - 158 (1,890) -
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- ---------------------------
Change in expected credit
losses and other credit
impairment charges (518) (1,418) 307 6 (1) 17 (1,607)
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Net operating income/(expense) 43,737 20,131 10,697 15,913 (978) 1,745 91,245
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Operating expenses (24,250) (10,250) (4,943) (6,945) (3,486) (1,412) (51,286)
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Operating profit/(loss) 19,487 9,881 5,754 8,968 (4,464) 333 39,959
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Share of profit in associates
and joint ventures 55 - - - 10,493 - 10,548
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Profit before tax 19,542 9,881 5,754 8,968 6,029 333 50,507
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Balance sheet data at
30 Jun 2021
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Loans and advances to
customers (net) 1,589,927 1,303,116 951,587 52,410 4,014 78 3,901,132
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
Customer accounts 3,304,632 1,513,022 869,069 207,281 36 7,455 5,901,495
--------------------------------- -------------------------- --------------------------- -------------------------- ---------------------------- ---------------------------- --------------------------- --------------------------
1 The financial information included in this table forms part of the Interim condensed consolidated financial statements, which have been reviewed by PricewaterhouseCoopers.
2 In the second half of 2021, the reportable segments were changed to reflect the change in the management of the Global Banking and Markets ('GBM') business, with the splitting out of Global Banking ('GB') and Markets and Securities Services ('MSS') as separate reportable segments, while GBM - Other (previously reported within GBM) is now reported under 'Other (GBM - other)'. Comparatives have been re-presented to conform to the current year's presentation. Further details on the change in reportable segments are set out in Note 10 'Segmental analysis' on the Interim condensed consolidated financial statements.
3 Includes inter-segment elimination. Financial review
The commentary in this financial review compares the group's financial performance for the half-year ended 30 June 2022 with the half-year ended 30 June 2021 unless otherwise stated.
Result commentary
The group reported profit before tax of HK$44,393m, a decrease of HK$6,114m, or 12%.
Net interest income increased by HK$4,512m, or 9%. Excluding the unfavourable foreign exchange impact, net interest income increased by HK$4,983m, or 10%, driven by Hong Kong mainly from balance sheet growth as customer deposits increased, coupled with improved customer deposit spreads and higher reinvestment yields due to higher market interest rates compared with the first half of 2021. To a lesser extent, increases were also noted in Singapore, reflecting the favourable impact from the higher interest rate environment, and in mainland China and India, mainly from balance sheet growth.
Net fee income decreased by HK$4,365m, or 18%. Excluding the unfavourable foreign exchange impact, net fee income decreased by HK$4,160m, or 17%, driven by Wealth and Personal Banking ('WPB') from decreases in unit trust fees due to lower sales volume, securities brokerage income from lower equities turnover and funds under management income. Net fee income also decreased in Markets and Securities Services ('MSS'), mainly from lower underwriting fees.
Net income from financial instruments measured at fair value through profit or loss decreased by HK$21,605m, or 76%.
Net income from assets and liabilities of insurance business, including related derivatives, measured at fair value through profit or loss decreased by HK$23,798m, or 180%. This was driven by the unfavourable equity market performance in Hong Kong in the first half of 2022 as compared with the favourable equity market performance in the first half of 2021, which resulted in revaluation losses on equities held to back insurance liabilities in the first half of 2022. To the extent that these gains or losses are attributable to policyholders, these are offset by a corresponding movement in 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.
Net income from financial instruments held for trading or managed on a fair value basis increased by HK$2,270m, or 15%, driven by mainland China, mainly from revaluation gains on foreign currency translation of balance sheet exposures. To a lesser extent, increases were also noted in Australia and India.
Net insurance premium income increased by HK$15,829m, or 49%, driven by Hong Kong due to strong sales volumes in the first half of 2022. 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$7,851m to HK$7,671m driven by the favourable movement of HK$7,105m in the present value of in-force long-term insurance business ('PVIF'). The changes in PVIF were primarily in Hong Kong and included a HK$1,544m increase in the value of new business, a HK$2,351m gain from a pricing update for policyholders' funds held on deposit with us, and an increase of HK$2,282m primarily reflecting the effect of sharing lower investment returns with policyholders. The movement in PVIF was partly offset by a corresponding movement in 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.
The increase also included a provisional gain of HK$556m on completion of our acquisition of AXA Insurance Pte Limited ('AXA Singapore') in the first half of 2022.
Net insurance claims and benefits paid and movement in liabilities to policyholders increased by HK$1,736m, or 4%, reflecting higher claims from higher business sales and the favourable movement in PVIF, partly offset by lower investment returns to policyholders from the unfavourable equity market performance in the first half of 2022.
Change in expected credit losses and other credit risk provisions increased by HK$2,537m, or 158%, notably in Commercial Banking ('CMB') and to a lesser extent in Global Banking ('GB'), mainly reflecting increases in allowance in relation to exposures to the mainland China's commercial real estate sector.
Total operating expenses increased by HK$2,725m, or 5%. Excluding the favourable foreign exchange impact, operating expenses increased by HK$3,163m, or 6%, reflecting our continued investment in technology and in wealth in Asia.
Share of profit in associates and joint ventures increased by HK$27m, or less than 1%. Excluding the favourable foreign exchange impact, share of profit in associates and joint ventures decreased by HK$52m, mainly from lower share of profits from Barrowgate Limited.
Net interest income
Half-year to
--------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
--------------------------------- -------------------------- ----------------------------
Net interest income 53,253 48,741
--------------------------------- -------------------------- ----------------------------
Average interest-earning assets 7,556,448 7,102,770
--------------------------------- -------------------------- ----------------------------
% %
--------------------------------- -------------------------- ----------------------------
Net interest spread 1.36 1.33
--------------------------------- -------------------------- ----------------------------
Contribution from net free funds 0.06 0.05
--------------------------------- -------------------------- ----------------------------
Net interest margin 1.42 1.38
--------------------------------- -------------------------- ----------------------------
Net interest income ('NII') increased by HK$4,512m, or 9%. Excluding the unfavourable foreign exchange impact, NII increased by HK$4,983m, or 10%, driven by Hong Kong from balance sheet growth as customer deposits increased, coupled with improved customer deposit spreads and higher reinvestment yields due to higher market interest rates compared with the first half of 2021. To a lesser extent, increases were also noted in Singapore, reflecting the favourable impact from the higher interest rate environment, and in mainland China and India, mainly from balance sheet growth.
Average interest-earning assets increased by HK$454bn, or 6%, driven by Hong Kong, mainly in financial investments and reverse repurchase agreements, reflecting growth in the commercial surplus as customer deposits increased. To a lesser
extent, increases were also noted in mainland China and India, mainly from growth in customer advances, and in Japan from an increase in reverse repurchase agreements.
Net interest margin ('NIM') increased by four basis points, primarily in Hong Kong and to a lesser extent in Singapore, reflecting the favourable impact from the higher interest rate environment which resulted in improved customer deposit spreads and higher reinvestment yields. This was partly offset by an increase in the commercial surplus, primarily deployed into reverse repurchase agreements, which contributed to lower yields.
As a result, the NIM at the Bank's operations in Hong Kong increased by five basis points, and at Hang Seng Bank, the NIM increased by one basis point.
Net fee income
Half-year to
---------------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
---------------------------- ------------------------------ -------------------------------
Funds under management 3,752 4,333
---------------------------- ------------------------------ -------------------------------
Unit trusts 2,743 4,193
---------------------------- ------------------------------ -------------------------------
Broking income 2,461 3,782
---------------------------- ------------------------------ -------------------------------
Cards 3,750 3,708
---------------------------- ------------------------------ -------------------------------
Global custody 2,135 2,307
---------------------------- ------------------------------ -------------------------------
Credit facilities 1,529 1,586
---------------------------- ------------------------------ -------------------------------
Imports/exports 1,591 1,477
---------------------------- ------------------------------ -------------------------------
Remittances 1,443 1,363
---------------------------- ------------------------------ -------------------------------
Account services 1,147 1,090
---------------------------- ------------------------------ -------------------------------
Underwriting 327 863
---------------------------- ------------------------------ -------------------------------
Insurance agency commission 866 807
---------------------------- ------------------------------ -------------------------------
Other 4,674 4,432
---------------------------- ------------------------------ -------------------------------
Fee income 26,418 29,941
---------------------------- ------------------------------ -------------------------------
Fee expense (6,778) (5,936)
---------------------------- ------------------------------ -------------------------------
Net fee income 19,640 24,005
---------------------------- ------------------------------ -------------------------------
Net income from financial instruments measured at fair value through profit or loss
Half-year to
-------------------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
------------------------------------------------- -------------------------------- ---------------------------------
Net income/(expense) arising on:
------------------------------------------------- -------------------------------- ---------------------------------
Net trading activities 17,196 17,884
Other instruments managed on a fair value basis 659 (2,299)
------------------------------------------------- -------------------------------- ---------------------------------
Net income from financial instruments held for
trading
or managed on a fair value basis 17,855 15,585
------------------------------------------------- -------------------------------- ---------------------------------
Financial assets held to meet liabilities under
insurance
and investment contracts (12,239) 13,689
------------------------------------------------- -------------------------------- ---------------------------------
Liabilities to customers under investment
contracts 1,638 (492)
------------------------------------------------- -------------------------------- ---------------------------------
Net income/(expense) from assets and liabilities
of
insurance businesses, including related
derivatives,
measured at fair value through profit or loss (10,601) 13,197
------------------------------------------------- -------------------------------- ---------------------------------
Changes in fair value of designated debts issued
and
related derivatives(1) (447) (312)
------------------------------------------------- -------------------------------- ---------------------------------
Changes in fair value of other financial
instruments
mandatorily measured at fair value through
profit or
loss 31 (27)
------------------------------------------------- -------------------------------- ---------------------------------
Net income from financial instruments measured at
fair value through profit or loss 6,838 28,443
------------------------------------------------- -------------------------------- ---------------------------------
1 Includes debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting mismatch.
Other operating income
Half-year to
------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
-------------------------------------------------------- -------------------------- --------------------------
Change in present value of in-force long-term insurance
business 5,600 (1,505)
-------------------------------------------------------- -------------------------- --------------------------
Gain on acquisition of subsidiary(1) 556 -
-------------------------------------------------------- -------------------------- --------------------------
Gains/(losses) on investment properties (57) 138
-------------------------------------------------------- -------------------------- --------------------------
Other(2) 1,572 1,187
-------------------------------------------------------- -------------------------- --------------------------
Other operating income/(expense) 7,671 (180)
-------------------------------------------------------- -------------------------- --------------------------
1 Includes a provisional gain of HK$556m from the acquisition of AXA Insurance Pte Limited. Details are included in Note 12 'Business acquisitions' on the Interim condensed consolidated financial statements.
2 Includes mainly recovery of operating expenses from fellow companies.
Insurance manufacturing
The following table shows the results of our insurance manufacturing operations by income statement line item, and separately the insurance distribution income earned by the group's bank channels.
Results of insurance manufacturing operations and insurance distribution
income earned by the group's bank channels
Half-year to
--------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
Insurance manufacturing operations(1)
------------------------------------------------------------ ---------------------------- --------------------------
Net interest income 8,520 8,065
------------------------------------------------------------ ---------------------------- --------------------------
Net fee expense (2,374) (1,933)
------------------------------------------------------------ ---------------------------- --------------------------
Net income/(expense) from financial instruments measured
at fair value (11,482) 13,064
------------------------------------------------------------ ---------------------------- --------------------------
Net insurance premium income 48,261 32,427
------------------------------------------------------------ ---------------------------- --------------------------
Change in present value of in-force long-term insurance
business 5,600 (1,505)
------------------------------------------------------------ ---------------------------- --------------------------
Other operating income 685 245
------------------------------------------------------------ ---------------------------- --------------------------
Total operating income 49,210 50,363
------------------------------------------------------------ ---------------------------- --------------------------
Net insurance claims and benefits paid and movement in
liabilities to policyholders (43,426) (41,637)
------------------------------------------------------------ ---------------------------- --------------------------
Net operating income before change in expected credit
losses and other credit impairment charges 5,784 8,726
------------------------------------------------------------ ---------------------------- --------------------------
Change in expected credit losses and other credit impairment
charges (8) (136)
------------------------------------------------------------ ---------------------------- --------------------------
Net operating income 5,776 8,590
------------------------------------------------------------ ---------------------------- --------------------------
Total operating expenses (2,564) (1,487)
------------------------------------------------------------ ---------------------------- --------------------------
Operating profit 3,212 7,103
------------------------------------------------------------ ---------------------------- -------------------------- Share of profit in associates and joint ventures 31 55 ------------------------------------------------------------ ---------------------------- -------------------------- Profit before tax 3,243 7,158 ------------------------------------------------------------ ---------------------------- -------------------------- Annualised new business premiums of insurance manufacturing operations 8,658 10,616 ------------------------------------------------------------ ---------------------------- -------------------------- Distribution income earned by banking operations 2,632 2,342 ------------------------------------------------------------ ---------------------------- --------------------------
1 The results presented for insurance manufacturing operations are shown before elimination of intercompany transactions with the group's
non-insurance operations.
Profit before tax from the insurance manufacturing business decreased by HK$3,915m, or 55%, driven by unfavourable equity market impacts, partly offset by higher new business volumes in the first half of 2022.
Net interest income increased by 6%, as net premium inflows from new business and renewals increased fixed income assets held to back insurance liabilities.
Net expense from financial instruments measured at fair value through profit or loss was HK$11,482m in the first half of 2022, compared with a net income of HK$13,064m in the first half of 2021. This was primarily due to the unfavourable equity market performance in Hong Kong in the first half of 2022, compared with the favourable market performance in the first half of 2021.
Net insurance premium income increased by HK$15,834m, mainly in Hong Kong due to strong sales volumes from our whole-of-life propositions in the first half of 2022.
The change in the PVIF increased by HK$7,105m, primarily in Hong Kong, reflecting an increase in the value of new business of
HK$1,544m, a HK$2,351m gain from a pricing update for policyholders' funds held on deposit with us to reflect the cost of the provision of these services, and an increase of HK$2,282m primarily reflecting the effect of sharing lower investment returns with policyholders.
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'.
Other operating income increased, largely due to a provisional gain of HK$556m on completion of our acquisition of AXA Singapore.
Total operating expenses increased by HK$1,077m, reflecting the incorporation of the results of AXA Singapore in the first half of 2022 and investment in our Pinnacle proposition in mainland China.
Change in expected credit losses and other credit impairment charges
Half-year to
------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
------------------------------------------------------------- ------------------------ ----------------------------
Loans and advances to banks and customers 3,793 2,072
------------------------------------------------------------- ------------------------ ----------------------------
* new allowances net of releases 4,242 2,572
-------------------------------------------------------------
* recoveries of amounts previously written off (449) (500)
Loan commitments and guarantees 174 (469)
------------------------------------------------------------- ------------------------ ----------------------------
Other financial assets 177 4
------------------------------------------------------------- ------------------------ ----------------------------
Change in expected credit losses and other credit impairment
charges 4,144 1,607
------------------------------------------------------------- ------------------------ ----------------------------
The change in expected credit losses ('ECL') as a percentage of average gross customer advances was 0.20% for the first half of 2022 (first half of 2021: 0.11%). The increase in ECL was notable in CMB, mainly reflecting additional allowances in relation to exposures to mainland China's commercial real estate sector in the first half of 2022. To a lesser extent, an increase was also noted in GB, reflecting exposures to the same sector.
Operating expenses
Half-year to
----------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
------------------------------------------------- --------------------- -----------------------
Employee compensation and benefits 20,113 20,246
------------------------------------------------- --------------------- -----------------------
General and administrative expenses 26,448 24,578
------------------------------------------------- --------------------- -----------------------
Depreciation of property, plant and equipment 4,573 4,409
------------------------------------------------- --------------------- -----------------------
Amortisation and impairment of intangible assets 2,877 2,053
------------------------------------------------- --------------------- -----------------------
Operating expenses 54,011 51,286
------------------------------------------------- --------------------- -----------------------
Employee compensation and benefits decreased by HK$133m, or 1%. Excluding the favourable foreign exchange impact, employee compensation and benefits increased by HK$102m, or 1%, as the impact from wage inflation was largely offset by lower performance-related pay and lower average headcount across the region.
General and administrative expenses increased by HK$1,870m, or 8%, reflecting our continued investment in technology and in wealth in Asia. To a lesser extent, there were also increases in marketing expenses and professional and consultancy expenses.
Amortisation and impairment of intangible assets increased by HK$824m, or 40%, mainly due to higher capitalised software balances.
Associates and joint ventures
At 30 June 2022, 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 Interim condensed consolidated financial statements for further details). As discussed in that note, in future periods, the value-in-use may increase or decrease depending on the effect of changes to model inputs. It is expected that the carrying amount will increase due to retained profits earned by BoCom. At the point where the carrying amount exceeds the value-in-use, impairment would be recognised. The group would continue to recognise its share of BoCom's profit or loss, but the carrying amount would be reduced to equal the value-in-use, with a corresponding reduction in the income statement. An impairment review would continue to be performed at each subsequent reporting period, with the carrying amount and income statement adjusted accordingly.
Risk Principal risks and uncertainties
The group continuously monitors and identifies risks. Our principal risks are credit risk, treasury risk, traded risk, resilience risk, regulatory compliance risk, financial crime risk, model risk, as well as financial and insurance risks from our insurance manufacturing operations. A description of principal risks and a summary of our current policies and practices regarding the management of risk is set out on pages 27 to 28 and pages 14 to 16 in the 'Risk' section of the Annual Report and Accounts 2021.
We have maintained a consistent approach to risk management throughout our history, helping to ensure we protect customers' funds, lend responsibly and support economies.
The repercussions from the Russia-Ukraine war, alongside the continuing geopolitical tensions and challenging economic conditions are continuing to impact our customers and our organisation.
Global commodity markets have been significantly impacted by the Russia-Ukraine war, leading to supply chain disruptions and increased prices for both energy and raw materials. The continuation of, or any further escalation in the Russia-Ukraine war could have additional economic, social and political repercussions. These include further sanctions and trade restrictions, longer term changes in the macroeconomic environment with the risk of higher and sustained inflation, and a continued increase in energy prices. This has been further impacted by continuing tensions between China and the US, the UK, the EU, India and other countries during 2022, which may affect the group and its customers by creating regulatory, reputational and market risks. The macroeconomic, trade and regulatory environments have become increasingly fragmented through disruptions to supply chains, increasing inflationary pressures, and market concerns regarding potential impacts following instability in mainland China's commercial real estate sector. We continue to monitor the situation closely and to seek to manage the potential implications of all the above developments on our customers and business.
We continued to focus on improving the quality and timeliness of the data used to inform management decisions, through measures such as forward-looking indicators, prudent active management of our risk appetite, and ensuring regular communication with our Board and key stakeholders.
While the financial performance of our operations varied in different geographies, the balance sheet and liquidity of the group remained strong.
We remain committed to investing in the reliability and resilience of our IT systems and critical services that support all parts of our business. We do so to protect our customers, affiliates and counterparties, and to help ensure that we minimise any disruption to services that could result in reputational and regulatory consequences. We continue to operate in a challenging environment in which cyber threats are prevalent, and continue to invest in business and technical controls to defend against these threats.
We are progressing with the implementation of our business transformation plans, while seeking to ensure that we are able to support growth and manage safely the associated risks, which include execution, operational, governance, reputational, conduct and financial risks.
Our emerging risks report identifies forward-looking risks so that they can be considered in determining whether any incremental action is needed to either prevent them from materialising or to limit their effect. Emerging risks are those that could have a material impact on our risk profile were they to occur, are not considered immediate and are not under active management.
Top risks are those that have the potential to have a material adverse impact on the financial results, reputation or business model of the group. We actively manage and take actions to mitigate our top risks.
Our suite of top and emerging risks is subject to regular review by senior governance forums. We continue to monitor closely the identified risks and ensure robust management actions are in place, as required.
Our current top and emerging risks are summarised below and discussed in more detail on pages 17 to 22 of the Annual Report and Accounts 2021.
Risk Trend Description
Externally driven
----------------------------------------------------------------------------------------
Geopolitical ^ Our operations and portfolios are exposed to risks
and macroeconomic associated with political instability, civil unrest
risks and military conflict, which could lead to disruption
of our operations, physical risk to our staff and/or
physical damage to our assets. Heightened geopolitical
tensions, alongside other factors, have also disrupted
supply chains globally, with potential ramifications
for the group. Inflation and rising interest rates
are likely to prompt a marked global slowdown which
will affect the group's portfolio.
------------------- ----- ------------------------------------------------------------
Technology and > We are exposed to the risk of service disruption
cyber security through technology failures or malicious activity
risk(1) by internal or external threats. In response to the
recent geopolitical events, enhanced monitoring of
this risk is being undertaken. We operate a continuous
improvement programme to enhance our technology operations
and to counter a hostile and fast-evolving cyber
threat environment.
------------------- ----- ------------------------------------------------------------
Evolving regulatory > The compliance risk environment has become more complex,
environment given heightened geopolitical tensions.
risk(2) There has been increased regulatory focus on operational
and cyber resilience, sanctions, and wider anti-money
laundering controls. These alongside other key regulatory
priorities, may result in change requirements across
the group in the short to medium term.
------------------- ----- ------------------------------------------------------------
Financial crime > We continue to support our customers against a backdrop
risk(3) of complex geopolitical, socio-economic and technological
challenges, including the Russia-Ukraine war. We
are monitoring the direct and indirect impacts of
the war on the group, and using its sanctions compliance
capabilities to respond to the new sanctions regulations,
noting the challenges that arise in implementing
the complex, novel and ambiguous aspects of certain
of the sanctions.
------------------- ----- ------------------------------------------------------------
Interbank offered > We are primarily exposed to regulatory compliance,
rate ('Ibor') legal, resilience, model and market risks as part
transition risk of transition away from demising Ibor benchmarks,
in advance of their cessation dates, to new reference
rates. As a result, we continue to take into account
the fairness of client outcomes, our compliance with
regulatory expectations and the operation of our
systems and processes. We have transitioned all of
our contracts in 2021 demised Ibors, but some contracts
are temporarily utilising 'synthetic' sterling Libor
or Japanese yen Libor. Our customer engagement for
demising Ibors has begun, in particular for US dollar
Libor.
------------------- ----- ------------------------------------------------------------
Environmental, ^ We are exposed to ESG risks relating to climate change,
social and nature and human rights. This risk has increased
governance ('ESG') owing to the pace and volume of regulatory developments
risks globally and stakeholders placing more emphasis on
financial institutions' actions and investment decisions
in respect of ESG matters. If we fail to meet evolving
regulatory and stakeholder expectations on ESG risk
management as a result of any event, behaviour, action
or inaction, this may result in financial and non-financial
risks for us, potentially causing stakeholders to
form a negative view of the group.
------------------- ----- ------------------------------------------------------------
Digitalisation > Developments in technology and changes in regulations
and are enabling new entrants to the industry.
technological This along with new products and services offered
advances risk by existing competitors, challenges us to continue
to innovate in order to take advantage of new digital
capabilities to best serve our customers, and adapt
our products to attract and retain customers and
employee talent.
------------------- ----- ------------------------------------------------------------
Internally driven
----------------------------------------------------------------------------------------
Risks associated > We monitor workforce capacity and capability requirements
with workforce in line with our published growth
capability, strategy. We have measures to support our people
capacity and to work safely during the Covid-19 pandemic, and
environmental to implement flexible working as government restrictions
factors with ease. We monitor people risks that may arise due
potential impact to business transformation, and perform periodic
on growth risk assessments, including against strategies, to
help ensure retention of key personnel to support
growth.
------------------- ----- ------------------------------------------------------------
Risks arising > We procure services and goods from a range of third
from the receipt parties. It is critical that we have appropriate
of services risk management policies, processes and practices
from third parties over the selection and governance of third parties
and their supply network, particularly for key activities
that could affect our operational resilience. Any
deficiency in the management of risks associated
with our third parties could affect our ability to
support our customers and meet regulatory expectations.
------------------- ----- ------------------------------------------------------------
Model risk New Evolving regulatory requirements are driving material
changes to models across the banking industry
with particular focus on capital models. In addition,
new technologies such as machine learning are
also driving changes to the model landscape and our
strategic focus on climate risk is leading
to new areas of modelling being developed. A key
area of focus is ensuring our standards, processes
and controls are adequate to identify, measure and
manage the resulting model risks.
------------------- ----- ------------------------------------------------------------
Data risk(4) > We use data to serve our customers and run our internal
operations, often in real-time within digital journeys
and processes. If this data is not accurate and timely,
our ability to serve customers, operate with resilience,
or meet regulatory requirements could be impacted.
We must ensure the confidentiality of data and comply
with the growing number of laws and regulations governing
data privacy and the cross-border movement of data.
------------------- ----- ------------------------------------------------------------
Change execution > Failure to effectively prioritise, manage and/or
risk deliver change impacts our ability to achieve our
strategic objectives. We must monitor, manage and
oversee change execution risk to ensure our change
portfolios and initiatives continue to deliver the
right outcomes for our customers, people, investors
and communities.
------------------- ----- ------------------------------------------------------------
^ Risk heightened during the first half 2022.
> Risk remained at the same level as 2021.
1 Previously 'Cyber threat and unauthorised access to systems' and 'IT systems infrastructure and technologies advances'.
2 Previously 'Regulatory compliance risk environment including conduct'. 3 Previously 'Financial crime risk environment'. 4 Previously 'Data management'. Key developments in the first half of 2022
We continue to manage actively those risks related to the Russia-Ukraine war and broader macroeconomic and geopolitical uncertainties alongside the continued risks resulting from the Covid-19 pandemic, and other key risks described in this section. In addition, we enhanced our risk management in the following areas:
-- We have continued to enhance decision making, particularly with regard to the governance of treasury risk to ensure senior executives have appropriate oversight and visibility of macroeconomic trends around inflation and interest rates.
-- We continued to develop our approach to emerging risk identification and management, including use of forward- looking indicators to support our analysis.
-- We enhanced our enterprise risk reporting processes to place greater focus on our emerging risks, including capturing the materiality, oversight and individual monitoring of these risks.
-- We are enhancing our third-party management frameworks and processes to improve visibility of the role our material third parties play in our operational resilience and including compliance with regulatory requirements by our supply network.
-- We are progressing with a comprehensive regulatory reporting programme to strengthen our global processes, improve consistency, and enhance controls.
-- We enhanced, and continue to embed, the governance and oversight around model adjustments and related processes for HKFRS 9 models and related Sarbanes-Oxley controls.
-- The group has appointed a Head of Climate and Nature Related Risks in support of our climate change strategy and to oversee the development of our climate risk management capabilities. The climate risk programme continues to shape our approach to climate risk across four key pillars: governance and risk appetite; risk management; stress testing; and disclosures.
-- We continued to improve the effectiveness of our financial crime controls, deploying advanced analytics capabilities. We are refreshing our financial crime policies, ensuring they remain up-to-date and address changing and emerging risks, and we continue to monitor regulatory changes.
--
Areas of special interest
During the first half of 2022, a number of areas were considered as part of our top and emerging risks because of the effect they have on the group. In this section we have focused on risks related to geopolitical and macroeconomic risk, Covid-19, climate risk and Ibor transition.
Geopolitical and macroeconomic risk
The Russia-Ukraine war continues to have far-reaching geopolitical and economic implications. We are monitoring the direct and indirect impacts of the war, and continue to respond to new sanctions and trade restrictions that have been imposed, noting the challenges that arise in implementing the complex, novel and ambiguous aspects of certain of these sanctions. Global commodity markets have been significantly impacted by the Russia-Ukraine war and the Covid-19 pandemic, leading to sustained supply chain disruptions. This has resulted in product shortages appearing across several regions, and increased prices for both energy and non-energy commodities (such as food). We do not expect these to ease significantly in the second half of 2022. In turn, this has had a significant impact on global inflation.
Rising global inflation is also prompting central banks to tighten monetary policy. Uncertainty over the economic outlook could nevertheless slow the pace of tightening, and keep fiscal policies broadly accommodative for some time. The US Federal Reserve Board ('FRB') delivered a 75bps increase in the Federal Funds rate in June 2022, with several more expected in the second half of 2022 and 2023. Financial markets currently expect the FRB to raise the Federal Funds rate to 3% by the end of 2022.
The European Central Bank is expected to lag the FRB but nevertheless began increasing its benchmark rates in July 2022. In recent months, the Hong Kong dollar exchange rate against the US dollar has traded on the weaker side of the peg, resulting in reduction in the liquidity buffer provided by the aggregate balance. While the Hong Kong dollar interbank rates continue to lag the US dollar interest rates currently, the spread between the two is expected to narrow based on the Hong Kong dollar supply and demands situation in the local market. We continue to monitor our risk profile closely in the context of uncertainty over monetary policy.
The rapid rise of the US dollar interest rate has led to a strengthening US dollar exchange rate against most currencies. Major central banks in Asia-Pacific (except for mainland China and Japan) are following the FRB with rate hikes but at slower pace. Asian currencies have depreciated against the US dollar across the region in the first half of 2022. In Japan, the accommodative monetary policies have led to a widening interest rate gap against the US dollar, resulting in a significantly weaker Japanese yen. We continue to monitor our direct and indirect risk exposure to Asian currencies depreciation at both portfolio and counterparty level.
Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.
The US-China relations remain complex, with tensions over a number of critical issues. The US government has recently articulated its approach to perceived strategic competition with China based on an intent to 'invest, align and compete'. The US, the UK, the EU, Canada and other countries have imposed various sanctions and trade restrictions on Chinese individuals and companies, including freezing assets of government officials, and investment and import/export restrictions targeting certain Chinese companies.
There is a continued risk of increased sanctions being imposed by the US and other governments in relation to human rights and other issues with China, and this could create a more complex operating environment for the group and its customers.
China has in turn announced a number of its own sanctions and trade restrictions that target, or provide authority to target, foreign individuals or companies. It has also promulgated new laws that provide a legal framework for imposing further sanctions and export restrictions. These include laws prohibiting implementation of - or compliance with - foreign sanctions against China as well as laws that create a private right of action in Chinese courts for damages caused by third parties implementing foreign sanctions or other discriminatory measures. These and any future measures and countermeasures that may be taken by the US, China and other countries may affect the group, its customers, and the markets in which we operate.
Market participants remain concerned about the repercussions for the Chinese domestic economy from instability in its commercial real estate sector, including deteriorating operating performance and challenging liquidity conditions, and more recently China's government-imposed lockdown restrictions in major Chinese cities to respond to elevated Covid-19 infections. Such repercussions may occur directly through financial exposures to the Chinese commercial real estate sector, or indirectly through the effect of a slowdown in economic activity in China and on global supply chains in various sectors. Despite a recent improvement in economic indicators as lockdown measures are lifted, we continue to monitor the situation closely, including potential indirect impacts, and seek to take mitigating actions as required.
Sri Lanka has defaulted on its foreign currency debts as it struggles with an economic and political crisis. There are uncertainties in the formation of a new government following the agreement by the leaders to resign in July 2022 amidst nationwide protests. With an inflation rate rising to 54.6% as of 30 June 2022, shortages of food, fuel and medicines and rolling power blackouts, the country is facing a plunging currency and shortage of foreign currency reserves for payment of imports.
We continue to monitor the situation in Sri Lanka and take actions through local Major Incident Groups, Counterparty Review and Action Group meetings. De-risking measures have been initiated to maintain a stable capital risk profile.
The impact of the pandemic and second order impacts from other geopolitical and macroeconomic events remain uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. To help mitigate this risk, model outputs and management adjustments are closely monitored and independently reviewed at the group and markets level for reliability and appropriateness.
As the geopolitical landscape evolves, compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional compliance, reputational and political risks for the group. We maintain dialogue with our regulators in various jurisdictions on the impact of legal and regulatory obligations on our business and customers.
The group will continue to consider potential regulatory, reputational and market risks arising from the evolving geopolitical landscape.
Expanding data privacy, national security and cybersecurity laws in a number of markets could pose potential challenges to intra-group data sharing. These developments could increase financial institutions' compliance burdens in respect of cross-border transfers of personal information.
Risks related to Covid-19
Despite the successful roll-out of vaccines around the world, the Covid-19 pandemic and its effect on the global economy have continued to impact our customers and organisation. The emergence of new variants and sub-variants poses a continuing risk. The global vaccination roll-out has helped reduce the social and economic impact of the Covid-19 pandemic, although there continues to be divergence in the speed at which vaccines have been deployed. Countries continue to differ in their approach to restrictions on activity and travel, and if these differences persist, this could prolong or worsen supply chain and international travel disruptions. Most notably, China's government-imposed lockdown restrictions in major cities, which were only eased recently, have adversely impacted China's economy, Asia tourism and global supply chains.
Central banks in major markets - with the exception of mainland China and Japan - are tightening their monetary policies, with the speed of such tightening varying across jurisdictions based on specific macroeconomic conditions. Policy tightening in several major emerging markets is also underway in order to counteract rising inflation and the risk of capital outflows. Governments are also expected to make fiscal support more targeted as the appetite for broad lockdowns and public health restrictions decreases. Government debt has risen in most advanced economies, and is expected to remain high into the medium term. High government debt burdens have raised fiscal vulnerabilities, increasing the sensitivity of debt service costs to interest rate increases and potentially reducing the fiscal space available to address future economic downturns.
Our Central scenario used to calculate credit impairment assumes that economic activity will continue to recover through 2022, surpassing peak pre-pandemic levels of GDP in our key markets. It is assumed that private sector growth accelerates, ensuring a strong recovery is sustained even as pandemic-related fiscal support is withdrawn. However, there is a high degree of uncertainty associated with economic forecasts in the current environment and there are significant risks to our Central scenario. The degree of uncertainty varies by market, depending on exposure to commodity price increases, supply chain constraints, the monetary policy response to inflation and the public health policy response to the pandemic. For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 14.
We continue to monitor the situation closely, and given the significant uncertainties related to the post-pandemic landscape in the future, additional mitigating actions may be required.
Climate risk
The pace of policy and regulatory developments focusing on climate risk management, disclosures, and stress testing and scenario analysis continues to increase in 2022. The Russia-Ukraine war continues to impact global commodity markets, necessitating actions in the short term around energy security. While these actions may impact the near-term transition path for us and our customers, we remain committed to our climate strategy to align our own operations and supply chain to net zero by 2030, and the financed emissions from our portfolio of customers to net zero by 2050. As announced in March 2022, the Group intends to publish a Group climate transition plan in 2023, and has committed to a science-aligned phase-down of fossil fuel finance, and a review of our wider financing and investment policies critical to achieving net zero by 2050.
Our most material risks in terms of managing climate risk relate to corporate and retail client financing within our banking portfolio, but there are also significant responsibilities in relation to asset ownership by our insurance business, as well as from the activities of our asset management business. We continue to monitor the impacts of climate risk, and further embed our approach across our key risk areas, priority markets and businesses.
We have refreshed our credit risk policy to further embed climate risk considerations into our control and oversight of the credit risk impact of climate change for new money requests, and delivered guidance on the oil and gas, power and utilities, and metals and mining sectors. We continue to develop guidance for our other higher transition risk sectors. To help with risk assessment, our developing transition and physical risk questionnaire is currently being applied across 10 sectors and 11 of the group's markets to determine the level of transition risk and physical risk exposure.
We are also focused on embedding climate risk into retail credit risk management processes and are implementing metrics to support risk management and exposure monitoring for properties with heightened climate-related physical risk exposure.
In addition to financial risks arising in our corporate and retail banking portfolio, we may also face increased reputational, legal and regulatory risks as we make progress towards our net zero ambition, as stakeholders are likely to place a greater focus on our actions, investment decisions and disclosures related to this ambition. We will face additional risks if we are perceived to mislead stakeholders regarding our climate strategy, the climate impact of a product or service, or regarding the commitments of our customers. In response to this, the Group has published internal guidance to increase awareness of greenwashing risk across the first and second lines of defence, and established a cross-line of defence panel of internal experts to provide greenwashing risk advice to existing governance forums. The Group has also created a product enhancement guide to outline how climate considerations should be embedded into existing product governance processes throughout the product lifecycle.
We continued to develop our climate stress testing and scenario capabilities, including model development, and delivered regulatory climate stress tests. These are being used to further improve our understanding of our risk exposures for use in risk management and business decision making.
While climate risk reporting has improved over time, we continue to focus on data quality and consistency with the development of our risk appetite and metrics.
Ibor transition
The publication of sterling, Swiss franc, euro, Japanese yen and some US dollar Libor interest rate benchmark settings, as well as Euro Overnight Index Average ('Eonia') ceased from the end of 2021. Our interbank offered rate ('Ibor') transition programme - which is tasked with the development of new near risk-free rate ('RFR') products and the transition of legacy Ibor products - has continued to support transition of a limited number of remaining contracts in these benchmarks to RFRs, or alternative reference rates.
During the first half of 2022, we continued to develop process, technology and RFR product capabilities in our remaining locations that have a requirement for US dollar Libor and other regional rates demising at later dates ('demising regional rates'), which are expected to demise from June 2023. We have also implemented controls to ensure we do not undertake any new US dollar Libor contracts outside of agreed exemptions to control the related risks. We carried out relevant communication to our clients to support them through transition of their products, and began the transition of trade, hedging and uncommitted lending facilities. To date, we have transitioned all of our contracts in 2021 demised Ibors, but some contracts are temporarily utilising 'synthetic' sterling Libor or Japanese yen Libor. We continue to actively engage in market and industry discussions around the transition of the remaining demising Ibors, including ceasing the use of 'synthetic' sterling and Japanese yen Libor.
The group's non-derivative financial liabilities as at 30 June 2022 included three Japanese yen Total Loss Absorbing Capacity ('TLAC') instruments at fixed to floating rate where the Japanese yen Libor benchmark will be used to reset the coupon rate if the bank chooses not to redeem these instruments on the respective call date, or dates, for each series. The interest rate for these instruments is currently at fixed rate and the earliest call date before the coupon rate reset among these instruments is in September 2023.
We remain mindful of the various factors that impact on Ibor remediation strategy for our regulatory capital and TLAC instruments, including - but not limited to - timescales for cessation of relevant Ibor rates, constraints relating to the governing law of outstanding instruments, the potential relevance of legislative solutions and industry best practice guidance. We remain committed in seeking to remediate or mitigate relevant risks relating to Ibor-demise, as appropriate, on our outstanding regulatory capital and TLAC instruments before the relevant calculation dates, which may occur post-cessation of the relevant Ibor rate or rates.
For US dollar Libor and other demising Ibors, we are exposed to regulatory compliance, resilience, legal, model and market risks.
-- Regulatory compliance: if we neglect to act appropriately in the transition of legacy contracts, we may observe an increase in client complaints resulting from a breach of duty to our clients;
-- Resilience: we may be exposed to increased operational risks due to changes in manual and automated processes, and the transition of large volumes of contracts;
-- Legal: we may be exposed to an increased risk of litigation as a result of Ibor transition, which may give rise to contractual, sales or other claims;
-- Model: as a result of required changes to our models there is a risk that model output is adversely affected, leading to increased regulatory notifications or incorrect model outputs;
-- Market: as a result of differences in Libor and other demising regional rates against RFRs interest rates, we are exposed to basis risk resulting from the asymmetric adoption of rates across assets, liabilities and products.
Based on our experience in transitioning contracts referencing Ibors that demised from the end of 2021, and an assessment of the risks that relate to the transition of US dollar Libor and other demising regional rates, we do not believe that our risk position has materially changed during the first half of 2022. Increased market and industry use of alternative rates, including the Secured Overnight Funding Rate ('SOFR'), have further reduced potential risks related to transition away from US dollar Libor and other demising regional rates. We will continue to monitor market initiatives and have developed controls and plans to mitigate these risks. We will monitor these risks through the development of our product capabilities and the transition of legacy contracts, with a focus on fair client outcomes.
Throughout the remainder of 2022, and into 2023, we are committed to engaging with our clients and investors to complete an orderly transition from the remaining demising Ibors. Additionally, following the recent announcement relating to the cessation of Canadian dollar offered rate ('CDOR') after June 2024, we are assessing the impacts and will take appropriate action.
Financial instruments impacted by Ibor reform
Financial instruments yet to transition
to alternative benchmarks, by main benchmark
Japanese
USD Libor yen Libor Sibor GBP Libor Others(1)
At 30 Jun 2022 HK$m HK$m HK$m HK$m HK$m
--------------- -------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Non-derivative
financial
assets(2) 191,471 - 44,317 966 6,124
--------------- -------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Non-derivative
financial
liabilities 132,013 9,117 - - -
--------------- -------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Derivative
notional
contract
amount 9,006,776 677 - - 447,284
At 31 Dec 2021
--------------- -------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Non-derivative
financial
assets(2) 206,508 2,846 56,291 22,197 4,779
--------------- -------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Non-derivative
financial
liabilities 147,198 10,930 - - -
--------------- -------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Derivative
notional
contract
amount 8,547,665 798,921 - 88,218 715,439
--------------- -------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (EUR Libor, Swiss Franc Libor, Eonia, SGD Swap Offer Rate ('SOR') and Thai Baht Interest Rate Fixing ('THBFIX')).
2 Gross carrying amount excluding allowances for expected credit losses.
2
The amounts in the above table relate to the group's main operating entities where the group has material exposures impacted by Ibor reform, including in Hong Kong, Singapore, Australia, Japan and Thailand. The amounts provide an indication of the extent of the group's exposure to the Ibor benchmarks that are due to be replaced.
Amounts are in respect of financial instruments that:
-- contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark;
-- have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and
-- are recognised on the group's consolidated balance sheet.
--
Credit risk
Overview
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products, such as guarantees and credit derivatives.
There were no material changes to credit risk policy in the first half of 2022.
For the wholesale and retail exposures mentioned in the credit risk section, wholesale exposures mainly refers to exposures to Commercial Banking, Global Banking and Markets and Securities Services, whereas retail exposures primarily consists of exposures to individuals under Wealth and Personal Banking.
A summary of our current policies and practices for the management of credit risk is set out in 'Credit risk management' on pages 29 to 31 of the Annual Report and Accounts 2021.
Summary of credit risk
The following table provides an overview of the group's credit risk by stage and industry, and the associated ECL coverage. The financial assets recorded in each stage have the following characteristics:
-- Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime ECL is recognised.
-- Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised.
-- POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime ECL is recognised.
Summary of credit risk (excluding debt instruments measured at fair
value through other comprehensive income ('FVOCI')) by stage
distribution and ECL coverage by industry sector(4)
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(1)
------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------- ------------------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3 1 2 3
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
Loans
and advances
to customers 3,360,179 482,200 55,773 566 3,898,718 (2,364) (7,835) (23,548) (172) (33,919) 0.1 1.6 42.2 30.4 0.9
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
* personal 1,455,378 74,886 10,381 - 1,540,645 (1,128) (2,784) (1,682) - (5,594) 0.1 3.7 16.2 - 0.4
-------------------------------- ------------ ----------- ------------------ ------------------ -----------
* corporate(2) 1,649,787 387,579 45,390 564 2,083,320 (996) (4,921) (21,866) (170) (27,953) 0.1 1.3 48.2 30.1 1.3
-------------------------------- ------------ ----------- ------------------ ------------------ -----------
* financial institutions(3) 255,014 19,735 2 2 274,753 (240) (130) - (2) (372) 0.1 0.7 - 100.0 0.1
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
Loans
and advances
to banks 492,337 1,118 - - 493,455 (29) (3) - - (32) 0.0 0.3 - - 0.0
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
Other
financial
assets 2,682,232 25,566 222 1 2,708,021 (312) (292) (20) - (624) 0.0 1.1 9.0 - 0.0
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
Loan and
other
credit-related
commitments 1,849,350 40,052 2,668 - 1,892,070 (298) (267) (23) - (588) 0.0 0.7 0.9 - 0.0
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
* personal 1,289,883 6,777 174 - 1,296,834 - - - - - - - - - -
-------------------------------- ------------ ----------- ------------------ ------------------ -----------
* corporate(2) 398,550 29,854 2,494 - 430,898 (285) (259) (23) - (567) 0.1 0.9 0.9 - 0.1
-------------------------------- ------------ ----------- ------------------ ------------------ -----------
* financial institutions(3) 160,917 3,421 - - 164,338 (13) (8) - - (21) 0.0 0.2 - - 0.0
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
Financial
guarantee 29,585 3,767 62 - 33,414 (12) (15) (25) - (52) 0.0 0.4 40.3 - 0.2
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
* personal 3,814 - 1 - 3,815 - - (1) - (1) - - 100.0 - 0.0
-------------------------------- ------------ ----------- ------------------ ------------------ -----------
* corporate(2) 23,007 3,735 61 - 26,803 (12) (15) (24) - (51) 0.1 0.4 39.3 - 0.2
-------------------------------- ------------ ----------- ------------------ ------------------ -----------
* financial institutions(3) 2,764 32 - - 2,796 - - - - - - - - - -
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
At 30
Jun 2022 8,413,683 552,703 58,725 567 9,025,678 (3,015) (8,412) (23,616) (172) (35,215) 0.0 1.5 40.2 30.3 0.4
-------------------------------- -------------------------------- ---------------- -------------- ------------ -------------------------------- ------------- -------------- ------------------ ----------- ---------------- ------------ ----------- ------------------ ------------------ -----------
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector
(continued)
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(1)
--------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3 1 2 3
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %
-------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ----------
Loans
and advances
to customers 3,349,434 480,632 41,332 1,558 3,872,956 (2,603) (9,426) (19,654) (334) (32,017) 0.1 2.0 47.6 21.4 0.8
-------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ----------
* personal 1,461,358 60,795 10,158 - 1,532,311 (1,236) (2,965) (1,765) - (5,966) 0.1 4.9 17.4 - 0.4
-------------------------------- ---------- ---------- ----------------- ----------------- ----------
* corporate(2) 1,626,514 398,273 31,068 1,556 2,057,411 (1,131) (6,384) (17,859) (332) (25,706) 0.1 1.6 57.5 21.3 1.2
-------------------------------- ---------- ---------- ----------------- ----------------- ----------
* financial institutions(3) 261,562 21,564 106 2 283,234 (236) (77) (30) (2) (345) 0.1 0.4 28.3 100.0 0.1
-------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ----------
Loans
and advances
to banks 431,079 1,207 - - 432,286 (36) (3) - - (39) 0.0 0.2 - - 0.0
-------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ----------
Other
financial
assets 2,092,847 21,164 289 1 2,114,301 (482) (140) (17) - (639) 0.0 0.7 5.9 - 0.0
-------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ----------
Loan and
other
credit-related
commitments 1,782,353 43,711 271 - 1,826,335 (260) (295) (25) - (580) 0.0 0.7 9.2 - 0.0
-------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ----------
* personal 1,245,694 6,976 154 - 1,252,824 - - - - - - - - - -
-------------------------------- ---------- ---------- ----------------- ----------------- ----------
* corporate(2) 417,349 30,978 117 - 448,444 (247) (288) (25) - (560) 0.1 0.9 21.4 - 0.1
-------------------------------- ---------- ---------- ----------------- ----------------- ----------
* financial institutions(3) 119,310 5,757 - - 125,067 (13) (7) - - (20) 0.0 0.1 - - 0.0
-------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ----------
Financial
guarantee 30,214 4,048 40 - 34,302 (14) (14) (16) - (44) 0.0 0.3 40.0 - 0.1
-------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ---------- * personal 4,000 - 1 - 4,001 (1) - (1) - (2) 0.0 - 100.0 - 0.0 -------------------------------- ---------- ---------- ----------------- ----------------- ---------- * corporate(2) 22,995 4,011 39 - 27,045 (13) (14) (15) - (42) 0.1 0.3 38.5 - 0.2 -------------------------------- ---------- ---------- ----------------- ----------------- ---------- * financial institutions(3) 3,219 37 - - 3,256 - - - - - - - - - - -------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ---------- At 31 Dec 2021 7,685,927 550,762 41,932 1,559 8,280,180 (3,395) (9,878) (19,712) (334) (33,319) 0.0 1.8 47.0 21.4 0.4 -------------------------------- ---------------- ---------------- -------------- ---------- ----------------- ------------- --------------- --------------- ------------ ----------------- ---------- ---------- ----------------- ----------------- ----------
The above tables do not include balances due from Group companies.
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Includes corporate and commercial customers. 3 Includes non-bank financial institutions.
4 The financial information included in this table forms part of the Interim condensed consolidated financial statements, which have been reviewed by PricewaterhouseCoopers.
Mainland China commercial real estate
The following table presents the group's total exposure to mainland China commercial real estate ('CRE') at 30 June 2022, by country/territory and credit quality. Mainland China reported real estate exposures comprise exposures booked in mainland China and offshore where the ultimate parent and beneficial owner is based in mainland China.
Mainland China CRE exposure
At 30 Jun 2022 At 31 Dec 2021
-------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------
Hong Mainland Rest Mainland Rest of
Kong China of Asia-Pacific Total Hong Kong China Asia-Pacific Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
Loans and
advances
to
customers(1) 76,687 50,912 913 128,512 77,229 53,116 658 131,003
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
Guarantees
issued
and
others(2) 15,385 8,047 232 23,664 13,624 18,533 127 32,284
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
Total
mainland
China CRE
exposure 92,072 58,959 1,145 152,176 90,853 71,649 785 163,287
Distribution
of mainland
China
CRE exposure
by
credit
quality
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
- Strong 16,434 16,610 204 33,248 27,630 30,141 239 58,010
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
- Good 19,059 22,739 211 42,009 20,681 18,357 - 39,038
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
-
Satisfactory 24,356 17,831 730 42,917 26,384 22,263 546 49,193
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
-
Sub-standard 15,271 745 - 16,016 12,245 94 - 12,339
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
- Impaired 16,952 1,034 - 17,986 3,913 794 - 4,707
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
92,072 58,959 1,145 152,176 90,853 71,649 785 163,287
Allowance for
ECL (6,940) (809) (22) (7,771) (4,371) (379) (15) (4,765)
------------- --------------------- ------------------------ -------------------------- --------------------- ----------------------- -------------------------- -------------------------- -----------------------
1 Amounts represent gross carrying amount.
2 Amounts represent nominal amount.
Risks associated with real estate developers in mainland China's real estate market have intensified in the first half of 2022 and at 30 June 2022, this portfolio had 78% of exposure booked with credit quality of 'satisfactory' or above. In addition, offshore exposures are typically higher risk than onshore exposures.
At 30 June 2022, the group had allowances for ECL of HK$6,940m held against mainland China commercial real estate exposures booked in Hong Kong. We continue to monitor the prevailing situation closely.
Measurement uncertainty and sensitivity analysis of ECL estimates
(Reviewed by PricewaterhouseCoopers)
There continues to be a high degree of uncertainty in relation to economic scenarios. Heightened geopolitical risks, ongoing risks relating to new Covid-19 variants and public health policy responses, and the effects of supply chain disruption are contributing to an environment of increasing interest rates and inflation, and higher risks of global stagflation. The level and speed of recovery from the global pandemic remains volatile.
As a result of this uncertainty, management judgements and estimates continue to reflect a degree of caution in both the selection of economic scenarios and their weightings, and in the use of management judgemental adjustments, which reflect how economic conditions interact with modelled outcomes, and are described in more detail below.
The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions to credit risk models to estimate future credit losses, and probability-weight the results to determine an unbiased ECL estimate.
Methodology
Five economic scenarios have been used to capture the current economic environment and to articulate management's view of the range of potential outcomes. Scenarios produced to calculate ECL are aligned to the group's top and emerging risks.
Of the four standard scenarios, three are drawn from consensus forecasts and distributional estimates. The fourth scenario, Downside 2, represents management's view of severe downside risks. In the second quarter of 2022, management has chosen to use an additional fifth scenario, known as Downside 1, to ensure that current supply-side risks are sufficiently reflected in forward economic guidance. The scenario is designed to capture the implications of a sustained global supply shock that keeps inflation elevated for a long period, raises unemployment and depresses GDP growth.
The use of an additional scenario is in line with HSBC's forward economic guidance methodology. Management may include additional scenarios when consensus scenarios are determined to inadequately capture the economic risks faced by the group. Unlike the consensus scenarios, these additional scenarios are driven by narrative assumptions aligned to an identified risk and may incorporate shocks that drive economic activity permanently away from long-term trend.
Description of consensus economic scenarios
The economic assumptions presented in this section have been formed internally, with reference to external forecasts specifically for the purpose of calculating ECL.
Economic forecasts are subject to a high degree of uncertainty in the current environment. Risks to the outlook are dominated by the actions of central banks as they raise interest rates to bring inflation back to target and curtail a rise in inflation expectations. The implications of the war in Ukraine and the progression and management of the pandemic in Asia also remain key sources of uncertainty. Other geopolitical risks such as the evolution of the differences between the US and China over a range of strategic issues also present downside risks.
The five global scenarios used for the purpose of calculating ECL at 30 June 2022 are the consensus Central scenario, the consensus Upside scenario, the consensus Downside scenario, the Downside 1 scenario and the Downside 2 scenario.
The scenarios used to calculate ECL in the Interim Report 2022 are described below.
The consensus Central scenario
HSBC's Central scenario features a gradual slowdown in GDP growth through 2022 and 2023, following a strong recovery in 2021. Unemployment is expected to remain low through this period.
GDP forecasts have been lowered in recent quarters. In Asia, the downward revisions follow from the stringent public health policy response to the pandemic in some markets. Elsewhere, the sharp rise in inflation, related to supply shortages and rising commodity prices, has started to weigh on growth as costs rise and real income growth stalls.
The Central scenario assumes that inflation peaks in 2022 and, supported by tighter monetary policy, reverts back towards central bank targets by the end of 2023.
Global GDP is expected to grow by 3.3% in 2022 in the Central scenario. The average rate of global GDP growth is expected to be 2.8% over the forecast period, which is in line with the average growth rate over the five-year period prior to the onset of the pandemic.
Across the key markets, the Central scenario assumes the following:
-- Economic growth is expected to slow in the near term as supply chain disruptions and price inflation diminish purchasing power. Growth is expected to return to trend in later years as supply chain issues are assumed to ease and inflation returns towards target.
-- Unemployment is expected to remain close to pre-pandemic levels and the labour market remains tight across our key markets.
-- Inflation is expected to remain elevated in 2022 as commodity, food and goods prices remain high. Inflation is subsequently expected to converge back to central bank targets over the next two years of the forecast.
-- Policy interest rates in key markets are expected to rise over the first 18 months of the projection period as central banks tighten policy to bring inflation back towards target. Thereafter, they settle at a higher level than existed pre-pandemic.
-- The West Texas Intermediate oil price is expected to average above US$100 in the first two years of the forecast, before dropping back as supply constraints ease. Over the entire projection the oil price averages US$81 per barrel.
The Central scenario was created with forecasts available in May, and subsequently updated in June. Dispersion between the constituent forecasts of the consensus remains unusually high, suggesting an elevated level of uncertainty. Probability weights assigned to the Central scenario are 55% and reflect the level of uncertainty seen in economic forecast across markets.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario.
Central scenario (2022 Q3 - 2027
Q2)
Hong Mainland
Kong China
% %
----------------------- ----- --------
GDP growth rate
(annual average rate)
----------------------- ----- --------
2022 1.1 4.5
----------------------- ----- --------
2023 3.8 5.1
----------------------- ----- --------
2024 2.5 5.0
----------------------- ----- --------
5-year average 2.9 4.9
----------------------- ----- --------
Unemployment rate
(annual average rate)
----------------------- ----- --------
2022 4.4 3.8
----------------------- ----- --------
2023 3.6 3.7
----------------------- ----- --------
2024 3.5 3.7
----------------------- ----- --------
5-year average 3.5 3.7
----------------------- ----- --------
House price growth
(annual average rate)
----------------------- ----- --------
2022 (1.2) (0.5)
----------------------- ----- --------
2023 1.2 1.3
----------------------- ----- --------
2024 2.5 3.5
----------------------- ----- --------
5-year average 1.9 3.2
----------------------- ----- --------
Inflation rate (annual
average rate)
----------------------- ----- --------
2022 2.3 2.2
----------------------- ----- --------
2023 2.2 2.3
----------------------- ----- --------
2024 2.2 2.3
----------------------- ----- --------
5-year average 2.2 2.4
----------------------- ----- --------
Probability 55 55
----------------------- ----- --------
The consensus Upside scenario
Compared with the consensus Central scenario, the consensus Upside scenario features a faster rate of GDP growth during the first two years, before converging to long-run trend. The scenario is consistent with a number of key upside risk themes. These include faster resolution of supply chain issues; a rapid and peaceful conclusion to the Russia-Ukraine war; and the de-escalation of tensions between the US and China.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario.
Consensus Upside scenario best outcome
Hong Kong Mainland
China
% %
------------------- ----------- -----------
GDP growth rate 12.4 (1Q23) 10.2 (2Q23)
------------------- ----------- -----------
Unemployment rate 2.8 (3Q23) 3.5 (1Q23)
------------------- ----------- -----------
House price growth 7.7 (2Q23) 6.2 (2Q23)
------------------- ----------- -----------
Inflation rate 4.1 (3Q23) 5.8 (1Q23)
------------------- ----------- -----------
Probability 5 5
------------------- ----------- -----------
Note: Extreme point in the consensus Upside is 'best outcome' in the scenario, for example the highest GDP growth and the lowest unemployment rate, in the first two years of the scenario.Inflation is positively correlated with GDP in the Upside scenario, and the 'best outcome' also refers to the cyclical high point.
Downside scenarios
Downside scenarios explore the intensification and crystallisation of a number of key economic and financial risks.
Inflation and the monetary policy response to it have become concerns for global growth. Supply chain disruptions, caused by the pandemic and Russia's invasion into Ukraine, have led to sharp rises in commodity prices and headline price inflation across many markets. A key concern is that inflation expectations become unanchored from central bank targets, particularly as labour markets and labour supply shortages across some sectors are putting upward pressure on wages. The de-anchoring of inflation expectations would raise the risk that inflation remains elevated for longer, exacerbating cost pressures and the squeeze on household real incomes and corporate margins. In turn, it raises the risk of a more forceful policy response from central banks, a steeper trajectory for interest rates and ultimately, economic recession.
Covid-19-related risks also remain significant. Despite the easing of Covid-19-related restrictions across Europe and North America, the emergence of a new Covid-19 variant with greater vaccine-resistance that necessitates a stringent public health policy response remains a key risk to the global outlook. In Asia, adherence to a stringent public health policy response in Hong Kong and mainland China in response to the circulation of highly virulent Covid-19 strains, presents ongoing risks to growth and global supply chains.
The geopolitical risk backdrop also present a threat. These risks include:
-- a prolonged Russia-Ukraine war with escalation beyond Ukraine's borders; and
-- continued differences between the US and other countries with China, which could affect sentiment and restrict global economic activity.
The consensus Downside scenario
In the consensus Downside scenario, economic activity is considerably weaker compared with the Central scenario. In this scenario, GDP growth weakens, unemployment rates rise and asset prices fall. The scenario is structured as a demand shock where inflation and commodity prices fall, before gradually recovering towards their long-run trend.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Downside scenario.
Consensus Downside scenario worst
outcome
Hong Kong Mainland
China
% %
------------------- ------------ ------------
GDP growth rate (2.9) (4Q23) 1.3 (1Q23)
------------------- ------------ ------------
Unemployment rate 5.4 (4Q22) 4.2 (1Q23)
------------------- ------------ ------------
House price growth (8.3) (3Q23) (4.3) (2Q23)
------------------- ------------ ------------
Inflation rate (0.5) (3Q23) (0.7) (3Q23)
------------------- ------------ ------------
Probability 20 30
------------------- ------------ ------------
Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. Inflation is positively correlated with GDP in the Downside scenario, and the 'worst outcome' refers to the cyclical low point.
Downside 1 scenario
An additional Downside scenario has been created to explore the implications of a prolonged period of high price inflation, a more aggressive upward path for policy interest rates, higher unemployment and a global recession.
In this scenario the war in Ukraine leads to a sustained supply shock that keeps inflation elevated above the baseline for a longer period than in the other scenarios. The scenario assumes that major central banks are slow to respond, but as inflation expectations start to de-anchor from the inflation target, they resort to taking stronger action. The rise in interest rates is expected to cause a severe credit crunch that ultimately results in a global economic contraction later in the projection period.
The following table describes key macroeconomic variables and the probabilities assigned in the Downside 1 scenario.
Downside 1 scenario worst outcome
Hong Kong Mainland
China
% %
------------------- ------------ ------------
GDP growth rate (3.0) (4Q23) (1.2) (1Q25)
------------------- ------------ ------------
Unemployment rate 6.5 (4Q24) 4.8 (1Q25)
------------------- ------------ ------------
House price growth (7.6) (2Q25) (9.8) (3Q23)
------------------- ------------ ------------
Inflation rate 4.2 (1Q23) 4.2 (1Q23)
------------------- ------------ ------------
Probability 15 5
------------------- ------------ ------------
Note: Extreme point in the Downside 1 is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate.
Downside 2 scenario
The Downside 2 scenario features a deep global recession and reflects management's view of the tail of the economic risk distribution. It incorporates the crystallisation of a number of risks simultaneously, including further escalation of the Russia-Ukraine war, worsening of supply chain disruptions and the emergence of a vaccine resistant Covid-19 variant that necessitates a stringent public health policy response.
This scenario features an initial supply side shock that pushes up inflation. This impulse is expected to prove short lived as a large downside demand shock causes commodity prices to correct sharply and global price inflation to slow as a severe and prolonged recession takes hold.
The following table describes key macroeconomic variables and the probabilities assigned in the Downside 2 scenario.
Downside 2 scenario worst outcome
Hong Kong Mainland
China
% %
------------------- ------------ ------------
GDP growth rate (9.3) (2Q23) (5.0) (2Q23)
------------------- ------------ ------------
Unemployment rate 5.9 (2Q23) 5.4 (2Q24)
------------------- ------------ ------------
(10.8) (18.7)
House price growth (3Q23) (2Q23)
------------------- ------------ ------------
Inflation rate (0.5) (1Q24) 1.4 (2Q24)
------------------- ------------ ------------
Probability 5 5
------------------- ------------ ------------
Note: Extreme point in the additional Downside is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. After a temporary increase, inflation remains positively correlated with GDP in the Downside 2 scenario, and the 'worst outcome' refers to the scenario low point.
Scenario weightings
In reviewing the economic conjuncture, the level of uncertainty and risk, management has considered both global and market- specific factors. This has led management to assigning scenario probabilities that are tailored to its view of uncertainty in individual markets.
A key consideration in the first half of 2022 has been the high level of uncertainty attached to the Central scenario projections. These concerns focused on:
-- the risks of higher inflation given the risks attached to gas supply security in Europe and global oil supply, which raises the possibility of a more significant impact on real incomes and GDP growth;
-- market interest rate expectations that imply a rapid and significant change to the interest rate environment;
-- the progression of the Covid-19 pandemic in Asian countries/territories and the impact of stringent public policy responses on growth in the region and global supply chains.
In mainland China and Hong Kong, increased weights have been assigned to Downside scenarios in light of the stringent public health response to the Covid-19 pandemic, the virulence of current strains, and the observed impact on economic activity of the recent restrictions. The consensus Upside and Central scenarios in both markets had a combined weighting of 60%.
Critical accounting estimates and judgements
The calculation of ECL under HKFRS 9 involves significant judgements, assumptions and estimates, as set out in the Annual Report and Accounts 2021 under 'Critical accounting estimates and judgements'. The level of estimation uncertainty and judgement has remained high since 31 December 2021 including significant judgements relating to:
-- the selection and weighting of economic scenarios, given rapidly changing economic conditions and a wide distribution of economic forecasts. There is judgement in making assumptions about the effects of inflation, supply chain disruption and length of time and severity of the continuing economic effects of the pandemic and health policy responses;
-- estimating the economic effects of those scenarios on ECL, in particular as the historical relationship between macroeconomic variables and defaults might not reflect the dynamics of high inflation scenarios.
How economic scenarios are reflected in ECL calculations
The methodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail loans and portfolios are set out on page 37 of the Annual Report and Accounts 2021. Models are used to reflect economic scenarios on ECL estimates. These models are based largely on historical observations and correlations with default.
Economic forecasts and ECL model response to these forecasts are subject to a high degree of uncertainty in the current environment, and models continue to be supplemented by management judgemental adjustments where required.
Management judgemental adjustments
In the context of HKFRS 9, management judgemental adjustments are typically short-term increases or decreases to the ECL at either a customer, segment or portfolio level to account for late-breaking events, model deficiencies and other assessments applied during management review and challenge.
This includes refining model inputs and outputs and using post-model adjustments based on management judgement and higher level quantitative analysis for impacts that are difficult to model.
The wholesale and retail management judgemental adjustments are presented as part of the global business impairment committees with representation from Model Risk Management. This is in line with the governance process for HKFRS 9 as set out on page 29 of the Annual Report and Accounts 2021.
The drivers of the management judgemental adjustments continue to evolve with the economic environment.
We have internal governance in place to monitor management judgemental adjustments regularly and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate.
Wider-ranging model changes will take time to develop and need observable loss data on which models can be developed. Models will be revisited over time once the longer-term impacts of the Covid-19 outbreak are observed. Therefore, we continue to anticipate significant management judgemental adjustments for the foreseeable future.
Management judgemental adjustments made in estimating the reported ECL at 30 June 2022 are set out in the following table.
Management judgemental adjustments
to ECL at 30 June 2022(1)
Retail Wholesale Total
HK$bn HK$bn HK$bn
-------------------------- --------------- --------------------- -------------
Banks, sovereigns
and government entities (0.1) 0.1 -
-------------------------- --------------- --------------------- -------------
Corporate lending
adjustments - 2.0 2.0
-------------------------- --------------- --------------------- -------------
Inflation-related
adjustments 0.1 - 0.1
-------------------------- --------------- --------------------- -------------
Macroeconomic-related
adjustments 0.5 - 0.5
-------------------------- --------------- --------------------- -------------
Pandemic-related economic
recovery adjustments 0.4 - 0.4
-------------------------- --------------- --------------------- -------------
Other retail lending
adjustments 0.5 - 0.5
-------------------------- --------------- --------------------- -------------
Total 1.4 2.1 3.5
-------------------------- --------------- --------------------- -------------
Management judgemental adjustments
to ECL at 31 December 2021(1)
Retail Wholesale Total
HK$bn HK$bn HK$bn
-------------------------- --------------- --------------------- -------------
Banks, sovereigns
and government entities 0.1 (0.2) (0.1)
-------------------------- --------------- --------------------- -------------
Corporate lending
adjustments - 4.1 4.1
-------------------------- --------------- --------------------- -------------
Inflation-related - - -
adjustments
-------------------------- --------------- --------------------- -------------
Macroeconomic-related
adjustments (0.4) - (0.4)
-------------------------- --------------- --------------------- -------------
Pandemic-related economic
recovery adjustments 0.6 - 0.6
-------------------------- --------------- --------------------- -------------
Other retail lending
adjustments 0.7 - 0.7
-------------------------- --------------- --------------------- -------------
Total 1.0 3.9 4.9
-------------------------- --------------- --------------------- -------------
1 Management judgemental adjustments presented in the table reflect increases or (decreases) to ECL, respectively.
In the wholesale portfolio, management judgemental adjustments were:
-- Adjustments relating to banks, sovereigns and government entities considering the possible pathways of the treatment of Sri Lankan local currency sovereign debt under a possible International Monetary Fund restructuring programme.
-- Adjustments to corporate exposures principally reflected the outcome of management judgements for high-risk and vulnerable sectors in some of our key markets, supported by credit experts' input, quantitative analyses and benchmarks. Considerations included potential default suppression in some sectors due to continued government intervention and in light of the continuing challenging forward-looking economic indicators, especially the impacts of rising inflation and rates linked to the US. The adjustment is lower than 31 December 2021 and reflects the greater alignment of the modelled ECL, notably in Hong Kong and mainland China, with management's expectation reflecting the latest macroeconomic variables forecast, the latest CRR downgrades, and deterioration of scenario weighting in mainland China.
In the retail portfolio, management judgemental adjustments mainly relate to macroeconomic conditions and customer support programmes.
In the retail portfolio, management judgemental adjustments were an ECL increase of HK$1.4bn at 30 June 2022 (31 December 2021: HK$1.0bn increase).
-- Inflation-related adjustments increased ECL by HK$0.1bn (31 December 2021: HK$0.0bn). These adjustments address where country-specific inflation risks were not fully captured by the modelled output.
-- Macroeconomic-related adjustments increased ECL by HK$0.5bn (31 December 2021: HK$0.4bn decrease). These adjustments were primarily in relation to model oversensitivity as well as country-specific risks related to future macroeconomic conditions.
--
Pandemic-related economic recovery adjustments increased ECL by HK$0.4bn (31 December 2021: HK$0.6bn increase) to adjust for the effects of the volatile pace of recovery from the pandemic where in management's judgement this leads to modelled outcomes that are overly sensitive given the limited observed deterioration in the underlying portfolio during the period. This adjustment was made only for markets where there are remaining concerns regarding Covid-19.
-- Other retail lending adjustments increased ECL by HK$0.5bn (31 December 2021: HK$0.7bn increase) reflecting those who remain in or have recently exited customer support programmes and all other data and model adjustments.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against the economic forecasts as part of the ECL governance process by recalculating the ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of a significant increase in credit risk and the measurement of the resulting ECL.
The ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating ECL for loans in stages 1 and 2 at the balance sheet date. The population of stage 3 loans (in default) at the balance sheet date is unchanged in these sensitivity calculations. Stage 3 ECL would only be sensitive to changes in forecasts of future economic conditions if the loss-given default of a particular portfolio was sensitive to these changes.
There is a particularly high degree of estimation uncertainty in numbers representing tail risk scenarios when assigned a 100% weighting.
For wholesale credit risk exposures, the sensitivity analysis excludes ECL and financial instruments related to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios. Therefore, it is impracticable to separate the effect of macroeconomic factors in individual assessments.
For retail credit risk exposures, the sensitivity analysis includes ECL for loans and advances to customers related to defaulted obligors. This is because the retail ECL for secured mortgage portfolios, including loans in all stages is sensitive to macroeconomic variables.
Wholesale and retail sensitivity
The wholesale and retail sensitivity analyses are stated inclusive of management judgemental adjustments, as appropriate to each scenario. The results tables exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared with personal and wholesale lending presented in other credit risk tables. Additionally, in both the wholesale and retail analysis, the Downside 1 scenario was only
introduced during the first half of 2022 and therefore was not present at 31 December 2021.
Wholesale analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Hong Mainland
Kong China
ECL of loans and
advances to customers
at 30 June 2022(2) HK$m HK$m
-------------------------- ----------------------- -------------------------
Reported ECL 4,192 1,694
-------------------------- ----------------------- -------------------------
Central scenario ECL 3,257 1,127
-------------------------- ----------------------- -------------------------
Upside scenario ECL 2,244 486
-------------------------- ----------------------- -------------------------
Downside scenario
ECL 5,514 2,339
-------------------------- ----------------------- -------------------------
Downside 1 ECL 5,019 2,978
-------------------------- ----------------------- -------------------------
Downside 2 scenario
ECL 10,301 5,717
-------------------------- ----------------------- -------------------------
ECL of loans and advances
to customers
at 31 December 2021(2)
-------------------------- ----------------------- -------------------------
Reported ECL 5,981 1,162
-------------------------- ----------------------- -------------------------
Central scenario ECL 5,085 881
-------------------------- ----------------------- -------------------------
Upside scenario ECL 3,712 281
-------------------------- ----------------------- -------------------------
Downside scenario
ECL 7,674 1,684
-------------------------- ----------------------- -------------------------
Downside 2 scenario
ECL 14,575 6,286
-------------------------- ----------------------- -------------------------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes off-balance sheet financial instruments that are subject to significant measurement uncertainty.
At 30 June 2022, the Downside 2 scenario reflects the most significant level of ECL sensitivity in Hong Kong and mainland China due to the combination of potential for deterioration of the credit quality on those markets and level of exposure.
The most significant level of ECL sensitivity related to the judgements over the mainland China offshore real estate portfolio booked in Hong Kong.
Retail analysis
HKFRS 9 ECL sensitivity to future
economic conditions(1)
Hong
Kong
ECL of loans and advances
to customers at 30 June 2022(2) HK$m
Reported ECL 2,637
Central scenario ECL 2,350
--------------------------------- -----------------
Upside scenario ECL 2,086
--------------------------------- -----------------
Downside scenario ECL 2,939
Downside 1 scenario ECL 3,306
--------------------------------- -----------------
Downside 2 scenario ECL 3,743
--------------------------------- -----------------
ECL of loans and advances
to customers at 31 December
2021(2)
--------------------------------- -----------------
Reported ECL 2,554
--------------------------------- -----------------
Central scenario ECL 2,395
--------------------------------- -----------------
Upside scenario ECL 1,884
--------------------------------- -----------------
Downside scenario ECL 2,802
--------------------------------- -----------------
Downside 2 scenario ECL 4,198
--------------------------------- -----------------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes only on-balance sheet financial instruments to which HKFRS 9 impairment requirements are applied.
At 30 June 2022, the most significant level of ECL sensitivity was observed in Hong Kong driven by the relative size of the portfolio.
Treasury risk
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
2022 2021
% %
------------------------------------ ----------------------- ------------------------
Capital ratios
------------------------------------ ----------------------- ------------------------
Common equity tier 1 ('CET1') ratio 14.4 15.4
------------------------------------ ----------------------- ------------------------
Tier 1 capital ratio 16.0 16.8
------------------------------------ ----------------------- ------------------------
Total capital ratio 17.9 18.7
------------------------------------ ----------------------- ------------------------
HK$m HK$m
------------------------------------ ----------------------- ------------------------
RWAs 3,252,522 3,156,553
------------------------------------ ----------------------- ------------------------
The following table sets out the composition of the group's capital base under Basel III at 30 June 2022.
Capital base
At
-------------------------------------------------------
30 Jun 31 Dec
2022 2021
HK$m HK$m
----------------------------------------------------------- -------------------------- ---------------------------
Common equity tier 1 ('CET1') capital
----------------------------------------------------------- -------------------------- ---------------------------
Shareholders' equity 711,336 714,139
----------------------------------------------------------- -------------------------- ---------------------------
- shareholders' equity per balance sheet 858,449 856,809
-----------------------------------------------------------
- revaluation reserve capitalisation issue (1,454) (1,454)
-----------------------------------------------------------
- other equity instruments (52,386) (44,615)
-----------------------------------------------------------
- unconsolidated subsidiaries (93,273) (96,601)
----------------------------------------------------------- --------------------------
Non-controlling interests 30,586 28,730
----------------------------------------------------------- -------------------------- ---------------------------
- non-controlling interests per balance sheet 65,453 66,702
-----------------------------------------------------------
- non-controlling interests in unconsolidated subsidiaries (11,342) (11,800)
-----------------------------------------------------------
- surplus non-controlling interests disallowed in CET1 (23,525) (26,172)
----------------------------------------------------------- --------------------------
Regulatory deductions to CET1 capital (274,563) (258,215)
----------------------------------------------------------- -------------------------- ---------------------------
- valuation adjustments (2,521) (1,834)
-----------------------------------------------------------
- goodwill and intangible assets (30,217) (28,883)
-----------------------------------------------------------
- deferred tax assets net of deferred tax liabilities (4,781) (3,353)
-----------------------------------------------------------
- cash flow hedging reserve 341 (60)
-----------------------------------------------------------
- changes in own credit risk on fair valued liabilities (4,676) 1,322
-----------------------------------------------------------
- defined benefit pension fund assets (12) (18)
-----------------------------------------------------------
- significant loss-absorbing capacity ('LAC') investments
in unconsolidated financial sector entities (145,999) (139,239)
-----------------------------------------------------------
- property revaluation reserves(1) (67,400) (67,563)
-----------------------------------------------------------
- regulatory reserve (19,298) (18,587)
----------------------------------------------------------- --------------------------
Total CET1 capital 467,359 484,654
----------------------------------------------------------- -------------------------- ---------------------------
Additional tier 1 ('AT1') capital
----------------------------------------------------------- -------------------------- ---------------------------
Total AT1 capital before regulatory deductions 54,043 46,073
----------------------------------------------------------- -------------------------- ---------------------------
- perpetual subordinated loans 52,386 44,615
-----------------------------------------------------------
- allowable non-controlling interests in AT1 capital 1,657 1,458
----------------------------------------------------------- --------------------------
Regulatory deductions to AT1 capital (11) (26)
----------------------------------------------------------- -------------------------- ---------------------------
- significant LAC investments in unconsolidated financial
sector entities (11) (26)
----------------------------------------------------------- --------------------------
Total AT1 capital 54,032 46,047
----------------------------------------------------------- -------------------------- ---------------------------
Total tier 1 capital 521,391 530,701
----------------------------------------------------------- -------------------------- ---------------------------
Tier 2 capital
----------------------------------------------------------- -------------------------- ---------------------------
Total tier 2 capital before regulatory deductions 68,653 67,802
----------------------------------------------------------- -------------------------- ---------------------------
- perpetual subordinated debt(2) - 3,119
-----------------------------------------------------------
- term subordinated debt 18,851 14,972
-----------------------------------------------------------
- property revaluation reserves(1) 30,984 31,057
-----------------------------------------------------------
- impairment allowances and regulatory reserve eligible
for inclusion in tier 2 capital 17,135 17,471
-----------------------------------------------------------
- allowable non-controlling interests in tier 2 capital 1,683 1,183
----------------------------------------------------------- --------------------------
Regulatory deductions to tier 2 capital (6,353) (8,025)
----------------------------------------------------------- -------------------------- ---------------------------
- significant LAC investments in unconsolidated financial
sector entities (6,353) (8,025)
----------------------------------------------------------- --------------------------
Total tier 2 capital 62,300 59,777
----------------------------------------------------------- -------------------------- ---------------------------
Total capital 583,691 590,478
----------------------------------------------------------- -------------------------- ---------------------------
1 Includes the revaluation surplus on investment properties which is reported as part of retained earnings and adjustments made in accordance with the Banking (Capital) Rules issued by the HKMA.
2 This tier 2 capital instrument is grandfathered under Basel III and has been phased out in full after 31 December 2021.
Liquidity and funding risk
Overview
Liquidity risk is the risk that we do not have sufficient financial resources to meet our obligations as they fall due. Liquidity risk arises from mismatches in the timing of cash flows.
Funding risk is the risk that we cannot raise funding or can only do so at excessive cost.
The group has comprehensive policies, metrics and controls, which aim to allow us to withstand severe but plausible liquidity stresses. The group manages liquidity and funding risk at an operating entity level to make sure that obligations can be met in the jurisdiction where they fall due, generally without reliance on other parts of the group.
Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through the Internal Liquidity Adequacy Assessment Process ('ILAAP'), which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively in each major entity. Liquidity and funding risk metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the Group's policies and controls.
Framework
The Global Treasury function is responsible for the application of policies and controls at a local operating entity level. The elements of liquidity and funding risk management framework are underpinned by a robust governance framework, with the two major elements being:
-- Asset and Liability Management Committees ('ALCOs') at the group and entity level; and
-- annual ILAAP used to validate risk tolerance and set risk appetite.
All operating entities are required to prepare an ILAAP document at appropriate frequency. Compliance with liquidity and funding requirements is monitored and reported to ALCO, RMM and the Executive Committee on a regular basis.
Liquidity and Funding Risk management processes include:
-- maintaining compliance with relevant regulatory requirements of the operating entity;
-- projecting cash flows under various stress scenarios and considering the level of liquid assets necessary in relation thereto;
-- monitoring liquidity and funding ratios against internal and regulatory requirements; -- maintaining a diverse range of funding sources with adequate back-up facilities; -- managing the concentration and profile of term funding; -- managing contingent liquidity commitment exposures within pre-determined limits; -- maintaining debt financing plans;
-- monitoring of depositor concentration in order to avoid undue reliance on large individual depositors and ensuring a satisfactory overall funding mix; and
-- maintaining liquidity and funding contingency plans. These plans identify early indicators of stress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crises, while minimising adverse long-term implications for the business.
Management of liquidity and funding risk
Funding and liquidity plans form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'). Operating entities have internal liquidity metrics ('ILM') to supplement the regulatory liquidity metrics. An appropriate funding and liquidity profile is managed through a wider set of measures:
-- a minimum LCR requirement; -- a minimum NSFR requirement or other appropriate metric; -- an ILM requirement; -- a legal entity depositor concentration limit; -- cumulative term funding maturity concentrations limit; -- a minimum LCR requirement by currency; -- intra-day liquidity; -- the application of liquidity funds transfer pricing; and -- forward-looking funding assessments.
Sources of funding
Our primary sources of funding are customer current accounts and customer savings deposits payable on demand or at short notice. We issue wholesale securities (secured and unsecured) to supplement our customer deposits and change the currency mix, maturity profile or location of our liabilities.
Currency mismatch in the LCR
Group policy requires all operating entities to monitor material single currency LCR. Limits are set to ensure that outflows can be met, given assumptions on stressed capacity in the FX swap markets.
Additional collateral obligations
Under the terms of our current collateral obligations of derivative contracts (which are ISDA compliant CSA contracts), the additional collateral required to post in the event of one-notch and two-notch downgrade in credit ratings is immaterial.
Liquidity and funding risk in the first half of 2022
The group is required to calculate its LCR and NSFR on a consolidated basis in accordance with rule 11(1) of The Banking (Liquidity) Rules ('BLR'), and is required to maintain both LCR and NSFR of not less than 100%.
The average LCR of the group for the period is as follows:
Quarter ended
---------------------------------------
30 Jun 31 Dec
2022 2021
% %
------------ ------------------ -------------------
Average LCR 154.5 154.3
------------ ------------------ -------------------
The average LCR increased marginally by 0.2 percentage points from 154.3% for the quarter ended 31 December 2021 to 154.5% for the quarter ended 30 June 2022.
The majority of high quality liquid assets ('HQLA') included in the LCR are Level 1 assets as defined in the BLR, which consist mainly of government debt securities.
The total weighted amount of HQLA of the group for the period are as follows:
Weighted amount
(average value)
at quarter
ended
------------------------------------
30 Jun 31 Dec
2022 2021
HK$m HK$m
---------------- ---------------- ------------------
Level 1 assets 1,802,138 1,767,933
---------------- ---------------- ------------------
Level 2A assets 84,082 79,368
---------------- ---------------- ------------------
Level 2B assets 66,812 64,106
---------------- ---------------- ------------------
Total 1,953,032 1,911,407
---------------- ---------------- ------------------
The NSFR of the group for the period is as follows:
At
---------------------------------------
30 Jun 31 Dec
2022 2021
% %
------------------------- ------------------ -------------------
Net stable funding ratio 149.5 151.9
------------------------- ------------------ -------------------
The NSFR decreased by 2.4 percentage points from 151.9% for the quarter ended 31 December 2021 to 149.5% for the quarter ended 30 June 2022.
Interdependent assets and liabilities included in the group's NSFR are certificates of indebtedness held and legal tender notes issued.
Further details of the group's liquidity information disclosures can be viewed in the Banking Disclosure Statement at 30 June 2022.
Market Risk
Overview
Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios.
A summary of our current policies and practices for the management of market risk is set out in 'Market risk management' on pages 57 to 59 of the Annual Report and Accounts 2021.
Market risk in the first half of 2022
Rising global recession risks and concerns over high inflation were the dominant macro market themes during the first half of 2022. Heightened geopolitical risks from the Russia-Ukraine war and continued Covid-19 pandemic restrictions in Asia led to supply chain disruptions resulting in higher energy, commodity and food prices. The majority of Asian central banks are stepping up in tightening monetary policies at a much faster pace than anticipated in order to counter rising inflation. Bond markets sold off sharply with a rapid rise of yield curves to multi-year highs. Market sentiment in credit markets was much weaker from credit spreads widening for both investment-grade and high-yield debts towards the widest level since the start of the Covid-19 pandemic. In particular, the mainland China commercial real estate sector remained weak amid increasing number of credit rating downgrades and defaults, fuelled further from China's growth concern. Recession risks and tightening liquidity conditions led to moderate sell offs in global equity markets. FX markets performance was dominated by the US dollar strengthening due to global geopolitical instability and the US Federal Reserve monetary tightening pace.
VaR remained within overall risk appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits including stress test and scenario analysis.
Trading portfolios
Value at risk of the trading portfolios
Trading value at risk ('VaR') was predominantly generated by Markets & Securities Services. Interest rate risks from market-making activities were the main drivers of trading VaR. Total trading VaR was lower as at 30 June 2022 compared with 31 December 2021 mainly due to the increase in portfolio diversification across different asset class VaRs.
The trading VaR for the period is shown in the table below.
Trading value at risk, 99% 1 day(1)
Foreign
exchange Interest Credit Portfolio
and commodity rate Equity spread diversification(2) Total(3)
HK$m HK$m HK$m HK$m HK$m HK$m
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Half-year to 30 Jun 2022
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Period end 41 158 52 35 (110) 176
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Average 44 171 56 28 203
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Maximum 78 217 80 43 259
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Half-year to 30 Jun 2021
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Period end 50 179 77 29 (154) 181
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Average 52 148 72 31 159
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Maximum 77 212 107 62 213
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Half-year to 31 Dec 2021
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Period end 36 135 60 31 (74) 188
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Average 47 166 82 37 190
------------------------- -------------- -------- ------ ------- ------------------------------ --------
Maximum 72 218 105 50 241
------------------------- -------------- -------- ------ ------- ------------------------------ --------
1 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
3 The total VaR is non-additive across risk types due to diversification effects. Insurance manufacturing operations risk management
Overview
The key risks for our insurance manufacturing operations are market risks, in particular interest rate, growth asset, and credit risks, as well as insurance underwriting and operational risks. Liquidity risk, while significant for other parts of the group, is relatively minor for our insurance operations.
A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture is provided on pages 62 to 63 of the Annual Report and Accounts 2021.
There have been no material changes to the policies and practices for the management of risks arising in our insurance operations described in the Annual Report and Accounts 2021.
Insurance manufacturing operations risk profile in the first half of 2022
The risk profile of our insurance manufacturing operations is assessed in the group's ICAAP based on their financial capacity to support the risks which they are exposed to. Capital adequacy is assessed on both the Group's
economic capital basis, and the relevant local insurance regulatory basis. The economic capital basis for the Hong Kong based manufacturing entities is largely aligned to the emerging Hong Kong risk-based capital regulations. Risk appetite buffers are set to ensure that the operations are able to remain solvent on both bases allowing for business-as-usual volatility and extreme but plausible stress events. In addition, the insurance manufacturing operations manage their market, liquidity, credit, underwriting and non-financial risk exposures to Board-approved risk appetite limits.
Equity values, which are a key risk driver for the financial strength of the insurance operations, in general fell during the first half of the year. This was partly offset by the impact of rising interest rates. Overall, at 30 June 2022 the majority of the capital and financial risk positions of our insurance operations were within risk appetite. However, the impact of changes in market factors, relative to the economic assumptions in place at the start of the year, had a negative impact on reported profit before tax of HK$6.2bn (first half of 2021: HK$1.4bn positive). We continue to monitor these risks closely in the current volatile economic climate.
The table below shows the composition of assets and liabilities by contract type and 89% (2021: 92%) of both assets and liabilities are derived from Hong Kong.
Balance sheet of insurance manufacturing subsidiaries by type of contract(4)
Shareholders'
assets
Non-linked Unit-linked and liabilities Total
HK$m HK$m HK$m HK$m
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
At 30 Jun 2022
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Financial
assets 693,332 37,356 40,604 771,292
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
- financial
assets
designated
and otherwise
mandatorily
measured at
fair value 175,948 35,704 382 212,034
--------------
- derivatives 855 1 6 862
--------------
- financial
investments
measured at
amortised
cost 467,030 441 34,379 501,850
--------------
- financial
investments
measured at
fair
value through
other
comprehensive
income 5,632 - 746 6,378
--------------
- other
financial
assets(1) 43,867 1,210 5,091 50,168
-------------- ------------------------------ ------------------------------ ------------------------------
Reinsurance
assets 31,132 9 - 31,141
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
PVIF(2) - - 71,075 71,075
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Other assets
and
investment
properties 14,155 26 6,561 20,742
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Total assets 738,619 37,391 118,240 894,250
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Liabilities
under
investment
contracts
designated at
fair value 26,730 8,079 - 34,809
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Liabilities
under
insurance
contracts 665,575 23,593 689,168
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Deferred
tax(3) 529 - 11,902 12,431
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Other
liabilities - - 39,782 39,782
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Total
liabilities 692,834 31,672 51,684 776,190
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Total equity - - 118,060 118,060
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Total equity
and
liabilities 692,834 31,672 169,744 894,250
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
At 31 Dec 2021
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
Financial
assets 637,317 37,382 46,971 721,670
-------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
- financial
assets
designated
and otherwise
mandatorily
measured at
fair value 160,555 35,906 457 196,918
--------------
- derivatives 631 6 3 640
--------------
- financial
investments
measured at
amortised
cost 432,733 479 37,734 470,946
--------------
- financial
investments
measured at
fair
value through
other
comprehensive
income 5,780 - 592 6,372
--------------
- other
financial
assets(1) 37,618 991 8,185 46,794 -------------- ------------------------------ ------------------------------ ------------------------------ Reinsurance assets 28,874 6 - 28,880 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- PVIF(2) - - 63,765 63,765 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Other assets and investment properties 13,626 4 5,304 18,934 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Total assets 679,817 37,392 116,040 833,249 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Liabilities under investment contracts designated at fair value 28,397 7,030 - 35,427 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Liabilities under insurance contracts 608,590 29,645 - 638,235 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Deferred tax(3) 9 - 10,579 10,588 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Other liabilities - - 35,269 35,269 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Total liabilities 636,996 36,675 45,848 719,519 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Total equity - - 113,730 113,730 -------------- ------------------------------ ------------------------------ ------------------------------ --------------------------- Total equity and liabilities 636,996 36,675 159,578 833,249 -------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------
1 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
2 Present value of in-force long-term insurance business. 3 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
4 Balance sheet of insurance manufacturing operations is shown before elimination of inter-company transactions with HSBC non-insurance operations.
Market risk
Description and exposure
Market risk is the risk of changes in market factors affecting
capital or profit. Market factors include interest rates, equity and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued.
Our most significant life insurance products are contracts with
discretionary participating features ('DPF'). These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds, with a proportion allocated to other asset classes to provide customers with the potential for enhanced
returns.
DPF products expose the group to the risk of variation in asset returns, which will impact our participation in the investment performance. In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by the group. Reserves are held against the cost of such guarantees, calculated by stochastic modelling.
The cost of such guarantees is accounted for as a deduction from the present value of in-force ('PVIF') asset, unless the cost of guarantees is already explicitly allowed for within the insurance contract liabilities.
For unit-linked contracts, market risk is substantially borne by the policyholders, but some market risk exposure typically remains as fees earned are related to the market value of the linked assets.
Sensitivities
Where appropriate, the effects of the sensitivity tests on profit after tax and total equity incorporate the impact of the stress on the PVIF. The relationship between the profit and total equity, and the risk factors is non-linear; therefore the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not symmetrical on the upside and downside. The sensitivities reflect the established risk-sharing mechanism with policyholders for participating products, and are stated before allowance for management actions which may mitigate the effect of changes in the market environment. The sensitivities presented allow for adverse changes in policyholders' behaviour that may arise in response to changes in market rates. The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the period and the total equity of our insurance manufacturing subsidiaries.
Sensitivity of the group's insurance manufacturing subsidiaries to
market risk factors
30 Jun 2022 31 Dec 2021
------------------------------------------------------------ ------------------------------------------------------------------
Effect Effect Effect Effect
on profit on total on profit on total
after tax equity after tax equity
HK$m HK$m HK$m HK$m
------------- ------------------------------ ---------------------------- -------------------------------- --------------------------------
+100 basis
points
parallel
shift in
yield curves (1,660) (2,431) (1,257) (2,036)
------------- ------------------------------ ---------------------------- -------------------------------- --------------------------------
-100 basis
points
parallel
shift in
yield curves 919 1,690 1,201 1,980
------------- ------------------------------ ---------------------------- -------------------------------- --------------------------------
10% increase
in equity
prices 2,424 2,424 2,388 2,388
------------- ------------------------------ ---------------------------- -------------------------------- --------------------------------
10% decrease
in equity
prices (2,527) (2,527) (2,426) (2,426)
------------- ------------------------------ ---------------------------- -------------------------------- --------------------------------
10% increase
in USD
exchange
rate
compared
to all
currencies 1,018 1,018 635 635
------------- ------------------------------ ---------------------------- -------------------------------- --------------------------------
10% decrease
in USD
exchange
rate
compared
to all
currencies (1,018) (1,018) (635) (635)
------------- ------------------------------ ---------------------------- -------------------------------- --------------------------------
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 of the group have been prepared in accordance with Hong Kong Accounting Standard ('HKAS') 34 'Interim Financial Reporting' as issued by the Hong Kong Institute of Certified Public Accountants; 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 of the UK's Financial Conduct Authority, being an indication of important events that have occurred during the first six months of the financial year ending 31 December 2022 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(#) , GBS, JP (Chairman)
David Gordon ELDON(#) , GBS, CBE, JP (Deputy Chairman)
David Yi Chien LIAO (Co-Chief Executive Officer)
Surendranath Ravi ROSHA (Co-Chief Executive Officer)
Sonia Chi Man CHENG*
Yiu Kwan CHOI*
Andrea Lisa DELLA MATTEA*
Rajnish KUMAR*
Beau Khoon Chen KUOK*
Irene Yun-lien LEE*
Victor Tzar Kuoi LI(#)
Ewen James STEVENSON(#)
Kevin Anthony WESTLEY*, BBS
* independent non-executive Director
(#) non-executive Director
On behalf of the Board
Peter Wong
Chairman
1 August 2022
Independent review report by PricewaterhouseCoopers Report On Review of the Interim condensed consolidated financial statements To the Board of Directors of The Hongkong and Shanghai Banking Corporation Limited
(incorporated in Hong Kong with limited liability)
Introduction
We have reviewed the Interim condensed consolidated financial statements set out on pages 26 to 43, 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 2022 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 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 these 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 Certain required disclosures as described in note 1(g) on the Interim condensed consolidated financial statements have been presented elsewhere in the Interim Report 2022, rather than in the notes on the Interim condensed consolidated financial statements. These are cross-referenced from the Interim condensed consolidated financial statements and are identified as reviewed.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the United Kingdom's Financial Reporting Council. 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
1 August 2022
Interim condensed consolidated financial statements
Consolidated income statement
Half-year to
------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
-------------------------------------------------------------- ------------------------- ---------------------------
Net interest income 53,253 48,741
-------------------------------------------------------------- ------------------------- ---------------------------
* interest income 67,458 60,260
--------------------------------------------------------------
* interest expense (14,205) (11,519)
-------------------------------------------------------------- -------------------------
Net fee income 19,640 24,005
-------------------------------------------------------------- ------------------------- ---------------------------
* fee income 26,418 29,941
--------------------------------------------------------------
* fee expense (6,778) (5,936)
-------------------------------------------------------------- -------------------------
Net income from financial instruments held for trading
or managed on a fair value basis 17,855 15,585
-------------------------------------------------------------- ------------------------- ---------------------------
Net income/(expense) from assets and liabilities of insurance
businesses, including related derivatives, measured at
fair value through profit or loss (10,601) 13,197
Changes in fair value of designated debts issued and related
derivatives (447) (312)
-------------------------------------------------------------- ------------------------- ---------------------------
Changes in fair value of other financial instruments
mandatorily
measured at fair value through profit or loss 31 (27)
-------------------------------------------------------------- ------------------------- ---------------------------
Gains less losses from financial investments (232) 1,133
-------------------------------------------------------------- ------------------------- ---------------------------
Net insurance premium income 48,059 32,230
-------------------------------------------------------------- ------------------------- ---------------------------
Other operating income/(expense) 7,671 (180)
-------------------------------------------------------------- ------------------------- ---------------------------
Total operating income 135,229 134,372
-------------------------------------------------------------- ------------------------- ---------------------------
Net insurance claims and benefits paid and movement in
liabilities to policyholders (43,256) (41,520)
-------------------------------------------------------------- ------------------------- ---------------------------
Net operating income before change in expected credit
losses and other credit impairment charges 91,973 92,852
-------------------------------------------------------------- ------------------------- ---------------------------
Change in expected credit losses and other credit impairment
charges (4,144) (1,607)
-------------------------------------------------------------- ------------------------- ---------------------------
Net operating income 87,829 91,245
-------------------------------------------------------------- ------------------------- ---------------------------
Employee compensation and benefits (20,113) (20,246)
-------------------------------------------------------------- ------------------------- ---------------------------
General and administrative expenses (26,448) (24,578)
-------------------------------------------------------------- ------------------------- ---------------------------
Depreciation and impairment of property, plant and equipment (4,573) (4,409)
-------------------------------------------------------------- ------------------------- ---------------------------
Amortisation and impairment of intangible assets (2,877) (2,053)
-------------------------------------------------------------- ------------------------- ---------------------------
Total operating expenses (54,011) (51,286)
-------------------------------------------------------------- ------------------------- ---------------------------
Operating profit 33,818 39,959
-------------------------------------------------------------- ------------------------- ---------------------------
Share of profit in associates and joint ventures 10,575 10,548
-------------------------------------------------------------- ------------------------- ---------------------------
Profit before tax 44,393 50,507
-------------------------------------------------------------- ------------------------- ---------------------------
Tax expense (7,512) (7,868)
-------------------------------------------------------------- ------------------------- ---------------------------
Profit for the period 36,881 42,639
-------------------------------------------------------------- ------------------------- ---------------------------
Attributable to:
-------------------------------------------------------------- ------------------------- ---------------------------
* ordinary shareholders of the parent company 33,242 37,545
--------------------------------------------------------------
* other equity holders 1,853 1,837
--------------------------------------------------------------
* non-controlling interests 1,786 3,257
-------------------------------------------------------------- -------------------------
Profit for the period 36,881 42,639
-------------------------------------------------------------- ------------------------- ---------------------------
Consolidated statement of comprehensive income
Half-year to
----------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
---------------------------------------------------------- ---------------------------- ----------------------------
Profit for the period 36,881 42,639
---------------------------------------------------------- ---------------------------- ----------------------------
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 (12,801) (2,145)
---------------------------------------------------------- ---------------------------- ----------------------------
- fair value losses (16,338) (1,716)
----------------------------------------------------------
- fair value (gains)/losses transferred to the income
statement 187 (996)
----------------------------------------------------------
- expected credit (recoveries)/losses recognised in the
income statement 162 (76)
----------------------------------------------------------
- income taxes 3,188 643
---------------------------------------------------------- ----------------------------
Cash flow hedges (1,576) (325)
---------------------------------------------------------- ---------------------------- ----------------------------
- fair value gains 6,099 5,309
----------------------------------------------------------
- fair value gains reclassified to the income statement (8,001) (5,694)
----------------------------------------------------------
- income taxes 326 60
---------------------------------------------------------- ----------------------------
Share of other comprehensive income/(expense) of
associates
and joint ventures (787) 480
---------------------------------------------------------- ---------------------------- ----------------------------
Exchange differences (22,112) (805)
---------------------------------------------------------- ---------------------------- ----------------------------
Items that will not be reclassified subsequently to profit
or loss:
---------------------------------------------------------- ---------------------------- ----------------------------
Property revaluation 1,672 2,500
---------------------------------------------------------- ---------------------------- ----------------------------
- fair value gains 2,013 3,004
----------------------------------------------------------
- income taxes (341) (504)
---------------------------------------------------------- ----------------------------
Equity instruments designated at fair value through other
comprehensive income 1,268 (2,721)
---------------------------------------------------------- ---------------------------- ----------------------------
- fair value gains/(losses) 1,270 (2,716)
----------------------------------------------------------
- income taxes (2) (5)
---------------------------------------------------------- ----------------------------
Changes in fair value of financial liabilities designated
at fair value upon initial recognition arising from
changes
in own credit risk 5,656 (392)
---------------------------------------------------------- ---------------------------- ----------------------------
- before income taxes 6,766 (464)
----------------------------------------------------------
- income taxes (1,110) 72
---------------------------------------------------------- ----------------------------
Remeasurement of defined benefit asset/liability 146 686
---------------------------------------------------------- ---------------------------- ----------------------------
- before income taxes 179 832
----------------------------------------------------------
- income taxes (33) (146)
---------------------------------------------------------- ----------------------------
Other comprehensive expense for the period, net of tax (28,534) (2,722)
---------------------------------------------------------- ---------------------------- ----------------------------
Total comprehensive income for the period 8,347 39,917
---------------------------------------------------------- ---------------------------- ----------------------------
Attributable to:
---------------------------------------------------------- ---------------------------- ----------------------------
- ordinary shareholders of the parent company 5,312 34,996
---------------------------------------------------------- ---------------------------- ----------------------------
- other equity holders 1,853 1,837
---------------------------------------------------------- ---------------------------- ----------------------------
- non-controlling interests 1,182 3,084
---------------------------------------------------------- ---------------------------- ----------------------------
Total comprehensive income for the period 8,347 39,917
---------------------------------------------------------- ---------------------------- ----------------------------
Consolidated balance sheet
At
----------------------------------------------
30 Jun 31 Dec
2022 2021
Notes HK$m HK$m
------------------------------------------------------ ------ --------------------- -----------------------
Assets
------------------------------------------------------ ------ --------------------- -----------------------
Cash and balances at central banks 233,769 276,857
-------------------------------------------------------------- --------------------- -----------------------
Items in the course of collection from other banks 47,348 21,632
-------------------------------------------------------------- --------------------- -----------------------
Hong Kong Government certificates of indebtedness 344,194 332,044
-------------------------------------------------------------- --------------------- -----------------------
Trading assets 681,035 777,450
-------------------------------------------------------------- --------------------- -----------------------
Derivatives 502,780 365,167
-------------------------------------------------------------- --------------------- -----------------------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 219,385 202,399
-------------------------------------------------------------- --------------------- -----------------------
Reverse repurchase agreements - non-trading 875,200 803,775
-------------------------------------------------------------- --------------------- -----------------------
Loans and advances to banks 493,423 432,247
-------------------------------------------------------------- --------------------- -----------------------
Loans and advances to customers 3 3,864,799 3,840,939
------------------------------------------------------ ------ --------------------- -----------------------
Financial investments 4 2,099,827 2,051,575
------------------------------------------------------ ------ --------------------- -----------------------
Amounts due from Group companies 202,711 112,719
-------------------------------------------------------------- --------------------- -----------------------
Interests in associates and joint ventures 5 189,058 188,485
------------------------------------------------------ ------ --------------------- -----------------------
Goodwill and intangible assets 105,323 95,181
-------------------------------------------------------------- --------------------- -----------------------
Property, plant and equipment 128,522 129,827
-------------------------------------------------------------- --------------------- -----------------------
Deferred tax assets 4,928 3,353
-------------------------------------------------------------- --------------------- -----------------------
Prepayments, accrued income and other assets 363,730 269,743
-------------------------------------------------------------- --------------------- -----------------------
Total assets 10,356,032 9,903,393
-------------------------------------------------------------- --------------------- -----------------------
Liabilities
------------------------------------------------------ ------ --------------------- -----------------------
Hong Kong currency notes in circulation 344,194 332,044
-------------------------------------------------------------- --------------------- -----------------------
Items in the course of transmission to other banks 52,117 25,701
-------------------------------------------------------------- --------------------- -----------------------
Repurchase agreements - non-trading 287,591 255,374
-------------------------------------------------------------- --------------------- -----------------------
Deposits by banks 337,078 280,310
-------------------------------------------------------------- --------------------- -----------------------
Customer accounts 6 6,113,666 6,177,182
------------------------------------------------------ ------ --------------------- -----------------------
Trading liabilities 106,297 92,723
-------------------------------------------------------------- --------------------- -----------------------
Derivatives 495,427 355,791
-------------------------------------------------------------- --------------------- -----------------------
Financial liabilities designated at fair value 149,750 138,965
-------------------------------------------------------------- --------------------- -----------------------
Debt securities in issue 107,280 67,364
-------------------------------------------------------------- --------------------- -----------------------
Retirement benefit liabilities 1,712 1,890
-------------------------------------------------------------- --------------------- -----------------------
Amounts due to Group companies 392,567 356,233
-------------------------------------------------------------- --------------------- -----------------------
Accruals and deferred income, other liabilities and
provisions 313,462 219,206
-------------------------------------------------------------- --------------------- -----------------------
Liabilities under insurance contracts 689,045 638,145
-------------------------------------------------------------- --------------------- -----------------------
Current tax liabilities 3,097 2,378
-------------------------------------------------------------- --------------------- -----------------------
Deferred tax liabilities 34,818 32,522
-------------------------------------------------------------- --------------------- -----------------------
Subordinated liabilities 4,029 4,054
-------------------------------------------------------------- --------------------- -----------------------
Total liabilities 9,432,130 8,979,882
-------------------------------------------------------------- --------------------- -----------------------
Equity
------------------------------------------------------ ------ --------------------- -----------------------
Share capital 180,181 172,335
-------------------------------------------------------------- --------------------- -----------------------
Other equity instruments 52,386 44,615
-------------------------------------------------------------- --------------------- -----------------------
Other reserves 117,341 151,804
-------------------------------------------------------------- --------------------- -----------------------
Retained earnings 508,541 488,055
-------------------------------------------------------------- --------------------- -----------------------
Total shareholders' equity 858,449 856,809
-------------------------------------------------------------- --------------------- -----------------------
Non-controlling interests 65,453 66,702
-------------------------------------------------------------- --------------------- -----------------------
Total equity 923,902 923,511
-------------------------------------------------------------- --------------------- -----------------------
Total liabilities and equity 10,356,032 9,903,393
-------------------------------------------------------------- --------------------- -----------------------
Consolidated statement of cash flows
Half-year to
----------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
---------------------------------------------------------- ---------------------------- ----------------------------
Profit before tax 44,393 50,507
---------------------------------------------------------- ---------------------------- ----------------------------
Adjustments for non-cash items:
---------------------------------------------------------- ---------------------------- ----------------------------
Depreciation and amortisation 7,450 6,462
---------------------------------------------------------- ---------------------------- ----------------------------
Net (gain)/loss from investing activities 312 (1,243)
---------------------------------------------------------- ---------------------------- ----------------------------
Share of profits in associates and joint ventures (10,575) (10,548)
---------------------------------------------------------- ---------------------------- ----------------------------
Gain on disposal of subsidiaries, businesses, associates
and joint ventures (1) (6)
---------------------------------------------------------- ---------------------------- ----------------------------
Gain on acquisition of subsidiary (556) -
---------------------------------------------------------- ---------------------------- ----------------------------
Change in expected credit losses gross of recoveries and
other credit impairment charges 4,593 2,107
---------------------------------------------------------- ---------------------------- ----------------------------
Provisions 162 277
---------------------------------------------------------- ---------------------------- ----------------------------
Share-based payment expense 380 512
---------------------------------------------------------- ---------------------------- ----------------------------
Other non-cash items included in profit before tax (5,074) 3,364
---------------------------------------------------------- ---------------------------- ----------------------------
Change in operating assets (272,129) (255,831)
---------------------------------------------------------- ---------------------------- ----------------------------
Change in operating liabilities 366,864 184,338
---------------------------------------------------------- ---------------------------- ----------------------------
Elimination of exchange differences 22,185 5,533
---------------------------------------------------------- ---------------------------- ----------------------------
Dividends received from associates 70 77
---------------------------------------------------------- ---------------------------- ----------------------------
Contributions paid to defined benefit plans (146) (156)
---------------------------------------------------------- ---------------------------- ----------------------------
Tax paid (4,431) (4,430)
---------------------------------------------------------- ---------------------------- ----------------------------
Net cash from operating activities 153,497 (19,037)
---------------------------------------------------------- ---------------------------- ----------------------------
Purchase of financial investments (648,340) (696,433)
---------------------------------------------------------- ---------------------------- ----------------------------
Proceeds from the sale and maturity of financial
investments 587,433 715,439
---------------------------------------------------------- ---------------------------- ----------------------------
Purchase of property, plant and equipment (1,313) (1,286)
---------------------------------------------------------- ---------------------------- ----------------------------
Proceeds from sale of property, plant and equipment and
assets held for sale 121 177
---------------------------------------------------------- ---------------------------- ----------------------------
Proceeds from disposal of customer loan portfolios 601 1,812
---------------------------------------------------------- ---------------------------- ----------------------------
Net investment in intangible assets (5,413) (4,006)
---------------------------------------------------------- ---------------------------- ----------------------------
Net cash outflow on purchase of subsidiaries (4,166) -
---------------------------------------------------------- ---------------------------- ----------------------------
Net cash from investing activities (71,077) 15,703
---------------------------------------------------------- ---------------------------- ----------------------------
Issue of ordinary share capital and other equity 15,617 -
instruments
---------------------------------------------------------- ---------------------------- ----------------------------
Purchase of non-controlling interest (1,548) -
---------------------------------------------------------- ---------------------------- ----------------------------
Subordinated loan capital issued(1) 57,351 43,632
---------------------------------------------------------- ---------------------------- ----------------------------
Subordinated loan capital repaid(1) (13,701) (19,665)
---------------------------------------------------------- ---------------------------- ----------------------------
Dividends paid to shareholders of the parent company and
non-controlling interests (22,030) (38,539)
---------------------------------------------------------- ---------------------------- ----------------------------
Net cash from financing activities 35,689 (14,572)
---------------------------------------------------------- ---------------------------- ----------------------------
Net increase/(decrease) in cash and cash equivalents 118,109 (17,906) ---------------------------------------------------------- ---------------------------- ---------------------------- Cash and cash equivalents at 1 Jan 1,055,084 1,047,807 ---------------------------------------------------------- ---------------------------- ---------------------------- Exchange differences in respect of cash and cash equivalents (54,150) (18,788) ---------------------------------------------------------- ---------------------------- ---------------------------- Cash and cash equivalents at 30 Jun(2) 1,119,043 1,011,113 ---------------------------------------------------------- ---------------------------- ----------------------------
Interest received in the first half of 2022 was HK$71,362m (first half of 2021: HK$65,677m), interest paid in the first half of 2022 was HK$15,406m (first half of 2021: HK$13,261m) and dividends received in the first half of 2022 was HK$2,927m (first half of 2021: HK$2,101m).
1 Changes in subordinated liabilities (including those issued to Group companies) during the first half of the year included amounts from issuance and repayments as presented above, and non-cash changes from foreign exchange loss of HK$1,209m in the first half of 2022 (first half of 2021: loss of HK$691m) and fair value loss after hedging of HK$20,926m in the first half of 2022 (first half of 2021: fair value loss of HK$3,808m).
2 At 30 June 2022 HK$147,072m (2021:HK$180,085m) was not available for use by the group.
Consolidated statement of changes in equity
Half-year to 30 Jun 2022
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other reserves
-----------------------------------------------------------------------------------------
Financial
assets Cash Total
Other Property at flow Foreign share- Non-
Share equity Retained revaluation FVOCI hedge exchange holders' controlling Total
capital(1) instruments earnings reserve reserve reserve reserve Other(3) equity interests equity
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
At 1 Jan 2022 172,335 44,615 488,055 64,990 3,869 153 (7,130) 89,922 856,809 66,702 923,511
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Profit for the
period - - 35,095 - - - - - 35,095 1,786 36,881
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Other comprehensive
income/(expense)
(net of tax) - - 5,828 1,572 (12,355) (1,351) (21,787) 163 (27,930) (604) (28,534)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
* debt instruments at fair value through other
comprehensive income - - - - (12,384) - - - (12,384) (417) (12,801)
------------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - 975 - - - 975 293 1,268
------------------------------------------------------------
* cash flow hedges - - - - - (1,351) - - (1,351) (225) (1,576)
------------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 5,655 - - - - - 5,655 1 5,656
------------------------------------------------------------
* property revaluation - - - 1,572 - - - - 1,572 100 1,672
------------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 177 - - - - - 177 (31) 146
------------------------------------------------------------
* share of other comprehensive income/(expense) of
associates and joint ventures - - (4) - (946) - - 163 (787) - (787)
------------------------------------------------------------
* exchange differences - - - - - - (21,787) - (21,787) (325) (22,112)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- ---------------------
Total comprehensive
income/(expense)
for the period - - 40,923 1,572 (12,355) (1,351) (21,787) 163 7,165 1,182 8,347
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Shares issued(1) 7,846 - - - - - - - 7,846 - 7,846
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Other equity
instruments issued(2) - 7,771 - - - - - - 7,771 - 7,771
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Dividends to
shareholders(4) - - (20,198) - - - - - (20,198) (1,832) (22,030)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Movement in respect
of share-based
payment arrangements - - 39 - - - - (83) (44) 6 (38)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Transfers and
other movements(5) - - (278) (1,691) 44 - - 1,025 (900) (605) (1,505)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
At 30 Jun 2022 180,181 52,386 508,541 64,871 (8,442) (1,198) (28,917) 91,027 858,449 65,453 923,902
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Half-year to 30 Jun 2021
------------------------------------------------------------ ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
At 1 Jan 2021 172,335 44,615 478,903 63,793 9,883 772 (10,688) 85,740 845,353 66,178 911,531
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Profit for the
period - - 39,382 - - - - - 39,382 3,257 42,639
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Other comprehensive
income/(expense)
(net of tax) - - 199 2,296 (3,779) (291) (1,007) 33 (2,549) (173) (2,722)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
* debt instruments at fair value through other
comprehensive income - - - - (2,023) - - - (2,023) (122) (2,145)
------------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - (2,181) - - - (2,181) (540) (2,721)
------------------------------------------------------------
* cash flow hedges - - - - - (291) - - (291) (34) (325)
------------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - (392) - - - - - (392) - (392)
------------------------------------------------------------
* property revaluation - - - 2,296 - - - - 2,296 204 2,500
------------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 569 - - - - - 569 117 686
------------------------------------------------------------
* share of other comprehensive income of associates and
joint ventures - - 22 - 425 - - 33 480 - 480
------------------------------------------------------------
* exchange differences - - - - - - (1,007) - (1,007) 202 (805)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- ---------------------
Total comprehensive
income/(expense)
for the period - - 39,581 2,296 (3,779) (291) (1,007) 33 36,833 3,084 39,917
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Dividends to
shareholders(4) - - (35,713) - - - - - (35,713) (2,826) (38,539)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Movement in respect
of share-based
payment arrangements - - 77 - - - - (77) - (3) (3)
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Transfers and
other movements(5) - - 1,194 (1,509) (13) - - 892 564 23 587
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
At 30 Jun 2021 172,335 44,615 484,042 64,580 6,091 481 (11,695) 86,588 847,037 66,456 913,493
------------------------------------------------------------ ---------------- ---------------------- ------------------ -------------------- ----------------- ------------- ----------------- -------------- ----------------- --------------------- -------------------
Consolidated statement of changes in equity (continued)
Half-year to 31 Dec 2021
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other reserves
---------------------------------------------------------------------------------------------
Financial Cash Total
Other Property assets flow Foreign share- Non-
Share equity Retained revaluation at FVOCI hedge exchange holders' controlling Total
capital(1) instruments earnings reserve reserve reserve reserve Other(3) 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 2021 172,335 44,615 484,042 64,580 6,091 481 (11,695) 86,588 847,037 66,456 913,493
------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- --------------------- -----------------
Profit for the
period - - 27,966 - - - - - 27,966 1,943 29,909
------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- --------------------- -----------------
Other comprehensive
income/(expense)
(net of tax) - - 961 2,063 (2,213) (328) 4,565 16 5,064 55 5,119
------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- --------------------- -----------------
* debt instruments at fair value through other
comprehensive income - - - - (1,752) - - - (1,752) (112) (1,864)
------------------------------------------------------------
* equity instruments designated at fair value through
other comprehensive income - - - - (556) - - - (556) (203) (759)
------------------------------------------------------------
* cash flow hedges - - - - - (328) - - (328) (47) (375)
------------------------------------------------------------
* changes in fair value of financial liabilities
designated at fair value upon initial recognition
arising from changes in own credit risk - - 913 - - - - - 913 1 914
------------------------------------------------------------
* property revaluation - - - 2,063 - - - - 2,063 208 2,271
------------------------------------------------------------
* remeasurement of defined benefit asset/liability - - 43 - - - - - 43 (5) 38
------------------------------------------------------------
* share of other comprehensive income of associates and
joint ventures - - 5 - 95 - - 16 116 - 116
------------------------------------------------------------
* exchange differences - - - - - - 4,565 - 4,565 213 4,778
------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- ---------------------
Total comprehensive
income/(expense)
for the period - - 28,927 2,063 (2,213) (328) 4,565 16 33,030 1,998 35,028
------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- --------------------- -----------------
Dividends to shareholders(4) - - (23,392) - - - - - (23,392) (1,592) (24,984)
------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- --------------------- ----------------- Movement in respect of share-based payment arrangements - - 54 - - - - (96) (42) 1 (41) ------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- --------------------- ----------------- Transfers and other movements(5) - - (1,576) (1,653) (9) - - 3,414 176 (161) 15 ------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- --------------------- ----------------- At 31 Dec 2021 172,335 44,615 488,055 64,990 3,869 153 (7,130) 89,922 856,809 66,702 923,511 ------------------------------------------------------------ -------------- ------------------- ------------------------ ----------------- ------------------- ---------------- ---------------- ----------------- ----------------- --------------------- -----------------
1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous years. During the first half of 2022, there were 3,138.4m new ordinary shares issued at an issue price of HK$2.5 each.
2 During the first half of 2022, there was an additional tier 1 capital instrument issued amounted to US$1,000m on which there were US$10m issue costs.
3 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.
4 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
5 The movement from retained earnings to other reserves includes the relevant transfers in associates according to local regulatory requirements, and from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.
Notes on the 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 on the basis of the policies set out in the 2021 annual financial statements and in accordance with HKAS 34 'Interim Financial Reporting' as issued by the Hong Kong Institute of Certified Public Accountants ('HKICPA') and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority. These financial statements should be read in conjunction with the Annual Report and Accounts 2021.
Standards applied during the half-year to 30 June 2022
There were no new standards or amendments to standards that had a material effect on these interim condensed consolidated financial statements.
(b) Use of estimates and judgements
Management believes that the group's critical accounting estimates and judgements are those which relate to the impairment of amortised cost and FVOCI debt financial assets, the valuation of financial instruments, interests in associates and liabilities under insurance contracts and present value of in-force long-term insurance business. There were no changes in the current period to the critical accounting estimates and judgements applied in 2021, which are stated in Note 1 of the Annual Report and Accounts 2021.
(c) Composition of the group
There were no material changes in the composition of the group in the half-year to 30 June 2022.
(d) Future accounting developments
HKFRS 17 'Insurance Contracts' was issued in January 2018, with amendments to the standard issued in October 2020 and February 2022. The standard sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. Following the amendments, HKFRS 17 is effective from 1 January 2023. The group is in the process of implementing HKFRS 17. Industry practice and interpretation of the standard are still developing. Therefore, the likely impact of its implementation remains uncertain. However, compared with the group's current accounting policy for insurance, there will be no present value of in-force long-term insurance business ('PVIF') asset recognised. Instead, the estimated future profit will be included in the measurement of the insurance contract liability as the contractual service margin and gradually recognised in revenue as services are provided over the duration of the insurance contract.
(e) Going concern
The interim condensed consolidated financial statements are prepared on a going concern basis, as the Directors are satisfied that the group and the Bank have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity.
(f) Accounting policies
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 2021, as are the methods of computation.
(g) Presentation of information
Certain disclosures required by HKFRSs have been included in the sections marked as 'Reviewed by PricewaterhouseCoopers' in this Interim Report 2022 as follows:
-- Consolidated income statement and balance sheet data by reportable segments are included in the 'Financial Review' on page 3.
-- 'Summary of credit risk (excluding debt instruments measured at fair value through other comprehensive income ('FVOCI')) by stage distribution and ECL coverage by industry sector' included in 'Risk' section on pages 12 to 13.
-- 'Measurement uncertainty and sensitivity analysis of ECL estimates' included in 'Risk' section on pages 14 to 18.
2 Dividends
---------
Half-year to
----------------------------------------------------------------------------------------------------------------------------
30 Jun 2022 30 Jun 2021
------------------------------------------------------------ --------------------------------------------------------------
HK$ per HK$m HK$ per HK$m
share share
------------------------------------------------------------ ------------------------------ ---------------------------- ------------------------------- -----------------------------
Dividends paid on ordinary shares
------------------------------------------------------------ ------------------------------ ---------------------------- ------------------------------- -----------------------------
* fourth interim dividend in respect of the previous
financial year approved and paid during the half-year 0.23 10,584 0.47 21,665
------------------------------------------------------------ ------------------------------ ---------------------------- ------------------------------- -----------------------------
* first interim dividend paid 0.17 7,761 0.26 12,211
------------------------------------------------------------ ------------------------------ ---------------------------- ------------------------------- -----------------------------
Total 0.40 18,345 0.73 33,876
------------------------------------------------------------ ------------------------------ ---------------------------- ------------------------------- -----------------------------
Total coupons on other equity instruments 1,853 1,837
------------------------------------------------------------ ------------------------------ ---------------------------- ------------------------------- -----------------------------
Dividends to shareholders 20,198 35,713
------------------------------------------------------------ ------------------------------ ---------------------------- ------------------------------- -----------------------------
Total coupons on other equity instruments
Half-year to
---------------------------------------------------------------
30 Jun 30 Jun
2022 2021
HK$m HK$m
----------------------------------------------------- ------------------------------ -------------------------------
US$1,000m Fixed rate perpetual subordinated loan
(interest
rate fixed at 6.090%) 477 474
----------------------------------------------------- ------------------------------ -------------------------------
US$1,200m Fixed rate perpetual subordinated loans
(interest
rate fixed at 6.172%) 580 576
----------------------------------------------------- ------------------------------ -------------------------------
US$600m Fixed rate perpetual subordinated loan
(interest
rate fixed at 5.910%) 278 275
----------------------------------------------------- ------------------------------ -------------------------------
US$1,100m Fixed rate perpetual subordinated loan
(interest
rate fixed at 6.000%) 518 512
----------------------------------------------------- ------------------------------ -------------------------------
Total 1,853 1,837
----------------------------------------------------- ------------------------------ -------------------------------
3 Loans and advances to customers
-------------------------------
At
----------------------------------------------------------
30 Jun 31 Dec
2022 2021
HK$m HK$m
-------------------------------------- --------------------------- -----------------------------
Gross loans and advances to customers 3,898,718 3,872,956
-------------------------------------- --------------------------- -----------------------------
Expected credit loss allowances (33,919) (32,017)
-------------------------------------- --------------------------- -----------------------------
3,864,799 3,840,939
-------------------------------------- --------------------------- -----------------------------
The following table provides an analysis of gross loans and advances to customers by industry sector based on the Statistical Classification of economic activities in the European Community ('NACE').
Analysis of gross loans and advances to customers
At
--------------------------------------------------------
30 Jun 31 Dec
2022 2021
HK$m HK$m
-------------------------------- -------------------------- ----------------------------
Residential mortgages 1,178,698 1,167,487
-------------------------------- -------------------------- ----------------------------
Credit card advances 81,772 89,005
-------------------------------- -------------------------- ----------------------------
Other personal 280,175 275,819
-------------------------------- -------------------------- ----------------------------
Total personal 1,540,645 1,532,311
-------------------------------- -------------------------- ----------------------------
Real estate 617,897 635,217
-------------------------------- -------------------------- ----------------------------
Wholesale and retail trade 446,001 428,785
-------------------------------- -------------------------- ----------------------------
Manufacturing 397,135 410,033
-------------------------------- -------------------------- ----------------------------
Transportation and storage 105,491 111,388
-------------------------------- -------------------------- ----------------------------
Other 516,796 471,988
-------------------------------- -------------------------- ----------------------------
Total corporate and commercial 2,083,320 2,057,411
-------------------------------- -------------------------- ----------------------------
Non-bank financial institutions 274,753 283,234
-------------------------------- -------------------------- ----------------------------
3,898,718 3,872,956
-------------------------------- -------------------------- ----------------------------
By geography(1)
-------------------------------- -------------------------- ----------------------------
Hong Kong 2,456,034 2,447,799
-------------------------------- -------------------------- ----------------------------
Rest of Asia-Pacific 1,442,684 1,425,157
-------------------------------- -------------------------- ----------------------------
1 The geographical information shown above is classified by the location of the principal operations of the subsidiary or the branch responsible for advancing the funds.
Gross loans and advances to customers increased by HK$26bn, or 1%, which included unfavourable foreign exchange translation effects of HK$66bn. Excluding this impact, the underlying increase of HK$92bn was driven by an increase in corporate and commercial lending of HK$64bn, mainly in mainland China, Japan and India. Residential mortgages also increased by HK$29bn, mainly in Australia and Hong Kong.
4 Financial investments
---------------------
Carrying amounts of financial investments
At
-----------------------------------------------------------
30 Jun 31 Dec
2022 2021
HK$m HK$m
----------------------------------------------------- ---------------------------- -----------------------------
Financial investments measured at fair value through
other comprehensive income 1,161,793 1,549,011
----------------------------------------------------- ---------------------------- -----------------------------
- treasury and other eligible bills 370,948 653,245
-----------------------------------------------------
- debt securities 782,989 888,664
-----------------------------------------------------
- equity securities 7,856 7,102
----------------------------------------------------- ----------------------------
Debt instruments measured at amortised cost 938,034 502,564
----------------------------------------------------- ---------------------------- -----------------------------
- treasury and other eligible bills 340,302 6,900
-----------------------------------------------------
- debt securities 597,732 495,664
----------------------------------------------------- ----------------------------
2,099,827 2,051,575
----------------------------------------------------- ---------------------------- -----------------------------
5 Interests in associates and joint ventures
------------------------------------------
Bank of Communications Co., Ltd ('BoCom')
The group's investment in BoCom is classified as an associate. Significant influence in BoCom was established with consideration of all relevant factors, including representation on BoCom's Board of Directors and participation in a Resource and Experience Sharing agreement ('RES'). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom's financial and operating policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28 whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group's share of BoCom's net assets. An impairment test is required if there is any indication of impairment.
Impairment testing
At 30 June 2022, the fair value of the group's investment in BoCom had been below the carrying amount for approximately 10 years. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment at 30 June 2022 as the recoverable amount as determined by a value-in-use ('VIU') calculation was higher than the carrying value.
At
-------------------------------------------------------------------------------------------------------------------------------------------------
30 Jun 2022 31 Dec 2021
--------------------------------------------------------------------- --------------------------------------------------------------------------
Carrying Fair Carrying Fair
VIU value value VIU value value
HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn
------ --------------------- --------------------- ----------------------- ----------------------- ----------------------- ------------------------
BoCom 190.6 185.4 76.6 193.0 184.8 66.6
------ --------------------- --------------------- ----------------------- ----------------------- ----------------------- ------------------------
The headroom, which is defined as the extent to which the VIU exceeds the carrying value, decreased by HK$3.0bn compared with 31 December 2021. The decrease in headroom was principally due to revisions to management's best estimates of BoCom's future earnings in the short to medium term, partly offset by the impact on the VIU from BoCom's actual performance, which was better than earlier estimates.
In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are described below and are based on factors observed at period-end. The factors that could result in a change in the VIU and an impairment include a short-term underperformance by BoCom, a change in regulatory capital requirements, or an increase in uncertainty regarding the future performance of BoCom resulting in a downgrade of the forecast of future asset growth or profitability. An increase in the discount rate could also result in a reduction of VIU and an impairment. At the point where the carrying value exceeds the VIU, impairment would be recognised.
If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's best estimates of future earnings available to ordinary shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best estimate. There are two main components to the VIU calculation. The first component is management's best estimate of BoCom's earnings which is based on explicit forecasts over the short to medium term. This results in forecast earnings growth that is lower than recent historical actual growth and also reflects the uncertainty arising from the current economic outlook. Reflecting management's intent to continue to retain its investment, earnings beyond the short to medium term are then extrapolated into perpetuity using a long-term growth rate to derive a terminal value, which comprises the majority of the VIU. The second component is the capital maintenance charge ('CMC'), which is management's forecast of the earnings that need to be withheld in order for BoCom to meet capital requirements over the forecast period, meaning that CMC is deducted when arriving at management's estimate of future earnings available to ordinary shareholders. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected capital requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other qualitative factors, to ensure that the inputs to the VIU calculation remain appropriate.
Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in accordance with the requirements of HKAS 36:
-- Long-term profit growth rate: 3% (31 December 2021: 3%) for periods after 2025, which does not exceed forecast GDP growth in mainland China and is similar to forecasts by external analysts.
-- Long-term asset growth rate: 3% (31 December 2021: 3%) for periods after 2025, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%.
-- Discount rate: 10.03% (31 December 2021: 10.03%), which is based on a capital asset pricing model ('CAPM'), using market data. The discount rate used is within the range of 8.2% to 10.2% (31 December 2021: 8.7% to 10.1%) indicated by the CAPM. While the CAPM range sits at the lower end of the range adopted by selected external analysts of 9.9% to 13.5% (31 December 2021: 9.9% to 13.5%), we continue to regard the CAPM range as the most appropriate basis for determining this assumption.
-- Expected credit losses ('ECL') as a percentage of customer advances: ranges from 0.99% to 1.15% (31 December 2021: 0.98% to 1.12%) in the short to medium term, reflecting reported credit experience through the ongoing Covid-19 pandemic in mainland China followed by an expected reversion to recent historical levels. For periods after 2025, the ratio is 0.97% (31 December 2021: 0.97%), which is higher than BoCom's average ECL as a percentage of customer advances in recent years prior to the pandemic.
-- Risk-weighted assets as a percentage of total assets: ranges from 61.0% to 63.2% (31 December 2021: 61.0% to 62.4%) in the short to medium term, reflecting reductions that may arise from a subsequent lowering of ECLs and a continuation of the trend of strong retail loan growth. For periods after 2025, the ratio is 61.0% (31 December 2021: 61.0%). These rates are similar to BoCom's actual results in recent years and forecasts disclosed by external analysts.
-- Operating income growth rate: ranges from 4.6% to 7.3% (31 December 2021: 5.1% to 6.2%) in the short to medium term, and is lower than BoCom's actual results in recent years and the forecasts disclosed by external analysts, reflecting BoCom's most recent actual results, global trade tensions and industry developments in mainland China.
-- Cost-income ratio: ranges from 35.5% to 35.8% (31 December 2021: 35.5% to 36.1%) in the short to medium term. These ratios are similar to BoCom's actual results in recent years and forecasts disclosed by external analysts.
-- Effective tax rate: ranges from 7.6% to 15.0% (31 December 2021: 6.8% to 15.0%) in the short to medium term, reflecting BoCom's actual results and an expected increase towards the long-term assumption through the forecast period. For periods after 2025, the rate is 15.0% (31 December 2021: 15.0%), which is higher than the recent historical average, and aligned to the minimum tax rate as proposed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
-- Capital requirements: capital adequacy ratio of 12.5% (31 December 2021: 12.5%) and tier 1 capital adequacy ratio of 9.5%
(31 December 2021: 9.5%), based on BoCom's capital risk appetite and capital requirements respectively.
The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:
Key assumption Changes to key assumption to reduce
headroom to nil
* Long-term profit growth rate * Decrease by 16 basis points
* Long-term asset growth rate * Increase by 13 basis points
* Discount rate * Increase by 21 basis points
* Expected credit losses as a percentage of customer * Increase by 2 basis points
advances
* Increase by 109 basis points
* Risk-weighted assets as a percentage of total assets
* Decrease by 28 basis points
* Operating income growth rate
* Increase by 63 basis points
* Cost-income ratio
* Increase by 182 basis points
* Long-term effective tax rate
* Increase by 22 basis points
* Capital requirements - capital adequacy ratio
* Increase by 167 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 based on external analysts' forecasts, statutory requirements and other relevant external data sources, 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 2022
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Long-term asset/profit
growth rate(1) -75/+82 25.7/31.6 216.3/222.2 +82/-75 (35.3)/(22.7) 155.3/167.9
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Discount rate -183 62.8 253.4 +207 (40.4) 150.2
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
2022 to 2022 to
2025: 103 2025: 123
Expected credit losses
as a percentage of customer 2026 onwards: 2026 onwards:
advances 91 12.7 203.3 105 (21.6) 169.0
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Risk-weighted assets
as a percentage of total
assets -110 0.6 191.2 +247 (16.2) 174.4
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Operating income growth
rate +51 9.7 200.3 -69 (13.0) 177.6
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Cost-income ratio -113 9.0 199.6 +188 (15.8) 174.8
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Long-term effective tax
rate -426 11.9 202.5 +1000 (28.2) 162.4
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Capital requirements
- capital adequacy ratio - - 190.6 +274 (68.7) 121.9
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Capital requirements
- tier 1 capital adequacy
ratio - - 190.6 +304 (40.8) 149.8
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
At 31 December 2021
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Long-term asset/profit
growth rate(1) -69/+87 22.9/33.1 215.9/226.1 +87/-69 (36.2)/(20.5) 156.8/172.5
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Discount rate -133 42.2 235.2 +207 (40.8) 152.2
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
2021 to 2025: 2021 to 2025:
103 121
Expected credit losses
as a percentage of customer 2026 onwards: 2026 onwards:
advances 91 11.9 204.9 105 (21.0) 172.0
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Risk-weighted assets
as a percentage of total
assets -111 2.2 195.2 +280 (15.8) 177.2
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
Operating income growth
rate +37 8.2 201.2 -58 (13.6) 179.4
---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------ Cost-income ratio -152 13.6 206.6 +174 (12.7) 180.3 ---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------ Long-term effective tax rate -104 2.9 195.9 +1000 (27.4) 165.6 ---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------ Capital requirements - capital adequacy ratio - - 193.0 +325 (77.6) 115.4 ---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------ Capital requirements - tier 1 capital adequacy ratio - - 193.0 +364 (50.0) 143.0 ---------------------------- ------------------------------------------ ---------------------- ------------------------- --------------- ------------------------ ------------------------
1 The reasonably possible ranges of the long-term profit growth rate and long-term asset growth rate assumptions reflect the close relationship between these assumptions, which would result in offsetting changes to each assumption.
Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is HK$145.4bn to HK$227.6bn (31 December 2021: HK$148.3bn to HK$228.4bn). The range is based on impacts set out in the table above arising from the favourable/unfavourable change in the earnings in the short to medium term, the long-term expected credit losses as a percentage of customer advances and a 50bps increase/decrease in the discount rate. All other long-term assumptions and the basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU.
6 Customer accounts
-----------------
Customer accounts by country/territory
At
-------------------------------------------
30 Jun 31 Dec
2022 2021
HK$m HK$m
--------------- -------------------- ---------------------
Hong Kong 4,263,818 4,284,719
--------------- -------------------- ---------------------
Singapore 447,702 448,976
--------------- -------------------- ---------------------
Mainland China 436,113 462,187
--------------- -------------------- ---------------------
Australia 222,574 220,233
--------------- -------------------- ---------------------
India 192,008 191,116
--------------- -------------------- ---------------------
Malaysia 128,314 128,673
--------------- -------------------- ---------------------
Taiwan 114,462 120,744
--------------- -------------------- ---------------------
Indonesia 45,544 46,938
--------------- -------------------- ---------------------
Other 263,131 273,596
--------------- -------------------- ---------------------
6,113,666 6,177,182
--------------- -------------------- ---------------------
7 Fair values of financial instruments carried at fair value
----------------------------------------------------------
The accounting policies, control framework and hierarchy used to determine fair values at 30 June 2022 are consistent with those applied for the Annual Report and Accounts 2021.
The following table provides an analysis of financial instruments carried at fair value and bases of valuation.
Fair value hierarchy
------------------------------------------------------------------------------
Level Level Level Third-party Inter-
1 2 3 total company(2) Total
HK$m HK$m HK$m HK$m HK$m HK$m
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
At 30 Jun 2022
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Assets
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Trading
assets(1) 456,695 220,557 3,783 681,035 - 681,035
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Derivatives 853 335,632 3,738 340,223 162,557 502,780
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Financial
assets
designated
and otherwise
mandatorily
measured
at fair value
through profit
or loss 93,540 43,335 82,510 219,385 - 219,385
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Financial
investments 829,523 327,842 4,428 1,161,793 - 1,161,793
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Liabilities
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Trading
liabilities(1) 73,961 32,333 3 106,297 - 106,297
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Derivatives 2,929 330,263 1,987 335,179 160,248 495,427
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Financial
liabilities
designated
at fair
value(1) - 128,085 21,665 149,750 - 149,750
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
At 31 Dec 2021
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Assets
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Trading
assets(1) 537,816 236,388 3,246 777,450 - 777,450
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Derivatives 440 212,740 3,294 216,474 148,693 365,167
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Financial
assets
designated
and otherwise
mandatorily
measured
at fair value
through profit
or loss 93,544 34,203 74,652 202,399 - 202,399
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Financial
investments 1,153,521 391,816 3,674 1,549,011 - 1,549,011
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Liabilities
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Trading
liabilities(1) 73,647 19,076 - 92,723 - 92,723
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Derivatives 963 200,667 2,130 203,760 152,031 355,791
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
Financial
liabilities
designated
at fair
value(1) - 118,516 20,449 138,965 - 138,965
--------------- -------------------------- --------------------- --------------------------- --------------------- -------------------------- ---------------------
1 Amounts with HSBC Group entities are not included 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
---------- -------------------- --------------------- ------------------------ -------------------------- --------------------------- -------------------------- --------------------------
1 Jan to
30 Jun
2022
---------- -------------------- --------------------- ------------------------ -------------------------- --------------------------- -------------------------- --------------------------
Transfers
from
Level
1 to
Level 2 13,916 7,424 4,219 - 2 - -
---------- -------------------- --------------------- ------------------------ -------------------------- --------------------------- -------------------------- --------------------------
Transfers
from
Level
2 to
Level 1 30,856 22,687 779 - 1,316 - -
---------- -------------------- --------------------- ------------------------ -------------------------- --------------------------- -------------------------- --------------------------
1 Jan to
31 Dec
2021
---------- --------------------- --------------------- ----------------------- -------------------------- ----------------------- -------------------------- --------------------------
Transfers
from
Level
1 to
Level 2 57,471 29,852 1,970 802 1,012 - 1,652
---------- --------------------- --------------------- ----------------------- -------------------------- ----------------------- -------------------------- --------------------------
Transfers
from
Level
2 to
Level 1 36,073 20,948 1,679 - 3,452 - -
---------- --------------------- --------------------- ----------------------- -------------------------- ----------------------- -------------------------- --------------------------
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarter. Transfers into and out of Levels of the fair value hierarchy are primarily attributable to changes in observability of valuation inputs and price transparency.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique
with significant unobservable inputs - Level 3
Assets Liabilities
------------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------
Designated
and otherwise
mandatorily
measured
at fair
value
through Designated
Financial Trading profit Trading at fair
investments assets or loss Derivatives Total liabilities value Derivatives Total
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ------------------------ ---------------------- ---------------------- ------------------------
Private
equity
and related
investments 3,873 68 81,965 - 85,906 3 - - 3
Structured
notes - - - - - - 21,665 - 21,665
Others 555 3,715 545 3,738 8,553 - - 1,987 1,987
------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ------------------------ ---------------------- ---------------------- ------------------------
At 30 Jun
2022 4,428 3,783 82,510 3,738 94,459 3 21,665 1,987 23,655
------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ------------------------ ---------------------- ---------------------- ------------------------
Private
equity
and related
investments 3,121 4 74,295 - 77,420 - - - -
Structured
notes - - - - - - 20,449 - 20,449
Others 553 3,242 357 3,294 7,446 - - 2,130 2,130 ------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ------------------------ ---------------------- ---------------------- ------------------------ At 31 Dec 2021 3,674 3,246 74,652 3,294 84,866 - 20,449 2,130 22,579 ------------ ---------------------- ------------------------ ---------------------- ---------------------- ---------------------- ------------------------ ---------------------- ---------------------- ------------------------
The basis for determining the fair value of the financial instruments in the table above is explained on page 122 of the Annual Report and Accounts 2021.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
Assets Liabilities
------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------
Designated
and otherwise
mandatorily
measured
at fair
value
through Designated
Financial Trading profit Trading at fair
investments assets or loss Derivatives liabilities value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
At 1 Jan 2022 3,674 3,246 74,652 3,294 - 20,449 2,130
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
Total gains/(losses) recognised
in profit or loss - (515) 1,838 989 - (770) 372
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
* net income/(losses) from financial instruments held
for trading or managed on a fair value basis - (515) - 989 - - 372
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 1,838 - - (770) -
-----------------------------------------------------------
* gains less losses from financial investments at fair
value through other comprehensive income - - - - - - -
Total gains/(losses) recognised
in other comprehensive income
('OCI') 796 17 (25) 9 - (529) (36)
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
- financial investments:
fair value (losses) 825 - - - - (5) -
- exchange differences (29) 17 (25) 9 - (524) (36)
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------
Purchases 705 1,459 10,394 - - - -
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
New issuances - - - - - 3,568 -
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
Sales (50) (424) (1) - - - -
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
Settlements (697) (2,025) (4,159) (284) - (344) (464)
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
Transfers out - (766) (285) (347) - (1,156) (96)
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
Transfers in - 2,791 96 77 3 447 81
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
At 30 Jun 2022 4,428 3,783 82,510 3,738 3 21,665 1,987
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
Unrealised gains/(losses)
recognised in profit or
loss relating to assets
and liabilities held at
30 Jun 2022 - (291) 1,875 3,011 - 55 (830)
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------ -----------------------
* net income/(losses) from financial instruments held
for trading or managed on a fair value basis - (291) - 3,011 - - (830)
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 1,875 - - 55 -
----------------------------------------------------------- ----------------------- ---------------------- ---------------------------- ------------------------ ------------------------ ------------------------
Movement in Level 3 financial instruments (continued)
Assets Liabilities
---------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------
Designated
and otherwise
mandatorily
measured
at fair
value
through Designated
Financial Trading profit Trading at fair
investments assets or loss Derivatives liabilities value Derivatives
HK$m HK$m HK$m HK$m HK$m HK$m HK$m
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
At 1 Jan 2021 6,635 1,237 49,534 1,028 - 20,484 3,538
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
Total gains/(losses) recognised
in profit or loss (7) (749) 5,853 1,612 - (3,263) 2,263
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
* net income from financial instruments held for
trading or managed on a fair value basis - (749) - 1,612 - - 2,263
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 5,853 - - (3,263) -
-----------------------------------------------------------
* gains less losses from financial investments at fair
value through other comprehensive income (7) - - - - - -
Total gains/(losses) recognised
in other comprehensive income
('OCI') (2,619) 1 8 5 - 160 5
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
- financial investments: (2,610) - - - - - -
fair value gains/(losses)
- exchange differences (9) 1 8 5 - 160 5
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- -------------------------
Purchases 585 2,825 10,427 - - - -
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
New issuances - - - - - 4,925 -
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
Sales (2) (243) - - - - -
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
Settlements (676) (31) (3,321) (479) - (622) (3,308)
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
Transfers out - (236) (921) (351) - (1,865) (367)
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
Transfers in - 13 - 58 - 3,134 260
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
At 30 Jun 2021 3,916 2,817 61,580 1,873 - 22,953 2,391
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
Unrealised gains/(losses)
recognised in profit or
loss relating to assets
and liabilities held at
30 Jun 2021 - (759) 5,477 1,348 - (6) 319
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------------- -------------------------
* net income/(losses) from financial instruments held
for trading or managed on a fair value basis - (759) - 1,348 - - 319
-----------------------------------------------------------
* changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss - - 5,477 - - (6) -
----------------------------------------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ----------------------- -------------------------
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarter. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
The following table shows the sensitivity of Level 3 fair values to reasonably possible alternative assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
At 30 Jun 2022 At 31 Dec 2021
-------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------
Reflected
in profit or Reflected Reflected in Reflected in
loss in OCI profit or loss OCI
------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------
Un- Un- Un- Un-
Favourable favourable Favourable favourable Favourable favourable Favourable favourable
changes changes changes changes changes changes changes changes
HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
Derivatives,
trading
assets and
trading
liabilities(1) 204 (275) - - 158 (162) - -
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
Financial
assets and
liabilities
designated
and otherwise
mandatorily
measured at
fair value
through profit
or
loss 4,134 (4,134) - - 3,741 (3,742) - -
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
Financial
investments - - 194 (194) - - 157 (157)
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
Total 4,338 (4,409) 194 (194) 3,899 (3,904) 157 (157)
--------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
1 'Derivatives, trading assets and trading liabilities' are presented as one category to reflect the manner in which these instruments are risk-managed.
The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.
Key unobservable inputs to Level 3 financial instruments
The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 30 June 2022.
There has been no change to the key unobservable inputs to Level 3 financial instruments and inter-relationships therein, which are detailed on page 124 of the Annual Report and Accounts 2021.
Quantitative information about significant unobservable inputs in Level
3 valuations
Fair value 30 Jun 31 Dec
2022 2021
----------------------------------- ---------------- -------------
Full range Full range
Assets Liabilities of inputs of inputs
-------------- --------------- ---------------- -------------
HK$m HK$m Key Lower Higher Lower Higher
Valuation unobservable
techniques inputs
--------------- ---------------- ----------------- -------------- --------------- ------- ------- ----- ------
Private equity
and
related See footnote See footnote
investments 85,906 3 1 1
Structured
notes - 21,665
--------------- ---------------- ----------------- -------------- --------------- ------- ------- ----- ------
- equity-linked Model - Option Equity 6 95
notes - 13,786 model volatility % % 6% 90%
--------------- ---------------- ----------------- -------------- --------------- ------- ------- ----- ------
Model - Option Equity 33 98
model correlation % % 22% 97%
--------------- ---------------- ----------------- -------------- --------------- ------- ------- ----- ------
- FX-linked Model - Option 3 36
notes - 7,699 model FX volatility % % 2% 36%
--------------- ---------------- ----------------- -------------- --------------- ------- ------- ----- ------
- other - 180
Others(2) 8,553 1,987
--------------- ---------------- ----------------- -------------- --------------- ------- ------- ----- ------
At 30 Jun 2022 94,459 23,655
--------------- ---------------- ----------------- -------------- --------------- ------- ------- ----- ------
1 Given the bespoke nature of the analysis in respect of each private equity holding, it is not practical to quote a range of key unobservable inputs.
2 'Others' includes a range of smaller holdings.
8 Fair values of financial instruments not carried at fair value
--------------------------------------------------------------
At
----------------------------------------------------------------------------------------------
30 Jun 2022 31 Dec 2021
-------------------------------------------- ------------------------------------------------
Carrying Fair Carrying
amount value amount Fair value
HK$m HK$m HK$m HK$m
---------------------- --------------------- --------------------- ----------------------- -----------------------
Assets(1)
---------------------- --------------------- --------------------- ----------------------- -----------------------
Reverse repurchase
agreements -
non-trading 875,200 874,724 803,775 803,828
---------------------- --------------------- --------------------- ----------------------- -----------------------
Loans and advances to
banks 493,423 493,454 432,247 432,531
---------------------- --------------------- --------------------- ----------------------- -----------------------
Loans and advances to
customers 3,864,799 3,851,562 3,840,939 3,830,416
---------------------- --------------------- --------------------- ----------------------- -----------------------
Financial investments
- at amortised cost 938,035 895,968 502,564 540,476
---------------------- --------------------- --------------------- ----------------------- -----------------------
Liabilities(1)
---------------------- --------------------- --------------------- ----------------------- -----------------------
Repurchase agreements
- non-trading 287,591 287,577 255,374 255,366
---------------------- --------------------- --------------------- ----------------------- -----------------------
Deposits by banks 337,078 337,072 280,310 280,408
---------------------- --------------------- --------------------- ----------------------- -----------------------
Customer accounts 6,113,666 6,113,659 6,177,182 6,177,676
---------------------- --------------------- --------------------- ----------------------- -----------------------
Debt securities in
issue 107,280 106,265 67,364 67,842
---------------------- --------------------- --------------------- ----------------------- -----------------------
Subordinated
liabilities 4,029 3,367 4,054 3,864
---------------------- --------------------- --------------------- ----------------------- -----------------------
1 Amounts with HSBC Group entities are not included here.
The fair values above are stated at a specific date and may be significantly different from the amounts which will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to the group as a going concern.
Other financial instruments not carried at fair value are typically short term in nature or re-priced to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness, Hong Kong currency notes in circulation, other financial assets and other financial liabilities, all of which are measured at amortised cost.
9 Contingent liabilities, contractual commitments and guarantees
--------------------------------------------------------------
At
----------------------------------------
30 Jun 31 Dec
2022 2021
HK$m HK$m
-------------------------------------- ------------------ --------------------
Guarantees and contingent liabilities 384,041 379,443
-------------------------------------- ------------------ --------------------
Commitments(1) 3,083,723 2,945,560
-------------------------------------- ------------------ --------------------
3,467,764 3,325,003
-------------------------------------- ------------------ --------------------
1 Includes HK$1,892,070m of commitments at 30 June 2022 (31 December 2021: HK$1,826,335m) to which the impairment requirements in HKFRS 9 are applied where the group has become party to an irrevocable commitment.
The above table discloses the nominal principal amounts of commitments (excluding capital commitments), guarantees and other contingent liabilities, which 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 2022 included amounts in relation to legal and regulatory matters as set out in Note 13.
10 Segmental analysis
------------------
The Executive Committee ('EXCO') is considered the Chief Operating Decision Maker ('CODM') for the purpose of identifying the group's operating segments. Operating segment results are assessed by the CODM on the basis of performance measured in accordance with HKFRSs. The basis of identifying operating segments is set out in Note 31 'Segmental analysis' in the Annual Report and Accounts 2021, and the segmental analysis is presented based on reportable segments as assessed under HKFRS 8 'Operating Segments'.
Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to operational business lines and geographical regions. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to other operating segments are included in Corporate Centre.
Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-group elimination items for the operating segments are presented in the Corporate Centre.
Change in operating and reportable segments
Effective from the second half of 2021, the operating and reportable segments have been changed to reflect the change in management of the Global Banking and Markets business, with the splitting out of Global Banking ('GB'), Markets and Securities Services ('MSS') and Global Banking and Markets - Other as separate operating segments following realignments within our internal reporting to the CODM. GB and MSS are separate reportable segments. Global Banking and Markets - Other, which mainly comprises of business activities which are jointly managed by GB and MSS, is reported under 'Other (GBM - other)'. Comparatives have been re-presented to conform to the current year's presentation.
Our global businesses and reportable segments
The group provides a comprehensive range of banking and related financial services to its customers in our global businesses: Wealth and Personal Banking ('WPB'), Commercial Banking ('CMB') and Global Banking and Markets ('GBM'). The products and services offered to customers are organised by these global businesses.
-- WPB offers a full range of retail banking and wealth products to our customers from personal banking to ultra-high net worth individuals. Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services. We also provide wealth management services, including insurance and investment products, global asset management services, investment management and Private Wealth Solutions for customers with more sophisticated and international requirements.
-- CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its customers access to products and services offered by other global businesses, such as Global Banking and Markets, which include foreign exchange products, raising capital on debt and equity markets and advisory services.
-- GBM comprises of two separate reportable segments: GB and MSS. GB provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services. MSS provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.
-- Corporate Centre includes strategic investments such as our investment in BoCom, Central Treasury revenue, and costs which are not allocated to global businesses, mainly in relation to investments in technology.
Financial performance by reportable segments is set out in the Financial Review on page 3, which forms part of the Interim condensed consolidated financial statements.
Geographical regions
Rest
Hong of Intra-segment
Kong Asia-Pacific elimination Total
HK$m HK$m HK$m HK$m
-------------------- --------------------- --------------------- --------------------------- ---------------------
Half-year to 30 Jun
2022
-------------------- --------------------- --------------------- --------------------------- ---------------------
Total operating
income 93,475 41,366 388 135,229
-------------------- --------------------- --------------------- --------------------------- ---------------------
Profit before tax 16,906 27,487 - 44,393
-------------------- --------------------- --------------------- --------------------------- ---------------------
At 30 Jun 2022
-------------------- --------------------- --------------------- --------------------------- ---------------------
Total assets 7,413,631 3,889,079 (946,678) 10,356,032
-------------------- --------------------- --------------------- --------------------------- ---------------------
Total liabilities 6,928,001 3,450,807 (946,678) 9,432,130
-------------------- --------------------- --------------------- --------------------------- ---------------------
Credit commitments
and contingent
liabilities
(contract amounts) 1,825,271 1,642,493 - 3,467,764
-------------------- --------------------- --------------------- --------------------------- ---------------------
Half-year to 30 Jun
2021
-------------------- --------------------- --------------------- --------------------------- ---------------------
Total operating
income 94,168 40,229 (25) 134,372
-------------------- --------------------- --------------------- --------------------------- ---------------------
Profit before tax 26,062 24,445 - 50,507
-------------------- --------------------- --------------------- --------------------------- ---------------------
At 30 Jun 2021
-------------------- --------------------- --------------------- --------------------------- ---------------------
Total assets 6,937,249 3,578,737 (751,965) 9,764,021
-------------------- --------------------- --------------------- --------------------------- ---------------------
Total liabilities 6,454,854 3,147,639 (751,965) 8,850,528
-------------------- --------------------- --------------------- --------------------------- ---------------------
Credit commitments
and contingent
liabilities
(contract amounts) 1,742,763 1,484,782 - 3,227,545
-------------------- --------------------- --------------------- --------------------------- ---------------------
11 Related party transactions
--------------------------
There were no changes in the related party transactions as described in the Annual Report and Accounts 2021 that have had a material effect on the financial position or performance of the group in the half-year to 30 June 2022. All related party transactions that took place in the half-year to 30 June 2022 were similar in nature to those described in the Annual Report and Accounts 2021.
12 Business acquisitions
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The following recently announced acquisitions form part of our strategy to become a market leader in Asian wealth management:
-- On 28 January 2022, HSBC Insurance (Asia-Pacific) Holdings Limited, a subsidiary of the group, notified the shareholders of Canara HSBC Life Insurance Company Limited ('Canara HSBC') of its intention to increase its shareholding in Canara HSBC up to 49%. The group currently has a 26% shareholding which is accounted for as an associate. Any increase in shareholding is subject to agreement with other shareholders in Canara HSBC, as well as internal and regulatory approvals. Established in 2008, Canara HSBC is a life insurance company based in India.
-- On 11 February 2022, HSBC Insurance (Asia-Pacific) Holdings Limited completed the acquisition of 100% of AXA Insurance Pte Limited ('AXA Singapore') for HK$4.1bn. A provisional gain on acquisition of HK$556m was recorded, reflecting the excess of the fair value of net assets acquired (gross assets of HK$35.5bn and gross liabilities of HK$30.9bn) over the acquisition price.
-- On 6 April 2022, the Bank announced it had increased its shareholding in HSBC Qianhai Securities Limited, a partially-owned subsidiary, from 51% to 90%.
-- On 23 June 2022, HSBC Insurance (Asia) Limited, a subsidiary of the group, acquired the remaining 50% equity interest in HSBC Life Insurance Company Limited. Headquartered in Shanghai, HSBC Life Insurance Company Limited offers a comprehensive range of insurance solutions covering annuity, whole life, critical illness and unit-linked insurance products.
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13 Legal proceedings and regulatory matters
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The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, the group considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 1.2(n) of the Annual Report and Accounts 2021. While the outcomes of legal proceedings and regulatory matters are inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 30 June 2022. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Anti-money laundering and sanctions-related matters
In December 2012, HSBC Holdings plc ('HSBC Holdings') entered into a number of agreements, including an undertaking with the UK Financial Services Authority (replaced with a Direction issued by the UK Financial Conduct Authority ('FCA') in 2013 and again in 2020) as well as a cease-and-desist order with the US Federal Reserve Board ('FRB'), both of which contained certain forward-looking anti-money laundering ('AML') and sanctions-related obligations. For several years thereafter, HSBC retained a Skilled Person under section 166 of the Financial Services and Markets Act and an Independent Consultant, under the FRB cease-and-desist order to produce periodic assessments of the Group's AML and sanctions compliance programme. The Skilled Person completed its engagement in the second quarter of 2021, and the FCA determined that no further Skilled Person work is required. Separately, the Independent Consultant completed its latest review pursuant to the FRB cease-and-desist order, which remains in place.
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.
Singapore Interbank Offered Rate ('Sibor') and Singapore Swap Offer Rate ('SOR')
In 2016, HSBC and other panel banks were named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in products related to the Sibor and SOR benchmark rates. The complaint alleges, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law.
In October 2021, the Bank reached a settlement in principle with the plaintiffs to resolve this action, the agreement for which was executed in May 2022. The settlement received preliminary court approval in June 2022, and the final approval hearing is scheduled for November 2022.
There are many factors that may affect the range of outcomes, and the resulting financial impact of this matter, which could be significant.
Other regulatory investigations, reviews and litigation
The Bank and/or certain of its affiliates are subject to a number of other investigations and reviews by various regulators and competition and law enforcement authorities, as well as litigation, in connection with various matters relating to the firm's businesses and operations, including investigations by tax administration, regulatory and law enforcement authorities in India and elsewhere in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
14 Interim Report 2022 and statutory accounts
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The information in this Interim Report 2022 is unaudited and does not constitute statutory accounts. The Interim Report 2022 was approved by the Board of Directors on 1 August 2022. The Bank's statutory annual consolidated accounts for the year ended 31 December 2021 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 22 February 2022. 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).
15 Ultimate holding company
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The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc, which is incorporated in England.
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August 09, 2022 05:58 ET (09:58 GMT)
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