TIDM63AS
RNS Number : 4287C
HSBC Bank plc
22 February 2022
22 February 2022
HSBC Bank plc 2021 Annual Report and Accounts
In fulfilment of its obligations under sections 4.1.3 and
6.3.5(1) of the Disclosure Guidance and Transparency Rules, HSBC
Bank plc (the "Company") hereby releases the unedited full text of
its 2020 Annual Report and Accounts for the year ended 31 December
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
Annual Report and Accounts 2021
Registered number - 00014259
Contents
Page
Strategic Report
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Highlights 2
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Key themes of 2021 3
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Key financial metrics 3
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About HSBC Group 4
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Purpose and strategy 4
Our Global Businesses 6
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How we do business 7
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Key Performance Indicators 11
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Economic background and outlook 13
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Financial summary 14
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Risk overview 20
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Report of the Directors
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Risk 22
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- Our approach to risk 22
- Top and emerging risks 24
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- Areas of special interest 30
- Our material banking and insurance
risks 32
Corporate Governance Report 92
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- Directors 92
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- Company Secretary 94
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- Board of Directors 94
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- Directors' emoluments 95
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- Board committees 95
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- Dividends 97
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- Internal control 93
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- Employees 99
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- Auditors 100
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* Articles of association, conflicts of interest and
indemnification of directors 101
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- Statement on going concern 102
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* Statement of directors' responsibilities in respect
of the financial statements 103
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Independent Auditors' Report 104
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Financial Statements
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Financial statements 107
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Notes on the financial statements 118
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Presentation of Information
This document comprises the Annual Report and Accounts 2021 for
HSBC Bank plc ('the bank' or 'the company') and its subsidiaries
(together 'the group'). 'We', 'us' and 'our' refer to HSBC Bank plc
together with its subsidiaries. It contains the Strategic Report,
the Report of the Directors, the Statement of Directors'
Responsibilities and Financial Statements, together with the
Independent Auditors' Report, as required by the UK Companies Act
2006. References to 'HSBC', 'HSBC Group' or 'Group' within this
document mean HSBC Holdings plc together with its subsidiaries.
HSBC Bank plc is exempt from publishing information required by
The Capital Requirements Country-by-Country Reporting Regulations
2013, as this information is published by its parent, HSBC Holdings
plc. This information is available on HSBC's website:
www.hsbc.com.
Pillar 3 disclosures for the group are also available on
www.hsbc.com, under Investors.
All narrative disclosures, tables and graphs within the
Strategic Report and Report of the Directors are unaudited unless
otherwise stated.
Our reporting currency is GBP sterling.
Unless otherwise specified, all $ symbols represent US
dollars.
Cautionary Statement Regarding Forward-
Looking Statements
This Annual Report and Accounts 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', '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 statement.
Highlights
For the year ended 31 December 2021
Reported profit/(loss) before tax
(GBPm)
GBP1,023m
(2020: GBP(1,614)m)
Reported revenue (GBPm)
GBP6,120m
(2020: GBP5,900m)
Reported risk-weighted assets at
period end (GBPbn)
GBP104bn
(2020: GBP122bn)
.
Adjusted profit/(loss) before tax
(GBPm)
GBP1,577m
(2020: GBP(184)m)
Total assets at period end (GBPbn)
GBP597bn
(2020: GBP681bn)
Common equity tier 1 ratio at period
end (%)
17.3%
(2020: 14.7%)
Key themes of 2021
HSBC Bank plc continued to support the Group through progress on
our strategic aims, although challenges in the geopolitical and
economic environment remain.
Financial Performance
Performance reflected an improvement in global economic
conditions and the impact of lower interest rates. Revenue
increased, there were releases of expected credit loss allowances,
and operating expenses were lower reflecting the impact of our
transformation programme. All of our global businesses generated
higher profits compared with 2020. The outlook for net interest
income is now more positive, although risks remain as inflation is
anticipated to increase across Europe. Read more on pages 13 to
18.
Strategic Transformation
We have continued to progress in our areas of strength and
develop our digital capabilities. During the year we announced the
planned sale of our retail banking business in France. We have
formulated our response to the requirement for an Intermediate
Parent Undertaking ('IPU') in line with European Union ('EU')
Capital Requirements Directive, as a result of which our subsidiary
HSBC Continental Europe plans to acquire HSBC Trinkaus &
Burkhardt AG ('HSBC Germany'), HSBC Malta and HSBC Private Bank
Luxembourg. More information can be found on pages 4 and 5.
Climate Ambition
As demonstrated at COP26, the Group is playing a leading role in
helping to mobilise the transition to a global net zero economy.
Since 2020, HSBC Bank plc has supported our customers' transition
to net zero and a sustainable future by providing them with $65.2bn
of financing and investment; this contributes towards the Group's
ambition to provide and facilitate $750bn to $1tn of sustainable
financing and investment by 2030. In May 2021, a climate change
resolution proposed by the Group's Board was backed by more than
99% of the Group's shareholders at its Annual General Meeting,
including a commitment to publish a policy to phase out the
financing of coal-fired power and thermal coal mining, by 2030 in
the European Union ('EU') / Organisation for Economic Cooperation
and Development ('OECD'), and 2040 in all other markets. We are
also working with peers and industry bodies to take action on
climate change, biodiversity and nature.
Key financial metrics
2021 2020
---------------------------------------------------------------- --------------------- --------------------------
For the year (GBPm)
---------------------------------------------------------------- --------------------- --------------------------
Profit/(loss) before tax (reported basis) 1,023 (1,614)
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Profit/(loss) before tax (adjusted basis)(1) 1,577 (184)
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Net operating income before change in expected credit
losses and other credit impairment charges (reported basis)(2) 6,120 5,900
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Profit/(loss) attributable to the parent company 1,041 (1,488)
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At year-end (GBPm)
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Total equity attributable to shareholders of the parent
company 23,584 23,666
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Total assets 596,611 681,150
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Risk-weighted assets(3) 104,314 122,392
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Loans and advances to customers (net of impairment allowances) 91,177 101,491
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Customer accounts 205,241 195,184
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Capital ratios (%)(3)
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Common equity tier 1 17.3 14.7
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Tier 1 21.0 18.1
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Total capital 31.7 27.3
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Performance, efficiency and other ratios (annualised %)
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Return on average ordinary shareholders' equity(4) 4.3 (7.9)
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Return on tangible equity (%)(5) 6.1 (2.7)
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Cost efficiency ratio (reported basis)(6) 89.2 113.6
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Cost efficiency ratio (adjusted basis)(6) 80.9 89.6
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Ratio of customer advances to customer accounts 44.4 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 15 to
16.
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 73. References to
EU regulations and directives (including technical standards)
should, as applicable, be read as references to the UK's version of
such regulation and/or directive, as onshored into UK law under the
European Union (Withdrawal) Act 2018, and as may be subsequently
amended under UK law.
4 The return on average ordinary shareholders' equity is defined
as profit attributable to shareholders of the parent company
divided by the average total shareholders' equity.
5 The RoTE is calculated by adjusting reported profit
attributable to ordinary shareholders by excluding movements in
PVIF and significant items (net of tax), divided by average
tangible shareholders' equity excluding fair value of own debt,
debt valuation adjustment ('DVA') and other adjustments for the
period. The calculation of this measure includes the UK bank levy
incurred for the first time in 2021, which was previously paid by
Group. Comparative data have not been re-presented.
6 Reported cost efficiency ratio is defined as total operating
expenses (reported) divided by net operating income before change
in expected credit losses and other credit impairment charges
(reported), while adjusted cost efficiency ratio is defined as
total operating expenses (adjusted) divided by net operating income
before change in expected credit losses and other credit impairment
charges (adjusted).
About HSBC Group
With assets of $3.0tn and operations in 64 countries and
territories at 31 December 2021, HSBC is one of the largest banking
and financial services organisations in the world. Approximately 40
million customers bank with the Group and the Group employs around
220,000 full-time equivalent staff. The Group has around 187,000
shareholders in 128 countries and territories.
Purpose and strategy
HSBC's purpose and ambition
The Group's purpose is 'Opening up a world of opportunity' and
the Group's ambition is to be the preferred international finance
partner for the Group's clients.
HSBC values
HSBC values help 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 Group strategy
The Group is implementing its strategy at pace across the four
strategic pillars aligned to its purpose, values and ambition
announced in February 2021.
The Group's strategy centres on four key areas: focus on our
areas of strength, digitise at scale to adapt our operating model
for the future; energise our organisation for growth and lead the
transition to net zero.
Focus on our strengths : in each of our global businesses, the
Group will focus on areas where we are strongest and have
significant opportunities for growth.
Digitise at scale: the Group will focus investments in areas
such as technology, to improve our customers' experience while
ensuring security and resilience. These investments in technology
will also help drive down costs, including through automating our
middle and back offices and building solutions to free up office
footprint.
Energise for growth : the Group is moving to a leaner and
simpler organisation that is energised and fit for the future. The
Group aim to inspire a dynamic culture and champion inclusion
across the organisation, as well as help employees develop future
skills.
Transition to net zero: the Group ambition is to support the
transition to a net zero global economy. The Group have set out an
ambitious plan to become a net zero bank, to support customers in
their transition, and to unlock new climate solutions.
HSBC in Europe
Europe is an important part of the global economy, accounting
for nearly 40% of global trade and one quarter of global Gross
Domestic Product. In addition, Europe is the world's top exporter
of services and second largest exporter of manufactured goods
(UNCTAD, 2020). HSBC Bank plc facilitates trade within Europe and
between Europe and other jurisdictions where the HSBC Group has a
presence.
With assets of GBP597bn at 31 December 2021, HSBC Bank plc is
one of Europe's largest banking and financial services
organisations. We employ around 15,000 people across our locations.
HSBC Bank plc is responsible for HSBC's European business, apart
from UK retail and most UK commercial banking activity which, post
ring-fencing, are managed by HSBC UK Bank plc.
HSBC Bank plc's ambition is to simplify its operating model;
with a wholesale banking hub for the European Union ('EU') in Paris
and a wholesale banking hub for western markets in London.
HSBC Bank plc operates in 20 markets(1) through the three
principal operating units detailed below.
The London hub consists of the UK non-ring fenced bank, which
provides overall governance and management for the Europe region as
a whole and is a global centre of excellence for wholesale banking
for the Group.
HSBC Continental Europe, comprises our Paris hub and its EU
branches (Belgium, Czech Republic, Greece, Ireland, Italy,
Luxembourg, Netherlands, Poland, Spain and Sweden) and Switzerland.
We are creating an integrated Continental European bank anchored on
Paris to better serve our clients and simplify our
organisation.
HSBC Germany Holdings GmbH serves the European Union's largest
economy and one of the leading export nations globally. HSBC
Germany's business proposition mirrors the importance of trade and
global connectivity.
1 Full list of markets where HSBC Bank plc has a presence:
Armenia, Belgium, Channel Islands and Isle of Man, Czech Republic,
France, Germany, Greece, Ireland, Italy, Israel, Luxembourg, Malta,
Netherlands, Poland, Russia, South Africa, Spain, Sweden,
Switzerland and the UK.
HSBC Bank plc's strategy and progress
on our 2021 commitments
We have a clear vision to be the leading international wholesale
bank in Europe, complemented by a targeted wealth and personal
banking business (see our global businesses 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).
Below we provide a progress update on our commitments and
strategic initiatives for 2021, in line with the Group's
strategy.
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 intend to be a
market leader in sustainable financing and help the Group meet its
ambition for net zero in its operations and supply chain by
2030.
New regulation in the EU provides an opportunity to simplify our
structure. In response to the requirement for an IPU in line with
the EU Capital Requirements Directive for European Union banking
entities, our subsidiary HSBC Continental Europe plans to acquire
HSBC Trinkaus & Burkhardt AG ('HSBC Germany'), HSBC Malta, and
HSBC Private Bank Luxembourg. HSBC Germany would then be
transferred into a newly created branch of HBCE in Germany. This
legal entity restructuring remains subject to regulatory
approvals.
Following the announcement in June 2021 regarding the planned
sale of our French retail operations, a binding Framework Agreement
was signed between HSBC Continental Europe and Promontoria MMB SAS
('My Money Group'), its subsidiary Banque des Caraïbes SA (the
'Purchaser') and My Money Bank ('MMB') on 25 November 2021. This
step marks the start of an implementation process expected to
complete in the second half of 2023, subject to obtaining the
authorization of the competent financial, government and regulatory
bodies. Until such point, the business remains part of, and will be
managed by HSBC Continental Europe. See Note 34 on page 174 for
further financial information on the transaction.
We intend to establish a Paris branch of HSBC Private
Luxembourg, from which French clients will be served. The project
is due to be completed during 2022 following the conclusion of the
associated social process last year. This will enable us to provide
an enhanced product range to clients leveraging our high quality
infrastructure in Luxembourg.
Digitise at scale
We continue to focus our investments in areas that help optimise
our technology capabilities and operations, as well as enhance
client experience. Our main areas of focus are Transaction Banking,
comprising Global Liquidity and Cash Management ('GLCM'), Global
Trade and Receivable Finance ('GTRF') and Foreign Exchange ('FX'),
which are central to our strategy.
Global Liquidity and Cash Management is focused on enhancing our
digital and self-serve capabilities for our clients and improving
our customer experience. In 2021, we continued to advance our
proposition, an example of this involved developing our Liquidity
Management Dashboard to facilitate customer cash flow forecasts.
Looking ahead, we will continue to develop our offering, to improve
our customer experience.
Our ambition for Global Trade and Receivables Finance is to make
trade safer, faster and easier. In 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, structured trade 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.
Our Wealth and Private Banking business in the Channel Islands
and Isle of Man has focussed on digitising documentation, with the
business saving over 600,000 pieces of paper through customers
migrating to e-statements and telephone PINs being distributed vis
SMS messaging.
During the same period, our technology investments have helped
reduce operating costs across the bank.
Energise for growth
In February 2021, we committed to continuing to energise our
people, which fundamentally contributes to a more effective, agile
and empowered organisation. The main areas of focus are to inspire
a dynamic culture, champion inclusion and develop future
skills.
Since then, we have been engaging colleagues through numerous
initiatives to apply our purpose and values to the delivery of our
strategy, how we work and how we serve our customers.
Recruiting the right talent and diversifying our workforce
remains important to us as is ensuring we create an environment for
our colleagues to learn and grow. We are committed to increasing
diverse representation in Europe, especially at senior levels. Our
new pan-European Employee Resource Group 'Inclusive Europe' and the
Diversity & Inclusion Council has sponsorship from our leaders
and will support our actions.
We continue to energise our colleagues through initiatives that
help develop their future skills and learning opportunities. During
the year we promoted and engaged our employees with an expanded
Future Skills curriculum that now incorporates the key strategic
skills of Personal, Digital, Data and Sustainability.
Transition to net zero
Becoming a Net Zero Bank
In 2020, the HSBC Group 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 change resolution in the 2021
Annual General Meeting. The resolution included a commitment to set
out the next steps in the Group's transition to net zero, including
setting sector-based targets, publishing a thermal coal phase-out
policy and reporting annually on progress. The resolution was
backed by more than 99% of the Group's shareholders.
In 2021, the HSBC Group was one of 43 founding members of the
Net Zero Banking Alliance ('NZBA'), which seeks to reinforce,
accelerate, and support the implementation of decarbonisation
strategies for the banking sector. The Group also launched a new
climate leadership training programme for its top 250 leadership
team, in which HSBC Bank plc non-executive directors and executives
are included.
In 2021, travel restrictions and lower energy usage due to the
Covid-19 outbreak favourably impacted HSBC Bank plc's greenhouse
gas emissions figures. More detail can be found in our
Environmental Social and Governance ('ESG') metrics disclosure on
page 8.
Supporting our Customers
The Group's climate ambition is to support customers in their
transition to net zero and a sustainable future. As part of this,
the Group aims to provide and facilitate between $750bn and $1tn of
sustainable finance and investment by 2030. To date, HSBC Bank plc
has contributed $65.2bn to this ambition led by strong performance
from debt capital markets, representing 51% of the Group's
cumulative contribution towards sustainable finance and
investments.
The breakdown of the Group's sustainable finance and investment
progress is included in its ESG Data pack. The detailed definitions
of the contributing activities for sustainable finance are
available in the Group's revised Sustainable Finance Data
Dictionary 2021. For the Group's ESG Data Pack, Sustainable Finance
Data Dictionary and PwC Assurance Report, see
www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre
.
Case study: Debt Management Office
In September 2021, HSBC Bank plc acted as Joint Structuring
Adviser and Joint Lead Manager on the United Kingdom Debt
Management Office's GBP10bn 12-year inaugural Green gilt
transaction with the proceeds to be used on projects to help the UK
finance its Green Industrial Revolution. As Joint Structuring
Adviser, we supported with establishing the UK Government's Green
Financing Framework published in June 2021.
Unlocking New Climate Solutions
HSBC Group partnered with the World Resources Institute and
World Wildlife Fund ("WWF") to launch the $100m Climate Solutions
Partnership with the aim to accelerate support for innovative
solutions tackling climate change. The programme will run for five
years, 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, 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.
Our Global Businesses
The Group manages its products and services through its three
global businesses: Global Banking and Markets ('GBM'); Commercial
Banking ('CMB'); Wealth and Personal Banking ('WPB'); and the
Corporate Centre (comprising, certain legacy assets, central
stewardship costs, and interests in our associates and joint
ventures).
Business segments
Our operating model has the following material segments: WPB;
CMB; a GBM business which is further split into 3 reportable
segments MSS, GB and GBM Other reflecting the reorganisation of the
GBM management structure during the year and a Corporate Centre.
These segments are supported by Digital Business Services and 11
global functions, including Risk, Finance, Compliance, Legal,
Marketing and Human Resources.
Markets & Securities Global Banking GBM Other Commercial Banking Wealth and Personal
Services ('MSS') ('GB') ('CMB') Banking ('WPB')
Markets & Securities HSBC Global GBM Other primarily We have a clear In Europe, Wealth
Services is Banking delivers comprises Principal strategy to be and Personal Banking
a products group tailored financial Investments ('PI') the Leading serves customers
that services solutions to and GBM's share International with their financial
all of the Bank's corporate and of the Bank's Corporate Bank needs through
clients, from institutional Markets Treasury in Europe. We Private Banking,
those in Global clients worldwide function. help to connect Retail Banking,
Banking to Commercial opening up The Principal our European customers Wealth Management,
Banking and opportunities Investments portfolio to our international Insurance and
Wealth and Personal through the ('PI') is focused network of Asset Management.
Banking. We strength of on delivering relationship Our core retail
offer clients our global investments that managers and product proposition offers
a range of services network and align to the specialists; a full suite of
and capabilities capabilities. group's strategy supporting products including
including Trading, We provide and seeks to their growth ambitions personal banking,
Financing and a comprehensive deliver strong and targets. Our mortgages, loans,
Securities Services suite of services returns across products, which credit cards,
across asset including corporate a diversified are designed to savings, investments
classes and banking, capital portfolio. Our help our customers and insurance.
geographies, markets, advisory, commitment to seize growth Alongside this,
supported by trade services sustainable private opportunities, WPB offers various
dedicated sales and global equity funds range from term propositions in
and research liquidity and contributes directly loans to region-wide certain markets,
teams. cash management. to the Group's treasury and trade including Jade,
Our European Our European aim to provide solutions. Commercial Premier, and Advance;
teams play a teams take and facilitate Banking is at as well as wealth
key role in a client-centric $750bn and $1tn the centre of solutions, financial
providing cross-asset approach bringing of sustainable creating revenue planning and
services, bridging together relationship finance and investment synergies within international
Emerging and and product by 2030. the Group: we services. In the
Developed Markets, expertise to collaborate closely Channel Islands
and collaborating deliver financial with our Global and the Isle of
with other global solutions customised Banking and Markets Man, we serve
businesses to to suit our colleagues to local Islanders
provide clients clients' growth provide expertise as well as
across the Group ambitions and in capital finance international
with bespoke financial objectives. and advisory solutions customers through
products and We work closely to support our our HSBC Expat
solutions that with our business Commercial Banking proposition.
support their partners including clients. Our trade Our Private Banking
growth ambitions. MSS, WPB and teams within proposition serves
We continue CMB, to provide Commercial high net worth
to invest in a range of Banking also provide and ultra-high
technology and tailored products import and export net worth clients
digital transformation and services finance solutions with investable
to enhance client that meet the to Global Banking assets greater
experience, needs of clients and Markets clients. than $5m in Channel
improve operational across the We also enable Islands and Isle
efficiencies bank. Global customers to gain of Man, France
and future proof Banking Europe visibility over and Germany. The
the business. operates as their liquidity range of services
We have taken an integral positions through available to private
actions to streamline part of the our main hubs banking clients
our cost base, global business in France and includes investment
optimise the and contributes Germany, which management, Private
usage of financial significant in turn helps Wealth Solutions
resources and revenues to clients to unlock and bespoke lending
enhance returns. other regions efficiencies in such as lending
Conduct is at through our their Treasury against financial
the heart of European client structures. As assets and residential
everything we base, supporting the European economy mortgage financing
do and we are the Europe pivots to a net for high-end
determined to ambition to zero carbon economy, properties.
have the highest be the leading we are expanding Private Banking
conduct standards international our services and hosts a 'Next
in the industry. wholesale bank. products to provide Generation' programme
customers with of events to support
innovative sustainable our client's next
finance solutions generation in
and ensuring our building and retaining
relationship managers the wealth within
are informed to the family. The
match these to Private bank offers
our clients' net this through its
zero ambitions. philanthropy advisory
to our clients,
which looks at
business succession
planning. We continue
to focus on meeting
the needs of our
customers, the
communities we
serve, and our
people, whilst
working to build
the bank of the
future.
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Adjusted profit/(loss) before tax
GBP(8)m GBP589m GBP99m GBP490m GBP323m
(2020: GBP20m) (2020: GBP55m) (2020: GBP(52)m) (2020: GBP152m) (2020: GBP(132)m)
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
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
We conduct our business to support the sustained success of our
customers, employees and other stakeholders.
Our approach
The Group recognises that it is important to be clear about who
we are and what we stand for to create long-term value for our
stakeholders. This will help the Group deliver the strategy and
operate our business in a way that is sustainable. Following an
extensive consultation with the Group's people and customers, the
Group refined our purpose and values. The Group's new purpose is
'Opening up a world of opportunity' with the ambition to be the
preferred international financial partner for clients. To achieve
this in a way that is sustainable, we are guided by values: we
value difference; we succeed together; we take responsibility; and
we get it done.
In 2021, our ability to help our stakeholders was more important
than ever, as we continued to promote and encourage good conduct
through our employees' behaviours and the decisions we take during
these unprecedented times. The Group define conduct as delivering
fair outcomes for its customers and not disrupting the orderly and
transparent operation of financial markets. This is central to the
Group's long-term success and ability to serve customers. We have
clear policies, frameworks and governance in place to protect them.
For further information on conduct, see page 81. Details on our
conduct framework are available at www.hsbc.com/conduct.
Fair outcomes
Our conduct approach guides us to do the right thing and to
focus on the impact we have for our customers and the financial
markets in which we operate. It complements our purpose and values
and - together with more formal policies and the tools we have to
do our jobs - provides a clear path to achieving our purpose and
delivering our strategy. For further information on conduct, see
page 4. For further details on our purpose-led conduct approach
framework, see www.hsbc.com/who-we-are. Our section 172 statement,
detailing our Directors' responsibility to stakeholders, can be
found on page 9.
Our Covid-19 actions
Having a clear purpose and strong values has never been more
important, with the Covid-19 pandemic testing us all in ways we
could never have anticipated. Since the world changed in 2020, we
adapted to new ways of working and endeavoured to provide support
to our customers during this challenging period. In the following
section, we have set out further ways that we continued to support
our stakeholders.
Our colleagues
We believe diversity makes us stronger and we are dedicated to
building a diverse and connected workforce. In 2021, HSBC Bank plc
increased representation of women in senior roles to 24.0% narrowly
missing our target of 24.3%. However, as we progress beyond the
Transformation and into growth mode, we are committed to stretching
our gender target further and have set a target of 26.4% (2.4%
higher than the 2021 actuals).
In July 2020, the Group set out HSBC's global race commitments,
which included the goal of doubling the number of Black employees
in senior roles over the following five years. In Europe, we
continue to place a strong focus on the quality and transparency of
our ethnicity data in countries where it is legally permissible. We
are committed to improving our ethnic diversity and put in place
important foundations in 2021 through leadership development
programmes, inclusive hiring, and investing in the next generation
of high-performing diverse talent.
Our Future Skills programme helps prepare our people for the
changing skills required in the future workplace. We are
encouraging our employees to take ownership of their development
and supporting them to do so.
During our Future Skills Summer campaign our new Degreed
Learning Experience Platform was formally launched to help
colleagues shape their development using both internal and external
learning content. As part of the campaign colleagues were
encouraged to identify four skills they wanted to personally
develop. By the end of 2021, 8,200 colleagues had successfully
registered and accessed the platform. More than 8,500 hours of
learning were completed by over 3,000 colleagues.
Our Climate ambition
We're playing a leading role in helping to mobilise the
transition to a global net zero economy, not just by financing it,
but by helping to shape and influence the global policy agenda. The
Group has set on-balance sheet financed emissions targets for the
oil and gas, and power and utilities sectors, aligned to the IEA's
net zero scenario, underpinned by a clear science-based strategy.
To support the Group's ambition of net zero financed emissions,
unlocking transition finance for our portfolio of clients will be
crucial. The Group has changed how disclosures are provided against
the Task Force on Climate-Related Disclosures ('TCFD') framework by
embedding the content previously provided in a stand-alone TCFD
Update within the HSBC Holdings plc Annual Report and Accounts
2021. The summary TCFD disclosure can be found on page 63 of the
HSBC Holdings plc Annual Report and Accounts 2021.
Engaging with our stakeholders
Engaging with our stakeholders is core to being a responsible
business. To determine material topics that our stakeholders are
interested in, we conduct a number of activities throughout the
year, including engagements outlined in the table below.
Material
topics highlighted
Our stakeholders How we engage by the engagement
Customers Our customers' Customer
voices are heard advocacy
through our interactions
with them, surveys
and by listening
to their complaints
---------------- ----------------------------
Employees Our colleagues' Future Skills
voices are heard and Diversity
through our employee & Inclusion
Snapshot survey,
Exchange meetings
and our 'speak-up'
channels, including
our global whistleblowing
platform, HSBC
Confidential
---------------- ----------------------------
Investors Our ordinary shares Coal financing
are held by our policies
parent HSBC Holdings
plc, however external
parties invest
in our bond issuance.
We engage with
these investors
via our investor
relations programme
which enables investor
queries alongside
a broader programme
of management meetings
and market engagement
---------------- ----------------------------
Communities We welcome dialogue Financial
with external stakeholders, Inclusion
including non-governmental and Community
organisations ('NGOs') Investment
and other civil
societies groups.
We engage directly
on specific issues
and by taking part
in external forums
and working groups
---------------- ----------------------------
Regulators We proactively Anti-bribery
and governments engage with regulators and Corruption
and governments
to facilitate strong
relationships via
virtual and in-person
meetings, responses
to consultations
individually and
jointly via the
industry bodies
---------------- ----------------------------
Suppliers Our ethical and Suppliers
environmental code ability to
of conduct for service HSBC
suppliers of goods at an appropriate
and services sets cost, risk
out how we engage profile and
with our suppliers ability to
on ethical and meet the
environmental performance demand by
the bank
---------------- ----------------------------
Supporting our stakeholders through Covid-19
The Covid-19 pandemic continues to create a great deal of
uncertainty and disruption for the people, businesses and
communities we serve around the world. It is affecting everyone in
different ways, with markets at different stages of the crisis.
The outbreak continued to pose significant challenges for our
customers. Our immediate priority has been to do what we can to
provide them with support and flexibility; with customers doing
more of their banking online, we have also deployed new technology
to help enable them to engage with us in new ways.
Employee well-being remains a top priority as we transition to
new ways of working and continue to navigate through the pandemic.
The support we provide is driven by the feedback from our people
surveys. In 2021, we launched new tools and training to support
mental, physical and financial health. We are also enabling more
colleagues to work flexibly and continue to follow social
distancing and protection measures in line with local guidance. We
firmly believe that helping our people to be healthy and happy is a
key enabler of our strategy, and benefits the people and
communities we serve.
Our ESG metrics and targets
The Group has established targets, that guide how we do
business, including how we operate and how we serve our customers.
These include targets designed to help us to make our business -
and those of our customers - more environmentally and socially
sustainable. They also help us to improve employee advocacy and
diversity at senior levels as well as strengthen our market
conduct.
The 2021 annual incentive scorecards of the Group Chief
Executive, Group Chief Financial Officer and members of the Group
Executive Committee have 30% weightings for measures linked to
outcomes that underpin the ESG metrics below. ESG metrics are also
incorporated into the Europe Chief Executive and Executive
Committee member scorecards.
Our Environmental metrics:
HSBC Holdings plc refreshed a number of metrics and targets to
better align with its strategy and the vision for ESG, including
its ambition to achieve zero net operational emissions by 2030.
HSBC Bank plc reports emissions following the Greenhouse Gas
Protocol, which incorporates the scope 2 market-based emissions
methodology. We report greenhouse gas emissions resulting from the
energy used in our buildings and employees' business travel. Due to
the nature of our primary business, carbon dioxide is the main type
of greenhouse gas applicable to our operations. While the amount is
immaterial, our current reporting also incorporates methane and
nitrous oxide for completeness. We do not report employee home
working emissions. In 2021 we collected data on energy use and
business travel for our operations in Europe in France, Germany,
Malta, and Switzerland, which accounted for approximately 67% of
our FTEs in HSBC Bank plc(1) .
At the end of 2021, HSBC Bank plc achieved a 12% reduction in
greenhouse gas emissions compared to 2020. Emissions in 2021 were
0.61 tonnes CO(2) e per FTE.
For further information regarding our environmental footprint,
please visit
https://www.hsbc.com/who-we-are/our-climate-strategy/becoming-a-net-zero-bank.
Our Social metrics:
-- Employee engagement w as 48% as at the end of 2021, up by by 2% compared to 2020(1) .
-- Employee gender diversity, our target was 24.3% of women in
senior leadership roles by the end of 2021. The outcome for 2021
was 24.0% of women in senior leadership roles(2) .
Our Governance metrics:
-- Sustained delivery of global conduct outcomes, with 97.8% of
staff having completed conduct training in 2021. Our target for
2021 was 98%(3) .
1 To estimate the proportion of FTEs in HSBC Bank plc covered by
the emissions data collected, we have calculated FTEs reporting
into HSBC Bank plc in the relevant countries where emissions data
is collected as a proportion of total FTEs in HSBC Bank plc.
2 Performance is based on our employee Snapshot results. We
transitioned to the employee engagement index in 2020.
3 Senior leadership is classified as those at band 3 and above
in the Group's global career band structure. We narrowly missed our
2021 target, our focus on improving gender balance in senior
leadership across Europe remains a priority for HSBC Bank plc's
executive committee for 2022.
4 The completion rate shown relates to the 2021 financial crime
training module. The 2021 regulatory conduct training has been
launched in January 2022 and will run through the first quarter of
2022.
Responsible Business Culture
We have the responsibility to protect our customers, our
communities and the integrity of the financial system. In this
section, we outline our requirements under the Non-Financial
Reporting Directive.
Environmental matters
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.
In fulfilment of the Group's commitment approved by shareholders
at the Group AGM in May 2021, the Group published a policy to phase
out thermal coal financing in EU and OECD markets by 2030, and
globally by 2040. This incorporates project finance, direct
lending, or arranging or underwriting of capital markets
transactions to in-scope clients, as well as the refinancing of
existing finance facilities.
More information about the Group's assessment of climate risk
can be found in the HSBC Holdings plc annual report, under the Task
Force on Climate-related Financial Disclosures and climate
strategy. HSBC has actively created opportunities for cross
sectoral dialogue to advance the topic of sustainability, across
key markets. In Germany, HSBC Bank plc and the International
Chamber of Commerce organised a two day Pre COP event on climate
action, global challenges, international climate policy and the
role of business, involving international and national experts from
the United Nations, European Union, governments, COP-Presidency
(UK), civil society, business and academia. HSBC Armenia also
organised, in partnership with the British Embassy, the first
conference to promote sustainable finance, titled 'Joining for a
Green Future'.
Employee matters
We want to encourage a dynamic and inclusive culture where our
colleagues can expect to be treated with dignity, and respect. We
are proud to be an organisation that takes action where we find
behaviours that falls short of this expectation. We monitor
achievement against this goal through metrics that we value.
Listening to our colleagues is critical to the business we conduct
and is reflected in our purpose and values, which were established
through enterprise wide listening and engagement activities. We
continue to seek innovative ways that encourage and provide
opportunities for our people to speak up about things that are
important to them. We recognise that at times people may not feel
comfortable speaking up through the usual channels. HSBC
Confidential is the Group's global whistleblowing channel, open to
colleagues past and present as an anonymous route through which
they can raise concerns confidentially at their discretion.
The development of our people is core to the success of our
organisation. We continue to develop and implement practices that
build employee capability and identify, develop and deploy talented
employees; this ensures an appropriate supply of high calibre
individuals with the right values, skills and experience for
current and future senior management positions.
Since the launch of HSBC University in 2017, we have continued
to add to the portfolio of world class leadership and professional
development programmes for leaders and people managers including
our flagship programmes, Accelerate into Leadership, Accelerating
Female Leadership and Leading Business and Functions.
Communities
We have a responsibility to invest in the communities where we
operate. We recognise that the world is evolving at a rapid pace
and that a range of new and different skills are now needed for
people to succeed. For this reason, much of our focus is on
charitable partnerships that develop employability and financial
capability skills. We also back climate solutions and innovation,
and contribute to disaster relief efforts based on need. In 2021 in
Europe, we contributed GBP1.7m to charitable programmes and our
employees volunteered 4,200 hours to community activities during
the working day.
Human rights
Our commitment to respecting human rights, principally as they
apply to our employees, our suppliers and through our financial
services lending, is set out in our Human Rights Statement. This
statement, along with our statements under the UK's Modern Slavery
Act ('MSA'), is available on
www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre
.
Anti-corruption and anti-bribery
We are committed to high standards of ethical behaviour and
operate a zero-tolerance approach to bribery and corruption. Our
anti-bribery and corruption policy sets the framework for the Group
and this is followed throughout HSBC Bank plc, to comply with
anti-bribery and corruption legislation in all jurisdictions in
which we operate, and gives practical effect to global initiatives,
such as the OECD Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions. Where local
legislation is in place in a jurisdiction, local policies are in
place as appropriate, for example in France the Sapin II law
requirements is adhered to.
The principal risks addressed by our anti-bribery and corruption
policy are the risk that our employees, associated persons or
customers engage in bribery or corruption, or that the Group does
so through its strategic activities.
HSBC conducts business with the commitment to supporting the
sustained success of our customers, people and communities.
Non-Financial Information Statement
Disclosures required pursuant to the Companies, Partnerships and
Groups (Accounts and Non-Financial Reporting) Regulations 2016 can
be found on the following pages:
Environmental matters
(including the impact
of the company's business
on the environment) Page 8
-------------------------- -------------
The company's employees Pages 7 to
10 and 94 to
95
-------------------------- -------------
Social matters Page 8
-------------------------- -------------
Respect for human rights Page 9
-------------------------- -------------
Anti-corruption and Page 9
anti-bribery matters
-------------------------- -------------
Business model Page 6
-------------------------- -------------
Principal risks Page 19
-------------------------- -------------
HSBC creates value by providing products and services to meet
our customers' needs. We aim to do so in a way that fits seamlessly
into their lives. This helps us to build long-lasting relationships
with our customers. HSBC maintains trust by striving to protect our
customers' data and information, and delivering fair outcomes for
them and if things go wrong, we need to address complaints in a
timely manner. Operating with high standards of conduct is central
to our long-term success and underpins our ability to serve our
customers. Our Conduct Framework guides activities to strengthen
our business and increases our understanding of how the decisions
we make affect customers and other stakeholders. Details on our
Conduct Framework are available at www.hsbc.com.
Section 172 statement
This section, from pages 9 to 11 forms our section 172
statement. It describes how the Directors have performed their duty
to promote the success of the bank, including how they have
considered and engaged with stakeholders and, in particular, how
they have taken account of the matters set out in section 172(1)(a)
to (f) of the Companies Act 2006 (the 'Act').
The Board considered a range of factors when making decisions
and is supported in the discharge of its duties by:
a. an induction programme and ongoing training to provide an
understanding of our business and financial performance and
prospects;
b. management processes which help ensure that proposals
presented to Board and committee meetings for decision include
information relevant to determine the action that would most likely
promote the success of the bank and involve engagement with
stakeholders where relevant to support appropriate decision making;
and
c. agenda planning for Board and committee meetings to provide
sufficient time for the consideration and discussion of key
matters.
Stakeholder Engagement
The Board understands the importance of effective engagement
with its stakeholders and is committed to open and constructive
dialogue. This helps build trust and allows the Board to better
understand the impact of the bank's actions on its stakeholders and
respond to the challenges facing the bank. Depending on the nature
of the issue in question, however, the relevance of each
stakeholder group may differ and not every decision the Board makes
will necessarily result in a positive outcome for all
stakeholders.
The Board continued to focus its engagement with the bank's six
key stakeholders, namely the bank's customers, employees,
shareholders and investors, communities, suppliers, and regulators
and governments. In discharging its responsibilities, the Board
seeks to understand, and have regard to, the interests and
priorities of these stakeholders.
For further details regarding the role of the Board and the way
in which it makes decisions, including key activities during 2021,
please see page 89.
The Board regularly receives reports from management on issues
concerning its stakeholders, which it takes into account in its
discussions and in its decision-making process as part of their
duties under section 172. In addition to this, the Board seeks to
understand the interests and views of the bank's stakeholders by
engaging with them directly as appropriate. The ongoing impact of
the Covid-19 pandemic has restricted the Board's ability to engage
with stakeholders face-to-face, but examples of how the Directors
engaged with stakeholders are set out below:
Customers
Customers are at the core of the bank's business model: without
customers there would be no bank. The Board strives to ensure it
has a broad understanding of customers, their needs and challenges,
and to give full consideration to these.
During the year, the CEO and his senior management team
continued to engage directly with customers, while the Board
continued to monitor the bank's approach to supporting customers.
The Board received regular reports from senior management on
interaction with customers, which included key performance
indicators measuring the impacts and challenges to customers as a
result of the ongoing Covid-19 pandemic and associated Covid-19
relief payment moratoria, the impact of the free trade agreement
between the EU and UK which excluded EU-wide arrangements for
financial services, the bank's Europe transformation programme and
associated conduct considerations. Dedicated deep dive sessions
were also held, with one such session focused on HSBC Life and the
Insurance business.
Employees
Employees are critical to the successful operation of the bank
and its long-term future.
During the year the Board received regular updates from senior
management on various metrics and feedback tools in relation to
employees, including updates on Diversity and Inclusion and the
Gender Pay Gap. Updates were also provided on the impact on
employee wellbeing and how the bank was supporting its staff. The
focus on employees by the Board was also heightened through the
frequent updates provided to the Board on the bank's Europe
transformation programme and how staff were being impacted by the
level of change. These updates considered key areas of people risk
and the future of work in a post-pandemic environment.
Shareholders and Investors
The bank is a wholly owned subsidiary of the HSBC Holdings plc
and, as such, the Board took into account the implications of its
decisions with regard to its ultimate shareholder, HSBC Holdings
plc, and its debt security investors.
During the course of the year, the Group Chairman held a number
of principal subsidiary chair conferences which were attended by
the Chairman of the Board. In addition, Chairs of the Audit and
Risk Committees participated in regional Audit and Risk committee
forums hosted by their Group counterparts. These were attended both
by the bank's Directors as well as Audit and Risk Committee Chairs
of material subsidiaries. The Board also received updates from
management on the bank's debt issuance programmes.
Regulators and Governments
Directors periodically meet with the bank's regulators, the
Financial Conduct Authority ('FCA') and Prudential Regulatory
Authority ('PRA'). It is central to the success of the bank that it
has strong relationships with these stakeholders and that there is
a mutual understanding on expectations and challenges given their
impact on customers, the business model and the bank's
strategy.
During the year, members of the Board met regularly with
regulators both in the UK and Europe and engagement continued
during 2021 notwithstanding the logistical challenges posed by the
impact and continued national and regional lock-downs due to the
Covid-19 pandemic. The Board held a dedicated deep dive session on
how HSBC interacts with regulators globally and at the European
level to better understand the scope of engagement at executive
level with relevant regulators in the region.
Suppliers
Suppliers are critical to supporting the infrastructure and
operations of the business and have contractual relationships with
the bank.
During the year, the Board received an update on the bank's
performance against its statutory reporting obligations in respect
of the payment of third party suppliers. This also provided an
insight into the impact of its procurement processes and procedures
on suppliers.
Communities and Environment
The bank has legal, regulatory and social responsibilities to
the community and its environment.
During the year the Board received updates on the Group's
evolving climate and sustainable finance strategy and net zero
ambition. As we go into 2022, and as a sustainable finance strategy
tailored for European business is further developed, the Board will
receive updates on the bank's delivery against the ambition and
strategy execution.
Employee Engagement
The Chief Executive Officer and senior management are actively
involved in the engagement of employees through leadership calls
and quarterly all employee webcasts to keep the workforce
up-to-date on business developments and answer questions. In
addition, the Chief Executive Officer issues a Europe-wide
newsletter which updates employees on initiatives across the
region. The Board receives regular updates from the Chief Executive
Officer and the Head of HR on employee matters, including feedback
received through Town Halls and Exchanges, as well as through
regular employee surveys. One of the non-executive Directors also
has a particular focus on employee matters to enhance the Board's
view of people issues and to gain a better understanding of the
employee perspective. Further details of the bank's engagement with
employees can be found on pages 7 to 10 and 94 to 95.
Principal Decisions
Set out below are some of the principal decisions made by the
Board during 2021. In each case, in taking such decisions, the
Directors exercised their statutory duties, including the duty to
act in the way that they consider, in good faith, would be most
likely to promote the success of the bank for the benefit of its
members as a whole.
Europe Transformation Programme
Following a revision of the bank's operating plan in 2020 in
response to the revised Group strategy, in 2021 the Board continued
to oversee and challenge management in their execution of the
bank's Europe transformation programme. The bank's continued focus
on simplification of its presence in the region included a proposal
being brought to the Board in May 2021 for the disposal of the
group's non-core retail banking business in France.
Prior to approval, the Board constructively challenged and
engaged with senior management to consider the financial and
commercial profile of the business itself, alternative proposals in
respect of the retail business and the likely consequences of the
disposal on the bank's key stakeholders, including customers and
its shareholder and investors. In considering stakeholders, the
Board also considered the consultation undertaken with relevant
French works' councils, and the interests of the bank's employees,
in respect of the disposal. Completion of the disposal will involve
engagement with other key stakeholders, including relevant
regulators.
In reaching its decision, the Board acknowledged the rationale
for the transaction in the context of the strategy for the group
set by its shareholder and considered the interests of its
shareholder in undertaking the disposal. It concluded that the
disposal would be a strong enabler in simplifying HSBC's business
in Continental Europe, allowing management to accelerate the
transformation of the European wholesale banking franchise.
Additionally, the Board had regard to customers. In particular, the
Board considered the terms negotiated as part of the transaction to
help to ensure an effective transition of the business to the buyer
in light of the importance of maintaining ongoing support for
customers. Furthermore, the proposed sale to an experienced
investor, with a strategic focus on retail banking, was recognised
as giving support to the development of the retail business over
the longer term.
Having taken all of these and other factors into account,
including an assessment of the financial merits and risks, and the
interests of employees, the Board agreed to proceed with the
proposal on the basis that it considered that it was in the best
interests of the bank's members as a whole and would promote the
long term success of the bank, as subsequently announced by HSBC on
18 June 2021.
Legacy Capital Consent Solicitation
A key regulatory responsibility of the bank for a number of
years has been to help facilitate an industry-wide transition from
the use of interbank offered rates ('Ibors'), such as the London
interbank offered rate ('Libor'), to using near risk free
replacement rates ('RFRs') or alternative reference rates. The bank
had two externally-issued outstanding English law capital
instruments (one of which was issued through a Jersey Limited
Partnership vehicle) that contained provisions requiring the
interest rate to be determined by reference to a GBP Libor
rate.
In view of the anticipated demise of GBP Libor from the end of
2021, in July 2021, the Board considered a proposal to seek consent
from the bondholders to amend the terms and conditions of such
instruments, to transition them from using GBP Libor to calculate
the interest rate to instead use the Sterling Overnight Index
Average ('SONIA') rate, which is the RFR recognised as the
preferred alternative rate for sterling markets.
As part of its consideration, the Board took into account the
impact of the project on the bank's key stakeholders, in particular
its investors in such instruments, and its obligations to, and
relationship with, its regulators. In this respect, the Board
acknowledged the expectations of the regulators that the bank seeks
to swiftly transition its portfolio of legacy GBP Libor contracts
(which includes these instruments) prior to the anticipated demise
date for GBP Libor. From an investor perspective, the Board was
mindful of the need to adopt transition terms that were consistent
with others in the market and that included the industry agreed
adjustment spread to be added to the relevant SONIA rate, to
compensate investors for the difference between SONIA and Libor
reference rates.
Having considered these factors,
the Board recognised and approved
the need for the bank to seek the
consent of bondholders to transition
these instruments, acknowledging
that this would be in the best interests
of the bank's members as a whole
and would promote the long term
success of the bank. Tax
Our approach to tax
We are committed to applying both the letter and the spirit of
the law in all territories where we operate, and have adopted the
UK Code of Practice for the Taxation of Banks. As a consequence, we
seek to pay our fair share of tax in the countries in which we
operate. We continue to strengthen our processes to help ensure our
banking services are not associated with any arrangements known or
suspected to facilitate tax evasion.
HSBC continues to apply global initiatives to improve tax
transparency such as:
-- the US Foreign Account Tax Compliance Act ('FATCA');
-- the OECD Standard for Automatic Exchange of Financial Account
Information (also known as the Common Reporting Standard);
-- the Capital Requirements Directive IV ('CRD IV') Country by Country Reporting;
-- the OECD Base Erosion and Profit Shifting ('BEPS') initiative; and
-- the UK legislation on the corporate criminal offence ('CCO')
of failing to prevent the facilitation of tax evasion.
We do not expect the BEPS or similar initiatives adopted by
national governments to adversely impact our results.
Key Performance Indicators
The Board of Directors tracks the
group's progress in implementing
its strategy with a range of financial
and non-financial measures or key
performance indicators ('KPIs').
Progress is assessed by comparison
with the group strategic priorities,
operating plan targets and historical
performance. The group reviews its
KPIs regularly in light of its strategic
objectives and may adopt new or
refined measures to better align
the KPIs to HSBC's strategy and
strategic priorities. Financial
KPIs
2021 2020
----------------------- -------------------- -------------------------
Profit/(loss) before
tax (reported) (GBPm) 1,023 (1,614)
----------------------- -------------------- -------------------------
Profit/(loss) before
tax (adjusted) (GBPm) 1,577 (184)
Cost efficiency ratio
(reported) (%) 89.2 113.6
----------------------- -------------------- -------------------------
Cost efficiency ratio
(adjusted) (%) 80.9 89.6
----------------------- -------------------- -------------------------
Return on tangible
equity (%) 6.1 (2.7)
----------------------- -------------------- -------------------------
Common equity tier
1 capital ratio (%) 17.3 14.7
----------------------- -------------------- -------------------------
Profit/(loss) before tax (reported/adjusted): Reported
profit/(loss) before tax is the profit/(loss) as reported under
IFRS. Adjusted profit/(loss) before tax adjusts the reported
profit/(loss) for the effect of significant items as detailed on
pages 15 to 16.
Reported profit before tax in 2021 was GBP1,023m compared with a
loss before tax of GBP(1,614)m in 2020. This was primarily driven
by lower reported operating expenses driven by the non-recurrence
of a GBP802m impairment of intangible assets in 2020
and lower restructuring and other related costs, including
severance costs, arising from the bank's transformation programme.
Expected credit losses and other credit impairment charges ('ECL')
were significantly lower reflecting an improvement in the economic
outlook. Revenue was higher compared with 2020, notably in our
insurance manufacturing business in WPB, partly offset by higher
restructuring and other related costs comprising disposal losses
associated with RWA reductions which related to the commitments at
our February 2020 business update.
Adjusted profit before tax was GBP1,577m compared with a loss
before tax of GBP(184)m in 2020. This was driven by lower ECL and
lower operating expenses as well as strong revenue performance. The
increase in revenue included positive market impacts on the present
value of in-force ('PVIF') insurance contracts in insurance
manufacturing in WPB driven by an increase in interest rate yield
curves and favourable movements in valuation adjustments in Markets
and Securities Services ('MSS'). Operating expenses decreased as a
result of the tight control of discretionary spend to reflect the
economic outlook and the initial impact of our transformation of
the bank. This was partly offset by the UK bank levy incurred in
2021, which was previously paid by the Group. In addition, there
was a gain of GBP191m compared with a loss of GBP(1)m in 2020
recognised from our share of profit/(loss) from associates.
Reported cost efficiency ratio was 24.4 percentage points lower
compared with 2020 driving by higher revenue and lower operating
expenses. Reported revenue increased by 3.7% and reported operating
expenses decreased by 18.5%, mainly driven by the factors mentioned
above.
Adjusted cost efficiency ratio improved by 8.7 percentage points
from 2020, reflecting higher revenue and lower costs Revenue
increased by 5.6%, mainly driven by favourable PVIF and positive
valuation adjustments. Operating expenses decreased by 4.7%, mainly
driven by lower costs reflecting our transformation plans partly
offset by the UK bank levy and higher variable pay.
Return on tangible equity ('RoTE') is computed by adjusting
reported profit attributable to ordinary shareholders by excluding
movements in PVIF and significant items (net of tax), divided by
average tangible shareholders' equity excluding fair value of own
debt, debt valuation adjustment ('DVA') and other adjustments for
the period. The adjustment to reported results and reported equity
excludes amounts attributable to non-controlling interests.
We provide RoTE as a way of assessing our performance, which is
closely aligned to our capital positions.
CET1 capital ratio represents the ratio of common equity tier 1
capital to total risk-weighted assets ('RWA'). CET1 capital is the
highest quality form of capital comprising shareholders' equity and
related non-controlling interests less regulatory deductions and
adjustments.
The group seeks to maintain a strong capital base to support the
development of its business and meet regulatory capital
requirements at all times.
The CET1 capital ratio of 17.3% in 2021 increased by 2.6
percentage points from 2020, mainly due to a reduction in RWAs.
Non-financial KPIs
We monitor a range of non-financial KPIs focusing on customers,
people, culture and values including customer service satisfaction,
employee engagement and diversity and sustainability.
For details on customer service and satisfaction please refer
below; for the remaining non-financial KPIs, refer to the Non
financial reporting section on page 8 and Corporate Governance
section on pages 88 to 96. Customer service, awards and
satisfaction
MSS
Our customers are at the heart of what we do and we are
committed to delivering services and capabilities that meet their
needs and help them fulfil their ambitions.
In 2021, we won numerous awards and consistently ranked highly
with our European clients, including winning Currency Manager of
the Year at the European Pension Awards, Western Europe's Best Bank
for SMEs by EuroMoney, ranking number one for overall service
quality in Continental Europe in the Coalition Greenwich Foreign
Exchange study, and ranking number one in both the UK and Ireland
as best fund and administration provider in the R&M Investor
Services Survey.
These accolades, coupled with multiple milestones and
achievements in sustainable finance, demonstrate our unique
capabilities to support clients locally and connect them to markets
and expertise in the East, as well the key role Europe plays in
supporting the Group's strategic priorities.
GB
Within Global Banking Europe we remain committed to providing
excellent customer experience and we continue to strive towards
improving our proposition to meet client needs.
In 2021, HSBC received a number of external awards, recognising
the support we've provided to our clients for example, Investment
Bank of the Year for Bonds by The Banker.
Aligned with our strategy of opening up opportunities for our
clients, HSBC was also recognised with an Excellence Award in
International Network Breadth by the Coalition Greenwich Awards and
won seven bond awards from Environmental Finance in 2021. These
awards, in particular, highlight the continued strength and
differentiation of our ESG capabilities globally as well as the
role we play in Europe helping our clients transition to net
zero.
CMB
Customer experience and satisfaction are fundamental priorities
for Commercial Banking in Europe. We measure a number of metrics,
track customer service levels and gather direct customer feedback
to ensure our solutions and channels remain relevant and fit for
our customers' needs today. In 2021, we launched Europe 1 Form, a
single document addressing all of a clients' onboarding
requirements to enable an account being opened. These type of
initiatives help to improve our customers' journeys and experience,
and ensures that we continue to achieve internal operating
efficiencies. We have also pivoted towards a centralised booking
model, which has enabled us to provide regional coverage to our
customers and helped to support our their needs on a pan-European
basis. Looking ahead, we will continue to support our customers to
formulate transition plans to achieve their net-zero targets.
WPB
In WPB Europe, enhancing customer experience and improving
satisfaction remains integral to our strategy. This is monitored
through a number of customer satisfaction metrics covering branch,
contact centre and digital channels. We recognise the importance of
customer feedback and continue to enhance our insights to gain a
better understanding of our clients to provide a more personalised
and relevant service.
Digital continues to be a principal area of investment;
enhancing customer experience, reducing processing costs and
driving the sustainability agenda. In Expat we have launched a new
mobile app including the deployment of soft token. This will reduce
the need for over 20,000 hard tokens being sent to customers
globally. Our Private Banking arm is also committed to enhancing
digital offerings, including enhanced capabilities to support our
advisory offering, and improved internal platforms and software to
support our people in delivering excellent client service.
We recognise that enhancing customer satisfaction is an evolving
process and are committed to ensure our investments and focus are
prioritised to achieve this.
Economic background and outlook
UK
Continued recovery amid high inflation
The UK economy grew by 1% in the fourth quarter of 2021,
bringing the level of output to 0.4% above its pre-pandemic level.
While the UK only tightened restrictions modestly over the winter
in response to concerns surrounding the Omicron variant of
COVID-19, the pace of economic growth slowed and uncertainty
remains high. Much of the expansion through 2021 was driven by
household and government spending. On the other hand, business
investment and exports have been subdued (10% and 18% below their
pre-pandemic peaks). Headwinds related to the UK's exit from the EU
might have played a role.
As the economy has rebounded, it has run into supply
constraints, both in terms of global supply chain disruption, and
labour shortages. The former might be constraining trade and
manufacturing, while the latter has been associated with record job
vacancy levels.
These supply issues, coupled with significant rises in energy
prices - wholesale gas prices in particular - have led to a sharp
rise in inflationary pressure. The annual CPI inflation rate stood
at 5.5% in January 2022, more than double the Bank of England's 2%
target. Inflation is expected to rise further in the near term,
with sharp rises in regulated utility prices set for April.
Looking ahead, HSBC Research expects the UK economy to continue
to normalise following the worst of the pandemic-related
disruption, with GDP growing by 4% in 2022 and by 1.6% in 2023. As
energy and supply-related pressures eventually ease, HSBC Research
expects CPI inflation to start falling back through 2022, then fall
to around the 2% mark in 2023.
UK rates could rise this year
Given inflation strength and 'tightness' in the labour market,
the Bank of England ('BoE') has begun to tighten monetary policy,
with a 15 basis point rise in Bank Rate in December and a 25 basis
point increase in January, lifting the rate to 0.50%. HSBC Research
expects another three rate increases in 2022 bringing Bank Rate up
to 1.25%. The BoE has announced that, with Bank Rate now at 0.50%,
it will stop reinvesting maturing government bonds held as part of
its Quantitative Easing ('QE') programme.
Fiscal policy, which has been highly supportive since the onset
of the pandemic, is set to achieve a narrowing in the government
budget deficit over the coming years. As part of the consolidation,
and in order to meet the increasing spending commitments relating
to an ageing population, taxes as a share of the overall economy
are set to rise, according to the government's forecasts, to levels
not seen since early the 1950s.
Eurozone
Recovering from renewed Covid-19 concerns
Even before heightened concerns about the Omicron variant,
Covid-19 cases were rising sharply in several European countries.
In response, several countries curtailed hospitality-sector opening
hours and tightened restrictions for unvaccinated people. This has
compounded ongoing headwinds from supply chain disruption, which
has weighed on the manufacturing sector in particular. And economic
growth slowed in the fourth quarter, from 2.2% to 0.3%, though that
allowed GDP to return to its pre-pandemic peak. More recently, case
numbers have been in decline and the business surveys point to a
pick-up in near-term growth.
Despite the softening in overall activity at the turn of the
year, the labour market has remained robust. In December 2021, the
eurozone unemployment rate declined from 7.1% to 7.0%. That
compares to a December 2020 peak of 8.4% and a February 2020 level
of 7.3%.
As a result of sharp rises in energy prices, and supply
disruption, annual eurozone consumer price inflation reached a
record high of 5.1% in January 2022. Importantly though, eurozone
wage cost pressures remain fairly contained, keeping a lid on
underlying inflation rates.
HSBC Research expects a continued economic recovery, with
eurozone GDP growing by 3.5% in 2022 and 2.3% in 2023. Meanwhile,
as long as wage pressures remain in check, and assuming an easing
in supply disruption, inflation is likely to fall sharply over the
coming months. HSBC Research sees the headline inflation rate
falling to around the 2% mark in early 2023.
Eurozone interest rates could rise this year
Although eurozone wage pressures appear to remain fairly soft,
significant upside news to inflation, alongside the ongoing
economic recovery, means that the European Central Bank ('ECB') has
signalled the possibility of paring back monetary policy stimulus.
In December the ECB announced that it will end its Pandemic
Emergency Purchase Programme ('PEPP') in March 2022.
Beyond that, HSBC Research expects the ECB to end net asset
purchases under its regular Asset Purchase Programme ('APP') by the
end of September 2022, paving the way for a 25 basis point rise in
the Deposit Rate (from -0.50% to -0.25%) in October 2022, then
another 25 basis point increase in March 2023. In mid-February,
market prices pointed to a faster pace of ECB tightening, with more
than 40bps of rate rises priced in for 2022.
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 107. In measuring our
performance, the financial measures that we use include those
derived from our reported results in order to eliminate factors
that distort year-on-year comparisons. These are considered
alternative performance measures.
All alternative performance measures are described and
reconciled to the closest reported financial measure when used.
Adjusted performance
Adjusted performance is computed by adjusting reported results
for the year-on-year effects of significant items that distort
year-on-year comparisons.
We use 'significant items' to describe collectively the group of
individual adjustments excluded from reported results when arriving
at adjusted performance. These items 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
year-on-year performance.
Summary consolidated income statement for the year ended
2021 2020
GBPm GBPm
--------------------------------------------- ---------------------------------- -----------------------------------
Net interest income 1,754 1,898
--------------------------------------------- ---------------------------------- -----------------------------------
Net fee income 1,413 1,400
--------------------------------------------- ---------------------------------- -----------------------------------
Net income from financial instruments
measured at fair
value 3,432 2,314
--------------------------------------------- ---------------------------------- -----------------------------------
Gains less losses from financial investments 60 95
--------------------------------------------- ---------------------------------- -----------------------------------
Net insurance premium income 1,906 1,559
--------------------------------------------- ---------------------------------- -----------------------------------
Other operating income 594 417
--------------------------------------------- ---------------------------------- -----------------------------------
Total operating income(1) 9,159 7,683
Net insurance claims, benefits paid and
movement in
liabilities to policyholders (3,039) (1,783)
--------------------------------------------- ---------------------------------- -----------------------------------
Net operating income before change in
expected credit
losses and other credit impairment
charges(1) 6,120 5,900
--------------------------------------------- ---------------------------------- -----------------------------------
Change in expected credit losses and other
credit impairment
charges 174 (808)
--------------------------------------------- ---------------------------------- -----------------------------------
Net operating income 6,294 5,092
Total operating expenses excluding impairment
of goodwill
and other intangible assets(2) (5,416) (5,903)
Impairment of goodwill and other intangible
assets (46) (802)
--------------------------------------------- ---------------------------------- -----------------------------------
Operating profit/(loss) 832 (1,613)
--------------------------------------------- ---------------------------------- -----------------------------------
Share of profit/(loss) in associates and
joint ventures 191 (1)
--------------------------------------------- ---------------------------------- -----------------------------------
Profit/(loss) before tax 1,023 (1,614)
Tax credit 23 136
--------------------------------------------- ---------------------------------- -----------------------------------
Profit/(loss) for the year 1,046 (1,478)
--------------------------------------------- ---------------------------------- -----------------------------------
Profit/(loss) attributable to the parent
company 1,041 (1,488)
--------------------------------------------- ---------------------------------- -----------------------------------
Profit attributable to non-controlling
interests 5 10
--------------------------------------------- ---------------------------------- -----------------------------------
1 Net operating income before change in expected credit losses
and other credit impairment charges is also referred to as
revenue.
2 Total operating income and expense include significant items as detailed on pages 14 to 16.
2
Reported performance
Performance in 2021 was stronger compared with 2020, which was
heavily impacted by the Covid-19 pandemic.
Reported profit before tax was GBP1,023m, compared with a loss
before tax in 2020 of GBP(1,614)m, an increase of GBP2,637m. This
was mainly due to a significant reduction in operating expenses, a
net release in ECL compared with charges in 2020, and stronger
revenue performance.
Reported revenue was GBP220m higher, largely driven by
favourable market impacts on the present value of in-force ('PVIF')
long-term insurance contracts in insurance manufacturing in WPB.
Also, 2020 revenue included a significant negative impact from
valuation adjustments in MSS. This was partly offset in 2021 by
higher restructuring and other related costs comprising disposal
losses associated with RWA reductions, related to the commitments
at our February 2020 business update. ECL were lower driven by a
net release in 2021 compared with net charge in 2020 as a result of
the deteriorating economic outlook during the onset of the Covid-19
outbreak. Operating expenses were lower, mainly driven by the
non-recurrence of a impairment of goodwill and other intangible
assets and lower transformation costs, partly offset by the UK bank
levy incurred for the first time in 2021. In addition, there was
also a gain compared with a loss in 2020 recognised from our share
of profit/(loss) from associates.
Net interest income ('NII') decreased by GBP144m or 8% compared
with the prior year. NII was lower mainly driven by the impact of
lower interest rate environment, notably in Retail deposits in WPB
and in GLCM (in Global Banking). Revenue was also lower due to a
reduction in balance sheet lending as a result of the
transformation programme to reduce RWAs. 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 GBP13m or 1% compared with the prior
year, primarily in WPB largely in Asset Management driven by
favourable market conditions and in Retail due to higher fees
commission driven by increased levels of customer activity compared
to 2020, which was impacted by the Covid-19 pandemic.
Net income from financial instruments measured at fair value
increased by GBP1,118m or 48% compared with the prior year. In WPB,
revenue increased primarily reflecting a stronger equity market
performance and higher interest rate yields in France compared with
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 net
insurance claims and benefits paid and movement in liabilities to
policyholders.
Revenue also increased in MSS largely driven by lower adverse
credit and funding valuation adjustments compared with 2020.
Excluding this, revenue was lower, as 2020 benefited from higher
market volatility supporting a particularly strong performance
within Global Foreign Exchange and Global Debt Markets, notably in
the UK.
By contrast, revenue decreased in GBM Other, mainly driven by
higher restructuring and other related costs comprising disposal
losses associated with RWA reductions, related to the commitments
at our February 2020 business update.
Gains less losses from financial investments decreased by
GBP35m, mainly driven by lower gains on the disposal of bonds held
at fair value through other comprehensive income ('FVOCI') in
Markets Treasury.
Net insurance premium income increased by GBP347m or 22%, in
WPB, from insurance manufacturing revenue in France driven by
higher new business volumes.
Net insurance claims, benefits paid and movement in liabilities
to policyholders increased by GBP1,256m or 70%, primarily in the
insurance business in WPB. The 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 that are held to
support these insurance contract liabilities are reported in 'Net
income from financial instruments designated at fair value'. This
was partly offset by a increase in premium income.
Other operating income increased by GBP177m or 42%, mainly due
to favourable market impacts, notably on PVIF, in insurance
manufacturing in WPB. This reflected a stronger equity market
performance and higher interest rate yields on the valuations of
the liabilities under insurance contracts. This was partly offset
by lower revenue in GBM Other due to lower intercompany recharge
recoveries from other entities in the Group, with an offsetting
decrease in operating expenses.
Changes in expected credit losses and other credit impairment
charges ('ECL') were a net release of GBP174m in 2021, compared
with a net charge of GBP808m in 2020. The net release in 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 2020 due to the
worsening economic outlook at the onset of the Covid-19 outbreak.
The reduction in ECL compared with 2020 also reflected lower levels
of stage 3 charges.
Total operating expenses excluding impairment of goodwill and
other intangible assets decreased by GBP487m or 8%, mainly driven
by a reduction in staff costs, lower contractor and consultancy
spend, and lower discretionary spend, in line with our
transformation plan. In addition, there was also lower expenses
related to severance costs arising from cost efficiency measures
across our global businesses and function. This reduction was
partly offset by the UK bank levy incurred in 2021, which was
previously paid by the Group.
Impairment of goodwill and other intangible assets was GBP756m
lower compared with the prior year. In 2020, operating expenses
included a GBP802m goodwill impairment which principally comprised
the write-off of 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 profit/(loss) in associates and joint ventures was a
profit of GBP191m compared with a loss of GBP(1)m in 2020. The
profit in 2021 included a GBP93m true-up of prior year valuations
in the underlying investments of an associate.
Tax credit was GBP113m lower compared with 2020. The effective
tax rate of 2.3% for 2021 included favourable non-recurring items
in respect of tax rate changes, prior period adjustments and the
recognition of previously unrecognised deferred tax assets in
France.
The effective tax rate of 8.4% for 2020, representing a tax
credit on loss before tax, was mainly due to the non-recognition of
deferred tax on the loss in France for the period.
Adjusted performance
Significant revenue items by business segment - (gains)/losses for
the year ended
GBM Corporate
MSS GB Other CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
31 Dec 2021
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
Reported revenue 2,043 1,367 310 1,096 1,276 28 6,120
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
Significant revenue items 12 - 269 (1) (1) (69) 210
* fair value movements on financial instruments(1) 12 - (5) (1) (1) - 5
-------------------------------------------------------
* restructuring and other related costs(2) - - 274 - - (69) 205
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- ---------------------
Adjusted revenue 2,055 1,367 579 1,095 1,275 (41) 6,330
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
31 Dec 2020(3)
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
Reported revenue 1,966 1,381 437 1,132 1,035 (51) 5,900
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
Significant revenue items 2 - 187 1 - (93) 97
* fair value movements on financial instruments(1) 2 - 2 1 - (2) 3
-------------------------------------------------------
* restructuring and other related costs(2) - - 185 - - (91) 94
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- ---------------------
Adjusted revenue 1,968 1,381 624 1,133 1,035 (144) 5,997
------------------------------------------------------- ---------------------- -------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
1 Includes fair value movements on non-qualifying hedges and
debt valuation adjustments on derivatives.
2 Includes losses associated with the RWA reduction commitments.
3 A change in reportable segments was made in 2021. Comparatives
data have been re-presented accordingly. For further guidance,
refer to
Note 9: Segmental Analysis on page 138.
Significant cost items by business segment - (recoveries)/charges for
the year ended
GBM Corporate
MSS GB Other CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
31 Dec 2021
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Reported operating expenses (2,064) (918) (588) (611) (981) (300) (5,462)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Significant cost items - - 103 (1) 6 236 344
----------------------------------------------------------
* restructuring and other related costs - - 103 (1) 6 236 344
----------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters - - - - - - -
----------------------------------------------------------
- - - - - - -
* impairment of other intangible assets
----------------------------------------------------------
Adjusted operating expenses (2,064) (918) (485) (612) (975) (64) (5,118)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
31 Dec 2020(2)
Reported operating expenses (1,950) (878) (1,351) (773) (1,169) (584) (6,705)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
Significant cost items 1 - 679 114 41 498 1,333
* restructuring and other related costs(1) - - 218 79 5 377 679
----------------------------------------------------------
* settlements and provisions in connection with legal
and regulatory matters 1 - - - - 8 9
----------------------------------------------------------
* impairment of other intangible assets - - 461 35 36 113 645
----------------------------------------------------------
Adjusted operating expenses (1,949) (878) (672) (659) (1,128) (86) (5,372)
---------------------------------------------------------- ---------------------- -------------------- ---------------- --------------------- --------------------- --------------------- ---------------------
1 Includes the write down of software GBP148m.
2 A change in reportable segments was made in 2021. Comparatives
data have been re-presented accordingly. For further guidance,
refer to
Note 9: Segmental Analysis on page 138.
Net impact on profit/(loss) before tax by business segment
GBM Corporate
MSS GB Other CMB WPB Centre Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------- -------------------
31 Dec 2021
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------- -------------------
Reported profit/(loss) before
tax (20) 589 (273) 492 318 (83) 1,023
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------- -------------------
Net impact on reported profit
and loss 12 - 372 (2) 5 167 554
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------- -------------------
* Significant revenue items 12 - 269 (1) (1) (69) 210
--------------------------------
* Significant cost items - - 103 (1) 6 236 344
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- --------------------
Adjusted profit/(loss) before
tax (8) 589 99 490 323 84 1,577
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------- -------------------
31 Dec 2020(1)
Reported profit/(loss) before
tax 17 55 (918) 37 (173) (632) (1,614)
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------- -------------------
Net impact on reported profit
and loss 3 - 866 115 41 405 1,430
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------- -------------------
* Significant revenue items 2 - 187 1 - (93) 97
--------------------------------
* Significant cost items 1 - 679 114 41 498 1,333
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- --------------------
Adjusted profit/(loss) before
tax 20 55 (52) 152 (132) (227) (184)
-------------------------------- ---------------------- -------------------- ----------------- --------------------- --------------------- -------------------- -------------------
1 A change in reportable segments was made in 2021. Comparatives
data have been re-presented accordingly. For further guidance,
refer to
Note 9: Segmental Analysis on page 138.
Adjusted performance
Adjusted profit before tax was GBP1,577m compared with a loss
before tax of GBP(184)m in 2020, up GBP1,761m. This reflected lower
ECL, a strong revenue performance and lower operating expenses.
There was also a gain in our share of profit in associates and
joint ventures compared with a loss in 2020. ECL were significantly
lower mainly reflecting an improvement in the economic outlook from
2020. Adjusted revenue performance was stronger largely driven by
the impact of volatile items including favourable market impacts on
insurance manufacturing in WPB and favourable valuation adjustments
in MSS. Adjusted operating expenses were lower as a result of our
transformation plans and continued prudent management of
discretionary spend. This was partly offset by the UK bank levy
which incurred in 2021.
Adjusted revenue increased by GBP333m or 6%, partly offset by
unfavourable movements in foreign exchange. Excluding this, revenue
increased primarily in WPB, MSS and Corporate Centre. The increase
in WPB reflected favourable market impacts on insurance
manufacturing as equity markets performance remained strong
compared with 2020, which was heavily impacted by the Covid-19
pandemic. In MSS, adjusted revenue was higher driven by lower
adverse credit and funding valuations and continued momentum in
Equities performance, partly offset by lower revenue in Global FX
driven by lower market volatility. Revenue also increased in
Corporate Centre, primarily due to a fair value gain from a
long-standing investment in a Germany-based company. There were
also gains from disposals in Legacy Credit.
Adjusted ECL were GBP982m lower compared with 2020. There was a
net release of GBP174m compared with a net charge of GBP808m in
2020. In 2021, there were releases of stage 1 and 2 provisions
reflecting an improvement in the economic outlook and a
stabilisation of credit risk, compared with a significant build-up
of allowances in the first half of 2020 at the onset of the
Covid-19 outbreak. There were also lower charges against specific
wholesale customers during 2021 compared with 2020.
Adjusted operating expenses decreased by GBP254m or 5%, in part
due to favourable movements in foreign exchange. Excluding this,
operating expenses decreased 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 the UK bank
levy booked in 2021, which was previously paid by the Group.
Share of profit/(loss) in associates and joint ventures was a
profit of GBP191m compared with a loss of GBP(1)m in 2020. Profit
in 2021 included a GBP93m true-up of prior year valuations in the
underlying investments of an associate.
Markets and Securities Services
Adjusted loss before tax was GBP(8)m compared to a profit before
tax of GBP20m, down GBP28m compared with 2020. This was driven by
higher operating expenses, largely offset by higher revenue.
Revenue increased by GBP87m or 4%, mainly driven by lower
adverse credit and funding valuations compared with 2020 and a
stronger performance in Equities, notably in structured
derivatives, driven by higher market volatility. This was partly
offset by lower revenue in Global FX as, in 2020, there was an
exceptional level of volatility and client activity driven by the
onset of the Covid-19 outbreak.
Operating expenses increased by GBP115m or 6%, largely driven by
an increase in performance-related pay reflecting higher revenue
and a higher Single Resolution Fund ('SRF') levy in France and
Germany. This was partly offset by a reduction in staff costs
resulting from our transformation cost-saving initiatives.
Global Banking
Adjusted profit before tax was GBP589m, an increase of GBP533m
compared with 2020, largely driven by lower ECL, partly offset by
higher operating expenses.
Revenue decreased by GBP14m or 1%, mainly driven by unfavourable
movements in foreign exchange. Excluding this, revenue remained
broadly stable compared with 2020. This was despite a reduction in
interest rates in the first half of 2020 and lower customer
balances in 2021, reflecting actions taken to reduce RWAs as part
of our transformation. Revenue in 2020 included mark-to-market
losses which were not repeated in 2021.
ECL net credit of GBP139m compared to a net charge of GBP448m in
2020. The net credit in 2021 mainly reflected releases of stage 1
and stage 2 allowances as the economic outlook improved. This
compared with the significant build-up of charges in 2020 resulting
from the deterioration in the economic situation due to the
Covid-19 outbreak.
Operating expenses were GBP40m or 5% higher compared with 2020,
mainly driven by higher performance-related pay, partly offset by a
reduction in staff costs resulting from our transformation
cost-saving initiatives.
Global Banking and Markets Other
Adjusted profit before tax was GBP99m, compared with a loss
before tax of GBP(52)m in 2020. This was largely driven by lower
operating expenses and gains from disposals in Principal
Investments ('PI').
Revenue decreased by GBP45m or 7%, mainly driven by lower
intercompany cost recoveries which resulted from a change in
billing methodology of GBM costs, where recharges and recoveries
were moved to other entities in the Group (with an offsetting
reduction in operating expenses). This was partly offset by higher
revenue in PI driven by gains following disposals of a number of
funds in 2021 compared with losses in 2020.
Operating expenses decreased by GBP187m or 28% compared with
2020, including the move of certain GBM costs from the bank to
other entities in the Group (offset by lower intercompany
recoveries in revenue). In addition, there was a reduction in staff
costs and performance-related pay resulting from our transformation
initiatives. This was partly offset by the UK bank levy incurred in
2021.
Commercial Banking
CMB performed well in 2021 as we continued to implement our
strategy to focus on serving our international customers.
Adjusted profit before tax was GBP490m, up by GBP339m compared
with 2020. This was mainly driven by lower ECL and lower operating
expenses, partly offset by lower revenue.
Revenue decreased by GBP38m or 3% compared with 2020. This was
primarily in Credit and Lending due to lower customer balances
reflecting actions taken to reduce RWAs as part of transformation.
Revenue also decreased in GLCM 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 net credit of GBP7m compared with a net charge of GBP322m in
2020. The net credit in 2021 largely reflected releases of stage 1
and stage 2 allowances reflecting the improved economic outlook. In
2020, there was significant build-up of charges resulting from the
deterioration in the economic situation driven by the Covid-19
outbreak. In addition, stage 3 charges were lower compared with
2020.
Operating expenses decreased by GBP47m or 7%, mainly driven by a
reduction in staff costs resulting from transformation initiatives.
There were also lower corporate real estate costs due to lower
depreciation as certain assets have been fully written down.
Wealth and Personal Banking ('WPB')
Adjusted profit before tax of GBP323m, up GBP456m compared with
2020. This was primarily due to higher revenue, lower operating
expenses and lower ECL.
Revenue increased by GBP241m or 19%, mainly in insurance
manufacturing in France and in the UK, largely from positive market
impacts, notably on PVIF, driven by favourable equity market
performance and higher interest rate yields on insurance contracts.
This partly offset by lower revenue in Retail in France and in the
Channel Islands and Isle of Man, mainly from deposits due to the
low interest rate environment, despite growth in average
balances.
ECL net credit of GBP23m compared with a net charge of GBP39m in
2020. This mainly reflected an improvement in the economic outlook
from 2020.
Operating expenses decreased by GBP152m or 23%. This was driven
by the non-recurrence of an impairment of real estate assets in
France in 2020. In addition, there were lower technology costs and
lower corporate real estate costs due to lower depreciation as
certain assets have been fully written down.
Corporate Centre
Adjusted profit before tax of GBP96m compared with a loss before
tax of GBP227m in 2020. This was mainly driven by a profit in
associates and joint ventures compared with a loss in 2020, lower
operating expenses and higher revenue.
Revenue was higher by GBP104m, primarily driven by gains on
portfolio disposals in Legacy Credit compared with losses in 2020.
The increase was also driven by a fair-value gain from a
long-standing investment in a Germany-based brokerage company.
ECL net charge of GBP2m in 2021 compared with a net release of
GBP5m in 2020, mainly driven by losses in Legacy Credit following
disposals.
Operating expenses decreased by GBP22m or 26%, largely driven by
lower intercompany recharges from other entities in the Group, with
an offsetting decrease in revenue.
Shares of profit/(loss) in associates and joint ventures was a
profit of GBP191m, of which GBP93m was due to a true-up of prior
year valuations in the underlying investments of an associate. This
compared with a loss of GBP(1)m in 2020.
Dividends
The consolidated reported profit for the year attributable to
the shareholders of the bank was GBP1,041m.
No dividend in respect of 2021 was declared on the ordinary
share capital during the year.
Further information about the results is given in the
consolidated income statement on page 108.
Review of business position
Summary consolidated balance sheet at 31 Dec
2021 2020
GBPm GBPm
------------------------------------------------------------- ------------------------ -------------------------
Total assets 596,611 681,150
------------------------------------------------------------- ------------------------ -------------------------
* cash and balances at central banks 108,482 85,092
-------------------------------------------------------------
* trading assets 83,706 86,976
-------------------------------------------------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 18,649 16,220
-------------------------------------------------------------
* derivatives 141,221 201,210
-------------------------------------------------------------
* loans and advances to banks 10,784 12,646
-------------------------------------------------------------
* loans and advances to customers 91,177 101,491
-------------------------------------------------------------
* reverse repurchase agreements - non-trading 54,448 67,577
-------------------------------------------------------------
* financial investments 41,300 51,826
-------------------------------------------------------------
* other assets 46,844 58,112
-------------------------------------------------------------
Total liabilities 572,896 657,301
------------------------------------------------------------- ------------------------ -------------------------
* deposits by banks 32,188 34,305
-------------------------------------------------------------
* customer accounts 205,241 195,184
-------------------------------------------------------------
* repurchase agreements - non-trading 27,259 34,903
-------------------------------------------------------------
* trading liabilities 46,433 44,229
-------------------------------------------------------------
* financial liabilities designated at fair value 33,608 40,792
-------------------------------------------------------------
* derivatives 139,368 199,232
-------------------------------------------------------------
* debt securities in issue 9,428 17,371
-------------------------------------------------------------
* liabilities under insurance contracts 22,264 22,816
-------------------------------------------------------------
* other liabilities 57,107 68,469
-------------------------------------------------------------
Total equity 23,715 23,849
------------------------------------------------------------- ------------------------ -------------------------
Total shareholders' equity 23,584 23,666
------------------------------------------------------------- ------------------------ -------------------------
Non-controlling interests 131 183
------------------------------------------------------------- ------------------------ -------------------------
Total reported assets were 12.4% 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 44.4%
from 52.0% as at 31 December 2020 driven by ongoing loan book
optimisation efforts.
Assets
Cash and balances at central banks increased by 27.5% as a
result of increased customer deposits and decreased reverse
repurchase agreements and advances to customers positions.
Trading assets and financial assets designated at fair value
slightly reduced due to changes in business and product mix during
the year.
Derivative assets decreased by 29.8% due to a combination of
market movement and trades compression and novation.
Non-trading reverse repurchase agreements decreased by 19.4%
primarily due to changes in market conditions.
Financial investments decreased by 20.3% as a result of
optimisation strategy.
Liabilities
Customer accounts increased by 5.2%, which is consistent with
our funding strategy to grow customer deposits and increase
stable funding.
Total of trading liabilities and financial liabilities
designated at fair value balances has decreased by 5.9%.
Debt securities in issue decreased by 45.7% in line with the
funding strategy.
Non-trading repurchase agreements decreased by 21.9% as a result
of market activities.
Derivative liabilities decreased by 30.0%. This is in line with
derivative assets as the underlying risk is broadly matched.
Equity
Total shareholder's equity remained broadly unchanged as
compared to 2020.
Net interest margin
Net interest margin is calculated by dividing net interest
income as reported in the income statement by the average balance
of
interest-earning assets. Average balances are based on daily
averages of the group's activities.
Net interest income
------------------ --------------------
2021 2020
GBPm GBPm
-------------------------------- ------------------ --------------------
Interest income 3,149 4,086
-------------------------------- ------------------ --------------------
Interest expense (1,395) (2,188)
-------------------------------- ------------------ --------------------
Net interest income 1,754 1,898
-------------------------------- ------------------ --------------------
Average interest-earning assets 354,324 369,617
-------------------------------- ------------------ --------------------
%%
-------------------------------- ------------------ -------------------
Gross interest yield(1) 0.51 0.74
-------------------------------- ------------------ --------------------
Less: gross interest payable(1) (0.01) (0.27)
-------------------------------- ------------------ --------------------
Net interest spread(2) 0.50 0.47
-------------------------------- ------------------ --------------------
Net interest margin(3) 0.50 0.51
-------------------------------- ------------------ --------------------
1 Gross interest yield is the average annualised interest rate
earned on average interest-earning assets ('AIEA'). Gross interest
payable is the average annualised interest cost as a percentage of
average interest-bearing liabilities.
2 Net interest spread is the difference between the average
annualised interest rate earned on AIEA, net of amortised premiums
and loan fees, and the average annualised interest rate payable on
average interest-bearing liabilities.
3 Net interest margin is net interest income expressed as an annualised percentage of AIEA.
Summary of interest income by asset type
2021 2020
-------------------------------------------------- -----------------------------------------------------
Average Interest Average Interest
balance income Yield(1) balance income Yield(1)
GBPm GBPm % GBPm GBPm %
Short term funds
and loans and
advances to
banks 119,025 (221) (0.19) 90,841 (113) (0.12)
----------------- ---------------- ---------------------- -------- ------------------ ----------------------- --------
Loans and
advances to
customers 99,151 1,585 1.60 116,518 2,058 1.77
----------------- ---------------- ---------------------- -------- ------------------ ----------------------- --------
Reverse
repurchase
agreements -
non-trading 57,630 (132) (0.23) 68,573 22 0.03
----------------- ---------------- ---------------------- -------- ------------------ ----------------------- --------
Financial
investments 45,142 497 1.10 51,335 652 1.27
----------------- ---------------- ---------------------- -------- ------------------ ----------------------- --------
Other
interest-earning
assets 33,376 67 0.20 42,350 118 0.28
----------------- ---------------- ---------------------- -------- ------------------ ----------------------- --------
Total
interest-earning
assets 354,324 1,796 0.51 369,617 2,737 0.74
----------------- ---------------- ---------------------- -------- ------------------ ----------------------- --------
1 Interest yield calculations include negative interest on
assets recognised as interest expense in the income statement.
Summary of interest expense by type of liability and equity
2021 2020
------------------------------------------------- ----------------------------------------------------
Average Interest Average Interest
balance expense Cost(1) balance expense Cost(1)
GBPm GBPm % GBPm GBPm %
Deposits by banks 32,891 (186) (0.57) 28,812 (60) (0.21)
Customer accounts 150,048 95 0.06 143,807 321 0.22
----------------- ---------------- ---------------------- ------- ------------------ ----------------------- -------
Repurchase
agreements -
non-trading 32,916 (192) (0.58) 38,829 (129) (0.33)
----------------- ---------------- ---------------------- ------- ------------------ ----------------------- -------
Debt securities
in issue -
non-trading 38,727 258 0.67 52,781 546 1.03
----------------- ---------------- ---------------------- ------- ------------------ ----------------------- -------
Other
interest-bearing
liabilities 36,811 68 0.18 47,384 160 0.34
----------------- ---------------- ---------------------- ------- ------------------ ----------------------- -------
Total
interest-bearing
liabilities 291,393 43 0.01 311,613 838 0.27
----------------- ---------------- ---------------------- ------- ------------------ ----------------------- -------
1 Interest payable calculations include negative interest on
liabilities recognised as interest income in the income
statement.
Risk overview
The group continuously identifies and monitors 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 risks. Changes in the
assessment of these risks may result in adjustments to the group's
business strategy and, potentially, its risk appetite.
Our banking risks include credit risk, treasury risk, market
risk, resilience risk, regulatory compliance risk, financial crime
and fraud risk and model risk. We also incur 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 Risk section of the Report of the
Directors on pages 21 to 87.
During 2021, a number of changes to our top and emerging risks
have been made, to reflect the revised assessment of their effect
on the group. Some risks were removed towards the end of 2021 as
current concerns in these areas were considered as having been
absorbed effectively into business as usual risk management
practices. These risks were the UK's exit from the EU, market
illiquidity and Covid-19. Covid-19 has been maintained as an Area
of Special Interest reflecting the continued impact of the pandemic
on our operations in 2021.
Environmental, social and governance also replaced
Climate-related risks to cover the wider scope of climate, nature
and human rights risks.
Externally driven
Geopolitical p We continually assess the impact of geopolitical events,
risk including the ongoing impacts of the Covid-19 pandemic, on
our businesses and exposures across the group, and take steps
to mitigate them, where required and possible, to help ensure
we remain within our risk appetite. The relationship between
the UK and the EU may come under more severe strain in 2022
over multiple disputes, most notably the Northern Ireland
Protocol and possible triggering of Article 16 that could
have potential repercussions on the terms of trade between
the UK and the EU. We will continue to work with regulators,
governments and our customers to manage the risks created
by the UK's exit from the EU as they arise, particularly
across those industry sectors most impacted. In addition
with tensions continuing to rise between Russia and Ukraine,
we will continue to monitor the development of this situation
and any potential implications for the group.
----------------- ------------------------------------------------------------------
Cyber threat u We protect the group and our customers by strengthening our
and unauthorised cyber defences, helping us to execute our business priorities
access safely and keep our customers' information secure. We employ
to 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 proactively monitor for regulatory developments to ensure
focus on they are interpreted and implemented effectively and in a
conduct timely way. We engage with regulators, policy makers and
of business standard setters as appropriate, to help make a positive
contribution to the evolving regulatory landscape. We also
track closely the key themes currently driving the regulatory
compliance agenda, which include: consumer protection and
customer vulnerability; the impact of digital services and
innovation; Ibor transition; regulatory reporting obligations;
mitigating the risk of inappropriate market conduct; and
environmental, social and governance ('ESG') matters, with
a particular focus on climate change, diversity and inclusion
considerations and enhancements to ESG disclosure and reporting
obligations.
----------------- ------------------------------------------------------------------
Financial u We continued to support our customers as the Bank's financial
crime and crime landscape evolved due to the Covid-19 pandemic and
fraud risk as broad geopolitical, socioeconomic and technological shifts
happened across our markets. We continued to make improvements
to our financial crime controls as emerging risks were identified
and to invest in advanced analytics and artificial intelligence
as key elements of our next generation of tools to fight
financial crime.
----------------- ------------------------------------------------------------------
Ibor transition u We remain focused on completing the system and product updates
to support the transition of demising Libor benchmarks, in
particular US dollar Libor. We continue to support the transition
of all legacy contracts referencing demised and demising
Ibor benchmarks, including from any sterling or Japanese
yen contracts using 'synthetic' Libor. Throughout 2022 there
will be an increasing focus on customer engagement for US
dollar Libor related transition activities.
----------------- ------------------------------------------------------------------
Environmental, p We continue to develop our approach to managing ESG risk,
social noting that the risk has increased owing to the pace and
and governance volume of regulatory developments globally, with the focus
on formalising climate risk management, enhanced disclosures,
and integration of other ESG risks such as nature-related
risks and human rights. Some stakeholders are also placing
more emphasis on financial institutions' actions and investment
decisions in respect of ESG.
----------------- ------------------------------------------------------------------
Internally driven
----------------------------------------------------------------------------------------
People p We monitor workforce capacity and capability requirements
risk in line with our published growth strategy. We have put in
place measures to support our people to work safely during
the Covid-19 pandemic, 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.
People Risk is heightened as a result of the ongoing pandemic
conditions, including long periods of working from home,
and impacts from our transformation programme. This has affected
our staff's resilience, wellbeing and level of engagement
over time, with increased attrition seen in some areas of
our business.
----------------- ------------------------------------------------------------------
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.
----------------- ------------------------------------------------------------------
Internally driven
Execution p We monitored and managed our change execution risk, including
risk capacity and resources to meet the increased delivery demand
across both strategic transformation projects, regulatory
deliverables and remediation activities throughout 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. Execution
risk is heightened by the inter-dependencies between projects
within our transformation programme, which are primarily
centred on France and Germany. A number of these initiatives
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.
---------------- ------------------------------------------------------------------
Model risk u We continue to strengthen our oversight of models. Our model
risk policy is fully embedded, including updated controls
around the monitoring and use of models. New model risk appetite
measures have been rolled out which are more forward looking
and will help our businesses and functions manage model risk
more effectively. Redevelopment of capital models to reflect
the evolving regulatory requirements are also either in progress
or pending regulatory approval for implementation.
---------------- ------------------------------------------------------------------
Data management u We protect our customers and organisation by making focused
investments in capabilities that manage data risk. We focus
on controls that manage data governance, usage, integrity,
privacy and retention. During 2021, we refreshed our data
strategy and continued to improve our approach to data risk
management and reporting.
---------------- ------------------------------------------------------------------
Third party u We continually enhance our third-party risk management framework
risk management as our supply chain evolves, and to stay aligned to the latest
regulatory expectations. We closely monitor for Covid-19-related
impacts on the delivery of services to the group, with businesses
and functions taking appropriate action where needed.
---------------- ------------------------------------------------------------------
p Risk has heightened during 2021
u Risk remains at the same level
as 2020
On behalf of the Board
Dave Watts, Director
21 February 2022
Registered number
00014259
Risk
Page
Our approach to risk 22
----------------------------------- ----
Our risk appetite 22
----------------------------------- ----
Risk management 24
----------------------------------- ----
Key developments and risk profile 24
----------------------------------- ----
Top and emerging risks 24
----------------------------------- ----
Externally driven 25
----------------------------------- ----
Internally driven 28
----------------------------------- ----
Areas of special interest 30
Risks related to Covid-19 30
----------------------------------- ----
Climate-related risks 30
----------------------------------- ----
Our material banking and insurance
risks 32
----------------------------------- ----
Credit risk 34
----------------------------------- ----
Treasury risk 73
----------------------------------- ----
Capital risk in 2021 77
----------------------------------- ----
Market risk 81
----------------------------------- ----
Resilience risk 84
----------------------------------- ----
Regulatory compliance risk 85
----------------------------------- ----
Financial crime risk 85
----------------------------------- ----
Model risk 87
----------------------------------- ----
Insurance manufacturing operations
risk 87
----------------------------------- ----
Our approach to risk
Our risk appetite
We recognise the importance of a strong culture, which refers to
our shared attitudes, values and standards that shape behaviours
related to risk awareness, risk taking and risk management. All our
people are responsible for the management of risk, with the
ultimate accountability residing with the Board.
We seek to build our business for the long term by balancing
social, environmental and economic considerations in the decisions
we make. Our strategic priorities are underpinned by our endeavour
to operate in a sustainable way. This helps us to carry out our
social responsibility and manage the risk profile of the business.
We are committed to managing and mitigating climate-related risks,
both physical and transition, and continue to incorporate
consideration of these into how we manage and oversee risks
internally and with our customers.
The following principles guide the group's overarching appetite
for risk and determine how our businesses and risks are
managed.
Financial position
-- Strong capital position, defined by regulatory and internal ratios.
-- Liquidity and funding management for each entity on a stand-alone basis.
Operating model
-- Ambition to generate returns in line with our risk appetite
and strong risk management capability.
-- Ambition to deliver sustainable earnings and appropriate returns for shareholders.
Business practice
-- Zero tolerance for knowingly engaging in any business,
activity or association where foreseeable reputational risk or
damage has not been considered and/or mitigated.
-- No appetite for deliberately or knowingly causing detriment
to consumers arising from our products and services or incurring a
breach of the letter or spirit of regulatory requirements.
-- No appetite for inappropriate market conduct by a member of staff or by any group business.
Enterprise-wide application
Our risk appetite encapsulates consideration of financial and
non-financial risks and is expressed in both quantitative and
qualitative terms. It is applied at the global business level, at
the group level and to material European entities.
Our risk management framework
An established risk governance framework and ownership structure
ensures oversight of, and accountability for, the effective
management of risk within the group. HSBC's Risk Management
Framework ('RMF') fosters the continuous monitoring of the risk
environment and an integrated evaluation of risks and their
interactions. Integral to the RMF are risk appetite, stress testing
and the identification of emerging risks.
The bank's Risk Committee focuses on risk governance and
provides a forward-looking view of risks and their mitigation. The
Risk Committee is a committee of the Board and has responsibility
for oversight and advice to the Board on, amongst other things, the
bank's risk appetite, tolerance and strategy, systems of risk
management, internal control and compliance. Additionally, members
of the Risk Committee attend meetings of the Chairman's Nominations
and Remuneration Committee at which the alignment of the reward
structures to risk appetite is considered.
In carrying out its responsibilities, the Risk Committee is
closely supported by the Chief Risk Officer, the Chief Financial
Officer, the Head of Internal Audit and the Head of Compliance,
together with other business functions on risks within their
respective areas of responsibility.
Responsibility for managing both financial and non-financial
risk lies with our people. They are required to manage the risks of
the business and operational activities for which they are
responsible. We maintain oversight of our risks through our various
specialist Risk Stewards, as well as the accountability held by the
Chief Risk Officer. Non-financial risk includes some of the most
material risks HSBC faces, such as cyber-attacks, poor customer
outcomes and loss of data. Actively managing non-financial risks is
crucial to serving our customers effectively and having a positive
impact on society. During 2021 we continued to strengthen the
control environment and our approach to the management of
non-financial risks, as is broadly set out in our risk management
framework. The management of non-financial risk focuses on
governance and risk appetite, providing a single view of the
non-financial risks that matter most, and associated controls. It
incorporates a risk management system designed to enable the active
management of non-financial risk. Our ongoing focus is on
simplifying our approach to non-financial risk management, while
driving more effective oversight and better end-to-end
identification and management of non-financial risks. This is
overseen by the Operational and Resilience Risk function, headed by
the Group Head of Operational and Resilience Risk.
Three lines of defence
To create a robust control environment to manage risks, we use
an activity-based three lines of defence model, whereby the
activity a member of staff undertakes drives which line they reside
within. This model delineates management accountabilities and
responsibilities for risk management and the control
environment.
The model underpins our approach to risk management by
clarifying responsibility, encouraging collaboration and enabling
efficient coordination of risk and control activities. The three
lines are summarised below:
-- The first line of defence owns the risks and is responsible
for identifying, recording, reporting and managing them, and
ensuring that the right controls and assessments are in place to
mitigate them.
-- The second line of defence challenges the first line of
defence on effective risk management, and provides advice and
guidance in relation to the risk.
-- The third line of defence is our Internal Audit function,
which provides independent assurance that the group's risk
management approach and processes are designed and operating
effectively.
Risk appetite
We formally articulate our risk appetite through our risk
appetite statement ('RAS'), which is approved by the Board on the
recommendation of the Risk Committee. Setting out our risk appetite
ensures that planned business activities provide an appropriate
balance of return for the risk we are taking, and that we agree a
suitable level of risk for our strategy. In this way, risk appetite
informs our financial planning process and helps senior management
to allocate capital to business activities, services and
products.
The RAS consists of qualitative statements and quantitative
metrics, covering financial and non-financial risks. It is
fundamental to the development of business line strategies,
strategic and business planning and senior management balanced
scorecards. Performance against the RAS is reported to the Risk
Management Meeting ('RMM') so that any actual performance that
falls outside the approved risk appetite is discussed and
appropriate mitigating actions are determined. This reporting
allows risks to be promptly identified and mitigated, and informs
risk-adjusted remuneration to drive a strong risk culture.
.
Risk management
As a provider of banking and financial services, the group
actively manages risk as a core part of its day-to-day activities.
It continues to maintain a strong liquidity position and is well
positioned for the evolving regulatory landscape.
Stress testing
Stress testing is an important tool that is used by banks, as
part of their internal risk management, and regulators to assess
vulnerabilities in individual banks and/or the financial banking
sector under hypothetical adverse scenarios. The results of stress
testing are used to assess banks' resilience to a range of adverse
shocks and to assess their capital adequacy.
HSBC Bank plc is subject to regulatory stress testing in several
jurisdictions. These requirements are increasing in frequency and
granularity. They include the programmes of the Bank of England
('BoE'), Prudential Regulation Authority ('PRA') and the European
Banking Authority ('EBA'). Assessment by regulators is on both a
quantitative and qualitative basis, the latter focusing on our
portfolio quality, data provision, stress testing capability and
capital planning processes.
A number of internal macroeconomic and event-driven scenarios
specific to the European region were considered and reported to
senior management during the course of the year. The selection of
stress scenarios is based upon the output of our top and emerging
risks identified and our risk appetite. The results help the Board
and senior management to set our risk appetite and confirm the
strength of our strategic and financial plans. Our risk appetite is
set at a level that enables the group to withstand future stress
impacts.
In 2021, the Group participated in the successful completion of
the BoE solvency stress testing exercise. The Solvency Stress Test
Scenario depicts a synchronised, global, double-dip recession in
2021, driven by a continuation and intensification of economic and
financial shocks experienced in 2020 as a result of the Covid-19
pandemic. Unemployment rises sharply in the stress, with certain
sectors such as hospitality, leisure, construction and transport
more affected than others.
Traded risk shocks are consistent with the macro-economic
scenario. The global stress causes financial market participants'
perceptions of risk to increase, and their risk appetite to
diminish. The traded risk shocks are lower than those included in
the 2019 exercise. This is, in part, because of a smaller rise in
risk premia in the stress scenario given an expectation from market
participants
that markets remain functional despite the broader macroeconomic
stress.
The BoE published the results of the 2021 Solvency Stress Test
in December 2021, confirming that these tests did not reveal any
capital inadequacies for the HSBC Group. In 2021, the Group
participated also in the Climate Biennial Exploratory Scenario
('CBES') exercise of BoE.
The CBES objective was to test the resilience of the UK
financial system to the physical and transition risks associated
with different climate pathways. The BoE has indicated that CBES
was a learning exercise for both participating banks and the BoE.
CBES will not be used to set capital requirements but to understand
the collective impact on the wider economy and also explore
vulnerabilities of current business models to future climate policy
pathways and how the Group is expected to adjust it's business
models in response to these climate change impacts.
Key developments and risk profile
Key developments in 2021
We continued to actively manage the risks resulting from the
Covid-19 pandemic and its impacts on our customers and operations
during 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 are progressing with a comprehensive regulatory reporting
programme to strengthen our processes, improve consistency, and
enhance controls.
-- 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 with a targeted update of our fraud controls. We
refreshed our financial crime and fraud policies, ensuring they
remained up to date and addressed changing and emerging risks, and
we continued to meet our regulatory obligations.
-- We introduced enhanced governance and oversight around model
adjustments and related processes for IFRS 9 models.
--
Top and emerging risks
Top and emerging risks are those that may impact on the
financial results, reputation or business model of the bank. If
these risks were to occur, they could have a material effect on the
group. The exposure to these risks and our risk management approach
are explained in more detail below.
Externally driven
Geopolitical risk
Our operations and portfolios are exposed to risks associated
with political instability, civil unrest and military conflict,
which could lead to disruption of our operations, physical risk to
our staff and/ or physical damage to our assets.
We will increasingly need to consider potential regulatory,
reputational and market risks arising from the evolving
geopolitical landscape.
The Covid-19 pandemic brought supply chain issues into focus and
has heightened geopolitical tensions, which could have potential
ramifications for the group and our customers.
Tensions between Russia and the US and a number of European
states have heightened significantly following the escalation of
hostilities between Russia and Ukraine. While negotiations are
ongoing to seek a resolution, a continuation of or any further
deterioration to the situation could have significant geopolitical
implications, including economic, social and political
repercussions on the group and its customers. In addition, the US,
the UK and the EU have threatened a significant expansion of
sanctions and trade restrictions against Russia in the event of a
Russian incursion into Ukraine, and Russian countermeasures are
also possible.
Political disagreements between the UK and the EU, notably over
the future operation of the Northern Ireland Protocol, has meant
work on the creation of a framework for voluntary regulatory
cooperation in financial services following the UK's withdrawal
from the EU has stalled. While negotiations are continuing, it is
unclear whether or when an agreement will be reached, and this has
led to speculation that the UK may trigger Article 16 of the
Protocol, which could suspend the operation of the Protocol in
certain respects. Any decision to do so could be met with
retaliatory action by the EU, complicating the terms of trade
between the UK and the EU and potentially preventing progress in
other areas such as financial services.
Mitigating actions
-- We closely monitor geopolitical and economic developments in
key markets and sectors and undertake scenario analysis where
appropriate. This helps us to take portfolio actions where
necessary, including enhanced monitoring, amending our risk
appetite and/or reducing limits and exposures.
-- We stress test portfolios of particular concern to identify
sensitivity to loss under a range of scenarios, with management
action being taken to rebalance exposures and manage risk appetite
where necessary.
-- We regularly review key portfolios to help ensure that
individual customer or portfolio risks are understood and our
ability to manage the level of facilities offered through any
downturn is appropriate.
-- We continue to monitor geopolitical tensions involving Russia
and Ukraine and any potential impacts on the group and our
customers.
-- We continue to monitor the UK's relationship with the EU, and
assess the potential impact on our people, operations and
portfolios.
-- We have taken steps, where necessary, to enhance physical
security in those geographical areas deemed to be at high risk from
terrorism and military conflicts.
Cyber threat and unauthorised access to systems
We continue to operate in a challenging cyber threat
environment, which requires ongoing investment in business and
technical controls to defend against these threats.
Key threats include unauthorised access to our data, advanced
malware attacks, attacks on third-party suppliers and security
vulnerabilities being exploited.
Mitigating actions
-- We continually evaluate threat levels for the most prevalent
attack types and their potential outcomes. To further protect our
business and our customers we strengthened our controls to reduce
the likelihood and impact of advanced malware, data leakage,
exposure through third parties and security vulnerabilities.
-- We continue to enhance our cybersecurity capabilities,
including cloud security, identity and access management, metrics
and data analytics, and third-party security reviews. An important
part of our defence strategy is ensuring our people remain aware of
cybersecurity issues and know how to report incidents.
-- We report and review cyber risk and control effectiveness
regularly at executive and non-executive Board level. We also
report it across our businesses and functions, to help ensure
appropriate visibility and governance of the risk and mitigating
actions.
-- We participate globally in several industry bodies and
working groups to share information about tactics employed by
cyber-crime groups and to collaborate in fighting, detecting and
preventing cyber-attacks on financial organisations.
Regulatory focus on conduct of business
We keep abreast of the emerging regulatory compliance and
conduct agenda, which currently includes, but is not limited to:
ESG matters; operational resilience; how digital and technology
changes, including payments, are impacting financial institutions;
how we are ensuring good customer outcomes, including addressing
customer vulnerabilities; regulatory reporting; and employee
compliance. We monitor regulatory developments closely and engage
with regulators, as appropriate, to help ensure new regulatory
requirements are implemented effectively and in a timely way.
The competitive landscape in which we operate may be impacted by
future regulatory changes and government intervention. In the UK,
potential regulatory developments include any legislative changes
resulting from a statutory review for ring-fencing, which has been
undertaken by an independent panel appointed by HM Treasury. The
panel has recommended several adjustments to the regime and HM
Treasury is reviewing these recommendations. Legislative amendments
may be proposed in due course.
Mitigating actions
-- We monitor for regulatory developments to understand the
evolving regulatory landscape and respond with changes in a timely
way.
-- We engage, wherever possible, with governments and regulators
to make a positive contribution to regulations and ensure that new
requirements are considered properly and can be implemented
effectively. We hold regular meetings with relevant authorities to
discuss strategic contingency plans, including those arising from
geopolitical issues.
-- We launched our simplified conduct approach to align to our
new purpose and values, in particular the value 'we take
responsibility'.
Financial crime and fraud risk
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. The financial crime threats we face have continued to
evolve, often in tandem with broader geopolitical, socioeconomic
and technological shifts in our markets, leading to challenges such
as managing conflicting laws and approaches to legal and regulatory
regimes. Financial crime risk evolved during the Covid-19 pandemic,
notably with the manifestation of fraud risks linked to the
economic slowdown and resulting deployment of government relief
measures. The accelerated digitisation of financial services has
fostered significant changes to the payments ecosystem, including a
multiplicity of providers and new payment mechanisms, not all of
which are subject to the same level of regulatory scrutiny or
regulations as financial institutions.
This is presenting increasing challenges to the industry in
terms of maintaining required levels of transparency, notably where
institutions serve as intermediaries. Developments around digital
assets and currencies, notably the role of stablecoins and central
bank digital currencies, have continued at pace, with an increasing
regulatory and enforcement focus on the financial crimes linked to
these types of assets.
Expectations with respect to the intersection of ESG issues and
financial crime as our organisation, customers and suppliers
transition to net zero, are increasing, not least with respect to
potential 'greenwashing'. Companies also face a heightened
regulatory focus on both human rights issues and environmental
crimes, from a financial crime perspective. We also continue to
face increasing challenges presented by national data privacy
requirements, which may affect our ability to manage financial
crime risks holistically and effectively.
Mitigating actions
-- We are strengthening our fraud and surveillance controls, and
investing in next generation capabilities to fight financial crime
through the application of advanced analytics and artificial
intelligence.
-- We are looking at the impact of a rapidly changing payments
ecosystem to ensure our financial crime controls remain appropriate
for changes in customer behaviour and gaps in regulatory coverage,
including the development of procedures and controls to manage the
risks associated with direct and indirect exposure to digital
assets and currencies.
-- We are assessing our existing policies and control framework
to ensure that developments in the ESG space are considered and the
risks mitigated.
-- We work with jurisdictions and relevant international bodies
to address data privacy challenges through international standards,
guidance, and legislation to help enable effective management of
financial crime risk.
-- We work closely with our regulators and engage in
public-private partnerships, playing an active role in shaping the
industry's financial crime controls for the future, notably with
respect to the enhanced, and transparent, use of technology.
Ibor transition
Interbank offered rates ('Ibors') have historically been used
extensively to set interest rates on different types of financial
transactions and for valuation purposes, risk measurement and
performance benchmarking.
Following the UK's Financial Conduct Authority ('FCA')
announcement 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, we have been actively
working to transition legacy contracts from Ibors to products
linked to near risk-free replacement rates ('RFRs') or alternative
reference rates. In March 2021, in accordance with the 2017 FCA
announcement, ICE Benchmark Administration Limited ('IBA')
announced that it would cease publication of 24 of the 35 main
Libor currency interest rate benchmark settings from the end of
2021, and that the most widely used US dollar Libor settings would
cease from 30 June 2023. The FCA subsequently used its regulatory
powers to compel IBA to publish the remaining six sterling and
Japanese yen settings, from 1 January 2022, under an amended
methodology, commonly known as 'synthetic' Libor. As a result, our
focus during 2021 was on the transition of legacy contracts
referencing the Euro Overnight Index average ('Eonia') and the
Libor settings that demised from the end of 2021, including those
settings subsequently being published on a 'synthetic' basis.
During 2021, we continued the development of IT and RFR product
capabilities, implemented supporting operational processes, and
engaged with our clients to discuss options for the transition of
their legacy contracts. The successful implementation of new
processes and controls, as well as the transition of contracts away
from Ibors, reduced the heightened financial and non-financial
risks to which we were exposed. However, while all but exceptional
Libor contract issuance ceased in 2021, or from the end of 2021 for
US dollar Libor, we remain exposed to material risks. These
include, from so-called 'tough legacy' contracts, that have not
been able to be transition to a new rate and will use a 'synthetic'
Libor or a contractual fallback rate, and from legacy contracts
that reference US dollar Libor, which are expected to demise from
June 2023.
Financial risks have been largely mitigated as a result of the
implementation of model and pricing changes. However, differences
in US dollar Libor and its replacement RFR, Secured Overnight
Funding Rate ('SOFR'), create a basis risk in the trading book and
banking book due to the asymmetric adoption of SOFR across assets,
liabilities and products that we need to actively manage through
appropriate financial hedging. Additionally, the comparatively
limited use of SOFR for new RFR products to date and lack of
alignment around conventions could potentially delay transition of
some US dollar Libor contracts into 2023. This would compress the
amount of time to transition these contracts, which could lead to
heightened operational and conduct-related risk as a result.
Additional non-financial risks, including regulatory compliance
risk, resilience risk, financial reporting risk, and legal risk
also remain for 'tough legacy' contracts, and the US dollar legacy
portfolio. These risks continue to be actively managed and
mitigated with a focus on ensuring that fair outcomes for our
clients are achieved.
These risks are present in different degrees across our product
offering.
Transition of Legacy contracts
During 2021, we successfully transitioned over 90% of legacy
Ibor lending contracts in sterling, Swiss franc, euro and Japanese
yen Libor interest rates, as well as Eonia, directly or via
appropriate fallback mechanisms. The majority of the remaining
contracts will transition in advance of their next interest payment
date, with only a small proportion of 'tough legacy' contracts
remaining. We expect that out of approximately 1000 lending
contracts there will be less than 20 'tough legacy' contracts, the
majority of which will be transitioned to alternative rates during
2022. Our approach to transition 'tough legacy' and US dollar
legacy Ibor contracts will differ by product and business area, but
will be based on the lessons learned from the successful transition
of contracts during 2021. We will continue to communicate with our
clients and investors in a structured manner and be client led in
the timing and nature of the transition.
For derivatives, approximately 99% of our sterling, Swiss franc,
euro and Japanese yen Libor interest rate exposures at the end of
2021 had successfully transitioned directly or via appropriate
fallback mechanisms, leaving a small number of 'tough legacy'
contracts. There are expected to be less than 20 bilateral
derivatives trades that remain 'tough legacy,' the majority of
which are expected to mature or transition in 2022. We anticipate
our 'tough legacy' and US dollar exposure will continue to reduce
through 2022 as a result of contract maturities, and active
transition. We will continue to look to actively reduce our US
dollar exposure by transitioning trades ahead of the demise date of
30 June 2023, by working with our clients to determine their needs
and how we transition their contracts. Additionally, we are working
with market participants, including clearing houses, to ensure we
are able to transition our cleared derivative contracts as the US
dollar Libor benchmark demise date approaches.
For our loan book, approximately 85% of our reported exposure at
the end of 2021 linked to sterling, Swiss franc, euro and Japanese
yen Libor interest rate contracts that required no further client
negotiation but remained drawn on Libor as they have yet to reach
their next interest payment date. The majority of the remaining
exposure linked to benchmarks that demised from the end of 2021
relates to contracts where discussions with our clients and other
market participants, for syndicated transactions, have continued in
early 2022, in advance of their next scheduled interest payment
date, and this has led to further transitions being completed.
A small number of 'tough legacy' contracts, less than 20, that
were unable to transition prior to their first interest payment
date in 2022, are expected to use legislative reliefs, such as
'synthetic' Libor, or an alternative rate determined by the
contractual fallback language and in the main will be transitioned
during 2022. For the remaining demising Ibors, notably US dollar
Libor, we have implemented new products and processes and updated
our systems in readiness for transition. Global Banking, Commercial
Banking and Global Private Banking have begun to engage with
clients who have upcoming contract maturities with a view to
refinancing using an appropriate replacement rate. Further
communications and outreach to customers with US dollar Libor
contracts with later maturities will occur in due course.
Where we hold bonds issued by other institutions, we have
remained dependent on the issuer's agents to engage in the
transition process, although analysis will be undertaken of the
issuers in US dollar Libor bonds to reduce our exposure, as
occurred through 2021.
The completion of an orderly transition from the remaining
Ibors, notably US dollar Libor, continues to be our programme's key
objective through 2022 and 2023, with the aim of putting systems
and processes in place to help achieve this.
Mitigating actions
-- The global Ibor transition programme, which is overseen by
the Group Chief Risk and Compliance Officer, will continue to
deliver IT and operational processes to meet its objectives.
-- We carry out extensive training, communication and client
engagement to facilitate appropriate selection of new rates and
products.
-- We have dedicated teams in place to support the transition.
-- We actively transitioned legacy contracts and ceased new
issuance of Libor-based contracts, other than those allowed under
regulatory exemptions, with associated monitoring and controls.
-- We assess, monitor and dynamically manage risks arising from
Ibor transition, and implement specific mitigating controls when
required.
-- We continue to actively engage with regulatory and industry
bodies to mitigate risks relating to 'tough legacy' contracts.
Financial instruments impacted by IBOR reforms
Interest Rate Benchmark Reform Phase 2, the amendments to IFRSs
issued in August 2020, represents the second phase of the IASB's
project on the effects of interest rate benchmark reform.
The amendments address issues affecting financial statements
when changes are made to contractual cash flows and hedging
relationships.
Under these amendments, changes made to a financial instrument
measured at other than fair value through profit or loss that are
economically equivalent and required by interest rate benchmark
reform, do not result in the derecognition or a change in the
carrying amount of the financial instrument. Instead they require
the effective interest rate to be updated to reflect the change in
the interest rate benchmark. In addition, hedge accounting will not
be discontinued solely because of the replacement of the interest
rate benchmark if the hedge meets other hedge accounting
criteria.
(audited)
Financial instruments yet
to transition to alternative
benchmarks, by main benchmark
USD Libor GBP Libor EONIA Others(1)
At 31 Dec 2021 GBPm GBPm GBPm GBPm
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Non-derivative
financial
assets(2)
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Loans and
advances to
customers 5,999 2,562 - 26
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Financial
investments 1,171 140 - -
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Others 693 499 - -
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Total
non-derivative
financial
assets 7,863 3,201 - 26
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Non-derivative
financial
liabilities
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Subordinated
liabilities 1,145 - - -
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Others 479 181 - -
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Total
non-derivative
financial
liabilities 1,624 181 - -
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Derivative
notional
contract amount
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Foreign
exchange 8,288 1,568 - 1,080
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Interest rate 1,567,577 215,377 1,679 76,059
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Others - - - -
--------------- ------------------------- ------------------------- ------------------------- -------------------------
Total
derivative
notional
contract
amount 1,575,865 216,945 1,679 77,139
--------------- ------------------------- ------------------------- ------------------------- -------------------------
At 31 Dec 2020
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Non-derivative
financial
assets(2)
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Loans and
advances to
customers 7,782 4,323 1 183
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Financial
investments 1,187 406 - -
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Others 1,043 1,033 - 1
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Total
non-derivative
financial
assets 10,012 5,762 1 184
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Non-derivative
financial
liabilities(2)
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Subordinated
liabilities 1,135 900 - -
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Others 798 510 3 1
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Total
non-derivative
financial
liabilities 1,933 1,410 3 1
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Derivative
notional
contract amount
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Foreign
exchange 6,296 2,768 - 8,148
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Interest rate 1,694,279 865,545 196,515 126,545
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Others 7 - - -
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
Total
derivative
notional
contract
amount 1,700,582 868,313 196,515 134,693
--------------- --------------------------- ------------------------- --------------------------- ---------------------------
1 Comprises financial instruments referencing other significant
demising benchmark rates (euro Libor, Swiss franc Libor, Japanese
Yen Libor, SOR and THBFIX Sibor).
2 Gross carrying amount excluding allowances for expected credit losses.
3 The amounts in the above table do not represent amounts at
risk as the steps to transition for certain trades have been
completed.
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 the group'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 ceased after 31 December 2021. This
change, together with the extended publication dates of Sibor, SOR
and THBFIX, reduce the amounts presented at 31 December 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.
Environmental, social and governance risk
We are subject to financial and non-financial risks associated
with environmental, social and governance related matters ('ESG')
which can impact us both directly and indirectly through our
customers.
Climate-related risk increased over 2021, owing to the pace and
volume of policy and regulatory changes regionally, particularly on
climate risk management, stress testing and scenario analysis and
disclosures. If we fail to meet regulatory expectations or
requirements on climate risk management, this could have regulatory
compliance and reputational impacts.
We face increased reputational, legal and regulatory risks as we
make progress towards the HSBC Group's net zero ambition, as
stakeholders are likely to place greater focus on our actions,
disclosures and financing decisions related to this. We will face
additional risks if we are perceived to mislead stakeholders
regarding our climate strategy, the climate impact of a product or
service, or regarding the commitments of our customers.
To track and report on our progress towards achieving our
ambition, we rely on internal and external data, guided by certain
industry standards. While emissions reporting has improved over
time, data remains of limited quality and consistency.
Methodologies we have used may evolve in line with market practice
and regulation as well as due to developments in climate science.
Any developments in data and methodologies could result in
revisions, meaning that reported figures may not be reconcilable or
comparable year-on-year. We may also have to re-evaluate our
progress towards the HSBC Group's climate-related ambition in
future and this could result in reputational, legal and regulatory
risks.
Climate risk will also have an impact on model risk, as models
play an important role in risk management and the financial
reporting of climate-related risks. The uncertain impacts of
climate change and data limitations, present challenges to creating
reliable and accurate model outputs.
We could also face increased resilience; retail credit; and
wholesale credit risks owing to the increase in frequency and
severity of weather events and chronic shifts in weather
patterns.
These risks could impact our own critical operations, resulting
in customer detriment and operational losses for the group. Our
customers' operations and assets could also be affected, reducing
their ability to afford mortgage or loan repayments, leading to
credit risk impacts for the firm.
There is increasing evidence that a number of nature-related
risks beyond climate change - which include risks that can be
represented more broadly by economic dependence on nature - can and
will have significant economic impact. These risks arise when the
provision of natural services - such as water availability, air
quality, and soil quality - is compromised by overpopulation, urban
development, natural habitat and ecosystem loss, and other
environmental stresses beyond climate change. They can show
themselves in various ways, including through macroeconomic,
market, credit, reputational, legal and regulatory risks, for both
the group and our customers.
Mitigating actions
-- We continue to deepen our understanding of the drivers of
climate risk and managing our exposure to climate risk is a
priority. Our dedicated Climate Risk Oversight Forums are
responsible for shaping and overseeing our approach and providing
support in managing climate risk in the region.
-- Our climate risk programme continues to accelerate the
development of our climate risk management capabilities across four
key pillars - governance and risk appetite, risk management, stress
testing and scenario analysis and disclosures. We are also
enhancing our approach to greenwashing risk.
-- In December 2021, the HSBC Group published its thermal coal
phase-out policy committing to phase out the financing of
coal-fired power and thermal coal mining in EU/OECD markets by the
end of 2030, and globally by the end of 2040. The policy helps us
chart the path to net zero and is a component of our approach
towards managing the climate risk of our lending portfolio and
wider banking activities.
-- We have started to incorporate the outcomes and insights from
the Bank of England's Climate Biennial Exploratory Scenario into
climate risk management, and are currently engaged in the 2022 ECB
Climate Risk Stress Test.
-- We have delivered climate risk training to our legal entity board and wider target audiences.
-- In 2021, we joined several industry working groups dedicated to helping us access and manage nature-related risks, such as the Taskforce on Nature-Related Financial Disclosure ('TNFD'). Our asset management business also published its biodiversity policy to publicly explain how our analysts address nature-related issues.
-- We continue to engage with our customers, investors and
regulators proactively on the management of climate risks. We also
engage with initiatives actively, including the EU Taxonomy
disclosures, Climate Financial Risk Forum, Equator Principles,
Taskforce on Climate-related Financial Disclosures and CDP
(formerly the Carbon Disclosure Project) to drive best practice for
climate risk management.
For further details on ESG, see our ESG review on page 8 and for
further details on our approach to climate risk management, see
'Areas of special interest' on page 28. For further details on ESG
risk management see 'Financial crime and fraud risk on page 23.
Internally driven
People risk
Our success in delivering our strategic priorities and managing
the regulatory environment proactively depends on the development
and retention of our leadership and high-performing employees. The
ability to continue to attract, develop and retain competent
individuals in an employment market impacted by the Covid-19
pandemic is challenging particularly due to organisational
restructuring. Changed working arrangements, local Covid-19
restrictions and health concerns during the pandemic also impact on
employee mental health and well-being.
Mitigating actions
-- We have put in place measures to help support our people so
they are able to work safely during the Covid-19 pandemic.
-- We promote a diverse and inclusive workforce and provide
active support across a wide range of health and wellbeing
activities. We continue to build our speak up culture through
active campaigns.
-- We monitor people risks that have arisen due to
organisational restructuring, helping to ensure we manage
redundancies sensitively and support impacted employees.
-- Launch of the Future Skills Curriculum through HSBC
University to help provide the critical skills that will enable
employees and HSBC to be successful in the future.
-- We continue to develop succession plans for key management
roles, with actions agreed and reviewed on a regular basis by the
group's Executive Committee.
-- We have robust plans in place, driven by senior management,
to mitigate the effect of external factors that may impact our
employment practices. Political, legislative and regulatory
challenges are closely monitored to minimise the impact on the
attraction and retention of talent and key performers.
IT systems infrastructure and resilience
HSBC is committed to investing in the reliability and resilience
of its IT systems and critical services. HSBC does so in order to
protect its customers and ensure they do not receive disruption to
services, which could result in reputational and regulatory
damage.
The group's strategy includes simplification of our technology
estate to reduce complexity and costs; this includes consolidation
of our core banking systems onto a single strategic platform. The
target state will leverage existing and known technology, and will
be simpler and easier to maintain. However, as with any strategic
transformation programme risks associated with implementation must
be managed continuously.
Mitigating actions
-- We continue to invest in transforming how software solutions
are developed, delivered and maintained, with a particular focus on
providing high-quality, stable and secure services. As part of
this, we are concentrating on improving system resilience and
service continuity testing. We have enhanced the security features
of our software development life cycle and improved our testing
processes and tools.
-- During 2021, we have upgraded many of our IT systems,
simplified our service provision and replaced older IT
infrastructure and applications. These enhancements led to
continued global improvements in service availability during 2021
for both our customers and employees.
-- We manage implementation risks arising from the
simplification of our technology estate continuously via thorough
oversight of these risks at all levels of the programme and
reporting up to our Risk Committee.
Execution risk
In order to deliver our strategic objectives and meet mandatory
regulatory requirements, it is important for the group to maintain
a strong focus on execution risk. This requires robust management
of significant resource-intensive and time-sensitive programmes.
Risks arising from the magnitude and complexity of change may
include regulatory censure, reputational damage or financial
losses. Current major initiatives include managing the operational
implications of the disposal of our French retail business, large
transformation programmes including the simplification and
integration of our IT Systems and other restructuring programmes
across Europe.
Mitigating actions
-- Our prioritisation and governance processes for significant
projects are monitored by the group's Executive Committee.
-- We continue to work to strengthen our change management
practices to deliver sustainable change, increased adoption of
Agile ways of working, and a more consistent standard of delivery.
For HSBC Bank plc, this includes embedding of an improved
Group-wide change framework released in the first half of 2021,
which sets out the mandatory principles and standards to be adhered
to when leading and delivering change.
Model risk
Model risk arises whenever business decision-making includes
reliance on models. We use models in both financial and
non-financial contexts and in a range of business applications
such as customer selection, product pricing, financial crime
transaction monitoring, creditworthiness evaluation and financial
reporting. Assessing model performance is a continuous undertaking.
Models can need redevelopment as market conditions change. This was
required following the outbreak of Covid-19 as some models used for
estimating credit losses needed to be redeveloped due to the
significant change to inputs including GDP, unemployment rates and
housing prices; and the varying government support measures
introduced.
Prior to the Covid-19 outbreak a key area of focus was improving
and enhancing our model risk governance, and this activity
continued throughout 2021. We prioritised the redevelopment and
validation of internal ratings-based ('IRB') and internal models
methods ('IMM') models, in relation to counterparty credit, as part
of the IRB repair and Basel III programmes with a key focus on
enhancing the quality of data used as model inputs.
Mitigating actions
-- We appointed model risk stewards for our key entities to
support, oversee and guide the global businesses and functions on
model risk management. The risk stewards provide close monitoring
of changes in model behaviour, working closely with business and
function model owners and sponsors.
-- We worked with the model owners of IRB models and traded risk
models to increase our engagement on management of model risk with
key regulators including the PRA and the ECB.
-- We embedded the model risk policy and model risk standards in
all business and functions to enable a more risk-based approach to
model risk management.
-- We made further enhancements to our control framework for
models used in financial reporting processes to address the control
weaknesses that emerged as a result of significant increases in
model adjustments and overlays that were applied to compensate for
the impact of Covid-19 on models and to introduce a requirement for
the second line of defence to approve material models prior to
use.
-- The model inventory system was enhanced to support the
management of model risk for multiple applications of a single
model.
-- We have submitted the first set of IRB models for regulatory
approval in 2021. The redevelopment and validation of remaining IRB
and IMM models for counterparty credit and our internal models
approach ('IMA') for traded risk models is in progress. Models are
expected to undergo PRA approval over the next 12 months.
Data management
We use a large number of systems and growing quantities of data
to support our customers. Risk arises if data is incorrect,
unavailable, misused, or if the privacy of our customers and
colleagues is unprotected. Along with other banks and financial
institutions, we need to meet external regulatory obligations and
laws that cover data, such as the Basel Committee on Banking
Supervisions 239 guidelines and the General Data Protection
Regulation ('GDPR').
Mitigating actions
-- Through our global data management framework, we monitor
proactively the quality, availability and security of data that
supports our customers and internal processes. We resolve any
identified data issues in a timely manner.
-- We have made improvements to our data policies and are
implementing an updated control framework to enhance the end-to-end
management of data risk by our businesses and functions.
-- We protect customer data via our data privacy framework,
which establishes practices, design principles and guidelines that
enable us to demonstrate compliance with data privacy laws and
regulations.
-- We continue to modernise our data and analytics
infrastructure through investments in Cloud technology, data
visualisation, machine learning and artificial intelligence.
-- We educate our employees on data risk and data management and
have delivered global mandatory training on the importance of
protecting data and managing data appropriately.
T
Third Party Risk Management
We use third parties to provide a range of services, in common
with other financial service providers. Risks arising from the use
of third-party service providers and their supply chain may be less
transparent. It is critical that we ensure we have appropriate risk
management policies, processes and practices over the selection,
governance and oversight of third parties and their supply chain,
particularly for key activities that could affect our operational
resilience. Any deficiency in the management of risks associated
with our third parties could affect our ability to support our
strategic approach and meet our customer and regulatory
expectations.
Mitigating actions
-- We have enhanced our control framework for external supplier
arrangements to ensure the risks associated with third-party
arrangements are understood and managed effectively by our
businesses and functions across the group.
-- We have applied the same control standards to intra-group
arrangements as we have for external third-party arrangements to
ensure we are managing them effectively.
-- We are implementing the changes required by our new
third-party risk policy to comply with new regulations as defined
by our regulators.
--
Areas of special interest
Risks related to Covid-19
Despite the successful roll-out of vaccines across the world,
the Covid-19 pandemic and its effect on the global economy have
continued to impact our customers and organisation. The global
vaccination roll-out in 2021 helped reduce the social and economic
impact of the Covid-19 pandemic and high vaccination rates are
enabling many countries across Europe in 2022 to ease
Covid-19-related restrictions on activity and constraints on
travel. However, the emergence of the Omicron variant in late 2021,
demonstrated the continued risk new variants pose.
The pandemic necessitated governments to respond at
unprecedented levels to protect public health, and to support local
economies and livelihoods. The resulting government support
measures and restrictions have created additional challenges, given
the rapid pace of change and significant operational demands.
Renewed outbreaks, particularly those resulting from the emergence
of variants of the virus, emphasise the ongoing threat of Covid-19
and could result in further tightening of government restrictions.
There remains a divergence in approach taken by countries to the
level of restrictions on activity and travel. Such diverging
approaches to future pandemic waves could prolong or worsen supply
chain and international travel disruptions.
We continue to support our personal and business customers
through market-specific measures initiated during the Covid-19
pandemic, and by supporting government schemes that focus on the
parts of the economy most impacted by the pandemic. For further
details of our customer relief programmes, see page 60.
The rapid introduction and varying nature of the government
support schemes introduced throughout the Covid-19 pandemic has led
to increased operational risks, including complex conduct
considerations, increased reputational risk and increased risk of
fraud. These risks are likely to be heightened further as and when
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 economy - 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, and government support measures
come to an end, there is a risk that the outputs of IFRS 9 models
may have a tendency to underestimate loan losses. To help mitigate
this risk, model outputs and management adjustments are closely
monitored and independently reviewed for reliability and
appropriateness prior to inclusion in the financial results.
Despite the ongoing economic recovery, significant uncertainties
remain in assessing the duration and impact of the Covid-19
pandemic, including whether any subsequent outbreaks result in a
reimposition of government restrictions. There is a risk that
economic activity remains below pre-pandemic levels for a prolonged
period, increasing inequality across markets, and it will likely be
some time before societies return to pre-pandemic levels of social
interactions. As a result, there may still be a requirement for
additional mitigating actions including further use of adjustments,
overlays and model redevelopment.
Governments and central banks in major economies have deployed
extensive measures to support their local populations. This is
expected to reverse partially in 2022. Central banks in major
markets are expected to raise interest rates, but such increases
are expected to be gradual and monetary policy is expected to
remain accommodative overall. Governments are also expected to
reduce the level of fiscal support they offer households and
businesses as the appetite for broad lockdowns and public health
restrictions decreases. Government debt has risen in most advanced
economies, and is expected to remain high into the medium term.
High government debt burdens have raised fiscal vulnerabilities,
increasing the sensitivity of debt service costs to interest rate
increases and potentially reducing the fiscal space available to
address future economic downturns. HSBC's Central scenario used to
calculate impairment assumes that economic activity will continue
to recover through 2022, surpassing peak pre-pandemic levels of GDP
in our key markets. It is assumed that private sector growth
accelerates, ensuring a strong recovery is sustained even as
pandemic-related fiscal support is withdrawn. However, there is a
high degree of uncertainty associated with economic forecasts in
the current environment and there are significant risks to our
Central scenario. The degree of uncertainty varies by our key
markets, driven by country specific trends in 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. For further details of our Central and
other scenarios, see 'Measurement uncertainty and sensitivity
analysis of ECL estimates' on page 41.
We continue to monitor the situation closely, and given the
novel and prolonged nature of the pandemic, additional mitigating
actions may be required.
Climate-related risks
Climate change can have an impact across HSBC's risk taxonomy
through both transition and physical channels.
Transition risk can arise from the move to a low-carbon economy,
such as through policy, regulatory and technological changes.
Physical risk can arise through increasing frequency and
severity of weather or other climatic events, such as flooding, or
chronic changes in precipitation patterns, temperatures or sea
levels.
These have the potential to cause both idiosyncratic and
systemic risks, resulting in potential financial and non-financial
impacts for the group. Financial impacts could materialise if
transition and physical risks impact the ability of our customers
to repay their loans. Non-financial impacts could materialise if
our own assets or operations are impacted by extreme weather or
chronic changes in weather patterns, or as a result of business
decisions to achieve our climate ambition.
How climate risk can impact our customers
Climate change could impact our customers in two main ways.
Firstly, customer business models may fail to align to a low-carbon
economy, which could mean that new climate-related regulation,
policy or technological changes would have a material impact on
their business. Secondly, extreme weather events or chronic changes
in weather patterns may damage our customers' assets and supply
chain leaving them unable to operate their business or perhaps even
live in their home.
One of the most valuable ways we can help our customers navigate
the transition challenges and to become more resilient to the
physical impacts of climate change is through financing and
investment. To do this effectively, we must understand the risks
they are facing.
The table below summarises the key categories of transition and
physical risk, with examples of how our customers might be affected
financially by climate change and the shift to a low-carbon
economy.
Transition Policy Mandates on, and regulation
and legal of, existing products
and services
Litigation from parties
who have suffered from
the effects of climate
change
---------- ------------ ---------------------------
Technology Replacement of existing
products with lower
emission options
---------- ------------ ---------------------------
End-demand Changing consumer behaviour
(market)
---------- ------------ ---------------------------
Reputational Increased scrutiny
following a change
in stakeholder perceptions
of climate-related
action or inaction
---------- ------------ ---------------------------
Physical Acute Increased frequency
and severity of weather
events
---------- ------------ ---------------------------
Chronic Changes in precipitation
patterns
Rising temperatures
---------- ------------ ---------------------------
Integrating climate into enterprise-wide risk management
Our approach to climate risk management is aligned to HSBC
Group's risk management framework and three line of defence model
which sets out how we identify, assess and manage our risks. This
approach ensures the Board and senior management have visibility
and oversight of our key climate risks.
Climate Risk Appetite
Our developing climate risk appetite measures support the
oversight and management of the financial and non-financial risks
from climate change, meet regulatory expectations and support the
business to deliver our climate ambition in a safe and sustainable
way. Our initial measures are focused on the oversight and
management of our key climate risks: wholesale credit risk, retail
credit risk, reputational risk, resilience risk and regulatory
compliance.
Our future ambition for our climate risk appetite is to:
-- Adapt the Risk Appetite Statement metrics to incorporate
forward looking transition plans and net zero commitments.
-- Expand to consider other financial and non-financial risks.
-- Use enhanced scenario analysis capabilities.
-- Broaden the scope of risks to include climate considerations
in Market Risk, Liquidity Risk, Legal Risk and Environmental Risk
management.
Climate Risk Policies, Processes and Controls
We are integrating climate risk into the supporting policies,
processes and controls for our key climate risks and we will
continue to update these as our climate risk management
capabilities mature over time. For example, we have updated our
policy on product management and developed the first version of a
climate risk scoring tool for our corporate portfolios. In
addition, HSBC Group has published the new Thermal Coal Phase-Out
Policy and we are implementing this in the region.
Climate Risk Governance and Reporting
Our key climate risks are reported and governed through our
climate risk governance structure. Our Climate Risk Oversight
Forums are responsible for the oversight, management and escalation
of all climate related matters in the region. The regional Risk
Management Meeting and the Risk Committee receive scheduled updates
on climate risk, and regular updates on our climate risk appetite
and top and emerging climate risks.
Our Chief Risk Officer is responsible for the manner by which
financial risks from climate change should be identified and
managed in line with the group's risk management framework.
We have assessed the impact of climate risk on our balance sheet
and have concluded that there is no material impact on the
financial statements for the year ended 31 December 2021.
Climate Risk Programme
Our dedicated Climate Risk Programme continues to accelerate the
development of our climate risk management capabilities. The key
achievements in 2021 include:
-- We delivered tailored training sessions on climate risk to our legal entity board.
-- We delivered training to colleagues across the three lines of
defence to increase their understanding of how climate risk can
impact their role, and we also included an introduction to our
climate ambition in our global mandatory training.
-- We developed our climate risk scoring tool for corporate
customers for use in priority regions, which builds on our
corporate transition questionnaire.
-- We have continued to develop our climate stress testing and
scenario analysis capabilities, including model development to
deliver on the ECB climate stress testing exercise.
We will continue to enhance our climate risk management
capabilities throughout 2022. This will include the further
roll-out of training, refinement of our risk appetite, enhancement
of our climate risk scoring tool and increasing the availability
and quality of data so that new metrics can be developed.
How climate risk can impact the group
Below, we provide detail on how climate risk impacts to our
customers might manifest across our key climate risks, and the
potential time frames involved using four main drivers under
transition risk; policy and legal, technology, end-demand (market)
and reputational; and two main drivers under physical risk; acute
and chronic.
Financial risks Non-financial
risk
--------------------------------------------- ------------------------
Risk type Wholesale Strategic Regulatory
credit Retail risk (reputational) Resilience compliance
credit risk risk
--------------------------------- ---------- ----------- -------------------- ---------- ------------
Timescale(1) Short-long Medium-long Short-long Short-long
term term term term Short-medium
--------------------------------- ---------- ----------- -------------------- ---------- ------------
Transition risk drivers
--------------------------------- ---------- ----------- -------------------- ---------- ------------
- Policy and legal l l l
--------------------------------- ---------- ----------- -------------------- ---------- ------------
- Technology l
--------------------------------- ---------- ----------- -------------------- ---------- ------------
- End-demand (market) l l
--------------------------------- ---------- ----------- -------------------- ---------- ------------
- Reputational l l l
--------------------------------- ---------- ----------- -------------------- ---------- ------------
Physical risk drivers
--------------------------------- ---------- ----------- -------------------- ---------- ------------
- Acute - increased frequency and
severity of weather event l l l
--------------------------------- ---------- ----------- -------------------- ---------- ------------
- Chronic - changes in weather
pattern l l l
--------------------------------- ---------- ----------- -------------------- ---------- ------------
1 Short term: less than one year; medium term: period to 2030; long term: period to 2050.
Our material banking and insurance risks
The material risk types associated with our banking and
insurance manufacturing operations are described in the following
tables.
Description of risks - banking operations (continued)
Credit risk (see page 32)
The risk of financial Credit risk arises Credit risk is:
loss if a customer principally from direct * measured as the amount that could be lost if a
or counterparty lending, trade finance customer or counterparty fails to make repayments;
fails to meet an and leasing business,
obligation under but also from certain
a contract. other products such * monitored using various internal risk management
as guarantees and measures and within limits approved by individuals
derivatives. within a framework of delegated authorities; and
* managed through a robust risk control framework that
outlines clear and consistent policies, principles
and guidance for risk managers.
-------------------------- ----------------------------- -----------------------------------------------------------
Treasury risk (see page 70)
The risk of having Treasury risk arises Treasury risk is:
insufficient capital, from changes to the * measured through appetites set as target and minimum
liquidity or funding respective resources ratios;
resources to meet and risk profiles driven
financial obligations by customer behaviour,
and satisfy regulatory management decisions * monitored and projected against appetites and using
requirements, including or the external environment. stress and scenario testing; and
the risk of adverse
impact on earnings
or capital due to * managed through control of resources in conjunction
structural foreign with risk profiles and cashflows.
exchange exposures
and changes in market
interest rates,
and including the
financial risks
arising from historic
and current provision
of pensions and
other post employment
benefits to staff
and their dependants.
-------------------------- ----------------------------- -----------------------------------------------------------
Market risk (see page 77)
The risk that movements Exposure to market Market risk is:
in market factors risk is separated into * measured using sensitivities, value at risk ('VaR')
such as foreign two portfolios: and stress testing, giving a detailed picture of
exchange rates, * trading portfolios; and potential gains and losses for a range of market
interest rates, movements and scenarios, as well as tail risks over
credit spreads, specified time horizons;
equity prices and * non-trading portfolios.
commodity prices
will reduce our * monitored using VaR, stress testing and other
income or the value Market risk exposures measures, including the sensitivity of net interest
of our portfolios. arising from our insurance income and the sensitivity of structural foreign
operations are discussed exchange; and
on page 84.
* managed using risk limits approved by the risk
management meeting ('RMM') and the RMM in various
global businesses.
-------------------------- ----------------------------- -----------------------------------------------------------
Resilience risk (see page 80)
Resilience risk Resilience risk arises Resilience risk is:
is the risk that from failures or inadequacies * measured through a range of metrics with defined
we are unable to in processes, people, maximum acceptable impact tolerances, and against our
provide critical systems or external agreed risk appetite.
services to our events. These may be
customers, affiliates, driven by rapid technological
and counterparties innovation, changing * monitored through oversight of enterprise processes,
as a result of sustained behaviours of our consumers, risks, controls and strategic change programmes; and
and significant cyber-threats and attacks,
operational disruption. crossborder dependencies,
and third party * managed by continuous monitoring and thematic
relationships. reviews.
Regulatory compliance risk (see page
81)
--------------------------------------------------------- -----------------------------------------------------------
Regulatory compliance Regulatory compliance Regulatory compliance risk is:
risk is the risk risk arises from the * measured by reference to risk appetite, identified
associated with failure to observe metrics, incident assessments, regulatory feedback
breaching our duty the letter and spirit and the judgement and assessment of our regulatory
to clients and other of relevant laws, codes, compliance teams;
counterparties, rules, regulations
inappropriate market and standards of good
conduct and breaching practice. This could * monitored against the first line of defence risk and
related financial result in poor market control assessments, the results of the monitoring
services regulatory or customer outcomes and control assurance activities of the second line
standards. leading to fines, penalties of defence functions, and the results of internal and
and reputational damage external audits and regulatory inspections; and
to our business.
* managed by establishing and communicating appropriate
policies and procedures, training employees in them
and monitoring activity to help ensure their
observance. Proactive risk control and/or remediation
work is undertaken where required.
-------------------------- ----------------------------- -----------------------------------------------------------
Financial crime risk (see page 81)
Financial crime Financial crime risk Financial crime risk is:
risk is the risk arises from day-to-day * measured by reference to risk appetite, identified
of knowingly or banking operations metrics, incident assessments, regulatory feedback
unknowingly helping involving customers, and the judgement of, and assessment by, our
parties to commit third parties and employees. regulatory compliance teams;
or to further potentially
illegal activity
through HSBC, including * monitored against the first line of defence risk and
money laundering, control assessments, the results of the monitoring
fraud, bribery and and control assurance activities of the second line
corruption, tax of defence functions, and the results of internal and
evasion, sanctions external audits and regulatory inspections; and
breaches, and terrorist
and proliferation
financing. * managed by establishing and communicating appropriate
policies and procedures, training employees in them
and monitoring activity to help ensure their
observance. Proactive risk control and/or remediation
work is undertaken where required.
-------------------------- ----------------------------- -----------------------------------------------------------
Model risk (see page 83)
Model risk is the Model risk arises in Model risk is:
potential for adverse both financial and * measured by reference to model performance tracking
consequences from non-financial contexts and the output of detailed technical reviews, with
business decisions whenever business decision key metrics including model review statuses and
informed by models, making includes reliance findings;
which can be exacerbated on models.
by errors in methodology,
design or the way * monitored against model risk appetite statements,
they are used. insight from the independent review function,
feedback from internal and external audits, and
regulatory reviews; and
* managed by creating and communicating appropriate
policies, procedures and guidance, training
colleagues in their application, and supervising
their adoption to ensure operational effectiveness.
-------------------------- ----------------------------- -----------------------------------------------------------
Our insurance manufacturing subsidiaries are regulated
separately from our banking operations. Risks in our insurance
entities are managed using methodologies and processes that are
subject to Group oversight. Our insurance operations are also
subject to some of the same risks as our banking operations, and
these, are covered by the Group's risk management processes. There
are though specific risks inherent to the insurance operations as
noted below.
Description of risks - insurance manufacturing operations
Financial risk (see page 84)
For insurance Exposure to financial Financial risk is:
entities, risks arises from: * measured (i) for credit risk, in terms of economic
Financial * market risk affecting the fair values of financial capital and the amount that could be lost if a
risk includes assets or their future cash flows; counterparty fails to make repayments; (ii) for
the risk of market risk, in terms of economic capital, internal
not being metrics and fluctuations in key financial variables;
able * credit risk; and and (iii) for liquidity risk, in terms of internal
to metrics, including stressed operational cash flow
effectively projections;
match * liquidity risk of entities not being able to make
liabilities payments to policyholders as they fall due.
arising under * monitored through a framework of approved limits and
insurance delegated authorities; and
contracts
with
appropriate * managed through a robust risk control framework that
investments outlines clear and consistent policies, principles
and that the and guidance. This includes using product design and
expected asset liability matching and bonus rates.
sharing
of financial
performance
with
policyholders
under certain
contracts is
not possible.
Insurance risk (see page 84)
The risk The cost of claims and Insurance risk is:
that, benefits can be influenced * measured in terms of life insurance liabilities and
over time, by many factors, including economic capital allocated to insurance underwriting
the mortality and morbidity risk;
cost of the experience, as well as
contract, lapse and surrender rates.
including * monitored though a framework of approved limits and
claims and delegated authorities; and
benefits
may exceed
the * managed through a robust risk control framework that
total amount outlines clear and consistent policies, principles
of premiums and guidance. This includes using product design,
and underwriting, reinsurance and claims-handling
investment procedures.
income
received.
------------- -------------------------------------------------------- ----------------------------------------------------------
Credit risk
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 management
Key developments in 2021
We continued to actively manage the risks resulting from the
Covid-19 outbreak and its impacts on our customers and operations
in 2021. For further details of market-specific measures to support
our personal and business customers, see page 28. Outside these
Covid-19 initiatives, there have been no material changes to credit
risk policy and we continue to apply the requirements of IFRS 9
'Financial Instruments' within Credit risk.
Climate Risk
For our Global Banking and Commercial Banking wholesale clients
operating in high transition risk sectors, a detailed Transition
Risk Questionnaire is completed which assess both the climate risk
the client faces and their plans to adapt to a Net Zero world. This
information is taken into consideration as part of the broader
client credit assessment. During 2022, we will broaden our
assessments to include other high risk sectors which may be
vulnerable to other climate considerations, including physical
risk. This will also be embedded as part of the usual credit
assessment process.
Governance and structure
We have established group-wide credit risk management and
related IFRS 9 processes. We continue to actively assess the impact
of economic developments in key markets on specific customers,
customer segments or portfolios. As credit conditions change, we
take mitigating action, including the revision of risk appetites or
limits and tenors, as appropriate. In addition, we continue to
evaluate the terms under which we provide credit facilities within
the context of individual customer requirements, the quality of the
relationship, local regulatory requirements, market practices and
our local market position.
Credit risk sub-function
(Audited)
Credit approval authorities are delegated by the Board to the
Chief Executive together with the authority to sub-delegate them.
The Credit risk sub-function in Risk is responsible for the key
policies and processes for managing credit risk, which include
formulating credit policies and risk rating frameworks, guiding the
appetite for credit risk exposures, undertaking independent reviews
and objective assessment of credit risk, and monitoring performance
and management of portfolios.
The principal objectives of our credit risk management are:
-- to maintain across the group a strong culture of responsible
lending and a robust risk policy and control framework;
-- to both partner and challenge global businesses in defining,
implementing and continually re-evaluating our risk appetite under
actual and scenario conditions; and
-- to ensure there is independent, expert scrutiny of credit risks, their costs and mitigation.
--
Key risk management process
IFRS 9 'Financial Instruments' process
The IFRS 9 process comprises three main areas: modelling and
data; implementation; and governance.
Modelling and data
The Group has established IFRS 9 modelling and data processes in
various geographies, which are subject to internal model risk
governance including independent review of significant model
developments.
Implementation
A centralised impairment engine performs the ECL calculation
using data, which is subject to a number of validation checks and
enhancements, from a variety of client, finance and risk systems.
Where possible, these checks and processes are performed in a
globally consistent and centralised manner.
Governance
Management review forums are established in order to review and
approve the impairment results. Management review forums have
representatives from Credit Risk and Finance. Required members of
the committee are the heads of Wholesale Credit, Market Risk, and
Wealth and Personal Banking Risk, as well as the global business
Chief Financial Officers and the Chief Accounting Officer.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of
counterparties or exposures have comparable economic
characteristics, or are engaged in similar activities, or operate
in the same geographical areas/industry sectors, so that their
collective ability to meet contractual obligations is uniformly
affected by changes in economic, political or other conditions. The
group uses a number of controls and measures to minimise undue
concentration of exposure in the group's portfolios across
industry, country and customer groups. These include portfolio and
counterparty limits, approval and review controls, and stress
testing.
Credit quality of financial instruments
(Audited)
Our risk rating system facilitates the internal ratings-based
approach under the Basel framework adopted by the Group to support
the calculation of our minimum credit regulatory capital
requirement. The five credit quality classifications each encompass
a range of granular internal credit rating grades assigned to
wholesale and retail lending businesses, and the external ratings
attributed by external agencies to debt securities.
For debt securities and certain other financial instruments,
external ratings have been aligned to the five quality
classifications based upon the mapping of related Customer Risk
Rating ('CRR') to external credit rating.
Wholesale lending
The CRR 10-grade scale summarises a more granular underlying
23-grade scale of obligor probability of default ('PD'). All
corporate customers are rated using the 10- or 23-grade scale,
depending on the degree of sophistication of the Basel approach
adopted for the exposure.
Each CRR band is associated with an external rating grade by
reference to long-run default rates for that grade, represented by
the average of issuer-weighted historical default rates. This
mapping between internal and external ratings is indicative and may
vary over time.
Retail lending
Retail lending credit quality is based on a 12-month
point-in-time probability-weighted PD.
Credit quality classification
Sovereign Other debt
debt securities securities Wholesale lending
and bills and bills and derivatives Retail lending
----------------- ------------- ----------------------- ---------------------------------
12-month
probability
External External Internal of Internal 12 month
credit credit credit default credit probability-weighted
rating rating rating % rating PD %
------------------------ ----------------- ------------- --------- ------------ ---------- ---------------------
Quality
classification(1,2)
------------------------ ----------------- ------------- --------- ------------ ---------- ---------------------
Strong BBB and A- and above CRR1 to 0 - 0.169 Band 1 and 0.000 -
above CRR2(1) 2 0.500
------------------------ ----------------- ------------- --------- ------------ ---------- ---------------------
Good BBB- to BBB+ to CRR3 0.170 - Band 3 0.501 -
BB BBB- 0.740 1.500
------------------------ ----------------- ------------- --------- ------------ ---------- ---------------------
BB- to B BB+ to B CRR4 to 0.741 - Band 4 and 1.501 -
Satisfactory and unrated and unrated CRR5 4.914 5 20.000
------------------------ ----------------- ------------- --------- ------------ ---------- ---------------------
Sub-standard B- to C B- to C CRR6 to 4.915 - Band 6 20.001 -
CRR8 99.999 99.999
------------------------ ----------------- ------------- --------- ------------ ---------- ---------------------
CRR9 to
Credit impaired Default Default CRR10 100 Band 7 100
------------------------ ----------------- ------------- --------- ------------ ---------- ---------------------
1 Customer risk rating ('CRR').
2 12-month point-in-time probability-weighted PD.
Quality classification definitions
* 'Strong' exposures demonstrate a strong capacity to
meet financial commitments, with negligible or low
probability of default and/or low levels of expected
loss.
* 'Good' exposures require closer monitoring and
demonstrate a good capacity to meet financial
commitments, with low default risk.
* 'Satisfactory' exposures require closer monitoring
and demonstrate an average to fair capacity to meet
financial commitments, with moderate default risk.
* 'Sub-standard' exposures require varying degrees of
special attention and default risk is of greater
concern.
* 'Credit-impaired' exposures have been assessed as
described in Note 1.2(i) on the Financial Statements.
============================================================
Renegotiated loans and forbearance
'Forbearance' describes concessions made on the contractual
terms of a loan in response to an obligor's financial
difficulties.
A loan is classed as 'renegotiated' when we modify the
contractual payment terms on concessionary terms because we have
significant concerns about the borrowers' ability to meet
contractual payments when due. Non-payment-related concessions
(e.g. covenant waivers), while potential indicators of impairment,
do not trigger identification as renegotiated loans.
Loans that have been identified as renegotiated retain this
designation until maturity or derecognition.
For details of our policy on derecognised renegotiated loans,
see Note 1.2(i) on the financial statements.
Credit quality of renegotiated loans
On execution of a renegotiation, the loan will also be
classified as credit impaired if it is not already so classified.
In wholesale lending, all facilities with a customer, including
loans that have not been modified, are considered credit impaired
following the identification of a renegotiated loan.
Wholesale renegotiated loans are classified as credit impaired
until there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future cash flows, observed
over a minimum one-year period, and there are no other indicators
of impairment. Personal renegotiated loans generally remain credit
impaired until repayment, write-off or derecognition.
Renegotiated loans and recognition of expected credit losses
(Audited)
For retail lending, unsecured renegotiated loans are generally
segmented from other parts of the loan portfolio. Renegotiated
expected credit loss assessments reflect the higher rates of losses
typically encountered with renegotiated loans. For wholesale
lending, renegotiated loans are typically assessed individually.
Credit risk ratings are intrinsic to the impairment assessments.
The individual impairment assessment takes into account the higher
risk of the future non-payment inherent in renegotiated loans.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances and
financial investments see Note 1.2(i) on the financial
statements.
Write-off of loans and advances
(Audited)
For details of our accounting policy on the write-off of loans
and advances, see Note 1.2(i) on the financial statements.
Unsecured personal facilities, including credit cards, are
generally written off at between 150 and 210 days past due. The
standard period runs until the end of the month in which the
account becomes 180 days contractually delinquent. Write-off
periods may be extended, generally to no more than 360 days past
due. However, in exceptional circumstances, they may be extended
further.
For secured facilities, write-off should occur upon repossession
of collateral, receipt of proceeds via settlement, or determination
that recovery of the collateral will not be pursued.
Any secured assets maintained on the balance sheet beyond 60
months of consecutive delinquency-driven default require additional
monitoring and review to assess the prospect of recovery.
There are exceptions in a few countries where local regulation
or legislation constrain earlier write-off, or where the
realisation of collateral for secured real estate lending takes
more time. In the event of bankruptcy or analogous proceedings,
write-off may occur earlier than the maximum periods stated above.
Collection procedures may continue after write-off.
Credit risk in 2021
At 31 December 2021, gross loans and advances to customers and
banks of GBP103.1bn decreased by GBP12.5bn, compared with
31 December 2020. This included adverse foreign exchange
movements of GBP4.3bn. Excluding foreign exchange movements, the
decline was driven by a GBP7.1bn decrease in wholesale loans and
advances to customers and a GBP1.5bn decrease in loans and advances
to banks. This was partly offset by a GBP0.4bn increase in personal
loans and advances .
During the first half of 2021, the group experienced a release
in allowances for ECL, reflecting an improvement of the economic
outlook. This trend continued during the second half of the year
following better than expected levels of credit performance and
lower levels of stage 3 charges. However, in the later part of the
year the trend slowed down due to the emergence of the new Covid-19
Omicron variant. Excluding foreign exchange movements, the
allowance for ECL in relation to loans and advances to customers
decreased by GBP258m from 31 December 2020.
This was attributable to:
-- a GBP225m decrease in wholesale loans and advances to
customers, of which GBP156m was driven by stages 1 and 2; and
-- a GBP33m increase in personal loans and advances to
customers, of which GBP14m was driven by stages 1 and 2.
During the first six months of the year, the group experienced
significant migrations from stage 2 to stage 1, reflecting an
improvement of the economic outlook. This trend continued during
the second half of 2021 as forward economic guidance ('FEG')
remained broadly stable in comparison with 30 June 2021.
Stage 3 balances at 31 December 2021 remained broadly stable
compared with 31 December 2020.
The ECL release for 2021 was GBP174m, inclusive of recoveries,
Uncertainty remains as some countries emerge from the pandemic at
different speeds of recovery, government support measures unwind
and the emergence of new strains of the virus test the efficacy of
vaccination programmes.
During 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 60.
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 allowance for ECL decreased from GBP1,632m at
31 December 2020 to GBP1,240m at 31 December 2021.
The allowance for ECL at 31 December 2021 comprised of GBP1,168m
(2020: GBP1,497m) in respect of assets held at amortised cost,
GBP72m (2020: GBP135m) in respect of loans and other credit related
commitments, and financial guarantees, and GBP19m (2020: GBP22m) in
respect of debt instruments measured at FVOCI.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
(Audited)
---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
31 Dec 2021 31 Dec 2020
--------------------------------------------------------------------------- ----------------------------------------------------------------------
Gross carrying/nominal Allowance Gross carrying/nominal Allowance
amount for ECL(1) amount for ECL(1)
The group GBPm GBPm GBPm GBPm
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
Loans and
advances to
customers at
amortised
cost 92,331 (1,154) 102,960 (1,469)
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
- personal 25,394 (163) 26,499 (208)
--------------
- corporate
and
commercial 56,087 (964) 62,987 (1,168)
--------------
- non-bank
financial
institutions 10,850 (27) 13,474 (93)
-------------- ---------------------------------- --------------------------------------- ----------------------------------
Loans and
advances to
banks at
amortised
cost 10,789 (5) 12,662 (16)
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
Other
financial
assets
measured at
amortised
cost 202,137 (9) 202,763 (12)
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
- cash and
balances at
central banks 108,482 - 85,093 (1)
--------------
- items in the
course of
collection
from other
banks 346 - 243 -
--------------
- reverse
repurchase
agreements -
non trading 54,448 - 67,577 -
--------------
- financial
investments 10 - 15 -
--------------
- prepayments,
accrued
income and
other
assets(2) 38,851 (9) 49,835 (11)
-------------- ---------------------------------- --------------------------------------- ----------------------------------
Total gross
carrying
amount on
balance
sheet 305,257 (1,168) 318,385 (1,497)
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
Loans and
other credit
related
commitments 115,695 (55) 143,036 (112)
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
- personal 2,269 (1) 2,211 (1)
--------------
- corporate
and
commercial 63,352 (48) 75,863 (89)
--------------
- financial 50,074 (6) 64,962 (22)
-------------- ---------------------------------- --------------------------------------- ----------------------------------
Financial
guarantees(3) 11,054 (17) 3,969 (23)
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
- personal 26 - 32 -
--------------
- corporate
and
commercial 9,894 (16) 2,735 (19)
--------------
- financial 1,134 (1) 1,202 (4)
-------------- ---------------------------------- --------------------------------------- ----------------------------------
Total nominal
amount off
balance
sheet(4) 126,749 (72) 147,005 (135)
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
432,006 (1,240) 465,390 (1,632)
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
Memorandum Memorandum
allowance allowance
Fair value for ECL(5) Fair value for ECL(5)
GBPm GBPm GBPm GBPm
-------------- ---------------------------------- --------------------------------------- ---------------------------------- ----------------------------------
Debt
instruments
measured at
fair
value through
other
comprehensive
income
('FVOCI') 41,188 (19) 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 110 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.
Summary of financial instruments to which the impairment
requirements in IFRS 9 are applied
(Audited)
------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
31 Dec 2021 31 Dec 2020
----------------------------------------------------------------------------- ------------------------------------------------------------------------
Gross carrying/nominal Allowance Gross carrying/nominal Allowance
amount for ECL(1) amount for ECL(1)
The bank GBPm GBPm GBPm GBPm
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
Loans and
advances to
customers at
amortised cost 34,286 (350) 43,831 (590)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
- personal 3,680 (6) 3,582 (13)
---------------
- corporate and
commercial 21,182 (308) 26,014 (494)
---------------
- non-bank
financial
institutions 9,424 (36) 14,235 (83)
--------------- ------------------------------------- -------------------------------------- ------------------------------------
Loans and
advances to
banks at
amortised
cost 6,782 (4) 8,078 (15)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
Other financial
assets
measured at
amortised cost 135,033 (1) 135,900 (1)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
- cash and
balances at
central banks 63,008 - 48,777 -
---------------
- items in the
course of
collection
from other
banks 211 - 37 -
---------------
- reverse
repurchase
agreements-non
trading 39,708 - 50,137 -
---------------
- financial
investments 3,337 - 2,214 -
---------------
- prepayments,
accrued income
and
other
assets(2) 28,769 (1) 34,735 (1)
--------------- ------------------------------------- -------------------------------------- ------------------------------------
Total gross
carrying
amount on
balance
sheet 176,101 (355) 187,809 (606)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
Loans and other
credit related
commitments 31,255 (29) 45,308 (81)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
- personal 589 - 352 -
---------------
- corporate and
commercial 19,175 (26) 25,444 (66)
---------------
- financial 11,491 (3) 19,512 (15)
--------------- ------------------------------------- -------------------------------------- ------------------------------------
Financial
guarantees(3) 1,270 (7) 1,510 (13)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
- personal 3 - 3 -
---------------
- corporate and
commercial 527 (6) 457 (9)
---------------
- financial 740 (1) 1,050 (4)
--------------- ------------------------------------- -------------------------------------- ------------------------------------
Total nominal
amount off
balance
sheet(4) 32,525 (36) 46,818 (94)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
208,626 (391) 234,627 (700)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
Memorandum Memorandum
allowance allowance
Fair value for ECL(5) Fair value for ECL(5)
GBPm GBPm GBPm GBPm
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
Debt
instruments
measured at
FVOCI 23,152 (4) 28,699 (9)
--------------- ------------------------------------- -------------------------------------- ------------------------------------ ----------------------------------
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 110 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 and
bank's credit risk by stage and industry, and the associated ECL
coverage. The financial assets recorded in each stage have the
following characteristics:
-- Stage 1: These financial assets are unimpaired and without
significant increase in credit risk on which a 12-month allowance
for ECL is recognised.
-- Stage 2: A significant increase in credit risk has been
experienced since initial recognition on which a lifetime ECL is
recognised.
--
Stage 3: There is objective evidence of impairment, and are
therefore considered to be in default or otherwise credit-impaired
on which a lifetime ECL is recognised.
-- Purchased or originated credit-impaired ('POCI'): Financial
assets that are purchased or originated at a deep discount that
reflects the incurred credit losses on which a lifetime ECL is
recognised.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2021
(Audited)
Gross carrying/nominal Allowance for
amount(2) 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
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 80,730 9,121 2,478 2 92,331 (86) (158) (908) (2) (1,154) 0.1 1.7 36.6 100.0 1.2
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- ------- -----
- personal 24,255 686 453 - 25,394 (22) (16) (125) - (163) 0.1 2.3 27.6 - 0.6
--------------------------------------
* corporate and commercial 46,237 8,066 1,782 2 56,087 (58) (137) (767) (2) (964) 0.1 1.7 43.0 100.0 1.7
--------------------------------------
* non-bank financial institutions 10,238 369 243 - 10,850 (6) (5) (16) - (27) 0.1 1.4 6.6 - 0.2
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- -------
Loans and
advances
to banks
at amortised
cost 10,750 39 - - 10,789 (4) (1) - - (5) - 2.6 - - -
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- ------- -----
Other financial
assets measured
at amortised
cost 202,048 47 42 - 202,137 - - (9) - (9) - - 21.4 - -
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 107,922 7,571 202 - 115,695 (25) (22) (8) - (55) - 0.3 4.0 - -
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- ------- -----
- personal 2,152 114 3 - 2,269 (1) - - - (1) - - - - -
--------------------------------------
* corporate and commercial 56,325 6,829 198 - 63,352 (20) (20) (8) - (48) - 0.3 4.0 - 0.1
--------------------------------------
- financial 49,445 628 1 - 50,074 (4) (2) - - (6) - 0.3 - - -
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- -------
Financial
guarantees(1) 10,215 740 99 - 11,054 (3) (7) (7) - (17) - 0.9 7.1 - 0.2
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- ------- -----
- personal 23 2 1 - 26 - - - - - - - - - -
--------------------------------------
* corporate and commercial 9,257 540 97 - 9,894 (2) (7) (7) - (16) - 1.3 7.2 - 0.2
--------------------------------------
- financial 935 198 1 - 1,134 (1) - - - (1) 0.1 - - - 0.1
-------------------------------------- --------------- ---------------- ---------------- ------------ ---------------- -------------- -------------- -------------- ------------ ------------------------------ ----- ----- ----- -------
At 31 Dec
2021 411,665 17,518 2,821 2 432,006 (118) (188) (932) (2) (1,240) - 1.1 33.0 100.0 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 days 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 31 December 2021
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
-------------------------------------------------------------------- ---------------------------------------------------------------------- -------------------------
Of Of
Of which: Of which: Of which: Of which: which: which:
1 to 30 and
Stage 1 to 30 and Stage 1 to 30 and Stage 29 >
2 29 DPD(1,2) > DPD(1,2) 2 29 DPD(1,2) > DPD(1,2) 2 DPD(1,2) DPD(1,2)
The group GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
Loans and
advances
to customers
at amortised
cost: 9,121 56 237 (158) (1) (1) 1.7 1.8 0.4
------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
- personal 686 49 29 (16) (1) (1) 2.3 2.0 3.4
-------------
- corporate
and
commercial 8,066 7 199 (137) - - 1.7 - -
-------------
- non-bank
financial
institutions 369 - 9 (5) - - 1.4 - -
------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- --------
Loans and
advances
to banks at
amortised
cost 39 - - (1) - - 2.6 - -
------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
Other
financial
assets
measured at
amortised
cost 47 - - - - - - - -
------------- -------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ----- -------- --------
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)
(Audited)
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
The group 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)
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
------------------------------------------------------------------- ------------------------------------------------------------------------- ----------------------------
Of
Of which: Of which: Of which: Of which: which: Of which:
1 to
Stage 1 to 30 and Stage 1 to 30 and Stage 29 30 and
2 29 DPD(1,2) > DPD(1,2) 2 29 DPD(1,2) > DPD(1,2) 2 DPD(1,2) > DPD(1,2)
The group 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.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2021
(Audited)
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
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 30,105 3,197 984 - 34,286 (33) (47) (270) - (350) 0.1 1.5 27.4 - 1.0
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- ------- -----
- personal 3,544 88 48 - 3,680 (1) (2) (3) - (6) - 2.3 6.3 - 0.2
--------------------------------------
* corporate and commercial 17,608 2,893 681 - 21,182 (28) (45) (235) - (308) 0.2 1.6 34.5 - 1.5
--------------------------------------
* non-bank financial institutions 8,953 216 255 - 9,424 (4) - (32) - (36) - - 12.5 - 0.4
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- -------
Loans and
advances
to banks
at amortised
cost 6,775 7 - - 6,782 (3) (1) - - (4) - 14.3 - - 0.1
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- ------- -----
Other financial
assets
measured
at amortised
cost 134,984 21 28 - 135,033 - - (1) - (1) - - 3.6 - -
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 28,911 2,301 43 - 31,255 (15) (11) (3) - (29) 0.1 0.5 7.0 - 0.1
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- ------- -----
- personal 585 2 2 - 589 - - - - - - - - - -
--------------------------------------
* corporate and commercial 17,010 2,124 41 - 19,175 (12) (11) (3) - (26) 0.1 0.5 7.3 - 0.1
--------------------------------------
- financial 11,316 175 - - 11,491 (3) - - - (3) - - - - -
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- -------
Financial
guarantees(1) 1,060 150 60 - 1,270 (1) - (6) - (7) 0.1 - 10.0 - 0.6
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- ------- -----
- personal 2 1 - - 3 - - - - - - - - - -
--------------------------------------
* corporate and commercial 437 31 59 - 527 - - (6) - (6) - - 10.2 - 1.1
--------------------------------------
- financial 621 118 1 - 740 (1) - - - (1) 0.2 - - - 0.1
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- -------
At 31 Dec
2021 201,835 5,676 1,115 - 208,626 (52) (59) (280) - (391) - 1.0 25.1 - 0.2
-------------------------------------- ------------------ -------------- -------------- ------------- -------------------------- -------------- --------------- -------------- ---------- ------------- ----- ----- ----- ------- -----
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 2021
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
-------------------------------------------------------------------- -------------------------------------------------------------------- -----------------------
Of which: Of which: Of which: Of which: Of Of
which: which:
1 to
Stage 1 to 30 and Stage 1 to 30 and Stage 29 30 and
2 29 DPD(1) > DPD(1) 2 29 DPD(1) > DPD(1) 2 DPD(1) > DPD(1)
The bank GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- -------------------- ----- ------ --------
Loans and
advances
to customers
at amortised
cost: 3,197 19 6 (47) (1) - 1.5 5.3 -
------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- -------------------- ----- ------ --------
- personal 88 19 6 (2) (1) - 2.3 5.3 -
-------------
- corporate
and
commercial 2,893 - - (45) - - 1.6 - -
-------------
- non-bank
financial
institutions 216 - - - - - - - -
------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- -------------------- ----- ------
Loans and
advances
to banks at
amortised
cost 7 - - (1) - - 14.3 - -
------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- -------------------- ----- ------ --------
Other
financial
assets
measured at
amortised
cost 21 - - - - - - - -
------------- ---------------------- -------------------- ---------------------- ---------------------- ---------------------- -------------------- ----- ------ --------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2020 (continued)
(Audited)
Gross carrying/nominal Allowance for
amount(2) 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
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- ------- -----
Loans and
advances
to customers
at amortised
cost 34,629 7,921 1,279 2 43,831 (79) (158) (351) (2) (590) 0.2 2.0 27.4 100.0 1.3
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- ------- -----
- personal 3,455 70 57 - 3,582 (1) (8) (4) - (13) - 11.4 7.0 - 0.4
--------------------------------------
* corporate and commercial 18,670 6,424 918 2 26,014 (70) (121) (301) (2) (494) 0.4 1.9 32.8 100.0 1.9
--------------------------------------
* non-bank financial institutions 12,504 1,427 304 - 14,235 (8) (29) (46) - (83) 0.1 2.0 15.1 - 0.6
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- -------
Loans and
advances
to banks
at amortised
cost 7,995 83 - - 8,078 (12) (3) - - (15) 0.2 3.6 - - 0.2
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- ------- -----
Other financial
assets
measured
at amortised
cost 135,843 35 22 - 135,900 - - (1) - (1) - - 4.5 - -
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- ------- -----
Loan and
other credit-related
commitments 39,343 5,905 60 - 45,308 (28) (48) (5) - (81) 0.1 0.8 8.3 - 0.2
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- ------- -----
- personal 338 14 - - 352 - - - - - - - - - -
--------------------------------------
* corporate and commercial 21,895 3,492 57 - 25,444 (23) (39) (4) - (66) 0.1 1.1 7.0 - 0.3
--------------------------------------
- financial 17,110 2,399 3 - 19,512 (5) (9) (1) - (15) - 0.4 33.3 - 0.1
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- -------
Financial
guarantees(1) 1,203 253 54 - 1,510 (2) (4) (7) - (13) 0.2 1.6 13.0 - 0.9
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- ------- -----
- personal 2 1 - - 3 - - - - - - - - - -
--------------------------------------
* corporate and commercial 331 73 53 - 457 (1) (1) (7) - (9) 0.3 1.4 13.2 - 2.0
--------------------------------------
- financial 870 179 1 - 1,050 (1) (3) - - (4) 0.1 1.7 - - 0.4
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- -------
At 31 Dec
2020 219,013 14,197 1,415 2 234,627 (121) (213) (364) (2) (700) 0.1 1.5 25.7 100.0 0.3
-------------------------------------- ---------------------- ---------------- ---------------- ------------- ------------------- --------------- ------------- -------------- ------------- ----------- ----- ----- ----- ------- -----
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
3 Purchased or originated credit-impaired ('POCI').
Stage 2 days past due analysis at 31 December 2020 (continued)
(Audited) Gross carrying amount Allowance for ECL ECL coverage %
--------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------
Of which: Of which: Of which: Of which: Of Of which:
which:
1 to 1 to 1 to
Stage 29 30 and Stage 29 30 and Stage 29 30 and
2 DPD(1) > DPD(1) 2 DPD(1) > DPD(1) 2 DPD(1) > DPD(1)
The bank GBPm GBPm GBPm GBPm GBPm GBPm % % %
------------- --------------------- ---------------------- ---------------------- ----------------------- ----------------------- ----------------------- ----- ------ ---------
Loans and
advances
to customers
at amortised
cost: 7,921 16 8 (158) (1) (1) 2.0 6.3 12.5
------------- --------------------- ---------------------- ---------------------- ----------------------- ----------------------- ----------------------- ----- ------ ---------
- Personal 70 15 8 (8) (1) (1) 11.4 6.7 12.5
-------------
- Corporate
and
commercial 6,424 1 - (121) - - 1.9 - -
-------------
- Non-bank
financial
institutions 1,427 - - (29) - - 2.0 - -
------------- --------------------- ---------------------- ---------------------- ----------------------- ----------------------- ----------------------- ----- ------
Loans and
advances
to banks at
amortised
cost 83 - - (3) - - 3.6 - -
------------- --------------------- ---------------------- ---------------------- ----------------------- ----------------------- ----------------------- ----- ------ ---------
Other
financial
assets
measured at
amortised
cost 35 - - - - - - - -
------------- --------------------- ---------------------- ---------------------- ----------------------- ----------------------- ----------------------- ----- ------ ---------
1 Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.
Stage 2 decomposition as at 31 December 2021
The following disclosure presents the stage 2 decomposition of
gross carrying amount and allowances for ECL for loans and advances
to customers.
The table below discloses the reasons why an exposure moved into
stage 2 originally, and is therefore presented as a significant
increase in credit risk since origination.
The Quantitative classification is predominantly related to
exposures where the adjusted 12-month PD is greater than the
average 12-month PD; or accounts with a significant increase in
credit risk when the origination PD has doubled.
The Qualitative classification primarily accounts for management
judgemental adjustments, CRR deterioration, and other reasons.
For further details on our approach to the assessment of
significant increase in credit risk, see 'Summary of significant
accounting policies' on page 119.
.
Loans and advances to customers(1)
Gross carrying amount Allowance for ECL
--------------------------------------------- ---------------------------------------------
Corporate Non-bank Corporate Non-bank ECL
and financial and financial Coverage
Personal commercial institutions Total Personal commercial institutions Total % Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Quantitative 561 3,611 162 4,334 (13) (41) (1) (55) 1.3
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Qualitative 102 4,260 198 4,560 (2) (96) (4) (102) 2.2
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
30 DPD
backstop(2) 23 195 9 227 (1) - - (1) 0.4
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Total Stage
2 686 8,066 369 9,121 (16) (137) (5) (158) 1.7
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
The bank
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Quantitative 26 1,731 95 1,852 (2) (9) - (11) 0.6
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Qualitative 62 1,162 121 1,345 - (36) - (36) 2.7
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
30 DPD - - - - - - - -
backstop(2) -
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
Total Stage
2 88 2,893 216 3,197 (2) (45) - (47) 1.5
------------- -------- ------------- ------------- ----- -------- ------------- ------------- ----- ---------
1 Where balances satisfy more than one of the above three
criteria for determining a significant increase in credit risk, the
corresponding gross exposure and ECL have been assigned in order of
categories presented.
2 Days past due ('DPD').
Credit exposure
Maximum exposure to credit risk
(Audited)
This section provides information on balance sheet items and
their offsets as well as loan and other credit-related commitments.
The offset on derivatives remains in line with the movements in
maximum exposure amounts.
'Maximum exposure to credit risk'
table
The following table presents our
maximum exposure before taking account
of any collateral held or other
credit enhancements (unless such
enhancements meet accounting offsetting
requirements). The table excludes
financial instruments whose carrying
amount best represents the net exposure
to credit risk and it excludes equity
securities as they are not subject
to credit risk. For the financial
assets recognised on the balance
sheet, the maximum exposure to credit
risk equals their carrying amount;
for financial guarantees and other
guarantees granted, it is the maximum
amount that we would have to pay
if the guarantees were called upon.
For loan commitments and other credit-related
commitments, it is generally the
full amount of the committed facilities.
The offset in the table relates
to amounts where there is a legally
enforceable right of offset in the
event of counterparty default and
where,
as a result, there is a net exposure
for credit risk purposes. However,
as there is no intention to settle
these balances on a net basis under
normal circumstances, they do not
qualify for net presentation for
accounting purposes. No offset has
been applied to off-balance sheet
collateral. In the case of derivatives
the offset column also includes
collateral received in cash and
other financial assets.
=======================================
Other credit risk mitigants
While not disclosed as an offset in the following 'Maximum
exposure to credit risk' table, other arrangements are in place
which reduce our maximum exposure to credit risk. These include a
charge over collateral on borrowers' specific assets such as
residential properties, collateral held in the form of financial
instruments that are not held on balance sheet and short positions
in securities. In addition, for financial assets held as part of
linked insurance/investment contracts the risk is predominantly
borne by the policyholder. See Note 28 on the financial statements
for further details of collateral in respect of certain loans and
advances and derivatives.
Collateral available to mitigate credit risk is disclosed in the
Collateral section on page 64.
Maximum exposure to credit risk
---------------------- ----------------------- ----------------------
(Audited) 2021 2020
-------------------------------------------------------------------- -----------------------------------------------------------------------
Maximum Maximum
exposure Offset Net exposure Offset Net
The group GBPm GBPm GBPm GBPm GBPm GBPm
--------------- --------------------- ---------------------- --------------------- ---------------------- ----------------------- ----------------------
Loans and
advances to
customers
held at
amortised cost 91,177 (7,057) 84,120 101,491 (8,717) 92,774
--------------- --------------------- ---------------------- --------------------- ---------------------- ----------------------- ----------------------
- personal 25,231 - 25,231 26,291 (3) 26,288
---------------
- corporate and
commercial 55,123 (6,228) 48,895 61,819 (7,662) 54,157
---------------
- non-bank
financial
institutions 10,823 (829) 9,994 13,381 (1,052) 12,329
--------------- --------------------- ---------------------- --------------------- ---------------------- -----------------------
Loans and
advances to
banks at
amortised
cost 10,784 (88) 10,696 12,646 (137) 12,509
--------------- --------------------- ---------------------- --------------------- ---------------------- ----------------------- ----------------------
Other financial
assets held at
amortised
cost 202,455 (10,239) 192,216 203,084 (10,604) 192,480
--------------- --------------------- ---------------------- --------------------- ---------------------- ----------------------- ----------------------
- cash and
balances at
central banks 108,482 - 108,482 85,092 - 85,092
---------------
- items in the
course of
collection
from other
banks 346 - 346 243 - 243
- reverse
repurchase
agreements
- non trading 54,448 (10,239) 44,209 67,577 (10,604) 56,973
---------------
- financial
investments 10 - 10 15 - 15
---------------
- prepayments,
accrued income
and
other assets 39,169 - 39,169 50,157 - 50,157
--------------- --------------------- ---------------------- --------------------- ---------------------- -----------------------
Derivatives 141,221 (139,668) 1,553 201,210 (200,137) 1,073
--------------- --------------------- ---------------------- --------------------- ---------------------- ----------------------- ----------------------
Total on
balance sheet
exposure
to credit risk 445,637 (157,052) 288,585 518,431 (219,595) 298,836
--------------- --------------------- ---------------------- --------------------- ---------------------- ----------------------- ----------------------
Total
off-balance
sheet 146,261 - 146,261 165,368 - 165,368
--------------- --------------------- ---------------------- --------------------- ---------------------- ----------------------- ----------------------
- financial and
other
guarantees(1) 26,840 - 26,840 18,177 - 18,177
---------------
- loan and
other
credit-related
commitments 119,421 - 119,421 147,191 - 147,191
--------------- --------------------- ---------------------- --------------------- ---------------------- -----------------------
At 31 Dec 591,898 (157,052) 434,846 683,799 (219,595) 464,204
--------------- --------------------- ---------------------- --------------------- ---------------------- ----------------------- ----------------------
1 'Financial and other guarantees' represents 'Financial
guarantees' and 'Performance and other guarantees' as disclosed in
Note 30, net of ECL.
Maximum exposure to credit risk (continued)
2021 2020
------------------------------------------------------------------ ----------------------------------------------------------------------
Maximum Maximum
exposure Offset Net exposure Offset Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
Loans and
advances to
customers
held at
amortised cost 33,936 (7,047) 26,889 43,241 (8,711) 34,530
--------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
- personal 3,674 - 3,674 3,569 - 3,569
---------------
- corporate and
commercial 20,874 (6,224) 14,650 25,520 (7,661) 17,859
---------------
- non-bank
financial
institutions 9,388 (823) 8,565 14,152 (1,050) 13,102
--------------- -------------------- ---------------------- -------------------- ---------------------- ----------------------
Loans and
advances to
banks at
amortised
cost 6,778 - 6,778 8,063 - 8,063
--------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
Other financial
assets held at
amortised
cost 135,109 (9,045) 126,064 135,948 (10,003) 125,945
--------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
- cash and
balances at
central banks 63,008 - 63,008 48,777 - 48,777
---------------
- items in the
course of
collection
from other
banks 211 - 211 37 - 37
---------------
- reverse
repurchase
agreements
- non trading 39,708 (9,045) 30,663 50,137 (10,003) 40,134
---------------
- financial
investments 3,337 - 3,337 2,214 - 2,214
---------------
- prepayments,
accrued income
and
other assets 28,845 - 28,845 34,783 - 34,783
--------------- -------------------- ---------------------- -------------------- ---------------------- ----------------------
Derivatives 125,787 (123,964) 1,823 182,066 (181,925) 141
--------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
Total on
balance sheet
exposure
to credit risk 301,610 (140,056) 161,554 369,318 (200,639) 168,679
--------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
Total
off-balance
sheet 41,034 - 41,034 54,899 - 54,899
--------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
- financial and
other
guarantees(1) 8,592 - 8,592 8,640 - 8,640
---------------
- loan and
other
credit-related
commitments 32,442 - 32,442 46,259 - 46,259
--------------- -------------------- ---------------------- -------------------- ---------------------- ----------------------
At 31 Dec 342,644 (140,056) 202,588 424,217 (200,639) 223,578
--------------- -------------------- ---------------------- -------------------- ---------------------- ---------------------- ----------------------
1 'Financial and other guarantees' represents 'Financial
guarantees' and 'Performance and other guarantees' as disclosed in
Note 30, net of ECL.
Concentration of exposure
We have a number of businesses with a broad range of products.
We operate in a number of markets with the majority of our
exposures in UK and France.
For an analysis of:
-- financial investments, see Note 15 on the financial statements;
-- trading assets, see Note 10 on the financial statements;
-- derivatives, see page 67 and Note 14 on the financial statements; and
-- loans and advances by industry sector and by the location of
the principal operations of the lending subsidiary or by the
location of the lending branch, see page 62 for wholesale lending
and page 67 for personal lending.
Credit deterioration of financial instruments
(Audited)
A summary of our current policies and practices regarding the
identification, treatment and measurement of stage 1, stage 2 and
stage 3 (credit impaired) and POCI financial instruments can be
found in Note 1.2 on the financial statements.
Measurement uncertainty and sensitivity
analysis of ECL estimates
(Audited)
Despite a broad recovery in economic conditions during 2021, ECL
estimates continued to be subject to a high degree of uncertainty
and management judgements and estimates continue to reflect a
degree of caution, both in the selection of economic scenarios and
their weightings, and through management judgemental adjustments.
Releases of provisions were made progressively as economic
conditions recovered and by 31 December 2021 the majority of the
2020 uplift in ECL provisions had been reversed.
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. Management judgemental adjustments are used to address
late-breaking events, data and model limitations, model
deficiencies and expert credit judgements.
Methodology
Four economic scenarios are used to capture the current economic
environment and to articulate management's view of the range of
potential outcomes. Scenarios produced to calculate ECL are aligned
to HSBC's top and emerging risks.
In the second quarter of 2020, to ensure that the severe risks
associated with the pandemic were appropriately captured,
management added a fourth, more severe, scenario to use in the
measurement of ECL. Starting in the fourth quarter of 2021, HSBC's
methodology has been adjusted so that the use of four scenarios, of
which two are Downside scenarios, is the standard approach to ECL
calculation.
Three of the 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.
Consensus Upside and Downside scenarios are created with reference
to distributions for select markets that capture forecasters' views
of the entire range of outcomes. In the later years of the
scenarios, projections revert to long-term consensus trend
expectations. In the consensus outer scenarios, reversion to trend
expectations is done mechanically with reference to historically
observed quarterly changes in the values of macroeconomic
variables.
The fourth scenario, Downside 2, is designed to represent
management's view of severe downside risks. It is a globally
consistent narrative-driven scenario that explores more extreme
economic outcomes than those captured by the consensus scenarios.
In this scenario, variables do not, by design, revert to long-term
trend expectations. They may instead explore alternative states of
equilibrium, where economic activity moves permanently away from
past trends.
Description of economic scenarios
The economic assumptions presented in this section have been
formed by HSBC with reference to external forecasts specifically
for the purpose of calculating ECL.
The global economy experienced a recovery in 2021, following an
unprecedented contraction in 2020. Restrictions to mobility and
travel eased across our key markets, aided by the successful
roll-out of vaccination programmes. The emergence of new variants
that potentially reduce the efficacy of vaccines remains a
risk.
Economic forecasts remain subject to a high degree of
uncertainty. Risks to the economic outlook are dominated by the
progression of the pandemic, vaccine roll-out and the public policy
response. Geopolitical risks also remain significant and include
continued differences between the US and other countries with China
over a range of economic and strategic defence issues. Continued
uncertainty over the long-term economic relationship between the UK
and EU also present downside risks.
The scenarios used to calculate ECL in the Annual Report and
Accounts 2021 are described below.
The consensus Central scenario
HSBC's Central scenario features a continued recovery in
economic growth in 2022 as activity and employment gradually return
to the levels reached prior to the outbreak of Covid-19.
Our Central scenario assumes that the stringent restrictions on
activity, imposed across several countries and territories in 2020
and early 2021 are not repeated. The new viral strain that emerged
late in 2021, Omicron, has only a limited impact on the recovery,
according to this scenario. Consumer spending and business
investment, supported by elevated levels of private sector savings,
are expected to drive the economic recovery as fiscal and monetary
policy support recedes.
Regional differences in the speed of economic recovery in the
Central scenario reflect differences in the progression of the
pandemic, roll-out of vaccination programmes, national level
restrictions imposed and scale of support measures. Global GDP is
expected to grow by 4.2% in 2022 in the Central scenario and the
average rate of global GDP growth is 3.1% over the five-year
forecast period. This exceeds the average growth rate over the
five-year period prior to the onset of the pandemic.
The key features of our Central scenario are:
-- Economic activity in our top markets continues to recover.
GDP grows at a moderate rate and exceeds pre-pandemic levels across
all our key markets in 2022.
-- Unemployment declines to levels only slightly higher than
existed pre-pandemic, with the exception of France where the
downward trend in unemployment, related to structural changes to
the labour market, resumes.
-- Covid-19-related fiscal spending recedes in 2022 as fewer
restrictions on activity allow fiscal support to be withdrawn.
Deficits remain high in several countries as they embark on
multi-year investment programmes to support recovery, productivity
growth and climate transition.
-- Inflation across many of our key markets remains elevated
through 2022. Supply driven price pressures persist through the
first half of 2022 before gradually easing. In subsequent years,
inflation quickly converges back towards central bank target
rates.
-- Policy interest rates in key markets rise gradually over our
projection period, in line with economic recovery.
-- The West Texas Intermediate oil price is forecast to average
$62 per barrel over the projection period.
In the longer-term, growth reverts back towards similar rates
that existed prior to the pandemic, suggesting that the damage to
long-term economic prospects is expected to be minimal.
The Central scenario was first created with forecasts available
in November, and subsequently updated in December.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
Central scenario 2022-2026
UK France
--------------- ------------------
% %
---------------------------- --------------- ------------------
GDP growth rate
---------------------------- --------------- ------------------
2022: Annual average growth
rate 5.0 3.9
---------------------------- --------------- ------------------
2023: Annual average growth
rate 2.1 2.1
---------------------------- --------------- ------------------
2024: Annual average growth
rate 1.9 1.6
---------------------------- --------------- ------------------
5-year average 2.5 2.1
---------------------------- --------------- ------------------
Unemployment rate
---------------------------- --------------- ------------------
2022: Annual average rate 4.5 8.0
---------------------------- --------------- ------------------
2023: Annual average rate 4.3 7.7
---------------------------- --------------- ------------------
2024: Annual average rate 4.2 7.6
---------------------------- --------------- ------------------
5-year average 4.3 7.7
---------------------------- --------------- ------------------
House price growth
---------------------------- --------------- ------------------
2022: Annual average growth
rate 5.5 4.9
---------------------------- --------------- ------------------
2023: Annual average growth
rate 3.3 4.6
---------------------------- --------------- ------------------
2024: Annual average growth
rate 3.3 4.0
---------------------------- --------------- ------------------
5-year average 3.5 3.9
---------------------------- --------------- ------------------
Short-term interest rate
---------------------------- --------------- ------------------
2022: Annual average rate 1.0 (0.5)
---------------------------- --------------- ------------------
2023: Annual average rate 1.3 (0.3)
---------------------------- --------------- ------------------
2024: Annual average rate 1.2 (0.1)
---------------------------- --------------- ------------------
5-year average 1.2 (0.2)
---------------------------- --------------- ------------------
Probability 60 60
---------------------------- --------------- ------------------
The graphs comparing the respective Central scenarios in the
fourth 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
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 Central scenario, the consensus Upside
scenario features a faster recovery in economic activity during the
first two years, before converging to long-run trend
expectations.
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 ongoing vaccine efficacy;
de-escalation of tensions between the US and China; continued
fiscal and monetary support; 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 9.9 (1Q22) 7.0 (2Q22)
-------------------- --------------- ------ ------------------ ------
Unemployment rate 3.0 (4Q23) 6.6 (4Q23)
-------------------- --------------- ------ ------------------ ------
House price growth 7.4 (2Q23) 6.8 (2Q22)
-------------------- --------------- ------ ------------------ ------
Short term interest
rate 0.7 (1Q22) (0.5) (1Q22)
-------------------- --------------- ------ ------------------ ------
Probability 10 10
-------------------- ----------------------- --------------------------
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.
Downside scenarios
The progress of the pandemic and the ongoing public policy
response continues to be a key source of risk. Downside scenarios
assume that new strains of the virus result in an acceleration in
infection rates and increased pressure on public health services,
necessitating restrictions on activity. The reimposition of such
restrictions could be assumed to have a damaging effect on consumer
and business confidence.
Government fiscal programmes in advanced economies in 2020 and
2021 were supported by accommodative actions taken by central
banks. These measures have provided households and firms with
significant support. An inability or unwillingness to continue with
such support or the untimely withdrawal of support present a
downside risk to growth.
While Covid-19 and related risks dominate the economic outlook,
geopolitical risks also present a threat. These risks include:
-- continued differences between the US and other countries with
China, which could affect sentiment and restrict global economic
activity; and
-- potential disagreements between the UK and the EU, which may
hinder the ability to reach a more comprehensive agreement on trade
and services, despite the Trade and Cooperation Agreement averting
a disorderly UK departure.
The consensus Downside scenario
In the consensus Downside scenario, economic recovery is weaker
compared with the Central scenario as key global risks, including
Covid-19, escalate. Compared to the Central scenario GDP growth is
expected to be lower, unemployment rates rise moderately and asset
and commodity prices fall, before gradually recovering towards
their long-run trend expectations.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Downside scenario.
Consensus Downside scenario worst
outcome
UK France
% %
-------------------- ------------------ ------ ------------------ ------
GDP growth rate (0.5) (3Q23) 0.5 (4Q23)
-------------------- ------------------ ------ ------------------ ------
Unemployment rate 5.6 (4Q22) 9.1 (3Q22)
-------------------- ------------------ ------ ------------------ ------
House price growth (4.2) (1Q23) 2.0 (4Q22)
-------------------- ------------------ ------ ------------------ ------
Short-term interest
rate 0.2 (4Q23) (0.5) (1Q22)
-------------------- ------------------ ------ ------------------ ------
Probability 15 15
-------------------- -------------------------- --------------------------
Note: Extreme point in the consensus Downside is 'worst outcome'
in the scenario, for example lowest GDP growth and the highest
unemployment rate, in the first two years of the scenario.
Downside 2 scenario
The Downside 2 scenario features a deep global recession. In
this scenario, new Covid-19 variants emerge that cause infections
to rise sharply in 2022, resulting in setbacks to vaccination
programmes and the rapid imposition of restrictions on mobility and
travel across some countries. The scenario also assumes governments
and central banks are unable to significantly increase fiscal and
monetary support, which results in abrupt corrections in labour and
asset markets.
The following table describes key macroeconomic variables and
the probabilities assigned in the Downside 2 scenario.
Downside 2 scenario worst outcome
UK France
% %
-------------------- ---------------------- ------ ------------------- ------
GDP growth rate (4.6) (4Q22) (4.6) (4Q22)
-------------------- ---------------------- ------ ------------------- ------
Unemployment rate 7.5 (2Q23) 10.0 (4Q23)
-------------------- ---------------------- ------ ------------------- ------
House price growth (14.2) (2Q23) (6.0) (2Q23)
-------------------- ---------------------- ------ ------------------- ------
Short-term interest
rate 1.6 (2Q22) 0.4 (2Q22)
-------------------- ---------------------- ------ ------------------- ------
Probability 15 15
-------------------- ------------------------------ ---------------------------
Note: Extreme point in the Downside 2 is 'worst outcome' in the
scenario, for example lowest GDP growth and the highest
unemployment rate, in the first two years of the scenario.
Scenario weighting
In reviewing the economic conjuncture, the level of uncertainty
and risk, management has considered both global and
country-specific factors. This has led management to assign
scenario probabilities that are tailored to its view of uncertainty
in individual markets.
To inform its view, management has considered the progression of
the virus in individual countries, the speed of vaccine roll-outs,
the degree of current and expected future government support and
connectivity with other countries. Management has also been guided
by the policy response and economic performance through the
pandemic, as well as the evidence that economies have adapted as
the virus has progressed.
A key consideration in the fourth quarter was the emergence of
the new variant, Omicron. The virulence and severity of the new
strain, in addition to the continued efficacy of vaccines against
it, was unknown when the variant first emerged. Management
therefore determined that uncertainty attached to forecasts had
increased and sought to reflect this in scenario weightings.
The UK and France faced the greatest economic uncertainties of
our key markets. The emergence of Omicron exacerbated the rise in
case rates and hospitalisations in both countries, necessitating
the imposition of new restrictions. These increase uncertainties
around economic growth and employment. Accordingly, the Central
scenario was assigned a 60% weight in both countries. The two
Downside scenarios were given a combined probability weighting of
30% for both the UK and France.
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. Despite a general recovery
in economic conditions during 2021, the level of estimation
uncertainty and judgement has remained high during 2021 as a result
of the ongoing economic effects of the Covid-19 pandemic and other
sources of economic instability, 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
wider distribution of economic forecasts than before the pandemic.
The key judgements are the length of time over which the economic
effects of the pandemic will occur, and the speed and shape of
recovery. The main factors include the effectiveness of pandemic
containment measures, the pace of roll-out and effectiveness of
vaccines, and the emergence of new variants of the virus, plus a
range of geopolitical uncertainties, which together represent a
high degree of estimation uncertainty, particularly in assessing
Downside scenarios;
-- estimating the economic effects of those scenarios on ECL,
where there is no observable historical trend that can be reflected
in the models that will accurately represent the effects of the
economic changes of the severity and speed brought about by the
Covid-19 pandemic and the recovery from those conditions. Modelled
assumptions and linkages between economic factors and credit losses
may underestimate or overestimate ECL in these conditions, and
there is significant uncertainty in the estimation of parameters
such as collateral values and loss severity; and
-- the identification of customers experiencing significant
increases in credit risk and credit impairment, particularly where
those customers have accepted payment deferrals and other reliefs
designed to address short-term liquidity issues given muted default
experience to date. The use of segmentation techniques for
indicators of significant increases in credit risk involves
significant estimation uncertainty.
How economic scenarios are reflected in ECL calculations
Models are used to reflect economic scenarios on ECL estimates.
As described above, modelled assumptions and linkages based on
historical information could not alone produce relevant information
under the conditions experienced in 2021, and judgemental
adjustments were still required to support modelled outcomes.
We have developed globally consistent methodologies for the
application of forward economic guidance into the calculation of
ECL for wholesale and retail credit risk. These standard approaches
are described below, followed by the management judgemental
adjustments made, including those to reflect the circumstances
experienced in 2021.
For our wholesale portfolios, a global methodology is used for
the estimation of the term structure of probability of default
('PD') and loss given default ('LGD'). For PDs, we consider the
correlation of forward economic guidance to default rates for a
particular industry in a country. For LGD calculations, we consider
the correlation of forward economic guidance to collateral values
and realisation rates for a particular country and industry. PDs
and LGDs are estimated for the entire term structure of each
instrument.
For impaired loans, LGD estimates take into account independent
recovery valuations provided by external consultants where
available or internal forecasts corresponding to anticipated
economic conditions and individual company conditions. In
estimating the ECL on impaired loans that are individually
considered not to be significant, we incorporate forward economic
guidance proportionate to the probability-weighted outcome and the
Central scenario outcome for non-stage 3 populations.
For our retail portfolios, the impact of economic scenarios on
PD is modelled at a portfolio level. Historical relationships
between observed default rates and macroeconomic variables are
integrated into IFRS 9 ECL estimates by using economic response
models. The impact of these scenarios on PD is modelled over a
period equal to the remaining maturity of the underlying asset or
assets. The impact on LGD is modelled for mortgage portfolios by
forecasting future loan-to-value ('LTV') profiles for the remaining
maturity of the asset by using national level forecasts of the
house price index and applying the corresponding LGD
expectation.
These models are based largely on historical observations and
correlations with default rates. Management judgemental adjustments
are described below.
Management judgemental adjustments
In the context of IFRS 9, management judgemental adjustments are
short-term increases or decreases to the ECL at either a customer,
segment or portfolio level to account for late-breaking events,
model and data limitations and deficiencies, and expert credit
judgement applied following management review and challenge.
At 31 December 2021, management judgements were applied to
reflect credit risk dynamics not captured by our models. The
drivers of the management judgemental adjustments reflect the
changing economic outlook and evolving risks across our
geographies.
Where the macroeconomic and portfolio risk outlook continues to
improve, supported by low levels of observed defaults, adjustments
initially taken to reflect increased risk expectations have been
retired or reduced.
However, other adjustments have increased where modelled
outcomes are overly sensitive and not aligned to observed changes
in the risk of the underlying portfolios during the pandemic, or
where sector-specific risks are not adequately captured.
The effect of management judgemental adjustments is considered
for balances and ECL when determining whether or not a significant
increase in credit risk has occurred and are attributed or
allocated to a stage as appropriate. This is in accordance with the
internal adjustments framework.
Management judgemental adjustments are reviewed under the
governance process for IFRS 9 (as detailed in the section 'Credit
risk management' on page 32). Review and challenge focuses on the
rationale and quantum of the adjustments with a further review
carried out by the second line of defence where significant. For
some management judgemental adjustments, internal frameworks
establish the conditions under which these adjustments should no
longer be required and as such are considered as part of the
governance process. This internal governance process allows
management judgemental adjustments to be reviewed regularly and,
where possible, to reduce the reliance on these through model
recalibration or redevelopment, as appropriate.
Management judgemental adjustments made in estimating the
scenario-weighted reported ECL at 31 December 2021 are set out in
the following table.
The table includes adjustments in relation to data and model
limitations, including those driven by late-breaking events and
sector-specific risks and as a result of the regular process of
model development and implementation.
Management judgemental adjustments
to ECL at 31 December 2021(1)
Retail Wholesale Total
GBPm GBPm GBPm
Low-risk counterparties
(banks, sovereigns
and government entities) - (4) (4)
--------------------------- -------------------- --------------------- ---------------------
Corporate lending
adjustments - 31 31
--------------------------- -------------------- --------------------- ---------------------
Retail lending probability
of default adjustments - - -
--------------------------- -------------------- --------------------- ---------------------
Retail model default
timing adjustments - - -
--------------------------- -------------------- --------------------- ---------------------
Macroeconomic-related
adjustments 17 - 17
--------------------------- -------------------- --------------------- ---------------------
Pandemic-related
economic recovery
adjustments 3 - 3
--------------------------- -------------------- --------------------- ---------------------
Other retail lending - - -
adjustments
--------------------------- -------------------- --------------------- ---------------------
Total 20 27 47
--------------------------- -------------------- --------------------- ---------------------
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
--------------------------- --------------------- -------------------- --------------------
Pandemic-related
economic recovery
adjustments - - -
--------------------------- --------------------- -------------------- --------------------
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.
Management judgemental adjustments at 31 December 2021 were an
increase to ECL of GBP27m for the wholesale portfolio and an
increase to ECL of GBP20m for the retail portfolio.
During 2021, management judgemental adjustments reflected an
evolving macroeconomic outlook and the relationship of the modelled
ECL to this outlook and to late-breaking and sector-specific
risks.
At 31 December 2021, wholesale management judgemental
adjustments were an ECL increase of GBP27m (31 December 2020:
GBP64m increase).
-- Adjustments relating to low credit-risk exposures decreased
ECL by GBP4m at 31 December 2021 (31 December 2020: GBP8m
increase). These were mainly to highly rated banks, sovereigns and
US government-sponsored entities, where modelled credit factors did
not fully reflect the underlying fundamentals of these entities or
the effect of government support and economic programmes in the
Covid-19 environment. The decrease in adjustment impact relative to
31 December 2020 was mostly driven by increased alignment of
modelled outcomes to management expectations following changes in
systems and data.
-- Adjustments to corporate exposures increased ECL by GBP31m at
31 December 2021 (31 December 2020: GBP56m increase). These
principally reflected the outcome of management judgements for
high-risk and vulnerable sectors in some of our key markets,
supported by credit experts' input, portfolio risk metrics,
quantitative analyses and benchmarks. Considerations include risk
of individual exposures under different macroeconomic scenarios and
comparison of key risk metrics to pre-pandemic levels, resulting in
either releases or increases to ECL. The decrease in adjustment
impact relative to 31 December 2020
was mostly driven by management judgements as a result of the
effect of further improvement of macroeconomic scenarios on
modelled outcomes and increased dislocation of modelled outcomes to
management expectations for high-risk sectors and due to
late-breaking events not fully reflected in the underlying
data.
At 31 December 2021, retail management judgemental adjustments
were an ECL increase of GBP20m (31 December 2020: GBP3m
increase).
-- Pandemic-related economic recovery adjustments increased ECL
by GBP3m (31 December 2020: GBP0) to adjust for the effects of the
volatile pace of recovery from the pandemic. This is where in
management's judgement, supported by quantitative analyses of
portfolio and economic metrics, modelled outcomes are overly
sensitive given the limited observed deterioration in the
underlying portfolio during the pandemic.
-- Positive macroeconomic-related adjustments have remained
broadly stable in comparison to 31 December 2020.
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 at the balance sheet date.
There is a particularly high degree of estimation uncertainty in
numbers representing more severe risk scenarios when assigned a
100% weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted (stage
3) obligors. It is generally impracticable to separate the effect
of macroeconomic factors in individual assessments of obligors in
default. The measurement of stage 3 ECL is relatively more
sensitive to credit factors specific to the obligor than future
economic scenarios, and loans to defaulted obligors are a small
portion of the overall wholesale lending exposure, even if
representing the majority of the allowance for ECL. Therefore, the
sensitivity analysis to macroeconomic scenarios does not capture
the residual estimation risk arising from wholesale stage 3
exposures.
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 Downside 2
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(1,2)
UK France
GBPm GBPm
-------------------------- ------- -------
ECL of loans and advances
to customers at
31 December 2021
-------------------------- ------- -------
Reported ECL 104 98
-------------------------- ------- -------
Consensus scenarios
-------------------------- ------- -------
Central scenario 90 89
-------------------------- ------- -------
Upside scenario 71 78
-------------------------- ------- -------
Downside scenario 109 120
-------------------------- ------- -------
Downside 2 scenario 189 138
-------
Gross carrying amount(2) 142,450 120,955
-------------------------- ------- -------
ECL of loans and advances
to customers at
31 December 2020
----------------------------- ------- -------
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 amounts but low ECL
under all the above scenarios.
Retail analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
GBPm GBPm
----------------------------- ------------------------ ----------------------
ECL of loans and advances
to customers at 31 December
2021
Reported ECL 5 91
------------------------ ----------------------
Consensus scenarios
Central scenario 4 91
------------------------ ----------------------
Upside scenario 4 91
------------------------ ----------------------
Downside scenario 5 92
------------------------ ----------------------
Downside 2 scenario 10 93
------------------------ ----------------------
Gross carrying amount 2,007 18,295
------------------------ ----------------------
IFRS 9 ECL sensitivity to future
economic conditions(1)
UK France
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)
(Audited)
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
The group 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 5,245 (66) (5,617) 90 372 (24) - - - -
-------------------- ---------------- ---------------- --------------------- ---------------------
- Transfers from
Stage 1 to Stage
2 (8,431) 14 8,431 (14) - - - - - -
- Transfers from
Stage 2 to Stage
1 13,714 (78) (13,714) 78 - - - - - -
- Transfers to
Stage
3 (93) - (401) 28 494 (28) - - - -
- Transfers from
Stage 3 55 (2) 67 (2) (122) 4 - - - -
-------------------- ---------------- --------------------- ---------------------
Net remeasurement
of ECL arising
from
transfer of stage - 43 - (22) - (5) - - - 16
---------------- ---------------- --------------------- ---------------------
New financial
assets
originated or
purchased 72,348 (55) - - - - - - 72,348 (55)
---------------- ---------------- --------------------- ---------------------
Asset derecognised
(including final
repayments) (57,098) 6 (3,481) 32 (454) 95 (3) 2 (61,036) 135
---------------- ---------------- --------------------- ---------------------
Changes to risk
parameters -
further
lending/repayments (16,766) 76 (3,927) 62 (213) 40 (29) 2 (20,935) 180
---------------- ---------------- --------------------- ---------------------
Changes to risk
parameters -
credit
quality - 54 - 7 - (176) - - - (115)
---------------- ---------------- --------------------- ---------------------
Changes to model
used for ECL
calculation - 2 - 9 - - - - - 11
---------------- ---------------- --------------------- ---------------------
Assets written off - - - - (152) 152 (5) 5 (157) 157
---------------- --------------------- ---------------------
Credit related
modifications
that resulted in
derecognition - - - - - - - - - -
---------------- ---------------- --------------------- ---------------------
Foreign exchange (7,512) 2 (1,060) 10 (126) 46 (1) 1 (8,699) 59
---------------- --------------------- ---------------------
Others(2) (1,320) - (170) 2 - (1) - - (1,490) 1
---------------- --------------------- ---------------------
At 31 Dec 2021 179,612 (118) 17,471 (188) 2,779 (923) 2 (2) 199,864 (1,231)
-------------------- ---------------- ---------------- --------------------- ---------------------
ECL income
statement
release/(charge)
for the period 126 88 (46) 4 172
--------------------- ---------------------
Recoveries 3
-------------------- -------------------- ---------------- -------------------- --------------------- ---------------------
Others (23)
-------------------- -------------------- ---------------- -------------------- --------------------- ---------------------
Total ECL income
statement release
for the period 152
-------------------- -------------------- ----------------
At 31 Dec 2021 12 months ended
31 Dec 2021
Gross carrying/nominal Allowance
amount for ECL ECL release/(charge)
GBPm GBPm GBPm
-------------------------------------
As above 199,864 (1,231) 152
-------------------------------------
Other financial 202,137 (9) (1)
assets measured
at
amortised cost
-------------------------------------
Non-trading 30,005 - -
reverse purchase
agreement
commitments
-------------------------------------
Performance and other guarantees not
considered for IFRS 9 18
Summary of
financial
instruments to
which the
impairment
requirements
in IFRS 9 are
applied/Summary
consolidated
income
statement 432,006 (1,240) 169
-------------------------------------
Debt instruments 41,188 (19) 5
measured at
FVOCI
-------------------------------------
Total allowance n/a (1,259) 174
for ECL/total
income
statement ECL
release for the
period
-------------------------------------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 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) (continued)
(Audited)
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
The group 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)
-------------------
Recoveries 2
---------------------- -------------------
Others (17)
---------------------- -------------------
Total ECL income
statement charge
for the period (781)
-------------------
At 31 Dec 2020 12 months ended
31 Dec 2020
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
As above 219,833 (1,620) (781)
------------------------------------
Other financial 202,763 (12) (2)
assets measured
at
amortised cost
------------------------------------
Non-trading 42,794 - -
reverse purchase
agreement
commitments
------------------------------------
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 51,713 (22) (8)
measured at
FVOCI
------------------------------------
Total allowance n/a (1,654) (808)
for ECL/total
income
statement ECL
charge for the
period
------------------------------------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 2020, these
amounted to GBP2bn 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)
(Audited)
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
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- -------------------- ------------------ -------------------- ------------------ --------------------- --------------------- --------------------
At 1 Jan 2021 78,422 (121) 14,161 (213) 1,395 (363) 2 (2) 93,980 (699)
-------------------- ------------------ ------------------ --------------------- ---------------------
Transfers of
financial
instruments 4,795 (27) (4,840) 39 45 (12) - - - -
-------------------- ------------------ ------------------ --------------------- ---------------------
- Transfers from
Stage 1 to Stage
2 (2,261) 3 2,261 (3) - - - - - -
- Transfers from
Stage 2 to Stage
1 7,043 (29) (7,043) 29 - - - - - -
- Transfers to
Stage
3 - - (59) 13 59 (13) - - - -
- Transfers from
Stage 3 13 (1) 1 - (14) 1 - - - -
-------------------- ------------------ --------------------- ---------------------
Net remeasurement
of ECL arising
from
transfer of stage - 13 - (1) - (1) - - - 11
------------------ ------------------ --------------------- ---------------------
New financial
assets
originated or
purchased 11,532 (31) - - - - - - 11,532 (31)
------------------ ------------------ --------------------- ---------------------
Asset derecognised
(including final
repayments) (11,861) 2 (1,836) 17 (80) 4 (2) 1 (13,779) 24
------------------ ------------------ --------------------- ---------------------
Changes to risk
parameters -
further
lending/repayments (13,051) 58 (1,813) 32 (190) 4 - - (15,054) 94
------------------ ------------------ --------------------- ---------------------
Changes to risk
parameters -
credit
quality - 48 - 59 - 13 - - - 120
------------------ ------------------ --------------------- ---------------------
Changes to model
used for ECL
calculation - 2 - 9 - - - - - 11
------------------ ------------------ --------------------- ---------------------
Assets written off - - - - (78) 78 (1) 1 (79) 79
-------------------- ------------------ ------------------ --------------------- ---------------------
Credit related
modifications
that resulted in
derecognition - - - - - - - - - -
------------------ ------------------ --------------------- ---------------------
Foreign exchange (76) - (15) - (4) 1 - - (95) 1
-------------------- ------------------ ------------------ --------------------- ---------------------
Others(2) (4,051) - - - - - - - (4,051) -
-------------------- ------------------ ------------------ --------------------- ---------------------
At 31 Dec 2021 65,710 (56) 5,657 (58) 1,088 (276) (1) - 72,454 (390)
-------------------- ------------------ ------------------ --------------------- ---------------------
ECL income
statement
release for the
period 92 116 20 1 229
--------------------- ---------------------
Recoveries 1
-------------------- -------------------- ------------------ -------------------- --------------------- ---------------------
Others (23)
-------------------- -------------------- ------------------ -------------------- --------------------- ---------------------
Total ECL income
release for the
period 207
-------------------- -------------------- ------------------
At 31 Dec 2021 12 months ended
31 Dec 2021
Gross carrying/nominal Allowance
amount for ECL ECL release
GBPm GBPm GBPm
As above 72,454 (390) 207
---------------------------------------
Other financial 135,033 (1) 1
assets measured
at
amortised cost
---------------------------------------
Non-trading 1,139 - -
reverse purchase
agreement
commitments
---------------------------------------
Performance and other guarantees not
considered for IFRS 9 4
Summary of
financial
instruments to
which the
impairment
requirements
in IFRS 9 are
applied/Summary
consolidated
income
statement 208,626 (391) 212
Debt instruments 23,152 (4) 5
measured at
FVOCI
---------------------------------------
Total allowance n/a (395) 217
for ECL/total
income
statement ECL
release for the
period
---------------------------------------
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 2021, these
amounted to GBP(4)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) (continued)
(Audited)
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
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------
At 1 Jan 2020 94,937 (77) 4,582 (77) 753 (242) 38 (24) 100,310 (420)
---------------------- ----------------- --------------------- ---------------------
Transfers of
financial
instruments: (12,397) (27) 11,422 47 975 (20) - - - -
---------------------- ----------------- --------------------- ---------------------
- Transfers from
Stage 1 to Stage
2 (17,892) 36 17,892 (36) - - - - - -
- Transfers from
Stage 2 to Stage
1 5,676 (68) (5,676) 68 - - - - - -
- Transfers to
Stage
3 (183) 5 (845) 17 1,028 (22) - - - -
- Transfers from
Stage 3 2 - 51 (2) (53) 2 - - - -
---------------------- ----------------- --------------------- ---------------------
Net remeasurement
of ECL arising
from
transfer of stage - 26 - (34) - - - - - (8)
New financial
assets
originated or
purchased 14,911 (43) - - - - - - 14,911 (43)
Asset derecognised
(including final
repayments) (7,687) 2 (666) 2 (167) 9 (15) 1 (8,535) 14
----------------------
Changes to risk
parameters -
further
lending/repayments (5,898) 35 (1,201) 13 (25) (9) 2 (3) (7,122) 36
----------------------
Changes to risk
parameters -
credit
quality - (54) - (129) - (232) - 1 - (414)
----------------------
Changes to model
used for ECL
calculation - 10 - (36) - - - - - (26)
----------------------
Assets written off - - - - (118) 118 (23) 23 (141) 141
---------------------- ----------------- --------------------- ---------------------
Credit related
modifications
that resulted in
derecognition - - - - (16) 4 - - (16) 4
----------------------
Foreign exchange (60) 7 24 1 (2) 4 - - (38) 12
---------------------- ----------------- --------------------- ---------------------
Others(2) (5,384) - - - (5) 5 - - (5,389) 5
---------------------- ----------------- --------------------- ---------------------
At 31 Dec 2020 78,422 (121) 14,161 (213) 1,395 (363) 2 (2) 93,980 (699)
---------------------- ----------------- --------------------- ---------------------
ECL income
statement
charge for the
period (24) (184) (232) (1) (441)
Recoveries -
Others (12)
Total ECL income
statement charge
for the period (453)
.
12 months ended
At 31 Dec 2020 31 Dec 2020
Gross carrying/nominal Allowance
amount for ECL ECL charge
GBPm GBPm GBPm
As above 93,980 (699) (453)
Other financial 135,900 (1) 4
assets measured
at
amortised cost
Non-trading 4,747 - -
reverse purchase
agreement
commitments
Performance and other guarantees not
considered for IFRS 9 (3)
Summary of
financial
instruments to
which the
impairment
requirements
in IFRS 9 are
applied/Summary
consolidated
income
statement 234,627 (700) (452)
Debt instruments 28,699 (9) (5)
measured at
FVOCI
Total allowance n/a (709) (457)
for ECL/total
income
statement ECL
charge for the
period
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
2 Includes the period on period movement in exposures relating
to other HSBC Group companies. As at 31 December 2020, these
amounted to GBP(5)bn and were classified as Stage 1 with no
ECL.
Credit quality
Credit quality of financial instruments
(Audited)
We assess the credit quality of all financial instruments that
are subject to credit risk. The credit quality of financial
instruments is a point-in-time assessment of the probability of
default ('PD'), whereas stages 1 and 2 are determined based on
relative deterioration of credit quality since initial
recognition.
Accordingly, for non-credit-impaired financial instruments,
there is no direct relationship between the credit quality
assessment and stages 1 and 2, though typically the lower credit
quality bands exhibit a higher proportion in stage 2.
The five credit quality classifications each encompass a range
of granular internal credit rating grades assigned to wholesale and
personal lending businesses and the external ratings attributed by
external agencies to debt securities, as shown in the table on page
33.
Distribution of financial instruments by credit quality at 31 December
2021
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
In-scope for
IFRS 9
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Loans and
advances
to customers
held at
amortised cost 41,339 20,531 23,469 4,512 2,480 92,331 (1,154) 91,177
- personal 18,956 4,136 1,793 56 453 25,394 (163) 25,231
- corporate and
commercial 16,533 13,867 19,597 4,305 1,785 56,087 (964) 55,123
- non-bank
financial
institutions 5,850 2,528 2,079 151 242 10,850 (27) 10,823
Loans and
advances
to banks held
at amortised
cost 8,649 320 1,815 5 - 10,789 (5) 10,784
Cash and
balances at
central banks 108,133 198 151 - - 108,482 - 108,482
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Items in the
course
of collection
from
other banks 343 - 3 - - 346 - 346
Reverse
repurchase
agreements -
non-trading 47,071 6,355 1,022 - - 54,448 - 54,448
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Financial
investments 2 - 8 - - 10 - 10
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Prepayments,
accrued
income and
other assets 36,558 666 1,574 11 42 38,851 (9) 38,842
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
- endorsements
and
acceptances 105 61 23 - 7 196 - 196
- accrued
income and
other 36,453 605 1,551 11 35 38,655 (9) 38,646
Debt
instruments
measured
at fair value
through
other
comprehensive
income(1) 36,410 1,899 1,406 118 - 39,833 (19) 39,814
Out-of-scope
for IFRS
9
Trading assets 28,110 5,331 8,985 350 - 42,776 - 42,776
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 2,246 304 2,644 3 - 5,197 - 5,197
Derivatives 111,471 25,487 4,054 207 2 141,221 - 141,221
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Total gross
carrying
amount on
balance sheet 420,332 61,091 45,131 5,206 2,524 534,284 (1,187) 533,097
Percentage of
total
credit quality 78.7% 11.4% 8.4% 1.0% 0.5% 100.0%
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ----------------------
Loans and other
credit-related
commitments 71,741 21,860 20,018 1,874 202 115,695 (55) 115,640
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Financial
guarantees 8,412 1,088 1,245 210 99 11,054 (17) 11,037
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
In-scope:
Irrevocable
loan
commitments
and
financial
guarantees 80,153 22,948 21,263 2,084 301 126,749 (72) 126,677
Loans and other
credit-related
commitments 2,134 1,114 432 94 7 3,781 - 3,781
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Performance and
other
guarantees 7,738 4,359 3,130 490 116 15,833 (31) 15,802
------------------------ ---------------------- ------------------------ ------------------------ ------------------------ ---------------------- ------------------------ ----------------------
Out-of-scope:
Revocable
loan
commitments
and
non-financial
guarantees 9,872 5,473 3,562 584 123 19,614 (31) 19,583
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments by credit quality at 31 December
2020 (continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-----------------------
In-scope for
IFRS 9
Loans and
advances
to customers
held at
amortised cost 43,077 24,780 26,477 5,619 3,007 102,960 (1,469) 101,491
- personal 19,232 4,341 2,251 141 534 26,499 (208) 26,291
- corporate and
commercial 16,340 17,132 22,330 5,023 2,162 62,987 (1,168) 61,819
- non-bank
financial
institutions 7,505 3,307 1,896 455 311 13,474 (93) 13,381
-----------------------
Loans and
advances
to banks held
at amortised
cost 10,518 721 1,412 11 - 12,662 (16) 12,646
Cash and
balances at
central banks 84,964 - 129 - - 85,093 (1) 85,092
------------------------ ------------------------ ------------------------ ----------------------- ------------------------ ----------------------- ------------------------- -----------------------
Items in the
course
of collection
from
other banks 240 - 3 - - 243 - 243
Reverse
repurchase
agreements -
non-trading 57,282 8,370 1,920 5 - 67,577 - 67,577
------------------------ ------------------------ ------------------------ ----------------------- ------------------------ ----------------------- ------------------------- -----------------------
Financial
investments 2 - 13 - - 15 - 15
------------------------ ------------------------ ------------------------ ----------------------- ------------------------ ----------------------- ------------------------- -----------------------
Prepayments,
accrued
income and
other assets 47,928 566 1,285 17 39 49,835 (11) 49,824
------------------------ ------------------------ ------------------------ ----------------------- ------------------------ ----------------------- ------------------------- -----------------------
- endorsements
and
acceptances 62 2 31 2 2 99 (1) 98
- accrued
income and
other 47,866 564 1,254 15 37 49,736 (10) 49,726
-----------------------
Debt
instruments
measured
at fair value
through
other
comprehensive
income(1) 46,029 2,487 405 153 - 49,074 (22) 49,052
Out-of-scope
for IFRS
9
Trading assets 34,302 5,996 9,493 410 - 50,201 - 50,201
------------------------ ------------------------ ------------------------ ----------------------- ------------------------ ----------------------- ------------------------- -----------------------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 2,460 1,152 587 4 - 4,203 - 4,203
Derivatives 165,868 30,113 4,299 890 40 201,210 - 201,210
Total gross
carrying
amount on
balance sheet 492,670 74,185 46,023 7,109 3,086 623,073 (1,519) 621,554
------------------------ ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
Percentage of
total
credit quality 79% 12% 8% 1% - 100%
------------------------ ------------------------ ------------------------ ------------------------ -----------------------
Loans and other
credit-related
commitments 97,281 26,361 17,081 2,047 266 143,036 (112) 142,924
Financial
guarantees 1,340 1,153 1,020 334 122 3,969 (23) 3,946
------------------------ ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
In-scope:
Irrevocable
loan
commitments
and
financial
guarantees 98,621 27,514 18,101 2,381 388 147,005 (135) 146,870
Loans and other
credit-related
commitments 2,525 986 578 177 1 4,267 - 4,267
------------------------ ------------------------ ------------------------ ----------------------- ------------------------ ----------------------- ------------------------- -----------------------
Performance and
other
guarantees 6,728 3,808 3,145 422 179 14,282 (51) 14,231
------------------------ ------------------------ ------------------------ ----------------------- ------------------------ ----------------------- ------------------------- -----------------------
Out-of-scope:
Revocable
loan
commitments
and
non-financial
guarantees 9,253 4,794 3,723 599 180 18,549 (51) 18,498
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments by credit quality at 31 December
2021
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
In-scope for
IFRS 9
Loans and
advances
to customers
held at
amortised cost 16,993 9,038 6,467 804 984 34,286 (350) 33,936
- personal 1,909 850 860 13 48 3,680 (6) 3,674
- corporate and
commercial 8,120 6,649 5,003 729 681 21,182 (308) 20,874
- non-bank
financial
institutions 6,964 1,539 604 62 255 9,424 (36) 9,388
Loans and
advances
to banks held
at amortised
cost 6,427 166 187 2 - 6,782 (4) 6,778
Cash and
balances at
central banks 63,008 - - - - 63,008 - 63,008
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
Items in the
course
of collection
from
other banks 211 - - - - 211 - 211
Reverse
repurchase
agreements -
non-trading 32,877 5,916 915 - - 39,708 - 39,708
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
Financial
investments 3,337 - - - - 3,337 - 3,337
Prepayments,
accrued
income and
other assets 28,524 121 94 2 28 28,769 (1) 28,768
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
- endorsements
and
acceptances 90 61 13 - 7 171 - 171
- accrued
income and
other 28,434 60 81 2 21 28,598 (1) 28,597
Debt
instruments
measured
at fair value
through
other
comprehensive
income(1) 21,748 64 1,039 - - 22,851 (4) 22,847
Out-of-scope
for IFRS
9
Trading assets 18,318 5,082 8,470 350 - 32,220 - 32,220
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 138 - 2,504 2 - 2,644 - 2,644
Derivatives 98,698 24,160 2,854 75 - 125,787 - 125,787
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
Total gross
carrying
amount on
balance sheet 290,279 44,547 22,530 1,235 1,012 359,603 (359) 359,244
Percentage of
total
credit quality 80.7% 12.4% 6.3% 0.3% 0.3% 100.0%
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ --------------------
Loans and other
credit-related
commitments 20,446 6,663 3,651 452 43 31,255 (29) 31,226
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
Financial
guarantees 630 89 471 20 60 1,270 (7) 1,263
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
In-scope:
Irrevocable
loan
commitments
and
financial
guarantees 21,076 6,752 4,122 472 103 32,525 (36) 32,489
Loans and other
credit-related
commitments 620 383 126 86 1 1,216 - 1,216
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
Performance and
other
guarantees 4,846 1,939 480 56 13 7,334 (7) 7,327
---------------------- ---------------------- ---------------------- ------------------------ ------------------------ -------------------- ------------------------ --------------------
Out-of-scope:
Revocable
loan
commitments
and
non-financial
guarantees 5,466 2,322 606 142 14 8,550 (7) 8,543
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments by credit quality at 31 December
2020 (continued)
(Audited)
Gross carrying/notional amount
Credit Allowance
Strong Good Satisfactory Sub-standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
In-scope for
IFRS 9
Loans and
advances to
customers held
at amortised
cost 20,109 12,752 8,496 1,193 1,281 43,831 (590) 43,241
- personal 1,804 816 880 25 57 3,582 (13) 3,569
- corporate and
commercial 7,870 9,401 6,785 1,038 920 26,014 (494) 25,520
- non-bank
financial
institutions 10,435 2,535 831 130 304 14,235 (83) 14,152
Loans and
advances to
banks held at
amortised
cost 7,256 412 410 - - 8,078 (15) 8,063
Cash and
balances at
central banks 48,777 - - - - 48,777 - 48,777
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
Items in the
course
of collection
from other
banks 37 - - - - 37 - 37
Reverse
repurchase
agreements
- non-trading 41,057 7,213 1,862 5 - 50,137 - 50,137
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
Financial
investments 2,214 - - - - 2,214 - 2,214
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
Prepayments,
accrued
income and
other assets 34,495 94 120 4 22 34,735 (1) 34,734
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
- endorsements
and
acceptances 44 2 22 - 2 70 (1) 69
- accrued
income and
other 34,451 92 98 4 20 34,665 - 34,665
Debt
instruments
measured
at fair value
through
other
comprehensive
income(1) 27,762 62 3 - - 27,827 (9) 27,818
Out-of-scope
for IFRS
9
Trading assets 21,486 5,922 9,406 410 - 37,224 - 37,224
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
Other financial
assets
designated and
otherwise
mandatorily
measured
at fair value
through
profit or loss 94 788 382 4 - 1,268 - 1,268
Derivatives 150,837 26,966 3,625 638 - 182,066 - 182,066
Total gross
carrying
amount on
balance sheet 354,124 54,209 24,304 2,254 1,303 436,194 (615) 435,579
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
Percentage of
total
credit quality 81% 13% 6% - - 100%
----------------------- ------------------------ ------------------------ ------------------------ -----------------------
Loans and other
credit-related
commitments 29,939 10,375 4,422 512 60 45,308 (81) 45,227
Financial
guarantees 913 134 376 33 54 1,510 (13) 1,497
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
In-scope:
Irrevocable
loan
commitments
and
financial
guarantees 30,852 10,509 4,798 545 114 46,818 (94) 46,724
Loans and other
credit-related
commitments 475 235 148 173 1 1,032 - 1,032
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
Performance and
other
guarantees 4,670 1,701 623 127 35 7,156 (13) 7,143
----------------------- ------------------------ ------------------------ ------------------------ ----------------------- ------------------------- -----------------------
Out-of-scope:
Revocable
loan
commitments
and
non-financial
guarantees 5,145 1,936 771 300 36 8,188 (13) 8,175
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ----------------------
Loans and
advances to
customers at
amortised
cost 41,339 20,531 23,469 4,512 2,480 92,331 (1,154) 91,177
---------------------- ----------------------
- stage 1 40,831 19,376 19,077 1,446 - 80,730 (86) 80,644
- stage 2 508 1,155 4,392 3,066 - 9,121 (158) 8,963
- stage 3 - - - - 2,478 2,478 (908) 1,570
- POCI - - - - 2 2 (2) -
---------------------- ----------------------
Loans and
advances to
banks at
amortised cost 8,649 320 1,815 5 - 10,789 (5) 10,784
- stage 1 8,620 311 1,814 5 - 10,750 (4) 10,746
- stage 2 29 9 1 - - 39 (1) 38
- stage 3 - - - - - - - -
- POCI - - - - - - - -
---------------------- ----------------------
Other financial
assets
measured at
amortised
cost 192,107 7,219 2,758 11 42 202,137 (9) 202,128
- stage 1 192,105 7,214 2,727 2 - 202,048 - 202,048
- stage 2 2 5 31 9 - 47 - 47
- stage 3 - - - - 42 42 (9) 33
- POCI - - - - - - - -
---------------------- ----------------------
Loans and other
credit-related
commitments 71,741 21,860 20,018 1,874 202 115,695 (55) 115,640
- stage 1 71,074 19,960 16,337 551 - 107,922 (25) 107,897
- stage 2 667 1,900 3,681 1,323 - 7,571 (22) 7,549
- stage 3 - - - - 202 202 (8) 194
- POCI - - - - - - - -
---------------------- ----------------------
Financial
guarantees 8,412 1,088 1,245 210 99 11,054 (17) 11,037
- stage 1 8,340 951 849 75 - 10,215 (3) 10,212
- stage 2 72 137 396 135 - 740 (7) 733
- stage 3 - - - - 99 99 (7) 92
- POCI - - - - - - - -
---------------------- ----------------------
At 31 Dec 2021 322,248 51,018 49,305 6,612 2,823 432,006 (1,240) 430,766
Debt
instruments at
FVOCI(1)
- stage 1 36,005 1,825 1,292 - - 39,122 (10) 39,112
- stage 2 405 74 114 118 - 711 (9) 702
- stage 3 - - - - - - - -
- POCI - - - - - - - -
---------------------- ----------------------
At 31 Dec 2021 36,410 1,899 1,406 118 - 39,833 (19) 39,814
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Loans and
advances to
customers at
amortised
cost 43,077 24,780 26,477 5,619 3,007 102,960 (1,469) 101,491
--------------------- --------------------- ----------------------- ----------------------- -----------------------
- stage 1 42,579 21,351 17,556 1,693 - 83,179 (129) 83,050
- stage 2 498 3,429 8,921 3,926 - 16,774 (297) 16,477
- stage 3 - - - - 2,966 2,966 (1,031) 1,935
- POCI - - - - 41 41 (12) 29
---------------------- --------------------- --------------------- ----------------------- ---------------------- -----------------------
Loans and
advances to
banks at
amortised cost 10,518 721 1,412 11 - 12,662 (16) 12,646
--------------------- --------------------- ----------------------- ----------------------- -----------------------
- stage 1 10,479 674 1,372 8 - 12,533 (13) 12,520
- stage 2 39 47 40 3 - 129 (3) 126
- stage 3 - - - - - - - -
- POCI - - - - - - - -
---------------------- --------------------- --------------------- ----------------------- ---------------------- -----------------------
Other financial
assets
measured at
amortised
cost 190,416 8,936 3,350 22 39 202,763 (12) 202,751
--------------------- --------------------- ----------------------- ----------------------- -----------------------
- stage 1 190,407 8,924 3,321 7 - 202,659 (2) 202,657
- stage 2 9 12 29 15 - 65 - 65
- stage 3 - - - - 39 39 (10) 29
- POCI - - - - - - - -
---------------------- --------------------- --------------------- ----------------------- ---------------------- -----------------------
Loans and other
credit-related
commitments 97,281 26,361 17,081 2,047 266 143,036 (112) 142,924
--------------------- --------------------- ----------------------- ----------------------- -----------------------
- stage 1 95,270 21,398 11,758 530 - 128,956 (34) 128,922
- stage 2 2,011 4,963 5,323 1,517 - 13,814 (68) 13,746
- stage 3 - - - - 266 266 (10) 256
- POCI - - - - - - - -
---------------------- --------------------- --------------------- ----------------------- ---------------------- -----------------------
Financial
guarantees 1,340 1,153 1,020 334 122 3,969 (23) 3,946
--------------------- --------------------- ----------------------- ----------------------- -----------------------
- stage 1 1,337 883 496 123 - 2,839 (4) 2,835
- stage 2 3 270 524 211 - 1,008 (10) 998
- stage 3 - - - - 121 121 (9) 112
- POCI - - - - 1 1 - 1
---------------------- --------------------- --------------------- ----------------------- ---------------------- -----------------------
At 31 Dec 2020 342,632 61,951 49,340 8,033 3,434 465,390 (1,632) 463,758
--------------------- --------------------- ----------------------- ----------------------- -----------------------
Debt
instruments at
FVOCI(1)
- stage 1 45,958 2,424 233 - - 48,615 (12) 48,603
- stage 2 71 63 172 153 - 459 (10) 449
- stage 3 - - - - - - - -
- POCI - - - - - - - -
---------------------- --------------------- --------------------- ----------------------- ---------------------- -----------------------
At 31 Dec 2020 46,029 2,487 405 153 - 49,074 (22) 49,052
--------------------- --------------------- ----------------------- ----------------------- -----------------------
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ----------------------
Loans and
advances to
customers at
amortised
cost 16,993 9,038 6,467 804 984 34,286 (350) 33,936
---------------------- ----------------------
- stage 1 16,757 8,305 4,964 79 - 30,105 (33) 30,072
- stage 2 236 733 1,503 725 - 3,197 (47) 3,150
- stage 3 - - - - 984 984 (270) 714
- POCI - - - - - - - -
---------------------- ----------------------
Loans and
advances to
banks at
amortised cost 6,427 166 187 2 - 6,782 (4) 6,778
---------------------- ----------------------
- stage 1 6,427 160 186 2 - 6,775 (3) 6,772
- stage 2 - 6 1 - - 7 (1) 6
- stage 3 - - - - - - - -
- POCI - - - - - - - -
---------------------- ----------------------
Other financial
assets
measured at
amortised
cost 127,957 6,037 1,009 2 28 135,033 (1) 135,032
---------------------- ----------------------
- stage 1 127,956 6,037 991 - - 134,984 - 134,984
- stage 2 1 - 18 2 - 21 - 21
- stage 3 - - - - 28 28 (1) 27
- POCI - - - - - - - -
---------------------- ----------------------
Loans and other
credit-related
commitments 20,446 6,663 3,651 452 43 31,255 (29) 31,226
- stage 1 20,307 6,469 2,135 - - 28,911 (15) 28,896
- stage 2 139 194 1,516 452 - 2,301 (11) 2,290
- stage 3 - - - - 43 43 (3) 40
- POCI - - - - - - - -
---------------------- ----------------------
Financial
guarantees 630 89 471 20 60 1,270 (7) 1,263
- stage 1 630 89 324 17 - 1,060 (1) 1,059
- stage 2 - - 147 3 - 150 - 150
- stage 3 - - - - 60 60 (6) 54
- POCI - - - - - - - -
---------------------- ----------------------
At 31 Dec 2021 172,453 21,993 11,785 1,280 1,115 208,626 (391) 208,235
Debt
instruments at
FVOCI(1)
- stage 1 21,748 64 1,035 - - 22,847 (2) 22,845
- stage 2 - - 4 - - 4 (2) 2
- stage 3 - - - - - - - -
- POCI - - - - - - - -
---------------------- ----------------------
At 31 Dec 2021 21,748 64 1,039 - - 22,851 (4) 22,847
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage distribution
(continued)
(Audited)
Gross carrying/notional amount
Sub- Credit Allowance
Strong Good Satisfactory standard impaired Total for ECL Net
The bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ----------------------- ---------------------- ----------------------- ---------------------- ----------------------- -----------------------
Loans and
advances to
customers at
amortised
cost 20,109 12,752 8,496 1,193 1,281 43,831 (590) 43,241
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
- stage 1 19,650 10,014 4,918 47 - 34,629 (79) 34,550
- stage 2 459 2,738 3,578 1,146 - 7,921 (158) 7,763
- stage 3 - - - - 1,279 1,279 (351) 928
- POCI - - - - 2 2 (2) -
---------------------- ----------------------- ---------------------- ----------------------- ---------------------- -----------------------
Loans and
advances to
banks at
amortised cost 7,256 412 410 - - 8,078 (15) 8,063
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
- stage 1 7,254 366 375 - - 7,995 (12) 7,983
- stage 2 2 46 35 - - 83 (3) 80
- stage 3 - - - - - - - -
- POCI - - - - - - - -
---------------------- ----------------------- ---------------------- ----------------------- ---------------------- -----------------------
Other financial
assets
measured at
amortised
cost 126,580 7,307 1,982 9 22 135,900 (1) 135,899
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
- stage 1 126,579 7,306 1,953 5 - 135,843 - 135,843
- stage 2 1 1 29 4 - 35 - 35
- stage 3 - - - - 22 22 (1) 21
- POCI - - - - - - - -
---------------------- ----------------------- ---------------------- ----------------------- ---------------------- -----------------------
Loans and other
credit-related
commitments 29,939 10,375 4,422 512 60 45,308 (81) 45,227
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
- stage 1 28,569 8,176 2,453 145 - 39,343 (28) 39,315
- stage 2 1,370 2,199 1,969 367 - 5,905 (48) 5,857
- stage 3 - - - - 60 60 (5) 55
- POCI - - - - - - - -
---------------------- ----------------------- ---------------------- ----------------------- ---------------------- -----------------------
Financial
guarantees 913 134 376 33 54 1,510 (13) 1,497
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
- stage 1 910 121 170 2 - 1,203 (2) 1,201
- stage 2 3 13 206 31 - 253 (4) 249
- stage 3 - - - - 54 54 (7) 47
- POCI - - - - - - - -
---------------------- ----------------------- ---------------------- ----------------------- ---------------------- -----------------------
At 31 Dec 2020 184,797 30,980 15,686 1,747 1,417 234,627 (700) 233,927
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
Debt
instruments at
FVOCI(1)
----------------------
- stage 1 25,570 62 - - - 25,632 (7) 25,625
- stage 2 - - 3 - - 3 (2) 1
- stage 3 - - - - - - - -
- POCI - - - - - - - -
---------------------- ----------------------- ---------------------- ----------------------- ---------------------- -----------------------
At 31 Dec 2020 25,570 62 3 - - 25,635 (9) 25,626
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Credit--impaired loans
(Audited)
The group determines that a financial instrument is credit
impaired and in stage 3 by considering relevant objective evidence,
primarily whether:
-- contractual payments of either principal or interest are past due for more than 90 days;
-- there are other indications that the borrower is unlikely to
pay such as that a concession has been granted to the borrower for
economic or legal reasons relating to the borrower's financial
condition; and
-- the loan is otherwise considered to be in default. If such
unlikeliness to pay is not identified at an earlier stage, it is
deemed to occur when an exposure is 90 days past due, even where
regulatory rules permit default to be defined based on 180 days
past due. Therefore, the definitions of credit-impaired and default
are aligned as far as possible so that stage 3 represents all loans
which are considered defaulted or otherwise credit-impaired.
--
Renegotiated loans and forbearance
The following table shows the gross carrying amounts of the
group's holdings of renegotiated loans and advances to customers by
industry sector and by stages. Mandatory and general offer loan
modifications that are not borrower-specific, for example
market-wide customer relief programmes, have not been classified as
renegotiated loans. For details on customer relief schemes see page
60.
A summary of our current policies and practices for renegotiated
loans and forbearance is set out in 'Credit risk management' on
page 32.
Renegotiated loans and advances to customers at amortised costs by
stage allocation
Stage Stage Stage POCI Total
1 2 3
The group GBPm GBPm GBPm GBPm GBPm
Gross
carrying
amount
Personal - - 132 - 132
- first lien
residential
mortgages - - 96 - 96
- other
personal
lending - - 36 - 36
Wholesale 49 192 706 2 949
- corporate
and
commercial 49 192 702 2 945
- non-bank
financial
institutions - - 4 - 4
At 31 Dec
2021 49 192 838 2 1,081
Allowance for
ECL
Personal - - (15) - (15)
- first lien
residential
mortgages - - (11) - (11)
- other
personal
lending - - (4) - (4)
Wholesale (1) (5) (218) (2) (226)
- corporate
and
commercial (1) (5) (218) (2) (226)
- non-bank - - - - -
financial
institutions
At 31 Dec
2021 (1) (5) (233) (2) (241)
The group
Gross
carrying
amount
Personal - - 122 - 122
- first lien
residential
mortgages - - 97 - 97
- other
personal
lending - - 25 - 25
Wholesale 43 348 773 40 1,204
- corporate
and
commercial 43 348 773 40 1,204
- non-bank - - - - -
financial
institutions
At 31 Dec
2020 43 348 895 40 1,326
Allowance for
ECL
Personal - - (18) - (18)
- first lien
residential
mortgages - - (14) - (14)
- other
personal
lending - - (4) - (4)
Wholesale (1) (9) (211) (12) (233)
- corporate
and
commercial (1) (9) (211) (12) (233)
- non-bank - - - - -
financial
institutions
At 31 Dec
2020 (1) (9) (229) (12) (251)
Stage Stage Stage POCI Total
1 2 3
The bank GBPm GBPm GBPm GBPm GBPm
Gross
carrying
amount
Personal - - 3 - 3
- first lien
residential
mortgages - - 2 - 2
- other
personal
lending - - 1 - 1
Wholesale 40 158 431 - 629
- corporate
and
commercial 40 158 431 - 629
At 31 Dec
2021 40 158 434 - 632
Allowance
for ECL
Personal - - - - -
- first lien - - - - -
residential
mortgages
- other - - - - -
personal
lending
Wholesale (1) (2) (124) - (127)
- corporate
and
commercial (1) (2) (124) - (127)
At 31 Dec
2021 (1) (2) (124) - (127)
Renegotiated loans and advances to customers at amortised costs by
stage allocation (continued)
Stage Stage Stage POCI Total
1 2 3
The bank GBPm GBPm GBPm GBPm GBPm
Gross
carrying
amount
Personal - - 7 - 7
- first lien
residential
mortgages - - 6 - 6
- other
personal
lending - - 1 - 1
Wholesale 39 181 520 2 742
- corporate
and
commercial 39 181 520 2 742
At 31 Dec
2020 39 181 527 2 749
Allowance
for ECL
Personal - - - - -
- first lien - - - - -
residential
mortgages
- other - - - - -
personal
lending
Wholesale (1) (4) (124) (2) (131)
- corporate
and
commercial (1) (4) (124) (2) (131)
At 31 Dec
2020 (1) (4) (124) (2) (131)
Customer relief programmes
In response to the Covid-19 pandemic, governments and regulators
around the world 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 31
December 2021. When schemes expire, accounts and customers and
their associated drawn balances are no longer reported under relief
regardless of their repayment status. 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
payment holidays, refinancing of existing facilities and new
lending under government-backed schemes. .
At 31 December 2021, the gross carrying value of loans to
personal customers under relief was GBP36m and wholesale customers
under relief was GBP3,428m. 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
31 December 2021.
Personal lending
HSBC
Extant at 31 December Continental Other
2021 UK Europe(1) Germany markets(2) Total
Market-wide schemes
Number of accounts
granted mortgage
customer relief 00s - - - - -
---------------------- ---------------------- ------- ---------------------- -----
Drawn loan value of GBPm
accounts granted
mortgage customer relief - - - - -
---------------------- ---------------------- ------- ---------------------- -----
Number of accounts
granted other
personal lending
customer relief 00s - 5 - - 5
---------------------- ---------------------- ------- ---------------------- -----
Drawn loan value of
accounts granted
other personal lending
customer relief GBPm - 32 - - 32
---------------------- ---------------------- ------- ---------------------- -----
HSBC-specific measures
---------------------- ---------------------- ---------------------- -----
Number of accounts
granted mortgage
customer relief 00s - - - - -
---------------------- ---------------------- ------- ---------------------- -----
Drawn loan value of GBPm
accounts granted
mortgage customer relief - - - - -
---------------------- ---------------------- ------- ---------------------- -----
Number of accounts
granted other
personal lending
customer relief 00s - <1 - - <1
---------------------- ---------------------- ------- ---------------------- -----
Drawn loan value of
accounts granted
other personal lending
customer relief GBPm - 4 - - 4
---------------------- ---------------------- ------- ---------------------- -----
Total personal lending
to major markets
under market-wide
schemes and
HSBC-specific
measures
Number of accounts
granted mortgage
customer relief 00s - - - - -
---------------------- ---------------------- ------- ---------------------- -----
Drawn loan value of GBPm
accounts granted
mortgage customer relief - - - - -
---------------------- ---------------------- ------- ---------------------- -----
Number of accounts
granted other
personal lending
customer relief 00s - 5 - - 5
---------------------- ------- ---------------------- -----
Drawn loan value of
accounts granted
other personal lending
customer relief GBPm - 36 - - 36
Market-wide schemes and
HSBC-specific
measures - mortgage
relief as a proportion
of total mortgages % - - - - -
Market-wide schemes and
HSBC-specific
measures - other
personal lending
relief as a proportion
of total other
personal lending loans
and advances % - 0.2 - - 0.2
Wholesale lending
HSBC
Extant at 31 December Continental Other
2021 UK Europe(1) Germany markets(2) 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 2,918 63 39 3,021
---------------------- ---------------------- ------- ---------------------- -----
HSBC-specific measures
---------------------- ---------------------- ---------------------- -----
Number of customers
under HSBC-specific
measures 00s - <1 - - <1
---------------------- ---------------------- ------- ---------------------- -----
Drawn loan value of
customers under
HSBC-specific measures GBPm - 407 - - 407
---------------------- ---------------------- ------- ---------------------- -----
Total wholesale lending
to major
markets under
market-wide schemes
and HSBC-specific
measures
Number of customers 00s <1 49 <1 1 50
---------------------- ---------------------- ------- ---------------------- -----
Drawn loan value GBPm 1 3,325 63 39 3,428
Market-wide schemes and
HSBC-specific
measures as a
proportion of total
wholesale lending loans
and advances % - 12.3 1.1 4.0 5.9
1 HSBC Continental Europe includes France and branches in Spain, Poland and Greece.
2 Other markets include Malta and Armenia.
Personal lending (continued)
HSBC
Continental Other
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
Continental Other
Extant at 31 December 2020 UK Europe(1) Germany markets(2) 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 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 a migration to stage 2 or stage 3.
The key accounting and credit risk judgement to ascertain whether a
significant increase in credit risk has occurred is whether the
economic effects of the Covid-19 outbreak on the customer are
likely to be temporary over the lifetime of the loan, and whether
they indicate that a concession is being made in respect of
financial difficulty that would be
consistent with stage 3.
Market-wide schemes The following narrative provides further
details on the major government and regulatory schemes offered in
France and Germany.
Personal lending
France - Other personal lending
The Prêt garanti par l'Etat ('PGE') government scheme provides
term lending to professionals, firms, business owners, craftsmen
and micro-entrepreneurs for a maximum duration of six years
including a first year deferral. The maximum relief value is at 25%
of baseline turnover with the maximum amount of EUR2.25m
granted. Borrowers need to confirm that Covid-19 has placed them
under temporary financial hardship and that they didn't experience
financial difficulties before the crisis.
Wholesale lending
France
The PGE government scheme provides term lending to all
registered French companies, excluding real estate special purpose
vehicles ('SPVs'), banks, and companies subject to insolvency
proceedings, for a maximum duration of one year (with the option to
amortise up to five years). The maximum loan value is linked to
turnover.
Germany - wholesale lending
Kreditanstalt für Wiederaufbau ('KfW') Coronavirus Aid provides
lending to corporates for a maximum tenor of ten years.
HSBC-specific measures
France business banking lending
Payment holidays offered to professionals, firms, business
owners, craftsmen and micro-entrepreneurs.
France wholesale lending
Payment holidays offered to commercial banking customers focused
largely on business banking or lower end micro and medium
enterprises. The duration is between 3 and 18 months and there is
no specific maximum loan value.
Wholesale lending
This section provides further details on the countries and
industries comprising wholesale loans and advances to customers
and banks. Industry granularity is also provided by stage with
geographical data presented for loans and advances to customers and
banks, loans and other credit-related commitments and financial
guarantees.
Total wholesale lending for loans and advances to banks and customers
by stage distribution
Gross carrying amount Allowance for ECL
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Corporate and commercial 46,237 8,066 1,782 2 56,087 (58) (137) (767) (2) (964)
- agriculture, forestry
and fishing 157 7 7 - 171 - - (5) - (5)
- mining and quarrying 1,207 86 58 - 1,351 (1) (1) (5) - (7)
- manufacture 7,327 1,624 281 2 9,234 (8) (14) (72) (2) (96)
* electricity, gas, steam and air-co
nditioning supply 2,891 49 30 - 2,970 (3) (1) (4) - (8)
* water supply, sewerage, waste mana
gement and
remediation 215 - 4 - 219 - - (4) - (4)
- construction 641 116 97 - 854 (2) (2) (40) - (44)
* wholesale and retail trade, repair
of motor vehicles
and motorcycles 7,743 889 192 - 8,824 (4) (8) (132) - (144)
- transportation
and storage 3,254 1,570 205 - 5,029 (9) (20) (56) - (85)
- accommodation and
food 831 409 80 - 1,320 (4) (10) (20) - (34)
* publishing, audiovisual and broadc
asting 2,390 81 50 - 2,521 (2) (2) (12) - (16)
- real estate 4,849 891 280 - 6,020 (9) (32) (159) - (200)
* professional, scientific and techn
ical activities 2,522 669 221 - 3,412 (3) (8) (60) - (71)
- administrative
and support services 8,765 1,204 178 - 10,147 (9) (21) (161) - (191)
* public administration and defence,
compulsory social
security 376 180 - - 556 - - - - -
- education 22 5 3 - 30 - (1) (1) - (2)
- health and care 473 47 6 - 526 (1) (4) (5) - (10)
- arts, entertainment
and recreation 104 116 5 - 225 - (3) (3) - (6)
- other services 1,427 66 85 - 1,578 (3) (2) (28) - (33)
- activities of households - 2 - - 2 - - - - -
- government 1,027 45 - - 1,072 - - - - -
-----------------------------------------
- asset-backed securities 16 10 - - 26 - (8) - - (8)
Non-bank financial
institutions 10,238 369 243 - 10,850 (6) (5) (16) - (27)
Loans and advances
to banks 10,750 39 - - 10,789 (4) (1) - - (5)
At 31 Dec 2021 67,225 8,474 2,025 2 77,726 (68) (143) (783) (2) (996)
By country
UK 27,765 3,001 832 - 31,598 (34) (43) (233) - (310)
France 29,287 3,492 572 1 33,352 (27) (62) (396) (1) (486)
Germany 4,628 1,175 328 - 6,131 - (17) (73) - (90)
Other countries 5,545 806 293 1 6,645 (7) (21) (81) (1) (110)
At 31 Dec 2021 67,225 8,474 2,025 2 77,726 (68) (143) (783) (2) (996)
Total wholesale lending for loans and other credit-related commitments
and financial guarantees(1) by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------------------ -------------------- --------------------
Corporate
and
commercial 65,582 7,369 295 - 73,246 (22) (27) (15) - (64)
Financial 50,380 826 2 - 51,208 (5) (2) - - (7)
At 31 Dec
2021 115,962 8,195 297 - 124,454 (27) (29) (15) - (71)
By
geography
---------------- ------------------ -------------------- --------------------
Europe 115,962 8,195 297 - 124,454 (27) (29) (15) - (71)
- of which:
UK 25,662 2,910 87 - 28,659 (16) (11) (3) - (30)
- of which:
France 77,664 1,273 37 - 78,974 (3) (3) (4) - (10)
- of which:
Germany 10,113 3,693 127 - 13,933 (4) (8) (1) - (13)
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Total wholesale lending for loans and advances to banks and customers
by stage distribution (continued)
Gross carrying amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------
Corporate and commercial 46,773 14,052 2,121 41 62,987 (100) (225) (831) (12) (1,168)
------------------------------------------
* agriculture, forestry and fishing 108 8 9 - 125 - - (5) - (5)
------------------------------------------
- mining and quarrying 1,110 215 108 - 1,433 (1) (3) (2) - (6)
------------------------------------------
* manufacture 8,598 2,900 286 13 11,797 (11) (34) (93) (3) (141)
------------------------------------------
* electricity, gas, steam and air-con
ditioning supply 2,532 299 29 - 2,860 (3) (3) (5) - (11)
* water supply, sewerage, waste manag
ement and
remediation 260 44 4 - 308 - (2) (3) - (5)
------------------------------------------
- construction 589 265 131 2 987 (7) (17) (46) (2) (72)
------------------------------------------
* wholesale and retail trade, repair
of motor vehicles
and motorcycles 7,074 1,779 283 1 9,137 (10) (22) (171) (1) (204)
------------------------------------------
* transportation and storage 3,506 2,175 253 - 5,934 (31) (30) (81) - (142)
------------------------------------------
* accommodation and food 964 408 23 - 1,395 (2) (8) (12) - (22)
------------------------------------------
* publishing, audiovisual and broadca
sting 2,381 424 50 - 2,855 (2) (16) (11) - (29)
- real estate 5,256 1,266 393 - 6,915 (17) (28) (194) - (239)
------------------------------------------
* professional, scientific and techni
cal activities 3,219 1,409 179 25 4,832 (3) (14) (53) (6) (76)
* administrative and support services 6,470 2,336 259 - 9,065 (8) (19) (125) - (152)
------------------------------------------
* public administration and defence,
compulsory social
security 449 147 - - 596 (1) (1) - - (2)
------------------------------------------
- education 26 76 1 - 103 - (3) (1) - (4)
------------------------------------------
- health and care 490 127 9 - 626 (1) (10) (6) - (17)
------------------------------------------
- arts, entertainment
and recreation 127 85 4 - 216 - (3) (3) - (6)
------------------------------------------
- other services 2,443 25 100 - 2,568 (2) (2) (20) - (24)
------------------------------------------
- activities of
households 2 - - - 2 - - - - -
------------------------------------------
- government 1,153 53 - - 1,206 (1) - - - (1)
------------------------------------------
- asset-backed securities 16 11 - - 27 - (10) - - (10)
------------------------------------------
Non-bank financial
institutions 11,415 1,748 311 - 13,474 (11) (35) (47) - (93)
------------------------------------------
Loans and advances
to banks 12,533 129 - - 12,662 (13) (3) - - (16)
------------------------------------------
At 31 Dec 2020 70,721 15,929 2,432 41 89,123 (124) (263) (878) (12) (1,277)
------------------------------------------
By country
------------------------------------------
UK 32,869 7,695 1,097 2 41,663 (87) (147) (310) (2) (546)
------------------------------------------
France 25,378 4,514 739 2 30,633 (16) (55) (417) (2) (490)
------------------------------------------
Germany 5,460 1,692 334 - 7,486 (4) (20) (68) - (92)
------------------------------------------
Other countries 7,014 2,028 262 37 9,341 (17) (41) (83) (8) (149)
------------------------------------------
At 31 Dec 2020 70,721 15,929 2,432 41 89,123 (124) (263) (878) (12) (1,277)
------------------------------------------
.
Total wholesale lending for loans and other credit-related commitments
and financial guarantees(1) by stage distribution (continued)
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Corporate
and
commercial 67,077 11,141 379 1 78,598 (32) (58) (18) - (108)
Financial 62,701 3,459 4 - 66,164 (6) (19) (1) - (26)
At 31 Dec
2020 129,778 14,600 383 1 144,762 (38) (77) (19) - (134)
By
geography
Europe 129,778 14,600 383 1 144,762 (38) (77) (19) - (134)
- of which:
UK 34,908 6,066 109 - 41,083 (29) (51) (12) - (92)
- of which:
France 80,356 1,992 49 - 82,397 (3) (9) (3) - (15)
- of which:
Germany 11,208 5,711 193 - 17,112 (2) (9) (1) - (12)
1 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Collateral and other credit enhancement
(Audited)
Although collateral can be an important mitigant of credit risk,
it is the group's practice to lend on the basis of the customer's
ability to meet their obligations out of cash flow resources rather
than placing primary reliance on collateral and other credit risk
enhancements. Depending on the customer's standing and the type of
product, facilities may be provided without any collateral or other
credit enhancements. For other lending, a charge over collateral is
obtained and considered in determining the credit decision and
pricing. In the event of default, the group may utilise the
collateral as a source of repayment.
Depending on its form, collateral can have a significant
financial effect in mitigating our exposure to credit risk. Where
there is sufficient collateral, an expected credit loss is not
recognised. This is the case for reverse repurchase agreements and
for certain loans and advances to customers where the loan to value
('LTV') is very low.
Mitigants may include a charge on borrowers' specific assets,
such as real estate or financial instruments. Other credit risk
mitigants include short positions in securities and financial
assets held as part of linked insurance/investment contracts where
the risk is predominantly borne by the policyholder. Additionally,
risk may be managed by employing other types of collateral and
credit risk enhancements, such as second charges, other liens and
unsupported guarantees. Guarantees are normally taken from
corporates and export credit agencies. Corporates would normally
provide guarantees as part of a parent/subsidiary relationship and
span a number of credit grades. The export credit agencies will
normally be investment grade.
Certain credit mitigants are used strategically in portfolio
management activities. While single name concentrations arise in
portfolios managed by Global Banking and Commercial Banking, it is
only in Global Banking that their size requires the use of
portfolio level credit mitigants. Across Global Banking, risk
limits and utilisations, maturity profiles and risk quality are
monitored and managed proactively. This process is key to the
setting of risk appetite for these larger, more complex,
geographically distributed customer groups. While the principal
form of risk management continues to be at the point of exposure
origination, through the lending decision-making process, Global
Banking also utilises loan sales and credit default swap ('CDS')
hedges to manage concentrations and reduce risk. These transactions
are the responsibility of a dedicated Global Banking portfolio
management team. Hedging activity is carried out within agreed
credit parameters, and is subject to market risk limits and a
robust governance structure. Where applicable, CDSs are entered
into directly with a central clearing house counterparty. Otherwise
our
exposure to CDS protection providers is diversified among mainly
banking counterparties with strong credit ratings.
CDS mitigants are held at portfolio level and are not included
in the expected loss calculations. CDS mitigants are not reported
in the following tables.
Collateral on loans and advances
The following tables include off-balance sheet loan commitments,
primarily undrawn credit lines.
The collateral measured in the following tables consists of
charges over cash and marketable financial instruments. The values
in the tables represent the expected market value on an open market
basis. No adjustment has been made to the collateral for any
expected costs of recovery. Marketable securities are measured at
their fair value.
Other types of collateral such as unsupported guarantees and
floating charges over the assets of a customer's business are not
measured in the following tables. While such mitigants have value,
often providing rights in insolvency, their assignable value is not
sufficiently certain and they are therefore assigned no value for
disclosure purposes.
The LTV ratios presented are calculated by directly associating
loans and advances with the collateral that individually and
uniquely supports each facility. When collateral assets are shared
by multiple loans and advances, whether specifically or, more
generally, by way of an all monies charge, the collateral value is
pro-rated across the loans and advances protected by the
collateral.
For credit-impaired loans, the collateral values cannot be
directly compared with impairment allowances recognised. The LTV
figures use open market values with no adjustments. Impairment
allowances are calculated on a different basis, by considering
other cash flows and adjusting collateral values for costs of
realising collateral as explained further on page 122.
Other corporate, commercial and financial (non-bank) loans and
advances
Other corporate, commercial and financial (non-bank) loans are
analysed separately in the following table, which focuses on the
countries containing the majority of our loans and advances
balances. For financing activities in other corporate and
commercial lending, collateral value is not strongly correlated to
principal repayment performance.
Collateral values are generally refreshed when an obligor's
general credit performance deteriorates and we have to assess the
likely performance of secondary sources of repayment should it
prove necessary to rely on them.
Wholesale lending - corporate, commercial and financial (non-bank)
loans and advances including loan commitments by level of
collateral for key countries by stage (excluding commercial real estate)
(Audited)
Of which:
Total UK France Germany
Gross Gross Gross Gross
carrying/nominal carrying/nominal carrying/nominal carrying/nominal
amount ECL coverage amount ECL coverage amount ECL coverage amount ECL coverage
The group GBPm % GBPm % GBPm % GBPm %
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
Stage 1
Not
collateralised 109,435 0.1 40,298 0.1 52,583 - 11,479 -
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
Fully
collateralised 10,399 0.1 6,133 0.1 2,221 0.1 708 -
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
LTV ratio:
- less than
50% 2,450 0.2 1,649 0.1 587 - - -
- 51% to 75% 3,543 0.1 2,124 - 989 0.1 - -
- 76% to 90% 801 0.1 446 - 349 - - -
- 91% to 100% 3,605 - 1,914 - 296 - 708 -
Partially
collateralised
(A): 3,424 0.1 85 - 3,248 0.1 - -
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
- collateral
value
on A 2,661 51 2,555 -
------------------------ ------------------------ ------------------------ ----------------------
Total Stage 1 123,258 0.1 46,516 0.1 58,052 - 12,187 -
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
Stage 2
Not
collateralised 11,024 0.9 4,365 0.9 1,890 1.5 3,942 0.6
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
Fully
collateralised 1,675 1.1 608 0.8 639 1.1 243 0.4
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
LTV ratio:
- less than
50% 689 1.7 217 1.4 350 1.1 - -
- 51% to 75% 253 0.8 217 0.9 34 2.9 - -
- 76% to 90% 271 0.4 165 - 106 0.9 - -
- 91% to 100% 462 0.9 9 - 149 1.3 243 0.4
Partially
collateralised
(B): 1,573 0.9 4 - 1,567 0.9 - -
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
- collateral
value
on B 1,408 3 1,404 -
------------------------ ------------------------ ------------------------ ----------------------
Total Stage 2 14,272 0.9 4,977 0.9 4,096 1.2 4,185 0.5
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
Stage 3
Not
collateralised 1,598 37.2 669 25.1 378 86.0 393 17.8
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
Fully
collateralised 148 16.2 77 7.8 10 50.0 24 16.7
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
LTV ratio:
- less than
50% 76 18.4 41 7.3 6 50.0 - -
- 51% to 75% 22 13.6 19 10.5 2 50.0 - -
- 76% to 90% 18 5.6 17 - 1 - - -
- 91% to 100% 32 15.6 - - 1 100.0 24 16.7
Partially
collateralised
(C): 216 27.3 35 17.1 165 27.3 - -
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
- collateral
value
on C 152 22 123 -
------------------------ ------------------------ ------------------------ ----------------------
Total Stage 3 1,962 34.6 781 23.0 553 67.8 417 17.7
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
POCI
Not - - - - - - - -
collateralised
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
Fully - - - - - - - -
collateralised
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
LTV ratio:
- less than - - - - - - - -
50%
- 51% to 75% - - - - - - - -
- 76% to 90% - - - - - - - -
- 91% to 100% - - - - - - - -
Partially
collateralised
(D): 2 100.0 - - 2 100.0 - -
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
- collateral
value
on D 2 - 2 -
------------------------ ------------------------ ------------------------ ----------------------
Total POCI 2 100.0 - - 2 100.0 - -
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
At 31 Dec 2021 139,494 0.6 52,274 0.5 62,703 0.7 16,789 0.6
------------------------ -------------------- ------------------------ ---------------------- ------------------------ -------------------- ---------------------- --------------------
Wholesale lending - corporate, commercial and financial (non-bank)
loans and advances including loan commitments by level of
collateral for key countries by stage (excluding commercial real estate)
(continued)
(Audited)
Of which:
Total UK France Germany
Gross Gross Gross Gross
carrying/nominal ECL carrying/nominal ECL carrying/nominal ECL carrying/nominal
amount coverage amount coverage amount coverage amount ECL coverage
The group GBPm % GBPm % GBPm % GBPm %
Stage 1
-------- -------- --------
Not
collateralised 117,820 0.1 49,970 0.1 47,647 - 13,685 -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
Fully
collateralised 12,232 0.1 8,241 0.2 2,163 - 638 -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
LTV ratio:
- less than
50% 1,886 0.3 1,019 0.3 543 - - -
- 51% to 75% 4,403 0.2 3,489 0.2 901 - - -
- 76% to 90% 751 0.1 267 0.4 360 - - -
- 91% to 100% 5,192 - 3,466 - 359 - 638 -
Partially
collateralised
(A): 3,476 0.1 59 - 3,167 0.1 - -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
- collateral
value on
A 2,855 32 2,621 -
------------------------ -------- ------------------------ -------- ------------------------ -------- -----------------------
Total Stage 1 133,528 0.1 58,270 0.1 52,977 - 14,323 -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
Stage 2
-------- -------- --------
Not
collateralised 23,132 1.0 12,398 1.2 2,447 1.1 6,220 0.4
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
Fully
collateralised 1,838 1.2 630 1.0 649 1.1 290 0.3
LTV ratio:
- less than
50% 824 1.5 326 1.2 348 0.6 - -
- 51% to 75% 334 1.2 269 0.4 45 2.2 - -
- 76% to 90% 47 2.1 26 3.8 17 - - -
- 91% to 100% 633 0.8 9 - 239 1.3 290 0.3
Partially
collateralised
(B): 2,629 0.7 87 2.3 2,528 0.6 - -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
- collateral
value on
B 2,223 14 2,200 -
------------------------ -------- ------------------------ -------- ------------------------ -------- -----------------------
Total Stage 2 27,599 1.0 13,115 1.2 5,624 0.9 6,510 0.4
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
Stage 3
-------- -------- --------
Not
collateralised 1,803 36.3 740 29.7 529 63.9 441 15.2
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
Fully
collateralised 210 9.5 152 1.3 12 66.7 21 14.3
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
LTV ratio:
- less than
50% 25 28.0 2 - 7 57.1 - -
- 51% to 75% 27 29.6 17 5.9 3 66.7 - -
- 76% to 90% 120 0.8 118 0.8 1 100.0 - -
- 91% to 100% 38 10.5 15 - 1 100.0 21 14.3
Partially
collateralised
(C): 275 24.0 71 11.3 191 26.2 - -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
- collateral
value on
C 182 40 136 -
------------------------ -------- ------------------------ -------- ------------------------ -------- -----------------------
Total Stage 3 2,288 32.4 963 23.9 732 54.1 462 15.2
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
POCI
-------- -------- --------
Not
collateralised 37 27.0 2 100.0 - - - -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
Fully - - - - - - - -
collateralised
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
LTV ratio:
- less than - - - - - - - -
50%
- 51% to 75% - - - - - - - -
- 76% to 90% - - - - - - - -
- 91% to 100% - - - - - - - -
Partially
collateralised
(D): 3 100.0 - - 3 100.0 - -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
- collateral
value on
D 3 - 3 -
------------------------ -------- ------------------------ -------- ------------------------ -----------------------
Total POCI 40 32.5 2 100.0 3 100.0 - -
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
At 31 Dec 2020 163,455 0.7 72,350 0.7 59,336 0.8 21,295 0.5
------------------------ -------- ------------------------ -------- ------------------------ -------- ----------------------- ------------
.
Other credit risk exposures
In addition to collateralised lending, other credit enhancements
are employed and methods used to mitigate credit risk arising from
financial assets. These are described in more detail below:
-- Some securities issued by governments, banks and other
financial institutions benefit from additional credit enhancement
provided by government guarantees that cover the assets;
-- Debt securities issued by banks and financial institutions
include asset-backed securities ('ABSs') and similar instruments
which are supported by underlying pools of financial assets. Credit
risk associated with ABSs is reduced through the purchase of credit
default swap ('CDS') protection;
-- Trading loan and advances mainly pledged against cash
collaterals are posted to satisfy margin requirements. There is
--
limited credit risk on trading loans and advances since in the
event of default of the counterparty these would be set off against
the related liability. Reverse repos and stock borrowings are by
their nature collateralised.
Collateral accepted as security that the group is permitted to
sell or repledge under these arrangements is described on page 155
of the financial statements.
-- The group's maximum exposure to credit risk includes
financial guarantees and similar contracts granted; as well as loan
and other credit-related commitments. Depending on the terms of the
arrangement, we may use additional credit mitigation if a guarantee
is called upon or a loan commitment is drawn and subsequently
defaults.
For further information on these arrangements, see Note 30 on
the financial statements.
Derivatives
We participate in transactions exposing us to counterparty
credit risk. Counterparty credit risk is the risk of financial loss
if the counterparty to a transaction defaults before satisfactorily
settling it. It arises principally from over-the-counter ('OTC')
derivatives and securities financing transactions and is calculated
in both the trading and non-trading books. Transactions vary in
value by reference to market factors such as interest rates,
exchange rates or asset prices.
The counterparty risk from derivative transactions is taken into
account when reporting the fair value of derivative positions. The
adjustment to the fair value is known as the credit value
adjustment ('CVA').
The International Swaps and Derivatives Association ('ISDA')
master agreement is our preferred agreement for documenting
derivatives activity. It is common, and our preferred practice, for
the parties involved in a derivative transaction to execute a
credit support annex ('CSA') in conjunction with the ISDA master
agreement. Under a CSA, collateral is passed between the parties to
mitigate the counterparty risk inherent in outstanding positions.
The majority of our CSAs are with financial institutional clients.
We manage the counterparty exposure on our OTC derivative contracts
by using collateral agreements with counterparties and
netting agreements. Currently, we do not actively manage our
general OTC derivative counterparty exposure in the credit markets,
although we may manage individual exposures in certain
circumstances.
We place strict policy restrictions on collateral types and as a
consequence the types of collateral received and pledged are, by
value, highly liquid and of a strong quality, being predominantly
USD, EUR and GBP cash and G7 Government Bonds.
Where a collateral type is required to be approved outside the
collateral policy, approval is required from a committee of senior
representatives from Markets, Legal and Risk.
See Note 28 on the financial statements for details regarding
legally enforceable right of offset in the event of counterparty
default and collateral received in respect of derivatives
Personal lending
This section provides further details on the countries and
products comprising personal loans and advances to customers.
Further product granularity is also provided by stage, with
geographical data presented for loans and advances to customers,
loan and other credit-related commitments, and financial
guarantees.
Total personal lending for loans and advances to customers at amortised
costs by stage distribution
Gross carrying amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
By portfolio
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
First lien residential mortgages 6,723 173 234 7,130 (11) (5) (65) (81)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
* of which: interest only (including offset) 3,134 115 94 3,343 (1) (2) (27) (30)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
* affordability including ARMs 451 2 6 459 (3) - (1) (4)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
Other personal lending 17,532 513 219 18,264 (11) (11) (60) (82)
- guaranteed loans in respect
of residential property 14,387 332 38 14,757 (5) (2) (1) (8)
- Other personal lending
which is secured 2,535 136 100 2,771 (3) (4) (24) (31)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
- credit cards 318 22 11 351 (1) (2) (1) (4)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
- Other personal lending
which is unsecured 292 23 70 385 (2) (3) (34) (39)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
At 31 Dec 2021 24,255 686 453 25,394 (22) (16) (125) (163)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
By geography
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
UK(1) 3,543 88 49 3,680 (1) (3) (3) (7)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
France 18,500 497 239 19,236 (10) (10) (75) (95)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
Germany 161 47 - 208 - - - -
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
Other countries 2,051 54 165 2,270 (11) (3) (47) (61)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
At 31 Dec 2021 24,255 686 453 25,394 (22) (16) (125) (163)
----------------- -------------------- -------------------- ----------------- --------------------- --------------------- --------------------- ---------------------
Total personal lending for loans and other credit-related commitments
and financial guarantees(2) by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK 586 3 2 591 - - - -
France 1,076 20 2 1,098 - - - -
Germany 136 85 - 221 - - - -
----------------- -------------------- -------------------- ----------------- --------------------- ------------------- ------------------- ---------------------
Other
countries 377 8 - 385 (1) - - (1)
At 31 Dec
2021 2,175 116 4 2,295 (1) - - (1)
----------------- -------------------- -------------------- ----------------- --------------------- ------------------- ------------------- ---------------------
1 Includes primarily first lien residential mortgages in Channel Islands and Isle of Man.
2 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Total personal lending for loans and advances to customers at amortised
costs by stage distribution (continued)
Gross carrying amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
By portfolio
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
First lien residential mortgages 7,087 211 265 7,563 (9) (10) (77) (96)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
* of which: interest only (including offset) 3,454 151 115 3,720 (1) (3) (30) (34)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
- affordability including
ARMs 394 2 4 400 (2) - (1) (3)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
Other personal lending 17,904 763 269 18,936 (9) (27) (76) (112)
- guaranteed loans in respect
of residential property 14,625 434 45 15,104 (2) (4) (3) (9)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
- Other personal lending
which is secured 2,521 94 141 2,756 (3) (7) (27) (37)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
- credit cards 288 37 14 339 (2) (6) (1) (9)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
- Other personal lending
which is unsecured 470 198 68 736 (2) (10) (45) (57)
At 31 Dec 2020 24,991 974 534 26,499 (18) (37) (153) (208)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
By geography
UK(1) 3,455 70 57 3,582 (2) (9) (5) (16)
France 19,230 689 296 20,215 (7) (20) (92) (119)
Germany 124 145 - 269 - - - -
Other countries 2,182 70 181 2,433 (9) (8) (56) (73)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
At 31 Dec 2020 24,991 974 534 26,499 (18) (37) (153) (208)
------------------ --------------------- --------------------- ------------------ --------------------- --------------------- --------------------- ---------------------
Total personal lending for loans and other credit-related commitments
and financial guarantees(2) by stage distribution (continued)
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
The group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK 340 15 - 355 - - - -
France 1,170 29 3 1,202 - - - -
Germany 65 170 - 235 - - - -
----------------------- ------------------------ ------------------------ --------------------- ---------------------- ------------------------- ---------------------- -------------------------
Other
countries 442 8 1 451 - (1) - (1)
At 31 Dec
2020 2,017 222 4 2,243 - (1) - (1)
----------------------- ------------------------ ------------------------ --------------------- ---------------------- ------------------------- ---------------------- -------------------------
1 Includes primarily first lien residential mortgages in Channel Islands and Isle of Man.
2 Excludes performance guarantee contracts to which the
impairment requirements in IFRS 9 are not applied.
Collateral on loans and advances
The following table provides a quantification of the value of
fixed charges we hold over specific assets where we have a history
of enforcing, and are able to enforce, collateral in satisfying a
debt in the event of the borrower failing to meet its
contractual
obligations, and where the collateral is cash or can be realised
by sale in an established market.
The collateral valuation excludes any adjustment for obtaining
and selling the collateral and in particular loans shown as
collateralised or partially collateralised may also benefit from
other forms of credit mitigants.
Personal lending: residential mortgage loans including loan commitments
by level of collateral for key countries
(Audited)
Of which:
Total UK France
Gross ECL Gross ECL Gross ECL
exposure coverage exposure coverage exposure coverage
The group GBPm % GBPm % GBPm %
Stage 1
Fully
collateralised 6,915 0.2 2,789 - 2,088 -
-------------------- -------------------- --------------------
LTV ratio:
- less than
50% 3,400 0.1 1,308 - 1,110 0.1
- 51% to 60% 1,274 0.2 540 - 431 -
- 61% to 70% 1,074 0.2 452 - 296 -
- 71% to 80% 776 0.3 358 - 177 -
- 81% to 90% 345 0.3 113 - 48 -
- 91% to 100% 46 - 18 - 26 -
-------------------- -------------------- --------------------
Partially
collateralised
(A): 90 - 11 - 50 -
-------------------- -------------------- --------------------
LTV ratio:
- 101% to 110% 18 - 2 - 12 -
- 111% to 120% 9 - 1 - 5 -
- greater than
120% 63 - 8 - 33 -
-------------------- -------------------- --------------------
- collateral
value on A 63 4 50
-------------------- -------------------- --------------------
Total 7,005 0.2 2,800 - 2,138 -
-------------------- -------------------- --------------------
Stage 2
Fully
collateralised 169 3.0 46 - 83 1.2
-------------------- -------------------- --------------------
LTV ratio:
- less than
50% 91 2.2 18 - 48 2.1
- 51% to 60% 25 4.0 6 - 13 -
- 61% to 70% 34 2.9 17 - 12 -
- 71% to 80% 15 6.7 5 - 7 -
- 81% to 90% 3 - - - 2 -
- 91% to 100% 1 - - - 1 -
-------------------- -------------------- --------------------
Partially
collateralised
(B): 5 - - - 2 -
-------------------- -------------------- ------------------- --------------------
LTV ratio:
- 101% to 110% 1 - - - - -
- 111% to 120% 1 - - - - -
- greater than
120% 3 - - - 2 -
-------------------- -------------------- --------------------
- collateral
value on B 4 - 3
-------------------- -------------------- --------------------
Total 174 2.9 46 - 85 1.2
-------------------- -------------------- ------------------- --------------------
Stage 3
Fully
collateralised 204 24.5 9 11.1 62 21.0
-------------------- -------------------- --------------------
LTV ratio:
- less than
50% 94 12.8 6 16.7 24 20.8
- 51% to 60% 31 19.4 3 - 8 25.0
- 61% to 70% 34 23.5 - - 19 10.5
- 71% to 80% 13 38.5 - - 3 33.3
- 81% to 90% 14 42.9 - - 4 25.0
- 91% to 100% 18 72.2 - - 4 50.0
-------------------- -------------------- --------------------
Partially
collateralised
(C): 30 53.3 - - 24 58.3
-------------------- -------------------- --------------------
LTV ratio:
- 101% to 110% 2 50.0 - - 2 50.0
- 111% to 120% 2 50.0 - - 2 50.0
- greater than
120% 26 53.8 - - 20 60.0
-------------------- -------------------- --------------------
- collateral
value on C 6 - 6
-------------------- -------------------- --------------------
Total 234 28.2 9 11.1 86 31.4
-------------------- -------------------- --------------------
At 31 Dec 2021 7,413 1.1 2,855 - 2,309 1.3
-------------------- -------------------- --------------------
Personal lending: residential mortgage loans including loan commitments
by level of collateral for key countries (continued)
(Audited)
Of which:
Total UK France
Gross ECL Gross ECL Gross ECL
exposure coverage exposure coverage exposure coverage
The group GBPm % GBPm % GBPm %
Stage 1
--------------------- -------- --------------------- ------------------- --------------------- ---------
Fully
collateralised 7,308 0.1 2,751 - 2,364 -
--------------------- --------------------- ---------------------
LTV ratio:
- less than
50% 3,110 0.1 1,018 - 1,147 -
- 51% to 60% 1,074 0.1 293 - 513 -
- 61% to 70% 991 0.1 316 - 378 -
- 71% to 80% 789 0.3 214 - 225 -
- 81% to 90% 505 0.4 109 - 70 -
- 91% to 100% 839 0.1 801 - 31 -
--------------------- --------------------- ---------------------
Partially
collateralised
(A): 90 - 9 - 63 -
--------------------- --------------------- ---------------------
LTV ratio:
- 101% to 110% 21 - - - 13 -
- 111% to 120% 14 - 2 - 10 -
- greater than
120% 55 - 7 - 40 -
--------------------- --------------------- ---------------------
- collateral
value on A 81 5 63
--------------------- --------------------- ---------------------
Total 7,398 0.1 2,760 - 2,427 -
--------------------- --------------------- ---------------------
Stage 2
Fully
collateralised 202 4.0 34 2.9 116 0.9
--------------------- --------------------- ---------------------
LTV ratio:
- less than
50% 114 1.8 17 - 64 1.6
- 51% to 60% 31 3.2 4 - 21 -
- 61% to 70% 22 4.5 - - 17 -
- 71% to 80% 15 13.3 - - 10 -
- 81% to 90% 6 16.7 - - 3 -
- 91% to 100% 14 7.1 13 7.7 1 -
--------------------- --------------------- ---------------------
Partially
collateralised
(B): 10 20.0 - - 5 -
--------------------- --------------------- ---------------------
LTV ratio:
- 101% to 110% 4 25.0 - - 2 -
- 111% to 120% 2 50.0 - - - -
- greater than
120% 4 - - - 3 -
--------------------- --------------------- ---------------------
- collateral
value on B 10 - 5
--------------------- --------------------- ---------------------
Total 212 4.7 34 2.9 121 0.8
--------------------- --------------------- ------------------- ---------------------
Stage 3
Fully
collateralised 200 22.0 12 8.3 69 23.2
--------------------- --------------------- ---------------------
LTV ratio:
- less than
50% 95 13.7 8 12.5 30 23.3
- 51% to 60% 34 23.5 3 - 10 30.0
- 61% to 70% 34 26.5 - - 16 12.5
- 71% to 80% 23 34.8 1 - 7 28.6
- 81% to 90% 9 44.4 - - 2 50.0
- 91% to 100% 5 40.0 - - 4 25.0
--------------------- --------------------- ---------------------
Partially
collateralised
(C): 65 50.8 - - 36 38.9
--------------------- --------------------- ---------------------
LTV ratio:
- 101% to 110% 10 60.0 - - 3 33.3
- 111% to 120% 8 62.5 - - 1 -
- greater than
120% 47 46.8 - - 32 40.6
--------------------- --------------------- ---------------------
- collateral
value on C 35 - 17
--------------------- --------------------- ---------------------
Total 265 29.1 12 8.3 105 28.6
--------------------- --------------------- ---------------------
At 31 Dec 2020 7,875 1.2 2,806 0.1 2,653 1.2
--------------------- --------------------- ---------------------
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 dependants. 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
(Audited)
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 underpinned 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, pensions,
non-trading book foreign exchange risk, and interest rate risk in
the banking book.
Treasury risk management
Key developments in 2021
-- Global Treasury initiated a new flagship programme to deliver
a more resilient, effective and efficient Treasury function over
the next 3 years with a focus on optimising and safeguarding
financial resources. The programme will deliver modernised
infrastructure and upgraded modelling capabilities alongside a
broad re-organisation of the Treasury function.
-- We continued to build our recovery and resolution
capabilities, including in relation to the Bank of England ('BoE')
Resolvability Assessment Framework, which had an overall compliance
deadline of 1 January 2022. The HSBC Group submitted a
self-assessment report on its resolvability to the Prudential
Regulation Authority ('PRA') and the BoE on 1 October 2021. This
included an assessment of how we addressed resolvability outcomes
that impact treasury risk, including valuations, and capital,
liquidity and funding capabilities in resolution. The HSBC Group
will publish a summary of its self-assessment report in June 2022.
The BoE will similarly publish a statement relating to the
resolvability of the HSBC Group at the same time.
-- The BoE's Financial Policy Committee ('FPC') confirmed its
guidance on the path for the UK countercyclical capital buffer
rate. It has announced that it is increasing the rate from 0% to
1%, effective December 2022 in line with the usual 12--month
implementation lag. Absent a material change in the outlook for the
UK's financial stability, the FPC would expect to further increase
the rate to 2% in the second quarter of 2022, which would take
effect 12 months later. As part of our ongoing focus on enhancing
the quality of our regulatory reporting, we are progressing with a
comprehensive programme to strengthen our global processes, improve
consistency and enhance control standards on various aspects of
regulatory reporting. Further details can be found in the
subsequent sub-section 'Regulatory reporting processes and
controls'.
-- We worked with the fiduciaries of all our pension plans to
ensure the measures taken in response to the Covid-19 pandemic,
including remote working for plan providers and dealing
appropriately with affected plan members, were properly maintained
and supported. Our de-risking programmes continued to provide
protection against the volatility in financial markets that
resulted from the pandemic's economic impact.
-- A new team was created within the Global Treasury function to
be accountable for monitoring and managing the financial risk and
capital implications of the HSBC Group's employee defined benefit
pension plans. This change creates clearer delineation of the roles
and responsibilities of the first and second lines of defence.
The group's CET1 ratio was 17.3% at 31 December 2021 and the
leverage ratio was 4.1%. The group continues to maintain and plan
for the appropriate resources required to manage its risk and
deliver its strategic objectives, including the sale of the retail
banking business in France.
Governance and structure
The Chief Risk Officer is the accountable risk steward for all
treasury risks. The Chief Financial Officer is the risk owner for
treasury risks with the exception of pension risk which is co-owned
together with the regional heads of Performance & Reward.
Capital, liquidity, interest rate risk in the banking book and
non-trading book foreign exchange risk are the responsibility of
the Executive Committee and the Risk Committee. The Treasury
function actively manages these risks on an on-going basis,
supported by the Asset and Liability Management Committee
('ALCO'), overseen by Treasury Risk Management and the Risk
Management Meeting ('RMM').
Pension risk is overseen by the Pension Risk Management
Meeting.
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, minimum
requirements for own funds and eligible liabilities ('MREL'), and
leverage. The ICAAP is an assessment of the Group'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, and we are
continuing to develop our approach. The Group's ICAAP supports the
determination of the capital risk appetite and target ratios, as
well as enables the assessment and determination of capital
requirements by regulators. Subsidiaries prepare ICAAPs in line
with global guidance, while considering their local regulatory
regimes to determine their own risk appetites and ratios.
We aim to ensure that management have oversight of our liquidity
and funding risks by maintaining comprehensive policies, metrics
and controls. We manage liquidity and funding risk at an operating
entity level to make sure that obligations can be met in the
jurisdiction where they fall due, generally without reliance on
other parts of the Group. Operating entities are required to meet
internal minimum requirements and any applicable regulatory
requirements at all times. These requirements are assessed through
the ILAAP, which ensures that operating entities have robust
strategies, policies, processes and systems for the identification,
measurement, management and monitoring of liquidity risk over an
appropriate set of time horizons, including intra-day. The ILAAP
informs the validation of risk tolerance and the setting of risk
appetite. It also assesses the capability to manage liquidity and
funding effectively in each major entity. These metrics are set and
managed locally but are subject to robust review and challenge by
the HSBC Group 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 financial resource plan that is approved by the Board.
Capital and RWA forecasts are submitted to the 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. The Group's 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 financial resource
plan that is approved by the Board. The Board-level appetite
measures are the LCR and NSFR, together with an internal liquidity
metric which was introduced in January 2021 to supplement the LCR
and NSFR. In addition, we use a wider set of measures to manage an
appropriate funding and liquidity profile, including legal entity
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, capital
and/or liquidity position. We closely monitor future regulatory
changes and continue to evaluate the impact of these upon our
capital and liquidity requirements. These include the UK's
implementation of amendments to the Capital Requirements
Regulation, the Basel III Reforms, and the regulatory impact from
the UK's withdrawal from the EU, as well as other regulatory
statements including changes to IRB modelling requirements.
Regulatory developments
The PRA has confirmed that software assets will be deducted in
full from CET1 capital starting 1 January 2022. This will reverse
the beneficial changes to the treatment of software assets that
were implemented as part of the EU's response to the Covid-19
pandemic. This will have an immaterial impact on our CET1
ratio.
Overall we expect RWAs to increase by up to 5% as a result of
new regulations during 2022. These include the changes to the UK's
version of the Capital Requirements Regulation, as well as other
regulatory statements including changes to IRB modelling
requirements. Following the implementation of the UK's amendments
to the Capital Requirements Regulation ('CRR II'), we have adopted
the PRA's new rules on net stable funding ratio ('NSFR'),
counterparty risk, equity investment in funds, and leverage ratio,
which will be reflected in disclosures starting in the first
quarter of 2022.
Further changes will occur with the introduction of the
remaining Basel III reforms on which the PRA is expected to consult
in the second half of 2022.
Regulatory reporting processes and controls
The quality of regulatory reporting remains a key priority for
management and regulators. Notably, the PRA published a Dear CEO
letter addressed to UK regulated banks, which highlighted areas of
concern over the processes firms use to deliver regulatory returns.
Recent sanctions issued by the PRA demonstrate their intent in this
respect. We are progressing with a comprehensive programme to
strengthen our processes, improve consistency, and enhance controls
on various aspects of regulatory reporting. We have commissioned a
number of independent external reviews, some at the request of our
regulators, including one of our credit risk RWA reporting process
which is currently ongoing. As a result of these initiatives, there
may be an impact on some of our regulatory ratios, such as the CET1
and LCR.
Stress testing and recovery planning
The Group uses stress testing to evaluate the robustness of
plans and risk portfolios, and to meet the stress testing
requirements set by supervisors. Stress testing also informs the
ICAAP and ILAAP and supports recovery planning. 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 in many jurisdictions. These include
the programmes of the Bank of England, the European Banking
Authority, 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 feed into the setting of regulatory minimum ratios and
buffers.
The Group and subsidiaries have established recovery plans,
which set out potential options management could take in a
range
of stress scenarios that could result in a breach of capital or
liquidity buffers. All entities monitor internal and external
triggers that could threaten their capital, liquidity or funding
positions. Entities have established recovery plans providing
detailed actions that management would consider taking in a stress
scenario should their positions deteriorate and 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.
Overall, recovery and resolution plans form part of the
framework safeguarding the Group's financial stability. The Group
is committed to developing its recovery and resolution capabilities
further, including in relation to the BoE's Resolvability
Assessment Framework.
Structural foreign exchange exposures
Structural foreign exchange exposures represent net assets or
capital investments in subsidiaries, branches, joint arrangement or
associates, together with any associated hedges, the functional
currencies of which are currencies other than pound sterling. An
entity's functional currency is that of the primary economic
environment in which the entity operates. We use the pound sterling
as our presentation currency in our consolidated financial
statements because sterling forms the major currency in which we
transact and fund our business. Exchange rate differences on
structural exposures are recognised in other comprehensive income
('OCI').
The structural foreign exchange exposures are managed within
limits such that the capital ratios and the capital ratios of
individual banking subsidiaries are largely protected from the
effect of changes in exchange rates. We may hedge certain
structural foreign exchange positions, either at entity level, or
by relying on hedges held in other group entities, subject to
approved limits.
Measurement of interest rate risk in the banking book
The following measures are used by Treasury to monitor and
control interest rate risk in the banking book including:
-- Net Interest Income ('NII') sensitivity; and
-- Economic Value of Equity ('EVE').
Net interest income sensitivity
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected NII under varying
interest rate scenarios (simulation modelling), where all other
economic variables are held constant. This monitoring is undertaken
by ALCO.
The group applies a combination of scenarios and assumptions
relevant to the businesses as well as applying standard scenarios
that are required throughout HSBC Group.
NII sensitivity reflects the group's sensitivity of earnings to
changes in market interest rates. We forecast both one year and
five year NII sensitivities across a range of interest rate
scenarios based on a static balance sheet assumption. Forecasts
include business line rate pass-on assumptions, re-investment of
maturing assets and liabilities at market rates per shock scenario
and prepayment risk. NII is modelled based on no management actions
i.e. the risk profile at the month end is assumed to remain
constant throughout the forecast horizon.
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, i.e. the current book value of equity plus the
present value of future net interest income in this scenario. EVE
sensitivity is the extent to which the EVE value will change due to
a pre-specified movement in interest rates, where all other
economic variables are held constant.
Pension risk management processes
HSBC provides future pension benefits on a defined contribution
basis from many of its European operations. However, there remain
future defined benefit pensions provided in the region.
Pension plans are run by local fiduciaries in line with local
legislative requirements. The largest pension plan is the HSBC
Trinkaus & Burkhardt Pension Scheme which is regulated by the
German Company Benefits Act (Gesetz zur Verbesserung der
betrieblichen Altersversorgung - Betriebsrentengesetz
-BetrAVG).
In defined contribution pension plans, the contributions that
HSBC is required to make are known, while the ultimate pension
benefit will vary, typically with investment returns achieved by
investment choices made by the employee. While the market risk to
HSBC of defined contribution plans is low, it is still exposed to
operational and reputational risk.
In defined benefit pension plans, the level of pension benefit
is known. Therefore, the level of contributions required by HSBC
will vary due to a number of risks, including:
-- investments delivering a return below that required to provide the projected plan benefits;
-- the prevailing economic environment leading to corporate
failures, thus triggering write-downs in asset values (both equity
and debt);
-- a change in either interest rates or inflation, causing an
increase in the value of the plan liabilities; and
-- plan members living longer than expected (known as
longevity risk).
Pension risk is assessed using an economic capital model that
takes into account potential variations in these factors. The
impact of these variations on both pension assets and pension
liabilities is assessed using a one-in-200-year stress test.
Scenario analysis and other stress tests are also used to support
pension risk management.
To fund the benefits associated with defined benefit plans,
sponsoring group companies, and in some instances employees, make
regular contributions in accordance with advice from actuaries and
in consultation with the plan's fiduciaries where relevant. These
contributions are normally set to ensure that there are sufficient
funds to meet the cost of the accruing benefits for the future
service of active members. However, higher contributions are
required when plan assets are considered insufficient to cover the
existing pension liabilities. Contribution rates are typically
revised annually or once every three years, depending on the
plan.
The defined benefit plans invest contributions in a range of
investments designed to limit the risk of assets failing to meet a
plan's liabilities. Any changes in expected returns from the
investments may also change future contribution requirements. In
pursuit of these long-term objectives, an overall target allocation
of the defined benefit plan assets between asset classes is
established. In addition, each permitted asset class has its own
benchmarks, such as stock market or property valuation indices or
liability characteristics. The benchmarks are reviewed at least
once every three to five years and more frequently if required by
local legislation or circumstances. The process generally involves
an extensive asset and liability review.
Capital risk in 2021
Capital overview
Capital adequacy metrics
At
31 Dec 31 Dec
2021 2020
--------------------- ---------------------
Risk-weighted assets
('RWAs') (GBPm)
---------------------
Credit risk 67,540 77,214
---------------------
Counterparty credit
risk 16,434 19,344
---------------------
Market risk 9,828 14,589
---------------------
Operational risk 10,512 11,245
---------------------
Total RWAs 104,314 122,392
---------------------
Capital on a transitional
basis (GBPm)
---------------------
Common equity tier
1 ('CET1') capital 18,007 18,042
---------------------
Tier 1 capital 21,869 22,165
---------------------
Total capital 33,036 33,438
---------------------
Capital ratios on a
transitional basis
(%)
---------------------
Common equity tier
1 17.3 14.7
---------------------
Total tier 1 21.0 18.1
---------------------
Total capital ratio 31.7 27.3
---------------------
Leverage ratio (transitional)
---------------------
Tier 1 capital (GBPm) 21,869 22,165
---------------------
Total leverage ratio
exposure measure (GBPm) 535,562 565,049
---------------------
Leverage ratio (%) 4.1 3.9
--------------------- ---------------------
Leverage ratio (fully
phased-in)
---------------------
Tier 1 capital (GBPm) 21,696 21,732
---------------------
Total leverage ratio
exposure measure (GBPm) 535,562 565,049
---------------------
Leverage ratio (%) 4.1 3.8
--------------------- ---------------------
References to EU regulations and directives (including technical
standards) should, as applicable, be read as references to the UK's
version of such regulation and/or directive, as onshored into UK
law under the European Union (Withdrawal) Act 2018, and as may be
subsequently amended under UK law.
Capital figures and ratios in the table above are calculated in
accordance with the revised 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.
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. Our
capital and ratios are presented under these arrangements
throughout the table above. Without their application, our CET1
ratio would be 17.2%.
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 ('ECL') in
the non-credit-impaired book thereafter.
Any add-back must be tax-effected and accompanied by a
recalculation of 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 the capital base amounted
to GBP48m under the STD approach with a tax impact of GBP12m which
resulted in a net add-back of GBP36m.
Own funds
Own funds disclosure
(Audited)
At
31 Dec 31 Dec
2021 2020
Ref(*) GBPm GBPm
---------------------------------
Common equity tier 1 ('CET1') capital:
instruments
and reserves
Capital instruments and the related
share premium
1 accounts 797 797
---------------------------------
* ordinary shares 797 797
2 Retained earnings(1) 15,511 17,229
---------------------------------
3 Accumulated other comprehensive income 1,975 2,888
(and other
reserves)
---------------------------------
5 Minority interests (amount allowed in 57 66
consolidated
CET1)
---------------------------------
5a Independently reviewed interim net 625 (1,755)
profits net of
any foreseeable charge or dividend(2)
---------------------------------
6 Common equity tier 1 capital before 18,965 19,225
regulatory adjustments
28 Total regulatory adjustments to common (958) (1,183)
equity tier
1(1)
---------------------------------
29 Common equity tier 1 capital 18,007 18,042
36 Additional tier 1 capital before 3,906 4,167
regulatory adjustments
43 Total regulatory adjustments to (44) (44)
additional tier 1
capital
---------------------------------
44 Additional tier 1 capital 3,862 4,123
---------------------------------
45 Tier 1 capital 21,869 22,165
51 Tier 2 capital before regulatory 11,591 11,724
adjustments
57 Total regulatory adjustments to tier 2 (424) (451)
capital
---------------------------------
58 Tier 2 capital 11,167 11,273
---------------------------------
59 Total capital 33,036 33,438
---------------------------------
* The references identify the lines prescribed in the European
Banking Authority template, which are applicable and where there is
a value.
1 From 1H21, the new deduction for insufficient coverage for
non-performing exposures has been combined with IFRS 9 transitional
adjustments. 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.
At 31 December 2021, our CET1 capital ratio increased to 17.3%
from 14.7% at 31 December 2020. This was mainly due to a fall in
RWAs.
Throughout 2021, we complied with the PRA's regulatory capital
adequacy requirements, including those relating to stress
testing.
Risk-weighted assets
RWA movement by key driver
Total
RWAs
GBPm
RWAs at 1 Jan 2021 122,392
Asset size (13,682)
---------------------
Asset quality 2,612
---------------------
Model updates (694)
---------------------
Methodology and policy (4,071)
Foreign exchange movement (2,243)
---------------------
Total RWA movement (18,078)
---------------------
RWAs at 31 Dec 2021 104,314
---------------------
Risk-weighted assets ('RWAs') decreased by GBP18.1bn during the
year, including a decrease of GBP2.2bn due to foreign currency
translation differences. The GBP15.9bn decrease (excluding foreign
currency translation differences) comprised the movements described
by the following comments.
Asset size
Credit risk RWAs fell by GBP9.1bn due to management actions,
lower lending and a fall in securitisation related RWAs, and a
reduction in counterparty credit risk RWAs due to management
actions and mark-to-market movements.
Market risk RWAs decreased by GBP4.1bn largely due to the
effects of risk mitigation actions, a reduction in the equity and
emerging markets bond portfolios and a decrease in stressed value
at risk.
The annual calculation of operational risk RWAs led to a
GBP0.5bn fall in RWAs due to lower average revenue and
expenses.
Asset quality
The GBP2.6bn increase in RWAs was mainly due to 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 GBP4.1bn decrease in RWAs was primarily due to risk
parameter refinements. This included a GBP0.2bn increase arising
from the adoption of a Pillar 1 approach to the capitalisation of
structural foreign exchange risk.
Leverage ratio
Our leverage ratio calculated in accordance with the Capital
Requirements Regulation was 4.1% at 31 December 2021, up from 3.8%
at 31 December 2020. This was mainly due to a decrease in the
leverage exposure measure, primarily driven by a reduction in
security finance transactions and on balance sheet exposures.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market
discipline and aims to make financial services firms more
transparent by requiring publication of wide-ranging information on
their risks, capital and management. Our Pillar 3 Disclosures at 31
December 2021 is published on our website,
www.hsbc.com/investors
Structural foreign exchange exposures
The group's structural foreign currency exposure is represented
by the net assets or capital investments in subsidiaries, branches,
joint arrangements or associates, the functional currencies of
which are currencies other than the sterling.
For our policies and procedures for managing structural foreign
exchange exposures, see page 72 of the 'Risk management'
section.
.
Net structural foreign exchange
exposures
2021 2020
GBPm GBPm
---------------------
Currency of structural
exposure
Euro 8,068 8,511
US Dollars 1,470 1,081
South African rand 285 277
Israeli new shekel 169 159
Others, each less than
GBP150m 319 446
At 31 Dec 10,311 10,474
Liquidity and funding risk in 2021
Liquidity coverage ratio
The LCR aims to ensure that a bank has sufficient unencumbered
high-quality liquid assets ('HQLA') to meet its liquidity needs in
a 30-calendar-day liquidity stress scenario. HQLA consist of cash
or assets that can be converted into cash at little or no loss of
value in markets.
At 31 December 2021, all the group's principal operating
entities were within the LCR risk tolerance level established by
the Board and applicable under the LFRF.
The following table displays the individual LCR levels for HSBC
Bank plc's principal operating entities on the European Commission
Delegated Regulation basis.
Operating entities' LCRs
At
31 Dec 31 Dec
2021 2020
% %
HSBC Bank plc 150 136
------ ------
HSBC Continental
Europe 145 143
------ ------
HSBC Germany 170 144
------ ------
HSBC Bank plc LCR increased mainly due to loan book optimisation
resulting in lower loan and committed facilities positions.
The LCR increase for HSBC Germany is mainly driven by increased
customer deposits and additional TLTRO III funding being raised in
June 2021.
In addition to the regulatory metric, the group enhanced its
liquidity framework in 2021 to include as 'internal liquidity
metric', which is being used to monitor and manage liquidity risk
via a low-point measure across a 270-day horizon, taking into
account recovery capacity.
Net stable funding ratio
The Net Stable Funding Ratio ('NSFR') requires institutions to
maintain sufficient stable funding relative to required stable
funding, and reflects a bank's long-term funding profile (funding
with a term of more than a year).
At 31 December 2021, all the group's principal operating
entities were within the NSFR risk tolerance level established by
the Board and applicable under the LFRF.
Operating entities' NSFRs
At
31 Dec 31 Dec
2021 2020
% %
------
HSBC Bank plc(1) 124 133
------
HSBC Continental
Europe(2) 130 130
------
HSBC Germany 163 138
------
1 HSBC Bank plc uses an adjusted NSFR as a basis for
establishing stable funding. The adjusted NSFR requires HSBC Bank
plc to maintain sufficient stable funding and reflects its long
term funding profile commensurate with the risk profile of the
balance sheet.
2 HBCE abide by the CRR II NSFR definition since JUN21.
Depositor concentration and term funding maturity
concentration
The LCR and NSFR metrics assume a stressed outflow based on a
portfolio of depositors within each depositor segment. To ensure
the validity of these assumptions in the sense that the deposit
base is sufficient diversified, the depositor concentration is
monitored on an ongoing basis.
In addition to this, operating entities monitor the term funding
maturity concentration metric to ensure they are not overly exposed
to term funding concentration of wholesale market counterparts by
the current maturity profile in any defined period.
Liquid assets of the group's principal operating entities
The table below shows the unweighted liquidity value of assets
categorised as liquid, which is used for the purposes of
calculating the LCR metric. This reflects the stock of unencumbered
liquid assets at the reporting date, using the regulatory
definition of liquid assets.
Operating entities' liquid
assets
At Estimated At Estimated
liquidity liquidity
value value
31 Dec 31 Dec
2021 2020
GBPm GBPm
HSBC Bank plc
Level 1 89,805 88,942
Level 2a 6,320 8,260
Level 2b 3,550 3,888
HSBC Continental
Europe
Level 1 39,159 34,981
Level 2a 450 267
Level 2b 142 -
HSBC Germany
Level 1 13,072 11,044
Level 2a 33 8
Level 2b 327 315
Sources of funding
Our primary sources of funding are customer current accounts,
repo and wholesale securities.
The following 'Funding sources and uses' table provides a
consolidated view of how our balance sheet is funded, and should be
read in light of the LFRF, which requires operating entities to
manage liquidity and funding risk on a stand-alone basis.
The table analyses our consolidated balance sheet according to
the assets that primarily arise from operating activities and the
sources of funding primarily supporting these activities. Assets
and liabilities that do not arise from operating activities are
presented at other balance sheet lines. In 2021, the level of
customer accounts continued to exceed the level of loans and
advances to customers. The positive funding gap was predominantly
deployed in liquid assets, cash and balances with central banks and
financial investments, as required by the LFRF.
Funding sources and uses for the group
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
------------------ ------------------------
Sources Uses
Loans and
Customer advances to
accounts 205,241 195,184 customers 91,177 101,491
------------------ ------------------- ------------------------ -----------------------
Loans and
Deposits by advances to
banks 32,188 34,305 banks 10,784 12,646
------------------ ------------------- ------------------------ -----------------------
Reverse
Repurchase repurchase
agreements agreements
- -
non-trading 27,259 34,903 non-trading 54,448 67,577
------------------ ------------------- ------------------------ -----------------------
Cash
collateral,
margin
Debt and
securities settlement
in issue 9,428 17,371 accounts 34,907 46,840
------------------ ------------------- ------------------------ -----------------------
Cash
collateral,
margin
and
settlement Assets held
accounts 37,076 47,173 for sale 9 90
------------------ -------------------
Subordinated Trading
liabilities 12,488 13,764 assets 83,706 86,976
------------------ -------------------
Financial
liabilities
designated
at fair - reverse
value 33,608 40,792 repos 8,626 8,182
------------------ -------------------
Liabilities
under
insurance - stock
contracts 22,264 22,816 borrowing 3,218 4,137
------------------ -------------------
- other
Trading trading
liabilities 46,433 44,229 assets 71,862 74,657
------------------ -------------------
Financial
- repos 7,663 8,441 investments 41,300 51,826
------------------------ -----------------------
Cash and
balances
with
- stock central
lending 1,637 3,356 banks 108,482 85,092
------------------------ -----------------------
Other
- other balance
trading sheet
liabilities 37,133 32,432 assets 171,798 228,612
------------------------ -----------------------
Total equity 23,715 23,849 At 31 Dec 596,611 681,150
------------------ ------------------- ------------------------ -----------------------
Other balance
sheet
liabilities 146,911 206,764
------------------ -------------------
At 31 Dec 596,611 681,150
------------------ -------------------
Contingent liquidity risk arising from committed lending
facilities
The group provides customers with committed facilities such as
standby facilities to corporate customers and committed backstop
lines to conduits sponsored by the group. All of the undrawn
commitments provided to conduits or external customers are
accounted for in the LCR and NSFR in line with the applicable
regulations. This ensures that under a stress scenario any
additional outflow generated by increased utilisation of these
committed facilities by either customers or the group's sponsored
conduits is appropriately reflected in our liquidity and funding
position.
In relation to commitments to customers, the table below shows
the level of undrawn commitments outstanding in terms of the five
largest single facilities and the largest market sector.
The group's contractual exposures at 31 December monitored under the
contingent liquidity risk limit structure
2021 2020
GBPbn GBPbn
Commitments to conduits
Multi-seller conduits(1)
- total lines 4.2 5.8
- largest individual lines 0.2 0.4
Securities investment conduits - total lines 1.3 1.6
Commitments to customers
- five largest (2) 10.4 6.6
- largest market sector(3) 7.7 8.0
1 Exposures relate to the Regency multi-seller conduit. This
vehicle provides funding to group customers by issuing debt secured
by a diversified pool of customer-originated assets.
2 Represents the undrawn balance for the five largest committed
liquidity facilities provided to customers, other than those
facilities to conduits.
3 Represents the undrawn balance for the total of all committed
liquidity facilities provided to the largest market sector, other
than those facilities to conduits.
Asset encumbrance and collateral management
An asset is defined as encumbered if it has been pledged as
collateral against an existing liability and, as a result, is no
longer available to the group to secure funding, satisfy collateral
needs or be sold to reduce the funding requirement. Collateral is
managed on an operating entity basis consistent with the approach
to managing liquidity and funding. Available collateral held in an
operating entity is managed as a single consistent collateral
pool
from which each operating entity will seek to optimise the use
of the available collateral. The objective of this disclosure is to
facilitate an understanding of available and unrestricted assets
that could be used to support potential future funding and
collateral needs. The disclosure is not designed to identify assets
which would be available to meet the claims of creditors or to
predict assets that would be available to creditors in the event of
a resolution or bankruptcy.
Summary of assets available to support potential future funding and
collateral needs (on- and off-balance sheet)
2021 2020
GBPm GBPm
---------------------------------------------------------- ---------------------------
Total on-balance sheet assets at 31 Dec 596,611 681,150
---------------------------------------------------------- --------------------------- -----------------------------
Less:
----------------------------------------------------------
- reverse repo/stock borrowing receivables and derivative
assets (207,513) (281,125)
---------------------------------------------------------- --------------------------- -----------------------------
- other assets that cannot be pledged as collateral (48,350) (51,068)
---------------------------------------------------------- --------------------------- -----------------------------
Total on-balance sheet assets that can support funding
and collateral needs at 31 Dec 340,748 348,957
---------------------------------------------------------- --------------------------- -----------------------------
Add: off-balance sheet assets
----------------------------------------------------------
- fair value of collateral received in relation to
reverse repo/stock borrowing/derivatives that is
available
to sell or repledge 202,794 213,690
---------------------------------------------------------- --------------------------- -----------------------------
Total assets that can support future funding and
collateral
needs 543,542 562,647
---------------------------------------------------------- --------------------------- -----------------------------
Less:
----------------------------------------------------------
- on-balance sheet assets pledged (93,513) (107,671)
---------------------------------------------------------- --------------------------- -----------------------------
- re-pledging of off-balance sheet collateral received
in relation to reverse repo/stock borrowing/derivatives (151,378) (154,486)
---------------------------------------------------------- --------------------------- -----------------------------
Assets available to support funding and collateral
needs at 31 Dec 298,651 300,490
---------------------------------------------------------- --------------------------- -----------------------------
Market risk
Overview
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.
Exposure to market risk is separated into two portfolios.
Trading portfolios comprise positions arising from market-making
and warehousing of customer-derived positions.
Non-trading portfolios including Markets Treasury comprise
positions that primarily arise from the interest rate management of
the group's retail and commercial banking assets and liabilities,
financial investments designated as held-to-collect-and-sale
('HTCS'), and exposures arising from the group's insurance
operations.
Key developments in 2021
There were no material changes to our policies and practices for
the management of market risk in 2021.
Market risk governance
(Audited)
The following diagram summarises the main business areas where
trading and non-trading market risks reside, and the market risk
measures used to monitor and limit exposures.
Non-trading
Trading risk risk
* Foreign exchange and commodities * Interest rates
* Interest rates * Credit spreads
* Credit spreads * Foreign exchange
* Equities
Value at risk Value at risk
| Sensitivity | Sensitivity
| Stress testing | Stress testing
Where appropriate, we apply similar risk management policies and
measurement techniques to both trading and non-trading portfolios.
Our objective is to manage and control market risk exposures to
optimise return on risk while maintaining a market profile
consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by
the group Chief Risk Officer. These limits are allocated across
business lines and to the group and its subsidiaries. The majority
of HSBC's total VaR and almost all trading VaR reside in GBM. Each
major operating entity has an independent market risk management
and control sub-function, which is responsible for measuring,
monitoring and reporting market risk exposures against limits on a
daily basis. Each operating entity is required to assess the market
risks arising in its business and to transfer them either to its
local Markets & Securities Services or Markets Treasury unit
for management, or to separate books managed under the supervision
of the local ALCO. The Traded Risk function enforces the controls
around trading in permissible instruments approved for each site as
well as following completion of the new product approval process.
Traded Risk also restricts trading in the more complex derivative
products to offices with appropriate levels of product expertise
and robust control systems.
Market risk measures
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with the group's risk
appetite.
We use a range of tools to monitor and limit market risk
exposures including sensitivity analysis, VaR, and stress
testing
Sensitivity analysis
Sensitivity analysis measures the impact of individual market
factor movements on specific instruments or portfolios, including
interest rates, foreign exchange rates, credit spreads and equity
prices, such as the effect of a one basis point change in yield. We
use sensitivity measures to monitor the market risk positions
within each risk type. Sensitivity limits are set for portfolios,
products and risk types, with the depth of the market being one of
the principal factors in determining the level of limits set.
Value at risk
VaR is a technique that estimates the potential losses on risk
positions as a result of movements in market rates and prices over
a specified time horizon and to a given level of confidence. The
use of VaR is integrated into market risk management and is
calculated for all trading positions regardless of how the group
capitalises those exposures. Where there is not an approved
internal model, the group uses the appropriate local rules to
capitalise exposures.
In addition, the group calculates VaR for non-trading portfolios
in order to have a complete picture of risk. The models are
predominantly based on historical simulation. VaR is calculated at
a 99% confidence level for a one-day holding period. Where we do
not calculate VaR explicitly, we use alternative tools like Stress
Testing.
The VaR models used by us are based predominantly on historical
simulation. These models derive plausible future scenarios from
past series of recorded market rates and prices, taking into
account inter-relationships between different markets and rates
such as interest rates and foreign exchange rates. The models also
incorporate the effect of option features on the underlying
exposures.
The historical simulation models used incorporates the following
features:
-- historical market rates and prices are calculated with
reference to foreign exchange rates and commodity prices, interest
rates, equity prices and the associated volatilities;
-- potential market movements utilised for VaR are calculated
with reference to data from the past two years; and
-- VaR measures are calculated to a 99% confidence level and use a one-day holding period.
The nature of the VaR models means that an increase in observed
market volatility will most likely lead to an increase in VaR
without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed
in the context of its limitations. For example:
-- the use of historical data as a proxy for estimating future
events may not encompass all potential events, particularly those
which are extreme in nature;
-- the use of a holding period assumes that all positions can be
liquidated or the risks offset during that period. This may not
fully reflect the market risk arising at times of severe
illiquidity, when the holding period may be insufficient to
liquidate or hedge all positions fully;
-- the use of a 99% confidence level by definition does not take
into account losses that might occur beyond this level of
confidence; and
-- VaR is calculated on the basis of exposures outstanding at
the close of business and therefore does not necessarily reflect
intra-day exposures.
Risk not in VaR framework
Other basis risks which are not completely covered in VaR are
complemented by our risk not in VaR ('RNIV') calculations, and are
integrated into our capital framework.
Risk factors are reviewed on a regular basis and either
incorporated directly in the VaR models, where possible, or
quantified through the VaR-based RNIV approach or a stress test
approach within the RNIV framework. The outcome of the VaR-based
RNIV is included in the VaR calculation; a stressed VaR RNIV is
also computed for the risk factors considered in the VaR-based RNIV
approach.
Stress-type RNIVs include a deal contingent derivatives capital
charge to capture risk for these transactions and a de-peg risk
measure to capture risk to pegged and heavily managed
currencies
Stress testing
Stress testing is an important procedure that is integrated into
our market risk management tool to evaluate the potential impact on
portfolio values of more extreme, although plausible, events or
movements in a set of financial variables. In such scenarios,
losses can be much greater than those predicted by VaR
modelling.
Stress testing is implemented at legal entity, regional and
overall Group levels. A standard set of scenarios is utilised
consistently across all regions within the HSBC Group. Scenarios
are tailored to capture the relevant events or market movements at
each level. The risk appetite around potential stress losses for
the group is set and monitored against referral limits.
Market risk reverse stress tests are undertaken on the premise
that there is a fixed loss. The stress testing process identifies
which scenarios lead to this loss. The rationale behind the reverse
stress test is to understand scenarios which are beyond normal
business settings that could have contagion and systemic
implications.
Stressed VaR and stress testing, together with reverse stress
testing and the management of gap risk, provide management with
insights regarding the 'tail risk' beyond VaR for which the group's
appetite is limited.
Trading portfolios
Back-testing
We routinely validate the accuracy of our VaR models by
back-testing the VaR metric against both actual and hypothetical
profit and loss. Hypothetical profit and loss excludes non-modelled
items such as fees, commissions and revenue of intra-day
transactions. 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.
The number of back-testing exceptions is used to gauge how well
the models are performing. We consider enhanced internal monitoring
of a VaR model if more than five profit exceptions or more than
five loss exceptions occur in a 250-day period.
We back-test our VaR at set levels of our group entity
hierarchy.
Non-trading portfolios
Non-trading VaR of HSBC Bank plc includes the interest rate risk
of non-trading financial instruments held by the global businesses
and transferred into portfolios managed by Markets Treasury or
Asset, Liability and Capital Management ('ALCM') functions. In
measuring, monitoring and managing risk in our non-trading
portfolios, VaR is just one of the tools used. The management of
interest rate risk in the banking book is described further in
'Non-trading interest rate risk' below, including the role of
Markets Treasury. The Group's and HSBC Bank plc's control of market
risk in the non-trading portfolios is based on transferring the
assessed market risk of non-trading assets and liabilities created
outside
Markets Treasury or Markets, to the books managed by Markets
Treasury, provided the market risk can be neutralised. The net
exposure is typically managed by Markets Treasury through the use
of fixed rate government bonds (liquid asset held in
held-to-collect-and-sale ('HTCS' books)) and interest rate swaps.
The interest rate risk arising from fixed rate government bonds
held within HTCS portfolios is reflected within the group's
non-trading VaR. Interest rate swaps used by Markets Treasury are
typically classified as either a fair value hedge or a cash flow
hedge and included within the group's non-trading VaR. Any market
risk that cannot be neutralised in the market is managed by HSBC
Bank plc ALCM in segregated ALCO books.
Defined benefit pension plans
Market risk also arises within the Bank's defined benefit
pension plans to the extent that the obligations of the plans are
not fully matched by assets with determinable cash flows. Refer to
the Pension risk management processes section on page 73 for
additional information.
Market risk in 2021
Financial markets performed well in 2021. During the first half
of the year, the rollout of COVID vaccination programmes, loose
financial conditions and continued fiscal support contributed to a
gradual reopening of major economies. Concerns of rising
inflationary pressures were mainly interpreted as transitory.
Whilst the path of monetary policies remained uncertain, central
banks continued to provide liquidity. This supported risk assets
valuations, while volatility in most asset classes was subdued. In
the second half of 2021, amid the emergence of new COVID variants,
global equities reached further record highs, as investors focused
on global economic resilience and corporate earnings. Yields
followed a downward trend for most of 3Q-21, before reversing in
the final weeks of the year, when markets began pricing a faster
pace of interest rate rises in some of the major economies, due to
persistently elevated inflation and the expectation of tighter
monetary policies. Credit markets remained strong, with credit
benchmark indices for investment-grade and high-yield debt close to
pre-pandemic levels.
We continued to manage market risk prudently during 2021.
Sensitivity exposures and VaR remained within appetite as the
business pursued its core market-making activity in support of our
customers. Market risk was managed using a complementary set of
risk measures and limits, including stress and scenario
analysis.
Trading portfolios
Value at risk of the trading portfolios
(Audited)
Trading VaR predominantly resides within Market Securities
Services where it was GBP19m at 31 December 2021 compared with
GBP27.5m at 31 December 2020. The Total Trading VaR peaked at
GBP31.9m early January owing to some negative convexity positions
in the FX options portfolio and then rapidly decreased and remained
fairly stable during the year, ranging between GBP15m and GBP25m.
We saw it spike to GBP29.8m end of March, owing to an unusually
large increase of the TRY Rates and the sensitivity of the FX cash
desk to that risk factor.
Daily VaR (trading portfolios), 99% 1 day (GBPm)
.
The group's trading VaR for the year is shown in the table
below.
Trading VaR, 99% 1 day
(Audited)
Foreign
exchange Credit
('FX') and Interest Equity Spread Portfolio
commodity rate ('IR') ('EQ') ('CS') Diversification(1) Total(2)
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
Balance
at 31
Dec
2021 4.5 10.0 10.5 14.9 (20.9) 19.0
------------------------------------ -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
Average 7.1 12.8 10.2 12.6 (20.4) 22.3
------------------------------------ -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
Maximum 19.3 26.7 14.9 16.7 - 31.9
------------------------------------ -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
Minimum 3.7 9.3 6.3 9.2 - 17.3
------------------------------------ -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
Balance
at 31
Dec
2020 7.6 11.0 13.9 14.1 (19.2) 27.5
-------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
Average 6.5 13.5 18.7 14.1 (20.8) 32.1
-------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
Maximum 14.2 21.2 33.2 29.2 - 47.7
-------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
Minimum 2.0 9.2 8.1 9.6 - 20.9
-------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------
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 2021, HSBC Bank plc experienced 5 back testing exceptions in
total, 2 of which against the Hypothetical P&L and 3 of which
against the Actual P&L.
The first exception against hypothetical P&L occurred in
March and was mostly due to a rates sell-off and a decrease of the
Equity volatilities.
The second exception against hypothetical P&L occurred at
the end of December and was mostly due to a decrease of the Equity
volatilities, which had a negative impact on the Equity Derivative
desk.
Two of the three exceptions against the Actual P&L were due
to the novation of trades from the RWA optimization unit in HBCE.
The last exception against the Actual P&L was mostly due to the
February month end Independent Price verification and Bid-Offer
reserve across HSBC Bank plc and HSBC France.
Non-trading portfolios
Value at risk of the non-trading portfolios
(Audited)
The non-trading VaR in 2021 was driven by interest rate risk in
the banking book. During the first half of the year, the
non-trading VaR trended upwards into the month of May as the
Markets Treasury business took advantage of higher yield
environment and increased USD and GBP sovereign bond holdings in
their book, with non-trading VaR reaching a high of GBP37.8m. Bond
positions receded during Q2 before increasing again at the tail end
of Q3 as rates sold off and inflation pressures grew. Markets
Treasury business re-deployed cash within the Liquid Asset Buffer
(LAB) into local government securities as opportunities arose. The
positions and non-trading VaR then declined in December to end the
year at GBP29.4m. The daily levels of total non-trading VaR over
the last year are set out in the graph below.
Daily VaR (non-trading portfolios), 99% 1 day (GBPm)
The group's non-trading VaR for the year is shown in the table
below.
Non-trading VaR, 99% 1 day
(Audited)
Interest Credit
rate spread Portfolio
('IR') ('CS') diversification(1) Total(2)
GBPm GBPm GBPm GBPm
Balance
at
Balance
at 31
Dec
2021 28.7 9.0 (8.4) 29.4
Average 26.6 10.0 (5.6) 31.0
Maximum 34.6 12.7 - 37.8
Minimum 18.0 7.2 - 22.5
Balance
at 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.
Resilience Risk
Overview
Resilience risk is the risk that we are unable to provide
critical services to our customers, affiliates and counterparties,
as a result of sustained and significant operational disruption.
Resilience risk arises from failures or inadequacies in processes,
people, systems or external events.
Resilience Risk management
Key developments in 2021
Our Operational and Resilience Risk function provides robust
non-financial risk steward oversight of the management of risk
within the group's businesses, functions and legal entities. It
also provides effective and timely independent challenge. During
the year we carried out a number of initiatives to strengthen the
management of non-financial risks:
-- We developed a more robust understanding of our risk and
control environment, by updating our material risk taxonomy and
control libraries, and refreshing material risk and control
assessments.
-- We further strengthened our non-financial risk governance and senior leadership.
-- We created a consolidated view of risk issues enabling better
senior management focus on non-financial risk, and the ability to
identify material control issues and intervention as required.
-- We improved how we provide analysis and reporting of
non-financial risks, with more risk practitioners having access to
a wider range of management information on their risks and
controls.
-- We increased the capability of risk stewards to allow for
effective stewardship to be in place in HSBC Bank plc.
-- We strengthened our approach in the comparison of issues and
near misses by implementing a group approach that considers all
events across the global businesses, functions and regions.
-- We enhanced risk management oversight across our most
material change initiatives to support growth in our strategic
transformation.
We prioritise our efforts on material risks and areas undergoing
strategic growth, aligning our location strategy to this need.
Governance and structure
The Operational and Resilience Risk target operating model
provides a consistent view across resilience risks, strengthening
our risk management oversight while operating effectively as part
of a simplified non-financial risk structure. We view resilience
risk across seven risk types related to: third parties and supply
chains; information, technology and cybersecurity; payments and
manual processing; physical security; business interruption and
contingency risk; building unavailability; and workplace
safety.
Operational and Resilience Risk is governed in the group through
the RMM and our Risk Committee with clear global escalation routes
through to the Non-Financial Risk Management Board ('NFRMB'),
chaired by the Group Chief Risk and Compliance Officer, and the
Group Risk Management Meeting ('GRMM').
Key risk management process
Operational resilience is our ability to anticipate, prevent,
adapt, respond to, recover and learn from internal or external
disruption, protecting customers, the markets we operate in and
economic stability. Resilience is determined by assessing whether
we are able to continue to provide our most important services,
within an agreed level. We accept we will not be able to prevent
all disruption, we prioritise investment to continually improve the
response and recovery strategies for our most important business
services.
Business operations continuity
Business Continuity, in response to the Covid-19 pandemic,
remains in place across a number of locations where we operate,
allowing the majority of service level agreements to be maintained.
There were no significant impacts to service delivery in locations
where we operate.
Regulatory compliance risk
Overview
Regulatory compliance risk is the risk that we fail to observe
the letter and spirit of all relevant laws, codes, rules,
regulations and standards of good market practice, which as a
consequence incur fines and penalties and suffer damage to our
business.
Regulatory compliance risk arises from the risks associated with
breaching our duty to our customers and inappropriate market
conduct, as well as breaching regulatory licensing, permissions and
rules.
Key developments in 2021
In 2021, we continued to embed the structural changes made in
the prior year to our wider approach to Compliance Risk Management.
Further, the integration of the Risk and Compliance Functions in
May 2021 has brought together two complimentary functions which
will strengthen the Regulatory Conduct mandate and our capability
to drive ever greater standards in regard to conduct of our
business.
In June 2021, we also announced HSBC's new purpose-led approach
to conduct. As part of this, we have taken the opportunity to
simplify our approach, making Conduct easier to understand and
showing how it fulfils our value: 'we take responsibility'.
Governance and structure
We have evolved our structure in response to ever-changing
business and industry needs. We reviewed the effectiveness of our
governance framework to manage regulatory compliance risk, such as
to enable compliance with the letter and the spirit of all
applicable laws and regulations, as well as our own standards,
values and policies.
In 2021, the key governance meeting was the HBEU Risk Management
Meeting ('RMM'). The RMM acts as the sole governance for risk
management across all risk types. The Chief Risk Officer ('CRO'),
currently chairs the RMM, attended by the CEO, Business Heads and
Risk Stewards. To attend to all compliance related discussions and
matters in the RMM, the Chief Compliance Officer is a key member of
the RMM.
The Europe Regulatory Conduct capability continues to work
closely with the Country Chief Compliance Officers and their
respective teams to help them identify and manage regulatory
compliance risks across the region. They also work together to
ensure good conduct outcomes and provide enterprise-wide support on
the regulatory agenda.
Key risk management processes
The Europe Regulatory Conduct function is responsible for
setting policies, standards and risk appetite to guide the
management of regulatory compliance. It also devises clear
frameworks and support processes to mitigate regulatory compliance
risks. The capability provides oversight, review and challenge to
the Country Chief Compliance Officers and their teams to help them
identify, assess and mitigate regulatory compliance risks, where
required. The regulatory compliance risk policies are regularly
reviewed. Policies and procedures require the prompt identification
and escalation of any actual or potential regulatory breach.
Relevant reportable events are escalated to the HBEU RMM and to the
Group Risk Committee, as appropriate.
Conduct of business
Our new simplified Conduct Approach, which was launched in 2021,
guides us to do the right thing and to recognise the real impact we
have for our customers and the financial markets in which we
operate. It complements our Purpose and Values, setting the right
outcomes to be achieved for our customers and markets. It
recognises cultural and behavioural drivers of good Conduct
Outcomes and applies across all risk disciplines, operational
processes and technologies. During 2021:
a. We understood and serviced our customer's ongoing needs and
continued to champion a strong conduct and customer-focused
culture.
b. We demonstrated this through providing support to our
customers facing financial difficulties as a result of the
prolonged impacts of the pandemic and the resulting uncertainty in
trading conditions.
c. We acted with integrity through areas such as commencing the
integration of Climate Risk into the Risk Management approach to
recognise the importance of strengthened controls and oversight for
our related activities.
d. We operated resiliently and securely to avoid harm to our
customers and markets by continuing to embed conduct within our
business line processes and through our Non- Financial and
Financial Risk Steward activities.
e. We continued our focus on culture and behaviours as a driver
of good conduct outcomes.
f. We placed a particular focus on the importance of well-being
and collaborative working as we continued to adapt to changing
working practices as the pace of change resulting from the pandemic
varied across our markets.
g. We continued to emphasise - and worked to create - an
environment in which employees are encouraged and feel safe to
speak up.
h. We delivered our annual global mandatory training course on
conduct to reinforce the important role we all play in adhering to
good conduct and values.
Regulators and governments
We seek strong, open and transparent engagement with all our
regulators and have extensive interaction with them as they pursue
their regulatory objectives. We engage with governments and
policymakers at a regional and national level to make a positive
contribution to the evolving regulatory landscape. We also actively
monitor changes in the laws and regulations that apply to our
activities, and respond to various formal consultations published
by governments, regulatory agencies and standard setting bodies,
either directly or through input to trade body responses.
Financial crime risk
Overview
Financial crime risk is the risk of knowingly or unknowingly
helping parties to commit or to further illegal activity through
HSBC, including money laundering, terrorist and proliferation
financing, tax evasion, bribery and corruption, sanctions, fraud
and market abuse. Financial crime risk arises from day-to-day
banking operations involving customers, third parties and
employees.
Key developments in 2021
We consistently review the effectiveness of our financial crime
risk management framework, which includes consideration of
geopolitical and wider economic factors, and 2021 was no exception.
We continued to support the business in navigating the complex and
dynamic nature of geopolitics as it relates to sanctions and export
control risk, notably with respect to the array of new regulations
and designations in 2021 and in alignment with our policy, which is
to comply with all applicable sanctions regulations in the
jurisdictions in which we operate.
We also continued to progress several key financial crime risk
management initiatives based on an increased use of technology to
enhance our processes, while minimising the impact to the customer,
including:
-- Deployment of a key component of our intelligence-led,
dynamic risk assessment capabilities for customer account
monitoring in one of our home markets, as well as undertaking key
enhancements to our traditional transaction monitoring systems
-- Strengthening our anti-fraud capabilities, notably with
respect to the early identification of first party lending fraud
and the identification of new strategic detection tools
-- Ongoing developments in leading-edge surveillance technology
and capabilities to identify potential market abuse, including
testing Machine Learning within Unauthorised Trading
-- Investing in the use of artificial intelligence ('AI') and
advanced analytics techniques to manage financial crime risk,
notably new automated capabilities in name and transaction
screening
-- Implementing a market leading gifts and entertainment
('G&E') recording and approval system, which, in combination
with an expenses reconciliation tool, allows HSBC to manage its
G&E risk consistently and effectively.
Governance and Structure
Since establishing a global framework of financial crime risk
management committees, we have continued to review the
effectiveness of our governance framework to manage financial crime
risk, such as to enable compliance with the letter and the spirit
of all applicable financial crime laws and regulations, as well as
our own standards, values and policies relating to financial crime
risks.
In 2021, the key financial crime governance meeting, HBEU
Financial Crime Risk Management Committee ('FCRMC'), established in
June 2017, merged into the HBEU Risk Management Meeting ('RMM'), to
support the strategic objectives of reducing bureaucracy and
increasing efficiency in decision making. This ensures a more
efficient approach to the management of financial crime risk, by
streamlining the body for executive governance. This is also due to
the success of the FCRMC framework, which helped successfully embed
the management of financial crime risk under the three lines of
defence model. The RMM now acts as the sole governance for risk
management across all risk types. This does not reduce the
importance which HSBC places on the management of financial crime
risk, nor does it reduce any of the underlying activities or
commitments. The Chief Risk Officer ('CRO'), currently chairs the
RMM, attended by the CEO and Business Heads. To attend to all
financial crime risk related discussions and matters in the RMM,
the Chief Compliance Officer and Money Laundering Reporting Officer
are key members of the RMM.
Key risk management processes
We assess the effectiveness of our financial crime risk
management framework on an ongoing basis and invest in enhancing
our operational control capabilities and technology solutions to
deter and detect criminal activity. We have continued to simplify
our end to end financial crime risk management framework,
streamlining and de-duplicating policy requirements, while also
strengthening our financial crime risk taxonomy and control
libraries, our investigative and monitoring capabilities through
technology deployments, as well as developing more targeted
metrics. We have also enhanced governance and reporting.
We are committed to working in partnership with the wider
industry and the public sector in managing financial crime risk,
protecting the integrity of the financial system and the
communities we serve. We participate in numerous public-private
partnerships and information-sharing initiatives, also supporting
national governments and international standard setters' reform
activity. In 2021, there was a particular focus on reform activity
in the EU and the UK, where we were front and centre of industry
responses to a number of consultation papers focused on the overall
effectiveness of the anti-money laundering framework. We also took
part in a number of round-tables organised by the Financial Action
Task Force, supporting their strategic review, as well as their
work on digitisation and beneficial ownership registers. These
align with our objectives of promoting a public policy and
regulatory environment that embraces the use of technology in
building the future financial crime framework to ensure our bank is
more resilient and secure, while enabling benefits for
customers.
ESG disclosures
We have continued our efforts to combat financial crime risks
and reduce their impact on our organisation, our customers and the
communities that we serve. These financial crime risks include
money laundering, terrorist and proliferation financing, tax
evasion, bribery and corruption, sanctions, fraud and market abuse.
As part of this work, we have made progress on several key
initiatives, enabling us to manage and mitigate these risks more
effectively, and further our pioneering work in financial crime
risk management across the financial services industry.
HSBC operates a zero tolerance approach to bribery and
corruption, and considers such activity to be unethical and
contrary to good environmental, social and corporate governance.
HSBC, its staff and third parties are prohibited from engaging in
or facilitating bribery or corruption. HSBC has a global
anti-bribery and corruption policy ('AB&C Policy'), which sets
out the key principles and minimum control requirements that enable
HSBC to mitigate bribery and corruption risk and comply with all
laws and regulations in the countries where we operate, including
the UK Bribery Act and France's Loi Sapin II. In order to prevent
bribery and corruption, the AB&C Policy requires that all
activity:
-- must be conducted without intent to bribe or corrupt;
-- must be reasonable and transparent;
-- must not be considered lavish or disproportionate to the professional relationship;
-- must be appropriately documented with business rationale; and
-- must be authorised at an appropriate level of seniority.
HSBC requires all staff, board of directors and associated
persons comply with the principles in the AB&C Policy. Annual
mandatory AB&C training is provided to all staff (including
temporary workers and contractors), with additional targeted
training tailored to the roles and risk rating of individuals. HSBC
carries out regular risk assessments, monitoring and testing of its
AB&C programme, with any applicable findings included within
the annual AB&C Policy refresh. HSBC also maintains clear
whistleblowing policies and processes, to ensure that individuals
can confidentially report concerns.
There are currently no concluded legal cases regarding bribery
or corruption brought against the issuer or its employees during
the reporting period.
We continue to invest in new technology to enable us to make an
impact in the fight against financial crime, including the use of
contextual monitoring in our trade finance business, the
enhancement of our fraud monitoring and market surveillance
capabilities and the application of machine learning techniques to
improve the accuracy and timeliness of our financial crime
detection capabilities, with due care and attention paid to the
ethical questions arising with the use of AI in particular.
We are confident our adoption of these new technologies will
continue to enhance our ability to respond quickly to suspicious
activity and be more granular in our risk assessments, helping to
protect our customers and the integrity of the financial
system.
Skilled Person & Independent Consultant
In December 2012, HSBC Holdings entered into a number of
agreements, including an undertaking with the UK Financial Services
Authority (replaced with a Direction issued by the UK Financial
Conduct Authority ('FCA') in 2013 and again in 2020), as well as a
cease-and-desist order with the US Federal Reserve Board ('FRB'),
both of which contained certain forward-looking anti-money
laundering ('AML') and sanctions-related obligations. HSBC also
agreed to retain an independent compliance monitor (who was, for
FCA purposes, a 'Skilled Person' under section 166 of the Financial
Services and Markets Act and, for FRB purposes, an 'Independent
Consultant') to produce periodic assessments of the Group's AML and
sanctions compliance programme.
In 2020, HSBC's engagement with the independent compliance
monitor, acting in his roles as both Skilled Person and Independent
Consultant, concluded. The role of FCA Skilled Person was assigned
to a new individual in the second quarter of 2020. Separately, a
new FRB Independent Consultant was appointed in the second quarter
of 2021 pursuant to the cease-and-desist order.
The new Skilled Person issued a final report in June 2021,
concluding its review. The 2021 FCA Firm Evaluation Letter
confirmed that there is no requirement for a further Skilled Person
review, finding that "HSBC had delivered its plans and developed an
automated transaction monitoring capability that is effective
overall". The new Independent Consultant carried out the eighth
annual review for the FRB and issued its report in November 2021.
Overall, the Independent Consultant assessed that HSBC's OFAC
compliance programme is substantially compliant with regulatory
expectations and is "well-performing, relative to its purpose and
design". For the second year running the Independent Consultant
also found HSBC in compliance with each sub-paragraph of the
December 2012 FRB Cease and Desist Consent Order (the 'Consent
Order').
Model risk
Overview
Model risk is the potential for adverse consequences from
business decisions informed by models, which can be exacerbated by
errors in methodology, design or the way they are used. Model risk
arises in both financial and non-financial contexts whenever
business decision making includes reliance on models.
Key developments in 2021
In 2021, we continued to make improvements in our model risk
management processes, amid regulatory changes in model
requirements.
Initiatives during the year included:
-- We redeveloped, validated and submitted critical Internal
Ratings Based ('IRB') Approach models for credit risk, Internal
Model Method ('IMM') for counterparty credit risk and Internal
Model Approach ('IMA') models for market risk to the PRA in
response to regulatory capital changes. These new models have been
built to enhanced standards using improved data as a result of
investment in processes and systems.
-- We redeveloped and validated models impacted by changes to
alternative rate setting mechanisms due to the IBOR transition.
-- We made further enhancements to our control framework for
models used in financial reporting processes to address the control
weaknesses that emerged as a result of significant increases in
model adjustments and overlays that were applied to compensate for
the impact of Covid-19 on models and to introduce a requirement for
second line of defence to approve material models prior to use.
-- Our businesses and functions were more involved in the
development and management of models, hiring colleagues who had
strong model risk skills. They also put an enhanced focus on key
model risk drivers such as data quality and model methodology.
-- Our model owners in businesses and functions fully embedded
the requirements included in the model risk policy and standards
introduced in 2020.
-- We delivered a suite of training on model risk to front line
teams to improve their awareness of model risk and their adherence
to the governance framework.
-- We rolled out new model risk appetite measures, which are
more forward looking and will help our businesses and functions
manage model risk more effectively.
-- We continued the transformation of the Model Risk Management
team, with changes to the model validation processes, including new
systems and processes. Key senior hires were made during the year
to lead the business areas and regions to strengthen oversight and
expertise within the function. We also made changes to the model
inventory system to provide businesses and functions with improved
functionality and more detailed information related to model
risk.
-- We initiated a programme of development related to climate
risk and models using advanced analytics and machine learning,
which have become critical areas of focus that will grow in
importance in 2022 and beyond. We also added qualified specialist
skills to the model risk teams to manage the increased model
risk.
Governance and structure
The group's Model Risk Committee is chaired by our Chief Risk
Officer and provides oversight of model risk. The committee
includes senior leaders and risk owners across the Lines of
Business and Risk and focuses on model-related concerns and key
model risk metrics.
Key risk management processes
We use a variety of modelling approaches, including regression,
simulation, sampling, machine learning and judgemental scorecards
for a range of business applications. These activities include
customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
Global responsibility for managing model risk is delegated from the
RMM to the Group Model Risk Committee, which is chaired by the
Group Chief Risk and Compliance Officer. This committee regularly
reviews our model risk management policies and procedures, and
requires the first line of defence to demonstrate comprehensive and
effective controls based on a library of model risk controls
provided by Model Risk Management.
Model Risk Management also reports on model risk to senior
management on a regular basis through the use of the risk map, risk
appetite metrics and top and emerging risks.
We regularly review the effectiveness of these processes,
including the model oversight committee structure, to help ensure
appropriate understanding and ownership of model risk is embedded
in the businesses and functions.
Insurance manufacturing operations risk Overview
The key risks for our insurance manufacturing operations are
market risks, in particular interest rate and equity, credit risks
and insurance underwriting and operational risks. These have a
direct impact on the financial results and capital positions of the
insurance operations. Liquidity risk, whilst significant in other
parts of the bank, is relatively minor for our insurance
operations.
HSBC's insurance business
We sell insurance products worldwide through a range of channels
including our branches, direct channels and third-party
distributors. The majority of sales are through an integrated
bancassurance model that provides insurance products principally
for customers with whom we have a banking relationship.
The insurance contracts we sell relate to the underlying needs
of our customers, which we can identify from our point-of-sale
contacts and customer knowledge. For the products we manufacture,
the majority of sales are of savings, universal life and protection
contracts.
We choose to manufacture these insurance products in HSBC
subsidiaries based on an assessment of operational scale and risk
appetite. Manufacturing insurance allows us to retain the risks and
rewards associated with writing insurance contracts by keeping part
of the underwriting profit and investment income within the
Group.
Where we do not have the risk appetite or operational scale to
be an effective insurance manufacturer, we engage with a small
number of leading external insurance companies in order to provide
insurance products to our customers through our banking network and
direct channels. These arrangements are generally structured with
our exclusive strategic partners and earn the group a combination
of commissions, fees and a share of profits. We distribute
insurance products in all of our geographical regions.
Insurance products are sold through all global businesses, but
predominantly by WPB and CMB through our branches and direct
channels
Insurance manufacturing operations risk management
Key developments in 2021
The insurance manufacturing subsidiaries follow the group's risk
management framework. In addition, there are specific policies and
practices relating to the risk management of insurance contracts.
There were no material changes to the policies and practices over
2021, although enhancements were made to the product pricing and
profitability framework to allow for the transition to IFRS17.
Governance
Insurance manufacturing risks are managed to a defined risk
appetite, which is aligned to the bank's risk appetite and risk
management framework, including the three lines of defence model.
For details on the governance framework, see page 21. The Group
Insurance Risk Management Meeting oversees the control framework
globally and is accountable to the WPB Risk Management Meeting on
risk matters relating to the insurance business.
The monitoring of the risks within the insurance operations is
carried out by Insurance Risk teams. The Bank's risk stewardship
functions support the Insurance Risk teams in their respective
areas of expertise.
Stress and scenario testing
Stress testing forms a key part of the risk management framework
for the insurance business. We participate in local and Group-wide
regulatory stress tests, including the Bank of England stress test
of the banking system, the European Insurance and Occupational
Pensions Authority stress test, and individual country insurance
regulatory stress tests.
The results of these stress tests and the adequacy of management
action plans to mitigate these risks are considered in the HBEU
ICAAP and the entities' regulatory Own Risk and Solvency
Assessments (ORSAs).
Management and mitigation of key risk types
Market risk
All our insurance manufacturing subsidiaries have market risk
mandates and limits that specify the investment instruments in
which they are permitted to invest and the maximum quantum of
market risk that they may retain. They manage market risk by using,
among others, some or all of the techniques listed below, depending
on the nature of the contracts written:
-- We are able to adjust bonus rates to manage the liabilities
to policyholders for products with discretionary participating
features ('DPF'). The effect is that a significant portion of the
market risk is borne by the policyholder.
-- We use asset and liability matching where asset portfolios
are structured to support projected liability cash flows. The Group
manages its assets using an approach that considers asset quality,
diversification, cash flow matching, liquidity, volatility and
target investment return. We use models to assess the effect of a
range of future scenarios on the values of financial assets and
associated liabilities, and ALCOs employ the outcomes in
determining how best to structure asset holdings to support
liabilities.
-- We use derivatives to protect against adverse market movements.
-- We design new products to mitigate market risk, such as
changing the investment return sharing portion between
policyholders and the shareholder.
-- We exit, to the extent possible, investment portfolios whose risk is considered unacceptable.
Credit risk
Our insurance manufacturing subsidiaries also have credit risk
mandates and limits within which they are permitted to operate,
which consider the credit risk exposure, quality and performance of
their investment portfolios. Our assessment of the creditworthiness
of issuers and counterparties is based primarily upon
internationally recognised credit ratings and other publicly
available information.
Stress testing is performed on investment credit exposures using
credit spread sensitivities and default probabilities.
We use a number of tools to manage and monitor credit risk.
These include a credit report containing a watch-list of
investments with current credit concerns, primarily investments
that may be at risk of future impairment or where high
concentrations to counterparties are present in the investment
portfolio. Sensitivities to credit spread risk are assessed and
monitored regularly.
Capital and liquidity risk
Capital risk for our insurance manufacturing subsidiaries 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.
Liquidity risk is managed by cash flow matching and maintaining
sufficient cash resources, investing in high credit-quality
investments with deep and liquid markets, monitoring investment
concentrations and restricting them where appropriate, and
establishing committed contingency borrowing facilities.
Insurance manufacturing subsidiaries complete quarterly
liquidity risk reports and an annual review of the liquidity risks
to which they are exposed.
Insurance underwriting risk
Our insurance manufacturing subsidiaries primarily use the
following frameworks and processes to manage and mitigate insurance
underwriting risks:
-- a formal approval process for launching new products or making changes to products;
-- a product pricing and profitability framework which requires
initial and ongoing assessment of the adequacy of premiums charged
on new insurance contracts to meet the risks associated with
them;
-- a framework for customer underwriting;
-- reinsurance which cedes risks above our appetite thresholds
to third party reinsurer thereby limiting our exposure; and
-- oversight of expense and reserving risks by entity Actuarial Control Committees.
--
Insurance manufacturing operations risk in 2021
Measurement
The following table shows the composition of assets and
liabilities by contract type.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Shareholder
With Unit- Other assets
DPF linked contracts(1) and liabilities Total
GBPm GBPm GBPm GBPm GBPm
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Financial assets 19,384 2,924 254 2,704 25,266
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
* financial assets designated and otherwise mandatorily
measured at fair value through profit or loss 9,876 2,859 89 1,236 14,060
- derivatives 47 - - 1 48
- financial investments - at amortised
cost 815 - - 42 857
- financial investments - at fair value
through other comprehensive income 7,490 - 104 1,327 8,921
- other financial assets(2) 1,156 65 61 98 1,380
Reinsurance assets - 53 104 - 157
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
PVIF(3) - - - 811 811
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Other assets and investment properties 748 1 - 59 808
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Total assets at 31 Dec 2021 20,132 2,978 358 3,574 27,042
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Liabilities under investment contracts
designated at fair value - 1,031 - - 1,031
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Liabilities under insurance contracts 19,998 1,938 328 - 22,264
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Deferred tax(4) 133 6 - 46 185
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Other liabilities - - - 2,003 2,003
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Total liabilities at 31 Dec 2021 20,131 2,975 328 2,049 25,483
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Total equity at 31 Dec 2021 - - - 1,559 1,559
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
Total liabilities and equity at 31 Dec
2021 20,131 2,975 328 3,608 27,042
---------------------- ------------------------ ---------------------- ------------------------ ----------------------
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.
Key risk types
Market risk
(Audited)
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 fixed interest assets 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. The
cost of such guarantees is accounted for as a deduction from the
present value of in-force 'PVIF' asset, unless the cost of such
guarantees is already explicitly allowed for within the insurance
contracts liabilities. The table below shows the total reserve held
for the cost of guarantees, the range of investment returns on
assets supporting these products and the implied investment return
that would enable the business to meet the guarantees. The cost of
guarantees decreased to GBP299m (2020: GBP347m) primarily due to
increases in interest rates and favourable equity performances in
France. 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.
Financial return guarantees
(Audited)
2021 2020
Long-term Long-term
Investment investment Investment investment
returns returns returns returns
implied on relevant Cost implied on relevant Cost
by guarantee portfolios of guarantees by guarantee portfolios of guarantees
% % GBPm % % GBPm
----------------------- ----------------------
0.8 - 0.7 -
Capital - 2.0 127 - 2.0 162
Nominal
annual
return 2.6 2.2 92 2.6 2.0 96
Nominal
annual
return 4.5 2.2 80 4.5 2.0 89
At 31
Dec 299 347
Sensitivities
The following table illustrates the effects of selected interest
rate and equity price scenarios on our profit for the year 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
(Audited)
2021 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 119 96 110 89
-------------- --------------------------------- --------------------------------- ---------------------------------
-100 basis
point
parallel
shift
in yield
curves (229) (203) (203) (179)
-------------- --------------------------------- --------------------------------- ---------------------------------
10% increase
in equity
prices 46 46 39 39
-------------- --------------------------------- --------------------------------- ---------------------------------
10% decrease
in equity
prices (49) (49) (42) (42)
-------------- --------------------------------- --------------------------------- ---------------------------------
.
Credit risk
(Audited)
Description and exposure
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet their obligation under a contract. It
arises in two main areas for our insurance manufacturers:
-- risk associated with credit spread volatility and default by
debt security counterparties after investing premiums to generate a
return for policyholders and shareholders; and
-- risk of default by reinsurance counterparties and
non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of
these items are shown in the table on page 85. The credit quality
of the reinsurers' share of liabilities under insurance contracts
is assessed as 'satisfactory' or higher as defined on page 33, with
100% of the exposure being neither past due nor impaired. Credit
risk on assets supporting unit-linked liabilities is predominantly
borne by the policyholder; therefore our exposure is primarily
related to liabilities under non-linked insurance and investment
contracts and shareholders' funds. The credit quality of these
financial assets is included in the table on page 50.
Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can secure
them only at excessive cost.
The following table shows the expected undiscounted cash
flows
for insurance contract liabilities at 31 December 2021. The
liquidity risk exposure is wholly borne by the policyholder in the
case of unit-linked business and is shared with the policyholder
for non-linked insurance.
The profile of the expected maturity of insurance contracts
at
31 December 2021 remained comparable with 2020.
The remaining contractual maturity of investment contract
liabilities is included within 'Financial liabilities designated at
fair value' in Note 27.
Expected maturity of insurance contract liabilities
(Audited)
Expected cash flows (undiscounted)
Within Over 15
1 year 1-5 years 5-15 years years Total
GBPm GBPm GBPm GBPm GBPm
Unit-linked 230 565 927 926 2,648
With DPF and
Other
contracts 1,341 5,102 7,318 6,415 20,176
At 31 Dec
2021 1,571 5,667 8,245 7,341 22,824
Unit-linked 222 539 790 672 2,223
With DPF and
Other
contracts 1,565 5,765 7,735 6,077 21,142
At 31 Dec
2020 1,787 6,304 8,525 6,749 23,365
.
Insurance underwriting risk
Description and exposure
Insurance underwriting risk is the risk of loss through adverse
experience, in either timing or amount, of insurance underwriting
parameters (non-economic assumptions). These parameters include
mortality, morbidity, longevity, lapse and expense rates.
The principal risk we face is that, over time, the cost of the
contract, including claims and benefits, may exceed the total
amount of premiums and investment income received.
The table on page 85 analyses our insurance manufacturing
exposures by type of contract.
The insurance risk profile and related exposures remain
largely
consistent with those observed at 31 December 2020.
Sensitivities
The table below shows the sensitivity of profit and total equity
to reasonably possible changes in non-economic assumptions across
all our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in
mortality or morbidity depends on the type of business being
written.
Sensitivity to lapse rates depends on the type of contracts
being written. For a portfolio of term assurance, an increase in
lapse rates typically has a negative effect on profit due
to the loss of future income on the lapsed policies. However,
some contract lapses have a positive effect on profit due to the
existence of policy surrender charges. We are most sensitive to a
change in lapse rates in France.
Expense rate risk is the exposure to a change in the allocated
cost of administering insurance contracts. To the extent that
increased expenses cannot be passed on to policyholders, an
increase in expense rates will have a negative effect on our
profits. This risk is generally greatest for smaller entities.
Sensitivity analysis
(Audited)
2021 2020
GBPm GBPm
--------------------- ---------------------
Effect on profit after
tax and total equity
at 31 Dec
---------------------
10% increase in mortality
and/or morbidity rates (20) (15)
10% decrease in mortality
and/or morbidity rates 19 15
10% increase in lapse
rates (19) (19)
10% decrease in lapse
rates 20 21
10% increase in expense
rates (40) (46)
10% decrease in expense
rates 40 43
Corporate Governance Report
The statement of corporate governance practices set out on pages
88 to 96, together with the information incorporated by reference,
constitutes the Corporate Governance Report of the bank. The
following disclosures, read together with those in the Strategic
Report, including the section 172 statement on pages 9 and 10 and
reporting on employee engagement on pages 7 to 10 describe how the
Board has discharged its duty under section 172 of the Companies
Act 2006 (the 'Act'), as well as the requirements under the
Companies (Miscellaneous Reporting) Regulations 2018 (the
'Reporting Regulations').
Engagement with employees, suppliers, customers and other key
stakeholders:
Customers Page 9 How we do business
Page 9 section 172
statement
Employees Page 9 How we do business
Pages 9 and section 172
10 statement
Pages 94 Corporate Governance
to 95 statement
Communities Pages 8 and
/ the environment 9 How we do business
Regulators Page 10 How we do business
Page 9 section 172
statement
Suppliers Page 10 How we do business
Page 9 section 172
statement
The bank, together with the wider Group, is committed to high
standards of corporate governance. The Group has a comprehensive
range of principles, policies and procedures influenced by the UK
Corporate Governance Code with requirements in respect of Board
independence, composition and effectiveness to ensure that the
Group is well managed, with appropriate oversight and control.
During the year, the bank adhered to these corporate governance
principles, policies and procedures, as applicable.
Board of Directors
As at 31 December 2021, the Board comprised 10 Directors
including the Chair, eight non-executive Directors, and two
executive Directors, being the Chief Executive Officer and the
Chief Financial Officer. All Directors are subject to election or
re-election at the bank's Annual General Meeting ('AGM'). The
Directors serving at 31 December 2021 are set out below.
Directors
Stephen O'Connor
Chairman
Chairman of the Nomination, Remuneration & Governance
Committee
Appointed to the Board: May 2018. Chairman since August
2018.
Stephen is a non-executive Director and Vice Chairman of HSBC
Continental Europe, Chairman of Quantile Group Limited and its
subsidiary Quantile Technologies Limited, and a Director of the
London Stock Exchange plc. He is also a non-executive Director of
the FICC Markets Standards Board. He has more than 25 years'
investment banking experience in London and New York.
Former appointments include: Senior Independent Director,
Chairman of the Risk Committee and member of both the Audit and
Nomination Committees of the London Stock Exchange Group plc and
Chairman of the International Swaps and Derivatives Association,
prior to which he was Managing Director and a member of the Fixed
Income Management Committee at Morgan Stanley.
Colin Bell
Executive Director and Chief Executive Officer
Chairman of the Executive Committee and Executive Director of
the Board
Appointed to the Board and as Chief Executive Officer: February
2021.
Colin Bell is Chief Executive Officer, HSBC Bank plc and HSBC
Europe. He joined HSBC in July 2016 and most recently held the role
of Group Chief Compliance Officer until February 2021. He is a
member of the Supervisory Board, Remuneration, Nomination and
Mediation Committees of HSBC Trinkaus & Burkhardt AG and is an
Executive Director of HSBC Bank plc.
Before HSBC, Colin worked at UBS, where he was Head of
Compliance and Operational Risk Control. He has more than 10 years
of experience in managing risk and financial crime, following 16
years in the British Army.
During his time in the Army, he held a variety of command and
staff appointments, including operational tours of Iraq and
Northern Ireland, time in the Ministry of Defence, a NATO
appointment and completion of the Advanced Command and Staff
Course.
David Watts
Executive Director and Chief Financial Office r
Member of the Executive Committee and Executive Director of the
Board
Appointed to the Board and as Chief Finance Officer: December
2021.
Dave joined the HSBC Group in 1994 and was previously a Director
and Chief Financial Officer of HSBC UK Bank plc.
Former HSBC Group roles include: Chief Financial Officer for
HSBC Bank plc, Global Commercial Banking, the Middle East and North
Africa, Group HSBC Technology and Operations, Global Banking, and
HSBC Securities (USA) Inc; Head of Group Cost and Investment
Reporting & Analysis; and Manager Treasury Services,
France.
Norma Dove-Edwin
Independent non-executive Director
Appointed to the Board: October 2021.
Norma serves as Chief Information Officer of ESO at National
Grid Plc. She is also a non-executive Director of Pod Point Group
Holdings plc.
Former appointments include: Group Chief Data and Information
Officer at Places for People and held a number of positions at
British American Tobacco Plc including as Head of Global Data
Services.
Dame Mary Marsh
Non-executive Director
Member of the Transformation, Operational Resilience and
Technology Committee
Appointed to the Board: January 2009.
Mary is a Director of the London Symphony Orchestra, a member of
the Governing Body and the Audit and Risk Committee of the London
Business School, a Trustee and Deputy Chair of the British Spanish
Society and a Trustee of Teach First.
Former appointments include: Non-executive Chair of the Trustees
of the Royal College of Paediatrics and Child Health, founding
Director of the Clore Social Leadership Programme and Chief
Executive of the National Society for the Prevention of Cruelty to
Children.
Yukiko Omura
Independent non-executive Director
Member of the Audit Committee
Appointed to the Board: May 2018.
Yukiko is a senior independent non-executive Director of The
Private Infrastructure Development Group Limited ('PIDG'). She also
serves as a non-executive Director of Assured Guaranty Ltd, and a
member of the Supervisory Board of Nishimoto HD Co. Ltd. She has
more than 35 years' international professional experience in both
the public and private financial sector, performing senior roles
for JP Morgan, Lehman Brothers, UBS and Dresdner Bank.
Former appointments include: Chair of GuarantCo Limited, a
subsidiary of PIDG, Under-Secretary General and COO/Vice President
of the International Fund for Agricultural Development and
Executive Vice President and CEO of the Multilateral Investment
Guarantee Agency of the World Bank Group.
Juliet Robinson
Independent non-executive Director
Chair of the Transformation, Operational Resilience and
Technology Committee and member of the Risk Committee
Appointed to the Board: February 2021.
Former appointments include: Dual role as European Head of
Operations and Global Head of Shared Services and Banking
Operations and other senior management positions at Morgan Stanley.
Prior to 2007 she performed senior roles within Goldman Sachs
International.
Dr Eric Strutz
Independent non-executive Director
Chairman of the Risk Committee and member of the Nomination,
Remuneration & Governance Committee and Transformation,
Operational Resilience and Technology Committee
Appointed to the Board: October 2016.
Eric is a member of the Supervisory Board and Risk Committee and
Chairman of the Audit Committee of HSBC Trinkaus & Burkhardt
AG, a member of the Board of Directors and the Remuneration
Committee and Chairman of the Audit Committee of Global Blue Group
Holding AG, and a member of the Advisory Board and Chairman of the
Audit & Risk Committee of Luxembourg Investment Company 261
Sarl.
Former appointments include: Vice Chairman and Lead Independent
Director of Partners Group Holding AG, where he also Chaired the
Risk and Audit Committee, Chief Financial Officer of Commerzbank
Group, Partner and Director of the Boston Consulting Group, as well
as non-executive Director of Mediobanca Banca di Credito
Finanziario SpA.
John Trueman
Deputy Chairman and non-executive Director
Member of the Audit Committee, the Risk Committee and the
Nomination, Remuneration & Governance Committee
Appointed to the Board: September 2004. Deputy Chairman since
December 2013.
Former appointments include: Chairman and member of the Risk
Committee of HSBC Global Asset Management Limited and Deputy
Chairman of S.G. Warburg & Co Ltd.
Andrew Wright
Independent non-executive Director
Chairman of the Audit Committee and member of the Risk Committee
and the Nomination, Remuneration & Governance Committee
Appointed to the Board: May 2018.
Andrew is a member of the Supervisory Board and chairs the Risk
Committee of HSBC Trinkaus & Burkhardt AG.
Former appointments include: Treasurer to the Prince of Wales
and the Duchess of Cornwall, a role he held from May 2012 until
June 2019, Global Chief Financial Officer for the Investment Bank
at UBS AG, Chief Financial Officer, Europe and the Middle East at
Lehman Brothers and Chief Financial Officer for the Private Client
and Asset Management Division at Deutsche Bank.
Board Changes during 2021 and following
the year-end
Nuno Matos stepped down from the Board and Colin Bell succeeded
him as a Director and Chief Executive Officer of the bank and
Europe with effect from 22 February 2021.
Stephen Moss stepped down from the Board on 23 February 2021 to
take up the position of Chief Executive Officer, Middle East, North
Africa and Turkey (MENAT) in April 2021.
Jacques Fleurant stepped down from the Board on 30 September
2021 and Dave Watts succeeded him as a Director and Chief Financial
Officer of the bank with effect from 15 December 2021.
Juliet Robinson joined the Board as an independent non-executive
Director and member of the Risk Committee with effect from
1 February 2021. In 1 January 2021 she was appointed as Chair of
the Transformation, Operational Resilience and Technology
Committee.
Norma Dove-Edwin joined the Board as an independent
non-executive Director with effect from 28 October 2021.
Company Secretary
The responsibilities of the Company Secretary include ensuring
good governance practices at Board level and effective information
flows within the Board and its committees and between senior
management and the non-executive Directors.
Philip Jockelson acted as Company Secretary of the bank
until
28 February 2021 and Alison Campbell was appointed as Company
Secretary from 1 March 2021.
Board of Directors
Key responsibilities
The Board, led by the Chair, is responsible amongst other
matters for:
(i) promoting the long-term success of the bank and delivering
sustainable value to shareholders and other stakeholders;
(ii) entrepreneurial leadership of the bank within a framework
of prudent and effective controls which enables risks to be
assessed and managed;
(iii) setting the bank's strategy and risk appetite statement
including monitoring the bank's risk profile;
(iv) establishing and monitoring the effectiveness of procedures
for maintenance of a sound system of control and risk management,
and compliance with statutory and regulatory obligations; and
(v) approving the capital and operating plans and material
transactions on the recommendation of management.
The role of the non-executive Directors is to support the
development of proposals on strategy, hold management to account
and ensure the executive Directors are discharging their
responsibilities properly by promoting a culture that encourages
constructive challenge. Non-executive Directors also review the
performance of management in meeting agreed goals and objectives.
The Chair regularly meets with the non-executive Directors without
executive Directors in attendance after Board meetings, and
otherwise, as necessary.
Operation of the Board
During 2021, the Board was required to meet at least six times a
year; six additional meetings were scheduled to help facilitate,
amongst other things, the execution of the bank's transformation
strategy. The Board agenda is agreed with the Chair, working
closely with the Company Secretary, in advance of scheduled
meetings. The agenda is informed by forward-looking planning and
additional emerging matters that require Board oversight or
approval.
The Chief Risk Officer, General Counsel, and Company Secretary
are regular attendees at Board meetings, and other senior
executives attend to contribute their subject matter expertise and
insight, as required.
Board activities during 2021
During 2021, the Board focused on the implementation of approved
strategy and execution of the bank's transformation programme
across the region, supporting senior management and overseeing
performance, risk and capital. The Board considered performance
against financial and other strategic objectives, key business
challenges, emerging risks, business development and relationships
with the bank's key stakeholders.
Deep dives on key aspects of the bank's business were also
conducted to consider the performance and strategy of targeted
businesses and countries. Throughout the year, the Board received
regular updates from management including the implementation of
regulatory programmes, technology, operations and resilience, as
well as people, culture and talent.
During the year the Board also approved the financial, capital,
liquidity and funding plans put forward by management and monitored
the implementation of plans. Further information on the principal
decisions made by the Board during 2021, including in respect of
the strategic reset and capital plans is located in the section 172
statement on pages 9 to 11.
Directors' emoluments
Details of the emoluments of the Directors of the bank for 2021,
disclosed in accordance with the Act, are shown in Note 5 'Employee
compensation and benefits'.
Non-executive Directors do not have service contracts, but are
engaged through letters of appointment. There are no obligations in
the non-executive Directors' letters of appointment that could give
rise to payments other than fees due or payments for loss of
office.
Board committees
The Board delegates oversight of certain audit, risk,
remuneration, nomination and governance matters to its committees.
Each standing Board committee is chaired by a non-executive Board
member and has a remit to cover specific topics in accordance with
their respective terms of reference. Only non-executive Directors
are members of Board committees. The Chairman of each non-executive
Board Committee reports to the Board on the activities of the
Committee since the previous Board meeting.
Board and Committee effectiveness and performance
The Board understands the importance of, and benefits that
derive from regular reviews of the effectiveness of the Board and
its committees. In 2020, the bank was subject to an internally
facilitated subsidiary governance review of the Group's main
subsidiary Boards and Committees. The review focused on (i) the
composition, skill-set, time commitment and fees for Boards and
Committees; (ii) service quality and scope of governance and
secretarial support; and (iii) the effectiveness of the bank's
relationship with the Group. The results of the subsidiary
governance review of the bank have been considered by the Board and
work was progressed during 2021 to address recommendations. An
annual review of the terms of reference for the Board and its
committees was facilitated by the Corporate Governance and
Secretariat function which assessed that the Board and its
committees had materially complied with their respective terms of
reference during 2021. Executive Directors are also subject to
performance evaluation which helps to determine the level of
variable pay they receive each year.
At the date of this report, the following are the principal
Committees of the Board:
Audit Committee
Key Responsibilities
The Audit Committee is accountable to the Board and has
non-executive responsibility for oversight of financial reporting
related matters, internal controls over financial reporting and
implementation of the group policies and procedures for capturing
and responding to whistleblower concerns.
The Committee's key responsibilities include:
(i) monitoring and assessing the integrity of the financial
statements, formal announcements and supplementary regulatory
information in relation to the bank's financial performance;
(ii) reviewing, as applicable, compliance with accounting
standards, listing rules, and other requirements in relation to
financial reporting;
(iii) reviewing and monitoring the relationship with the
external auditor; and
(iv) overseeing the work of Internal Audit and monitoring and
assessing the effectiveness, performance, resourcing, independence
and standing of the function.
The committee has responsibility for the oversight of the bank's
whistleblowing arrangements, and receives regular updates on
matters relating to the whistleblowing arrangements that are in
place.
Committee activities during 2021
In addition to significant accounting judgements, key matters
considered by the Committee during the year were regulatory
reporting and control enhancements, interbank offered rates (IBOR)
transition, IFRS 17 implementation, the development of
climate-related disclosure, pension risk, the bank's financial
resources and capital, transformation of the Finance function, the
independence, fees and performance of the external auditor, PwC,
and updates on key issues identified by Internal Audit related to
the bank and its subsidiaries.
The committee also received updates from the Chairs of the Audit
committees of key subsidiaries of the Bank, updates from the
external auditor on the progress and findings of their audit, and
bi-annual updates on the tax position of the bank and its
subsidiaries.
Operation of the Committee
The committee held seven scheduled meetings during the year and
held separate meetings with each of the Chief Finance Officer, the
Chief Risk Officer, the Head of Internal Audit and representatives
of the external auditor without management present.
The committee meets regularly with the bank's senior financial
and Internal Audit management and the external auditors to
consider, among other matters, the bank's financial reporting, the
nature and scope of audit reviews, the effectiveness of the systems
of internal control relating to financial reporting and the
monitoring of the Finance function transformation programme.
The Chief Financial Officer, Financial Controller, Chief Risk
Officer, Head of Internal Audit, and Company Secretary are standing
attendees and regularly attend Committee meetings to contribute
their subject matter expertise and insight. Other members of senior
management routinely attended meetings of the Committee. The
external auditor attended all meetings.
During 2021 the committee continued to actively engage with the
bank's key subsidiaries and key subsidiary audit committees, with
regular reporting throughout the year. The Chair of the committee
regularly meets with the Chair of the Group Audit Committee (GAC)
to help maintain connectivity with the group and develop deeper
understanding on judgements around key matters. Further, from time
to time the Chair is invited to attend meetings of the GAC on
relevant topics. The committee comprises a majority of independent
non-executive Directors. The current members are Andrew Wright
(Chair), Yukiko Omura and John Trueman.
Significant accounting judgements and related matters considered by
the Audit Committee ('AC') for the year ended 2021 included:
Interim and annual reporting The AC considered key matters in relation
to interim and annual reporting, including
changes to segmental reporting.
Expected credit loss ('ECL') The AC considered key judgements in relation
to ECL, in particular post-model adjustments
in certain sectors due to economic uncertainty.
Valuation of financial instruments The AC considered key valuation metrics and
judgements involved in the determination of
the fair value of financial instruments. The
AC also considered management's analysis of
exit losses upon the novation of certain derivative
portfolios and the determination that there
was insufficient evidence to support the introduction
of fair value adjustments in respect of these.
Going concern The AC considered a wide range of information
relating to present and potential conditions,
including projections for profitability, cash
flows, liquidity and capital.
Impairment of investment The AC reviewed management's periodic assessment
in subsidiaries of impairment of investments in subsidiaries
and paid particular attention to the reliability
of cash flow projections and long-term growth
rate and discount rate assumptions. Management
assessed that there had been no impairment
of the bank's investment in HSBC Continental
Europe for the year ended 2021 with due regard
to the sensitivity of this judgement to changes
in assumptions, in particular those relating
to the sale of retail banking activities in
Continental Europe.
Appropriateness of provisioning The AC received reports from management on
for legal proceedings and the recognition and measurement of provisions
regulatory matters and contingent liabilities for legal proceedings
and regulatory matters, including investigations
by regulators and competition and law-enforcement
authorities.
Regulatory reporting The AC reviewed management's efforts to strengthen
and simplify the end-to-end operating and
control model, including independent external
reviews of key aspects of regulatory reporting.
IBOR transition The AC considered the implications of benchmark
interest rate reform, including the recognition
and measurement of financial instruments and
related disclosures.
Controls The AC considered the financial control environment
on an ongoing basis through the year, reviewing
and challenging remediation actions undertaken
and enhancements made. This included confirmation
of mitigating controls where programmes of
work had not fully completed by the year end.
Areas of particular focus in 2021 have been
Model Risk Governance, controls over use of
external market data, accounting and tax implications
of Merger and Acquisition ('M&A') transactions,
general ledger substantiation and Financial
Statement Disclosures.
Tax The AC reviewed management's judgements on
the recognition and measurement of deferred
tax assets and liabilities, in particular
those arising from the sale of retail banking
activities in Continental Europe, and the
accounting and disclosure of retrospective
VAT assessments issued by HMRC.
Environmental, Social and The AC considered regulatory developments
Governance ('ESG') Reporting in ESG Reporting, in particular at 31 December
2021 for bank subsidiaries in the European
Union.
Restructuring provisions The AC considered key judgements in relation
to restructuring provisions, mainly relating
to transformation in Continental Europe and
Germany.
Risk Committee
Key Responsibilities
The Risk Committee is accountable to the Board and has overall
non-executive responsibility for oversight of risk-related matters
and the risks impacting the bank.
The committee's key responsibilities include:
(i) advising the Board on risk appetite-related matters, and key
regulatory submissions;
(ii) overseeing and advising the Board on all risk-related
matters, including financial risks, non-financial risks and the
effectiveness of the bank's conduct framework;
(iii) reviewing, challenging and satisfying itself that the
bank's stress testing framework, governance and internal controls
are robust; and
(iv) to review the effectiveness of the bank's risk management
framework and internal control systems (other than internal
financial controls overseen by the Audit Committee).
Committee activities during 2021
Key matters considered by the committee during the year included
the bank's approach to the financial and non-financial risks in the
context of evolving Covid-19 infections and strict lockdown
measures across the region, wholesale credit and market risks
including, interbank offered rates ('IBOR') transition,
geopolitical, operational and climate-related risks.
The committee also reviewed and challenged management on key
regulatory processes, including the bank's internal capital
adequacy assessment process ('ICAAP') and the internal liquidity
adequacy assessment process ('ILAAP'); recovery and resolution
plans (including the bank's response to the Bank of England's
Resolvability Assessment Framework requirements); the outcome of
stress tests undertaken during the year; and the bank's capital
liquidity and funding plans.
Operation of the Committee
The committee held 11 scheduled meetings during the year. The
Chief Risk Officer, Chief Financial Officer, Head of Internal
Audit, and Head of Risk Strategy are standing attendees and
regularly attend committee meetings to contribute their subject
matter expertise and insight.
The committee reviews and challenges current and forward-looking
risk issues, and the regional senior business leaders are regularly
invited to participate at committee meetings, working together with
functional and regional leaders across all three lines of
defence.
The Chair and members of the committee meet regularly with the
bank's senior financial, risk, internal audit and compliance
management and the external auditors to consider, among other
matters, risk reports and internal audit reports and the
effectiveness of compliance activities.
During 2021 the committee continued to actively engage with the
bank's key subsidiaries and key subsidiary risk committees, with
regular reporting from the respective Chairs throughout the year.
The Chair of the committee attended several Group-led meetings to
help promote connectivity, escalation and cascade of important
topics. The committee comprises a majority of independent
non-executive Directors. The current members are: Eric Strutz
(Chair), Juliet Robinson, John Trueman and Andrew Wright.
Transformation, Operational Resilience and Technology
Committee
Key Responsibilities
The Transformation, Operational Resilience and Technology
Committee ('TRT') was established during the year to assist the
Board and Risk Committee with their respective responsibilities in
relation to the bank's transformation strategy, operational
resilience, as well as the governance and oversight of
technology.
The Committee's key responsibilities include:
(i) reviewing progress of the transformation strategy and the
steps management have taken to manage risk, and to monitor progress
against set objectives;
(ii) reviewing the effectiveness of governance frameworks to set
and oversee the internal control environment in relation to
technology;
(iii) reviewing regional technology strategy, ensuring it is
aligned with the adopted business strategies of the bank; and
(iv) overseeing and challenging management on execution of
operational resilience objectives and deliverables.
Committee activities during 2021
Key matters considered by the Committee during the year included
a review of IT and Cloud strategies, oversight of the bank's
operating systems, operational resilience and technology
infrastructure, including operational resilience of critical IT and
other business services, information and cyber security risks, and
major IT change programmes.
The Committee also reviewed and challenged management on the
progress and associated risks with respect the transformation
strategy, including transformation governance, cost complexity and
key change programmes underway.
Operation of the Committee
The Committee has been established for an initial 12-month
period from March 2021. The Board has recommended the continuation
of the Committee for the duration of 2022.
The Committee held eight scheduled meetings during 2021.
The Chief Operating Officer, Chief Information Officer, Chief
Risk Officer, Head of Internal Audit, and Head of Transformation
are standing attendees and regularly attend Committee meetings to
contribute their subject matter expertise and insight.
The current members are: Juliet Robinson (Chair), Mary Marsh,
and Eric Strutz.
Nomination, Remuneration & Governance Committee
Key Responsibilities
The Nomination, Remuneration & Governance Committee has
responsibility for:
(i) leading the process for Board appointments and for
identifying and nominating, for the approval of the Board,
candidates for appointment to the Board;
(ii) the endorsement of the appointment of individuals to
certain Board and management positions at the bank's subsidiaries;
including proposed fees payable to non-executive Directors on
subsidiary boards;
(iii) reviewing the implementation and appropriateness of the
Group's Director remuneration policy and the remuneration of the
bank's senior executives, including the identification of the
Material Risk Taker population for the purposes of the Capital
Requirements Directive;
(iv) reviewing and developing the corporate governance framework
on behalf of the Board and ensuring it is consistent
with best corporate governance standards and practices while
remaining appropriate to the size, complexity and strategy of the
bank; and
(v) overseeing the implementation and compliance with the HSBC
Group Subsidiary Accountability Framework ('SAF').
Further information in relation to the HSBC's approach to
remuneration for group employees is available in the Director's
remuneration report on pages 276 - 278 of HSBC's Annual Report and
Accounts available on
https://www.hsbc.com/investors/results-and-announcements/annual-report.
Committee activities during 2021
Key matters considered by the Committee during the year included
the appointment to the Board of new Directors, including an
additional independent non-executive Director, as well as a number
of senior positions within the bank's executive team, including the
Chief Financial Officer.
The Committee undertook a full review of Board composition,
succession planning for all material subsidiaries under SAF,
approval of a revised Board Diversity Policy. The Committee applies
the principles in the policy when considering the composition of
the Board, including in relation to gender, ethnicity and age.
Other activities during the year included, the review of key
remuneration matters for the bank and its subsidiaries in the
context of the HSBC's remuneration framework, including variable
and fixed pay allocations, aligned with the bank's risk appetite,
and in keeping with the bank's strategy, culture and values, and
long-term interests of the bank. The Committee reviewed the annual
pay review outcomes across the region.
Operation of the Committee
The Committee held eight scheduled meetings during 2021, with
additional meetings arranged to consider specific matters.
The Head of HR and Head of Performance & Reward attend
Committee meetings on a regular basis to contribute their subject
matter expertise and insight. Other senior executives attend
periodically for specific items considered by the Committee.
The Committee comprises a majority of non-executive Directors.
The current members are: Stephen O'Connor (Chair), Eric Strutz,
Andrew Wright, and John Trueman (for Nomination and Governance
matters only).
Executive Committee
The Executive Committee is a committee of the Board and has
overall executive responsibility, under formal delegation, for the
management and day-to-day running of the bank. The committee is
accountable to the Board for overseeing the execution of the bank's
strategy.
The purpose of the committee is to support the Chief Executive
Officer of the bank in the performance of their duties and exercise
of their powers, authorities and discretions in relation to the
management of the bank and its subsidiaries. The committee meets on
a regular basis and is chaired by the Chief Executive Officer.
During 2021, in addition to its day-to-day oversight of the
bank's operations, the committee's principal areas of focus
included managing the bank's response to the evolving nature of the
Covid-19 pandemic across the region, oversight of the bank's
transformation strategy, including the sale of the French retail
banking operations, oversight of the performance across the bank's
lines of business, review of the bank's financial performance. cost
management, and preparing the bank's forward looking Financial
Resource Plan. The committee also received updates on regulatory
remediation programmes, regulatory engagement themes across the
region and the transition to IBOR.
Dividends
Information about dividends paid during the year is provided on
page 17 of the Strategic Report and in Note 8 to the financial
statements.
Internal control
The Board is responsible for maintaining and reviewing the
effectiveness of risk management and internal control systems and
for determining the aggregate level and types of risks the bank is
willing to take in achieving its strategic objectives.
To meet this requirement and to discharge its obligations under
the FCA Handbook and the PRA Handbook, procedures have been
designed for safeguarding assets against unauthorised use or
disposal; for maintaining proper accounting records; and for
ensuring the reliability and usefulness of financial information
used within the business or for publication.
These procedures provide reasonable assurance against material
misstatement, errors, losses or fraud. They are designed to provide
effective internal control within the group and accord with the
Financial Reporting Council's guidance for Directors issued in
2014, internal control and related financial and business
reporting. The procedures have been in place throughout the year
and up to 21 February 2022, the date of approval of this Annual
Report and Accounts 2021.
The key risk management and internal control procedures include
the following:
-- Global principles: The HSBC Group's Global Principles set an
overarching standard for all other policies and procedures and are
fundamental to the Group's risk management structure. They inform
and connect our purpose, values, strategy and risk management
principles, guiding us to do the right thing and treat our
customers and our colleagues fairly at all times.
-- Risk management framework ('RMF'): The risk management
framework supports our Global Principles. It outlines the key
principles and practices that we employ in managing material risks.
It applies to all categories of risk and supports a consistent
approach in identifying, assessing, managing and reporting the
risks we accept and incur in our activities.
-- Delegation of authority within limits set by the Board:
Subject to certain matters reserved for the Board, the Chief
Executive Officer has been delegated authority limits and powers
within which to manage the day-to-day affairs of the group,
including the right to sub-delegate those limits and powers. Each
relevant executive has authority within which to manage the
day-to-day affairs of the business or function for which he or she
is accountable. Those individuals are required to maintain a clear
and appropriate apportionment of significant responsibilities and
to oversee the establishment and maintenance of systems of control
that are appropriate to their business or function. Authorities to
enter into credit and market risk exposures are delegated with
limits to line management of group companies. However, credit
proposals with specified higher-risk characteristics require the
concurrence of the appropriate global function. Credit and market
risks are measured and reported at subsidiary company level and
aggregated for risk concentration analysis on a group-wide
basis.
-- Risk identification and monitoring: Systems and procedures
are in place to identify, assess, control and monitor the material
risk types facing the group as set out in the RMF.The group's risk
measurement and reporting systems are designed to help ensure that
material risks are captured with all the attributes necessary to
support well-founded decisions, that those attributes are
accurately assessed and that information is delivered in a timely
manner for those risks to be successfully managed and
mitigated.
-- Changes in market conditions/practices: Processes are in
place to identify new risks arising from changes in market
conditions/practices or customer behaviours, which could expose the
group to heightened risk of loss or reputational damage. The group
employs a top and emerging risks framework, which contains an
aggregate of all current and forward-looking risks and enables it
to take action that either prevents them materialising or limits
their impact.
-- During 2021, due to the prolonged impact of the Covid-19
pandemic on the global economy, banks continued to play an expanded
role to support society and customers. The pandemic and its impact
on the global economy have impacted many of our customers' business
models and income, requiring significant levels of support from
both governments and banks. To meet the additional challenges, we
supplemented our existing approach to risk management with
additional tools and practices and these continue to be in place.
We continue 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
-- Responsibility for risk management: All employees are
responsible for identifying and managing risk within the scope of
their role as part of the three lines of defence model. This is an
activity-based model to delineate management accountabilities and
responsibilities for risk management and the control environment.
The second line of defence sets the policy and guidelines for
managing specific areas, provides advice and guidance in relation
to the risk, and challenges the first line of defence (the risk
owners) on effective risk management.
-- The Board has delegated to the Audit Committee oversight for
the implementation of the group's policies and procedures for
capturing and responding to whistleblower concerns, ensuring
confidentiality, protection and fair treatment of whistleblowers,
and receiving reports arising from the operation of those policies
as well as ensuring arrangements are in place for independent
investigation.
-- Strategic plans: Strategic plans are prepared for global
businesses, global functions and geographical regions within the
framework of the HSBC Group's overall strategy. The bank also
prepares and adopts a Financial Resourcing Plan, which is informed
by detailed analysis of risk appetite, describing the types and
quantum of risk that the bank is prepared to take in executing its
strategy and sets out the key business initiatives and the likely
financial effects of those initiatives.
-- The effectiveness of the group's system of risk management
and internal control is reviewed regularly by the Board, the Risk
Committee and the Audit Committee.
-- During 2021, the group continued to focus on operational
resilience and invest in the non-financial risk infrastructure.
There was a particular focus on material and emerging risks with
significant progress made enhancing the end-to-end risk and control
assessment process. The Risk Committee, supported by the TRT, and
the Audit Committee received confirmation that executive management
has taken or is taking the necessary actions to remedy any failings
or weaknesses identified through the operation of the group's
framework of controls. In response to the prolonged Covid-19
pandemic, our business continuity responses have been successfully
implemented and the majority of service level agreements continue
to be maintained.
Internal control over financial reporting
The key risk management and internal control procedures over
financial reporting include the following:
-- Entity level controls: The primary mechanism through which
comfort over risk management and internal control systems is
achieved, is through assessments of the effectiveness of entity
level controls ('ELCs'), and the reporting of risk and control
issues on a regular basis through the various risk management and
risk governance forums. ELCs are internal controls that have a
pervasive influence over the entity as a whole. They include
controls related to the control environment, for example the bank's
values and ethics, the promotion of effective risk management and
the overarching governance exercised by the Board and its
non-executive committees. The design and operational effectiveness
of ELCs are assessed annually as part of the assessment of the
effectiveness of internal controls over financial reporting.
-- Process level transactional controls: Key process level
controls that mitigate risk of financial mis-statement are
identified, recorded and monitored in accordance with the risk
framework. This includes the identification and assessment of
relevant control issues against which action plans are tracked
through to remediation. Further details on the group's approach to
risk management can be found on page 21. The Audit Committee has
continued to receive regular updates on HSBC's ongoing activities
for improving the effective oversight of end-to-end business
processes and management continues to identify opportunities for
enhancing key controls, such as through the use of automation
technologies.
-- External Reporting Forum: The External Reporting Forum
reviews financial reporting disclosures made by the bank for any
material errors, mis-statements or omissions. The integrity of
disclosures is underpinned by structures and processes within the
group's Finance and Risk functions that support rigorous analytical
review of financial reporting and the maintenance of proper
accounting records.
-- Disclosure Committee: The Disclosure Committee considers the
external reporting obligations of the bank to ensure compliance
with reporting obligations under the EU Market Abuse
Regulations.
-- Financial reporting: The group's financial reporting process
is controlled using documented accounting policies and reporting
formats, supported by detailed instructions and guidance on
reporting requirements, issued to all reporting entities within the
group in advance of each reporting period end. The submission of
financial information from each reporting entity is supported by a
certification by the responsible financial officer and analytical
review procedures at subsidiary and group levels.
-- Subsidiary certifications: Certifications are provided to the
Audit Committee and the Risk Committees (full and half yearly) and
to the Nomination, Remuneration and Governance Committee (annually)
from the audit, risk and remuneration committees of key material
subsidiary companies confirming amongst other things that:
- Audit - the financial statements of the subsidiary have been
prepared in accordance with group policies, present fairly the
state of affairs of the subsidiary and are prepared on a going
concern basis;
- Risk - the Risk Committee of the subsidiary has carried out
its oversight activities consistent with and in alignment to the
RMF; and
- Remuneration - the Remuneration Committee of the subsidiary
has discharged its obligations in overseeing the implementation and
operation of HSBC's Group Remuneration Policy.
Employees
Health and safety
We are committed to providing a safe and healthy working
environment for everyone. We have adopted global policies,
mandatory procedures, and incident and information reporting
systems across the organisation that reflect our core values and
are aligned to international standards. Our global health and
safety performance is subject to ongoing monitoring and
assurance.
Our Chief Operating Officers have overall responsibility for
engendering a positive health and safety culture and ensuring that
global policies, procedures and systems are put into practice
locally. They also have responsibility for ensuring all local legal
requirements are met.
We delivered a range of programmes in 2021 to help us understand
and manage our health and safety risks:
-- We continued to provide enhancements to our workplaces
globally to minimise the risks of Covid-19, including enhancing
cleaning, improved ventilation and social distancing measures
-- We updated our advice and risk assessment methodology on
working from home, providing more awareness and best practices on
good ergonomics and wellbeing to be adopted as we transitioned to
new ways of working
-- We delivered health and safety training and awareness to
49,000 employees and contractors ensuring roles and
responsibilities were clear and understood
-- We completed the annual safety inspection on all of our
buildings globally, subject to local Covid-19 restrictions, to
ensure we were meeting our standards and continuously improving our
safety performance
-- We continued to focus on enhancing the safety culture in our
supply chain through our SAFER Together programme, covering the
five key elements of best practice safety culture, including
speaking up about safety, and recognising excellence
-- Our 2021 safety climate survey results showed a continued
high level of positive safety culture, significantly above the
industry average
-- Our Eat Well Live Well programme continued educating and
informing our colleagues on how to make healthy food and drink
choices. We enhanced the programme to provide digital educational
and information resources, including a suite of videos and recipe
ideas. The programme was a key component of HSBC's winning entry in
the 2021 Global Healthy Workplace Awards
Employee health and safety
2021 2020 2019
Number of workplace - - -
fatalities
-------------------------
Number of major injuries
to employees(1) 2 2 3
------------------------- --------------
All injury rate per
100,000 employees 14 35 130
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1 Fractures, dislocation, concussion, hospitalisation, unconsciousness.
1
Diversity and Inclusion
Our employees and the societies they represent and serve span
many cultures, communities and continents. We believe this
diversity makes us stronger, and we are dedicated to building a
diverse and connected workforce where everyone feels a sense of
belonging. In Europe, we have carried out actions to drive
improvements in representation and sentiment across multiple
diversity strands, strengthen our employee networks, and improve
our diversity data.
We set up a HBEU Diversity and Inclusion Council, including
several members from the European Executive Committee in order to
reinforce our commitments, engage more closely with our Employee
Resources Groups and track our progress.
Throughout the year, more than thirty events and conferences
were organised across several European countries on topics such as
inclusive leadership, disability, parenthood, resilience, mental
health, hypersensitivity, women in leadership, cross-generation,
multicultural working environment.
Exchange meetings to discuss key diversity topics including
ethnicity and multiculturalism took place in several countries e.g.
Germany, Malta, Italy and France.
We actively participated in the #24 hours of Pride through
virtual events and building lightening in the UK, Poland, Malta,
Luxembourg, France, Channel Islands, Ireland and Italy
We continued to increase Employee Resources Groups (ERG)
representation across Europe. In 2021, we launched a new
Pan-European ERG called 'Inclusive Europe' aiming to create an
inclusive culture, reinforce collaboration between existing ERGs.
Our Pride ERGs in countries have gathered to create a European
structure. A new 'EmbRace' ERG has been launched in Ireland to
promote ethnic diversity and an ERG to support people with
disabilities has also been set up in France.
All our ERGs are actively involved in supporting employees
locally. Balance, our ERG dedicated to gender diversity, have run a
programme (e-Taste of the Top) to give exposure to 27 female talent
allowing them to cover a week of leave for very senior positions. A
new initiative, Coaching Circles, has been launched to create a
peer to peer coaching culture. This is available to all
employees.
In 2021, we updated our recruitment training to emphasise the
need for inclusivity, and made this mandatory for all hiring
managers. We also ran sessions for leadership teams on 'Unconcious
Bias' to raise awareness of affinity bias amongst others. In the
UK, acknowledging the previous under representation of Black and
Ethnic Minority talent on our development programmes and
introducing leadership development specifically for talented
individuals in this group. In 2021, 189 colleagues at GCB 4 (mid
manager) took part in our ethnic minority Accelerate into
Leadership programme and, to date, 15% of participants have
progressed in their career.
In France, HSBC has signed a charter along with other large
financial companies in order to significantly improve female
representation.
Gender diversity statistics HSBC Bank plc's overall female
representation is improving and we are committed to building a
strong pipeline of female talent to improve gender balance in
senior leadership across Europe. Our target was 24.3% of women in
senior leadership (Global Career Band 0-3) roles by the end of
2021. The outcome for 2021 was 24% of women in senior leadership
roles.
Female representation by management level:
All grades - 52.2%
GCB 6-8 Clerical grades - 65.8%
GCB 4-5 Management - 43.6%
GCB 0-3 Senior management - 24%
HBEU Executive Committee - 29.4%
Employment of people with a disability
We strongly believe in providing equal opportunities for all
employees. The employment of people with a disability is included
in this commitment. The recruitment, training, development and
promotion of people with a disability are based on the aptitudes
and abilities of the individual. Should employees become disabled
during their employments with us, efforts are made to continue
their employment. Where necessary, we will provide appropriate
training, facilities and reasonable equipment. A number of
countries have dedicated teams to ensure that barriers to work are
removed for colleagues.
Continuous work is done to ensure individual support is provided
to make home office adjustments. Learning and talent
development
The development of our people continues to be of critical
importance to our organisations success as we develop and implement
practices that identifies talent, and builds broad employee
capability, together with the right values, skills and experience
to meet the future needs of our business. This applies across all
levels of our business including the launch of our new General
Manager Curriculum in 2021 which will be followed with the launch
of a new learning curriculum for our Managing Directors in
2022.
With the launch of our new Learning Experience Platform -
Degreed, we continue to make progress in the move to a modern
learning culture where, 'on demand' resources are available for our
learners to access as the need arises, driving a departure from
'done to', mandatory learning and moving to a self-driven
learner-led culture. We commit to continually providing
opportunities for our colleagues to develop skills and capability
that empower them to realise their potential for the future.
HSBC University remains the hub for dedicated HSBC learning and
during the year the offering was extended to provided targeted
guidance and development to help colleagues navigate through hybrid
working patterns and broader Future of Work topics. This sits
within the broader offering of HSBC Leadership, risk management,
strategy and performance, as well as business-specific technical
training all with virtual online formats.
Employee relations
We consult with and, where appropriate, negotiate with employee
representative bodies where we have them. We also aim to maintain
well-developed communications and consultation programmes with all
employee representative bodies and there have been no material
disruptions to our operations from labour disputes during the past
five years.
Disclosure of information to auditors
The directors are not aware that there is any relevant audit
information (as defined in the Companies Act 2006) of which the
bank's auditors are unaware and processes are in place to ensure
that the bank's auditors are aware of any relevant audit
information.
Auditors
PricewaterhouseCoopers LLP ('PwC') are the external auditors to
the bank. PwC has expressed its willingness to continue in office
and the Board recommends that PwC be re-appointed as the bank's
auditors. A resolution proposing the re-appointment of PwC as the
bank's auditors, and giving authority to the Audit Committee to
determine its remuneration, will be submitted to the forthcoming
AGM.
Branches
HSBC Bank plc provides a wide range of banking and financial
services through 20 markets. HSBC Bank plc is simplifying its
operating model to one integrated business supporting a wholesale
banking hub for the European Union ('EU') in Paris and a wholesale
banking hub for western markets in London. Further information on
the bank's branches are located in 'HSBC in Europe' on page 4.
Disclosures required pursuant to the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008 as
updated by Companies (Miscellaneous Reporting) Regulations 2018 can
be found on the following pages:
Engagement with employees
(Sch.7 Para 11 and 11A 2008/2018 Pages 9
Regs), s172 Statement) and 10
Engagement with suppliers,
customers and others in
a business relationship
with the bank (Sch.7 Para
11B 2008 Regs) Page 9
Policy concerning the employment
of disabled persons (Sch.7
Para 10 2008 Regs) Page 95
Financial Instruments (Sch.7 Pages 32
Para 6 2008 Regs) to 70
Note 14,
Hedge accounting policy Pages 150
(Sch.7 Para 6 2008 Regs) to 154
Articles of Association, Conflicts
of interest
and indemnification of Directors
The bank's Articles of Association gives the Board authority to
approve Directors' conflicts and potential conflicts of interest.
The Board has adopted policies and procedures for the approval of
Directors' conflicts or potential conflicts of interest. On
appointment, new Directors are advised of the process for dealing
with conflicts and a review of those conflicts that have been
authorised, and the terms of those authorisations, is routinely
undertaken by the Board.
The Articles of Association of the bank contain a qualifying
third-party indemnity provision, which entitles Directors and
other
officers to be indemnified out of the assets of the bank against
claims from third parties in respect of certain liabilities. HSBC
Group has granted, by way of deed poll, indemnities to the
Directors, including former Directors who retired during the year,
against certain liabilities arising in connection with their
position as a Director of or of any Group company, including the
bank and its subsidiaries. Directors are indemnified to the maximum
extent permitted by law.
The indemnities that constitute a 'qualifying third-party
indemnity provision', as defined by section 234 of the Companies
Act 2006, remained in force for the whole of the financial year
(or, in the case of Directors appointed during 2020, from the date
of their appointment). The deed poll is available for inspection at
the registered office of HSBC Holdings.
Additionally, Directors have the benefit of Directors' and
Officers' liability insurance. Qualifying pension scheme
indemnities have also been granted to the Trustees of the Group's
pension schemes, which were in force for the whole of the financial
year and remain in force as at the date of this report.
Research and Development
In the ordinary course, the lines of business develop new
products and services.
Events after the Balance Sheet Date
In its assessment of events after the balance sheet date, the
group has considered and concluded that there are no events
requiring adjustment or disclosures in the financial
statements.
Statement on going concern
The Directors consider it appropriate to prepare the financial
statements on the going concern basis. In making their going
concern assessment, the Directors have considered a wide range of
detailed information relating to present and potential conditions,
including profitability, cash flows, capital requirements and
capital resources.
Further information relevant to the assessment is provided in
the Strategic Report and the Report of the Directors, in
particular:
-- a description of the group's strategic direction;
-- a summary of the group's financial performance and a review of performance by business;
-- the group's approach to capital management and its capital position; and
-- the top and emerging risks facing the group, as appraised by
the Directors, along with details of the group's approach to
mitigating those risks and its approach to risk management in
general.
In addition, the objectives, policies and processes for managing
credit, liquidity and market risk are set out in the 'Report of the
Directors: Risk'.
The Report of the Directors comprising pages 21 to 98 was
approved by the Board on 21 February 2022 and is signed on its
behalf by.
By order of the Board
Dave Watts
Director
HSBC Bank plc
21 February 2022
Registered number 00014259
Statement of directors' responsibilities in respect of the financial
statements
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the group and the company financial statements in
accordance with UK-adopted accounting standards, and have also
applied international financial reporting standards ('IFRSs')
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union. These financial statements are also prepared in
accordance with IFRSs as issued by the International Accounting
Standards Board (IASB), including interpretations issued by the
IFRS Interpretations Committee, as there are no applicable
differences from IFRSs as issued by the IASB for the periods
presented.
Under company law, directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the group and company and of the
profit or loss of the group for that period. In preparing the
financial statements, the directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- state whether UK-adopted accounting standards, IFRSs adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union and IFRSs as issued by the International Accounting
Standards Board ('IASB'), including interpretations issued by the
IFRS Interpretations Committee, have been followed, subject to any
material departures disclosed and explained in the financial
statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the group and company
will continue in business.
The directors are responsible for safeguarding the assets of the
group and company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The directors are also responsible for keeping adequate
accounting records that are sufficient to show and explain the
group's and company's transactions and disclose with reasonable
accuracy at any time the financial position of the group and
company and enable them to ensure that the financial statements
comply with the Companies Act 2006.
The directors are responsible for the maintenance and integrity
of the company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Directors' confirmations
The directors consider that the Annual Report and accounts,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the group's
and company's position and performance, business model and
strategy.
Each of the directors, whose names and functions are listed in
the Corporate Governance Report confirm that, to the best of their
knowledge:
-- the group and company financial statements, which have been
prepared in accordance with UK-adopted accounting standards, IFRSs
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union and IFRSs as issued by the International
Accounting Standards Board ('IASB'), including interpretations
issued by the IFRS Interpretations Committee, give a true and fair
view of the assets, liabilities and financial position of the group
and company, and of the profit of the group; and
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
group and company, together with a description of the principal
risks and uncertainties that it faces.
On behalf of the Board
Dave Watts
Director
HSBC Bank plc
21 February 2022
Registered number 00014259
Independent auditors' report to the members of HSBC Bank plc
Report on the audit of the financial statements
Opinion
In our opinion, HSBC Bank plc's group financial statements and
company financial statements (the 'financial statements'):
-- give a true and fair view of the state of the group's and of
the company's affairs as at 31 December 2021 and of the group's
profit and the group's and company's cash flows for the year then
ended;
-- have been properly prepared in accordance with UK-adopted
international accounting standards; and
-- have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the
HSBC Bank plc Annual Report and Accounts 2021 (the 'Annual
Report'), which comprise:
-- the consolidated balance sheet as at 31 December 2021;
-- the consolidated income statement and consolidated statement
of comprehensive income for the year then ended;
-- the consolidated statement of cash flows for the year then ended;
-- the consolidated statement of changes in equity for the year then ended;
-- the HSBC Bank plc balance sheet as at 31 December 2021;
-- the HSBC Bank plc statement of cash flows for the year then ended;
-- the HSBC Bank plc statement of changes in equity for the year then ended; and
-- the notes on the financial statements, which include a
description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit
Committee.
Separate opinion in relation to international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union
As explained in note 1.1(a) to the financial statements, the
group, in addition to applying UK-adopted international accounting
standards, has also applied international financial reporting
standards adopted pursuant to Regulation (EC) No 1606/2002 as it
applies in the European Union.
In our opinion, the group financial statements have been
properly prepared in accordance with international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in note 1.1(a) to the financial statements, the
group, in addition to applying UK-adopted international accounting
standards, has also applied international financial reporting
standards ('IFRSs') as issued by the International Accounting
Standards Board ('IASB').
In our opinion, the group financial statements have been
properly prepared in accordance with IFRSs as issued by the
IASB.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ('ISAs (UK)') and applicable law. Our
responsibilities under ISAs (UK) are further described in the
Auditors' responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Independence
We remained independent of the group in accordance with the
ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC's Ethical
Standard, as applicable to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance
with these requirements.
To the best of our knowledge and belief, we declare that
non-audit services prohibited by the FRC's Ethical Standard were
not provided.
Other than those disclosed in note 6, we have provided no
non-audit services to the company or its controlled undertakings in
the period under audit.
Our audit approach
Overview
Audit scope
We performed audits of the complete financial information of two
components, namely the UK non-ring-fenced bank and HSBC Continental
Europe (HBCE).
For five further components, specific audit procedures were
performed over selected significant account balances and financial
statement note disclosures.
Key audit matters
-- Expected credit losses ('ECL') impairment of loans and advances (group and company)
-- Valuation of financial instruments (group and company)
-- Recognition of deferred tax assets (group); and
-- Impairment of investment in subsidiaries (company).
Materiality
-- Overall group materiality: GBP218 million (2020: GBP222
million) based on 1% of Tier 1 capital.
-- Overall company materiality: GBP140 million (2020: GBP142
million) based on 1% of Tier 1 capital.
-- Performance materiality: GBP164 million (2020: GBP166
million) (group) and GBP105 million (2020: GBP106 million)
(company).
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the directors made
subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain.
Key audit matters
Key audit matters are those matters that, in the auditors'
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had
the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the
results of our procedures thereon, were addressed in the context of
our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on
these matters. This is not a complete list of all risks identified
by our audit. Compared to last year the number of key audit matters
has reduced from six to four. The following are no longer
considered to be key audit matters.
-- Impact of Covid-19 (group and company) - Given the impact of
Covid-19 on working practices and international travel, the
majority of our interactions continued to be undertaken virtually,
including those with the partners and teams for component audit
teams, and with Board members and management. Similarly, a
substantial part of our audit testing was performed remotely. We
have established practices throughout 2021 for interacting and
undertaking our audit testing virtually, consistent with the hybrid
working models at both PwC and HSBC.
-- The present value of in-force long-term insurance contracts
('PVIF') asset (group) - The risk is reduced due to a reduction in
the materiality of changes to judgemental assumptions resulting in
lower estimation uncertainty.
-- Information Technology ('IT') Access Management (group and
company) - Management has remediated a number of the control
deficiencies in relation to IT access management.
Recognition of deferred tax assets (group) is a new key audit
matter this year. The remaining three key audit matters are
consistent with last year.
Expected credit losses - Impairment of loans and advances (group
and company)
Determining expected credit losses ('ECL') involves management judgement
and is subject to a high degree of estimation uncertainty. Management
makes various assumptions when estimating ECL. The significant assumptions
that we focus on in our audit included those with greater levels of
management judgement and for which variations had the most significant
impact on ECL. These included assumptions made in determining the following:
* forward looking economic scenarios and their
probability weightings for the wholesale portfolios;
* material management judgemental adjustments;
* wholesale customer risk ratings ('CRRs'); and
* estimating expected cash flows and collateral
valuations for credit impaired wholesale exposures.
The impact of Covid-19, including the nature and extent of government
support, and more recent factors, including supply chain constraints
and increasing energy prices, have resulted in unprecedented economic
conditions that vary between territories and industries, leading to
uncertainty around judgements made in determining the severity and
probability weighting of macroeconomic variable ('MEV') forecasts across
the different economic scenarios used in ECL models.
The modelling methodologies used to estimate ECL are developed using
historical experience. The impact of the unprecedented economic conditions
has resulted in certain limitations in the reliability of these methodologies
to forecast the extent and timing of future customer defaults and therefore
estimate ECL. In addition, modelling methodologies do not incorporate
all factors that are relevant to estimating ECL, such as differentiating
the impact on industry sectors of economic conditions. These limitations
are addressed with management adjustments, the measurement of which
is inherently judgemental and subject to a high level of estimation
uncertainty. Management makes other assumptions which are less judgemental
or for which variations have a less significant impact on ECL. These
assumptions include:
* Model methodologies themselves; and
* Quantitative and qualitative criteria used to assess
significant increases in credit risk.
We held discussions with the Audit Committee covering governance and
controls over ECL, with a significant focus on judgemental adjustments.
We also discussed a number of other areas, including:
* the severity of MEV forecasts in economics scenarios
and their related probability weightings;
* management judgemental adjustments and the nature and
extent of analysis used to support those adjustments;
* the criteria and conditions used to assess to what
extent management judgemental adjustments continue to
be needed; and
* management's policies, governance and controls over
model validation and monitoring.
We assessed the design and effectiveness of governance and controls
over the estimation of ECLs. We observed management's review and challenge
governance forums for (1) the determination of MEV forecasts and their
probability weightings for different economic scenarios, and (2) the
assessment of ECL for Wholesale portfolios, including the assessment
of model limitations and approval of any resulting adjustments to modelled
outcomes.
We also tested controls over:
* model validation and monitoring;
* credit reviews that determine CRRs for wholesale
customers;
* the identification of credit impaired events;
* the input of critical data into source systems and
the flow and transformation of critical data from
source systems to the impairment models; and
* the calculation and approval of management
judgemental adjustments to modelled outcomes.
We involved our economic experts to assist in assessing the reasonableness
of the severity and probability weighting of MEV forecasts. These assessments
considered the sensitivity of ECLs to variations in the severity and
probability weighting of MEVs for different economic scenarios. We
involved our modelling experts in assessing the appropriateness of
the significant assumptions and methodologies used for models and management
judgemental adjustments. We independently reperformed the calculations
for a sample of those models and management judgemental adjustments.
We further considered whether the judgements made in selecting the
significant assumptions would give rise to indicators of possible management
bias.
In addition, we performed substantive testing over:
* the compliance of ECL methodologies and assumptions
with the requirements of IFRS 9;
* the appropriateness and application of the
quantitative and qualitative criteria used to assess
significant increases in credit risk;
* a sample of critical data used in the year end ECL
calculation and to estimate management judgemental
adjustments as at 31 December 2021;
* assumptions and critical data for a sample of credit
impaired wholesale exposures; and
* a sample of CRRs applied to wholesale exposures.
We evaluated and tested the Credit Risk disclosures made in the financial
statements.
* Credit risk, page 32.
* Audit Committee, page 90.
* Note 1.2(i) Impairment of amortised cost and FVOCI
financial assets, page 122
Valuation of financial instruments (group and company)
The financial instruments held by the group range from those that are
traded daily on active markets with quoted prices, to more complex
and bespoke positions. The valuation of these financial instruments
can require the use of complex valuation models and/or prices or inputs
which are not readily observable in the market.
Where significant pricing inputs are unobservable, the financial instruments
are classified as Level 3 (L3), per the IFRS 13 fair value hierarchy.
Determining unobservable inputs in fair value measurement involves
management judgement and is subject to a high degree of estimation
uncertainty. There is also a risk that certain L3 portfolios are not
valued appropriately due to the complexity of the trades, specifically
where valuation modelling techniques result in significant limitations
or where there is greater uncertainty around the choice of an appropriate
pricing methodology.
Valuation of the L3 asset backed securities held by the Markets & Securities
Services business have a significant risk attached to the valuation
methodology due to the complexity of the valuation models and lack
of observable pricing inputs.
The own credit spread (OCS) adjustment for issued debt instruments
held at fair value also forms part of our significant risk due to its
underlying modelling complexity as well as unobservability of the inputs.
We discussed with the Audit Committee the results of our review of
fair valuation adjustment methodology and the results of our substantive
testing which included independent revaluation of a range of financial
instruments, including a sample of Level 3 positions.
For fair values based on complex valuation models and significant unobservable
inputs, specifically asset backed securities and issued debt instruments
held at fair value, we performed the following:
* Tested the design and operating effectiveness of key
controls supporting the identification and
measurement of the valuation of financial instruments,
including the independent price verification process.
* Engaged our valuation experts to perform independent
revaluation of a sample of trades to determine if
management's estimates fell within a reasonable
range.
For OCS, we engaged our valuation experts to assess the methodology
and underlying assumptions and compare with our knowledge of current
industry practice. Controls over the calculation of these adjustments
were also tested.
We also evaluated the adequacy and extent of disclosures made in the
financial statements in relation to valuation of L3 financial instruments.
* Audit Committee, page 90.
* Note 1.2(c) Valuation of financial instruments, page
120
* Note 11: Fair values of financial instruments carried
at fair value, page 140
Recognition of deferred tax assets (group)
Recognition of deferred tax assets ('DTAs') relies on an assessment
of the availability of future taxable profits against which to recognise
accumulated tax losses.
An assessment of the recoverability of deferred tax assets was performed
and deferred tax assets of GBP555m have been recorded in HSBC Continental
Europe ('HBCE') of which GBP261m relates to deductible temporary differences
and GBP294m relates to brought forward tax losses.
As at 31 December 2021, HBCE had accumulated tax losses of GBP496m,
of which GBP380m arose during 2021. Losses generated in 2019 and 2020
had not previously been recognised on the balance sheet as DTAs given
the history of HBCE taxable losses in those years. Management judgement
is required when assessing whether there is convincing other evidence
of future taxable profits, including over assumptions regarding the
forecast cash flows and determination of risk adjustments to such cash
flows and with regard to the timing of the reversal of temporary differences.
Management's assessment required consideration of the impact of the
disposal of the French retail business, including the impact that business,
and other one off restructuring costs, have had on historical taxable
profitability as well as the impact on future taxable profits across
a number of scenarios. Significant management judgements and assumptions
have been required in determining the quantum and probability of future
taxable profits.
We discussed with the Audit Committee our risk assessment with respect
to DTA recognition. We held discussions with the Audit Committee covering
controls over DTA and we also discussed the results of our challenge
of the key judgements and estimates being made with regard to deferred
tax.
* We tested the design and operating effectiveness of
controls over deferred tax asset recognition.
* With the support of our tax specialists we assessed
the viability of management's strategy to recover
deferred tax assets.
* We tested key inputs into the deferred tax
recognition model, including forecast cash flows to
approved plans and consistency with other judgements.
* We challenged management on their methodology and
underlying assumptions in arriving at their
judgements, including in relation to availability of
convincing other evidence of future taxable profits
and determination of risk adjustments applied to
those forecast taxable profits.
* In assessing these judgements we considered the
historic taxable profits and losses and the evidence
provided to support the judgement that the criteria
for recognition had been reached. We challenged the
achievability of management's forecast taxable
profits and assumptions made over the future reversal
of deferred tax assets and liabilities and reviewed
management's stress and scenario analyses over the
likelihood of future taxable profits.
We evaluated and tested the disclosures made in the financial statements
in relation to deferred tax.
* Audit Committee Report, page 90.
* Note 1.2(l) Tax, page 126
* Note 7: Tax, page 135
Impairment of investment in subsidiaries (company)
An annual impairment indicators assessment is performed for each of
the company's investments in subsidiaries. The sale of the retail banking
business in France, for which a framework agreement was signed in November
2021, and the ongoing restructuring within the company's largest subsidiary,
HSBC Continental Europe ('HBCE'), is considered by management to be
an indicator of impairment.
An impairment test was performed for the company's investment in HBCE
using a value in use ('VIU') model to estimate the recoverable amount.
The recoverable amount was higher than the carrying value for this
investment and therefore no impairment was recorded. The investment
in HBCE amounts to GBP4.3bn as at 31 December 2021.
The methodology in the VIU model is dependent on various assumptions,
both short term and long term in nature. These assumptions, which are
subject to estimation uncertainty, are derived from a combination of
management's judgement, experts engaged by management and market data.
The significant assumptions that we focused our audit on were those
with greater levels of management judgement and for which variations
had the most significant impact on the recoverable amount. Specifically,
these included forecast cash flows for 2022 to 2026, capital requirements,
long term growth rates and discount rates.
We discussed the appropriateness of methodologies used and significant
assumptions with the Audit Committee, giving consideration to the group's
strategy. We discussed the sensitivity of the impairment assessment
to the key assumptions, in particular the forecast cash flows and the
discount rate. We also discussed the disclosures made in relation to
investment in subsidiaries, including the use of sensitivity analysis
to explain estimation uncertainty and the conditions that would result
in an impairment being recognised.
We tested the control in place over the forecasted cash flow assumptions
used to determine the recoverable amounts. We assessed the appropriateness
of the methodology used, and the mathematical accuracy of the calculations,
to estimate the recoverable amounts. In respect of the significant
assumptions, our testing included the following:
* Challenging the achievability of management's
forecast cash flows;
* Obtaining and evaluating evidence where available for
critical data relating to significant assumptions,
from a combination of historic experience and
external market and other group financial
information;
* Assessing whether the cash flows included in the
model were in accordance with the relevant accounting
standard;
* Assessing the sensitivity of the VIU to reasonable
variations in significant assumptions, both
individually and in aggregate; and
* Determining a reasonable range for the discount rate
used within the model, with the assistance of our
valuation experts, and comparing it to the discount
rate used by management.
We evaluated and tested the disclosures made in the financial statements
in relation to investment in subsidiaries.
* Audit Committee Report, page 90.
* Note 1.2(a) Consolidation and related policies, page
119
* Note 18: Investment in subsidiaries, page 156
How we tailored the audit scope
We performed a risk assessment, giving consideration to relevant
external and internal factors, including Covid-19, climate change,
geopolitical and economic risks, relevant accounting and regulatory
developments, the group's strategy and the changes taking place
across the group. We also considered our knowledge and experience
obtained in prior year audits. As part of considering the impact of
climate change in our risk assessment, we evaluated management's
assessment of the impact of climate risk including their conclusion
that there is no material impact on the financial statements. In
particular, we considered management's assessment of the impact on
ECL on loans and advances, the financial statement line item we
determined to be most likely to be impacted by climate risk.
Management's assessment gave consideration to a number of matters,
including the HSBC Holdings plc climate stress testing performed in
2021.
Using our risk assessment, we tailored the scope of our audit to
ensure that we performed enough work to be able to give an opinion
on the financial statements as a whole, taking into account the
structure of the group and the company, the accounting processes
and controls, and the industry in which they operate.
HSBC Bank plc is structured into five divisions being Markets
& Securities Services, Global Banking, GBM Other, Commercial
Banking and Wealth and Personal Banking, which are supported by a
Corporate Centre. The divisions operate across a number of
operations, subsidiary entities and branches ('components')
throughout Europe. Within the group's main consolidation and
financial reporting system, the consolidated financial statements
are an aggregation of the components. Each component submits their
financial information to the group in the form of a consolidation
pack.
In establishing the overall approach to the group and company
audit, we scoped using the balances included in the consolidation
pack. We determined the type of work that needed to be performed
over the components by us, as the group engagement team, or
auditors within PwC UK and from other PwC network firms operating
under our instruction ('component auditors').
As a result of our scoping, for the group we determined that
audits of the complete financial information of the UK
non-ring-fenced bank ('UK NRFB') and HSBC Continental Europe (HBCE)
were necessary, owing to their financial significance. We
instructed component auditors, PwC UK and PwC France to perform the
audits of these components. Our interactions with component
auditors included regular communication throughout the audit,
including the issuance of instructions, a review of working papers
relating to the key audit matters and formal clearance meetings.
The group audit engagement partner was also the partner on the
audit of the UK NRFB significant component.
We then considered the significance of other components in
relation to primary statement account balances and note
disclosures. In doing this we also considered the presence of any
significant audit risks and other qualitative factors (including
history of misstatements through fraud or error). For five
components, specific audit procedures were performed over selected
significant account balances. For the remainder, the risk of
material misstatement was mitigated through group audit procedures
including testing of entity level controls and group and company
level analytical review procedures.
Certain group-level account balances were audited by the group
engagement team.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on
the financial statements as a whole.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Financial statements - group Financial statements - company
Overall materiality GBP218 million (2020: GBP222 GBP140 million (2020: GBP142
million). million).
How we determined 1% of Tier 1 capital. 1% of Tier 1 capital.
it
Rationale for benchmark Tier 1 capital is used as Tier 1 capital is used as
applied a benchmark as it is considered a benchmark as it is considered
to be a key driver of HSBC to be a key driver of HSBC
Bank plc's decision making Bank plc's decision making
process and has been a primary process and has been a primary
focus for regulators. focus for regulators.
Tier 1 capital was also used as the benchmark in the prior year.
The basis for determining materiality was re-evaluated and we
considered other benchmarks, such as profit before tax. Tier 1
capital is a common benchmark for wholly owned banking
subsidiaries, because of the focus on financial stability. Tier 1
capital was determined to continue to be an appropriate benchmark
given the importance of this metric to the HSBC Bank plc decision
making process and to principal users of the financial statements,
including the ultimate holding company HSBC Holdings plc.
For each component in the scope of our group audit, we allocated
a materiality that is less than our overall group materiality. The
range of materiality allocated across components was GBP9 million
to GBP130 million. Certain components were audited to a local
statutory audit materiality that was also less than our overall
group materiality.
We use performance materiality to reduce to an appropriately low
level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically,
we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances,
classes of transactions and disclosures, for example in determining
sample sizes. Our performance materiality was 75% (2020: 75%) of
overall materiality, amounting to GBP164 million (2020: GBP166
million) for the group financial statements and GBP105 million
(2020: GBP106 million) for the company financial statements. In
determining the performance materiality, we considered a number of
factors - the history of misstatements, risk assessment and
aggregation risk and the effectiveness of controls - and concluded
that an amount at the upper end of our normal range was
appropriate.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP11 million
(group audit) (2020: GBP7 million) and GBP7 million (company audit)
(2020: GBP7 million) as well as misstatements below those amounts
that, in our view, warranted reporting for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors' assessment of the group's and
the company's ability to continue to adopt the going concern basis
of accounting included:
-- Performing a risk assessment to identify factors that could
impact the going concern basis of accounting, including the impact
of external risks including Covid-19 and climate change risks.
-- Understanding and evaluating the group and company's
financial forecasts and stress testing of liquidity and regulatory
capital, including the severity of the stress scenarios that were
used.
-- Reading and evaluating the adequacy of the disclosures made
in the financial statements in relation to going concern.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
group's and the company's ability to continue as a going concern
for a period of at least twelve months from when the financial
statements are authorised for issue.
In auditing the financial statements, we have concluded that the
directors' use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
However, because not all future events or conditions can be
predicted, this conclusion is not a guarantee as to the group's and
the company's ability to continue as a going concern.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our auditors'
report thereon. The directors are responsible for the other
information. Our opinion on the financial statements does not cover
the other information and, accordingly, we do not express an audit
opinion or, except to the extent otherwise explicitly stated in
this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we
identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to conclude
whether there is a material misstatement of the financial
statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to
report that fact. We have nothing to report based on these
responsibilities.
With respect to the Strategic Report and Report of the
Directors, we also considered whether the disclosures required by
the UK Companies Act 2006 have been included.
Based on our work undertaken in the course of the audit, the
Companies Act 2006 requires us also to report certain opinions and
matters as described below.
Strategic Report and Report of the Directors
In our opinion, based on the work undertaken in the course of
the audit, the information given in the Strategic Report and Report
of the Directors for the year ended 31 December 2021 is consistent
with the financial statements and has been prepared in accordance
with applicable legal requirements.
In light of the knowledge and understanding of the group and
company and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic
Report and Report of the Directors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial
statements
As explained more fully in the Statement of directors'
responsibilities in respect of the financial statements, the
directors are responsible for the preparation of the financial
statements in accordance with the applicable framework and for
being satisfied that they give a true and fair view. The directors
are also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, the directors are
responsible for assessing the group's and the company's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or the company or to cease operations, or have no realistic
alternative but to do so.
Auditors' responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors' report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud, is detailed below.
Based on our understanding of the group and industry, we
identified that the principal risks of non-compliance with laws and
regulations related to the Financial Conduct Authority's ('FCA')
regulations, the Prudential Regulation Authority's ('PRA')
regulations, UK Listing Rules, Pensions legislation, Anti-Bribery
and Corruption legislation, Anti-Money Laundering legislation and
UK tax legislation, and we considered the extent to which
non-compliance might have a material effect on the financial
statements. We also considered those laws and regulations that have
a direct impact on the financial statements such as the Companies
Act 2006. We evaluated management's incentives and opportunities
for fraudulent manipulation of the financial statements (including
the risk of override of controls), and determined that the
principal risks were related to posting inappropriate journal
entries to increase revenue or reduce costs, creation of fictitious
transactions to hide losses or to improve financial performance,
and management bias in accounting estimates. The group engagement
team shared this risk assessment with the component auditors so
that they could include appropriate audit procedures in response to
such risks in their work. Audit procedures performed by the group
engagement team and/or component auditors included:
-- Review of correspondence with and reports to the regulators, including the PRA and FCA;
-- Review of reporting to the Audit Committee and Risk Committee
in respect of compliance and legal matters;
-- Review of a sample of legal correspondence with legal advisors;
-- Enquiries of management and review of internal audit reports
in so far as they related to the financial statements;
-- Obtaining legal confirmations from legal advisors relating to
material litigation and compliance matters;
-- Challenging assumptions and judgements made by management in
their significant accounting estimates, in particular in relation
to the determination of fair value for certain financial
instruments, the determination of expected credit losses,
impairment assessments of investments in subsidiaries and
recognition of deferred tax assets (see related key audit matters
above);
-- Obtaining confirmations from third parties to confirm the
existence of a sample of transactions and balances; and
-- Identifying and testing journal entries meeting specific
fraud criteria, including those posted with certain descriptions,
posted and approved by the same individual, backdated journals or
posted by infrequent and unexpected users.
There are inherent limitations in the audit procedures described
above. We are less likely to become aware of instances of
non-compliance with laws and regulations that are not closely
related to events and transactions reflected in the financial
statements. Also, the risk of not detecting a material misstatement
due to fraud is higher than the risk of not detecting one resulting
from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through
collusion.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other
cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors' report.
Use of this report
This report, including the opinions, has been prepared for and
only for the company's members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose. We
do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not obtained all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept by the
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- certain disclosures of directors' remuneration specified by law are not made; or
-- the company financial statements are not in agreement with
the accounting records and returns.
We have no exceptions to report arising from this
responsibility.
Appointment
Following the recommendation of the Audit Committee, we were
appointed by the directors on 31 March 2015 to audit the financial
statements for the year ended 31 December 2015 and subsequent
financial periods. The period of total uninterrupted engagement is
seven years, covering the years ended 31 December 2015 to 31
December 2021.
Other matter
In due course, as required by the Financial Conduct Authority
Disclosure Guidance and Transparency Rule 4.1.14R, these financial
statements will form part of the ESEF-prepared annual financial
report filed on the National Storage Mechanism of the Financial
Conduct Authority in accordance with the ESEF Regulatory Technical
Standard ('ESEF RTS'). This auditors' report provides no assurance
over whether the annual financial report will be prepared using the
single electronic format specified in the ESEF RTS.
Claire Sandford
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
21 February 2022
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