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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 | - |
TIDM62YN
RNS Number : 3522D
HSBC UK Bank PLC
18 February 2020
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Financial statements
Page
Consolidated income statement 70
------------------------------------------
Consolidated statement of comprehensive
income 71
------------------------------------------
Consolidated balance sheet 72
------------------------------------------
Consolidated statement of cash
flows 73
------------------------------------------
Consolidated statement of changes
in equity 74
------------------------------------------
HSBC UK Bank plc balance sheet 75
------------------------------------------
HSBC UK Bank plc statement of
cash flows 76
------------------------------------------
HSBC UK Bank plc statement of
changes in equity 77
------------------------------------------ ----
Notes on the financial
statements
Basis of preparation and
1 significant accounting policies 78
2 Net fee income 86
----
Employee compensation and
3 benefits 86
4 Auditors' remuneration 91
5 Tax 91
6 Dividends 93
Fair values of financial
instruments carried at fair
7 value 93
----
Fair values of financial
instruments not carried at
8 fair value 94
----
9 Derivatives 95
---- ----
10 Financial investments 98
----
Assets pledged, collateral
11 received and assets transferred 98
----
12 Interests in joint ventures 99
----
13 Investments in subsidiaries 99
----
14 Structured entities 100
----
15 Goodwill and intangible assets 100
----
Prepayments, accrued income
16 and other assets 102
----
17 Debt securities in issue 102
----
Accruals, deferred income
18 and other liabilities 102
----
19 Provisions 103
----
20 Subordinated liabilities 105
----
Maturity analysis of assets,
liabilities and off-balance
21 sheet commitments 106
----
Offsetting of financial assets
22 and financial liabilities 111
----
Called up share capital and
23 other equity instruments 112
----
Contingent liabilities, contractual
commitments
24 and guarantees 113
----
25 Lease commitments 113
----
Legal proceedings and regulatory
26 matters 114
----
27 Related party transactions 115
----
Events after the balance
28 sheet date 117
----
HSBC UK Bank plc's subsidiaries
29 and joint ventures 118
---- ------------------------------------ ----
Consolidated income statement
for the year ended 31 December
2019(5) 2018
Notes GBPm GBPm
Net interest income 4,752 2,456
* interest income(1,2,3) 5,696 2,805
* interest expense(4) (944) (349)
Net fee income 2 1,230 648
* fee income 1,456 831
* fee expense (226) (183)
Net income from financial instruments held for trading
or managed on a fair value basis 400 198
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit
or loss 2 -
Gains less losses from financial investments 48 22
Other operating income 52 33
Total operating income 6,484 3,357
Net operating income before change in expected credit
losses and other credit impairment charges 6,484 3,357
Change in expected credit losses and other credit
impairment charges (613) (305)
Net operating income 5,871 3,052
Employee compensation and benefits 3 (934) (611)
General and administrative expenses (3,601) (1,267)
Depreciation and impairment of property, plant and
equipment and right-of-use assets (170) (46)
Amortisation and impairment of intangible assets (156) (64)
Total operating expenses (4,861) (1,988)
Operating profit 1,010 1,064
Profit before tax 1,010 1,064
Tax expense 5 (494) (301)
-------------------------------------------------------- ------ ------ ------
Profit for the year 516 763
-------------------------------------------------------- ------ ------ ------
Attributable to:
--------------------------------------------------------
* ordinary shareholders of the parent company 512 763
* non-controlling interests 4 -
-------------------------------------------------------- ------ ------ ------
1 Interest income recognised on financial assets measured at amortised cost is GBP5,459m (2018: GBP2,722m).
2 Interest income recognised on financial assets measured at FVOCI is GBP237m (2018: GBP81m).
3 Interest revenue calculated using the effective interest method comprises interest recognised on financial assets measured at either amortised cost or fair value through other comprehensive income.
4 Interest expense on financial instruments, excluding interest on trading liabilities designated or otherwise mandatorily measured at fair value is GBP943m (2018: GBP349m).
5 HSBC UK's banking operations commenced on 1 July 2018. To provide better comparative information, the summary income statement is presented for the six months to 30 June 2019 and 31 December 2019 on Page 10 in the Strategic Report.
Consolidated statement of comprehensive income
for the year ended 31 December
2019 2018
GBPm GBPm
----- -------
Profit for the year 516 763
------------------------------------------------------------- ---- ----
Other comprehensive income
-------------------------------------------------------------
Items that will be reclassified subsequently to profit
or loss when specific conditions are met:
-------
Debt instruments at fair value through other comprehensive
income (4) 10
- fair value gains 42 34
- fair value gains transferred to the income statement
on disposal (48) (21)
- expected credit losses recognised in the income statement 1 -
- income taxes 1 (3)
---- ----
Cash flow hedges 34 (17)
- fair value gains/(losses) 39 (107)
-------------------------------------------------------------
- fair value losses reclassified to the income statement 7 84
-------------------------------------------------------------
- income taxes (12) 6
------------------------------------------------------------- ---- ----
Exchange differences 1 (2)
- other exchange differences 1 (2)
------------------------------------------------------------- ----
Items that will not be reclassified subsequently to
profit or loss:
Remeasurement of defined benefit asset/liability (207) (364)
----
- before income taxes (268) (485)
-------------------------------------------------------------
- income taxes 61 121
------------------------------------------------------------- ---- ----
Other comprehensive expense for the year, net of tax (176) (373)
------------------------------------------------------------- ----
Total comprehensive income for the year 340 390
------------------------------------------------------------- ---- ----
Attributable to:
- ordinary shareholders of the parent company 336 390
---- ----
- non-controlling interests 4 -
------------------------------------------------------------- ---- ----
Total comprehensive income for the year 340 390
------------------------------------------------------------- ---- ----
Consolidated balance sheet
at 31 December
2019 2018
Notes GBPm GBPm
------------------------------------------------------- ------ ------- ---------
Assets
Cash and balances at central banks 37,030 33,193
Items in the course of collection from other banks 504 603
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 7 66 35
------ ------- -------
Derivatives 9 121 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 10 19,737 13,203
Prepayments, accrued income and other assets 16 8,203 8,528
Interests in joint ventures 12 9 9
Goodwill and intangible assets 15 3,973 3,810
Total assets 257,102 238,939
------------------------------------------------------- ------ ------- -------
Liabilities and equity
Liabilities
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
Derivatives 9 201 346
Debt securities in issue 17 3,142 -
Accruals, deferred income and other liabilities 18 1,834 2,409
Current tax liabilities 409 359
Provisions 19 1,325 630
Deferred tax liabilities 5 1,223 1,189
Subordinated liabilities 20 9,533 4,937
Total liabilities 234,851 216,606
------------------------------------------------------- ------ ------- -------
Equity
Called up share capital 23 - -
Share premium account 23 9,015 9,015
------
Other equity instruments 23 2,196 2,196
Other reserves 7,688 7,657
Retained earnings 3,292 3,405
Total shareholders' equity 22,191 22,273
------------------------------------------------------- ------ ------- -------
Non-controlling interests 60 60
------------------------------------------------------- ------ ------- -------
Total equity 22,251 22,333
Total liabilities and equity 257,102 238,939
------------------------------------------------------- ------ ------- -------
The accompanying notes on pages 78 to 118, and the audited sections in: the 'Financial Summary' on pages 10 to 15 and the 'Report of the Directors' on pages 17 to 60 form an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 17 February 2020 and signed on its behalf by:
John David Stuart
Director
Consolidated statement of cash flows
for the year ended 31 December
2019 2018
GBPm GBPm
-------------------------------------------------------------- -------- ---------
Profit before tax 1,010 1,064
------- ------
Adjustments for non-cash items:
--------
Depreciation and amortisation(1) 326 110
-------
Net gain from investing activities (49) -
-------
Change in expected credit losses gross of recoveries
and other credit impairment charges 697 364
------- ------
Provisions including pensions 1,248 184
-------
Share-based payment expense 17 -
-------
Elimination of exchange differences(2) 255 (190)
-------
Changes in operating assets and liabilities
-------------------------------------------------------------- --------
Change in net trading securities and derivatives (161) (33)
Change in loans and advances to banks and customers (8,306) (7,346)
Change in reverse repurchase agreements - non-trading 408 (3,422)
Change in financial assets designated and otherwise
mandatorily measured at fair value (31) (27)
Change in other assets 511 1,941
Change in deposits by banks and customer accounts 10,879 4,102
Change in repurchase agreements - non-trading (541) 639
Change in debt securities in issue 3,142 -
Change in other liabilities (1,621) (4,576)
-------
Contributions paid to defined benefit plans (115) (80)
-------
Tax paid (360) (74)
-------
Net cash from operating activities 7,309 (7,344)
-------------------------------------------------------------- ------- ------
Purchase of financial investments (19,300) (5,369)
-------
Proceeds from the sale and maturity of financial investments 12,629 3,292
-------
Net cash flows from the purchase and sale of property,
plant and equipment (69) (57)
-------
Net investment in intangible assets (319) (164)
-------
Net cash flow on acquisition of subsidiaries, businesses
and joint venture(3) - 29,410
-------
Net cash from investing activities (7,059) 27,112
-------------------------------------------------------------- ------- ------
Issue of ordinary share capital and other equity instruments - 9,000
-------
Subordinated loan capital issued(4) 4,619 2,020
-------------------------------------------------------------- ------- ------
Funds received from the shareholder of the parent company - 3,000
-------------------------------------------------------------- ------- ------
Dividends paid to shareholders of the parent company
and non-controlling interests (455) (1)
-------
Net cash from financing activities 4,164 14,019
-------------------------------------------------------------- ------- ------
Net increase in cash and cash equivalents 4,414 33,787
-------------------------------------------------------------- ------- ------
Cash and cash equivalents at 1 Jan 33,817 2
------- ------
Exchange differences in respect of cash and cash equivalents (145) 28
-------
Cash and cash equivalents at 31 Dec(5) 38,086 33,817
-------------------------------------------------------------- ------- ------
Cash and cash equivalents comprise:
--------
- cash and balances at central banks 37,030 33,193
-------
- items in the course of collection from other banks 504 603
-------
- loans and advances to banks of one month or less 787 105
-------
- treasury bills, other bills and certificates of deposit
less than three months 23 149
-------
- cash collateral and net settlement accounts 85 -
-------------------------------------------------------------- ------- ------
- less: items in the course of transmission to other
banks (343) (233)
-------------------------------------------------------------- ------- ------
Cash and cash equivalents at 31 Dec(5) 38,086 33,817
-------------------------------------------------------------- ------- ------
Interest received was GBP5,648m (2018: GBP2,574m), interest paid was GBP987m (2018: GBP228m).
1 The impact of the right-of-use assets recognised under IFRS 16 at the beginning of 2019 is not recognised in 2018.
2 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.
3 No cash or cash equivalent was paid in consideration of the investment in subsidiaries and joint venture as it formed part of the Part VII transfer of asset and liabilities. The aggregate amount of cash and cash equivalent in the subsidiaries and other businesses over which control was obtained was GBP29,410m.
4 Subordinated liabilities changes during the year are attributable to cash flows from issuance of securities of GBP4,619m (2018: GBP2,020m). Non-cash changes during the year included foreign exchange (loss) of GBP(23)m (2018: Nil).
5 At 31 December 2019 GBP627m (2018: GBP363m) was not available for use by the group, all related to mandatory deposits at central banks (2018: GBP363m).
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves
Called
up
share
capital Financial Cash Total
and Other assets flow Foreign Group share- Non-
share equity Retained at FVOCI hedging exchange re-organisation holders' controlling Total
premium instru-ments earnings reserve reserve reserve reserve equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------------- ------- ------------ ---------- ----------- --------- ---------- --------------- -------- ------------- ---------
At 1 Jan 2019 9,015 2,196 3,405 14 (46) (2) 7,691 22,273 60 22,333
--------------------------------------------------------
Profit for the
year - - 512 - - - - 512 4 516
--------------------------------------------------------
Other comprehensive
income
(net of tax) - - (207) (5) 34 2 - (176) - (176)
--------------------------------------------------------
* debt instruments at fair value through other
comprehensive income - - - (4) - - - (4) - (4)
--------------------------------------------------------
* cash flow hedges - - - - 34 - - 34 - 34
--------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (207) - - - - (207) - (207)
--------------------------------------------------------
* exchange differences - - - (1) - 2 - 1 - 1
Total comprehensive
income for the
year - - 305 (5) 34 2 - 336 4 340
-------------------------------------------------------- ------- ------------ ------ ---- ---- ---- --- --- ----- --------------- ------- ---- ------- ------
Capital securities
issued - - - - - - - - - -
--------------------------------------------------------
Dividends to shareholders - - (451) - - - - (451) (4) (455)
--------------------------------------------------------
Capital contribution - - - - - - - - - -
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- --- ----- --------------- ------- ---- ------- ------
Transfer - - - - - - - - - -
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- --- ----- --------------- ------- ---- ------- ------
Group Reorganisation
Reserve - - - - - - - - - -
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- --- ----- --------------- ------- ---- ------- ------
Other movements(1) - - 33 - - - - 33 - 33
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- --- ----- --------------- ------- ---- ------- ------
At 31 Dec 2019 9,015 2,196 3,292 9 (12) - 7,691 22,191 60 22,251
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- ----- --------------- ------- ---- ------- ------
At 1 Jan 2018 15 - - - - - - 15 - 15
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- --- ----- --------------- ------- ---- ------- ------
Profit for the
year - - 763 - - - - 763 - 763
-------------------------------------------------------- ------- ------------ ------ ------- ---- ------- ------
Other comprehensive
income
(net of tax) - - (364) 10 (17) (2) - (373) - (373)
--------------------------------------------------------
* debt instruments at fair value through other
comprehensive income - - - 10 - - - 10 - 10
* cash flow hedges - - - - (17) - - (17) - (17)
* remeasurement of defined benefit asset/liability - - (364) - - - - (364) - (364)
* exchange differences - - - - - (2) - (2) - (2)
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- --- ---- --------------- ------- ------
Total comprehensive
income for the
year - - 399 10 (17) (2) - 390 - 390
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- ---- --------------- ------- ---- ------- ------
Capital securities
issued(2) 9,000 - - - - - - 9,000 - 9,000
-------------------------------------------------------- -------
Dividends to shareholders - - - - - - - - (1) (1)
--------------------------------------------------------
Capital contribution(3) - - 3,000 - - - - 3,000 - 3,000
--------------------------------------------------------
Transfer(4,5) - 2,196 - - - - - 2,196 60 2,256
--------------------------------------------------------
Group Reorganisation
Reserve(6) - - - 4 (29) - 7,691 7,666 - 7,666
--------------------------------------------------------
Other movements - - 6 - - - - 6 1 7
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- --- ----- --------------- -------- ---- ------- ---------
At 31 Dec 2018 9,015 2,196 3,405 14 (46) (2) 7,691 22,273 60 22,333
-------------------------------------------------------- ------- ------------ ------ ---- ----- ---- --- ---- --------------- ------- ---- ------- ------
1 Relates primarily to GBP33m pension assets transfer from HSBC Global Services (UK) Limited in 2019 (2018: Nil).
2 All new capital subscribed during 2018 was issued to HSBC UK Holdings Limited. 3 HSBC UK Holdings Limited injected GBP3,000m of CET1 capital in 2018.
4 Other equity instruments amounting to GBP2,196m consists of additional Tier 1 capital issued during 2018.
5 Non-controlling interests ('NCI') of GBP60m transferred to the group relates to Marks and Spencer Financial Services plc.
6 Relates primarily to the recognition of goodwill GBP3,142m and the pension asset net of deferred tax GBP4,776m for the transfer of the ring- fenced businesses to HSBC UK Bank plc in 2018.
HSBC UK Bank plc balance sheet
at 31 December
2019 2018
Notes GBPm GBPm
------------------------------------------------------- ------ ------- ---------
Assets
Cash and balances at central banks 37,020 33,187
Items in the course of collection from other banks 355 457
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 7 66 35
------
Derivatives 9 118 61
Loans and advances to banks 4,643 3,883
Loans and advances to customers 173,901 165,850
Reverse repurchase agreements - non-trading 3,014 3,422
Financial investments 10 19,737 13,203
Investments in subsidiaries 13 1,600 1,907
------ ------- -------
Prepayments, accrued income and other assets 16 8,216 8,523
Interests in joint ventures 12 5 5
Goodwill and intangible assets 15 881 718
Total assets 249,556 231,251
------------------------------------------------------- ------ ------- -------
Liabilities and equity
Liabilities
Deposits by banks 4,277 4,265
Customer accounts 207,830 196,858
Repurchase agreements - non-trading 98 639
Items in the course of transmission to other banks 336 225
Derivatives 9 197 341
Debt securities in issue 17 2,917 -
Accruals, deferred income and other liabilities 18 2,271 2,274
Current tax liabilities 362 286
Provisions 19 1,114 515
Deferred tax liabilities 5 1,255 1,224
Subordinated liabilities 20 9,454 4,858
Total liabilities 230,111 211,485
------------------------------------------------------- ------ ------- -------
Equity
Called up share capital 23 - -
Share premium account 23 9,015 9,015
------
Other equity instruments 23 2,196 2,196
Other reserves 5,245 5,214
Retained earnings 2,989 3,341
Total equity 19,445 19,766
Total liabilities and equity 249,556 231,251
------------------------------------------------------- ------ ------- -------
Profit after tax for the year was GBP273m (2018: GBP701m)
The accompanying notes on pages 78 to 118, and the audited sections of the 'Report of the Directors' on pages 17 to 60 form an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 17 February 2020 and signed on its behalf by:
John David Stuart
Director
HSBC UK Bank plc statement of cash flows
for the year ended 31 December
2019 2018
GBPm GBPm
-------------------------------------------------------------- -------- ---------
Profit before tax 715 968
-------
Adjustments for non-cash items:
--------
Depreciation and amortisation(1) 289 94
-------
Net loss from investing activities 435 -
------- ------
Change in expected credit losses gross of recoveries
and other credit impairment charges 537 313
------- ------
Provisions including pensions 1,005 124
------- ------
Share-based payment expense 14 (1)
------- ------
Elimination of exchange differences(2) 255 (190)
------- ------
Changes in operating assets and liabilities
--------
Change in net trading securities and derivatives (162) 6
-------
Change in loans and advances to banks and customers (8,392) (9,560)
-------
Change in reverse repurchase agreements - non-trading 408 (3,422)
-------
Change in financial assets designated and otherwise
mandatorily measured at fair value (31) (27)
-------
Change in other assets 322 1,801
-------
Change in deposits by banks and customer accounts 10,984 5,457
-------
Change in repurchase agreements - non-trading (541) 639
-------
Change in debt securities in issue 2,917 -
-------
Change in other liabilities (875) (3,392)
------- ------
Contributions paid to defined benefit plans (115) (80)
------- ------
Tax paid (286) -
------- ------
Net cash from operating activities 7,479 (7,270)
-------------------------------------------------------------- ------- ------
Purchase of financial investments (19,300) (5,369)
------- ------
Proceeds from the sale and maturity of financial investments 12,629 3,290
------- ------
Net cash flows from the purchase and sale of property,
plant and equipment (50) (48)
------- ------
Net investment in intangible assets (306) (154)
------- ------
Net cash outflow on cost of investment in subsidiaries - (48)
------- ------
Net cash flow on acquisition of subsidiaries, businesses
and joint venture(3) - 29,222
-------------------------------------------------------------- ------- ------
Net cash from investing activities (7,027) 26,893
-------------------------------------------------------------- ------- ------
Issue of ordinary share capital and other equity instruments - 9,000
-------
Subordinated loan capital issued(4) 4,619 2,020
-------------------------------------------------------------- ------- ------
Funds received from the shareholder of the parent company - 3,000
-------------------------------------------------------------- ------- ------
Dividends paid to shareholders of the parent company (451) -
-------------------------------------------------------------- ------- ------
Net cash from financing activities 4,168 14,020
Net increase in cash and cash equivalents 4,620 33,643
-------------------------------------------------------------- ------- ------
Cash and cash equivalents at 1 Jan 33,673 2
------- ------
Exchange differences in respect of cash and cash equivalents (145) 28
------- ------
Cash and cash equivalents at 31 Dec(5) 38,148 33,673
-------------------------------------------------------------- ------- ------
Cash and cash equivalents comprise:
-------- ---------
- cash and balances at central banks 37,020 33,187
------- ------
- items in the course of collection from other banks 355 457
------- ------
- loans and advances to banks of one month or less 1,001 105
------- ------
- treasury bills, other bills and certificates of deposit
less than three months 23 149
------- ------
- cash collateral and net settlement accounts 85 -
-------------------------------------------------------------- ------- ------
- less: items in the course of transmission to other
banks (336) (225)
-------------------------------------------------------------- ------- ------
Cash and cash equivalents at 31 Dec(5) 38,148 33,673
-------------------------------------------------------------- ------- ------
Interest received was GBP5,183m (2018: GBP2,454m), interest paid was GBP971m (2018: GBP212m).
1 The impact of the right-of-use assets recognised under IFRS 16 at the beginning of 2019 is not recognised in 2018.
2 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on line-by-line basis, as details cannot be determined without unreasonable expense.
3 No cash or cash equivalent was paid in consideration of the investment in subsidiaries and joint venture as it formed part of the Part VII transfer of asset and liabilities. The aggregate amount of cash and cash equivalent in the businesses over which control was obtained was GBP29,222m.
4 Subordinated liabilities changes during the year are attributable to cash flows from issuance of securities of GBP4,619m, (2018: GBP2,020m). Non-cash changes during the year included foreign exchange (loss) of GBP(23)m (2018: Nil).
5 At 31 December 2019, GBP617m (2018: GBP350m) was not available for use by the bank, all related to mandatory deposits at central banks (2018: GBP350m).
HSBC UK Bank plc statement of changes in equity
for the year ended 31 December
Other reserves
Called
up
share
capital Financial Total
and Other assets Cash flow Foreign Group share-
share equity Retained at FVOCI hedging exchange re-organisation holders'
premium instruments earnings reserve reserve reserve reserve equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------------------------
At 1 Jan 2019 9,015 2,196 3,341 14 (46) (2) 5,248 19,766
Profit for the
year - - 273 - - - - 273
--------------------------------------------------------
Other comprehensive
income
(net of tax) - - (207) (5) 34 2 - (176)
--------------------------------------------------------
* debt instruments at fair value through other
comprehensive income - - - (4) - - - (4)
--------------------------------------------------------
* cash flow hedges - - - - 34 - - 34
--------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (207) - - - - (207)
--------------------------------------------------------
* exchange differences - - - (1) - 2 - 1
-------------------------------------------------------- ------- ----------- ------ ---- ---- ---- --- --- ----- --------------- -------
Total comprehensive
income for the
year - - 66 (5) 34 2 - 97
-------------------------------------------------------- ------- ----------- ------ ---- ---- ---- --- --- ----- --------------- -------
Capital securities
issued - - - - - - - -
-------------------------------------------------------- -------
Dividends to shareholders - - (451) - - - - (451)
--------------------------------------------------------
Capital contribution - - - - - - - -
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- --- ----- --------------- -------
Transfer - - - - - - - -
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- --- ----- --------------- -------
Group Reorganisation
Reserve - - - - - - - -
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- --- ----- --------------- -------
Other movements(1) - - 33 - - - - 33
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- --- ----- --------------- -------
At 31 Dec 2019 9,015 2,196 2,989 9 (12) - 5,248 19,445
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- ----- --------------- -------
At 1 Jan 2018 15 - - - - - - 15
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- --- ----- --------------- -------
Profit for the
year - - 701 - - - - 701
-------------------------------------------------------- ------- ----------- ------ -------
Other comprehensive
income
(net of tax) - - (364) 10 (17) (2) - (373)
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- ---- --------------- -------
* debt instruments at fair value through other
comprehensive income - - - 10 - - - 10
--------------------------------------------------------
* cash flow hedges - - - - (17) - - (17)
--------------------------------------------------------
* remeasurement of defined benefit asset/liability - - (364) - - - - (364)
--------------------------------------------------------
* exchange differences - - - - - (2) - (2)
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- --- ---- --------------- -------
Total comprehensive
income for the
year - - 337 10 (17) (2) - 328
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- ---- --------------- -------
Capital securities
issued(2) 9,000 - - - - - - 9,000
--------------------------------------------------------
Dividends to shareholders - - - - - - - -
--------------------------------------------------------
Capital contribution(3) - - 3,000 - - - - 3,000
--------------------------------------------------------
Transfer(4) - 2,196 - - - - - 2,196
--------------------------------------------------------
Group Reorganisation
Reserve(5) - - - 4 (29) - 5,248 5,223
--------------------------------------------------------
Other movements - - 4 - - - - 4
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- --- ----- --------------- -------
At 31 Dec 2018 9,015 2,196 3,341 14 (46) (2) 5,248 19,766
-------------------------------------------------------- ------- ----------- ------ ---- ----- ---- --- ---- --------------- -------
1 Relates primarily to GBP33m pension assets transfer from HSBC Global Services (UK) Limited in 2019 (2018: Nil).
2 All new capital subscribed during 2018 was issued to HSBC UK Holdings Limited. 3 HSBC UK Holdings Limited injected GBP3,000m of CET1 capital in 2018.
4 Other equity instruments amounting to GBP2,196m consists of additional Tier 1 capital issued during 2018.
5 Relates primarily to the recognition of the pension asset net of deferred tax GBP4,776m for the transfer of the ring- fenced businesses to HSBC UK Bank plc in 2018 .
Notes on the financial statements
1 Basis of preparation and significant accounting policies
---------------------------------------------------------
1.1 Basis of preparation
(a) Compliance with International Financial Reporting Standards
The consolidated financial statements of HSBC UK and the separate financial statements of the bank have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB'), including interpretations issued by the IFRS Interpretations Committee, and as endorsed by the European Union ('EU'). 'Interest Rate Benchmark Reform: Amendments to IFRS 9 and IAS 39 'Financial Instruments', was endorsed in January 2020 and has been early adopted as set out below. Therefore, there were no unendorsed standards effective for the year ended 31 December 2019 affecting these consolidated and separate financial statements, and the group's application of IFRSs results in no differences between IFRSs as issued by the IASB and IFRSs as endorsed by the EU.
Standards adopted during the year ended 31 December 2019
IFRS 16 'Leases'
On 1 January 2019, we adopted the requirements of IFRS 16 retrospectively. The cumulative effect of initially applying the standard was recognised as an adjustment to the opening balance of retained earnings at that date. Comparatives were not restated. The adoption of the standard increased assets by GBP0.4bn and increased financial liabilities by the same amount with no effect on net assets or retained earnings.
On adoption of IFRS 16, we recognised lease liabilities in relation to leases that had previously been classified as 'operating leases' in accordance with IAS 17 'Leases'. These liabilities were recognised in 'other liabilities' and measured at the present value of the remaining lease payments, discounted at the lessee's incremental borrowing rate at 1 January 2019. The associated right of use ('ROU') assets were recognised in 'other assets' and measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments or provisions for onerous leases recognised on the balance sheet at 31 December 2018. In addition, the following practical expedients permitted by the standard were applied:
-- reliance was placed on previous assessments on whether leases were onerous;
-- operating leases with a remaining lease term of less than 12 months at 1 January 2019 were treated as short-term leases; and
-- initial direct costs were not included in the measurement of ROU assets for leases previously accounted for as operating leases.
The differences between IAS 17 and IFRS 16 are summarised in the table below:
Leases were Leases are recognised as an ROU asset and a corresponding
classified liability at the date at which the leased asset is made available
as either for use. Lease payments are allocated between the liability
finance or and finance cost. The finance cost is charged to profit or
operating loss over the lease term so as to produce a constant period
leases. Payments rate of interest on the remaining balance of the liability.
made under The ROU asset is depreciated over the shorter of the ROU asset's
operating useful economic life and the lease term on a straight-line
leases were basis.
charged to In determining the lease term, we consider all facts and circumstances
profit or that create an economic incentive to exercise an extension
loss on a option or not exercise a termination option over the planning
straight-line horizon of five years.
basis over In general, it is not expected that the discount rate implicit
the period in the lease is available so the lessee's incremental borrowing
of the lease. rate is used. This is the rate that the lessee would have
to pay to borrow the funds necessary to obtain an asset of
a similar value in a similar economic environment with similar
terms and conditions. The rates are determined for each economic
environment in which we operate and for each term by adjusting
swap rates with funding spreads (own credit spread) and cross-currency
basis where appropriate.
------------------ ------------------------------------------------------------------------
Interest Rate Benchmark Reform: Amendments to IFRS 9 and IAS 39 'Financial Instruments'
Amendments to IFRS 9 and IAS 39 issued in September 2019 modify specific hedge accounting requirements so that entities apply those hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows of the hedging instrument are based is not altered as a result of interest rate benchmark reform. These amendments replace the need for specific judgements to determine whether certain hedge accounting relationships that hedge the variability of cash flows or interest rate risk exposures for periods after the interest rate benchmarks are expected to be reformed or replaced continue to qualify for hedge accounting as at 31 December 2019. For example, in the context of cash flow hedging, the amendments require the interest rate benchmark on which the hedged cash flows are based, or on which the cash flows of the hedging instrument are based, to be assumed to be unaltered over the period of the documented hedge relationship, while uncertainty over the interest rate benchmark reform exists. The IASB is expected to provide further guidance on the implication for hedge accounting during the reform process and after the reform uncertainty is resolved.
These amendments apply from 1 January 2020 with early adoption permitted. The group has adopted the amendments that apply to IAS 39 from 1 January 2019 and has made the additional disclosures as required by the amendments. Further information is included in
Note 9.
Amendment to IAS 12 'Income Taxes' and other changes
An amendment to IAS 12 was issued in December 2017 as part of the annual improvement cycle. The amendment clarifies that an entity should recognise the tax consequences of dividends where the transactions or events that generated the distributable profits are recognised. This amendment was applied on 1 January 2019 and had no material impact. Comparatives have not been restated.
In addition, the group has adopted a number of interpretations and amendments to standards, which have had an insignificant effect on the consolidated group and the separate financial statements of the bank.
(b) Future accounting developments
Minor amendments to IFRSs
The IASB has published a number of minor amendments to IFRSs which are effective from 1 January 2020, some of which have been endorsed for use in the EU. The group expects they will have an insignificant effect, when adopted, on the consolidated financial statements of the group and the separate financial statements of the bank.
Major new IFRSs
The IASB has published IFRS 17 'Insurance Contracts'. IFRS 17 has not yet been endorsed but is not expected to have a significant impact on the consolidated financial statements of the group and the separate financial statements of the bank.
(c) Foreign currencies
The functional currency of the bank is sterling, which is also the presentational currency of the consolidated financial statements of
the group.
Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured at historical cost, which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is recognised.
(d) Presentation of information
Certain disclosures required by IFRSs have been included in the audited sections of this Annual Report and Accounts 2019 as follows:
-- disclosures concerning the nature and extent of risks relating to financial instruments are included in the 'Report of the Directors: Risk' on pages 17 to 51; and
-- capital disclosures are included in the 'Report of the Directors: Capital' on pages 52 to 53.
In publishing the parent company financial statements together with the group financial statements, the bank has taken advantage of the exemption in Section 408(3) of the Companies Act 2006 not to present its individual income statement and related notes.
(e) Critical accounting estimates and judgements
The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted as the critical accounting estimates and judgements in section 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management's estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of these financial statements. Management's selection of the group's accounting policies that contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved.
(f) Segmental analysis
HSBC UK's chief operating decision-maker is the group Chief Executive, supported by the group Executive Committee, and operating segments are reported in a manner consistent with the internal reporting provided to the group Chief Executive and the group Executive Committee.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the group's accounting policies. Segmental income and expenses include transfers between segments and these transfers are conducted at arm's length. Shared costs are included in segments on the basis of the actual recharges made.
The types of products and services from which each reportable segment derives its revenue are discussed in the 'Strategic Report - Products and services'.
(g) Going concern
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the group and bank have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.
1.2 Summary of significant accounting policies (a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, the group consolidates when it holds, directly or indirectly, the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal.
Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. The election is made for each business combination.
The bank's investments in subsidiaries are stated at cost less impairment losses.
Goodwill
Goodwill is allocated to cash-generating units ('CGUs') for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. The group's CGUs are based on the business lines described in the Strategic Report. Impairment testing is performed once a year, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.
Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained.
Critical accounting estimates and judgements
The review of goodwill for impairment reflects management's best estimate
of the future cash flows of the CGUs and the rates used to discount
these cash flows, both of which are subject to uncertain factors as
follows:
* The accuracy of forecast cash flows is subject to a * The future cash flows of the CGUs are sensitive to
high degree of uncertainty in volatile market the cash flows projected for the periods for which
conditions. Where such circumstances are determined detailed forecasts are available and to assumptions
to exist, management re-tests goodwill for impairment regarding the long-term pattern of sustainable cash
more frequently than once a year when indicators of flows thereafter. Forecasts are compared with actual
impairment exist. This ensures that the assumptions performance and verifiable economic data, but they
on which the cash flow forecasts are based continue reflect management's view of future business
to reflect current market conditions and management's prospects at the time of the assessment
best estimate of future business prospects
* The rates used to discount future expected cash flows
can have a significant effect on their valuation, and
are based on the costs of capital assigned to
individual CGUs. The cost of capital percentage is
generally derived from a capital asset pricing model,
which incorporates inputs reflecting a number of
financial and economic variables, including the
risk-free interest rate in the country concerned and
a premium for the risk of the business being
evaluated. These variables are subject to
fluctuations in external market rates and economic
conditions beyond management's control
* Key assumptions used in estimating goodwill
impairment are described in Note 15
============================================================ ============================================================
Interests in associates and joint arrangements
Joint arrangements are investments in which the group, together with one or more parties, has joint control. Depending on the group's rights and obligations, the joint arrangement is classified as either a joint operation or a joint venture. The group classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint arrangements, as associates.
The group recognises its share of the assets, liabilities and results in a joint operation. Investments in associates and interests in joint ventures are recognised using the equity method. The attributable share of the results and reserves of joint ventures and associates are included in the consolidated financial statements of the group based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and
31 December.
Investments in associates and joint ventures are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisition of interests in joint ventures and associates is not tested separately for impairment, but is assessed as part of the carrying amount of the investment.
(b) Income and expense
Operating income
Interest income and expense
Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value, are recognised in 'Interest income' and 'Interest expense' in the income statement using the effective interest method. However, as an exception to this, interest on debt instruments issued by the group for funding purposes that are designated under the fair value option to reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.
Interest on credit-impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Critical accounting estimates and judgements
The effective interest rate applied to interest income recognised on
credit card lending includes significant estimates and judgements related
to their behavioural life. This life is estimated based on internal
models and is reviewed regularly to reflect actual experience. The
application of the effective interest rate method to credit card lending
has resulted in the recognition of GBP147m (2018: GBP138m) within loans
and advances to customers as at 31 December 2019.
Management has assessed the
* The estimated life is reviewed annually and sensitivity of balance and
management has assessed seven years as continuing to interest assumptions by considering
be the most appropriate life. the impact of changes as
follows:
* a decrease in the closing balance stick rate
* A key metric is the stick rate, being the proportion assumption of 5% would decrease the asset value by
of acquired balances which remain on book after the GBP7.7m (2018:GBP3.8m);
end of promotional period. Where actual experience
differs from forecasts, an adjustment to the carryin
g * similarly, a decrease in the assumed interest yiel
value of the asset is required to be recognised in d
the financial statements. of 5% would decrease the asset value by GBP17.0m
(2018: GBP14.6m). (The interest yield assumption i
s
the amount of interest receivable over the life of
the account).
=========================================================== =========================================================
Non-interest income and expense
The group generates fee income from services provided at a fixed price over time, such as account service and card fees, or when it delivers a specific transaction at a point in time, such as broking services and import/export services. With the exception of certain performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and the group's performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee income is generally earned from short-term contracts with payment terms that do not include a significant financing component.
The group acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades, the group acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement.
The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement.
Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities.
The group buys and sells currencies to customers, as principal and presents the results of this activity, including the related gains and losses from changes in foreign exchange rates, as trading.
Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:
-- 'Net income from financial instruments held for trading or managed on a fair value basis': This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss.
-- 'Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss': This includes interest on instruments that fail the solely payments of principal and interest ('SPPI') test, see (d).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, the group recognises the difference as a trading gain or loss at inception (a 'day 1 gain or loss'). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction either until the transaction matures or is closed out or the valuation inputs become observable.
The fair value of financial instruments is generally measured on an individual basis. Financial instruments are classified into one of three fair value hierarchy levels, described in Note 7, 'Fair values of financial instruments carried at fair value'.
(d) Financial instruments measured at amortised cost
Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs. If the initial fair value is lower than the cash amount advanced, such as in the case of some leveraged finance and syndicated lending activities, the difference is deferred and recognised over the life of the loan through the recognition of interest income.
Non-trading reverse repurchase, repurchase and similar agreements
When debt securities are sold subject to a commitment to repurchase them at a predetermined price ('repos'), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell ('reverse repos') are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement.
(e) Financial assets measured at fair value through other comprehensive income
Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair value through other comprehensive income ('FVOCI'). These comprise primarily debt securities. They are recognised on the trade date when the group enters into contractual arrangements to purchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income statement as 'Gains less losses from financial instruments'. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in profit or loss.
(f) Derivatives
Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.
Where the derivatives are managed with debt securities issued by the group that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.
Hedge accounting
When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses these derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges or cash flow hedges as appropriate to the risk being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is
discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments is recognised in other comprehensive income and the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income statement within 'Net income from financial instruments held for trading or managed on a fair value basis'. The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.
(g) Impairment of amortised cost and FVOCI financial assets
Expected credit losses ('ECL') are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months, or less, where the remaining life is less than 12 months ('12-month ECL'). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where 12-month ECL is recognised are considered to be 'stage 1'; financial assets which are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in 'stage 3'. Purchased or originated credit-impaired financial assets ('POCI') are treated differently, as set out below.
Credit impaired (stage 3)
The group determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and
-- the loan is otherwise considered to be in default.
If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired.
Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL allowance.
Write-off
Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Renegotiation
Loans are identified as renegotiated and classified as credit impaired when we modify the contractual payment terms due to significant credit distress of the borrower. Renegotiated loans remain classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity or derecognition.
A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms or if the terms of an existing agreement are modified such that the renegotiated loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances are considered to be POCI and will continue to be disclosed as renegotiated loans.
Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any evidence of being credit impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows over the minimum observation period, and there are no other indicators of impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.
Loan modifications that are not credit impaired
Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that the group's rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at
market rates and no payment-related concession has been provided.
Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or
implicitly compares the risk of default occurring at the reporting date with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale. However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and included on a watch or worry list, are included in stage 2.
For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default ('PD'), which encompasses a wide range of information including the obligor's customer risk rating ('CRR'), macroeconomic condition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure of significance varies depending on the credit quality at origination as follows:
0.1-1.2 15bps 2.1-3.3 30 bps -------- -------
For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates.
For loans originated prior to the implementation of IFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle ('TTC') PDs and TTC migration probabilities, consistent with the instrument's underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional
CRR deterioration-based thresholds, as set out in the table below:
0.1 5 notches 1.1-4.2 4 notches 4.3-5.1 3 notches 5.2-7.1 2 notches 7.2-8.2 1 notch 8.3 0 notch -------- ----------
Further information about the 23-grade scale used for CRR can be found on page 25 - Risk rating scales.
For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.
For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporates all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies loans with a PD higher than would be expected from loans that are performing as originally expected, and higher than what would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.
Unimpaired and without significant increase in credit risk (stage 1)
ECL resulting from default events that are possible within the next 12 months ('12-month ECL') are recognised for financial instruments that remain in stage 1.
Purchased or originated credit impaired
Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes the recognition of a new financial instrument following a renegotiation where concessions have been granted for economic or contractual reasons relating to the borrower's financial difficulty that otherwise would not have been considered. The amount of change-in-lifetime ECL is recognised in profit or loss until the POCI is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.
Movement between stages
Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are
transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are not POCI will continue to be in stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that are assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and probability-weighted, and incorporate all available information that is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.
In general, the group calculates ECL using three main components: a probability of default, a loss given default ('LGD') and the exposure at default ('EAD').
The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively.
The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money.
The group leverages the Basel II IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the following table:
PD Through the cycle (represents Point in time (based on current
long-run average PD throughout conditions, adjusted to take
a full economic cycle). into account estimates of future
conditions that will impact PD).
The definition of default includes
a backstop of 90+ days past due, Default backstop of 90+ days
although this has been modified past due for all portfolios.
to 180+ days past due for some
portfolios, particularly UK and
US mortgages.
EAD Cannot be lower than current Amortisation captured for term
balance products
LGD Downturn LGD (consistent losses Expected LGD (based on estimate
expected to be suffered during of loss given default including
a severe but plausible economic the expected impact of future
downturn). economic conditions such as changes
in value of collateral).
Regulatory floors may apply to
mitigate risk of underestimating No floors.
downturn LGD due to lack of historical
data. Discounted using the original
effective interest rate of the
Discounted using cost of capital. loan.
All collection costs included. Only costs associated with obtaining/selling
collateral included.
------ ---------------------------------------- ----------------------------------------------
Discounted back from point of
Other default to balance sheet date.
------ ---------------------------------------- ----------------------------------------------
While 12-month PDs are recalibrated from Basel II models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life.
The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on the credit risk officer's estimates as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on the estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by the group and the judgement of the credit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to the most likely outcome.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which the group is exposed to credit risk. For wholesale overdrafts, credit risk management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of the next substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility. However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit the group's exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period the group remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
Forward-looking economic inputs
The group applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of our view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in
most economic environments. In certain economic environments, additional analysis and may be necessary and result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 31.
Critical accounting estimates and judgements
The calculation of the group's ECL under IFRS 9 requires the Group
to make a number of judgements, assumptions and estimates. The most
significant are set out below:
* Defining what is considered to be a significant * The sections marked as audited on pages 31 to 34,
increase in credit risk. 'Measurement uncertainty and sensitivity analysis of
ECL estimates' set out the assumptions used in
determining ECL and provide an indication of the
* Determining the lifetime and point of initial sensitivity of the result to the application of
recognition of overdrafts and credit cards. different weightings being applied to different
economic assumptions.
* Selecting and calibrating the PD, LGD and EAD mode
ls,
which support the calculations, including making
reasonable and supportable judgements about how
models react to current and future economic
conditions.
* Selecting model inputs and economic forecasts,
including determining whether sufficient and
appropriately weighted economic forecasts are
incorporated to calculate unbiased expected loss.
========================================================= ===========================================================
(h) Employee compensation and benefits
Share-based payments
The group enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for the provision of their services.
The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement. Expenses are recognised when the employee starts to render service to which the award relates.
Cancellations result from the failure to meet a non-vesting condition during the vesting period, and are treated as an acceleration of vesting recognised immediately in the income statement. Failure to meet a vesting condition by the employee is not treated as a cancellation, and the amount of expense recognised for the award is adjusted to reflect the number of awards expected to vest.
Post-employment benefit plans
The group operates a pension plan which provides defined benefit and defined contribution pensions.
Payments to defined contribution schemes are charged as an expense as the employees render service.
Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.
Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.
The cost of obligations arising from other post-employment plans are accounted for on the same basis as defined benefit pension plans.
Critical accounting estimates and judgements
The most significant critical accounting judgements and estimates relate
to the determination of key assumptions applied in calculating the
defined benefit pension obligation.
* A range of assumptions could be applied, and
different assumptions could significantly alter the
defined benefit obligation and the amounts recognised
in profit or loss or OCI.
* The calculation of the defined benefit pension
obligation includes assumptions with regard to the
discount rate, inflation rate, pension payments and
deferred pensions, pay and mortality. Management
determines these assumptions in consultation with the
plan's actuaries.
* Key assumptions used in calculating the defined
benefit pension obligation and the sensitivity of the
calculation to different assumptions are described in
Note 3
=========================================================================
(i) Tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same statement in which the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods as the assets will be realised or the liabilities settled.
Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.
(j) Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.
Critical accounting estimates and judgements
The recognition and measurement of provisions requires the group to
make a number of judgements, assumptions and estimates. The most significant
are set out below:
* Determining whether a present obligation exists. * Provisions for legal proceedings and regulatory
Professional advice is taken on the assessment of matters remain very sensitive to the assumptions used
litigation and similar obligations. in the estimate. There could be a wider range of
possible outcomes for any pending legal proceedings,
investigations or inquiries. As a result it is often
* Provisions for legal proceedings and regulatory not practicable to quantify a range of possible
matters typically require a higher degree of outcomes for individual matters. It is also not
judgement than other types of provisions. When practicable to meaningfully quantify ranges of
matters are at an early stage, accounting judgements potential outcomes in aggregate for these types of
can be difficult because of the high degree of provisions because of the diverse nature and
uncertainty associated with determining whether a circumstances of such matters and the wide range of
present obligation exists, and estimating the uncertainties involved.
probability and amount of any outflows that may
arise. As matters progress, management and legal
advisers evaluate on an ongoing basis whether * Provisions for customer remediation also require
provisions should be recognised, revising previous significant levels of estimation. The amounts of
estimates as appropriate. At more advanced stages, it provisions recognised depend on a number of different
is typically easier to make estimates around a better assumptions, such as the volume of inbound complaints
defined set of possible outcomes. ,
the projected period of inbound complaint volumes,
the decay rate of complaint volumes, the populations
identified as systemically mis-sold and the number of
policies per customer complaint. More information
about these assumptions is included in Note 19.
============================================================ ============================================================
Contingent liabilities, contractual commitments and guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to legal proceedings or regulatory matters, are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable.
2 Net fee income
---------------
Year ended
31 Dec 31 Dec
2019 2018
Net fee income by product GBPm GBPm
-------------------------------------- ------
Account services 583 362
-------------------------------------- ----- -----
Funds under management 88 46
----- -----
Cards 281 145
----- -----
Credit facilities 103 72
-------------------------------------- ----- -----
Imports/exports 49 21
-------------------------------------- ----- -----
Insurance agency commission 47 27
-------------------------------------- ----- -----
Receivables finance 85 37
-------------------------------------- ----- -----
Other 220 121
-------------------------------------- ----- -----
Fee income 1,456 831
-------------------------------------- ----- -----
Less: fee expense (226) (183)
-------------------------------------- ----- -----
Net fee income 1,230 648
-------------------------------------- ----- -----
Net fee income by global business
-------------------------------------- ------ --------
Retail Banking and Wealth Management 660 341
-------------------------------------- ----- -----
Commercial Banking 725 378
-------------------------------------- ----- -----
Global Banking and Markets (180) (98)
-------------------------------------- ----- -----
Private Banking 35 12 -------------------------------------- ----- ----- Corporate Centre (10) 15 -------------------------------------- ----- -----
Net fee income includes GBP1,125m of fees earned on financial assets that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate) (2018: GBP636m), GBP174m of fees payable on financial liabilities that are not at fair value through profit of loss (other than amounts included in determining the effective interest rate) (2018: GBP117m), GBP69m of fees earned on trust and other fiduciary activities (2018: GBP50m) and Nil fees payable relating to trust and other fiduciary activities (2018: GBP2m).
3 Employee compensation and benefits
-----------------------------------
2019 2018
GBPm GBPm
----------------------------- ---- ------
Wages and salaries 887 400
--- ----
Social security costs 89 44
--- ----
Post-employment benefits(1) (42) 167
--- ----
Year ended 31 Dec 934 611
----------------------------- --- ----
1 Includes a GBP187m past service cost in respect of GMP equalisation in 2018.
Average number of persons employed by the group during the year
2019 2018 (1)
-------------------------------------------------- -------- ----------
Retail Banking and Wealth Management 17,356 8,739
-------- --------
Commercial Banking 5,058 2,424
-------- --------
Global Banking and Markets 54 26
-------- --------
Private Banking 294 137
-------- --------
Corporate Centre 273 151
-------- --------
Year ended 31 Dec 23,035 11,477
-------------------------------------------------- -------- --------
1 In October 2017, 21,571 employees were transferred from HSBC Bank plc to the group, and were seconded back to HSBC Bank plc until 30 June 2018. Numbers exclude staff seconded to HSBC Bank plc until 30 June 2018.
Share-based payments
The share-based payment income statement charge is recognised in wages and salaries as follows:
2019 2018
GBPm GBPm
------------------------------------------------------ ------- ---------
Restricted share awards 6 -
-------
Savings-related and other share award option plans 10 7
------- -------
Year ended 31 Dec 16 7
------------------------------------------------------ ------- -------
HSBC Group share awards
Deferred share
awards (including * An assessment of performance over the relevant period
annual incentive ending on 31 December is used to determine the amount
awards, LTI awards of the award to be granted.
delivered in
shares) and GPSP
* Deferred awards generally require employees to remain
in employment over the vesting period and are not
subject to performance conditions after the grant
date.
* Deferred share awards generally vest over a period of
three, five or seven years.
* Vested shares may be subject to a retention
requirement post-vesting. GPSP awards are retained
until cessation of employment.
* Awards granted from 2010 onwards are subject to a
malus provision prior to vesting.
* Awards granted to Market Risk Takers from 2015
onwards are subject to clawback post vesting.
-------------------- -------------------------------------------------------------
International
Employee Share * The plan was first introduced in Hong Kong in 2013
Purchase Plan and now includes employees based in 27 jurisdictions.
('ShareMatch')
* Shares are purchased in the market each quarter up to
a maximum value of GBP750, or the equivalent in local
currency.
* Matching awards are added at a ratio of one free
share for every three purchased.
* Matching awards vest subject to continued employment
and the retention of the purchased shares for a
maximum period of two years and nine months.
-------------------- -------------------------------------------------------------
Movement on HSBC share awards
2019 2018
Number Number
(000s) (000s)
---------------------------------------------------------- ------ --------
Restricted share awards outstanding at 1 Jan 999 -
----- -----
Transfer from HSBC Bank plc and other Group subsidiaries N/A 1,126
---------------------------------------------------------- ------ -----
Additions during the year 1,156 20
----- -----
Released in the year (831) (143)
----- -----
Forfeited in the year (36) (4)
----- -----
Restricted share awards outstanding at 31 Dec 1,288 999
---------------------------------------------------------- ----- -----
Weighted average fair value of awards granted (GBP) 5.98 1.33
---------------------------------------------------------- ----- -----
HSBC Group share option plans
Savings-related
share option * Eligible employees can save up to GBP500 per month
plans ('Sharesave') with the option to use the savings to acquire shares.
* Exercisable within six months following either the
third or fifth anniversary of the commencement of a
three-year or five-year contract, respectively.
* The exercise price is set at a 20% (2018: 20%)
discount to the market value immediately preceding
the date of invitation.
--------------------- -------------------------------------------------------------
Calculation of fair values
The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant.
Movement on HSBC Group share option plans
Savings-related
share option
plans
Number WAEP(1)
(000s) GBP
-----------------------------------------------------
Outstanding at 1 Jan 2019 24,463 4.97
--------- -------
Granted during the year 14,125 4.69
--------- -------
Exercised during the year (5,152) 4.43
--------- -------
Expired during the year (37) 4.24
--------- -------
Forfeited during the year (4,929) 5.45
----------------------------------------------------- --------- -------
Outstanding at 31 Dec 2019 28,470 4.84
----------------------------------------------------- --------- -------
Of which exercisable 891 4.53
----------------------------------------------------- --------- -------
Weighted average remaining contractual life (years) 2.78
----------------------------------------------------- --------- ---------
Outstanding at 1 Jan 2018 - 0.00
Transfer from HSBC Bank plc and other Group subsidiaries 27,064 4.51
Granted during the year 8,803 5.45
Exercised during the year (10,294) 4.15
Expired during the year (879) 5.37
----------------------------------------------------------
Forfeited during the year (231) 4.70
------- ----
Outstanding at 31 Dec 2018 24,463 4.97
---------------------------------------------------------- ------- ----
Of which exercisable 1,218 4.10
---------------------------------------------------------- -------
Weighted average remaining contractual life (years) 2.59
---------------------------------------------------------- ------- ------
1 Weighted average exercise price.
Post-employment benefit plans
We operate a pension plan for our employees called the HSBC Bank (UK) Pension Scheme ('the plan'), which has both defined benefit and defined contribution sections. To meet the requirements of the Banking Reform Act, from 1 July 2018, the main employer of the plan changed from HSBC Bank plc to HSBC UK Bank plc, with additional support from HSBC Holdings plc. At that time, the non-ring fenced entities including HSBC Bank plc exited the section of the plan for ring-fenced entities (the 'HSBC UK section') and joined a newly created section for the future defined benefit and defined contribution pension benefits of their employees.
The Pension Risk section on page 46 contains details about the policies and practices associated with the plan.
The defined benefit section was closed to future benefit accrual in 2015, with Group defined benefits earned by employees at that date continuing to be linked to their salary while they remain employed by HSBC. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the operation of the plan. Its assets are held separately from the assets of the group.
The investment strategy of the plan is to hold the majority of assets in bonds, with the remainder in a diverse range of investments. It also includes some interest rate swaps to reduce interest rate risk and inflation swaps to reduce inflation risk.
The latest funding valuation of the plan at 31 December 2016 was carried out by Colin G Singer, at Willis Towers Watson Limited, who is a Fellow of the UK Institute and Faculty of Actuaries, using the projected unit credit method. At that date, the market value of the plan's assets was GBP28.8bn and this exceeded the value placed on its liabilities on an ongoing basis by GBP1.4bn, giving a funding level of 105%. These figures relate only to the HSBC UK section of the plan and include defined contribution assets amounting to GBP2.0bn. The main differences between the assumptions used for assessing the liabilities for this funding valuation and those used for IAS 19 are more prudent assumptions for discount rate, inflation rate and life expectancy. The next funding valuation will have an effective date of
31 December 2019.
Although the plan was in surplus at the valuation date, further contributions will be made to the plan to support a lower-risk investment strategy over the longer term. The remaining contributions are GBP160m in each of 2020 and 2021.
The actuary also assessed the value of the liabilities the HSBC UK section of the plan were to be stopped and an insurance company asked to secure all future pension payments. This is generally larger than the amount needed on the ongoing basis described above because an insurance company would use more prudent assumptions and include an explicit allowance for the future administrative expenses of the plan. Under this approach, the amount of assets needed was estimated to be GBP37bn at 31 December 2016.
The Trust Deed gives the ability for HSBC UK to take a refund of surplus assets after the plan has been run down such that no further beneficiaries remain. On this basis, any net surplus in the HSBC UK section of the plan is recognised in the group's financial statements.
Guaranteed Minimum Pension Equalisation
Following a judgement issued by the High Court of Justice of England and Wales in 2018, we estimated the financial effect of equalising benefits in respect of guaranteed minimum pensions ('GMP') equalisation, and any potential conversion of GMPs into non-GMP benefits, to be an approximate 0.9% increase in the plan's liabilities, or GBP187m. This was recognised in the Income Statement in 2018. We continue to assess the impact of GMP equalisation, however no further amounts have been recognised in 2019.
Income statement charge
2019 2018
GBPm GBPm
------------------------------------ ----- ------
Defined benefit pension plans(1) (115) 122
----
Defined contribution pension plans 73 44
------------------------------------ ----
Pension plans (42) 166
------------------------------------ ---- ----
Year ended 31 Dec (42) 166
------------------------------------ ---- ----
1 Includes a GBP187m past service cost in respect of GMP equalisation in 2018.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value Net defined
of plan Present value of benefit
assets defined benefit obligations assets/(liabilities)
GBPm GBPm GBPm
---------------------------------------------
At 1 Jan 2019 26,687 (20,846) 5,841
--------- ------------------------- ------------------ ---
Service cost - (26) (26)
--------------------------------------------- --------- ------------------------- ------------------
Current service cost - (7) (7)
---------------------------------------------
Past service cost and gains/(losses) from
settlements - (19) (19)
--------- ------------------------- ------------------
Net interest income/(cost) on the net
defined benefit asset/(liability) 736 (571) 165
--------------------------------------------- --------- ------------------------- ------------------ ---
Remeasurement effects recognised in other
comprehensive income 1,729 (1,998) (269)
---------------------------------------------
- return on plan assets (excluding interest
income) 1,729 - 1,729
- actuarial losses - (2,392) (2,392)
- other changes 394 394
---------- ------------------------- --- ------------------ ---
Exchange differences 195 (162) 33
---------------------------------------------
Benefits paid (795) 795 -
--------------------------------------------- --------- ------------------------- --- ------------------ ---
Other movements(1) 95 (3) 92
--------------------------------------------- --------- ------------------------- ------------------ ---
At 31 Dec 2019 28,647 (22,811) 5,836
--------------------------------------------- --------- ------------------------- ------------------ ---
At 1 Jan 2018 - - -
Transfer in from HSBC Bank plc on 1 July
2018 26,948 (20,580) 6,368
Service cost - (189) (189)
Current service cost - (2) (2)
Past service cost and gains/(losses) from
settlements - (187) (187)
Net interest income/(cost) on the net
defined benefit asset/(liability) 358 (279) 79
--------------------------------------------- ------ ------- -----
Remeasurement effects recognised in other
comprehensive income (279) (206) (485)
- return on plan assets (excluding interest
income) (279) - (279)
- actuarial losses - (186) (186)
- other changes - (20) (20)
------ ------- -----
Exchange differences - - -
Benefits paid (405) 405 -
Other movements(1) 65 3 68
At 31 Dec 2018 26,687 (20,846) 5,841
--------------------------------------------- ------ ------- -----
1 Other movements include contributions by HSBC UK, contributions by employees, administrative costs and taxes paid by plan.
HSBC UK expects to make GBP160m of contributions to defined benefit pension plans during 2020. Benefits expected to be paid from the HSBC UK Pension Scheme to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:
Benefits expected to be paid from plan
2020 2021 2022 2023 2024 2025-2029
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------ ------ ------ ------ ------ -----------
The plan(1) 818 842 866 891 917 5,000
----------------------------- ------ ------ ------ ------ ------ ---------
1 The duration of the defined benefit obligation is 18.1 years under the disclosure assumptions adopted (2018:17.0 years).
Fair value of plan assets by asset classes
------ -------------- ---------------
31 Dec 2019 31 Dec 2018
No quoted No quoted
Quoted market market price Quoted market market price
price in in active price in in active
Value active market market Value active market market
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ -------- -------------- ------------- ------ -------------- ---------------
The plan
------------------------ -------- -------------- ------------- ------ -------------- ---------------
Fair value of plan
assets 28,647 25,658 2,989 26,687 23,710 2,977
------ -------------- -------------
- equities 501 236 265 2,468 2,101 367
- bonds 23,976 23,976 - 20,763 20,763 -
------------------------
- derivatives 1,551 - 1,551 1,618 - 1,618
------------------------
- other 2,619 1,446 1,173 1,838 846 992
------------------------ -------- -------------- ------------- ------ -------------- -------------
Post-employment defined benefit plan actuarial financial assumptions
The group determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA-rated or equivalent) debt instruments with maturities consistent with those of the defined benefit obligations.
Key actuarial assumptions for the plan
Rate of
Discount Inflation increase Rate of
rate rate for pensions pay increase
% % % %
-------------------- -------- --------- ------------- ---------------
UK
At 31 Dec 2019 2.00 3.10 2.90 3.65
-------------------- -------- --------- ------------- -------------
At 31 Dec 2018 2.80 3.40 3.10 3.65
-------------------- -------- --------- ------------- -------------
Mortality tables and average life expectancy at age 60 for the plan
Life expectancy Life expectancy
at age 60(3) at age 60(3)
for for
Mortality a male member a female member
table currently: currently:
Aged 60 Aged 40 Aged 60 Aged 40
-------------------- -------------- --------- --------- --------- ---------
UK
-------------------- -------------- --------- --------- --------- ---------
At 31 Dec 2019 SAPS S2(1) 28.0 29.4 28.2 29.8
--------------------- ------------- --------- --------- --------- ---------
At 31 Dec 2018 SAPS S2(2) 28.1 29.6 28.4 30.0
--------------------- ------------- --------- --------- --------- ---------
1 Self-administered pension scheme ('SAPS') S2 table (males: 'Normal Health Pensioners' version; females: 'All Pensioners' version) with a multiplier of 0.94 for males and 1.15 for females. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI') 2018 core projection model with an initial addition to improvements of 0.25% per annum and a long-term rate of improvement of 1.25% per annum. Separate tables have been applied to lower paid pensioners and dependant members.
2 Self-administered pension scheme ('SAPS') S2 table (males: 'Normal Health Pensioners' version; females: 'All Pensioners' version) with a multiplier of 0.94 for males and 1.15 for females. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI') 2017 core projection model with a long-term rate of improvement of 1.25% per annum. Separate tables have been applied to lower paid pensioners and dependant members.
3 The presentation of the mortality table has been updated to show life expectancies at the age of 60 rather than 65 as presented in prior years to better reflect market disclosure practices. The prior year data has been updated accordingly.
The effect of changes in key assumptions on the plan
Impact on HSBC Bank (UK)
Pension Scheme Obligation
Financial impact Financial impact
of increase of decrease
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
---------------------------------------------
Discount rate - increase/decrease of 0.25% (987) (844) 1,055 900
Inflation rate - increase/decrease of 0.25% 590 569 (559) (562)
Pension payments and deferred pensions -
increase/decrease of 0.25% 639 926 (776) (870)
Pay - increase/decrease of 0.25% 54 22 (55) (23)
--------------------------------------------- ------- ------- -------- ------
Change in mortality - increase of 1 year 958 771 N/A N/A
--------------------------------------------- ------- ------- ------------ ---------
Directors' emoluments
The aggregate emoluments of the Directors of the bank, computed in accordance with the Companies Act 2006 as amended by statutory instrument 2008 No.410, were:
2019 2018
GBP000 GBP000
-------------------------------------- ------ --------
Fees paid to non-executive Directors 1,793 1,262
--------------------------------------
Salaries and other emoluments(1,2) 3,459 1,366
Annual incentives(2,3) 901 495
Long-term incentives(2,4) 253 295
Year ended 31 Dec 6,406 3,418
-------------------------------------- ------ ------
1 Salaries and other emoluments include Fixed Pay Allowances.
2 During the first six months of 2018 the banks' Executive Directors provided services to other companies within the HSBC Group and their services to the bank were incidental. Therefore the Executive Directors remuneration for 2018 disclosed represents the period from 1 July to 31 December 2018.
3 Discretionary annual incentives for the Executive Directors are based on a combination of individual and corporate performance and are determined by the Remuneration Committee of the bank's ultimate parent company, HSBC Holdings plc. Incentive awards made to Executive Directors are delivered in the form of cash and HSBC Holdings plc shares. The total amount shown is comprised of GBP450,576 (2018: GBP247,275) in cash and GBP450,576 (2018: GBP247,275) in Restricted Shares, which is the upfront portion of the annual incentive granted in respect of performance year 2019.
4 The amount shown is comprised of GBP125,505 (2018: GBP120,000) in deferred cash and GBP127,395 (2018: GBP175,358) in deferred Restricted Shares. These amounts relate to the portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2019. The total deferral period of deferred cash and share awards is no less than 5 years up to a maximum of 7 years. Grants with a 5 year deferral vest in 5 equal tranches on each anniversary of the grant date on a pro-rate basis. Grants with a 7 year deferral vest in 5 equal tranches on each anniversary from the 3rd anniversary of the grant date on a pro-rata basis.. The deferral periods and pro-rata calculations are in line with the requirements set out in the Remuneration rules applicable to Material Risk Takers. The share awards are subject to a retention period of 6 months to 1 year upon vesting. Details of the Plans are contained within the Directors' Remuneration Report of HSBC Holdings plc.
No Directors exercised share options over HSBC Holdings plc ordinary shares during the year (2018: 1).
Awards were made to three Directors under long-term incentive plans in respect of qualifying services rendered in 2019 (2018: 3). During 2019, three Directors received shares in respect of awards under long-term incentive plans that vested during the year (2018: 3).
No retirement benefits accrued to Directors during the year in respect of their qualifying services (2018: no Directors). Three Directors received cash in lieu of pension contributions during the year in respect of their qualifying services. Cash received in lieu of pension is included in the salary and other emoluments disclosure in the table above.
Of these aggregate figures, the following amounts are attributable to the highest paid Director:
2019 2018
GBP000 GBP000
---------------------------------- ------ --------
Salaries and other emoluments(3) 2,104 776
Annual incentives(1,3) 503 274
Long-term incentives(2,3) 124 176
Year ended 31 Dec 2,731 1,226
---------------------------------- ------ ------
1 Awards made to the highest paid Director are delivered in the form of cash and HSBC Holdings plc shares. The amount shown is comprised of GBP251,721 (2018: GBP136,805) in cash and GBP251,721(2018: GBP136,805) in Restricted Shares.
2 The amount shown is comprised of GBP60,472 (2018: GBP66,575) in deferred cash and GBP63,902 (2018: GBP109,145) in deferred Restricted Shares. These amounts relate to a portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2019. The total deferral period of deferred cash and share awards is 7 years with the deferred awards subject to pro-rata vesting in five equal tranches between the third and seventh anniversary of grant. The share awards are subject to a one year retention period upon vesting.
3 During the first six months of 2018 the bank's Executive Directors provided services to other companies within the HSBC Group and their services to the bank were incidental. Therefore the Executive Directors remuneration disclosed represents the period from 1 July to 31 December 2018.
The highest paid Director received shares in respect of qualifying services under a long-term incentive scheme.
Pension contributions of GBPnil were made by the bank in respect of services by the highest paid Director during the year (2018: GBPnil).
4 Auditors' remuneration
-----------------------
2019 2018
GBPm GBPm
Audit fees payable to PwC 5.1 4.3
Other audit fees payable 1.8 0.7
---------------------------
Year ended 31 Dec 6.9 5.0
--------------------------- ---- ----
Fees payable by the group to PwC
2019 2018
GBPm GBPm
------------------------------------------------------ ---- ------
Audit fees for HSBC UK Bank plc's statutory audit(1) 4.0 3.6
----
Fees for other services provided to the group 2.9 1.4
----
- audit of the group's subsidiaries(2) 1.1 0.7
------------------------------------------------------
- audit-related assurance services(3) 1.8 0.7
------------------------------------------------------ ----
Year ended 31 Dec 6.9 5.0
------------------------------------------------------ ---- ----
1 Fees payable to PwC for the statutory audit of the consolidated financial statements of the group and the separate financial statements of HSBC UK Bank plc. They exclude amounts payable for the statutory audit of the bank's subsidiaries which have been included in 'Fees for other services provided to the group'.
2 Including fees payable to PwC for the statutory audit of the bank's subsidiaries.
3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim and quarter reviews.
No fees were payable to PwC as principal auditor for the following types of services: internal audit services and services related to litigation, recruitment and remuneration.
Fees payable for non-audit services for HSBC UK Bank plc are not disclosed separately because such fees are disclosed on a consolidated basis for the group.
5 Tax
----
Tax expense
2019 2018
GBPm GBPm
----------------------------------------------------- ---- ------
Current tax 429 321
- for this year 452 323
- adjustments in respect of prior years (23) (2)
--- ---
Deferred tax 65 (20)
- origination and reversal of temporary differences 71 (21)
-----------------------------------------------------
- effect of changes in tax rates (4) 2
-----------------------------------------------------
- adjustments in respect of prior years (2) (1)
----------------------------------------------------- --- ---
Year ended 31 Dec 494 301
----------------------------------------------------- --- ---
The tax rate applying to HSBC UK Bank plc and its banking subsidiaries was 27%, comprising 19% UK corporation tax rate plus 8% surcharge tax rate on UK banking profits. The tax rate applicable for non-banking entities is 19% (2018: 19%).
Tax reconciliation
The tax charged to the income statement differs from the tax expense that would apply if all profits had been taxed at the UK corporation tax rate as follows:
2019 2018
GBPm % GBPm %
Profit before tax 1,010 1,064
Tax expense
Taxation at UK corporation tax of 19.00%
(2018: 19.00%) 192 19.0 202 19.0
Items increasing the tax charge in 2019:
* non-deductible UK customer redress 301 29.8 15 1.3
* UK banking surcharge 73 7.2 80 7.6
Items reducing tax charge in 2019:
* deductions for AT1 coupon payments (36) (3.6) - -
* adjustments in respect of prior period liabilities (25) (2.4) (3) (0.2)
* other permanent disallowables (7) (0.7) 5 0.5
* change in tax rates (4) (0.4) 2 0.1
Year ended 31 Dec 494 48.9 301 28.3
----------------------------------------------------------- ----- ---- ----- ----
The effective tax rate for the year was 48.9% (2018: 28.3%), reflecting the UK rate of corporation tax for banking entities of 27% (2018: 27%), the tax impact of non-deductible redress provisions of GBP301m (2018: GBP15m) offset by the tax impact of deductions for additional tier 1 coupon payments of GBP36m recognised in the income statement tax charge, following a change to IAS 12 effective from 1 January 2019. 2018 was not restated for this change.
Redress provisions associated with PPI and certain other customer redress are not deductible for tax in the UK and, additionally, give rise to an increase in taxable profit equal to 10% of the redress incurred.
Movement of deferred tax assets and liabilities
Loan Defined Fixed
impairment Cash flow FVOCI benefit and intangible
provisions hedges reserves pension assets Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- ----------- -------- ----------------- ----- ---------
The group
--------------------- ------------- ----------- ----------- -------- ----------------- ----- ---------
At 1 Jan 2019 147 16 (4) (1,460) 99 13 (1,189)
--------------------- --------- ------- ------ ------- ---------- ----- ---- ------
Income statement (17) - - (41) (1) (6) (65)
--------- ------- ------ --- ------- ---------- ---- ---- ------
Other comprehensive
income - (12) 1 42 - 31
------ --- ------- ---------- ----- ----- ------
At 31 Dec 2019 130 4 (3) (1,459) 98 7 (1,223)
Assets 130 4 - - 98 7 239
--------------------- --------- ------- ------ --- ------- ---------- ----- ---- ------
Liabilities - - (3) (1,459) - - (1,462)
--------------------- --------- ------- ------ ------- ---------- ----- ---- ------
At 1 Jan 2018 - - - - - - -
--------------------------- --- ------ ------
Transfer from HSBC Bank
plc and its subsidiaries 156 10 (1) (1,592) 87 6 (1,334)
--------------------------- ------ ------
Income statement (9) - - 11 12 7 21
------ ------
Other comprehensive
income - 6 (3) 121 - - 124
------ ------
At 31 Dec 2018 147 16 (4) (1,460) 99 13 (1,189)
Assets 147 16 - - 99 13 275
--------------------------- --- ------ ------
Liabilities - - (4) (1,460) - - (1,464)
--------------------------- --- ------ ------
Movement of deferred tax assets and liabilities
Loan Defined Fixed
impairment Cash flow FVOCI benefit and intangible
provisions hedges reserves pension assets Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
The bank
At 1 Jan 2019 137 16 (4) (1,460) 81 6 (1,224)
Income statement (16) - - (41) (1) (4) (62)
Other comprehensive
income - (12) 1 42 - - 31
At 31 Dec 2019 121 4 (3) (1,459) 80 2 (1,255)
--------------------- --------- ------- ------ ------- ---------- ----- ---- ------
Assets 121 4 - - 80 2 207
Liabilities - - (3) (1,459) - - (1,462)
--------------------- --------- ------- ------ ------- ---------- ----- ---- ------
At 1 Jan 2018 - - - - - - -
------------------------- --- ------ ------
Transfer from HSBC Bank
plc 145 10 (1) (1,592) 70 -(1,368)
--- ------ ------
Income statement (8) - - 11 11 6 20
--- ------ ------
Other comprehensive
income - 6 (3) 121 - - 124
------------------------- --- ------ ------
At 31 Dec 2018 137 16 (4) (1,460) 81 6(1,224)
------------------------- --- ------ ------
Assets 137 16 - - 81 6 240
-------------------------
Liabilities - - (4) (1,460) - -(1,464)
------------------------- --- ------ ------
Based on the enacted law at 31 December 2019, the UK corporation tax rate is due to reduce from 19% to 17% on 1 April 2020. The Conservative Party (now in Government) has indicated its intention to reverse this rate reduction as part of the UK Budget on 11 March 2020, which, if enacted, will result in a GBP98m increase to the group's (GBP100m increase to the bank's) net deferred tax liability, as at 31 December 2019.
6 Dividends
----------
Dividends to the shareholder of the parent company
------- ------
2019 2018
GBP per GBP per
share GBPm share GBPm
------- ---- ------- ------
Dividends paid on ordinary shares
------- ---- ------- ------
Interim dividend in respect of the
previous year 4,000 200 - -
------------------------------------------- ---- ------- ----
Interim dividend in respect of the
current year 2,400 120 - -
------------------------------------------- ------- ---- ------- ----
Total 6,400 320 - -
------------------------------------------- ------- ---- ------- ----
On 13 February 2020, the Directors declared an interim dividend to the ordinary shareholder of GBP100m in respect of the financial year ending 31 December 2019 which will be payable on 19 March 2020. No liability is recognised in the financial statements in respect of this dividend.
Total coupons on capital securities classified as equity
2019 2018
First call
date GBPm GBPm
Undated Subordinated Additional Tier 1 instruments
- GBP1,096m Dec 2019 65 -
----
- GBP1,100m Dec 2024 66 -
---------------------------------------------------- ------------ ---- ----
Total 131 -
------------------------------------------------------------------ ---- ----
7 Fair values of financial instruments carried at fair value
-----------------------------------------------------------
Control framework
Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk taker.
Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is used.
For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.
Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:
-- Level 1 - valuation technique using quoted market price: financial instruments with quoted prices for identical instruments in active markets that can be accessed at the measurement date.
-- Level 2 - valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.
-- Level 3 - valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.
Financial instruments carried at fair value and bases of valuation
2019 2018
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Recurring fair value measurements
at 31 Dec
------------------------------------ ------ ----- ----- ------ ------ ----- ----- --------
Assets
------------------------------------ ------ ----- ----- ------ ------ ----- ----- --------
Financial assets designated
and otherwise mandatorily
measured at fair value
through profit or loss 65 1 - 66 34 1 - 35
------------------------------------
Derivatives 2 119 - 121 2 64 - 66
------------------------------------ ------ ----- ----- ------
Financial investments 19,285 452 - 19,737 12,613 590 - 13,203
------ ----- ----- ------
Liabilities
------------------------------------ ------ ----- ----- ------ ------ ----- ----- --------
Derivatives 4 197 - 201 1 345 - 346
------------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
The bank
------ --- ------
Recurring fair value measurements
at 31 Dec
----------------------------------- ------ --- ------ ------ --- --------
Assets
----------------------------------- ------ --- ------ ------ --- --------
Financial assets designated
and otherwise mandatorily
measured at fair value
through profit or loss 65 1 - 66 34 1 - 35
-----------------------------------
Derivatives 2 116 - 118 2 59 - 61
----------------------------------- ------ --- ------
Financial investments 19,285 452 -19,737 12,613 590 -13,203
Liabilities
----------------------------------- ------ --- ------ ------ --- --------
Derivatives 3 194 - 197 1 340 - 341
----------------------------------- ------ --- ------ ------ --- ------
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency. There were no transfers between Level 1 and Level 2 during 2019 and 2018.
Fair value adjustments
Fair value adjustments are adopted when the group determines there are additional factors considered by market participants that are not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement, such as when models are enhanced and therefore fair value adjustments may no longer be required.
8 Fair values of financial instruments not carried at fair value
---------------------------------------------------------------
Fair values of financial instruments not carried at fair value and
bases of valuation
Fair value
Significant
Quoted market Observable unobservable
Carrying price Level inputs Level inputs Level
amount 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm
The group
At 31 Dec 2019
Assets
Loans and advances to
banks 1,389 - 1,389 - 1,389
------------- ------------- -------
Loans and advances to
customers 183,056 - 531 183,744 184,275
------------------------------------ -------- ------------- ------------- -------
Reverse repurchase agreements
- non-trading 3,014 - 3,014 - 3,014
------------------------------------ -------- ------------- ------------- ------------- -------
Liabilities
Deposits by banks 529 - 529 - 529
------------------------------------ ------------- ------------- -------
Customer accounts 216,214 - 216,214 - 216,214
------------------------------------ ------------- ------------- -------
Repurchase agreements
- non-trading 98 - 98 - 98
------------------------------------ ------------- ------------- -------
Debt securities in issue 3,142 - 3,142 - 3,142
------------------------------------ ------------- ------------- -------
Subordinated liabilities 9,533 - 10,094 - 10,094
------------------------------------ -------- ------------- ------------- ------------- -------
At 31 Dec 2018
------------------------------------ -------- ------------- ------------- ------------- ---------
Assets
Loans and advances to
banks 1,263 - 1,263 - 1,263
------------------------------------
Loans and advances to
customers 174,807 - 631 176,229 176,860
------------------------------------
Reverse repurchase agreements
- non-trading 3,422 - 3,422 - 3,422
------------------------------------ -------- ------------- ------------- ------------- -------
Liabilities
Deposits by banks 1,027 - 1,027 - 1,027
------------------------------------
Customer accounts 204,837 - 204,818 - 204,818
------------------------------------
Repurchase agreements
- non-trading 639 - 639 - 639
------------------------------------
Debt securities in issue - - - - -
------------------------------------
Subordinated liabilities 4,937 - 5,040 - 5,040
------------------------------------ -------- ------------- ------------- ------------- -------
The bank
At 31 Dec 2019
-------------------------------
Assets
Loans and advances to
banks 4,643 - 4,643 - 4,643
------- ------- -------
Loans and advances to
customers 173,901 - 531 174,480 175,011
------------------------------- ------- ------- -------
Reverse repurchase agreements
- non-trading 3,014 - 3,014 - 3,014
------------------------------- ------- ------- ------- -------
Liabilities
Deposits by banks 4,277 - 4,277 - 4,277
------------------------------- ------- ------- -------
Customer accounts 207,830 -207,830 - 207,830
------------------------------- ------- ------- -------
Repurchase agreements
- non-trading 98 - 98 - 98
------------------------------- ------- ------- -------
Debt securities in issue 2,917 - 2,917 - 2,917
------------------------------- ------- ------- -------
Subordinated liabilities 9,454 - 10,015 - 10,015
------------------------------- ------- ------- ------- -------
At 31 Dec 2018
------------------------------- ------- ------- ------- ---------
Assets
Loans and advances to
banks 3,883 - 3,883 - 3,883
-------------------------------
Loans and advances to
customers 165,850 - 631 167,468 168,099
-------------------------------
Reverse repurchase agreements
- non-trading 3,422 - 3,422 - 3,422
------------------------------- ------- ------- ------- -------
Liabilities
Deposits by banks 4,265 - 4,265 - 4,265
-------------------------------
Customer accounts 196,858 -196,858 - 196,858
-------------------------------
Repurchase agreements
- non-trading 639 - 639 - 639
-------------------------------
Debt securities in issue - - - - -
-------------------------------
Subordinated liabilities 4,858 - 4,961 - 4,961
------------------------------- ------- ------- ------- -------
Other financial instruments not carried at fair value are typically short-term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks and items in the course of collection from and transmission to other banks, all of which are measured at amortised cost.
Valuation
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It does not reflect the economic benefits and costs that the group expects to flow from an
instrument's cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and customers, loans are segregated into portfolios of similar characteristics. Where applicable fair value is measured using quoted price for similar assets in and active market, where not applicable the fair value of the portfolios is determined using internal pricing models using external market data, and discounting future cash flows to present value.
The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.
Deposits by banks and customer accounts
The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.
Repurchase and reverse repurchase agreements - non-trading
Fair values approximate carrying amounts as balances are generally short dated.
9 Derivatives
------------
Notional contract amounts and fair values of derivatives by product
contract type held
Notional contract
amount Fair value - Assets Fair value - Liabilities
Trading Hedging Trading Hedging Total Trading Hedging Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------
Foreign exchange 7,733 803 64 2 66 65 14 79
Interest rate 9,405 20,250 340 288 628 342 353 695
Gross total fair
values 17,138 21,053 404 290 694 407 367 774
-------------------- ---------- -------- --------- ------- ----- ----------- ------- -------
Offset (Note 22) (573) (573)
-------------------- ---------- -------- --------- ------- ----- ----------- ------- -------
At 31 Dec 2019 17,138 21,053 404 290 121 407 367 201
-------------------- ---------- -------- --------- ------- ----- ----------- ------- -------
Foreign exchange 5,740 2,222 42 5 47 44 79 123
Interest rate 15,587 12,522 142 79 221 133 292 425
------------------
Gross total fair
values 21,327 14,744 184 84 268 177 371 548
------------------ ------ ------ --- ---- --- --- ----
Offset (Note 22) (202) (202)
------------------ ------ ------ --- ---- --- --- ----
At 31 Dec 2018 21,327 14,744 184 84 66 177 371 346
------------------ ------ ------ --- ---- --- --- ----
Notional contract
amount Fair value - Assets Fair value - Liabilities
Trading Hedging Trading Hedging Total Trading Hedging Total
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------
Foreign exchange 7,355 803 60 2 62 61 14 75
Interest rate 9,385 20,251 341 288 629 342 353 695
Gross total fair
values 16,740 21,054 401 290 691 403 367 770
------------------ ---------- -------- ---------- ------- ----- ------------ ------- ------
Offset (Note 22) (573) (573)
------------------ ---------- -------- ---------- ------- ----- ------------ ------- ------
At 31 Dec 2019 16,740 21,054 401 290 118 403 367 197
------------------ ---------- -------- ---------- ------- ----- ------------ ------- ------
Foreign exchange 5,189 2,222 37 5 42 38 79 117
Interest rate 15,567 12,522 142 79 221 133 293 426
Gross total fair
values 20,756 14,744 179 84 263 171 372 543
------------------ ------ ------ --- ---- --- --- ----
Offset (Note 22) (202) (202)
------------------ ------ ------ --- ---- --- --- ----
At 31 Dec 2018 20,756 14,744 179 84 61 171 372 341
------------------ ------ ------ --- ---- --- --- ----
The notional contract amounts of derivatives held for trading purposes and derivatives designated in qualifying hedge accounting indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Use of derivatives
We undertake derivative activity for two primary purposes: to create risk management solutions for clients and to manage and hedge our own risks.
Trading derivatives
Most of the group's derivative transactions relate to sales and trading activities. Sales activities include marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities principally includes risk management. Risk management activity is undertaken to manage the risks arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.
Hedge accounting derivatives
The group applies hedge accounting to manage interest rate risk and foreign exchange risk. The 'Report of the Directors Risk' presents more details on how these risks arise and how they are managed by the group.
Fair value hedges
The group enters into fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value due to movements in market interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss.
Hedging instrument by hedged risk
Hedging Instrument
Carrying amount
------------------
Change in
Notional amount(1) Assets Liabilities Balance sheet fair value(2)
Hedged risk GBPm GBPm GBPm presentation GBPm
Interest rate(3) 17,740 280 350 Derivatives 62
------------------ ------------------ ----------- ----------- ------------- --------------
At 31 Dec 2019 17,740 280 350 62
------------------ ------------------ ----------- ----------- ------------- --------------
Interest rate(3) 8,762 63 278 Derivatives (38)
------------------ ----- --- ----------- ---
At 31 Dec 2018 8,762 63 278 (38)
------------------ ----- --- ----------- ---
1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
2 Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.
3 The hedged risk 'interest rate' includes inflation risk.
Hedged item by hedged risk
Hedged item Ineffectiveness
------------------------
Accumulated fair value
hedge adjustments included
Carrying amount in carrying amount (2)
------------
Change Recognised Profit and
in fair in profit loss
Assets Liabilities Assets Liabilities value(1) and loss presentation
------------
Hedged Balance sheet
risk GBPm GBPm GBPm GBPm presentation GBPm GBPm
---------- ------------
Financial
assets
designated
and otherwise
mandatorily
measured at
fair value
through other
Interest comprehensive
rate(4) 12,289 133 income 148 4
------------
Net income
from
financial
instruments
held for
trading
or managed
Subordinated on a fair
6,292 219 Liabilities(3) (206) value basis
-------- ---------- ------------
At 31 Dec
2019 12,289 6,292 133 219 (58) 4
---------- --------- ----------- ------- ----------- -------------- -------- ---------- ------------
Financial
assets designated
and otherwise Net income
mandatorily from financial
measured at instruments
fair value held for trading
through other or managed
Interest comprehensive on a fair
rate(4) 7,161 166 income 57 (2) value basis
-----------------
Subordinated
2,033 21 Liabilities(3) (21)
--- --- -----------------
At 31 Dec
2018 7,161 2,033 166 21 36 (2)
---------- ----- ----- --- ------------------ --- -----------------
1 Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.
2 The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were liabilities of GBP26m (2018: GBP1.3m) for FVOCI.
3 The notional amount of non-dynamic fair value hedges is equal to GBP6,019m (2018: GBP2,000m), of which the weighted-average maturity date is June 2028 and the weighted average swap rate is 1.78% (2018: 1.45%). These hedges are all internal to HSBC Group and composed by internal funding between Group and HSBC UK.
4 The hedged risk 'interest rate' includes inflation risk.
The hedged item is either the benchmark interest rate risk portion within the fixed rate of the hedged item or the full fixed rate and it is hedged for changes in fair value due to changes in the benchmark interest rate risk.
Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fair value of derivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items and hedging instruments.
The disclosures for the group are materially the same as the disclosures for the bank.
Cash flow hedges
The group's cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign-currency basis.
The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuances of non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.
The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes in foreign exchange market rates with cross-currency swaps, these are considered dynamic hedges.
Hedging instrument by hedged risk
Hedged
Hedging Instrument Item Ineffectiveness
------------------------
Carrying amount Change Change Recognised
in fair in fair in profit
value(2) value(3) and loss
---------- ------------ ------------
Notional
amount(1) Assets Liabilities
Balance Profit and
Hedged sheet loss
risk GBPm GBPm GBPm presentation GBPm GBPm GBPm presentation
--------- ----------- --------- ---------- ------------
Foreign
currency 803 2 14 Derivatives 16 16 -
------------
Net income
from
financial
instruments
held for
trading or
managed on
Interest a fair value
rate 2,510 8 3 Derivatives 24 23 1 basis
---------- --------- ----------- ------------ --------- --------- ---------- ------------
At 31 Dec
2019 3,313 10 17 40 39 1
---------- ---------- --------- ----------- ------------ --------- --------- ---------- ------------
Net income
from financial
instruments
held for
trading or
managed on
a fair value
Foreign currency 2,222 5 79 Derivatives (110) (110) - basis
------------------ ---------------
Interest rate 3,760 16 14 Derivatives 2 3 (1)
----- ----------- ---- ---- ---------------
At 31 Dec 2018 5,982 21 93 (108) (107) (1)
------------------ ----- ----------- ---- ---- ---------------
1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
2 Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.
3 Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.
Sources of hedge ineffectiveness may arise from basis risk, including but not limited to timing differences between the hedged items and hedging instruments and hedges using instruments with a non-zero fair value.
During the year to 31 December 2019, a profit of GBP1m (2018: Loss of GBP1m) was recognised due to hedge ineffectiveness.
The disclosures for the group are materially the same as the disclosures for the bank.
Reconciliation of equity and analysis of other comprehensive income
by risk type
Interest Foreign
rate Currency
GBPm GBPm
-----------
Cash flow hedging reserve at 1 Jan 2019 (24) (22)
-------------------------------------------------------------
Fair value gains/(losses) 23 16
------------------------------------------------------------- ------ -------
Fair value (gains)/losses reclassified from the cash
flow hedge reserve to the income statement in respect
of:
- hedged items that have affected profit or loss (2) 9
Income taxes (12) -
Cash flow hedging reserve at 31 Dec 2019 (15) 3
------------------------------------------------------------- ------ -------
Cash flow hedging reserve at 1 Jan 2018 - -
Fair value gains/(losses) 3 (110)
-------------------------------------------------------- --- ----
Fair value (gains)/losses reclassified from the cash
flow hedge reserve to the income statement in respect
of:
- hedged items that have affected profit or loss (7) 91
Income taxes 6 -
Transfer in from HSBC Bank plc (26) (3)
-------------------------------------------------------- --- ----
Cash flow hedging reserve at 31 Dec 2018 (24) (22)
-------------------------------------------------------- --- ----
Interest Rate Benchmark Reform: Amendments to IFRS 9 and IAS 39 'Financial Instruments'
Following the request received by the Financial Stability Board from the G20, a fundamental review and reform of the major interest rate benchmarks is under way across the world's largest financial markets. This reform was not contemplated when the standard was published, and consequently the IASB has published a set of temporary exceptions from applying specific hedge accounting requirements to provide clarification on how the standard should be applied in these circumstances.
Amendments to IFRS 9 and IAS 39 were endorsed in January 2020 and modify specific hedge accounting requirements. Under these temporary exceptions, IBORs are assumed to continue for the purposes of hedge accounting until such time as the uncertainty is resolved.
The application of this set of temporary exceptions is mandatory for accounting periods starting on or after 1 January 2020, but early adoption is permitted and the group has elected to apply these exceptions for the year ended 31 December 2019. Significant judgement will be
required in determining when uncertainty is expected to be resolved and therefore when the temporary exceptions will cease to apply, however at 31 December 2019 the uncertainty exists and therefore the temporary exceptions apply to all of the group's hedge accounting relationships that reference Ibors.
The group has cash flow and fair value hedge accounting relationships that are exposed to different Ibors, predominantly US Dollar Libor, Sterling Libor, Eonia, and Euribor. Existing derivatives, loans, bonds, and other financial instruments designated in these relationships referencing Ibors will transition to new Risk-Free Rates ('RFRs') in different ways and at different times. External progress on the transition to RFRs is being monitored, with the objective of ensuring a smooth transition for the group's hedge accounting relationships. The specific issues arising will vary with the details of each hedging relationship, but may arise due to the transition of existing products included in the designation, a change in expected volumes of products to be issued, a change in contractual terms of new products issued, or a combination of these factors. Some hedges may need to be de-designated and new relationships entered into, while others may survive the transition.
The hedge accounting relationships that are affected by the adoption of the temporary exceptions hedge items presented in the Balance Sheet as 'Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income', 'Loans and advances to customers', 'Debt securities in issue', and 'Deposits by banks'.
The notional amounts of Interest Rate derivatives designated in hedge accounting relationships represent the extent of the risk exposure managed by the group that is directly affected by Ibor reform and impacted by the temporary exceptions. Although HSBC UK has designated hedge accounting relationships which involve cross currency swaps, these are not significant and have not been presented below:
Hedging instrument impacted by IBOR reform held by the group
Hedging instrument
Not impacted
by Ibor Notional
Impacted by IBOR reform reform amount(1)
EUR GBP $ Total
GBPm GBPm GBPm GBPm GBPm GBPm
Fair value
hedges 675 4,243 2,523 7,441 10,299 17,740
Cash flow hedges - 2,210 - 2,210 300 2,510
------- ------ -------------
At 31 Dec 2019 675 6,453 2,523 9,651 10,599 20,250
------------------------ ---- ------- ------- ------ ------------- -----------
1 The notional contract amounts of Interest Rate derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
For further risks and governance regarding the impact of the market-wide benchmarks reform, see Risk overview section on page 16.
10 Financial investments
--- ----------------------
Carrying amount of financial investments
------ --------
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
------ ------ ------ --------
Financial investments measured at
fair value through other comprehensive
income 19,737 13,203 19,737 13,203
- treasury and other eligible bills 3,708 1,286 3,708 1,286
- debt securities 16,029 11,917 16,029 11,917
------ ------ ------ ------
At 31 Dec 19,737 13,203 19,737 13,203
----------------------------------------- ------ ------ ------ ------
11 Assets pledged, collateral received and assets transferred
--- -----------------------------------------------------------
Assets pledged
Financial assets pledged as collateral
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
----- ----- ----- -------
Debt securities 3,238 4,324 3,238 4,324
Other 107 95 107 95
Assets pledged at 31 Dec 3,345 4,419 3,345 4,419
-------------------------- ----- ----- ----- -----
The amount of assets pledged to secure liabilities may be greater than the book value of assets utilised as collateral. For example, where assets are placed with a custodian or a settlement agent that has a floating charge over all the assets placed to secure any liabilities under settlement accounts.
These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and borrowing, repurchase agreements and derivative margining. The group places both cash and non-cash collateral in relation to derivative transactions.
Financial assets pledged as collateral that the counterparty has the
right to sell or repledge
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
Financial investments 2,950 2,299 2,950 2,299
-------- --------
At 31 Dec 2,950 2,299 2,950 2,299
-------------------------------------- -------- -------- -------- --------
Collateral received
The fair value of assets accepted as collateral, relating primarily to standard securities lending, reverse repurchase agreements and derivative margining, that the group is permitted to sell or repledge in the absence of default was GBP3,691m (2018: GBP3,422m) The bank: GBP3,691m (2018: GBP3,422m). The group is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard securities lending, reverse repurchase agreements and derivative margining.
Assets transferred
The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities held by counterparties as collateral under repurchase agreements and securities lent under securities lending agreements. For secured borrowings, the transferred asset collateral continues to be recognised in full and a related liability, reflecting the group's obligation to repurchase the assets for a fixed price at a future date is also recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral received is not recognised on the balance sheet. The group is unable to use, sell or pledge the transferred assets for the duration of these transactions, and remains exposed to interest rate risk and credit risk on these pledged assets. The counterparty's recourse is not limited to the transferred assets.
Transferred financial assets not qualifying for
full derecognition and associated financial liabilities
--------------------------------
2019 2018
------------------------------ --------------------------------
Carrying amount of: Carrying amount of:
Transferred Associated Transferred Associated
assets liabilities assets liabilities
The group and bank GBPm GBPm GBPm GBPm
----------------------------------------------
Repurchase agreements 846 98 727 639
----------------
Securities lending agreements 2,104 - 1,572 -
---------------------------------------------- ---------------- ------------ ---------------- ------------
12 Interests in joint ventures
--- ----------------------------
Interests in joint ventures
Vaultex UK Limited is a joint venture of the bank and the group. Vaultex UK Limited is incorporated in England and its principal activity is that of cash management services. At 31 December 2019, the group had a 50% interest in the GBP10m issued equity capital (2018: 50%).
For further detail see Note 29.
13 Investments in subsidiaries
--- ----------------------------
Main subsidiaries of HSBC UK Bank plc
Country of HSBC UK Bank
incorporation plc's interest
or registration in equity capital Share class
%
England and Ordinary
HSBC Equipment Finance (UK) Limited Wales 100.00 GBP1
---------------- ------------------ -----------
England and Ordinary
HSBC Invoice Finance (UK) Limited Wales 100.00 GBP1
England and Ordinary
HSBC Private Bank (UK) Limited Wales 100.00 GBP10
----------------
England and Ordinary
HSBC Trust Company (UK) Limited Wales 100.00 GBP5
----------------
Marks and Spencer Financial Services England and Ordinary
plc Wales 100.00 GBP1
------------------------------------- ---------------- ------------------ -----------
All the above prepare their financial statements up to 31 December.
Details of all group subsidiaries, as required under Section 409 of the Companies Act 2006, are set out in Note 29. The principal country of operation is the same as the country of incorporation.
Impairment testing of investments in subsidiaries
At each reporting period end, HSBC UK Bank plc reviews investments in subsidiaries for indicators of impairment. An impairment is recognised when the carrying amount exceeds the recoverable amount for that investment.
The recoverable amount is the higher of the investment's fair value less costs of disposal and its value in use. The value in use is calculated by discounting management's cash flow projections for the investment.
-- The cash flow projections for each investment are based on the latest approved plans and a long-term growth rate is used to extrapolate the cash flows in perpetuity.
-- The growth rate reflects inflation and is based on the long-term average for the UK.
-- The rate used to discount the cash flows is based on the cost of capital assigned to each investment, which is derived using a capital asset pricing model ('CAPM'). CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market's assessment of the economic variables and management's judgement. The discount rates for each investment are refined to reflect the UK rate of inflation.
On 9 December 2019, the High Court of Justice formally sanctioned the Banking Business Transfer Scheme (including the acceptance of deposits), the provision of financial services and other related activities from HSBC Private Bank (UK) Limited to HSBC UK Bank plc under Part VII of the Financial Services and Markets Act 2000 for an effective date of 1 January 2020. An impairment of GBP483m was recognised on HSBC UK Bank plc's investment in HSBC Private Bank (UK) Limited on 31 December 2019, with there being no outstanding items at 31 December 2019 that would prevent the transfer occurring. The impairment arose because the cost of investment was higher than the consideration received for the net assets being transferred.
No impairment was recognised as a result of the impairment test performed in 2018.
14 Structured entities --- --------------------
The group is involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets and investment funds, established either by the group or a third party.
Consolidated structured entities
Total assets of the group's consolidated structured entities, split by entity type:
Securitisations Total
GBPm GBPm
--------------- -------
At 31 Dec 2019 397 397
----------------- --------------- -----
At 31 Dec 2018 - -
----------------- --------------- -----
Securitisations
In 2019, the group established a structured entity to securitise customer loans and advances in order to diversify its sources of funding for asset origination and capital efficiency purposes. The loans and advances were transferred by the group to the structured entity synthetically, and the structured entity issued debt securities to investors.
Unconsolidated structured entities
The term 'unconsolidated structured entities' refers to all structured entities not controlled by the group. The group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.
The group's interest in unconsolidated structured entities consist of unit holdings in four funds managed by a third party within the wider HSBC Group. The groups unit holdings are held in order to facilitate customer transactions and are recognised as Other assets with a carrying value and maximum exposure to loss as at 31 December 2019 of GBP0.2m (2018: GBP0.2m). The total assets of the funds as at
31 December 2019 was GBP1.3bn (2018: GBP1.2bn). The group has no liabilities or commitments in respect of the funds.
15 Goodwill and intangible assets
--- -------------------------------
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
------------------------------- ----- ----- ------ ------
Goodwill 3,285 3,285 223 223
Other intangible assets(1, 2) 688 525 658 495
----- ------
At 31 Dec 3,973 3,810 881 718
------------------------------- ----- ----- ------ ----
1 For 2019, the amortisation and impairment of intangible assets totalled for the group GBP156m (2018: GBP64m).
2 Included within the group's other intangible assets is internally generated software with a net carrying value of GBP688m (2018: GBP518m).
Impairment testing
The group's impairment test in respect of goodwill allocated to each cash generating unit ('CGU') is performed as at 1 July each year, with a review for indicators of impairment at 30 June and 31 December. At 31 December 2019, the review identified an indicator of impairment for PB. As a result, an impairment test has been performed as at 31 December 2019 for the PB CGU. For all other CGUs, the annual test performed as at 1 July remains the latest impairment test and the disclosures given are as at 1 July for CMB and RBWM, and 31 December for PB. The testing at 1 July and 31 December resulted in no impairment of goodwill.
Basis of the recoverable amount
The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use ('VIU') at each respective testing date for 2019 and 2018. For each CGU, the VIU is calculated by discounting management's cash flow projections for the CGU. The key assumptions used in the VIU calculation for each CGU are discussed below.
Key assumptions in VIU calculation
Nominal
growth
Nominal rate
Growth growth beyond
Goodwill rate beyond rate beyond Goodwill initial
at 31 initial Goodwill initial at: cash
Dec Discount cash flow at 1 Discount cash flow 1 Jul Discount flow
2019 rate projections Jul 2019 rate projections 2018 rate projections
-------- -------- ----------- -------- -------- ----------- -------- -------- -------------
Cash-generating
unit GBPm % % GBPm % % GBPm % %
-------- -------- ----------- -------- -------- ----------- -------- -------- -------------
RBWM 1,686 N/A N/A 1,686 8.3 3.3 1,686 7.9 3.8
-------- -----------
CMB 1,239 N/A N/A 1,239 9.7 3.3 1,239 9.7 3.8
-------- -----------
PB 360 8.8 1.8 360 9.5 3.3 360 9.4 3.8
Total 3,285 3,285 3,285
----------- -------------
The group's CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.
Management's judgement in estimating the cash flows of a CGU
The cash flow projections for each CGU are based on the latest plans presented to the Board. The Board challenge and endorse planning assumptions in light of internal capital allocation decisions necessary to support HSBC UK's strategy, current market conditions, and our macro-economic outlook. For the goodwill impairment tests conducted at 1 July 2019 and 31 December 2019, management's cash flow projections until the end of 2023 and 2024 were used respectively.
Discount rate
The rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived using a CAPM. CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market's assessment of the economic variables and management's judgement.
Long-term growth rate
The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective within the group of business units making up the CGUs. Prior to the 31 December impairment test, these growth rates reflected GDP and inflation (nominal GDP) for the UK. At 31 December 2019, we considered the extent to which growth rates based on nominal GDP data remained appropriate given the uncertainty in the macroeconomic environment. We anticipate that when global growth does stabilise it will be at a slightly lower level than recent years. As a result, we considered it appropriate to base the long-term growth rate assumption on inflation data, moving away from a higher nominal GDP basis. The rates are based on 20-year forecast rates, as they represent an objective estimate of likely future trends.
Sensitivities of key assumptions in calculating VIU
At 31 December 2019, the PB CGU was sensitive to reasonably possible adverse changes in the key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the model. These include the external range of observable discount rates, historical performance against forecast and risks attaching to the key assumptions underlying cash flow projections.
A reasonable change in a single key assumption may not result in impairment. Though taken together a combination of reasonable changes in key assumptions could result in a recoverable amount that is lower than the CGUs carrying amount.
The following table presents a summary of the key assumptions underlying the most sensitive inputs to the model for PB, the key risks attaching to each, and details of a reasonably possible change to assumptions where, in the opinion of management, these could result in an impairment.
Reasonably possible changes in key assumptions
Cash-generating
unit
PB Cash flow -- Level of interest -- Market uncertainty. -- Cash flow
projections rates. -- Low interest projections decrease
-- Global Investment rate environment. by 30%.
and UK Real Estate -- Regulatory
markets. changes.
-- Assets under management
growth from new business
and market performance.
Discount -- Discount rate -- External evidence -- Discount rate
rate used is a reasonable arises to suggest increases by 200
estimate of a suitable that the rate used basis points.
market rate for the is not appropriate
profile of the business. to the business.
Sensitivity of VIU changes to current assumptions to achieve nil headroom
Increase / (decrease)
Cash-generating unit Carrying amount Value in use Discount rate Cash flows
At 31 December 2019 GBPm GBPm bps %
PB 971 1,189 200 (23.4)
Whilst there are no indicators of impairment at 31 December 2019, PB's recoverable amount exceeds the carrying amount by only GBP218m and therefore, the test is sensitive to the assumptions used. The reasonably possible changes in assumptions for Cash Flow projections and Discount Rate, detailed above would result in an impairment. Thus there is a risk of impairment in the future should business performance or economic factors diverge from forecasts.
16 Prepayments, accrued income and other assets
--- ---------------------------------------------
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
----- ----- ----- -------
Prepayments and accrued income 740 650 727 636
----- -----
Settlement accounts 16 56 16 268
--------------------------------------- ----- -----
Cash collateral and margin receivables 107 279 107 279
----- -----
Endorsements and acceptances 71 86 71 86
Employee benefit assets (Note 3) 5,836 5,841 5,836 5,841
--------------------------------------- ----- ----- ----- -----
Right-of-use assets(1) 311 N/A 292 N/A
----- ----- ----- -------
Other accounts 530 1,008 691 921
----- -----
Owned property, plant and equipment 592 608 476 492
--------------------------------------- ----- -----
At 31 Dec 8,203 8,528 8,216 8,523
----- ----- ----- -----
1 Right-of-use assets have been recognised from 1 January 2019 following the adoption of IFRS 16. Comparatives have not been restated.
Prepayments, accrued income and other assets include GBP1,364m (2018: GBP2,016m) of financial assets, the majority of which are measured at amortised cost.
17 Debt securities in issue
-------------------------
During 2019, we have established our Debt Issuance Programme to diversify our funding sources and ensure we have appropriate access to markets.
Our Commercial Paper and Certificates of Deposit Programme was established prior to 31 December 2018 and we commenced issuing under the programme during 2019.
Debt securities in issue
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
Bonds and medium-term notes(1) 1,225 - 1,000 -
--------- --------
Other debt securities in issue(2) 1,917 - 1,917 -
--------- --------
Total debt securities in issue 3,142 - 2,917 -
--------- ---- -------- ----
1 The group's Bonds and medium-term notes includes GBP225m issued by structured entities.
2 Other debt securities in issue consists of commercial paper and certificates of deposits issued in 2019.
18 Accruals, deferred income and other liabilities
--- ------------------------------------------------
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
----------------------------------- ----- ----- ----- -------
Accruals and deferred income 562 498 483 438
Settlement accounts 14 31 14 548
----------------------------------- ----- -----
Cash collateral and margin payable 13 4 13 4
-----
Endorsements and acceptances 71 86 71 86
-----
Lease liabilities 326 N/A 307 N/A
----- ----- -----
Other liabilities 848 1,790 1,383 1,198
At 31 Dec 1,834 2,409 2,271 2,274
----------------------------------- ----- ----- ----- -----
For the group, accruals, deferred income and other liabilities include GBP1,395m (2018: GBP2,208m), and for the bank GBP1,917m (2018: GBP2,200m) of financial liabilities, the majority of which are measured at amortised cost.
19 Provisions
--- -----------
Legal proceedings
Restructuring and regulatory Customer Other
costs(2) matters remediation(3) provisions Total
The group GBPm GBPm GBPm GBPm GBPm
----------------- ------------- --------
Provisions (excluding contractual
commitments)
At 1 Jan 2019 - - 540 5 545
--------- ---- ----- ------------- -------- ---
Additions 59 - 1,297 - 1,356
Amounts utilised (8) - (643) - (651)
Unused amounts reversed - (3) (4) (1) (8)
Exchange and Other movements 1 7 - - 8
--------- ---- ----- ------------- -------- ---
At 31 Dec 2019 52 4 1,190 4 1,250
--------- ---- ----- ------------- -------- ---
Contractual commitments(1)
--------------- ----------------- -------------
At 1 Jan 2019 85
--------------- ----------------- -------------
Net change in expected credit
loss provision and other movements (10)
--------------- ----------------- -------------
At 31 Dec 2019 75
--------------- ----------------- -------------
Total provisions
--------------- ----------------- ------------- --------
At 31 Dec 2018 630
--------------- ----------------- -------------
At 31 Dec 2019 1,325
--------------- ----------------- -------------
Provisions (excluding contractual
commitments)
At 1 Jan 2018 - - - - -
----
Transfer from HSBC Bank plc and
its subsidiaries 2 2 742 5 751
----
Additions - - 78 3 81
Amounts utilised - - (283) - (283)
Unused amounts reversed (2) (1) (13) (2) (18)
Unwinding of discounts - - - (1) (1)
Exchange and Other movements - (1) 16 - 15
----
At 31 Dec 2018 - - 540 5 545
----
Contractual commitments(1)
At 1 Jan 2018 -
Transfer from HSBC Bank plc and
its subsidiaries 72
Net change in expected credit
loss provision and other movements 13
At 31 Dec 2018 85
Total provisions
At 31 Dec 2018 630
1 Contractual commitments include the provision for contingent liabilities measured under IFRS 9 Financial Instruments in respect of financial guarantees and the expected credit loss provision on off-balance sheet guarantees and commitments.
2 Restructuring costs include charges received from HSBC Global Services (UK) Limited, which do not form part of the balance sheet provision movement.
3 During 2019 the additional provisions of GBP1,297m were recorded in the consolidated income statement under net income income (GBP138m), net fee income (GBP44m) and operating expenses (GBP1,115m).
Legal proceedings
Restructuring and regulatory Customer Other
costs(2) matters remediation(3) provisions Total
The bank GBPm GBPm GBPm GBPm GBPm
----------------- ----------- --------
Provisions (excluding contractual
commitments)
At 1 Jan 2019 - - 427 4 431
--------- ---- ----- ------------- -----------
Additions 58 - 1,054 - 1,112
Amounts utilised (8) - (495) - (503)
Unused amounts reversed - (3) (4) - (7)
--------- ---- ---- ------------- -----------
Exchange and Other movements 1 7 1 - 9
--------- ---- ----- ------------- -----------
At 31 Dec 2019 51 4 983 4 1,042
--------- ---- ----- ------------- -----------
Contractual commitments(1)
--------------- ----------------- -----------
At 1 Jan 2019 84
--------------- ----------------- -----------
Net change in expected credit
loss provision and other movements (12)
--------------- ----------------- -----------
At 31 Dec 2019 72
--------------- ----------------- -----------
Total provisions
--------------- ----------------- -----------
At 31 Dec 2018 515
--------------- ----------------- -----------
At 31 Dec 2019 1,114
--------------- ----------------- -----------
Legal proceedings
Restructuring and regulatory Customer Other
costs(2) matters remediation provisions Total
Provisions (excluding contractual
commitments)
At 1 Jan 2018 - - - - -
--------- ---- ---------- -------- ---
Transfer from HSBC Bank plc and
its subsidiaries 2 - 615 5 622
--------- ---- ---------- -------- ---
Additions - - 18 2 20
--------- ----
Amounts utilised - - (209) - (209)
Unused amounts reversed (2) - (13) (2) (17)
Unwinding of discounts - - - (1) (1)
Exchange and Other movements - - 16 - 16
--------- ---- ---------- -------- ---
At 31 Dec 2018 - - 427 4 431
--------- ---- ---------- -------- ---
Contractual commitments(1)
At 1 Jan 2018 -
Transfer from HSBC Bank plc 71
Net change in expected credit
loss provision and other movements 13
At 31 Dec 2018 84
Total provisions
At 31 Dec 2018 515
1 Contractual commitments include the provision for contingent liabilities measured under IFRS 9 Financial Instruments in respect of financial guarantees and the expected credit loss provision on off-balance sheet guarantees and commitments.
2 Restructuring costs include charges received from HSBC Global Services (UK) Limited, which do not form part of the balance sheet provision movement.
3 During 2019 the additional provisions of GBP1,054m were recorded in the HSBC UK income statement under net income income (GBP126m), net fee income (GBP32m) and operating expenses (GBP896m).
Payment Protection Insurance
At 31 December 2019, GBP801m (2018: GBP435m) of the customer remediation provision relates to the estimated liability for redress in respect of the possible mis-selling of payment protection insurance ('PPI') policies in previous years.
Payments totalling GBP567m were made during 2019. An increase in provisions of GBP932m was recognised during the year, primarily reflecting the deadline of 29 August 2019 for bringing complaints announced by the FCA, and leading to:
-- a higher than expected increase in the number of inbound complaints received prior to 29 August 2019;
-- The effect on the total number of inbound complaints as a result of treating customer information requests relating to PPI policies received between 29 June 2019 and 29 August 2019 as complaints;
-- the additional operational expenses related to the increases in populations of potential claims;
-- an industry wide exercise by the Official Receiver to pursue redress amounts in respect of bankrupt and insolvent customers; and
-- an increased volume of actual or forecast legal claims for PPI mis-selling which is not affected by the deadline of 29 August 2019.
The estimated liability for redress for both single and regular premium policies is calculated on the basis of a refund of the total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher).
Future estimated redress levels are based on historical redress paid to customers per policy.
At 31 December 2019, contact has been made with customers who collectively held 3.0 million policies, representing 56% of total policies sold. A total of 5.4 million PPI policies have been sold since 2000, generating estimated revenue of GBP2.6bn at 2019. The gross written premiums on these policies were approximately GBP3.4bn. Although the deadline for bringing complaints has passed, customers can still commence litigation for PPI mis-selling. Provision has been made for the best estimate of any obligation to pay compensation in respect of an estimated 45,000 claims. However, given the limited period following the complaints time bar, the volume and quality of future claims through legal channels, and the amount of any compensation to be paid, remain uncertain.
The following table summarises the cumulative number of information requests received between 29 June to 29 August 2019, and the number of claims expected to be assessed in the future, excluding claims received through legal channels:
Cumulative PPI complaints received to 31 December 2019
Cumulative
actual to
31 Dec 2019
Information Requests received during Autoconversion period
(000s) 1,889
Information Requests awaiting evaluation (000s) 234
------------
Remaining autoconverted claims anticipated to be worked (000s)(1) 167
------------
Remaining reactive claims anticipated to be worked (000s)(1) 44
------------
Total remaining claims anticipated to be worked (000s)(1) 211
------------
Average uphold rate per claim(2) 86%
Average redress per claim(3) (GBP) 2,440
------------
1 Includes claims where a valid PPI policy had already been located, and claims which are anticipated to be valid after future assessment; excludes invalid claims for which no PPI policy exists.
2 Includes inbound and auto-converted claims, but excludes Financial Ombudsman Service complaints.
3 Includes inbound and auto-converted claims, but excludes claims from the Official Receiver.
The PPI provision is based upon assumptions and estimates taken from historic experience. The profile of cases yet to be assessed could therefore vary leading to different uphold rates or average redress levels being used to arrive at the provision.
We continued to monitor available information up until the date of the approval of the financial statements to ensure the provision estimate was appropriate.
Sensitivity to key assumptions
-- A 10% increase/decrease in the uphold rate for complaints yet to be worked would increase/decrease the redress provision by approximately GBP30m.
-- A 10% increase/decrease in the average redress for complaints yet to be worked would increase/decrease the redress provision by approximately GBP42m.
-- An increase/decrease in customer redress volumes of 10,000 received through legal channels would increase/decrease the redress provision by approximately GBP22m.
Collections and recoveries related matters
At 31 December 2019, a provision of GBP220m was held relating to the estimated liability for redress payable to customers following a review of collections and recoveries practices in the UK in respect of various HSBC Group companies, including HSBC UK.
The provision has been estimated based on a number of customer cohorts who may have been impacted and a number of assumptions which are highly judgemental, none of which are individually material. At this early stage, the extraction of all relevant data is incomplete, and there is significant uncertainty surrounding the total number of customers affected and the amount of any redress to be paid. Redress is expected to be completed during 2020.
The table below sets out sensitivities to the assumptions applied but it is not intended to indicate a range of any final amount payable.
Assumption GBPm 20% increase/decrease in population of customers impacted 40.4 20% increase/decrease in level of redress to be paid in respect of interest and fees charged 26.6
Customer fee and mischarging related matters
At 31 December 2019, GBP118m of the customer remediation provision relates to the estimated liability for redress in respect of customer fee and mischarging related matters. This follows internal reviews to identify any issues for which provisions had not previously been raised and to re-assess provisions in respect of matters previously provided for.
As a consequence of the matters identified from these reviews, additional provisions of GBP117m were recognised in the period. The provision relates to a number of different issues, none of which are individually material.
The estimated liability for redress is based on sampling and analysis performed to date for each of the matters, detailed reviews to identify exact populations requiring redress are ongoing and expect to be completed in 2020.
Legal proceedings and regulatory matters
Further details of legal proceedings and regulatory matters are set out in Note 26. Legal proceedings include civil court, arbitration or tribunal proceedings brought against the group (whether by way of claim or counterclaim), or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulatory or law enforcement agencies in connection with alleged wrongdoing.
20 Subordinated liabilities
--- -------------------------
Subordinated liabilities
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
At amortised cost 9,533 4,937 9,454 4,858
* subordinated liabilities(1) 9,533 4,937 9,454 4,858
At 31 Dec 9,533 4,937 9,454 4,858
----- ----- ----- -----
1 Includes GBP6.5bn of eligible debt issued to meet our Minimum requirement for own funds and Eligible Liabilities ('MREL') applicable from 1 January 2020.
Subordinated liabilities rank behind senior obligations and generally count towards the capital base of the group. Capital securities may be called and redeemed by the group subject to prior notification to and consent of the PRA.
The balance sheet amounts disclosed below are presented on an IFRS basis and do not reflect the amount that the instruments contribute to regulatory capital principally due to regulatory amortisation and regulatory eligibility limits.
Subordinated liabilities of the group
Carrying amount
2019 2018
First Maturity
call date date GBPm GBPm
---------
Capital instruments
Tier 2 instruments
HSBC UK Bank plc Subordinated Floating
GBP550m Loan 2028(1) Jul 2023 Jul 2028 550 550
---------- -------- -------- -------
HSBC UK Bank plc Subordinated Floating
GBP1,000m Loan 2030(2) Jul 2025 Jul 2030 1,000 1,000
---------- -------- -------- -------
HSBC UK Bank plc Subordinated Floating
GBP650m Loan 2033(3) Sep 2028 Sep 2033 650 650
---------- -------- -------- -------
HSBC UK Bank plc Subordinated Floating
$840m Loan 2028(5) Jul 2023 Jul 2028 635 658
---------- -------- -------- -------
HSBC UK Bank plc 2.8594% Subordinated
GBP100m Loan 2029 Mar 2024 Mar 2029 100 -
---------- -------- -------- -------
Other Tier 2 instruments each less that
GBP100m(4) 79 79
-------- -------
Other instruments
Subordinated loan instruments not eligible
for inclusion in regulatory capital
---------
HSBC UK Bank plc 3.2485% MREL eligible
GBP1,000m Subordinated Loan 2026 Nov 2025 Nov 2026 1,000 1,000
---------- -------- -------- -------
HSBC UK Bank plc 3.4602% MREL eligible
GBP1,000m Subordinated Loan 2029 Aug 2028 Aug 2029 1,000 1,000
---------- -------- -------- -------
HSBC UK Bank plc 3.0000% MREL eligible
GBP1,000m Subordinated Loan 2028 Jul 2027 Jul 2028 1,000 -
---------- -------- -------- -------
HSBC UK Bank plc 3.9730% MREL eligible
$3000m Subordinated Loan 2030 May 2029 May 2030 2,269 -
---------- -------- -------- -------
HSBC UK Bank plc 3.0000% MREL eligible
GBP750m Subordinated Loan 2030 May 2029 May 2030 750 -
---------- -------- -------- -------
HSBC UK Bank plc 1.8777% MREL eligible
GBP350m Subordinated Loan 2025 Oct 2024 Oct 2025 350 -
---------- -------- -------- -------
HSBC UK Bank plc 2.1003% MREL eligible
GBP150m Subordinated Loan 2025 Oct 2024 Oct 2025 150 -
---------- -------- -------- -------
At 31
Dec 9,533 4,937
-------- -------
1 The distribution rate is three month sterling Libor plus 1.51%.
2 The distribution rate is three month sterling Libor plus 1.78%.
3 The distribution rate is three month sterling Libor plus 2.03%.
4 Two subordinated notes issued by Marks and Spencer Financial Services plc, GBP54m maturing 2026 and GBP25m maturing 2027.
5 The distribution rate is three month USD Libor plus 1.51%. 21 Maturity analysis of assets, liabilities and off-balance sheet commitments --- ---------------------------------------------------------------------------
The following table provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. These balances are included in the maturity analysis as follows:
-- Trading derivatives are included in the 'Due not more than 1 month' time bucket, because trading balances are typically held for short periods of time.
-- Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over 5 years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the 'Due over 5 years' time bucket.
-- Non-financial assets and liabilities with no contractual maturity are included in the 'Due over 5 years' time bucket.
-- Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.
Maturity analysis of assets, liabilities and off-balance sheet commitments
Due Due
Due over over Due
over 3 6 over
1 month months months 9 Due over Due over
but not but not but not months 1 year 2 years
Due not more more more but not but not but not
more than than than more more more
than 3 6 9 than than than Due over
1 month months months months 1 year 2 years 5 years 5 years Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- ------- ------- ------- ------- -------- -------- --------
The group
Financial
assets
Cash and
balances
at central
banks 37,030 - - - - - - - 37,030
Items in the
course
of collection
from
other banks 504 - - - - - - - 504
Financial
assets
designated or
otherwise
mandatorily
measured
at fair value 57 - - - - - - 9 66
Derivatives 63 1 3 2 - 2 8 42 121
Loans and
advances
to banks 786 - 603 - - - - - 1,389
Loans and
advances
to customers 20,484 10,827 7,576 5,774 5,240 17,685 30,911 84,559 183,056
- personal 5,834 4,776 1,839 1,702 1,636 6,216 16,657 78,271 116,931
- corporate and
commercial 14,073 5,772 5,461 3,906 3,466 11,003 13,753 6,170 63,604
- financial 577 279 276 166 138 466 501 118 2,521
Reverse
repurchase
agreements
- non-trading 1,671 1,260 83 - - - - - 3,014
Financial
investments 317 1,603 2,085 1,471 227 1,309 6,800 5,925 19,737
Accrued income
and
other
financial
assets 1,143 118 27 8 7 39 22 - 1,364
Total financial
assets
at 31 Dec 2019 62,055 13,809 10,377 7,255 5,474 19,035 37,741 90,535 246,281
Non-financial
assets - - - - - - - 10,821 10,821
Total assets at
31
Dec 2019 62,055 13,809 10,377 7,255 5,474 19,035 37,741 101,356 257,102
Financial
liabilities
Deposits by
banks 513 16 - - - - - - 529
Customer
accounts(1) 211,409 2,401 510 428 539 440 487 - 216,214
- personal 136,192 860 440 400 462 435 485 - 139,274
- corporate and
commercial 70,125 1,443 59 27 77 4 2 - 71,737
- financial 5,092 98 11 1 - 1 - - 5,203
Repurchase
agreements
- non-trading 98 - - - - - - - 98
Items in the
course
of
transmission
to
other banks 343 - - - - - - - 343
Derivatives 67 - - 1 1 3 56 73 201
Debt securities
in
issue 483 566 868 1,000 - - - 225 3,142
Accruals and
other
financial
liabilities 1,223 181 25 17 17 64 120 74 1,721
Subordinated
liabilities - - - - - - - 9,533 9,533
Total financial
liabilities
at 31 Dec
2019 214,136 3,164 1,403 1,446 557 507 663 9,905 231,781
Non-financial
liabilities - - - - - - - 3,070 3,070
Total
liabilities
at 31 Dec
2019 214,136 3,164 1,403 1,446 557 507 663 12,975 234,851
Off-balance
sheet
commitments
given
-------- ------- ------- ------- ------- -------- -------- --------
Loan and other
credit-related
commitments 67,118 4 1 2 7 114 41 15 67,302
- personal 37,014 - - - - - - - 37,014
- corporate and
commercial 28,600 4 1 2 7 114 41 15 28,784
- financial 1,504 - - - - - - - 1,504
Maturity analysis of assets, liabilities and off-balance sheet commitments
(continued)
Due
over Due
Due 3 over Due
over months 6 over
1 month but months 9 Due over Due over
but not not but not months 1 year 2 years
Due not more more more but not but not but not
more than than than more more more
than 3 6 9 than than than Due over
1 month months months months 1 year 2 years 5 years 5 years Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------
The group
Financial
assets
Cash and
balances
at central
banks 33,193 - - - - - - - 33,193
-------- ------- ------- ------- --------
Items in the
course
of collection
from
other banks 603 - - - - - - - 603
Financial
assets
designated or
otherwise
mandatorily
measured
at fair value 29 - - - - - - 6 35
Derivatives 50 - 9 - - 6 - 1 66
-------- ------- ------- ------- --------
Loans and
advances
to banks 908 - 351 - - - - 4 1,263
-------- ------- ------- ------- --------
Loans and
advances
to customers 14,085 9,321 7,562 5,918 5,676 18,257 33,511 80,477 174,807
- personal 2,415 1,546 2,164 2,143 2,040 7,363 17,843 74,129 109,643
- corporate and
commercial 10,917 7,566 5,173 3,622 3,396 10,627 15,163 6,167 62,631
- financial 753 209 225 153 240 267 505 181 2,533
Reverse
repurchase
agreements
- non-trading 1,989 1,433 - - - - - - 3,422
Financial
investments 375 444 1,024 518 568 393 6,366 3,515 13,203
-------- ------- ------- ------- --------
Accrued income
and
other
financial
assets 1,805 182 26 2 1 - - - 2,016
-------- ------- ------- ------- --------
Total financial
assets
at 31 Dec 2018 53,037 11,380 8,972 6,438 6,245 18,656 39,877 84,003 228,608
-------- ------- ------- ------- --------
Non-financial
assets - - - - - - - 10,331 10,331
-------- ------- ------- ------- --------
Total assets at
31
Dec 2018 53,037 11,380 8,972 6,438 6,245 18,656 39,877 94,334 238,939
-------- ------- ------- ------- --------
Financial
liabilities
Deposits by
banks 1,018 9 - - - - - - 1,027
-------- ------- ------- ------- --------
Customer
accounts(1) 200,036 2,103 1,023 692 528 312 134 9 204,837
- personal 128,872 873 816 657 477 297 122 7 132,121
- corporate and
commercial 66,700 1,054 188 34 50 15 12 2 68,055
- financial 4,464 176 19 1 1 - - - 4,661
Repurchase
agreements
- non-trading 189 - 450 - - - - - 639
Items in the
course
of
transmission
to
other banks 233 - - - - - - - 233
Derivatives 44 3 - 26 - 134 - 139 346
-------- ------- ------- ------- --------
Debt securities
in
issue - - - - - - - - -
Accruals and
other
financial
liabilities 1,671 399 14 - - - - 94 2,178
Subordinated
liabilities - - - - - - - 4,937 4,937
-------- ------- ------- ------- --------
Total financial
liabilities
at 31 Dec
2018 203,191 2,514 1,487 718 528 446 134 5,179 214,197
Non-financial
liabilities - - - - - - - 2,409 2,409
-------- ------- ------- ------- --------
Total
liabilities
at 31 Dec
2018 203,191 2,514 1,487 718 528 446 134 7,588 216,606
Off-balance
sheet
commitments
given
-------
Loan and other
credit-related
commitments 69,570 13 - 42 - 78 59 44 69,806
- personal 39,389 - - - - - - - 39,389
- corporate and
commercial 29,895 13 - 42 - 78 59 44 30,131
- financial 286 - - - - - - - 286
1 'Customers accounts' includes GBP114,056m (2018: GBP110,226m) insured by guarantee schemes.
Maturity analysis of assets, liabilities and off-balance sheet commitments
Due Due
Due over over Due
over 3 6 over
1 month months months 9 Due over Due over
but not but not but not months 1 year 2 years
Due not more more more but not but not but not
more than than than more more more
than 3 6 9 than than than Due over
1 month months months months 1 year 2 years 5 years 5 years Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- -------- --------
The bank
Financial
assets
Cash and
balances
at central
banks 37,020 - - - - - - - 37,020
Items in the
course
of collection
from
other banks 355 - - - - - - - 355
Financial
assets
designated or
otherwise
mandatorily
measured
at fair value 57 - - - - - - 9 66
Derivatives 60 1 3 2 - 2 8 42 118
Loans and
advances
to banks 1,001 476 1,308 171 149 532 964 42 4,643
Loans and
advances
to customers 19,016 8,079 8,799 5,428 5,012 16,673 27,475 83,419 173,901
- personal 5,102 2,018 1,496 1,410 1,413 5,514 14,958 77,782 109,693
- corporate and
commercial 11,490 3,910 4,608 3,708 3,307 10,142 11,254 5,459 53,878
- financial 2,424 2,151 2,695 310 292 1,017 1,263 178 10,330
Reverse
repurchase
agreements
- non-trading 1,671 1,260 83 - - - - - 3,014
Financial
investments 317 1,603 2,085 1,471 227 1,309 6,800 5,925 19,737
Accrued income
and
other
financial
assets 1,413 84 20 1 1 - - - 1,519
Total financial
assets at 31
Dec
2019 60,910 11,503 12,298 7,073 5,389 18,516 35,247 89,437 240,373
Non-financial
assets - - - - - - - 9,183 9,183
Total assets at
31 Dec 2019 60,910 11,503 12,298 7,073 5,389 18,516 35,247 98,620 249,556
Financial
liabilities
Deposits by
banks 4,024 36 46 35 32 60 44 - 4,277
Customer
accounts(1) 203,400 2,092 452 428 531 440 487 - 207,830
- personal 130,290 617 391 400 455 436 485 - 133,074
- corporate and
commercial 69,419 1,380 50 27 76 4 2 - 70,958
- financial 3,691 95 11 1 - - - - 3,798
Repurchase
agreements
- non-trading 98 - - - - - - - 98
Items in the
course
of
transmission
to other banks 336 - - - - - - - 336
Derivatives 62 - - 1 1 3 56 74 197
Debt securities
in issue 483 566 868 1,001 - - - - 2,918
Accruals and
other
financial
liabilities 1,778 149 23 16 16 60 109 74 2,225
Subordinated
liabilities - - - - - - - 9,454 9,454
Total financial
liabilities at
31
Dec
2019 210,181 2,843 1,389 1,481 580 563 696 9,602 227,335
Non-financial
liabilities - - - - - - - 2,776 2,776
Total
liabilities
at 31 Dec
2019 210,181 2,843 1,389 1,481 580 563 696 12,378 230,111
Off-balance
sheet
commitments
given
Loan and other
credit-related
commitments 52,875 - - - - - - - 52,875
- personal 25,891 - - - - - - - 25,891
- corporate and
commercial 26,470 - - - - - - - 26,470
- financial 514 - - - - - - - 514
Maturity analysis of assets, liabilities and off-balance sheet commitments
(continued)
Due Due
Due over over Due
over 3 6 over
1 month months months 9 Due over Due over
but not but not but not months 1 year 2 years
Due not more more more but not but not but not
more than than than more more more
than 3 6 9 than than than Due over
1 month months months months 1 year 2 years 5 years 5 years Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- --------
The bank
Financial
assets
Cash and
balances
at central
banks 33,187 - - - - - - - 33,187
-------- ------- ------- ------- -------- -------
Items in the
course
of collection
from
other banks 457 - - - - - - - 457
Financial
assets
designated or
otherwise
mandatorily
measured
at fair value 29 - - - - - - 6 35
Derivatives 45 - 9 - - 6 - 1 61
-------- ------- ------- ------- -------- -------
Loans and
advances
to banks 1,041 445 1,012 118 121 418 697 31 3,883
-------- ------- ------- ------- -------- -------
Loans and
advances
to customers 14,006 6,634 9,228 5,485 5,259 17,200 29,427 78,611 165,850
- personal 1,652 1,149 1,739 1,722 1,714 6,274 15,636 72,839 102,725
- corporate and
commercial 10,338 3,397 4,353 3,433 3,144 10,021 12,498 5,538 52,722
- financial 2,016 2,088 3,136 330 401 905 1,293 234 10,403
-------
Reverse
repurchase
agreements
- non-trading 1,989 1,433 - - - - - - 3,422
Financial
investments 375 444 1,024 518 568 393 6,367 3,514 13,203
-------- ------- ------- ------- -------- -------
Accrued income
and
other
financial
assets 2,025 76 26 2 1 - - - 2,130
Total financial
assets at 31
Dec
2018 53,154 9,032 11,299 6,123 5,949 18,017 36,491 82,163 222,228
-------- ------- ------- ------- -------- -------
Non-financial
assets - - - - - - - 9,023 9,023
-------- ------- ------- ------- -------- -------
Total assets at
31 Dec 2018 53,154 9,032 11,299 6,123 5,949 18,017 36,491 91,186 231,251
-------- ------- ------- ------- -------- -------
Financial
liabilities
Deposits by
banks 3,956 39 115 50 50 25 30 - 4,265
-------- ------- ------- ------- -------- -------
Customer
accounts(1) 193,037 1,579 810 555 509 264 104 - 196,858
- personal 123,626 480 643 529 465 257 100 - 126,100
- corporate and
commercial 65,326 923 148 25 43 7 4 - 66,476
- financial 4,085 176 19 1 1 - - - 4,282
Repurchase
agreements
- non-trading 189 - 450 - - - - - 639
Items in the
course
of
transmission
to other banks 225 - - - - - - - 225
Derivatives 38 3 - 26 - 134 - 140 341
-------- ------- ------- ------- -------- -------
Debt securities
in issue - - - - - - - - -
Accruals and
other
financial
liabilities 2,015 139 16 - - - - - 2,170
Subordinated
liabilities - - - - - - - 4,858 4,858
-------- ------- ------- ------- -------- -------
Total financial
liabilities at
31
Dec
2018 199,460 1,760 1,391 631 559 423 134 4,998 209,356
Non-financial
liabilities - - - - - - - 2,129 2,129
-------- ------- ------- ------- -------- -------
Total
liabilities
at 31 Dec
2018 199,460 1,760 1,391 631 559 423 134 7,127 211,485
Off-balance
sheet
commitments
given
Loan and other
credit-related
commitments 55,505 - - - - - - - 55,505
- personal 28,009 - - - - - - - 28,009
- corporate and
commercial 27,264 - - - - - - - 27,264
- financial 232 - - - - - - - 232
1 'Customers accounts' includes GBP111,797m (2018: GBP107,993m) insured by guarantee schemes .
Contractual maturity of financial liabilities
The table below shows, on an undiscounted basis, all cash flows relating to principal and future coupon payments (except for derivatives not treated as hedging derivatives). For this reason, balances in the table below do not agree directly with those in our consolidated balance sheet and the bank's balance sheet. Undiscounted cash flows payable in relation to hedging derivative liabilities are classified according to their contractual maturities. Derivatives not treated as hedging derivatives are included in the 'Due not more than 1 month' time bucket and not by contractual maturity. In addition, loans and other credit-related commitments, financial guarantees and similar contracts are generally not recognised on our balance sheet. The undiscounted cash flows potentially payable under loan and other credit-related commitments, and financial guarantees are classified on the basis of the earliest date they can be called.
Cash flows payable under financial liabilities by remaining
contractual maturities
Due over Due over Due over
1 month 3 month 1 year
Due not but not but not but not
more than more than more than more than Due over
1 month 3 month 1 year 5 years 5 years Total
The group GBPm GBPm GBPm GBPm GBPm GBPm
Deposits by banks 505 24 - - - 529
Customer accounts 206,683 7,132 1,488 941 - 216,244
Repurchase agreements -
non-trading - 99 - - - 99
Derivatives 67 27 31 208 255 588
Debt securities in issue - 1,233 1,973 103 277 3,586
Subordinated liabilities - 77 232 1,225 12,595 14,129
Other financial liabilities 1,186 553 58 184 74 2,055
208,441 9,145 3,782 2,661 13,201 237,230
Loan and other credit-related
commitments 67,117 4 10 155 15 67,301
Financial guarantees 1,077 - - - - 1,077
At 31 Dec 2019 276,635 9,149 3,792 2,816 13,216 305,608
Proportion of cash flows
payable in period 91% 3% 1% 1% 4% 100%
Deposits by banks 1,018 8 - - - 1,026
Customer accounts 196,287 5,886 2,250 454 12 204,889
Repurchase agreements -
non-trading - 189 453 - - 642
Derivatives 44 3 26 133 279 485
Debt securities in issue - - - - - -
Subordinated liabilities - 35 105 557 6,329 7,026
Other financial liabilities 1,792 679 13 - - 2,484
199,141 6,800 2,847 1,144 6,620 216,552
Loan and other credit-related
commitments 69,552 29 42 137 44 69,804
Financial guarantees 1,284 - - - - 1,284
At 31 Dec 2018 269,977 6,829 2,889 1,281 6,664 287,640
Proportion of cash flows
payable in period 95% 2% 1% 0% 2% 100%
Cash flows payable under financial liabilities by remaining
contractual maturities
Due over Due over Due over
1 month 3 month 1 year
Due not but not but not but not
more than more than more than more than Due over
1 month 3 month 1 year 5 years 5 years Total
The bank GBPm GBPm GBPm GBPm GBPm GBPm
Deposits by banks 2,645 1,419 115 110 - 4,289
Customer accounts 200,449 5,050 1,417 940 - 207,856
Repurchase agreements -
non-trading - 99 - - - 99
Derivatives 62 27 31 209 255 584
Debt securities in issue - 1,227 1,954 - - 3,181
Subordinated liabilities - 77 232 1,225 12,516 14,050
Other financial liabilities 1,743 520 54 168 74 2,559
204,899 8,419 3,803 2,652 12,845 232,618
Loan and other credit-related
commitments 52,875 - - - - 52,875
Financial guarantees 1,066 - - - - 1,066
At 31 Dec 2019 258,840 8,419 3,803 2,652 12,845 286,559
Proportion of cash flows
payable in period 91% 3% 1% 1% 4% 100%
Deposits by banks 1,214 2,790 217 58 - 4,279
Customer accounts 190,070 4,559 1,879 373 - 196,881
Repurchase agreements -
non-trading - 189 453 - - 642
Derivatives 38 3 26 133 279 479
Debt securities in issue - - - - - -
Subordinated liabilities - 35 105 557 6,250 6,947
Other financial liabilities 2,569 411 13 - - 2,993
193,891 7,987 2,693 1,121 6,529 212,221
Loan and other credit-related
commitments 55,505 - - - - 55,505
Financial guarantees 1,263 - - - - 1,263
At 31 Dec 2018 250,659 7,987 2,693 1,121 6,529 268,989
Proportion of cash flows
payable in period 94% 3% 1% 0% 2% 100%
22 Offsetting of financial assets and financial liabilities
--- ---------------------------------------------------------
The 'Amounts not set off in the balance sheet' include transactions where:
-- the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right of set off only in the event of default, insolvency or bankruptcy, or the offset criteria are not otherwise satisfied; and
-- in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-cash collateral has been received/pledged.
For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right of offset remains appropriate.
Amounts subject to enforceable netting
arrangements
Amounts not set
off in the balance
sheet
Net Amounts
amounts not subject
in the to enforceable
Gross Amounts balance Financial Non-cash Cash Net netting
amounts offset sheet instruments collateral collateral amount arrangements(4) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Derivatives(1)
(Note
9) 691 (573) 118 (57) - (7) 54 3 121
Reverse repos,
stock
borrowing and
similar
agreements
classified
as:
- non-trading
assets 3,697 (683) 3,014 - (3,014) - - - 3,014
------ --- -------- -------- --- -----
Loans and
advances
to
customers(2) 5,720 (1,326) 4,394 (3,764) - - 630 4 4,398
------ -------- -------- --- -----
At 31 Dec 2019 10,108 (2,582) 7,526 (3,821) (3,014) (7) 684 7 7,533
------ -------- -------- -----
Derivatives(1) (Note
9) 263 (202) 61 (22) (25) (4) 10 5 66
Reverse repos, stock
borrowing and similar
agreements classified
as:
- non-trading assets 3,422 - 3,422 - (3,422) - - -3,422
------ -----
Loans and advances
to customers(2) 7,768 (2,021) 5,747 (4,177) - - 1,570 -5,747
------ -----
At 31 Dec 2018 11,453 (2,223) 9,230 (4,199) (3,447) (4) 1,580 59,235
------ -----
Financial liabilities
Derivatives(1) (Note
9) 770 (573) 197 (57) - (32) 108 4 201
Repos, stock lending
and similar agreements
classified as:
- non-trading liabilities 781 (683) 98 - (98) - - - 98
------ --- --- -----
Customer accounts(3) 6,936 (1,326) 5,610 (3,764) - - 1,846 45,614
-----
At 31 Dec 2019 8,487 (2,582) 5,905 (3,821) (98) (32) 1,954 85,913
--- -----
Derivatives(1) (Note
9) 543 (202) 341 (22) - (95) 224 5 346
Repos, stock lending
and similar agreements
classified as:
- non-trading liabilities 639 - 639 - (639) - - - 639
------ --- -----
Customer accounts(3) 7,311 (2,021) 5,290 (4,177) - - 1,113 15,291
-----
At 31 Dec 2018 8,493 (2,223) 6,270 (4,199) (639) (95) 1,337 66,276
-----
1 At 31 December 2019, the amount of cash margin paid that had been offset against the gross derivatives liabilities was GBP168m (2018: GBP141m).
2 At 31 December 2019, the total amount of 'Loans and advances to customers' recognised on the balance sheet was GBP183,056m (2018: GBP174,807m) of which GBP4,394m (2018: GBP5,747m) was subject to offsetting.
3 At 31 December 2019, the total amount of 'Customer accounts' recognised on the balance sheet was GBP216,214m (2018: GBP204,837m) of which GBP5,610m (2018: GBP5,290m) was subject to offsetting.
4 These exposures continue to be secured by financial collateral, but we may not have sought or been able to obtain a legal opinion evidencing enforceability of the right of offset.
23 Called up share capital and other equity instruments --- -----------------------------------------------------
Called up share capital and share premium
HSBC UK Bank plc ordinary shares of GBP1.00 each, issued and fully
paid
2019 2018
Number GBPm Number GBPm
At 1 Jan and 31 Dec 50,002 - 50,002 -
HSBC UK Bank plc share premium
2019 2018
GBPm GBPm
At 31 Dec 9,015 9,015
Total called up share capital and share premium
2019 2018
GBPm GBPm
At 31 Dec 9,015 9,015
Other equity instruments
HSBC UK Bank plc additional tier 1 instruments
2019 2018
GBPm GBPm
Undated Subordinated Additional Tier 1 instrument
GBP1,096m issued 2014 (Callable December 2019 onwards) 1,096 1,096
Undated Subordinated Additional Tier 1 instrument
GBP1,100m issued 2014 (Callable December 2024 onwards) 1,100 1,100
At 31
Dec 2,196 2,196
The bank has issued capital instruments that are included in the group's capital base as fully CRD IV compliant additional tier 1 capital.
Interest on these instruments will be due and payable only at the sole discretion of the bank, and the bank has sole and absolute discretion at all times and for any reason to cancel (in whole or in part) any interest payment that would otherwise be payable on any date. There are limitations on the payment of principal, interest or other amounts if such payments are prohibited under UK banking regulations, or other requirements, if the bank has insufficient distributable items or if the bank fails to satisfy the solvency condition as defined in the instruments terms.
The instruments are undated and are repayable, at the option of the bank, in whole at the initial call date, or on any Interest Payment Date after the initial call date. In addition, the instruments are repayable at the option of the bank in whole for certain regulatory or tax reasons. Any repayments require the prior notification to and consent of the PRA. These instruments rank pari passu with the bank's most senior class or classes of issued preference shares and therefore ahead of ordinary shares. These instruments will be written down in whole, together with any accrued but unpaid interest if either the group's solo or consolidated Common Equity Tier 1 Capital Ratio falls below 7.00%.
24 Contingent liabilities, contractual commitments and guarantees
--- ---------------------------------------------------------------
The group The bank
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
Guarantees and other contingent liabilities:
* financial guarantees(1) 1,077 1,284 1,066 1,263
- performance and other guarantees 2,351 2,220 2,351 2,220
At 31 Dec 3,428 3,504 3,417 3,483
Commitments(2) :
- documentary credits and short-term trade-related
transactions 95 83 95 83
- forward asset purchases and forward deposits
placed 184 248 - -
- standby facilities, credit lines and
other commitments to lend 67,023 69,475 52,780 55,422
At 31 Dec 67,302 69,806 52,875 55,505
1 Financial guarantees contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due, in accordance with the original or modified terms of a debt instrument. The amounts in the above table are nominal principal amounts.
2 Includes GBP64bn of commitments at 31 December 2019, (2018:GBP65bn) to which the impairment requirements in IFRS 9 are applied where the group has become party to an irrevocable commitment.
The above table discloses the nominal principal amounts, which represents the maximum amounts at risk should the contracts be fully drawn upon and clients default. As a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements. The expected credit loss provision relating to guarantees and commitments under IFRS 9 is disclosed in Note 19.
The majority of the guarantees have a term of less than one year, while guarantees of more than one year are subject the group's annual credit review process.
Contingent liabilities arising from legal proceedings, regulatory and other matters against group companies are disclosed in Note 26
Financial Services Compensation Scheme
The Financial Services Compensation Scheme ('FSCS') provides compensation to customers of financial services firms that have failed. Following the Financial Crisis, the compensation paid out to customers was initially funded through loans from HM Treasury which was fully repaid in 2018 by the FSCS. HSBC UK could be liable to pay a proportion of any future amounts that the FSCS borrows from HM Treasury to the extent the industry levies imposed to date are not sufficient to cover the compensation due to customers in any future possible collapse. The ultimate FSCS levy to the industry as a result of a collapse cannot be estimated reliably. It is dependent on various uncertain factors including the potential recovery of assets by the FSCS, changes in the level of protected products (including deposits and investments) and the population of FSCS members at the time.
The group provides guarantees and similar undertakings on behalf of third-party customers. These guarantees are generally provided in the normal course of the group's banking businesses.
25 Lease commitments --- ------------------
Finance lease receivables
The group leases a variety of assets to third parties under finance leases, including transport assets, property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income.
2019 2018
Total Total
future Unearned future Unearned
minimum finance Present minimum finance Present
payments income Value payments income Value
GBPm GBPm GBPm GBPm GBPm GBPm
Lease receivables
* No later than one year 33 (5) 28 588 (35) 553
* Later than one year and no later than 5 years N/A N/A N/A 2,716 (155) 2,561
* One to two years(1) 341 (19) 322 N/A N/A N/A
* Two to three years(1) 607 (32) 575 N/A N/A N/A
* Three to four years(1) 635 (33) 602 N/A N/A N/A
* Four to five years(1) 713 (36) 677 N/A N/A N/A
* Later than 5 years 1,469 (81) 1,388 707 (52) 655
At 31 Dec 3,798 (206) 3,592 4,011 (242) 3,769
1 For 2019 additional maturity bandings have been presented as required under IFRS 16, 2018 maturity bandings have not been restated.
26 Legal proceedings and regulatory matters --- -----------------------------------------
The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, the group considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 1. While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters at 31 December 2019 (see page 103). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Anti-money laundering and sanctions-related matters
In December 2012, among other agreements, HSBC Holdings plc ('HSBC Holdings') agreed to an undertaking with the UK Financial Service 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 HSBC's significant progress in strengthening its financial crime risk management capabilities, HSBC'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 HSBC 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.
Through the Skilled Person/Independent Consultant's prior reviews, as well as internal reviews conducted by HSBC Group, certain potential AML and sanctions compliance issues have been identified that HSBC Group is reviewing further with the FRB, FCA and/ or OFAC. The FCA is also conducting an investigation into HSBC Bank plc's and HSBC UK's compliance with UK money laundering regulations and financial crime systems and controls requirements. HSBC is cooperating with this investigation.
Based on the facts currently known, it is not practicable at this time for HSBC UK to predict the resolution of these matters, including the timing or any possible impact on HSBC UK, which could be significant.
Foreign exchange related investigation
In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the Criminal Division of the US Department of Justice ('DoJ') (the 'FX DPA'), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. This concluded the DoJ's investigation into HSBC's historical foreign exchange activities. Under the terms of the FX DPA, the HSBC Group has a number of ongoing obligations, including implementing enhancements to its internal controls and procedures in its Global Markets business, which will be the subject of annual reports to the DoJ.
In February 2019, various HSBC Group companies were named as defendants in a claim issued in the High Court of England and Wales that alleges foreign exchange-related misconduct. This matter is at an early stage. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
Film finance litigation
In July and November 2015, two actions were brought by individuals against HSBC Private Bank (UK) Limited ('PBGB') in the High Court of England and Wales seeking damages on various alleged grounds, including breach of duty to the claimants, in connection with their participation in certain Ingenious film finance schemes. These actions are ongoing.
In December 2018, a separate action was brought against PBGB in the High Court of England and Wales by multiple claimants seeking damages for alleged unlawful means conspiracy and dishonest assistance in connection with lending provided by PBGB to third parties in respect of certain Ingenious film finance schemes in which the claimants participated. In June 2019, a similar claim was issued against PBGB in the High Court of England and Wales by additional claimants. These actions are ongoing.
In February 2019 and October 2019, PBGB received letters before claim by two largely separate groups of investors in Eclipse film finance schemes, each of which asserted various claims against PBGB in connection with its role in facilitating the design, promotion and operation of such schemes. These matters are at an early stage.
It is possible that additional actions or investigations will be initiated against PBGB as a result of its historical involvement in the provision of certain film finance related services.
Based on the facts currently known, it is not practicable at this time for HSBC UK to predict the resolution of these matters, including the timing or any possible aggregate impact on HSBC UK, which could be significant.
Collections and recoveries related investigation
Various HSBC Group companies, including HSBC UK, are subject to an investigation by the FCA in connection with collections and recoveries operations in the UK. This matter is at a very early stage.
Based on the facts currently known, it is not practicable at this time for HSBC UK to predict the resolution of this matter, including the timing or any possible impact on HSBC UK, which could be significant.
27 Related party transactions --- ---------------------------
The immediate parent company of the group is HSBC UK Holdings Limited and the ultimate parent company is HSBC Holdings plc. Both are incorporated in England.
Copies of these financial statements may be obtained from the following address:
HSBC Holdings plc
8 Canada Square
London E14 5HQ
The group's related parties include the parent, fellow subsidiaries, joint ventures, post-employment benefit plans for HSBC employees, Key Management Personnel ('KMP') of the bank and its ultimate parent company, HSBC Holdings plc, close family members of KMP and entities which are controlled, jointly controlled or significantly influenced by KMP or their close family members.
Particulars of transactions between the group and its related parties are tabulated below in accordance with IAS 24 'Related party disclosures'. The disclosure of the year-end balance and the highest amounts outstanding during the year are considered to be the most meaningful information to represent the amount of the transactions and outstanding balances during the year.
Key Management Personnel
The KMP of the bank are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the bank and the group, and include the Directors of the bank, and directors and certain Group Managing Directors of HSBC Holdings plc. The emoluments of those KMP who are not directors of the bank are paid by other Group companies who make no recharge to the bank. It is not possible to make a reasonable apportionment of their emoluments in respect of the bank. Accordingly, no emoluments in respect of these KMP are included in the following disclosure.
The table below represents the compensation for Directors of the bank in exchange for services rendered to the bank for the period they served during the year.
Compensation of Key Management Personnel
2019 2018(1)
GBP000 GBP000
------
Short-term employee benefits 5,703 2,875
Other long-term employee benefits 125 120
Share-based payments 578 423
Year ended 31 Dec 6,406 3,418
------ -------
1 During the first six months of 2018 the banks' Executive Directors provided services to other companies within the HSBC Group and their services to the bank were incidental. Therefore the Executive Directors remuneration disclosed for 2018 represents the period from 1 July to
31 December 2018.
Transactions and balances during the year with Key Management Personnel(1)
2019 2018
Highest
Highest amounts
amounts outstanding
Balance outstanding Balance during
at 31 Dec(2) during year(3) at 31 Dec(2) year(3)
GBPm GBPm GBPm GBPm
Advances and credits 17 25 11 12
---------------
Deposits 17 83 27 50
--------------- ------------- ------------
1 Includes close family members and entities which are controlled or jointly controlled by KMP or their close family members.
2 Exchange rates applied for non-GBP amounts is as at 31 December 2019 and 2018. 3 Exchange rates applied for non-GBP amounts is the average for the year.
The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.
In addition to the requirements of IAS 24, particulars of advances (loans and quasi-loans), credits and guarantees entered into by the bank and its subsidiaries with Directors of the bank are required to be disclosed pursuant to section 413 of the Companies Act 2006. Under the Companies Act, there is no requirement to disclose transactions with other KMP.
Transactions with Directors: advances, credits and guarantees (Companies
Act 2006)
2019 2018
Balance Balance
at 31 Dec at 31 Dec
GBP000 GBP000
------------
Loans 12,120 5,361
---------- ----------
Other related parties
Transactions and balances during the year with KMP of the bank's ultimate
parent company(1,2)
2019 2018
Highest Highest
amounts amounts
outstanding outstanding
Balance during Balance during
at 31 Dec(3) year(4) at 31 Dec(3) year(4)
GBPm GBPm GBPm GBPm
Advances and credits 6 15 12 12
Deposits - - - -
1 Excludes those who are also KMP of the bank.
2 Includes close family members and entities which are controlled or jointly controlled by the KMP or their close family members.
3 Exchange rates applied for non-GBP amounts is as at 31 December 2019 and 2018. 4 Exchange rates applied for non-GBP amounts is the average for the year.
The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.
Transactions and balances during the year with the joint venture
2019 2018
Highest Highest
balance balance
Balance during the Balance during the
at 31 Dec year at 31 Dec year
GBPm GBPm GBPm GBPm
Unsubordinated amounts due from the
joint venture 83 90 90 100
---------- -----------
Amounts due to joint ventures 21 21 17 17
---------- ----------- ---------- -----------
Guarantees and commitments 300 480 400 480
---------- ----------- ---------- -----------
The group provides certain banking and financial services to its joint venture, including loans, overdrafts, interest and non-interest- bearing deposits and current accounts. Details of the interest in the joint venture are given in Note 12.
The group's transactions and balances during the year with HSBC Holdings
plc and subsidiaries of HSBC Holdings plc
2019 2018
Due to/from Due to/from
Due to/from subsidiaries Due to/from subsidiaries
HSBC Holdings of HSBC Holdings HSBC Holdings of HSBC Holdings
plc plc plc plc
Highest Highest Highest Highest
31 Dec balance 31 Dec balance 31 Dec balance 31 Dec balance
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------- -------- -------- ---------- --------- -------- --------- ----------
Assets
Derivatives - - 45 46 - - 27 38
---------- -------- -------- ---------- --------- --------
Loans and
advances
to banks - - 671 1,526 - - 802 920
---------- -------- -------- ---------- --------- -------- --------- --------
Loans and
advances
to customers - - - - - - - 177
Other assets 2 7 239 462 8 8 416 1,842
---------- -------- -------- ---------- --------- -------- --------- --------
Total related
party assets at
31 Dec 2 7 955 2,034 8 8 1,245 2,977
Liabilities - - - -
Deposits by
banks - - 283 1,293 - - 220 846
---------- -------- -------- ---------- --------- --------
Customer
accounts - - 1 3 - 784 1 61
Derivatives - - 118 197 - - 211 224
---------- -------- -------- ---------- --------- --------
Subordinated
liabilities - 79 9,533 9,745 79 79 4,858 4,859
Total related
party
liabilities
at 31 Dec - 79 9,935 11,238 79 863 5,290 5,990
Due to/from
Due to/from subsidiaries
HSBC Holdings of HSBC Holdings
plc plc
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
Income statement
Interest income - - 10 (3)
Interest expense 2 4 259 59
Fee income - - 64 14
Fee expense - - 43 25
Other operating income - 4 16 15
------------------------------------- ---------- ---- ---------- ------
General and administrative expenses 234 74 1,811 894
------------------------------------- ---------- ---- ---------- ------
The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.
In 2018, all costs relating to the set-up of HSBC UK Bank plc up to the date of legal separation were incurred by HSBC Bank plc. These included directors' emoluments and auditors' remuneration.
The bank's transactions and balances during the year with HSBC UK Bank
plc subsidiaries, HSBC Holdings plc and subsidiaries of
HSBC Holdings plc
2019 2018
Due to/from Due to/from
subsidiaries Due to/from subsidiaries Due to/from
of HSBC subsidiaries of HSBC subsidiaries
UK Bank Due to/from of HSBC UK Bank Due to/from of HSBC
plc HSBC Holdings Holdings plc HSBC Holdings Holdings
subsidiaries plc plc subsidiaries plc plc
31 Highest 31 Highest 31 Highest 31 Highest 31 Highest 31 Highest
Dec balance Dec balance Dec balance Dec balance Dec balance Dec balance
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Derivatives - - - - 43 46 - - - - 24 37
Loans and
advances
to banks 3,274 3,311 - - 662 1,519 2,729 2,729 - - 706 913
Loans and
advances
to customers 8,417 8,513 - - - - 8,005 8,005 - - - -
Other assets 1,895 2,303 1 6 226 455 2,134 2,134 6 7 412 1,873
Total related
party
assets at 31
Dec 13,586 14,127 1 6 931 2,020 12,868 12,868 6 7 1,142 2,823
Liabilities
Deposits by
banks 3,749 4,135 - - 283 1,292 3,238 3,385 - - 220 846
Customer
accounts 373 373 - - 1 1 357 357 - 784 1 1
Derivatives - - - - 117 192 - - - - 209 217
Subordinated
liabilities - - - - 9,454 9,666 - - - - 4,858 4,859
Total related
party
liabilities
at 31
Dec 4,122 4,508 - - 9,855 11,151 3,595 3,742 - 784 5,288 5,923
The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.
Post-employment benefit plans
The group's pension funds had placed deposits of GBP169m (2018: GBP104m) with its banking subsidiaries, earning interest of GBP0.2m (2018: nil).
The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.
28 Events after the balance sheet date --- ------------------------------------
These accounts were approved by the Board of Directors on 17 February 2020 and authorised for issue.
On 13 February 2020, the Directors declared an interim dividend to ordinary shareholders of GBP100m in respect of the financial year ending 31 December 2019. No liability is recognised in the financial statements in respect of this dividend.
On 1 January 2020, substantially all of HSBC Private Bank (UK) Limited assets and liabilities were transferred to HSBC UK Bank plc. This was effected by way of a court sanctioned transfer scheme under Part VII of the Financial Services and Markets Act 2000. Further details are given in Note 13.
29 HSBC UK Bank plc's subsidiaries and joint ventures --- ---------------------------------------------------
In accordance with section 409 of the Companies Act 2006 a list of HSBC UK Bank plc subsidiaries and joint ventures, the registered office address and the effective percentage of equity owned at 31 December 2019 is disclosed below.
Unless otherwise stated, the share capital comprises ordinary or common shares which are held by HSBC UK Bank plc subsidiaries. The ownership percentage is provided for each undertaking. The undertakings below are consolidated by HSBC UK Bank plc unless otherwise indicated.
Subsidiaries
The undertakings below are consolidated by HSBC UK Bank plc.
% of share
class held
by immediate
parent company
(or by HSBC
UK Bank
plc where
Subsidiaries this varies) Footnotes
Assetfinance December
(F) Limited 100.00 4
---------
Assetfinance June (D)
Limited 100.00 4
---------
Assetfinance March
(D) Limited 100.00 4
---------
Assetfinance September
(G) Limited 100.00 4
---------
B&Q Financial Services 1,
Limited 100.00 5
---------
Canada Square Nominees 1,
(UK) Limited 100.00 6
---------
HSBC Branch Nominee
(UK) Limited 100.00 1,4
---------
1,
HSBC Client Share Offer 2,
Nominee (UK) Limited 100.00 7
---------
HSBC Equipment Finance 1,
(UK) Limited 100.00 4
---------
HSBC Executor & Trustee
Company (UK) Limited 100.00 4
1,
HSBC Finance Limited 100.00 6
---------
HSBC Invoice Finance 1,
(UK) Limited 100.00 8
---------
HSBC Private Bank (UK) 1,
Limited 100.00 6
---------
1,
HSBC Stockbrokers Nominee 2,
(UK) Limited 100.00 7
---------
HSBC Trust Company 1,
(UK) Limited 100.00 6
---------
HSBC UK Client Nominee 1,
Limited 100.00 4
---------
HSBC Wealth Client 1,
Nominee Limited 100.00 4
---------
John Lewis Financial 1,
Services Limited 100.00 6
---------
Marks and Spencer Financial 1,
Services plc 100.00 9
---------
Marks and Spencer Unit 1,
Trust Management Limited 100.00 9
Midland Bank (Branch 1,
Nominees) Limited 100.00 4
---------
Midland Nominees Limited 100.00 4
---------
St Cross Trustees Limited 100.00 4
---------
Turnsonic (Nominees)
Limited 100.00 4
---------
Joint ventures
The undertakings below are Joint Ventures and equity accounted.
% of share
class held
by immediate
parent company
(or by HSBC
UK Bank
plc where
Joint ventures this varies) Footnotes
3,
Vaultex UK Limited 50.00 10
---------
Footnotes
Directly held by HSBC UK Bank
1 plc
2 In Liquidation
Financial year ended 6 October
3 2019
Registered Offices
1 Centenary Square, Birmingham,
4 United Kingdom, B1 1HQ
Camden House West, The Parade,
Birmingham, United Kingdom, B1
5 3PY
8 Canada Square, London, United
6 Kingdom, E14 5HQ
Hill House, 1 Little New Street,
London, United Kingdom, EC4A
7 3TR
21 Farncombe Road, Worthing,
8 United Kingdom, BN11 2BW
Kings Meadow Chester Business
Park, Chester, United Kingdom,
9 CH99 9FB
All Saints Triangle, Caledonian
Road, London, United Kingdom,
10 N1 9UT
Reconciliation of Non-GAAP Financial Measures
Return on equity and return on tangible equity
Return on tangible equity ('RoTE') is computed by adjusting the reported equity for goodwill and intangibles. The adjustment to reported results and reported equity excludes amounts attributable to non-controlling interests. We provide RoTE in addition to return on equity ('RoE') as a way of assessing our performance, which is closely aligned to our capital position. The measures are calculated in USD in line with the standard HSBC Group wide calculation methodology.
The following table details the adjustments made to the reported results and equity:
Return on Equity and Return on Tangible Equity
Year ended
31 Dec 31 Dec
2019 2018
$m $m
-------
Profit
Profit attributable to the ordinary shareholders of
the parent company 504 923
------
Significant items (net of tax) 1,544 304
Other - (5)
------ ------
Adjusted profit attributable to the ordinary shareholders
of the parent company 2,048 1,222
Equity
Average shareholders' equity 28,567 28,742
------
Additional Tier 1 (2,813) (2,842)
------
Average ordinary shareholders' equity 25,754 25,900
------
Effect of goodwill and other intangibles (net of deferred
tax) (5,013) (4,899)
------
Other - (23)
------ ------
Average tangible ordinary shareholders' equity 20,741 20,978
------
Ratio % %
-------
Return on equity (annualised) 2.0 6.4
------
Return on average tangible equity (annualised) 2.4 8.8
------ ------
Adjusted return on average tangible equity (annualised)(1) 9.9 11.7
------
1 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.
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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