TIDM63AS
RNS Number : 9129U
HSBC Bank plc
03 August 2020
3 August 2020
HSBC Bank plc
2020 Interim Report
In fulfilment of its obligations under sections 4.2.2, 6.3.3(2)
and 6.3.5(1) of the Disclosure Guidance and Transparency Rules,
HSBC Bank plc (the "Company") hereby releases the unedited full
text of its 2020 Interim Report for the half-year ended 30 June
2020.
The document is now available on the Company's website:
http://www.hsbc.com/investor-relations/subsidiary-company-reporting
The document has also been submitted to the National Storage
Mechanism (NSM) and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
HSBC Bank plc
Interim Report 20 20
Contents
Page
Presentation of information 1
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Cautionary statement regarding
forward-looking statements 1
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Highlights 2
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Key financial metrics 3
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Purpose and strategy 4
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About HSBC Bank plc 4
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How we do business 6
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Economic background and outlook 7
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Interim management report - Financial
summary 8
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Review of business position 12
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Reported performance by country 13
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Risk 14
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Capital 34
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Statement of Directors' Responsibilities 44
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Independent Review Report to
HSBC Bank plc 45
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Condensed Financial Statements 46
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Notes on the Condensed Financial
Statements 53
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Presentation of information
This document comprises the
Interim Report 2020
for HSBC Bank plc ('the bank') and its subsidiaries (together
'the group'). 'We', 'us' and 'our' refer to HSBC Bank plc together
with its subsidiaries. References to 'HSBC' or 'the Group' within
this document mean HSBC Holdings plc together with its
subsidiaries.
It contains the Interim Management Report and Condensed
Consolidated Financial Statements of the group, together
with the Auditor's review report, as required by the Financial
Conduct Authority's ('FCA') Disclosure Guidance and Transparency
Rules ('DTR'). The Capital section also contains certain Pillar 3
disclosures which the bank considers require semi-annual
disclosure.
Within the Interim Management Report and Condensed Consolidated
Financial Statements and related notes, the group has presented
income statement figures for the three most recent six-month
periods to illustrate the current performance compared with recent
periods.
Unless otherwise stated, commentary on the income statement
compares the six months to 30 June 2020 with the same period in the
prior year. Balance sheet commentary compares the position at 30
June 2020 to 31 December 2019.
In accordance with IAS 34, the Interim Report is intended to
provide an update on the Annual Report and Accounts 2019 and
therefore focuses on events during the first six months of 2020,
rather than duplicating information previously reported.
Our reporting currency is GBP sterling. Unless otherwise
specified, all $ symbols represent US dollars.
Cautionary statement regarding forward-
looking statements
This
Interim Report 2020
contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the
group.
Statements that are not historical facts, including statements
about the group's beliefs and expectations, are forward-looking
statements. Words such as 'expects', 'anticipates', 'intends',
'plans', 'believes', 'seeks', 'estimates', 'potential' and
'reasonably possible', variations of these words and similar
expressions are intended to identify forward-looking statements.
These statements are based on current plans, estimates and
projections, and therefore undue reliance should not be placed on
them. Forward-looking statements speak only as of the date they are
made. HSBC Bank plc makes no commitment to revise or update any
forward-looking statements to reflect events or circumstances
occurring or existing after the date of any forward-looking
statement.
Forward-looking statements involve inherent risks and
uncertainties. Readers are cautioned that a number of factors could
cause actual results to differ, in some instances materially, from
those anticipated or implied in any forward-looking statements.
Highlights
For the half-year ended 30 June 2020
Reported (loss) / profit before
tax (GBPm)
GBP
(1,283)m
(1H19: GBP151m)
Reported revenue (GBPm)
GBP
2,889m
(1H19: GBP3,137m)
Reported risk-weighted assets at
period end (GBPbn)
GBP138bn
(31 Dec 2019: GBP125bn)
Adjusted (loss) / profit before
tax (GBPm)
GBP
(459)m
(1H19: GBP290m)
Total assets at period end (GBPbn)
GBP
758bn
(31 Dec 2019: GBP636bn)
Common equity tier 1 ratio at period
end (%)
13.5
%
(31 Dec 2019: 14.2%)
Key financial metrics
Half-year to
30 Jun 30 Jun 31 Dec
Footnotes 2020 2019 2019
For the period (GBPm)
(Loss) / profit before tax (reported basis) (1,283) 151 (1,023)
------- -------
(Loss) / profit before tax (adjusted basis) 1 (459) 290 313
-------
Net operating income before change in expected
credit losses and other credit impairment charges 2 2,889 3,137 2,907
-------
(Loss) / profit attributable to the parent
company (1,230) 23 (1,036)
-------
At period end (GBPm)
--------
Total equity attributable to the parent company 24,623 25,917 23,503
-------
Total assets 757,819 673,008 636,491
-------
Risk-weighted assets 3 138,378 148,817 125,413
------- ------- -------
Loans and advances to customers (net of impairment
allowances) 115,164 114,906 108,391
------- ------- -------
Customer accounts 207,089 183,084 177,236
------- ------- -------
Capital ratios (%) 3
-------- --------
Common equity tier 1 13.5 13.3 14.2
------- -------
Tier 1 16.5 15.4 17.6
------------------------------------------------------ ---------- ------- ------- -------
Total capital 25.6 24.8 27.9
-------
Performance, efficiency and other ratios (annualised
%)
---------- -------- -------- ----------
Return on average ordinary shareholders' equity 4 (10.4) (0.1) (9.2)
------------------------------------------------------ ---------- ------- ------- -------
Return on tangible equity 5 (5.3) (0.7) 0.6
-------
Cost efficiency ratio (reported basis) 6 120.6 92.6 133.3
-------
Cost efficiency ratio (adjusted basis) 6 92.1 88.3 87.4
-------
Jaws (adjusted basis) 7 (4.0) (12.6) 1.1
-------
Ratio of customer advances to customer accounts 55.6 62.8 61.2
------------------------------------------------------ ---------- ------- ------- -------
1 Adjusted performance is computed by adjusting reported results
for the effect of significant items as detailed on pages 10 and
11.
2 Net operating income before change in expected credit losses
and other credit impairment charges is also referred to as
revenue.
3 For further information, refer to the Capital section on pages 34 to 43.
4 The return on average ordinary shareholders' equity is defined
as profit attributable to the parent company divided by the average
total shareholders' equity.
5 RoTE is calculated as reported profit attributable to ordinary
shareholders less changes in impairment of goodwill and intangible
assets and present value of in-force long-term insurance business
divided by average tangible shareholders' equity.
6 Reported cost efficiency ratio is defined as total operating
expenses (reported) divided by net operating income before change
in expected credit losses and other credit impairment charges
(reported), while adjusted cost efficiency ratio is defined as
total operating expenses (adjusted) divided by net operating income
before change in expected credit losses and other credit impairment
charges (adjusted).
7 Adjusted jaws measures the difference between adjusted revenue and adjusted cost growth rates.
HSBC at a glance
HSBC is one of the largest banking and financial services
organisations in the world, with operations in 64 countries and
territories.
Purpose and strategy
Our purpose
Our purpose is to be where the growth is, connecting customers
to opportunities. We help enable businesses to thrive and economies
to prosper, helping people to fulfil their hopes, dreams and
realise their ambitions.
HSBC values
HSBC values define who we are as an organisation and what makes
us distinctive.
Open
We are open to different ideas and cultures and value diverse
perspectives.
Connected
We are connected to our customers, communities, regulators and
each other, caring about individuals and their progress.
Dependable
We are dependable, standing firm for what is right and
delivering on commitments.
Our role in society
How we do business is as important as what we do. We seek to
build trusting and lasting relationships with our many
stakeholders, including customers, employees and shareholders to
generate value in society.
HSBC in Europe
HSBC Bank plc is responsible for our European business,
excluding UK retail and most commercial banking activity which has
been ring-fenced. In the February 2020 business update, the Group
announced plans to remodel our European business to focus on our
strengths. As a part of our plan to transform, HSBC Bank plc is now
managed as one integrated business with two main hubs in London and
Paris. This is complemented by our subsidiary in Germany, which
serves the European Union's largest economy.
HSBC Bank plc operates in 20 markets(1) . Our operating entities
represent the Group to customers, regulators, employees and other
stakeholders. We are organised around the principal operating units
detailed below.
The London hub consists of the UK non-ring fenced bank, which
provides overall governance and management for the Europe region as
a whole and is a global centre of excellence for wholesale banking
for the Group. In addition, the management team directly oversees
our businesses in Armenia, Channel Islands & Isle of Man, and
Malta.
HSBC France, comprises our Paris hub and its European Union
branches (Belgium, Czech Republic, Greece, Ireland, Italy,
Luxembourg, Netherlands, Poland, Spain and Sweden). We are creating
an integrated Continental European bank anchored on Paris to better
serve our clients, and simplify our organisation.
HSBC Germany serves the European Union's largest economy and one
of the leading export nations globally. HSBC Germany's business
proposition mirrors the importance of trade and global connectivity
with a clearly defined international Corporate and Institutional
target clientele.
1 Full list of markets where HSBC Bank plc has a presence:
Armenia, Belgium, Channel Islands and Isle of Man, Czech Republic,
France, Germany, Greece, Ireland, Italy, Israel, Luxembourg, Malta,
Netherlands, Poland, Russia, South Africa, Spain, Sweden,
Switzerland and the UK.
About HSBC Bank plc
With assets of
GBP758bn
at 30 June
2020
, HSBC Bank plc is one of Europe's largest banking and financial
services organisations. More than
1.3 million
customers bank with us
We employ around
17,200
people across our locations
Our vision and strategy
We have a clear vision, to build a strong and successful
European business, focused on international wholesale banking
clients linked to our global network and a targeted wealth
franchise.
HSBC Bank plc's strategic vision is to be the leading
international bank for international corporates in Europe, focused
primarily on clients that value our network with a focus on
transactional banking and financing. This is complemented by a
targeted wealth offering, through our Wealth and Personal Banking
business (see products and services). HSBC Bank plc will remain a
key centre of excellence for risk management and product expertise,
but at a reduced scale.
The impact of Covid-19 on our strategy
Consistent with the Group, HSBC Bank plc paused client and
employee transformation actions from late March to mid-June 2020 -
as a part of our support to customers, employees and society in
navigating Covid-19. Further information as to how we have and will
continue to support our stakeholders can be found on page 6.
In February 2020, our business update outlined plans to remodel
our European business, enabling us to become simpler and more
competitive. The transformation of Europe has begun and is now in
full implementation and we strive to support colleagues closely
through all organisational change.
Progress on our 2020 Business Update
Restructuring in Europe
We have commenced restructuring our business in Europe. In order
to simplify our organisation, we have implemented a leaner
management structure (see HSBC in Europe). This aligns with UK and
European Union legal entity and regulatory requirements for
financial services, following the UK's withdrawal from the European
Union.
We have reduced total operating expenses (on an adjusted basis,
excluding impairment of goodwill and other intangible assets) by 4%
compared to the same period last year. This was driven by cost
discipline and reprioritisation of investments to partly mitigate
revenue headwinds. Staff costs reduced by 4% as employee and
contractor numbers were down since the end of 2019.
Performance-related pay, marketing and consultancy expenditure was
also reduced. Risk-weighted assets have increased by 10.3% since
December 2019, as a result of the economic impact of Covid-19 (for
detailed information, refer to risk-weighted assets on pages
34-35). The commitment announced in February 2020 to reduce RWAs
remains unchanged.
We have previously announced a strategic review of our retail
business in France; this is ongoing and no decisions have been
made.
Investing in our opportunities and areas of strength
We were pleased to increase our shareholding in HSBC Germany to
over 99%, increasing our participation in Europe's largest economy
which enabled us to further establish our presence and our
principal operating units.
We continue to invest in our strengths within Global Liquidity
and Cash Management ('GLCM'), in particular enhancing our digital
functionality for our clients during this time of accelerated
change. Within our HSBCnet channel, we have introduced a soft
token, enabling authentication with mobile, providing a cheaper,
simpler, stronger and a more flexible alternative to a security
device. GLCM plans to protect and grow its customer base by
enhancing existing payments and liquidity capabilities in target
markets.
Global Trade and Receivable Finance ('GTRF') Europe intends to
build upon HSBC's leadership in trade finance whilst driving
sustainable and profitable growth. GTRF Europe is an integral part
of the Global Trade Transformation Programme. The programme is
increasing investment in new product platforms (including block
chain) and deployment of automated Anti-Money Laundering and
Sanctions controls which will result in improved risk management
and efficiency.
Products and services
The Group manages its products and services through its three
global businesses: GBM; CMB; WPB
(1)
; and Corporate Centre (Corporate Centre comprises Central
Treasury, certain legacy assets, central stewardship costs, and
interests in our associates and joint ventures).
Our Global Businesses
Our operating model consists of three global businesses and a
Corporate Centre, supported by HSBC Operations, Services and
Technology, and 11 global functions, including Risk, Finance,
Compliance, Legal, Marketing and Human Resources.
Global Banking and Markets Commercial Banking Wealth and Personal Banking
('GBM') ('CMB') ('WPB')(1)
HSBC Global Banking and We serve customers In Europe, Wealth and Personal
Markets deliver tailored ranging from small Banking helps around 1.2
financial solutions to enterprises to multinational million customers with their
major government, corporate corporates operating financial needs through Private
and institutional clients across borders. We Banking, Retail Banking,
worldwide. Operating provide the tools and Wealth Management, Insurance
as a global business, expertise that European and Asset Management.
we also contribute significant businesses need to Our core retail proposition
revenues to other regions thrive. Our network offers a full suite of products
through our European of relationship managers including personal banking,
client base. and product specialists mortgages, loans, credit
We provide a comprehensive work closely to meet cards, savings, investments
suite of services across customer needs, from and insurance. Alongside
capital financing, sales term loans to region-wide this, WPB offers various
and trading, transaction treasury and trade propositions in certain markets,
and advisory banking solutions. We are fully including Jade, Premier,
services, trade services, committed to helping and Advance; as well as wealth
research, securities European businesses solutions, financial planning
services and global liquidity navigate change and and international services.
and cash management. seize export opportunities Our Private Banking proposition
Our European teams bring as the EU strikes new serves high net worth and
together relationship trade agreements. CMB ultra high net worth clients
managers and product is at the centre of with investable assets greater
specialists to deliver creating revenue synergies than $5m in Channel Islands
financial solutions customised within the Group. We and Isle of Man, France and
to suit our clients' work closely with our Germany, including those
business-specific growth GBM colleagues to provide with international banking
ambitions and financial expertise in capital needs. The range of services
objectives. We continue finance and advisory available to private banking
to work closely with solutions to support clients includes investment
colleagues in CMB to our CMB clients. Our management (comprising of
provide a range of tailored trade teams within discretionary, advisory and
products and seamless CMB also provide import brokerage services), Private
services that meet the and export finance Wealth Solutions (including
needs of clients across solutions to GBM clients. trusts and estate planning)
the bank. With major operations and bespoke lending such
Our business is underpinned in France and Germany, as lending against financial
by a focus on the highest and full-service centres assets and residential mortgage
standards of conduct in hubs such as Ireland, financing for high-end properties.
and financial crime risk the Netherlands and WPB collaborates with all
management. We remain Switzerland, we provide Global Businesses across
committed to deepening corporates with the the Group to provide financial
client relationships, means to consolidate solutions across all stages
improving synergies across and simplify their of the client continuum,
HSBC Global Businesses. European operations, from supporting small business
We continue to invest enabling our customers owners within France and
in digital programmes to have greater visibility Malta through HSBC Fusion
focused on clients such over their liquidity to our Private Banking service
as HSBCnet, streamlining position and unlock where we aspire to be the
the platform and improving efficiencies in their bank of choice to our best
customer experience. treasury structures. corporate clients.
Our customers expect The depth of our global business
us to be innovative, service matches that of our
whether it's a receivables diverse client needs: from
finance solution to branches, self-service terminals,
optimise working capital telephone service centres
or support in pursuing and digital services (internet
the sustainability and mobile banking). Private
agenda. Banking hosts a 'Next Generation'
programme of events to support
our client's next generation
and offers philanthropy advisory
to their clients. We continue
to focus on meeting the needs
of our customers, the communities
we serve, and our people,
whilst working to build the
bank of the future. We aim
to deliver growth and target
to grow revenue faster than
costs, increasing return
on equity over time.
-------------------------------- ------------------------------ ------------------------------------
Adjusted (loss)/profit before tax
GBP(214)m GBP48m GBP(148)m
(1H19: GBP132m) (1H19: GBP255m) (1H19: GBP116m)
-------------------------------- ------------------------------ ------------------------------------
Risk-Weighted Assets
GBP87,555m GBP32,053m GBP9,831m
(31 Dec 2019: GBP81,466m) (31 Dec 2019: GBP28,750m) (31 Dec 2019: GBP9,119m)
-------------------------------- ------------------------------ ------------------------------------
1 Global Private Banking and Retail Banking and Wealth
Management have been merged to form WPB. Refer to Note 3 Segmental
analysis.
Our Global Businesses are presented on an adjusted basis, which
is consistent with the way in which we assess the performance of
our Global Businesses.
How we do business
Europe (inclusive of the UK) as a region is a fundamental part
of the global economy, representing 25% of global Gross Domestic
Product ('GDP') and nearly 40% of global trade. It's the largest
integrated trading bloc in the world and a key trading partner with
Asia, the Middle East, the US, Canada and Latin America. Europe is
therefore critical to the Group as a key hub for our global network
and capabilities.
The Covid-19 pandemic has created a great deal of uncertainty.
It is affecting everyone in different ways, with markets at
different stages of the crisis. We are tailoring our response to
the different circumstances and situations in which our
stakeholders find themselves.
Customers
Europe is home to some of the best performing, forward-thinking
companies, ranging from entrepreneurial start-ups to large
multinationals. HSBC supports businesses of all sizes across Europe
and offers a wide range of banking services with a focus on
wholesale banking.
In response to the Covid-19 outbreak, governments and regulators
around the world have introduced a number of support measures. We
are participating in market-wide schemes with GBP2.1bn of financing
raised for wholesale clients in our major markets. We have GBP
3.4bn of exposure (including undrawn commitments) through
government-guaranteed loan schemes attracting GBP1.8bn RWAs at 30
June 2020.
In June 2020 HSBC Bank plc was announced as an accredited lender
for the Coronavirus Large Business Interruption Loan Scheme
('CLBILS'). This accreditation is jointly held by our Commercial
Banking and Global Banking businesses.
HSBC has produced forward-thinking, innovative content to guide
clients in navigating the new normal, sharing HSBC's expertise
around the world. Examples of these can be found here:
https://www.business.hsbc.ie/en-gb/generic/security-centre
https://www.hsbcprivatebank.com/en/about-us/video-gallery?vid=%7BBB2189F9-E2EF-4C0B-9DDC-4E189F960B16%7D
In July 2020 HSBC was voted #1 Standout Dealer for global
corporates (Greenwich), Global Market Share Leader for Corporates
(2020 Euromoney FX Survey).
Sustainability
Europe is at the forefront of international efforts to fight
climate change and is a world leader in sustainable finance. We
share these values and want to help governments and businesses
achieve their aims of developing a sustainable future for all. In
2020 Euromoney named HSBC as 'Western Europe's Best Bank for
Sustainable Finance', building on our position as market
leader.
Case Studies:
HSBC Bank plc jointly led in the management of issuing an
Inaugural Response Bond by Nordic Investment Bank. EUR1bn has been
pledged over three years, to finance projects that aim to alleviate
the social and economic consequences of the Covid-19 pandemic.
HSBC Bank plc assisted Neoen (a leading international producer
of renewable energy) with issuing the first ever 'green'
convertible bond in Europe. HSBC Bank plc acted as an active lead
underwriter for Neoen, proceeds from the new issuance will be used
to finance renewable energy production or storage activities.
Communities
To deal with the immediate and pressing impact of the Covid-19
outbreak in Europe, we have focused our efforts on our community to
provide support to leading Non-Governmental Organisations,
ultimately providing medical response, food security and access to
support for vulnerable people.
To date, our business has committed more than $3.6m of the total
$25m Group pledge, to programmes and partners across Europe, such
as the UK National Emergencies Trust, Cresus in France, Caritas in
Malta and Red Cross across many countries.
Employees
Our people at HSBC span many cultures, communities and
continents. HSBC want to build trusted relationships, where our
people feel empowered in their roles and inspired to grow. We are
focussed on ensuring our employees are valued, respected and
supported to fulfil their potential and thrive. HSBC understands
the importance of building a diverse and inclusive workforce,
valuing individuals and their contribution. This allows us to
better represent our customers and the communities we serve.
In times of uncertainty during the Covid-19 pandemic, our focus
has been on ensuring the wellbeing and safety of our employees. A
healthy and happy workforce is essential for a positive working
environment and our priorities for our people are mental health,
flexible working and financial well-being. 90% of our staff felt
that HSBC was providing them with the information needed to work as
effectively as possible during the Covid-19 situation. 85% of our
staff felt that their line manager was providing them with the
support they need to work through the impact of Covid-19.
In March, we paused the redundancy programme intended to deliver
the reduction in headcount we announced in February, because of the
high degree of uncertainty created by the escalating impact of
Covid-19. We decided in June to lift the pause on redundancies,
proceeding thoughtfully but purposefully, while taking local
considerations into account.
We strive to support colleagues closely through all
organisational change. Our focus is to prioritise retention of our
permanent employees through mechanisms such as redeployment. Where
redundancies were necessary in the first half of 2020 we sought to
treat people fairly and responsibly. Where appropriate, we provided
suitable notice periods and consulted with employee representative
bodies. We use objective and appropriate selection criteria for
redundancies. We prohibit selection on grounds linked to personal
characteristics, for example gender, race, age or having raised
past concerns, except as required by law. In many markets our
discretionary severance payments exceed statutory minimums and our
employees are additionally provided with access to counselling via
employee assistance programmes and career transition support.
Our approach to Diversity
Our actions are focused on ensuring our people are valued,
respected and supported to fulfil their potential and thrive. Our
global ethnicity inclusion programme, which launched in May, will
help us take targeted actions to ensure we enable the careers and
career progression of all our colleagues in a supportive and
inclusive way. It will also help us improve the data and reporting
of our people's ethnic backgrounds globally.
We are listening to what our colleagues are telling us in
response to the Black Lives Matter movement and in Europe there is
active commitment to, and sponsorship of the Diversity &
Inclusion (D&I) agenda from senior management, through:
-- Ensuring our approach is adapted and relevant to our local markets
-- Increasing awareness through communications and podcasts
-- Regular Exchange meetings to encourage open dialogue on current D&I topics
Details of the Group D&I strategy, purpose and resources are
available on the website at
www.hsbc.com/our-approach/culture-and-people/diversity-and-inclusion.
A further update to our plans and progress will be included in
our Annual Report and Accounts 2020.
Investors
HSBC Bank plc maintains an active dialogue with its investors.
The bank's relationship with its debt investors is held via HSBC
Group Investor Relations as many of these relationships span
investments across multiple entities within the broader HSBC
Group.
Regulators and Governments
HSBC Bank plc has proactively engaged with relevant regulators
and standards setters regarding the numerous policy changes issued
in response to the pandemic, to help our customers, to contribute
to normalisation and recovery and to manage the operational
capacity at both banks and regulators. We have continued to uphold
our standards, track and document any changes and maintained our
transparency with regulators. We have also engaged extensively with
relevant regulators and central banks globally in pursuit of their
supervisory objectives and other activities aimed at maintaining
the health of the economy, the stability of the financial system
and the safety and soundness of individual financial
institutions.
Suppliers
Across our 20 European markets (see page 4 for further detail),
we have maintained our commitment to supporting suppliers when they
may need it most.
Economic background and
outlook
UK
Counting the cost of Covid-19
UK Gross Domestic Product (GDP) fell by 19.1% in the three
months to May - a far sharper drop than anything seen during the
Global Financial Crisis - as the fallout from Covid-19 weighed on
economic activity. Job losses have already been widespread, with
the 'claimant count' unemployment rate standing at 7.3% in June
from a February level of 3.4%. Meanwhile, lower energy prices and
the broader downturn are weighing on inflation - the consumer price
inflation rate was 0.6% in June, having started the year at
1.8%.
The economic lockdown has been unwinding gradually. Most sectors
of the economy have reopened. Alongside the economic reopening,
some activity indicators have come off their trough. Having slumped
by over 20% across March and April, retail sales rose by 12% in May
and by 14% in June.
To mitigate some of the economic impact of the pandemic, fiscal
and monetary policies have been loosened considerably. On the
fiscal side, the Coronavirus Job Retention Scheme, which provides
wage subsidies to 'furloughed' employees, has covered over 9
million people. But the scheme is set to end in October. Meanwhile,
the Bank of England has cut Bank Rate to 0.10% and announced
GBP300bn of additional asset purchases under its Quantitative
Easing programme since March.
Even so, given widespread job losses, continued social
distancing measures and broader economic uncertainty, the recovery
in economic activity to pre-crisis levels is set to be a protracted
one. Unemployment is set to remain elevated and inflation is likely
to remain subdued.
Risks to the outlook
The UK's economic outlook faces two key risks. First, the
recovery from Covid-19 might be more protracted, particularly if a
'second wave' of the virus brings about the need for renewed
lockdowns. Second, significant uncertainty continues to surround
the UK's future relationship with the EU. The 'status quo'
transition period is set to expire at the end of this year, and
further talks are required to find an accord that avoids a
potentially disorderly rupture of economic ties. Further stimulus
measures - including a cut in Bank Rate below zero - cannot be
ruled out if downside economic risks crystallise.
Eurozone
Unprecedented downturn, uncertain recovery
Eurozone real GDP fell by 12.1% q-o-q in the second quarter of
2020, following a 3.6% drop in the first quarter. This is an
unprecedented downturn for the eurozone, reflecting the economic
shock from Covid-19 and associated lockdown measures. The eurozone
jobless rate has started to creep up (7.8% in May versus a March
trough of 7.2%) and substantial further rises seem likely.
Meanwhile, mainly as a result of lower energy prices, but also due
to the slump in economic demand, inflation has fallen sharply -
having started the year at a rate of 1.4% annual eurozone consumer
price inflation stood at 0.4% in July (initial estimate).
With the phased reopening of European economies, leading
indicators point to a recovery in economic activity. But although
lockdown measures have eased, the lingering effects of Covid-19
(social distancing, joblessness and corporate failures) will likely
see the activity struggling to return to pre-crisis levels. As a
result, HSBC Research's view is that the economy is likely to run
persistently below capacity and annual inflation is likely to stay
well below the European Central Bank's ('ECB') target of 'below,
but close to, 2%'.
Policy challenges ahead
Significant fiscal and monetary policy challenges lie ahead. A
big step was taken in June, with EU leaders agreeing on a EUR750bn
recovery fund to help finance the recovery from Covid-19. However,
many economies are nevertheless likely to be left with substantial
debt burdens which might constrain fiscal policy in the long
run.
Meanwhile, the prospect of persistently subdued inflation is
likely to keep monetary policy very loose. The ECB has so far
announced EUR1.35tn of asset purchases under its Pandemic Emergency
Purchase Programme. Further expansion of ECB asset purchases seems
likely, given the weak inflation outlook and large volume of public
debt issuance this year and next.
Financial summary
Use of non-GAAP financial measures
Our reported results are prepared in accordance with
International Financial Reporting Standards ('IFRSs') as detailed
in the Financial Statements starting on page
46
. In measuring our performance, the financial measures that we
use include those derived from our reported results in order to
eliminate factors that distort period-on-period comparisons. These
are considered non-GAAP financial measures.
Non-GAAP financial measures are described and reconciled to the
closest reported financial measure when used.
Change in reportable segments since year end 2019
Effective from the second quarter in 2020, we simplified our
organisational structure by merging Global Private Banking ('GPB')
and Retail Banking and Wealth Management ('RBWM') to form Wealth
and Personal Banking ('WPB'). This followed realignments within our
internal reporting and includes the reallocation of Balance Sheet
Management from Corporate Centre to the global businesses.
Comparative data has been re-presented accordingly and reflected in
all the business performance commentary.
The global business segmental results are presented on an
adjusted basis in accordance with IFRS 8 'Operating Segments', as
detailed in 'Basis of preparation' in Note 3: Segmental analysis on
page 54. Reconciliations of reported and adjusted performance are
presented on pages 10 and 11.
Adjusted performance
Adjusted performance is computed by adjusting reported results
for the period-on-period effects of significant items that distort
period-on-period comparisons.
We use 'significant items' to describe collectively the group of
individual adjustments excluded from reported results when arriving
at adjusted performance. These items, which are detailed below, are
ones that management and investors would ordinarily identify and
consider separately when assessing performance to understand better
the underlying trends in the business.
We consider adjusted performance provides useful information for
investors by aligning internal and external reporting, identifying
and quantifying items management believes to be significant and
providing insight into how management assesses period-on-period
performance.
Summary consolidated income statement
Half-year to
30 Jun 30 Jun 31 Dec
2020 2019 2019
GBPm GBPm GBPm
------- ------- ---------
Net interest income 917 670 813
Net fee income 697 679 665
Net income from financial instruments measured
at fair value 499 2,273 1,609
---------------------------------------------------- ------ ------
Gains less losses from financial investments 82 41 (3)
------
Net insurance premium income 764 1,248 899
------
Other operating income 116 254 262
------
Total operating income(1) 3,075 5,165 4,245
---------------------------------------------------- ------ ------ ------
Net insurance claims, benefits paid and movement
in liabilities to policyholders (186) (2,028) (1,338)
---------------------------------------------------- ------ ------ ------
Net operating income before change in expected
credit losses and other credit impairment charges 2,889 3,137 2,907
---------------------------------------------------- ------ ------ ------
Change in expected credit losses and other credit
impairment charges (651) (84) (40)
---------------------------------------------------- ------ ------ ------
Net operating income 2,238 3,053 2,867
---------------------------------------------------- ------ ------ ------
Total operating expenses excluding impairment of
goodwill and other intangible assets(1) (2,711) (2,902) (2,713)
---------------------------------------------------- ------ ------ ------
Impairment of goodwill and other intangible assets (772) (4) (1,163)
---------------------------------------------------- ------ ------ ------
Operating (loss)/profit (1,245) 147 (1,009)
---------------------------------------------------- ------ ------ ------
Share of (loss) / profit in associates and joint
ventures (38) 4 (14)
(Loss)/profit before tax (1,283) 151 (1,023)
---------------------------------------------------- ------ ------ ------
Tax expense 63 (118) (1)
(Loss)/profit for the period (1,220) 33 (1,024)
---------------------------------------------------- ------ ------ ------
(Loss)/profit attributable to the parent company (1,230) 23 (1,036)
------
Profit attributable to non-controlling interests 10 10 12
---------------------------------------------------- ------ ------ ------
1 Total operating income and expenses include significant items as detailed on pages 10 and 11.
Reported performance
The following commentary reflects the newly formed Wealth and
Personal Banking ('WPB') business segment following the
simplification of our organisational structure.
Performance in the first half of 2020 was heavily impacted by
the Covid-19 pandemic and heightened levels of market volatility.
This resulted in lower revenue and higher Expected Credit Losses
('ECL').
Reported loss before tax of GBP1,283m compared with a profit
before tax of GBP151m in the first half of 2019, down GBP1,434m.
This was primarily due to higher ECL mainly driven by charges
related to specific wholesale exposures, and charges related to the
impact of Covid-19 on the economic outlook. The decrease included
an impairment and write-off of capitalised software related
principally to our businesses in the UK and France. This
reflected
underperformance and deterioration in the future forecasts of
these businesses, substantially relating to prior periods. However,
this was partially offset by a reduction in performance-related
pay. In addition, revenue was lower, impacted by the sharp fall in
equity markets and widening of credit spreads towards the end of
the first quarter of 2020, and then by the effect of interest rate
reductions on our deposit franchises in the second quarter. There
were market impacts on the present value of in-force long-term
insurance contracts ('PVIF') in insurance manufacturing in WPB,
while GBM revenue included an adverse movement in valuation
adjustments and valuation losses in Principal Investments
('PI').
Net interest income ('NII') increased by GBP247m or 37%. NII was
lower in WPB, CMB and GBM compared with the first half of 2019,
mainly driven by the impact of the lower interest rate environment.
This decrease in NII was more than offset by a reduction in the
funding cost of trading assets, and through
initiatives to reduce the overall funding costs of the bank
through retiring more expensive wholesale funding.
Net fee income increased by GBP18m or 3%, mainly in Global
Banking due to higher transaction volumes in the Capital Markets
businesses primarily from market activity driven by the impact of
Covid-19. This was partly offset by a decrease in net fee income in
WPB, primarily in Retail Banking and Asset Management due to the
adverse market conditions, lower levels of customer activity and
Assets Under Management ('AUM') reflecting the impact of
Covid-19.
Net income from financial instruments measured at fair value
decreased by GBP1,774m or 78%. In WPB, revenue decreased mainly in
insurance manufacturing primarily from the effect of a fall in
equity markets and higher credit spread. This adverse movement
resulted in a corresponding movement in liabilities to
policyholders, reflecting the extent to which policyholders
participate in the investment performance of the associated asset
portfolio. In GBM, revenue increased due to a strong performance in
Global Markets, partly offset by adverse credit and funding
valuation adjustments and adverse bid-offer spread reflecting the
impact of Covid-19. Revenue also decreased in Principal Investments
('PI') which included the impact of Covid-19-related valuation
losses in the first half of 2020.
Gains less losses from financial investments increased by
GBP41m, mainly driven by higher gains on the disposal of bonds held
at fair value through other comprehensive income ('FVOCI') in
Balance Sheet Management ('BSM').
Net insurance premium income decreased by GBP484m or 39%, mainly
in WPB, driven by a reduction in insurance revenue in France due to
lower business volumes.
Other operating income decreased by GBP138m or 54%, mainly
driven by market impacts on PVIF in insurance manufacturing within
WPB. This reflected the impact of a fall in equity markets and
lower interest rates on the valuations of the liabilities under
insurance contracts. In addition, revenue was lower due to a
decrease in the fair value of preference share holdings in
Visa.
Net insurance claims, benefits paid and movement in liabilities
to policyholders decreased by GBP1,842m or 91%, primarily in
insurance manufacturing within WPB. This decrease was driven by
lower returns on financial assets supporting contracts where the
policyholder is subject to part or all of the investment risks and
also lower new business volumes. The losses recognised on the
financial assets measured at fair value through profit and loss
held to support these insurance contract liabilities are reported
in 'Net income from financial instruments designated at fair
value'. This was partly offset by a decrease in premium income.
Changes in expected credit losses and other impairment charges
('ECL') were GBP567m higher compared with the first half of 2019.
This was mainly driven by an increase in charges relating to a
small number of wholesale exposures, notably in GBM and CMB, and
higher charges related to the ongoing impact of the Covid-19
outbreak on the forward economic outlook.
Total operating expenses excluding impairment of goodwill and
other intangible assets decreased by GBP191m or 7%, as we
re-prioritised costs and investments to mitigate revenue headwinds,
resulting in lower staff costs, performance-related pay and
marketing and consultancy expenditure. The decrease also reflects a
number of significant items including:
-- the non-recurrence of costs of GBP58m associated with the
group's preparation for the UK's exit from the European Union
booked in the first half 2019, and
-- a reduction of GBP43m in expenses related to severance costs
arising from cost efficiency measures across our global businesses
and functions.
Impairment of goodwill and other intangible assets in the first
of 2020 includes a GBP770m impairment and write-off of capitalised
software related principally to our businesses in the UK and
France. This reflected the underperformance and deterioration in
the future forecasts of these businesses, substantially relating to
prior periods.
Share of (loss)/profit in associates and joint ventures was a
loss of GBP38m compared to a profit of GBP4m in the first half of
2019. This reflected the impact of Covid-19 and the lower interest
environment on the share of profit recognised from our
associates.
For further details of significant items affecting revenue and
costs, please refer to significant revenue/cost items by business
segment on pages 10 and 11.
Tax credit was GBP63m compared to a tax expense of GBP118m in
the first half of 2019. The effective rate for the first half of
2020 of 4.9% was primarily due to the non-recognition of deferred
tax on the loss recorded in the UK for the period. The effective
tax rate for the first half of 2019 of 78.1% was higher due to
charges in respect of prior years.
Adjusted performance
Significant revenue items by business segment - gains/(losses)
Half-year to 30 Jun
2020
Corporate
WPB CMB GBM Centre Total
GBPm GBPm GBPm GBPm GBPm
---- ---- ------ ---------
Reported revenue 424 578 1,962 (75) 2,889
---- ---- ----- -------- -----
Significant revenue items - - 18 (1) 17
---- ---- ----- -------- -----
* debit valuation adjustment on derivative contracts - - (22) - (22)
-----------------------------------------------------------
* fair value movement on non-qualifying hedges - - 2 (1) 1
-----------------------------------------------------------
* restructuring and other related costs - - 38 - 38
-----------------------------------------------------------
Adjusted revenue 424 578 1,980 (76) 2,906
----------------------------------------------------------- ---- ---- ----- -------- -----
Half-year to 30 Jun
2019(1)
----------------------------------------------------------- ----
Reported revenue 681 616 1,994 (154) 3,137
---- ---- ----- -------- -----
Significant revenue items - 1 24 (6) 19
---- ---- ----- -------- -----
* debit valuation adjustment on derivative contracts - - 21 - 21
-----------------------------------------------------------
* fair value movement on non-qualifying hedges - 1 3 (6) (2)
-----------------------------------------------------------
Adjusted revenue 681 617 2,018 (160) 3,156
----------------------------------------------------------- ---- ---- ----- -------- -----
Half-year to 31 Dec
2019(1)
----------------------------------------------------------- ----
Reported revenue 675 595 1,749 (112) 2,907
---- ---- ----- -------- -----
Significant revenue items 1 - 6 (1) 6
---- ---- ----- -------- -----
* customer redress programmes 1 - - - 1
* debit valuation adjustment on derivative contracts - - 6 - 6
* fair value movement on non-qualifying hedges - - - (1) (1)
Adjusted revenue 676 595 1,755 (113) 2,913
----------------------------------------------------------- ---- ---- ----- -------- -----
1 A change in reportable segments was made in 2Q20. Comparative
data have been re-presented accordingly. For further guidance,
refer to Note 3 on page 54.
Significant cost items by business segment - (recoveries)/charges
Half-year to 30 Jun
2020
-------
Corporate
WPB CMB GBM Centre Total
GBPm GBPm GBPm GBPm GBPm
-------
Reported operating expenses (635) (418) (2,266) (164) (3,483)
------------------------------------------------------------ ------ ---- ------ -------- ------
Significant cost items 91 82 495 139 807
------------------------------------------------------------ ------ ---- ------ -------- ------
* costs of structural reform(1) - - - - -
------------------------------------------------------------
* UK customer redress programmes - - - - -
------------------------------------------------------------
* restructuring and other related costs(2) 56 49 37 30 172
------------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters - - 2 2 4
------------------------------------------------------------
* impairment of other intangible assets 35 33 456 107 631
------------------------------------------------------------
Adjusted operating expenses (544) (336) (1,771) (25) (2,676)
------------------------------------------------------------ ------ ---- ------ -------- ------
Half-year to 30 Jun
2019(3)
-------
Reported operating expenses (570) (331) (1,885) (120) (2,906)
------------------------------------------------------------ ------ ---- ------ -------- ------
Significant cost items 2 4 62 52 120
------------------------------------------------------------ ------ ---- ------ -------- ------
* costs of structural reform(1) - 3 18 37 58
------------------------------------------------------------
* UK customer redress programmes - - (3) - (3)
------------------------------------------------------------
* restructuring and other related costs 2 1 47 16 66
------------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters - - - (1) (1)
------------------------------------------------------------
Adjusted operating expenses (568) (327) (1,823) (68) (2,786)
------------------------------------------------------------ ------ ---- ------ -------- ------
Half-year to 31 Dec
2019(3)
------------------------------------------------------------ -------
Reported operating expenses (1,159) (844) (1,793) (80) (3,876)
------------------------------------------------------------ ------ ---- ------ -------- ------
Significant cost items 650 525 85 70 1,330
------------------------------------------------------------ ------ ---- ------ -------- ------
* costs of structural reform(1) - - 11 18 29
------------------------------------------------------------
* UK customer redress programmes - - 3 - 3
------------------------------------------------------------
* restructuring and other related costs 18 5 70 45 138
------------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters - - 1 7 8
------------------------------------------------------------
* impairment of goodwill 632 520 - - 1,152
------------------------------------------------------------ ------ ---- ------ -------- ------
Adjusted operating expenses (509) (319) (1,708) (10) (2,546)
------------------------------------------------------------ ------ ---- ------ -------- ------
1 Costs of structural reform includes costs associated with the UK's exit from the EU.
2 Includes the write down of software GBP139m.
3 A change in reportable segments was made in 2Q20. Comparative
data have been re-presented accordingly. For further guidance,
refer to Note 3 on page 54.
Net impact on profit before tax by business segment
Half-year to 30 Jun
2020
-----
Corporate
WPB CMB GBM Centre Total
GBPm GBPm GBPm GBPm GBPm
Reported (loss)/profit before tax (239) (34) (727) (283) (1,283)
---- ---- ---- -------- ------
Net impact on reported profit or loss 91 82 513 138 824
---------------------------------------
* significant revenue items - - 18 (1) 17
* significant cost items 91 82 495 139 807
---- ---- ---- -------- ------
Adjusted (loss)/profit before tax (148) 48 (214) (145) (459)
--------------------------------------- ---- ---- ---- -------- ------
Half-year to 30 Jun
2019(1)
-----
Reported profit/(loss) before tax 114 250 46 (259) 151
---- ---- ---- -------- ------
Net impact on reported profit or loss 2 5 86 46 139
---- ---- ---- --------
* significant revenue items - 1 24 (6) 19
* significant cost items 2 4 62 52 120
---- ---- ---- -------- ------
Adjusted profit/(loss) before tax 116 255 132 (213) 290
--------------------------------------- ---- ---- ---- -------- ------
Half-year to 31 Dec
2019(1)
-----
Reported profit/(loss) before tax (490) (323) (22) (188) (1,023)
---- ---- ---- -------- ------
Net impact on reported profit or loss 651 525 91 69 1,336
---- ---- ---- -------- ------
* significant revenue items 1 - 6 (1) 6
* significant cost items 650 525 85 70 1,330
---- ---- ---- -------- ------
Adjusted profit/(loss) before tax 161 202 69 (119) 313
--------------------------------------- ---- ---- ---- -------- ------
1 A change in reportable segments was made in 2Q20. Comparative
data have been re-presented accordingly. For further guidance,
refer to Note 3 on page 54.
Adjusted performance
The following commentary reflects the newly formed WPB business
segment following the simplification of our organisational
structure.
Adjusted loss before tax of GBP459m compared to a profit before
tax of GBP290m in the first half of 2019, down GBP749m. This was
largely driven by higher ECL and lower revenue. ECL was higher
mainly due to charges relating to a small number of wholesale
exposures, and higher charges related to the ongoing global impact
of the Covid-19 outbreak on the forward economic outlook and on our
customers. Revenue decreased primarily from the effects of a sharp
fall in equity markets and widening of credit spreads towards the
end of the first quarter of 2020 and also from the lower interest
rate environment. This was partly offset by a reduction in
operating expenses as we reviewed and re-prioritised spend to
reflect the economic outlook. Performance-related pay was lower and
we reduced discretionary expenditure across our businesses.
Adjusted revenue decreased by GBP250m or 8%, reflecting lower
revenue in WPB, GBM and CMB, partly offset by lower losses in
Corporate Centre.
The decrease in revenue included adverse market impacts on PVIF
in insurance manufacturing within WPB following a weakening of
equity prices and lower interest rates, as well as a decrease in
GBM due to adverse credit and funding valuation adjustments and
lower revenue in Principal Investments ('PI') which included the
impact of Covid-19-related valuation losses. Revenue was also lower
due to a decrease in the fair value of
preference share holdings in Visa and due to the impact of the
lower interest rate environment on our businesses, particularly in
GLCM (in GBM and CMB).
These reductions were partly offset by higher revenue in Global
Markets, notably in the Foreign Exchange and Fixed Income ('FICC')
businesses driven by strong trading performance and increased
market volatility related to Covid-19 as well as an increase in
client activity. Revenue also increased in Corporate Centre,
primarily driven by the reallocation of certain internal liquidity
charges to the global businesses in the first half of 2020.
Adjusted ECL were GBP567m higher, mainly reflecting charges
relating to a small number of wholesale exposures (in both GBM and
CMB) and higher charges related to the ongoing impact of the
Covid-19 outbreak on the forward economic outlook.
Adjusted operating expenses were lower by GBP110m or 4%, as we
reviewed and re-prioritised costs and investments to partly
mitigate revenue headwinds. The decrease primarily reflected lower
performance-related pay, staff and consultancy costs, and lower
marketing spend. This was partly offset by an increase in the
Single Resolution Fund ('SRF') levy in France and Germany.
Share of (loss)/profit in associates and joint ventures was a
loss of GBP38m compared to a profit of GBP4m in the first half of
2019. This reflected the impact of Covid-19 and the lower interest
rate environment on the share of profit recognised from our
associates.
Wealth and Personal Banking ('WPB')
Adjusted loss before tax of GBP148m compared with a profit
before tax of GBP116m in the first half of 2019, down by GBP264m.
This was primarily due to lower revenue and higher ECL, partly
offset by lower operating expenses.
Revenue decreased by GBP257m or 38%, mainly in insurance
manufacturing in France largely from negative market impacts
following a sharp fall in equity markets and lower interest rates.
The decrease in revenue included adverse market impacts on PVIF
compared with favourable movements in the first half of 2019.
Revenue also decreased in our Asset Management Group ('AMG') and
Retail Banking businesses due to adverse market conditions, lower
levels of customer activity and lower Assets Under Management
('AUM') reflecting the impact of Covid-19. In the UK, revenue was
also lower due to a decrease in the fair value of preference share
holdings in Visa and a decrease in revenue from the UK life
insurance business, notably in onshore investment bonds following
market and fund price decreases as a result of equity market
volatility. In the Channel Islands and Isle of Man, there was a
decrease in revenue from deposits due to the low interest rate
environment.
ECL net charges of GBP29m compared to a net credit of GBP4m in
the first half of 2019, an increase of GBP33m. This was driven by
higher charges relating to the global impact of Covid-19 on the
forward economic outlook compared to net releases in the first half
of 2019.
Operating expenses decreased by GBP24m or 4%, mainly driven by
lower staff costs and reductions in marketing and consultancy
costs.
Commercial Banking ('CMB')
Adjusted profit before tax was GBP48m, a decrease of GBP207m
compared with the first half of 2019. This was driven by higher ECL
and lower revenue including the impact of lower interest rates.
Revenue decreased by GBP39m or 6%, primarily driven by a
decrease in the fair value of preference share holdings in Visa.
Revenue also decreased in GLCM due to the lower interest rate
environment, partly offset by growth in average deposit
balances.
ECL increased by GBP160m, driven by higher charges against
specific customers in the first half of 2020, notably in the retail
and automobile sectors in France and Germany. In addition, there
were higher charges related to the global impact of Covid-19 on the
forward economic outlook and on our customers.
Operating expenses increased by GBP9m or 3%, mainly driven by an
increase in the Single Resolution Fund ('SRF') levy in France.
Global Banking and Markets ('GBM')
Adjusted loss before tax of GBP214m compared with a profit of
GBP132m in the first half of 2019, a decrease of GBP346m. This was
driven by higher ECL and lower revenue, partly offset by lower
operating expenses.
Revenue decreased by GBP38m or 2%, mainly in Principal
Investments ('PI') which included the impact of Covid-19-related
valuation losses compared to a gain booked in the first half of
2019. In GLCM, revenue also decreased driven by margin compression
following reductions in interest rates towards the end of the first
quarter of 2020, although this was partly offset by growth in
average balances. By contrast, Global Markets revenue grew, notably
in the Foreign Exchange and Fixed Income ('FICC') businesses driven
by strong trading performance, an increase in market volatility and
higher client activity. This was partly offset by lower revenue in
Equities, driven by weaker performance in Prime Finance which
included the effect of dividend cancellation, as well as the
non-repeat of a legal provision released in the first half of 2019.
Markets also received a higher allocation of the bank's funding
costs compared with the first half of 2019 to better reflect
internal funding used to finance activities in the business.
ECL increased by GBP359m, driven by higher charges against a
small number of clients in Global Banking within the oil and gas
and real estate sectors. In addition, there was an increase in
charges related to the impact of Covid-19 on the forward economic
outlook.
Operating expenses decreased by GBP52m or 3% compared with the
first half of 2019 mainly due to lower performance-related pay.
This was party offset by an increase in SRF levy in France and the
transfer of the levy from Corporate Centre in Germany in the first
half of 2020.
Corporate Centre
Adjusted loss before tax of GBP145m was GBP68m lower than the
loss of GBP213m in the first half of 2019. This was mainly driven
by higher revenue and lower operating expenses partly offset by a
loss in associates and joint ventures.
Revenue increased by GBP84m, primarily driven by the
reallocation of certain internal liquidity charges to the global
businesses in the first half of 2020. Revenue also increased in
Legacy Credit driven by lower losses on portfolio disposals
compared with the half of 2019.
ECL increased by GBP16m compared with the first half of 2019.
There was a net charge of GBP5m in the first half of 2020 compared
with a net credit of GBP11m in the first half of 2019. This was
mainly driven by Legacy Credit portfolio disposals.
Operating expenses decreased by GBP43m or 63%, mainly driven by
the transfer of the Single Resolution Fund levy in Germany to the
global businesses in the first half of 2020. There was also lower
mark-up on services provided by the Group's UK service company
('Servco').
Share of (loss)/profit in associates and joint ventures was a
loss of GBP38m compared to a profit of GBP4m in the first half of
2019. This reflected the impact of Covid-19 and the lower interest
rate environment on the share of profit recognised from our
associates.
Review of business position
Summary consolidated balance sheet
At
30 Jun 31 Dec
2020 2019
GBPm GBPm
---------
Total assets 757,819 636,491
------------------------------------------------------- ------- -------
Cash and balances at central banks 94,247 51,816
-------------------------------------------------------
Trading assets 86,038 98,249
-------------------------------------------------------
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 18,222 17,012
Derivatives 228,787 164,538
Loans and advances to banks 14,258 11,467
Loans and advances to customers 115,164 108,391
Reverse repurchase agreements - non-trading 62,842 85,756
Financial investments 56,452 46,464
Other assets 81,809 52,798
------- -------
Total liabilities 733,003 612,479
------------------------------------------------------- ------- -------
Deposits by banks 38,157 23,991
Customer accounts 207,089 177,236
Repurchase agreements - non-trading 31,263 49,385
Trading liabilities 48,487 48,026
Financial liabilities designated at fair value 42,255 41,642
Derivatives 222,552 161,083
Debt securities in issue 24,159 25,039
Liabilities under insurance contracts 22,192 21,509
Other liabilities 96,849 64,568
------- -------
Total equity 24,816 24,012
------------------------------------------------------- ------- -------
Total shareholders' equity 24,623 23,503
Non-controlling interests 193 509
------------------------------------------------------- ------- -------
Total reported assets were 19% higher than at 31 December 2019.
The group maintained a strong and liquid balance sheet with the
ratio of customer advances to customer accounts decreasing to 55.6%
from 61.2% at 31 December 2019.
Assets
Cash and balances at central banks increased by 82% as a result
of increased customer deposits.
Trading assets decreased by 12% due primarily to a reduction in
equity shares positions.
Derivative assets increased by 39%. This was largely due to an
increase in mark-to-market of interest rate contracts as a result
of a downward shift of yield curves for major currencies.
Non-trading reverse repurchase agreements decreased by 27%,
primarily due to a reduction in market activity relative to
year-end.
Financial investments increased by 21% as a result of deploying
surplus liquidity.
Liabilities
Customer accounts increased by 17%, this is consistent with our
funding strategy to grow customer deposits and increase
liquidity.
Trading liabilities and financial liabilities designated at fair
value balances have remained broadly unchanged.
Debt securities in issue decreased by 4% due primarily to
maturing longer term debt which is partially offset by the issuance
of short-term commercial paper and certificates of deposits.
Derivative liabilities increased by 38%. This is in line with
derivative assets as the underlying risk is broadly matched.
Equity
Total shareholders' equity increased by 5% due primarily to a
capital injection by the Group.
Reported performance by country
Profit/(loss) before tax by country within global businesses
Half-year to 30 Jun 2020
---------
Corporate
WPB CMB GBM Centre Total
GBPm GBPm GBPm GBPm GBPm
--------- ---------- ------ --------- -----------
United Kingdom 36 - (684) (221) (869)
----- ------ ----- -------- --------
France (270) (102) (164) (54) (590)
----- ------ ----- -------- --------
Germany 9 (3) 87 (6) 87
----- ------ ----- -------- --------
Other (14) 71 34 (2) 89
------------------------------- ----- ------ ----- -------- --------
Loss before tax(1) (239) (34) (727) (283) (1,283)
------------------------------- ----- ------ ----- -------- --------
Half-year to 30 Jun 2019(2)
------------------------------- ---------
United Kingdom 87 113 (8) (216) (24)
------------------------------- --------
France 10 68 (52) (25) 1
------------------------------- ----- --------
Germany 8 10 32 (9) 41
------------------------------- --------
Other 9 59 74 (9) 133
------------------------------- ----- ------ --------
Profit/(loss) before tax 114 250 46 (259) 151
------------------------------- ----- ------ ----- -------- --------
Half-year to 31 Dec 2019(2)
------------------------------- ---------
United Kingdom 105 104 (142) (149) (82)
France 29 26 3 (35) 23
Germany 6 27 42 11 86
Other(3) (630) (480) 75 (15) (1,050)
------------------------------- ----- ------ ----- -------- --------
Loss before tax (490) (323) (22) (188) (1,023)
------------------------------- ----- ------ ----- -------- --------
1 Includes the impact of a GBP631m intangible impairment related
to UK (GBP517m) and France (GBP114m) in 2020.
2 A change in reportable segments was made in 2Q20. Comparative
data have been re-presented accordingly. For further guidance,
refer to Note 3 on page 54.
3 Includes GBP1.2bn of goodwill impairment related to WPB (GBP632m) and CMB (GBP520m).
Risk
Risk overview
The group continually monitors and identifies risks. This
process, which is informed by its risk factors and the results of
its stress testing programme, gives rise to the classification of
certain financial and non-financial banking risks. Changes in the
assessment of these risks may result in adjustments to the group's
business strategy and, potentially, its risk appetite. The risks we
manage include credit risk, capital and liquidity risk, market
risk, resilience risk, regulatory compliance risk, financial crime
and fraud risk, and model risk. We also manage insurance risk.
In addition to these banking risks, we have identified top and
emerging risks with the potential to have a material impact on our
financial results or reputation and the sustainability of our
long-term business model. A new risk has been added in respect of
the Covid-19 outbreak.
The exposure to our risks and risk management of these are
explained in more detail in the Report of the Directors on pages 20
to 74 of the Annual Report and Accounts 2019.
Externally driven
Covid-19 -- Since the Covid-19 outbreak, we have worked with regulators,
governments and our customers to implement measures to
mitigate the financial, operational and other impacts
of the outbreak on our clients, our businesses and the
economies in which we operate. We have successfully invoked
business continuity plans to effectively manage our operations
under the constraints imposed by governments in response
to the outbreak.
------------------- --- ----------------------------------------------------------------
UK exit from p The UK left the EU on 31 January 2020 and entered a transition
EU period until 31 December 2020. Any execution risks to
our programme created by the Covid-19 outbreak, for example
remote working, continue to be closely monitored and
mitigated. We will continue to work with regulators,
governments and our customers to manage the risks created
by the UK's exit from the EU as they arise, particularly
across those industry sectors most impacted.
------------------- --- ----------------------------------------------------------------
Geopolitical p We monitor developments in geopolitical risk and assess
risk what impacts this may have on our portfolios. Covid-19
has resulted in an unprecedented global economic slowdown
with a significant increase in credit stress across our
portfolios. We have increased the frequency and depth
of our monitoring activities with Covid-19 vulnerability
assessments performed as part of the customer reviews.
Stress tests and other sectoral reviews were performed
to identify portfolios or customers who were experiencing
or were likely to experience financial difficulty as
a result of Covid-19. We are also increasing resources
to help address the increased level of credit defaults
in the current environment.
------------------- --- ----------------------------------------------------------------
Cyber threat u We endeavour to protect HSBC and our customers by strengthening
and unauthorised our cyber defences, helping us to execute our business
access to priorities safely and keep our customers' information
systems secure. Our data-driven approach, grounded in strong
controls that mitigate advanced cyber threats, enhances
our capability in threat detection, access controls,
and resiliency.
------------------- --- ----------------------------------------------------------------
Regulatory p We continue to enhance our management of conduct in a
focus on number of areas, including the treatment of potentially
conduct of vulnerable customers, market surveillance, employee training
business and performance. At the forefront of current conduct
risk considerations is the fair treatment of customers
in financial difficulty and ensuring state credit support
provided as a result of the pandemic is not exploited.
We are fully focussed on providing appropriate customer
outcomes in all circumstances.
------------------- --- ----------------------------------------------------------------
Financial u During the first half of 2020, the Global Standards programme
crime and was finalised with any residual aspects integrated into
fraud risk the group's day-to-day operations. We continued to focus
on enhancing our risk management capabilities and the
effectiveness of our financial crime controls. The application
of both advanced analytics and artificial intelligence
remains a key element of our next generation of tools
to fight financial crime, and our investment in these
areas is ongoing. As fraudulent activity is often more
prevalent in times of crisis, we have put in place additional
measures to minimise and detect fraud.
------------------- ----------------------------------------------------------------
Market illiquidity p The Covid-19 outbreak created significant volatility
and volatility in global markets. Against this background we continue
to monitor risks closely and report regularly on illiquidity
and concentration risks to the Prudential Regulation
Authority ('PRA').
------------------- --- ----------------------------------------------------------------
Ibor transition p We are focused on developing alternative rate products,
and the supporting processes and systems, to make these
available to our customers. We are part of the HSBC Group
programme that is concurrently developing the capability
to transition, through repapering, outstanding Libor
and Eonia contracts. The overall level of risk including
operational, conduct and legal risk, has potentially
increased as a result of a decline in our customers'
appetite to transition and the changes in industry milestones
due to the disruption of the Covid-19 outbreak. We continue
to proactively engage with industry bodies, regulators
and our customers to support an orderly transition.
------------------- --- ----------------------------------------------------------------
Climate-related u We continue to improve how we identify, oversee and manage
risks climate-related risk, both physical and transition risk.
Our risk management priorities focus on assessing the
transition and physical risk in our wholesale credit
portfolio, reviewing retail mortgage exposures in respect
of natural hazard risk, and developing scenarios for
internal use in risk management, planning and stress
testing. We continue to proactively engage our customers,
investors and regulators in order to support the transition
to a low-carbon economy, in particular with regard to
compiling the related data and disclosures.
------------------- --- ----------------------------------------------------------------
Internally driven
People risk p We continue to monitor workforce capacity and capability
requirements in line with our strategy and any emerging
issues in the markets in which we operate. These issues
can include changes to immigration and tax rules as well
as industry-wide regulatory changes. We have put in place
measures for our people to ensure that they are able
to work safely and are properly supported in coping with
Covid-19. We are also monitoring people risks that may
arise due to business transformation, ensuring that we
sensitively manage any redundancies and support impacted
employees.
------------------- --- ----------------------------------------------------------------
IT systems u We actively monitor and improve service resilience across
infrastructure our technology infrastructure. We are enhancing our service
and resilience management disciplines and change execution capabilities
to minimise service disruption to our customers. Our
IT systems have been resilient and we have further improved
them to support both our customers and our people in
new ways of operating during the Covid-19 outbreak.
------------------- --- ----------------------------------------------------------------
Execution p We continue to strengthen our prioritisation and governance
risk processes for significant strategic, regulatory and compliance
projects. With business continuity plans in place across
the markets in which we operate and significant remote
working in place, the impact of Covid-19 on the bank's
major change programmes is being closely monitored.
------------------- --- ----------------------------------------------------------------
Internally driven
Model risk p We continue to strengthen our oversight of models and
our second line of defence Model Risk Management function.
The impact of Covid-19 on model performance has highlighted
the importance of the increased controls and monitoring
requirements being put in place, with several models
requiring revisions to reflect the current extreme economic
shocks and to be in line with the expectation of the
future outlook perspective.
---------------------------------------------------------------
Data management u We continue to enhance and advance our insights, data
aggregation, reporting and decisions through ongoing
improvement and investments in data governance, data
quality, data privacy, data architecture, machine learning
and artificial intelligence capabilities.
---------------------------------------------------------------
Third-party u We continue to implement and embed changes though a Group-wide
risk management third-party risk management programme so we can better
identify, understand, mitigate and manage the risks that
arise from the outsourcing of services. The programme,
due to conclude in the second half of 2020, aims to ensure
adherence to our internal third-party risk policy and
framework. We have worked closely with our third-party
providers, which have faced constraints and enhanced
oversight on their operations during the Covid-19 outbreak.
There has been no major impact to our services during
the period.
----------------- ---------------------------------------------------------------
p Risk has heightened during 2020
u Risk remains at the same level
as 31 December 2019
-- New risk introduced in 2020
Managing risk
As a provider of banking and financial services, managing risk
is at the core of our day-to-day activities. While the group's
strategy, risk appetite, plans and performance targets are set
top-down, responsibility for risk management is allocated through
the delegation of individual accountability, with reporting and
escalation facilitated through risk governance structures.
Policies, procedures and limits are defined to ensure activities
remain within an understood and appropriate level of risk.
Identification, measurement, monitoring and reporting of risks
inform regular and strategic decision making. This is supported by
an effective system of controls to ensure compliance.
We use a comprehensive and newly updated risk management
framework across the organisation and all risk types, underpinned
by the Group's culture and values. This outlines the key
principles, policies and practices that we employ in managing
material risks, both financial and non-financial.
The first half of 2020 has been marked by unprecedented global
economic events, leading to banks playing an expanded role to
support society and customers. The Covid-19 outbreak and its impact
on the global economy has impacted many of our customers' business
models and income, requiring significant levels of support from
both governments and banks. In response, to the Covid-19 outbreak,
and other key areas, such as increased geopolitical and
macroeconomic risks, we have changed our approach to the management
of risk in this rapidly changing environment.
Throughout the Covid-19 outbreak, we have supported our
customers and adapted our operational processes. Our people,
processes and systems have responded to the changes needed and
increased workload in serving our customers through this time.
To meet the additional challenges, we supplemented our existing
approach to risk management with additional tools and practices to
mitigate and manage risks. We increased our focus on the quality
and timeliness of our management of information, through measures
such as early warning indicators, prudent active risk management of
our risk appetite, and ensuring regular communication with our
Board and other key stakeholders.
Our risk appetite
Our risk appetite defines our desired forward-looking risk
profile, and informs the strategic and financial planning process.
It provides an objective baseline to guide strategic decision
making, helping to ensure that planned business activities provide
an appropriate balance of return for the risk assumed, while
remaining within acceptable risk levels.
Our risk appetite also provides an anchor between our businesses
and the risk and finance functions, helping to enable our senior
management to allocate capital, funding and liquidity optimally to
finance growth, while monitoring exposure and the cost impacts
of managing non-financial risks. It also helps to develop
aligned people and system capabilities. Our risk appetite is
articulated in our risk appetite statement, which is approved by
the Board. Key elements include:
-- risks that we accept as part of doing business, such as
credit risk, market risk, and capital and liquidity risk, which are
controlled through both active risk management and our risk
appetite;
-- risks that we incur as part of doing business, such as
non-financial risks, which are actively managed to remain within an
acceptable appetite; and
-- risks for which we have zero tolerance, such as knowingly
engaging in activities where foreseeable reputational risk has not
been appropriately considered.
We continued to evolve our risk appetite, by enhancing both the
financial and non-financial aspects of our risk appetite statement,
to ensure we remain able to support our customers and strategic
goals against the backdrop of the Covid-19 outbreak. Specific
emphasis was placed on capital risk to ensure the group had
adequate capacity to provide financial support to customers, and a
pragmatic approach to the management of non-financial risks,
arising from large scale operational changes from amended working
practices, such as widescale homeworking.
Top and emerging risks
The group aims to identify, monitor and, where possible, measure
and mitigate large-scale events or sets of circumstances that may
have the potential to have a material impact on our financial
results or reputation, and the sustainability of our long-term
business model. These events, giving risto additional banking
risks, are captured together as the top and emerging risks. The
group made a number of changes to its assessment of existing top
and emerging risks to reflect their current effect on the group and
changes in the scope of risk definitions, to ensure appropriate
focus.
Further details on the group's top and emerging risks and other
banking risks we manage are set out from page 14.
Areas of special interest
Risks related to Covid-19
The uncertainty of Covid-19 and its effect on the global economy
has impacted our customers and our performance and the future
effects of the pandemic are uncertain. Covid-19 has necessitated
unprecedented levels of government response to protect public
health, local economies and livelihoods. The Covid-19 outbreak has
impacted countries and territories at different times and
magnitudes as it has developed. The varying government measures in
response to the outbreak have added challenges,
given the rapid pace of change and significant operational
demands. The speed at which countries and territories will be able
to unwind their lockdown measures and return to pre-Covid-19
economic levels will vary based on the levels of infection and
local political decisions. The risk of subsequent waves of
infection remain.
Restrictions implemented by governments the world over to limit
the spread of Covid-19 resulted in a sharp contraction in global
economic activity in the first half of this year. Economic activity
is expected to gradually recover in the second half of the year but
there is significant uncertainty associated with the pace and scale
of resumption. As a result, 2020 is expected to see pronounced
recession in many economies, including those in Europe. The extent
of economic activity, and any reduction in unemployment rates
across our major markets in 2021, is contingent on successful
containment of the virus and the resolution of other top risks
including what trade terms will be in place between the UK and the
EU from 1 January 2021, following the end of the transition
period.
The risk of renewed drops in economic activity is material, and
the economic fallout from Covid-19 risks is exacerbating inequality
across markets that had already suffered from social unrest. This
will leave the burden on governments and central banks to keep up
or increase fiscal and monetary stimulus. After a sharp fall in the
early phases of the spread of Covid-19, financial markets have
rebounded although they remain volatile. Depending on the degree to
which global economic growth suffers permanent losses, financial
asset prices may suffer a further, sharp fall.
Governments and central banks in major economies have deployed
extensive measures to support households and corporates. Measures
implemented by governments include income support to households and
funding support to corporates, while measures taken by central
banks include cuts to interest rates, support to funding markets
and asset purchases. These measures are expected to be unwound
gradually as government restrictions ease and as activity
increases. Central banks are expected to maintain record-low
interest rates for a considerable period of time and the debt
burden of governments will rise significantly.
In many of our markets we have initiated market-specific
measures to support our personal and business customers through
these challenging times, including mortgage assistance, payment
holidays, the waiving of certain fees and charges, and liquidity
relief for businesses facing market uncertainty and supply chain
disruption. We are also working closely with governments and
supporting national schemes that focus on the parts of the economy
most impacted by Covid-19. On 1 July 2020 HSBC Bank plc became an
accredited lender under the UK's Coronavirus Large Business
Interruption Scheme ('CLBILS'). For details of our customer relief
programs see pages 28 and 29.
It is recognised that the above measures expose the group to
heightened risks. The rapid introduction and varying nature of the
government support schemes, as well as customer expectations, can
lead to risks as the group implements large-scale changes in a
short period of time. This has led to increased operational risks,
including complex conduct considerations, increased reputational
risk and increased risk of fraud. These risks are likely to be
heightened further as and when the government support schemes are
unwound.
At 30 June 2020, our common equity tier 1 ('CET1') ratio was
13.5%, compared with 14.2% at 31 December 2019, and our liquidity
coverage ratio ('LCR') was 141%. Our capital, funding and liquidity
position is expected to help us to continue supporting our
customers throughout the Covid-19 outbreak.
The Covid-19 outbreak has led to a weakening in GDP in many of
our major markets, a key input used for calculating ECL, and there
remains the risk of more adverse economic scenarios given its
ongoing impact. Furthermore, ECL will also increase from other
parts of our business impacted by the disruption to supply chains.
The impact will vary by sectors of the economy, with heightened
risk to the oil and gas, transport and discretionary consumer
sectors being observed in the first stages of the outbreak. The
impact of the outbreak on the long-term prospects of businesses in
these sectors is uncertain and may lead to significant ECL charges
on specific exposures, which may not be fully captured in ECL
estimates. In addition, in times of crisis, fraudulent activity is
often more prevalent, leading to potentially significant ECL
charges.
As a result of the Covid-19 outbreak, business continuity plans
have been implemented successfully. Despite high levels of working
from home, the majority of our service level agreements, both
internal and external, are being maintained. No major impacts to
supply chain have been experienced from our third-party service
providers. The risk of damage or theft to the group's physical
assets or criminal injury to our employees remains unchanged; no
significant incidents have impacted our buildings or staff.
Expedited decisions to ensure the continuity of critical customer
services are being documented through governance.
Process of UK withdrawal from the European Union
The UK left the EU on 31 January 2020 and entered a transition
period until 31 December 2020, during which negotiations have been
taking place on the future relationship between the UK and the EU.
At this stage it remains unclear what that relationship will look
like, potentially leaving firms with little time to adapt to
changes, which may enter into force on 1 January 2021.
Our programme to manage the impact of the UK leaving the EU has
now been largely completed. The programme base case scenario
assumes the UK exits the transition period without the existing
passporting or regulatory equivalence framework that supports
cross-border business. Priority has been given to ensuring we can
continue to service our European Economic Area ('EEA') based
customers once this framework falls away, with three main areas of
activity:
-- extension of our product and balance sheet capabilities in
continental Europe, mainly in HSBC France and its branches in the
Netherlands and Ireland;
-- migration of HSBC's EEA clients to HSBC France and other affiliates within the EU; and
-- transferring HSBC's EEA branch businesses to HSBC France.
These objectives were largely completed by the end of 2019. The
current priority is to complete the migration of remaining
customers to one of our entities in the EU.
Product offering and client migration
To accommodate customer migrations and new business after the
UK's departure from the EU, we expanded and enhanced our existing
product offering in France, the Netherlands and Ireland.
The UK's departure from the EU's financial services regulatory
framework at the end of the transition period without alternative
equivalence type arrangements, or a trade deal being in place, is
likely to have an impact on our clients' operating models,
including their working capital requirements, investment decisions
and access to financial markets infrastructure. Our priority is to
provide continuity of service, while minimising the level of change
for our customers.
We are required to migrate some EEA-incorporated clients from
the UK to HSBC France, or another EEA entity. This has now mostly
been completed for clients we expect can no longer be serviced from
the UK. We are working in close collaboration with any remaining
clients to make the transition as smooth as possible before the end
of December 2020. We have been in close contact with these clients
since the beginning of the transition period and will support them
in the final phase of their migration to one of our entities in the
EU. We are also considering the application of regulatory regimes
in certain EU member states that allow cross-border business with
third country firms and the extent to which those may permit
continued servicing of some EEA clients from the UK following the
transition period.
Employees
The migration of EEA-incorporated clients requires us to
strengthen our local teams in the EU, and France in particular.
Given the scale and capabilities of our existing business in
France, we are well prepared to take on additional roles and
activities. Looking beyond the transfer of roles to the EU, we are
also providing support to our employees who are UK citizens
resident in EEA countries, and employees who are citizens of an EU
member state resident in the UK.
Across the programme, we have made good progress in terms of
ensuring we are prepared for the UK leaving the EU under the terms
described above. However, there remain execution risks, many of
them linked to the uncertain outcome of negotiations.
Model Risk
The Covid-19 crisis has resulted in very significant movement in
economic and market drivers, changes in retail and wholesale
behaviours and a significant increase in government support
programmes for businesses and consumers. All of these factors
significantly impact the performance of financial models, including
retail, wholesale, IFRS 9 and capital models. This has required
more on-going monitoring and more frequent testing of models used
across the group, particularly for credit models. It has also
resulted in the use of compensating controls in a consistent and
explainable manner for some models, such as overlays and overrides
on top of model outputs to help protect the group from unwanted
risks. The performance and usage of models over the next 12 to 18
months will continue to be impacted significantly by the
consequences of Covid-19.
It is too early in the current situation to be certain of the
magnitude of change required for models used by the group. However,
it is likely that capital, credit risk, IFRS 9 models, and
valuation models and financial reporting models, in other areas
impacted by Covid-19, will need to be recalibrated or in some cases
may need to be replaced with the development of new models. The
effectiveness of these models will depend in large part on the
depth and length of the economic downturn currently faced by the
economies of the major markets in which we operate.
Ibor transition
The Financial Stability Board has observed that the decline in
interbank short-term unsecured funding poses structural risks for
interest rate benchmarks that reference these markets. In response,
regulators and central banks in various jurisdictions have convened
national working groups to identify alternative benchmark rates,
near risk-free rates or Risk Free Rates ('RFRs') for these Ibors
and, where appropriate, to facilitate an orderly transition to
these rates.
Following the announcement by the FCA in July 2017 that it will
no longer persuade or require banks to submit rates for Libor after
2021, the national working groups for the affected currencies were
tasked with facilitating an orderly transition of the relevant
Libors to their chosen RFRs. The euro working group is also
responsible for facilitating an orderly transition of the Euro
Overnight Index Average ('Eonia') to the euro short-term rate
('EURSTER') as a result of Eonia not being made compliant with the
EU Benchmark Regulation.
Regulators have reiterated that firms cannot rely on Libor being
published after the end of 2021, but acknowledge that Covid-19 may
impact transition plans. Some delays in milestones were agreed in
April 2020, in consultation with the industry groups.
National working groups, regulators and governments have also
recognised that certain Libor contracts genuinely have no or
inappropriate alternatives and no realistic ability to be
renegotiated or amended prior to Libor's cessation. In response,
the US Government intends to implement legislation that gives
market participants the confidence to transition these 'tough
legacy' contracts to the recommended benchmark replacement without
the fear of legal repercussions. Similarly, in June 2020, the UK
Government announced that it would grant powers to the FCA to
enable continued publication of a Libor number using a different
and more robust methodology and inputs, and therefore reduce
disruption to any holders of these tough legacy contracts. There
is, however, no certainty as to whether the FCA will exercise these
powers or what form the revised methodology would take, and the FCA
has consequently encouraged users of Libor to renegotiate or amend
as many contracts as possible before Libor's cessation.
The HSBC Group established the Ibor transition programme with
the objective of facilitating an orderly transition from Libor and
Eonia for the Group and its clients. During the first half of 2020
the group's Libor transition has developed as follows:
Develop RFR product capabilities
Our global businesses continue to develop their capabilities to
offer RFR-based products and the supporting processes and systems.
The Covid-19 outbreak has impacted the appetite and readiness of
many of our customers to adopt RFR-based products. Consequently,
the sale of Libor and Eonia contracts with maturities beyond 2021,
known as legacy contracts, will continue for longer than initially
anticipated, to Q1 2021, as agreed by the industry-led Risk Free
Rates Working Group. This is likely to increase the volume of
legacy contracts that will need to be transitioned.
Transition legacy contracts
The programme is also continuing to develop the capability to
transition legacy Libor and Eonia contracts at a larger scale. The
Covid-19 outbreak has affected the pace with which many of our
customers will have been preparing to adopt RFR-based products.
Consequently, we expect legacy contract transition to occur over a
shortened time period, largely in the second half of 2021. In
combination with a potentially increased number of legacy contracts
requiring transition, this may still increase the overall level of
execution risk on the transition process, which could potentially
increase the level of conduct and operational risks. Our plans have
been adjusted to reflect the changed industry milestones, the
greater effort required and associated risks. Critical focus
remains on the conduct risk elements of the transition,
specifically to address conduct considerations at a product
level.
In addition to the heightened conduct and operational risks, the
process of adopting new reference rates may expose the group to an
increased level of financial risk, such as potential earnings
volatility resulting from contract modifications and changes in
hedge accounting relationships. Furthermore, the transition to
alternative reference rates could have a range of adverse impacts
on our business, including legal proceedings or other actions
regarding the interpretation and enforceability of provisions in
Ibor-based contracts and regulatory investigations or reviews in
respect of our preparation and readiness for the replacement of
Ibor with alternative reference rates. The FCA and PRA have
highlighted that the transition remains a key priority with
increased engagement now underway.
We continue to proactively engage with industry bodies,
regulators and our clients to support an orderly transition and the
mitigation of the risks resulting from the transition.
Interest rate environment
Central banks have reduced interest rates in most financial
markets due to the adverse impact on the timelines and path for
economic recovery, and the increased likelihood of negative
interest rates. This raises a number of risks and concerns, such as
the readiness of our systems and processes to accommodate zero or
negative rates, the resulting impacts on customers, regulatory
constraints and the financial implications given the significant
impact that prolonged low interest rates are likely to have on our
net interest income.
For some products, we have floored deposit rates at zero or made
decisions to not charge negative rates. This, alongside loans
repriced at lower rates, results in our commercial margins being
compressed, which will be reflected in our profitability. The
pricing of this risk will need to be considered carefully. If there
is a rebalancing of portfolios toward fee-generating business and
trading activities to offset reduced profits, we may become
exposed once rates start rising again. These factors may
challenge the long-term profitability of the banking sector,
including HSBC, and will be considered as part of the group's
transformation programme.
Key developments in the first half
of 2020
We have been actively managing the risks resulting from Covid-19
and its impact on our customers and operations during the first
half of 2020, as well as other key risks described in this Risk
section.
We supplemented our existing approach to risk management with
additional tools and practices to mitigate and manage risks. We
increased our focus on the quality and timeliness of our management
information through measures such as the introduction of early
warning indicators and prudent active risk management of our risk
appetite.
In the first half of 2020, we additionally continued to enhance
our risk management in the following areas:
-- In January 2020 we simplified our approach and articulation
of risk management, through the combination of the enterprise risk
management framework and the operational risk management
framework.
-- We continued to focus on simplifying our approach to
non-financial risk management. We are driving more effective
oversight and better end-to-end identification and management of
non-financial risks.
-- We combined the second line of defence Operational Risk and
second line of defence Resilience Risk sub-functions. By bringing
the two teams together, we will benefit from improved stewardship,
better risk management capabilities and better outcomes for our
customers.
-- We continued to focus on enhancing our risk management
capabilities and the effectiveness of our financial crime controls.
The application of both advanced analytics and artificial
intelligence remains a key element of our next generation of tools
to fight financial crime, and our investment in these areas is
ongoing.
-- We continued to promote and encourage good conduct through
our people's behaviour and decision making to deliver fair outcomes
for customers and preserve market integrity.
Credit risk
Page
Summary of credit risk 19
----
Measurement uncertainty and
sensitivity analysis of ECL
estimates 22
----
Reconciliation of changes in
gross carrying/nominal amount
and allowances for loans and
advances to banks and customers
including loan commitments
and financial guarantees 26
----
Customer relief programmes 28
---------------------------------- ----
Overview
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet an obligation under a contract. Credit
risk arises principally from direct lending, trade finance and
leasing business, but also from certain other products, such as
guarantees and derivatives.
Credit risk in the first half of 2020
During the first half of 2020, due to unique market conditions
in the Covid-19 outbreak, we expanded operational practices to
provide short-term support to customers under the current policy
framework. For further details of market-specific measures to
support our personal and business customers, see page 28. There
have been no material changes to credit risk policy.
A summary of our current policies and practices for the
management of credit risk is set out in 'Credit risk management' on
pages 28 and 29 of the Annual Report and Accounts 2019.
Summary of credit risk
The following tables analyse loans by industry sector which
represent the concentration of exposures on which credit risks are
managed.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
At
30 Jun 2020 31 Dec 2019
Gross carrying/nominal Allowance Gross carrying/nominal Allowance
amount for ECL(1) amount for ECL(1)
GBPm GBPm GBPm GBPm
---------------------- ----------- ---------------------- -------------
Loans and advances to customers at
amortised cost 116,698 (1,534) 109,428 (1,037)
* personal 26,720 (205) 24,833 (173)
- corporate and commercial 72,382 (1,200) 66,990 (809)
------------------------------------
- non-bank financial institutions 17,596 (129) 17,605 (55)
------------------------------------ ---------------------- ---------- ---------------------- ----------
Loans and advances to banks at
amortised
cost 14,277 (19) 11,471 (4)
---------------------- ----------
Other financial assets measured at
amortised cost 230,761 (11) 181,755 (9)
- cash and balances at central
banks 94,249 (2) 51,816 -
- items in the course of collection
from other banks 671 - 707 -
- reverse repurchase agreements -
non-trading 62,842 - 85,756 -
- financial investments 15 - 13 -
- prepayments, accrued income and
other
assets(2) 72,984 (9) 43,463 (9)
------------------------------------ ---------------------- ----------
Total gross carrying amount
on-balance
sheet 361,736 (1,564) 302,654 (1,050)
------------------------------------ ---------------------- ---------- ---------------------- ----------
Loans and other credit related
commitments 159,864 (120) 121,447 (54)
---------------------- ----------
- personal 2,347 (1) 1,950 (2)
- corporate and commercial 80,190 (103) 68,893 (50)
- financial 77,327 (16) 50,604 (2)
---------------------- ---------- ---------------------- ----------
Financial guarantees(3) 4,365 (15) 4,318 (9)
---------------------- ----------
- personal 39 - 34 -
- corporate and commercial 2,983 (13) 2,849 (8)
- financial 1,343 (2) 1,435 (1)
---------------------- ---------- ---------------------- ----------
Total nominal amount off-balance
sheet(4) 164,229 (135) 125,765 (63)
------------------------------------ ---------------------- ---------- ---------------------- ----------
525,965 (1,699) 428,419 (1,113)
------------------------------------ ---------------------- ---------- ---------------------- ----------
Memorandum
Memorandum allowance
allowance for
Fair value for ECL(5) Fair value ECL(5)
GBPm GBPm GBPm GBPm
---------------------- ----------- ---------------------- -------------
Debt instruments measured at fair
value
through other comprehensive income
('FVOCI') 56,346 (32) 46,360 (16)
------------------------------------ ---------------------- ---------- ---------------------- ----------
1 The total ECL is recognised in the loss allowance for the
financial asset unless the total ECL exceeds the gross carrying
amount of the financial asset, in which case the ECL is recognised
as a provision.
2 Includes only those financial instruments which are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets' as presented within the consolidated balance
sheet on page 48 includes both financial and non-financial
assets.
3 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
4 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
5 Debt instruments measured at FVOCI continue to be measured at
fair value with the allowance for ECL as a memorandum item. Change
in ECL is recognised in 'Change in expected credit losses and other
credit impairment charges' in the income statement.
The following table provides an overview of the group's credit
risk by stage and industry, and the associated ECL coverage. The
financial assets recorded in each stage have the following
characteristics:
-- Stage 1: These financial assets are unimpaired and without a
significant increase in credit risk for which a 12-month allowance
for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been
experienced on these financial assets since initial recognition for
which a lifetime ECL is recognised.
-- Stage 3: There is objective evidence of impairment and the
financial assets are therefore considered to be in default or
otherwise credit impaired for which a lifetime ECL is
recognised.
-- POCI: Financial assets that are purchased or originated at a
deep discount are seen to reflect the incurred credit losses on
which a lifetime ECL is recognised.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
30 June 2020
Gross carrying/nominal
amount(2) Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(3) Total 1 2 3 POCI(3) Total 1 2 3 POCI(3) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
------- ------ ----- ------- ------- ----- ----- ------- --------- ------- ----- ----- ----- ------- -------
Loans and
advances
to customers
at amortised
cost 97,842 15,459 3,326 71 116,698 (132) (289) (1,080) (33) (1,534) 0.1 1.9 32.5 46.5 1.3
- personal 25,125 1,059 536 - 26,720 (11) (34) (160) - (205) - 3.2 29.9 - 0.8
* corporate and commercial 57,951 11,926 2,434 71 72,382 (110) (209) (848) (33) (1,200) 0.2 1.8 34.8 46.5 1.7
* non-bank financial institutions 14,766 2,474 356 - 17,596 (11) (46) (72) - (129) 0.1 1.9 20.2 - 0.7
---------------------------------------
Loans and
advances
to banks
at amortised
cost 13,065 1,205 7 - 14,277 (6) (9) (4) - (19) - 0.7 57.1 - 0.1
---------------------------------------
Other financial
assets measured
at amortised
cost 230,644 83 34 - 230,761 (2) - (9) - (11) - - 26.5 - -
--------------------------------------- -------
Loan and
other credit-related
commitments 144,965 14,622 277 - 159,864 (21) (62) (37) - (120) - 0.4 13.4 - 0.1
---------------------------------------
- personal 2,222 113 12 - 2,347 - (1) - - (1) - 0.9 - - -
* corporate and commercial 67,706 12,221 263 - 80,190 (18) (48) (37) - (103) - 0.4 14.1 - 0.1
- financial 75,037 2,288 2 - 77,327 (3) (13) - - (16) - 0.6 - - -
---------------------------------------
Financial
guarantees(1) 3,112 1,127 125 1 4,365 (5) (9) (1) - (15) 0.2 0.8 0.8 - 0.3
- personal 37 1 1 - 39 - - - - - - - - - -
* corporate and commercial 2,028 836 118 1 2,983 (5) (8) - - (13) 0.2 1.0 - - 0.4
- financial 1,047 290 6 - 1,343 - (1) (1) - (2) - 0.3 16.7 - 0.1
---------------------------------------
At 30 Jun
2020 489,628 32,496 3,769 72 525,965 (166) (369) (1,131) (33) (1,699) - 1.1 30.0 45.8 0.3
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ------ ---- ------ ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 Purchased or originated credit-impaired ('POCI').
Unless identified at an earlier stage, all financial assets are
deemed to have suffered a significant increase in credit risk when
they are 30 days past due ('DPD') and are transferred from Stage 1
to Stage 2. The following disclosure presents the ageing of Stage 2
financial assets by those less than 30 and greater than 30 DPD and
therefore presents those financial assets classified as Stage 2 due
to ageing ('30 DPD') and those identified at an earlier stage (less
than 30 DPD).
Stage 2 days past due analysis at 30 June 2020
Gross carrying Allowance for ECL ECL coverage %
Of which: Of which: Of which:
------- ----------- -------
1 to 30 and 1 to
Stage 29 > Stage 1 to 30 and Stage 29 30 and
2 DPD(1) DPD(1) 2 29 DPD(1) > DPD(1) 2 DPD(1) > DPD(1)
GBPm GBPm GBPm GBPm GBPm GBPm % % %
------- ------ ------- ----------- ----------- ----------- ------- ------- ---------
Loans and
advances
to customers
at amortised
cost 15,459 104 111 (289) (2) (4) 1.9 1.9 3.6
- personal 1,059 51 86 (34) (2) (3) 3.2 3.9 3.5
- corporate
and
commercial 11,926 53 25 (209) - (1) 1.8 - 4.0
- non-bank
financial
institutions 2,474 - - (46) - - 1.9 - -
Loans and
advances
to banks at
amortised
cost 1,205 - - (9) - - 0.7 - -
Other
financial
assets
measured at
amortised
cost 83 - - - - - - - -
-------------- ------- ------ ------- ------- ------- ------- ------- ------- -------
1 Days past due ('DPD'). Up-to-date accounts in Stage 2 are not shown in amounts presented above.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2019 (continued)
Gross carrying/nominal
amount(2) Allowance for ECL ECL coverage %
Stage Stage Stage Stage Stage Stage Stage Stage Stage
1 2 3 POCI(3) Total 1 2 3 POCI(3) Total 1 2 3 POCI(3) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
Loans and
advances
to customers
at amortised
cost 100,077 7,238 2,043 70 109,428 (104) (126) (774) (33) (1,037) 0.1 1.7 37.9 47.1 0.9
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- ------ ----- ----- ----- ------- -----
- personal 23,273 1,073 487 - 24,833 (6) (23) (144) - (173) - 2.1 29.6 - 0.7
---------------------------------------
* corporate and commercial 59,654 5,806 1,460 70 66,990 (85) (100) (591) (33) (809) 0.1 1.7 40.5 47.1 1.2
---------------------------------------
* non-bank financial institutions 17,150 359 96 - 17,605 (13) (3) (39) - (55) 0.1 0.8 40.6 - 0.3
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- --- ------ ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 11,408 63 - - 11,471 (4) - - - (4) - - - - -
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- --- ------ ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 181,697 26 32 - 181,755 - - (9) - (9) - - 28.1 - -
Loan and
other credit
related commitments 118,078 3,235 129 5 121,447 (22) (11) (21) - (54) - 0.3 16.3 - -
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- --- ------ ----- ----- ----- ------- -----
- personal 1,859 88 3 - 1,950 - (2) - - (2) - 2.3 - - 0.1
---------------------------------------
* corporate and commercial 65,796 2,967 125 5 68,893 (20) (9) (21) - (50) - 0.3 16.8 - 0.1
---------------------------------------
- financial 50,423 180 1 - 50,604 (2) - - - (2) - - - - -
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- --- ------ ----- ----- ----- ------- -----
Financial
guarantees(1) 3,685 567 63 3 4,318 (2) (6) (1) - (9) 0.1 1.1 1.6 - 0.2
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- --- ------ ----- ----- ----- ------- -----
- personal 33 - 1 - 34 - - - - - - - - - -
---------------------------------------
* corporate and commercial 2,352 433 61 3 2,849 (2) (6) - - (8) 0.1 1.4 - - 0.3
---------------------------------------
- financial 1,300 134 1 - 1,435 - - (1) - (1) - - 100.0 - 0.1
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- --- ------ ----- ----- ----- ------- -----
At 31 Dec 414,945 11,129 2,267 78 428,419 (132) (143) (805) (33) (1,113) - 1.3 35.5 42.3 0.3
--------------------------------------- ------- ------ ----- ------- ------- ---- ---- ---- ---- ------ ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 Purchased or originated credit-impaired ('POCI').
Stage 2 days past due analysis at 31 December 2019 (continued)
Gross carrying
amount Allowance for ECL ECL coverage %
--------------------- ---------------------------- -----------------------
Of which: Of which: Of which:
1 to 30 and 1 to 1 to
Stage 29 > Stage 29 30 and Stage 29 30 and
2 DPD(1) DPD(1) 2 DPD(1) > DPD(1) 2 DPD(1) > DPD(1)
GBPm GBPm GBPm GBPm GBPm GBPm % % %
----- ------ ------ -------- -------- -------- ----- ------ --------
Loans and advances
to customers at amortised
cost 7,238 73 100 (126) (1) (3) 1.7 1.4 3.0
----- ------ ------ ---- ---- ---- ----- ------ ------
* personal 1,073 58 44 (23) (1) (1) 2.1 1.7 2.3
* corporate and commercial 5,806 15 56 (100) - (2) 1.7 - 3.6
* non-bank financial institutions 359 - - (3) - - 0.8 - -
----- ------ ------ ---- ---- ---- ----- ------ ------
Loans and advances
to banks at amortised
cost 63 - - - - - - - -
----- ------ ------ ---- ---- ---- ----- ------ ------
Other financial assets
measured at amortised
cost 26 5 - - - - - - -
--------------------------------------- ----- ------ ------ ---- ---- ---- ----- ------ ------
1 Days past due ('DPD'). Up-to-date accounts in Stage 2 are not shown in amounts presented above.
Measurement uncertainty and sensitivity
analysis of ECL estimates
The recognition and measurement of ECL involves the use of
significant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions to
credit risk models to estimate future credit losses, and
probability-weight the results to determine an unbiased ECL
estimate.
Methodology
Our methodology in relation to the adoption and generation
of
economic scenarios is described on page 37 of the Annual Report
and Accounts 2019. There have been no significant
changes during the first half of 2020. While in keeping with
HSBC's methodology, the exceptional nature of the current economic
environment has led to extensive application of management's
judgement in determining the range of possible outcomes, the number
and severity of scenarios selected and the probability weights
assigned.
Description of consensus economic scenarios
The economic assumptions presented in this section have been
formed by HSBC, with reference to external forecasts specifically
for the purpose of calculating ECL. The emergent nature of the
Covid-19 outbreak at the end of 2019 meant that, consistent with
other banks, HSBC's view of the distribution of risks, as disclosed
in the Annual Report and Accounts 2019, did not, on a
forward-looking basis, consider the impact of the virus. Our
consensus Central scenario at the 2019 year-end projected moderate
growth over a five-year horizon, with strong prospects for
employment and a gradual increase in policy interest rates by
central banks in the major economies of Europe. The onset of the
virus has led to a fundamental reassessment of our central forecast
and the distribution of risks.
Economic forecasts are subject to a high degree of uncertainty
in the current environment. Limitations of forecasts and economic
models require a greater reliance on management judgement in
addressing both the error inherent in economic forecasts and in
assessing associated ECL outcomes. The main factors that affect
uncertainty across our key markets are:
-- epidemiological concerns, including a possible resurgence of
Covid-19 later in 2020 and in 2021;
-- the ability of new or continued restrictions in individual
markets to affect global growth due to deep cross-border trade and
financial linkages;
-- the ability of governments and central banks to continue to
limit the economic damage through support measures;
-- the potential for other geopolitical and macroeconomic risks
to affect growth and economic stability as the world recovers from
Covid-19-related restrictions; and
-- market-specific differences in the progression of Covid-19
and the associated responses by public authorities that imply
differentiation in the degree of uncertainty across our key
markets.
Economic forecasts and data released since the creation of
scenarios in May confirmed the view of elevated uncertainty in some
markets such as in the UK, where monthly GDP and unemployment data
suggested a larger degree of estimation error than usual in
short-term forecasts. The volatility in economic data and forecasts
received since the generation of scenarios has been considered by
management and is reflected in management's choice of scenarios, in
probability weights and in its assessment of ECL outcomes.
The scenarios used to calculate ECL in the Interim Report 2020
are described below.
The consensus Central scenario
HSBC's Central scenario features a 'V-shaped' shock to economic
activity, as characterised by a deep, initial contraction in GDP,
followed by a sharp recovery. This V-shape in activity reflects the
unique nature of this downturn and is driven by restrictions on
mobility and activity imposed by governments to reduce the spread
of Covid-19. The Central scenario further assumes that the
stringent restrictions on activity, employed across several
countries and territories in the first half of 2020, will not be
repeated, allowing economic activity to rebound. Minimal long-term
damage to economic prospects is expected, allowing economic growth
across our key markets to return to forecast trend rates.
Cross-country differences in the depth of the contraction, and the
speed and scale of subsequent recovery, reflect timing differences
in the progression of the Covid-19 outbreak, national level
differences in restrictions imposed and the scale of support
measures.
Global GDP is expected to contract by 3.9% in 2020 and grow by
4.8% in 2021 in the Central scenario. The average rate of global
GDP growth is expected to be 2.7% over the forecast period
2020-2025, which is slightly lower than the average growth rate
over the 2015-2019 period.
The unique circumstances surrounding the current fall in
economic activity make it difficult to compare current prospects
for global economic activity with previous recessions. However, we
note that the depth of the contraction in economic activity and the
subsequent recovery are both expected to be sharper than
experienced during the last global economic downturn of 2008-2009
across our key markets.
Across the key markets, we note:
-- Economic activity has fallen significantly in the first half
of 2020 across our major markets. The Central scenario projects an
annual contraction in GDP across almost all our major markets in
2020. GDP is expected to be positive across all our major markets
in 2021.
-- The unemployment rate is expected to rise sharply in most of
our major markets, before reverting gradually to pre-crisis levels
over the forecast horizon.
-- Inflation is expected to fall sharply in 2020 in line with
the slowdown in economic activity, before increasing to gradually
converge to central bank targets in our key markets over the
forecast period.
-- Governments have provided extensive support to households and
corporates in our key markets. Fiscal deficits are expected to
increase sharply in 2020 before reducing in the later years of the
projection period. Sovereign indebtedness is expected to increase
sharply as a result.
-- Major central banks have lowered their main policy interest
rates, implemented emergency support measures for funding markets,
and either restarted or increased quantitative easing programmes,
in order to support economies and the financial system. Interest
rate policy is expected to be highly accommodative over the
projection horizon.
-- The West Texas Intermediate oil price is forecast to average
$37 per barrel over the projection period.
The Central scenario was first created with forecasts available
in May, and subsequently updated in June to reflect significant
changes to forecasts. The UK unemployment rate was the only
variable to have been amended as a result of this update.
Probability weights assigned to the Central scenario reflect both
the higher level of uncertainty in the current global economic
environment and relative differences across markets. Weights
assigned to the Central scenario vary from 55% to 70%.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
Central scenario (3Q20-2Q25)
UK France
% %
GDP growth
Annual average growth
rate: 2020 (7.8) (8.7)
--------
Annual average growth
rate: 2021 5.9 7.2
---------------------------
1Q22-2Q25: average growth 1.9 1.7
---------------------------
(8.6) (8.9)
3Q20-2Q22: worst quarter (3Q20) (3Q20)
--------------------------- ------------ ------------
Unemployment rate
Annual average: 2020 6.8 9.8
--------
Annual average: 2021 6.3 10.0
---------------------------
1Q22-2Q25: average 4.7 8.9
---------------------------
10.6
3Q20-2Q22: worst quarter 8.1 (3Q20) (3Q20)
--------------------------- ------------ ------------
House price index
Annual average growth
rate: 2020 (2.2) (0.5)
--------
Annual average growth
rate: 2021 0.9 (0.3)
---------------------------
1Q22-2Q25: average growth 3.7 3.4
---------------------------
(3.4) (3.9)
3Q20-2Q22: worst quarter (4Q20) (4Q20)
--------------------------- ------------ ------------
10-year bond yield
---------------------------
Annual average: 2020 0.5 0.0
--------
Annual average: 2021 0.8 0.2
---------------------------
1Q22-2Q25: average 1.6 0.9
---------------------------
3Q20-2Q22: worst quarter 0.4 (3Q20) 0.0 (3Q20)
--------------------------- ------------ ------------
Probability 60 70
--------------------------- -------- --------
The consensus Upside scenario
Compared with the consensus Central scenario, the consensus
Upside scenario features a faster recovery in economic activity
during the first two years, before converging to long-run trends.
Despite this feature, the scenario forecasts 2020 as a year in
which global GDP growth contracts and several quarters elapse
before economic activity reaches the level attained at the end of
2019, prior to the onset of the Covid-19 outbreak.
The scenario is consistent with a number of key upside risk
themes. These include orderly global abatement of Covid-19 via
successful containment and/or the development of a vaccine,
deescalation of tensions between the US and China, continued
support from fiscal and monetary policy, positive resolution of
economic uncertainty in the UK, stronger oil prices and
deescalation of geopolitical tensions in Hong Kong.
Probability weights assigned to the Upside scenario range from
0% to 10%. These weights reflect management's view of the potential
for more positive outcomes relative to the Central scenario in our
key markets.
The consensus Downside scenario
Global real GDP growth contracts significantly in 2020 in the
Downside scenario, accompanied by a sharp increase in unemployment,
and falls in asset and consumer prices, before gradually recovering
towards its long-run trend. Compared with the Central scenario, the
recovery in economic activity is considerably weaker.
The scenario is consistent with our key downside risks. These
include renewed outbreaks of Covid-19 and/or slower easing of
restriction of travel and activity, an intensification of tensions
between the US and China, a worsening of economic uncertainty in
the UK, further risks to economic growth in Hong Kong and weaker
commodity prices.
A broad range of weights has been assigned to the consensus
Downside scenario. These range from 0% to 35% and reflect
management's view of the dispersion of risks and severity across
key markets.
UK management Downside scenario
The consensus Downside scenario was replaced with a management
Downside scenario for the UK only, to reflect management's view of
the dispersion of risks. Management took the view that this
scenario provided a better representation of risks that lie in
between the Central and the alternative Downside scenario 1. In
this scenario, UK GDP falls 9.6% in 2020 and UK unemployment peaks
at 8.5% in 2021. This scenario has been assigned a 20%
probability.
Alternative Downside scenario 1
An alternative Downside scenario has been created to reflect
management's view of extreme risks. This 'U-shaped' scenario
assumes that a number of HSBC's top risks crystallise
simultaneously and results in an extremely severe and prolonged
recession. This scenario has been assigned a 5% probability across
all markets except the UK where it has been assigned a 10%
weighting.
The range of macroeconomic projections across the various
scenarios are shown in the table below:
Outer scenario ranges (3Q20-2Q25)
UK France
% %
-------- ------------
GDP growth (8.3) to (8.7)
(16.7) to (22.0)
(3Q20) (3Q20)
(1Q21) (3Q20)
-------- ------------
8.0 to 10 to
Unemployment rate 10.5 11.5
(3Q20) (3Q20)
(2Q21) (1Q21)
-------- ------------
House price index (2.8) to (2.4)
(24.7) to (13.4)
(3Q20) (4Q20)
(2Q21) (3Q21)
-------- ------------
10-year bond yield 0.5 to 0.1 to
(1.7) (0.5)
(3Q20) (3Q20)
(3Q21) (2Q22)
-------- ------------
Consensus Upside
scenario: Probability 10 10
------------------------------ ----------
Consensus Downside
scenario: Probability 0 15
------------------------------ ----------
UK management Downside
scenario: Probability 20 n/a
------------------------------ -------- ------------
Alternative Downside
1: Probability 10 5
------------------------------ -------- ----------
Note: The worst point refers to the quarter that is either the
trough or peak in the respective variable. The figures provided
represent the worst point across all four outer scenarios: the
consensus Upside, the consensus Downside, the UK management
Downside and the alternative Downside 1. These figures should not
be directly compared with the annual averages presented in the
previous table for the Central scenario.
UK GDP growth
Note: Real GDP shown as year-on-year percentage change.
Critical accounting estimates and judgements
The calculation of ECL under IFRS 9 involves significant
judgements, assumptions and estimates, as set out in the Annual
Report and Accounts 2019 under 'Critical accounting estimates and
judgements'. The level of estimation uncertainty and judgement has
increased since 31 December 2019 as a result of the economic
effects of the Covid-19 outbreak, including significant judgements
relating to:
-- the selection and weighting of economic scenarios, given
rapidly changing economic conditions in an unprecedented manner,
uncertainty as to the effect of government and central bank support
measures designed to alleviate adverse economic impacts, and a
widening in the distribution of economic forecasts. The key
judgement is whether the economic effects
of the pandemic are more likely to be temporary or prolonged,
and the shape of recovery;
-- estimating the economic effects of those scenarios on ECL,
where there is no observable historical trend that can be reflected
in the models that will accurately represent the effects of the
economic changes of the severity and speed brought about by
Covid-19 outbreak. Modelled assumptions and linkages between
economic factors and credit losses may underestimate or
overestimate ECL in these conditions, and there is significant
uncertainty in the estimation of parameters such as collateral
values and loss severity; and
-- the identification of customers experiencing significant
increases in credit risk and credit impairment, particularly where
those customers have accepted payment deferrals and other reliefs
designed to address short-term liquidity issues, or have extended
those deferrals, given limitations in the available credit
information on these customers. The use of segmentation techniques
for indicators of significant increases in credit risk involves
significant estimation uncertainty.
How economic scenarios are reflected in ECL
The methodologies for the application of forward economic
guidance into the calculation of ECL for wholesale and retail loans
and portfolios are set out in page 38 of the Annual Report and
Accounts 2019. These models are based largely on historical
observations and correlations with default rates.
The severe projections at 30 June 2020 of macroeconomic
variables are outside the historical observations on which IFRS 9
models have been built and calibrated to operate. Moreover, the
complexities of governmental support programmes and regulatory
guidance on treatment of customer impacts (such as forbearance and
payment holidays) and the unpredictable pathways of the pandemic
have never been modelled. Consequently, HSBC's IFRS 9 models, in
some cases, generate outputs that appear overly conservative when
compared with other economic and credit metrics. Post-model
adjustments are required to ensure that an appropriate amount of
ECL impairment is recognised.
These data and model limitations have been addressed in the
short term using in-model and post-model adjustments. This includes
refining model inputs and outputs, and using post-model adjustments
based on management judgement and higher level quantitative
analysis for impacts that are difficult to model. To ensure a
consistent framework, we identified the model segments where
results were overly conservative based on historical benchmarks and
defined the worst economic inputs where the model output is
considered reliable. For example, in the case of probability of
default ('PD') models for bank and sovereign exposures, based on
the historical calibration data, the model was defined as producing
meaningful results when the GDP growth input is not worse than five
standard deviations below the long-term average. Re-running the
models with these capped economic limits established boundary
conditions used by credit experts as a starting point for further
adjustments based on their own structured judgement and granular
analysis. For the wholesale portfolio, this analysis produced a
'credit experts best estimate' to act as a benchmark against the
modelled outcomes, and inform post-model adjustments. In the short
term, the focus is on refining model inputs and outputs in a
consistent and explainable manner, using post-model adjustments.
Wider-ranging model changes will take time to develop and need more
real data on which models can be trained.
Models will be recalibrated over time once the full impacts of
Covid-19 are observed but that will not occur in 2020. Therefore,
we anticipate significant in-model and post-model adjustments for
the foreseeable future.
Post-model adjustments
In the context of IFRS 9, post-model adjustments are short-term
increases or decreases to the ECL at either a customer or portfolio
level to account for late breaking events, model deficiencies and
expert credit judgement applied following management review and
challenge. We have internal governance in place to regularly
monitor post-model adjustments and, where possible, to reduce the
reliance on these through model recalibration or redevelopment, as
appropriate. Depending on the path of the Covid-19 outbreak and the
shape of the economic recovery, we anticipate the composition of
modelled ECL and post-model adjustments may be revised
significantly over 2020, particularly when the economy resumes
positive GDP growth and the uncertainty over long-term unemployment
abates.
Post-model adjustments made in estimating the reported ECL at 30
June 2020 are set out in the following table. The table includes
adjustments in relation to data and model limitations resulting
from Covid-19 economic conditions, and as a result of the regular
process of model development and implementation. It shows the
adjustments applicable to the scenario-weighted ECL numbers.
Adjustments in relation to Downside scenarios are more significant,
as results are subject to greater uncertainty.
Net post-model reductions
/ (additions) in
ECL (GBPm) Retail Wholesale Total
---------------------------- ------ --------- -------
Low-risk counterparties
and economies (banks,
sovereigns and government
entities) 146 246 392
---------------------------- ----- --------- ----
Corporate lending
adjustments - 117 117
---------------------------- ----- --------- ----
Retail lending adjustments (2) - (2)
---------------------------- ----- --------- ----
Total 144 363 507
---------------------------- ----- --------- ----
The adjustments relating to low-credit risk exposures are mainly
to highly rated banks, sovereigns and US government-sponsored
entities, where modelled credit factors do not fully reflect the
underlying fundamentals of these entities or the effect of
government support and economic programmes in the Covid-19
environment.
Adjustments to corporate exposures principally reflect the
outcome of the 'credit experts best estimate' review on wholesale
corporate exposures. Post-model adjustments, both positive and
negative, have been made where modelled rating migration and ECL
outputs based on historical relationships produced results that
were overly sensitive. This can be the case when using economic
inputs that are well outside the range of historical experience.
For retail lending, the net impact of model adjustments was much
less significant. The adjustment, under low-risk counterparties and
economies, was to reduce ECL on insurance portfolios due to model
over-prediction of downgrades in the bank and sovereign
portfolios.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against
the economic forecasts as part of the ECL governance process by
recalculating the ECL under each scenario described above for
selected portfolios, applying a 100% weighting to each scenario in
turn. The weighting is reflected in both the determination of a
significant increase in credit risk and the measurement of the
resulting ECL.
The ECL calculated for the Upside and Downside scenarios should
not be taken to represent the upper and lower limits of possible
ECL outcomes. The impact of defaults that might occur in future
under different economic scenarios is captured by recalculating ECL
for loans in Stages 1 and 2 at the balance sheet date. The
population of Stage 3 loans (in default) at the balance sheet date
is unchanged in these sensitivity calculations. Stage 3 ECL would
only be sensitive to changes in forecasts of future economic
conditions if the loss-given default ('LGD') of a particular
portfolio was sensitive to these changes.
There is a particularly high degree of estimation uncertainty in
numbers representing tail risk scenarios when assigned a 100%
weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted
obligors because the measurement of ECL is relatively more
sensitive to credit factors specific to the obligor than future
economic scenarios. Therefore, it is impracticable to separate the
effect of macroeconomic factors in individual assessments.
For retail credit risk exposures, the sensitivity analysis
includes ECL for loans and advances to customers related to
defaulted obligors. This is because the retail ECL for secured
mortgage portfolios including loans in all stages is sensitive to
macroeconomic variables.
Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated
inclusive of post-model adjustments, as appropriate to each
scenario. The results tables exclude portfolios held by insurance
business and small portfolios.
In both the wholesale and retail analysis, the comparative
period results for alternative Downside scenarios are not directly
comparable to the current period, because they reflect different
risk profiles relative with the Consensus scenarios for the period
end.
Wholesale analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL coverage of financial
instruments subject to
significant measurement
uncertainty at 30 June
2020(2) GBPm GBPm
------------------------------- ------- ---------
Reported ECL 283 99
------- ---------
Consensus scenarios
------------------------------- ------- ---------
Central scenario 223 85
------- ---------
Upside scenario 178 81
------- ---------
Downside scenario(3) 315 153
------- -------
Alternative scenarios
------- ---------
Alternative Downside
scenario 702 249
------- -------
Gross carrying amount/nominal
amount (4) 138,543 111,909
------------------------------- ------- -------
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL coverage of financial
instruments subject to
significant measurement
uncertainty at 31 December
2019(2) GBPm GBPm
------------------------------- ------- ---------
Reported ECL 119 42
------- ---------
Consensus scenarios
------------------------------- ------- ---------
Central scenario 92 40
------- ---------
Upside scenario 83 38
------- ---------
Downside scenario 108 60
------- -------
Alternative scenarios
------- ---------
UK alternative Downside
scenario 1 ('AD1') 160
------------------------------- ------- ---------
Gross carrying amount/nominal
amount (4) 125,085 119,967
------------------------------- ------- -------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes off-balance sheet financial
instruments that are subject to significant measurement
uncertainty.
3 For the UK, this is the UK management Downside scenario.
4 Includes low credit-risk financial instruments such as debt
instruments at FVOCI, which have high carrying values but low ECL
under all the scenarios.
In the wholesale portfolio, at 30 June 2020, the alternative
Downside scenario reflected the most significant levels of ECL
sensitivity in the UK, due to the potential for deterioration of
credit quality in the UK and levels of exposure.
ECL sensitivities demonstrated an increase from the 2019
year-end across all countries and territories, primarily due to the
deterioration of economic forecasts under all scenarios.
The UK observed the highest sensitivity when compared with 4Q19,
mainly due to the deterioration of economic forecasts, with an
emphasis on the unemployment rate in the June 2020 economic
forecasts.
The higher ECL sensitivities can all be observed for the
alternative Downside scenario 1, which represents a prolonged
recovery period and sharper impact relative to other scenarios.
Retail analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL of loans and advances
to customers at 30 June
2020(2) GBPm GBPm
----- ------
Reported ECL 11 113
-----
Consensus scenarios
--------------------------- ----- ------
Central scenario 10 112
----- ------
Upside scenario 9 110
----- ------
Downside scenario(3) 13 119
----- ------
Alternative scenarios
----- ------
Alternative Downside
scenario 16 118
Gross carrying amount 1,935 19,182
--------------------------- ----- ------
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL of loans and advances
to customers at 31 December
2019(2, 4) GBPm GBPm
----- ------
Reported ECL 8 102
-----
Consensus scenarios
------------------------------ ----- ------
Central scenario 7 102
----- ------
Upside scenario 7 102
----- ------
Downside scenario 9 103
----- ------
Gross carrying amount 2,012 17,749
------------------------------ ----- ------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes only on-balance sheet financial
instruments to which IFRS 9 impairment requirements are applied. In
the retail portfolio during the first half of 2020, there was a
significant increase in reported expected credit losses in all
markets due to the Covid-19 outbreak.
3 For the UK, this is the UK management Downside scenario.
4 Comparative figures have been represented.
Across all countries and territories, primarily due to the
worsening of the economic forecasts, ECL sensitivities demonstrated
an increase from the 2019 year-end.
Reconciliation of changes in gross carrying/nominal amount and
allowances for loans and advances to banks and customers
The following disclosure provides a reconciliation by stage of
the group's gross carrying/nominal amount and allowances for loans
and advances to banks and customers, including loan commitments and
financial guarantees. Movements are calculated on a quarterly basis
and therefore fully capture stage movements between quarters. If
movements were calculated on a year-to-date basis they would only
reflect the opening and closing position of the financial
instrument.
The transfers of financial instruments represent the impact of
stage transfers upon the gross carrying/nominal amount and
associated allowance for ECL.
The net remeasurement of ECL arising from stage transfers
represents the increase or decrease due to these transfers, for
example, moving from a 12-month (Stage 1) to a lifetime (Stage 2)
ECL measurement basis. Net remeasurement excludes the underlying
customer risk rating ('CRR')/probability of default ('PD')
movements of the financial instruments transferring stage. This is
captured, along with other credit quality movements in the 'changes
in risk parameters - credit quality' line item.
Changes in 'New financial assets originated or purchased',
'assets derecognised (including final repayments)' and 'changes to
risk parameters - further lending/repayments' represent the impact
from volume movements within the group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1)
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross
Gross carrying/ carrying/ Allowance carrying/ Gross
carrying/nominal Allowancefor nominal Allowance nominal for nominal Allowancefor carrying/nominal Allowancefor
amount ECL amount for ECL amount ECL amount ECL amount ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------- ------------------ -------------- ----------- ----------- ----------- ----------- ----------- -------------- ------------------ --------------
At 1 Jan 2020 195,249 (132) 11,103 (143) 2,235 (796) 78 (33) 208,665 (1,104)
---------- ------ ------- ---- ------- ------ ------ --- ------- ----- ---- ------ ----- ---------- ------ -------- ---
Transfers of financial
instruments: (15,897) 4 14,233 12 1,664 (16) - - - -
---------- ----- ------- ----- ------- ------ --- ------ --- ------- ----- ---- ------ ------ ---------- ------ -------- ----
* transfers from Stage 1 to Stage 2 (18,718) 30 18,718 (30) - - - - - -
* transfers from Stage 2 to Stage 1 2,989 (26) (2,989) 26 - - - - - -
* transfers to Stage 3 (172) - (1,528) 19 1,700 (19) - - - -
- transfers from
Stage 3 4 - 32 (3) (36) 3 - - - -
Net remeasurement
of ECL arising from
transfer of stage - 18 - (44) - (1) - - - (27)
-----------------------------------------
New financial assets
originated or purchased 51,054 (24) - - - - 9 - 51,063 (24)
Asset derecognised
(including final
repayments) (39,006) 2 (657) 12 (298) 48 (15) 1 (39,976) 63
-----------------------------------------
Changes to risk
parameters - further
lending/repayments (5,931) 24 6,901 (33) 96 59 (3) (1) 1,063 49
-----------------------------------------
Changes to risk
parameters - credit
quality - (59) - (130) - (452) - 1 - (640)
-----------------------------------------
Changes to model
used for ECL calculation - 10 - (36) - - - - - (26)
-----------------------------------------
Assets written off - - - - (80) 80 - - (80) 80
Credit-related modifications
that resulted in
derecognition - - - - (1) - - - (1) -
Foreign exchange 7,676 (7) 753 (5) 118 (43) 3 (1) 8,550 (56)
Others(2) 3,614 - 42 (2) - (1) - - 3,656 (3)
At 30 Jun 2020 196,759 (164) 32,375 (369) 3,734 (1,122) 72 (33) 232,940 (1,688)
----------------------------------------- ---------- ------ ------- ---- ------- ------ ------ --- ------- ----- ---- ------ ----- ---------- ------ -------- ---
ECL income statement
(charge)/release
for the period (29) (231) (346) 1 (605)
Add: Recoveries 1
------------------ -------------- ----------- ----------- ----------- ----------- ----------- -------------- ------------------
Add/(less): Others 5
------------------ -------------- ----------- ----------- ----------- ----------- ----------- -------------- ------------------ -------- ----
Total ECL income
(charge)/release
for the period (599)
----------------------------------------- ------------------ -------------- ----------- ----------- ----------- ----------- ----------- -------------- ------------------ -------- ---
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1)
Half-year
ended 30 Jun
At 30 Jun 2020 2020
----------------
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
---------------------- ---------
As above 232,940 (1,688) (599)
---------------------------------------------------- ---------------------- -------- ------------
Other financial assets measured at
amortised cost 230,761 (11) (2)
---------------------- -------- ------------
Non-trading reverse purchase agreement
commitments 62,264 - -
---------------------------------------------------- ---------------------- -------- ------------
Performance and other guarantee not
considered for IFRS 9 (32)
Summary of financial instruments to
which the impairment requirements in
IFRS 9 are applied/Summary consolidated
income statement 525,965 (1,699) (633)
---------------------------------------------------- ---------------------- -------- ------------
Debt instruments measured at FVOCI 56,346 (32) (18)
---------------------------------------------------- ---------------------- -------- ------------
Total allowance for ECL/total income
statement ECL charge for the period n/a (1,731) (651)
---------------------------------------------------- ---------------------- -------- ------------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 30 June 2020, these amounted
to GBP3.6bn and were classified as Stage 1 with no ECL.
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1)
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross
Gross Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance Gross Allowance
carrying/nominal for nominal for nominal for nominal for carrying/nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ------------------ ----------- --------- ----------- ----------- ----------- ----------- ----------- ------------------ -----------
At 1 Jan 2019 205,009 (154) 17,010 (207) 2,557 (989) 124 (78) 224,700 (1,428)
-------------------- ---------- ------ ------ -------- ------ ------ --- ------ ----- ---- ----- --- ---------- ------ -------
Transfers of
financial
instruments: 1,566 (61) (2,198) 83 632 (22) - - - -
-------------------- ------ -------- ------ --- ------ --- ------ ----- ---- ----- ---- ---------- ------ -------
- transfers from
Stage 1 to Stage
2 (8,660) 19 8,660 (19) - - - - - -
- transfers from
Stage 2 to Stage
1 10,426 (80) (10,426) 80 - - - - - -
- transfers to
Stage
3 (205) 1 (487) 24 692 (25) - - - -
- transfers from
Stage 3 5 (1) 55 (2) (60) 3 - - - -
---------- ------ ------ -------- ------ ------ ------ --- ----- ---- ----- ---- ---------- ------ -------
Net remeasurement
of ECL arising
from
transfer of stage - 52 - (28) - (1) - - - 23
--------------------
New financial
assets
originated or
purchased 113,078 (79) - - - - 21 (16) 113,099 (95)
Asset derecognised
(including final
repayments) (88,021) 5 (1,479) 17 (411) 96 (7) 3 (89,918) 121
Changes to risk
parameters -
further
lending/repayments (26,328) 60 (2,380) 21 (99) 62 23 8 (28,784) 151
Changes to risk
parameters -
credit
quality - 46 - (38) - (333) - (28) - (353)
---------- ------ ------ --- -------- ------ ------ --- ------ ----- ---- ----- --- ---------- ------ -------
Assets written off - - - - (304) 304 (78) 78 (382) 382
Credit related
modifications
that resulted in
derecognition - - - - (65) 46 - - (65) 46
Foreign exchange (6,029) 4 (341) 4 (84) 32 (6) 3 (6,460) 43
Others(2) (4,026) (5) 491 5 9 9 1 (3) (3,525) 6
--------------------
At 31 Dec 2019 195,249 (132) 11,103 (143) 2,235 (796) 78 (33) 208,665 (1,104)
-------------------- ---------- ------ ------ -------- ------ ------ --- ------ ----- ---- ----- --- ---------- ------ -------
ECL income
statement
(charge)/release
for the period 84 (28) (176) (33) (153)
Add: Recoveries 6
Add/(less): Others (3)
Total ECL income
(charge)/release
for the period (150)
-------------------- ------------------ ----------- --------- ----------- ----------- ----------- ----------- ----------- ------------------ -------
Reconciliation of changes in gross carrying/nominal amount and allowances
for loans and advances to banks and customers including
loan commitments and financial guarantees(1) (continued)
12 month
ended
31 December
At 31 Dec 2019 2019
---------------
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
---------------------- ---------
As above 208,665 (1,104) (150)
---------------------------------------------------- ---------------------- -------- -----------
Other financial assets measured at
amortised cost 181,755 (9) 3
---------------------- -------- -----------
Non-trading reverse purchase agreement
commitments 37,999 - -
---------------------------------------------------- ---------------------- -------- -----------
Performance and other guarantees not
considered for IFRS 9 (4)
Summary of financial instruments to
which the impairment requirements in
IFRS 9 are applied/Summary consolidated
income statement 428,419 (1,113) (151)
---------------------------------------------------- ---------------------- -------- -----------
Debt instruments measured at FVOCI 46,360 (16) 27
---------------------------------------------------- ---------------------- -------- -----------
Total allowance for ECL/total income
statement ECL charge for the period n/a (1,129) (124)
---------------------------------------------------- ---------------------- -------- -----------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 2019, these
amounted to GBP(5)bn and were classified as Stage 1 with no
ECL.
Customer relief programmes
In response to the Covid-19 outbreak, governments and regulators
around the world have introduced a number of support measures for
both personal and wholesale customers in market-wide schemes. The
following table presents the number of personal accounts/wholesale
customers and the associated drawn loan values of customers under
these schemes and HSBC-specific measures for major markets at 30
June 2020. In relation to personal lending, the majority of relief
measures, including payment holidays, relate to existing lending,
while in wholesale lending the relief measures comprise of payment
holidays, refinancing of existing facilities and new lending under
government backed schemes.
Personal lending
Other major
UK France markets(1) Total
Market-wide schemes
Number of accounts granted mortgage customer
relief 1,378 - - 1,378
Drawn loan value of accounts granted mortgage
customer relief GBPm 177 - - 177
Number of accounts granted other personal
lending customer relief 628 248 - 876
Drawn loan value of accounts granted other
personal lending customer relief GBPm 6 20 - 26
HSBC-specific measures
Number of accounts granted mortgage customer
relief - - 1,660 1,660
Drawn loan value of accounts granted mortgage
customer relief GBPm - - 234 234
Number of accounts granted other personal
lending customer relief - 2,503 812 3,315
Drawn loan value of accounts granted other
personal lending customer relief GBPm - 564 24 588
Total personal lending to major markets
under market-wide schemes and HSBC-specific
measures
Number of accounts granted mortgage customer
relief 1,378 - 1,660 3,038
Drawn loan value of accounts granted mortgage
customer relief GBPm 177 - 234 411
Number of accounts granted other personal
lending customer relief 628 2,751 812 4,191
Drawn loan value of accounts granted other
personal lending customer relief GBPm 6 584 24 614
Market-wide schemes and HSBC-specific measures
- mortgage relief as a proportion of total
mortgages % 9.6 - 12.6 6.3
--------
Market-wide schemes and HSBC-specific measures
- other personal lending relief as a proportion
of total other personal lending loans and
advances % 6.6 3.3 5.1 3.4
--------------------------------------------------- ------ ----- ------ ----------- --------
Wholesale lending
Other major
UK France markets(1) Total
Market-wide schemes
Number of customers under market-wide schemes - 3,633 9 3,642
Drawn loan value of customers under market-wide
schemes GBPm - 2,119 76 2,195
HSBC-specific measures
Number of customers under HSBC-specific
measures 58 9,410 111 9,579
Drawn loan value of customers under HSBC-specific
measures GBPm 30 3,212 204 3,446
Total wholesale lending to major markets
under market-wide schemes and HSBC-specific
measures
Number of customers 58 13,043 120 13,221
Drawn loan value GBPm 30 5,331 280 5,641
Market-wide schemes and HSBC-specific measures
as a proportion of total wholesale lending
loans and advances % 0.1 21.4 2.3 7.5
--------------------------------------------------- ------ ----- ------ ----------- --------
1 Other major markets include Germany, Malta and Spain. Italy is
not included because it has no exposures at 30 June 2020.
The initial granting of customer relief does not automatically
trigger a migration to Stage 2 or 3. However, information provided
by payment deferrals is considered in the context of other
reasonable and supportable information. This forms part of the
overall assessment for significant increase in credit risk and
credit impairment to identify loans for which lifetime ECL is
appropriate. An extension in payment deferral does not
automatically result in Stage 2 or Stage 3. The key accounting and
credit risk judgement to ascertain whether a significant increase
in credit risk has occurred is whether the economic effects of the
Covid-19 outbreak on the customer are likely to be temporary over
the lifetime of the loan, and whether they indicate that a
concession is being made in respect of financial difficulty that
would be consistent with Stage 3.
Market-wide schemes
The following narrative provides further details on the major
government and regulatory schemes offered in the UK, France and
other major markets.
UK personal lending
Mortgages
Customer relief granted on UK mortgages primarily consists of
payment holidays or partial payment deferrals.
Relief is offered for an initial period of three months, but
subject to FCA consultation, this may be extended for a further
three months in certain circumstances. No payment is required from
the borrower during this period and interest continues to be
charged as usual. There is no impact upon the customers' arrears or
default status from the utilisation of these schemes.
Other personal lending payment holidays
Customer relief is granted for an initial period of three
months, but subject to FCA consultation, this may be extended for a
further three months. The maximum relief value is up to the due
payment amount during the period.
UK wholesale lending
The primary relief granted under government schemes consists of
Coronavirus Large Business Interruption Loan Schemes ('CLBILS'). It
provides finance to medium and large-sized enterprises that have a
turnover in excess of GBP45m with loans of up to GBP200m. The
interest rate and tenor of the loan are negotiated on commercial
terms. A government guarantee of 80% is provided under the scheme.
No lending has been granted as at 30 June 2020.
France personal lending
Other personal lending
The Prêt garanti par l'Etat ('PGE') government scheme provides
term lending to professionals, firms, business owners, craftsmen
and micro-entrepreneurs for a maximum duration of one year. The
maximum relief value is EUR7m. Borrowers need to confirm that
Covid-19 has placed them under temporary financial hardship and
that they didn't experience financial difficulties before the
crisis.
France wholesale lending
The Prêt garanti par l'Etat ('PGE') government scheme provides
term lending to all registered French companies, excluding real
estate special purpose vehicles ('SPVs'), banks, and companies
subject to insolvency proceedings, for a maximum duration of one
year (with the option to amortise up to five years). The maximum
loan value is linked to turnover.
Other major markets - wholesale lending
Germany
Kreditanstalt für Wiederaufbau (KfW) Coronavirus Aid provides
lending to corporates for a maximum tenor of five years. The loan
size is dependent on turnover and is capped at EUR100m.
Malta
The Covid-19 guarantee scheme provides funding to all business
undertakings established and operating in Malta, for a maximum loan
tenor of five years. The maximum loan value is EUR10m for small and
medium enterprises and EUR25m for large enterprises. Higher amounts
must be referred to Malta Development Bank.
Spain
The Official Credit Institute (Instituto de Crédito Oficial)
('ICO') scheme provides funding to Spanish companies, that are not
listed as delinquent or insolvent and are not in a critical
situation as defined by Regulation, for a maximum tenor of five
years. The maximum loan size is linked to company wage bills and
turnover. HSBC Spain assesses the eligibility of facilities for
funding up to EUR50m. Facilities over EUR50m are referred to the
ICO.
Italy
Italy's government backed lending scheme (SACE guarantee)
provides state backed guarantees to companies based in Italy. HSBC
Italy had no exposure to state guarantees at 30 June 2020.
HSBC-specific measures
UK wholesale lending
HSBC is offering repayment holidays on small business term
loans, flexible business loans, fixed rate loans and LIBOR loans to
CMB customers. The duration is three to six months and there is no
specific cap or maximum loan value.
France personal lending
Payment holidays offered to professionals, firms, business
owners, craftsmen and micro-entrepreneurs for a duration between
one and nine months. The maximum relief value is EUR2m.
France wholesale lending
Payment holidays offered to commercial banking customers focused
largely on business banking or lower end micro and medium
enterprises. The duration is between 3 and 18 months and there is
no specific maximum loan value.
Malta personal lending
Mortgages and term loans
Repayment holidays offered to customers for a duration between
three and six months. There is no specific cap or maximum loan
value.
Malta wholesale lending
Repayment holidays offered to customers for a duration between
three and six months. There is no specific cap or maximum loan
value.
Market Risk in the first half of 2020
Market risk is the risk that movements in market factors,
including foreign exchange rates and commodity prices, interest
rates, credit spreads and equity prices will reduce the group's
income or the value of its portfolios.
There were no material changes to our policies and practices for
the management of market risk in the first half of 2020.
Global financial conditions worsened rapidly with the onset of
the Covid-19 outbreak from mid-February. Market volatility reached
extreme levels across most asset classes and equity prices fell
sharply from the previous historic peak levels. In credit markets,
spreads and yields reached multi-year highs. The gold market
experienced Covid-19-related disruption in refining and
transportation, affecting the relative pricing of gold futures
contracts. Oil prices collapsed due to rising oversupply as demand
reduced materially from the economic slowdown. Financial markets
tended to stabilise from April onwards, as governments in mainly
developed countries announced economic recovery programmes and key
central banks intervened to provide liquidity and support asset
prices.
We managed market risk prudently in the first half of 2020.
Sensitivity exposures remained within appetite as the business
pursued its core market-making activity in support of our customers
during the outbreak. We also undertook hedging activities to
protect the business from potential future deterioration in credit
conditions. Market risk continued to be managed using a
complementary set of exposure measures and limits, including stress
and scenario analysis.
The overall risk profile remained relatively stable in 1H20 as
the Fixed Income business continued to be the main driver of
trading VaR. Interest rate risks from market-making activities were
the key contributors to trading VaR, with partially offsetting
gains from credit spread risks. The Equity and Foreign Exchange
businesses provided a further offset to overall market risks in the
trading book.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets where it
was GBP34.2m at 30 June 2020 compared with GBP24.9m at 31 December
2019. The Total Trading VaR has been fairly volatile during the
first half of 2020 due to an unprecedented level of volatility
owing to the Covid-19 pandemic; it remained fairly stable during Q1
but increased rapidly during Q2, driven by the Credit, and equity
trading VaRs.
The Credit VaR increase was essentially due to a general
widening of the credit spreads in March and the utilisation of
multiplicative shifts In the credit VaR model. Subsequently, the
tightening of the credit spreads during Q2 resulted in a decrease
of the Credit VaR.
The equity VaR increase was mostly driven by the equity Dividend
add-on; the large dividend cuts applied by many companies in Q1,
have been integrated as new scenarios in the risks not in VaR,
which as a result, increased the overall add-on.
Daily VaR (trading portfolios), 99% 1 day (GBPm)
Trading
VaR
inc RNIV
IR trading
inc RNIV
Equity
Trading
inc RNIV
CR Trading
FX Trading
Diversification
The group's trading VaR for the year is shown in the table
below.
Trading VaR, 99% 1 day
Foreign
exchange Credit
(FX) and Interest Equity Spread Portfolio
commodity rate (IR) (EQ) (CS) Diversification(1) Total(2)
GBPm GBPm GBPm GBPm GBPm GBPm
Balance as at 30 Jun
2020 6.3 16.4 19.0 14.1 (21.6) 34.2
Average 6.2 13.9 17.9 15.4 (20.6) 32.8
Maximum 12.1 20.4 33.2 29.2 49.2
Minimum 2.0 10.2 8.1 10.0 20.9
------------------------ ---------- ---------- ------ ------- --------------------- --------
Balance at 31 Dec 2019 3.1 16.1 11.4 10.8 (16.5) 24.9
Average 4.1 17.1 10.3 17.1 (16.6) 32.0
Maximum 10.3 23.3 19.7 26.3 39.8
Minimum 2.0 12.9 6.3 8.3 23.2
------------------------ ---------- ---------- ------ ------- --------------------- --------
Balance as at 30 Jun
2019 3.5 16.5 10.8 22.3 (17.9) 35.2
Average 4.2 18.1 9.5 17.2 (16.6) 32.4
Maximum 9.3 23.3 15.7 23.8 39.8
Minimum 2.4 14.3 6.3 12.3 24.8
------------------------ ---------- ---------- ------ ------- --------------------- --------
1 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate, equity and foreign exchange, together in one
portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative
number represents the benefit of portfolio diversification. As the
maximum occurs on different days for different risk types, it is
not meaningful to calculate a portfolio diversification benefit for
this measure.
2 The total VaR is non-additive across risk types due to
diversification effect and it includes VaR RNIV.
Back-testing
In H1 2020, the group experienced 5 loss back-testing exceptions
against Actual profit and losses. The group also experienced 13
loss back-testing exceptions against Hypothetical profit and
losses. The high number of Hypothetical back-testing exceptions
that occurred in March 2020 was primarily due to the extreme market
volatility resulting from the economic impact of the Covid-19
outbreak, which was significantly greater than the volatility used
in the model calibration.
In recognition of the exceptional market environment, the PRA
has granted temporary relief, valid for six months, that permits UK
firms, including HSBC, to offset the impact of the higher VaR
multiplier resulting from exceptions that occurred after the onset
of the Covid-19 outbreak. This offset is against incremental RNIV
market risk capital requirements.
The Hypothetical profit and loss reflects the profit and loss
that would be realised if positions were held constant from the end
of one trading day to the end of the next. This measure of profit
and loss does not align with how risk is dynamically hedged, and is
not therefore necessarily indicative of the actual performance of
the business.
Despite the high number of loss exceptions, performance of the
VaR model was in line with expectations when considered in the
context of the extraordinary market movements observed in March and
April 2020. During this period, market risk continued to be managed
using a complementary set of exposure measures and limits,
including stress and scenario analysis. This ensured that the
business was prudently managed and performed well across the
period.
Non-trading portfolios
Value at risk of the non-trading portfolios
The non-trading VaR as at 30 June 2020 was GBP32.7m, driven by
interest rate risk in the banking book arising from BSM and ALCO
book positions. The VaR for non-trading activity was GBP16.9m as at
31 December 2019 with spikes seen particularly during March and
April due to unprecedented levels of volatility in the markets
caused by the Covid-19 outbreak. Extreme volatility in the yields
of sovereign debt and interest rate swaps, coupled with volatility
in the spread of agencies and supranationals led to an overall
increase in the non-trading VaR during the first half of the year.
The BSM business were actively managing the interest rate risk by
reducing outright interest rate risk during the height of the
crisis
and adding on treasury spread risk as the economy recovers from
the peaks of Covid-19 driving some of the fluctuations of VaR
between March and June. The daily levels of total non-trading VaR
over the last year are set out in the graph below.
Daily VaR (non-trading portfolios), 99% 1 day (GBPm)
Non-trading
VaR
IR non-trading
CS non-trading
Diversification
The group's non-trading VaR for the year is shown in the table
below.
Non-trading VaR, 99% 1 day
Interest Credit
rate spread Portfolio
(IR) (CS) diversification(1) Total(2)
GBPm GBPm GBPm GBPm
Balance as at 30 Jun 2020 23.4 13.7 (4.4) 32.7
Average 17.4 10.2 (4.2) 23.4
Maximum 26.8 14.8 32.7
Minimum 14.3 5.7 15.2
Balance as at 31 Dec 2019 15.7 5.7 (4.5) 16.9
Average 17.5 5.3 (4.3) 18.5
Maximum 20.7 7.3 22.5
Minimum 14.9 4.2 15.4
Balance as at 30 Jun 2019 18.3 5.2 (4.2) 19.3
Average 17.9 5.3 (4.3) 18.9
Maximum 20.7 7.3 22.5
Minimum 15.6 4.4 15.4
--------------------------- -------- ------- --------------------- --------
1 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate, equity and foreign exchange, together in one
portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative
number represents the benefit of portfolio diversification. As the
maximum occurs on different days for different risk types, it is
not meaningful to calculate a portfolio diversification benefit for
this measure.
2 The total VaR is non-additive across risk types due to diversification effect.
Insurance manufacturing operations risk
Overview
The majority of the risk in our insurance business derives from
manufacturing activities and can be categorised as financial risk
and insurance risk. Financial risks include market risk, credit
risk and liquidity risk. Insurance risk is the risk, other than
financial risk, of loss transferred from the holder of the
insurance contract to HSBC, the issuer. The cost of claims and
benefits can be influenced by many factors, including mortality and
morbidity experience, as well as lapse and surrender rates.
A summary of our policies and practices regarding the risk
management of insurance operations, our insurance model and the
main contracts we manufacture is provided on page 71 of the Annual
Report and Accounts 2019.
There have been no material changes to the policies and
practices for the management of risks arising in our insurance
operations described in the Annual Report and Accounts 2019.
Insurance manufacturing operations risk profile in the first
half of 2020
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and liabilities
are measured on a market value basis, and a capital requirement is
defined to ensure that there is a less than one in 200 chance of
insolvency over a one-year time horizon, given the risks to which
the businesses are exposed. The methodology for the economic
capital calculation is largely aligned to the pan-European Solvency
II insurance capital regulations. A key risk appetite metric is the
economic coverage ratio, which is calculated by dividing the
economic net asset value by the economic capital requirement. The
business has a current appetite to remain above 135% with a
tolerance to 110%. In addition to economic capital, the regulatory
solvency ratio is also a metric used to manage risk appetite on an
entity basis.
Covid-19 impacts on financial markets has impacted the
profitability of manufactured insurance products and has caused
overall capital levels to fall in several of the insurance
entities. At 30 June 2020 regulatory capital levels were above risk
appetite and the group economic capital level was above risk
tolerance. A variety of management actions was taken during the
period to actively manage the risk profile of the insurance
entities. Enhanced monitoring of risks and pricing conditions will
continue, as the low level of interest rates results in a higher
cost of guarantees to be paid to policyholders, increasing the
reinvestment risk for interest rate sensitive products. This will
have an impact on their profitability and increase the solvency
requirements for the entities which are most exposed to these
products.
The following table shows the composition of assets and
liabilities by contract type.
Balance sheet of insurance manufacturing subsidiaries by type of contract
Shareholder
assets
With Unit- Other and
DPF linked contracts(1) liabilities Total
Footnotes GBPm GBPm GBPm GBPm GBPm
Financial assets 19,791 2,187 251 2,370 24,599
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 8,473 2,116 93 983 11,665
* derivatives 104 - - 3 107
- financial investments - at amortised
cost 283 - 1 15 299
- financial investments - at fair
value through other comprehensive
income 9,181 - 111 1,258 10,550
- other financial assets 2 1,750 71 46 111 1,978
Reinsurance assets - 51 146 - 197
PVIF 3 - - - 649 649
------ ------ ------------
Other assets and investment properties 794 1 1 48 844
-------------------------------------------------------------
Total assets at 30 Jun 2020 20,585 2,239 398 3,067 26,289
------------------------------------------------------------- ---------- ------ ------ ------------ ----------- ------
Liabilities under investment contracts
designated at fair value - 875 - - 875
------ -----------
Liabilities under insurance contracts 20,472 1,358 362 - 22,192
------ -----------
Deferred tax 4 113 2 - 45 160
------------------------------------------------------------- ---------- ------ ------ ------------ ----------- ------
Other liabilities - - - 1,704 1,704
Total liabilities at 30 Jun 2020 20,585 2,235 362 1,749 24,931
------------------------------------------------------------- ---------- ------ ------ ------------ ----------- ------
Total equity at 30 Jun 2020 - - - 1,358 1,358
------------------------------------------------------------- ---------- ------ ------ ------------ ----------- ------
Total liabilities and equity at 30
Jun 2020 20,585 2,235 362 3,107 26,289
------------------------------------------------------------- ---------- ------ ------ ------------ ----------- ------
Financial assets 19,258 2,116 233 2,231 23,838
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 8,222 2,057 78 1,359 11,716
- derivatives 61 - - 2 63
- financial investments - at amortised
cost 69 - 1 7 77
- financial investments - at fair
value through other comprehensive
income 9,033 - 105 749 9,887
- other financial assets 2 1,873 59 49 114 2,095
Reinsurance assets - 50 129 - 179
PVIF 3 - - - 715 715
------ ----- ---
Other assets and investment properties 763 1 1 54 819
Total assets at 31 Dec 2019 20,021 2,167 363 3,000 25,551
-------------------------------------------------------------- ------ ----- --- ----- ------
Liabilities under investment contracts
designated at fair value - 862 - - 862
Liabilities under insurance contracts 19,889 1,295 325 - 21,509
Deferred tax 4 137 6 - 31 174
Other liabilities - - - 1,645 1,645
-----
Total liabilities at 31 Dec 2019 20,026 2,163 325 1,676 24,190
--------------------------------------------------------------
Total equity at 31 Dec 2019 - - - 1.361 1,361
-------------------------------------------------------------- ------ ----- --- ----- ------
Total liabilities and equity at 31
Dec 2019 20,026 2,163 325 3,037 25,551
-------------------------------------------------------------- ------ ----- --- ----- ------
1 'Other contracts' includes term assurance and credit life insurance.
2 Comprise mainly loans and advances to banks, cash and
intercompany balances with other non-insurance legal entities.
3 Present value of in-force long-term insurance business.
4 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
Market risk
Description and exposure
Market risk is the risk of changes in market factors affecting
the bank's capital or profit. Market factors include interest
rates, equity and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued.
Our most significant life insurance products are investment
contracts with discretionary participating features ('DPF') issued
in France. These products typically include some form of capital
guarantee or guaranteed return on the sums invested by the
policyholders, to which discretionary bonuses are added if allowed
by the overall performance of the funds. These funds are primarily
invested in bonds with a proportion allocated to other asset
classes, to provide customers with the potential for enhanced
returns. DPF products expose the bank to the risk of variation in
asset returns, which will impact our participation in the
investment performance. In addition, in some scenarios the asset
returns can become insufficient to cover the policyholders'
financial guarantees, in which case the shortfall has to be met by
the bank. Amounts are held against the cost of such guarantees,
calculated by stochastic modelling.
Where local rules require, these reserves are held as part of
liabilities under insurance contracts. Any remainder is accounted
for as a deduction from the present value of in-force 'PVIF'
long-term insurance contracts. The table below shows the total
reserve held for the cost of guarantees, the range of investment
returns on assets supporting these products and the implied
investment return that would enable the business to meet the
guarantees. For unit-linked contracts, market risk is substantially
borne by the policyholder, but some market risk exposure typically
remains as fees earned are related to the market value of the
linked assets.
Sensitivities
The following table illustrates the effects of selected interest
rate and equity price scenarios on our profit for the period and
the total equity of our insurance manufacturing subsidiaries.
Where appropriate, the effects of the sensitivity tests on
profit after tax and equity incorporate the impact of the stress on
the PVIF. Where observable long-tenor interest rates are at or
close to zero, the -100bps stress sensitivity allows for the impact
of negative rates.
Due in part to the impact of the cost of guarantees and hedging
strategies which may be in place, the relationship between the
profit and total equity and the risk factors is non-linear.
Therefore, the results disclosed should not be extrapolated to
measure sensitivities to different levels of stress. For the same
reason, the impact of the stress is not necessarily symmetrical on
the upside and downside. The sensitivities are stated before
allowance for management actions which may mitigate the effect of
changes in the market environment. The sensitivities presented
allow for adverse changes in policyholder behaviour that may arise
in response to changes in market rates.
Sensitivity of the group's insurance manufacturing subsidiaries to
market risk factors
30 June 2020 31 December 2019
Effect Effect Effect
on on Effect on
profit total on profit total
after tax equity after tax equity
GBPm GBPm GBPm GBPm
------- ----------- ---------
+100 basis point parallel shift
in yield curves 102 81 84 67
---------- ------
-100 basis point parallel shift
in yield curves (196) (173) (175) (157)
10% increase in equity prices 29 29 28 28
---------- ------
10% decrease in equity prices (30) (30) (30) (30)
-------------------------------------------- --------- ------ ---------- ------
Capital
Key capital numbers
At
30 Jun 31 Dec
Footnotes 2020 2019
------- ---------
Available capital
(GBPm) 1
Common equity tier
1 ('CET1') capital 18,701 17,791
------- -------
Tier 1 capital 22,819 22,130
-------
Total regulatory capital 35,490 34,929
------------------------------- ---------- ------- -------
Risk-weighted assets
('RWAs') (GBPm)
Credit risk 2 87,585 79,208
------------------------------- ---------- ------- -------
Counterparty credit
risk 21,699 21,286
Market risk 17,282 13,107
-------
Operational risk 11,812 11,812
Total risk-weighted
assets 138,378 125,413
------------------------------- ---------- ------- -------
Capital ratios (%) 1
Common equity tier
1 13.5 14.2
Tier 1 16.5 17.6
------------------------------- ---------- ------- -------
Total capital 25.6 27.9
Leverage ratio (transitional)
Tier 1 capital (GBPm) 22,819 22,130
Total leverage ratio
exposure measure (GBPm) 600,340 571,302
------------------------------- ---------- ------- -------
Leverage ratio (%) 3.8 3.9
Leverage ratio (fully
phased-in)
Tier 1 capital (GBPm) 22,386 21,480
------- -------
Total leverage ratio
exposure measure (GBPm) 600,340 571,302
------- -------
Leverage ratio (%) 3.7 3.8
------------------------------- ---------- ------- -------
1 Capital figures and ratios are calculated in accordance with
the revisions to the Capital Requirements Regulation and Directive,
as implemented ('CRR II'), and are subject to the 'CRR Quick Fixes'
package where applicable. See page 35 for further detail.
2 'Credit risk' here, and in all tables in this capital section
where the term is used, excludes counterparty credit risk.
Capital overview
Our objective in managing the group's capital is to maintain
appropriate levels of capital to support our business strategy, and
meet regulatory and stress testing requirements.
We manage group capital to ensure we exceed current and expected
future requirements, and that we respect the payment priority of
our capital providers. Throughout the six months to
30 June 2020, we complied with the Prudential Regulation
Authority's ('PRA') regulatory capital adequacy requirements,
including those relating to stress testing.
A summary of our policies and practices regarding capital
management, measurement and allocation is provided on page 75 of
the Annual Report and Accounts 2019.
Risk-weighted assets
Risk-weighted assets ('RWAs') rose by GBP13.0bn during the first
half of the year, including an increase of GBP6.0bn due to foreign
currency translation differences. The GBP7.0bn increase (excluding
foreign currency translation differences) comprised the movements
described by the following comments.
Asset size
The GBP6.0bn increase in RWAs was predominantly due to GBP3.6bn
lending growth in GBM and CMB and a GBP3.2bn increase in market
risk RWAs as a result of market volatility. This was partly offset
by management initiatives of GBP1.1bn within GBM and CMB.
Asset quality
Changes in asset quality led to a RWA increase of GBP1.3bn
mainly within CMB and GBM.
Model updates
Model updates led to a GBP1.1bn decrease in RWAs. This was
largely due to a GBP0.8bn fall in market risk RWAs, as a result of
a temporary adjustment to the calculation of risks not in VaR, and
a GBP0.3bn decrease within GBM and CMB due to global corporate
model updates.
Methodology and policy
The GBP0.6bn rise in RWAs included a GBP3.8bn increase caused by
changes in approach to wholesale credit risk exposures and a
GBP0.8bn increase in market risk RWAs relating to foreign exchange
risk. This was partly offset by reductions due to management
initiatives mainly within GBM worth GBP4.1bn, which included risk
parameter refinements and a change in the treatment of undrawn
private equity fund commitments.
With effect from 1 January 2020, we implemented two changes in
approach to our wholesale credit risk exposures. Application of the
new securitisation framework to the pre-existing book caused RWAs
to rise by GBP2.8bn, mainly in Corporate Centre and GBM. We also
transferred several UK corporate portfolios from the Advanced to
the Foundation IRB approach which resulted in a GBP1.0bn rise in
RWAs in GBM.
RWA movement by global business by key driver
Credit risk, counterparty
credit risk and operational
risk
Corporate Market Total
WPB CMB GBM Centre risk RWAs
GBPm GBPm GBPm GBPm GBPm GBPm
---------- -------- ------- --------- ------- ----------
RWAs at 1 Jan 2020 9,119 28,768 68,569 5,850 13,107 125,413
--------------------------
Asset size (63) 91 2,055 822 3,189 6,094
Asset quality (159) 1,266 269 (72) - 1,304
Model updates - (73) (191) 24 (811) (1,051)
Methodology and policy 495 405 (2,426) 1,315 835 624
Foreign exchange movement 422 1,511 2,945 154 962 5,994
Total RWA movement 695 3,200 2,652 2,243 4,175 12,965
RWAs at 30 Jun 2020 9,814 31,968 71,221 8,093 17,282 138,378
--------------------------
Regulatory developments
Covid-19
The current Covid-19 pandemic has created an unprecedented
challenge to the global economy. Governments, central banks and
regulatory authorities have responded to this challenge with a
number of regulatory measures. The substance of the announcements
and the pace of response varies by jurisdiction but broadly, these
have included a number of customer support measures; operational
capacity measures; and amendments to the RWAs, capital and
liquidity frameworks.
In the EU, the relief measures have included a package known as
the 'CRR Quick Fixes' that was enacted in June 2020. The package
represents an acceleration of some of the beneficial elements of
the amendments to the Capital Requirements Regulation ('CRR II')
that were originally scheduled for June 2021, together with other
amendments to mitigate the potential volatility in capital ratios
arising from the pandemic. The material changes that were finalised
in June, include:
-- a resetting of the transitional provisions in relation to
recognising IFRS 9 provisions in Common Equity Tier 1 ('CET1')
capital;
-- the acceleration of the timetable for the changes to the CET1
deduction of software assets so that once the European Banking
Authority ('EBA') finishes its current consultation on the new
methodology, the rules can go live;
-- the CRR II changes to the small and medium sized enterprises
('SME') supporting factor and the new infrastructure supporting
factor; and
-- the CRR II change to the netting in the leverage ratio
exposure measure of regular-way purchases and sales.
The Prudential Regulation Authority ('PRA') has published a
statement in response to the package, stating that it will be
undertaking a quantitative analysis of the benefits which will be
used to inform its supervisory approach. This will include an
assessment of whether further action is necessary in Pillar 2.
In addition to the CRR Quick Fix package, there were other
changes to the regime in response to Covid-19. These included the
enactment by the EU of beneficial changes to the CET1 deduction for
prudent valuation adjustments, which will remain in place until 1
January 2021, and the PRA announcing that it is setting all Pillar
2A requirements in 2020 and 2021 as a nominal amount, instead of a
percentage of total RWAs.
The Basel Committee
In December 2017, the Basel Committee ('Basel') published the
Basel III Reforms. The package finalised in July 2020 when Basel
published the final revisions to the credit valuation adjustment
('CVA') framework.
In March 2020, Basel announced a one-year delay to the
implementation of the package. It is now to be implemented on
1 January 2023, with a five-year transitional provision for the
output floor. This floor ensures that, at the end of the
transitional period, banks' total RWAs will be no lower than 72.5%
of those generated by the standardised approaches. The final
standards will need to be transposed into the relevant local law
before coming into effect. The EU and the UK authorities have
already indicated that they will apply the new timetable.
There remains a significant degree of uncertainty about the
impact of these changes due to the number of national discretions
within Basel's reforms and the need for further supporting
technical standards to be developed. Furthermore, any impact needs
to be viewed in light of the possibility of offsets against Pillar
2, which may arise as shortcomings within Pillar 1 are
addressed.
The Capital Requirements Regulation amendments
In June 2019, the EU enacted the CRR II. This is the EU's
implementation of changes to the own funds regime and to the
Financial Stability Board's ('FSB') requirements for total
loss-absorbing capacity ('TLAC'), known in the EU as the minimum
requirements for own funds and eligible liabilities ('MREL'). The
CRR II will also implement the first tranche of changes to the EU's
legislation to reflect the Basel III Reforms, including the changes
to market risk ('FRTB') rules, revisions to the standardised
approach for measuring counterparty risk, changes to the equity
investments in funds rules and the new leverage ratio rules. The
CRR II rules will follow a phased implementation with significant
elements entering into force in 2021, in advance of Basel's
timeline.
The EU's implementation of the Basel III Reforms
The remaining elements of the Basel III Reforms will be
implemented in the EU by a further set of amendments to the Capital
Requirements Regulation. In 2019, the European Commission began
consulting on its implementation, which will include reforms to the
credit and operational risk rules and a new output floor. However,
draft legislative text has not yet been published. The EU
implementation will be subject to an extensive negotiation process
with the EU Council and Parliament. As a result, the final form of
the rules remains unclear.
The UK's withdrawal from the EU
The UK left the EU on 31 January 2020. In order to smooth the
transition, the UK remains subject to EU law during an
implementation period, which will end on 31 December 2020. The PRA
has announced its intention that, save for in certain limited
circumstances, the changes to the prudential framework arising as a
result of the UK's withdrawal will be delayed until 31 March
2022.
In June, Her Majesty's Treasury ('HMT') published an update on
the framework to implement future prudential changes in the UK.
This will be in the form of a Financial Services Bill in which
powers will be delegated to the PRA for detailed rule making. The
UK has stated that it intends to implement its own version of CRR
II to the same timetable as the EU.
At the same time, HMT published a consultation on the
implementation of the amendments to the Bank Recovery and
Resolution Directive ('BRRD2'), the main EU regulation overseeing
resolution and MREL standards. It also subsequently published a
consultation on aspects of the amendments to the Capital
Requirements Directive ('CRDV'). HMT propose to implement in UK law
only those elements of BRRD2 and CRDV that are live on 31 December
2020.
In July 2020, the PRA also issued a consultation on implementing
parts of the CRDV, which include its requirements for Pillar 2,
remuneration and governance. In the autumn, the PRA will consult on
the remaining elements of CRDV and the CRR II elements that apply
from December 2020.
Other developments
In July 2020, the PRA published its final policy on reducing
Pillar 2A to reflect the additional resilience associated with the
higher Countercyclical Capital Buffer ('CCyB') in a standard risk
environment proposed by the Financial Policy Committee. However,
reflecting the reduction of the UK's CCyB to 0% and the fact that
the UK's structural CCyB rate set in a standard risk environment
has not changed, the PRA has introduced a requirement to
temporarily increase the PRA buffer to offset some of the
reductions in Pillar 2A that firms receive under this proposal. The
rules take immediate effect.
Also in July, the PRA published a statement outlining its views
on the implications of London Interbank Offered Rate ('LIBOR')
transition for contracts in scope of its resolution-related rules.
The EBA also published its final guidelines on the treatment of
structural foreign exchange positions which will apply from
1 January 2022, one year later than originally planned.
In June, the PRA sent a letter to CEOs outlining its
expectations of firms in managing climate-related financial risks
and advising firms that they must have fully embedded their
approaches to managing such risk by the end of 2021.
Comparison of own funds, capital and leverage ratios, with and without
the application of transitional arrangements for IFRS 9
(IFRS9-FL)
At
30 Jun 31 Dec 30 Jun
Ref* Footnotes 2020 2019 2019
---------- -------- -------- --------
Available capital (GBPbn)
1 Common equity tier 1 ('CET1') capital ^ 18.7 17.8 19.7
---------- ------
CET1 capital as if IFRS 9 transitional
2 arrangements had not been applied 18.6 17.7 19.7
3 Tier 1 capital ^ 22.8 22.1 22.9
Tier 1 capital as if IFRS 9 transitional
4 arrangements had not been applied 22.8 22.1 22.9
5 Total capital ^ 35.5 34.9 36.9
Total capital as if IFRS 9 transitional
6 arrangements had not been applied 35.4 34.9 36.9
------
Risk-weighted assets ('RWAs') (GBPbn)
7 Total RWAs 138.4 125.4 148.8
Total RWAs as if IFRS 9 transitional
8 arrangements had not been applied 138.3 125.4 148.7
------
Capital ratios (%)
9 CET1 ^ 13.5 14.2 13.3
----------
CET1 as if IFRS 9 transitional arrangements
10 had not been applied 13.5 14.1 13.2
------
11 Total tier 1 ^ 16.5 17.6 15.4
----------
12 Tier 1 as if IFRS 9 transitional arrangements
had not been applied 16.5 17.6 15.4
13 Total capital ^ 25.6 27.9 24.8
----------
Total capital as if IFRS 9 transitional
14 arrangements had not been applied 25.6 27.8 24.8
Leverage ratio
--------
Total leverage ratio exposure measure
15 (GBPbn) 600.3 571.3 621.9
----------
16 Leverage ratio (%) ^ 3.7 3.8 3.6
----------
Leverage ratio as if IFRS 9 transitional
17 arrangements had not been applied (%) 3.7 3.7 3.6
----------
* The references identify the lines prescribed in the EBA
template that are applicable and where there is a value.
^ Figures have been prepared on an IFRS 9 transitional basis.
The group has adopted the regulatory transitional arrangements
for IFRS 9 'Financial Instruments', including paragraph four within
article 473a of the Capital Requirements Regulation, published by
the EU on 27 December 2017. These transitional arrangements permit
banks to add back to their capital base a proportion of the impact
that IFRS 9 has upon their loan loss allowances during the first
five years of use. The impact is defined as:
-- the increase in loan loss allowances on day one of IFRS 9 adoption; and
-- any subsequent increase in expected credit losses ('ECL') in
the non-credit-impaired book thereafter.
Any add-back must be tax affected and accompanied by a
recalculation of capital deduction thresholds, exposure and RWAs.
The impact is calculated separately for portfolios using the
standardised ('STD') and internal ratings based ('IRB') approaches.
For IRB portfolios, there is no add-back to capital unless loan
loss allowances exceed regulatory 12-month expected losses.
The EU's CRR 'Quick Fix' relief package enacted in June 2020
increased from 70% to 100% the relief that banks may take for loan
loss allowances recognised since 1 January 2020 on the
non-credit-impaired book.
In the current period, the add-back to CET1 capital amounted to
GBP102m under the STD and IRB approaches with a tax impact of
GBP(43)m. At 31 December 2019, the add-back to the capital base
under the STD approach was GBP83m with a tax impact of
GBP(21)m.
Regulatory balance sheet
Structure of the regulatory group
Assets, liabilities and post-acquisition reserves of
subsidiaries engaged in insurance activities are excluded from the
regulatory consolidation. Our investments in these insurance
subsidiaries are recorded at cost and deducted from common CET1
capital, subject to thresholds.
The regulatory consolidation also excludes special purpose
entities ('SPEs') where significant risk has been transferred to
third parties. Exposures to these SPEs are risk weighted as
securitisation positions for regulatory purposes.
Participating interests in banking associates are proportionally
consolidated for regulatory purposes by including our share of
assets, liabilities, profits and losses, and RWAs in accordance
with the PRA's application of EU legislation. Non-participating
significant investments, along with non-financial associates, are
deducted from capital, subject to thresholds.
Reconciliation of balance sheet - financial accounting to regulatory
scope of consolidation
Deconsolidation
Accounting of insurance/ Consolidation Regulatory
balance other of banking balance
sheet entities associates sheet
Ref GBPm GBPm GBPm GBPm
----- ---------- ----------------- --------------- ------------
Assets
-----
Cash and balances at central banks 94,247 - 18 94,265
Items in the course of collection
from other banks 671 - - 671
Trading assets 86,038 - - 86,038
Financial assets designated and otherwise
mandatorily measured at fair value
through profit or loss 18,222 (11,699) 362 6,885
--- ----
* of which: debt securities eligible as tier 2 issued
by group FSEs that are outside the regulatory scope
of consolidation r - 428 - 428
---- ----
Derivatives 228,787 (60) - 228,727
Loans and advances to banks 14,258 (298) - 13,960
--------- ----------- --- --------- ---- ---------
Loans and advances to customers 115,164 (507) - 114,657
- of which: expected credit losses
on IRB portfolios h (1,212) - - (1,212)
--------- ----------- ---- --------- ---- ---------
Reverse repurchase agreements - non-trading 62,842 - - 62,842
Financial investments 56,452 (11,037) - 45,415
--------- ----------- --- --------- ---- ---------
Capital invested in insurance and
other entities - 633 - 633
---- ----
Prepayments, accrued income and other
assets 79,030 (968) 27 78,089
- of which: retirement benefit assets j 22 - - 22
----- --------- ----------- ---- --------- ---- ---------
Current tax assets 606 - - 606
---- ----
Interests in associates and joint
ventures 422 - (406) 16
---- ---
Goodwill and intangible assets e 804 (650) - 154
Deferred tax assets f 276 145 2 423
--------- ----------- ---- --------- ---- ---------
Total assets at 30 Jun 2020 757,819 (24,441) 3 733,381
--- ----
Liabilities and equity
---------- ----------------- --------------- ------------
Liabilities
----- ---------- ----------------- --------------- ------------
Deposits by banks 38,157 (24) - 38,133
Customer accounts 207,089 358 - 207,447
Repurchase agreements - non-trading 31,263 - - 31,263
Items in the course of transmission
to other banks 277 - - 277
Trading liabilities 48,487 - - 48,487
Financial liabilities designated
at fair value 42,255 376 - 42,631
n,
o,
q,
- of which: included in tier 2 i 2,374 - - 2,374
--------- ----------- ---- --------- ---- ---------
Derivatives 222,552 38 - 222,590
---- ----
- of which: debit valuation adjustment i 46 - - 46
----- ---- ----
Debt securities in issue 24,159 (1,277) - 22,882
--- ----
Accruals, deferred income and other
liabilities 81,543 (985) 3 80,561
--- ----
Current tax liabilities 133 (8) - 125
--- ----
Liabilities under insurance contracts 22,192 (22,192) - -
--- ----
Provisions 626 (2) - 624
* of which: credit-related contingent liabilities and
contractual commitments on IRB portfolios h 132 - - 132
---- ----
Deferred tax liabilities 23 (15) - 8
--- ----
Subordinated liabilities 14,247 - - 14,247
- of which:
included in tier 1 l 700 - - 700
n,
o,
included in tier 2 q 13,547 - - 13,547
----- --------- ----------- ---- --------- ---- ---------
Total liabilities at 30 Jun 2020 733,003 (23,731) 3 709,275
--- ----
Equity
-----
Called up share capital a 797 - - 797
----- --------- ----------- ---- --------- ---- ---------
Other equity instruments k 3,722 - - 3,722
c,
Other reserves g (4,557) 8 - (4,549)
b,
Retained earnings c 24,661 (718) - 23,943
--------- ----------- --- --------- ---- ---------
Total shareholders' equity 24,623 (710) - 23,913
d,
m,
Non-controlling interests p 193 - - 193
----- --------- ----------- ---- --------- ---- ---------
Total equity at 30 Jun 2020 24,816 (710) - 24,106
Total liabilities and equity at 30
Jun 2020 757,819 (24,441) 3 733,381
--------- ----------- --- --------- ---- ---------
The references (a)-(r) identify balance sheet components which
are used in the calculation of regulatory capital on pages 38 and
39.
Own funds
Own funds disclosure
At
30 Jun 31 Dec
2020 2019
Ref* Ref GBPm GBPm
---------- ----------
Common equity tier 1 capital: instruments and reserves
---------- ----------
1 Capital instruments and related share premium accounts 797 797
* ordinary shares a 797 797
2 Retained earnings b 17,328 19,272
3 Accumulated other comprehensive income (and other
reserves) c 3,388 2,048
5 Minority interests (amount allowed in consolidated
common equity tier 1) d 67 350
5a Independently reviewed interim net profits net of
any foreseeable charge or dividend(1) b (1,204) (3,019)
6 Common equity tier 1 capital before regulatory adjustments 20,376 19,448
Common equity tier 1 capital: regulatory adjustments
7 Additional value adjustments(2) (665) (651)
8 Intangible assets (net of related deferred tax liability) e (141) (854)
10 Deferred tax assets that rely on future profitability
excluding those arising from temporary differences
(net of related tax liability) f (132) (72)
11 Fair value reserves related to gains or losses on
cash flow hedges g (170) (65)
12 Negative amounts resulting from the calculation
of expected loss amounts h (272) (189)
14 Gains or losses on liabilities at fair value resulting
from changes in own credit standing i (274) 193
15 Defined benefit pension fund assets j (21) (19)
28 Total regulatory adjustments to common equity tier
1 (1,675) (1,657)
-------
29 Common equity tier 1 capital 18,701 17,791
-------
Additional tier 1 ('AT1') capital: instruments
30 Capital instruments and related share premium accounts 3,722 3,722
31 * classified as equity under IFRSs k 3,722 3,722
33 Amount of qualifying items and related share premium
accounts subject to phase out from AT1 l 433 650
34 Qualifying tier 1 capital included in consolidated
AT1 capital (including minority interests not included
in CET1) issued by subsidiaries and held by third
parties m 12 12
36 Additional tier 1 capital before regulatory adjustments 4,167 4,384
-------
Additional tier 1 capital: regulatory adjustments
37 Direct and indirect holdings of own AT1 instruments(3) (49) (45)
43 Total regulatory adjustments to additional tier
1 capital (49) (45)
-------
44 Additional tier 1 capital 4,118 4,339
-------
45 Tier 1 capital (T1 = CET1 + AT1) 22,819 22,130
-------
Tier 2 capital: instruments and provisions
---------- ----------
46 Capital instruments and related share premium accounts n 12,462 12,336
- of which: instruments grandfathered under CRR
II 1,492 1,399
-------
47 Amount of qualifying items and the related share
premium accounts subject to phase out from T2 o 440 661
48 Qualifying own funds instruments included in consolidated
T2 capital (including minority interests and AT1
instruments not included in CET1 or AT1) issued p,
by subsidiaries and held by third parties q 229 232
49 - of which: instruments issued by subsidiaries subject
to phase out q 54 57
-------
- of which: instruments issued by subsidiaries grandfathered
under CRR II 39 43
51 Tier 2 capital before regulatory adjustments 13,131 13,229
Tier 2 capital: regulatory adjustments
----------
52 Direct and indirect holdings of own T2 instruments(3) (32) (31)
55 Direct and indirect holdings by the institution
of T2 instruments and subordinated loans of financial
sector entities where the institution has a significant
investment in those entities (net of eligible short
positions) r (428) (399)
57 Total regulatory adjustments to tier 2 capital (460) (430)
-------
58 Tier 2 capital 12,671 12,799
-------
59 Total capital (TC = T1 + T2) 35,490 34,929
-------
60 Total risk-weighted assets 138,378 125,413
-------
Capital ratios and buffers
61 Common equity tier 1 13.5% 14.2%
----------
62 Tier 1 16.5% 17.6%
----------
63 Total capital 25.6% 27.9%
----------
64 Institution specific buffer requirement 2.52% 2.89%
----------
65 - capital conservation buffer requirement 2.50% 2.50%
66 - countercyclical buffer requirement 0.02% 0.39%
68 Common equity tier 1 available to meet buffers 9.0% 9.7%
----------
Amounts below the threshold for deduction (before
risk weighting)
72 Direct and indirect holdings of the capital of financial
sector entities where the institution does not have
a significant investment in those entities (amount
below 10% threshold and net of eligible short positions) 1,350 1,712
73 Direct and indirect holdings by the institution
of the CET1 instruments of financial sector entities
where the institution has a significant investment
in those entities (amount below 10% threshold and
net of eligible short positions) 635 600
75 Deferred tax assets arising from temporary differences
(amount below 10% threshold, net of related tax
liability) 475 447
----------
Own funds disclosure (continued)
At
30 Jun 31 Dec
2020 2019
Ref* Ref GBPm GBPm
Applicable caps on the inclusion of provisions in
tier 2
Cap on inclusion of credit risk adjustments in T2
77 under standardised approach 322 330
79 Cap for inclusion of credit risk adjustments in
T2 under internal ratings-based approach 445 396
------ ------
Capital instruments subject to phase-out arrangements
(only applicable between
1 Jan 2013 and 1 Jan 2022)
82 Current cap on AT1 instruments subject to phase-out
arrangements 463 695
83 Amount excluded from AT1 due to cap (excess over
cap after redemptions and maturities) 267 364
84 Current cap on T2 instruments subject to phase-out
arrangements 506 759
------ ------
85 Amount excluded from T2 due to cap (excess over
cap after redemptions and maturities) 251 109
------ ------
* The references identify the lines prescribed in the EBA
template that are applicable and where there is a value.
The references (a)-(r) identify balance sheet components on page
37 that are used in the calculation of regulatory capital.
1 This row includes losses that have been recognised and
deducted as they arose and were therefore not subject to an
independent review.
2 Additional value adjustments are deducted from CET1. These are
calculated on all assets measured at fair value.
3 As advised by the PRA a market making waiver has been applied
to the deduction of holdings of own T1 and T2 instruments.
The main features of HSBC Group's capital instruments, including
those of the bank, are published on the Group's website,
https://www.hsbc.com/investors/fixed-income-investors/regulatory-capital-securities.
At 30 June 2020, our common equity tier 1 ('CET1') capital ratio
decreased to 13.5% from 14.2% at 31 December 2019. This was mainly
due to an increase in RWAs, and was partly offset by an increase in
capital during the period. CET1 capital increased in 1H20 by
GBP0.9bn, mainly as a result of a capital injection of GBP1bn by
HSBC UK Holdings Limited, foreign exchange differences of GBP0.7bn,
offset by loss for the period on a regulatory basis (adjusted for
intangible impairments) of GBP0.5bn net of cash and scrip
dividends.
Leverage ratio
The leverage ratio was introduced into the Basel III
framework
as a non-risk-based limit, to supplement risk-based capital
requirements. It aims to constrain the build-up of excess leverage
in the banking sector, introducing additional safeguards against
model risk and measurement errors. This ratio has been implemented
in the EU for reporting and disclosure purposes but, at this stage,
has not been set as a binding requirement. The PRA's leverage ratio
requirement applies at the highest level of UK consolidation. For
HSBC, this applies at the Group level and not at the HSBC Bank plc
level.
Although there is currently no binding leverage ratio
requirement on the group, the risk of excess leverage is managed as
part of HSBC's global risk appetite framework and monitored using a
leverage ratio metric within our Risk Appetite Statement
('RAS').
The RAS articulates the aggregate level and types of risk that
HSBC is willing to accept in its business activities in order to
achieve its strategic business objectives. The RAS is monitored via
the risk appetite profile report, which includes comparisons of
actual performance against the risk appetite and tolerance
thresholds assigned to each metric, to ensure that any excessive
risk is highlighted, assessed and mitigated appropriately. The risk
appetite profile report is presented monthly to the Risk Management
Meeting ('RMM').
For the group, the leverage exposure measure is also calculated
and presented to the Asset, Liability and Capital Management
Committee every month.
Our leverage ratio calculated in accordance with the Capital
Requirements Regulation was 3.7% at 30 June 2020, a decrease from
3.8% at 31 December 2019. Our leverage exposure measure includes a
GBP17.1bn favourable impact arising from the 'CRR Quick Fix' relief
permitting the netting in leverage exposure of regular-way
purchases and sales awaiting settlement under certain
conditions.
Summary reconciliation of accounting assets and leverage ratio exposures
(LRSum)
At
30 Jun 31 Dec
2020 2019
Ref* GBPm GBPm
----------- ----------
1 Total assets as per published financial statements 757,819 636,491
Adjustments for:
2
* entities which are consolidated for accounting
purposes but are outside the scope of regulatory
consolidation (24,438) (24,038)
4 - derivative financial instruments (173,776) (93,974)
5 - securities financing transactions ('SFT') 2,052 (1,243)
6 - off-balance sheet items (i.e. conversion to credit
equivalent amounts of off-balance sheet exposures) 50,539 49,188
- intragroup exposures excluded from the leverage
EU-6a ratio exposure measure (397) (341)
7 - other adjustments (11,459) 5,219
-------- -------
8 Total leverage ratio exposure 600,340 571,302
------
* The references identify the lines prescribed in the EBA
template that are applicable and where there is a value.
Leverage ratio common disclosure (LRCom)
At
30 Jun 31 Dec
2020 2019
Ref* GBPm GBPm
On-balance sheet exposures (excluding derivatives
and SFTs)
On-balance sheet items (excluding derivatives,
1 SFTs and fiduciary assets, but including collateral) 414,047 355,108
(Asset amounts deducted in determining Tier 1
2 capital) (615) (1,178)
Total on-balance sheet exposures (excluding derivatives,
3 SFTs and fiduciary assets) 413,432 353,930
Derivative exposures
Replacement cost associated with all derivatives
transactions (i.e. net of eligible cash variation
4 margin) 53,242 30,146
5 Add-on amounts for potential future exposure ('PFE')
associated with all derivatives transactions
(mark-to-market method) 83,103 86,906
Gross-up for derivatives collateral provided where
deducted from the balance sheet assets pursuant
6 to IFRSs 8,096 5,213
(Deductions of receivables assets for cash variation
7 margin provided in derivatives transactions) (43,912) (28,285)
(Exempted central counterparty ('CCP') leg of
8 client-cleared trade exposures) (49,706) (28,442)
Adjusted effective notional amount of written
9 credit derivatives 120,277 117,851
(Adjusted effective notional offsets and add-on
10 deductions for written credit derivatives) (116,148) (112,846)
11 Total derivative exposures 54,952 70,543
Securities financing transaction exposures
Gross SFT assets (with no recognition of netting),
12 after adjusting for sales accounting transactions 230,590 217,376
(Netted amounts of cash payables and cash receivables
13 of gross SFT assets) (153,936) (124,530)
14 Counterparty credit risk exposure for SFT assets 5,160 5,136
16 Total securities financing transaction exposures 81,814 97,982
Other off-balance sheet exposures
Off-balance sheet exposures at gross notional
17 amount 126,839 120,337
(Adjustments for conversion to credit equivalent
18 amounts) (76,300) (71,149)
19 Total off-balance sheet exposures 50,539 49,188
Exempted exposures
EU-19a (Exemption of intragroup exposures (solo basis)) (397) (341)
Capital and total exposures
20 Tier 1 capital 22,386 21,480
21 Total leverage ratio exposure 600,340 571,302
22 Leverage ratio (%) 3.7 3.8
Choice of transitional arrangements for the definition
EU-23 of the capital measure Fully phased-in Fully phased-in
* The references identify the lines prescribed in the EBA
template that are applicable and where there is a value.
Leverage ratio - Split of on-balance sheet exposures (excluding derivatives,
SFTs and exempted exposures) (LRSpl)
At
30 Jun 31 Dec
2020 2019
GBPm GBPm
Total on-balance sheet exposures (excluding derivatives,
EU-1 SFTs and exempted exposures) 370,135 326,823
EU-2 - trading book exposures 66,694 83,656
EU-3 - banking book exposures 303,441 243,167
'banking book exposures' comprises:
EU-5 exposures treated as sovereigns 145,716 93,555
EU-7 institutions 14,498 13,058
EU-8 secured by mortgages of immovable properties 24,048 8,462
EU-9 retail exposures 4,071 17,452
EU-10 corporate 78,436 74,726
EU-11 exposures in default 3,057 1,181
other exposures (e.g. equity, securitisations
EU-12 and other non-credit obligation assets) 33,615 34,733
* The references identify the lines prescribed in the EBA
template that are applicable and where there is a value.
Risk-weighted assets
Overview of RWAs (OV1)
At
30 Jun 31 Dec 30 Jun
2020 2019 2020
Capital(1)
RWAs RWAs required
GBPm GBPm GBPm
Credit risk (excluding counterparty credit
1 risk) 79,218 72,773 6,338
2 - standardised approach 19,733 21,514 1,579
3 - foundation IRB approach 29,016 11,605 2,321
4 - advanced IRB approach 30,469 39,654 2,438
6 Counterparty credit risk 21,688 21,173 1,734
7 - mark-to-market 10,974 9,973 878
10 - internal model method 8,831 9,017 706
- risk exposure amount for contributions to
11 the default fund of a central counterparty 264 270 21
12 - credit valuation adjustment 1,619 1,913 129
13 Settlement risk 11 113 1
Securitisation exposures in the non-trading
14 book 5,593 3,819 447
14a - internal ratings-based approach ('SEC-IRBA')(2) 906 459 72
14b - external ratings-based approach ('SEC-ERBA')(2) 2,249 - 180
14c - internal assessment approach ('IAA')(2) 1,717 1,099 137
14d - standardised approach ('SEC-SA')(2) 721 196 58
- exposures subject to the pre-existing securitisation
14e framework(3) - 2,065 -
19 Market risk 17,282 13,107 1,382
20 - standardised approach 2,902 1,567 232
21 - internal models approach 14,380 11,540 1,150
23 Operational risk 11,812 11,812 946
25 - standardised approach 11,812 11,812 946
Amounts below the thresholds for deduction
27 (subject to 250% risk weight) 2,774 2,616 222
29 Total 138,378 125,413 11,070
1 'Capital requirement' represents the minimum total capital
charge set at 8% of RWAs by article 92 of the Capital Requirements
Regulation.
2 On 1 January 2019, a new securitisation framework came into
force in the EU for new transactions. The new framework prescribes
the four approaches listed in rows 14a to 14d of the table
above.
3 Further details of our exposures subject to approaches under
the pre-existing framework at 31 December 2019 can be found on page
3 of the HSBC Bank plc Pillar 3 Disclosures at 31 December 2019
document. These transactions, which were subject to
'grandfathering' provisions, transferred to approaches under the
new framework on 1 January 2020.
Credit risk, including amounts below the thresholds for
deduction
Credit risk RWAs increased by GBP6.6bn in the first half of the
year, primarily due to lending growth and the transfer of certain
UK corporate exposures from the Advanced to the Foundation IRB
approach. This was partly offset by a fall in RWAs due to
management initiatives.
Counterparty credit risk
Counterparty credit risk (including settlement risk) RWAs
increased by GBP0.4bn, which was primarily due to credit rating
downgrades and foreign exchange movements, partly offset by
management initiatives and reduction in exposures.
Securitisation in non-trading book
Securitisation RWAs increased by GBP1.8bn, primarily due to
GBP2.3bn of exposures which moved onto the new securitisation
framework.
Market risk
Market risk RWAs increased by GBP4.2bn. This was mainly due to a
GBP0.8bn increase in foreign exchange risk under the standardised
approach and a GBP3.2bn increase arising from market volatility
under the internal models approach.
Credit risk - RWAs by exposure
class
30 Jun 2020 31 Dec 2019
Capital Capital
RWAs required RWAs required
Footnotes GBPm GBPm GBPm GBPm
---------- ------ ---------
IRB advanced approach 28,634 2,291 37,679 3,014
----------
- central governments and central
banks 2,886 232 1,915 153
- institutions 2,311 185 2,439 195
- corporates 1 20,156 1,612 30,560 2,445
- total retail 3,281 262 2,765 221
----------
- of which:
secured by mortgages on immovable
property - small and medium-sized
enterprises ('SME') 274 22 278 22
secured by mortgages on immovable
property - non-SME 1,791 143 586 47
qualifying revolving retail 55 4 38 3
other SME 639 51 507 41
other non-SME 522 42 1,356 108
---------- -------
IRB securitisation positions 906 72 2,084 167
IRB non-credit obligation assets 1,835 147 1,976 158
IRB foundation approach 29,016 2,321 11,605 928
- central governments and central
banks 3 - 2 -
- institutions 9 1 17 1
- corporates 29,004 2,320 11,586 927
-------
Standardised approach 27,194 2,176 25,864 2,069
- central governments and central
banks 1,188 95 1,117 89
- regional governments or local
authorities - - 2 -
----------
- public sector entities 10 1 9 1
----------
- institutions 1,926 154 1,085 87
- corporates 9,340 747 11,494 920
- retail 325 26 412 33
- secured by mortgages on immovable
property 1,705 136 1,448 116
- exposures in default 451 36 470 38
- items associated with particularly
high risk 4,787 383 5,481 438
- securitisation positions 4,687 375 1,735 139
- collective investments undertakings 10 1 6 -
- equity 2 2,431 194 2,327 186
- other items 334 28 278 22
-------
Total 87,585 7,007 79,208 6,336
---------- ------ --------- ------- ---------
1 'Corporates' includes specialised lending exposures subject to
the supervisory slotting approach of GBP3,936m (2019: GBP4,104m)
and RWAs of GBP2,641m (2019: GBP2,699m).
2 'Equity' includes investments in group insurance companies that are risk-weighted at 250%.
Counterparty credit risk - RWAs by exposure class and product
At
30 Jun 2020 31 Dec 2019
Capital Capital
RWAs required RWAs required
Footnotes GBPm GBPm GBPm GBPm
By exposure class
------- --------- ------- -----------
IRB advanced approach 7,010 561 15,258 1,221
---------
- central governments and central
banks 330 26 302 24
- institutions 5,456 437 5,878 470
- corporates 1,224 98 9,078 727
IRB foundation approach 9,537 763 1,553 124
---------
- corporates 9,537 763 1,553 124
---------
Standardised approach 3,067 245 2,087 167
---------
- central governments and central
banks 11 1 14 1
- institutions 2,741 219 1,869 150
- corporates 315 25 204 16
CVA advanced 1,213 97 1,375 110
CVA standardised 406 32 538 43
Central counterparties ('CCP')
standardised 466 37 475 38
--------- ------- ---------
Total 21,699 1,735 21,286 1,703
------- --------- ------- ---------
By product
- derivatives (OTC and exchange
traded derivatives) 15,355 1,228 14,581 1,167
- SFTs 3,607 289 3,916 313
- other 1 854 68 606 48
- CVA advanced 1,213 97 1,375 110
- CVA standardised 406 32 538 43
- CCP default funds 2 264 21 270 22
Total 21,699 1,735 21,286 1,703
--------- ------- --------- ------- ---------
1 Includes free deliveries not deducted from regulatory capital.
2 Default fund contributions are cash balances posted to CCPs by all members.
Market risk under standardised approach (MR1)
At
30 Jun 2020 31 Dec 2019
Capital Capital
RWAs required RWAs required
GBPm GBPm GBPm GBPm
---------- ----------- ---------- -----------
Outright products
1 Interest rate risk (general and specific) 497 40 377 30
2 Equity risk (general and specific) 245 20 44 3
3 Foreign exchange risk 1,029 82 194 16
4 Commodity risk 31 2 74 6
Options
6 Delta-plus method 103 8 59 5
8 Securitisation 997 80 819 65
-------- --------- -------- ---------
9 Total 2,902 232 1,567 125
Market risk under IMA (MR2-A)
At
30 Jun 2020 31 Dec 2019
Capital Capital
RWAs required RWAs required
GBPm GBPm GBPm GBPm
--------- ----------- ----------
1 VaR (higher of values a and b) 4,768 381 3,404 272
(a) Previous day's VaR 67 45
---------
(b) Average daily VaR(1) 381 272
--------- ----------
Stressed VaR (higher of values a
2 and b) 6,683 535 5,226 418
(a) Latest SVaR 68 59
---------
(b) Average SVaR(1) 535 418
--------- ----------
Incremental risk charge (higher of
3 values a and b) 2,314 185 2,152 172
(a) Most recent IRC value 154 144
---------
(b) Average IRC value(1) 185 172
--------- ----------
5 Other 615 49 758 61
---------
6 Total 14,380 1,150 11,540 923
1 VaR average values are calculated on a 60 business days basis.
SVaR and IRC average values are calculated on a 12-week basis.
Statement of Directors' Responsibilities
The Directors, who are required to prepare the financial
statements on the going concern basis unless it is not appropriate,
are satisfied that the group and bank have the resources to
continue in business for the foreseeable future and that the
financial statements continue to be prepared on the going concern
basis.
The Directors, the names of whom are set out below, confirm that
to the best of their knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 'Interim Financial Reporting' as adopted
by the EU; and
-- the interim management report includes a fair review of the
information required by DTR 4.2.7R of the Disclosure Guidance and
Transparency Rules, being an indication of important events that
have occurred during the first six months of the financial year
ending 31 December 2020 and their impact on the condensed set of
financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the financial
year.
S P O'Connor (Chairman); J F Trueman (Deputy Chairman); N Matos
(Chief Executive Officer); J Fleurant (Chief Financial Officer);
Dame M E Marsh ; S Moss; Y Omura ; E W Strutz ; and A M Wright
.
On behalf of the Board
J Fleurant
Director
3 August 2020
Registered number 14259
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
IR SSSSADESSEEA
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August 03, 2020 04:52 ET (08:52 GMT)
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