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| Name | Symbol | Market | Type |
|---|---|---|---|
| Hsbc Uk Bk 20 | LSE:62YN | 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 Apr 2019 to Apr 2024
TIDM62YN
RNS Number : 3520D
HSBC UK Bank PLC
18 February 2020
HSBC UK Bank plc 2019 Annual Report and Accounts
In fulfilment of its obligations under section 4.1.3 and 6.3.5(1) of the Disclosure Guidance and Transparency Rules, HSBC UK Bank plc (the "Company") hereby releases the unedited full text of its 2019 Annual Report and Accounts for the year ended 31 December 2019.
The document is now available on the Company's website at:
http://www.hsbc.com/investor-relations/subsidiary-company-reporting
A copy of the above document has been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility via the National Storage Mechanism which is located at http://www.morningstar.co.uk/uk/NSM .
HSBC UK Bank plc
Annual Report and
Accounts 2019
Hot Features
Premium
Contents
Page
Strategic report
Key financial metrics 2
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About us 3
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Our strategy 5
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How we do business 6
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Key performance indicators 10
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Financial summary 11
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Risk overview 18
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Report of the Directors
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Risk 19
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Capital 70
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Corporate governance report 73
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Disclosure of information to
the auditors and Statement of
Directors' Responsibilities 81
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Independent auditors' Report 82
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Financial statements
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Financial statements 70
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Notes on the financial statements 78
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Presentation of information
This document comprises the Annual Report and Accounts 2019 for HSBC UK Bank plc ('the bank') and its subsidiaries (together 'HSBC UK' or 'the group'). 'We', 'us' and 'our' refer to HSBC UK Bank plc together with its subsidiaries. It contains the Strategic Report, the Report of the Directors, the Statement of Directors' Responsibilities and Financial Statements, together with the Independent Auditors' Report, as required by the UK Companies Act 2006. References to 'HSBC Group' or 'the Group' within this document mean HSBC Holdings plc together with its subsidiaries.
HSBC UK is exempt from publishing information required by The Capital Requirements Country-by-Country Reporting Regulations 2013, as this information is published by its ultimate parent, HSBC Holdings plc. This information will be available in June 2020 on the Group's website: www.hsbc.com.
Pillar 3 disclosures for HSBC UK are also available on www.hsbc.com, under Investor Relations.
All narrative disclosures, tables and graphs within the Strategic Report and Report of the Directors are unaudited unless otherwise stated.
Our reporting currency is GBP sterling. Unless otherwise specified, all $ symbols represent US dollars.
Cautionary statement regarding forward- looking statements
This Annual Report and Accounts 2019 contains certain forward-looking statements with respect to the financial condition, results of operations and business of the group.
Statements that are not historical facts, including statements about the group's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC UK 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.
Key financial metrics
Year ended Half Year
31 Dec 31 Dec 31 Dec 30 Jun
2019 2018(1) 2019(1) 2019(1)
Reported results
------- --------
Reported revenue (GBPm) 6,484 3,357 3,169 3,315
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Reported profit before tax (GBPm)(3) 1,010 1,064 394 616
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Reported profit after tax (GBPm) 516 763 165 351
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Profit attributable to the shareholders of the
parent company (GBPm) 512 763 164 348
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Return on average tangible equity (annualised)
('RoTE') (%)(3) 2.4 8.8 N/A N/A
------- -------- -------- ----------
Net interest margin (%) 2.05 2.22 N/A N/A
------- -------- --------
Expected credit losses and other credit impairment
charges ('ECL') as % of average gross loans and
advances to customers (%) 0.34 0.35 N/A N/A
--------------------------------------------------------- ------- -------- -------- ----------
Adjusted results
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Adjusted revenue (GBPm) 6,613 3,352 3,298 3,315
-------- -------- --------
Adjusted profit before tax (GBPm)(3) 2,263 1,299 1,125 1,138
-------- -------- --------
Cost efficiency ratio (%)(3) 56.5 52.1 57.4 55.7
-------- -------- --------
Adjusted return on average tangible equity (annualised)
('RoTE') (%)(2, 3) 9.9 11.7 N/A N/A
------- -------- -------- ----------
Balance sheet
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Total assets (GBPm) 257,102 238,939 N/A N/A
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Net loans and advances to customers (GBPm) 183,056 174,807 N/A N/A
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Customer accounts (GBPm) 216,214 204,837 N/A N/A
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Average interest-earning assets (GBPm) 231,701 219,419 N/A N/A
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Loans and advances to customers as % of customer
accounts (%) 84.7 85.3 N/A N/A
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Total shareholders' equity (GBPm) 22,191 22,273 N/A N/A
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Tangible ordinary shareholders equity (GBPm) 16,001 16,243 N/A N/A
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Capital, leverage and liquidity
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Common equity tier 1 ('CET1') capital ratio (%)(3) 13.0 12.7 N/A N/A
------- -------- -------- ----------
Total capital ratio (%) 19.2 18.3 N/A N/A
--------------------------------------------------------- ------- -------- -------- ----------
Risk-weighted assets ('RWAs') (GBPm) 85,881 91,839 N/A N/A
------- -------- -------- ----------
Leverage ratio (%) 5.0 5.6 N/A N/A
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High-quality liquid assets (liquidity value) (GBPm) 56,822 46,357 N/A N/A
------- -------- -------- ----------
Liquidity coverage ratio (%) 165 143 N/A N/A
--------------------------------------------------------- ------- -------- -------- ----------
1 HSBC UK's banking operations commenced on 1 July 2018, following the transfer of the qualifying businesses and subsidiaries from HSBC Bank plc. Results for the year ended 2019 have been provided on a half year to date basis in order to provide better comparability to the 2018 results. Balance sheet data and related metrics are not provided on this basis.
2 In the event that the current IAS 19 Pension fund surplus was zero, additional CET1 capital would be required to be held and Adjusted RoTE would be 11.3% (2018: 13.7%); we refer to this as Pension Adjusted RoTE.
3 These metrics are tracked as Key Performance Indicators of the group.
Presentation of non-GAAP measures
In measuring our performance, the financial measures that we use include those derived from our reported results in order to eliminate factors that distort period-on-period comparisons. Such measures are referred to as adjusted performance. A reconciliation of reported to adjusted performance is provided on pages 11 to 14.
RoTE is computed by adjusting the reported equity for goodwill and intangibles. A reconciliation is provided on page 119, which details the adjustments made to the reported results and equity in calculating RoTE.
About us
HSBC UK comprises of Retail Banking and Wealth Management ('RBWM'); Commercial Banking ('CMB'), Private Banking ('PB') and a restricted Global Banking and Markets ('GB&M') business.
HSBC UK is strongly connected to the rest of the HSBC Group and leverages this network to support customers and grow revenue across key trade corridors around the world.
Purpose, values and ambition HSBC Group's purpose
To be where the growth is; connecting customers to opportunities. They enable businesses to thrive and economies to prosper, helping people to fulfil their hopes and dreams and realise their ambitions.
Our values
Our values define who we are as an organisation:
Dependable
We are dependable, standing firm for what is right and delivering on our commitments.
Open
We are open to different ideas and cultures, and value diverse perspectives.
Connected
We are connected to our customers, communities, regulators and each other, caring about individuals and their progress.
Our UK ambition
Deeply rooted in the UK and providing a unique gateway to the world. We are investing in growth and innovation to make banking simple, safe and sustainable, and be the bank of choice for our customers, colleagues and communities through the generations.
What we do
HSBC UK, headquartered in Birmingham, has over 15 million active customers, with 22,000 colleagues across the country, supported by a further 10,000 colleagues based in our service company HSBC Global Services (UK) Limited, who provide services to HSBC UK and the wider HSBC Group.
HSBC UK manages its products and services through four businesses: RBWM, CMB, PB and a restricted GB&M business. In addition, certain central operations of the HSBC UK business lines are managed through the Corporate Centre.
Retail Banking and Wealth Management
Customers
RBWM serves over 14 million active customers under four brands: HSBC UK, first direct, M&S Bank and John Lewis Financial Services ('JLFS'). As well as catering for the mass retail market, we also provide services for emerging affluent to upper affluent individuals under the following propositions: HSBC UK Advance, HSBC UK Premier, and Jade by HSBC UK Premier.
Products and services
We offer a comprehensive set of banking products and services to support retail customers' everyday banking needs through a selection of channels, including branch, telephony and digital. We offer full banking services, mortgages, unsecured lending, wealth solutions and general insurance.
Commercial Banking
Customers
CMB serves over 830,000 active customers across the UK, ranging from start-ups to multi-national corporates, through four customer groups: Large Corporates ('LC'); Mid-Market Enterprises ('MME'); Business Banking ('BB'); and Small Business Banking ('SBB').
Products and services
CMB supports customers with tailored financial products and services to allow them to operate efficiently and to grow, with a strong relationship focus. These include Credit and Lending, Global Liquidity and Cash Management (GLCM), and Global Trade and Receivables Finance (GTRF). Through close collaboration with HSBC Group, we can make available GB&M products and Securities Services to our customers.
Private Banking
Customers
PB serves high and ultra-high net worth individuals and families; including those with international banking needs.
Products and services
PB supports clients with investment management; including advisory, discretionary and brokerage services. We also offer private wealth solutions, comprising trusts and estate planning, designed to protect wealth and preserve it for future generations. This is as well as a full range of lending and transactional banking services.
Global Banking and Markets
We are able to offer selected GB&M products to our customer base. For example, we maintain a markets team that help to support the sale of eligible markets products to our CMB customers from HSBC Bank plc.
Corporate Centre
Corporate Centre comprises Central Treasury, including Balance Sheet Management, interests in a joint venture, and central stewardship costs that support our businesses.
Economic background and outlook
Real quarterly UK GDP growth slowed from 0.5% in the third quarter of 2019, to 0.0% in the fourth quarter, according to data from the Office of National Statistics. The underlying pace of UK economic growth remains subdued, with full-year growth at 1.4% for 2019.
The labour market remains relatively firm with the unemployment rate standing at 3.8% in the three months to November. The annual rate of inflation, according to the Consumer Price Index ('CPI'), stood at 1.3% in December 2019. The 'core' CPI rate, which strips out food and energy prices, stood at 1.4%.
Following the general election on 12 December, the UK's political landscape has changed substantially. With a large majority in Parliament, the government presided over the UK's withdrawal from the European Union (EU) on 31 January. After a transition period lasting until the end of 2020, the UK is set to move to a new trading relationship with the EU.
Still some uncertainty remains. Firstly, it remains to be seen what form the UK's future relationship with the EU, and other trading partners, will take. Secondly the government is yet to outline its fiscal plan in detail, which will be set out in the March budget. Whilst business surveys point to a post-election boost to economic growth, it is unclear how large and sustained this will be.
Given these continued uncertainties, HSBC Research maintains a cautious outlook. It forecasts below-average GDP growth of 1.1% in 2020, then an acceleration to 1.4% in 2021, driven, in part, by looser fiscal policy. Despite this, the subdued outlook is unlikely to deliver much inflationary pressure. HSBC Research also forecasts the Bank Rate to be reduced from 0.75% to 0.50% in the first half of this year, then to remain on hold until at least the end of 2021.
Process of UK withdrawal from the European Union
The UK left the EU on 31 January 2020, and entered a transition period until 31 December 2020. During the transition period the UK will continue to be bound by EU laws and regulations. Beyond that date, there is no certainty on what the future relationship between the UK and the EU will be. This creates market volatility and economic risk, particularly in the UK. We will continue to work with regulators, governments, our customers and colleagues to manage the risks resulting from the UK's exit from the EU as they arise, particularly across those industry sectors most impacted. For more information please refer to pages 18 and 22 of the Report of the Directors.
Our strategy
The launch of the HSBC Group's ring-fenced bank (HSBC UK) in 2018, marked the beginning of a new chapter for HSBC's strategy in the UK. This has been built around four strategic priorities: customer experience, colleague engagement and shareholder value growth, all underpinned by simplification of the business.
Customer experience
We are investing in digital capabilities to enhance the overall customer experience, whilst also launching new initiatives to support our customers.
Progress in 2019
We have made good progress in improving customer experience across our brands and businesses. first direct achieved top spot in the Competition and Markets Authority ('CMA') rankings for customer service in February 2020. HSBC UK RBWM also showed significant improvements, moving from twelfth to joint sixth. CMB moved to second place in the most recent Savanta (previously Charterhouse) survey whilst we also saw an improvement in our annual Private Banking relationship survey, with scores increasing by 0.3 points to 8.1 out of 10. For more information on customer service and satisfaction measures, please refer to page 9.
This progress reflects our continued focus on enhancing the customer experience, including the integration of features from our Connected Money proposition into our mobile app and the beta test of HSBC Kinetic for business customers. We also launched our 'Intrepid Exporters' campaign in CMB as well as a new GBP14bn Small and Medium Enterprise ('SME') lending fund, our largest to date, as part of our commitment to help British businesses navigate the UK's withdrawal from the EU and realise their ambitions for growth. This is reflected in our ranking of joint third for SME overdraft and loan services within the February 2020 CMA rankings.
Financial inclusion and vulnerability has also been a key focus for HBSC UK, with the launch of the Survivor Bank and No Fixed Address initiatives in 2019. For more information on how we have supported financial inclusion please refer to page 5.
Future focus
We plan to focus on accelerating digital developments to drive customer growth across our businesses with the aim of improving the customer experience. We aim to focus on leveraging our multi-brand strategy within RBWM to acquire new customers as well as improving our penetration of MMEs within our CMB business through a renewed focus on being where the growth is.
Colleague engagement
We are building an inclusive culture with a greater focus on colleagues' wellbeing.
Progress in 2019
According to internal measures, colleague engagement improved in 2019, with the metric 'I would recommend HSBC as a great place to work" increasing by 2 percentage points to 62% (vs FY18). With a focus on mental health and wellbeing, we held a number of wellbeing events throughout the year and hosted our first wellbeing month in May which saw over 2,500 colleagues attend events. Over 400 colleagues also voluntarily undertook 'mental health conversation skills in practice' training throughout 2019.
Future focus
We plan to build on the progress made in 2019, ensuring that our colleagues continue to feel empowered. Wellbeing, mental health, career development and pride will remain key priorities.
Shareholder value growth
Responding to emerging customer needs, we aim to grow our business in a safe and sustainable way. This will include us targeting growth in market share for mortgages and commercial lending.
Progress in 2019
Customer numbers have grown across RBWM, whilst combined customer numbers in our LC and MME customer groups in CMB remained broadly flat. We also leveraged relationships across business lines, with over 330 customers referred into PB from RBWM and CMB.
Despite a challenging environment, HSBC UK maintained revenues and grew loans and advances balances, with mortgage balances increasing by 7.1% to GBP101bn and commercial lending balances increasing by 1.7% to GBP68bn. We grew our mortgage market share by 0.3% to 6.8%, whilst our commercial lending market share remained broadly flat at 9.9%(1) .
Reported profit has been impacted by an increase in operating expenses, this is primarily due to an increase in customer remediation, including a GBP932m increase in PPI provisions. Adjusted return on tangible equity ('RoTE') was 9.9% (Pension Adjusted RoTE was 11.3%).
For more information on our financial performance in 2019, please refer to pages 10 to 15.
1 Loans and overdraft balances as a percentage of the market.
Future focus
We aim to continue to grow our mortgage market share, through controlled expansion of the intermediary channel, as well as our commercial lending market share, whilst maintaining a conservative risk appetite. We aim to grow revenue as we invest in the business and are committed to a positive adjusted jaws (year-on-year revenue growth % higher than cost growth %) discipline in the medium term.
Simplification
We are enhancing and simplifying our business to enable and empower our colleagues to support our customers.
Progress in 2019
We continually strive to simplify our organisation and in 2019 we delivered efficiencies in key on-boarding journeys, with mortgage time-to-offer reducing to 9 days from 12 days and relationship managed CMB segment on-boarding times decreasing by 30%, vs December 2018. We have also removed complexity by eliminating scarcely used products in RBWM and CMB, whilst also saving time for our colleagues by optimising internal governance.
Work was ongoing throughout 2019 for the transfer of nearly all of HSBC Private Bank (UK) Limited's business to the bank. This was effected by way of a court sanctioned transfer scheme under Part VII of the Financial Services and Markets Act 2000, and was completed on 1 January 2020. The transfer is anticipated to enhance the collaboration between RBWM, CMB and PB, helping to improve the customer lifecycle experience. Closer alignment will also provide PB with access to digital and technology developments.
Future focus
We aim to simplify our back office systems and processes to support our colleagues and utilise new and emerging technologies where possible to help improve customer service and cost efficiency.
Our core advantages Full banking capability
We serve customers ranging from individual savers through to large multinational corporations with the support of our four businesses. Our full banking capability assists us in seeking to meet our customers' diverse financial needs, reduce our risk profile and volatility, and generate stable returns for shareholders.
Value of our network and access to an exceptional global presence
Within the UK we provide products and services digitally, by phone and face-to-face through over 650 branches, bureaux and offices, 64 commercial centres, and 4 contact centres.
For customers with international interests, we are intrinsically connected with the HSBC Group's wider global network, enabling our customers to seize international growth opportunities. This helps us build deeper and more enduring relationships with businesses and individuals. The HSBC Group's geographic reach and network of customers also allows greater insight into the trade and capital flows across supply chains.
Business synergies
We share resources and product capabilities across our businesses and leverage these synergies when serving our customers. For example, the foreign exchange and wealth management needs of RBWM customers create opportunities for GB&M. CMB collaborates closely across HSBC UK to fully support our customers at various points in their lifecycle; for example, PB can support the owners of CMB companies looking to exit and grow their wealth, and CMB works closely with RBWM to offer colleague banking services for our customers.
How we do business
We conduct our business in a way that seeks to ensure we support the sustained success of our customers, colleagues and communities. We see investment in our capabilities and processes as a source of remaining sustainable in the long-term.
Supporting our customers
We create value by providing the products and services our customers need and aim to do so in a way that fits seamlessly into their lives. This helps us to build long-lasting relationships with our customers. We build trust by striving to protect our customers' data and information, and delivering fair outcomes for them. If things do go wrong, we address complaints in a timely manner
.
How we listen
We listen to our customers in a number of different ways, including through our interactions with them, surveys, social media and through their complaints. We use these insights to improve our services.
When things go wrong
To improve our services we must be open to feedback and acknowledge when things go wrong. We listen to complaints to address customers' concerns and understand where we can improve processes, procedures and systems. We focus on colleague training and emphasise the importance of recording complaints. This improves our complaint handling expertise and helps ensure our customers are provided with fair outcomes. Complaints are also monitored and reported to governance forums.
Taking responsibility for the experiences we deliver
We define conduct as delivering fair outcomes for customers and not disrupting the orderly and transparent operation of financial markets. This is central to our long-term success and our ability to serve customers. We have clear policies, frameworks and governance in place to protect customers. These encompass the way we behave, design products and services, train and incentivise colleagues, and interact with customers and each other. Our Group Conduct Framework guides activities to strengthen our business and increases our understanding of how the decisions we make affect customers and other stakeholders. Details on our Conduct Framework are available at www.hsbc.com
Building financial inclusion and accessibility
At HSBC UK we are committed to offering support to those who, are in many cases, excluded from the banking system. In 2019, we launched our Survivor Bank initiative, which supports victims of human trafficking and modern-day slavery, with over 320 accounts opened in 2019. We also launched our 'No Fixed Address' initiative supporting the homeless and people with no fixed address, with over 90 accounts opened in 2019, with both initiatives being live in 32 branches.
We are supporting victims of financial abuse by implementing the Financial Abuse Code of Practice into UK procedures, and launching a national sort code for survivors of financial abuse. To support in the delivery of our Financial Inclusion and Vulnerability (FIV) programme, a robust internal and external campaign has been created to drive a culture change and bring FIV awareness to the forefront for our colleagues, when both serving customers or developing our products and journeys. This is reinforced by our specialist team who provide support to our customers in vulnerable circumstances.
Supporting our colleagues
Our colleagues span many cultures and communities. By focusing on colleague well-being, diversity, inclusion and engagement, as well as building our colleagues' skills and capabilities for now and
for the future, we aim to create an environment where our colleagues can fulfil their potential. We want to have an open culture where our people feel connected, supported to speak up and where our leaders encourage feedback.
Creating an inclusive environment
We aim to create a working environment that is diverse and inclusive, where everyone feels they can thrive. We encourage diversity of thought from all of our colleagues so we can deliver on our ambition and believe continued success will require a workforce that reflects our customers and the communities we serve.
Our definition of diversity and inclusion goes broader than inherent characteristics to include other differences that make individuals unique, such as cultural fluency, global experience and work styles.
Gender balance is an important part of creating a diverse and inclusive environment. HSBC UK supports the 30% Club, which strives for a target of 30% women in senior leadership roles
(classified as 0-3 in our global career band structure) by the end of 2020. HSBC UK achieved a figure of 32% in 2019.
More information about our diversity and inclusion activity and our UK Gender Pay Gap Report is available at www.hsbc.com.
Listening to our colleagues
It is vital we understand how our colleagues feel as it helps us give them the right support to thrive and serve our customers well. We capture their views on a range of topics, such as our strategy, culture, behaviour, well-being and working environment, through our colleague survey, Snapshot, which runs twice yearly. Results are presented to the HSBC UK Executive Committee, the Board of Directors of HSBC UK ('the Board'), and other relevant committees of the functions and businesses. This ensures the attitudes and sentiments of our colleagues inform decision-making at all levels of HSBC UK, and action can then be taken to tackle areas of concern. Additionally, we also participate in the external Banking Standards Board Annual assessment, comprising a colleague survey and focus groups where our colleagues can also have their say.
We have a structured communications approach that uses leadership communications, campaigns and a regular flow of news to help colleagues to serve our customers better, make sense of our strategy, focus on our commercial priorities and provide clarity on issues. We build a sense of pride and purpose by recognising our colleagues' contributions to our business and celebrating the achievements of HSBC UK.
Empowering a speak up culture
Having a culture where our colleagues feel able to speak up is critical. Individuals are actively encouraged to raise concerns about wrongdoing or unethical conduct and multiple channels, including telephone hotlines, online and email, have been established to support this.
HSBC Confidential provides a platform that enables all colleagues to raise concerns on any issues outside of the usual escalation channels; in confidence and without fear of retaliation. Concerns raised are investigated thoroughly and independently. HSBC UK does not condone or tolerate any acts of retaliation against anyone who raises a concern.
Supporting our community
We have a responsibility to invest in the long-term prosperity of our community. In 2019, we donated GBP6.6m to charities and non-profit organisations, running programmes and projects in the UK.
We are committed to helping our colleagues contribute to their communities, and we encourage volunteering through paid volunteering days.
We recognise technology is developing at a rapid pace and new skills are needed to succeed. That is why we are focussed on increasing the future skills of our customers, colleagues and communities. Our initiatives also support disaster relief efforts when required.
Future skills
Our sustainability strategy focuses on three key areas of future skills: employability, entrepreneurship and financial capability.
Employability
The Prince's Trust
HSBC UK's charitable partnerships help young people develop employment related skills. The Group has supported The Prince's Trust since 2012 and we are the largest corporate partner for their employment programme. In 2019, our support enabled 1,985 young people to re-engage with education, training or employment.
In 2013, the Group started our UK Traineeship Programme, providing work experience and real job opportunities to young people supported by The Prince's Trust. In 2019 HSBC UK provided training for 36 young unemployed people, leading to 14 successful job outcomes, 11 of which gained employment directly with HSBC UK.
Entrepreneurship skills
Young Enterprise Company programme
HSBC have supported Young Enterprise for over thirty years. Our 2019 funding has supported 3,374 pupils from the most deprived areas of the UK to take part in the Company Programme.
The programme gives young entrepreneurs a live experience of starting a company and taking a product to market, making the connection between school and the preparation for the world of work. Teams of up to 25 pupils work together and develop a range of skills that will support their careers and empower the next generation of entrepreneurs:
"Young Enterprise has been such an incredible experience. As a team we have grown so close and Young Enterprise has been an incredible platform to do that. For the future we expect to go bigger and better and can't wait to see what comes next." Harriette Evans, Bath Company of the Year winners 2019
Financial capability
Young Money Centre of Excellence in Financial Education
HSBC UK are working with Young Enterprise to create 17 primary centres of excellence across England, Wales and Scotland. This will see the very first centre of excellence in Financial Education launched in Scotland.
The Centres of Excellence programme is designed to embed sustainable financial education throughout a whole school, with young people at the heart of the programme. The goal is that they leave school with the knowledge, skills and confidence to be able to make informed and independent financial decisions:
"Introducing the Centre of Excellence programme into Scotland brings a focus on high quality and sustainable financial education - something which Young Enterprise Scotland are truly committed to supporting schools to achieve. Creating a network of schools that can showcase best practise financial education and support other local schools to do the same, creates an excellent starting point from which to develop financial education further within Scotland." Geoff Leask - Chief Executive at Young Enterprise Scotland
Community investment
Our local charitable funding supports vulnerable people through the generations. In 2019, these colleague-led projects supported 25,605 people across 58 local charities. In addition, we have a fund available to allow colleagues to match fundraising or volunteering in their own time. This raised GBP6.9m for local charities including our matched funding.
Thousands of HSBC UK colleagues volunteer every year with our charitable partnerships and programmes. All colleagues can take two days per annum to volunteer for a charity of their choice in work time. 8,155 colleagues gave a total of 68,099 work-time hours to community activities.
Maintaining a responsible business culture
HSBC UK is a leading UK financial institution that aims to be simple, safe and sustainable; this reflects our responsibility to protect our customers, our communities and the integrity of the financial system.
At a glance
We act on our responsibility to run our business in a way that upholds high standards of corporate governance.
We are committed to working with our regulators to manage the safety of the financial system, adhering to the sprit and the letter of the rules and regulations governing our industry. In our endeavour to restore trust in our industry, we aim to act with courageous integrity and learn from past events to prevent their recurrence.
We meet our responsibility to society by paying taxes and being transparent in our approach to this. We also seek to ensure we respect global standards on human rights in our workplace and our supply chains, and continually work to improve our compliance management capabilities.
Anti-bribery and corruption
HSBC UK is committed to high standards of ethical behaviour and operates a zero tolerance approach to bribery and corruption. We consider such activity to be unethical and contrary to good corporate governance. HSBC Group has a global Anti-Bribery & Corruption Policy which gives practical effect to global initiatives such as the Organisation of Economic Co-Operation and Development, the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and Principle 10 of the United Nations Global Compact.
Human rights
HSBC UK's commitment to respecting human rights, principally as they apply to our colleagues, our suppliers and through our lending, is set out in our 2015 HSBC Group statement on Human Rights. This statement, along with our Environmental, Social and Governance Criteria ('ESG') updates and our statements under the UK's Modern Slavery Act, are available on www.hsbc.com/our-approach/measuring-our-impact.
Engaging with our suppliers
HSBC Group have globally consistent standards and procedures for the onboarding and use of external suppliers and require suppliers to meet our compliance and financial stability requirements, as well as to keep to our sustainability code of conduct. Payment on time is of paramount importance, and as such our commitment to paying our suppliers is in line with local requirements, including the Prompt Payment Code in the UK.
More information can be found on our public website www.hsbc.com.
Section 172 statement
As set out in section 172 of the UK Companies Act 2006 (the 'Act'), the Directors must act in good faith to promote the success of the company for the benefit of its members as a whole. In performing their duty, under the Act, the Board is required to have full regard to, amongst other things: the interests of our colleagues; the impact of our operations on the community and environment; the need to foster the bank's business relationships with suppliers, customers and others; and the need to nurture our relationship with key stakeholders in order to maintain a reputation for high standards of business conduct and enhance the sustainable long term success of the business. The Directors give careful consideration to the factors set out above in discharging their duties.
The Directors are supported in the discharge of their duties by:
-- An induction programme and ongoing training to provide an understanding of our business, financial performance and prospects;
-- Management, who present proposals to the Board and Committee meetings for decision, include relevant information to enable them to determine the action that would most likely promote the success of the bank; and
-- Agendas for the Board and Committee meetings are structured to provide sufficient time for the consideration and discussion of key matters.
Stakeholder engagement
Building strong relationships with our stakeholders will help achieve our ambition and promote the long term success of HSBC UK. Our stakeholders that we consider in this regard are the people who work for us, bank with us, own us, supply us and regulate us. Members of the UK Board regularly meet with bank's regulators and we proactively engage with them to facilitate strong relationships and understand the regulators' expectations that are critical to our business. Our customers' voices are heard through our interactions with them, surveys, listening to and engaging with them on social media and from their complaints. Further information on engagement with some of our stakeholders can be found on pages 6,9 and 18.
As a wholly owned subsidiary, we also benefit from certain engagement practices which take place at a HSBC Group level. For details on some of the engagement that takes place with stakeholders at the HSBC Group level, please see the HSBC Holdings plc 2019 Annual Report and Accounts and HSBC Holdings plc Environmental, Social and Governance update.
Colleague engagement
Enhancing colleague engagement is an integral part of the bank's strategy. Management, including the Chief Executive Officer ('CEO'), are actively involved in the engagement of colleagues through regular leadership calls and all colleague web-casts to keep the workforce up-to-date on business developments and answer submitted questions. The Board receives regular updates from the CEO and the Head of Human Resources on colleague matters, including feedback received through our regular external and internal colleague surveys such as the Banking Standards Board survey and internal Snapshots. During the year, Directors have also had opportunities to directly engage with local management and other colleagues.
Further details of HSBC UK's engagement with colleagues can be found on pages 4 and 6.
Consideration of stakeholders in principal decisions
The maintenance of a reputation for high standards of business conduct and the likely consequences of the Board's actions in the long-term, are taken into account in the Board's discussions and in their decision making process under section 172 of the Act. During the period, the Board received information to support its understanding of the interests and views of our key stakeholders, as appropriate, as part of the decision making process, including reports and presentations on our financial and operational performance, key performance indicators ('KPIs') on non-financial aspects of performance, including people, customers, culture and values, diversity, sustainability, risk and the outcomes of specific pieces of engagement (for example, the results of customer and colleague surveys).
The Board delegates authority for day-to-day management of the bank to the management team and engages management in setting, approving and overseeing execution of the business strategy and related policies. Management conduct much of the bank's primary engagement with both internal and external stakeholders, including regulators, with the outputs of this engagement activity providing critical insight and perspectives for the Board when taking decisions or challenging management in respect of decisions made on behalf of the bank.
Depending on the nature of the issue in question, the relevance of each stakeholder group may differ. Board decisions will not necessarily result in a positive outcome for all of our stakeholders, but by considering our purpose, values and ambition, and having due regard for stakeholder relationships, the Board aims to ensure that its decisions promote the long-term success of the bank.
The Board is responsible for reviewing the bank's strategy and approving the risk appetite statement, capital and operating plans, and dividend proposed by management. Examples of other principal decisions taken by the bank during the year include: (i) the approval of the transfer of nearly all of HSBC Private Bank (UK) Limited's business to the bank. Consideration was given to the benefits and risks of the proposed transfer, including any additional actual or contingent liabilities which could alter the bank's solvency, capital or liquidity positions; the impact on relevant stakeholders, including customers and the bank's shareholder; and regulatory implications; and (ii) the UK People Strategy and Plan. Internal and external factors considered including colleague engagement; the culture of the organisation; how we work and our organisational design; pace of automation; and demographic and generational changes.
Supporting sustainable finance
Providing the finance to help our customers transition to a low or net zero carbon economy is one of HSBC Group's key sustainable finance commitments. In 2019, we continued to expand our sustainable finance offerings across CMB, RBWM and PB.
Commercial Banking
In July 2019, HSBC UK launched a green loan proposition for our CMB customers in the UK, aligning our green loan offering to the Europe, Middle-East and Africa and Asia-Pacific Loan Market Association's ('LMA') Green Loan Principles ('GLP') published in March 2018. These aim to create market standards and guidelines, providing a consistent methodology for use across the green loan market.
The green loan proposition is available for green term loans, green revolving credit facilities and green asset finance to LCs, MMEs and SMEs. A green loan is available for a minimum amount of GBP300,000, enabling businesses to access finance to support their sustainability projects.
In 2017, HSBC Group announced a commitment to provide and facilitate $100bn of sustainable finance globally by 2025. HSBC UK has provided GBP0.7bn ($0.9bn) of green loans and sustainable finance to our customers in 2019 and GBP1.3bn ($1.7bn) since the 2017 announcement.
HSBC Group has issued $3.4bn of green and sustainability bonds. The HSBC Group green bond report provides a summary and the asset register lists the loans that underpin the issuances. The latest report include $1.1bn of balances as at 30 June 2019 that were booked on the HSBC UK balance sheet. The green bond and asset register is available at www.hsbc.com/investors/fixed-income-investors/green-and-sustainability-bonds.
Providing innovative green products - Derwent London plc case study
We have worked with our long standing customer Derwent London plc, a specialist property developer and investor with a design-led philosophy and a progressive and sustainable approach to development. We acted as "Green Loan Coordinator", "Mandated Lead Arranger" and coordinator to provide a GBP450m revolving credit facility. This facility included a GBP300m green tranche making it the first revolving credit facility provided to a real estate investment trust in the UK which is fully aligned to the LMA's GLP. The GBP300m Green tranche will be used to fund sustainable development and activities, all of which will be published in a report by Derwent and independently verified to ensure compliance with the GLP.
The Green tranche is available to fund activities that satisfy the criteria set out in Derwent's newly established 'Green Finance Framework'. This published document describes the group's sustainability objectives, specifies minimum 'Green' eligibility criteria and outlines how it intends to fund development and refurbishment projects that will deliver first class working, amenity and outdoor spaces, improved energy efficiency and reduced consumption of natural resources.
Supporting sustainable SMEs - e-cargobikes.com case study
e-cargobikes.com offer last-mile delivery services to grocers and retailers throughout the UK. e-cargobikes.com are an existing customer, who were looking for asset and invoice financing. They had already made significant commercial progress by securing a delivery contract from Co-op Food, and obtaining exclusive rights to their specific electric cargo-bike gave them an important competitive edge in the market. The e-cargo bike solution offers grocers and retailers an environmentally and financially sustainable alternative to fossil-fuelled vehicles in high-density urban areas. They also alleviate traffic congestion, create a safer community for all and promote active lifestyles.
The asset finance has the capacity to fund a further c.140 bikes to grow the fleet allowing the business to fulfil its obligations under the new contracts. HSBC UK were able to provide a holistic sustainable financing offering of a GBP0.5m asset purchasing facility, and a further GBP2m invoice finance facility to support e-cargobikes.com's fast growth.
e-cargobikes.com is just one example of how HSBC UK is supporting SMEs in the low carbon economy.
Retail Banking and Wealth Management
HSBC Global Sustainable Multi-Asset Portfolios are designed to provide capital growth through investment in assets that meet sustainable investment principles. We currently offer two risk-profiled portfolios - "Conservative" and "Balanced" - which offer global diversification with a higher Environmental, Social and Governance (ESG) score and a lower carbon intensity than the market.
Performance was strong over 2019 for both portfolios, with 9.96% growth in the Conservative portfolio and a 10.03% growth in the Balanced portfolio, over the one-year period from 30 November 2018 to 30 November 2019.
Given such strong demand and customer interest, we are aiming to launch three additional risk profile portfolios in the Global Sustainable Multi-Asset range ("Cautious", "Dynamic" and "Adventurous"). We are also intending to provide a Sustainable Model Portfolio Service for our internal and external discretionary customers across five risk profiles by the end of 2020.
Private Banking
In 2019, PB partnered with GB&M to offer its first green structured notes to customers. These structured notes finance green projects such as energy efficiency, renewable energy, waste and water treatment or public transportation. Customers have the advantage of tailoring the tenure, currency and underlying ESG index
exposure to their investment needs while proceeds are being used for environmental purposes. These green structured notes are issued under the HSBC Green Bond framework, with a second party opinion from Cicero, a strategic advisory company.
Customers have the opportunity to follow up on the green projects they have helped finance through an annual report. This compliments our sustainable investment product range spanning across single line equity and fixed income, funds, exchange-traded funds and now structured notes.
Thought leadership, training, engagement
Thought leadership
We partnered with Imperial Business Partners and published a research paper called 'Lending to Low Carbon Technologies'. This reviewed the technology readiness levels for low-carbon solutions in the UK and presents a risk assessment from a bank lending perspective. The paper was written by researchers from Imperial College and is available on www.sustainablefinance.hsbc.com
Training
We continue to partner with Earthwatch, an environmental charity, to deliver our sustainability training programmes, which 132 colleagues attended in 2019.
In addition, 2,468 colleagues have completed online Sustainability training co-created with the University of Cambridge Institute for Sustainability Leadership.
Engagement
In 2019, we worked with WWF to highlight the ecological crisis and how it will impact businesses. We did this by promoting and screening their new film Our Planet: Our Business to our global network.
We also established a Climate Action Network in the UK led by passionate colleagues. These colleagues collaborate across all areas of the business to engage and educate our people on climate change and our sustainable operations strategy.
Sustainable operations
HSBC UK is committed to playing its part in supporting the transition to a low-carbon economy, both internally through our operations and externally by supporting our customers on their own transition journey.
Currently c.70% of our electricity comes from renewables through power purchase agreements for two wind farms and one solar farm. This helps move us closer to our ambition to source 100% of our electricity from renewable sources by 2030.
Reduce programme
As part of our Global Reduce Programme, we have committed to reduce CO2 emissions by 2 tonnes per full-time equivalent employee (FTE). By the end of 2019, globally we reached 2.26 tonnes and in the UK we have reached 1.08 tonnes per FTE.
Key Performance Indicators
The Board tracks HSBC UK's progress in implementing its strategy with a range of financial and non-financial measures or KPIs. Progress is assessed by comparison with the group strategic priorities, operating plan targets and historical performance.
HSBC UK reviews its KPIs regularly in light of its strategic objectives and may adopt new or refined measures to better align the KPIs to HSBC Group's strategy and strategic priorities.
Financial KPIs
Financial KPIs are included in the summary of Key Financial Metrics on page 2 and a review of these are detailed in the Financial Summary sections on pages 10 to 15 and the Capital section on pages 52 to 54.
Non-financial KPIs
We also monitor a range of non-financial KPIs focusing on our strategic priorities of customer experience, colleague engagement, shareholder value growth and simplification, as well as internal risk metrics. For in depth details on customer service and satisfaction please refer below; for diversity, inclusion and colleagues development, please refer to the corporate governance report on pages 54 to 59.
Customer service and satisfaction
We track our customer service and satisfaction through a series of industry measures across RBWM, CMB and PB.
Retail Banking and Wealth Management
In addition to the CMA rankings, we also use the Customer Recommendation Index (CRI), which measures customers' likelihood to recommend HSBC UK products and services to friends or family (scores out of 100). This measure is tracked relative to competitors.
Scores for HSBC UK RBWM have remained consistent since the end of 2018, with the overall score remaining at 76 in December 2019. In the CMA Service Quality Indicators, HSBC UK was ranked joint sixth in the February 2020 publication for overall service quality, with a score of 61%. This was an improvement of four percentage points and six ranking positions compared to the February 2019 release.
first direct continues to be a market leader for customer recommendation, and in February 2020 was ranked first in the CMA rankings. first direct also lead the market in CRI, ending the year with a score of 92, a one-point decline vs. 2018.
M&S Bank's CRI score has seen improvements across 2019, improving two points since December 2018, with a score of 78 in December 2019.
Commercial Banking
CMB has seen continued progress in the satisfaction of its customers, as measured by Savanta, reaching overall second position with all customer segments in the top three.
We continue to support our customers aspirations to grow their businesses both domestically and internationally, reflected by the strong perceptions of our lending support, where we are ranked joint third of twelve banks amongst SMEs (as measured within the February 2020 CMA Service Quality Indicator Study). CMB continues to be ranked the number one bank in the Savanta Survey for being able to support UK businesses trading internationally. Our international trade credentials were further endorsed with HSBC being named the market leader in global trade finance for the third year running in Euromoney magazine's Trade Finance Survey 2019.
Private Banking
In our annual internal Private Banking relationship survey we have seen a good year on year performance, with the UK satisfaction score increasing from a mean score of 7.8 out of 10 in 2018 to 8.1 in 2019. The improvements reflect a continued strength in the relationship with our customers, with customers' satisfaction with relationship management teams scoring 8.8, along with the supporting teams scoring 8.6.
Financial summary
The business and subsidiaries were in operation in HSBC Bank plc prior to the transfer to the bank on 1 July 2018. To provide better comparative information, the income statement is also presented for the six months 30 June 2019 ('1H19') and 31 December 2019 ('2H19').
Summary consolidated income statement for the year ended
Year ended Half-year to
---------------- ------------------
Audited Unaudited
31 Dec 31 Dec 31 Dec 30 Jun
2019 2018 2019 2019
GBPm GBPm GBPm GBPm
------- -------
Net interest income 4,752 2,456 2,315 2,437
------ ------ ------
Net fee income 1,230 648 612 618
------ ------ ------
Net income from financial instruments held
for trading or managed on a fair value basis 400 198 192 208
------------------------------------------------------ ------ ------ ------ ------
Changes in fair value of other financial instruments
mandatorily measured at fair value through
profit or loss 2 - 2 -
------------------------------------------------------ ------ ------ ------ ------
Gains less losses from financial investments 48 22 19 29
------ ------ ------ ------
Other operating income 52 33 29 23
------ ------ ------
Total operating income(1) 6,484 3,357 3,169 3,315
------------------------------------------------------ ------ ------ ------ ------
Net operating income before change in expected
credit losses and other credit impairment charges
('Revenue') 6,484 3,357 3,169 3,315
------------------------------------------------------ ------ ------ ------ ------
Change in expected credit losses and other
credit impairment charges (613) (305) (281) (332)
------ ------ ------ ------
Net operating income 5,871 3,052 2,888 2,983
------------------------------------------------------ ------ ------ ------ ------
Total operating expenses(1) (4,861) (1,988) (2,494) (2,367)
------ ------ ------ ------
Operating profit 1,010 1,064 394 616
------------------------------------------------------ ------ ------ ------ ------
Profit before tax 1,010 1,064 394 616
------------------------------------------------------ ------ ------ ------ ------
Tax expense (494) (301) (229) (265)
------ ------ ------ ------
Profit for the year 516 763 165 351
------------------------------------------------------ ------ ------ ------ ------
Profit attributable to shareholders of the
parent company 512 763 164 348
------ ------ ------
Profit attributable to non-controlling interests 4 - 1 3
------------------------------------------------------ ------ ------ ------ ------
1 Total operating income and expenses includes significant items as detailed on pages 12 to 14.
Reported performance
2019 Full Year ('FY') reported profit before tax was GBP1,010m. 2H19 reported profit before tax of GBP394m was GBP222m, 36%, lower than 1H19 and GBP670m, 63%, lower than six months 31 December 2018 ('2H18'), both driven by the negative impact of significant items in both revenue and operating expenses.
2019 FY Net interest income ('NII') was GBP4,752m. 2H19 NII of GBP2,315m was GBP122m, 5%, lower than 1H19 and GBP141m, 6%, lower than 2H18, both due to increased customer redress programme provisions.
2019 FY Net fee income ('NFI') was GBP1,230m. 2H19 NFI of GBP612m was GBP6m, 1% lower than 1H19. 2H19 NFI was GBP36m, 6%, lower than 2H18 due to additional CMB customer redress provisions.
2019 FY Net income from financial instruments held for trading or managed on a fair value basis was GBP400m and GBP192m in 2H19, which was GBP16m, 8%, lower than 1H19 , driven by seasonal factors in the GB&M foreign currency exchange revenue. 2H19 was GBP6m, 3%, lower than 2H18.
2019 FY Gains less losses from financial investments were GBP48m and GBP19m in 2H19, which were GBP10m, 34%, lower than 1H19 driven from lower disposal gains and losses taken when reducing risk during the heightened geopolitical risk in 4Q19 in the Balance Sheet Management function. 2H19 was GBP3m, 14%, lower than 2H18.
2019 FY Other operating income was GBP52m. 2H19 other operating income of GBP29m was GBP6m, 26%, higher than 1H19 and GBP4m,12%, lower than 2H18.
2019 FY Expected credit losses and other credit impairment charges ('ECL') were GBP613m. 2H19 ECL of GBP281m were GBP51m, 15%, lower than 1H19 and GBP24m, 8%, lower than 2H18, both largely driven by changes in allowances for UK economic uncertainty.
2019 FY Operating expenses were GBP4,861m. 2H19 operating expenses of GBP2,494m were GBP127m, 5% higher than
1H19. 2H19 were GBP506m, 25% higher than 2H18 driven by a number of significant items including: -- Higher UK customer redress provisions of GBP490m. -- An increase of GBP52m in restructuring and other related costs.
Offset by:
-- Pension costs of GBP187m in 2H18 following the October 2018 High Court judgement on Guaranteed Minimum Pension equalisation ('GMP').
Excluding significant items, 2H19 operating expenses were GBP144m higher than 2H18 mainly due to additional customer redress provisions (not classified as significant items) and increases in fraud, investment and regulatory costs.
For further details of significant items affecting revenue and costs, please refer to significant revenue/cost items by business segment on pages 12 to 14.
Net interest income
Year ended
--------------------
31 Dec 31 Dec
2019 2018
GBPm GBPm
-------------------------- -------- ----------
Interest income 5,696 2,805
-------------------------- -------
Interest expense (944) (349)
------- -------
Net interest income 4,752 2,456
-------------------------- ------- -------
Average interest-earning
assets 231,701 219,419
-------------------------- -------
% %
-------------------------- -------- ----------
Gross interest yield(1) 2.46 2.53
-------------------------- -------
Less: cost of funds (0.53) (0.37)
-------------------------- ------- -------
Net interest spread(2) 1.93 2.16
-------------------------- -------
Net interest margin(3,
4) 2.05 2.22
-------------------------- ------- -------
1 Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA').
2 Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing funds.
3 Net interest margin is net interest income expressed as an annualised percentage of AIEA.
4 Net interest margin of 2.05% includes a reduction of 5bps (2018: 0bps) due to significant items.
Net interest margin ("NIM") decreased from 2.22% in 2H18 to 2.05% in 2019. This is driven by customer redress provisions impacting NII, an increase in cost of funds, due to the issuance of debt securities and subordinated debt in 2019, and a shift in the loan mix towards retail mortgages.
Return on average tangible equity ('RoTE') (%)
ROTE (%) is measured as the profit attributable to the ordinary shareholders divided by the reported equity adjusted for goodwill and intangibles. The 2019 RoTE of 2.4% was 6.4% lower than the 2H18 (annualised) RoTE of 8.8% driven by lower Reported profit before tax.
Non-GAAP financial measures
Our reported results are prepared in accordance with IFRSs, as detailed in the financial statements starting on page 70. In measuring our performance, the financial measures that we use include those derived from our reported results in order to eliminate factors that distort year-on-year comparisons. These are considered non-GAAP financial measures.
Within the Strategic Report we present performance on an adjusted basis, which is our segment measure for our reportable segments under IFRS 8 but constitutes a non-GAAP financial measure when otherwise presented.
Adjusted performance
Adjusted performance is computed by adjusting the results for the effects of significant items that distort year-on-year comparisons.
We use significant items to describe collectively the group of individual adjustments excluded from the results when arriving at adjusted performance. An item might be deemed significant if the item is not incurred as part of the normal operational activities of the individual segment, separate identification and explanation of the item is necessary in order for users to gain a proper understanding of the performance of the business, and it is quantitatively and qualitatively material to the Group's consolidated financial statements. Customer remediation and redress programmes, which constitute the majority of the group's significant items, are considered and assessed separately against the above criteria prior to recognition as a significant item.
Significant items, which are detailed on pages 12 to 14, are ones that management and investors would ordinarily identify and consider separately when assessing performance to understand better the underlying trends in the business. We consider adjusted performance to provide useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant and providing insight into how management assesses year-on-year performance.
Segmental reporting
Global businesses are our reportable segments under IFRS 8.
The HSBC Group Chief Executive, supported by the rest of the Group Management Board, is considered the Chief Operating Decision Maker for the purposes of identifying the HSBC Group's, and therefore HSBC UK's, reportable segments. HSBC UK's chief operating decision-maker is the HSBC UK Chief Executive, supported by the HSBC UK Executive Committee. The global business results are assessed by the HSBC UK Chief Operating Decision Maker on the basis of adjusted performance that removes the effects of significant items from results. We therefore present HSBC UK global business results on an adjusted basis.
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. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs which are not allocated to global businesses 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 are presented in the Corporate Centre.
A description of the global businesses is provided in the Strategic Report, page 3.
Adjusted profit before tax and balance sheet data for the year ended
(audited)
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------- ----- ------ --------- ----------
Net operating income before change
in expected credit losses and
other credit impairment charges 3,488 2,708 176 158 83 6,613
-------------------------------------- ------- ------ ---- ----- -------- -------
- external 3,466 2,716 173 158 100 6,613
- inter-segment 22 (8) 3 - (17) -
-------------------------------------- ------- ------ ---- ----- -------- -------
of which; net interest income 2,775 1,951 1 106 45 4,878
-------------------------------------- ------- ------ ---- ----- -------- -------
Change in expected credit losses
and other credit impairment charges (295) (299) - (19) - (613)
Net operating income 3,193 2,409 176 139 83 6,000
-------------------------------------- ------- ------ ---- ----- -------- -------
Total operating (expenses)/income (2,339) (1,209) (122) (125) 58 (3,737)
-------------------------------------- ------- ------ ---- ----- -------- -------
Operating profit 854 1,200 54 14 141 2,263
-------------------------------------- ------- ------ ---- ----- -------- -------
Adjusted profit before tax 854 1,200 54 14 141 2,263
-------------------------------------- ------- ------ ---- ----- -------- -------
% % % % % %
Adjusted cost efficiency ratio 67.1 44.6 69.3 79.1 (69.9) 56.5
-------------------------------------- ------- ------ ---- ----- -------- -------
Balance sheet information GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- -------- ------- ----- ------ --------- ----------
Loans and advances to customers
(net) 113,732 64,772 - 4,293 259 183,056
-------------------------------------- ------- ------ ---- ----- -------- -------
Customer accounts 134,737 75,758 - 5,921 (202) 216,214
-------------------------------------- ------- ------ ---- ----- -------- -------
Adjusted profit before tax and balance sheet data for the year ended
(audited) (continued)
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2018 GBPm GBPm GBPm GBPm GBPm GBPm
-------- ------- ----- ------ --------- ----------
Net operating income before change
in expected credit losses and
other credit impairment charges 1,766 1,378 72 78 58 3,352
----------------------------------------- ------- ------ ---- ----- -------- -------
- external 1,747 1,365 74 78 88 3,352
-----------------------------------------
- inter-segment 19 13 (2) - (30) -
----------------------------------------- ------- ------ ---- ----- -------- -------
of which: net interest income/(expense) 1,391 979 (3) 57 28 2,452
----------------------------------------- ------- ------ ---- ----- -------- -------
Change in expected credit losses
and other credit impairment charges (164) (145) - 4 - (305)
Net operating income 1,602 1,233 72 82 58 3,047
----------------------------------------- ------- ------ ---- ----- -------- -------
Total operating (expenses)/income (1,125) (530) (69) (54) 30 (1,748)
Operating profit 477 703 3 28 88 1,299
Adjusted profit before tax 477 703 3 28 88 1,299
----------------------------------------- ------- ------ ---- ----- -------- -------
% % % % % %
Adjusted cost efficiency ratio 63.7 38.5 95.8 69.2 (51.7) 52.1
Balance sheet information GBPm GBPm GBPm GBPm GBPm GBPm
Loans and advances to customers
(net) 106,609 63,302 - 4,269 627 174,807
Customer accounts 128,409 71,411 - 5,338 (321) 204,837
----------------------------------------- ------- ------ ---- ----- -------- -------
Adjusted profit before tax for the half year ended
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------ ----- ----- --------- ---------
Net operating income before change
in expected credit losses and
other credit impairment charges 1,771 1,331 87 81 28 3,298
------ ----- ---- ---- -------- ------
- external 1,755 1,341 87 81 34 3,298
- inter-segment 16 (10) - - (6) -
----------------------------------------- ------ ----- ---- ---- -------- ------
of which: net interest income/(expense) 1,406 961 (1) 53 22 2,441
------ ----- ---- ---- -------- ------
Change in expected credit losses
and other credit impairment charges (159) (119) - (3) - (281)
----------------------------------------- ------ ----- ---- ---- -------- ------
Net operating income 1,612 1,212 87 78 28 3,017
----------------------------------------- ------ ----- ---- ---- -------- ------
Total operating (expenses)/income (1,173) (647) (59) (64) 51 (1,892)
----------------------------------------- ------ ----- ---- ---- -------- ------
Operating profit 439 565 28 14 79 1,125
----------------------------------------- ------ ----- ---- ---- -------- ------
Adjusted profit before tax 439 565 28 14 79 1,125
----------------------------------------- ------ ----- ---- ---- -------- ------
% % % % % %
------- ------ ----- ----- --------- ---------
Adjusted cost efficiency ratio 66.2 48.6 67.8 79.0 (182.1) 57.4
----------------------------------------- ------ ----- ---- ---- -------- ------
30 Jun 2019
Net operating income before change
in expected credit losses and
other credit impairment charges 1,717 1,377 89 77 55 3,315
-------------------------------------- ------ ----- ---- ---- ----- ------
- external 1,711 1,375 86 77 66 3,315
- inter-segment 6 2 3 - (11) -
of which: net interest income 1,369 990 2 53 23 2,437
Change in expected credit losses
and other credit impairment charges (136) (180) - (16) - (332)
Net operating income 1,581 1,197 89 61 55 2,983
Total operating (expenses)/income (1,166) (562) (63) (61) 7 (1,845)
Operating profit 415 635 26 - 62 1,138
Adjusted profit before tax 415 635 26 - 62 1,138
-------------------------------------- ------ ----- ---- ---- ----- ------
% % % % % %
Adjusted cost efficiency ratio 67.9 40.8 70.8 79.2 (12.7) 55.7
-------------------------------------- ------ ----- ---- ---- ----- ------
Significant revenue items by business segment - (gains)/losses for
the year ended (audited)
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2019 GBPm GBPm GBPm GBPm GBPm GBPm
------- ---- ---- --------- --------
Revenue 3,364 2,703 176 158 83 6,484
------- ------- ---- ---- --------- ------
Significant revenue items 124 5 - - - 129
------- ------- ---- ---- --------- ------
- customer redress programmes 124 5 - - - 129
------- ------- ---- ---- --------- ------
Adjusted revenue 3,488 2,708 176 158 83 6,613
--------------------------------------- ------- ------- ---- ---- --------- ------
31 Dec 2018
Revenue 1,766 1,383 72 78 58 3,357
----- ----- -----
Significant revenue items - (5) - - - (5)
----- ----- -----
- customer redress programmes - (5) - - - (5)
----- ----- -----
Adjusted revenue 1,766 1,378 72 78 58 3,352
------------------------------- ----- ----- -----
Significant revenue items by business segment - (gains)/losses for
the half year ended
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2019 GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 1,647 1,326 87 81 28 3,169
------- ------- ---- ---- --------- ------
Significant revenue items 124 5 - - - 129
----------------------------------------- ------- ------- ---- ---- --------- ------
- customer redress programmes 124 5 - - - 129
----------------------------------------- ------- ------- ---- ---- --------- ------
Adjusted revenue 1,771 1,331 87 81 28 3,298
----------------------------------------- ------- ------- ---- ---- --------- ------
30 Jun 2019
Revenue 1,717 1,377 89 77 55 3,315
----- ----- -----
Significant revenue items - - - - - -
--------------------------- ----- ----- -----
Adjusted revenue 1,717 1,377 89 77 55 3,315
--------------------------- ----- ----- -----
Significant cost items by business segment for the year ended (audited)
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2019 GBPm GBPm GBPm GBPm GBPm GBPm
Operating expenses (3,393) (1,234) (122) (127) 15 (4,861)
Significant cost items 1,054 25 - 2 43 1,124
- restructuring and other related
costs(1) 55 11 - 2 43 111
- customer redress programmes 999 14 - - - 1,013
Adjusted operating expenses (2,339) (1,209) (122) (125) 58 (3,737)
-------------------------------------- ------- ------ ---- ---- --------- ------
31 Dec 2018
Operating expenses (1,186) (518) (69) (54) (161) (1,988)
Significant cost items 61 (12) - - 191 240
- costs of structural reform 1 2 - - 11 14
- customer redress programmes 60 (14) - - - 46
- guaranteed minimum pension benefits
equalisation - - - - 187 187
- other - - - - (7) (7)
Adjusted operating expenses (1,125) (530) (69) (54) 30 (1,748)
--------------------------------------- ------ ---- --- --- ---- ------
Significant cost items by business segment for the half year ended
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2019 GBPm GBPm GBPm GBPm GBPm GBPm
Operating expenses (1,728) (663) (59) (66) 22 (2,494)
Significant cost items 555 16 - 2 29 602
- restructuring and other related
costs(1) 34 2 - 2 29 67
- customer redress programmes 521 14 - - - 535
Adjusted operating expenses (1,173) (647) (59) (64) 51 (1,892)
-------------------------------------- ------- ---- --- --- --------- ------
30 Jun 2019
Operating expenses (1,665) (571) (63) (61) (7) (2,367)
Significant cost items 499 9 - - 14 522
- restructuring and other related
costs(1) 21 9 - - 14 44
- customer redress programmes 478 - - - - 478
Adjusted operating expenses (1,166) (562) (63) (61) 7 (1,845)
----------------------------------- ------ ---- --- --- ------
1 Restructuring costs include charges received from HSBC Global Services (UK) Limited, which do not form part of the balance sheet provision movement.
Net impact on profit before tax by business segment for the year ended
(audited)
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2019 GBPm GBPm GBPm GBPm GBPm GBPm
Profit/(loss) before tax (324) 1,170 54 12 98 1,010
------- ------- ---- ---- --------- ------
Net Impact on reported profit
and loss 1,178 30 - 2 43 1,253
------- ---- ---- --------- ------
* significant revenue items 124 5 - - - 129
* significant cost items 1,054 25 - 2 43 1,124
------- ------- ---- ---- --------- ------
Adjusted profit before tax 854 1,200 54 14 141 2,263
------------------------------------------- ------- ------- ---- ---- --------- ------
31 Dec 2018
Profit/(loss) before tax 416 720 328 (103) 1,064
Net Impact on reported profit
and loss 61 (17) - - 191 235
* significant revenue items - (5) - - - (5)
* significant cost items 61 (12) - - 191 240
Adjusted profit before tax 477 703 328 88 1,299
---------------------------------- --- --- ---- -----
Net impact on profit before tax by business segment for the half year
ended
Corporate
RBWM CMB GB&M PB Centre Total
31 Dec 2019 GBPm GBPm GBPm GBPm GBPm GBPm
---- ---- ---- --------- --------
Profit/(loss) before tax (240) 544 28 12 50 394
------ ---- ---- ---- --------- ------
Net Impact on reported profit and
loss 679 21 - 2 29 731
* significant revenue items 124 5 - - - 129
----------------------------------------------
* significant cost items 555 16 - 2 29 602
------ ---- ---- ---- --------- ------
Adjusted profit before tax 439 565 28 14 79 1,125
---------------------------------------------- ------ ---- ---- ---- --------- ------
30 Jun 2019
---- --- -------
Profit/(loss) before tax (84) 626 26 -48 616
--- --- -----
Net Impact on reported profit and
loss 499 9 - -14 522
- significant revenue items - - - - - -
- significant cost items 499 9 - -14 522
--- --- -----
Adjusted profit before tax 415 635 26 -62 1,138
----------------------------------- --- --- -----
Adjusted performance
Our 2019 adjusted profit before tax was GBP2,263m. 2H19 adjusted profit before tax of GBP1,125m was GBP13m, 1%, lower than 1H19 and GBP174m, 13%, lower than 2H18. These variances reflect higher adjusted operating expenses and lower adjusted revenue offset by lower expected credit losses and other credit impairment charges ('ECL').
2019 FY adjusted revenue was GBP6,613m. 2H19 adjusted revenue of GBP3,298m was GBP17m, 1%, lower than 1H19. 2H19 adjusted revenue was GBP54m, 2% lower than 2H18 driven by additional customer redress provisions not classified as significant items in CMB.
2019 FY ECL were GBP613m. 2H19 ECL of GBP281m were GBP51m, 15%, lower than 1H19 and GBP24m, 8%, lower than 2H18, both largely driven by changes in allowances for UK economic uncertainty.
2019 FY adjusted operating expenses were GBP3,737m. 2H19 adjusted operating expense of GBP1,892m were GBP47m, 3%, higher than 1H19 and GBP144m, 8%, higher than 2H18, increases driven by additional customer redress provisions not classified as significant items, and increases in fraud, investment and regulatory costs.
The 2019 adjusted RoTE of 9.9% was 1.8% lower than the 2H18 (annualised) adjusted RoTE of 11.7% driven by lower adjusted profit before tax.
Adjusted cost efficiency ratio is measured as total adjusted operating expenses divided by adjusted net operating income before ECL. The adjusted cost efficiency ratio in 2019 increased by 4.4% vs. 2018, from 52.1% to 56.5%.
Retail Banking and Wealth Management
2019 FY adjusted profit before tax was GBP854m, 2H19 was GBP439m, GBP24m, 6%, higher than 1H19 driven by higher revenue partially offset by higher ECL. 2H19 compared to 2H18 is GBP38m, 8%, lower primarily driven from higher operating expenses.
2019 FY adjusted revenue was GBP3,488m, 2H19 was GBP1,771m, GBP54m, 3%, higher than 1H19 driven from balance growth in mortgages, loans and current accounts. 2H19 revenue was GBP5m higher than 2H18.
2019 FY ECL were GBP295m. 2H19 ECL of GBP159m were GBP23m, 17%, higher than 1H19, driven by portfolio growth and model updates partly offset by a release of allowances related to economic uncertainty. 2H19 ECL were GBP5m, 3%, lower than 2H18.
2019 FY adjusted operating expenses were GBP2,339m, 2H19 were GBP1,173m, GBP7m, 1%, higher than 1H19. 2H19 were GBP48m, 4%, higher than 2H18 due to increased fraud costs, additional customer redress provisions, increased investment costs and wage inflation.
Commercial Banking
2019 FY adjusted profit before tax was GBP1,200m. 2H19 adjusted profit before tax of GBP565m was GBP70m, 11%, lower than 1H19 and GBP138m, 20%, lower than 2H18 both due to lower revenue and higher operating expenses offset by lower ECL.
2019 FY adjusted revenue was GBP2,708m, 2H19 was GBP1,331m, GBP46m, 3%, lower than 1H19 and GBP47m, 3%, lower than 2H18. The revenue reduction in 2H19 reflects additional customer redress provisions.
2019 FY ECL were GBP299m. 2H19 ECL of GBP119m were GBP61m, 34%, lower than 1H19 and GBP26m, 18%, lower than 2H18. The decrease in 2H19 ECL has largely been driven by changes in allowances for UK economic uncertainty.
2019 FY adjusted operating expenses were GBP1,209m, 2H19 were GBP647m, GBP85m, 15%, higher than 1H19 and GBP117m, 22%, higher than 2H18, the increases have been driven by additional customer redress provisions, increases in fraud and regulatory costs.
Global Banking and Markets
GB&M in HSBC UK reflects the transacting of foreign currency exchange for RBWM and CMB customers. The majority of the foreign exchange revenue is passed over to RBWM and CMB, with an element retained in GB&M.
2019 FY adjusted profit before tax was GBP54m, 2H19 was GBP28m, GBP2m, 7%, higher than 1H19. 2H19 was GBP25m higher than 2H18 due to higher revenue and lower operating expenses.
2019 FY adjusted revenue was GBP176m, 2H19 was GBP87m, in line with 1H19 revenue of GBP89m. 2H19 was GBP15m, 21%, higher than 2H18 due to increases in revenue share agreements and favourable market conditions driving increasing foreign exchange revenues.
2019 FY adjusted operating expenses were GBP122m, 2H19 adjusted operating expenses of GBP59m were GBP4m, 6%, lower than 1H19 and GBP10m, 14%, lower than 2H18 both due to lower costs of back and middle office foreign exchange activities.
Private Banking
2019 FY adjusted profit before tax was GBP14m. 2H19 adjusted profit was GBP14m, GBP14m higher than 1H19 due lower ECL. 2H19 was GBP14m, 50%, lower than 2H18 driven by higher operating expenses.
2019 FY adjusted revenue was GBP158m, 2H19 was GBP81m, GBP4m, 5%, higher than 1H19 and GBP3m, 4%, higher than 2H18 driven by higher annuity fee and investment product income.
2019 ECL were GBP19m, 2H19 were GBP3m, GBP13m, 81%, lower than 1H19 due to lower impairments and default rates. 2H19 ECL were GBP7m higher than 2H18 due to a net recovery position in 2H18.
2019 FY adjusted operating expenses were GBP125m. 2H19 adjusted operating expenses of GBP64m were GBP3m, 5%, higher than 1H19. 2H19 were GBP10m, 19%, higher than 2H18 driven by increases in technology, operations and legal costs.
Corporate Centre
2019 FY adjusted profit before tax was GBP141m. 2H19 adjusted profit before tax of GBP77m was GBP17m, 27%, higher than 1H19 and GBP10m, 11%, lower than 2H18.
2019 FY adjusted revenue was GBP83m. 2H19 adjusted revenue of GBP28m was GBP27m, 49%, lower than 1H19 and GBP30m, 52%, lower
than 2H18 driven by lower disposal gains and losses taken when reducing risk during the heightened geopolitical risk in 4Q19 in the Balance Sheet Management function, and issuance fees and fair value volatility on subordinated liabilities incurred in 2H19.
2019 FY adjusted operating expenses were a net income of GBP58m, driven by income from the IAS19 pension surplus. 2H19 adjusted operating expenses net income of GBP51m was GBP44m higher than 1H19, due to reduced support costs and a higher net income from the IAS 19 pension surplus. 2H19 net income was GBP21m higher than 2H18 due to a higher net income from the IAS 19 pension surplus.
Dividends
The consolidated reported profit for the year attributable to the shareholders of the bank was GBP512m. Interim dividends of GBP200m, in lieu of a final dividend in respect of the previous financial year, and GBP120m in respect of 2019 were paid on the ordinary share capital during the year.
An interim dividend of GBP100m, in lieu of a final dividend in respect of the current year, was declared after 31 December 2019, payable on 19 March 2020.
Further information regarding dividends is given in Note 6.
Summary consolidated balance sheet as at
31 Dec 31 Dec
2019 2018
GBPm GBPm
------------------------------------------------------------ ------- ---------
Total assets 257,102 238,939
------------------------------------------------------------ ------- -------
* cash and balances at central banks 37,030 33,193
* items in the course of collections from other banks 504 603
* financial assets designated and otherwise mandatory
measured at fair value 66 35
* derivative assets 121 66
* loans and advances to banks 1,389 1,263
* loans and advances to customers 183,056 174,807
- reverse repurchase agreements - non trading 3,014 3,422
------------------------------------------------------------
* financial investments 19,737 13,203
------------------------------------------------------------
* prepayment, accrued income and other assets 8,212 8,537
------------------------------------------------------------
* goodwill and intangible assets 3,973 3,810
------- -------
Total liabilities 234,851 216,606
------------------------------------------------------------ ------- -------
* deposits by banks 529 1,027
* customer accounts 216,214 204,837
- repurchase agreements - non trading 98 639
------------------------------------------------------------
* items in the course of transmission to other banks 343 233
* derivative liabilities 201 346
- debt securities in issue 3,142 -
------------------------------------------------------------
* accruals, deferred income and other liabilities 1,834 2,409
------------------------------------------------------------
* current and deferred tax liabilities 1,632 1,548
------------------------------------------------------------
* provisions 1,325 630
------------------------------------------------------------
* subordinated liabilities 9,533 4,937
------------------------------------------------------------ ------- -------
Total equity 22,251 22,333
------------------------------------------------------------ ------- -------
* total shareholders' equity(1) 22,191 22,273 * non-controlling interests 60 60 ------------------------------------------------------------ ------- -------
1 Total shareholders' equity includes share capital, share premium, additional Tier 1 instruments and reserves. Reserves include accounting reserves relating to the recognition of goodwill and the pension asset net of deferred tax which do not form part of regulatory capital.
The group maintained a strong and liquid balance sheet. The ratio of customer advances to customer accounts decreased slightly to 84.7% compared to 85.3% at 31 December 2018.
Assets
Cash and balances at central banks increased by 12%, and financial investments increased by 49%, as we continued to manage our liquid assets.
Loans and advances to customers increased by 5% due to growth in retail and commercial lending, particularly in retail mortgages.
Liabilities
Customer accounts increased by 6% due to growth in commercial and retail balances.
Subordinated liabilities increased by 93% due to debt issued to HSBC Holdings plc for Minimum Requirements for own funds and Eligible Liabilities ('MREL') compliance.
Debt securities in issue has increased as HSBC UK issued senior unsecured debt for funding and liquidity purposes, and securities for credit risk mitigation purposes.
Equity
Total shareholders' equity remained in line with that at
31 December 2018.
Risk overview
We continuously identify and monitor risks. This process, which is informed by our risk factors and the results of the stress testing programme, gives rise to the classification of certain principal risks. Changes in the assessment of principal risks may result in adjustments to our business strategy and, potentially, our risk appetite.
Our banking risks include credit risk, capital and liquidity risk, market risk, resilience risk, regulatory compliance risk, financial crime and fraud risk and model risk.
In addition to these banking risks, we have identified top and emerging risks with the potential to have a material impact on our financial results or reputation and the sustainability of our long-term business model.
The exposure to our risks and risk management of these are explained in more detail in the Risk section of the Report of the Directors on pages 17 to 51.
During 2019, a number of changes to our top and emerging risks have been made, to reflect the revised assessment of their effect on HSBC UK.
Two risks have been added in 2019. These are 'Climate-related risks' and 'Third party risk management'.
Externally driven
Geopolitical u We continually assess the impact of geopolitical events
risk on our businesses and exposures across HSBC UK, and take
steps to mitigate them, where required and possible, to
help ensure we remain within our risk appetite. The UK
left the EU on
31 January 2020. We will continue to work with regulators,
governments and our customers to manage the risks created
by the UK's exit from the EU as they arise, particularly
across those industry sectors most impacted.
----------------- --- -----------------------------------------------------------------
Turning p We continue to undertake detailed reviews of our portfolios
of the credit and are also proactively assessing customers and industry
cycle sectors likely to come under stress as a result of geopolitical
or macroeconomic events, reducing limits where appropriate.
--- -----------------------------------------------------------------
Regulatory u We proactively engage with regulators and policy makers,
developments wherever possible, to help ensure that new regulatory
requirements are considered fully and can be implemented
in an effective manner.
-----------------------------------------------------------------
Information u We continue to strengthen our cyber control framework
security and improve our resilience and cybersecurity capabilities,
risk and including threat detection and analysis, access control,
cyber crime payment system controls, data protection, network controls
and backup and recovery.
----------------- --- -----------------------------------------------------------------
Ibor transition p HSBC UK is part of the HSBC Group Interbank Offered Rates
('Ibor') transition programme. This programme is focussed
on replacing Ibors by developing processes and systems
to support alternative rate products and making these
available to our clients. The programme is developing
the proposed transition operating model to re-paper outstanding
Libor and Eonia contracts. We have identified a number
of potential execution, conduct and financial risks and
are in the process of addressing these. We continue to
engage with industry bodies, regulators and our clients
to support an orderly transition.
----------------- --- -----------------------------------------------------------------
Climate-related -- The HSBC Group are committed to facilitating the re-allocation
risks of capital to help finance the global transition to a
low- carbon economy. The Group continues to make progress
in this area. We regularly review our sustainability risk
policies to ensure they remain fit-for-purpose, while
still supporting customers. We have initiated the analysis
of the impact of transition risk on our credit portfolio.
----------------- --- -----------------------------------------------------------------
Internally driven
People risk u We continue to monitor workforce capacity and capability
requirements in line with our strategy and any emerging
issues in the UK market. These issues can include changes
to immigration and tax rules as well as industry-wide
regulatory changes.
-----------------------------------------------------------------
IT systems u We actively monitor and improve service resilience across
infrastructure our technology infrastructure. We are enhancing the end-to-end
and resilience mapping of key processes, and strengthening our problem
diagnosis/resolution and change execution capabilities,
seeking to reduce service disruption to our customers.
----------------- --- -----------------------------------------------------------------
Execution u We continue to strengthen our prioritisation and governance
risk processes for significant strategic, regulatory and compliance
projects.
----------------- --- -----------------------------------------------------------------
Model risk p We have evolved our model risk management capability and
practice by enhancing the second line of defence Model
Risk Management function, strengthening model oversight,
and by evolving our model risk governance framework.
----------------- --- -----------------------------------------------------------------
Conduct p We continue to enhance our management of conduct in a
and customer number of areas, including the treatment of potentially
detriment vulnerable customers, governance of product arrangements,
and encouragement of a 'Speak Up' culture.
----------------- --- -----------------------------------------------------------------
Financial u Throughout 2019, we continued to implement the final elements
crime and of the Global Standards programme to integrate our anti-money
fraud risk laundering and sanctions capabilities into our day-to-day
operations. We continue to enhance our financial crime
risk management capabilities and the effectiveness of
our financial crime controls, with investment being maintained
in the next generation of tools to fight financial crime
through the application of advanced analytics and artificial
intelligence.
----------------- --- -----------------------------------------------------------------
Data management u We continue to enhance and advance our data insights,
data aggregation, reporting and decisions through ongoing
improvement and investments in data governance, data quality,
data privacy, data architecture, machine learning and
artificial intelligence capabilities.
----------------- --- -----------------------------------------------------------------
Third party -- We continue to strengthen essential governance processes
risk management and relevant policies relating to how we identify, assess,
mitigate and manage risks across the range of third parties
with which we do business. This includes control monitoring
and assurance throughout the third-party life cycle.
----------------- --- -----------------------------------------------------------------
p Risk has heightened during 2019
u Risk remains at the same level
as 2018
-- New Risk introduced during 2019
The Strategic Report comprising pages 2 to 16 was approved by the Board on 17 February 2020 and is signed on its behalf by
John David Stuart
Director
HSBC UK Bank plc
Registered number: 9928412
Risk
Page
Our conservative risk appetite 19
----
Risk management 21
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Key developments and risk profile 21
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Top and emerging risks 21
----
Externally driven 21
----
Internally driven 24
--------------------------------------- ----
Areas of special interest 27
--------------------------------------- ----
Process of UK withdrawal from
the European Union 28
--------------------------------------- ----
IBOR transition 29
--------------------------------------- ----
Our material banking risks 29
--------------------------------------- ----
Credit risk Overview 30
--------------------------------------- ----
Liquidity and funding risk management 55
--------------------------------------- ----
Market risk 59
--------------------------------------- ----
Resilience risk 65
--------------------------------------- ----
Regulatory compliance risk management 67
--------------------------------------- ----
Financial crime and fraud risk
management 67
--------------------------------------- ----
Model risk 69
--------------------------------------- ----
Our conservative risk appetite
We maintain a conservative risk profile. This is central to our business and strategy.
We recognise that the primary role of risk management is to protect our business, customers, colleagues, shareholders and the communities that we serve whilst supporting our strategy and enabling sustainable growth.
We recognise the importance of a strong risk culture, which refers to our shared attitudes, values and norms that shape behaviours related to risk awareness, risk taking and risk management. All employees are responsible for the management of risk, with the ultimate responsibility residing with the Board.
The following principles guide HSBC UK's overarching risk appetite and determine how its businesses and risks are managed:
Financial position
-- Strong capital position, defined by regulatory and internal ratios. -- Liquidity and funding management for each entity on a
stand-alone basis.
Operating model
-- Generate returns in line with a conservative risk appetite and strong risk management capability.
-- Deliver sustainable earnings and consistent returns for shareholders.
Business practice
-- Zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and/or mitigated.
-- No appetite for deliberately or knowingly causing detriment to consumers arising from our products and services or incurring a breach of the letter or spirit of regulatory requirements.
-- No appetite for inappropriate market conduct by a member of staff or by any HSBC UK business.
Enterprise-wide application
Our risk appetite encapsulates consideration of financial and non-financial risks and is expressed in both quantitative and qualitative terms. It applies across all our business lines.
Our risk management framework
An established risk governance framework and ownership structure ensures oversight of, and accountability for, the effective management of risk. Our Enterprise Risk Management Framework ('ERMF') fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. Integral to our risk management framework are risk appetite, stress testing and the identification of emerging risks.
Our Risk Committee focuses on risk governance and provides a forward-looking view of risks and their mitigation. The Risk Committee is a committee of the Board and has responsibility for oversight and advice to the Board on, amongst other things, the bank's risk appetite, tolerance and strategy, systems of risk management, internal control and compliance. Additionally, members of the Risk Committee attend meetings of the Chairman's Nominations and Remuneration Committee at which the alignment of the reward structures to risk appetite is considered.
In carrying out its responsibilities, the Risk Committee is closely supported by the Chief Risk Officer, the Chief Financial Officer, the Head of Internal Audit and the Heads of Compliance, together with other business functions on risks within their respective areas of responsibility.
Responsibility for managing both financial and non-financial risk lies with our people. They are required to manage the risks of the business and operational activities for which they are responsible. We maintain oversight of our risks through our various specialist Risk Stewards, as well as the accountability held by the Chief Risk Officer.
Non-financial risk includes some of the most material risks HSBC UK faces, such as cyber attacks, the loss of data and poor conduct outcomes. Actively managing non-financial risk is crucial to serving our customers effectively and having a positive impact on society. During 2019, we continued to strengthen the control environment and our approach to the management of non-financial risk, as set out in our Operational Risk Management Framework ('ORMF'). The approach outlines non-financial risk governance and risk appetite, and provides a single view of the key non-financial risks, and associated controls. It incorporates a risk management system designed to enable the active management of non-financial risk. Our ongoing focus is on simplifying our approach to non-financial risk management, while driving more effective oversight and better end-to-end identification and management of non-financial risks. This is overseen by the Operational Risk Management function, headed by the HSBC UK Head of Operational Risk.
Three lines of defence
To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment.
The model underpins our approach to risk management by clarifying responsibility and encouraging collaboration, as well as enabling efficient coordination of risk and control activities. The three lines of defence are summarised below:
-- The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing them in line with risk appetite, and ensuring that the right controls and assessments are in place to mitigate them.
-- The second line of defence challenges the first line of defence on effective risk management, and provides advice and guidance in relation to the risk.
-- The third line of defence is our Global Internal Audit function, which provides independent assurance that our risk management approach and processes are designed and operating effectively.
Our risk culture
Our risk culture is reinforced by our values. It is instrumental in aligning the behaviours of individuals with our attitude to assuming and managing risk, which helps to ensure that our risk profile remains in line with our risk appetite.
We use clear and consistent employee communication on risk to convey strategic messages and set the tone from senior management and our Board. We also deploy mandatory training
on risk and compliance topics to embed skills and understanding in order to strengthen our risk culture and reinforce the attitude to risk in the behaviour expected of employees, as described in our risk policies.
The risk culture is reinforced by our approach to remuneration. Individual awards, including those for senior executives, are based on compliance with Group values and the achievement of both financial and non-financial objectives, that are aligned to our risk appetite and our strategy.
Whistleblowing
The Group operate a whistleblower platform, HSBC Confidential, allowing staff to report matters of concern confidentially that, where necessary, are escalated to the Board. The Group also maintain an external email address for concerns about accounting and internal financial controls or auditing matters (accountingdisclosures@hsbc.com).
For further details, see page 6 of the How we do Business section.
Risk appetite
We formally articulate our risk appetite through our risk appetite statement ('RAS'), which is approved by the Board on the recommendation of the Risk Committee. Setting out our risk appetite ensures that planned business activities provide an appropriate balance of return for the risk we are taking, and that we agree a suitable level of risk for our strategy. In this way, risk appetite informs our financial planning process and helps senior management to allocate capital to business activities, services and products.
The RAS consists of qualitative statements and quantitative metrics, covering financial and non-financial risks. It is fundamental to the development of business line strategies, strategic and business planning and senior management balanced scorecards. Performance against the RAS is reported to the Risk Management Meeting ('RMM') on a monthly basis so that any actual performance that falls outside the approved risk appetite is discussed and appropriate mitigating actions are determined. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture.
Our RAS and business activities are guided and underpinned by qualitative principles and/or quantitative metrics.
Risk management
As a provider of banking and financial services, we actively manage risk as a core part of our day-to-day activities. We continue to maintain a strong liquidity position and are well positioned for the evolving regulatory landscape. We also maintained our conservative risk profile in 2019.
Stress testing
Stress testing is an important tool for banks and regulators to assess vulnerabilities in individual banks and/or the financial banking sector under hypothetical adverse scenarios. The results of stress testing are used to assess banks' resilience to a range of adverse shocks and to assess their capital adequacy.
A number of internal macroeconomic and event-driven scenarios specific to the UK or the global economy were considered and reported to senior management during the course of the year. These scenarios included considering highly adverse outcomes in relation to the UK's withdrawal from the EU. HSBC UK also conducted Reverse Stress Testing. This exercise required HSBC UK to assess scenarios and circumstances that would render its business model non-viable, thereby identifying potential business vulnerabilities.
Furthermore, HSBC UK is subject to regulatory stress testing and the requirements are increasing in frequency and granularity. The assessment by the regulators is on both a quantitative and qualitative basis, the latter focusing on our portfolio quality, data provision, stress testing capability and capital planning processes.
In 2019, HSBC UK contributed to the successful completion of the HSBC Group's annual Bank of England ('BoE') concurrent stress testing exercise. The stresses applied to economic activity and financial market prices in the 2019 Annual Cyclical Scenario were the same as in the 2018 test. The scenario incorporates a severe and synchronised UK and global macro-economic and financial market stress, as well as an independent stress of misconduct costs. The Prudential Regulation Authority ('PRA') considered the scenario still appropriate in the context of prevailing domestic and global economic risks.
The BoE published the results of the 2019 Concurrent Stress Test in December 2019, confirming that these tests did not reveal any capital inadequacies for the HSBC Group. In 2020, HSBC UK will be submitting results to the PRA produced on a standalone basis.
Key developments and risk profile
Key developments in 2019
-- We continued to strengthen our approach to managing non-financial risk, as set out in the ORMF. The framework sets out our approach to governance and risk appetite. It enables a single view of key non-financial risks and associated controls. This is overseen by the operational risk function, headed by HSBC UK's Head of Operational Risk. We also integrated our operational risk and conduct frameworks to better assess and mitigate conduct risks.
-- The HSBC Group simplified its risk taxonomy used within HSBC UK through consolidating certain existing risks into broader categories, for example Resilience Risk. These changes streamline risk reporting and promote common language in our risk management approach. Further simplification will continue during 2020, including combining the HSBC Group's two key risk management frameworks, the ERMF and the ORMF, into one.
-- We started the process to form a Resilience Risk sub-function to reflect the growing importance of operational resilience. The resilience risk sub function will be led from 1Q20 by a newly appointed HSBC UK Head of Resilience Risk.
Top and emerging risks
Top and emerging risks are those that may impact on our financial results, reputation or business model. If these risks were to occur, they could have a material effect on HSBC UK.
The exposure to these risks and our risk management approach are explained in more detail below.
Externally driven
Geopolitical risk
The UK left the EU on 31 January 2020, and entered a period of transition until 31 December 2020. We will continue to work with regulators, governments and our customers and employees to manage the risks resulting from the UK's exit from the EU as they arise, particularly across those industry sectors most impacted.
A conclusive outcome to the general election in December 2019 has improved the UK's political stability. However, uncertainty regarding the terms of the UK's future relationship (including trading) with both the EU and the rest of the world is expected to continue for some time to come. Market volatility is expected to persist as the UK continues its negotiations on a future trade agreement with the EU and its potential future trading partners around the world. Throughout this period, we will continually update our assessment of potential consequences for our customers, products and banking model and re-evaluate our mitigating actions accordingly. The scale and nature of the impact on us will depend on the precise terms on which we and our customers will be able to conduct cross-border business following the end of the transition period.
-- Clients: the UK's departure from the EU is likely to impact our CMB clients' operating models, including their supply chains, working capital requirements, investment decisions and financial markets infrastructure access. Some EEA incorporated
clients will be required to be migrated from the UK to HSBC France (or another EEA entity) and most customers, who we expect will no longer be able to be serviced out of the UK, have now been migrated.
-- People: the potential loss of freedom of movement could impact our EEA staff resident in the UK.
Our priority is to ensure we continue to support our clients and people through this period of uncertainty, and help minimise any disruption. Changes to the UK's current trade relationships could require changes to our banking model to ensure we continue to comply with law and regulation in meeting the needs of our customers and conducting our business. In addition, any negative impact on the economy, demand for borrowing and capital flows as a result of the aforementioned uncertainty, volatility or result of UK negotiations could have a consequential negative impact on HSBC UK.
The outbreak of coronavirus in mainland China and Hong Kong is being actively monitored to assess any potential economic impact on our clients, our staff or our businesses.
Mitigating actions
-- We have undertaken a comprehensive impact assessment of the UK leaving the EU, to understand the range of potential implications for our customers, our products and our business. Where necessary, we have identified actions, including evolving our business models, to ensure we can continue to serve our customers.
-- We actively monitor our portfolio to identify areas of stress, supported by stress testing analyses. Vulnerable industry sectors or asset classes are subject to additional management review to determine if any adjustments to risk policy or appetite are required.
-- We continue to stay very close to our clients, via proactive communications and dedicated channels to respond to customer queries.
-- We will be supporting our EEA staff resident in the UK with their settlement applications.
-- We will continue to work with regulators, governments and our clients in an effort to manage risks as they arise, particularly across the most impacted industry sectors.
-- We have reviewed our business continuity plans following the coronavirus outbreak to ensure the safety and well-being of our staff and customers, and to ensure our ability to maintain our business operations is upheld.
Turning of the credit cycle
Modest UK economic growth was seen in 2019. Uncertainty continues to exist concerning the impact of the UK's withdrawal from the EU, including the potential impacts of re-negotiated trade related arrangements with the EU and its member states. Retail sales growth in the UK continues to be subdued with increased reports of tightening discretionary spending.
Impairment charges increased in 2019, reflecting a return to more typical levels after a sustained period of unusually benign credit conditions.
Mitigating actions
-- We closely monitor economic developments in key markets and sectors and undertake scenario analysis. This enables us to take portfolio actions where necessary, including enhanced monitoring, amending our risk appetite and/or reducing limits and exposures. We also continue to monitor certain high risk portfolios such as retail, construction, commercial real estate and service companies within oil and gas.
-- We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions being taken to rebalance exposures and manage risk appetite where necessary.
-- Reviews of key portfolios are undertaken regularly to ensure that individual customer or portfolio risks are understood and our ability to manage the level of facilities offered through any downturn are appropriate. In 2019, we have undertaken specific reviews of portfolios in sectors showing vulnerability such as retail and commercial real estate. For our Retail banking portfolios, detailed performance monitoring is reviewed on a monthly basis, which includes early warning indicators and a view of concentration risks.
Regulatory developments
Financial service providers continue to operate to stringent regulatory and supervisory requirements, particularly in the areas of capital and liquidity management, conduct of business, financial crime, internal risk and control frameworks, the use of models and the integrity of financial services delivery and operational resilience.
The legislative, policy and regulatory change agenda in the financial services sector has been extensive over the past couple of years and the scale of proposed and possible change in this arena is expected to continue into 2020. The areas of potential legislative and regulatory change that may impact HSBC UK in due course include:
-- Consumer protection enhancements, including in the economic crime arena and the potential for the FCA to impose a duty of care on financial services providers;
-- The possible extension of Open Banking into Open Finance as a means of enhancing competition; and
-- Implications resulting from the UK's exit from the EU including through the onshoring of EU law, all of which may affect the activities of HSBC UK.
Mitigating actions
-- We are engaged with government, regulatory and industry bodies in the UK to seek to ensure that new requirements are properly considered by regulators and the financial sector and can be implemented in an effective manner.
-- We hold regular meetings with UK authorities to discuss strategic contingency plans covering a wide range of scenarios relating to the UK's exit from the EU and what may happen at the end of transition period.
Information security risk and cyber crime
HSBC UK and other organisations continue to operate in an increasingly hostile cyber threat environment, which requires ongoing investment in business and technical controls to defend against these threats.
Key threats include unauthorised access to online customers, advanced malware attacks and distributed denial of service attacks.
Mitigating actions
-- We continually evaluate threat levels for the most prevalent attack types and their potential outcomes. To further protect HSBC UK and our customers we strengthened our controls to reduce the likelihood and impact of advanced malware, data leakage, infiltration of payment systems and denial of service attacks. We continue to enhance our cybersecurity capabilities, including threat detection, access control as well as back-up and recovery. An important part of our defence strategy is ensuring our people remain aware of cybersecurity issues and know how to report incidents.
-- Cyber risk is a priority area for the Board. We report and review cyber risk and control effectiveness quarterly at executive and non-executive Board level. We also report it across our businesses and functions, to help ensure appropriate visibility and governance of the risk and mitigating actions.
-- We participate in law enforcement and industry schemes to share information about tactics employed by cyber-crime groups and to collaborate in fighting, detecting and preventing cyber-attacks on financial organisations.
Ibor transition
Ibors, including sterling Libor, are used to set interest rates on hundreds of trillions of US dollars' worth of different types of financial transactions and are used extensively for valuation purposes, risk measurement and performance benchmarking. In HSBC UK, our key Libor exposure is within our Corporate lending portfolio.
Following the announcement by the FCA in July 2017 that it will no longer persuade or require banks to submit rates for Libor after 2021, the UK market, along with the Bank of England Working Group on Sterling Risk-Free Reference Rates ('RFRWG') has been engaged with facilitating an orderly transition of the relevant Libors to their replacement rates, for example the Sterling Over Night Index Average ('Sonia') for sterling and the Secured Overnight Financing Rate ('SOFR') for US dollars.
The process of developing products that reference the replacement rates and transitioning legacy Ibor contracts exposes HSBC UK to material execution, conduct (and other non-financial risks) and financial risks.
Mitigating actions
-- HSBC UK is part of the HSBC Group's global programme to facilitate an orderly transition from Libor for our business and our clients. The UK is a lead market for the required transition activity. In HSBC UK, programme activity is sponsored by the UK CRO, who chairs the UK Ibor transition Project Steering Committee ('PSC').
-- The HSBC UK programme is focused on developing alternative rate products that reference the RFRWG's selected replacement rates and making them available to customers. It is also focusing on the supporting processes and systems to develop these products. At the same time, the HSBC UK programme is developing the capability to transition outstanding Libor contracts.
-- We have identified a number of potential execution, conduct (and other non-financial risks) and financial risks and we are in the process of addressing these.
-- We will continue to engage with industry bodies, regulators and our clients to support an orderly transition.
Climate-related risks
Climate change can impact a number of our risk types:
-- Transition Risk, arising from the move to a low-carbon economy, such as through policy, regulatory and technological changes.
-- Physical Risk, through increasing severity and/or frequency of severe weather events or other climatic events (e.g. sea level rise, flooding).
These have potential to cause both idiosyncratic and systemic risks, resulting, over time, in potential financial impacts for HSBC UK. Impacts could materialise through higher RWAs, greater transactional losses and/or increased capital requirements. HSBC UK is developing a structured approach to Climate Risk management, in conjunction with the HSBC Group.
The awareness of climate risk, regulatory expectations and reputational risk have all heightened through 2019. The exposure we have to the risk and materialisation of the risk have not materially heightened.
Mitigating actions
-- We are considering transition risk from three perspectives: understanding our exposure to transition risk; understanding how our clients are managing transition risk; and measuring our client's progress in reducing carbon emissions. For wholesale credit portfolios, we are using questionnaires to assess transition risk across six sectors. For our retail credit portfolio, we review mortgage exposures on a geographical basis in respect of natural hazard risk and mitigants. For operational risk, we are working with our property insurers to understand geographical exposure of the property portfolio and assess effectiveness of controls for design resilience, operations and business continuity.
-- HSBC UK, as part of a wider HSBC Group exercise continues to expand its thinking with regard to stress testing of climate risks. It has commenced sector specific scenario analysis and continues current work to source data and develop scenarios.
-- We have public and internal policies for certain sectors which pose us sustainability risk. These include policies on energy, agricultural commodities, chemicals, forestry, mining and metals, and UNESCO World Heritage sites and Ramsar-designated wetlands.
-- Our enterprise risk management framework continues to be enhanced to develop and embed the measurement, monitoring and management of climate-related risks.
-- An internal HSBC UK Climate Risk Management Meeting provides oversight by seeking to develop risk frameworks in order to protect our UK businesses and clients from climate related risks.
-- In line with the PRA requirements we have assigned responsibility for Climate Risk to relevant Senior Management Function ('SMF') holders. Additionally, risk stewards will consider physical and transition risks from climate change relevant to their specific risk function.
-- The HSBC Group is working with the PRA, FCA and wider industry through their Climate Financial Risk Forum to ensure it remains aware of and drives emerging best practice.
Internally driven
People risk
Our colleagues are critical to our success and it is important that we identify, manage and mitigate any risks that might have an impact on our colleagues feeling empowered and able to thrive in their careers, as well as being able to support our customers and the communities they serve. We aim to foster a culture that proactively promotes the right colleague behaviours and conduct, and that we have the right number of people with the right skills, knowledge and capabilities to be able to do the right thing for customers.
We proactively engage with regulators and policy makers to help ensure that regulatory changes are implemented effectively. Potential capability issues associated with the changes announced by the Government relating to the use of contractors (IR35) continues to be managed closely.
We continue to increase our focus on resource planning and employee retention to ensure we mitigate any risks around capacity and capability, as well as equipping line managers with the skills to both manage change and support their colleagues to ensure we engender a strong positive culture. Ongoing work continues to ensure we are fully prepared for what might happen at the end of the transition period, following the UK's exit from the EU. Impacted colleagues have received the appropriate support to gain settlement status in the UK where appropriate.
Mitigating actions
-- We have processes in place to identify where behaviours and conduct give us cause for concern and can mitigate the risk accordingly.
-- HSBC University is focused on the development of our colleagues and supporting our leaders to create an environment for success. This is critical to retaining high-calibre individuals with the values, skills and experience for current and future roles.
IT systems infrastructure and resilience
The HSBC Group is committed to investing in the reliability and resilience of its IT systems and critical services, many of which are relied upon by HSBC UK. The HSBC Group does so in order to protect its customers and ensure they do not receive disruption to services, which could result in reputational and regulatory damage.
Mitigating actions
-- We are continuing to invest in transforming how software solutions are developed, delivered and maintained, with a particular focus on providing high-quality, stable and secure services. As part of this, we are concentrating on materially improving system resilience and service continuity testing. We have enhanced the security features of our software development life cycle and improved our testing processes and tools.
-- We continue to invest in our fraud systems and controls.
-- During 2019, we upgraded many of our IT systems, simplifying our service provision and replacing older IT infrastructure and applications.
Execution risk
In order to deliver our strategic objectives and meet mandatory regulatory requirements, it is important for the bank to maintain a strong focus on execution risk. This requires robust management of significant resource-intensive and time-sensitive programmes. Risks arising from the magnitude and complexity of change may include regulatory censure, reputational damage or financial losses. Current major initiatives include managing the operational implications of the UK leaving the EU on HSBC UK; Ibor transition and the continued development of Open Banking.
Mitigating actions
-- Our prioritisation and governance processes for significant projects are monitored by the HSBC UK Executive Committee.
-- In 2019, we continued to manage execution risk through closely monitoring the punctual delivery of critical initiatives, internal and external dependencies, and key risks, to allow better portfolio management.
Model risk
Models are used in both financial and non-financial contexts. Model risk arises whenever business decision making includes reliance on models. HSBC UK uses models in a range of business applications, in activities such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting.
In 2019, we elevated model risk to the highest level within our risk management framework, in reflection of its increasing importance. We have undertaken a number of initiatives to strengthen the Model Risk Management sub-function, including:
Mitigating actions
-- We are investing increased resources in the HSBC UK Model Risk Management Function.
-- We refined the model risk policy to enable a more risk-based approach to Model Risk Management.
-- We designed a new target operating model for Model Risk Management, informed by internal and industry best practice. This will drive the evolution of the overall governance framework to ensure best practice.
-- We are refreshing the existing model risk controls to enable better understanding of control objectives and to provide the modelling areas with implementation guidance to enhance effectiveness.
Conduct and customer detriment
Financial institutions remain under close observation regarding conduct of business, particularly in relation to fair outcomes for customers and orderly and transparent operations in financial markets. Regulators, prosecutors, the media and the public all have heightened expectations as to the behaviour and conduct of financial institutions, and any shortcomings or failure to demonstrate adequate controls are in place to mitigate such risks could result in regulatory sanctions, fines or an increase in civil litigation.
Mitigating actions
-- We also integrated our operational risk and conduct frameworks to better assess and mitigate conduct risks.
-- We have continued to enhance our management of conduct in areas including our governance of product arrangements, the treatment of potentially vulnerable customers and encouragement of a 'Speak Up' culture and management of related third party risks.
Financial crime and fraud risk
Throughout 2019, HSBC UK continued to implement the final elements of the Global Standards programme to integrate our anti-money laundering and sanctions capabilities into our day-to-day operations. We continue to enhance our financial crime risk management capabilities and the effectiveness of our financial crime controls, with the HSBC Group maintaining its investment in the next generation of tools to fight financial crime through the application of advanced analytics and artificial intelligence.
Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. There is an increased regulatory focus on fraud and anti-bribery and corruption controls, with expectations that banks should do more to protect customers from fraud and identify and manage bribery and corruption risks within their businesses. Financial crime threats continue to evolve, often in tandem with geopolitical developments. The highly speculative, volatile and opaque nature of virtual currencies, including the pace of development in this area, create challenges in effectively managing financial crime risks. The evolving regulatory environment continues to present execution challenge. The HSBC Group continues to see increasing challenges presented by national data privacy requirements in a global organisation, which may affect its ability to effectively manage financial crime risks.
In December 2012, among other agreements, HSBC Holdings plc ('HSBC Holdings') agreed to an undertaking with the UK Financial Services Authority, which was replaced by a Direction issued by the UK Financial Conduct Authority ('FCA') in 2013, and consented to a cease-and-desist order with the US Federal Reserve Board ('FRB'), both of which contained certain forward-looking anti-money laundering ('AML') and sanctions-related obligations. HSBC also agreed to retain an independent compliance monitor (who is, for FCA purposes, a 'Skilled Person' under section 166 of the Financial Services and Markets Act and, for FRB purposes, an 'Independent Consultant') to produce periodic assessments of the Group's AML and sanctions compliance programme (the 'Skilled Person/Independent Consultant'). In December 2012, HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions. Reflective of the HSBC Group's significant progress in strengthening its financial crime risk management capabilities, the HSBC Group's engagement with the current Skilled Person will be terminated and a new Skilled Person with a narrower mandate will be appointed to assess the remaining areas that require further work in order for the HSBC Group, including HSBC UK, to transition fully to business-as-usual financial crime risk management. The Independent Consultant will continue to carry out an annual OFAC compliance review at the FRB's discretion. The role of the Skilled Person/Independent Consultant is discussed on page 51.
Mitigating actions
-- We continue to enhance our financial crime risk management capabilities. We are investing in next generation capabilities to fight financial crime through the application of advanced analytics and artificial intelligence.
-- We are strengthening and investing in our fraud controls, to introduce next generation anti-fraud capabilities to protect both customers and the bank.
-- We continue to embed our improved Anti-Bribery and Corruption policies and controls, focusing on conduct.
-- We continue to educate our staff on emerging digital landscapes and associated risks.
-- We have developed procedures and controls to manage the risks associated with direct and indirect exposure to virtual currencies, and we continue to monitor external developments.
-- We continue to collaborate with government and law enforcement agencies to address data privacy challenges through international standards, guidance, and legislation to enable effective management of financial crime risk.
-- We continue to take steps designed to ensure that the reforms we have put in place are both effective and sustainable over the long-term.
Data management
HSBC UK uses a large number of systems and applications to support key business processes and operations. As a result, we often need to reconcile multiple data sources, including customer data sources, to reduce the risk of error. We, along with other organisations, also need to meet external/ regulatory obligations such as the General Data Protection Regulation ('GDPR'), Basel Committee for Banking Supervision ('BCBS') 239, and Basel III.
Mitigating actions
-- We are progressively improving data quality across a large number of systems. Our data management, aggregation and oversight continues to strengthen and enhance the effectiveness of internal systems and processes. We are implementing data controls for critical processes in the 'front-office' systems to improve our data capture at the point of entry. The HSBC Group has achieved its objective of meeting a 'largely compliant' rating in support of the BCBS 239 principles and have now embedded them across the key markets and regions. Embedding of these data controls and best practices ensures that our customer experience and regulatory requirements become more consistent, timely and accurate.
-- Through HSBC Group's Global Data Management Framework, we are expanding and enhancing our data governance processes to proactively monitor critical customer, product and transaction data and resolving associated data issues in a timely manner. We have also implemented data controls in order to improve the reliability of data used by our customers and staff.
-- We are modernising our data and analytics infrastructure through investments in advanced capabilities in cloud visualisation, machine learning and artificial intelligence platforms.
-- In order to protect customer data, we have implemented the global Data Privacy Framework that establishes data privacy practices, design principles and guidelines that demonstrate compliance with data privacy laws and regulations where HSBC UK operates, such as GDPR.
To help our employees keep abreast of data management and data privacy laws and regulations we take part in annual data symposiums and data privacy awareness training highlighting its commitment to protect personal data for customers, employees and stakeholders.
Third party risk management
We utilise third parties for the provision of a range of services, in common with other financial service providers. Risks arising from the use of third-party service providers may be less transparent and therefore more challenging to manage or influence. It is critical that we ensure we have appropriate risk management policies, processes and practices. These should include adequate control over the selection, governance and oversight of third parties, particularly for key processes and controls that could affect operational resilience. Any deficiency in our management of risks arising from the use of third parties could affect our ability to meet strategic, regulatory or client expectations and damage our reputation.
Mitigating actions
-- We continued to embed our our third party management framework in the first line of defence through a dedicated team. Processes, controls and technology to asses third party service providers against key criteria and associated control monitoring testing and assurance have been deployed.
-- A Third Party Risk Steward has been recruited to oversee third party risk management within HSBC UK. Enhanced reporting of third party risk within our governance committees is being progressed.
Areas of special interest
During 2019, a number of areas have been identified and considered as part of our top and emerging risks because of the effect they may have on HSBC UK.
Process of UK withdrawal from the European Union
The UK left the EU on 31 January 2020 and entered into a transition period until 31 December 2020, during which time negotiations will take place on the future relationship between the UK and the EU. At this stage it remains unclear what that relationship will look like, potentially, leaving firms with little time to adapt to changes which may enter into force on 1 January 2021.
Our programme to manage the impact of the UK leaving the EU has now been largely completed. It is based on the assumption of a scenario whereby the UK will no longer have access to the existing passporting or regulatory equivalence framework that supports cross border business.
Legal entity restructuring
Changes in legal entity structure are likely to be minor and limited to our existing branch in Ireland. We previously used our Irish branch, that relied on passporting out of the UK, for the placement of excess EUR deposits. This may no longer be possible post the end of the transition period. To mitigate this, we have on-boarded appropriate counterparties for foreign exchange swaps and repos, which will enable the Balance Sheet Management ('BSM') team in HSBC UK to manage the EUR position in line with how other non-Sterling currencies are managed.
Customer migrations
The UK's departure from the EU is likely to have an impact on our CMB clients' operating models, including their working capital requirements, investment decisions and financial markets infrastructure access. Our priority is to provide continuity of service, and while our intention is to minimise the level of change for our customers, we have engaged with our EEA-incorporated clients to migrate them from the UK to HSBC France, or another EEA entity. We are working in close collaboration with any remaining clients to make the transition as smooth as possible.
Employees
We will support our EEA staff resident in the UK with their settlement applications.
Across the programme, we have made good progress in terms of ensuring we are prepared for whatever may happen at the end of the transition period. However, there remain execution risks, many of them linked to the uncertain outcome of negotiations.
We have carried out detailed reviews of our credit portfolios to determine those sectors and customers most vulnerable to the UK's exit from the EU. For further details, please see 'Impact of UK economic uncertainty on ECL' on page 33.
Ibor transition
The FSB issued a report in 2014 entitled 'Reforming Major Interest Rate Benchmarks'. This report was produced as a result of attempts to manipulate key Ibors and in recognition of a liquidity decline in interbank unsecured markets. Subsequently, regulators and central banks, in various jurisdictions, have convened National Working Groups ('NWG') including the Bank of England RFRWG, to identify replacement rates for Ibors and, where appropriate, to facilitate an orderly transition to these rates. These rates include the Sonia for sterling and the SOFR for US dollars.
The HSBC Group established the Ibor transition programme with the objective of facilitating an orderly transition from Libor and Eonia for the Group and its clients. This global programme oversees the transition effected by each of the Global Businesses and is sponsored by the Group Chief Risk Officer. In the UK, programme activity is sponsored by the UK CRO, who chairs the UK Ibor transition PSC. The programme is currently focussed on developing alternative rate products, that reference the RFRWG's selected replacement rates, and the supporting processes and systems. The resulting execution risks are being closely monitored by the programme.
The programme is concurrently developing the capability to transition, through re-papering, outstanding Libor and Eonia contracts. HSBC UK has around GBP53.1bn worth of Libor and Eonia contracts, of which approximately GBP26.9bn is outstanding that matures beyond 2021.
HSBC UK's ability to transition our portfolio of Ibor referenced loans by the end of 2021, is materially dependent on the availability of products that reference the replacement rates (for example, Sonia for Sterling) and on our customers being ready and able to adapt their own processes and systems to accommodate the replacement products. This may give rise to an elevated level of conduct related risks. HSBC UK is engaging with impacted clients to ensure that customers are aware of the risks associated with ongoing transactions in Libor and Eonia linked products as well as the need to transition legacy contracts prior to the end of 2021.
In addition to the conduct and execution risk, the process of adopting new reference rates may expose the group to an increased level of operational and financial risks, such as potential earnings volatility resulting from contract modifications and a large volume of product and associated process changes. Furthermore, the transition to alternative reference rates could have a range of adverse impacts on our business, including legal proceedings or other actions regarding the interpretation and enforceability of provisions in Ibor based contracts and regulatory investigations or reviews in respect of our preparation and readiness for the replacement of Ibors with alternative reference rates.
HSBC UK continues to engage with industry bodies, regulators and our clients to support an orderly transition and the mitigation of the risks resulting from the transition.
Our material banking risks
The material risk types associated with our banking operations are described in the following tables.
Description of risks - banking operations
Credit risk (see page 24)
The risk of Credit risk Credit risk is:
financial loss arises principally * measured as the amount that could be lost if a
if a customer from direct customer or counterparty fails to make repayments;
or counterparty lending, trade
fails to meet finance and
an obligation leasing business, * monitored using various internal risk management
under a contract. but also from measures and within limits approved by individuals
certain other within a framework of delegated authorities; and
products such
as guarantees
and derivatives. * managed through a robust risk control framework that
outlines clear and consistent policies, principles
and guidance for risk managers.
------------------------ ------------------------------
Capital and liquidity risk
(see pages 44 and 52)
The risk of Capital and Capital and liquidity risk is:
having insufficient liquidity risk * measured through appetites set as target and ratios;
capital, liquidity arises from
or funding resources changes to the
to meet financial respective resources * monitored and projected through appetites and using
obligations and risk profiles stress and scenario testing and;
and satisfy driven by customer
regulatory behaviour, management
requirements, decisions or * managed through capital and liquidity resources in
including pension the external conjunction with risk profiles and cashflows.
risk. environment.
------------------------ ------------------------------ ------------------------------------------------------------
Market risk (see page 46)
The risk that Exposure to Market risk is:
movements in market risk * measured using sensitivities, value at risk ('VaR')
market factors, is separated and stress testing, giving a detailed picture of
including but into two portfolios: potential gains and losses for a range of market
not limited * trading portfolios; and movements and scenarios, as well as tail risks over
to interest specified time horizons;
rates, credit
spreads and * non-trading portfolios.
foreign exchange * monitored using VaR sensitivities, stress testing and
rates will reduce other measures, including the sensitivity of net
our income or interest income and the sensitivity of structural
the value of foreign exchange; and
our portfolios.
* managed using risk limits approved by the risk
management meeting ('RMM').
------------------------ ------------------------------
Resilience risk (see page
49)
Resilience risk Resilience risk Resilience risk is:
is the risk arises from * measured through a range of metrics with defined
that we are failures or maximum acceptable impact tolerances and against our
unable to provide inadequacies agreed risk appetite;
critical services in processes,
to our customers, people, systems
affiliates, or external * monitored through oversight of enterprise processes,
and counterparties events. These risks, controls and strategic change programmes; and
as a result may be driven
of sustained by rapid technological
and significant innovation, * managed by continuous monitoring and thematic review.
operational changing behaviours
disruption. of our consumers,
cyber threats
and attacks,
cross border
dependencies,
and third party
relationships.
.
------------------------ ------------------------------ ------------------------------------------------------------
Regulatory compliance risk
(see page 50)
The risk that Regulatory compliance Regulatory compliance risk is:
we fail to observe risk arises * measured by reference to identified metrics, incident
the letter and from the risks assessments, regulatory feedback and the judgement
spirit of all associated with and assessment of our regulatory compliance teams;
relevant laws, breaching our
codes, rules, duty to our
regulations customers and * monitored against the first line of defence risk and
and standards other counterparties, control assessments, the results of the monitoring
of good market inappropriate and control activities of the second line of defence
practice, and market conduct functions, and the results of internal and external
incur fines and breaching audits and regulatory inspections; and
and penalties other regulatory
and suffer damage requirements.
to our business. * managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to assure their observance.
Proactive risk control and/or remediation work is
undertaken where required.
------------------------ ------------------------------ ------------------------------------------------------------
Financial crime and fraud risk (see page 50)
The risk that Financial crime Financial crime and fraud risk is:
we knowingly and fraud risk * measured by reference to identified metrics, incident
or unknowingly arises from assessments, regulatory feedback and the judgement
help parties day- and assessment of our financial crime risk teams;
to commit or to-day banking
to further potentially operations.
illegal activity * monitored against our financial crime risk appetite
including both statement and metrics, the results of the monitoring
internal and and control activities of the second line of defence
external fraud. functions, and the results of internal and external
audits and regulatory inspections; and
* managed by establishing and communicating appropriate
policies and procedures, training employees in them,
and monitoring activity to ensure their observance.
Proactive risk control and/or remediation work is
undertaken where required.
------------------------ ------------------------------ ------------------------------------------------------------
Model risk (see page 51)
Model risk is Model risk arises Model risk is:
the potential in both financial * measured by reference to model performance tracking
for adverse and non-financial and the output of detailed technical reviews, with
consequences contexts whenever key metrics including model review statuses and
from business business decision findings;
decisions informed making includes
by models, which reliance on
can be exacerbated models. * monitored against model risk appetite statements,
by errors in insight from the independent review function,
methodology, feedback from internal and external audits, and
design or the regulatory reviews.
way they are
used.
* managed by creating and communicating appropriate
policies, procedures and guidance, training
colleagues in their application, and supervising
their adoption to ensure operational effectiveness.
------------------------ ------------------------------ ------------------------------------------------------------
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.
Credit risk management
(Audited)
Of the risks in which we engage, credit risk generates the largest regulatory capital requirements.
The principal objectives of our credit risk management are:
-- to maintain across HSBC UK a strong culture of responsible lending and a robust risk policy and control framework;
-- to both partner and challenge the businesses in defining, implementing, and continually re-evaluating our risk appetite under actual and scenario conditions; and
-- to ensure there is independent, expert scrutiny of credit risks, their costs and mitigation.
Within HSBC UK, the Credit Risk function is headed by the Chief Risk Officer who reports to the Chief Executive Officer, with a functional reporting line to the Group Chief Risk Officer.
Its responsibilities are:
-- to formulate credit policy. Compliance, subject to approved dispensations, is mandatory for all operating companies which must develop local credit policies consistent with group policies that very closely reflect HSBC Group policy;
-- to guide operating companies on the group's appetite for credit risk exposure to specified market sectors, activities and banking products and controlling exposures to certain higher-risk sectors;
-- to undertake an independent review and objective assessment of risk. Credit risk assesses all credit facilities and exposures over designated limits, prior to the facilities being committed to customers or transactions being undertaken;
-- to monitor the performance and management of portfolios across the group;
-- to control exposure to sovereign entities, banks and other financial institutions, as well as debt securities which are not held solely for the purpose of trading;
-- to set policy on large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography do not become excessive in relation to the group's capital base, and remain within internal and regulatory limits;
-- to maintain and develop the risk rating framework, systems and models through appropriate governance;
-- to report on retail portfolio performance, high risk portfolios, risk concentrations, large impaired accounts, impairment allowances and stress testing results and recommendations to HSBC UK's RMM, Risk Committee and Board; and
-- to act on behalf of the group as the primary interface, for credit-related issues, with the BoE, the PRA, the FCA, rating agencies, analysts and counterparts in major banks and non-bank financial institutions.
Concentration of credit risk exposure
(Audited)
Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or are engaged in similar activities, or operate in the same geographical areas/industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. A number of controls and measures are used to minimise undue concentration of exposure in the portfolios across industry, country and customer groups. These include portfolio and counterparty limits, approval and review controls, and stress testing.
Credit quality of financial instruments
(Audited)
Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support the calculation of our minimum credit regulatory capital requirement.
The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and retail lending businesses, and the external ratings attributed by external agencies to debt securities.
For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related customer risk rating ('CRR') to external credit rating.
Wholesale lending
The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default ('PD'). All corporate customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the Basel approach adopted for the exposure.
Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and may vary over time.
Retail lending
Retail lending credit quality is based on a 12-month point-in-time probability-weighted probability of default ('PD').
Credit quality classification
Debt securities
and other
bills Wholesale lending Retail lending
---------------
12-month
Basel
probability 12-month
of probability-
External Internal default Internal weighted
Footnotes credit rating credit rating % credit rating PD %
--------- --------------- -------------- ---------------- -------------- ---------------
Quality 1,
classification 2
--------- --------------
CRR1 to Band 1 and
Strong A- and above CRR2 0.000-0.169 2 0.000-0.500
--------- --------------
Good BBB+ to
BBB- CRR3 0.170-0.740 Band 3 0.501-1.500
BB+ to B CRR4 to Band 4 and
Satisfactory and unrated CRR5 0.741-4.914 5 1.501-20.000
---------------
CRR6 to
Sub-standard B- to C CRR8 4.915-99.999 Band 6 20.001-99.999
--------------------- ---------------- ---------------
CRR9 to
Credit-impaired Default CRR10 100.000 Band 7 100.000
--------------------- --------- --------------- -------------- ---------------- -------------- ------------
1 Customer risk rating ('CRR').
2 12-month point-in-time probability-weighted probability of default ('PD').
Quality classification definitions
* 'Strong' exposures demonstrate a strong capacity to
meet financial commitments, with negligible or low
probability of default.
* 'Good' exposures demonstrate a good capacity to meet
financial commitments, with low default risk.
* 'Satisfactory' exposures require closer monitoring
and demonstrate an average to fair capacity to meet
financial commitments, with moderate default risk.
* 'Sub-standard' exposures require varying degrees of
special attention and default risk is of greater
concern.
* 'Credit-impaired' exposures have been assessed as
described on Note 1.2(g) on the financial statements.
=============================================================
Renegotiated loans and forbearance
(Audited)
'Forbearance' describes concessions made on the contractual terms of a loan in response to an obligor's financial difficulties.
A loan is classed as 'renegotiated' when we modify the contractual payment terms on concessionary terms because we have significant concerns about the borrowers' ability to meet contractual payments when due. Non-payment-related concessions (e.g. covenant waivers), while potential indicators of impairment, do not trigger identification as renegotiated loans.
Where customers are in (or approaching) financial difficulty, due consideration is given to provide assistance to customers (either on a temporary or permanent basis) to help them meet the contractual commitments relating to their account. The HSBC UK policy provides guidance on when customers are considered to be in financial difficulty and the various forbearance tools that are available to assist them. It is recognised that customers find themselves in financial difficulties as a result of many different situations and Collections staff speaking with customers will often be best placed to understand the individual circumstances and needs of specific customers. Prior to agreeing a forbearance an appropriate level of assessment on a customer's affordability is completed to ensure any solution agreed with the customer is sustainable.
Refinance risk
Personal lending
Interest only mortgages incorporate bullet payments at the point of final maturity. To reduce refinance risk, an initial on-boarding assessment of customers' affordability is made on a capital repayment basis and every customer has a credible defined repayment strategy. Additionally, the customer is contacted at least once during the mortgage term to check the status of the repayment strategy. In situations where it is identified that a borrower is expected not to be able to repay a bullet/balloon payment, the customer is offered advice and options in order to help them repay the loan in accordance with their loan agreement. In the event that this is not possible, the customer will either default on the repayment or it is likely that the bank may need to apply forbearance to the loan.In either circumstance this gives rise to a loss event and an impairment allowance will be considered where appropriate.
Wholesale lending
Many types of wholesale lending incorporate bullet/balloon payments at the point of final maturity; often, the intention or assumption is that the borrower will take out a new loan to settle the existing debt. Where this is true the term refinance risk refers generally to the possibility that, at the point that such a repayment is due, a borrower cannot refinance by borrowing to repay existing debt. In situations where it is identified that a borrower is expected not to be able either to repay a bullet/balloon payment or to be capable of refinancing their existing debt on commercial terms then the customer will either default on the repayment or it is likely that the bank may need to refinance the loan on terms it would not normally offer in the ordinary course of business. In either circumstance this gives rise to a loss event and the loan will be considered impaired.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances and financial investments, see Note 1.2(g) on the Financial Statements.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and advances, see Note 1.2(g) on the Financial Statements.
Personal lending
Property collateral for residential mortgages is repossessed and sold on behalf of the borrower only when all normal debt recovery procedures have been unsuccessful. Any portion of the balance not covered following the realisation of security is written-off.
Unsecured personal lending products are normally written off, when there is no realistic prospect of full recovery.
Wholesale lending
Wholesale loans and advances are written off where normal collection procedures have been unsuccessful to the extent that there appears no realistic prospect of repayment. These procedures may include a referral of the business relationship to a debt recovery company. Debt reorganisation will be considered at all times and may involve, in exceptional circumstances and in the absence of any viable alternative, a partial write-off in exchange for a commitment to repay the remaining balance.
In the event of bankruptcy or analogous proceedings, write-off
for both personal and wholesale lending may occur earlier than
at the periods stated above. Collections procedures may continue after write-off.
Credit risk in 2019
Dovish global monetary policies remained accommodative through much of 2019, and share indices hit record highs. The Bank of England and the European Central Bank are expected to maintain adequate market liquidity during 2020. Broad corporate credit quality in the UK and Europe has been helped by a record low rate environment despite a lower than expected trend of economic growth. Certain industry segments of the economy are however experiencing market or demand cycle changes that are providing a more challenged market place and this trend is likely to continue going forward. In some areas borrowers have taken on material amounts of new financial leverage leading to more stretched financial profiles. The second order impacts on UK and European corporates of coronavirus are being carefully followed by the bank as this issue develops.
A summary of our current policies and practices regarding credit risk is set out on page 24.
A temporary pause in the issuance of default notices for RBWM accounts took place during 2019, pending changes to policies and processes associated with the issuance of these notices as a result of a review of the Bank's Retail Collections and Recoveries operations. This has resulted in reduced levels of write-off in 2019, and a corresponding increase in Stage 3 balances and ECL. This will be addressed through the recommencement of the default notice process in Q1 2020, which will result in the write-off of balances from Stage 3 and corresponding reductions in ECL.
Re-presentation of gross carrying/nominal amounts staging
The wholesale lending gross carrying/nominal amounts in stages 1 and 2, which were disclosed at 31 December 2018, have been re-presented to reflect the UK economic uncertainty adjustment which was not previously included. In comparison, the allowance for ECL did reflect the UK economic uncertainty adjustment. As a result of the re-presentation, there has been an increase in stage 2 amounts, with a corresponding decrease in stage 1. The 31 December 2018 amounts reflected the probability-weighted view of stage allocation for the consensus scenarios only. The financial instruments and disclosures impacted are as follows:
-- Loans and advances to customers: A change of GBP3,585m comprised of GBP3,462m for corporate and commercial and GBP123m non-bank financial institutions.
-- Loans and other credit - related commitments: A change of GBP602m is attributable to GBP565m for corporate and commercial and GBP37m for non-bank financial institutions.
-- Financial guarantees: A change of GBP19m comprised of GBP18m to corporate and commercial and GBP1m for non-bank financial institutions.
-- Commercial real estate lending: A change of GBP376m.
-- Wholesale lending - commercial real estate loans and advances including loan commitments by level of collateral: A change of GBP493m.
-- Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral: A change of GBP3,743m.
The 'reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees' disclosure for 31 December 2018 includes this re-presentation of GBP4,206m in other movements. There is no impact upon total gross carrying values/nominal amounts, personal lending amounts or allowance for ECL.
Summary of credit risk
The disclosure below presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL.
The allowance for ECL increased from GBP1,537m at 31 December 2018 to GBP1,744m at 31 December 2019.
The allowance for ECL at 31 December 2019 comprises
GBP1.679m in respect of assets held at amortised cost and GBP65m in respect of loan commitments and financial guarantees. There is GBP1m allowances for ECL in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').
The following table provides an overview of the group and bank's credit risk exposure. As the majority of the group's financial instruments are held by the bank, the remaining IFRS 7 credit disclosures are provided on a group only basis.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
(Audited)
---------------------- ----------- ---------------------- ------------
31 Dec 2019 31 Dec 2018
Allowance Allowance
Gross carrying/nominal for Gross carrying/nominal for
amount ECL(1) amount ECL(1)
The group GBPm GBPm GBPm GBPm
----------- ------------
Loans and advances to customers at
amortised cost 184,734 (1,678) 176,266 (1,459)
- personal 117,669 (738) 110,208 (565)
- corporate and commercial 64,537 (933) 63,491 (860)
- non-bank financial institutions 2,528 (7) 2,567 (34)
---------------------- ---------- ---------------------- ---------
Loans and advances to banks at
amortised
cost 1,390 (1) 1,263 -
Other financial assets measured at
amortised costs 41,871 - 39,142 (3)
---------
- cash and balances at central banks 37,030 - 33,193 -
- items in the course of collection
from other banks 504 - 603 -
-------------------------------------
- reverse repurchase agreements -
non
trading 3,014 - 3,422 -
- prepayments, accrued income and
other
assets(2) 1,323 - 1,924 (3)
---------------------- ---------- ---------------------- ---------
Total gross carrying amount
on-balance
sheet 227,995 (1,679) 216,671 (1,462)
------------------------------------- ---------------------- ---------- ---------------------- ---------
Loans and other credit related
commitments 63,858 (60) 64,628 (63)
-------------------------------------
- personal 37,422 (6) 39,389 (4)
-------------------------------------
- corporate and commercial 25,599 (54) 24,884 (59)
-------------------------------------
- non-bank financial institutions 837 - 355 -
-------------------------------------
Financial guarantees 1,077 (5) 1,284 (12)
------------------------------------- ---------------------- ---------- ---------------------- ---------
- personal 25 - 16 -
- corporate and commercial 685 (5) 782 (12)
- non-bank financial institutions 367 - 486 -
Total nominal amount off-balance
sheet(3) 64,935 (65) 65,912 (75)
---------------------- ---------- ---------------------- ---------
At 31 December 292,930 (1,744) 282,583 (1,537)
------------------------------------- ---------------------- ---------- ---------------------- ---------
Memorandum
Memorandum allowance
allowance for
Fair value for ECL(4) Fair value ECL(4)
GBPm GBPm GBPm GBPm
Debt instruments measured at fair
value
through other comprehensive income
('FVOCI') 19,737 (1) 13,203 -
------------------------------------- ---------------------- ---------- ---------------------- ---------
1 The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
2 Includes only those financial instruments which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 72 includes both financial and non-financial assets.
3 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
4 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the income statement.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
(Audited)
---------------------- ----------- ---------------------- -------------
The bank 31 Dec 2019 31 Dec 2018
------------------------------------
Allowance
Gross carrying/nominal for Gross carrying/nominal Allowance
amount ECL(1) amount for ECL(1)
GBPm GBPm GBPm GBPm
----------- -------------
Loans and advances to customers at
amortised cost 175,301 (1,400) 167,130 (1,280)
- personal 110,274 (581) 103,186 (463)
- corporate and commercial 54,691 (813) 53,507 (783)
- non-bank financial institutions 10,336 (6) 10,437 (34)
---------------------- ----------
Loans and advances to banks at
amortised
cost 4,644 (1) 3,883 -
Other financial assets measured at
amortised costs 41,874 - 38,950 -
- cash and balances at central
banks 37,020 - 33,187 -
- items in the course of collection
from other banks 355 - 457 -
------------------------------------
- reverse repurchase agreements -
non
trading 3,014 - 3,422 -
- prepayments, accrued income and
other
assets(2) 1,485 - 1,884 -
---------------------- ---------- ---------------------- ----------
Total gross carrying amount
on-balance
sheet 221,819 (1,401) 209,963 (1,280)
------------------------------------ ---------------------- ---------- ---------------------- ----------
Loans and other credit related
commitments 49,432 (57) 52,225 (62)
------------------------------------
- personal 25,891 (5) 28,009 (3)
------------------------------------
- corporate and commercial 23,041 (52) 23,915 (59)
------------------------------------
- non-bank financial institutions 500 - 301 -
------------------------------------
Financial guarantees 1,066 (5) 1,263 (12)
------------------------------------ ---------------------- ----------
- personal 15 - 15 -
- corporate and commercial 684 (5) 762 (12)
- non-bank financial institutions 367 - 486 -
Total nominal amount off-balance
sheet(3) 50,498 (62) 53,488 (74)
---------------------- ---------- ---------------------- ----------
At 31 December 272,317 (1,463) 263,451 (1,354)
------------------------------------ ---------------------- ---------- ---------------------- ----------
Memorandum
Memorandum allowance
allowance for
Fair value for ECL(4) Fair value ECL(4)
GBPm GBPm GBPm GBPm
Debt instruments measured at fair
value
through other comprehensive income
('FVOCI') 19,737 (1) 13,203 -
------------------------------------ ---------------------- ---------- ---------------------- ----------
1 The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
2 Includes only those financial instruments which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the bank's balance sheet on page 75 includes both financial and non-financial assets.
3 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
4 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the income statement.
The following table provides an overview of the group's credit risk by stage and industry, and the associated ECL coverage. The financial assets recorded in each stage have the following characteristics:
-- Stage 1: 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 since initial recognition on which a lifetime ECL is recognised.
-- Stage 3: objective evidence of impairment, and are therefore considered to be in default or otherwise credit-impaired on which a lifetime ECL is recognised.
-- POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime ECL is recognised.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2019
(Audited)
Gross carrying/nominal
amount(1) Allowance for ECL ECL coverage %
------- ------- -------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
------ ----- ---- ------- -------- ----- ----- ---- ------- -------
Loans and
advances
to customers
at amortised
cost 168,351 13,177 3,179 27 184,734 (214) (626) (838) - (1,678) 0.1 4.8 26.4 1.2 0.9
- personal 112,398 4,069 1,202 - 117,669 (76) (385) (277) - (738) 0.1 9.5 23.0 - 0.6
* corporate and commercial 53,843 8,710 1,957 27 64,537 (135) (238) (560) - (933) 0.3 2.7 28.6 1.2 1.4
* non-bank financial institutions 2,110 398 20 - 2,528 (3) (3) (1) - (7) 0.1 0.8 5.0 - 0.3
Loans and
advances
to banks
at amortised
cost 1,390 - - - 1,390 (1) - - - (1) 0.1 - - - 0.1
---------------------------------------
Other financial
assets
measured
at amortised
cost 41,834 28 9 - 41,871 - - - - - - - - - -
---------------------------------------
Loan and
other credit-related
commitments 61,059 2,456 341 2 63,858 (27) (14) (19) - (60) - 0.6 5.6 0.9 0.1
---------------------------------------
- personal 36,974 369 79 - 37,422 (6) - - - (6) - - - - -
- corporate
and commercial 23,323 2,013 261 2 25,599 (21) (14) (19) - (54) 0.1 0.7 7.3 0.9 0.2
* financial 762 74 1 - 837 - - - - - - - - - -
Financial
guarantee
and similar
contracts 898 142 37 - 1,077 (2) (2) (1) - (5) 0.2 1.4 2.7 - 0.5
- personal 25 - - - 25 - - - - - - - - - -
- corporate
and commercial 534 114 37 - 685 (2) (2) (1) - (5) 0.4 1.8 2.7 - 0.7
* financial 339 28 - - 367 - - - - - - - - - -
At 31 Dec
2019 273,532 15,803 3,566 29 292,930 (244) (642) (858) - (1,744) 0.1 4.1 24.1 1.2 0.6
--------------------------------------- ------- ------ ----- ---- ------- ---- ---- ---- ---- ------ ----- ----- ----- ---- -----
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure below presents the ageing of stage 2 financial assets. It distinguishes those assets that are
classified as stage 2 when they are less than 30 days past due (1-29 DPD) from those that are due to ageing and are more than 30 DPD (30 and >DPD). Past due financial instrument are those loans where customers have failed to make payments in accordance with the contractual terms of their facilities.
Stage 2 days past due analysis at 31 Dec 2019
(Audited)
Gross carrying amount Allowance for ECL ECL coverage %
Stage Of Of Stage Of Of Stage Of Of
2 which: which: 2 which: which: 2 which: which:
------
1 to 30 and 1 to 30 and 1 to
29 > 29 > 29 30 and
DPD(1) DPD(1) DPD(1) DPD(1) DPD(1) > DPD(1)
GBPm GBPm GBPm GBPm GBPm GBPm % % %
------ ------ -------- -------- ------ -----
Loans and advances
to customers
at amortised
cost: 13,177 364 212 (626) (43) (48) 4.8 11.8 22.6
----- ------ ------
* personal 4,069 242 149 (385) (35) (41) 9.5 14.5 27.5
---------------------------------------
* corporate and commercial 8,710 122 63 (238) (8) (7) 2.7 6.6 11.1
---------------------------------------
* non-bank financial institutions 398 - - (3) - - 0.8 - -
Loans and advances
to banks at amortised
cost - - - - - - - - -
Other financial
assets measured
at amortised
cost 28 - - - - - - - -
--------------------------------------- ------ ------ ------ ---- ---- ----- ----- ------ ------
1 Days past due ('DPD'). Up to date accounts in Stage 2 are not shown in amounts presented above.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31December 2018 (2) (continued)
(Audited)
Gross carrying/nominal Allowance for ECL coverage
amout(1) ECL %
------- ---- ------- ---- -------
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total 1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
------ ----- ---- ------- ----- ----- ----- ---- ------- -------
Loans
and advances
to customers
at amortised
cost 159,533 14,129 2,604 - 176,266 (247) (597) (615) - (1,459) 0.2 4.2 23.6 - 0.8
------- ------ ----- ------- ---- ---- ---- ---- ------
- personal 105,920 3,282 1,006 - 110,208 (71) (327) (167) - (565) 0.1 10.0 16.6 - 0.5
- corporate
and commercial 51,622 10,352 1,517 - 63,491 (170) (261) (429) - (860) 0.3 2.5 28.3 - 1.4
* non-bank financial institutions 1,991 495 81 - 2,567 (6) (9) (19) - (34) 0.3 1.8 23.5 - 1.3
------- ------ ----- ---- ------- ---- ---- ---- ---- ------
Loans
and advances
to banks
at amortised
cost 1,262 1 - - 1,263 - - - - - - - - - -
--------------------------------------- ------- -------
Other
financial
assets
measured
at amortised
cost 39,110 23 9 - 39,142 (3) - - - (3) - - - - -
--------------------------------------- ------- ------ ----- ---- ------- ---- ---- ---- ---- ------
Loan and
other
credit-related
commitments 61,344 2,960 324 - 64,628 (32) (13) (18) - (63) 0.1 0.4 5.6 - 0.1
--------------------------------------- ------- ------ ----- ------- ---- ---- ---- ------
- personal 38,994 172 223 - 39,389 (4) - - - (4) - - - - -
- corporate
and commercial 22,038 2,745 101 - 24,884 (28) (13) (18) - (59) 0.1 0.5 17.8 - 0.2
* financial 312 43 - - 355 - - - - - - - - - -
------- ------ ----- ------- ---- ---- ---- ------ ----- -----
Financial
guarantee
and similar
contracts 1,098 115 71 - 1,284 (3) (2) (7) - (12) 0.3 1.7 9.9 - 0.9
------- ------ ----- ------- ---- ---- ---- ------
- personal 15 1 - - 16 - - - - - - - - - -
- corporate
and commercial 602 111 69 - 782 (3) (2) (7) - (12) 0.5 1.8 10.1 - 1.5
* financial 481 3 2 - 486 - - - - - - - - - -
------- ------ ----- ------- ---- ----
At 31
Dec 2018 262,347 17,228 3,008 - 282,583 (285) (612) (640) - (1,537) 0.1 3.6 21.3 - 0.5
--------------------------------------- ------- ------ ----- ---- ------- ---- ---- ---- ---- ------ ----- ----- ----- ---- -----
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 During the period, the group has re-presented the wholesale lending stage 1 and stage 2 amount. For further details, see page 26.
Stage 2 days past due analysis at 31 Dec 2018 (2) (continued)
(Audited)
Gross carrying
amount(1) Allowance for ECL ECL coverage %
Stage Of Of Stage Of Of Stage Of Of
2 which: which: 2 which: which: 2 which: which:
------
1 to 30 and 1 to 30 and 1 to 30 and
29 DPD > DPD 29 DPD > DPD 29 DPD > DPD
GBPm GBPm GBPm GBPm GBPm GBPm % % %
------ ------ -------- ------ ------ -----
Loans and advances
to customers at
amortised cost: 14,129 333 177 (597) (53) (47) 4.2 15.9 26.6
----- ------ ------
* personal 3,282 238 153 (327) (37) (38) 10.0 15.5 24.8
---------------------------------------
* corporate and commercial 10,352 95 24 (261) (16) (9) 2.5 16.8 37.5
---------------------------------------
* non-bank financial institutions 495 - - (9) - - 1.8 - -
-----
Loans and advances
to banks at amortised
cost 1 - - - - - - - -
Other financial
assets measured
at amortised cost 23 - 1 - - - - - -
--------------------------------------- ------ ------ ------ ---- ----- ----- ----- ------ ------
1 Days past due ('DPD'). Up to date accounts in Stage 2 are not shown in amounts presented above.
2 During the period, the group has re-presented the wholesale lending stage 1 and stage 2 amount. For further details, see page 26.
Credit exposure
Maximum exposure to credit risk
(Audited)
'Maximum exposure to credit risk' table The following table presents our maximum exposure before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net exposure to credit risk; and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount; for financial guarantees and similar contracts granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of the committed facilities. The offset in the table relates to amounts where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. No offset has been applied to off-balance sheet collateral. In the case of derivatives the offset column also includes collateral received in cash and other financial assets. =========================================
The following table provides information on balance sheet items, offsets, and loan and other credit-related commitments.
The offset on derivatives remains in line with the movements in maximum exposure amounts.
Other credit risk mitigants
While not disclosed as an offset in the following 'Maximum exposure to credit risk' table, other arrangements are in place which reduce our maximum exposure to credit risk. These include a charge over collateral on borrowers' specific assets such as residential properties and collateral held in the form of financial instruments that are not held on balance sheet. See Note 22 for further details of collateral in respect of certain loans and advances and derivatives.
Maximum exposure to credit risk
(Audited)
31 Dec 2019 31 Dec 2018
Maximum Maximum
exposure Offset Net exposure Offset Net
The group GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------
Loans and advances to customers
held at amortised cost 183,056 (3,804) 179,252 174,807 (3,220) 171,587
--------- ------ ------- --------- ------ -------
- personal 116,931 (26) 116,905 109,643 (88) 109,555
- corporate and commercial 63,604 (3,594) 60,010 62,631 (3,132) 59,499
- non-bank financial institutions 2,521 (184) 2,337 2,533 - 2,533
--------- ------ ------- --------- ------ -------
Loans and advances to banks at
amortised cost 1,389 - 1,389 1,263 - 1,263
--------- ------ ------- --------- ------ -------
Other financial assets held at
amortised cost 42,006 - 42,006 39,287 - 39,287
------------------------------------- --------- ------ ------- --------- ------ -------
- cash and balances at central
banks 37,030 - 37,030 33,193 - 33,193
-------------------------------------
- items in the course of collection
from other banks 504 - 504 603 - 603
-------------------------------------
- reverse repurchase agreements
- non-trading 3,014 - 3,014 3,422 - 3,422
-------------------------------------
- prepayments, accrued income and
other assets 1,458 - 1,458 2,069 - 2,069
------------------------------------- --------- ------ ------- --------- ------ -------
Derivatives 121 (26) 95 66 (36) 30
------------------------------------- --------- ------ ------- --------- ------ -------
Total on-balance sheet exposure
to credit risk 226,572 (3,830) 222,742 215,423 (3,256) 212,167
------------------------------------- --------- ------ ------- --------- ------ -------
Total off-balance sheet 70,654 - 70,654 73,226 - 73,226
--------- ------ ------- --------- ------ -------
- financial guarantees and similar
contracts 3,413 - 3,413 3,483 - 3,483
-------------------------------------
- loan and other credit-related
commitments 67,241 - 67,241 69,743 - 69,743
------------------------------------- --------- ------ ------- --------- ------ -------
Concentration of exposures
The diversification of our lending portfolio and our broad range of businesses and products ensured that we did not overly depend on any one business segment to generate growth in 2019.
Loans and advances to customers and banks held at amortised cost
The table on page 39 analyses loans and advances by industry sector to show any concentration of credit risk exposures.
Other financial assets held at amortised cost
Financial investments
Our holdings of government and government agency debt securities, corporate debt securities, asset-backed securities and other securities were spread across a range of issuers in 2019 with 97% (2018: 100%) invested in government or government agency debt securities.
Items in the course of collection from other banks
Settlement risk arises in any situations where a payment in cash, securities or equities is made with the expectation of a corresponding receipt of cash, securities or equities. Daily settlement limits are established for counterparties to cover the aggregate of transactions with each counterparty on any
single day.
The group substantially mitigates settlement risk on many transactions, particularly those involving securities, by settling through assured payment systems, or on a delivery-versus-payment basis.
Measurement uncertainty and sensitivity analysis of ECL estimates
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
We use multiple economic scenarios to reflect assumptions about future economic conditions, starting with three economic scenarios based on consensus forecast distributions, supplemented by alternative or additional economic scenarios and/or management adjustments where, in management's judgement, the consensus forecast distribution does not adequately capture the relevant risks.
The three economic scenarios represent the 'most likely' outcome and two less likely outcomes referred to as the Upside and Downside scenarios. Each outer scenario is consistent with a probability of 10%, while the Central scenario is assigned the remaining 80%, according to the decision of the Group's senior
management. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances.
Economic assumptions in the Central consensus economic scenario are set using consensus forecasts which represent the average of forecasts of external economists. Reliance on external forecasts helps ensure that the Central scenario is unbiased and maximises the use of independent information. The Upside and Downside scenarios are selected with reference to externally available forecast distributions and are designed to be cyclical, in that GDP growth, inflation and unemployment usually revert back to the Central scenario after the first three years. We determine the maximum divergence of GDP growth from the Central scenario using the 10th and the 90th percentile of the entire distribution of forecast outcomes. While key economic variables are set with reference to external distributional forecasts, we also align the overall narrative of the scenarios to the macroeconomic risks described in our 'Top and emerging risks' on page 18. This ensures that scenarios remain consistent with the more qualitative assessment of these risks. We project additional variable paths using the external provider's global macro model.
The Upside and Downside scenarios are generated once a year, reviewed at each reporting date to ensure that they are an appropriate reflection of management's view and updated if economic conditions change significantly. The Central scenario is generated every quarter. For quarters without updates to outer scenarios, wholesale and retail credit risk use the updated Central scenario to approximate the impact of the most recent outer scenarios.
Additional scenarios are created as required, to address those forward-looking risks that management consider are not adequately captured by the consensus. At the reporting date, we have deployed additional scenarios to address economic uncertainty.
Description of consensus economic scenarios
The economic assumptions presented in this section have been formed internally by the HSBC Group specifically for the purpose of calculating ECL.
The consensus Central scenario
Our Central scenario is one of moderate growth over the forecast period 2020-2024. Global GDP growth is expected to be 2.8% on average over the period, which is marginally lower than the average growth rate over the period 2014-2018. We note:
-- Expected average rates of GDP growth over the 2020-2024 period are lower than average growth rates achieved over the 2014-2018 period. This reflects expectations that the long-term impact of current economic uncertainty will be moderately adverse.
-- The unemployment rate is expected to rise over the forecast horizon.
-- Inflation is expected to be stable and will remain close to central bank targets in our core markets over the forecast period.
-- The Bank of England kept its main policy interest rates in 2019 and is expected to continue to maintain a low interest rate environment over the projection horizon.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario applied at 31 December 2019 and 31 December 2018.
Central scenario
Average Average
2020-2024 2019-2023
---------- ------------
UK UK
GDP growth rate (%) 1.6 1.7
Inflation (%) 2.0 2.1
Unemployment (%) 4.4 4.5
Short-term interest
rate (%) 0.6 1.2
10-year Treasury
bond yields (%) 1.7 2.6
House price growth
(%) 3.0 2.9
--------------------- ---------- ----------
Equity price growth
(%) 2.8 3.2
--------------------- ---------- ----------
Probability (%) 55 50
--------------------- ---------- ----------
The consensus Upside scenario
The economic forecast distribution of risks (as captured by consensus probability distributions of GDP growth) has shown a decrease in upside risks over the course of 2019. In the first two years of the Upside scenario, global real GDP growth rises before converging to the Central scenario.
Increased confidence, de-escalation of trade tensions, removal of trade barriers, expansionary fiscal policy, positive resolution of economic uncertainty in the UK, stronger oil prices and a calming of geopolitical tensions are the risk themes that support the Upside scenario.
The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario applied at 31 December 2019 and 31 December 2018.
Upside scenario
Average Average
2020-2024 2019-2023
---------- ------------
UK UK
------------
GDP growth rate (%) 2.1 2.2
Inflation (%) 2.4 2.3
Unemployment (%) 4.0 4.2
Short-term Interest
rate (%) 0.6 1.3
10-year Treasury bond
yields (%) 1.7 2.7
House price growth
(%) 4.4 4.1
Equity price growth
(%) 4.4 6.0
----------------------- ---------- ----------
Probability (%) 10 10
----------------------- ---------- ----------
The Downside scenarios
The consensus Downside scenario
The distribution of risks (as captured by consensus probability distributions of GDP growth) has shown a marginal increase in downside risks over the course of 2019 (see discussion on the economic uncertainty below). In the Downside scenario, global real GDP growth declines for two years before recovering towards its long-run trend. House price growth either stalls or contracts and equity markets correct abruptly in our major markets in this scenario. The potential slowdown in global demand would drive commodity prices lower and result in an accompanying fall in inflation. Central banks would be expected to enact loose monetary policy, which in some markets would result in a reduction in the key policy interest rate. The scenario is consistent with our top and emerging risks.
The following table describes key macroeconomic variables and the probabilities assigned in the Consensus Downside scenario applied at 31 December 2019 and 31 December 2018.
Downside scenario
Average Average
2020-2024 2019-2023
------------ ------------
UK UK
------------
GDP growth rate (%) 1.4 1.1
Inflation (%) 1.7 1.7
Unemployment (%) 4.8 4.8
Short Term Interest
rate (%) 0.1 0.3
10Y Treasury bond Yields
(%) 0.8 1.6
House price growth (%) 1.6 1.0
Equity price growth
(%) (1.1) (0.2)
-------------------------- -------- --------
Probability (%) - -
-------------------------- -------- --------
Alternative Downside scenarios for the UK
Three alternative Downside scenarios were maintained in 2019 for the UK, reflecting management's view of the distribution of economic risks. These scenarios reflect management's judgement that the consensus distribution does not adequately reflect the risks that stem from the UK's departure from the EU on
31 January 2020. Management evaluated events over the course of 2019 and assigned probabilities to these scenarios that take into consideration all relevant economic and political events. The three scenarios and associated probabilities are described below.
-- UK alternative Downside scenario 1: Economic uncertainty could have a large impact on the UK economy resulting in a long-lasting recession with a weak recovery. This scenario reflects the consequences of such a recession with an initial risk-premium shock and weaker long-run productivity growth. This scenario has been used with a 25% weighting.
-- UK alternative Downside scenario 2: This scenario reflects the possibility that economic uncertainty could result in a deep cyclical shock triggering a steep depreciation in sterling, a sharp increase in inflation and an associated monetary policy response. This represents a tail risk and has been assigned a 5% weighting.
-- UK alternative Downside scenario 3: This scenario reflects the possibility that the adverse impact associated with economic uncertainty currently in the UK could manifest over a far longer period of time with the worst effects occurring later than in the above two scenarios. This scenario is also considered a tail risk and has been assigned a 5% weighting.
The table below describes key macro-economic variables and the probabilities for each of the Alternative Downside scenarios applied at 31 December 2019 and 31 December 2018:
Average 2020-2024
Alternative Alternative Alternative
Downside Downside Downside
scenario scenario scenario
1 2 3
------------- -------------
GDP growth rate
(%) 0.3 (0.3) (0.8)
Inflation (%) 2.3 2.5 2.7
Unemployment
(%) 6.5 8.0 7.7
Short-term interest
rate (%) 0.4 2.5 2.5
10-year Treasury
bond yields (%) 1.8 4.0 4.0
House price growth
(%) (1.7) (3.7) (4.8)
Equity price
growth (%) (3.3) (4.6) (9.6)
--------------------- --------- --------- ---------
Probability (%) 25 5 5
--------------------- --------- --------- ---------
Average 2019-2023
Alternative Alternative Alternative
Downside Downside Downside
scenario scenario scenario
1 2 3
------------- -------------
GDP growth rate
(%) 0.5 (0.1) (0.7)
Inflation (%) 2.2 2.4 2.7
Unemployment
(%) 6.5 8.0 7.7
Short-term interest
rate (%) 0.4 2.5 2.5
10-year Treasury
bond yields (%) 1.8 4.0 4.0
House price growth
(%) (1.5) (3.3) (4.8)
Equity price
growth (%) (0.9) (2.3) (7.5)
--------------------- --------- --------- ---------
Probability (%) 30 5 5
--------------------- --------- --------- ---------
The conditions that resulted in departure from the consensus economic forecasts will be reviewed regularly as economic conditions change in future to determine whether these adjustments continue to be necessary.
The graph below shows the historical and forecasted GDP growth rate for five years for the various economic scenarios.
How economic scenarios are reflected in the wholesale calculation of ECL
We have developed a globally consistent methodology for the application of forward economic guidance into the calculation of ECL by incorporating forward economic guidance into the estimation of the term structure of probability of default ('PD') and loss given default ('LGD'). For PDs, we consider the correlation of forward economic guidance to default rates for a particular industry in a country. For LGD calculations, we consider the correlation of forward economic guidance to collateral values and realisation rates for a particular country and industry. PDs and LGDs are estimated for the entire term structure of each instrument.
For impaired loans, LGD estimates take into account independent recovery valuations provided by external consultants where available or internal forecasts corresponding to anticipated economic conditions and individual company conditions. In estimating the ECL on impaired loans that are individually considered not to be significant, we incorporate forward economic guidance proportionate to the probability-weighted outcome and the Central scenario outcome for non-stage 3 populations.
How economic scenarios are reflected in the retail calculation of ECL
We have developed and implemented a globally consistent methodology for incorporating forecasts of economic conditions into ECL estimates. The impact of economic scenarios on PD is modelled at a portfolio level. Historical relationships between observed default rates and macroeconomic variables are integrated into IFRS 9 ECL estimates by using economic response models. The impact of these scenarios on PD is modelled over a period equal to the remaining maturity of underlying asset or assets. The impact on LGD is modelled for mortgage portfolios by forecasting future loan-to-value ('LTV') profiles for the remaining maturity of the asset by using national level forecasts of the house price index and applying the corresponding LGD expectation.
Impact of UK economic uncertainty on ECL
At 31 December 2019, the impact of using additional scenarios to the consensus distribution to address economic uncertainty was GBP207m (2018: GBP258m), consisting of GBP123m (2018: GBP126m) in the retail portfolio and GBP84m (2018: GBP132m) in the wholesale portfolio. We also considered developments after the balance sheet date and concluded that they did not necessitate any adjustment to the approach or judgements taken on 31 December 2019.
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
actual ECL outcomes. The impact of defaults that might occur in 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 LGD 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, and an indicative range is provided for the UK tail risk sensitivity analysis.
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, and 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 analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
2019 2018
UK UK
GBPm GBPm
ECL of financial instruments
subject to significant
measurement uncertainty
at 31 Dec(2)
Reported ECL 430 491
Consensus scenarios
----------- ---------
Central scenario 320 357
Upside scenario 286 326
Downside scenario 378 411
------------------------------ ----------- ---------
Alternative scenarios
UK alternative Downside
scenario 1 580 534
Tail risk scenarios
(UK alternative Downside
scenarios 2 and 3) 1,008-1,115 891-1,019
------------------------------ ----------- ---------
Gross carrying/ nominal
amount(3) 137,868 129,651
------------------------------ ----------- ---------
1 Excludes ECL and financial instruments relating to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios.
2 Includes off-balance sheet financial instruments that are subject to significant measurement uncertainty. Also includes low credit risk financial instruments such as Debt instruments at FVOCI which have low ECL coverage ratios under all the above scenarios.
3 Includes low credit-risk financial instruments such as Debt instruments at FVOCI, which have low ECL coverage ratios under all the above scenarios.
The possible impact of Downside scenarios increased over 2019, primarily due to downward revisions in consensus forecasts and their resultant impact on the additional Downside scenarios.
The underlying movement in the reported ECL was driven by changes in the probability weights of the underlying scenarios together with a shift in the portfolio mix of underlying assets. Furthermore, the impact of the additional Downside scenarios, particularly alternative Downside scenario 2 and alternative Downside scenario 3, were relatively more severe than 2018 given marginally weaker than forecast economic performance in 2019.
Retail analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
2019 2018
UK UK
GBPm GBPm
ECL of loans and advances
to customers at 31
Dec(2)
Reported ECL (GBPm) 708 546
Consensus scenarios
Central scenario 584 417
Upside scenario 519 370
Downside scenario 694 495
--------------------------- ----------- ---------
Alternative scenarios
UK alternative Downside
scenario 1 910 699
Tail risk scenarios
(UK alternative Downside
scenarios 2 and 3) 1,138-1,297 897-1,036
--------------------------- ----------- ---------
Gross carrying amount
(GBPm) 113,135 106,201
--------------------------- ----------- ---------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes only on balance sheet financial instruments to which IFRS 9 impairment requirements are applied.
At 31 December 2019, the significant level of retail ECL sensitivity in the retail portfolio was observed due to the interaction between economic forecasts, the quantum of exposures and credit characteristics of the underlying portfolios.
The changes in sensitivity from 31 December 2018 is reflective of changes in lending volumes, credit quality and movements in foreign exchange. The increase in stage 3 ECL is due to a pause in write-offs and changes in credit quality.
For all the above sensitivity analyses, as the level of uncertainty, economic forecasts, historical economic variable correlations or credit quality changes, corresponding changes in the ECL sensitivity would occur.
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
The following disclosure provides a reconciliation by stage of the group's gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees.
The transfers of financial instruments represents the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL. The net remeasurement of ECL arising from stage transfers represents the increase or decrease
due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying CRR/PD movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the 'changes in risk parameters - credit quality' line item.
The 'new financial assets originated or purchased', 'net further lending' and 'assets derecognised (including final repayments)' represent the gross carrying/nominal amount and associated allowance ECL impact from volume movements within the group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1, 2, 3)
(Audited)
Non credit impaired Credit impaired
------------------------ --------- ---------
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross Gross Gross
carrying/ carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/
nominal Allowance nominal for nominal for nominal for nominal Allowance
amount for ECL amount ECL amount ECL amount ECL amount for ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ----------- --------- ----------- ----------- ----------- --------- --------- --------- -----------
At 1 Jan 2019 222,184 (283) 17,187 (611) 3,000 (640) - - 242,371 (1,534)
------------------ -------- ------ -------- ------ ------ --- ------ --------- --------- -------- -------
Transfers of
financial
instruments: (2,733) (227) 1,290 369 1,443 (142) - - - -
- transfers from
Stage 1 to Stage
2 (14,484) 53 14,484 (53) - - - - - -
------------------
- transfers from
Stage 2 to Stage
1 11,873 (262) (11,873) 262 - - - - - -
------------------
- transfers to
Stage 3 (313) 2 (1,618) 188 1,931 (190) - - - -
------------------
- transfers from
Stage 3 191 (20) 297 (28) (488) 48 - - - -
------------------ -------- ------ -------- ------ ------ ------ --- --------- --------- -------- -------
Net remeasurement
of ECL arising
from transfer of
stage - 193 - (138) - (2) - - - 53
------------------
New financial
assets
originated or
purchased 41,977 (71) - - - - 29 - 42,006 (71)
Asset
derecognised
(including final
repayments) (22,938) 21 (1,840) 78 (617) 175 - - (25,395) 274
------------------ -------- ------ --- -------- ------ --- ------ ------ --- --------- --------- -------- -------
Changes to Risk
parameters -
further
lending/
repayment (7,621) 55 (889) 38 248 5 - - (8,262) 98
------------------
Changes to risk
parameters -
credit
quality - 66 - (377) - (739) - - (1,050)
Assets written
off - - - - (472) 472 - - (472) 472
Credit related
modifications
that
resulted in
derecognition - - - - (45) 11 - - (45) 11
Others - - - - - 3 - - - 3
------------------ -------- ------ --- -------- ------ --- ------ --- ------ --- --------- --------- -------- -------
At 31 Dec 2019 230,869 (246) 15,748 (641) 3,557 (857) 29 - 250,203 (1,744)
------------------ -------- ------ -------- ------ ------ --- ------ --------- --------- -------- -------
ECL
release/(charge)
for the period 264 (399) (561) - (696)
Recoveries 78
Others 5
--------- -------
Total change in
ECL for the
period (613)
------------------ --------- --------- ----------- ----------- ----------- --------- --------- --------- -------
At 1 Jan 2018 - - - - - - -- - -
------------------------
Transfer to from
HSBC Bank Plc and
its subsidiaries 216,026 (288) 9,502 (453) 2,711 (663) --228,239 (1,404)
------------------------
Transfers of financial
instruments: (1,336) (36) 876 90 460 (54) -- - -
------
- transfers from
Stage 1 to Stage
2 (4,977) 50 4,977 (50) - - -- - -
------------------------
- transfers from
Stage 2 to Stage
1 3,729 (86) (3,729) 86 - - -- - -
- transfers to
Stage 3 (143) 6 (462) 65 605 (71) -- - -
- transfers from
Stage 3 55 (6) 90 (11) (145) 17 -- - -
Net remeasurement
of ECL arising
from transfer of
stage - 55 - (54) - (1) -- - -
------------------------
Net new lending
and further
lending/payments 12,160 (17) 2,653 53 53 196 -- 14,866 232
Changes to risk
parameters - credit
quality - 9 - (250) - (352) - - (593)
------
Assets written
off - - - - (233) 233 -- (233) 233
------
Others (4,666) (6) 4,156 3 9 1 -- (501) (2)
------------------------ ------
At 31 Dec 2018 222,184 (283) 17,187 (611) 3,000 (640) --242,371 (1,534)
------------------------ ------
ECL release/(charge)
for the period 47 (251) (157) - (361)
------
Recoveries 52
Others 4
Total change in
ECL for the period (305)
------------------------ ----- ------
1 The Reconciliation excludes loans and advances to other HSBC Group companies. As at 31 December 2019, these amounted to GBP0.8bn
(2018: GBP0.8bn) and were classified as Stage 1 with no ECL.
2 The 31 December 2018 comparative' Reconciliation of changes in gross carrying/nominal amount and allowance for loans and advances to banks and customers' disclosure presents 'New financial assets originated or purchased', 'Assets derecognised (including final repayments)' and 'Changes to risk parameters-further lending/repayments' under' Net new lending and further lending/ repayments'. To provide greater granularity, these amounts have been separately presented in the 31 December 2019 disclosure.
3 During the period, the group has re-presented the wholesale lending stage 1 and stage 2 amount. For further details, see page 26.
Credit quality of financial instruments
(Audited)
We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a-point-in-time assessment of PD, whereas stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition. Accordingly, for non-credit-impaired financial instruments there is no direct relationship between the credit quality assessment and stages 1 and 2, though typically the lower credit quality bands exhibit a higher proportion in stage 2.
The five credit quality classifications defined above each encompass a range of granular internal credit rating grades assigned to wholesale and retail lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the table on page 25.
Distribution of financial instruments by credit quality
(Audited)
Gross carrying/notional amount
Allowance
Credit for
Strong Good Satis-factory Sub-standard impaired Total ECL Net
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- -------------- --------- -----------
In-scope for IFRS 9
Loans and advances to
customers
held at amortised cost 111,802 29,968 35,158 4,600 3,206 184,734 (1,678) 183,056
--------- -------
- personal 104,316 6,339 5,400 412 1,202 117,669 (738) 116,931
- corporate and commercial 6,905 23,002 28,614 4,032 1,984 64,537 (933) 63,604
- non-bank financial
institutions 581 627 1,144 156 20 2,528 (7) 2,521
Loans and advances to banks
held at amortised cost 1,385 - 5 - - 1,390 (1) 1,389
--------- ---------
Cash and balances at central
banks 37,030 - - - - 37,030 - 37,030
--------- ---------
Items in the course of
collection
from other banks 504 - - - - 504 - 504
--------- ---------
Reverse repurchase agreements
- non-trading 3,014 - - - - 3,014 - 3,014
--------- ---------
Other assets 1,063 110 141 - 9 1,323 - 1,323
--------- ---------
- endorsements and
acceptances 6 52 13 - - 71 - 71
- accrued income and other 1,057 58 128 - 9 1,252 - 1,252
-------
Debt instruments measured at
fair value through other
comprehensive
income(1) 19,580 - - - - 19,580 (1) 19,579
Out-of-scope for IFRS 9
--------- -------------- --------- -----------
Derivatives 84 30 6 1 0 121 - 121
--------- -------------- --------- -------
Total gross carrying amount
on balance sheet 174,462 30,108 35,310 4,601 3,215 247,696 (1,680) 246,016
--------- -------------- --------- -------
Percentage of total credit
quality 70.4% 12.2% 14.2% 1.9% 1.3% 100.0% - -
-------
Loan and other credit related
commitments 36,988 15,950 10,009 568 343 63,858 (60) 63,798
--------- -------------- --------- -------
Financial guarantees 381 295 315 49 37 1,077 (5) 1,072
--------- -------------- --------- -------
In-scope: Irrecoverable loan
commitments and financial
guarantees 37,369 16,245 10,324 617 380 64,935 (65) 64,870
--------- -------
Loan and other credit related
commitments 429 1,587 1,233 163 32 3,444 - 3,444
--------- -------------- --------- -------
Performance and other
guarantees 487 903 788 142 31 2,351 (9) 2,342
--------- -------------- --------- -------
Out-of-scope: Revocable loan
commitments and
Non-financial
guarantees 916 2,490 2,021 305 63 5,795 (9) 5,786
Total nominal amount off
balance
sheet 38,285 18,735 12,345 922 443 70,730 (74) 70,656
At 31 Dec 2019 212,747 48,843 47,655 5,523 3,658 318,426 (1,754) 316,672
--------- -------
In-scope for IFRS 9
Loans and advances to customers
held at amortised cost 106,089 26,485 37,827 3,261 2,604 176,266 (1,459) 174,807
- personal 98,679 5,550 4,477 496 1,006 110,208 (565) 109,643
- corporate and commercial 7,009 20,301 31,998 2,666 1,517 63,491 (860) 62,631
- non-bank financial institutions 401 634 1,352 99 81 2,567 (34) 2,533
Loans and advances to banks
held at amortised cost 1,254 7 2 - - 1,263 - 1,263
Cash and balances at central
banks 33,193 - - - - 33,193 - 33,193
Items in the course of collection
from other banks 603 - - - - 603 - 603
Reverse repurchase agreements
- non-trading 3,422 - - - - 3,422 - 3,422
Other assets 1,626 99 189 1 9 1,924 (3) 1,921
- endorsements and acceptances 3 51 31 1 - 86 - 86
- accrued income and other 1,623 48 158 - 9 1,838 (3) 1,835
Debt instruments measured at
fair value through other
comprehensive
income(1) 13,019 - - - - 13,019 - 13,019
Out-of-scope for IFRS 9
Derivatives 49 15 2 - - 66 - 66
Assets held for sale - - - - - - - -
Total gross carrying amount
on balance sheet 159,255 26,606 38,020 3,262 2,613 229,756 (1,462) 228,294
Percentage of total credit quality 69.4% 11.6% 16.5% 1.4% 1.1% 100.0% - -
Loan and other credit related
commitments 42,745 11,383 9,640 536 324 64,628 (63) 64,565
Financial guarantees 499 239 460 15 71 1,284 (12) 1,272
In-scope: Irrecoverable loan
commitments and financial
guarantees 43,244 11,622 10,100 551 395 65,912 (75) 65,837
Loan and other credit related
commitments 5,178 - - - - 5,178 - 5,178
Performance and other guarantees 232 787 1,111 50 40 2,220 (9) 2,211
Out-of-scope: Revocable loan
commitments and Non-financial
guarantees 5,410 787 1,111 50 40 7,398 (9) 7,389
Total nominal amount off balance
sheet 48,654 12,409 11,211 601 435 73,310 (84) 73,226
At 31 Dec 2018 207,909 39,015 49,231 3,863 3,048 303,066 (1,546) 301,520
1 For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage allocation (1)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------
Loans and advances
to
customers at
amortised
cost 111,802 29,968 35,158 4,600 3,206 184,734 (1,678) 183,056
------
- stage 1 111,521 28,906 27,314 610 - 168,351 (214) 168,137
- stage 2 281 1,062 7,844 3,990 - 13,177 (626) 12,551
- stage 3 - - - - 3,179 3,179 (838) 2,341
- POCI - - - - 27 27 - 27
Loans and advances
to
banks at amortised
cost 1,385 - 5 - - 1,390 (1) 1,389
------
- stage 1 1,385 - 5 - - 1,390 (1) 1,389
- stage 2 - - - - - - - -
- stage 3 - - - - - - - -
- POCI - - - - - - - -
Other financial
assets
measured at
amortised
cost 41,611 110 141 - 9 41,871 - 41,871
------
- stage 1 41,610 109 115 - - 41,834 - 41,834
- stage 2 1 1 26 - - 28 - 28
- stage 3 - - - - 9 9 - 9
- POCI - - - - - - - -
Loan and other
credit-related
commitments 36,988 15,950 10,009 568 343 63,858 (60) 63,798
------
- stage 1 36,859 15,785 8,304 111 - 61,059 (27) 61,032
- stage 2 129 165 1,705 457 - 2,456 (14) 2,442
- stage 3 - - - - 341 341 (19) 322
- POCI - - - - 2 2 - 2
Financial guarantees 381 295 315 49 37 1,077 (5) 1,072
------
- stage 1 381 288 206 23 - 898 (2) 896
- stage 2 - 7 109 26 - 142 (2) 140
- stage 3 - - - - 37 37 (1) 36
- POCI - - - - - - - -
At 31 Dec 2019 192,167 46,323 45,628 5,217 3,595 292,930 (1,744) 291,186
------
Debt instruments at
FVOCI(2)
------
- stage 1 19,580 - - - - 19,580 (1) 19,579
- stage 2 - - - - - - - -
- stage 3 - - - - - - - -
- POCI - - - - - - - -
At 31 Dec 2019 19,580 - - - - 19,580 (1) 19,579
------ ------------
Loans and advances to
customers at amortised
cost 106,089 26,485 37,827 3,261 2,604 176,266 (1,459) 174,807
- stage 1 105,892 25,393 27,772 476 - 159,533 (247) 159,286
- stage 2 197 1,092 10,055 2,785 - 14,129 (597) 13,532
- stage 3 - - - - 2,604 2,604 (615) 1,989
- POCI - - - - - - - -
Loans and advances to
banks at amortised cost 1,254 7 2 - - 1,263 - 1,263
- stage 1 1,253 7 2 - - 1,262 - 1,262
- stage 2 1 - - - - 1 - 1
- stage 3 - - - - - - - -
- POCI - - - - - - - -
Other financial assets
measured at amortised
cost 38,846 98 188 1 9 39,142 - 39,142
- stage 1 38,845 97 168 - - 39,110 - 39,110
- stage 2 1 1 20 1 - 23 - 23
- stage 3 - - - - 9 9 - 9
- POCI - - - - - - - -
Loan and other credit-related
commitments 42,745 11,383 9,640 536 324 64,628 (63) 64,565
- stage 1 42,651 10,860 7,692 141 - 61,344 (32) 61,312
- stage 2 94 523 1,948 395 - 2,960 (13) 2,947
- stage 3 - - - - 324 324 (18) 306 - POCI - - - - - - - - Financial guarantees 499 239 460 15 71 1,284 (12) 1,272 - stage 1 499 227 370 1 - 1,098 (3) 1,095 - stage 2 - 12 90 14 - 115 (2) 113 - stage 3 - - - - 71 71 (7) 64 - POCI - - - - - - - - At 31 Dec 2018 189,433 38,212 48,117 3,813 3,008 282,583 (1,534) 281,049 Debt instruments at FVOCI(2) - stage 1 13,019 - - - - 13,019 - 13,019 - stage 2 - - - - - - - - - stage 3 - - - - - - - - - POCI - - - - - - - - At 31 Dec 2018 13,019 - - - - 13,019 - 13,019
1 During the period, the group has re-presented the wholesale lending stage 1 and stage 2 amount. For further details, see page 26.
2 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.
Credit-impaired loans
(Audited)
HSBC UK determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and
-- the loan is otherwise considered to be in default. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit-impaired and default are aligned as far as possible so that stage 3 represents all loans which are considered defaulted or otherwise credit-impaired.
Renegotiated loans and forbearance
The following table shows the gross carrying amounts of the group's holdings of renegotiated loans and advances to customers by industry sector and by stages. Wholesale renegotiated loans are classified as stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period, and there are no other indicators of impairment. Personal renegotiated loans are deemed to remain credit-impaired until repayment or derecognition.
Renegotiated loans and advances to customers at amortised costs by
stage allocation
Stage Stage Stage
1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm
-------- ------ ---- --------
Gross carrying amount
-------- ------ ---- --------
Personal - - 472 - 472
- first lien residential mortgages - - 326 - 326
- other personal lending - - 146 - 146
---- ---- ----- ---- -----
Wholesale 292 354 915 27 1,588
- corporate and commercial 292 354 909 27 1,582
- non-bank financial institutions - - 6 - 6
At 31 Dec 2019 292 354 1,387 27 2,060
---- ---- ----- ---- -----
Allowance for ECL
-------- -------- ------ ---- --------
Personal - - (87) - (87)
- first lien residential mortgages - - (31) - (31)
- other personal lending - - (56) - (56)
---- ---- ----- ---- -----
Wholesale (1) (24) (277) - (302)
- corporate and commercial (1) (24) (277) - (302)
- non-bank financial institutions - - - - -
---- ---- ----- ---- -----
At 31 Dec 2019 (1) (24) (364) - (389)
---- ---- ----- ---- -----
Gross carrying amount
---- ---- ------ --------
Personal - - 465 - 465
- first lien residential mortgages - - 348 - 348
- other personal lending - - 117 - 117
Wholesale 282 234 987 -1,503
- corporate and commercial 282 234 980 -1,496
- non-bank financial institutions - - 7 - 7
At 31 Dec 2018 282 234 1,452 -1,968
Allowance for ECL
---- ---- ------ --------
Personal - - (59) - (59)
- first lien residential mortgages - - (28) - (28)
- other personal lending - - (31) - (31)
Wholesale (11) (17) (280) - (308)
- corporate and commercial (11) (17) (279) - (307)
- non-bank financial institutions - - (1) - (1)
At 31 Dec 2018 (11) (17) (339) - (367)
Wholesale lending
This section provides further detail on the products in wholesale loans and advances to customers and banks. Product granularity is also provided by stage.
Total wholesale lending for loans and advances to banks and customers
by stage distribution
Gross carrying Allowance for ECL
amount
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Corporate and commercial 53,843 8,710 1,957 27 64,537 (135) (238) (560) - (933)
* agriculture, forestry and fishing 3,234 371 89 - 3,694 (7) (15) (8) - (30)
* mining and quarrying 314 761 2 - 1,077 (1) (6) - - (7)
* manufacture 6,552 1,261 178 - 7,991 (21) (36) (78) - (135)
* electricity, gas, steam and air-con
ditioning supply 451 60 81 - 592 (1) (2) (11) - (14)
* water supply, sewerage, waste manag
ement and
remediation 879 21 20 - 920 (2) (1) (12) - (15)
- construction 2,110 1,514 250 - 3,874 (5) (21) (114) - (140)
* wholesale and retail trade, repair
of motor vehicles
and motorcycles 8,156 1,923 272 - 10,351 (14) (49) (80) - (143)
* transportation and storage 1,469 144 89 - 1,702 (5) (5) (39) - (49)
* accommodation and food 7,202 432 98 - 7,732 (17) (17) (15) - (49)
* publishing, audiovisual and broadca
sting 1,700 333 33 15 2,081 (9) (8) (5) - (22)
- real estate 10,703 800 578 - 12,081 (12) (23) (109) - (144)
* professional, scientific and techni
cal activities 3,238 211 63 - 3,512 (13) (12) (34) - (59)
* administrative and support services 3,852 569 95 12 4,528 (14) (23) (30) - (67)
* public administration and defence,
compulsory social
security 6 7 - - 13 - - - - -
- education 784 48 9 - 841 (4) (3) (4) - (11)
- health and care 1,348 137 75 - 1,560 (5) (8) (15) - (28)
* arts, entertainment and recreation 908 59 18 - 985 (3) (5) (4) - (12)
- other services 406 59 7 - 472 (2) (4) (2) - (8)
- activities of households - - - - - - - - - -
- assets backed securities 531 - - - 531 - - - - -
Non-bank financial institutions 2,110 398 20 - 2,528 (3) (3) (1) - (7)
Loans and advances to banks 1,390 - - - 1,390 (1) - - - (1)
At 31 Dec 2019 57,343 9,108 1,977 27 68,455 (139) (241) (561) - (941)
------ ----- ----- ---- ------ ---- ---- ---- ---- ----
Total wholesale credit-related commitments and financial guarantees
by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------
Corporate and commercial 23,857 2,127 298 2 26,284 (23) (16) (20) - (59)
Financial 1,101 102 1 - 1,204 - - - - -
At 31 Dec 2019 24,958 2,229 299 2 27,488 (23) (16) (20) - (59)
Total wholesale lending for loans and advances to banks and customers
by stage distribution(1)
Gross carrying Allowance for ECL
amount
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Corporate and commercial 51,622 10,352 1,517 - 63,491 (170) (261) (429) - (860)
------ ------ ----- ---- ------ ---- ---- ---- ---- ----
* agriculture, forestry and fishing 2,370 1,163 75 - 3,608 (8) (26) (6) - (40)
* mining and quarrying 549 437 70 - 1,056 (3) (2) (4) - (9)
* manufacture 6,494 1,550 110 - 8,154 (21) (33) (36) - (90)
* electricity, gas, steam and air-con
ditioning supply 297 143 23 - 463 (1) (7) (7) - (15)
* water supply, sewerage, waste manag
ement and
remediation 961 75 16 - 1,052 (2) (1) (11) - (14)
- construction 3,382 396 284 - 4,062 (7) (10) (113) - (130)
* wholesale and retail trade, repair
of motor vehicles
and motorcycles 7,526 2,180 211 - 9,917 (16) (48) (53) - (117)
* transportation and storage 1,371 242 18 - 1,631 (5) (6) (4) - (15)
* accommodation and food 5,439 1,274 87 - 6,800 (25) (26) (18) - (69)
* publishing, audiovisual and broadca
sting 1,592 285 66 - 1,943 (11) (5) (39) - (55)
- real estate 10,583 823 254 - 11,660 (18) (26) (65) - (109)
* professional, scientific and techni
cal activities 3,260 421 44 - 3,725 (14) (21) (20) - (55)
* administrative and support services 3,631 705 111 - 4,447 (17) (20) (23) - (60)
* public administration and defence,
compulsory social
security 17 - - - 17 - - - - -
- education 718 152 8 - 878 (6) (5) (3) - (14)
- health and care 1,140 295 99 - 1,534 (5) (9) (18) - (32)
* arts, entertainment and recreation 918 132 18 - 1,068 (4) (6) (3) - (13)
- other services 738 79 23 - 840 (7) (10) (6) - (23)
- activities of households 1 - - - 1 - - - - -
- assets backed securities 635 - - - 635 - - - - -
------ ------
Non-bank financial institutions 1,991 495 81 - 2,567 (6) (9) (19) - (34)
------ ------
Loans and advances to banks 1,262 1 - - 1,263 - - - - -
------ ------
At 31 Dec 2018 54,875 10,848 1,598 - 67,321 (176) (270) (448) - (894)
------ ------ ----- ---- ------ ---- ---- ---- ---- ----
Total wholesale credit-related commitments and financial guarantees
by stage distribution (1) (continued)
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Corporate and commercial 22,640 2,856 170 - 25,666 (31) (15) (25) - (71)
Financial 793 46 2 - 841 - - - - -
At 31 Dec 2018 23,433 2,902 172 - 26,507 (31) (15) (25) - (71)
1 During the period, the group has re-presented the wholesale lending stage 1 and stage 2 amount. For further details, see page 26.
Commercial real estate
Commercial real estate lending includes the financing of corporate, institutional and high net worth individuals who are investing primarily in income-producing assets and, to a lesser extent, in their construction and development. The business focuses mainly on traditional core asset classes such as retail, offices, light industrial and residential building projects.
Commercial real estate lending(1)
2019 2018
GBPm GBPm
-------
Gross loans and advances
Stage 1 12,094 13,196
Stage 2 1,986 1,006
Stage 3 716 525
POCI - -
At 31 Dec 14,796 14,727
------
- of which: renegotiated
loans 589 560
Allowance for ECL (226) (204)
1 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 26.
Refinance risk in commercial real estate
Commercial real estate lending tends to require the repayment of a significant proportion of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a customer, being unable to repay the debt on maturity, fails to refinance it at commercial rates. We monitor our commercial real estate portfolio closely, assessing indicators for signs of potential issues with refinancing.
Commercial real estate gross loans
and advances maturity
analysis
2019 2018
GBPm GBPm
----------
< 1 year 7,775 7,379
1-2 years 3,661 3,383
2-5 years 3,057 3,673
> 5 years 303 292
At 31 Dec 14,796 14,727
----------
Collateral and other credit enhancement held
(Audited)
Although collateral can be an important mitigant of credit risk, it is HSBC UK's practice to lend on the basis of the customer's ability to meet their obligations out of their cash flow resources rather than rely on the value of security offered. Depending on the customer's standing and the type of product, facilities may be provided unsecured.
For other lending a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of a default, the group may utilise the collateral as a source of repayment. Depending on its form, collateral can have a significant financial effect in mitigating exposure to credit risk.
Collateral on loans and advances
Collateral held is analysed separately for commercial real estate and for other corporate and commercial and financial (non-bank) lending. The following tables include off-balance sheet loan commitments, primarily undrawn credit lines.
The collateral measured in the following tables consists of fixed first charges on real estate, and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis. No adjustment has been made to the collateral for any expected costs of recovery. Marketable securities are measured at their fair value. Other types of collateral such as unsupported guarantees and floating charges over the assets of a customer's business are not measured in the following tables. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes.The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. When collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral.
For credit-impaired loans, the collateral values cannot be directly compared with impairment allowances recognised. The LTV figures use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 84.
Commercial real estate loans and advances
The value of commercial real estate collateral is determined by using a combination of external and internal valuations and physical inspections. For CRR 1-7, local valuation policies determine the frequency of review on the basis of local market conditions because of the complexity of valuing collateral for commercial real estate. For CRR 8-10, almost all collateral would have been revalued within the last three years.
Facilities of a working capital nature are generally not secured by a first fixed charge, and are therefore disclosed as not collateralised.
Wholesale lending: commercial real
estate loans and
advances including loan commitments
by level of collateral
(by stage)(1 2)
(Audited)
2019 2018
Gross Gross
carrying/nominal ECL carrying/nominal ECL
amount coverage amount coverage
GBPm % GBPm %
Stage 1
Not collateralised 4,143 0.1 5,760 0.2
-----------------
Fully collateralised 12,742 - 12,388 0.1
---------
LTV ratio:
-----------
- less than
50% 4,469 0.1 5,932 0.1
---------
- 51% to 75% 6,682 - 5,171 0.1
---------
- 76% to 90% 1,247 0.1 823 0.1
---------
- 91% to 100% 344 0.1 462 0.1
----------------- ---------
Partially collateralised
(A): 411 0.1 406 0.1
- collateral
value on A 373 237
-----------------
Total 17,296 0.1 18,554 0.1
----------------- ---------
Stage 2
Not collateralised 1,296 1.2 561 1.5
----------------- ---------
Fully collateralised 840 1.4 1,043 1.5
---------
LTV ratio:
- less than
50% 416 2.0 415 2.6
---------
- 51% to 75% 355 0.7 593 0.6
---------
- 76% to 90% 12 6.0 21 2.5
---------
- 91% to 100% 57 0.7 14 8.5
----------------- ---------
Partially collateralised
(B): 224 0.2 47 4.2
- collateral
value on B 42 16
-----------------
Total 2,360 1.2 1,651 1.6
----------------- ---------
Stage 3
Not collateralised 49 92.4 44 90.2
----------------- ---------
Fully collateralised 305 12.7 206 15.0
---------
LTV ratio:
- less than
50% 32 6.2 89 24.8
---------
- 51% to 75% 52 4.0 47 6.9
---------
- 76% to 90% 54 4.6 41 3.3
---------
- 91% to 100% 167 19.3 29 14.8
----------------- ---------
Partially collateralised
(C): 383 27.9 218 40.3
- collateral
value on C 126 108
-----------------
Total 737 25.9 468 33.8
----------------- ---------
POCI
Not collateralised - - - -
----------------- ---------
Fully collateralised - - - -
----------------- ---------
LTV ratio:
- less than
50% - - - -
---------
- 51% to 75% - - - -
---------
- 76% to 90% - - - -
---------
- 91% to 100% - - - -
----------------- ---------
Partially collateralised
(D): - - - -
----------------- ---------
- collateral
value on D - -
-----------------
Total - - - -
----------------- ---------
At 31 Dec 20,393 1.1 20,673 1.0
----------------- ---------
1 During the period, the group has re-presented the wholesale lending stage 1 and stage 2 amount. For further details, see page 26.
2 The 2018 comparative amounts have been re-presented. The impact of these re-presentations is to increase stage 1 not collateralised amounts by GBP459m, increase fully collateralised amounts by GBP679m and increase partially collateralised amount by GBP34m; to increase stage 2 not collateralised amounts by GBP21m, increase fully collateralised amounts by GBP295m and increase partially collateralised amount by GBP6m; and to decrease stage 3 not collateralised amounts by GBP3m, decrease fully collateralised amounts by GBP133m and increase partially collateralised amount by GBP14m.
Wholesale lending: commercial real
estate loans and advances
including loan commitments by level
of collateral (1)
(Audited)
2019 2018
Gross Gross
carrying/nominal carrying/nominal ECL
amount ECL coverage amount coverage
GBPm % GBPm %
Rated CRR/
PD1 to 7
Not collateralised 5,437 0.3 6,319 0.3
----------------- ------------
Fully collateralised 13,524 0.1 13,376 0.2
----------------- ------------
Partially collateralised
(A): 630 0.1 435 0.5
- collateral
value on A 411 248
-----------------
Total 19,591 0.2 20,130 0.2
----------------- ------------
Rated CRR/
PD 8
Not collateralised 2 8.5 2 11.9
----------------- ------------
Fully collateralised 58 7.6 55 7.2
LTV ratio:
- less than
50% 21 13.2 25 5.3
- 51% to 75% 18 4.7 12 8.1
- 76% to 90% 11 4.7 5 8.6
- 91% to 100% 8 3.0 13 9.6
----------------- ------------
Partially collateralised
(B): 5 3.0 18 2.3
- collateral
value on B 4 5
-----------------
Total 65 7.2 75 6.2
----------------- ------------
Rated CRR/
PD9 to 10
Not collateralised 49 92.4 44 90.2
----------------- ------------
Fully collateralised 305 12.7 206 14.9
LTV ratio:
- less than
50% 32 6.2 89 24.6
- 51% to 75% 52 4.0 47 6.4
- 76% to 90% 54 4.6 41 3.9
- 91% to 100% 167 19.3 29 15.1
----------------- ------------
Partially collateralised
(C): 383 27.9 218 40.2
- collateral
value on C 126 108
-----------------
Total 737 25.9 468 33.8
----------------- ------------
At 31 Dec 20,393 1.1 20,673 1.0
----------------- ------------
1 The 2018 comparative amounts have been re-presented. The impact of these re-presentations is to increase rated CRR/PD1 to 7 not collateralised amounts by GBP480m, increase fully collateralised amounts by GBP1,259m and increase partially collateralised amount by GBP28m; to decrease rated CRR/PD8 fully collateralised amounts by GBP285m and increase partially collateralised amount by GBP12m; and to decrease rated CRR/PD 9 to 10 not collateralised amounts by GBP3m, decrease fully collateralised amounts by GBP133m and increase partially collateralised amount by GBP14m.
Other corporate, commercial and financial
(non-bank) loans and advances
(Audited)
Other corporate, commercial and financial (non-bank) loans are analysed separately in the following table. For financing activities in corporate and commercial lending that are not predominantly commercial real estate-oriented, collateral value is not strongly correlated to principal repayment performance.
Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them.
Accordingly, the following table reports values only for customers with CRR 8-10, recognising that these loans and advances generally have valuations that are comparatively recent.
Wholesale lending: other corporate,
commercial and financial
(non-bank) loans and advances including
loan commitments by
level of collateral (by stage) (1
2)
(Audited)
2019 2018
Gross Gross
carrying/nominal ECL carrying/nominal ECL
amount coverage amount coverage
GBPm % GBPm %
-------------------
Stage 1
Not collateralised 40,356 0.3 41,055 0.3
----------------- ---------
Fully collateralised 18,775 0.1 14,045 0.2
LTV ratio:
- less than
50% 8,000 0.1 5,465 0.2
- 51% to 75% 6,918 0.1 5,200 0.3
- 76% to 90% 2,312 0.2 2,138 0.2
- 91% to 100% 1,545 0.1 1,242 0.1
-----------------
Partially collateralised
(A): 5,809 0.1 4,598 0.2
- collateral
value on A 2,679 2,250
-----------------
Total 64,940 0.2 59,698 0.3
----------------- ---------
Stage 2
Not collateralised 7,164 2.4 8,435 2.2
----------------- ---------
Fully collateralised 1,751 2.2 3,087 1.7
-----------------
LTV ratio:
- less than
50% 659 2.4 1,331 2.0
- 51% to 75% 717 2.0 1,261 1.5
- 76% to 90% 196 2.3 357 1.3
- 91% to 100% 179 2.0 138 2.1
-----------------
Partially collateralised
(B): 1,117 1.4 1,397 1.2
- collateral
value on B 279 265
-----------------
Total 10,032 2.3 12,919 2.0
----------------- ---------
Stage 3
Not collateralised 994 29.4 811 30.8
----------------- ---------
Fully collateralised 295 15.4 282 8.3
LTV ratio:
- less than
50% 58 22.3 89 9.1
- 51% to 75% 148 8.5 116 2.4
- 76% to 90% 52 29.7 69 15.4
- 91% to 100% 37 12.2 8 24.3
-----------------
Partially collateralised
(C): 234 22.3 145 25.1
- collateral
value on C 115 82
-----------------
Total 1,523 25.6 1,238 25.0
----------------- ---------
POCI
Not collateralised - - - -
----------------- ---------
Fully collateralised - - - -
-----------------
LTV ratio:
- less than
50% - - - -
- 51% to 75% - - - -
- 76% to 90% - - - -
- 91% to 100% - - - -
----------------- ---------
Partially Collateralised
(D): 29 1.2 - -
- collateral
value on D 2 -
-----------------
Total 29 1.2 - -
----------------- ---------
At 31 Dec 76,524 1.0 73,855 1.0
----------------- ---------
1 During the period, the group has re-presented the wholesale lending stage 1 and stage 2 amount. For further details, see page 26.
2 The 2018 comparative amounts have been re-presented. The impact of these re-presentations is to decrease stage 1 not collateralised amounts by GBP9,384m, increase fully collateralised amounts by GBP6,036m and increase partially collateralised amount by GBP1,171m; to increase stage 2 not collateralised amounts by GBP2,358m, decrease fully collateralised amounts by GBP2,612m and increase partially collateralised amount by GBP809m; and to increase stage 3 not collateralised amounts by GBP84m, increase fully collateralised amounts by GBP3m and increase partially collateralised amount by GBP39m.
Wholesale lending: other corporate,
commercial and financial
(non-bank) loans and advances including
loan commitments by level of collateral
rated CRR/PD 8 to 10 only(1)
(Audited)
2019 2018
Gross Gross
carrying/nominal carrying/nominal ECL
amount ECL coverage amount coverage
GBPm %
Rated CRR/
PD 8
-------------------
Not collateralised 208 12.9 238 5.5
Fully collateralised 77 4.9 44 6.9
LTV ratio:
-------------------
- less than
50% 29 5.9 21 5.9
- 51% to 75% 25 6.1 20 7.2
- 76% to 90% 21 2.4 2 12.9
- 91% to 100% 2 2.2 1 8.4
Partially collateralised
(A): 40 4.9 14 8.9
- collateral
value on A 25 12
Total 325 10.1 296 5.8
Rated CRR/
PD9 to 10
Not collateralised 994 29.4 811 30.8
Fully collateralised 295 15.4 282 8.3
LTV ratio:
- less than
50% 58 22.3 89 9.0
- 51% to 75% 148 8.5 116 2.4
- 76% to 90% 52 29.8 69 15.2
- 91% to 100% 37 12.3 8 24.9
Partially collateralised
(B): 263 20.0 145 25.1
- collateral
value on B 117 82
Total 1,552 25.1 1,238 25.0
At 31 Dec 1,877 22.5 1,534 21.3
1 The 2018 comparative amounts have been re-presented. The impact of these re-presentations is to increase rated CRR/PD8 not collateralised amounts by GBP34m, increase fully collateralised amounts by GBP6m and increase partially collateralised amount by GBP2m; and to increase rated CRR/PD 9 to 10 not collateralised amounts by GBP84m, increase fully collateralised amounts by GBP3m and increase partially collateralised amount by GBP39m.
Other credit risk exposures
In addition to collateralised lending, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are described in more detail below:
-- some securities issued by governments, banks and other financial institutions benefit from additional credit enhancement provided by government guarantees that cover the assets;
-- debt securities issued by banks and financial institutions include asset-backed securities and similar instruments which are supported by underlying pools of financial assets;
-- the group's maximum exposure to credit risk includes financial guarantees and similar arrangements that we issue or enter into, and loan commitments that we are irrevocably committed to. Depending on the terms of the arrangement, we may have recourse to additional credit mitigation in the event that a guarantee is called upon or a loan commitment is drawn and subsequently defaults.
Personal lending
We provide a broad range of secured and unsecured personal lending products to meet customer needs. Personal lending includes advances to customers for asset purchases such as residential property where the loans are secured by the assets being acquired. We also offer unsecured lending products such as overdrafts, credit cards and personal loans. The following table shows the levels of personal lending products in the various portfolios.
Total personal lending for loans and advances to customers at amortised
costs by stage distribution
Gross carrying amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
By portfolio
First lien residential
mortgages 99,197 1,387 880 101,464 (12) (14) (92) (118)
-------- ------ ------- ---- ---- ----
- of which: interest
only (including offset) 19,480 980 143 20,603 (4) (9) (17) (30)
-------- ------ ------- ---- ---- ----
Other personal lending 13,201 2,682 322 16,205 (64) (371) (185) (620)
- other 7,383 1,287 163 8,833 (36) (159) (99) (294)
- credit cards 5,818 1,395 159 7,372 (28) (212) (86) (326)
-------- ------ ------- ---- ---- ----
At 31 Dec 2019 112,398 4,069 1,202 117,669 (76) (385) (277) (738)
-------- ------ ------- ---- ---- ----
Total personal credit-related commitments and financial guarantees
by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------ ------ ------ ----- ----- --------
At 31 Dec 2019 36,999 369 79 37,447 (6) - - (6)
Total personal lending for loans and advances to customers at amortised
costs by stage distribution
Gross carrying amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
By portfolio
First lien residential
mortgages 92,973 930 800 94,703 (7) (13) (87) (107)
-------- ------ ------ ------- ---- ---- ---- ----
- of which: interest
only (including offset) 20,895 788 100 21,783 (2) (7) (11) (20)
-------- ------ ------ ------- ---- ---- ---- ----
Other personal lending 12,947 2,352 206 15,505 (64) (314) (80) (458)
------ ------- ----
- other 7,138 961 127 8,226 (36) (133) (49) (218)
- credit cards 5,809 1,391 79 7,279 (28) (181) (31) (240)
-------- ------ ------- ---- ---- ----
At 31 Dec 2018 105,920 3,282 1,006 110,208 (71) (327) (167) (565)
-------- ------ ------ ------- ---- ---- ---- ----
Total personal credit-related commitments and financial guarantees
by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------ ------ ------ ----- ----- --------
At 31 Dec 2018 39,009 173 223 39,405 (4) - - (4)
Mortgage lending
We offer a wide range of mortgage products designed to meet customer needs, including capital repayment, interest-only and offset mortgages. Internal credit policies prescribe the range of acceptable residential property LTV thresholds with the maximum upper limit for new loans set between 50% and 95%, depending on the product type and loan amount.
The quality of our mortgage book remained high, with negligible defaults and impairment allowances. The average LTV ratio on new lending was 67%, compared with an estimated 51% for the overall mortgage portfolio.
Exposure to UK interest-only mortgage loans
The following information is presented for the bank's HSBC branded UK interest-only mortgage loans with balances of
GBP11.0bn; this excludes offset mortgages in first direct, private banking mortgages, endowment mortgages and other products.
At the end of 2019, the average LTV ratio in the portfolio was 42%, and 99% of mortgages had an LTV ratio of 75% or less.
Of the interest-only mortgages that expired in 2017, 86% were repaid within 12 months of expiry with a total of 95% being repaid within 24 months of expiry. For interest-only mortgages expiring during 2018, 91% were fully repaid within 12 months of expiry.
The profile of maturing UK interest-only loans is as follows:
UK interest-only mortgage loans
GBPm
Matured interest-only mortgage
loans(1) 120
------
Interest-only mortgage loans
by maturity 10,903
- 2020 231
- 2021 329
- 2022 325
- 2023 421
- 2024-2028 2,345
- post 2028 7,252
------
At 31 Dec 2019 11,023
------
1 Includes interest-only mortgages which have reached their contractual maturity date, but were unsettled at the end of 2019.
Other personal lending
Other personal lending consists of credit cards, personal loans and overdrafts.
Collateral and other credit enhancements held
(Audited)
The following table provides a quantification of the value of fixed charges we hold over specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and where the collateral is cash or can be realised by sale in an established market. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit from other forms of credit mitigants.
Personal lending: residential mortgage loans including loan commitments
by level of collateral
(Audited)
2019 2018
Gross carrying/nominal Gross carrying/nominal
amount ECL coverage amount ECL coverage
GBPm % GBPm %
Stage 1
Fully collateralised 105,857 - 99,849 -
LTV ratio:
- less than 50% 52,213 - 51,341 -
- 51% to 60% 16,292 - 16,127 -
- 61% to 70% 14,796 - 13,463 -
- 71% to 80% 13,131 - 11,608 -
- 81% to 90% 8,289 - 6,819 -
- 91% to 100% 1,136 - 491 -
Partially collateralised (A): 243 - 275 -
LTV ratio:
- 101% to 110% 67 0.1 85 -
- 111% to 120% 36 - 35 -
- greater than 120% 140 - 155 -
- collateral value on A 174 209
Total 106,100 - 100,124 -
Stage 2
Fully collateralised 1,426 0.9 928 1.3
LTV ratio:
- less than 50% 852 0.7 703 0.9
- 51% to 60% 169 1.4 84 3.0
- 61% to 70% 197 1.2 82 2.2
- 71% to 80% 175 1.0 31 3.3
- 81% to 90% 27 2.9 21 3.1
- 91% to 100% 6 1.1 7 2.4
Partially collateralised (B): 17 1.7 1 7.6
LTV ratio:
- 101% to 110% 15 1.3 - -
- 111% to 120% 1 3.6 1 3.4
- greater than 120% 1 4.6 - -
- collateral value on B 15 1 -
Total 1,443 0.9 929 1.4
Stage 3
Fully collateralised 876 9.9 783 10.7
LTV ratio:
- less than 50% 527 7.8 486 7.8
- 51% to 60% 119 10.0 118 11.3
- 61% to 70% 102 10.6 91 18.6
- 71% to 80% 74 19.1 54 14.9
- 81% to 90% 36 12.1 26 19.2
- 91% to 100% 18 25.3 8 35.2
Partially collateralised (C): 19 27.2 18 15.8
LTV ratio:
- 101% to 110% 8 19.6 7 16.0
- 111% to 120% 5 21.7 4 25.8
- greater than 120% 6 42.9 7 10.0
- collateral value on C 18 14
Total 895 10.3 801 10.9
At 31 Dec 108,438 0.1 101,854 0.1
Liquidity and funding risk management
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 arises when funding cannot be raised except at excessive cost.
Key developments in 2019
We have amended the Board Risk Appetite Statement to remove the depositor concentration and term contractual maturity limits. Both these risks will be monitored and controlled at the Asset and Liability Committee ('ALCO') level.
We have transferred second-line of defence activities to a newly created team in the Risk function. This team provides independent review and challenge of first-line business activities and approves the liquidity and funding risk management framework ('LFRF').
ILAAP and risk appetite
We maintain a comprehensive LFRF, which aims to enable us to withstand very severe liquidity stresses. The LFRF comprises policies, metrics and controls designed to ensure that management have oversight of our liquidity and funding risks in order to manage them appropriately.
We manage liquidity and funding risk 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 is used to
ensure that we 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 intraday, so as to ensure we maintain adequate levels of liquidity buffers. It informs the validation of risk tolerance and the setting of risk appetite. It also assesses our capability to effectively manage liquidity and funding. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the LFRF across the Group.
Performance and measurement
Funding and liquidity plans form part of the annual operating plan that is approved by the Board with the Board level appetite measures being the liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'). An appropriate funding and liquidity profile is managed through a wider set of measures:
-- minimum LCR requirement; -- minimum NSFR requirement; -- depositor concentration limit;
-- 3-month and 12-month cumulative rolling term contractual maturity limits covering deposits from banks, deposits from non-bank financial institutions and securities issued;
-- minimum LCR requirement by currency; -- intra-day liquidity; -- application of liquidity funds transfer pricing; and -- forward-looking funding assessments.
Risks to liquidity and funding
Risks to liquidity and funding are assessed through forecasting, stress testing and scenario analysis combined with ongoing assessments of risks in the business and external environment.
Stress testing, recovery and contingency planning
We use stress testing to evaluate the robustness of plans and risk portfolios, inform the ILAAP and support recovery planning as well as meeting the requirements for stress testing set by regulators. It is an important methodology used to evaluate how much funding and liquidity we require in setting risk appetite.
We maintain contingency plans which can be enacted in the event of internal or external triggers which threaten the liquidity or funding position. We also have established recovery plans addressing the actions that management would consider taking in a stress scenario if the position deteriorates and threatens to breach risk appetite and regulatory minimum levels. The recovery plans set out a range of appropriate actions which could feasibly be executed in a stressed environment to recover the liquidity and funding position.
Liquidity and funding risk in 2019
Liquidity metrics
At 31 December 2019, we were above regulatory minimum levels.
We maintain sufficient unencumbered liquid assets to comply with regulatory requirements. The liquidity value of these liquid assets is shown in the table below along with the LCR level on a European Commission ('EC') basis.
We maintain sufficient stable funding relative to the required stable funding assessed using the NSFR.
Our liquidity and funding position in as at the end of 2019 is analysed in the following sections.
HSBC UK liquidity group(1)
At
31 Dec 31 Dec
2019 2018
LCR (%) 165 143
HQLA(2) (GBPm) 56,822 46,357
Net Outflows (GBPm) 34,355 32,442
NSFR (%) 150 144
1 HSBC UK Liquidity Group comprises: HSBC UK Bank plc (including Dublin branch), Marks and Spencer Financial Services plc, HSBC Trust Company (UK) Limited and HSBC Private Bank (UK) Limited. It is managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA.
2 In 2019, the group disclosed HQLA on a weighted basis, 2018 comparatives have been presented on the same basis.
Liquid assets
As at 31 December 2019 we had a total of GBP56,822m of highly liquid unencumbered LCR eligible liquid assets (31 December 2018: GBP46,357m) held in a range of asset classes and currencies. Of these, 99% were eligible as level 1 (31 December 2018: 98%).
The below tables reflects the composition of the liquidity pool by asset type and currency at 31 December 2019:
Liquidity Cash Level Level
pool 1 2
GBPm GBPm GBPm GBPm
Cash and balance
at central bank 36,385 36,385 - -
----------------------------
Central and local
government bonds 17,545 - 17,415 130
----------------------------
Regional government
PSE 428 - 254 174
----------------------------
International organisation
and MDBs 749 - 749 -
----------------------------
Covered bonds 429 - 239 190
----------------------------
Other 1,286 - 1,286 -
----------------------------
Total at 31 Dec
2019(1) 56,822 36,385 19,943 494
----------------------------
Total at 31 Dec
2018(1) 46,357 32,421 12,897 1,039
----------------------------
1 In 2019 the group disclosed HQLA on a weighted basis, 2018 comparatives have been presented on the same basis.
GBP $ EUR Other Total
GBPm GBPm GBPm GBPm GBPm
Liquidity pool
at 31 Dec 2019 45,886 6,365 4,424 147 56,822
Liquidity pool
at
31 Dec 2018 38,571 4,820 1,981 985 46,357
Sources of funding
Our primary sources of funding are customer current accounts and customer savings deposits payable on demand or at short notice. The following 'Funding sources and uses' table provides a consolidated view of how our balance sheet is funded, and should be read in light of the LFRF, which requires we manage liquidity and funding risk on a stand-alone basis.
The table analyses our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. In 2019, the level of customer accounts exceeded the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets, cash and balances with central banks and financial investments, as required by the LFRF.
Funding Sources Funding Uses
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
Sources Uses
Loans and advances to
Customer accounts 216,214 204,837 customers 183,056 174,807
Loans and advances to
Deposits by banks 529 1,027 banks 1,389 1,263
Repurchase agreements Reverse repurchase agreements
- non-trading 98 639 - non-trading 3,014 3,422
---
Debt securities in issue 3,142 -
Accruals, deferred income Prepayments, accrued
and other liabilities 27 35 income and other assets(1) 123 338
- Cash collateral, margin - Cash collateral, margin
and settlement accounts 27 35 and settlement accounts 123 338
Subordinated liabilities 9,533 4,937 Financial investments 19,737 13,203
Cash and balances with
Total equity 22,251 22,333 Central banks 37,030 33,193
---
Other balance sheet
Other balance sheet liabilities 5,308 5,131 assets 12,753 12,713
---
At 31 Dec 257,102 238,939 At 31 Dec 257,102 238,939
---
1 Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 72 includes both financial and non-financial assets.
Pension risk
Governance and structure
A global pension risk framework and accompanying global policies on the management of risks related to defined benefit and defined contribution plans are in place. Pension risk is managed by a network of local and regional pension risk forums. During 2H19, the European Pension Oversight Forum, which previously covered UK and Europe, was split into two and a new Pension Oversight Forum ('POF') established to cover just the HSBC Bank (UK) Pension Scheme, named the UK POF. The HSBC UK Chief Risk Officer remains as Chair of the UK POF, and the Forum is responsible for the governance and oversight of all pension plans sponsored by HSBC UK.
The HSBC UK section of the HSBC Bank (UK) Pension Scheme is an occupational pension scheme as defined by the Pension Schemes Act 1993. It is set up under trust and the assets are held separately to those of HSBC UK. It is regulated by the Pensions Regulator.
Key risk management processes
In the UK, all future pension benefits are provided on a defined contribution basis. A defined benefit pension plan remains in respect of past service. The defined benefit pension plan is sectionalised to ensure no entities outside the ring-fence participate in the same section as HSBC UK.
In the defined contribution pension plan, the contributions that HSBC UK is required to make are known, while the ultimate pension benefit will vary, typically with investment returns achieved by investment choices made by the employee. While the market risk to HSBC UK of the defined contribution plan is low, the bank is still exposed to operational and reputational risk.
In the defined benefit pension plan, the level of pension benefit is known. Therefore, the level of contributions required by HSBC UK will vary due to a number of risks, including:
-- investments delivering a return below that required to provide the projected plan benefits;
-- the prevailing economic environment leading to corporate failures, thus triggering write-downs in asset values (both equity and debt);
-- a change in either interest rates or inflation, causing an increase in the value of the plan liabilities; and
-- plan members living longer than expected (known as
longevity risk).
Pension risk is assessed using an economic capital model that takes into account potential variations in these factors. The impact of these variations on both pension assets and pension liabilities is assessed using a one-in-200-year stress test. Scenario analysis and other stress tests are also used to support pension risk management.
To fund the benefits associated with HSBC UK's section of the defined benefit plan, HSBC UK make contributions in accordance with advice from actuaries and in consultation with the plan's trustees where relevant. Contributions are required when the section's assets are considered insufficient to cover the existing pension liabilities. Contributions are typically revised once every three years.
The defined benefit plan invests contributions in a range of investments designed to limit the risk of assets failing to meet the plan's liabilities. Any changes in expected returns from the investments may also change future contribution requirements. In pursuit of these long-term objectives, an overall target allocation of the defined benefit plan assets between asset classes is established. In addition, each permitted asset class has its own benchmarks, such as stock market or property valuation indices or liability characteristics.
The benchmarks are reviewed on a manager by manager basis at least once every three to five years and more frequently if required by circumstances. The process takes account of changes in the plan's liabilities. The most significant benchmark is the interest rate and inflation hedging programme and this was last reviewed during 2019. The assets are invested in a diverse range of assets to reduce any concentrations of risk.
In addition, during 2019, the defined benefit plan performed longevity swap transactions with The Prudential Insurance Company of America ('PICA') a subsidiary of Prudential Financial, Inc. and with Swiss Re. The arrangements provide long term protection to the defined benefit plan against costs resulting from pensioners or their dependants living longer than initially expected and cover approximately three-quarters of the pensioner liabilities (50% with PICA and 25% with Swiss Re).
Market risk
Overview
Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates and credit spreads, will reduce our income or the value of our portfolios. Exposure to market risk is separated into two portfolios.
-- Trading portfolios -- Non-trading portfolios.
A summary of our current policies and practices regarding the management of market risk is set out below.
Where appropriate, we apply similar risk management policies and measurement techniques to both trading and non-trading portfolios. Our objective is to manage and control market risk exposures to optimise return on risk while maintaining a market profile consistent with our established risk appetite.
Market risk management
The nature of the hedging and risk mitigation strategies performed corresponds to the market risk management instruments available within each operating jurisdiction. These strategies range from the use of traditional market instruments, such as interest rate swaps,
to more sophisticated hedging strategies to address a combination of risk factors arising at portfolio level.
Market risk governance
(Audited)
Market risk is managed and controlled through limits approved by the RMM of the HSBC Group Management Board for HSBC Holdings and the global businesses. These limits are allocated across business lines and approved by the HSBC Group's legal entities, including HSBC UK.
The management of market risk is principally undertaken in Markets and BSM using risk limits allocated from the risk appetite, which is subject to the HSBC Group RMM approval. The level of limits set is based on the overall risk appetite for HSBC UK being cascaded down to the individual entities and the limits required for the individual desks to be able to execute their stated business strategy under the HSBC UK ring-fencing Exceptions Policy. Limits are set for portfolios, products and risk types, with market liquidity being a primary factor in determining the level of limits set. The market risk limits for HSBC UK are endorsed at HSBC UK RMM.
Global Risk is responsible for setting market risk management policies and measurement techniques and is responsible for measuring market risk exposures in accordance with the policies defined by Global Risk, and monitoring and reporting these exposures against the prescribed limits on a daily basis.
HSBC UK is required to assess the market risks arising on each product in its business and to transfer them to either its local Markets unit for management, to balance sheet management books or to separate books managed under the supervision of ALCO.
The aim is to ensure that all market risks are consolidated within operations which have the necessary skills, tools, management and governance to manage them professionally. In certain cases where the market risks cannot be fully transferred, we identify the impact of varying scenarios on valuations or on net interest income resulting from any residual risk positions.
Model risk is governed through Model Oversight Committees ('MOCs'). They have direct oversight and approval responsibility for all traded risk models utilised for risk measurement and management and stress testing. The MOCs prioritise the development of models, methodologies and practices used for traded risk management within the Group and ensure that they remain within risk appetite and business plans. The Markets MOC reports into the Group MOC, which oversees all model risk types at Group level. Group MOC informs the Group RMM about material issues at least on a bi-annual basis. Group RMM has delegated day-to-day governance of all traded risk models to the Markets MOC.
The control of market risk in the trading and non-trading portfolios is based on a policy restricting individual operations to trading within a list of permissible instruments authorised for HSBC UK by Global Risk, enforcing new product approval procedures, and ensuring compliance with the HSBC UK Exceptions Policy implemented to ensure HSBC UK activity is compliant with the legislative restriction on ring fenced bodies.
Market risk measures
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures while maintaining a market profile consistent with HSBC UK strategy and risk appetite as well as operating within the HSBC Group's risk appetite for the entity. We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, value at risk ('VaR'), and stress testing.
Sensitivity analysis
Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates and credit spreads, such as the effect of a one basis point change in yield. We use sensitivity measures to monitor the market risk positions within each risk type. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the factors in determining the level of limits set at each risk type.
Value at risk ('VaR')
VaR is a technique that estimates the potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and is calculated for all trading positions. HSBC UK does not have a market risk internal model approval and therefore VaR is not used for any regulatory return but only used for internal management information purposes. We use the standardised approach for its market risk capital calculation.
In addition, we calculate VaR for non-trading portfolios in order to have a complete picture of risk.
Stress testing
Stress testing is an important procedure that is integrated into our market risk management tool to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be much greater than those predicted by VaR modelling.
Stress testing is implemented at legal entity, regional and overall Group levels. Scenarios are tailored to capture the relevant events or market movements at each level. The risk appetite around potential stress losses is set and monitored against referral limits.
Market risk reverse stress tests are undertaken on the premise that there is a fixed loss. The stress testing process identifies which scenarios lead to this loss. The rationale behind the reverse stress test is to understand scenarios which are beyond normal business settings that could have contagion and systemic implications.
Stressed VaR and stress testing, together with reverse stress testing provides management with insights regarding the 'tail risk' beyond VaR for which appetite is limited.
Trading portfolios
Back-testing
Trading book VaR is not used for calculating capital requirements arising from market risk within HSBC UK therefore there is no back testing of trading book VaR.
Non-trading portfolios
Non-trading VaR of HSBC UK includes the interest rate risk of non-trading financial instruments held by the global businesses and transferred into portfolios managed by BSM or Asset Liability and Capital Management ('ALCM') functions. In measuring, monitoring and managing risk in our non-trading portfolios, VaR is just one of the tools used. The management of interest rate risk in the
banking book is described further in 'Interest rate risk in the banking book' section below, including the role of BSM.
Our control of market risk in the non-trading portfolios is based on transferring the assessed market risk of assets and liabilities created outside BSM or Markets, to the books managed by BSM, provided the market risk can be neutralised. The net exposure is typically managed by BSM through the use of fixed rate government bonds (high quality asset held in held-to-collect-and sell (HTCS books)) and interest rate swaps. The interest rate risk arising from fixed rate government bonds held within HTCS portfolios is reflected within non-trading VaR. Interest rate swaps used by BSM are typically classified as either a fair value hedge or a cash flow hedge and included within non-trading VaR. Any market risk that cannot be neutralised in the market is managed by HSBC UK ALCM in segregated ALCO books.
Structural foreign exchange exposures
Structural foreign exchange exposures represent the group's net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than sterling. An entity's functional currency is that of the primary economic environment in which the entity operates.
The group does not have investments in subsidiaries in non-sterling currencies.
Interest rate risk in the banking book
Overview
Interest Rate Risk in the Banking Book ('IRRBB') is the risk of an adverse impact to earnings or capital due to changes in market interest rates. IRRBB is principally generated by our non-traded assets and liabilities. This risk is monitored and controlled by ALCM. Interest rate risk in the banking book is transferred to and managed by Balance Sheet Management ('BSM'), and also monitored by Wholesale Market Risk, Product Control and ALCM function with reference to established risk appetites.
Governance and structure
ALCM monitors and controls non-traded interest rate risk. This includes reviewing and challenging the business prior to the release of new products and in respect of proposed behavioural assumptions used for hedging activities. ALCM is also responsible for maintaining and updating the transfer pricing framework, informing the ALCO of the overall IRRBB exposure and managing the balance sheet in conjunction with BSM.
BSM manages the banking book interest rate positions transferred to it within the market risk limits approved by RMM. Effective governance of BSM is supported by the dual reporting lines it has to the Chief Executive Officer of GB&M and to the Group Treasurer, with Risk acting as a second line of defence. The global businesses can only transfer non-trading assets and liabilities to BSM provided BSM can economically hedge the risk it receives. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that BSM cannot economically hedge is not transferred and will remain within the global business where the risks originate.
Measurement of interest rate risk in the banking book
The ALCM function uses a number of measures to monitor and control interest rate risk in the banking book, including:
-- Non-traded VaR;
-- Net Interest Income ('NII') sensitivity; and
-- Economic value of equity ('EVE').
Non-traded VaR
Non-traded VaR uses the same models as those used in the trading book and excludes both HSBC Holdings and the elements of risk that are not transferred to BSM.
Net interest income sensitivity
A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income ('NII') under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken by ALCO, where both one-year and five-year net interest income sensitivities across a range of interest rate scenarios are forecast.
Projected net interest income sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure. The exception to this is where the size of the balances or repricing is deemed interest rate sensitive, for example, non-interest-bearing current account migration and fixed-rate loan early prepayment. These sensitivity calculations do not incorporate actions that would be taken by BSM or in the business units to mitigate the effect of interest rate movements.
The net interest income sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. Rates are not assumed to become negative in the 'down-shock' scenario unless the central bank rate is already negative. In these cases, rates are not assumed to go further negative, which may, in certain currencies, effectively result in non-parallel shock. In addition, the net interest income sensitivity calculations take account of the effect of anticipated differences in changes between interbank and internally determined interest rates, where the entity has discretion in terms of the timing and extent of rate changes.
Economic value of equity
Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity providers under a managed run-off scenario. This equates to the current book value of equity plus the present value of future net interest income in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity is the extent to which the EVE value will change due to a pre-specified movements in interest rates, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivity as a percentage of capital resources.
Defined benefit pension scheme
Market risk also arises within HSBC UK's defined benefit pension plan to the extent that the obligations of the plan are not fully matched by assets with determinable cash flows. Refer to Pension risk section on page 46 for additional information.
Market risk in 2019
There were no material changes to our policies and practices for the management of market risk in 2019.
Exposure to market risk is separated into two portfolios.
Trading portfolios comprise positions arising from market-making and hedging of customer-derived positions or short dated trades executed for nostro management or liquidity management purposes.
Non-trading portfolios including BSM comprise positions that primarily arise from the interest rate management of the group's
retail and commercial banking assets and liabilities and financial investments designated as held-to-collect-and-sale ('HTCS') held as part of the entities liquid asset buffer ('LAB').
Trading portfolios
(Audited)
The HSBC Group's preferred method of market risk capital calculations is to use a VaR model. However due to the small size of the regulatory trading portfolio within HSBC UK, the current approach to capital calculations for market risk in the trading portfolio within the group is to use the standardised model. Trading portfolio market risk exposures within the group are not material as customer facing trades within markets are hedged on a one for one basis and the BSM trading portfolio limits are primarily used for short-term cash management.
Value at Risk of the non-trading portfolios
(Audited)
Non-trading VaR of the group includes contributions from BSM and ALCO. It is primarily driven by interest rate risk of non-trading BSM positions which have the most significant market risk limits within HSBC UK. These limits and corresponding exposures are the consequence of BSM needing to meet its twin objectives of managing the structural interest rate risk transferred from the global businesses and the management of the entity's LAB. The daily levels of total non-trading VaR over the last year are set out
in the graph below. The primary driver of the non-trading VaR is the Interest Rate risk exposure held within BSM (GBP24.5m IR VaR as at 31 December 2019). The main contributor of Interest rate risk within BSM are the securities held within the LAB and their corresponding hedges.
At the start of 2019, a proportion of the HTCS portfolio was converted from outright holdings to Asset Swaps reducing the outright interest rate risk duration on the book which brought about a reduction in the banking book VaR. Throughout the whole of 2019, the HSBC UK BSM desk looked to increase the diversity of the HSBC UK LAB by reducing the balance held in cash and central bank deposits and increasing the securities portion. The securities portion of the LAB was increased via the purchase of outright securities and asset swaps across USD, GBP and EUR, which increased both the outright interest rate risk and the treasury/non treasury basis risk. This increased the VaR of the non-trading portfolio.
Daily VaR (non-trading portfolios), 99% 1 day (GBPm) Non-trading VaR IR non-trading CS non-trading Intent Diversification
The group's non-trading VaR for the year is shown in the table below.
Non-trading VaR, 99% 1 day
(Audited)
Credit Interest
spread Rates Diversifi-cation(1) Total(2)
GBPm GBPm GBPm GBPm
Balance at
31 Dec 2019 0.6 24.5 (0.4) 24.7
Average 0.8 14.1 (0.9) 13.9
Maximum 1.5 25.3 25.5
Minimum 0.5 8.7 8.4
---------------------
Balance at
31 Dec 2018 0.7 16.8 (0.2) 17.3
Average 1.1 20.7 (0.9) 20.9
Maximum 3.2 23.8 24.1
Minimum 0.6 16.7 17.0
-----
1 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 and credit risk 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 occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for this measure.
2 The total VaR is non-additive across risk types due to diversification effects.
Resilience risk
Overview
Resilience risk is the risk that we are unable to provide critical services to our customers, affiliates and counterparties, as a result of sustained and significant operational disruption. Sustained and significant operational disruption means events that affect:
-- the stability of the financial system; -- the viability of the bank and our industry peers; or -- the ability of our customers to access our services.
We seek to understand the effects and outcomes of these events, prioritising services which are both vulnerable to disturbance and critical to our customer service offering.
Resilience risk management
Operational resilience is our ability to adapt operations to continue functioning when an operational disturbance occurs. We measure resilience in terms of the maximum disruption period or the impact tolerance that we are willing to accept for a business service.
Resilience risk cannot be managed down to zero, so we concentrate on critical business services that have the highest potential to threaten our ability to provide continued service to our customers. Our resilience strategy is focused on the establishment of robust back-up plans, detailed response methods, alternative delivery channels and recovery options.
The Resilience Risk team provides guidance and stewardship to our businesses and global functions about how we can prevent, adapt, and learn from resilience-related threats when something goes wrong. We view resilience through six lenses: strategic change and emerging threats, third-party risk, information and data resilience, payments and processing resilience, systems and cyber resilience, and protective security risk. IT Resilience (including Cyber) and Third Party Risk Management continue to be areas of particular focus for HSBC UK. These have developed significantly in 2019, and we will continue that focus and investment in 2020.
Key developments in 2019
In May 2019, we launched the Non-financial risk simplified risk taxonomy, which contained the new resilience risk. The new resilience risk brings together a number of existing risks such as cyber, ISR and Third Party Risk Management under one risk category.
Resilience risk was formed to simplify the way we interact with our stakeholders and to deliver clear, consistent and credible responses globally. Since that time, we have undertaken a number of initiatives to develop and embed the new sub-function and drive the management of resilience risk. These included:
-- Development of a Target Operating Model to envision our desired state for the resilience risk function.
-- Definition of the first line of defence responsibility for managing operational continuity and resilience within HSBC UK.
-- Re-organisation of the second line of defence into a simplified resilience risk engagement model that eliminates duplication and ensures a coordinated response across the risk types.
-- Recruitment of a new HSBC UK Head of Resilience Risk, who will commence duties in first quarter of 2020, providing challenge to the control owners of the key component areas of operational resilience.
-- Enhancement of our risk oversight for the UK by strengthening the interlock between our Global functions/Business control committees, which includes Third Party and outsourcing.
-- Establishment of the UK Service Governance oversight committee which aims to spotlight UK vulnerable services and protect them.
-- Definition of the UK IT strategy, which has set a direction of travel to reduce complexity through simplification.
-- Investment of significant resource and funds into improving how we understand and manage our engagements with Third Parties.
Governance and structure
The Group Resilience Risk Executive Committee ('RR ExCo') oversees resilience risk, and has accountability to Global Risk Management Board. The RR ExCo is supported by its sub-committees that provide oversight over each of the respective RR sub-teams.
The Resilience Risk Group Governance Meeting ensures that resilience risk is managed within its defined risk appetite. It is jointly chaired by the Global Head of Operational Resilience and the Group CIO. The Resilience Risk Group Governance Meeting has accountability into the Non-Financial Risk Management Board and is escalated (via individual accountability) to the Global Risk Committee.
Within the UK, resilience risk is managed within the HSBC UK RMM and Risk Committee, with clear escalation path into the RR EXCO and GRMM.
Key risk management process
The newly formed resilience risk team oversees the identification, management and control of resilience risks. Global policies and procedures are currently being re-written to align with the new resilience risk service catalogue. Within HSBC UK, we have undertaken a number of specific initiatives to develop and embed the new sub-function.
These include:
-- Defining the first line of defence responsibility for managing operational continuity and resilience within HSBC UK.
-- Re-organising the second line of defence into a simplified resilience risk engagement model that eliminates duplication and ensures a coordinated response across the disciplines.
-- Undertaking recruitment of a new HSBC UK Head of Resilience Risk, who will commence duties in 1Q20, providing challenge to the control owners of the key component areas of operational resilience.
Regulatory compliance risk management
Overview
Regulatory compliance risk is the risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice, and as a consequence incur fines and penalties and suffer damage to our business.
Regulatory compliance risk arises from the risks associated with breaching our duty to our customers and other counterparties, inappropriate market conduct and breaching other regulatory requirements.
Regulatory developments
Financial service providers continue to operate to stringent regulatory and supervisory requirements, particularly in the areas of capital and liquidity management, conduct of business, financial crime, internal control frameworks, the use of models and the integrity of financial services delivery.
Key elements of the regulatory agenda in 2019 have focussed on the introduction of 'Open Banking' technologies, fair pricing in financial services and additional High Cost Credit remedies including overdrafts. Looking forward to 2020, we expect further developments in relation to proposals designed to enhance consumer protection, treatment of vulnerable customers as well as further work on operational resilience. Consideration is now being given to the Future of Financial Services Regulation as the UK exits the European Union. HMT's Future Regulatory Framework (FRF) review commenced in late 2019 and is expected to continue in 2020, the outcome of which may result in refinements to the regulatory framework.
As a result of the UK's decision to leave the EU, the FCA, PRA and HMT have progressed necessary actions to ensure that EU laws and regulations that are directly applicable to UK firms were transposed into UK law and regulation ahead of the 31(st) of January, the official date of exit. A transition period for the UK and EU to negotiate a future relationship is now in place until the 31 December 2020, during which EU rights and obligations continue to apply. A series of statutory instruments and changes to the FCA and PRA Handbooks to onshore EU law and regulation have been published. In the absence of an agreement on the future relationship, such transposed laws will take effect at the end of the transition period.
We continue to engage in the development of new and amended regulations in the UK to ensure that the implications have been fully considered by regulators and the wider industry.
We will continue to work with the UK Authorities and Regulatory Bodies to discuss contingency and scenario planning throughout the transition period.
Conduct of business
Financial institutions continue to operate under increased level of scrutiny regarding conduct of business, particularly in relation to fair outcomes for customers, especially those in vulnerable positions, and orderly and transparent operations in financial markets. Key stakeholders, including regulators, prosecutors, the media and the public have heightened expectations as to the behaviour and conduct of financial service providers, and any shortcomings or failure to demonstrate adequate controls are in place to mitigate such risks could result in regulatory sanctions, fines or an increase in civil litigation.
A number of thematic areas were identified as priorities for UK Regulatory Compliance in 2019, taking into account our regulators' expectations, key business risks, and other known activities and initiatives. These included areas such as product governance, customer redress initiatives and vulnerable customers.
We further enhanced the way our operational risk management framework facilitates the delivery of fair outcomes for customers, and to maintain financial market integrity.
Financial crime and fraud risk management
Overview
Financial crime and fraud risk is the risk that we knowingly or unknowingly help parties to commit or to further potentially illegal activity. Financial crime risk arises from day-to-day banking operations.
Key developments in 2019
During 2019, HSBC UK continued to increase efforts to strengthen its ability to combat financial crime. HSBC UK integrated into day-to-day operations the majority of the financial crime risk core capabilities delivered through the Global Standards programme, which was set up in 2013 to enhance risk management policies, processes and systems. The HSBC Group has begun several initiatives to define the next phase of financial crime risk management which are applicable to HSBC UK.
-- Continued strengthening of anti-fraud capabilities, focusing on threats posed by new and existing technologies, and delivery of a comprehensive fraud training programme to our people.
-- Continued investment in the use of artificial intelligence ('AI') and advanced analytics techniques to develop a financial crime risk management framework for the future.
-- Advanced anti-money laundering ('AML') and sanctions automation systems were launched to detect and disrupt financial crime in international trade. These systems will help strengthen our ability to fight financial crime through the detection of suspicious activity and possible criminal networks.
Governance and structure
HSBC UK has continued to strengthen and review the effectiveness of our governance framework to manage financial crime and fraud risk. Formal governance committees are held across HSBC UK, enabling compliance with the letter and the spirit of all applicable financial crime compliance laws and
regulations, and the Group's own standards, values and policies relating to financial crime risks.
In 2019, the HSBC UK Board has received regular reports from the HSBC UK Head of Financial Crime Compliance on actions being taken to address issues and vulnerabilities in relation to financial crime and updates on the ongoing work to strengthen financial crime controls.
Key risk management processes
HSBC UK continued to deliver a programme to further enhance the policies and controls around identifying and managing the risks of bribery and corruption across the business. A Group transformation programme, applicable to HSBC UK, also continues to strengthen anti-fraud capabilities, and strengthen anti-tax evasion controls. The Group and HSBC UK have strengthened governance and policy frameworks and improved the management information reporting process which demonstrates the effectiveness of our financial crime controls. The Group continue to invest in the next generation of capabilities to fight financial crime by applying advanced analytics and artificial intelligence. HSBC UK remains committed to enhancing our risk assessment capabilities, and to delivering more proactive risk management.
Working in partnership with the public and private sector is vital to managing financial crime risk. HSBC UK are strong proponents of public-private partnerships and information-sharing initiatives. During 2019, HSBC UK continued to work in partnership with the Joint Money Laundering Intelligence Taskforce, in order to bring further benefit to the bank by enhancing the understanding of financial crime risks through information sharing and support economic crime reform through work with the UK Economic Crime Strategic Board, the UK government and UK law enforcement agencies.
Skilled person/Independent consultant
Following expiration in December 2017 of the anti-money laundering Deferred Prosecution Agreement entered into with the US Department of Justice ('DoJ'), the then Monitor has continued to work in his capacity as a Skilled Person under Section 166 of the Financial Services and Markets Act under the Direction issued by the UK Financial Conduct Authority ('FCA') in 2012. He has also continued to work in his capacity as an Independent Consultant under a cease-and-desist order issued by the US Federal Reserve Board ('FRB'). This work is applicable to the HSBC UK.
The Skilled Person has assessed the progress of the HSBC Group towards being able to effectively manage its financial crime risk on a business-as-usual basis. As part of this review, the Skilled Person has undertaken a review of HSBC UK and has noted that HSBC UK continues to make material progress towards its financial crime risk target end state in terms of key systems, processes and people. Nonetheless, the Skilled Person has identified some areas that require further work before HSBC UK reaches a business-as-usual state. We recognise that there is more to do before our financial crime compliance programme is fully operationally effective. Reflective of the HSBC Group's significant progress in strengthening its financial crime risk management capabilities, the HSBC Group's engagement with the current Skilled Person will be terminated and a new Skilled Person with a narrower mandate will be appointed to assess the remaining areas that require further work in order for the HSBC Group, including HSBC UK, to transition fully to business-as-usual financial crime risk management. The FCA also intends to take steps to maintain global oversight of the HSBC Group's management of financial crime risk.
The Independent Consultant completed his sixth annual assessment, which was primarily focused on HSBC's sanctions programme and included HSBC UK. The Independent Consultant concluded that the HSBC Group and HSBC UK continue to make significant strides toward establishing an effective sanctions compliance programme, commending the Group's material progress since the fifth annual assessment in 2018. The Independent Consultant has, however, determined that certain areas within the Group's sanctions compliance programme require further work. A seventh annual assessment will take place in the first quarter of 2020. The Independent Consultant will continue to carry out an annual Office of Foreign Assets Control compliance review, at the FRB's discretion.
Model risk
Overview
Model risk is the potential for adverse consequences from business decisions informed by models, which can be exacerbated by errors in methodology, design or the way they are used. Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models.
Key developments in 2019
In 2019 we carried out a number of initiatives to further develop and embed the Model Risk Management, including:
-- Investing in the HSBC UK Model Risk Management Function.
-- We refined the model risk policy to enable a more risk-based approach to model risk management.
-- We designed a new target operating model for Model Risk Management, informed by internal and industry best practice. This will drive the evolution of the overall governance framework to ensure best practice.
-- We are refreshing the existing model risk controls to enable better understanding of control objectives and to provide the modelling areas with implementation guidance to enhance effectiveness.
Governance and structure
HSBC UK has a Head of Model Risk Management who reports into the HSBC UK CRO.
Key risk management processes
Global responsibility is delegated from the Risk Management Meeting of the Board to the Global Model Risk Committee, which is chaired by the Group Chief Risk Officer. This committee regularly reviews our Global model risk management policies and procedures that HSBC UK complies with, and requires the first line of defence to demonstrate comprehensive and effective controls based on a library of model risk controls provided by Model Risk Management. HSBC UK has a Model Risk Committee that escalates locally via the HSBC UK RMM and also globally via the Global Model Risk Committee.
Model Risk Management also report on model risk to senior management on a regular basis through the use of the risk map and top and emerging risks.
We regularly review the effectiveness of these processes, including the model oversight committee structure, to ensure appropriate understanding and ownership of model risk is embedded in the businesses and functions.
Capital
Capital overview
Key capital numbers
At 31 Dec
Footnotes 2019 2018
Available capital
(GBPm) 1
Common equity tier
1 capital 11,202 11,700
------- -------
Tier 1 capital 13,453 13,896
------- -------
Total regulatory
capital 16,462 16,826
------- -------
Risk-weighted assets
(GBPm)
Credit risk 2 75,353 81,135
------- -------
Counterparty credit
risk 198 66
------- -------
Market risk 27 38
------- -------
Operational risk 10,303 10,600
------- -------
Total risk-weighted
assets 85,881 91,839
------- -------
Capital ratios (%)
Common equity tier
1 13.0 12.7
-------
Total tier 1 15.7 15.1
-------
Total capital 19.2 18.3
Leverage ratio
Total leverage ratio
exposure measure
(GBPm) 268,271 246,659
------- -------
Leverage ratio (%) 5.0 5.6
------- -------
1 Unless otherwise stated, all figures are calculated using the EU's regulatory transitional arrangements for IFRS 9 'Financial Instruments' in article 473a of the Capital Requirements Regulation.
2 'Credit risk' here, and in all tables where the term is used, excludes counterparty credit risk.
Capital management
Approach and policy
(Audited)
Our objective in managing the group's capital is to maintain appropriate levels of capital to support our business strategy and meet regulatory and stress testing related requirements.
We manage group capital to ensure that we exceed current and expected future requirements. Throughout 2019, we complied with the PRAs regulatory capital adequacy requirements, including those relating to stress testing.
Capital measurement
The PRA is the supervisor of the bank and lead supervisor of the group. The PRA sets capital requirements and receives information on the capital adequacy of the bank and the group.
Our policy and practice in capital measurement and allocation at the group level is underpinned by the Capital Requirements Regulation and the Capital Requirements Directive ('CRD IV') rules and any national discretions applied by the PRA.
The Basel III framework is structured around three 'pillars': minimum capital requirements, supervisory review process and market discipline. Basel III introduced a number of capital buffers, including the Capital Conservation Buffer, Countercyclical Capital Buffer and other systemic risk buffers. CRD IV legislation implemented Basel III in the EU, and the 'PRA Rulebook' for CRR Firms transposed the various national discretions under the CRD IV legislation into UK requirements.
The Bank of England announced Systemic Risk Buffer ('SRB') rates for the UK Ring-Fenced banks applicable from 1 August 2019. These are set as a percentage of the risk-weighted assets, with HSBC UK subject to a SRB of 1% of total RWAs at the sub-consolidated level. These rates are refreshed annually.
Regulatory capital
Our capital base is divided into three main categories, namely common equity tier 1, additional tier 1 and tier 2, depending on their characteristics.
-- Common equity tier 1 ('CET 1') capital is the highest quality form of capital, comprising shareholders' equity and related non-controlling interests (subject to limits). Various capital deductions and regulatory adjustments are made against these items; these include deductions for goodwill and intangible assets, deferred tax assets that rely on future profitability, negative amounts resulting from the calculation of expected loss amounts under internal ratings based ('IRB') approach and surplus defined benefit pension fund assets.
-- Additional tier 1 capital comprises eligible non-common equity capital instruments and any related share premium; it also includes other qualifying instruments issued by subsidiaries subject to certain limits. Holdings of additional tier 1 instruments of financial sector entities are deducted from our additional tier 1 capital.
-- Tier 2 capital comprises eligible capital instruments and any related share premium and other qualifying tier 2 capital instruments issued by subsidiaries, subject to limits. Holdings of tier 2 capital instruments of financial sector entities are deducted from our tier 2 capital.
Risks to capital
Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs and/or capital position. The downside or upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary.
In June 2017, the PRA published its final policy statement setting out revisions to the way that firms model probability of default ('PD') and loss given default ('LGD') for residential mortgage exposures, in order to mitigate cyclicality. In addition,the PRA also removed the discretion to use 180 days instead of 90 days in the 'days past due' component of the definition of default for exposures secured by residential mortgages, and certain small and medium sized enterprise (SME) commercial mortgages. These changes will need to be implemented by the end of 2020.
In December 2017, the Basel Committee on Banking Supervision ('Basel') published the Basel III Reforms. The package aims for a
1 January 2022 implementation, with a five-year transitional provision for the output floor. This floor ensures that, at the end of the transitional period, banks' total RWAs are no lower than 72.5% of those generated by the standardised approaches. The final standards will need to be transposed into the relevant local law before coming into effect.
We continue to evaluate the final package. Given that the package contains a significant number of national discretions, the possible impact is uncertain.
Capital
Own funds
Own funds disclosure
(Audited) At
31 Dec 31 Dec
Ref* 2019 2018
GBPm GBPm
Common equity tier 1 (CET1) capital: instruments
and reserves
Capital instruments and the related share premium
1 accounts 9,015 9,015
- ordinary shares 9,015 9,015
2 Retained earnings 10,978 10,713
3 Accumulated other comprehensive income (and other
reserves) (211) (399)
5a Independently reviewed interim net profits net
of any foreseeable charge or dividend 161 562
6 Common equity tier 1 capital before regulatory
adjustments 19,943 19,891
28 Total regulatory adjustments to common equity
tier 1 (8,741) (8,191)
29 Common equity tier 1 capital 11,202 11,700
36 Additional tier 1 capital before regulatory adjustments 2,251 2,196
44 Additional tier 1 capital 2,251 2,196
45 Tier 1 Capital (T1 = CET1 + AT1) 13,453 13,896
51 Tier 2 capital before regulatory adjustments 3,009 2,930
58 Tier 2 capital 3,009 2,930
59 Total capital 16,462 16,826
* The references identify the lines prescribed in the EBA template, which are applicable and where there is a value.
Throughout 2019, we complied with the PRA's regulatory capital adequacy requirements.
At 31 December 2019, our common equity tier 1 ('CET1') ratio increased to 13.0% from 12.7% at 31 December 2018 as a result of a reduction in RWAs.
CET1 capital decreased during the year by GBP0.5bn, mainly due to a rise in the deduction for excess expected loss.
Our Pillar 2A requirement at 31 December 2019, as per the PRA's Individual Capital Requirement based on a point-in-time assessment, was 4.19% of RWAs, of which 2.35% was met by CET1.
Risk-weighted assets
RWAs decreased by GBP6.0bn in the year, mainly from Internal model and methodology updates (GBP7.5bn) and new or updated models (GBP1.2bn), partially offset by the effects of an increase in book size (GBP2.4bn) and an external policy update (GBP0.3bn).
Methodology and policy
RWAs reduced following the implementation of a number of initiatives during the year:
-- PRA approval of a change in the calculation of RWAs for defaulted clients (GBP3.5bn), which was partly offset by an increase in Expected Loss.
-- The implementation of a new securitisation programme resulted in a reduction to RWAs of GBP1.0bn.
-- Review and update of customer data, notably Customer Risk Rating and LGD amendments (GBP2.6bn)
RWAs increased by GBP0.3bn as a result of a change in the accounting treatment of leased assets.
Model updates
RWAs in CMB decreased following PRA approval of an update to the large corporate model, and decreased in RBWM following approval by the PRA of new models in first direct for current accounts, credit cards and personal loans.
Asset size
CMB RWAs increased due to growth in Corporate lending. RBWM RWAs rose primarily due to increased mortgage lending.
On 1 January 2020, exposures subject to the UK corporate loss-given-default model moved from the advanced to the foundation approach.
RWA movement by business by key driver
Credit risk, counterparty credit
risk and operational risk
Corporate Market Total
RBWM CMB GB&M GPB Centre risk RWAs
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- ------- ---- ------ --------- ------ ---------
RWAs at 1 Jan 2019 21,370 66,009 22 1,924 2,476 38 91,839
------- ------ --- ----- -------- ----- ------
Transfers - (230) - - - - (230)
------- ------ --- ----- -------- ----- ------
Asset size 785 1,688 262 (29) (326) (9) 2,371
------
Asset quality 719 (177) - (167) (110) - 265
------- ------ --- ----- -------- ----- ------
Model updates (472) (687) - - - - (1,159)
------ --- ----- -------- ----- ------
* portfolios moving onto IRB approach - - - - - - -
* new/updated models (472) (687) - - - - (1,159)
------
Methodology and policy (334) (6,924) 54 65 (59) - (7,198)
------
* internal updates (334) (6,924) 54 65 (398) - (7,537)
* external updates - regulatory - - - - 339 - 339
------
Foreign exchange movement - - (1) - (4) (2) (7)
------- ------ --- ----- -------- -----
Total RWA movement 698 (6,330) 315 (131) (499) (11) (5,958)
------- ------ --- ----- -------- ----- ------
RWAs at 31 Dec 2019 22,068 59,679 337 1,793 1,977 27 85,881
------- ------ --- ----- -------- ----- ------
Leverage ratio
Our leverage ratio, calculated in accordance with the Capital Requirements Regulation, was 5.0% at 31 December 2019, down from 5.6% at 31 December 2018.
The decrease in the ratio was largely due to growth in the balance sheet.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2019 is published on HSBC Group's website, www.hsbc.com, under 'Investors'.
Corporate governance report
The statement of corporate governance practices set out on pages 54 to 59 and information incorporated by reference constitutes the corporate governance report of HSBC UK Bank plc.
Corporate governance statement
The bank is, together with the wider Group, committed to high standards of corporate governance. The Group has a comprehensive range of corporate governance principles, policies and procedures influenced by the UK Corporate Governance Code with requirements for subsidiaries in respect of Board independence, composition and effectiveness to ensure that the Group is well managed, with appropriate oversight and control. HSBC UK is also subject to robust corporate governance requirements imposed by the PRA's Ring-Fenced Bodies Regulations. These corporate governance requirements surpass those of the alternative governance codes. As such, the bank did not apply any specific corporate governance code during the financial year.
During the year, the bank complied with all of HSBC's corporate governance principles, policies and procedures and also with those in the PRA's Ring-Fenced Bodies Regulations.
The Directors serving as at 31 December 2019 are set out below.
Directors
Dame Clara Furse
Chairman and independent non-executive Director
Chairman of the Chairman's Nominations and Remuneration Committee.
Appointed to the Board: April 2017
Clara is a non-executive director of Vodafone Group plc and Amadeus IT Group, S.A. She is a member of the Panel of Senior Advisors to Chatham House and of Bocconi University's International Advisory Council. Former appointments include: external member of the Bank of England's Financial Policy Committee; lead independent director of the UK's Department for Work and Pensions; Chief Executive of the London Stock Exchange; Group Chief Executive of Credit Lyonnais Rouse; member of the Shanghai International Financial Advisory Council and non-executive director of Euroclear plc, LCH Clearnet Group Ltd., Fortis SA, Nomura Holdings and the Legal & General Group.
John David Stuart (known as Ian Stuart)
Executive Director and Chief Executive Officer
Chairman of the Executive Committee.
Appointed to the Board: May 2017
Ian joined the HSBC Group in 2014. He is a Group Managing Director of HSBC Holdings plc and a board member of UK Finance, the industry association for the financial services sector. He is also a business ambassador for Meningitis Now. Ian has worked in financial services for almost four decades. He joined HSBC as a Group General Manager and Head of Commercial Banking Europe in 2014, having previously led the corporate and banking businesses in Barclays and Natwest. He started his career at the Bank of Scotland.
Jonathan James Calladine (known as James Calladine)
Executive Director and Chief Risk Officer
Member of the Executive Committee.
Appointed to the Board: October 2017
James joined the HSBC Group in 1983. He took up the post of UK Chief Risk Officer and was appointed to the Board in October 2017. Former HSBC Group roles include: Chief Risk Officer for the HSBC Group's Latin American operations; regional Chief Risk
Officer for Continental Europe; and Senior Manager, Internal Audit in Asia Pacific.
James Coyle
Independent non-executive Director
Chairman of the Audit Committee and a member of the Risk Committee and Chairman's Nominations and Remuneration Committee.
Appointed to the Board: May 2018
James is chairman of Marks & Spencer Unit Trust Management Limited and a non-executive director of Marks and Spencer Financial Services plc (together, M&S Bank) and a member of the Audit & Risk Committee of M&S Bank. James is also chairman of HSBC Trust Company (UK) Limited and a non-executive director and member of the Audit and Risk Committee of HSBC Private Bank (UK) Limited. He is a non-executive director and chairman of the Audit and Risk Committee of Scottish Water, a non-executive director and chairman of the Audit and Risk Committee of Honeycomb Investment Trust plc, and an independent non-executive member of Deloitte UK Oversight Board. Former appointments include: chairman and chairman of the Audit and Risk Committee of World First UK Limited; member of Committees of the Financial Reporting Council, Group Financial Controller for Lloyds Banking Group; Group Chief Accountant of Bank of Scotland; member of the Audit Committee of the British Bankers Association; non-executive director of the Scottish Building Society; and a non-executive director and chairman of the Audit Committee of Vocalink plc.
Mridul Hegde CB
Independent non-executive Director
Chairman of the Risk Committee and a member of the Audit Committee and the Chairman's Nominations and Remuneration Committee.
Appointed to the Board: February 2018
Mridul's former appointments include: non-executive Director of the UK Municipal Bonds Agency and member of its Risk and Audit Committee; and senior roles at the Financial Reporting Council and HM Treasury, where she was Director of Financial Stability during the 2008 financial crisis and prior to that, Director of Public Spending.
Dame Denise Holt
Independent non-executive Director
Member of the Audit Committee.
Appointed to the Board: May 2018
Denise is a non-executive director of Iberdrola SA and Chairs the Council of the University of Sussex and the Cañada Blanch Centre for Contemporary Spanish Studies at the London School of Economics. Former appointments include: chairman and non-executive director of Marks and Spencer Financial Services plc; a member of the Board of Governors at Nuffield Health; member of
the board of Ofqual (examinations regulators) and of the NHS pay review body. Her career in the Foreign & Commonwealth Office included 40 years' experience of working in government, with postings in Ireland, Brazil and, as a senior Ambassador, in Mexico and Spain.
Alan Keir
Non-executive Director
Member of the Audit Committee and Risk Committee.
Appointed to the Board: February 2018
Alan is a non-executive director of Sumitomo Mitsui Bank Europe and Majid Al Futtaim Holdings. He is Honorary President of Horizons, the Association for former HSBC employees. Former appointments include a variety of senior executive roles within the HSBC Group. He was a Group Managing Director of HSBC Holdings plc from 2011 until his retirement from the Group in March 2016. He has previously served on the boards of HSBC Bank plc, HSBC Turkey, HSBC Trinkaus and Burkhardt, HSBC Bank Middle East and HSBC France. He is also a former Board member of the British Bankers Association, the UK-UAE Business Council,
the Private Sector Council for GREAT (a government campaign to promote the best of Great Britain) and the University of Bradford School of Management Advisory Board. He has also sat on the Advisory Council of TheCityUK.
Rosemary Leith
Independent non-executive Director
Member of the Risk Committee
Appointed to the Board: February 2018
Rosemary is a non-executive director of: YouGov plc where she chairs the Remuneration Committee and is also a member of the Audit Committee; and the World Wide Web Foundation. Rosemary is a Trustee of the National Gallery where she chairs the Digital Advisory Board and a member of the Advisory Councils of Glasswing Ventures, Motive Partners and the Queens University School of Business. She is a Fellow at Harvard University's Berkman Klein Centre. Former appointments include: director of the Almeida Theatre, member of the Advisory Board of Infinite Analytics and Oxford University Wolfson College, and chair of the Council on Cyber security for the World Economic Forum, Global Agenda Council.
David Lister
Independent non-executive Director
Member of the Audit Committee and Risk Committee.
Appointed to the Board: May 2018
David is a non-executive director and chairman of HSBC Private Bank (UK) Limited, Marks and Spencer Financial Services plc and FDM Group (Holdings) plc. He is also a non-executive director of Interxion Holding N.V.; and a member of the board of governors at Nuffield Health. Former appointments include: non-executive director of CIS General Insurance Limited, Weatherbys Limited and the Department for Work and Pensions; Trustee of The Tech Partnership Limited; and Group Chief Information Officer at each of National Grid, Royal Bank of Scotland, Reuters and Boots.
Philippe Leslie Van de Walle (known as Leslie Van de Walle)
Independent non-executive Director
Member of the Risk Committee and Chairman's Nominations and Remuneration Committee
Appointed to the Board: February 2018
Leslie is the senior independent director and chairman of the Remuneration Committee of DCC plc, non-executive chairman of Euromoney Institutional Investor plc and, until 24 March 2020, a non-executive director and deputy chairman of Crest Nicholson Holdings plc. Former appointments include: non-executive Chairman of Robert Walters plc, SIG plc and Weener Plastic Packaging Group; non-executive director of Cape plc and Aegis Group plc; non-executive director and member of the Risk Committee of Aviva plc; senior independent non-executive director and member of the Risk & Regulatory Committee and Remuneration Committee of La Seda de Barcelona; Group CEO of United Biscuits plc and Rexam plc; and Executive Vice President Global Retail and Chairman, Europe of Royal Dutch Shell plc.
David Watts
Executive Director and Chief Financial Officer
Member of the Executive Committee.
Appointed to the Board: October 2017
Dave joined the HSBC Group in 1994. He took up the post of UK Chief Financial Officer and was appointed to the Board in October 2017. Former HSBC Group roles include: Chief Financial Officer for: HSBC Bank plc, Global Commercial Banking, the Middle East and North Africa, Group HSBC Technology and Operations, Global Banking, and HSBC Securities (USA) Inc; Head of Group Cost and Investment Reporting & Analysis; and Manager Treasury Services, France.
Company Secretary
Nicola Black
Nicola joined the HSBC Group in 2000 and was appointed Company Secretary in May 2017. She previously served as Company Secretary of HSBC Bank plc (2014-2017) and prior to that as Assistant Group Company Secretary, HSBC Holdings plc.
Board of Directors
The role of the Board is to provide entrepreneurial leadership of the bank within a framework of prudent and effective controls which enables risks to be assessed and managed. The Board is collectively responsible for the long-term success of the bank and delivery of sustainable value to shareholders.
It reviews the strategy for the bank and approves the risk appetite statement, capital and operating plans presented by management.
The roles of the Chairman and Chief Executive Officer are separate: the Chairman leads the Board and is responsible for its effectiveness and the Chief Executive Officer leads the business and is responsible for executing the strategy.
The majority of Board members, including the Chairman, are independent.
The Board meets regularly and Directors receive information between meetings about developments in the group's business. All Directors have full and timely access to all relevant information and may take independent professional advice if necessary.
The names of Directors serving at the date of this report and brief biographical particulars for each of them are set out on pages 54 and 55.
All Directors, including those appointed by the Board to fill a casual vacancy, are subject to annual re-election at the bank's Annual General Meeting. Non-executive Directors have no service contracts.
How the Directors have regard to key stakeholders
As described on page 7, the Board considers feedback from engagement exercises with employees and key stakeholders throughout the year and has regard to the interest of these stakeholders when approving the risk appetite statement, capital and operating plans, resulting in more robust challenge of management's proposals and stronger plans to achieve the bank's strategic objectives. Details about how the Directors have engaged with employees and had regard to their interests and the need to foster the company's business relationships when making decisions can be found on page 7.
Directors' emoluments
Details of the emoluments of the Directors of the bank for
2019
, disclosed in accordance with the Companies Act, are shown in Note 3 'Employee compensation and benefits'.
Board committees
The Board has established a number of committees to assist it in discharging its responsibilities, the membership of which comprises certain Directors and, where appropriate, senior executives. The Chairman of each non-executive Board committee reports to each meeting of the Board on the activities of the Committee since the previous Board meeting. All such committees are accountable to the Board.
All of the members of the Chairman's Nominations and Remuneration Committee and the majority of members of the Audit and Risk Committees are independent non-executive Directors.
As at the date of this report, the following are the principal committees:
Audit Committee
The Audit Committee has non-executive responsibility for oversight of and advice to the Board on financial reporting related matters, including relevant internal controls.
The Committee meets regularly with the bank's senior financial and internal audit management and the external auditor to consider, among other matters; the group's financial reporting; the nature and scope of audit reviews; the effectiveness of the systems of internal control relating to financial reporting; and ensuring that the Internal Audit function supports the ability of the bank to be able to take decisions independently of other members of the HSBC Group by having appropriate standing within the bank and being free from constraint by management or other restrictions.
The current members are: James Coyle (Chairman); Mridul Hegde, Denise Holt, Alan Keir and David Lister.
Risk Committee
The Risk Committee has been delegated responsibilities from the Board in relation to non-executive oversight of risk related matters and the enterprise risks impacting the group, risk governance and internal control systems (other than internal financial control systems).
The Committee holds regular meetings with the bank's senior financial, risk, internal audit and compliance management and the external auditor to discharge its delegated responsibilities including to consider, among other matters: current and forward-looking risk exposures; the group's risk appetite and tolerance for determining strategy; the alignment of remuneration with risk appetite; and ensuring that the risk management function supports the ability of the bank to take decisions independently of other members of the HSBC Group by having appropriate standing within the bank and being free from constraint by management or other restrictions.
The current members are: Mridul Hegde (Chairman); James Coyle; Alan Keir; David Lister; Rosemary Leith; and Leslie
Van de Walle.
Chairman's Nominations and Remuneration Committee
The Chairman's Nominations and Remuneration Committee has responsibility for matters related to nomination and remuneration as delegated by the Board. It is responsible for: (i) leading the process for Board appointments and for identifying and nominating, for approval by the Board, candidates for appointment to the Board; (ii) the endorsement of certain board and senior executive appointments for the material subsidiaries of the bank; and (iii) reviewing the implementation and appropriateness of the Group's remuneration policy and the remuneration of the bank's senior executives. It also has responsibility for the oversight of the bank's whistleblowing arrangements.
In undertaking its responsibilities, the Committee shall, among other things, plan for the orderly succession of the Board; review the Board's structure, size and composition, including skills, knowledge and diversity of the Board; assess the independence of non-executive Directors by reference to the criteria in the ring-fencing rules; and ensure that remuneration policies, practices and procedures are in line with the business strategy, objectives, values and long-term interests of the Company.
The current members are: Dame Clara Furse (Chairman); James Coyle; Mridul Hegde; and Leslie Van de Walle.
Executive Committee
The Executive Committee meets regularly and operates as a general management committee under the direct authority of the Board, exercising all of the powers, authorities and discretions of the Board in so far as they concern the management and day-to-day running of the bank, in accordance with such policies and
directions as the Board may from time to time determine. The bank's Chief Executive Officer, Ian Stuart, chairs the Committee.
Regular Risk Management Meetings of the Executive Committee, chaired by the Chief Risk Officer, are held to establish, maintain and periodically review the policy and guidelines for the management of risk within the group.
Regular Financial Crime Risk Management meetings of the Executive Committee, chaired by the Chief Executive Officer, are held to ensure effective enterprise wide management of financial crime risk within the group and to support the Chief Executive Officer in discharging his financial crime risk responsibilities.
Post balance sheet events
Details on post balance sheet events can be found in note 28 to the financial statements.
Likely future developments
Details on the likely future developments in the business can be found in the 'future focus' sections on pages 4 and 5.
Companies (Miscellaneous Reporting) Regulations 2018
With the exception of the statement regarding corporate governance arrangements, the disclosures required under these regulations can be found in the section 172 statement set out in the Strategic Report.
Dividends
Information about dividends is provided on page 15 of the Strategic Report.
Internal control
The Board is responsible for the Risk Appetite Statement and any risk within the Risk Appetite Statement outside of risk tolerance. This is discharged through reviewing the effectiveness of risk management and internal control systems and for determining the aggregate level and types of risks the bank is willing to take to achieve its strategic objectives.
The bank has policies in place to ensure compliance with the PRAs Rulebook for Ring-fenced bodies, including an over-arching Ring-fenced bodies policy, together with additional policies covering Exceptions, Arm's Length Transactions and Distributions.
In addition, the group has implemented procedures designed to safeguard assets against unauthorised use or disposal, maintain proper accounting records and ensure the reliability and usefulness of financial information whether used within the business or for publication.
These procedures can only provide reasonable assurance against material mis-statement, errors, losses or fraud. They are designed
to provide effective internal control within the bank. The procedures have been in place throughout the year and up to 17 February 2020, the date of approval of the Annual Report and Accounts 2019.
Key risk management and internal control procedures include the following:
-- The Group's Global Principles set an overarching standard for all other policies and procedures and are fundamental to the Group's risk management structure. They inform and connect our purpose, values, strategy and risk management principles, guiding us to do the right thing and treat our customers and our colleagues fairly at all times.
-- Appointments to the most senior positions within the bank require the endorsement of the Board of Directors of HSBC Holdings plc.
-- Delegation of authority within limits set by the Board. Authority to manage the day to day running of the bank is delegated within limits set by the Board to the Chief Executive Officer who has responsibility for overseeing the establishment and maintenance of systems of control appropriate to the business and authority to delegate such duties and responsibilities as he sees fit.
-- Risk identification and monitoring. Systems and procedures are in place to identify, measure, monitor, control and report on the material risk types facing the group.
-- Changes in market conditions/practices. Processes are in place to identify new risks arising from changes in market conditions/practices or customer behaviours, which could expose the group to heightened risk of loss or reputational damage. The group employs a top and emerging risks framework which enables it to identify current and forward-looking risks and to take action which either prevents them materialising or limits their impact.
-- Responsibility for risk management. All employees are responsible for identifying and managing risk within the scope of their role as part of the three lines of defence model, which is an activity-based model to delineate management accountabilities and responsibilities for risk management and the control environment. The second line of defence sets the policy and guidelines for managing specific areas, provides advice and guidance in relation to the risk, and challenges the first line of defence (the risk owners) on effective risk management.
-- Strategic plans. Strategic plans are prepared annually for each of the businesses that make up the group, within the framework of the HSBC Group's overall strategy. These business strategic plans are brought together into the five year HSBC UK Country Strategic Plan, which is refreshed every three years. Progress against the Country Strategic Plan is reported regularly to the Executive Committee, Board and the HSBC Group Management Board. The bank also approves a financial Annual Operating Plan, which is informed by detailed analysis of risk appetite, describing the types and quantum of risk that the bank is prepared to take in executing its strategy and sets out the key business initiatives and the likely financial effects of those initiatives.
-- IT operations. Centralised control is exercised over all IT developments and operations. Common systems are employed for similar business processes wherever practicable.
The key risk management and internal control procedures over financial reporting include the following:
-- Audit Committee. The Audit Committee reviews financial reporting disclosures made by the bank for any material errors, misstatements or omissions. The integrity of disclosures is underpinned by structures and processes within the group's Finance and Risk functions that support rigorous analytical review of financial reporting and the maintenance of proper accounting records.
-- Financial reporting. The bank's financial reporting process for preparing the consolidated Annual Report and Accounts 2019 is controlled using documented accounting policies and reporting formats, supported by detailed instructions and guidance on reporting requirements, issued by the HSBC Group to HSBC UK that are then cascaded to all reporting entities within the group in advance of each reporting period end. The submission of the bank's financial information is subject to certification by the responsible financial officer, and analytical review procedures at reporting entity and group levels.
-- Subsidiary certifications. Full and half-yearly certifications are provided to the Audit Committee and the Risk Committee from audit and risk committees of principal subsidiary companies, confirming that their financial statements have been prepared in accordance with Group policies, presented fairly the state of affairs of the relevant principal subsidiary and are prepared on a going concern basis.
During the year, the Risk Committee and the Audit Committee have kept under review the effectiveness of this system of internal control and have reported regularly to the Board. In carrying out their reviews, the Audit Committee and Risk Committee receive regular business and operational risk assessments; regular reports from the heads of key risk functions, which cover all internal controls, both financial and non-financial; internal audit reports; external audit reports; prudential reviews; and regulatory reports.
The Risk Committee monitors the status of principal risks and considers whether the mitigating actions put in place are appropriate. In addition, when unexpected losses have arisen or when incidents have occurred which indicate gaps in the control framework or in adherence to Group policies, the Risk Committee and the Audit Committee review special reports, prepared at the instigation of management, which analyse the cause of the issue, the lessons learned and the actions proposed by management to address the issue.
Employees
Health and safety
As part of the HSBC Group, HSBC UK is committed to providing a healthy and safe working environment for our employees, contractors, customers and visitors on HSBC Group premises, and where impacted by our operations. We aim to be compliant with all applicable health and safety legal requirements, and to ensure that best practice health and safety management standards are implemented and maintained across the Group.
Everyone in the HSBC Group has a responsibility for helping to create a healthy and safe working environment. Employees are expected to take ownership of their safety, and are encouraged and empowered to report any concerns.
Chief Operating Officers have overall responsibility for ensuring that the correct policies, procedures and safeguards are put into practice. This includes making sure that everyone in the HSBC Group has access to appropriate information, instruction, training and supervision.
Putting our commitment into practice, we delivered a range of programmes in 2019 to help us understand and manage effectively the risks we face and improve the buildings in which we operate:
We continued to deliver improvements in health and safety culture, through education and awareness programmes targeted at our areas of highest risk, which are construction and facilities management / maintenance activity.
We developed and implemented an improved health and safety training and awareness programme for all employees, ensuring roles and responsibilities were clear and understood. The programme, which included a new section for branch managers and staff, forms part of the mandatory annual training for all of our employees.
We implemented improved systems and processes for hazard identification and remediation. We also updated our suite of
management information dashboards to continually improve our awareness and management of our key risks.
An independent subject matter expert assessed our health and safety management system against the new international standard ISO 45001. The expert confirmed the robustness of our policies, procedures and processes, whilst identifying areas for continuous improvement.
Our safety management system was subjected to an extensive review by our independent internal audit team and resulted in zero high risk items being identified.
We continue to focus on enhancing the safety culture in our supply chain through our 'SAFER together' programme, building the awareness and capability to act and behave in the safest way.
We improved the Parenting Room facilities available to expectant mothers and new mothers returning to work in our large office buildings.
Employee health and safety
Footnotes 2019 2018
Number of workplace
fatalities - -
---------
Number of RIDDOR
reportable injuries 1 15 7
All injury rate per
100,000 employees 1,559 1,613
1 RIDDOR - The Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013.
Well-being
At HSBC UK we recognise the value our people bring to the organisation. The well-being and engagement of our workforce is a key priority for us. We work with teams across every business area to develop initiatives and interventions that support our people and improve both their well-being confidence and capability.
We provide a range of tools, guidance and benefits to support our employees to enhance and improve their physical, mental and financial well-being.
We also provide a range of volunteering opportunities for employees to connect with local communities. We are investing in the knowledge and capability of our managers to help foster teams where people feel confident and comfortable in talking about well-being matters.
Diversity and inclusion
We are committed to enabling a thriving environment where our colleagues are valued, respected and supported to fulfil their potential; and where leveraging the range of ideas, backgrounds, styles and perspectives of our colleagues assists us in meeting the needs of our different stakeholder groups and driving better business outcomes for all. Our colleagues are expected to build positive and lasting relationships across the variety of people they interact with.
We focus on enhancing the diversity profile of our workforce so that it is more reflective of the communities we operate in and the customers we serve.
To support an inclusive environment, our policy is that each of us must treat colleagues with dignity and respect. We have zero tolerance for discrimination, bullying, harassment and victimisation on any ground, including age, race, ethnic or national origin, colour, mental or physical health conditions, disability, pregnancy, gender, gender expression, gender identity, sexual orientation, marital status or other domestic circumstances, employment status, working hours or other flexible working arrangements, or religion or belief. Such behaviour is considered a personal conduct matter and managed in accordance with applicable local policies and procedures and our consequence management framework.
Diversity and inclusion ('D&I') carries the highest level of executive support and as part of our commitment to shared ownership of the inclusion environment, we have implemented Driving Inclusion Workshops for our most senior and influential HSBC UK Leaders, as well as introducing an Inclusive Leadership objective to the performance scorecards of all HSBC UK People Managers.
More information about our diversity and inclusion activity is available under https://www.hsbc.com/our-approach.
Our focus on diversity and inclusion
We celebrate the diversity of our colleagues and customers and are taking actions to make sure that everyone is included in HSBC UK.
We have carried out a wide range of activities to celebrate and support diversity and inclusion. These include:
-- Conducting a comprehensive review of every aspect of our hiring process to identify opportunities to improve our recruitment practices. As a result of our review, D&I training has been made available to our recruiters and we have implemented basic principles around how to approach conversations with hiring managers, challenging in the right way and alternative routes to market. These measures assist us in broadening our pool of diverse talent.
-- We have completed the delivery of a programme of learning, development and coaching for our senior leaders so that they are enabled to drive inclusion in their areas of responsibility.
-- Continuing to engage directly with our diverse colleges through our Employee Resource Groups and Communities. Our 16 groups have a total of 14,000 members. Our groups focus on gender, age, ethnicity, LGBT+, faith, working parents and carers, and ability. Our HSBC Communities cover a variety of topics including flexible working, mindfulness, military/veterans, Chinese and Greek culture.
Supporting disabled colleagues
We believe in providing equal opportunities for all colleagues. The employment of colleagues with a disability is included in this commitment. The recruitment, training, career development and promotion of colleagues with a disability are based on the aptitudes and abilities of the individual. If a colleague becomes disabled whilst working for HSBC UK, our aim is to keep them working with us. Our dedicated Reasonable Adjustments Team will work with any colleague who becomes disabled and their manager to identify and implement reasonable adjustments aimed at keeping them in work.
Gender balance at senior leadership
We continue to focus on improving gender balance in senior leadership roles (classified as 0-3 in our global career band structure), with HSBC UK's intermediate goal on gender diversity being aligned to HSBC Group's global target of 30% of senior leadership roles held by women by 2020 (in line with our 30% Club CEO Campaign commitment). At HSBC UK, we have achieved 32% and we are continuing to focus on further improving our gender balance at a senior leadership level.
Employee development
The development of all our colleagues is essential to the future strength of our business and also in retaining high-calibre individuals with the values, skills and experience for current and future roles.
HSBC University, the home of learning at the HSBC Group, provides training programmes, educational resources and opportunities for connectivity, research and community engagement - with the core offering themed around leadership, risk management, strategy and performance, as well as business-specific technical training.
Over the last year, HSBC University has further developed its offering across all of the core strategic areas of focus mentioned. The effect of this is that at every level, there are programmes, materials and tools available that are designed to support every colleague on their own specific leadership development. Sustainability, Digital, and Wellbeing have been core for 2019 with HSBC UK front running dedicated learning for Mental Health Awareness training for all colleagues and a further enhanced face to face mental health training for all line managers.
Significant investment is being provided to help support the skills and development needs of the ever changing work-force and this will be the primary focus for 2020 as we gain momentum of understanding around the roles within banking of the future and how HSBC UK needs to support and grow each and every colleague to be successful.
Employee share schemes
The HSBC Group offers employees two options to voluntarily participate in Share purchase schemes helping to align the interests of employees with the creation of shareholder value. Our Sharesave plan allows employees to save an amount of money each month over a three- or five-year period and these savings can be used to purchase shares at a previously agreed discounted rate. Our Share Investment Plan allows employees to purchase shares each month from their pre-tax pay and should they be held for a minimum period of time, any proceeds from the sale of the shares are released free from tax or National Insurance contributions.
Auditor
PricewaterhouseCoopers LLP ('PwC') is external auditor to the bank. PwC has expressed its willingness to continue in office and the Board recommends that PwC be re-appointed as the bank's auditor. A resolution proposing the re-appointment of PwC as the bank's auditor and giving authority to the Audit Committee to determine its remuneration will be submitted to the forthcoming AGM.
Conflicts of interest and indemnification of Directors
The bank's Articles of Association give the Board authority to approve Directors' conflicts and potential conflicts of interest. The Board has adopted a policy and procedures for the approval of Directors' conflicts or potential conflicts of interest. The Board's powers to authorise conflicts are operating effectively and the procedures are being followed. A review of situational conflicts which have been authorised, including the terms of authorisation, is undertaken by the Board annually.
The Articles of Association provide that Directors and directors of associated companies are entitled to be indemnified out of the assets of the company against claims from third parties in respect of certain liabilities arising in connection with the performance of their functions, in accordance with the provisions of the UK Companies Act 2006. Such indemnity provisions have been in place during the financial year but have not been utilised by the Directors. All Directors have the benefit of directors' and officers' liability insurance.
Statement on going concern
The Directors consider it appropriate to prepare the financial statements on a going concern basis. In making their going concern assessment, the Directors have considered a wide range of detailed information relating to present and potential conditions, including profitability, cash flows, capital requirements and capital resources.
Further information relevant to the assessment is provided in the Strategic Report and the Report of the Directors, in particular:
-- A description of the group's strategic direction; -- A summary of the group's financial performance and a review of performance by business; -- The group's approach to capital management and its capital position; and
-- The top and emerging risks facing the group, as appraised by the Directors, along with details of the group's approach to mitigating those risks and its approach to risk management
in general.
In addition, the objectives, policies and processes for managing credit, liquidity and market risk are set out in the 'Report of the Directors: Risk'.
The Directors' Report comprising pages 17 to 60 was approved by the Board on 17 February 2020 and is signed on its behalf by:
Nicola Black
Company Secretary
HSBC UK Bank plc
Registered number 9928412
Disclosure of Information to the Auditor and Statement of Directors' Responsibilities
The Directors who held office at the date of approval of this Directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the bank's auditors are unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the company's auditors are aware of that information. The Directors are responsible for preparing the Annual Report and Accounts 2019, comprising the consolidated financial statements of the group and parent company financial statements for the bank in accordance with applicable laws and regulations.
Company law requires the Directors to prepare a Strategic Report, a Report of the Directors and group and parent company financial statements for each financial year. The Directors are required to prepare the group financial statements in accordance with IFRSs as adopted by the European Union and have elected to prepare the bank's financial statements on the same basis.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and bank and of their profit or loss for that period. In preparing each of these financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently; -- make judgements and estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with IFRSs as adopted by the European Union; and
-- prepare the financial statements on a going concern basis unless it is not appropriate. Since the Directors are satisfied that the group has the resources to continue in business for the foreseeable future, the financial statements continue to be prepared on a going concern basis.
The Directors have responsibility for ensuring that sufficient accounting records are kept that disclose with reasonable accuracy at any time the financial position of the bank and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for safeguarding the assets of the Company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors have responsibility for the maintenance and integrity of the Annual Report and Accounts 2019 as they appear on the bank's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, the names of whom are set out in the Governance section of the Directors' Report on pages 54 and 55 of the Annual Report and Accounts 2019, confirm to the best of their knowledge:
-- In accordance with rule 4.1.12(3)(a) of the Disclosure Rules and Transparency Rules, the consolidated financial statements, which have been prepared in accordance with IFRSs as issued by the IASB and as endorsed by the European Union, have been prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the bank and the undertakings included in the consolidation taken as a whole; and
-- The management report represented by the Strategic Report and Directors' Report has been prepared in accordance with rule 4.1.12(3)(b) of the Disclosure Rules and Transparency Rules, and includes a fair review of the development and performance of the business and the position of the bank and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that the group faces.
Approved by the Board on 17 February 2020 and signed on its behalf by:
Nicola Black
Company Secretary
HSBC UK Bank plc
Registered number 9928412
Independent auditors' report to the member of HSBC UK Bank plc Report on the audit of the financial statements
Opinion
In our opinion, HSBC UK Bank plc's group financial statements and parent company financial statements (the 'financial statements'):
-- give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2019 and of the group's profit and the group's and the parent company's cash flows for the year then ended;
-- have been properly prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union and, as regards the parent company's financial statements, as applied in accordance with the provisions of the Companies Act 2006; and
-- have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts (the 'Annual Report'), which comprise:
-- the consolidated income statement for the year ended 31 December 2019; -- the consolidated statement of comprehensive income for the year ended 31 December 2019; -- the consolidated balance sheet at 31 December 2019; -- the consolidated statement of cash flows for the year ended 31 December 2019; -- the consolidated statement of changes in equity for the year ended 31 December 2019; -- the HSBC UK Bank plc balance sheet at 31 December 2019; -- the HSBC UK Bank plc statement of cash flows for the year ended 31 December 2019; -- the HSBC UK Bank plc statement of changes in equity for the year ended 31 December 2019; and
-- the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the Financial Reporting Council's ('FRC') Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC's Ethical Standard were not provided to the group or the parent company.
Other than those disclosed in note 4 to the financial statements, we have provided no non-audit services to the group or the parent company in the period from 1 January 2019 to 31 December 2019.
Our audit approach
Overview
* Overall group materiality: GBP107m (2018: GBP65m),
based on 5% of adjusted profit before tax.
* Overall parent company materiality: GBP93m (2018:
GBP57m), based on 5% of adjusted profit before tax.
* HSBC UK Bank plc is a member of the HSBC Group, the
ultimate parent company of which is HSBC Holdings
plc. HSBC UK Bank plc operates in the UK.
* We performed an audit of the complete financial
information of three reporting units, namely HSBC UK
Bank plc, Marks and Spencer Financial Services plc
('M&S') and HSBC Private Bank (UK) Limited ('Private
Bank').
* For two further reporting units, specific audit
procedures were performed over selected significant
account balances.
The following areas were identified as key audit
matters for the group and parent company. These
are discussed in further detail in the Appendix:
* Customer Redress - Payment Protection Insurance
('PPI')
* Provision for conduct related matters other than PPI
* Expected credit loss ('ECL') provision for loans and
advances
* Valuation of goodwill relating to the Private Banking
('PB') cash generating unit ('CGU')
* Recognition of income under Effective Interest Rate
accounting
* Valuation of defined benefit pension obligation
* Information Technology ('IT') Access Management
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations include, but are not limited to, the Financial Conduct Authority's regulations, the Prudential Regulation Authority's regulations, UK Listing Rules, Pensions legislation and the UK tax legislation. We considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue or reduce expenditure, and management bias in accounting estimates. Our audit procedures included challenging estimates and judgements made by management in their significant accounting estimates, in particular in relation to the expected credit loss provisions of loans and advances to customers, valuation of goodwill relating to the PB CGU, and provisioning for PPI and other conduct related matters (see related key audit matters in the Appendix), and identifying and testing journal entries, in particular journal entries posted with unusual account combinations or posted by senior management. The group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included review of the financial statement disclosures to underlying supporting documentation, review of correspondence with and reports to the regulators, review of correspondence with legal advisors, enquiries of management, enquiries of legal counsel and review of internal audit reports in so far as they related to the financial statements.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. The key audit matters are discussed further in the Appendix.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the parent company, the accounting processes and controls, and the industry in which they operate.
HSBC UK Bank plc is structured into four divisions being Retail Banking and Wealth Management, Commercial Banking, Private Banking and Global Banking and Markets. The divisions operate across a number of operations and subsidiary entities in the United Kingdom. Within the group's main consolidation and financial reporting system, the consolidated financial statements are an aggregation of the operations and subsidiary entities ('reporting units'). Each reporting unit submits their financial information to the group in the form of a consolidation pack.
In establishing the overall approach to the group and parent company audit, we scoped our work using the balances included in the consolidation pack. We determined the type of work that needed to be performed over the reporting units by us, as the group engagement team, or auditors within PwC UK operating under our instruction ('component auditors').
As a result of our scoping, for the parent company we determined that an audit of the complete financial information of HSBC UK Bank plc was necessary, owing to its financial significance. For group purposes, we additionally performed an audit of the complete financial information of M&S and Private Bank. We instructed component auditors, PwC UK, to perform the audits of these reporting units. Our interactions with component auditors included regular communication throughout the audit, the issuance of instructions, a review of working papers relating to the key audit matters and formal clearance meetings. The group audit engagement partner was also the partner on the audit of the HSBC UK Bank plc and Private Bank significant reporting units.
We then considered the significance of other reporting units in relation to primary statement account balances. In doing this we also considered the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). For two reporting units, specific audit procedures were performed over selected significant account balances. For the remainder, the risk of material misstatement was mitigated through group audit procedures including testing of entity level controls and subsidiary level analytical review procedures.
Certain group-level account balances (including goodwill) were audited by the group engagement team.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements Parent company financial statements
Overall materiality GBP107m (2018: GBP65m) GBP93m (2018: GBP57m)
How we determined 5% of adjusted profit before 5% of adjusted profit before
it tax tax
Rationale for Adjusted profit before tax is the primary measure used
benchmark applied by shareholders in assessing the performance of the
group and the parent company and removes the impact
of significant items that distort year-on-year comparisons.
In determining overall materiality, we have excluded
costs relating to customer redress programmes as they
are large, one-off items unrelated to the underlying
performance of the group and parent company.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across reporting units was between GBP10.8m and GBP93m. Certain reporting units were audited to a local statutory audit materiality that was also less than our overall group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above GBP4.6m (Group audit) (2018: GBP2.8m) and GBP4.6m (Parent company audit) (2018: GBP2.8m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Conclusions relating to going concern
ISAs (UK) require us to report to you when:
-- the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
-- the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's and parent company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
We have nothing to report in respect of the above matters.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group's and parent company's ability to continue as a going concern. For example, the terms of the United Kingdom's withdrawal from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the group and parent company's trade, customers, suppliers and the wider economy.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Report of the Directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below.
Strategic Report and Report of the Directors
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Report of the Directors for the year ended 31 December 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Report of the Directors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors' Responsibilities in respect of the financial statements set out on page 60, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group's and the parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditors' responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditors responsibilities. This description forms part of our auditors' report.
Use of this report
This report, including the opinions, has been prepared for and only for the parent company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
-- certain disclosures of directors' remuneration specified by law are not made; or
-- the parent company financial statements are not in agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we were appointed by the members on 7 August 2017 to audit the financial statements for the year ended 31 December 2017 and subsequent financial periods. The period of total uninterrupted engagement is 3 years, covering the years ended 31 December 2017 to 31 December 2019.
Carl Sizer (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
17 February 2020
Appendix: Key audit matters discussed with the Audit Committee
The key audit matters are discussed below together with an explanation of how the audit was tailored to address these specific areas.
All key audit matters are applicable to both the group and parent company.
Customer Redress - Payment Protection Insurance ('PPI')
The provision for customer redress We discussed with the Audit Committee
in respect of PPI incorporates a the appropriateness of applying historic
number of estimates that are highly validity rates and average redress
judgemental. to the remaining information requests.
A high volume of information requests We discussed the adequacy of provisions
and complaints were received in the for matters not impacted by timebar,
run up to the timebar on the 29 August including Official Receiver complaints
2019. As a result of the volumes and legal claims.
received a significant number are We discussed the results of our controls
yet to be assessed for mis-selling. and substantive testing. We also
The validity rate applied to the discussed alternative scenarios and
information requests and the average the range of sensitivity in concluding
redress for these cases including on the adequacy of the provision
those in respect of the complaints held.
brought by the Official Receiver No material misstatements have been
are the key estimates underlying identified from our work.
the provision.
An estimate has also been made in
relation to potential future legal
claims where volumes are difficult
to predict.
* Evaluated the design and tested the operating
effectiveness of key controls over the process of
capturing key data used in the PPI provision
calculation model.
* Examined the modelling process around the PPI
provision calculation. Tested historical validity
rates, and redress amounts with worked cases and
assessed whether the estimates underpinning the
provision calculations, including future trends
expected in respect of these inputs, were
appropriate.
* Tested historic data relating to the number of legal
claims received and assessed whether the assumptions
relating to future volumes were appropriate.
* Considered the sensitivity of the provision to
possible variations in estimates. This could result
in different amounts for some provisions to those
calculated however these differences were within a
reasonable range of outcomes.
* Observed management's review and challenge forums to
assess the appropriateness of the provision.
* Evaluated whether the disclosures within the
financial statements appropriately address the
significant uncertainties that exist around
determining the provisions and the sensitivity of the
provisions to changes in the underlying estimates by
comparing to the output of our audit work.
Note 1: Basis of preparation and significant accounting policies 1.2(j)
Provisions, page 85.
Note 19: Provisions, page 103.
Provision for conduct related matters other than PPI
A number of deficiencies have been We discussed with the Audit Committee
identified in the Bank's internal the process performed by management
processes that have resulted in customer to estimate the impacted populations.
detriment. The provision for these We also discussed the estimates used
matters reflects the expected cost in determining the expected redress
of repayment of historic fees and for each cohort.
interest, distress and inconvenience We discussed the results of our controls
payments and related operational and substantive testing. We also
remediation activities. discussed alternative scenarios and
Management grouped customers into the range of sensitivity in concluding
cohorts based on the nature of the on the adequacy of the provision
matter. The volume of customers impacted held.
and expected redress amounts to be No material misstatements have been
paid are the key estimates underlying identified from our work.
the provision.
Few customer redress payments have
been made to date and the population
of impacted customers is still being
identified. The data available to
support these estimates is limited,
making them highly subjective.
* Evaluated the design and tested the operating
effectiveness of key controls over key inputs to the
calculated provision.
* Evaluated the completeness of impacted cohorts
identified by management by comparing these to
customer populations expected to be affected by
process deficiencies.
* Examined the appropriateness of the provisioning
model and underlying estimates used. Tested the
appropriateness of customer populations identified
for each cohort and the estimated redress per
customer.
* Considered the sensitivity of the provision to
possible changes in outcome. Considered the different
amounts calculated to be within a reasonable range of
outcomes.
* Observed management's review and challenge forums to
assess the appropriateness of the provision.
* Evaluated whether the disclosures within the
financial statements appropriately address the
uncertainties inherent to determining the provision
and the sensitivity of the provision to changes in
key estimates by comparing to the output of our audit
work.
Note 1: Basis of preparation and significant accounting policies 1.2(j)
Provisions, page 85.
Note 19: Provisions, page 103.
Expected credit loss ('ECL') provision for loans and advances
The ECL provision for loans and advances We discussed with the Audit Committee
has a significant number of data changes to risk factors and other
inputs for both the retail and wholesale inputs within the models, geopolitical
portfolios. risks, such as the terms of the UK's
In addition to the data inputs a departure from the EU; the migration
number of key judgements are used of customer risk ratings; and impairments
to estimate the ECL provision, in of significant wholesale exposures.
particular the severity and likelihood We discussed the more judgemental
of alternative downside economic decisions made by management, in
scenarios that form part of the forward particular the severity and likelihood
economic guidance, the determination of alternative downside economic
of customer credit ratings and probabilities scenarios that form part of the forward
of default and loss rates that go economic guidance including their
into the expected credit loss models impact on ECL and consideration of
and the estimation of specific impairments required post model adjustments,
for wholesale exposures. including the impact of model and
Whilst the credit environment has data limitations.
remained largely benign as a result We also discussed how the control
of low interest rates and low unemployment, environment over the calculation
broader economic risks such as the of ECL evolved following initial
impact of the UK departure from the adoption, reporting on areas of improvement
EU remain which increase the estimation and the results of our testing.
uncertainty in the ECL. No material misstatements have been
identified from our work.
* Utilised our credit modelling specialists to perform
risk risk based substantive testing of models that
were updated during the year, including independently
rebuilding the modelling for certain estimates.
* Independently reviewed the updates to the scripts
used in the underlying tool to calculate ECL to
validate that they reflected approved updates to
models, parameters and inputs.
* Controls over the inputs of critical data into source
system and the flow and transformation of data
between source systems to the impairment calculation
engine were tested. Substantive testing was performed
over the critical data used in the year end ECL
calculation.
* Tested the review and challenge of multiple economic
scenarios by an expert panel and internal governance
committee, and assessed the reasonableness and
likelihood of these scenarios using our economic
experts. Relevant economic, political and other
events were considered in assessing the
reasonableness of alternative downside scenarios. The
severity and magnitude of the scenarios were compared
to external forecasts and data from historical
economic downturns, and the sensitivities of the
scenarios on the ECL were considered.
* Observed management's review and challenge forums to
assess the ECL output and approval of post model
adjustments.
* Tested the approval of the key inputs, estimates and
discounted cash-flows that support the impairments of
significant wholesale exposures, and substantively
tested a sample of significant wholesale exposures.
Note 1: Basis of preparation and significant accounting policies 1.2(g)
Impairment of amortised cost and FVOCI financial assets, page 82.
Summary of credit risk, page 26
Measurement uncertainty and sensitivity analysis of ECL estimates,
page 31.
Valuation of goodwill relating to the Private Banking ('PB') cash generating
unit ('CGU')
The macroeconomic and geopolitical We discussed the appropriateness
environment in which the group operates of the VIU estimates with the Audit
has become more challenging, impacting Committee, particularly those for
both 2019 earnings and the outlook which variations had the most significant
into 2020. Furthermore, a strategy impact on the VIU estimate. We focused
update has been announced by HSBC on the estimates related to the growth
Holdings plc that may impact the rate targets in the AOP, and the
future profitability of certain businesses long term growth rates and discount
across the group. rates for PB. Our discussions and
These matters were considered a potential focus on estimates was driven by
indicator of impairment of the goodwill consideration of the achievability
held by the group in respect of Private of management's AOP and the prospects
Banking ('PB') cash generating unit for the private banking business
('CGU'). in the future.
An impairment test was performed No material misstatements have been
by the Bank using a value in use identified from our work.
('VIU') model that estimates the
value of the PB CGU. The VIU is GBP218m
in excess of the carrying value for
this CGU. This is highly sensitive
to estimates within the model.
The determination of the VIUs is
based on the requirements of the
accounting standard IAS 36 'Impairment
of assets' and estimates about future
cash flows which are estimated using
the group's Annual Operating Plan
('AOP'), long term growth rates and
discount rates. These estimates,
which are judgemental, are derived
from a combination of management
estimates, market data and other
information provided by external
parties.
* Assessed the appropriateness of the methodology,
including the estimation of VIU.
* Reasonable ranges for the discount rates and terminal
growth rates used within the model were independently
calculated with the assistance of our valuation
experts, and compared to the rates used by
management.
* Recalculated terminal growth rates used within the
model utilising external market data, and compared to
the rates used by management.
* Inputs used in the determination of estimations
within the model including the Annual Operating Plan
were challenged.
* Assessed whether the cash flows included in the model
were in accordance with the relevant accounting
standard.
* Performed sensitivity analysis on key estimates used,
both individually and in aggregate.
* The controls in place over the model, and its
mathematical accuracy, were tested.
* Evaluated whether the disclosures within the Annual
Report and Accounts 2019 appropriately address the
significant estimates used to determine the
impairment of goodwill.
Note 1: Basis of preparation and significant accounting policies 1.2(a)
Consolidation and related policies, page 79.
Note 15: Goodwill and intangible assets, page 100.
Recognition of income under Effective Interest Rate accounting
Loans and advances are recognised Discussions with the Audit Committee
at amortised cost, and interest income focused on the key judgments and
recognised using the Effective Interest estimates including the level of
Rate (EIR) method. The majority of expected customer balances and interest
interest income is calculated by yield on significant promotional
automated systems and requires little offers, the retention of balances
or no management judgement. Therefore after the end of the promotional
we focused our work in relation to period and consideration as to how
revenue recognition on EIR accounting the Group's historic experience is
and specifically credit cards. consistent with that expected in
EIR accounting is inherently subjective the future.
as it requires management to predict We discussed the impact on key estimates
customer behaviour into the future, of judgements applied in response
over the expected life of the products, to the FCA's proposed changes to
on which the EIR adjustment calculation rules impacting customers in persistent
is based. Changes in the key estimates debt.
could have a material impact on the We also discussed the results of
EIR adjustments and hence the revenue our audit work including testing
recognised in any one accounting of management controls, substantive
period. testing and evaluation of the application
For credit cards there are significant of accounting standards.
judgments in calculating the EIR No material misstatements have been
adjustment including setting estimates identified from our work.
relating to the retention of customer
balances over the expected life,
the proportion that remain active
following the end of the promotional
period and the related interest income
earned on those balances.
Management have estimated the impact
that persistent debt regulations
will have on customer behaviour and
therefore on the accrued interest
balance. This included assessing
the proportion of customers who will
take up each of the options offered
by the bank, including increasing
credit card repayments or switching
to alternative products and considering
those who may have cards suspended.
* Tested the controls over data input and checked the
accuracy of model calculations.
* Observed management's governance meetings for the
setting, challenge and approval of key estimates,
including monitoring of actual trends compared to
forecast estimates.
* Tested the governance over product pricing models and
the use of that output to support the determination
of EIR at origination.
* Tested the appropriateness of models used by
management in EIR calculations and critically
assessed and challenged the appropriateness of the
key estimates, including expected life of customer
accounts and assessing whether the use of customer
balance and yield curves based on historic data were
appropriately reflective of current behaviour and an
appropriate indicator of the future.
* Performed sensitivity analyses of key estimates to
understand the materiality of the impact that
potential realistic changes in estimates may have,
either individually or in combination, on the EIR
asset.
* Performed testing over the adjustments taken to
revenue during the year as a result of persistent
debt regulations, considering the appropriateness of
estimates made around the contact programme, customer
responsiveness and resulting actions, and the
completeness of the populations identified.
* Assessed the sufficiency of the disclosures in the
financial statements relating to significant
estimates made in the EIR calculation, including
disclosure of sensitivities.
Note 1: Basis of preparation and significant accounting policies 1.2(b)
Income and expense, page 80.
Valuation of defined benefit pension obligation
The valuation of the defined benefit We discussed with the Audit Committee
obligations of the HSBC Bank (UK) the key judgments made by management
Pension Scheme is dependent on a in setting the actuarial estimates
number of actuarial estimates, including used to determine the value of the
the discount rate, inflation rate defined benefit obligations.
and mortality rates. We also discussed the results of
Management uses actuarial experts the work performed by our actuarial
to determine the valuation of the experts and how the estimates compare
defined benefit obligation using to our independently compiled expected
a number of market based inputs and range.
other financial and demographic estimates. No material misstatements have been
The estimates were updated to reflect identified from our work.
market decreases in the discount
rate and to reflect changing market
practice and management's views of
long term inflation. Mortality rates
were updated to reflect the latest
data for life expectancy.
Changes in these estimates can have
a material impact on the valuation
due to the long duration of the pension
obligations and as such the valuation
is considered highly judgemental.
* Tested the controls for determining the actuarial
estimates used in calculating the valuation of future
pension obligations and the approval of those
estimates by senior management.
* Engaged our actuarial experts to understand the
judgements made by management and managements'
actuarial expert in determining the key financial and
demographic estimates used in the calculation of the
liability.
* Assessed the reasonableness of the estimates using
independently developed benchmarks and external
market data.
* Evaluated management's approach to derive the
discount rate and inflation estimates and compared
this to market practice.
* Evaluated the appropriateness of the disclosures
within the financial statements, including the
disclosure regarding the sensitivity of estimates by
comparing them to the output of our audit work.
Note 1: Basis of preparation and significant accounting policies 1.2(h)
Employee compensation and benefits, page 85.
Note 3: Employee compensation and benefits, page 86.
Information Technology ('IT') Access Management
Our audit approach relies extensively The significance of IT controls to
on automated controls and therefore our audit and the status of the remediation
on the effectiveness of controls was discussed at the Audit Committee
over IT systems. meetings during the year.
In previous years, we identified No material misstatements have been
and reported that controls over access identified from our work.
to applications, operating systems
and data in the financial reporting
process required improvements. Access
management controls are critical
to ensure that changes to applications
and underlying data are made in an
appropriate manner. Appropriate access
and change controls contribute to
mitigating the risk of potential
fraud or errors as a result of changes
to applications and data. Management
implemented remediation activities
that have contributed to progress
being made in reducing the risk over
access management in the financial
reporting process. Controls continue
to require some improvement going
forward.
Access rights were tested over applications, operating systems and
databases relied upon for financial reporting. Specifically, the audit
tested that:
* new access requests for joiners were properly
reviewed and authorised;
* user access rights were removed on a timely basis
when an individual left or moved role;
* access rights to applications, operating systems and
databases were periodically monitored for
appropriateness; and
* highly privileged access was restricted to
appropriate personnel.
Other areas that were independently assessed included: password policies;
security configurations; controls over changes to code, data and config;
and that the ability to make such change via privileged operating system
or databases access in the production environment was appropriately
restricted.
Where control deficiencies were identified, a range of other procedures
were performed:
* where access outside of policy was identified, we
understood the nature of the access, and, where
required, obtained additional evidence on whether
that access had been exploited;
* testing of remediated controls to manage the
monitoring of business access, including access that
would allow a user to potentially override
segregations of duty; and
* substantive testing of whether users inappropriately
hold access to key functionality underpinning
financial reporting processes, specific year-end
reconciliations (i.e. custodian, bank account and
suspense account reconciliations) and confirmations
with external counterparties.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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