TIDM63AS
RNS Number : 2358H
HSBC Bank plc
02 August 2021
2 August 2021
HSBC Bank plc
2021 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 2021 Interim Report for the half-year ended 30 June
2021.
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 2021
Contents
Page
Presentation of information 1
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Cautionary statement regarding
forward-looking statements 1
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Overview
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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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HSBC Bank Plc's vision
and strategy 4
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How we do business 6
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Economic background and
outlook 8
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Interim management report
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Financial summary 8
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Reported performance 9
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Adjusted performance 10
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Review of business position 13
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Risk 14
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Risk overview 14
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Managing risk 15
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Key developments in the
first half of 2021 15
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Top and emerging risks 15
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Areas of special interest 16
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Credit risk 18
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Treasury risk 30
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Interim condensed financial
statements
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Statement of Directors'
Responsibilities 46
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Independent Review Report
to HSBC Bank plc 47
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Condensed financial statements 48
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Consolidated income statement 48
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Consolidated statement
of comprehensive income 49
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Consolidated balance sheet 50
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Consolidated statement
of cash flows 51
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Consolidated statement
of changes in equity 52
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Notes on the condensed
financial statements 55
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Presentation of information
This document comprises the Interim Report 2021 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
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
Treasury risk section also contains certain Pillar 3 disclosures
which the bank considers require semi-annual disclosure.
Within the Interim management report and Condensed 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 2021 with the same period in the
prior year. Balance sheet commentary compares the position at 30
June 2021 to 31 December 2020.
In accordance with IAS 34 'Interim Financial Reporting', the
Interim Report is intended to provide an update on the Annual
Report and Accounts 2020 and therefore focuses on events during the
first six months of 2021, 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 2021 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', 'will', '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 2021.
Reported profit / (loss) before
tax (GBPm)
GBP815m
(1H20: GBP(1,283)m)
Reported revenue (GBPm)
GBP3,357m
(1H20: GBP2,889m)
Reported risk-weighted assets at
period end (GBPbn)
GBP111bn
(31 Dec 2020: GBP122bn)
Adjusted profit / (loss) before
tax (GBPm)
GBP990m
(1H20: GBP(459)m)
Total assets at period end (GBPbn)
GBP624bn
(31 Dec 2020: GBP681bn)
Common equity tier 1 ratio at period
end (%)
16.1%
(31 Dec 2020: 14.7%)
Key financial metrics
Half-year to
---------------------------
30 Jun 30 Jun 31 Dec
2021 2020 2020
------------------------------------------------------------- ------- ------- ---------
For the period (GBPm)
------------------------------------------------------------- ------- ------- ---------
Profit/(loss) before tax (reported basis) 815 (1,283) (331)
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Profit/(loss) before tax (adjusted basis)(1) 990 (459) 275
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Net operating income before change in expected
credit losses and other credit impairment charges(2) 3,357 2,889 3,011
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Profit/(loss) attributable to the parent company 737 (1,230) (258)
------------------------------------------------------------- ------- ------- -------
At period end (GBPm)
------------------------------------------------------------- ------- ------- ---------
Total equity attributable to the parent company 23,719 24,623 23,666
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Total assets 623,963 757,819 681,150
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Risk-weighted assets(3) 110,769 138,378 122,392
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Loans and advances to customers (net of impairment
allowances) 93,210 115,164 101,491
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Customer accounts 200,649 207,089 195,184
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Capital ratios (%)(3)
------------------------------------------------------------- ------- ------- ---------
Common equity tier 1 16.1 13.5 14.7
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Tier 1 19.6 16.5 18.1
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Total capital 30.2 25.6 27.3
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Performance, efficiency and other ratios (%)
------------------------------------------------------------- ------- ------- ---------
Return on average ordinary shareholders' equity
(annualised)(4) 7.0 (10.4) (3.6)
------------------------------------------------------------- ------- ------- -------
Adjusted return on average tangible equity (annualised)(5,6) 6.8 (5.3) (2.7)
------------------------------------------------------------- ------- ------- -------
Cost efficiency ratio (reported basis)(7) 81.1 120.6 113.6
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Cost efficiency ratio (adjusted basis)(7) 76.1 92.1 87.2
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Ratio of customer advances to customer accounts 46.5 55.6 52.0
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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 Unless otherwise stated, regulatory capital ratios and
requirements are based on the transitional arrangements of the
Capital Requirements Regulation in force at the time. These include
the regulatory transitional arrangements for IFRS 9 'Financial
Instruments', which are explained further on page 34. Following the
end of the transition period after the UK's withdrawal from the EU,
any reference to EU regulations and directives (including technical
standards) should be read as a reference to the UK's version of
such regulation and/or directive, as onshored into UK law under the
European Union (Withdrawal) Act 2018, as amended.
4 The return on average ordinary shareholders' equity is defined
as profit attributable to the parent company divided by the average
total shareholders' equity. Dividend paid on AT1 instruments is net
of tax in the calculation.
5 Adjusted return on average tangible equity is calculated as
profit attributable to ordinary shareholders, excluding impairment
of goodwill and other intangible assets and changes in present
value of in-force insurance contracts ('PVIF') (net of tax),
divided by average ordinary shareholders' equity excluding
goodwill, PVIF and other intangible assets (net of deferred
tax).
6 For this metric, half-year to 31 December 2020 is calculated
on a full-year basis and not a 2H20 basis.
7 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).
Purpose and strategy
Our purpose and ambition
Our purpose is 'Opening up a world of opportunity' and our
ambition is to be the preferred international finance partner for
our clients.
HSBC values
HSBC values define who we are as an organisation and are key to
our long-term success.
We value difference
Seeking out different perspectives.
We succeed together
Collaborating across boundaries.
We take responsibility
Holding ourselves accountable and taking the long view.
We get it done
Moving at pace and making things happen.
HSBC in Europe
Europe is an important part of the global economy, accounting
for over a third of global trade and a quarter of global Gross
Domestic Product (IHS Markit, 2020). In addition, Europe is the
world's largest exporter of manufactured goods and services
(European Commission, 2020). HSBC Bank plc helps to facilitate
trade within Europe and between Europe and other countries where
the Group has a presence.
With assets of GBP624bn at 30 June 2021, HSBC Bank plc is one of
Europe's largest banking and financial services organisations. We
employ around 16,200(1) people across our locations. HSBC Bank plc
is responsible for HSBC's European business, aside from UK retail
and most UK commercial banking activity which, post ring-fencing,
are managed by HSBC UK Bank plc.
HSBC Bank plc is simplifying its operating model to one
integrated business with two main hubs in London and Paris. HSBC
Bank plc operates in 20 markets(2) . 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 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 Continental Europe, comprises our Paris hub and its
European Union ('EU') branches (Belgium, Czech Republic, Greece,
Ireland, Italy, Luxembourg, Netherlands, Poland, Spain and Sweden).
We are creating an integrated Continental European bank anchored in
Paris to better serve our clients, and simplify our
organisation.
HSBC Germany Holdings GmbH serves
the European Union's largest economy
and is one of the leading export
nations globally (The World Bank,
2020). HSBC Germany's business proposition
mirrors the importance of trade and
global connectivity.
1 In April 2021, 486 employees transferred
from HSBC Global Services (UK) Limited
to HSBC Bank plc.
2 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
HSBC Bank plc's Vision and Strategy
We have a clear vision, to be the leading international
wholesale bank in Europe, complemented by a targeted wealth and
personal banking business (see products and services on page
6).
HSBC Bank plc exists to open up a world of opportunity for our
customers by connecting them to international markets. Europe is
the largest trading region in the world and Asia is Europe's
biggest and fastest growing external trading partner (UNCTAD,
2020). We are uniquely positioned to capitalise on this opportunity
and play a pivotal role for the Group as the largest generator of
outbound revenues.
In February 2021, the Group adapted our strategy to focus on our
strengths, digitise at scale, energise for growth and transition to
net zero. Below we provide a progress update on our commitments and
strategic initiatives for the first half of 2021.
Looking ahead, with continued low interest rates and the
unwinding of government support schemes, we expect to be operating
in a more cautious environment for the remainder of the year.
Whilst Covid-19 has affected the phasing of our transformation
activity, it has not altered our strategy. Further information as
to how we have and will continue to support our stakeholders can be
found on page 6.
For 1H 2021 adjusted operating expenses were GBP2.6bn, a
decrease of 3% versus same period in prior year (an 8% decrease
excluding variable pay of GBP107m). This reflected cost savings
from management actions, including a reduction in FTE, tight
control of contractor and consultancy spend as well as lower
discretionary spend. Risk-weighted assets ('RWAs') decreased by
GBP28bn or 20% between 30 June 2021 and 30 June 2020, driven by
savings from our RWAs reduction programme.
Focus on our strengths
Through our transformation programme we are building a leaner,
simpler bank with a sharper strategic focus. We have an ambition to
grow, leveraging our industry leading positions in transaction
banking, trade, capital markets and financing. We will also make
targeted investments in technology and automation. We intend to be
a market leader in sustainable financing and meet the Group's
commitment for net zero operations and supply chain by 2030.
We have made progress on our transformation; we are now
operating as one integrated business with hubs in London and Paris,
supported by shared services (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.
To further simplify our operating structure, HSBC achieved 100%
ownership of HSBC Germany in February 2021.
We have previously announced a strategic review of our retail
business in France. We have now completed that review, and we have
signed a Memorandum of Understanding ('MOU') with Promontoria MMB
SAS ('My Money Group'), its subsidiary Banque des Caraïbes SA (the
'Purchaser') and My Money Bank ('MMB') in June 2021, regarding the
potential sale of HSBC Continental Europe's retail banking business
in France. Should the sale proceed, it would generate an estimated
pre-tax loss including related transaction costs for HSBC
Continental Europe of EUR1.9bn. The vast majority of the estimated
loss is currently anticipated to be recognised in 2022. Please see
Note 11 'Business disposals' for more information.
Digitise at scale
We continue to invest in Transaction Banking (Global Liquidity
and Cash Management 'GLCM', Global Trade and Receivable Finance
'GTRF' and Foreign Exchange 'FX'), which is central to our
strategy. We are committed to maintaining our core strength in
Global Liquidity and Cash Management; focused on enhancing our
digital and self-serve capabilities for our clients. In 2021, we
enhanced our proposition and we will continue to improve our
offering, to improve our customer experience. Global Trade and
Receivables Finance's ambition is to make trade safer, faster and
easier. In the first half of 2021, we improved key aspects of our
proposition by taking steps to: simplify and digitise the client
experience, upgrade our infrastructure, and connect customers to
technology partners. We aim to continue to invest in the future of
trade by further developing our capabilities across key areas such
as real-time credit decisioning, buy-now pay later solutions and
sustainable trade finance.
In Foreign Exchange we further enhanced our electronic trading
infrastructure to provide improved risk management to our clients.
Our focus is to support customers' FX and cross-border payment
needs through improved pricing tools and e-trading.
Energise for growth
Inspiring a dynamic culture and championing inclusion
The Group launched our refreshed purpose and values in February
2021. Since then, we have engaged colleagues through numerous
initiatives across Europe to apply our values in how we work and
how we serve our customers. We have hosted workshops and provided
guidance to our colleagues to ensure continued discussion on our
purpose and values.
In February 2021, we committed to increase diverse
representation in Europe, especially in senior levels. A new
Employee Resource Group and a Diversity & Inclusion Council has
been launched to support our actions which has the sponsorship from
our leaders.
Developing future skills and enabling growth
We are investing in our talent and building future skills across
the region. We continue to focus on deepening digital, professional
and enabling skills in Europe, providing platforms to support
self-driven learning and development and targeting upskilling in
technology. In 2021, we launched a Talent Playbook which aims to
identify and retain our key talent. A number of Future Skills
Learning solutions have been made available to our colleagues in
Europe throughout 1H 2021 with positive take up rates. We also have
'Future Skills Influencers' in our region, who take charge of
promoting future skills through local initiatives.
Transition to net zero
Becoming a Net Zero Bank
In 2020, HSBC set out ambitions to achieve net zero in the
Group's operations and supply chain by 2030 or sooner, and to align
the Group's financed emissions to the Paris Agreement goal to
achieve net zero by 2050 or sooner. To help achieve HSBC's
ambitions, the Group passed a climate resolution in the 2021 Annual
General Meeting, detailing our approach to the net zero transition.
The resolution was backed by 99.7% of the Group's shareholders.
HSBC joined the Net Zero Banking Alliance, which brings
collaboration and consistency across the banking sector to
collectively reach the Paris Agreement goals. The Group also
launched a new climate leadership training programme for our top
250 leadership team, in which HSBC Bank plc non-executive directors
and executives are included.
HSBC Bank plc have reduced carbon emissions by 40,176 t CO2e
(metric tonnes of Carbon Dioxide Equivalent) (-52%) in 2020
compared against the 2019 baseline (October 2018-September 2019).
This result is largely driven by the UK Power Purchase Agreements
and green tariff initiatives implemented across the majority of
Europe. Colleagues have also significantly reduced their travel
since March 2020 due to the ongoing effects of Covid-19.
Supporting our Customers
HSBC aims to provide $750bn to $1tn of sustainable financing and
investments by 2030 to help our customers transition to lower
carbon emissions. To date, HSBC Bank plc has contributed $48.4bn to
this target led by strong performance from debt capital markets,
representing 55% of Group's cumulative sustainable finance and
investments.
Unlocking New Climate Solutions
HSBC partnered with the World Resources Institute and WWF to
form the Climate Solutions Partnership with the aim to accelerate
support for innovative solutions tackling climate change. As a part
of this, there are two projects located in France in partnership
with the French National Forestry Office and the Earthworm
Foundation. Both of these local nature-based projects will
contribute to net zero goals by better enabling CO2 capture,
preserving biodiversity and engaging the community. HSBC also
launched a Business Plan for the Planet campaign to help business
transition to a sustainable model. In France, Germany and Malta we
issued leadership content around carbon neutrality, Environmental
Social and Governance ('ESG') and Agrofood. These topics were
illustrated with client case studies, content articles, videos and
infographics published on our websites, media partnerships and
social media. We also engaged on live sessions webinars series with
HSBC experts, clients and partners to help small and medium
companies transition.
Products and services
The Group manages its products and services through its three
global businesses: GBM; CMB; WPB; and the Corporate Centre
(comprising, 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 Digital Business Services(1) , 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')
HSBC Global Banking HSBC Commercial Banking In Europe, Wealth and Personal
and Markets delivers serves businesses ranging Banking serves individual
tailored financial solutions from small enterprises customers with their financial
to major government, to multinational corporates needs via three propositions:
corporate and institutional operating across borders. mass retail through Personal
clients worldwide. We Our global network Banking, mass affluent through
provide a comprehensive of relationship managers Premier and High Net Worth
suite of services across and product specialists ('HNW') and Ultra High Net
lending, advisory and work closely to meet Worth ('UHNW') through Global
capital markets, trade customer needs, from Private Banking. Using four
services, research, term loans to trade integrated WPB manufacturing
securities services solutions. In Europe, capabilities: transactional
and global liquidity we are fully committed banking, lending and analytics,
and cash management. to helping businesses Wealth products and platforms,
Our European teams bring navigate change and Asset management & Insurance.
together relationship seize export opportunities. Our core retail proposition
managers and product With major operations offers a full suite of products
specialists, to deliver in France and Germany, including personal banking,
financial solutions and full-service centres mortgages, loans, credit
customised to suit our in hubs such as Ireland, cards, savings, investments
clients' business specific the Netherlands and and insurance. In the Channel
growth ambitions and Switzerland, we provide Islands and Isle of Man,
financial objectives. corporates with the we serve local islanders
We continue to collaborate means to consolidate as well as international
with other business and simplify their customers through our HSBC
areas including WPB European operations. Expat proposition.
and CMB, to provide Combined with our enhanced Our Private Banking proposition
a range of tailored digital offering, this serves high and ultra-high
products and seamless gives customers greater net worth clients with investable
services that meet the visibility over their assets greater than $5m in
needs of clients across liquidity position Channel Islands and Isle
the bank. GBM operates and unlocks efficiencies of Man, France and Germany
as an integral part in their treasury structures. including those with international
of the global business By working closely needs. Our range of services
and also contributes with our Global Banking includes investment management
significant revenues and Markets colleagues, (discretionary, advisory
to other regions through we provide customers and brokerage services),
our European client with access to capital Trust & Fiduciary Services
base. finance, advisory and (including trusts and estate
Our business is underpinned markets solutions. planning) and complex bespoke
by a focus on the highest By working closely lending.
standards of conduct with our Wealth & Personal The depth of our global business
and financial crime Banking colleagues, service matches that of our
risk management. We we offer them a comprehensive diverse client needs: from
remain committed to range of employee and branches, self-service terminals,
deepening client relationships, private banking services. telephone service centres
improving synergies We also provide a comprehensive and digital services. Private
across HSBC global businesses. range of sustainable Banking hosts a 'Next Generation'
We continue to invest investment products programme of events to support
in digital programmes to help our customers our client's next generation
focused on clients such on their ESG journeys. and offers philanthropy advisory
as HSBCnet, streamlining Operating at the heart to our clients. We continue
the platform and improving of the HSBC Group, to focus on meeting the needs
customer experience. Commercial Banking of our customers, the communities
In particular for Global opens up a world of we serve, and our people,
Markets, our objective opportunity for European whilst working to build the
is to be a client led companies. bank of the future.
provider of cross asset
services, connecting
the Emerging Markets
with our Developed Markets
expertise and innovation.
-------------------------------- -------------------------------- -----------------------------------
Adjusted profit/(loss) before tax
GBP490m GBP211m GBP219m
(1H20: GBP(214)m) (1H20: GBP48m) (1H20: GBP(148)m)
-------------------------------- -------------------------------- -----------------------------------
Risk-Weighted Assets
GBP67,199m GBP24,559m GBP11,647m
(31 Dec 2020: GBP76,582m) (31 Dec 2020: GBP26,923m) (31 Dec 2020: GBP12,082m)
-------------------------------- -------------------------------- -----------------------------------
1 In the first half of the year, in line with the Group, we
re-branded our HSBC Operations, Services and Technology function to
Digital Business Services.
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
Our purpose, 'Opening up a world of opportunities', explains why
we exist and guides us in what we do every day. In the first half
of 2021, we encouraged all our colleagues to explore what 'Opening
up a world of opportunity' meant to them personally and how it can
help us collectively contribute to delivering our strategy.
Our refreshed values define the principles that guide our
individual and organisational behaviours. They influence the way we
work together and the choices we make. We are embedding the values
throughout our organisation, and our leaders and colleagues are
regularly encouraged to reflect on what our values mean in
day-to-day actions and decisions.
We recognise the important role we play in 'Opening up a world
of opportunity' for our customers, investors, our people and
communities, and in building a more sustainable, inclusive
world.
Having a clear purpose and strong values has never been more
important, with the pandemic testing us all in ways we could never
have anticipated. As the world changed over the course of the last
18 months, we adapted to new ways of working and endeavoured to
provide support to our customers during this challenging period. We
recognise that the world is at different stages of the pandemic,
with some countries going through a peak while others are on a
trajectory to recovery. We look to support our stakeholders, taking
this into account.
In the section below, we set out how we have supported our
stakeholders - our customers, employees, investors, communities,
regulators and governments and suppliers - during the first half of
2021.
Customers
Europe is home to some of the best performing, forward-thinking
companies, ranging from entrepreneurial start-ups to large
multinationals. HSBC supports individuals and businesses of all
sizes across Europe by offering a wide range of banking
services.
In response to the Covid-19 outbreak, governments and regulators
around the world have introduced a number of support measures. In
2020, HSBC Bank plc played a key role in supporting clients during
the Covid-19 outbreak, in particular through government schemes in
the UK and France. In 1H 2021, we have focused on supporting
clients with repayment and refinancing opportunities. In
Continental Europe, HSBC remains a key partner for SSA
('sovereigns, supranationals and agencies') borrowers and has
leveraged its global platform to help issuers navigate market
volatility, and provide support in response to Covid-19.
In France, HSBC has been one of the leading banks in providing
French State-backed facilities and liquidity lines during
Covid-19.
Within Global Banking, we remain committed to serving clients
with cross-border needs who require access to our international
network and integrated product offering.
Across our Commercial Bank we continue to support clients to
navigate their business in the context of Covid-19.
Sustainability
Europe is at the forefront of international efforts on
sustainable finance and Net Zero. HSBC shares this ambition towards
Net Zero and is supporting governments and clients achieve their
commitment to the Paris Agreement. In 2021, the Group joined the
Net Zero Banking Alliance, a group of 43 international banks to
establish a robust and transparent framework for monitoring
progress and setting the standard for the banking industry. HSBC
also committed to phase out financing for all coal-fired power and
thermal coal mining by 2030 in developed markets, and by 2040 in
other markets in addition to publishing clear, measurable short-
and medium-term targets in line with our commitment to the Paris
Agreement goal of restricting global warming to 1.5C. The Group is
also performing strongly in the sustainable finance market with
landmark deals completed.
In May 2021, HSBC Bank plc was the joint lead manager for the
German government's first-ever green bond with a 30-year maturity
for a total volume of EUR6bn. It is the longest-dated green bond of
a sovereign issuer in the euro capital market. HSBC Bank plc has
also supported three renewable energy clients in Spain, and one in
Italy, providing our tailored Clean Energy Sustainable Trade
Instrument Solution to support the development of wind and solar
generation capacity across a number of projects.
Communities
As Covid-19 continues to impact Europe, HSBC Bank plc is focused
on strengthening resilience through developing Future Skills
training programmes for our employees. Reskilling is a key priority
in the context of the transformation of our business in Europe. We
will seek to provide financial education for our teams and
disadvantaged communities, as a means to reduce inequality and
support financial inclusion. In order to foster employability
within deprived communities we will aim to support different social
entrepreneurship projects.
In 2021, we have committed over EUR400,000 to 12 programmes and
partners across Europe, such as the Youth Entrepreneurship
Initiative of Bermuda, Coalition for the Protection of Children,
Inter Agency Committee for Children and Families, Young Money, The
Diana Awards, Junior Achievement IOM, Cresus, Article 1 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.
We are currently focused on defining our future ways of working,
including supporting employees to return to the office safely and
implementing hybrid working. Hybrid working is about creating a
working environment that enables our employees to be at their best
and deliver extraordinary outcomes for our customers. We aim to
build a culture that promotes flexibility, collaboration, learning
and wellbeing in both physical and virtual workplaces.
As we continue to deliver our transformation 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 appropriate, we provide
suitable notice periods and consult 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.
Our approach to Diversity and Inclusion
Our actions are focused on ensuring our people are valued,
respected and supported to fulfil their potential and thrive.
In Europe, we are focusing on four diversity strands: Gender,
Ability, Pride and Multiculturalism and we are encouraging open
dialogue on Diversity and Inclusion topics. We are also supporting
existing and new Employee Resources Groups like Inclusive Europe
and Pride Europe.
In 1H 2021, we refined our governance so the Executive Committee
can sponsor initiatives more closely through a HSBC Bank plc
Diversity & Inclusion Council with permanent membership from
the senior leadership team.
Details of the Group Diversity & Inclusion strategy, purpose
and resources are available on the website at
www.hsbc.com/our-approach/cultureand-people/diversity-and-inclusion
.
A further update to our plans and progress will be included in
our Annual Report and Accounts 2021.
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 markets (see page 4 for further detail), we aim to
continue to uphold our commitment to supporting suppliers when they
may need it most.
Economic background and
outlook
UK
Better news despite Covid-19 risks
The UK economy is gradually reopening. Although the spread of
the Delta variant of Covid-19 led to a significant rise in cases
through June and into July, the vaccination rollout has helped keep
hospitalisation numbers low, relative to previous waves of the
virus. So, despite a delay to reopening plans, England saw another
easing in restrictions on 19 July, including the end of most
domestic social distancing measures.
Meanwhile, the economic data have generally been robust, with a
rebound in activity taking place. UK GDP grew by 3.6% in the three
months to May 2021, while the unemployment rate remains low, at
4.8% in the three months to May. And while there is evidence that
the UK's exit from the EU is causing some trade disruption, the
broader macroeconomic impact seems to have been fairly
contained.
Inflation has firmed, too, with the headline CPI rate rising to
2.5% y-o-y in June, above the Bank of England's 2% target. Some of
the strength relates to higher commodity prices and, possibly, the
impact of supply disruption relating to Covid-19. But some strength
may reflect broader resilience in the labour market, which could
prove persistent.
Looking ahead, HSBC Research expects the UK economy to recover
fairly strongly through this year and next, with GDP growth of 7.1%
in 2021 and 5.1% in 2022, after a 9.1% drop in 2020. HSBC Research
also expects limited spare capacity to persist in the labour market
such that CPI inflation runs a little above 2% into next year.
UK rates could rise next year
In response to the Covid-19 outbreak, the Bank of England
('BoE') cut Bank Rate from 0.75% to 0.1% last year, and announced a
total of GBP460bn worth of asset purchases under its Quantitative
Easing ('QE') programme. Given the potential prospect of a solid
economic bounce and above 2% inflation, HSBC Research now sees the
BoE raising Bank rate to 0.25% in May 2022, then up to 0.50% in
November 2022 and at least one 25bp rise in 2023.
Fiscal policy support has also been substantial - over the past
year it has included a temporary VAT cut, grants to businesses
affected by Covid-19 and the Job Retention Scheme which has offered
large wage subsidies to enable companies to keep staff on their
payroll. Over the coming months, some of that emergency support is
set to be withdrawn, with the Job Retention Scheme scheduled to end
in September 2021. HSBC Research expects limited rises in
unemployment when that happens, but possible fallout from the end
of the scheme poses a risk to the outlook.
Eurozone
The reopening continues
Despite the rise of the Delta variant, Covid-19 cases remain
much lower than they were at the start of this year. Meanwhile, the
vaccination programme continues at a rapid pace and, across much of
the continent, restrictions are being relaxed. For the most part,
consumer-facing services such as hospitality have been reopened.
Meanwhile, business and consumer confidence stand at
well-above-average levels, which bodes well for consumer spending,
investment and the jobs market. However, continued travel
restrictions mean that those economies which are more reliant on
tourism, including Spain and Greece, face ongoing headwinds. This
improving backdrop means that HSBC Research expects eurozone GDP to
grow by 4.4% in 2021 and 4.0% in 2022, after a 6.7% contraction in
2020, with GDP reaching its pre-pandemic level around the turn of
2021/22. Despite that prospective rebound in activity, the
inflation outlook remains more muted than in, for example, the US
and the UK. Admittedly, commodity prices and supply disruption
lifted the HICP inflation rate to 1.9% in June 2021. But wage
settlements remain weak and, based on that, HSBC Research forecasts
eurozone inflation of 1.6% in 2022, below the European Central
Bank's ('ECB's') 2% inflation aim.
Fiscal and monetary support continue
Substantial fiscal support measures continue. For example, many
eurozone governments have extended 'short-time' work schemes, which
offer generous wage subsidies aimed at keeping people in work.
However, these schemes are likely to end over the coming months,
while funds should start to flow from the EUR750bn EU Recovery
Fund, which should lift levels of investment, while facilitating
the green and digital transitions.
Meanwhile, the prospect of subdued
inflation is likely to keep monetary
policy very loose. The European Central
Bank ('ECB') has so far announced
an envelope of asset purchases under
its Pandemic Emergency Purchase Programme
of up to EUR1.85tn. While that programme
is set to end in March 2022, the
soft inflation outlook means that,
in the view of HSBC Research, the
ECB will likely raise the rate of
asset purchases under its 'regular'
Asset Purchase Programme from EUR20bn
to EUR40bn a month. The likelihood
of eurozone policy rate rises this
year or next appears very low.
Financial summary
Use of alternative performance measures
Our reported results are prepared in accordance with
International Financial Reporting Standards ('IFRSs') as detailed
in the Financial Statements starting on page 48. 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
alternative performance measures.
All alternative performance measures are described and
reconciled to the closest reported financial measure when used.
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 56. Reconciliation 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
2021 2020 2020
GBPm GBPm GBPm
--------------------------------------------------- ------- ------- ---------
Net interest income 860 917 981
--------------------------------------------------- ------- ------- -------
Net fee income 744 697 703
--------------------------------------------------- ------- ------- -------
Net income from financial instruments measured
at fair value 2,067 499 1,815
--------------------------------------------------- ------- ------- -------
Gains less losses from financial investments 46 82 13
--------------------------------------------------- ------- ------- -------
Net insurance premium income 987 764 795
--------------------------------------------------- ------- ------- -------
Other operating income 353 116 301
--------------------------------------------------- ------- ------- -------
Total operating income(1) 5,057 3,075 4,608
--------------------------------------------------- ------- ------- -------
Net insurance claims, benefits paid and movement
in liabilities to policyholders (1,700) (186) (1,597)
--------------------------------------------------- ------- ------- -------
Net operating income before change in expected
credit losses and other credit impairment charges 3,357 2,889 3,011
--------------------------------------------------- ------- ------- -------
Change in expected credit losses and other credit
impairment charges 71 (651) (157)
--------------------------------------------------- ------- ------- -------
Net operating income 3,428 2,238 2,854
--------------------------------------------------- ------- ------- -------
Total operating expenses excluding impairment of
goodwill and other intangible assets(1) (2,720) (2,711) (3,192)
--------------------------------------------------- ------- ------- -------
Impairment of goodwill and other intangible assets (1) (772) (30)
--------------------------------------------------- ------- ------- -------
Operating profit/(loss) 707 (1,245) (368)
--------------------------------------------------- ------- ------- -------
Share of profit/(loss) in associates and joint
ventures 108 (38) 37
--------------------------------------------------- ------- ------- -------
Profit/(loss) before tax 815 (1,283) (331)
--------------------------------------------------- ------- ------- -------
Tax (expense)/credit (74) 63 73
--------------------------------------------------- ------- ------- -------
Profit/(loss) for the period 741 (1,220) (258)
--------------------------------------------------- ------- ------- -------
Profit/(loss) attributable to the parent company 737 (1,230) (258)
--------------------------------------------------- ------- ------- -------
Profit attributable to non-controlling interests 4 10 -
--------------------------------------------------- ------- ------- -------
1 Total operating income and expenses include significant items as detailed on pages 10 and 11.
1
Reported performance
Performance in the first half of 2021 was stronger compared to
the first half of 2020, which was heavily impacted by the Covid-19
pandemic. Expected Credit Losses ('ECL') were significantly lower
coupled with higher reported revenue and lower operating
expenses.
Reported profit before tax of GBP815m compared with a loss
before tax of GBP(1,283)m in the first half of 2020, up GBP2,098m.
This was primarily due to significantly lower ECL reflecting an
improvement in the economic outlook from 2020 and a resulting
stabilisation of credit risk. Reported revenue was higher driven by
favourable market impacts in insurance manufacturing in WPB, and
favourable movements in valuation adjustments in GBM. Operating
expenses were lower, mainly driven by the non-recurrence of
impairment of goodwill and other intangible assets booked in the
first half of 2020.
Net interest income ('NII' ) decreased by GBP57m or 6%. NII was
lower in WPB, CMB and GBM compared with the first half of 2020,
mainly driven by the impact of the lower interest rate environment,
notably in GLCM (in our CMB and GBM businesses). This was partly
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 GBP47m or 7%, mainly in Global
Banking due to higher transaction volumes in Payments, both
domestic and international, and in corporate cards driven by
economic recovery post the easing of lockdown restrictions.
Net income from financial instruments measured at fair value
increased by GBP1,568m. In WPB, revenue increased primarily driven
by a more favourable equity market performance and higher interest
rate yields in France compared with the first half of 2020 when the
value of equity and unit trust assets supporting insurance
contracts were heavily impacted by the Covid-19 outbreak.
This favourable movement resulted in a corresponding movement in
liabilities to policyholders, reflecting the extent to which
policyholders participate in the investment performance of the
associated assets. The offsetting movements are recorded in
liabilities to policyholders.
In GBM, revenue increased in Principal Investments ('PI') mainly
driven by gains in portfolio valuations in the first half of 2021
compared with a minimal result in the first half of 2020. Revenue
also increased in Markets and Securities Services reflecting a
strong performance in Equities Derivatives, lower adverse credit
and funding valuation adjustments as well as favourable bid-offer
spread. This was partly offset by a reduction the Global FX income
driven by a lower level of volatility.
Gains less losses from financial investments decreased by
GBP36m, mainly driven by losses on the disposal of bonds held at
fair value through other comprehensive income ('FVOCI') in Markets
Treasury.
Net insurance premium income increased by GBP223m or 29%, mainly
in WPB, from insurance revenue in France due to higher new business
volumes.
Other operating income increased by GBP237m, mainly driven by
favourable market impacts, notably in PVIF, in insurance
manufacturing in WPB. This reflected strong equity market
performance and higher interest rate yields on the valuations of
the liabilities under insurance contracts.
Net insurance claims, benefits paid and movement in liabilities
to policyholders increased by GBP1,514m, primarily in insurance
manufacturing in WPB. This increase was driven by higher returns on
financial assets supporting contracts where the policyholder is
subject to part or all of the investment risks. The gains
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 an increase in
premium income.
Changes in expected credit losses and other impairment charges
('ECL') were a net release of GBP71m in the first half of 2021,
compared with a net charge of GBP651m in the first half of 2020.
The net release in the first half of 2021 reflected an improvement
in the economic outlook and a stabilisation of credit risk. This
compared with the significant build-up of stage 1 and stage 2
allowances in the first half of 2020 due to the worsening economic
outlook at the onset of the Covid-19 outbreak. The reduction in ECL
also reflected low levels of stage 3 charges.
Total operating expenses excluding impairment of goodwill and
other intangible assets increased by GBP9m, mainly driven by an
increase of GBP99m in expenses related to severance costs arising
from cost efficiency measures across our global businesses and
functions and higher performance related pay. This was mostly
offset by a reduction in staff costs, lower contractor and
consultancy spend, and lower discretionary spend, in line with our
transformation plans.
Impairment of goodwill and other intangible assets in the first
half of 2020 of GBP772m principally comprised the write-off
capitalised software. This mainly related to our businesses in the
UK and France and 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
profit of GBP108m compared to a loss of GBP(38)m in the first half
of 2020. Profit in the first half of 2021 included a GBP93m true-up
of prior year valuations of an associate.
Tax charge was GBP74m compared to a tax credit of GBP63m in the
same period of 2020. The effective rate for the first half of 2021
of 9.1% was driven by the remeasurement of UK deferred tax balances
following the substantive enactment of legislation to increase the
main rate of UK corporation tax from 19% to 25% from 1 April 2023
and movements in unrecognised deferred tax.
The low effective tax rate of 4.8% for the first half of 2020,
representing a tax credit on a loss before tax, was mainly due to
the non-recognition of deferred tax on the UK loss for the
period.
Adjusted performance
Significant revenue items by business segment - (gains)/losses
Half-year to 30 Jun 2021
Corporate
GBM CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ------- ---- ---- --------- --------
Reported revenue 2,022 556 714 65 3,357
---------------------------------------------------------- ------- ---- ---- --------- ------
Significant revenue items 110 (1) (1) (65) 43
---------------------------------------------------------- ------- ---- ---- --------- ------
* debit valuation adjustment on derivative contracts 10 - - - 10
----------------------------------------------------------
* fair value movement on non-qualifying hedges (4) (1) (1) - (6)
----------------------------------------------------------
* restructuring and other related costs 104 - - (65) 39
----------------------------------------------------------
Adjusted revenue 2,132 555 713 - 3,400
---------------------------------------------------------- ------- ---- ---- --------- ------
Half-year to 30 Jun 2020
----------------------------------------------------------
Reported revenue 1,962 578 424 (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 1,980 578 424 (76) 2,906
---------------------------------------------------------- ------- ---- ---- --------- ------
Half-year to 31 Dec 2020
----------------------------------------------------------
Reported revenue 1,822 554 611 24 3,011
---------------------------------------------------------- ------- ---- ---- --------- ------
Significant revenue items 171 1 - (92) 80
---------------------------------------------------------- ------- ---- ---- --------- ------
* debit valuation adjustment on derivative contracts 24 - - - 24
----------------------------------------------------------
* fair value movement on non-qualifying hedges - 1 - (1) -
----------------------------------------------------------
* restructuring and other related costs 147 - - (91) 56
---------------------------------------------------------- ------- ---- ---- --------- ------
Adjusted revenue 1,993 555 611 (68) 3,091
---------------------------------------------------------- ------- ---- ---- --------- ------
Significant cost items by business segment - (recoveries)/charges
Half-year to 30 Jun 2021
Corporate
GBM CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm
----------------------------------------------------------- ------- ----- ----- --------- ---------
Reported operating expenses (1,739) (335) (508) (139) (2,721)
----------------------------------------------------------- ------- ----- ----- --------- -------
Significant cost items 32 (8) 5 103 132
----------------------------------------------------------- ------- ----- ----- --------- -------
* restructuring and other related costs 32 (8) 5 103 132
-----------------------------------------------------------
- - - - -
* settlements and provisions in connection with legal
and regulatory matters
-----------------------------------------------------------
- - - - -
* impairment of other intangible assets
Adjusted operating expenses (1,707) (343) (503) (36) (2,589)
----------------------------------------------------------- ------- ----- ----- --------- -------
Half-year to 30 Jun 2020(2)
-----------------------------------------------------------
Reported operating expenses (2,247) (370) (579) (287) (3,483)
----------------------------------------------------------- ------- ----- ----- --------- -------
Significant cost items 476 34 35 262 807
----------------------------------------------------------- ------- ----- ----- --------- -------
* restructuring and other related costs(1) 18 1 - 153 172
-----------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters 2 - - 2 4
-----------------------------------------------------------
* impairment of other intangible assets 456 33 35 107 631
Adjusted operating expenses (1,771) (336) (544) (25) (2,676)
----------------------------------------------------------- ------- ----- ----- --------- -------
Half-year to 31 Dec 2020
-----------------------------------------------------------
Reported operating expenses (1,932) (403) (590) (297) (3,222)
----------------------------------------------------------- ------- ----- ----- --------- -------
Significant cost items 204 80 6 236 526
----------------------------------------------------------- ------- ----- ----- --------- -------
* restructuring and other related costs 200 78 5 224 507
-----------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters (1) - - 6 5
-----------------------------------------------------------
* impairment of other intangible assets 5 2 1 6 14
----------------------------------------------------------- ------- ----- ----- --------- -------
Adjusted operating expenses (1,728) (323) (584) (61) (2,696)
----------------------------------------------------------- ------- ----- ----- --------- -------
1 Includes the write down of software GBP139m.
2 During the second half of 2020, management reviewed the
allocation policy of the significant software impairment and
write-offs between the businesses (GBM, CMB, WPB and Corporate
Centre) resulting in a change in the reported impairment cost by
businesses. The comparative amounts have been re-presented to
reflect this change.
Net impact on profit before tax by business segment
Half-year to 30 Jun 2021
Corporate
GBM CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm
-------------------------------------- ------ ---- ----- --------- ---------
Reported (loss)/profit before tax 348 220 215 32 815
-------------------------------------- ------ ---- ----- --------- -------
Net impact on reported profit or loss 142 (9) 4 38 175
-------------------------------------- ------ ---- ----- --------- -------
* significant revenue items 110 (1) (1) (65) 43
--------------------------------------
* significant cost items 32 (8) 5 103 132
-------------------------------------- ------ ---- ----- --------- -------
Adjusted (loss)/profit before tax 490 211 219 70 990
-------------------------------------- ------ ---- ----- --------- -------
Half-year to 30 Jun 2020(1)
--------------------------------------
Reported profit/(loss) before tax (708) 14 (183) (406) (1,283)
-------------------------------------- ------ ---- ----- --------- -------
Net impact on reported profit or loss 494 34 35 261 824
-------------------------------------- ------ ---- ----- --------- -------
* significant revenue items 18 - - (1) 17
--------------------------------------
* significant cost items 476 34 35 262 807
-------------------------------------- ------ ---- ----- --------- -------
Adjusted profit/(loss) before tax (214) 48 (148) (145) (459)
-------------------------------------- ------ ---- ----- --------- -------
Half-year to 31 Dec 2020
--------------------------------------
Reported profit/(loss) before tax (138) 23 10 (226) (331)
-------------------------------------- ------ ---- ----- --------- -------
Net impact on reported profit or loss 375 81 6 144 606
-------------------------------------- ------ ---- ----- --------- -------
* significant revenue items 171 1 - (92) 80
--------------------------------------
* significant cost items 204 80 6 236 526
-------------------------------------- ------ ---- ----- --------- -------
Adjusted profit/(loss) before tax 237 104 16 (82) 275
-------------------------------------- ------ ---- ----- --------- -------
1 During the second half of 2020, management reviewed the
allocation policy of the significant software impairment and
write-offs between the businesses (GBM, CMB, WPB and Corporate
Centre) resulting in a change in the reported impairment cost by
businesses. The comparative amounts have been re-presented to
reflect this change.
Adjusted performance
Adjusted profit before tax of GBP990m compared to a loss before
tax of GBP(459)m in the first half of 2020, up GBP1,449m. This was
largely driven by lower ECL, higher revenue and lower operating
expenses. ECL was lower mainly reflecting an improvement in the
economic outlook from the first half of 2020. Adjusted revenue
increased primarily driven by the impact of volatile items
including favourable market impacts on insurance manufacturing in
WPB and favourable valuation adjustments in GBM. Operating expenses
decreased as a result of our transformation plans and continued
prudent management of discretionary spend.
Adjusted revenue increased by GBP494m or 17%, reflecting higher
revenue in WPB and GBM. The increase in WPB reflected favourable
market impacts on insurance manufacturing as equity markets
recovered from losses in the first half of 2020.
In GBM, adjusted revenue was higher in Principal Investments
('PI') driven by valuation gains, and in Markets and Securities
Services from favourable credit and funding valuation adjustments
and continued momentum in Equities. This was partly offset by a
decrease in revenue in Global Foreign Exchange driven by lower
market volatility. There was also a reduction in revenue in our
Global Liquidity and Cash Management ('GLCM') business within GBM
and CMB, driven by the low interest rate environment.
Adjusted ECL were GBP722m lower than the first half of 2020.
There was a net release of GBP71m compared a net charge of GBP651m
in the first half of 2020. The net release in the first half of
2021, notably in GBM and CMB, reflected an improvement in the
economic outlook and a stabilisation of credit risk. This compared
with the significant build-up of stage 1 and stage 2 allowances in
the first half of 2020 due to the worsening economic outlook at the
onset of the Covid-19 outbreak. The reduction in ECL also reflected
low levels of stage 3 charges.
Adjusted operating expenses were lower by GBP87m or 3%, as we
reviewed and re-prioritised spend aligning with our transformation
plans and to reflect
the economic outlook. This resulted in a reduction in FTE, tight
control of contractor and consultancy spend as well as lower
discretionary spend.
This decrease was partly offset by higher performance-related
pay reflecting strong revenue performance and an increase in the
Single Resolution Fund ('SRF') levy in France and Germany.
Share of (loss)/profit in associates and joint ventures was a
profit of GBP108m which included a GBP93m true-up of prior year
valuations of an associate. This was compared to a loss of GBP(38)m
in the first half of 2020.
Global Banking and Markets ('GBM')
Adjusted profit before tax of GBP490m compared with a loss of
GBP(214)m in the first half of 2020, an increase of GBP704m. This
was driven by strong revenue performance, lower ECL and lower
operating expenses.
Revenue increased by GBP152m or 8%, mainly in Principal
Investments ('PI') reflecting valuation gains on a number of funds
in the UK. In Markets and Securities Services, revenue was higher
driven by a combination of strong Equities Derivatives performance
and lower adverse movements in credit and funding valuation
adjustments. This was partly offset by a decrease in revenue in
Global FX driven by lower market volatility as the first quarter of
2020 recorded an exceptional level of volatility and activity due
to the outbreak of Covid-19.
By contrast, revenue decreased in Banking, mainly in GLCM
reflecting margin compression driven by the continued low interest
rate environment, although this was partly offset by increased fee
income due to economic recovery post easing of lockdown
restrictions. Revenue in Credit and Lending also fell due to lower
net interest income driven by lower customer balances, reflecting
actions to reduce RWAs as part of our transformation.
ECL net credit of GBP65m compared to a net charge of GBP423m in
the first half of 2020. The net credit in the first half of 2021
reflected releases of provisions, notably in the first quarter, as
the economic outlook improved. This compared with net charges in
the first half of 2020 resulting from the deterioration in the
economic situation due to the Covid-19 outbreak.
Operating expenses decreased by GBP64m or 4%, mainly due to
lower staff costs resulting from our transformation cost-saving
initiatives partly offset by higher performance-related pay
reflecting revenue performance and a higher SRF levy in France and
Germany. There were also lower intercompany recharges with an
offset in intercompany recoveries in revenue.
Commercial Banking ('CMB')
CMB performed well in the the first half of 2021 as we continued
to implement our strategy to focus on serving our international
customers.
Adjusted profit before tax was GBP211m, an increase of GBP163m
compared with the first half of 2020. This was mainly driven by
lower ECL partly offset by lower revenue and higher operating
expenses.
Revenue decreased by GBP23m or 4%, primarily in Credit and
Lending due to lower customer balances reflecting actions taken to
reduce RWA as part of our transformation. Revenue in GLCM also fell
driven by the lower interest rate environment, despite growth in
average deposit balances. This was partly offset by an increase in
revenue allocated from Markets Treasury.
ECL decreased by GBP193m compared to the first half of 2020,
mainly driven by lower charges against specific customers, notably
in the automobile and retail sectors. In addition, charges were
also lower driven by the improved economic outlook.
Operating expenses increased by GBP7m or 2%, mainly driven by an
increase in the SRF levy.
Wealth and Personal Banking ('WPB')
Adjusted profit before tax of GBP219m compared with a loss
before tax of GBP(148)m in the first half of 2020, up by GBP367m.
This was due to higher revenue, lower operating expenses and lower
ECL.
Revenue increased by GBP289m or 68%, mainly in insurance
manufacturing in France and in the UK, largely from positive market
impacts, notably PVIF, driven by favourable equity market
performance and higher interest rate yields on insurance contracts.
Revenue was also higher from the UK life insurance business,
notably in onshore investment bonds driven by an increase in
policyholder assets.
This increase was partly offset by a reduction in revenue in the
Channel Islands and Isle of Man, from deposits due to the low
interest rate environment despite growth in customer balances.
ECL a net credit of GBP9m compared with a net charge of GBP28m
in the first half of 2020. This mainly reflected an improvement in
the economic outlook from the first half of 2020.
Operating expenses decreased by GBP41m or 7%, mainly driven by
lower technology costs due to lower investment spend and lower
corporate real estate costs due to lower depreciation as certain
assets have been fully written down. This was partly offset by an
increase in performance-related pay.
Corporate Centre
Adjusted profit before tax of GBP70m compared to a loss of
GBP(145)m in the first half of 2020. This was mainly driven by a
profit in associates and joint ventures compared to a loss in the
first half of 2020, as well as higher revenue.
Revenue increased by GBP76m, primarily driven by gains on
portfolio disposals in Legacy Credit compared with losses in the
first half of 2020. Revenue also increased driven by a fair value
gain from a long-standing investment in a Germany-based brokerage
company which has benefited from an investment in a company that
recently completed a fundraising.
ECL decreased by GBP4m compared with the first half of 2020,
mainly driven by lower losses in Legacy Credit following portfolio
disposals.
Operating expenses increased by GBP11m or 10%, driven by an
increase in intercompany recharges from other entities in the
Group, with an offsetting increase in revenue.
Share of (loss)/profit in associates and joint ventures was a
profit of GBP108m, of which GBP93m was due to a true-up of prior
year valuations of an associate. This compared with a loss of
GBP(38)m in the first half of 2020.
Review of business position
Summary consolidated balance sheet
At
------------------
30 Jun 31 Dec
2021 2020
GBPm GBPm
------------------------------------------------------------- ------- ---------
Total assets 623,963 681,150
------------------------------------------------------------- ------- -------
* cash and balances at central banks 108,056 85,092
* trading assets 95,913 86,976
-------------------------------------------------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 17,616 16,220
-------------------------------------------------------------
* derivatives 139,772 201,210
-------------------------------------------------------------
* loans and advances to banks 10,999 12,646
-------------------------------------------------------------
* loans and advances to customers 93,210 101,491
-------------------------------------------------------------
* reverse repurchase agreements - non-trading 53,032 67,577
-------------------------------------------------------------
* financial investments 44,753 51,826
-------------------------------------------------------------
* other assets 60,612 58,112
------------------------------------------------------------- ------- -------
Total liabilities 600,077 657,301
* deposits by banks 40,427 34,305
-------------------------------------------------------------
* customer accounts 200,649 195,184
-------------------------------------------------------------
* repurchase agreements - non-trading 29,440 34,903
-------------------------------------------------------------
* trading liabilities 48,179 44,229
-------------------------------------------------------------
* financial liabilities designated at fair value 37,478 40,792
-------------------------------------------------------------
* derivatives 138,366 199,232
-------------------------------------------------------------
* debt securities in issue 13,980 17,371
-------------------------------------------------------------
* liabilities under insurance contracts 22,332 22,816
-------------------------------------------------------------
* other liabilities 69,226 68,469
------------------------------------------------------------- ------- -------
Total equity 23,886 23,849
------------------------------------------------------------- ------- -------
Total shareholders' equity 23,719 23,666
-------------------------------------------------------------
Non-controlling interests 167 183
------------------------------------------------------------- ------- -------
Total reported assets were 8% lower than at 31 December 2020.
The group maintained a strong and liquid balance sheet with the
ratio of customer advances to customer accounts decreasing to 46%
from 52% at 31 December 2020.
Assets
Cash and balances at central banks increased by 27% as a result
of increased customer deposits and decreased reverse repurchase
agreements position.
Trading assets increased by 10% due primarily to an increase in
equity shares positions.
Derivative assets decreased by 31%. This was largely due to a
decrease in mark-to-market of interest rate contracts as a result
of a shift in yield curves for major currencies.
Non-trading reverse repurchase agreements decreased by 22%
primarily due to a reduction in market activity and different
allocation of central cash investments, which were diverted from
the repo market to other products for optimisation reasons.
Financial investments decreased by 14% as a result of
optimisation strategy.
Liabilities
Customer accounts increased slightly, which is consistent with
our funding strategy to grow customer deposits and increase stable
funding.
Trading liabilities and financial liabilities designated at fair
value balances have remained broadly unchanged.
Debt securities in issue decreased by 20% primarily due to
maturing longer term debt.
Derivative liabilities decreased by 31%. This is in line with
derivative assets as the underlying risk is broadly matched.
Equity
Total shareholders' equity remained broadly unchanged.
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, treasury 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.
The exposure to our risks and risk management of these are
explained in more detail in the Report of the Directors on pages 22
to 86 of the Annual Report and Accounts 2020.
Externally driven
Covid-19 u 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 continued to invoke business continuity plans
to effectively manage our operations under the constraints
imposed by governments in response to the outbreak and introduced
measures to enable our people to work safely and flexibly
during the outbreak, including those to enable employees
who have been working from home the ability to return to
the workplace, in line with the lifting of restrictions
and in accordance with advice from governments.
------------------ --------------------------------------------------------------------
UK exit u A new trading relationship between the UK and the EU, outlined
from EU within the Trade and Cooperation Agreement, commenced on
1 January 2021. The Agreement addressed financial services
in a limited manner and, as a result, did not change our
planning in relation to the UK's withdrawal from the EU.
Bilateral discussions have concluded at a technical level
between the UK and the EU to create the framework for voluntary
regulatory cooperation in financial services through the
establishment of a Joint UK-EU Financial Regulatory Forum,
which will provide a platform within which both parties
will be able to discuss financial services-related issues
including future equivalence determinations. We will continue
to work with regulators, governments and our customers to
manage any risks by the Trade and Cooperation Agreement,
or from future regulatory cooperation proposals on financial
services as they arise, particularly across those industry
sectors most impacted.
------------------ --------------------------------------------------------------------
Geopolitical u We continue to closely monitor emerging risks posed by an
risk evolving geopolitical landscape and adopt commensurate procedures
and controls based on an assessment of the impacts that
these may have on our portfolios. The relationship between
the UK and the EU may take time to settle following the
UK's departure from the EU, despite the agreement of the
Trade and Cooperation Agreement at the end of 2020. Although
there has been an economic recovery during the first half
of 2021 and some reduction in credit stress in our portfolios,
we continue to maintain tight monitoring activities to identify
sectors and customers experiencing financial difficulties
as a result of the Covid-19 outbreak.
------------------ --------------------------------------------------------------------
Cyber threat u We protect the group and our customers by strengthening
and unauthorised our cyber defences, helping us to execute our business priorities
access to safely and keep our customers' information secure. We employ
systems a defence in depth approach to cyber security and continue
to focus on controls to prevent, detect and mitigate the
impacts of persistent and increasingly advanced cyber threats
with a specific emphasis on vulnerability management, malware
defences, protections against unauthorised access and third-party
risk. We closely monitor the continued dependency on widespread
remote working and online facilities.
------------------ --------------------------------------------------------------------
Regulatory u We closely monitor for regulatory developments to ensure
focus on they are interpreted and implemented effectively and in
conduct a timely way. We also engage with regulators, policy makers
of business and standard setters as appropriate, to help shape new regulatory
requirements. Key themes currently driving the regulatory
compliance agenda include: consumer protection and customer
vulnerability; the impact of digital services and innovation;
and environmental, social and governance matters, with a
particular focus on climate risk.
------------------ --------------------------------------------------------------------
Financial u We continued to support our customers and the business throughout
Crime and the Covid-19 pandemic, while making improvements to our
Fraud risk financial crime controls. We also continued to invest in
our screening and monitoring controls.
------------------ --------------------------------------------------------------------
Market illiquidity u The Covid-19 outbreak has 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 PRA.
------------------ --------------------------------------------------------------------
Ibor transition p We remain focused on completing the provision of alternative
near-risk free products, together with the supporting processes
and systems, to replace all outstanding Ibor-linked contracts
that are on a demise path, within the required timelines.
Due to delays in market readiness, we are preparing for
an increased risk that the transition of outstanding contracts
will be concentrated in the latter part of 2021.
------------------ --------------------------------------------------------------------
Climate p We continue to enhance identification, oversight and management
Related of climate-related risks. Following the publication of the
Risks HSBC Group's climate ambition, we are developing business
plans and capabilities to execute it, and are participating
in the Group's dedicated climate risk programme. Our climate
risk management framework and approach, developed over 2020,
will further mature throughout 2021 and we will further
develop our risk appetite and key indicators. We are also
building our scenario analysis capabilities in preparation
for the Bank of England's climate biennial exploratory scenario.
------------------ --------------------------------------------------------------------
Internally driven
-------------------------------------------------------------------------------------------
People risk u We monitor workforce capacity and capability requirements
in line with our published growth strategy. We have put
in place measures to support our people to work safely during
the Covid-19 outbreak, and to integrate them back into the
workplace as government restrictions ease. We monitor people
risks that may arise due to business transformation to help
sensitively manage redundancies and support impacted employees.
------------------ --------------------------------------------------------------------
IT systems u We continue to monitor and improve our IT systems and network
infrastructure resilience, both on our premises and on the Cloud to minimise
and resilience service disruption and improve customer experience. To support
the business strategy, we strengthened our end to end management,
build and deployment controls and system monitoring capabilities.
We continue to seek to reduce the complexity of our technology
estate and consolidate our core banking systems onto a single
strategic platform.
------------------ --------------------------------------------------------------------
Execution p We monitor and manage our change execution risk, including
risk capacity and resources to meet the increased delivery demand
across both strategic transformation programmes, regulatory
deliverables and remediation programmes in 2021. Our transformation
programme continues to oversee all initiatives mobilised
to deliver the commitments made to restructure the business
and reduce costs by the end of 2022. A number of initiatives
within this programme impact our colleagues and are supported
by increased levels of investment in technology. We are
working to strengthen our change management practices to
deliver sustainable change efficiently and safely, aligned
to a new Group change framework launched during the first
half of 2021.
------------------ --------------------------------------------------------------------
Internally driven
Model risk u We continue to strengthen our oversight of models. A new
model risk policy is being embedded, including updated controls
around the monitoring and use of models. We have launched
new model risk appetite measures, which focuses on the risks
inherent in the use of models. We are redeveloping our capital
models to reflect the evolving regulatory requirements.
In addition, models impacted by the switch to new alternative
measures due to the demise of LIBOR are being redeveloped.
We have also enhanced governance and oversight of models
used in Sarbanes-Oxley processes in light of potential impacts
from the uncertain external environment on the model outcomes.
---------------- -----------------------------------------------------------------
Data management u We continue to remediate the control environment for data-related
risks with focused investments in data governance, data
usage, data integrity, data privacy and information lifecycle
management. In the first half of 2021, our data strategy
was refreshed to align to three pillars: protect, connect
and unlock. Our Data and Architecture Office has established
a programme of work to embed the new strategy and enhance
our data management.
---------------- -----------------------------------------------------------------
Third Party u The impacts of the Covid-19 pandemic on the delivery of
Risk Management services to the group are being closely monitored, with
businesses and functions taking appropriate action where
needed. We have continued to enhance our third-party risk
management programme to help ensure engagements comply with
our third-party risk policy and required standards.
---------------- -----------------------------------------------------------------
p Risk has heightened during 2021
u Risk remains at the same level
as 31 December 2020
Managing risk
We aim to use a comprehensive risk management approach across
the organisation and across all risk types, underpinned by our
culture and values. This is outlined in our risk management
framework, including the key principles and practices that we
employ in managing material risks, both financial and
non-financial.
Banks continued to play an expanded role in supporting society
and customers during the first half of 2021 due to the
unprecedented global economic events caused by the Covid-19
outbreak. Many of our customers' business models and income were
impacted by the global economic downturn, requiring them to take
significant levels of support from both governments and banks.
Throughout the pandemic, we have continued to support our
customers and adapted our operational processes. We have maintained
high levels of service as our people, processes and systems
responded to the required changes.
To meet the additional challenges caused by the Covid-19
pandemic, we have supplemented our existing approach to risk
management with additional tools and practices, and these continue
today. We increased our focus on the quality and timeliness of the
data used to inform management decisions, 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.
Risk appetite supports senior management in allocating capital,
funding and liquidity optimally to finance growth, while monitoring
exposure to non-financial risks.
In the first half of 2021, we
continued to build on the enhancements
made in 2020 to ensure we remain
able to support our customers
and strategic goals against the
backdrop of the Covid-19 outbreak.
Capital and liquidity remain
at the core of our risk appetite
framework, with forward-looking
statements informed by stress
testing. We also continue to
develop our climate risk appetite
as we seek to engage with businesses,
encourage conversations around
climate risk and start to embed
climate risk appetite into business
planning.
Key developments in the first
half of 2021
We continued to actively manage the risks resulting from the
Covid-19 outbreak and its impacts on our customers and operations
during the first half of 2021, as well as other key risks described
in this section. In addition, we enhanced our risk management in
the following areas:
-- We streamlined the articulation of our risk appetite
framework, providing further clarity on how risk appetite interacts
with strategic planning and recovery planning processes.
-- We continued to simplify our approach to non-financial risk
management, with the implementation of more effective oversight
tools and techniques to improve end-to-end identification and
management of these risks.
-- We accelerated the transformation of our approach to managing
financial risks across the businesses and risk functions, including
initiatives to enhance portfolio monitoring and analytics, credit
risk, traded risk and treasury risk management, as well as the
models used to manage financial risks.
-- We continued to enhance our approach to portfolio and
concentration risk management, through clearly defined roles and
responsibilities, and improving our data and management information
reporting capabilities.
-- We continued the development of our climate risk management
capabilities. Our climate risk programme will shape our approach to
climate risk across four key pillars: governance and risk appetite;
risk management; stress testing; and disclosures. We enhanced our
risk appetite statement with quantitative climate risk metrics.
-- We continued to improve the effectiveness of our financial
crime controls. We refreshed our financial crime policies, ensuring
they remained up-to-date and addressed changing and emerging risks,
as well as meeting our regulatory obligations.
-- We introduced enhanced governance and oversight around model
adjustments and related processes for IFRS 9 models and
Sarbanes
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 rise to 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 Covid-19 pandemic and its effect on the global economy have
impacted our customers and our performance. The outbreak
necessitated governments to respond at unprecedented levels to
protect public health, and to support local economies and
livelihoods. It affected regions at different times and to varying
degrees. The varying government support measures and restrictions
in response have added challenges given the rapid pace of change
and significant operational demands. The speed at which countries
and territories are able to return to pre-Covid 19 levels of
economic activity will vary based on the extent of continuing
government support offered, infection rates and the ability to roll
out vaccines. Renewed outbreaks emphasise the ongoing threat of
Covid-19, as seen in India during the first half of 2021 following
the outbreak of a new variant of the virus, and may again result in
renewed tightening of government restrictions following recent
relaxations.
Government restrictions imposed around the world to limit the
spread of Covid-19 resulted in a sharp contraction in global
economic activity during 2020, including in countries in Europe.
HSBC's Central scenario used to calculate impairment assumes that
economic activity will recover over the course of 2021. In this
scenario, recovery is supported by a successful roll-out of
vaccination programmes across our key markets, and the use of a
variety of non-pharmacological measures to contain the virus. There
remains however a high degree of uncertainty associated with
economic forecasts in the current environment. The degree of
uncertainty varies across our key markets, driven by country
specific trends in by the evolution of the pandemic, associated
policy responses and ongoing impacts felt from the Trade and
Cooperation Agreement in place between the UK and the EU from 1
January 2021.
There is a material risk of a renewed drop in economic activity,
particularly in countries with low vaccination rates. The economic
fallout from the Covid-19 outbreak risks increasing inequality
across markets that have already suffered from social unrest. It
will likely take time before societies return to pre-pandemic
levels of social interactions, meaning that increased inequalities
in living standards within societies will continue to disrupt most
markets in the medium term. This will leave the burden on
governments and central banks to maintain or increase fiscal and
monetary stimulus, possibly in a more targeted fashion than seen
during 2020 and the first half of 2021. After financial markets
suffered a sharp fall in the early phases of the spread of
Covid-19, they rebounded but still remain volatile. Depending on
the long term impact on global economic growth, financial asset
prices may suffer a further sharp fall.
Governments and central banks in major economies have deployed
extensive measures to support their local populations. Central
banks in developed markets are expected to maintain historically
low interest rates for a considerable period of time, with
Government debt having risen in most advanced economies and
expected to remain high in the medium term. This could eventually
pose a dilemma for central banks, as they face the conflicting aims
of keeping debt servicing costs contained whilst preventing a steep
rise in inflation.
We continue to support our personal and business customers,
through market specific measures initiated during the Covid-19
pandemic, and by supporting national government schemes that focus
on the parts of the economy most impacted by the Covid-19 pandemic.
For details of our customer relief programmes see page 29.
The rapid introduction and varying nature of the government
support schemes, as well as customer expectations, has led to
increased operational risks for the group including complex conduct
considerations, increased reputational risk and increased risk of
fraud. These risks are likely to be heightened further as and when
those government support schemes are unwound. We are focused upon
avoiding and mitigating any conduct risks that may arise from the
implementation decisions we have had to make and also those that
may be created if our customers find themselves in financial
difficulties as a result of the impact of the Covid-19
pandemic.
The impact of the pandemic on the long-term prospects of
businesses in the most vulnerable sectors of the economies of our
major markets, such as retail, hospitality and commercial real
estate, remains uncertain and may lead to significant credit losses
on specific exposures, which may not be fully captured in ECL
estimates. In addition, in times of stress, fraudulent activity is
often more prevalent, leading to potentially significant credit or
operational losses.
As economic conditions improve, there is a risk that the outputs
of IFRS9 models may have a tendency to under predict loan losses.
Model outputs and management adjustments are closely monitored and
independently reviewed for reliability and appropriateness prior to
inclusion in the financial results. We are also working to
redevelop models used to calculate capital levels and drive
business decisions. These include models for credit and traded risk
to address new and changing regulatory requirements related to
internal ratings-based ('IRB') repair, Ibor replacement and the
fundamental review of the trading book.
The operational support functions on which the group relies are
based in a number of countries worldwide, some of which, notably
India, have been particularly affected by the Covid-19 outbreak and
have recently experienced a significant increase in infection
rates. As a result of the Covid-19 outbreak, business continuity
responses have been implemented and the majority of service level
agreements have been maintained in locations where the group
operates. We continue to monitor the situation closely in
particular in those countries where the level of Covid-19
infections is most prevalent.
Despite the ongoing economic recovery, significant uncertainties
remain in assessing the duration and impact of the Covid-19
outbreak, including whether any subsequent outbreaks result in a
reimposition of government restrictions, or further lockdowns.
There is a risk that economic activity remains below pre-pandemic
levels for a prolonged period. We continue to monitor the situation
closely, and given the novel and prolonged nature of the outbreak,
additional mitigating actions may be required.
Ibor transition
Interbank offered rates ('Ibors') are used to set interest rates
on hundreds of trillions of US dollars of various financial
transactions and are used extensively for valuation purposes, risk
measurement and performance benchmarking.
The FCA announced in July 2017 that it would no longer continue
to persuade or require panel banks to submit rates for the London
interbank offered rate ('Libor') after 2021. In addition, the 2016
EU Benchmark Regulation, which aims to ensure the accuracy,
robustness and integrity of interest rate benchmarks, has resulted
in other regulatory bodies' reassessment of their national
benchmarks, including the Euro Overnight Index Average ('Eonia').
Furthermore, the FCA and the administrator of Libor, ICE Benchmark
Administration Limited ('IBA'), announced on 5 March 2021 that
publication of 26 of the 35 main Libor currency interest rate
benchmark tenors would cease at the end of 2021. Additionally, the
FCA and IBA confirmed that the publication of the most widely used
US dollar Libor settings will be extended until
30 June 2023, and that consultation will occur for continuing
three sterling settings under a 'synthetic' calculation
methodology. As a result, our transition programme continued its
efforts to provide near risk-free rate ('RFR') and alternative rate
products and is currently focused on actively transitioning clients
away from those contracts that reference Ibors demising at the end
of 2021.
Provision of alternative rate and RFR product capabilities
During 2020 and the first half of 2021, all global businesses
developed and implemented system, modelling and operational
capabilities for the majority of RFR products, and alternative
rates, with only a limited number of non-standard products
requiring completion in the second half of 2021. Our product
readiness and increased market liquidity has enabled new
transactions to be undertaken in RFR and alternative rate products
for all benchmarks. This, and market initiatives to reduce Ibor
trade volumes, has contributed to a continued decrease in Ibor
exposures that have post-2021 maturities.
However, given the extension of the publication of US dollar for
the most widely used settings, the market activity for the Secured
Overnight Financing Rate ('SOFR') continues to develop at a slow
pace. We are currently monitoring other industry developments to
term SOFR, and supporting market initiatives to increase the volume
of activity in the SOFR derivative market. We will also continue to
develop additional products for our customers, and in support of
the transition from US dollar Libor.
Transition legacy contracts
For benchmarks demising in 2021, the group plans to transition
all viable legacy Ibor contracts by 30 September 2021, to the
extent possible in line with RFR working group guidelines. However,
we remain dependent on our clients' decisions and the market to
meet these targets. We approached customers in a structured manner,
based on product readiness and customer prioritisation, and our
transition progress is being tracked using internal targets. In
prioritising our client engagement we also took into account our
clients' adherence to the fallback provisions for derivatives
within the ISDA protocol, implemented in January 2021, and
contractual fallback language within legacy loan contracts.
Following our transition discussions with clients, we will be led
by their decisions on timing and their level of readiness to
transition. We are tracking client decisions to adequately plan for
operational activities that need to occur in the second half of
2021. However, given the continued impact of Covid-19 on our
customers and the market, there is a risk that not all of our
clients are operationally ready to transition their Ibor contracts.
This could potentially result in delays to transition, past the 30
September 2021 target date, with transition activities being
further concentrated into the latter half of 2021. This could
increase operational, regulatory compliance, legal, and resilience
risks.
While operational risks could be increased by transitions being
concentrated towards the end of 2021, contractual repapering and
rebooking activities will be managed accordingly. Additionally we
may need to rely on legislative solutions to allow for a smooth
transition of all contracts. The FCA and HM Treasury continues to
consult with the industry about how best to manage potential 'tough
legacy' scenarios, including possibly using a synthetic Libor.
Adequate contract continuity provisions will be critical to the
successful implementation of such solutions.
As a result of our transition efforts, the group continues to
reduce its Ibor and Eonia derivatives, loan, and bond exposures
maturing beyond 2021.
For the derivatives exposures, following the first quarter
cessation milestone for issuance of new sterling Libor linear
derivatives, we are only transacting sterling linear derivatives
for risk management purposes. This has led to a decrease in Libor
exposures and an increase in the volume of transactions referencing
Sterling Overnight Index Average ('Sonia'). Second quarter industry
milestones for cessation of sterling non-linear derivatives have
been adhered to and this is expected to result in a further
exposure reduction.
For the group's loan book, all loan contracts referencing 2021
demising Ibors that require refinancing are being offered on an RFR
or alternative rates basis. We have adhered to the cessation
milestone for issuance of new Libor loans, and continue to support
and engage our clients in transitioning to a suitable alternative
rate or replacement RFR product, prior to the relevant Ibor
cessation date. For syndicated loans, we are actively engaging with
agents and participants, as appropriate, but will be reliant on all
syndicate members to transition.
Financial instruments impacted by IBOR reforms
Financial instruments yet
to transition to alternative
benchmarks, by main benchmark
USD Libor GBP Libor EONIA Others(1)
At 30 Jun 2021 GBPm GBPm GBPm GBPm
---------------------------------------- --------- --------- ------- -----------
Non-derivative financial assets(2) 7,615 5,931 200 82
---------------------------------------- --------- --------- ------- ---------
Non-derivative financial liabilities(2) 1,375 1,384 8 -
---------------------------------------- --------- --------- ------- ---------
Derivative notional contract amount 1,326,274 874,975 210,130 118,972
---------------------------------------- --------- --------- ------- ---------
At 31 Dec 2020
---------------------------------------- --------- ------- ------- ---------
Non-derivative financial assets(2) 10,012 5,762 1 184
---------------------------------------- --------- ------- ------- -------
Non-derivative financial liabilities(2) 1,933 1,410 3 1
---------------------------------------- --------- ------- ------- -------
Derivative notional contract amount 1,700,582 868,313 196,515 134,693
---------------------------------------- --------- ------- ------- -------
1 Comprises financial instruments referencing other significant
benchmark rates yet to transition to alternative benchmarks (EUR
Libor, JPY Libor, CHF Libor, SOR and THBFIX).
2 Gross carrying amount excluding allowances for expected credit losses.
The amounts in the above table relate to the group's main
operating entities where we have material exposures impacted by
Ibor reform, including in the United Kingdom, France, and Germany.
The amounts provide an indication of the extent of the group's
exposure to the Ibor benchmarks that are due to be replaced.
Amounts are in respect of financial instruments that:
-- contractually reference an interest rate benchmark that is
planned to transition to an alternative benchmark;
-- have a contractual maturity date beyond the date by which the
reference interest rate benchmark is expected to cease; and
-- are recognised on HSBC's consolidated balance sheet;
In March 2021, the administrator of Libor, IBA, announced that
the publication date of most US dollar Libor tenors has been
extended from 31 December 2021 to 30 June 2023. Publication of
one-week and two-month tenors will cease after 31 December 2021.
This change, together with the extended publication dates of SOR
and THBFIX, reduce the amounts presented at 30 June 2021 in the
above table as some financial instruments included at
31 December 2020 will reach their contractual maturity date
prior to the extended publication dates. Comparative data have not
been re-presented.
Interest rate benchmark reform: Amendments to IFRS 9 and IAS 39
'Financial Instruments'
The group has cash flow and fair value hedge accounting
relationships that are exposed to different Ibors, predominantly US
Dollar Libor, Sterling Libor and Euribor as well as overnight rates
subject to the market-wide benchmarks reform, such as the European
Overnight Index Average rate ('Eonia'). Existing financial
instruments (such as derivatives, loans and bonds) designated in
relationships referencing these benchmarks are expected to
transition to RFRs in different ways and at different times.
External progress on the transition to RFRs is being monitored,
with the objective of ensuring a smooth transition for the group's
hedge accounting relationships. The specific issues arising will
vary with the details of each hedging relationship, but may arise
due to the transition of existing products included in the
designation, a change in expected volumes of products to be issued,
a change in contractual terms of new products issued, or a
combination of these factors. Some hedges may need to be
de-designated and new relationships entered
into, while others may survive the market-wide benchmarks
reform.
The hedged items that are affected by the Phase 2 amendments to
the IASB's Ibor reform are presented in the balance sheet as
'Financial assets designated and otherwise mandatorily measured at
fair value through other comprehensive income', 'Loans and advances
to customers', 'Debt securities in issue', and 'Deposits
by banks'. The notional amounts of interest rate derivatives
designated in hedge accounting relationships represent the extent
of the risk exposure managed by the group that is expected to be
directly affected by market-wide Ibor reform and in scope of the
IASB Ibor reform Phase 1 and Phase 2 amendments. The cross-currency
swaps designated in hedge accounting relationships and affected by
Ibor reform are not significant and have not been presented
below:
Hedging instrument impacted by Ibor reform
Hedging instrument
---------------------------------------------------------------
Impacted by Ibor reform
-----------------------------------
NOT Impacted
by Ibor Notional
EUR(2) GBP USD Other Total reform Amount(1)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------ ----- ----- ----- ------ ------------ ------------
Fair Value Hedges 7,379 57 1,793 8 9,237 16,475 25,712
------------------ ------ ----- ----- ----- ------ ------------ ----------
Cash Flow Hedges 6,267 500 181 - 6,948 3,100 10,048
------------------ ------ ----- ----- ----- ------ ------------ ----------
At 30 Jun 2021 13,646 557 1,974 8 16,185 19,575 35,760
------------------ ------ ----- ----- ----- ------ ------------ ----------
Fair Value Hedges 12,822 1,855 1,908 60 16,645 13,092 29,737
------------------ ------ ----- ----- ----- ------ ------------ ----------
Cash Flow Hedges 6,111 1,552 183 - 7,846 2,675 10,521
------------------ ------ ----- ----- ----- ------ ------------ ----------
At 31 Dec 2020 18,933 3,407 2,091 60 24,491 15,767 40,258
------------------ ------ ----- ----- ----- ------ ------------ ----------
1 The notional contract amounts of interest rate derivatives
designated in qualifying hedge accounting relationships indicate
the nominal value of transactions outstanding at the balance sheet
date. They do not represent amounts at risk.
2 The notional contract amounts of euro interest rate
derivatives impacted by Ibor reform mainly comprise hedges with a
Euribor benchmark, which are Fair value hedges of GBP6,859m (31
December 2020: GBP7,606m) and Cash flow hedges GBP6,267m (31
December 2020: GBP6,111m).
Credit risk
Page
Summary of credit risk 18
--------------------------------- ----
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 27
--------------------------------- ----
Customer relief programmes 29
--------------------------------- ----
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 2021
There were no material changes to credit risk policy in the
first half of 2021.
A summary of our current policies and practices for the
management of credit risk is set out in 'Credit risk management' on
pages 32 and 33 of the Annual Report and Accounts 2020.
At 30 June 2021, gross loans and advances to customers and banks
of GBP105.5bn decreased by GBP10.1bn, compared with
31 December 2020. This included adverse foreign exchange
movements of GBP2.9bn. Excluding foreign exchange movements, the
decline was driven by GBP5.9bn decrease in wholesale loans and
advances to customers and a GBP1.4bn loans and advances to banks.
This was partly offset by a GBP0.1bn increase in personal loans and
advances to customers.During the first six months of 2021, the
group experienced a release in allowances for ECL, which was driven
by improving economic forecasts. Excluding foreign exchange
movements, the allowance for ECL in relation to loans and advances
to customers decreased by GBP136m from 31 December 2020. This was
attributable to:
-- a GBP122m decrease in wholesale loans and advances to
customers, of which GBP45m was driven by stage 1 and 2; and
-- a GBP14m decrease in personal loans and advances to
customers, of which GBP5m was driven by stage 1 and 2.
At 30 June 2021, the allowance for ECL of GBP1,436m decreased by
GBP218m compared with 31 December 2020. The allowance comprised
GBP1,310m in respect of assets held at amortised cost, GBP108m in
respect of loan commitments and financial guarantees, and GBP18m in
respect of debt instruments measured at fair value through other
comprehensive income ('FVOCI').
Stage 3 balances at 30 June 2021 remained broadly stable
compared with 31 December 2020.
The ECL release for the first six months of 2021 was GBP71m,
inclusive of recoveries. Uncertainty remains as countries emerge
from the pandemic at different speeds, government support measures
unwind and new virus strains test the efficacy of vaccination
programmes.
During the first half of 2021, we continued to provide Covid-19
related support to customers under the current policy framework.
For further details of market-specific measures to support our
personal and business customers, see page 29.
Summary of credit risk
The following disclosure presents the gross carrying/nominal
amount of financial instruments to which the impairment
requirements in IFRS9 are applied and the associated allowance for
ECL.
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 2021 31 Dec 2020
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 94,503 (1,293) 102,960 (1,469)
------------------------------------------- --------------- ----------- ---------------------- -----------
* personal 25,649 (185) 26,499 (208)
-------------------------------------------
- corporate and commercial 55,750 (1,012) 62,987 (1,168)
-------------------------------------------
- non-bank financial institutions 13,104 (96) 13,474 (93)
------------------------------------------- --------------- ----------- ---------------------- -----------
Loans and advances to banks at amortised
cost 11,006 (7) 12,662 (16)
------------------------------------------- --------------- ----------- ---------------------- -----------
Other financial assets measured at
amortised cost 214,331 (10) 202,763 (12)
------------------------------------------- --------------- ----------- ---------------------- -----------
- cash and balances at central banks 108,056 - 85,093 (1)
-------------------------------------------
- items in the course of collection
from other banks 638 - 243 -
-------------------------------------------
- reverse repurchase agreements -
non-trading 53,032 - 67,577 -
-------------------------------------------
- financial investments 13 - 15 -
-------------------------------------------
- prepayments, accrued income and
other assets(2) 52,592 (10) 49,835 (11)
------------------------------------------- --------------- ----------- ---------------------- -----------
Total gross carrying amount on-balance
sheet 319,840 (1,310) 318,385 (1,497)
------------------------------------------- --------------- ----------- ---------------------- -----------
Loans and other credit related commitments 135,040 (90) 143,036 (112)
------------------------------------------- --------------- ----------- ---------------------- -----------
- personal 2,396 - 2,211 (1)
-------------------------------------------
- corporate and commercial 67,975 (76) 75,863 (89)
-------------------------------------------
- financial 64,669 (14) 64,962 (22)
------------------------------------------- --------------- ----------- ---------------------- -----------
Financial guarantees(3) 10,721 (18) 3,969 (23)
------------------------------------------- --------------- ----------- ---------------------- -----------
- personal 30 - 32 -
-------------------------------------------
- corporate and commercial 9,399 (17) 2,735 (19)
-------------------------------------------
- financial 1,292 (1) 1,202 (4)
------------------------------------------- --------------- ----------- ---------------------- -----------
Total nominal amount off-balance sheet(4) 145,761 (108) 147,005 (135)
------------------------------------------- --------------- ----------- ---------------------- -----------
465,601 (1,418) 465,390 (1,632)
------------------------------------------- --------------- ----------- ---------------------- -----------
Memorandum Memorandum
allowance allowance
Fair for for
value ECL(5) Fair value ECL(5)
GBPm GBPm GBPm GBPm
------------------------------------------- --------------- ----------- ---------------------- -------------
Debt instruments measured at fair
value through other comprehensive
income ('FVOCI') 44,644 (18) 51,713 (22)
------------------------------------------- --------------- ----------- ---------------------- -----------
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 50 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 2021
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(2)
Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total Stage Stage Stage POCI(3) Total
1 2 3 1 2 3 1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -------
Loans and
advances
to customers
at amortised
cost 75,410 16,356 2,701 36 94,503 (117) (250) (917) (9) (1,293) 0.2 1.5 34.0 25.0 1.4
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
- personal 24,349 811 489 - 25,649 (17) (30) (138) - (185) 0.1 3.7 28.2 - 0.7
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 39,480 14,334 1,900 36 55,750 (90) (192) (721) (9) (1,012) 0.2 1.3 37.9 25.0 1.8
-------------------------------------- ----- ----- ----- ------- -----
* non-bank financial institutions 11,581 1,211 312 - 13,104 (10) (28) (58) - (96) 0.1 2.3 18.6 - 0.7
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 10,877 129 - - 11,006 (6) (1) - - (7) 0.1 0.8 - - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 214,252 40 39 - 214,331 - - (10) - (10) - - 25.6 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 122,648 12,166 226 - 135,040 (24) (53) (13) - (90) - 0.4 5.8 - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
- personal 2,177 217 2 - 2,396 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 57,510 10,253 212 - 67,975 (20) (44) (12) - (76) - 0.4 5.7 - 0.1
-------------------------------------- ----- ----- ----- ------- -----
- financial 62,961 1,696 12 - 64,669 (4) (9) (1) - (14) - 0.5 8.3 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
Financial
guarantees(1) 9,521 1,106 93 1 10,721 (4) (7) (7) - (18) - 0.6 7.5 - 0.2
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
- personal 23 6 1 - 30 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 8,520 787 91 1 9,399 (3) (7) (7) - (17) - 0.9 7.7 - 0.2
-------------------------------------- ----- ----- ----- ------- -----
- financial 978 313 1 - 1,292 (1) - - - (1) 0.1 - - - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ----- ------- ------- ----- ----- ----- ------- -----
At 30 Jun
2021 432,708 29,797 3,059 37 465,601 (151) (311) (947) (9) (1,418) - 1.0 31.0 24.3 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').
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 2021
Gross carrying Allowance for ECL ECL coverage %
of which: of which: of which:
-------- -------- ------
1 to 1 to 1 to
29 30 and 29 30 and 29 30 and
Stage DPD(1, > DPD(1, Stage DPD(1, > DPD(1, Stage DPD(1, > DPD(1,
2 2) 2) 2 2) 2) 2 2) 2)
GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- -------- ------- -------- -------- -------- -------- ------ -------- ----------
Loans and
advances
to customers
at amortised
cost 16,356 103 50 (250) (5) (1) 1.5 4.9 2.0
------------- -------- ------- -------- -------- -------- -------- ------ -------- --------
- personal 811 52 33 (30) (2) (1) 3.7 3.8 3.0
------------- ------ -------- --------
- corporate
and
commercial 14,334 48 17 (192) (2) - 1.3 4.2 -
------------- ------ -------- --------
- non-bank
financial
institutions 1,211 3 - (28) (1) - 2.3 33.3 -
------------- -------- ------- -------- -------- -------- -------- ------ -------- --------
Loans and
advances
to banks at
amortised
cost 129 - - (1) - - 0.8 - -
------------- -------- ------- -------- -------- -------- -------- ------ -------- --------
Other
financial
assets
measured at
amortised
cost 40 1 - - - - - - -
------------- -------- ------- -------- -------- -------- -------- ------ -------- --------
1 Days past due ('DPD'). Up-to-date accounts in Stage 2 are not shown in amounts presented above.
2 The days past due amounts presented above are on a contractual
basis and include the benefit of any customer relief payment
holidays granted.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2020 (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 83,179 16,774 2,966 41 102,960 (129) (297) (1,031) (12) (1,469) 0.2 1.8 34.8 29.3 1.4
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
- personal 24,991 974 534 - 26,499 (18) (37) (153) - (208) 0.1 3.8 28.7 - 0.8
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 46,773 14,052 2,121 41 62,987 (100) (225) (831) (12) (1,168) 0.2 1.6 39.2 29.3 1.9
-------------------------------------- ----- ----- ----- ------- -----
* non-bank financial institutions 11,415 1,748 311 - 13,474 (11) (35) (47) - (93) 0.1 2.0 15.1 - 0.7
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
Loans and
advances
to banks
at amortised
cost 12,533 129 - - 12,662 (13) (3) - - (16) 0.1 2.3 - - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 202,659 65 39 - 202,763 (2) - (10) - (12) - - 25.6 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
Loan and
other credit
related commitments 128,956 13,814 266 - 143,036 (34) (68) (10) - (112) - 0.5 3.8 - 0.1
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
- personal 1,991 217 3 - 2,211 - (1) - - (1) - 0.5 - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 65,199 10,404 260 - 75,863 (29) (51) (9) - (89) - 0.5 3.5 - 0.1
-------------------------------------- ----- ----- ----- ------- -----
- financial 61,766 3,193 3 - 64,962 (5) (16) (1) - (22) - 0.5 33.3 - -
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
Financial
guarantees(1) 2,839 1,008 121 1 3,969 (4) (10) (9) - (23) 0.1 1.0 7.4 - 0.6
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
- personal 26 5 1 - 32 - - - - - - - - - -
-------------------------------------- ----- ----- ----- ------- -----
* corporate and commercial 1,878 737 119 1 2,735 (3) (7) (9) - (19) 0.2 0.9 7.6 - 0.7
-------------------------------------- ----- ----- ----- ------- -----
- financial 935 266 1 - 1,202 (1) (3) - - (4) 0.1 1.1 - - 0.3
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
At 31 Dec
2020 430,166 31,790 3,392 42 465,390 (182) (378) (1,060) (12) (1,632) - 1.2 31.3 28.6 0.4
-------------------------------------- ------- ------ ----- ------- ------- ----- ----- ------- ------- ------- ----- ----- ----- ------- -----
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 2020 (continued)
Gross carrying amount Allowance for ECL ECL coverage %
of which: of which: of which:
------- ------------------ -------- ------------------ ------ --------------------
1 to 30 and 1 to 30 and 1 to
Stage 29 > Stage 29 > Stage 29 30 and
2 DPD(1,2) DPD(1,2) 2 DPD(1,2) DPD(1,2) 2 DPD(1,2) > DPD(1,2)
GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- ------- -------- -------- -------- -------- -------- ------ -------- ----------
Loans and
advances
to customers
at amortised
cost 16,774 64 50 (297) (3) (2) 1.8 4.7 4.0
------------- ------- -------- -------- -------- -------- -------- ------ -------- --------
- personal 974 54 39 (37) (2) (2) 3.8 3.7 5.1
------------- ------ -------- --------
- corporate
and
commercial 14,052 9 11 (225) (1) - 1.6 11.1 -
------------- ------ -------- --------
- non-bank
financial
institutions 1,748 1 - (35) - - 2.0 - -
------------- ------- -------- -------- -------- -------- -------- ------ -------- --------
Loans and
advances
to banks at
amortised
cost 129 - - (3) - - 2.3 - -
------------- ------- -------- -------- -------- -------- -------- ------ -------- --------
Other
financial
assets
measured at
amortised
cost 65 - - - - - - - -
------------- ------- -------- -------- -------- -------- -------- ------ -------- --------
1 Days past due ('DPD'). Up-to-date accounts in Stage 2 are not shown in amounts presented above.
2 The days past due amounts presented above are on a contractual
basis and include the benefit of any customer relief payment
holidays granted.
Measurement uncertainty and sensitivity
analysis of ECL estimates
There remains a high degree of uncertainty as countries emerge
from the pandemic at different speeds, government support measures
unwind and new virus strains test the efficacy of vaccination
programmes. As a result of this uncertainty, management judgements
and estimates reflect a degree of caution which is reflected both
in the selection of economic scenarios and their weightings, and in
the management judgemental adjustments, which reflect how economic
conditions interact with modelled outcomes, and are described in
more detail below.
The recognition and measurement of ECL involves the use of
significant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions to
credit risk models to estimate future credit losses, and
probability-weight the results to determine an unbiased ECL
estimate.
Methodology
Four economic scenarios have been used to capture the
exceptional nature of the current economic environment and to
articulate management's view of the range of potential outcomes.
Scenarios produced to calculate ECL are aligned to HSBC's top and
emerging risks. Three of these scenarios are drawn from consensus
forecasts and distributional estimates. The Central scenario is
deemed the 'most likely' scenario, and usually attracts the largest
probability weighting, while the outer scenarios represent the
tails of the distribution, which are less likely to occur. The
Central scenario is created using the average of a panel of
external forecasters, while consensus Upside and Downside scenarios
are created with reference to distributions for select markets that
capture forecasters' views of the entire range of outcomes.
Management has chosen to use an additional scenario to represent
its view of severe downside risks. The use of an additional
scenario is in line with HSBC's forward economic guidance
methodology and has been regularly used over the course of 2021.
Management may include additional scenarios if it feels that the
consensus scenarios do not adequately capture the top and emerging
risks. Unlike the consensus scenarios, these additional scenarios
are driven by narrative assumptions, could be country-specific and
may result in shocks that drive economic activity permanently away
from trend.
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.
Global economic growth is experiencing a recovery in 2021,
following an unprecedented contraction in 2020. Restrictions to
mobility have started to ease across our key markets, aided in some
cases by the successful roll-out of vaccination programmes. Data
from vaccinated groups suggests vaccines provide a high level of
immunity against the Covid-19 virus despite the emergence of more
transmissible variants. To date, vaccinations have shown their
effectiveness in lowering hospitalisations and deaths. A rapid
roll-out of vaccination programmes has been a key factor enabling
economies to reopen and some resumption of travel. The emergence of
new variants that reduce the efficacy of vaccines remains a
risk.
Economic forecasts are subject to a high degree of uncertainty
in the current environment. While risks to the economic outlook are
dominated by the progression and management of the pandemic and
vaccine roll-out, geopolitical risks also present downside threats.
These risks include global geopolitical risks including continued
differences between the US and China over a range of issues and the
evolution of the UK's relationship with the EU. Four global
scenarios have been used for the purpose of calculating ECL at 30
June 2021. These are the consensus Central scenario, the consensus
Upside scenario, the consensus Downside scenario and an additional
Downside scenario.
The scenarios used to calculate ECL in the Interim Report 2021
are described below.
The consensus Central scenario
Following a severe and unprecedented drop in global economic
activity in 2020, HSBC's Central scenario features a sharp recovery
in 2021, followed by a subsequent normalisation of growth. The
V-shape in activity over the course of 2020 and 2021 reflects
the impact of the pandemic on our key markets, with restrictions to
mobility and a reduction in activity resulting in a strong
contraction in 2020, and an increase in mobility and resumption in
activity in 2021 signalling a recovery.
The Central scenario further assumes that the stringent
restrictions on activity, employed across several countries and
territories in 2020 and the first half of 2021 will not be
repeated. This will allow economic activity to first rebound and
then revert to more normal long-run trend rates of growth. Minimal
long-term damage to economic prospects is expected. Cross-region
differences in the speed and scale of recovery across the forecast
horizon reflect timing differences in the progression of the
Covid-19 outbreak, different speeds of roll-out of vaccination
programmes, national level differences in restrictions imposed and
the scale of support measures.
Global GDP is expected to grow by 5.3% in 2021 in the Central
scenario. The average rate of global GDP growth is expected to be
3.3% over the forecast period, which is higher than the average
growth rate over the five-year period prior to the onset of the
pandemic.
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 (see the following chart).
Across the key markets, the Central scenario assumes the
following:
-- Economic growth is expected to increase sharply in 2021 as
governments ease restrictions to mobility, encouraging consumers
and firms to spend and invest. GDP is expected to grow across all
our major markets in 2021. Country-specific measures aimed at
supporting labour markets as economies reopen will affect the rate
at which unemployment will decline.
-- Inflation is expected to rise in 2021 in line with the
economic recovery, before gradually converging back to central bank
targets over the forecast period.
-- Fiscal deficits are expected to reduce gradually over the
course of the projection period from their peak in 2020 following a
period where governments, in several of our key markets, provided
extensive support to households and corporates. Sovereign
indebtedness is expected to remain at high levels.
-- Interest rate policy is expected to be highly accommodative
over the projection horizon after major central banks 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 during the course of 2020.
-- The West Texas Intermediate oil price is forecast to average
$58 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. 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 45% to
60%.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
Central scenario (3Q21-2Q26)
UK France
% %
--------------------- --- --------
GDP growth
--------------------- --- --------
2021: Annual average
growth rate 6.1 4.9
--------------------- --- ------
2022: Annual average
growth rate 5.5 3.9
--------------------- --- ------
2023: Annual average
growth rate 2.2 2.1
--------------------- --- ------
5-year average 3.0 2.1
--------------------- --- ------
Unemployment rate
--------------------- --- --------
2021: Annual average
rate 5.8 8.9
--------------------- --- ------
2022: Annual average
rate 5.8 8.7
--------------------- --- ------
2023: Annual average
rate 5.0 8.4
--------------------- --- ------
5-year average 5.1 8.3
--------------------- --- ------
House price growth
--------------------- --- --------
2021: Annual average
growth rate 8.3 4.5
--------------------- --- ------
2022: Annual average
growth rate 2.7 3.5
--------------------- --- ------
2023: Annual average
growth rate 2.5 4.2
--------------------- --- ------
5-year average 3.0 3.5
--------------------- --- ------
Short-term interest
rate
--------------------- --- --------
2021: Annual average
rate 0.2 (0.6)
--------------------- --- ------
2022: Annual average
rate 0.3 (0.6)
--------------------- --- ------
2023: Annual average
rate 0.5 (0.5)
--------------------- --- ------
5-year average 0.6 (0.4)
--------------------- --- ------
Probability 50 45
--------------------- --- ------
The graphs comparing the respective Central scenarios in the
second quarters of 2020 and 2021 reveal the extent of economic
dislocation that occurred in 2020 and compare current economic
expectations with those held a year ago.
GDP growth: Comparison of Central scenarios
UK
Note: Real GDP shown as year-on-year percentage change.
France
Note: Real GDP shown as year-on-year percentage change.
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.
The scenario is consistent with a number of key upside risk
themes. These include the orderly and rapid global abatement of
Covid-19 via successful containment and prompt deployment of a
vaccine; de-escalation of tensions between the US and China;
continued support from fiscal and monetary policy; and smooth
relations between the UK and the EU.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Upside scenario.
Consensus Upside scenario best outcome
UK France
% %
------------------------------------ ----------- ------------
GDP growth rate 11.1 (1Q22) 8.3 (2Q22)
------------------------------------ ----------- ------------
Unemployment rate 3.4 (2Q23) 7.2 (3Q22)
------------------------------------ ----------- ------------
House price growth 9.1 (3Q21) 6.1 (3Q22)
------------------------------------ ----------- ------------
Short-term interest (0.6)
rate 0.2 (3Q21) (1Q22)
------------------------------------ ----------- ------------
Probability 5 5
------------------------------------ ----------- ----------
Note: Extreme point in the consensus Upside is 'best outcome' in
the scenario, for example the highest GDP growth and the lowest
unemployment rate, in the first two years of the scenario.
The consensus Downside scenario
In the consensus Downside scenario, economic recovery is
considerably weaker compared with the Central scenario. GDP growth
remains weak, unemployment rates stay elevated and asset and
commodity prices fall before gradually recovering towards their
long-run trends.
The scenario is consistent with the key downside risks
articulated above. Further outbreaks of Covid-19, coupled with
delays in vaccination programmes, lead to longer-lasting
restrictions on economic activity in this scenario. Other global
risks also increase and drive a rise in risk aversion in asset
markets.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Downside scenario.
Consensus Downside scenario worst
outcome
UK France
% %
----------------------------- ---------- -------------
(1.6)
GDP growth rate 0.4 (2Q23) (3Q21)
----------------------------- ---------- -------------
Unemployment rate 7.3 (2Q22) 11.0 (4Q21)
----------------------------- ---------- -------------
(3.7)
House price growth (4Q22) 0.3 (1Q22)
----------------------------- ---------- -------------
Short-term interest (0.6)
rate 0.2 (2Q23) (3Q21)
----------------------------- ---------- -------------
Probability 30 35
----------------------------- ---------- -----------
Note: Extreme point in the consensus Downside is 'worst outcome'
in the scenario, for example the lowest GDP growth and the highest
unemployment rate, in the first two years of the scenario.
Additional Downside scenario
An additional Downside scenario that features a global recession
has been created to reflect management's view of severe risks. Such
a scenario has been in use since 2Q20. In this scenario, infections
rise over the second half of 2021, with setbacks to vaccine
programmes such that it takes until the end of 2022 for the
pandemic to come to an end. The scenario also assumes governments
and central banks are unable to significantly increase fiscal and
monetary programmes, which results in a rise in unemployment and a
fall in asset prices. In France, the impacts on the unemployment
rate are similar to those in the consensus Downside scenario,
reflective of recent historical experiences. GDP growth is stronger
in the additional Downside scenario compared with the other
scenarios and this stronger bounce-back is a consequence of the
deeper initial economic contraction.
The following table describes key macroeconomic variables and
the probabilities assigned in the Additional Downside scenario.
Additional Downside scenario worst
outcome
UK France
% %
------------------------------ ---------- -------------
(2.1) (3.1)
GDP growth rate (2Q22) (1Q22)
------------------------------ ---------- -------------
Unemployment rate 9.3 (3Q22) 11.1 (4Q21)
------------------------------ ---------- -------------
(7.8) (5.9)
House price growth (2Q22) (2Q22)
------------------------------ ---------- -------------
Short-term interest
rate 1.0 (4Q21) 0.3 (4Q21)
------------------------------ ---------- -------------
Probability 15 15
------------------------------ ---------- -----------
Note: Extreme point in the additional Downside is 'worst
outcome' in the scenario, for example the lowest GDP growth and the
highest unemployment rate, in the first two years of the
scenario.
In considering economic uncertainty and assigning probabilities
to scenarios, management has considered both global and
country-specific factors. This has led management to assigning
scenario probabilities that are tailored to its view of uncertainty
in individual markets.
To inform its view, management has considered trends in the
progression of the virus in individual countries, the expected
reach and efficacy of vaccine roll-outs over the course of 2021,
the size and effectiveness of future government support schemes and
the connectivity with other countries. Management has also been
guided by the actual response to the Covid-19 outbreak and by the
economic experience across countries in 2020.
The UK and France face the greatest economic uncertainties in
our key markets. In the UK, the discovery of more infectious
strains of the virus and subsequent national restrictions on
activity imposed before the end of 2020, as well as the current
increase in infections, have resulted in considerable uncertainty
in the economic outlook. In France, the increases in cases and
hospitalisations in the first few months of 2021, the difficulties
experienced with the launch of a national vaccination programme and
the spread of a more infectious strain of the virus similarly
affect the economic outlook. Given these considerations, the
consensus Central scenarios for the UK and France have been
assigned probabilities of 50% and 45% respectively, while the
consensus Downside scenarios have been allocated 30% and 35%. The
additional Downside scenario has been assigned 15% probability to
each of these markets to reflect the view that the balance of risks
is weighted to the downside.
The following graphs show the historical and forecasted GDP
growth rate for the various economic scenarios in UK and
France.
UK
France
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 2020 under 'Critical accounting estimates and
judgements'. The level of estimation uncertainty and judgement has
remained high since 31 December 2020 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 wide
distribution of economic forecasts. There is judgement in making
assumptions about the length of time and severity of the economic
effects of the pandemic and the shape of recovery;
-- estimating the economic effects of those scenarios on ECL,
when the volatility of economic changes associated with the
pandemic is outside the observable historical trends that can be
reflected in the models. Modelled assumptions and linkages between
economic factors and credit losses may underestimate or
overestimate ECL in these conditions, including the effect of real
estate prices on modelled ECL outcomes; and
-- the identification of customers experiencing significant
increases in credit risk and credit impairment, where judgements
are made about the extent to which government support programmes
have deferred or mitigated the risk of defaults, and the effects
once support levels are reduced, particularly in relation to
lending in high-risk and vulnerable sectors. Where customers have
accepted payment deferrals and other reliefs designed to address
short-term liquidity issues, or have extended those deferrals,
judgements include the extent to which they are able to meet their
financial obligations on returning to their original terms. The use
of segmentation techniques for indicators of significant increases
in credit risk for retail customers involves 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 on page 46 of the Annual Report and
Accounts 2020. Models are used to reflect economic scenarios on ECL
estimates. These models are based largely on historical
observations and correlations with default rates.
We continue to observe volatility in macroeconomic variables as
a result of the Covid-19 pandemic, which - together with
significant governmental support programmes, forbearance and
payment holidays - have impacted model performance and historical
correlations between macroeconomic variables and defaults. As
economic forecasts begin to improve, the level and speed of
economic recovery remains outside the range of historical
experience used to calibrate the models, and the timing of defaults
has considerably shifted from the modelled assumptions. Management
judgements have been used to overcome the limitations in the model
generated outcome, increasing the ECL.
Management judgemental adjustments arise when data and model
limitations are 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.
Management judgemental adjustments
In the context of IFRS 9, management judgemental adjustments are
typically short-term increases or decreases to the ECL at either a
customer or portfolio level to account for late-breaking events,
model deficiencies and other assessments applied during management
review and challenge.
At 30 June 2021, management judgements were applied to reflect
credit risk dynamics not captured by our models. The drivers of the
management judgemental adjustments continue to evolve with the
economic environment. We have internal governance in place to
monitor management judgemental adjustments regularly and, where
possible, to reduce the reliance on these through model
recalibration or redevelopment, as appropriate.
Wider-ranging model changes will take time to develop and need
observable loss data on which models can be developed. Models will
be revisited over time once the longer-term impacts of the Covid-19
outbreak are observed. Therefore, we continue to anticipate
significant management judgemental adjustments for the foreseeable
future.
Judgemental adjustments, which primarily relate to delays in the
timing and extent of defaults, will likely cease to occur when
macroeconomic forecasts have stabilised and move within the range
of historical experience, portfolio impacts due to unwinding of
government schemes become visible and the uncertainty due to
Covid-19 reduces.
The wholesale and retail management judgemental adjustments are
presented as part of the global business impairment committees with
representation from Model Risk Management. This is in line with the
governance process as set out on page 33 of the Annual Report and
Accounts 2020.
Management judgemental adjustments made in estimating the
reported ECL at 30 June 2021 are set out in the following table.
The table includes adjustments in relation to data and model
limitations resulting from the pandemic, and as a result of the
regular process of model development and implementation. It shows
the adjustments applicable to the scenario-weighted ECL
numbers.
Management judgemental adjustments
to ECL at 30 June 2021(1)
Retail Wholesale Total
GBPm GBPm GBPm
--------------------------- ------ --------- -------
Low-risk counterparties
(banks, sovereigns
and government entities) (3) 4 1
--------------------------- ------ --------- -----
Corporate lending
adjustments - 20 20
--------------------------- ------ --------- -----
Retail lending probability
of default adjustments (1) - (1)
--------------------------- ------ --------- -----
Retail model default
timing adjustments (1) - (1)
--------------------------- ------ --------- -----
Macroeconomic related
adjustments 10 - 10
--------------------------- ------ --------- -----
Other retail lending
adjustments (2) - (2)
--------------------------- ------ --------- -----
Total 3 24 27
--------------------------- ------ --------- -----
Management judgemental adjustments
to ECL at 31 December 2020(1)
Retail Wholesale Total
GBPm GBPm GBPm
--------------------------- ------ --------- -------
Low-risk counterparties
(banks, sovereigns
and government entities) (5) 8 3
--------------------------- ------ --------- -----
Corporate lending
adjustments - 56 56
--------------------------- ------ --------- -----
Retail lending probability
of default adjustments (10) - (10)
--------------------------- ------ --------- -----
Retail model default
timing adjustments 3 - 3
--------------------------- ------ --------- -----
Macroeconomic related
adjustments 11 - 11
--------------------------- ------ --------- -----
Other retail lending
adjustments 4 - 4
--------------------------- ------ --------- -----
Total 3 64 67
--------------------------- ------ --------- -----
1 Management judgemental adjustments presented in the table
reflect increases or (decreases) to ECL, respectively.
Adjustments to expected credit loss ('ECL') allowances on
wholesale credit risk exposures added GBP24m to allowances at
30 June 2021 (31 December 2020: GBP64m). These adjustments
include the outcome of management judgements on high-risk and
vulnerable sectors in some of our key markets, supported by
quantitative analyses and benchmarks, and by internal credit
experts' assessments of risks. Considerations included potential
default suppression in some sectors due to continued government
intervention as well as relevant idiosyncratic factors.
Net adjustments of GBP24m comprise GBP186m (31 December 2020:
GBP174m) management judgements, offset by GBP162m (31 December
2020: GBP110m) other adjustments that reduced allowances, notably
those to reflect export credit agency guarantees that mitigate
credit risk. The decrease in net adjustments relative to 31
December 2020 was driven by a GBP29m increase in the ECA mitigation
adjustment, which countered a GBP12m increase in management
judgements.
The most significant management judgement was applied to the
commercial real estate sector, which added GBP93m to allowances (31
December 2020: GBP67m). The GBP26m increase reflects internal
credit experts' latest assessment of risk. Management judgements of
GBP4m (31 December 2020: GBP8m) applied to bank and sovereign
credit exposures reduced allowances by GBP4m.
In the retail portfolio, management judgemental adjustments were
an ECL increase of GBP3m at 30 June 2021 (31 December 2020: GBP3m
increase).
The adjustments relating to probability of default decreased ECL
by GBP1m (31 December 2020: GBP10m decrease) reflecting less severe
projections of macroeconomic variables and scenario observations on
which the models are calibrated to operate.
The adjustments relating to default timing decreased ECL by
GBP1m (31 December 2020: GBP3m increase). These have been applied
in several economies as customer relief and government support
programmes continue to suppress defaults. The level of adjustment
decreased during the period reflecting the improvement in
macroeconomic forecasts and the unwinding in a number of markets as
customer relief and government support concludes.
Macroeconomic-related adjustments increased ECL by GBP10m
(31 December 2020: GBP11m increase). These adjustments were
broadly unchanged and applied to reflect credit experts' input,
quantitative analyses and benchmarks on increased levels of risk,
given the continued level of economic uncertainty.
Other retail lending adjustments decreased ECL by GBP2m
(31 December 2020: GBP4m increase) reflecting adjustments in
relation to customers who remain in or have recently exited
customer support programmes in addition to all other data and core
model adjustments.
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against
the economic forecasts as part of the ECL governance process by
recalculating the ECL under each scenario described above for
selected portfolios, applying a 100% weighting to each scenario in
turn. The weighting is reflected in both the determination of a
significant increase in credit risk and the measurement of the
resulting ECL.
The ECL calculated for the Upside and Downside scenarios should
not be taken to represent the upper and lower limits of possible
ECL outcomes. The impact of defaults that might occur in the future
under different economic scenarios is captured by recalculating ECL
for loans in stages 1 and 2 at the balance sheet date. The
population of stage 3 loans (in default) at the balance sheet date
is unchanged in these sensitivity calculations. Stage 3 ECL would
only be sensitive to changes in forecasts of future economic
conditions if the loss-given default of a particular portfolio was
sensitive to these changes.
There is a particularly high degree of estimation uncertainty in
numbers representing tail risk scenarios when assigned a 100%
weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL for 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 management judgemental adjustments, as appropriate to
each scenario. The results tables exclude portfolios held by the
insurance business and small portfolios, and as such cannot be
directly compared to personal and wholesale lending presented in
other credit risk tables. Additionally, in both the wholesale and
retail analysis, the comparative period results for additional/
alternative Downside scenarios are also not directly comparable
with the current period, because they reflect different risk
profiles relative to the consensus scenarios for the period
end.
Wholesale analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL of loans and advances
to customers at
30 June 2021 GBPm GBPm
----------------------------- ------- ---------
Reported ECL 240 94
----------------------------- ------- -------
Consensus scenarios
----------------------------- ------- ---------
Central scenario 187 81
----------------------------- ------- -------
Upside scenario 135 75
----------------------------- ------- -------
Downside scenario 252 104
----------------------------- ------- -------
Additional Downside scenario 432 164
----------------------------- ------- -------
Gross carrying amount(2) 134,784 139,024
----------------------------- ------- -------
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL of loans and advances
to customers at
31 December 2020 GBPm GBPm
----------------------------- ------- -------
Reported ECL 317 88
----------------------------- ------- -------
Consensus scenarios
----------------------------- ------- -------
Central scenario 219 82
----------------------------- ------- -------
Upside scenario 156 73
----------------------------- ------- -------
Downside scenario 339 98
----------------------------- ------- -------
Additional Downside scenario 657 178
------- -------
Gross carrying amount
(2) 137,825 123,444
----------------------------- ------- -------
1 ECL sensitivity includes off-balance sheet financial
instruments that are subject to significant measurement
uncertainty.
2 Includes low credit-risk financial instruments such as debt
instruments at FVOCI, which have high carrying values but low ECL
under all the scenarios.
At June 21, the higher sensitivity in UK is largely driven by
significant exposure in the country and more severe impacts of the
Downside scenarios relative to the Central and probability-weighted
scenarios.
Retail analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
ECL of loans and advances
to customers at
30 June 2021 GBPm GBPm
Reported ECL 10 99
----------------------------- ----- ------
Consensus scenarios
Central scenario 9 98
----------------------------- ----- ------
Upside scenario 8 97
----------------------------- ----- ------
Downside scenario 12 99
----------------------------- ----- ------
Additional Downside scenario 15 100
----------------------------- ----- ------
Gross carrying amount 1,967 18,269
----------------------------- ----- ------
ECL of loans and advances
to customers at
31 December 2020
Reported ECL 12 114
----------------------------- ----- ------
Consensus scenarios
----------------------------- ----- --------
Central scenario 11 113
----------------------------- ----- ------
Upside scenario 8 111
----------------------------- ----- ------
Downside scenario 14 115
----------------------------- ----- ------
Additional Downside scenario 17 118
----- --------
Gross carrying amount 1,980 19,254
----------------------------- ----- ------
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
Reconciliation of changes in gross carrying/nominal amount and
allowances for loans and advances to banks and customers including
loan commitments and financial guarantees
The following disclosure provides a reconciliation by stage of
the group's gross carrying/nominal amount and allowances for loans
and advances to banks and customers, including loan commitments and
financial guarantees. 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 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 2021 184,715 (180) 31,726 (378) 3,352 (1,050) 40 (12) 219,833 (1,620)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Transfers of
financial
instruments: (1,043) (39) 841 42 202 (3) - - - -
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
- transfers from
Stage 1 to Stage
2 (5,039) 5 5,039 (5) - - - - - -
-------------------
- transfers from
Stage 2 to Stage
1 4,017 (44) (4,017) 44 - - - - - -
-------------------
- transfers to
Stage
3 (32) - (209) 5 241 (5) - - - -
-------------------
- transfers from
Stage 3 11 - 28 (2) (39) 2 - - - -
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Net remeasurement
of ECL arising
from
transfer of stage - 21 - (13) - (1) - - - 7
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
New financial
assets
originated or
purchased 41,704 (32) - - - - 1 - 41,705 (32)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Asset derecognised
(including final
repayments) (28,137) 3 (1,830) 8 (257) 28 (2) 2 (30,226) 41
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to risk
parameters -
further
lending/repayments (14,749) 38 (197) 15 (75) 38 (1) - (15,022) 91
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to risk
parameters -
credit
quality - 29 - - - (91) - - - (62)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to model
used for ECL
calculation - 5 - 9 - - - - - 14
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Assets written off - - - - (112) 112 - - (112) 112
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Credit-related
modifications
that resulted in
derecognition - - - - (1) - - - (1) -
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Foreign exchange (5,053) 4 (771) 5 (89) 31 (1) 1 (5,914) 41
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Others(2) (1,014) - (12) 1 - (1) - - (1,026) -
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
At 30 Jun 2021 176,423 (151) 29,757 (311) 3,020 (937) 37 (9) 209,237 (1,408)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
ECL income
statement
(charge)/release
for the period 64 19 (26) 2 59
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Add: Recoveries 1
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Add/(less): Others (11)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Total ECL income
(charge)/release
for the period 49
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Half-year
ended 30 Jun
At 30 Jun 2021 2021
---------------
ECL
Gross carrying/nominal Allowance release /
amount for ECL (charge)
GBPm GBPm GBPm
----------------------------------------- ---------------------- --------- ---------------
As above 209,237 (1,408) 49
----------------------------------------- ---------------------- --------- -------------
Other financial assets measured at
amortised cost 214,331 (10) (1)
----------------------------------------- ---------------------- --------- -------------
Non-trading reverse purchase agreement
commitments 42,033 - -
----------------------------------------- ---------------------- --------- -------------
Performance and other guarantee not
considered for IFRS 9 19
----------------------------------------- ---------------------- --------- -------------
Summary of financial instruments to
which the impairment requirements in
IFRS 9 are applied/Summary consolidated
income statement 465,601 (1,418) 67
----------------------------------------- ---------------------- --------- -------------
Debt instruments measured at FVOCI 44,644 (18) 4
----------------------------------------- ---------------------- --------- -------------
Total allowance for ECL/total income
statement ECL release / (charge) for
the period n/a (1,436) 71
----------------------------------------- ---------------------- --------- -------------
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. At 30 June 2021, these amounted to
GBP(1)bn 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 2020 195,249 (132) 11,103 (143) 2,235 (796) 78 (33) 208,665 (1,104)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Transfers of
financial
instruments: (19,123) (62) 16,792 93 2,331 (31) - - - -
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
- transfers from
Stage 1 to Stage
2 (31,600) 54 31,600 (54) - - - - - -
-------------------
- transfers from
Stage 2 to Stage
1 12,821 (121) (12,821) 121 - - - - - -
-------------------
- transfers to
Stage
3 (351) 7 (2,147) 32 2,498 (39) - - - -
-------------------
- transfers from
Stage 3 7 (2) 160 (6) (167) 8 - - - -
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Net remeasurement
of ECL arising
from
transfer of stage - 60 - (67) - (2) - - - (9)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
New financial
assets
originated or
purchased 95,477 (62) - - - - 10 (1) 95,487 (63)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Asset derecognised
(including final
repayments) (72,860) 6 (2,553) 21 (998) 139 (16) 1 (76,427) 167
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to risk
parameters -
further
lending/repayments (21,912) 48 5,666 6 (41) 101 (11) (2) (16,298) 153
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to risk
parameters -
credit
quality - (53) - (248) - (687) - - - (988)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Changes to model
used for ECL
calculation - 10 - (36) - - - - - (26)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Assets written off - - - - (252) 252 (23) 23 (275) 275
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Credit related
modifications
that resulted in
derecognition - - - - (18) 5 - - (18) 5
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Foreign exchange 6,058 5 498 (3) 95 (33) 2 - 6,653 (31)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Others(2) 1,826 - 220 (1) - 2 - - 2,046 1
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
At 31 Dec 2020 184,715 (180) 31,726 (378) 3,352 (1,050) 40 (12) 219,833 (1,620)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
ECL income
statement
charge for the
period 9 (324) (449) (2) (766)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Add: Recoveries 2
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Add/(less): Others (17)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
Total ECL income
charge for the
period (781)
------------------- ---------------- --------- --------- --------- --------- --------- --------- --------- ---------------- ---------
12 months
ended
31 December
At 31 Dec 2020 2020
--------------
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
----------------------------------------- ---------------------- --------- --------------
As above 219,833 (1,620) (781)
----------------------------------------- ---------------------- --------- ------------
Other financial assets measured at
amortised cost 202,763 (12) (2)
----------------------------------------- ---------------------- --------- ------------
Non-trading reverse purchase agreement
commitments 42,794 - -
----------------------------------------- ---------------------- --------- ------------
Performance and other guarantees not
considered for IFRS 9 (17)
----------------------------------------- ---------------------- --------- ------------
Summary of financial instruments to
which the impairment requirements in
IFRS 9 are applied/Summary consolidated
income statement 465,390 (1,632) (800)
----------------------------------------- ---------------------- --------- ------------
Debt instruments measured at FVOCI 51,713 (22) (8)
----------------------------------------- ---------------------- --------- ------------
Total allowance for ECL/total income
statement ECL charge for the period N/A (1,654) (808)
----------------------------------------- ---------------------- --------- ------------
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. At 31 December 2020, these amounted
to GBP2bn 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 2021. 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.
At 30 June 2021, the gross carrying value of loans to personal
customers under relief was GBP65m (31 December 2020: GBP197m). This
comprised GBP21m in relation to mortgages (31 December 2020:
GBP69m) and GBP44m in relation to other personal lending
(31 December 2020: GBP128m). The decrease in personal customer
relief during the first six months of 2021 was driven by customers
exiting relief measures. The gross carrying value of loans to
wholesale customers under relief was GBP4,354m (31 December 2020:
GBP5,468m). We continue to monitor the recoverability of loans
granted under customer relief programmes, including loans to a
small number of customers that were subsequently found to be
ineligible for such relief. The ongoing performance of such loans
remains an area of uncertainty at 30 June 2021.
Personal lending
HSBC Other
Continental major
Extant at 30 June 2021 UK Europe(1) Germany markets(2) Total
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Market-wide schemes
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of accounts granted mortgage
customer relief 00s <1 - - - <1
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Drawn loan value of accounts granted
mortgage customer relief GBPm 6 - - - 6
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Number of accounts granted other personal
lending customer relief 00s - 5 - - 5
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 37 - - 37
--------------------------------------------- ---- --- ------------ ------- ----------- -----
HSBC-specific measures
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of accounts granted mortgage
customer relief 00s - <1 - <1 1
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
mortgage customer relief GBPm - 2 - 13 15
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Number of accounts granted other personal
lending customer relief 00s - <1 - <1 <1
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 6 - 1 7
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Total personal lending to major markets
under market-wide schemes and HSBC-specific
measures
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of accounts granted mortgage
customer relief 00s <1 <1 - <1 1
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
mortgage customer relief GBPm 6 2 - 13 21
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Number of accounts granted other personal
lending customer relief 00s - 6 - <1 6
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 43 - 1 44
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Market-wide schemes and HSBC-specific
measures - mortgage relief as a proportion
of total mortgages % 0.3 0.1 - 0.5 0.3
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Market-wide schemes and HSBC-specific
measures - other personal lending relief
as a proportion of total other personal
lending loans and advances % - 0.3 - 0.5 0.3
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Wholesale lending
HSBC Other
Continental major
Extant at 30 June 2021 UK Europe(1) Germany markets(2) Total
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Market-wide schemes
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of customers under market-wide
schemes 00s <1 51 <1 <1 52
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of customers under
market-wide schemes GBPm 1 3,390 77 32 3,500
--------------------------------------------- ---- --- ------------ ------- ----------- -----
HSBC-specific measures
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of customers under HSBC-specific
measures 00s - 1 - <1 1
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of customers under
HSBC-specific measures GBPm - 679 - 175 854
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Total wholesale lending to major markets
under market-wide schemes and HSBC-specific
measures
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of customers 00s <1 52 <1 <1 53
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value GBPm 1 4,069 77 207 4,354
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Market-wide schemes and HSBC-specific
measures as a proportion of total wholesale
lending loans and advances % - 17.2 1.2 15.4 7.3
--------------------------------------------- ---- --- ------------ ------- ----------- -----
1 HSBC Continental Europe includes France and branches in Spain, Italy, Poland and Greece.
2 Other major markets include Malta, Jersey, Armenia and Middle East leasing partnership.
Personal lending (continued)
HSBC Other
Continental major
Extant at 31 December 2020 UK Europe(1) Germany markets(2) Total
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Market-wide schemes
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of accounts granted mortgage
customer relief 00s 1 - - - 1
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
mortgage customer relief GBPm 9 - - - 9
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Number of accounts granted other personal
lending customer relief 00s <1 5 - - 5
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 38 - - 38
--------------------------------------------- ---- --- ------------ ------- ----------- -----
HSBC-specific measures
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of accounts granted mortgage
customer relief 00s - <1 - 3 3
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
mortgage customer relief GBPm - 2 - 58 60
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Number of accounts granted other personal
lending customer relief 00s - 3 - 2 5
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 85 - 5 90
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Total personal lending to major markets
under market-wide schemes and HSBC-specific
measures
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of accounts granted mortgage
customer relief 00s 1 <1 - 3 4
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
mortgage customer relief GBPm 9 2 - 58 69
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Number of accounts granted other personal
lending customer relief 00s <1 8 - 2 10
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of accounts granted
other personal lending customer relief GBPm - 123 - 5 128
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Market-wide schemes and HSBC-specific
measures - mortgage relief as a proportion
of total mortgages % 0.5 0.1 - 2.2 0.9
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Market-wide schemes and HSBC-specific
measures - other personal lending relief
as a proportion of total other personal
lending loans and advances % - 0.7 - 2.3 0.7
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Wholesale lending (continued)
HSBC Other
Continental major
Extant at 31 December 2020 UK Europe(1) Germany markets2 Total
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Market-wide schemes
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of customers under market-wide
schemes 00s <1 49 <1 1 50
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of customers under
market-wide schemes GBPm 1 3,997 47 24 4,069
--------------------------------------------- ---- --- ------------ ------- ----------- -----
HSBC-specific measures
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of customers under HSBC-specific
measures 00s <1 3 - <1 4
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value of customers under
HSBC-specific measures GBPm 1 1,103 - 295 1,399
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Total wholesale lending to major markets
under market-wide schemes and HSBC-specific
measures
--------------------------------------------- ---- --- ------------ ------- ----------- -------
Number of customers 00s <1 52 <1 1 54
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Drawn loan value GBPm 2 5,100 47 319 5,468
--------------------------------------------- ---- --- ------------ ------- ----------- -----
Market-wide schemes and HSBC-specific
measures as a proportion of total wholesale
lending loans and advances % - 20.7 0.7 22.7 8.5
--------------------------------------------- ---- --- ------------ ------- ----------- -----
1 HSBC Continental Europe includes France and branches in Spain, Poland and Greece.
2 Other major markets include Malta, Jersey, Armenia and Middle East leasing partnership.
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 whether there has been a 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.
The details of the market-wide schemes and HSBC specific
measures offered are set out on Page 61 of the Annual Report and
Accounts 2020.
Treasury risk
Overview
Treasury risk is the risk of having insufficient capital,
liquidity or funding resources to meet financial obligations and
satisfy regulatory requirements, together with the financial risks
arising from the provision of pensions and other post-employment
benefits to staff and their dependents. Treasury risk also includes
the risk to our earnings or capital due to non-trading book foreign
exchange exposures and changes in market interest rates.
Treasury risk arises from changes to the respective resources
and risk profiles driven by customer behaviour, management
decisions or the external environment.
Approach and policy
Our objective in the management of treasury risk is to maintain
appropriate levels of capital, liquidity, funding, foreign exchange
and market risk to support our business strategy, and meet our
regulatory and stress testing-related requirements.
Our approach to treasury management is driven by our strategic
and organisational requirements, taking into account the
regulatory, economic and commercial environment. We aim to maintain
a strong capital and liquidity base to support the risks inherent
in our business and invest in accordance with our strategy, meeting
regulatory requirements at all times.
Our policy is supported by our risk management framework, our
internal capital adequacy assessment process ('ICAAP') and our
internal liquidity adequacy assessment process ('ILAAP'). The risk
framework incorporates a number of measures aligned to our
assessment of risks for both internal and regulatory purposes.
These risks include credit, market, operational, ensions,
non-trading book foreign exchange risk and interest rate risk in
the banking book. A summary of our current policies and practices
regarding the management of treasury risk is set out on pages 71 to
72 of the Annual Report and Accounts 2020.
Treasury risk management
Key developments in the first half of 2021
-- We continued to develop the Treasury Risk Management
function, which was established in 2020. This second-line of
defence function provides independent oversight of first-line
activities across capital risk, liquidity and funding risk,
non-trading book foreign exchange risk (including structural and
other banking book foreign exchange risk), and interest rate risk
in the banking book, together with pension risk.
-- We continued to build our recovery and resolution
capabilities in line with the Group's resolution strategy to meet
requirements from the BoE under its Resolvability Assessment
Framework ahead of 1 January 2022. We met our compliance deadline
of 31 March 2021 for valuation in resolution requirements, and
continue to enhance our capabilities in preparation for the
submission of a resolvability self-assessment report to the BoE in
October 2021.
-- The BOE's Financial Policy Committee ('FPC') reconfirmed its guidance on the path for the UK countercyclical capital buffer rate.
-- Central bank interest rates remain at historically low
levels, although a vaccine-led economic recovery and rising
inflation indicators have contributed to an increase in interest
rate yields and a steepening of yield curves in our major markets
in the first half of 2021. Against a backdrop of high and rising
asset valuations, monetary policies have generally remained
accommodative, but rising inflation is posing a policy dilemma for
some central banks. We continued to closely monitor our risk
profile in the context of a possible tightening in monetary
policy.
-- We maintained a significant focus on the switchover from IBOR
index curves to RFRs for in-scope currencies. Despite considerable
complexity, we are on track to complete changes to our funds
transfer pricing, external issuance and hedging in line with
regulatory deadlines.
For quantitative disclosures on capital ratios, own funds and
RWAs, see pages 32 to 35.
Capital, liquidity and funding risk management processes
Assessment and risk appetite
Our capital management policy is underpinned by a global capital
management framework and our ICAAP. The framework incorporates key
capital risk appetites for CET1, total capital, and minimum
requirements for own funds and eligible liabilities ('MREL'). The
ICAAP is an assessment of the bank's capital position, outlining
both regulatory and internal capital resources and requirements
resulting from our business model, strategy, risk profile and
management, performance and planning, risks to capital, and the
implications of stress testing. Our assessment of capital adequacy
is driven by an assessment of risks. These risks include credit,
market, operational, pensions, insurance, structural foreign
exchange and interest rate risk in the banking book. Climate risk
is also considered as part of the ICAAP. The ICAAP supports the
determination of our capital risk appetite and target ratios, as
well as enables the assessment and determination of capital
requirements by our regulator.
We aim to ensure that management has oversight of our liquidity
and funding risks by maintaining comprehensive policies, metrics
and controls. The Group manages liquidity and funding risk at an
operating entity level to make sure that obligations can be met in
the jurisdiction where they fall due, generally without reliance on
other parts of the Group. HSBC Bank plc is required to meet
internal minimum requirements and any applicable regulatory
requirements at all times. These requirements are assessed through
the ILAAP, which ensures that we have robust strategies, policies,
processes and systems for the identification, measurement,
management and monitoring of liquidity risk over an appropriate set
of time horizons, including intra-day. The ILAAP informs the
validation of risk tolerance and the setting of risk appetite.
These metrics are set and managed locally but are subject to robust
global review and challenge to ensure consistency of approach and
application of the Group's policies and controls.
Planning and performance
Capital and risk-weighted asset ('RWA') plans form part of the
annual operating plan that is approved by the Board. Capital and
RWA forecasts are reviewed at Asset and Liability Management
Committee ('ALCO') on a monthly basis, and capital and RWAs are
monitored and managed against the plan.
Through our internal governance processes, we seek to strengthen
discipline over our investment and capital allocation decisions,
and to ensure that returns on investment meet management's
objectives. Our strategy is to allocate capital to businesses and
entities to support growth objectives where returns above internal
hurdle levels have been identified and in order to meet their
regulatory and economic capital needs. We evaluate and manage
business returns by using a return on average tangible equity
measure.
Funding and liquidity plans form part of the annual operating
plan that is approved by the Board. The Board-level appetite
measures are the liquidity coverage ratio ('LCR') and an internal
funding metric ('IFM'). An internal liquidity metric ('ILM') was
introduced in January 2021 to supplement the LCR and IFM metrics.
In addition, we use a wider set of measures to manage an
appropriate funding and liquidity profile, including depositor
concentration limits, intra-day liquidity, forward-looking funding
assessments and other key measures.
Risks to capital and liquidity
Outside the stress testing framework, other risks may be
identified that have the potential to affect our RWAs and/or
capital position. Downside and Upside scenarios are assessed
against our capital management objectives and mitigating actions
are assigned as necessary. We closely monitor future regulatory
changes, such as the Basel III reforms, and continue to evaluate
the impact of these upon our capital requirements. Part of the
impact from the Basel III reforms may be offset by the reductions
in Pillar 2 capital requirements.
Regulatory reporting processes and controls
There is an ongoing focus on the quality of regulatory reporting
by the PRA and other regulators. We continue to strengthen our
processes and controls, following the commissioning of independent
external reviews of various aspects of regulatory reporting,
including at the request of our regulators. As part of the
strengthening of our control environment, we are improving global
consistency and control standards across a number of our processes.
There may be an impact on some of our regulatory ratios as a
result. We are keeping the PRA and other relevant regulators
informed of adverse findings from external and internal
reviews.
Stress testing and recovery and resolution planning
The Group uses stress testing to evaluate the robustness of
plans and risk portfolios, and to meet the requirements for stress
testing set by supervisors. Stress testing also informs the ICAAP
and ILAAP and supports recovery planning in many jurisdictions. It
is an important output used to evaluate how much capital and
liquidity the Group requires in setting risk appetite for capital
and liquidity risk. It is also used to re-evaluate business plans
where analysis shows capital, liquidity and/or returns do not meet
their target.
In addition to a range of internal stress tests, we are subject
to supervisory stress testing from the BoE, the European Banking
Authority ('EBA'), and the European Central Bank, as well as stress
tests undertaken in other jurisdictions. The results of regulatory
stress testing and our internal stress tests are used when
assessing our internal capital requirements through the ICAAP. The
outcomes of stress testing exercises carried out by the PRA and
other regulators may feed into the setting of regulatory minimum
ratios and buffers.
The group and certain subsidiaries have established recovery
plans, which set out potential options management could take in a
range of stress scenarios that may result in a breach of our
internal capital or liquidity requirements, or threaten to breach
risk appetite and regulatory minimum levels. This is to help ensure
that our capital and liquidity position can be recovered even in an
extreme stress event. We monitor internal and external triggers
that highlight potential threats to our capital, liquidity or
funding positions.
The Group is further developing its recovery and resolution
capabilities in line with the BoE's Resolvability Assessment
Framework requirements.
Measurement of interest rate risk in the banking book
processes
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse
impact to earnings or capital due to changes in market interest
rates. It is generated by our non-traded assets and liabilities,
specifically loans, deposits and financial instruments that are not
held for trading intent or held in order to hedge positions held
with trading intent. Interest rate risk that can be economically
hedged may be transferred to the Markets Treasury business. Hedging
is generally executed through interest rate derivatives or
fixed-rate government bonds. Any interest rate risk that Markets
Treasury cannot economically hedge is not transferred and will
remain within the global business where the risks originate.
The Asset, Liability and Capital Management ('ALCM') function
uses a number of measures to monitor and control interest rate risk
in the banking book, including:
-- net interest income sensitivity;
-- economic value of equity sensitivity; and
-- hold-to-collect-and-sell stressed value at risk.
Net interest income sensitivity
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected net interest income
('NII') under varying interest rate scenarios (i.e. simulation
modelling), where all other economic variables are held constant.
This monitoring is undertaken at an entity level by ALCO, where
one-year and five-year NII sensitivities are forecast across a
range of interest rate scenarios.
Projected NII sensitivity figures represent the effect of pro
forma movements in projected yield curves based on a static balance
sheet size and structure. The exception to this is where the size
of the balances or repricing is deemed interest rate sensitive, for
example, non-interest-bearing current account migration and
fixed-rate loan early prepayment. These sensitivity calculations do
not incorporate actions that would be taken by Markets Treasury or
in the business that originates the risk to mitigate the effect of
interest rate movements. The NII sensitivity calculations assume
that interest rates of all maturities move by the same amount in
the 'up-shock' scenario. The sensitivity calculations in the
'down-shock' scenarios reflect no floors to the shocked market
rates. However, customer product-specific interest rate floors are
recognised where applicable.
Economic value of equity sensitivity
Economic value of equity ('EVE') represents the present value of
the future banking book cash flows that could be distributed to
equity providers under a managed run-off scenario. This equates to
the current book value of equity plus the present value of future
NII in this scenario. EVE can be used to assess the economic
capital required to support interest rate risk in the banking book.
An EVE sensitivity represents the expected movement in EVE due to
pre-specified interest rate shocks, where all other economic
variables are held constant. EVE sensitivities are monitored as a
percentage of capital resources.
Hold-to-collect-and-sell stressed value at risk
Hold-to-collect-and-sell stressed value at risk ('VaR') is a
quantification of the potential losses to a 99% confidence level of
the portfolio of securities held under a held-to-collect-and-sell
business model in the Markets Treasury business. The portfolio is
accounted for at fair value through other comprehensive income
together with the derivatives held in designated hedging
relationships with these securities. This is quantified based on
the worst losses over a one-year period going back to the beginning
of 2007 and the assumed holding period is 60 days.
Hold-to-collect-and-sell stressed VaR uses the same models as
those used for trading book capitalisation and covers only the
portfolio managed by Markets Treasury under this business
model.
Capital risk in the first half of 2021
Capital overview
Capital adequacy metrics
At
------------------
30 Jun 31 Dec
2021 2020
------------------------------ ------- ---------
Risk-weighted assets
('RWAs') (GBPm)
------------------------------ ------- ---------
Credit risk 72,353 77,214
------------------------------ ------- -------
Counterparty credit
risk 16,997 19,344
------------------------------ ------- -------
Market risk 10,105 14,589
------------------------------ ------- -------
Operational risk 11,314 11,245
------------------------------ ------- -------
Total RWAs 110,769 122,392
------------------------------ ------- -------
Capital on a transitional
basis (GBPm)
============================== ======= =========
Common equity tier
1 ('CET1') capital 17,835 18,042
============================== ======= =======
Tier 1 capital 21,742 22,165
============================== ======= =======
Total capital 33,444 33,438
============================== ======= =======
Capital ratios on
a transitional basis
(%)
------------------------------ ------- ---------
Common equity tier
1 16.1 14.7
------------------------------ ------- -------
Tier 1 19.6 18.1
------------------------------ ------- -------
Total capital ratio 30.2 27.3
------------------------------ ------- -------
Leverage ratio (transitional)
------------------------------ ------- ---------
Tier 1 capital (GBPm) 21,742 22,165
------------------------------ ------- -------
Total leverage ratio
exposure measure (GBPm) 560,264 565,049
------------------------------ ------- -------
Leverage ratio (%) 3.9 3.9
------------------------------ ------- -------
Leverage ratio (fully
phased-in)
------------------------------ ------- ---------
Tier 1 capital (GBPm) 21,526 21,732
------------------------------ ------- -------
Total leverage ratio
exposure measure (GBPm) 560,264 565,049
------------------------------ ------- -------
Leverage ratio (%) 3.8 3.8
------------------------------ ------- -------
Following the end of the transition period following the UK's
withdrawal from the EU, any reference to EU regulations and
directives (including technical standards) should be read as a
reference to the version onshored into UK law under the European
Union (Withdrawal) Act 2018, as amended. Capital figures and ratios
in the table above are calculated in accordance with the revisions
to the Capital Requirements Regulation and Directive, as
implemented ('CRR II'). Leverage ratios are calculated using the
end point definition of capital and the IFRS 9 regulatory
transitional arrangements.
At 30 June 2021, our common equity tier 1 ('CET1') capital ratio
increased to 16.1% from 14.7% at 31 December 2020. This was mainly
due to a decrease in RWAs.
Throughout the first half of 2021, we complied with the
Prudential Regulation Authority's ('PRA') regulatory capital
adequacy requirements.
Regulatory developments
Amendments to the Capital Requirements Regulation ('CRR II') and
the Basel III Reforms
The Basel Committee on Banking Supervision ('Basel') completed
the Basel III Reforms in July 2020 when it published the final
revisions to the CVA framework. The package is scheduled to be
implemented on 1 January 2023, with a five-year transitional
provision for the output floor. The final standards will need to be
transposed into the relevant local law before coming into
effect.
The CRR II represents the first tranche of changes to the
regulatory framework to implement the Basel III Reforms, including
the changes to the market risk rules under the Fundamental Review
of the Trading Book ('FRTB'), the standardised approach for
measuring counterparty risk, the equity investments in funds rules,
amendments to the large exposures rules, the new leverage ratio
rules and the implementation of the net stable funding ratio.
The CRR II rules were originally drafted when the UK was a
member of the EU; however, since parts of the CRR II were not
implemented before the UK's withdrawal from the EU, the UK will
implement its own rules. Her Majesty's Treasury ('HMT') and the PRA
recently finalised the UK's version of the CRR II for
implementation on 1 January 2022. In relation to equity investments
in funds, HMT has removed the equivalence provisions that were
embedded in the EU's original version of the CRR II. As a result,
firms will be able to determine the RWAs using a look through
approach for funds outside of the UK without the need for
equivalence. In addition, HMT has delayed the requirement for
reporting to commence on the standardised approach to the FRTB
until it becomes a binding capital requirement.
In June 2021, the Financial Policy Committee and the PRA
published consultations outlining the CRR II changes to the
leverage ratio framework. The UK's minimum leverage ratio
requirement will be 3.25%, plus a buffer based upon a firm's
countercyclical buffer. The minimum Tier 1 requirement must be met
by at least 75% CET1, with the buffer being met with 100% of CET1.
Central bank reserves will continue to be excluded from the
leverage ratio exposure measure, as will the Bounce Back Loan
Schemes loans; however, the PRA has not chosen to adopt many of the
EU's exemptions from the measure, such as those in relation to
government guaranteed export credits. There are also no plans to
introduce mandatory capital distribution restrictions for firms
that breach their leverage ratio buffers. Broadly, the rules will
be implemented and require disclosure from 1 January 2022; however,
firms newly in scope will only be subject to the new minimum
requirement from 1 January 2023.
In addition to the final rules on CRR II, the PRA has also
reversed the beneficial changes to the treatment of software assets
that were implemented as part of the EU's response to Covid-19.
From 1 January 2022, software assets must be deducted in full from
CET1 capital.
The PRA will consult on the implementation of the remaining
elements of the Basel III Reforms later in the year. There remains
a significant degree of uncertainty in the impact due to the number
of national discretions and the need for further supporting
technical standards to be developed. The UK's implementation of the
remaining elements of the Basel III Reforms is currently scheduled
to be on 1 January 2023, consistent with Basel's timeline.
Credit Risk
In order to address concerns about the variability and
comparability of RWAs under the IRB approach, the EU developed a
series of amendments to the framework, known as the IRB repair
package. The majority of these were developed and finalised while
the UK was a member of the EU and therefore are being implemented
in the UK by the PRA on 1 January 2022; however, there were some
elements of the EU's package that were not in force when the UK
ceased to be subject to EU law. These include the EU's technical
standards on economic downturns, the EBA's guidelines on credit
risk mitigation for the advanced IRB ('A-IRB') approach, and the
EU's final technical standards on risk weighting specialised
lending exposures. The PRA has confirmed that it would not be
implementing the technical standards on specialised lending.
Similarly, it will not implement the EU's guidelines on credit risk
mitigation in the A-IRB approach in 2022, although it will may
consider reflecting the guidelines as part of its implementation of
the Basel III Reforms. In March 2021, the PRA consulted on the
implementation of the technical standards on economic downturn.
In June 2021, the PRA published rules for when a firm could use
models approved by overseas regulators in the calculation of a UK
group's consolidated capital requirements. Such models may only be
used for exposures to retail customers and to small and
medium-sized enterprises up to a limit of 7.5% of total group
exposure and RWAs.
Capital Buffers
In its July 2021 Financial Stability Report ('FSR'), the
Financial Policy Committee ('FPC'), reconfirmed its guidance on the
path for the UK Countercyclical Capital Buffer ('CCyB') rate. It
expects to maintain this rate at 0% until at least December 2021.
Due to the usual 12--month implementation lag, any subsequent
increase would therefore not be expected to take effect until the
end of 2022 at the earliest.
Climate & Environmental Social and Governance ('ESG')
Risk
Globally, regulators and standard setters continue to publish
multiple proposals and discussion papers on ESG topics. These
include publications by HMT, the Department for Business, Energy
and Industrial Strategy ('BEIS') and the Financial Conduct
Authority ('FCA') on the potential implementation of
climate-related financial disclosures that are aligned to the
Taskforce on Climate-related Financial Disclosure ('TCFD'). This
work is supported by the development of green taxonomies by bodies,
such as the newly-formed Green Technical Advisory Group ('GTAG') in
the UK. Further work by the TCFD included proposed new disclosure
guidance on metrics, targets and transition plans.
In June, the BoE launched the 2021 Climate Biennial Exploratory
Scenario exercise. This aims to test the resilience of financial
institutions and their business models to transition and physical
risks depending upon the speed of government policy action. The
impact is based on an end-2020 static balance sheet and is assumed
to take place over the period 2021 to 2050 focusing on credit
risk.
In July, the FSB published a roadmap on climate-related
financial risks that focuses on four key policy areas: firm-level
disclosures; data; vulnerabilities analysis and regulatory and
supervisory tools. The roadmap includes steps and indicative
timeframes towards implementation and has been delivered to the G20
Finance Ministers and Central Bank Governors for endorsement.
Other Developments
In April 2021, an independent review panel under the auspices of
the Financial Services (Banking Reform) Act 2013, published a call
for evidence on the operation of ring-fencing and proprietary
trading activities in the UK. The call for evidence will inform the
panel's review of ring-fencing and proprietary trading which they
aim to finalise within a year. In parallel with similar
developments in Europe, the PRA is reviewing the requirements for
the capitalisation of structural FX risk to align to a Pillar 1
approach.
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* 2021 2020 2020
---- --------------------------------------------------- --------- --------- ---------
Available capital (GBPm)
---- --------------------------------------------------- --------- --------- ---------
1 Common equity tier 1 ('CET1') capital (^) 17,835 18,042 18,701
---- --------------------------------------------------- ------- ------- -------
2 CET1 capital as if IFRS 9 transitional arrangements 17,798 17,992 18,642
had not been applied
---- --------------------------------------------------- ------- ------- -------
3 Tier 1 capital (^) 21,742 22,165 22,819
---- --------------------------------------------------- ------- ------- -------
Tier 1 capital as if IFRS 9 transitional
4 arrangements had not been applied 21,705 22,115 22,760
---- --------------------------------------------------- ------- ------- -------
5 Total capital (^) 33,444 33,438 35,490
---- --------------------------------------------------- ------- ------- -------
Total capital as if IFRS 9 transitional
6 arrangements had not been applied 33,407 33,388 35,431
---- --------------------------------------------------- ------- ------- -------
Risk-weighted assets ('RWAs') (GBPm)
---- --------------------------------------------------- --------- --------- ---------
7 Total RWAs 110,769 122,392 138,378
---- --------------------------------------------------- ------- ------- -------
8 Total RWAs as if IFRS 9 transitional arrangements 110,737 122,347 138,323
had not been applied
---- --------------------------------------------------- ------- ------- -------
Capital ratios (%)(1)
---- --------------------------------------------------- --------- --------- ---------
9 CET1 (^) 16.1 14.7 13.5
---- --------------------------------------------------- ------- ------- -------
10 CET1 as if IFRS 9 transitional arrangements 16.1 14.7 13.5
had not been applied
---- --------------------------------------------------- ------- ------- -------
11 Total tier 1 (^) 19.6 18.1 16.5
---- --------------------------------------------------- ------- ------- -------
12 Tier 1 as if IFRS 9 transitional arrangements 19.6 18.1 16.5
had not been applied
---- --------------------------------------------------- ------- ------- -------
13 Total capital (^) 30.2 27.3 25.6
---- --------------------------------------------------- ------- ------- -------
Total capital as if IFRS 9 transitional
14 arrangements had not been applied 30.2 27.3 25.6
---- --------------------------------------------------- ------- ------- -------
Leverage ratio(2)
---- --------------------------------------------------- --------- --------- ---------
15 Total leverage ratio exposure measure (GBPm)^ 560,264 565,049 600,340
---- --------------------------------------------------- ------- ------- -------
16 Leverage ratio (%) (^) 3.8 3.8 3.7
---- --------------------------------------------------- ------- ------- -------
Leverage ratio as if IFRS 9 transitional
17 arrangements had not been applied (%) 3.8 3.8 3.7
---- --------------------------------------------------- ------- ------- -------
* 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.
1 Capital figures and ratios are reported using the CRR II
transitional basis for capital instruments.
2 Leverage ratio is calculated using the CRR II end point basis for capital.
Regulatory transitional arrangements for IFRS 9 'Financial
Instruments'
We have adopted the regulatory transitional arrangements in CRR
II for IFRS 9, including paragraph four of article 473a.
The IFRS 9 regulatory transitional arrangements allow 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 in the non-
credit-impaired book thereafter.
Any add-back must be tax affected and accompanied by a
recalculation of deferred tax, 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.
In the current period, the add-back to CET1 capital amounted to
GBP49m under the STD approach with a tax impact of GBP(12)m. At
31 December 2020, the add-back to the capital base under the STD
approach was GBP69m with a tax impact of GBP(19)m.
Own funds
Own funds disclosure
---------
At
--------------------
30 Jun 31 Dec
2021 2020
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(1) b 15,475 17,229
---- ------------------------------------------------------------ --- ------- -------
3 Accumulated other comprehensive income (and other c 2,308 2,888
reserves)
---- ------------------------------------------------------------ --- ------- -------
5 Minority interests (amount allowed in consolidated d 54 66
common equity tier 1)
---- ------------------------------------------------------------ --- ------- -------
5a Independently reviewed interim net profits net of b 512 (1,755)
any foreseeable charge or dividend(2)
---- ------------------------------------------------------------ --- ------- -------
6 Common equity tier 1 capital before regulatory adjustments 19,146 19,225
---- ------------------------------------------------------------ --- ------- -------
Common equity tier 1 capital: regulatory adjustments
---- ------------------------------------------------------------ --- --------- ---------
7 Additional value adjustments(3) (666) (569)
---- ------------------------------------------------------------ --- ------- -------
8 Intangible assets (net of related deferred tax liability) e (99) (100)
---- ------------------------------------------------------------ --- ------- -------
10 Deferred tax assets that rely on future profitability
excluding those arising from temporary differences
(net of related tax liability) f (320) (305)
---- ------------------------------------------------------------ --- ------- -------
11 Fair value reserves related to gains or losses on g (107) (159)
cash flow hedges
---- ------------------------------------------------------------ --- ------- -------
12 Negative amounts resulting from the calculation h (291) (303)
of expected loss amounts
---- ------------------------------------------------------------ --- ------- -------
14 Gains or losses on liabilities at fair value resulting i 136 105
from changes in own credit standing
---- ------------------------------------------------------------ --- ------- -------
15 Defined benefit pension fund assets j (41) (30)
---- ------------------------------------------------------------ --- ------- -------
27a Other regulatory adjustments to CET1 capital (including k 77 178
IFRS 9 transitional adjustments when relevant)(1)
---- ------------------------------------------------------------ --- ------- -------
28 Total regulatory adjustments to common equity tier (1,311) (1,183)
1
---- ------------------------------------------------------------ --- ------- -------
29 Common equity tier 1 capital 17,835 18,042
---- ------------------------------------------------------------ --- ------- -------
Additional tier 1 ('AT1') capital: instruments
---- ------------------------------------------------------------ --- --------- ---------
30 Capital instruments and related share premium accounts 3,722 3,722
---- ------------------------------------------------------------ --- ------- -------
31 * classified as equity under IFRSs l 3,722 3,722
---- ------------------------------------------------------------ --- ------- -------
33 Amount of qualifying items and related share premium m 216 433
accounts subject to phase out from AT1
---- ------------------------------------------------------------ --- ------- -------
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 n 12 12
---- ------------------------------------------------------------ --- ------- -------
36 Additional tier 1 capital before regulatory adjustments 3,950 4,167
---- ------------------------------------------------------------ --- ------- -------
Additional tier 1 capital: regulatory adjustments
---- ------------------------------------------------------------ --- --------- ---------
37 Direct and indirect holdings of own AT1 instruments(4) (43) (44)
---- ------------------------------------------------------------ --- ------- -------
43 Total regulatory adjustments to additional tier (43) (44)
1 capital
---- ------------------------------------------------------------ --- ------- -------
44 Additional tier 1 capital 3,907 4,123
---- ------------------------------------------------------------ --- ------- -------
45 Tier 1 capital (T1 = CET1 + AT1) 21,742 22,165
---- ------------------------------------------------------------ --- ------- -------
Tier 2 capital: instruments and provisions
---- ------------------------------------------------------------ --- --------- ---------
46 Capital instruments and related share premium accounts o 11,718 11,079
---- ------------------------------------------------------------ --- ------- -------
- of which: instruments grandfathered under CRR
II 1,288 1,326
---- ------------------------------------------------------------ --- ------- -------
47 Amount of qualifying items and the related share p 220 441
premium accounts subject to phase out from T2
---- ------------------------------------------------------------ --- ------- -------
48 Qualifying own funds instruments included in consolidated
T2 capital (including minority interests and AT1
instruments not included in CET1 or AT1) issued q,
by subsidiaries and held by third parties r 196 204
---- ------------------------------------------------------------ --- ------- -------
49 - of which: instruments issued by subsidiaries subject 38 46
to phase out r
---- ------------------------------------------------------------ --- ------- -------
- of which: instruments issued by subsidiaries grandfathered
under CRR II 38 32
---- ------------------------------------------------------------ --- ------- -------
51 Tier 2 capital before regulatory adjustments 12,134 11,724
---- ------------------------------------------------------------ --- ------- -------
Tier 2 capital: regulatory adjustments
---- ------------------------------------------------------------ --- --------- ---------
52 Direct and indirect holdings of own T2 instruments(4) (29) (29)
---- ------------------------------------------------------------ --- ------- -------
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) s (403) (422)
---- ------------------------------------------------------------ --- ------- -------
57 Total regulatory adjustments to tier 2 capital (432) (451)
---- ------------------------------------------------------------ --- ------- -------
58 Tier 2 capital 11,702 11,273
---- ------------------------------------------------------------ --- ------- -------
59 Total capital (TC = T1 + T2) 33,444 33,438
---- ------------------------------------------------------------ --- ------- -------
60 Total risk-weighted assets 110,769 122,392
---- ------------------------------------------------------------ --- ------- -------
Capital ratios and buffers
---- ------------------------------------------------------------ --- --------- ---------
61 Common equity tier 1 16.1% 14.7%
---- ------------------------------------------------------------ --- --------- ---------
62 Tier 1 19.6% 18.1%
---- ------------------------------------------------------------ --- --------- ---------
63 Total capital 30.2% 27.3%
---- ------------------------------------------------------------ --- --------- ---------
64 Institution specific buffer requirement 2.52% 2.52%
---- ------------------------------------------------------------ --- --------- ---------
65 - capital conservation buffer requirement 2.50% 2.50%
---- ------------------------------------------------------------ ---
66 - countercyclical buffer requirement 0.02% 0.02%
---- ------------------------------------------------------------ --- ---------
68 Common equity tier 1 available to meet buffers 11.6% 10.2%
---- ------------------------------------------------------------ --- --------- ---------
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) 1,306 1,069
---- ------------------------------------------------------------ --- --------- ---------
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) 675 627
---- ------------------------------------------------------------ --- --------- ---------
75 Deferred tax assets arising from temporary differences 582 493
(amount below 10% threshold, net of related tax
liability)
---- ------------------------------------------------------------ --- --------- ---------
Own funds disclosure (continued)
--------
At
----------------
30 Jun 31 Dec
2021 2020
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 246 257
----- ------------------------------------------------------------ ------ ------
79 Cap for inclusion of credit risk adjustments in 371 404
T2 under internal ratings-based approach
----- ------------------------------------------------------------ ------ ------
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 232 463
arrangements
----- ------------------------------------------------------------ ------ ------
83 Amount excluded from AT1 due to cap (excess over 484 267
cap after redemptions and maturities)
----- ------------------------------------------------------------ ------ ------
84 Current cap on T2 instruments subject to phase-out 252 506
arrangements
----- ------------------------------------------------------------ ------ ------
85 Amount excluded from T2 due to cap (excess over 670 237
cap after redemptions and maturities)
----- ------------------------------------------------------------ ------ ------
* The references identify the lines prescribed in the EBA
template that are applicable and where there is a value.
The references (a)-(s) identify balance sheet components on page
42 that are used in the calculation of regulatory capital. This
table shows how they contribute to the regulatory capital
calculation. Their contribution may differ from their accounting
value in table 'reconciliation of balance sheets - financial
accounts to regulatory scope of consolidation' as a result of
adjustment or analysis to apply regulatory definitions of
capital.
1 From 1H21, the new deduction for insufficient coverage for
non-performing exposures has been combined with IFRS 9 transitional
adjustments in row 27a. Comparatives have been restated.
2 This row includes losses that have been recognised and
deducted as they arose and were therefore not subject to an
independent review.
3 Additional value adjustments are calculated on all assets
measured at fair value and subsequently deducted from CET1.
4 As advised by the PRA, a market making waiver has been applied
to the deduction of holdings of own T1 and T2 instruments.
We applied the UK requirement to amortise software assets for
regulatory capital purposes. The impact on our CET1 ratio was
immaterial. For further information, refer to page 33.
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
Risk-weighted assets
RWA movement by global business by key driver
Credit risk, counterparty credit
risk and operational risk
-----------------------------------------
Corporate Market Total
GBM CMB WPB Centre risk RWAs
GBPm GBPm GBPm GBPm GBPm GBPm
RWAs at 1 Jan 2021 62,440 26,839 12,045 6,479 14,589 122,392
Asset size (4,938) (1,631) (251) 76 (3,517) (10,261)
-------------------------- --------- --------- -------- --------- ------- --------
Asset quality 3,581 (231) 254 319 - 3,923
-------------------------- --------- --------- -------- --------- ------- --------
Model updates 12 - - 1 (727) (714)
--------- --------
Methodology and policy (2,575) 290 (91) 42 (68) (2,402)
-------------------------- --------- --------- -------- --------- ------- --------
Foreign exchange movement (767) (836) (335) (59) (172) (2,169)
-------------------------- --------- --------- -------- --------- ------- --------
Total RWA movement (4,687) (2,408) (423) 379 (4,484) (11,623)
-------------------------- --------- --------- -------- --------- ------- --------
RWAs at 30 Jun 2021 57,753 24,431 11,622 6,858 10,105 110,769
-------------------------- --------- --------- -------- --------- ------- --------
As measured from 1 January 2021 to 30 June 2021, our cumulative
risk-weighted asset saves as part of our reduction programme were
GBP7.2bn.
Risk-weighted assets ('RWAs') decreased by GBP11.6bn during the
first half of the year, including a decrease of GBP2.2bn due to
foreign currency translation differences. The GBP9.4bn decrease
(excluding foreign currency translation differences) comprised the
movements described by the following comments.
Asset size
The GBP10.3bn decrease in RWAs was driven by reductions within
GBM and CMB. The GBP4.9bn decrease in GBM RWAs was largely due to
management actions, fall in securitisation related RWAs, and a
reduction in counterparty credit risk RWAs as a result of
management actions and mark-to-market movements. The GBP1.6bn
decrease in CMB RWAs was largely due to management actions and
lower lending. Market risk RWAs decreased by GBP3.5bn largely due
to the effects of risk mitigation actions on the emerging markets
bond portfolio, a decrease in stressed value at risk and the
transfer of risk in relation to our structured rates portfolio.
Asset quality
The GBP3.9bn increase in RWAs was mainly due to a rise of
GBP3.6bn within GBM as a result of portfolio changes and credit
migration. The increase in WPB and Corporate Centre RWAs was mainly
due to unfavourable portfolio changes and credit migration.
Model updates
The GBP0.7bn decrease in RWAs was mainly due to a fall in market
risk RWAs largely from the implementation of an options risk
model.
Methodology and policy
The GBP2.4bn decrease in RWAs was primarily due to risk
parameter refinements in GBM.
Overview of RWAs
At
---------------------------------------
30 Jun 31 Dec 30 Jun
2021 2020 2021
Capital
RWAs RWAs requirement(1)
GBPm GBPm GBPm
--- ---------------------------------------------- --------- --------- -----------------
Credit risk (excluding counterparty credit
1 risk) 64,920 69,671 5,194
=== ============================================== ------- ------- ---------------
2 - standardised approach 14,408 15,733 1,153
=== ==============================================
3 - foundation IRB approach 23,476 25,654 1,878
=== ==============================================
4 - advanced IRB approach 27,036 28,284 2,163
=== ==============================================
6 Counterparty credit risk 16,988 19,342 1,359
=== ============================================== ------- ------- ---------------
7 - mark-to-market 8,937 9,683 715
=== ==============================================
10 - internal model method 6,262 7,676 501
=== ==============================================
11 - risk exposure amount for contributions to 237 305 19
the default fund of a central counterparty
=== ==============================================
12 - credit valuation adjustment 1,552 1,678 124
=== ============================================== ------- ------- ---------------
13 Settlement risk 9 2 1
=== ============================================== ------- ------- ---------------
14 Securitisation exposures in the non-trading 4,291 4,744 343
book
=== ============================================== ------- ------- ---------------
14a - internal ratings-based approach ('SEC-IRBA') 724 795 58
=== ==============================================
14b - external ratings-based approach ('SEC-ERBA') 1,975 2,064 158
=== ==============================================
14c - internal assessment approach ('IAA') 991 1,270 79
=== ==============================================
14d - standardised approach ('SEC-SA') 601 615 48
=== ============================================== ------- ------- ---------------
19 Market risk 10,105 14,589 808
=== ============================================== ------- ------- ---------------
20 - standardised approach 1,629 1,859 130
=== ==============================================
21 - internal models approach 8,476 12,730 678
=== ==============================================
23 Operational risk 11,314 11,245 905
=== ==============================================
25 - standardised approach 11,314 11,245 905
=== ==============================================
27 Amounts below the thresholds for deduction 3,142 2,799 251
(subject to 250% risk weight)
29 Total 110,769 122,392 8,861
--- ---------------------------------------------- ------- ------- ---------------
1 'Capital requirement' in this and subsequent tables represents
the minimum capital charge set at 8% of RWAs by article 92 of the
Capital Requirements Regulation.
Credit risk - RWAs by exposure class
30 Jun 2021 31 Dec 2020
Capital Capital
RWAs requirement RWAs requirement
GBPm GBPm GBPm GBPm
--------------------------------------------- ------ ------------ ------ --------------
IRB advanced approach 25,274 2,022 26,399 2,112
--------------------------------------------- ------ ------------ ------ ------------
- central governments and central banks 2,441 195 2,770 222
---------------------------------------------
- institutions 1,933 155 1,980 158
---------------------------------------------
- corporates(1) 15,481 1,238 16,167 1,293
---------------------------------------------
- total retail 5,419 434 5,482 439
---------------------------------------------
- of which:
secured by mortgages on immovable property
- small and medium-sized enterprises
('SME') 235 19 270 22
---------------------------------------------
secured by mortgages on immovable property
- non-SME 4,022 322 3,910 313
---------------------------------------------
qualifying revolving retail 59 5 59 5
---------------------------------------------
other SME 342 27 416 33
---------------------------------------------
other non-SME 761 61 827 66
--------------------------------------------- ------ ------------ ------ ------------
IRB securitisation positions 724 58 795 64
--------------------------------------------- ------ ------------ ------ ------------
IRB non-credit obligation assets 1,762 141 1,885 151
--------------------------------------------- ------ ------------ ------ ------------
IRB foundation approach 23,476 1,878 25,654 2,052
--------------------------------------------- ------ ------------ ------ ------------
- central governments and central banks 6 - 6 -
---------------------------------------------
- institutions 6 1 7 1
---------------------------------------------
- corporates 23,464 1,877 25,641 2,051
--------------------------------------------- ------ ------------ ------ ------------
Standardised approach 21,117 1,689 22,481 1,798
--------------------------------------------- ------ ------------ ------ ------------
- central governments and central banks 1,455 116 1,232 99
---------------------------------------------
- regional governments or local authorities 2 - 2 -
---------------------------------------------
- public sector entities 8 1 9 1
---------------------------------------------
- institutions 1,215 97 1,418 113
---------------------------------------------
- corporates 6,273 502 7,340 587
---------------------------------------------
- retail 283 23 305 24
---------------------------------------------
- secured by mortgages on immovable
property 1,717 137 1,666 133
---------------------------------------------
- exposures in default 393 31 413 33
---------------------------------------------
- items associated with particularly
high risk 3,572 286 3,852 308
---------------------------------------------
- securitisation positions 3,567 285 3,949 316
---------------------------------------------
- collective investments undertakings 1 - - -
---------------------------------------------
- equity(2) 2,297 184 2,096 168
---------------------------------------------
- other items 334 27 199 16
--------------------------------------------- ------ ------------ ------ ------------
Total 72,353 5,788 77,214 6,177
--------------------------------------------- ------ ------------ ------ ------------
1 Corporates includes specialised lending exposures subject to
the supervisory slotting approach of GBP2,421m (31 Dec 2020:
GBP3,166m) and RWAs of GBP1,483m (31 Dec 2020: GBP2,007m).
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 2021 31 Dec 2020
Capital Capital
RWAs requirement RWAs requirement
GBPm GBPm GBPm GBPm
-------------------------------------------- ------ ------------ ------ --------------
By exposure class
-------------------------------------------- ------ ------------ ------ --------------
IRB advanced approach 5,852 468 6,473 517
-------------------------------------------- ------ ------------ ------ ------------
- central governments and central banks 197 16 229 18
--------------------------------------------
- institutions 5,281 422 5,588 447
--------------------------------------------
- corporates 374 30 656 52
-------------------------------------------- ------ ------------ ------ ------------
IRB foundation approach 7,225 578 8,855 708
-------------------------------------------- ------ ------------ ------ ------------
- corporates 7,225 578 8,855 708
-------------------------------------------- ------ ------------ ------ ------------
Standardised approach 1,998 160 1,874 151
-------------------------------------------- ------ ------------ ------ ------------
- central governments and central banks 41 3 19 2
--------------------------------------------
- institutions 1,850 148 1,655 133
--------------------------------------------
- corporates 107 9 200 16
-------------------------------------------- ------ ------------ ------ ------------
CVA advanced 1,156 92 1,159 93
-------------------------------------------- ------ ------------ ------ ------------
CVA standardised 396 32 519 42
-------------------------------------------- ------ ------------ ------ ------------
Central counterparties ('CCP') standardised 370 30 464 37
-------------------------------------------- ------ ------------ ------ ------------
Total 16,997 1,360 19,344 1,548
-------------------------------------------- ------ ------------ ------ ------------
By product
-------------------------------------------- ------ ------------ ------ --------------
- derivatives (OTC and exchange traded
derivatives) 10,833 867 12,524 1,002
--------------------------------------------
- SFTs 3,843 307 4,057 325
--------------------------------------------
- other(1) 532 43 780 62
--------------------------------------------
- CVA advanced 1,156 92 1,159 93
--------------------------------------------
- CVA standardised 396 32 519 42
--------------------------------------------
- CCP default funds(2) 237 19 305 24
-------------------------------------------- ------ ------------ ------ ------------
Total 16,997 1,360 19,344 1,548
-------------------------------------------- ------ ------------ ------ ------------
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 2021 31 Dec 2020
Capital Capital
RWAs requirement RWAs requirement
GBPm GBPm GBPm GBPm
----------------------------------------- --------- -------------- --------- --------------
Outright products
----------------------------------------- --------- -------------- --------- --------------
1 Interest rate risk (general and specific) 233 19 294 24
----------------------------------------- ------- ------------ ------- ------------
2 Equity risk (general and specific) 103 8 49 4
----------------------------------------- ------- ------------ ------- ------------
3 Foreign exchange risk 623 50 574 46
----------------------------------------- ------- ------------ ------- ------------
4 Commodity risk 67 5 62 5
----------------------------------------- ------- ------------ ------- ------------
Options
----------------------------------------- --------- -------------- --------- --------------
6 Delta-plus method 48 4 83 6
----------------------------------------- ------- ------------ ------- ------------
8 Securitisation 555 44 797 64
----------------------------------------- ------- ------------ ------- ------------
9 Total 1,629 130 1,859 149
----------------------------------------- ------- ------------ ------- ------------
Market risk under IMA (MR2-A)
At
---------------------------------------------------
30 Jun 2021 31 Dec 2020
Capital Capital
RWAs requirement RWAs requirement
GBPm GBPm GBPm GBPm
=== ================================== ========= ============== ======== ==============
1 VaR (higher of values a and b) 2,878 230 3,835 307
=== ================================== ======= ============ ====== ============
(a) Previous day's VaR 139 63
=== ================================== ========= ============ ======== ============
(b) Average daily VaR(1) 230 307
=== ================================== ========= ============ ======== ============
Stressed VaR (higher of values a
2 and b) 3,747 300 5,785 463
=== ================================== ======= ============ ====== ============
(a) Latest SVaR 136 74
=== ================================== ========= ============ ======== ============
(b) Average SVaR(1) 300 463
=== ================================== ========= ============ ======== ============
Incremental risk charge (higher of
3 values a and b) 990 79 2,154 172
=== ================================== ======= ============ ====== ============
(a) Most recent IRC value 79 172
=== ================================== ========= ============ ======== ============
(b) Average IRC value(1) 79 172
=== ================================== ========= ============ ======== ============
5 Other 861 69 956 76
=== ================================== ======= ============ ====== ============
6 Total 8,476 678 12,730 1,018
--- ---------------------------------- ------- ------------ ------ ------------
1 VaR average values are calculated on a 60 business days basis.
SVaR and IRC average values are calculated on a 12-week basis.
Leverage
Leverage ratio common disclosure (LRCom)
At
------------------------------------
30 Jun 31 Dec
2021 2020
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) 381,445 379,994
------ -------------------------------------------------------- --------------- ---------------
(Asset amounts deducted in determining Tier 1 (718) (603)
2 capital)
------ -------------------------------------------------------- --------------- ---------------
Total on-balance sheet exposures (excluding derivatives, 380,727 379,391
3 SFTs and fiduciary assets)
------ -------------------------------------------------------- --------------- ---------------
Derivative exposures
------ -------------------------------------------------------- ----------------- -----------------
Replacement cost associated with all derivatives 32,327 45,347
transactions (i.e. net of eligible cash variation
4 margin)
------ -------------------------------------------------------- --------------- ---------------
5 Add-on amounts for potential future exposure ('PFE')
associated with all derivatives transactions
(mark-to-market method) 73,728 75,434
------ -------------------------------------------------------- --------------- ---------------
Gross-up for derivatives collateral provided where 6,047 10,622
deducted from the balance sheet assets pursuant
6 to IFRSs
------ -------------------------------------------------------- --------------- ---------------
(Deductions of receivables assets for cash variation (28,441) (42,471)
7 margin provided in derivatives transactions)
------ -------------------------------------------------------- --------------- ---------------
(Exempted central counterparty ('CCP') leg of (35,203) (43,884)
8 client-cleared trade exposures)
------ -------------------------------------------------------- --------------- ---------------
Adjusted effective notional amount of written 73,825 95,483
9 credit derivatives
------ -------------------------------------------------------- --------------- ---------------
(Adjusted effective notional offsets and add-on (71,026) (91,107)
10 deductions for written credit derivatives)
------ -------------------------------------------------------- --------------- ---------------
11 Total derivative exposures 51,257 49,424
------ -------------------------------------------------------- --------------- ---------------
Securities financing transaction exposures
------ -------------------------------------------------------- ----------------- -----------------
Gross SFT assets (with no recognition of netting), 177,001 187,608
12 after adjusting for sales accounting transactions
------ -------------------------------------------------------- --------------- ---------------
(Netted amounts of cash payables and cash receivables (108,179) (106,479)
13 of gross SFT assets)
------ -------------------------------------------------------- --------------- ---------------
14 Counterparty credit risk exposure for SFT assets 5,286 5,815
------ -------------------------------------------------------- --------------- ---------------
16 Total securities financing transaction exposures 74,108 86,944
------ -------------------------------------------------------- --------------- ---------------
Other off-balance sheet exposures
------ -------------------------------------------------------- ----------------- -----------------
Off-balance sheet exposures at gross notional 127,083 126,409
17 amount
------ -------------------------------------------------------- --------------- ---------------
(Adjustments for conversion to credit equivalent (72,675) (76,789)
18 amounts)
------ -------------------------------------------------------- --------------- ---------------
19 Total off-balance sheet exposures 54,408 49,620
------ -------------------------------------------------------- --------------- ---------------
Exempted exposures
------ -------------------------------------------------------- ----------------- -----------------
EU-19a (Exemption of intragroup exposures (solo basis)) (236) (330)
------ -------------------------------------------------------- --------------- ---------------
Capital and total exposures
------ -------------------------------------------------------- ----------------- -----------------
20 Tier 1 capital(1) 21,526 21,732
------ -------------------------------------------------------- --------------- ---------------
21 Total leverage ratio exposure 560,264 565,049
------ -------------------------------------------------------- --------------- ---------------
22 Leverage ratio (%)(1) 3.8 3.8
------ -------------------------------------------------------- --------------- ---------------
Choice of transitional arrangements for the definition Fully phased-in Fully phased-in
EU-23 of the capital measure
------ -------------------------------------------------------- ----------------- -----------------
* The references identify the lines prescribed in the EBA
template that are applicable and where there is a value.
1 Leverage ratio is calculated using the CRR II end point basis for capital.
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 3.8% at 30 June 2021, unchanged from 31
December 2020.
The following tables provide a reconciliation of the total
assets in our published balance sheet under IFRS and the total
leverage exposure, and a breakdown of on-balance sheet exposures
excluding derivatives, SFTs and exempted exposures, by asset
class.
Summary reconciliation of accounting assets and leverage ratio exposures
(LRSum)
At
-----------------------
30 Jun 31 Dec
2021 2020
Ref* GBPm GBPm
----- ------------------------------------------------------- ---------- -----------
1 Total assets as per published financial statements 623,963 681,150
----- ------------------------------------------------------- -------- ---------
Adjustments for:
----- ------------------------------------------------------- ---------- -----------
2 (25,133) (24,641)
* entities which are consolidated for accounting
purposes but are outside the scope of regulatory
consolidation
----- ------------------------------------------------------- -------- ---------
4 * derivative financial instruments (88,498) (151,753)
----- ------------------------------------------------------- -------- ---------
5 4,777 7,030
* securities financing transactions ('SFT')
----- ------------------------------------------------------- -------- ---------
6 - off-balance sheet items (i.e. conversion to 54,408 49,620
credit equivalent amounts of off-balance sheet
exposures)
----- ------------------------------------------------------- -------- ---------
- intragroup exposures excluded from the leverage
EU-6a ratio exposure measure (236) (330)
----- ------------------------------------------------------- -------- ---------
7 - other adjustments (9,017) 3,973
----- ------------------------------------------------------- -------- ---------
8 Total leverage ratio exposure 560,264 565,049
----- ------------------------------------------------------- -------- ---------
* 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
2021 2020
Ref* GBPm GBPm
------- --------------------------------------------------------- ------- ---------
Total on-balance sheet exposures (excluding derivatives,
EU-1 SFTs and exempted exposures) 353,004 337,523
------- --------------------------------------------------------- ------- -------
EU-2 - trading book exposures 79,198 74,249
------- ---------------------------------------------------------
EU-3 - banking book exposures 273,806 263,274
------- --------------------------------------------------------- ------- -------
'banking book exposures' comprises:
------- --------------------------------------------------------- ------- ---------
EU-5 exposures treated as sovereigns 148,749 132,819
------- --------------------------------------------------------- ------- -------
EU-7 institutions 10,145 11,384
------- --------------------------------------------------------- ------- -------
EU-8 secured by mortgages of immovable properties 23,350 24,056
------- --------------------------------------------------------- ------- -------
EU-9 retail exposures 3,746 4,118
------- --------------------------------------------------------- ------- -------
EU-10 corporate 61,245 67,272
------- --------------------------------------------------------- ------- -------
EU-11 exposures in default 1,621 1,963
------- --------------------------------------------------------- ------- -------
other exposures (e.g. equity, securitisations
EU-12 and other non-credit obligation assets) 24,950 21,662
------- --------------------------------------------------------- ------- -------
* The references identify the lines prescribed in the EBA
template that are applicable and where there is a value.
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 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 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 108,056 - 15 108,071
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Items in the course of collection
from other banks 638 - - 638
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Trading assets 95,913 - - 95,913
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Financial assets designated and
otherwise mandatorily measured
at fair value through profit or
loss 17,616 (13,495) 561 4,682
---------------------------------------------------------------- ---------- --------------- ------------- ----------
* of which: debt securities eligible as tier 2 issued
by group FSEs that are outside the regulatory scope
of consolidation s - 403 - 403
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Derivatives 139,772 (17) - 139,755
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Loans and advances to banks k 10,999 (541) - 10,458
---------------------------------------------------------- ---------- --------------- ------------- ----------
Loans and advances to customers k 93,210 (415) - 92,795
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
- of which: expected credit losses
on IRB portfolios h (1,053) - - (1,053)
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Reverse repurchase agreements -
non-trading 53,032 - - 53,032
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Financial investments 44,753 (9,725) - 35,028
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Capital invested in insurance and
other entities - 604 - 604
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Prepayments, accrued income and
other assets 57,228 (936) 42 56,334
---------------------------------------------------------------- ---------- --------------- ------------- ----------
- of which: retirement benefit
assets j 42 - - 42
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Current tax assets 440 2 - 442
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Interests in associates and joint
ventures 653 - (616) 37
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Goodwill and intangible assets e 901 (783) - 118
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Deferred tax assets f 752 170 1 923
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Total assets at 30 Jun 2021 623,963 (25,136) 3 598,830
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Liabilities and equity
---------------------------------------------------------- ---- ---------- --------------- ------------- ------------
Liabilities
---------------------------------------------------------- ---- ---------- --------------- ------------- ------------
Deposits by banks 40,427 - - 40,427
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Customer accounts 200,649 302 - 200,951
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Repurchase agreements - non-trading 29,440 - - 29,440
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Items in the course of transmission
to other banks 339 - - 339
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Trading liabilities 48,179 - - 48,179
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Financial liabilities designated
at fair value 37,478 245 - 37,723
---------------------------------------------------------------- ---------- --------------- ------------- ----------
o,
- of which: included in tier 2 i 2,286 - - 2,286
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Derivatives 138,366 - - 138,366
---------------------------------------------------------------- ---------- --------------- ------------- ----------
- of which: debit valuation adjustment i 22 - - 22
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Debt securities in issue 13,980 (1,155) - 12,825
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Accruals, deferred income and other
liabilities 55,278 (1,251) 3 54,030
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Current tax liabilities 216 (14) - 202
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Liabilities under insurance contracts 22,332 (22,332) - -
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Provisions 705 (3) - 702
---------------------------------------------------------------- ---------- --------------- ------------- ----------
* of which: credit-related contingent liabilities and
contractual commitments on IRB portfolios h 109 - - 109
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Deferred tax liabilities 18 (13) - 5
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Subordinated liabilities 12,670 - - 12,670
---------------------------------------------------------------- ---------- --------------- ------------- ----------
- of which:
included in tier 1 m 700 - - 700
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
o,
p,
q,
included in tier 2 r 11,970 - - 11,970
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Total liabilities at 30 Jun 2021 600,077 (24,221) 3 575,859
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Equity
---------------------------------------------------------- ---- ---------- --------------- ------------- ------------
Called up share capital a 797 - - 797
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Other equity instruments l 3,722 - - 3,722
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
c,
Other reserves g (5,291) 13 - (5,278)
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
b,
Retained earnings c 24,491 (918) - 23,573
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Total shareholders' equity 23,719 (905) - 22,814
---------------------------------------------------------------- ---------- --------------- ------------- ----------
d,
Non-controlling interests n 167 (10) - 157
---------------------------------------------------------- ---- ---------- --------------- ------------- ----------
Total equity at 30 Jun 2021 23,886 (915) - 22,971
---------------------------------------------------------------- ---------- --------------- ------------- ----------
Total liabilities and equity at
30 Jun 2021 623,963 (25,136) 3 598,830
---------------------------------------------------------------- ---------- --------------- ------------- ----------
The references (a)-(s) identify balance sheet components which
are used in the calculation of regulatory capital on pages 35 and
36.
Market Risk in the first half of 2021
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 2021.
We managed market risk prudently in the first half of 2021.
Sensitivity exposures remained within appetite as the business
pursued its core market-making activity in support of our
customers. We continued to undertake 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 Value
At Risk (VaR), stress and scenario analysis.
Following the extreme market volatility observed throughout
2020, the overall risk profile of the Markets and Securities
Services business remained defensive, notably in FX and Equity, and
positions remained relatively stable across the first half of 2021.
The Global Debt Markets business continued to be the main driver of
trading VaR, with interest rate risks from market-making activities
the key contributor.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR predominantly resides within the Markets and
Securities Services business, and was GBP24.2m as of 30 June
2021,
down from GBP34.2m as of 30 June 2020, and GBP27.5m as of
31 December 2020. The total trading VaR has reduced over the
period, corresponding to the stabilisation of Financial markets as
vaccination programmes were rolled out globally, bringing the
Covid-19 pandemic under greater control.
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
-------------------- ---------- ---------- ------ ------- ------------------- ----------
Half-year to 30 Jun
2021 5.5 12.4 10.9 13.1 (17.7) 24.2
-------------------- ---------- ---------- ------ ------- ------------------- --------
Average 8.3 12.7 9.8 11.7 (19.7) 22.8
-------------------- ---------- ---------- ------ ------- ------------------- --------
Maximum 19.3 26.7 14.9 16.7 31.9
-------------------- ---------- ---------- ------ ------- ------------------- --------
Minimum 4.4 9.3 6.3 9.2 18.8
-------------------- ---------- ---------- ------ ------- ------------------- --------
Half-year to 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
-------------------- ---------- ---------- ------ ------- ------------------- --------
Half-year to 31 Dec
2020 7.6 11.0 13.9 14.1 (19.2) 27.5
-------------------- ---------- ---------- ------ ------- ------------------- --------
Average 6.8 13.2 19.4 12.9 (21.0) 31.3
-------------------- ---------- ---------- ------ ------- ------------------- --------
Maximum 14.2 21.2 26.8 16.2 - 42.6
-------------------- ---------- ---------- ------ ------- ------------------- --------
Minimum 4.0 9.2 13.9 9.6 - 24.3
-------------------- ---------- ---------- ------ ------- ------------------- --------
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 the first half of 2021, there were no back-testing exceptions
against Actual profit and losses, and one loss back-testing
exception against Hypothetical profit and losses. The Hypothetical
back-testing exception occurred on 23rd March 2021, and was driven
by the London FX Cash business exposure to volatility in the TRY FX
Forward market, following an unexpected geopolitical event.
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. Performance of the VaR model throughout the first
half of 2021 was in line with expectations. Over the 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 2021 was GBP31m, driven by
interest rate risk in the banking book arising from Markets
Treasury and ALCO book positions. The VaR for non-trading activity
was GBP33m as at 31 December 2020. The reduction corresponds to the
general stabilisation of financial markets as vaccination
programmes are rolled out globally, and the expectation that the
economy will recover from the Covid-19 pandemic. Credit spreads
have tightened since the start of the year driving the decline in
the Credit Spread Non-trading VaR. Treasury bond yields steepened
considerably up to March and then retraced as the markets evaluated
the rate of inflation driven by economic recovery from Covid-19.
Markets Treasury have been actively managing their HQLA portfolio
as the treasury yields moved in H1, driving some movements in the
interest rate non-trading VaR this year.
The group's non-trading VaR for the year is shown in the table
below.
Non-trading VaR, 99% 1 day
Interest Credit Portfolio
rate spread diversification(1)
(IR) (CS) Total(2)
GBPm GBPm GBPm GBPm
------------------------- -------- -------
Half-year to 30 Jun 2021 29.6 8.0 (6.6) 31.0
-------------------
Average 27.6 10.9 (5.7) 32.8
-------------------
Maximum 34.6 12.7 - 37.8
-------------------
Minimum 20.6 7.9 - 29.1
-------------------
Half-year to 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
Half-year to 31 Dec 2020 25.1 11.6 (3.4) 33.3
Average 21.9 12.3 (6.3) 27.9
Maximum 28.8 16.6 - 35.0
Minimum 14.3 5.5 - 15.0
1 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate, 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 82 of the Annual
Report and Accounts 2020.
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 2020.
Insurance manufacturing operations risk profile in the first
half of 2021
The risk profile of our insurance manufacturing operations is
assessed in the Group's ICAAP based on their financial capacity to
support the risks to which they are exposed. Capital adequacy is
assessed on both the Group's economic capital basis, and the
relevant local insurance regulatory basis. The group's economic
capital basis is largely aligned to European Solvency II
regulations. Risk appetite buffers are set to ensure that the
operations are able to remain solvent on both bases allowing for
business-as-usual volatility and extreme but plausible stress
events. In addition, the insurance manufacturing operations also
manage their market, liquidity, credit, underwriting and
non-financial risk exposures to Board-approved risk appetite
limits. Interest rates and equity values, which are the key risk
drivers for the financial strength of the insurance operations, in
general rose during the first half of the year. This had a
favourable impact on capital positions and financial risk
exposures. As a result, at 30 June 2021 the majority
of the capital and financial risk positions of our insurance
operations were within risk appetite. However, we continue to
monitor these risks closely, as lower interest rates impact on
margins and increase profit sensitivity on our insurance
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 Other and
DPF Unit-linked contracts(1) liabilities Total
GBPm GBPm GBPm GBPm GBPm
Financial assets 19,680 2,658 241 2,591 25,170
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 9,494 2,597 84 1,287 13,462
- derivatives 36 - - 1 37
- financial investments - at amortised
cost 516 - - 26 542
- financial investments - at fair value
through other comprehensive income 8,069 - 103 1,148 9,320
- other financial assets(2) 1,565 61 54 129 1,809
Reinsurance assets - 55 126 - 181
PVIF(3) - - - 783 783
Other assets and investment properties 747 1 1 41 790
Total assets at 30 Jun 2021 20,427 2,714 368 3,415 26,924
Liabilities under investment contracts
designated at fair value - 1,000 - - 1,000
Liabilities under insurance contracts 20,296 1,708 328 - 22,332
Deferred tax(4) 130 6 - 46 182
Other liabilities - - - 1,877 1,877
Total liabilities at 30 Jun 2021 20,426 2,714 328 1,923 25,391
Total equity at 30 Jun 2021 - - - 1,533 1,533
Total liabilities and equity at 30 Jun
2021 20,426 2,714 328 3,456 26,924
Balance sheet of insurance manufacturing subsidiaries by type of contract
(continued)
Shareholder
assets
With Other and
DPF Unit-linked contracts(1) liabilities Total
GBPm GBPm GBPm GBPm GBPm
Financial assets 20,261 2,412 249 2,490 25,412
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 9,148 2,352 92 991 12,583
- derivatives 76 - - 2 78
- financial investments - at amortised
cost 372 1 - 17 390
- financial investments - at fair value
through other comprehensive income 8,724 - 112 1,341 10,177
- other financial assets(2) 1,941 59 45 139 2,184
Reinsurance assets - 47 134 - 181
PVIF(3) - - - 647 647
Other assets and investment properties 809 1 - 60 870
Total assets at 31 Dec 2020 21,070 2,460 383 3,197 27,110
Liabilities under investment contracts
designated at fair value - 944 - - 944
Liabilities under insurance contracts 20,962 1,512 342 - 22,816
Deferred tax(4) 107 3 - 39 149
Other liabilities - - - 1,776 1,776
Total liabilities at 31 Dec 2020 21,069 2,459 342 1,815 25,685
Total equity at 31 Dec 2020 - - - 1,425 1,425
Total liabilities and equity at 31 Dec
2020 21,069 2,459 342 3,240 27,110
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. 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.
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. The differences between the
impacts on profit after tax and equity are driven by the changes in
value of the bonds measured at fair value through other
comprehensive income, which are only accounted for in equity.
Sensitivity of the group's insurance manufacturing subsidiaries to market
risk factors
30 June 2021 31 December 2020
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 91 67 110 89
----------------------------------------------- ---------- ------- ---------- -------
-100 basis point parallel shift in
yield curves (169) (141) (203) (179)
----------------------------------------------- ---------- ------- ---------- -------
10% increase in equity prices 41 41 39 39
----------------------------------------------- ---------- ------- ---------- -------
10% decrease in equity prices (43) (43) (42) (42)
----------------------------------------------- ---------- ------- ---------- -------
Board Changes
Jacques Fleurant will be retiring as Chief Finance Officer,
Europe and stepping down as Director of the HSBC Bank plc Board
effective 30 September 2021. The Company is in the process of
identifying a suitable successor.
Statement of Directors' Responsibilities
The Directors, who are required to prepare the financial
statements on a 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 a going concern
basis.
The Directors, the names of whom are set out below, confirm that
to the best of their knowledge:
-- the interim condensed financial statements have been prepared
in accordance with UK adopted IAS 34 'Interim Financial Reporting,
IAS 34 'Interim Financial Reporting' as issued by the International
Accounting Standards Board ('IASB'), IAS 34 'Interim Financial
Reporting' as adopted by the EU and the Disclosure Guidance and
Transparency Rules sourcebook of the UK's Financial Conduct
Authority;
-- this Interim Report 2021 gives a true and fair view of the
assets, liabilities, financial position of the group and of the
profit or loss of the group for that period; and
-- this Interim Report 2021 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 2021
and their impact on the condensed set of financial statements;
and
- a description of the principal risks and uncertainties of the
remaining six months of the financial year.
S P O'Connor (Chairman); J F Trueman (Deputy Chairman); C W Bell
(Chief Executive Officer); J Fleurant (Chief Financial Officer);
Dame M E Marsh; Y Omura ; J A Robinson ; E W Strutz ; and A M
Wright .
On behalf of the Board
J Fleurant
Director
1 August 2021
Registered number 14259
Independent non-executive Director
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END
IR FIFSTTIIFIIL
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