TIDMRT90
RNS Number : 5955Q
HSBC UK Bank PLC
21 February 2023
HSBC UK Bank plc 2022 Annual Report and Accounts
In fulfilment of its obligations under sections 4.1.3 and
6.3.5(1) of the Disclosure and Transparency Rules, HSBC UK Bank plc
hereby releases the unedited full text of its 2022 Annual Report
and Accounts (the "document") for the year ended 31 December
2022.
The document is now available on our corporate website:
http://www.hsbc.com/investor-relations/subsidiary-company-reporting
The document has also been submitted to the Financial Conduct
Authority's National Storage Mechanism and will shortly be
available for viewing at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
HSBC UK Bank plc
Annual Report and Accounts 2022
Contents
Page
Strategic report
About us 2
Financial highlights 3
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Key financial metrics 4
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Our purpose and values 5
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Our core strengths 5
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Our strategy 5
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Stakeholder engagement 8
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Business performance and KPIs 9
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Economic background and outlook 10
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Financial summary 10
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Risk overview 14
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Risk environment 15
Report of the Directors
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Risk review 17
Corporate Governance Report 65
Directors' Report Disclosures
table 70
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Statement of Directors' Responsibilities
in respect of the financial statements 71
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Financial statements
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Independent auditors' report
to the member of HSBC UK Bank
plc 72
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Financial statements 78
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Notes on the financial statements 87
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Other information
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Reconciliation of alternative
performance measures 126
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Abbreviations 127
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Presentation of information
This document comprises the Annual Report and Accounts 2022 for
HSBC UK Bank plc ('the bank' or 'the Company') and its subsidiaries
(together 'HSBC UK' or 'the group'). 'We', 'us' and 'our' refer to
HSBC UK Bank plc together with its subsidiaries. It contains the
Strategic Report, the Report of the Directors, the Statement of
Directors' Responsibilities and Financial Statements, together with
the Independent Auditors' Report, as required by the UK Companies
Act 2006. References to 'HSBC Group' or 'the Group' within this
document mean HSBC Holdings plc together with its subsidiaries.
A full list of abbreviations is provided on page 127.
HSBC UK is exempt from publishing information required by The
Capital Requirements Country-by-Country Reporting Regulations 2013,
as this information is published by its ultimate parent, HSBC
Holdings plc. This information is available on the Group's website:
www.hsbc.com
Pillar 3 disclosures for HSBC UK are also available on
www.hsbc.com, under Investor Relations.
All narrative disclosures, tables and graphs within the
Strategic Report and Report of the Directors are unaudited unless
otherwise stated.
Our reporting currency is GBP sterling. Unless otherwise
specified, all GBP symbols represent GBP sterling and $ symbols
represent US dollars. The abbreviations 'GBPm' and 'GBPbn'
represents millions and billions (thousands of millions) of GBP
sterling.
This Annual Report and Accounts 2022 contains certain
forward-looking statements with respect to the financial condition,
ESG related matters, 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 no undue reliance should be placed on
them. Forward-looking statements apply only as of the date they are
made. HSBC UK makes no commitment to revise or update any
forward-looking statements to reflect events or circumstances
occurring or existing after the date of any forward-looking
statement.
Forward-looking statements involve inherent risks and
uncertainties. Readers are cautioned that a number of factors,
including ESG related factors, could cause actual results to
differ, in some instances materially, from those anticipated or
implied in any forward-looking statement.
About us
HSBC UK Bank plc is a public limited company with debt
securities traded on the London Stock Exchange. The Company is a
ring-fenced bank and wholly owned subsidiary of HSBC Holdings
plc.
HSBC UK, headquartered in Birmingham, has over 14 million active
customers, with over 18,500 FTE employees across the country,
supported by a further 5,000 FTE based in our service company HSBC
Global Services (UK) Limited, who provide services to HSBC UK and
the wider HSBC Group.
HSBC UK is intrinsically linked to the rest of the HSBC Group
and leverages this network to support customers and grow revenue
across key trade corridors around the world. HSBC UK provides
products and services to customers through three businesses,
supported by a corporate centre.
Wealth and Personal Banking
Customers
WPB helps our customers manage their day-to-day finances and
manage, protect and grow their wealth. We serve over 13.5 million
active customers under three brands: HSBC UK, including our Private
Bank, first direct and M&S Bank. In 2022, we exited our
partnership with John Lewis.
Products and services
We offer a comprehensive set of banking products and services to
support customers' banking needs including: current and savings
accounts, mortgages, unsecured lending, wealth solutions and
insurance services.
Commercial Banking
Customers
CMB serves over 700,000 active customers across the UK, ranging
from start-ups to multi-national corporates: Business Banking
(which incorporates Small Business Banking); Mid-Market
Enterprises; and Large Corporates.
Products and services
We support customers with tailored financial products and
services to allow them to operate efficiently and grow. These
include credit and lending, global payments solutions, and global
trade and receivables finance.
Global Banking and Markets
A restricted Global Banking and Markets business offering
restricted FX products and cash management services to our customer
base and also making available other products from HSBC Bank
plc.
Corporate Centre
Corporate Centre supports central operations of the HSBC UK
business lines and comprises Markets Treasury, interests in a joint
venture, and stewardship costs.
The Annual Report and Accounts for the year ended 31 December
2022 outline our business and financial performance aligned to our
key strategic pillars.
Our strategy
Our UK strategy comprises the following four pillars:
Focus on our strengths
We seek to use our strengths as a major UK bank to play a vital
role in the future of the UK economy, supporting our customers and
the
communities in which we operate, including through the cost of
living crisis; and focusing on those areas where we have
opportunities to grow.
Digitise at scale
We aim to use technology to deliver fast, easy and secure
banking.
Energise for growth
We seek to inspire an inclusive and customer-focused culture
where employees can learn, develop and grow.
Transition to net zero
HSBC Group is targeting a transition to net zero for financed
emissions from the portfolio of customers by 2050, and operations
and supply chain by 2030.
Our strategy, setting out further details of our four strategic
pillars, can be found on pages 5 to 6.
Stakeholder engagement
Building strong relationships with our stakeholders helps us to
deliver our strategy in line with our long-term values, and operate
the business in a sustainable way. Our stakeholders are the people
who work for us, bank with us, own us, regulate us, and live in the
societies we serve and the planet we all inhabit. These human
connections are complex and overlap. Many of our employees are
customers and shareholders of our Group, while our business
customers are often suppliers. We aim to serve, creating value for
our customers and shareholders. Our size and global reach mean our
actions can have significant impact. We aim to do business
responsibly, and thinking for the long term. This is key to
delivering our strategy.
Our section 172 statement, detailing our Directors'
responsibility to stakeholders, can be found on pages 8 to 9.
Financial performance
We delivered reported profit before tax of GBP3,638m, GBP158m
higher than 2021, driven by higher revenue, offset by higher ECL
and operating expenses. Adjusted profit before tax increased 7%
compared with 2021, to GBP4,036m.
Reported revenue increased 27% to GBP7,952m due to higher base
interest rates increasing net interest margin by 36bps from 2021 to
1.89%, balance sheet growth and increased activity.
ECL increased by GBP1,471m from a GBP989m release in 2021 driven
by post Covid-19 releases of allowances built up in 2020 to a
charge of GBP482m in 2022 due to the deterioration in the economic
outlook.
Reported operating expenses increased by GBP73m, including
restructuring programme costs. On an adjusted basis, operating
expenses were 1% lower than 2021 as we continue to actively manage
our cost base, despite continued investment in technology,
inflationary pressures and one-off cost of living payments made to
staff.
Our 2022 reported RoTE of 16.3% was 2.8% higher than the 2021
reported RoTE of 13.5%, driven by higher profit before tax.
Our Financial summary, containing further details of our
financial performance, can be found on page 10.
Risk overview
We use an established risk management framework underpinned by a
strong culture to enable effective risk governance and an
understanding of the risks that apply to HSBC UK. All our people
are responsible for the management of risk, with the ultimate
accountability residing with the Board.
Full details of our top and emerging risks and areas of key
interest are included on page 19.
Financial highlights
For the year ended 31 December 2022Reported
profit before tax
GBP3.6bn
(2021: GBP3.5bn)
Reported revenue
GBP8.0bn
(2021: GBP6.3bn)
Loans and advances to customers
GBP204.1bn
(2021: GBP195.5bn)
Risk-weighted assets
GBP92.4bn
(2021: GBP83.7bn)
Adjusted profit before tax
GBP4.0bn
(2021: GBP3.8bn)
Expected credit losses and other
credit impairment charges / (releases)
GBP0.5bn
(2021: GBP(1.0)bn)
Customer accounts
GBP281.1bn
(2021: GBP281.9bn)
Common equity tier 1 capital ratio
13.5 %
(2021: 15.3%)
Key financial metrics
Year ended
31 Dec 31 Dec
2022 2021
---------------------------------------------------------- --------------------------- -----------------------------
Reported results
---------------------------------------------------------- --------------------------- -----------------------------
Reported revenue (GBPm) 7,952 6,250
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Reported profit before tax (GBPm)(2) 3,638 3,480
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Reported profit after tax (GBPm) 2,876 2,368
---------------------------------------------------------- --------------------------- -----------------------------
Profit attributable to the shareholders of the parent
company (GBPm) 2,871 2,363
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Return on average tangible equity (%)(2) 16.3 13.5
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Net interest margin (%) 1.89 1.53
Expected credit losses/(releases) as % of average gross
loans and advances to customers (%) 0.24 (0.51)
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Adjusted results
---------------------------------------------------------- --------------------------- -----------------------------
Adjusted revenue (GBPm) 7,944 6,239
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Adjusted profit before tax (GBPm)(2) 4,036 3,764
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Cost efficiency ratio (%)(2) 43.1 55.5
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Adjusted return on average tangible equity (%)(1,2) 17.9 14.7
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Balance sheet
---------------------------------------------------------- --------------------------- -----------------------------
Total assets (GBPm) 342,441 346,063
---------------------------------------------------------- --------------------------- -----------------------------
Net loans and advances to customers (GBPm) 204,143 195,526
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Customer accounts (GBPm) 281,095 281,870
---------------------------------------------------------- --------------------------- -----------------------------
Average interest-earning assets (GBPm) 327,840 303,151
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Loans and advances to customers as % of customer accounts
(%) 72.6 69.4
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Total shareholders' equity (GBPm) 22,166 23,745
---------------------------------------------------------- --------------------------- -----------------------------
Tangible ordinary shareholders equity (GBPm) 15,699 17,332
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Capital, leverage and liquidity
---------------------------------------------------------- --------------------------- -----------------------------
Common equity tier 1 capital ratio (%)(2,3) 13.5 15.3
---------------------------------------------------------- --------------------------- -----------------------------
Total capital ratio (%)(3) 19.3 21.6
---------------------------------------------------------- --------------------------- -----------------------------
Risk-weighted assets(3) (GBPm) 92,413 83,723
---------------------------------------------------------- --------------------------- -----------------------------
Leverage ratio(3) (%) 5.9 4.2
---------------------------------------------------------- --------------------------- -----------------------------
High-quality liquid assets (liquidity value) (GBPm)(4) 110,722 103,943
---------------------------------------------------------- --------------------------- -----------------------------
Liquidity coverage ratio (%)(4) 226 222
---------------------------------------------------------- --------------------------- -----------------------------
1 In the event that the current IAS 19 pension fund surplus was
zero adjusted RoTE would be 19.7%. Further detail is on page
126.
2 These metrics are tracked as KPIs of the group.
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 59. Leverage
ratios are reported based on the disclosure rules in force at that
time, and include claims on central banks. Current period leverage
metrics exclude central bank claims in accordance with the UK
leverage rules that were implemented on 1 January 2022. References
to EU regulations and directives (including technical standards)
should, as applicable, be read as a reference to the UK's version
of such regulation and/or directive, as onshored into UK law under
the European Union (Withdrawal) Act 2018, and as may be
subsequently amended under UK law.
4 The LCR and HQLA are based on the average value of the
preceding 12 months. Prior period numbers have been restated for
consistency.
Presentation of alternative performance measures (non-GAAP financial
measures)
In measuring our performance, the financial measures that we use
include those derived from our reported results to eliminate
factors that distort period-on-period comparisons. Such measures
are referred to as adjusted performance. A reconciliation of
reported to adjusted performance is provided on pages 12 to 13.
RoTE is computed by adjusting the reported equity for goodwill
and intangibles. A reconciliation is provided on page 126, which
details the adjustments made to the reported results and equity in
calculating RoTE.
Our purpose and values
Our purpose
Opening up a world of opportunity.
Our values
-- 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.
Our core strengths
Full banking capability
We serve customers ranging from personal customers through to
multi-national corporates with the support of our three businesses.
Our full banking capability assists us in seeking to meet our
customers' diverse financial needs, reduce our risk profile and
volatility, and generate returns for shareholders.
Value of our network
Within the UK we provide products and services digitally, by
phone and face-to-face through our branches, bureaux and offices,
and commercial centres. We are also supported by our Global Service
Centres.
Access to HSBC Group's global network
and business synergies
For customers with international interests, we are intrinsically
connected with the HSBC Group's wider global network, enabling our
customers to seize international growth opportunities. This helps
us build deeper and more enduring relationships with businesses and
individuals. HSBC Group's geographic reach and network of customers
also allows greater insight into the trade and capital flows across
supply chains. We share resources and product capabilities across
our businesses and leverage these synergies when serving our
customers.
Our strategy
Our UK strategy comprises the following four pillars:
Focus on our strengths
Supporting our customers
Throughout the year in WPB, we have taken a number of measures
to support our customers through the current cost of living
challenges. We have reached out to over 5.5m customers via email
and phone to make them aware of the information and tools available
to support with the cost of living. We launched the 'Rising Cost of
Living Hub' on our website which offers guidance on where to go for
additional support and provide money saving tips. We also gave
customers with an existing overdraft the opportunity to request an
increased interest-free buffer of GBP500 for a 12-month period.
We have enhanced support for our vulnerable customers as we
focused on financial accessibility and inclusion. We turned all of
our UK branches into Safe Spaces, to be used by anyone trying to
escape domestic violence. As at 31 December 2022, we have opened
9,219 accounts for Ukrainian settlers and 371 for Afghan settlers.
Additionally, the success of our past work continues as we have
supported 4,209 individuals through our No Fixed Address service
since 2018 and 2,125 through our Survivor Bank service, supporting
survivors of human trafficking and modern slavery.
During the extreme market volatility in September 2022, we
worked hard to support our mortgage customers. We simplified our
online mortgage rate switching journey, with customers able to
complete in less than 10 minutes. We also extended our rate
switching window from 90 to 120 days, enabling customers to lock in
their go-forward rate with more certainty.
In CMB, we have proactively engaged and supported our business
customers to navigate rising inflation and supply chain pressures.
We supported Small and Medium-sized Enterprises with Financial
Health Checks and focused cost of living webinars combining
economic updates with showcasing of the support available to
businesses. We support global multi-banked corporates with
requirements across all HSBC Group's product range including
capital financing structures, financial sponsor shareholding and
acquisition debt. In UK Global Trade & Receivables Finance, we
launched a new iteration of the government's Recovery Loan Scheme
Invoice Finance Facility which aims to improve the terms on offer
to borrowers, extending the funding up to 100% of the value of
invoices notified to HSBC UK.
Despite the uncertain environment, we continued to provide
support to help British businesses grow. This year we launched a
GBP250m 'Growth Lending' fund to help high-growth tech firms scale
up and achieve their global ambitions and we have received business
introductions to various sub sectors including FemTech, Climatech,
Edtech and Insurtech looking to use the fund. In addition, we
increased our total support for UK SMEs to GBP90bn since it was
first launched in 2018. The fund is split into regional pots and
funds for key sectors such as International, Technology,
Agriculture and Franchise.
Improving customer service
Our strategic NPS benchmarking survey, that runs twice a year,
saw first direct ranked joint 1st across all retail providers. For
HSBC UK WPB, our score increased to +11, ranking us joint 10th vs.
our peers.
In CMB, we have seen a decline in our overall score to -19 vs.
-15 FY21 as measured by Savanta. Our MME segment overall ranking
reduced to 3rd; BB improved to 4th and SBB remains at 8th but with
improved customer digital satisfaction. Our LC segment remains #1
in the market for overall penetration and strategic advice in the
Coalition Greenwich Survey.
We recognise that there is more work to be done to consistently
meet and exceed customer needs. We have invested in additional
contact centre training and resources to improve customer service
which fell below our expected standards in 2022.
In 2022, we closed 70 branches and have 114 planned closures for
2023. We are cognisant of the impact our branch closures will have
on some customers, and are digitising customer journeys at scale,
while investing in our go-forward branch network. In 2022, we
provided 918 community tablets to support our customers where
digital servicing will support them to access banking services.
HSBC UK is a member of Cash Access UK Limited, a company whose
members are a group of banks and building societies. The company
aims to preserve access to cash for consumers and businesses over
the long-term.
Growing our business
Through focusing on the areas where we have distinctive
capabilities, we continued to attract new customers. In 2022, we
saw 190,000 personal customers switch to one of our brands from
another provider, the highest ever; with first direct being the top
bank for most switched to bank in the UK and winning MoneyFacts
Consumer Awards Current Account Switching Provider of the year.
Meanwhile HSBC Kinetic, our digital SME bank, had onboarded
c.53,000 customers since launching in 2021 and has been recognised
with several industry awards including Best Digital Customer
Experience for account opening and onboarding by The Digital Banker
2022.
In 2022, we have helped first time buyers purchase c.12,000
properties, doing so by expanding our intermediary coverage to 870
brokers. As a result, we provided GBP27.9bn of gross new mortgage
lending (FY21: GBP27.6bn) and increased our mortgage stock market
share to 7.7% (FY21: 7.5%)(1) .
Across the Private Bank we have increased our bespoke investment
opportunities for clients - broadening our discretionary
proposition with new equity strategies launched. In 2022, we
acquired GBP3.0bn in net new money (FY21: GBP2.2bn).
In CMB, we were recognised in the market as Lender of the Year
for 2022 at the Unquote British Private Equity Awards and our UK
Global Payments Solutions team was named as Best in Service and
Market Leader in the 2022 Euromoney Cash Management Survey. Our
enhanced Global Payments Solutions proposition and optimisation
activities drove a strong performance in 2022 achieving +62%
revenue year on year. In GTRF, we were rated #1 Trade Finance Bank
in the UK for the 6th year running at the Euromoney Awards for
Excellence and assets are at record levels, near GBP7bn on a period
end basis reflecting +25% growth on prior year. Furthermore,
commercial lending (loans and overdrafts)(2) has increased 7% vs.
FY21 despite the roll-off of government loan scheme balances.
Through supporting our customers expand internationally we achieved
double digit international revenue growth rates.
1 Bank of England - Gross Lending, Net Lending & Stock, DEC 22.
2 Total Loans & Advances less GTRF and Covid lending.
Digitise at scale
As part of our ambition to make banking simpler for our
customers, we have opened 377,000 current accounts digitally and
more than 780,000 unsecured lending products. This means that more
than 95% of our unsecured lending originates through a digital
channel.
In WPB, we launched Global Money, offering UK customers fee-free
spending overseas; or for sending money abroad across 65 currencies
covering at least 200 countries. As at 31 December 2022 we have
onboarded 124,000 customers. This year we overhauled account
applications on the first direct mobile app, reducing the time it
takes to apply to 8 minutes. In M&S we launched Sparks Pay, the
first product built on HSBC Group's new Global Lending platform
using a cloud-based decision engine to support a faster
journey.
Leveraging the foundations built in 2021, we continue to
optimise our mobile wealth services, including the ability to make
regular payments and invest in new low-cost sustainable funds. In
2022, 69% of all new non-advised fund acquisitions on Global
Investment Centre has come through mobile channel.
We aim to use technology to deliver secure banking and that is
why this year we introduced our first ever machine learning model
to help detect payment fraud and scams. Since deployment, this
model has increased detection cases by 21%.
In CMB, we have enhanced functionalities in our digital channels
such as the Digital Business Banking payment tracker giving
customers transparency over the end-to-end journey of cross-border
payments. Following customer feedback, customers in HSBCnet can now
download a payment message online to use as proof that funds have
been sent to allow the release of goods and services. In Global
Wallet, our award winning multi-currency virtual wallet, we
increased our customer base by five times compared to 2021 with
transaction values also rising tenfold. Digital adoption in CMB
continues on a forward trajectory with 76% of customers now
digitally active.
We launched new technologies to further support customers with
our HSBC Trade Solutions platform helping to process transactions
for clients that trade internationally with Guarantees and Standby
Documentary Credits. Our new Dynamic Risk Assessment transaction
monitoring system uses artificial intelligence and machine learning
models to help detect financial crime risk and protect
customers.
Energise for growth
Supporting our employees
Our ambition is to transform our culture to one that is truly
customer-centric and high performing, becoming an organisation that
is widely recognised by our customers and employees for providing
world-class service and propositions. By bringing the voice of the
customer into the running of our business, we will enable employees
to better understand customers' situations, perceptions and
expectations.
Employee engagement
Our employees' health, well-being and engagement continues to be
a priority. We have provided extensive support through the launch
of a new Digital GP Service giving employees, their partners and
dependants quick and easy access to primary care at the time of
need.
We gave a one-off payment of GBP1,500 to almost 17,000
employees, to support them with rising cost of living pressures. In
partnership with the Bank Workers Charity, we have continued the
HSBC Support Fund to provide short-term financial support to
current and former employees who find themselves in financial
hardship. Since launch in May 2021, 130 grants have been awarded
for an aggregate amount of GBP190k.
We have seen employee engagement improve in 2022, with 75% of
employees taking part in our internal Snapshot survey vs. 60% in
2021. 63% of employees would recommend HSBC UK as a great place to
work, an +8 increase from last year; and the overall engagement
index that shows how employees feel about the organisation is at
65%, +6 higher than in 2021.
We have provided guidance and structure to our people, to enable
us to embed hybrid working in a sustainable way, while supporting
our customers. We also launched Talent Marketplace, enabling people
to undertake short-term assignments to help gain relevant hands-on
experience within a specific discipline.
Speak-up culture
Empowering a speak up culture where our employees feel able to
raise issues is critical. Multiple channels are available to our
employees, including our confidential whistleblowing helpline and
our Human Resources Direct platform. Our HSBC Confidential
whistleblowing helpline enables employees to raise concerns in
confidence and anonymously if they wish, without fear of
retaliation and reprisal. Concerns are investigated thoroughly and
independently and HSBC UK does not condone or tolerate any acts of
retaliation against concern raisers.
Diversity and Inclusion
In 2022, we continued the delivery of our '3 Rs' inclusion
strategy:
-- Representation: We entered into a three-year partnership with
MOBOLISE, a Black Talent programme; and, recruited five people with
complex disabilities into bespoke Head Office roles. By year end
our senior leadership was 37.9% female, 2.6% black heritage, and
our new recruits included 10.9% with a disability. For further
details, please visit HSBC Group's gender and ethnicity disclosures
available online.
-- Respect: We continued to integrate inclusion messaging within
standard communications and training and our employee survey scores
show that we are making a difference, with overall inclusion scores
increasing by 4 points this year.
-- Reputation: HSBC UK was named a top 10 employer by the
Ethnicity Awards, ranked 32nd in the Stonewall LGBTQ+ Index, and
was recognised as a Gold Standard employer following an assessment
by the Business Disability Forum, with a score of 95.8%, the
highest score awarded.
Supporting our community
Community partnerships
Employability: The Prince's Trust
This year we celebrated a decade of impact across our
partnership. Since 2012, we have reached more than 55,000 young
people not in education or employment. In 2022, over 2,180 young
people benefited from the Prince's Trust Employability programmes
with HSBC UK's support.
Youth Financial Capability
In 2022, HSBC UK have supported over 445,000 children and young
people to learn about money through our programmes and partnerships
with Young Money, The Scouts Association, our Education team and
volunteer network.
Charity Finance Group
In partnership with the Charity Finance Group we created a
Modern Banking Customer Guide to help charities, voluntary
organisations, faith and community groups meet their banking needs
in an evolving world and raise awareness of digital banking
options.
Community support
In 2022, HSBC UK donated GBP8.3m to charities and non-profit
organisations running programmes and projects in the UK.
Additionally, our employees fundraised over GBP1m, supported with
an additional GBP1.1m contribution from HSBC UK through our
employee Pound for Pound scheme. Our employee led projects
supported over 15,000 vulnerable people across 58 local charities
and 3,315 employees took paid volunteering leave to support their
local communities.
Transition to net zero
HSBC Group continues to take steps to implement its climate
ambition to become net zero in its operations and supply chain by
2030, and align financed emissions to net zero by 2050. HSBC Group
expanded the coverage of sectors for on-balance sheet financed
emissions targets, recognising the challenge of evolving
methodologies and data limitations.
The transition to net zero is one of the biggest challenges for
our generation. Success will require governments, customers and
finance providers to work together. HSBC Group's global footprint
means that many of its clients operate in high-emitting sectors and
regions that face the greatest challenge in reducing emissions.
This means that HSBC Group's transition will be challenging but is
an opportunity to make an impact.
HSBC Group recognises that to achieve its climate ambition it
needs to be transparent on the opportunities, challenges, related
risks and progress it makes. To deliver on HSBC Group's ambition,
it requires enhanced processes and controls, and new sources of
data. HSBC Group continues to invest in climate resources and
skills, and develop its business management process to integrate
climate impacts. Until systems, processes, controls and governance
are fully developed, certain aspects of HSBC Group's reporting will
rely on manual sourcing and categorisation of data. In 2023, HSBC
Group will continue to expand its disclosures, with our reporting
needing to evolve to keep pace with market developments.
In December 2022, HSBC Group published its updated energy policy
and an update on the Group's thermal coal phase-out policy. These
policies were drafted in consultation with leading independent
scientific and international bodies and investors. For further
details, please refer to the ESG review in the HSBC Holdings plc
Annual Report and Accounts 2022.
HSBC Group is committed to a science-aligned phase-down of
fossil fuel finance in line with the Paris Agreement and have
committed to publish its own Group-wide Climate Transition Plan in
2023.
More information about HSBC Group's assessment of climate risk
can be found in the HSBC Holdings plc Annual Report and Accounts
2022.
Supporting our customers
Sustainable finance and investment ambition
HSBC Group is supporting customers through the transition to net
zero and a sustainable future with an ambition to provide and
facilitate $750bn to $1tn of sustainable finance and investment by
2030(2) . HSBC Group currently finances a number of industries that
make a significant contribution to greenhouse gas emissions, where
many customers operate in the high-emitting sectors and regions
that face the greatest challenge in reducing emissions. HSBC
Group's approach is rooted in engaging with customers to help them
diversify and decarbonise.
In 2022, HSBC UK provided more than GBP4.7bn of sustainable
finance, which includes green loans, sustainability linked loans
and sustainable bonds(2) . Examples include:
HSBC UK Green SME Fund
Launched in January 2022, our Green SME Fund provides structured
lending to support businesses' green initiatives. We supported 146
customers with GBP40m of financing, with loans starting from
GBP7,000.
Hornsea 2
HSBC UK supported a consortium on the acquisition of a 50% stake
in the world's largest operating offshore windfarm, Hornsea 2.
JDR Cables
HSBC UK in collaboration with HSBC Group supported a GBP1bn
Green Loan under the UK Export Finance Export Development Guarantee
Scheme for JDR Cables. The proceeds will support a new sub-sea
cable manufacturing facility for the renewable energy sector. HSBC
UK acted as a sole sustainability coordinator plus other roles on
this transaction.
2 Detailed definitions can be found in HSBC Group's Sustainable Finance Data Dictionary. See https://www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.
We also continue to grow our Sustainable Finance Ambassador
network, which now has over 1,000 members, with the aim of
deepening our employees' understanding of the opportunities and
risks faced by our clients as a result of the transition to
net-zero.
Thought leadership
We partnered with the Climate Action For Associations collective
to publish a series of practical guides on our Business Banking
Sustainability Hub, for small businesses navigating the transition
to net-zero. We have published climate thought-leadership research
on our Centre for Sustainable Finance, including our SME Emissions
Framework Scoping Exercise and Retrofit Conundrum Reports.
Unlocking climate solutions
Through our philanthropic partners we are unlocking barriers to
finance companies and projects to tackle climate change. Since the
start of our partnership with the National Trust in 2021, 579,000
native trees have been planted across England, Wales and Northern
Ireland, creating 674 hectares of woodland and wood pasture. In
addition, HSBC UK has funded 'Access to Nature' education sessions
at National Trust properties, providing transport and
nature-connection activities to over 6,500 children with the least
access.
Working together with the National Trust for Scotland, we have
supported a pioneering landscape restoration project in Dumfries
and Galloway. Since the start of the partnership in 2021,
restoration work has been carried out across 45 hectares of wetland
and woodland, and a no fence technology has been introduced to
trial how sustainable livestock management can be balanced with
nature recovery.
Our partnerships with the University of Birmingham and Imperial
College London have enabled us to support over 86 climate
innovation ventures since 2021 that are developing services,
products or technologies with potential to positively impact on
climate change and the environment.
Stakeholder engagement
This section forms our section 172 statement and addresses the
requirements of the Companies (Miscellaneous Reporting) Regulations
2018. The first part, 'Engaging with our key stakeholders', sets
out information about the stakeholders we view as critical to the
bank and its prospects, including how the Board had regard for them
in its discussions and decision-making throughout the year. The
second part, 'Board engagement and governance', provides two
examples of principal discussions and decisions taken by the Board
in 2022 when discharging their responsibility. These show how the
Directors and Board respectively discharged their individual and
collective responsibility for promoting the long-term success of
the bank and took different stakeholder considerations into account
in reaching a decision or forming a view. More detailed information
on the activities of the Board during 2022 are set out in the
Corporate Governance Report on page 65.
Engaging with our key stakeholders
With the easing of Covid restrictions, a broad range of events,
offering direct engagement with customers and employees, were
attended by members of the Board during 2022 to help them
understand what really mattered to these stakeholders and validate
that the bank's current strategy continued to support them in the
particularly challenging current environment.
Customers
Customer needs are central to the bank's business and must be
understood so that we can appropriately support them. How we have
served and supported our customers during 2022 is covered in the
'Our strategy' section on page 5 in the Strategic report. Examples
of how the Board has engaged with customers during 2022
include:
-- CEO Reports to the Board provided key customer-related
metrics and performance indicators, such as customer survey
feedback and net promoter scores, which allowed the Board to
monitor the bank's approach to supporting customers and the
performance and impact of associated activities.
-- Reports to the Board on complaints, the impact of cost of
living pressures, supporting vulnerable customers and our branch
strategy, enabled the Board to assess whether the improvement of
customer service and outcomes were prioritised appropriately to
deliver the bank's determination to be a truly customer-centric
organisation.
-- Direct customer interactions reinforced the Board's views
about what is required to improve customer experience.
Representatives of Large Corporate customers met with the Board to
share their views on areas of focus and concern and the service
they expect from the bank. The Board was immersed in the Retail
customer experience during a day spent with colleagues at first
direct when Directors listened to customer phone calls and heard
about digital journey developments.
Employees
Employees are critical to the successful operation of the bank
and its long-term future. Understanding how our employees feel
helps us to give them the right support to thrive and serve our
customers. How we engage with employees in different ways, as well
as our focus on improving diversity and inclusion in HSBC UK, is
detailed on page 6.
Examples of how the Board has engaged with employees
include:
-- CEO Reports to the Board provided updates on employee related
activities and events, metrics on employee attrition, gender
diversity and personal conduct cases and the internal employee
survey ('Snapshot'). This allowed the Board to understand employee
sentiment, health and well-being throughout 2022. When the Board
considered management's update on its People Strategy it was able
to assess whether the areas of focus and prioritisation remain
appropriate in the rapidly changing external environment.
-- The Board used the Culture Dashboard developed in 2021 to
assess whether actions being taken are effective in energising
colleagues to put the customer first, own their careers and build
skills for the future.
-- Individual Directors met with colleagues from across the bank
to understand and hear their perspectives of what it is like to
work for HSBC UK, whether they trust their leaders, feel HSBC UK is
making a difference for its customers and are proud of its role in
society, and what more can be done to improve their own experiences
in the workplace.
Shareholder and investors
The bank is a wholly owned subsidiary of HSBC Holdings plc and
therefore the Board and its executive management consider the
impact and implications of their decisions in relation to its
shareholder and debt security investors during these engagements.
Examples of how the Board did this include:
-- The Board Chairman and Committee Chairs engaged with their
Group counterparts and attended Group forums and Board Committee
meetings, together with Executive Directors, to engage on common
issues and strategic priorities.
-- Reviewing and approving HSBC UK specific components of Group programmes.
-- Evaluating the strength of the bank's balance sheet to ensure
that the ability to pay principal or interest on its listed debt
securities was not at risk.
-- Supporting a successful investor day led by the bank's
executive team to provide investors in the Group with a better
understanding of the bank and its growth prospects in the UK.
Suppliers
Suppliers provide critical support to help us operate our
business effectively. We work with our suppliers to ensure mutually
beneficial relationships, which includes our commitment to the
Prompt Payment Code. Examples of Board engagement during 2022
include:
-- The Chief Operating Officer's regular reports on third-party
supplier matters such as the operating model, relationship
management, material outsourcing, performance and operational
resilience.
-- Management reporting on how the bank oversees the quality of
the services provided by our critical third-party suppliers and how
we work together with our suppliers to mitigate impacts to
customers.
This allowed the Board to assess whether the bank had met the
Operational Resiliency regulatory requirements for outsourcing and
third party risk management and the effectiveness of our
relationships with third party suppliers and the bank's processes
in providing adequate oversight and control of supplier risk. It
also enabled the Board to remain alert to pressure points and
oversee how the bank managed risk relating to its third, fourth and
fifth party suppliers. Further detail on third party risk
management is included in the Risk section in the Report of
Directors on page 24.
Communities
HSBC UK has an important role in supporting the communities in
which it operates and is dependent on those communities for the
majority of our workforce. We have established a number of
community partnerships which are detailed in the 'Supporting our
Community' section on page 7. In 2021, the Board had assessed HSBC
UK's existing social impact, profile and narrative, and supported
the intention to focus the bank's social and community projects on
financial inclusion, resilience, capability and opportunity. This
work on HSBC UK's societal purpose has continued in 2022 with the
Board:
-- Agreeing the appropriate governance model and funding;
-- Understanding how our societal purpose would be embedded
within the business to deliver: long-term sustainable success and
meaningful change, particularly in the current challenging economic
environment; and engagement with the brand by improving customer
perception of HSBC UK; and
-- Examining the approach being taken to align partnerships
across HSBC UK to the societal purpose, including the exit plans
for any incompatible partnerships.
The Board also received an update on the bank's progress against
its Climate Strategy and Plan, acknowledging that there remained
work to be done in developing product propositions. The Board
encouraged management to consider how risk appetite metrics could
be enhanced to measure clients' transition from brown to green
activities.
Regulators and Government
As a UK bank, the government and regulators in the UK are key
stakeholders with whom we maintain constructive dialogue and
relations. Examples of Board engagement with them during 2022
include:
-- Meetings between Directors and regulators, both as part of
continuous assessment and on specific issues such as the FCA's
annual Firm Evaluation and the PRA's periodic summary review.
-- Participation by Directors in government and regulatory
consultations, industry forums and round table events.
Board engagement and governance
Below are two examples of principal decisions and discussions
during the year where the Directors had regard to their statutory
duties under section 172(1) (a)-(f) of the Companies Act 2006:
Managing the Cost of Living Challenges
The Board has considered the bank's response to cost of living
challenges on customers, particularly lower-income households,
smaller businesses, and our employees. Supporting our customers
remains a priority, with the bank continually evaluating
initiatives and relief measures that could be taken. During the
second half of the year the Board considered the actions being
taken by our WPB and CMB businesses. These included:
-- enhanced forbearance tools, including tailored forbearance strategies for CMB customers;
-- the ability to modify terms and conditions applying to an
existing facility, or the restructuring of an existing contract,
that would not ordinarily be granted were a customer not
experiencing financial difficulty;
-- online resources for both WPB and CMB customers, including
dedicated self-help tools and webinars, with more targeted
intervention towards customers identified as more likely to be
financially stretched;
-- increased capacity in the WPB Financial Support Team, as well
as the establishment of the CMB Financial Support Team dedicated to
supporting our commercial clients experiencing financial
difficulty; and
-- an increase to charge-free buffers for retail customers on an opt-in basis for 12 months.
The pressures on employees caused by rising inflation and energy
prices have been closely tracked and regularly discussed by the
Board. As these inflationary pressures rose, the Board agreed to
make a one-off payment of GBP1,500 to our more junior employees to
underpin their financial security. In reaching its decision, the
Board was mindful of the need to avoid embedding inflationary
pressure into the economy but was keen to provide immediate relief
to those employees experiencing cash flow pressures. Proactive
steps have also been taken to increase fixed pay for over 90% of
HSBC UK colleagues. The Board was also updated about the additional
steps taken to support employees, including:
-- Face-to-face financial health checks offered to all employees
and financial wellbeing support tools;
-- HSBC UK's Support Fund for those colleagues who are in financial distress; and
-- Ongoing education about HSBC UK's benefit options.
Branch Network Transformation
Planning the future shape and size of the Branch Network is
crucial, given the pace of change in customer behaviours. During
2022, the Board reviewed and evaluated options for the Branch
Network Transformation (the 'transformation plans') to achieve an
optimal end-state Branch Network over the medium term. In
particular, the Board considered an opportunity (arising from the
timing of lease-breaks) to accelerate the transformation plans in
2023. During its discussions, the Board considered whether the
impacts to, and outcomes for, our stakeholders were appropriate.
The Board examined, in particular, whether the transformation
plans:
-- safeguarded the provision of critical services for customers
(such as access to cash, vulnerable customer support, advice, and
the broader customer digital /financial education agenda) whilst
creating a more efficient operating model;
-- were sufficiently customer centric, given branches remain
valuable to customers - even in a digital age - by providing the
human touch in the moments that matter and whether this was
consistent with the bank's wider holistic strategy to improve
customer outcomes;
-- would, in parallel, deliver new and simplified customer journeys from enhanced technology;
-- adhered to all aspects of regulatory guidance and reflected
feedback from engagement with our regulators;
-- had taken appropriate account of the direct and indirect
impacts to colleagues. The Board was keen to ensure that
communications were open and transparent on proposed closures and
the funding to invest in other areas of the Branch Network was
secured; and
-- conflicted with HSBC UK's strategic ambition to be at the
heart of local communities, if there was no longer a direct
physical presence.
The Board concluded that the data supported an optimum end state
Branch Network, based on the shift in customer demand and
behaviours. The Board acknowledged that the transformation plans
would enable a greater proportion of the bank's investment spend
and running costs to be focused on enhancing the service that the
bank was able to offer to its wider customer base. The proposal to
accelerate the branch closures was supported, conditional upon
ensuring the outcome for vulnerable and impacted customers was
acceptable.
Business performance and KPIs
The Board tracks the bank's progress in implementing its
strategy with a range of financial and non-financial measures or
KPIs.
Progress is assessed by comparison with the group strategic
priorities, operating plan targets and historical performance.
Management and the Board review its KPIs regularly in light of
its strategic objectives and may adopt new or refined measures to
better align the KPIs to HSBC Group's strategy and strategic
priorities. 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 to
page 5; for supporting our employees and diversity and inclusion
refer to page 6; for sustainability refer to page 7 and for other
non-financial KPIs refer to the Corporate Governance section on
pages 65 to 69.
Economic background and outlook
UK economic outlook
HSBC Global Research forecasts UK GDP to fall 0.4% in 2023,
followed by a rise of 1.5% in 2024. While GDP was flat in Q4 2022,
meaning a recession at that point was avoided, UK household real
incomes are still set to fall by 1.1% in 2023, and the impact of
higher interest rates poses an additional headwind. Fiscal support
and lower oil and gas prices mean this squeeze is less intense than
it might have been, but companies face the end of government energy
support, higher labour and borrowing costs and - for larger
businesses - a rise in corporation tax in April.
The UK labour market has continued to outperform. The
unemployment rate stood at 3.7% in December 2022 (close to the
multi-decade low of 3.5% in August), with private sector pay growth
rising to 7.3% 3m/yr - the fastest rate on record, excluding
pandemic-related erratics. Widespread strikes across the public and
private sectors are adding to pressures on pay. That said, there
are signs that the imbalances have begun to unwind: vacancies have
fallen, redundancies are up, and surveys point to improving supply
and waning demand for labour. HSBC Global
Research forecasts unemployment averaging 4.2% in 2023 and then
4.9% in 2024, but with total pay growth staying relatively high, at
5.4% in 2023 and 4.7% in 2023.
UK CPI inflation rose to 11.1% Y-o-Y in October 2022, but fell
back to 10.1% in January 2023. HSBC Global Research believes that
the October rate was the peak, and that the annual rate will
continue to decline, largely thanks to lower energy and durable
goods price pressures. However, food and core inflation remain
elevated, and high labour costs are expected to keep CPI inflation
above the BoE's 2% target through 2023 and 2024.
HSBC Global Research expects CPI inflation to average 7.1% in
2023 and then 3.5% in 2024. However, inflation expectations have
started to fall, reducing the risk of a wage-price spiral.
As a consequence of the rise in inflation, the BoE has now
raised Bank Rate ten times, taking it to 4.00%, and launched a
programme of quantitative tightening - including active gilt sales.
HSBC Global Research forecasts just one further rate rise, of
25bps, taking Bank Rate to 4.25%. This is in line with market
expectations. However, the market then expects rates to start to
fall back in 2024, whereas HSBC Global Research expects inflation
still to be too high to allow this.
Financial summary
Summary consolidated income statement for the year ended
Year ended
---------------------------------------------------------
Audited
---------------------------------------------------------
31 Dec 31 Dec
2022 2021
GBPm GBPm
----------------------------------------------------------- --------------------------- ----------------------------
Net interest income 6,203 4,650
----------------------------------------------------------- --------------------------- ----------------------------
Net fee income 1,245 1,080
----------------------------------------------------------- --------------------------- ----------------------------
Net income from financial instruments held for trading
or managed on a fair value basis 384 318
Changes in fair value of other financial instruments
mandatorily
measured at fair value through profit or loss 36 15
----------------------------------------------------------- --------------------------- ----------------------------
Gains less losses from financial investments 37 101
Other operating income 47 86
Net operating income before change in expected credit
losses and other credit impairment charges 7,952 6,250
----------------------------------------------------------- --------------------------- ----------------------------
Change in expected credit losses and other credit
impairment
charges (482) 989
Net operating income 7,470 7,239
----------------------------------------------------------- --------------------------- ----------------------------
Total operating expenses (3,832) (3,759)
----------------------------------------------------------- --------------------------- ----------------------------
Operating profit 3,638 3,480
----------------------------------------------------------- --------------------------- ----------------------------
Profit before tax 3,638 3,480
----------------------------------------------------------- --------------------------- ----------------------------
Tax expense (762) (1,112)
----------------------------------------------------------- --------------------------- ----------------------------
Profit for the year 2,876 2,368
----------------------------------------------------------- --------------------------- ----------------------------
Profit attributable to shareholders of the parent company 2,871 2,363
----------------------------------------------------------- --------------------------- ----------------------------
Profit attributable to non-controlling interests 5 5
----------------------------------------------------------- --------------------------- ----------------------------
Reported performance
2022 reported profit before tax of GBP3,638m is GBP158m, or 5%,
higher than 2021 reported profit before tax of GBP3,480m, driven by
higher revenue, offset by higher ECL and operating expenses.
Net interest income increased by GBP1,553m or 33%, mainly due to
the impact of higher base interest rates on customer deposit
spreads offset by mortgage margin compression due to competitive
market conditions in 2022.
Net fee income increased by GBP165m or 15%, due to growth across
both CMB and WPB products as the market recovers following the
Covid-19 pandemic.
Net income from financial instruments held for trading or
managed on a fair value basis increased by GBP66m or 21%,
principally due to foreign exchange income as market conditions
impacting commercial customer foreign exchange payment volumes and
demand for foreign currency from retail customers improved
following the lifting of Covid-19 travel restrictions.
Change in fair value of other financial instruments mandatorily
measured at fair value through profit or loss increased by GBP21m,
primarily due to higher fair value gains in 2022 following the
revaluation of equity investments.
Gains less losses from financial investments decreased by GBP64m
due to lower disposal gains realised by the Markets Treasury desk
due to the volatile market conditions in 2022.
Other operating income decreased by GBP39m, driven by gains on
derecognition in CMB in 2021, notably in the context of the Libor
transition.
ECL increased by GBP1,471m from a GBP989m release in 2021 to a
charge of GBP482m in 2022. The 2022 charge included additional
stage 1 and stage 2 allowances in respect of the impacts of the
Russia-Ukraine war and heightened economic uncertainty and
inflationary pressures. This compared with a net release in 2021
primarily relating to Covid-19-related allowances previously built
up in 2020.
Total operating expenses increased by GBP73m. Restructuring
programmes and technology investment costs were partially offset by
front and back office cost reductions across the business as we
continue to actively manage our cost base.
Tax expense The effective tax rate is 20.9% (2021: 32.0%). The
effective tax rate is reduced by 4.7% in 2022 by a credit arising
from the remeasurement of the group's deferred tax balances
following the substantive enactment of legislation to reduce the UK
banking surcharge rate from 8% to 3%, with effect from 1 April
2023. 2021 effective tax rate was higher than the UK rate of
corporation tax for banking entities of 27% due to the main rate of
UK corporation tax increasing from 19% to 25% impacting deferred
tax balances.
Net interest income
Year ended
At
31 Dec 31 Dec
2022 2021
GBPm GBPm
------------------------- ----------------------------- -----------------------------
Interest income 7,592 5,072
------------------------- ----------------------------- -----------------------------
Interest expense (1,389) (422)
------------------------- ----------------------------- -----------------------------
Net interest income 6,203 4,650
------------------------- ----------------------------- -----------------------------
Average interest-earning
assets 327,840 303,151
------------------------- ----------------------------- -----------------------------
% %
------------------------- ----------------------------- -----------------------------
Gross interest yield(1) 2.32 1.67
------------------------- ----------------------------- -----------------------------
Less: Gross interest
payable(1) (0.55) (0.18)
------------------------- ----------------------------- -----------------------------
Net interest spread(2) 1.77 1.49
------------------------- ----------------------------- -----------------------------
Net interest margin(3) 1.89 1.53
------------------------- ----------------------------- -----------------------------
1 Gross interest yield is the average annualised interest rate
earned on 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 funds.
3 Net interest margin is net interest income expressed as an annualised percentage of AIEA.
Net interest margin increased from 1.53% in 2021 to 1.89% in
2022. This was driven by the UK interest rate increases in 2022,
with increased yields on cash at central banks and customer
lending, partly offset by an increase in interest expense on
customer accounts.
Return on average tangible equity
RoTE is measured as the profit attributable to ordinary
shareholders divided by the reported equity adjusted for goodwill
and intangibles. The 2022 RoTE of 16.3% was 2.8% higher than the
2021 RoTE of 13.5%, driven by higher reported profit before tax.
Average tangible equity has remained in line with 2021.
Alternative performance measures
Our reported results are prepared in accordance with IFRSs, as
detailed in the financial statements starting on page 79. In
measuring our performance, the financial measures that we use
include those derived from our reported results to eliminate
factors that distort YoY comparisons. These are considered
alternative performance measures (non-GAAP financial measures).
Within the Strategic report we present performance on an
adjusted basis, which is our segment measure for our reportable
segments under IFRS 8 but constitutes alternative performance
measures when otherwise presented.
Adjusted performance
Adjusted performance is computed by adjusting reported results
for the effects of significant items that distort YoY comparisons.
We use significant items to describe collectively the group of
individual adjustments excluded from the results when arriving at
adjusted performance. An item might be deemed significant if the
item is not incurred as part of the normal operational activities
of the individual segment, separate identification and explanation
of the item is necessary for users to gain a proper understanding
of the performance of the business, and it is quantitatively and
qualitatively material to the group's consolidated financial
statements.
Customer remediation and redress programmes, are considered and
assessed separately against the above criteria prior to recognition
as a significant item. Significant items, which are detailed on
page 12 , are ones that management and investors would ordinarily
identify and consider separately when assessing performance to
understand better the underlying trends in the business.
We consider adjusted performance to provide useful information
for investors by aligning internal and external reporting,
identifying and quantifying items management believes to be
significant and providing insight into how management assesses YoY
performance.
Segmental reporting
Global businesses are our reportable segments under IFRS 8.
The HSBC Group Chief Executive, supported by the rest of the
Group Executive Committee, is considered the CODM for the purposes
of identifying the HSBC Group's, and therefore HSBC UK's,
reportable segments. HSBC UK's CODM is the HSBC UK Chief Executive,
supported by the HSBC UK Executive Committee. The global business
results are assessed by the CODM on the basis of adjusted
performance that removes the effects of significant items from
results. We therefore present HSBC UK global business results on an
adjusted basis as required by IFRS.
Our operations are closely integrated and, accordingly, the
presentation of data includes internal allocations of certain items
of income and expense. These allocations include the costs of
certain support services and global functions to the extent that
they can be meaningfully attributed to global businesses. While
such allocations have been made on a systematic and consistent
basis, they necessarily involve a degree of subjectivity. Costs
which are not allocated to global businesses are included in
Corporate Centre.
Where relevant, income and expense amounts presented include the
results of inter-segment funding along with inter-company and
inter-business line transactions. All such transactions are
undertaken on arm's length terms. The intra-group elimination items
are presented in the Corporate Centre.
A description of the global businesses is provided in the
Strategic report, page 2.
Changes to presentation from 1 January 2023
Notable items
From 1 January 2023, 'adjusted performance' will no longer
exclude the impact of significant items. We will separately
disclose 'notable items', which are components of our income
statement which management would consider as outside the normal
course of business and generally non-recurring in nature.
Adjusted profit before tax and balance sheet data for the year ended
Corporate
WPB CMB GBM Centre Total
At 31 Dec 2022 GBPm GBPm GBPm GBPm GBPm
Net operating
income/(expense)
before
change in
expected credit
losses and
other credit
impairment
charges 4,321 3,509 151 (37) 7,944
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
- external 4,146 3,308 394 96 7,944
------------------
- inter-segment 175 201 (243) (133) -
------------------ ---------------------- ---------------------- -------------------------- --------------------------
- of which: net
interest income 3,655 2,533 (1) 10 6,197
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Change in expected
credit losses and
other credit
impairment
charges (287) (195) - - (482)
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Net operating
income/(expense) 4,034 3,314 151 (37) 7,462
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Total operating
income/(expenses) (2,267) (1,132) (34) 7 (3,426)
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Operating
profit/(loss) 1,767 2,182 117 (30) 4,036
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Adjusted
profit/(loss)
before tax 1,767 2,182 117 (30) 4,036
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
% % % % %
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Adjusted cost
efficiency ratio 52.5 32.3 22.5 18.9 43.1
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Balance sheet GBPm GBPm GBPm GBPm GBPm
information
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Loans and advances
to customers
(net) 138,927 65,408 - (192) 204,143
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
Customer accounts 181,785 99,622 - (312) 281,095
------------------ ---------------------- ---------------------- -------------------------- -------------------------- ------------------------
At 31 Dec 2021
Net operating
income/(expense)
before
change in
expected credit
losses and
other credit
impairment
charges 3,369 2,748 124 (2) 6,239
----------------- ------------------------- ----------------------- ------------------------- -------------------------- ------------------------
- external 3,271 2,642 327 (1) 6,239
-----------------
- inter-segment 98 106 (203) (1) -
----------------- ------------------------- ----------------------- ------------------------- --------------------------
- of which: net
interest
income/(expense) 2,774 1,858 - 10 4,642
----------------- ------------------------- ----------------------- ------------------------- -------------------------- ------------------------
Change in
expected credit
losses and
other credit
impairment
charges 439 550 - - 989
----------------- ------------------------- ----------------------- ------------------------- -------------------------- ------------------------
Net operating
income/(expense) 3,808 3,298 124 (2) 7,228
----------------- ------------------------- ----------------------- ------------------------- -------------------------- ------------------------
Total operating
expenses (2,219) (1,174) (32) (39) (3,464)
Operating
profit/(loss) 1,589 2,124 92 (41) 3,764
Adjusted
profit/(loss)
before tax 1,589 2,124 92 (41) 3,764
----------------- ------------------------- ----------------------- ------------------------- -------------------------- ------------------------
%% %% %
----------------- ------------------------- ---------------------- ------------------------- ------------------------- ------------------------
Adjusted cost
efficiency ratio
(%) 65.9 42.7 25.8 (1,950.0) 55.5
----------------- ------------------------- ----------------------- ------------------------- -------------------------- ------------------------
Balance sheet GBPm GBPm GBPm GBPm GBPm
information
----------------- ------------------------- ----------------------- ------------------------- -------------------------- ------------------------
Loans and
advances to
customers (net) 131,700 63,784 - 42 195,526
Customer accounts 178,685 103,375 - (190) 281,870
----------------- ------------------------- ----------------------- ------------------------- -------------------------- ------------------------
Significant revenue items by business segment - (gains)/losses for
the year ended
Corporate
WPB CMB GBM Centre Total
At 31 Dec 2022 GBPm GBPm GBPm GBPm GBPm
------------------ -------------------------- -------------------------- ------------------------ ------------------------ --------------------------
Revenue 4,331 3,507 151 (37) 7,952
------------------ -------------------------- -------------------------- ------------------------ ------------------------ --------------------------
Significant
revenue items (10) 2 - - (8)
------------------ -------------------------- -------------------------- ------------------------ ------------------------ --------------------------
- customer
remediation and
related
matters (9) 2 - - (7)
------------------
- restructuring
and other related
revenue (1) - - - (1)
------------------ -------------------------- -------------------------- ------------------------ ------------------------
Adjusted
revenue/(expense) 4,321 3,509 151 (37) 7,944
------------------ -------------------------- -------------------------- ------------------------ ------------------------ --------------------------
At 31 Dec 2021
------------------ -------------------------- -------------------------- ------------------------ -------------------------- --------------------------
Revenue 3,364 2,759 124 3 6,250
------------------ -------------------------- -------------------------- ------------------------ -------------------------- --------------------------
Significant
revenue items 5 (11) - (5) (11)
------------------ -------------------------- -------------------------- ------------------------ -------------------------- --------------------------
- customer
remediation and
related
matters 5 (13) - - (8)
------------------
- restructuring
and other related
revenue - 2 - (5) (3)
------------------ -------------------------- -------------------------- ------------------------ --------------------------
Adjusted
revenue/(expense) 3,369 2,748 124 (2) 6,239
------------------ -------------------------- -------------------------- ------------------------ -------------------------- --------------------------
Significant cost items by business segment - recoveries/(charges) for
the year ended
Corporate
WPB CMB GBM Centre Total
At 31 Dec 2022 GBPm GBPm GBPm GBPm GBPm
------------------ ------------------------ -------------------------- ------------------------- -------------------------- ------------------------
Operating expenses (2,309) (1,170) (35) (318) (3,832)
------------------ ------------------------ -------------------------- ------------------------- -------------------------- ------------------------
Significant cost
items 42 38 1 325 406
------------------ ------------------------ -------------------------- ------------------------- -------------------------- ------------------------
- restructuring
and other related
costs(1) 70 39 1 319 429
------------------
- customer
remediation and
related matters (28) (1) - 6 (23)
Adjusted operating
expenses (2,267) (1,132) (34) 7 (3,426)
------------------ ------------------------ -------------------------- ------------------------- -------------------------- ------------------------
At 31 Dec 2021
------------------ ------------------------ -------------------------- ------------------------- -------------------------- ------------------------
Operating expenses (2,311) (1,181) (32) (235) (3,759)
------------------ ------------------------ -------------------------- ------------------------- -------------------------- ------------------------
Significant cost
items 92 7 - 196 295
------------------ ------------------------ -------------------------- ------------------------- -------------------------- ------------------------
- restructuring
and other related
costs(1) 63 6 - 190 259
------------------
- customer
remediation and
related matters 29 1 - 6 36
Adjusted operating
(expenses)/income (2,219) (1,174) (32) (39) (3,464)
------------------ ------------------------ -------------------------- ------------------------- -------------------------- ------------------------
1 Restructuring costs include charges received from HSBC Global
Services (UK) Limited, which do not form part of the balance sheet
provision movement.
Net impact on profit before tax by business segment for the year ended
Corporate
WPB CMB GBM Centre Total
At 31 Dec 2022 GBPm GBPm GBPm GBPm GBPm
-------------------------------- ----------------------- ------------------------- ------------------------- ----------------------- ---------------------------
Profit/(loss) before tax 1,735 2,142 116 (355) 3,638
-------------------------------- ----------------------- ------------------------- ------------------------- ----------------------- ---------------------------
Net impact on reported profit
and loss 32 40 1 325 398
-------------------------------- ----------------------- ------------------------- ------------------------- ----------------------- ---------------------------
* significant revenue items (10) 2 - - (8)
--------------------------------
* significant cost items 42 38 1 325 406
-------------------------------- ----------------------- ------------------------- ------------------------- -----------------------
Adjusted profit/(loss) before
tax 1,767 2,182 117 (30) 4,036
-------------------------------- ----------------------- ------------------------- ------------------------- ----------------------- ---------------------------
At 31 Dec 2021 GBPm GBPm GBPm GBPm GBPm
Profit/(loss)
before tax 1,492 2,128 92 (232) 3,480
-------------- ------------------------- ------------------------- ------------------------ ------------------------- ------------------------
Net impact on
reported
profit and
loss 97 (4) - 191 284
-------------- ------------------------- ------------------------- ------------------------ ------------------------- ------------------------
- significant
revenue items 5 (11) - (5) (11)
--------------
- significant
cost items 92 7 - 196 295
-------------- ------------------------- ------------------------- ------------------------ -------------------------
Adjusted
profit before
tax 1,589 2,124 92 (41) 3,764
-------------- ------------------------- ------------------------- ------------------------ ------------------------- ------------------------
Adjusted performance
Our adjusted profit before tax in 2022 increased by GBP272m, or
7%, compared with 2021, to a profit of GBP4,036m. This reflected
higher revenue across all businesses and lower operating expenses,
offset by higher ECL.
Adjusted revenue increased by GBP1,705m or 27%, with increases
in WPB and CMB due to the impact of higher base interest rates on
net interest margins, increased customer deposit balances in WPB
and increased activity as the market recovers from the Covid-19
pandemic.
ECL increased by GBP1,471m, as described on page 10 'Reported
Performance'.
Adjusted operating expenses decreased by GBP38m or 1%, due to
ongoing cost management discipline, partially offset by increased
technology investment costs and one-off cost of living payments
made to staff.
The 2022 adjusted RoTE of 17.9% was 3.2% higher than the 2021
adjusted RoTE of 14.7% driven by higher adjusted profit before tax,
with average tangible equity in line with 2021.
Adjusted cost efficiency ratio is measured as total adjusted
operating expenses divided by adjusted net operating income before
ECL. The adjusted cost efficiency ratio in 2022 improved by 12.4%
vs. 2021, from 55.5% to 43.1%.
Wealth and Personal Banking
Adjusted profit before tax was GBP1,767m, 11% (GBP178m) higher
than 2021 driven by higher revenue, offset by higher ECL and higher
operating costs.
Revenue increased by GBP952m or 28%. Higher customer deposit
margins were partially offset by mortgage margin compression. There
has been continued balance sheet growth and increased customer
spending levels post-Covid-19 pandemic.
ECL increased by GBP726m from a release of GBP439m in 2021 to a
charge of GBP287m in 2022, as described on page 10 'Reported
performance'.
Operating expenses increased by GBP48m or 2%, due to increased
technology investment costs and one-off cost of living payments
made to staff, partially offset by ongoing cost management
actions.
Commercial Banking
Adjusted profit before tax was GBP2,182m, 3% (GBP58m) higher
than 2021 due to higher revenue and lower operating expenses,
offset by higher ECL.
Revenue increased by GBP761m or 28% due to higher net interest
margin from customer loans and deposits, growth in fee-based
revenue, higher lending balances, and higher fair value gains in
2022 following the revaluation of equity investments.
ECL have increased by GBP745m from a release of GBP550m in 2021
to a charge of GBP195m in 2022, as described on page 10 'Reported
Performance'.
Operating expenses decreased by GBP42m or 4% driven by lower
back-office operations costs and fraud losses, partially offset by
increased technology investment costs.
Global Banking and Markets
GBM in HSBC UK reflects the transacting of foreign currency
exchange for WPB and CMB customers.
The majority of the foreign exchange revenue is transferred to
WPB and CMB, with an element retained in GBM.
Adjusted profit before tax was GBP25m, or 27%, higher than 2021,
driven by stronger underlying foreign exchange payment
revenues.
Corporate Centre
Adjusted loss before tax of GBP30m in 2022 was GBP11m lower than
the loss before tax of GBP41m in 2021, driven by lower operating
expenses due to the increased benefit arising from our material
pension surplus as discount rates improved.
Dividends
The consolidated reported profit for the year attributable to
the shareholders of the bank was GBP2,871m.
Total interim dividends of GBP1,787m, were paid on the ordinary
share capital during the year, of which GBP491m relates to the
previous year and GBP1,296m relates to the current year. GBP142m of
dividends were paid in respect of our additional tier 1 capital
instruments.
On 14 February 2023, the Directors resolved to pay an interim
dividend of GBP539m to the ordinary shareholder in respect of the
financial year ending 31 December 2022.
Further information regarding dividends is given in Note 6.
Summary consolidated balance sheet as at
31 Dec 31 Dec
2022 2021
GBPm GBPm
--------------------------------------------------------- -------------------------- ---------------------------
Total assets 342,441 346,063
--------------------------------------------------------- -------------------------- ---------------------------
* cash and balances at central banks 94,407 112,478
* financial assets mandatory measured at fair value
through profit and loss 108 79
---------------------------------------------------------
* derivative assets 546 64
---------------------------------------------------------
* loans and advances to banks 6,357 1,914
---------------------------------------------------------
* loans and advances to customers 204,143 195,526
---------------------------------------------------------
- reverse repurchase agreements - non-trading 7,406 7,988
---------------------------------------------------------
* financial investments 16,092 14,377
* other assets 13,382 13,637
--------------------------------------------------------- --------------------------
Total liabilities 320,215 322,258
--------------------------------------------------------- -------------------------- ---------------------------
* deposits by banks 10,721 11,180
---------------------------------------------------------
* customer accounts 281,095 281,870
---------------------------------------------------------
- repurchase agreements - non-trading 9,333 10,438
* derivative liabilities 304 292
---------------------------------------------------------
- debt securities in issue 1,299 900
- other liabilities 17,463 17,578
--------------------------------------------------------- --------------------------
Total equity 22,226 23,805
--------------------------------------------------------- -------------------------- ---------------------------
* total shareholders' equity(1) 22,166 23,745
---------------------------------------------------------
* non-controlling interests 60 60
--------------------------------------------------------- --------------------------
1 Total shareholders' equity includes share capital, share
premium, additional Tier 1 instruments and reserves.
The group maintained a strong and liquid balance sheet. The
ratio of customer advances to customer accounts increased to 72.6%
compared to 69.4% at 31 December 2021 driven by a 4.4% increase in
loans and advances to customers.
Impact of Climate Risk
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 2022. We
considered the impact on a number of areas of our balance sheet
including expected credit losses, classification and measurement of
financial instruments, goodwill and other intangible assets, our
owned properties, our pension plan, as well as our going
concern.
For further detail on how climate risk can impact HSBC UK in the
medium to long-term see page 62 and on credit risk see page 26.
Additionally, for further disclosure on how management has
considered the impact of climate-related risks on its financial
position and performance see critical accounting estimates and
judgements, detailed in Note 1 'Basis of preparation and
significant accounting policies' from page 87.
Assets
Cash and balances at central banks decreased by GBP18bn due to
continued growth in customer lending and reclassification of cash
encumbrance for net settlement schemes to loans and advances to
banks.
Loans and advances to customers increased by GBP8.6bn, mainly
driven by growth in retail mortgage lending by GBP7.4bn due to
HSBC's competitive pricing and growth strategy and increase in
trade import loans by GBP0.7bn.
Liabilities
Customer accounts have marginally decreased by GBP0.8bn due to
higher customer expenditure (decrease in CMB deposits by GBP4bn
partially offset by increase in WPB deposits by GBP3bn).
Repurchase agreements - non-trading have decreased by GBP1bn as
part of activities to manage liquidity and margin and subordinated
liabilities broadly remained flat, in line with capital management
requirements.
Equity
Total shareholders' equity, including non-controlling interests,
decreased by GBP1.6bn or 7% compared with 31 December 2021.
This reflected the effects of profits generated of GBP2.9bn,
offset by dividend payments of GBP1.9bn and reduction in OCI of
GBP2.6bn.
The reduction in OCI included adverse movement of GBP1.3bn on
cash flow hedges driven by the impact of increasing interest rates
on fixed swap hedges, remeasurement of the defined benefit pension
assets and obligations of GBP1bn, adverse movement of GBP0.3bn on
financial instruments designated as hold-to-collect and sell, which
are held as hedges to our exposure to interest rate movements, as a
result of the increase in term market yield curves in 2022.
Risk overview
Difficult economic conditions in the UK, including significant
increases in the cost of living have impacted our customers and our
organisation in 2022. The macroeconomic, trade and regulatory
environment has become increasingly fragmented, which alongside
geopolitical factors continue to disrupt supply chains in several
industries globally, including commercial real estate. The mismatch
between supply and demand, worsened by repercussions from the
Russia-Ukraine war, has pushed up commodity and other prices in the
UK, particularly energy, creating further challenges for the BoE
and our customers. Against a recessionary backdrop and increasing
inflationary pressures, interest rates have continued to rise. The
economic outlook is described in more detail in the 'Description of
consensus economic scenarios' section of the Report. See page
34.
Our balance sheet and liquidity remained strong which helped us
to support our customers as the economic slowdown has developed.
Increased pressure has been seen on our business operations and
customer support centres as our people, processes and systems have
responded to meet the current challenges of the UK economy.
We continue our increased focus on the quality and timeliness of
the data used to inform management decisions and for regulatory
reporting, through measures such as early warning indicators,
prudent active risk management of our risk appetite, and ensuring
regular communication with our Board and key stakeholders.
Risk environment
We continuously identify, assess, manage and monitor risks. This
process, which is informed by our risk factors and the results of
the stress testing programme, gives rise to the classification of
certain financial and non-financial banking risks. Changes in the
assessment of these risks may result in adjustments to our business
strategy and, potentially, our risk appetite.
Our material banking risks include credit risk, treasury risk,
market risk, climate risk, resilience risk, regulatory compliance
risk, financial crime and fraud risk and model risk. See pages 26
to 64.
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. See pages 19 to 24.
The exposure to our risks and risk management of these are
explained in more detail in the Risk section of the Report of the
Directors on pages 17 to 70.
During 2022, we have reviewed our list of top and emerging risks
and made changes to reflect the revised assessment of their effect
on HSBC UK. We have removed Covid-19 as it is considered to have
been absorbed into business as usual risk management practices.
Credit risk has been added to reflect the current economic
environment.
Externally driven
Geopolitical p Our operations and portfolios are subject to risks associated
and macroeconomic with political instability, civil unrest and military conflict,
risk which could lead to disruption of our operations, physical
risk to our staff and/or physical damage to our assets.
Heightened geopolitical tensions, alongside other factors,
have also disrupted supply chains globally. Inflation and
rising interest rates in the UK have contributed to the
current economic slowdown that will affect our customers
and our business.
---------------------- -----------------------------------------------------------------
Credit risk -- We regularly undertake detailed reviews of our portfolios
and proactively manage credit facilities to customers and
sectors likely to come under stress as a result of current
macroeconomic and geopolitical events, including UK recessionary
pressures and second order impacts from the Russia-Ukraine
war. We remain focused on assessing and managing the impacts
of the cost of living crisis and higher interest rates
on our customers, including those that will need to refinance
their mortgage onto increased rate loans. Sector deep dives
and stress tests are regularly conducted with particular
focus on the Automotive, Construction and Contracting,
Commercial Real Estate, Hospitality, Hotels, Oil and Gas
and Retail industry sectors. We have increased the frequency
and depth of our monitoring activities with stress tests
and other sectoral reviews performed to identify portfolios
or customers who are likely to experience financial difficulty.
Evolving p The regulatory risk environment continues to be complex.
regulatory There has been increased regulatory focus on the protection
environment of consumers, particularly those that are vulnerable; sanctions;
risk operational resilience; cyber threats; crypto-asset related
risks; wider anti-money laundering controls; and diversity
and inclusion. These, alongside other regulatory priorities,
may result in change requirements across HSBC UK in the
short to medium term. We continue to monitor regulatory
and wider industry developments closely and engage with
regulators, as appropriate.
---------------------- -----------------------------------------------------------------
Cyber threat u HSBC UK faces a risk of service disruption from external
and unauthorised and internal malicious activity. In response to the recent
access to geopolitical events, including the Russia-Ukraine war,
systems we have further strengthened our monitoring approach. HSBC
UK operates a continuous improvement programme to protect
our technology operations and to counter a hostile and
fast evolving cyber threat environment.
---------------------- -----------------------------------------------------------------
Ibor transition q We remain exposed to regulatory compliance, legal and resilience
risks as contracts transition away from demising Ibor benchmarks
to new reference rates. As a result, we continue to consider
the fairness of client outcomes, our compliance with regulatory
expectations and the operation of our systems and processes.
We have transitioned all but a small number of contracts
in demised Ibors and are well progressed in transitioning
contracts in remaining demising Ibors, specifically US
dollar Libor. HSBC UK has significantly fewer US dollar
Libor facilities to transition, versus the number transitioned
for GBP Libor and the nature of our good progress means
we consider the risk to have decreased versus 2021.
---------------------- -----------------------------------------------------------------
Environmental, p We are subject to ESG risks relating to climate change;
social and greenwashing; nature; and human rights. This risk has increased
governance owing to the pace and volume of regulatory developments
risk globally and stakeholders placing more emphasis on financial
institutions' actions and investment decisions in respect
of ESG matters. Failure to meet these evolving expectations
may result in financial and non-financial risks for HSBC
UK, including adverse reputational consequences.
---------------------- -----------------------------------------------------------------
Digital u With the increasing attention of the public, governments,
currencies regulatory bodies and central banks on digital assets,
and disintermediation including cryptocurrencies, the banking landscape has the
risk potential to move significantly to a more direct linkage
between currency providers and payment participants, to
the possible detriment of intermediaries, such as HSBC
UK. We continue to monitor digital asset consultations,
pilots and issuances, the state of the market and the impact
on participants and evolution in use of digital assets
to understand how changes may impact our customers and
business. We also closely observe and assess the potential
for consequential financial crime and the resulting impact
on payment transparency and architecture.
---------------------- -----------------------------------------------------------------
Internally driven
----------------------------------------------------------------------------------------
People risk p HSBC UK is exposed to risks associated with employee retention,
talent availability and compliance with employment laws
and regulations. Heightened demand for talent in the UK
labour market, coupled with the cost of living crisis have
led to increased attrition and employee attraction challenges,
and continuing pressure on our people. There is additional
focus on actively embedding hybrid working to maintain
employee engagement.
---------------- -------------------------------------------------------------------
IT systems p We continue to monitor and improve IT systems and network
infrastructure resilience to minimise service disruption and improve HSBC
and operational UK customer experience, through for example, our Operational
resilience Resilience programme. The significant volume of change
and the complexity of our IT environment increases the
risk of service interruption which we work to mitigate
through change management controls. We are seeing increased
demand on customer support centres and our business operations
as a result of the current economic environment and there
is additional focus on operational resilience. To support
the business strategy, we have continued to strengthen
our end-to-end management, build and deployment controls
and system monitoring capabilities.
Model risk p Model risk has heightened with increased regulatory requirements
driving material changes to models across the banking industry
in the UK. Currently there is a particular focus on capital
models, however this focus is expected to be extended to
all models based on the Consultation Paper (CP 6/22) published
by the PRA in June 2022.The macroeconomic environment and
new technologies such as machine learning continue to drive
changes to the model risk landscape. A key area of focus
is ensuring our standards, processes and controls are adequate
to identify, measure and manage the resulting model risks.
---------------- -------------------------------------------------------------------
Financial u We continue to support our customers against a backdrop
crime and of complex geopolitical, socioeconomic, and technological
fraud risk challenges, including the Russia-Ukraine war. We are monitoring
the impacts of the Russia-Ukraine war on HSBC UK, and using
our sanctions compliance capabilities to respond to evolving
sanctions regulations, noting the challenges that arise
in implementing the unprecedented volume and diverse set
of sanctions and trade restrictions. Fraud, particularly
first-party payment fraud, continues to be a key area of
focus for HSBC UK. We are investing in new fraud detection
technologies, in order to limit losses and protect customers
to within agreed tolerance levels.
---------------- -------------------------------------------------------------------
Conduct u HSBC UK has fully integrated the Global Purpose-Led Conduct
and customer Approach into our Risk Management Framework; our business
detriment activities; and our governance, ensuring we consider and
act on the impact our actions and decisions have on our
customers and society. This integration to a higher standard
of identification and reporting has enabled further simplification
to processes, ensuring our approach to conduct is more
meaningful to colleagues. Throughout 2022, HSBC UK has
been working towards meeting new Consumer Duty regulation
requirements, and a new Code of Conduct rule, ensuring
we deliver good customer outcomes and act consistently
to support customers. With the expected rise in vulnerable
customers and those in financial difficulty due to the
cost of living crisis, the standards that we have sustained
and enhanced throughout 2022 have contributed to HSBC UK
being well positioned to support these customers in 2023
and mitigate foreseeable new potential conduct risks.
---------------- -------------------------------------------------------------------
Data risk p We use data to serve our customers and run our internal
operations, often in real-time within digital experiences
and processes. If this data is not accurate and timely,
our ability to serve customers, operate with resilience,
or meet regulatory requirements could be impacted. We need
to further invest in controls to ensure data is kept confidential,
and that we comply with the growing number of laws and
increasing expectations from regulators concerning data
privacy controls and the cross-border movement of data.
---------------- -------------------------------------------------------------------
Third-party u We procure services and goods from a range of third parties.
risk It is critical that we have appropriate risk management
policies and processes over the selection and governance
of third parties. This includes third parties' supply networks,
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 customers and meet regulatory expectations.
---------------- -------------------------------------------------------------------
Execution p Failure to effectively prioritise, manage and/or deliver
risk transformation across the organisation impacts our ability
to achieve our strategic objectives. Given the increased
scale, complexity and pace of strategic change at HSBC
UK, we must monitor, manage and oversee change execution
risk to ensure our change portfolios and initiatives continue
to deliver the right outcomes for our customers, people,
investors and communities.
---------------- -------------------------------------------------------------------
-- New risk introduced in 2022
p Risk has heightened during 2022
u Risk remains at the same level
as 2021
q Risk has decreased during 2022
The Strategic report comprising pages 2 to 16 was approved by
the Board on 20 February 2023 and is signed on its behalf by:
John David Stuart
Director
HSBC UK Bank plc
Registered number: 9928412
Risk review
Page
How we manage our risks 17
----------------------------- --------
Risk management 18
----------------------------- --------
What are our principal risks
and uncertainties 19
----------------------------- --------
Top and emerging risks 19
----------------------------- --------
Externally driven 19
----------------------------- --------
Internally driven 23
Our material banking risks 25
----------------------------- --------
Credit risk 26
----------------------------- --------
Treasury risk 55
----------------------------- --------
Market risk 61
----------------------------- --------
Climate risk 62
----------------------------- --------
Resilience risk 62
----------------------------- --------
Regulatory compliance risk 63
----------------------------- --------
Financial crime risk 64
----------------------------- --------
Model risk 64
----------------------------- --------
How we manage our risks
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 endeavours
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 HSBC UK's overarching risk
appetite and determine how its businesses and risks are
managed.
Financial position
-- We aim to maintain a strong capital position, defined by
regulatory and internal capital ratios.
-- We carry out liquidity and funding management for each
operating entity, on a stand-alone basis.
Operating model
-- We seek to generate returns in line with a conservative risk
appetite and strong risk management capability.
-- We aim to deliver sustainable earnings and consistent returns for shareholders.
Business practice
-- We have zero tolerance for any of our people knowingly
engaging in any business, activity or association where foreseeable
reputational risk or damage has not been considered and/or
mitigated.
-- We have no appetite for deliberately or knowingly causing
detriment to consumers, or incurring a breach of the letter or
spirit of regulatory requirements.
-- We have no appetite for inappropriate market conduct by any
member of staff or by any HSBC UK business.
Enterprise-wide application
Our risk appetite encapsulates the consideration of financial
and non-financial risks. We define financial risk as the risk of a
financial loss as a result of business activities. We actively take
these types of risks to maximise shareholder value and profits.
Non-financial risk is defined as the risk to achieving our
strategy or objectives as a result of inadequate or failed internal
processes, people and systems, or from external events.
Our Risk Management Framework
An established risk governance framework and ownership structure
ensures oversight of, and accountability for, the effective
management of risk. Our Risk Management Framework fosters the
continuous monitoring of the risk environment and an integrated
evaluation of risks and their interactions. Integral to our Risk
Management Framework are risk appetite, stress testing and the
identification of emerging risks.
Our Risk Committee focuses on risk governance and provides a
forward-looking view of risks and their mitigation. The Risk
Committee is a committee of the Board and has responsibility for
oversight and advice to the Board on, amongst other things, the
bank's risk appetite, tolerance and strategy, systems of risk
management, internal control and compliance. Additionally, members
of the Risk Committee attend meetings of the Chairman's Nominations
and Remuneration Committee at which the alignment of the reward
structures to risk appetite is considered.
In carrying out its responsibilities, the Risk Committee is
closely supported by the Chief Risk Officer, the Chief Financial
Officer, the Head of Internal Audit and the 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
UK faces, such as cyber-attacks, poor customer outcomes, loss of
data and the current geopolitical risks. Actively managing
non-financial risks is crucial to serving our customers effectively
and having a positive impact on society. During 2022, we continued
to strengthen the control environment and our approach to the
management of non-financial risks, as 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 risks. This is overseen by the
Operational and Resilience Risk function, headed by the HSBC UK
Head of Operational and Resilience Risk.
Three lines of defence
All our people are responsible for identifying and managing risk
within the scope of their roles. Roles are defined using the three
lines of defence model, which takes into account our business and
functional structures.
To create a robust control environment to manage risks, we use
an activity-based three lines of defence model. This model
delineates management accountabilities and responsibilities for
risk management and the control environment.
The model underpins our approach to risk management by
clarifying responsibility and encouraging collaboration, as well as
enabling efficient coordination of risk and control activities. The
three lines of defence are summarised below:
-- The first line of defence owns the risks and is responsible
for identifying, recording, reporting and managing them in line
with risk appetite, and ensuring that the right controls and
assessments are in place to mitigate them.
-- The second line of defence challenges the first line of
defence on effective risk management, and provides advice and
guidance in relation to the risk.
-- The third line of defence is our Internal Audit function,
which provides independent assurance that our risk management
approach and processes are designed and operating effectively.
Risk appetite
We formally articulate our risk appetite through our Risk
Appetite Statement, 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 so that any actual performance that falls
outside the approved risk appetite is discussed and appropriate
mitigating actions are determined. This reporting allows risks to
be promptly identified and mitigated, and informs risk-adjusted
remuneration to drive a strong risk culture.
Our RAS and business activities are guided and underpinned by
qualitative principles and/or quantitative metrics.
Stress testing
Stress testing is an important tool for banks and regulators to
assess vulnerabilities in individual banks and/or the financial
banking sector under hypothetical adverse scenarios. The results of
stress testing are used to assess banks' resilience and capital
adequacy to a range of adverse shocks.
A number of internal macroeconomic and event-driven stress
scenarios specific to the UK or the global economy were considered
and reported to senior management during the course of the year.
These stress scenarios included the impact of the Russia-Ukraine
war and the impact of increasing inflation in the UK.
Furthermore, HSBC UK is subject to regulatory stress testing and
the requirements are increasing in frequency and granularity. The
assessment by the regulators is on both a quantitative and
qualitative basis, the latter focusing on our portfolio quality,
data provision, stress testing capability and capital planning
processes.
During 2022, HSBC UK prepared its first standalone BoE Annual
Concurrent Stress Test exercise. The exercise subjects the major UK
banks to hypothetical deep simultaneous recessions in the UK and
global economies, large falls in asset prices and higher global
interest rates, and a separate stress of misconduct costs.
The BoE will publish the results of the 2022 Annual Cyclical
Stress in summer 2023.
The 2022 internal stress tests confirm that HSBC UK is well
positioned to withstand potential shocks.
Risk management
We recognise that the primary role of risk management is to
protect our customers, business, employees, shareholders and the
communities that we serve, while ensuring we are able to support
our strategy and provide sustainable growth. This is supported
through our three lines of defence model.
We use a comprehensive Risk Management Framework across the
organisation and across all risk types, underpinned by the HSBC
Group's culture and values. This outlines the key principles,
policies and practices that we employ in managing material risks,
both financial and non-financial.
The framework fosters continual monitoring, promotes risk
awareness and encourages sound operational and strategic decision
making. It also ensures a consistent approach to identifying,
assessing, managing and reporting the risks we accept and incur in
our activities.
Internal control
We have:
-- Established policies to ensure compliance with the PRA
Rulebook for Ring-fenced bodies. These include an over-arching
Ring-fenced bodies policy, together with additional policies
covering Exceptions, Arm's Length Transactions and
Distributions.
-- Implemented the HSBC Group Risk Management Framework and
other HSBC Group policies and procedures. These are designed to:
safeguard assets against unauthorised use or disposal; maintain
proper accounting records; and ensure the reliability and
usefulness of financial information.
Policies and procedures are designed to provide effective
internal control within the group but can only provide reasonable
assurance against mitigating material misstatement, errors, losses
or fraud.
The key risk management and internal control procedures, that
have been in place throughout the year ended 31 December 2022 and
up to the date of approval of this report, include:
-- 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 employees fairly at all times.
-- The HSBC Group Risk Management Framework: see 'Our Risk
Management Framework' section of the report on page 17.
-- Delegations of authority: Subject to certain matters reserved
to the Board, the Board has delegated powers and authority to
manage the day-to-day running of the Company within certain limits
to the CEO and its Executive Committee. The CEO is permitted to
sub-delegate such powers and authorities, within those limits, as
he sees fit.
-- Strategic plans: Strategic plans are prepared annually for
each of the lines of business that make up the group, within the
framework of the HSBC Group's overall strategy. The relevant lines
of business strategic plans are incorporated into the five year
HSBC UK Country Strategic Plan, which is refreshed every three
years, and approved by the Company's Board. Progress against the
Country Strategic Plan is reported regularly to the Executive
Committee, Board and the HSBC Group Executive Committee.
We also approve an annual Financial Resource Plan, which is
informed by detailed analysis of risk appetite, stress-testing
exercises, and the types and quantum of risk that the Company is
prepared to take, within the parameters set by the HSBC Group, to
execute its strategy, and also sets out the key business
initiatives and the financial impact of those initiatives in order
to determine the most appropriate use of the Company's resources.
The key risk management and internal control procedures over
financial reporting include the following:
-- Financial reporting: The financial reporting process for
preparing the consolidated Annual Report and Accounts 2022 is
controlled using documented accounting policies and reporting
formats, supported by detailed instructions and guidance on
reporting requirements. These are issued by the HSBC Group to HSBC
UK that are cascaded to all reporting entities within the group in
advance of each reporting period end. The submission of the
Company's financial information is subject to certification by the
CFO, and analytical review procedures undertaken at reporting
entity and group levels.
-- Disclosure Committee: The Disclosure Committee comprises
certain executive management and supports the discharge of the
Company's obligations in relation to its debt securities traded on
the London Stock Exchange. In particular, it considers whether a
new event or circumstance constitutes inside information, reviews
all material disclosures and considers and advises upon any
requests and reports to be made by any subsidiaries or affiliates
of its group with regard to inside information.
-- Audit Committee: The Board's Audit Committee reviews the
internal financial controls and reporting disclosures for any
material errors, misstatements or omissions with regard to the
integrity of financial statements and disclosures and provides
oversight over internal financial controls. It is supported by
structures and processes within the group's Finance and Risk
functions that provide analytical review of financial reporting and
the maintenance of accounting records, and seek the committee's
support regarding material accounting policies and practices before
they are agreed with the External Auditors.
-- Risk Committee: The Board's Risk Committee provides oversight
over internal controls systems and the status of principal risks,
and considers whether the mitigating actions put in place are
appropriate. In addition, when unexpected losses have arisen or
incidents have occurred which indicate gaps in the control
framework or in adherence to policies, the committee reviews
reports prepared by management that analyse the cause of the issue,
any lessons learned and actions proposed to address the issue.
During the year, the Risk Committee and Audit Committee kept
under review the effectiveness of this system of internal controls
and reported regularly to the Board. In carrying out their
respective reviews, the committees receive regular reports from:
business and operational risk assessments; heads of key risk
functions covering all internal controls, both financial and
non-financial; internal audit reports; external audit reports;
prudential reviews; and regulatory reports. More details on the
committee's responsibilities and activities during the year are set
out in the 'Board Committees' section on page 67.
What are our principal risks and
uncertainties
Key developments in 2022
We actively managed the risks related to the cost of living
crisis in the UK and broader macroeconomic and geopolitical
uncertainties, including the Russia-Ukraine war, and other key
risks described in this section. In addition, we enhanced our risk
management in the following areas:
-- We have continued to improve our risk governance decision
making, particularly with regard to the governance of treasury risk
to ensure senior executives have appropriate oversight and
visibility of macroeconomic trends around inflation and interest
rates.
-- We enhanced our enterprise risk reporting processes to place
a greater focus on our emerging risks, including by capturing the
materiality, oversight and individual monitoring of these
risks.
-- We have commenced activity to review and strengthen both our
Risk Culture and our financial risk control environment as part of
ongoing work to enhance our Risk Management Framework.
-- We have further strengthened our third-party risk policy and
processes to improve control and oversight of our material third
parties that are key to maintaining our operational resilience, and
to meet new and evolving regulatory requirements.
-- We have continued to embed, the governance and oversight
around model adjustments and related processes for IFRS 9 models
and financial reporting processes.
-- Through our dedicated climate risk programme we have
continued to embed climate considerations throughout the firm,
including updating the scope of our programme to cover all risk
types, expanding the scope of climate related training and
developing new climate risk metrics to monitor and manage
exposures.
-- We continued to improve the effectiveness of our financial
crime controls, using advanced analytics capabilities. We are
refreshing our financial crime policies, seeking to ensure they
remain up-to-date and address changing and emerging risks. We
continue to monitor regulatory changes.
Top and emerging risks
We use a top and emerging risks process to provide a
forward-looking view of issues with the potential to threaten the
execution of our strategy or operations over the medium to long
term.
We proactively assess the internal and external risk
environment, as well as review the themes identified across HSBC UK
businesses for any risks that may require escalation. We update our
top and emerging risks as necessary.
Our current top and emerging risks are as follows.
Externally driven
Geopolitical and macroeconomic risk
This risk has heightened in 2022 as the UK economy faced a
number of challenges, including rising inflation, increased
interest rates and a period of significant market volatility that
followed changes to the policies announced by the UK Government.
Against this backdrop, the recovery has stalled, with GDP still
below its pre-Covid-19 pandemic level. Consumer confidence has
fallen as the cost of living crisis has deepened, partly driven by
the sharp rise in energy prices, and with real incomes falling, the
economy is expected to go into recession in 2023.
Global commodity markets have been significantly impacted by the
Russia-Ukraine war and localised Covid-19 outbreaks, leading to
continued supply chain disruptions. These disruptions have resulted
in UK product shortages and increased prices for both energy and
non-energy commodities, such as food. The increased rate of
inflation in the UK has been exacerbated by these pressures albeit
some easing of disruptions has been seen in the second half of
2022. The BoE may be close to the end of its monetary tightening
cycle. However, should interest rates need to rise beyond what is
currently expected, a realignment of market expectations could
cause turbulence in financial asset prices.
Higher inflationary and interest rate expectations in the UK,
and the resulting economic environment, have had an impact on ECL
and could increase the uncertainty of our modelled ECL estimates.
The combined pressure of higher inflation and interest rates may
impact the ability of our customers to repay debt. In line with
existing practice we have continued to carry out enhanced
monitoring of model outputs and the use of model overlays,
including management adjustments. These adjustments are based on
the expert judgement of senior credit risk managers to reflect
current market inflation and interest rate conditions where they
have not been incorporated in the underlying macroeconomic
scenarios. Inflation and rising interest rates have been considered
both directly in certain models, and assessed via adjustments where
not directly considered. Whilst UK government programmes
implemented during the Covid-19 pandemic to support businesses and
individuals have ceased, these have impacted the level of credit
losses, which in turn may have impacted the longer-term reliability
of loss and capital models.
Second order impacts from the Russia-Ukraine war remain
uncertain. These impacts may lead to significant credit losses on
specific exposures, which may not be fully captured in our ECL
estimates and may result in the use of an ECL overlay
adjustment.
HSBC UK is monitoring the impacts of the Russia-Ukraine war and
continues to respond to the further economic sanctions and trade
restrictions that have been imposed on Russia in response. In
particular, significant sanctions and trade restrictions against
Russia have been put in place by the UK, the US and the EU, as well
as other countries. Such sanctions and restrictions have
specifically targeted certain Russian government officials,
politically exposed persons, business people, Russian oil imports,
energy products, financial institutions and other major Russian
companies, as well as more generally applicable investment, export,
and import bans and restrictions. In response to
such sanctions and trade restrictions, as well as asset flight,
Russia has implemented certain countermeasures. Further sanctions,
trade restrictions and Russian counter sanctions may adversely
affect HSBC UK and its customers by creating regulatory,
reputational and market risks.
Negotiations between the UK and the EU over the operation of the
Northern Ireland Protocol are continuing. While there are signs
that differences may be diminishing, failure to reach agreement
could have implications for the future operation of the EU-UK Trade
and Cooperation Agreement. In June 2022, the UK government
published proposed legislation that seeks to amend the Protocol in
a number of respects. In response, the EU launched infringement
procedures against the UK, and is evaluating the UK response,
received in September 2022. If the proposed legislation were to
pass, and infringement procedures progressed, it could further
complicate the terms of trade between the UK and the EU and
potentially prevent progress in other areas such as financial
services. We are monitoring the situation closely, including the
potential impacts on our customers.
The US-China relationship remains complex. The US, the UK, the
EU and other countries have imposed various sanctions and trade
restrictions on China. Although sanctions and trade restrictions
are impossible to predict, increases in diplomatic tensions between
China and the US and other countries could result in new and/or
enhanced sanctions that could negatively impact HSBC UK, its
customers and the markets in which it operates. China has in turn
announced a number of its own sanctions and trade restrictions that
target, or provide authority to target, foreign individuals and
companies. China has also promulgated laws that provide a legal
framework for imposing further sanctions and export restrictions.
These and any future measures and countermeasures that may be taken
by the US, China and other countries may affect HSBC UK and its
customers.
High Covid-19 vaccination rates and acquired population immunity
in 2022 across the UK have minimised the public health risks and
the need for restrictions. New Covid-19 variants and sub-variants
pose a continuing risk and could result in the UK Government
reintroducing restrictions, potentially impacting our personal and
business customers.
Our Central macroeconomic scenario, which has the highest
probability weighting in our IFRS 9 'Financial Instruments'
calculations of ECL, assumes low growth and a higher inflation
environment. However, due to the rapidly changing economic
conditions, the potential for forecast dispersion and volatility
remain high, impacting the degree of accuracy and certainty of our
Central scenario forecast. The level of volatility depends on
various factors, including commodity price increases, supply chain
constraints and the monetary policy response to inflation. There is
also uncertainty with respect to the relationship between the
economic drivers and the historical loss experience, which has
required adjustments to modelled ECLs in cases where we determined
that the model was unable to capture the material underlying risks.
For further details of our Central and other scenarios, see
'Measurement uncertainty and sensitivity analysis of ECL estimates'
on page 33.
Mitigating actions
-- We closely monitor geopolitical and economic developments
including the impacts of the Russia-Ukraine war and undertake
scenario analysis and stress testing where appropriate. This helps
us to take portfolio actions where necessary, including seeking to
ensure enhanced monitoring and amending our risk appetite.
-- We continue to monitor the UK's relationship with the EU, and
assess the potential impact on our people, operations and
portfolios.
-- We continue to monitor our risk profile closely in the
context of the current geopolitical and macroeconomic situation,
and given the significant uncertainties, additional mitigating
actions may be required.
Credit risk
Credit risk in the UK has increased driven chiefly by the
current cost of living crisis and the macroeconomic environment.
The longer term outlook for credit risk is difficult to predict.
This uncertainty is driven by a number of factors, including the
impacts of the UK's withdrawal from the EU and the economic
slowdown in the UK, exacerbated by geopolitical events, including
the Russia-Ukraine war.
Mitigating actions
-- We have reviewed our customer affordability and credit
scoring models and made adjustments to reflect the increased rate
of inflation and current economic conditions. We have also
proactively contacted customers to advise of the support tools that
we offer to provide help with the increased cost of living.
-- Mortgage stress rates have been refreshed to reflect the
latest interest rate expectations, and are regularly reviewed,
helping us to recognise rises as well as reductions in base rate
expectations to help ensure that our stress rate remains
appropriate in light of the latest outlooks.
-- We are hiring additional colleagues in our Financial Support
Team in anticipation of an increase in demand.
-- Reviews of key credit portfolios are undertaken regularly to
help ensure that individual customer or portfolio risks are
understood and our ability to manage the level of facilities
offered through the economic downturn are appropriate.
-- We continue to monitor high risk wholesale industry sectors
closely and in 2022 we undertook specific reviews of portfolios
showing vulnerability such as Automotive, Leveraged Finance, Power
and Utilities, Commercial Real Estate, Metals and Mining,
Chemicals, Retail and Aviation. Detailed performance monitoring is
reviewed on a monthly basis, which includes early warning
indicators and a view of concentration risks. Portfolio limits and
exposures have been re-assessed and reductions implemented where
appropriate.
-- We stress test portfolios of particular concern to help
identify sensitivity to loss under a range of scenarios, with
management actions being taken to help rebalance exposures and
manage risk appetite where necessary.
Evolving regulatory environment risk
Financial service providers continue to face stringent
regulatory and supervisory requirements, particularly in the areas
of capital and liquidity management, conduct of business, financial
crime, internal control frameworks, the use of models, the
integrity of financial services delivery and financial and
operational resilience. The competitive landscape in which HSBC UK
operates may be significantly altered by future regulatory changes
and government intervention. Regulatory changes, including those
resulting from the UK's exit from the EU, may affect our
activities.
We aim to keep abreast of the emerging regulatory compliance and
conduct agenda, including those which relate to: ESG matters; how
we are ensuring good customer outcomes, including addressing
customer vulnerabilities as a result of the cost of living crisis;
regulatory compliance; regulatory reporting; employee compliance
including use of e-communication channels; and the proposed reforms
to the UK financial services sector, known as the Edinburgh
Reforms. 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 HSBC UK operates may be impacted by
future regulatory changes and government intervention.
Mitigating actions
-- We continue to engage in the development of new and amended
regulations in the UK to ensure that the implications have been
fully considered by regulators and the wider industry.
-- We continue to work with the UK authorities and regulatory
bodies to discuss any impacts on customers and markets.
-- We monitor regulatory developments to ensure that we fully
understand the evolving regulatory landscape and implement any
applicable change in a timely way.
Cyber threat and unauthorised access to systems
Together with other organisations, we continue to operate in an
increasingly hostile cyber threat environment. These threats
include potential unauthorised access to customer accounts, attacks
on our systems or those of our third-party suppliers and require
ongoing investment in business and technical controls to defend
against them.
Mitigating actions
-- We seek to evaluate threat levels for the most prevalent
cyber-attack types and their potential outcomes. To further protect
HSBC UK and our customers and help ensure the safe expansion of our
business lines, we aim to strengthen our controls to reduce the
likelihood and impact of advanced malware, data leakage, exposure
through third parties and security vulnerabilities.
-- We seek to enhance our cybersecurity capabilities, including
threat detection, access control, data analytics and third-party
security reviews. An important part of our defence strategy is
ensuring that our colleagues are aware of cybersecurity issues and
know how to identify and report incidents.
-- We report and review cyber risk and control effectiveness 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 its mitigating actions.
-- We participate globally in industry bodies and working groups
to collaborate on tactics employed by cyber-crime groups and to
collaborate in defending against, detecting and preventing
cyber-attacks on financial organisations.
Ibor transition
The publication of sterling, Swiss franc, euro and Japanese yen
Libor interest rate benchmarks, as well as Eonia, ceased from the
end of 2021. Our Ibor transition programme, which is tasked with
the development of new near RFR products and the transition of
legacy Ibor products, has continued to support the transition of a
limited number of sterling Libor contracts, which used the
published 'synthetic' sterling interest rate methodology during
2022.
The remaining 'tough legacy' sterling contracts have required
protracted client discussions where contracts are complex or
restructuring of facilities is required. Following the
announcements by the FCA in September and November 2022 that
'synthetic' sterling Libor rates will cease to be published on 31
March 2023 for one and six-month sterling Libor, or 31 March 2024
for three-month sterling Libor, we have or are prepared to
transition or remediate the remaining few contracts outstanding as
at 31 December 2022 in advance of those cessation dates.
For US dollar Libor and other demising Ibors, HSBC UK has a
significantly lower volume of contracts to transition compared to
sterling Libor. Through the second half of 2022, we have contacted
all of our affected clients, discussed their transition options,
and have converted over half of the legacy contracts to alternative
rates. As a result, the level of residual risk has and continues to
diminish. Following the FCA's consultation in November 2022
proposing that US dollar Libor is to be published using a
'synthetic' methodology for a defined period, we will continue to
work with our clients to support them through the transition of
their products if transition is not completed by 30 June 2023.
Until all legacy contracts in demising Ibors are transitioned we
are exposed to, and actively monitor, risks including:
-- Regulatory compliance and conduct risks, as the transition of
legacy contracts to RFRs or alternative rates, or sales of products
referencing RFRs, may not deliver fair client outcomes;
-- Resilience and operational risks, as changes to manual and
automated processes, made in support of new RFR methodologies, and
the transition of Ibor contracts may lead to operational
issues;
-- Legal risk, as issues arising from the use of legislative
solutions and from legacy contracts that the group is unable to
transition may result in unintended or unfavourable outcomes for
clients and market participants, which could potentially increase
the risk of disputes; and
-- Market risk, because as a result of differences in Libor and
RFR interest rates, we are exposed to basis risk resulting from the
asymmetric adoption of rates across assets, liabilities and
products.
Mitigating actions
-- Our HSBC UK Ibor transition programme, which is overseen by
the HSBC UK Chief Risk Officer, has delivered 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 in demised and demising Ibors,
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.
Environmental, social and governance risk
We are subject to financial and non-financial risks associated
with ESG related matters. Our current areas of focus include the
following: climate risk, nature-related risks and human rights
risks. These can impact us both directly and indirectly through our
customers and our own activities.
Focus on climate-related risk continued to increase over 2022,
owing to the pace and volume of policy and regulatory changes on
climate risk management, stress testing and scenario analysis and
disclosures. If we fail to meet evolving regulatory expectations or
requirements on climate risk management, this could have regulatory
compliance and reputational impacts. Climate change can have an
impact across HSBC UK's risk taxonomy through both transition risk,
arising from the move to a low-carbon economy, such as through
policy, regulatory and technological changes, and physical risk
impacts due to the increasing severity and/or frequency of severe
weather or other climatic events, such as rising sea levels and
flooding, and chronic shifts in weather patterns, which could
affect our ability to conduct our day-to-day operations.
Our most material medium to long term risks in regards to
managing climate risk relate to corporate and retail client
financing within our banking portfolio, but there are also
significant responsibilities in relation to our employee pension
plans, and we continue to monitor the impacts of climate risk, and
further embed our approach across our key risk areas and business
lines.
We have refreshed our credit risk policy to further embed
climate risk considerations into our corporate credit decisions for
new money requests. We also delivered training to select colleagues
in our Risk function to raise awareness of how climate risk is
likely to impact certain high transition risk sectors and the
associated credit risk considerations. We continue to develop
guidance for our other higher transition risk sectors. To help with
risk assessment, our developing client transition and physical risk
questionnaire is currently live across 10 sectors to improve our
understanding of the level of transition risk and physical risk
exposure.
We are also focused on embedding climate considerations into our
retail credit risk management processes and have implemented
metrics to support monitoring for properties with heightened
climate-related physical risk exposure.
Transition risk efforts have focused on assessing the potential
risk to our mortgage portfolio by using current and potential
energy efficiency ratings for individual properties, sourced from
property EPC data. We are working towards improving the proportion
of properties on our book with an EPC rating of C or above, and on
improving the EPC data coverage. We have approximately 54% of
properties in our portfolio with a valid EPC certificate (dated
within the last 10 years) as at September 2022.
In addition to financial risks arising in our corporate and
retail banking portfolio, we face increased reputational, legal and
regulatory risks as we make progress towards the HSBC Group's net
zero ambition, with stakeholders likely to place a greater focus on
our actions, investment decisions and disclosures related to this
ambition. We will face greenwashing 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, including within our marketing material and campaigns.
In response to this risk, we have published internal guidance to
stakeholders across our business to increase awareness across the
first and second lines of defence and our product governance
framework has been expanded to improve the management of
greenwashing risk throughout the whole product lifecycle.
While climate risk reporting, and in particular reporting on
financed emissions, has improved over time, we continue to focus on
data quality and consistency with the development of our risk
appetite and metrics.
Climate risk may also impact on model risk as the uncertain
impacts of climate change and data limitations present challenges
to creating reliable and accurate model outputs.
Methodologies we have used may develop over time in line with
market practice and regulations, as well as developments in climate
science. Any developments in data and methodologies could result in
revisions to reported data going forward, including on financed
emissions, meaning that reported figures may not be reconcilable or
comparable year-on-year.
There is increasing evidence that a number of nature-related
risks beyond climate change, which include risks that can be
represented more broadly by impact and 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, ecosystem
degradation arising from economic activity 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 HSBC UK and our
customers. We continue to engage with investors, regulators and
customers on nature-related risks to evolve our approach and
understand best practice risk mitigation.
Regulation and disclosure requirements in relation to human
rights, and to modern slavery in particular, are increasing.
Businesses are expected to be transparent about their efforts to
identify and respond to the risk of negative human rights impacts
arising from their business activities and relationships.
Mitigating actions
-- Our product design, management and governance processes have
been adapted to help ensure that climate risk factors are
effectively and consistently considered, including the risk of
greenwashing.
-- We have enhanced and expanded the use of a Transition Risk
Questionnaire to better understand our exposure to the highest
transition risk sectors and we continue to engage with our
customers to understand and support their transition away from high
carbon activities.
-- HSBC UK implements HSBC Group's sustainability risk policies
as part of its broader reputational risk framework. We focus our
policies on sensitive sectors which may have a high adverse impact
on people or on the environment and in which we have a significant
number of customers. In December 2022, the HSBC Group announced a
revised Energy Policy and we intend to use our deep relationships
to partner with our customers in this sector to help them
transition to cleaner, safer and cheaper energy alternatives.
-- The Trustee of our employee pension plan, the HSBC Bank (UK)
Pension Scheme, manages climate risk in line with its fiduciary
duties and local regulatory requirements, with global corporate
policy encouraging consideration of ESG risks when selecting
investments. Further details of the plan's approach to ESG risk
management is available on the HSBC Bank (UK) Pension Scheme
website, www.futurefocus.staff.hsbc.co.uk, including information on
the Trustees commitment to net zero and the annual Taskforce on
Climate-Related Financial Disclosures statement.
-- In 2021, the HSBC Group joined several industry working
groups dedicated to helping us assess, and manage, nature-related
risks, such as the Taskforce on Nature-related Financial
Disclosure. We will use these outputs to assess the availability of
internal nature related data and identify opportunities to enhance
our capabilities further.
-- In 2022, the HSBC Group conducted a review to refresh our
salient human rights issues, which are the human rights at risk of
the most severe negative impact through our business activities and
relationships. This review built on an earlier review that had
identified modern slavery and discrimination as priority human
rights issues. The HSBC Group incorporated additional human rights
elements into existing procurement processes and supplier code of
conduct, and we are applying the approach being developed by the
HSBC Group to inform our own management of this risk.
-- We continue to engage with our customers, investors and
regulators proactively on the management of ESG risks.
Digital currencies and disintermediation risk
Digital assets have, over the past few years, been a growing
part of the financial landscape bringing with them increased
competition and financial risk. CBDC and cryptocurrencies are the
focus of disintermediation risk as such currencies could result in
a more direct linkage between currency providers and payment
participants. CBDCs could require end users to hold accounts
directly with a central bank on a ledger retained by them
eliminating the use for intermediaries, such as HSBC UK. However,
the pilots and issued CBDCs are coalescing around leveraging
existing banking networks and infrastructure to support any CBDC
initiative.
Cryptocurrencies facilitate peer-to-peer transactions across
borders as a common means of exchange which could reduce the
requirement for foreign exchange services and payment
intermediaries. Over the past year the crypto ecosystem has seen
significant disruption with volatile prices, individual currencies
failing and contagion spreading to industry participants.
Cryptocurrencies to date have not been seen as a replacement to
fiat currencies rather they are currently seen as a speculative
investment.
Mitigating actions
-- We are involved in various initiatives and working groups
addressing any related changes within the market, including those
which the BoE has initiated.
-- We are monitoring pilots, progress and industry developments
in digital assets and other aspects of decentralised finance as
they become better established and a sense of their evolution
emerges.
-- HSBC UK, as part of the wider HSBC Group, is involved in
various consultations, industry initiatives and working groups
addressing any changes within the market, including those which the
BoE has initiated. The bank is taking a holistic view of the risk
across product and client segments, including important
considerations such as vulnerability and financial inclusion.
-- We will continue to monitor progress and industry
developments in digital assets and other aspects of decentralised
finance to assess the risk and impact on business models, markets
and customers.
Internally driven
People risk
Our success in delivering our strategic priorities whilst
proactively managing the regulatory and legislative environment
depends on the attraction, development, and retention of our
leadership and high-performing employees. A highly competitive UK
employment market, coupled with heightened inflationary pressures,
will continue to test our ability to attract and retain talent. We
remain focussed on supporting our employees during the cost of
living crisis.
As we embed hybrid working in HSBC UK, we continue to
concentrate on building and maintaining a high-performance culture
and employee engagement in the new environment.
Mitigating actions
-- We are supporting our people during the economic downturn
with a range of financial well-being activities.
-- We seek to promote a diverse and inclusive workforce and
provide support across a wide range of health and well-being
activities. We continue to build our speak-up culture through
active campaigns.
-- We monitor hiring activities and levels of employee
attrition, to ensure effective hiring and forecasting to meet
business demands.
-- We develop succession plans for key management roles, with
oversight from the HSBC UK Executive Committee.
-- We monitor people risks that could arise due to
organisational restructuring to help ensure that we sensitively
manage redundancies and support impacted employees. We encourage
our people leaders to focus on talent retention at all levels, with
an empathetic mindset and approach, while ensuring the whole
proposition of working at HSBC UK is well understood. Our Future
Skills curriculum provide skills that will help to enable employees
and HSBC UK to be successful in the future.
-- Political, legislative and regulatory challenges are closely
monitored to minimise any impact on our employment practices or the
attraction and retention of talent and key performers.
IT systems infrastructure and operational resilience
We operate an extensive and complex technology landscape, which
must remain resilient in order to support customers. Risks arise
where technology is not understood, maintained, or developed
appropriately. We remain committed to investing in the reliability
and resilience of our IT systems and critical services. We do so in
order to protect our customers and colleagues to help prevent
disruption to services that could result in reputational, legal and
regulatory consequences. Increased pressure has been seen on our
business operations and customer support centres as our people,
processes and systems have responded to meet the current economic
environment.
HSBC UK'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. We continue to
concentrate on our system resilience and service continuity by
aiming to enhance the security features of our software development
life cycle and improve our testing processes and tools.
-- We continue to upgrade many of our IT systems, simplify our
service provisions and replace older IT infrastructure and
applications. With increased pressure on our business operations,
additional management attention is being focused on ensuring that
high service standards are consistently being maintained.
Model risk
Model risk arises whenever business decision making includes
reliance on models. We use models in both financial and
non-financial contexts, as well as 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. Significant
increases in inflation and interest rates which impact the cost of
living in the UK, may impact the reliability and accuracy of credit
risk models which need close monitoring, with recalibration or
redevelopment of these models, if required.
We continued to prioritise the redevelopment of IRB models as
part of the IRB repair and Basel III programmes with a key focus on
enhancing the quality of data used as model inputs. A number of
these models have been submitted to the PRA for feedback and
approval is in progress.
Mitigating actions
-- We have continued to embed the enhanced monitoring, review
and challenge of expected loss model performance through our Model
Risk Management function as part of a broader quarterly process to
determine loss levels. The Model Risk Management team aims to
provide effective review and challenge of any future redevelopment
of these models.
-- Model Risk Management works closely with businesses to ensure
that models in development meet the risk management, pricing and
capital management needs. Global Internal Audit provides assurance
over the risk management framework for models.
-- Additional oversight and challenge is performed by Model Risk
Management as the second line of defence. The team tests whether
controls implemented by model users comply with model risk policy
and if model risk standards are adequate.
-- We further embedded our Risk Appetite measures focused on
forward looking model risk supported by upgrades to the Model
Inventory System to provide more granular measurement and
management of model risk for multiple applications of a single
model.
-- We continue to strengthen model risk controls through the
Risk Control Assessment process; and the lines of business and
functions test these controls to better assess and understand model
risk.
Financial crime and fraud risk
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to detect and prevent financial
crime which continues to evolve. Challenges include implementing
the unprecedented volume and diverse set of sanctions, notably as a
result of the Russia-Ukraine war.
Amid rising inflation and increasing cost of living pressures,
we face increasing regulatory expectations with respect to the
management of internal and external fraud and the abuse of
vulnerable customers for financial crime.
The digitisation of financial services continues to have an
impact on the payments ecosystem, with an increasing number of new
market entrants and payment mechanisms, not all of which are
subject to the same level of regulatory scrutiny and requirements
as banks. This presents ongoing challenges in terms of maintaining
required levels of payment transparency, notably where banks serve
as intermediaries. Developments around digital assets and
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, continue to increase.
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 seek to manage sanctions and trade restrictions through
the use of, and enhancements to, our existing controls.
-- We continue to strengthen the first party lending fraud
framework, updated our fraud policy and associated control library,
and continued to invest in new fraud detection technologies.
-- We look at the impact of a rapidly changing payments
ecosystem as well as risks associated with direct and indirect
exposure to digital assets and currencies in an effort to ensure
our financial crime controls remain appropriate.
-- We engage with regulators, policymakers and relevant
international bodies to address data privacy challenges through
international standards, guidance, and legislation.
Conduct and customer detriment
We seek to regularly enhance our management of conduct, learning
from the past, including supporting our people in their management
of potentially vulnerable customers, product governance
arrangements, and encouraging our 'Speak Up' culture. At the
forefront of current conduct risk considerations is delivering good
outcomes for customers, particularly those who are vulnerable. We
seek to achieve good customer outcomes in all circumstances.
Mitigating actions
-- We aim to service our customers' ongoing needs and continue to champion a strong conduct and customer-focused culture, by providing support to our customers facing financial difficulties, particularly in light of the current cost of living crisis in the UK.
-- We continue to deliver our dedicated programme that is
focused on the implementation of Consumer Duty requirements.
-- We have implemented a new purpose-led conduct approach,
making conduct easier to understand, setting outcomes to be
achieved for our customers and recognising cultural and behavioural
drivers of good conduct outcomes.
-- We focus on the effectiveness of HSBC UK's conduct
governance, to help promote visibility and read across of conduct
issues in all business lines and the efficient, and consistent
escalation of issues.
-- We have delivered our annual mandatory training course on
conduct to reinforce the importance of conduct for all
colleagues.
-- We continue to provide bespoke training to our Compliance
colleagues to help promote an environment in which employees are
encouraged, feel safe to speak up and know of all the channels that
are available to them to do so.
-- We have continued the integration of Climate Risk into the
Risk Management framework to recognise the importance of
strengthened controls and oversight for our related activities.
Data risk
We use multiple systems and growing quantities of data to
support our customers. Risk arises if data is incorrect,
unavailable, misused, or unprotected. Along with other banks and
financial institutions, we need to meet the increasing external
regulatory obligations and laws that cover data, such as the UK
General Data Protection Regulation and the Basel Committee for
Banking Supervision's 239 guidelines.
Mitigating actions
-- Through our global data management framework, we proactively
monitor the quality, availability and security of data that
supports our customers and internal processes. We work towards
resolving any identified data issues in a timely manner.
-- We have made improvements to our data policies. We are
implementing an updated control framework to enhance the end-to-end
management of data risk.
-- We aim to protect customer data through 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. We
delivered regular mandatory training on how to protect and manage
data appropriately.
Third-party risk
We use third parties to provide a range of goods and services.
Risks arising from the use of third-party providers and their
supply chain may be harder to identify. 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 customers and meet regulatory
expectations.
Mitigating actions
-- We have enhanced our control framework for the use of
third-party providers to help ensure that the risks associated with
these arrangements are understood and managed effectively by our
businesses and functions across HSBC UK.
-- We continue to enhance the effective management of our
intra-group arrangements as we have for external third-party
arrangements using the same control standards.
-- We are implementing the changes required by new regulations as set by our regulators.
Execution risk
We have continued investment in strategic change to support the
delivery of our strategic priorities and regulatory commitments.
This requires robust management of significant resource-intensive
and time-sensitive programmes that are due to be executed in 2023.
Risks arising from the magnitude and complexity of change planned
in 2023 may include regulatory censure, reputational damage and/or
financial losses.
Mitigating actions
-- Change execution risk was added to our risk taxonomy and
control library in 2022, so that the risk can be defined, managed,
reported and overseen in the same way as HSBC UK's other material
risks.
-- The Transformation Oversight Executive Committee oversees the
prioritisation, strategic alignment and management of execution
risk for all change portfolios and initiatives in HSBC UK.
--
Our material banking risks
The material risk types associated with our banking operations
are described in the following tables.
Description of risks - banking operations
Credit risk (see page 26)
----------------------------------------------------------------------- -----------------------------------------------------------
The risk of Credit risk arises Credit risk is:
financial principally from * measured as the amount that could be lost if a
loss if a direct lending, customer or counterparty fails to make repayments;
customer trade finance
or counterparty and leasing business,
fails to meet but also from * monitored using various internal risk management
an certain other measures and within limits approved by individuals
obligation products such within a framework of delegated authorities; and
under as guarantees
a contract. and derivatives.
* managed through a robust risk control framework that
outlines clear and consistent policies, principles
and guidance for risk managers.
Treasury risk (see page 55)
----------------------------------------------------------------------- -----------------------------------------------------------
The risk of Treasury risk Treasury risk is:
having arises from changes * measured through appetites set as target and ratios;
insufficient to the respective
capital, resources and
liquidity or risk profiles * monitored and projected through appetites and using
funding driven by customer stress and scenario testing; and
resources to behaviour, management
meet decisions or
financial the external * managed through control resources in conjunction with
obligations environment. risk profiles and cashflows.
and satisfy
regulatory
requirements,
including
the risk of
adverse
impact on
earnings
or capital due
to
structural
foreign
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 61)
----------------------------------------------------------------------- -----------------------------------------------------------
The risk that Exposure to market Market risk is:
movements risk is separated * measured using sensitivities, value at risk and
in market into two portfolios: stress testing, giving a detailed picture of
factors, * trading portfolios; and potential gains and losses for a range of market
including but movements and scenarios, as well as tail risks over
not specified time horizons;
limited to * non-trading portfolios.
interest
rates, credit * monitored using VaR sensitivities, stress testing and
spreads other measures, including the sensitivity of net
and foreign interest income and the sensitivity of structural
exchange foreign exchange; and
rates will
reduce
our income or * managed using risk limits approved by the Risk
the Management Meeting.
value of our
portfolios.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Climate risk (see page 62)
Climate risk Climate risk Climate risk is:
relates can materialise * measured using a variety of risk appetite metrics and
to the through: Key Management Indicators, which assess the impact of
financial * physical risk, which arises from the increased climate risk across the risk taxonomy;
and frequency and severity of weather events;
non-financial
impacts that * monitored using stress testing; and
may * transition risk, which arises from the process o
arise as a f
result moving to a low-carbon economy; and * managed through adherence to risk appetite thresholds
of climate and via specific policies.
change
and the move to * greenwashing risk, which arises from the act of
a greener knowingly or unknowingly misleading stakeholders
economy. regarding our strategy relating to climate, the
climate impact/benefit of a product or service,
or
the climate commitments or performance of our
customers.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Resilience risk (see page 62)
----------------------------------------------------------------------- -----------------------------------------------------------
Resilience risk Resilience risk Resilience risk is:
is the risk arises from failures * measured through a range of metrics with defined
that or inadequacies maximum acceptable impact tolerances and against our
we are unable in processes, agreed risk appetite;
to people, systems
provide or external events.
critical These may be * monitored through oversight of enterprise processes,
services to our driven by rapid risks, controls and strategic change programmes; and
customers, technological
affiliates, innovation, changing
and behaviours of * managed by continuous monitoring and thematic review.
counterparties our consumers,
as a result of cyber threats
sustained and attacks,
and significant cross border
operational dependencies,
disruption. and third party
relationships.
--------------- ------------------------------------------------------ -----------------------------------------------------------
Description of risks - banking operations (continued)
Regulatory compliance risk (see
page 63)
--------------------------------------------------- ------------------------------------------------------------
Regulatory compliance Regulatory compliance Regulatory compliance risk is:
risk is the risk risk arises from * measured by reference to risk appetite, identified
associated with the failure to metrics, incident assessments, regulatory feedback
breaching our duty observe the letter and the judgement and assessment of our regulatory
to clients and other and spirit of compliance teams;
counterparties, relevant laws,
inappropriate market codes, rules,
conduct and breaching regulations and * monitored against the first line of defence risk and
related financial standards of control assessments, the results of the monitoring
services regulatory good practice. and control assurance activities of the second line
standards. This could result of defence functions, and the results of internal and
in poor market external audits and regulatory inspections; and
or customer outcomes
leading to fines,
penalties and * managed by establishing and communicating appropriate
reputational policies and procedures, training employees in them
damage to our and monitoring activity to help ensure their
business. observance. Proactive risk control and/or remediation
work is undertaken where required.
-------------------------- ----------------------- ------------------------------------------------------------
Financial crime risk (see page 64)
-----------------------------------------------------------------------------------------------------------------
Financial crime Financial crime Financial crime risk is:
risk is the risk risk arises from * measured by reference to risk appetite, identified
of knowingly or day-to-day banking metrics, incident assessments, regulatory feedback
unknowingly helping operations involving and the judgement of, and assessment by, our
parties to commit customers, third compliance teams;
or to further potentially parties and employees.
illegal activity
through HSBC UK, * monitored against the first line of defence risk and
including money control assessments, the results of the monitoring
laundering, fraud, and control assurance activities of the second line
bribery and corruption, of defence functions, and the results of internal and
tax 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 64)
Model risk is the Model risk arises Model risk is:
potential for adverse in both financial * measured by reference to model performance tracking
consequences from and non-financial and the output of detailed technical reviews, with
business decisions contexts whenever key metrics including model review statuses and
informed by models, business decision findings;
which can be exacerbated making includes
by errors in methodology, reliance on models.
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;
* managed by creating and communicating appropriate
policies, procedures and guidance, training employees
in their application, and supervising their adoption
to ensure operational effectiveness.
-------------------------- ----------------------- ------------------------------------------------------------
Credit risk
Overview
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet a payment obligation under a contract.
Credit risk arises principally from direct lending, trade finance
and leasing business, but also from other products such as
guarantees and credit derivatives.
Credit risk management
(Audited)
The principal objectives of our credit risk management are:
-- to maintain across HSBC UK a strong culture of responsible
lending and a robust risk policy and control framework;
-- to both partner and challenge the businesses in defining,
implementing, and continually re-evaluating our risk appetite under
actual and scenario conditions; and
-- to ensure there is independent, expert scrutiny of credit
risks, their costs and their mitigation.
Within HSBC UK, the Credit Risk function is headed by the Chief
Risk Officer who reports to the Chief Executive Officer, with a
functional reporting line to the Group Chief Risk Officer.
Its responsibilities are:
-- to formulate credit policy. Compliance, subject to approved
dispensations, is mandatory for all operating companies which must
develop local credit policies consistent with group policies that
closely reflect HSBC Group policy;
-- to guide operating companies on the group's appetite for
credit risk exposure to specified market sectors, activities and
banking products and controlling exposures to certain higher-risk
sectors;
-- to undertake an independent review and objective assessment
of risk. Credit risk assesses all credit facilities and exposures
over designated limits, prior to the facilities being committed to
customers or transactions being undertaken;
-- to monitor the performance and management of portfolios across the group;
-- to control exposure to sovereign entities, banks and other
financial institutions, as well as debt securities which are not
held solely for the purpose of trading;
-- to set policy on large credit exposures, ensuring that
concentrations of exposure by counterparty, sector or geography do
not become excessive in relation to the group's capital base, and
remain within internal and regulatory limits;
-- to maintain and develop the risk rating framework, systems
and models through appropriate governance;
-- to report on retail portfolio performance, high risk
portfolios, risk concentrations, large impaired accounts,
impairment allowances and stress testing results and
recommendations to HSBC UK's RMM, Risk Committee and Board; and to
act on behalf of the group as the primary interface, for
credit-related issues, with the BoE, the PRA, the FCA, rating
agencies, analysts and counterparts in major banks and non-bank
financial institutions.
Concentration of credit risk exposure
(Audited)
Concentrations of credit risk arise when a number of
counterparties or exposures have comparable economic
characteristics, or are engaged in similar activities, or operate
in the same geographical areas/industry sectors, so that their
collective ability to meet contractual obligations is uniformly
affected by changes in economic, political or other conditions.
A number of controls and measures are used to minimise undue
concentration of exposure in the portfolios across industry,
country and customer groups. These include portfolio and
counterparty limits, approval and review controls, and stress
testing.
Credit quality of financial instruments
(Audited)
Our risk rating system facilitates the internal ratings-based
approach under the Basel framework adopted by the group to support
the calculation of our minimum credit regulatory capital
requirement.
The five credit quality classifications each encompass a range
of granular internal credit rating grades assigned to wholesale and
retail lending businesses, and the external ratings attributed by
external agencies to debt securities.
For debt securities and certain other financial instruments,
external ratings have been aligned to the five quality
classifications based upon the mapping of related CRR to external
credit rating.
Wholesale lending
The CRR 10-grade scale summarises a more granular underlying
23-grade scale of obligor 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
Debt securities
and other Wholesale Retail
bills lending lending
--------------- --------------------------------------- --------------------------------------
12-month
Basel
probability 12-month
External Internal of Internal probability-
credit credit default credit weighted
rating rating % rating PD %
-------------------- --------------- --------- ---------------------------- -------- ----------------------------
Quality
classification(1,2)
-------------------- --------------- --------- ---------------------------- -------- ----------------------------
Strong A- and CRR1 to 0.000-0.169 Band 1 0.000-0.500
above CRR2 and 2
-------------------- --------------- --------- ---------------------------- -------- ----------------------------
Good BBB+ to CRR3 0.170-0.740 Band 3 0.501-1.500
BBB-
-------------------- --------------- --------- ---------------------------- -------- ----------------------------
BB+ to CRR4 to Band 4
Satisfactory B and unrated CRR5 0.741-4.914 and 5 1.501-20.000
-------------------- --------------- --------- ---------------------------- -------- ----------------------------
Sub-standard B- to C CRR6 to 4.915-99.999 Band 6 20.001-99.999
CRR8
-------------------- --------------- --------- ---------------------------- -------- ----------------------------
CRR9 to
Credit-impaired Default CRR10 100.000 Band 7 100.000
-------------------- --------------- --------- ---------------------------- -------- ----------------------------
1 Customer risk rating.
2 12-month point-in-time probability-weighted probability of default.
Quality classification definitions
* 'Strong' exposures demonstrate a strong capacity to
meet financial commitments, with negligible or low
probability of default.
* 'Good' exposures demonstrate a good capacity to meet
financial commitments, with low default risk.
* 'Satisfactory' exposures require closer monitoring
and demonstrate an average to fair capacity to meet
financial commitments, with moderate default risk.
* 'Sub-standard' exposures require varying degrees of
special attention and default risk is of greater
concern.
* 'Credit-impaired' exposures have been assessed as
described on Note 1.2(g) on the financial statements.
============================================================
Forborne loans and advances
(Audited)
Forbearance measures consist of concessions towards an obligor
that is experiencing or about to experience difficulties in meeting
its financial commitments.
We continue to classify loans as forborne when we modify the
contractual payment terms due to having significant concerns about
the borrowers' ability to meet contractual payments when they were
due.
In 2022, we expanded our definition of forborne to capture
non-payment-related concessions, such as covenant waivers. For our
wholesale portfolio, we began identifying non-payment-related
concessions in 2021 when our internal policies were changed. For
our retail portfolios, we began identifying them during 2022.
The comparative disclosures have been presented under the prior
definition of forborne for the wholesale and retail portfolios.
For details of our policy on forbearance, see Note 1.2(g) on the
financial statements.
Credit quality of forborne loans
For wholesale lending, where payment related forbearance
measures result in a diminished financial obligation or if there
are other indicators of impairment, the loan will be classified as
credit impaired if it is not already so classified. All facilities
with a customer, including loans that have not been modified, are
considered credit impaired following the identification of a
payment related forborne loan. For retail lending, where a material
concession has been granted, the loan will be classified as credit
impaired if it is not already so classified. In isolation,
non-payment forbearance measures may not result in the loan being
classified as credit impaired unless combined with other indicators
of credit impairment. These are classed as performing forborne
loans for both wholesale and retail lending.
Wholesale and retail lending forborne 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. Any forborne loans not considered
credit impaired will remain forborne for a minimum of two years
from the date that credit impairment no longer applies. For
wholesale lending, any forbearance measures granted on any loan
already classed as forborne results in customer being classed as
credit impaired.
Forborne loans and recognition of expected credit losses
(Audited)
Forborne loans expected credit loss assessments reflect the
higher rates of losses typically experienced with these types of
loans such that they are in stage 2 and stage 3. The higher rates
are more pronounced in unsecured retail lending requiring further
segmentation. For wholesale lending, forborne 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
forborne loans.
Refinance risk
Personal lending
Interest only mortgages incorporate bullet payments at the point
of final maturity. To reduce refinance risk, an initial on-boarding
assessment of customers' affordability is made on a capital
repayment basis and every customer has a credible defined repayment
strategy. Additionally, the customer is contacted during the
mortgage term to check the status of the repayment strategy. In
situations where it is identified that a borrower is expected not
to be able to repay a bullet/balloon payment, the customer is
offered advice and options to help them repay the loan in
accordance with their loan agreement. In the event that this is not
possible, the customer will either default on the repayment or it
is likely that the bank may need to apply forbearance to the loan.
In either circumstance this gives rise to a credit impaired
event.
Wholesale lending
Many types of wholesale lending incorporate bullet/ balloon
payments at the point of final maturity; often, the intention or
assumption is that the borrower will take out a new loan to settle
the existing debt. Where this is true the term refinance risk
refers generally to the possibility that, at the point that such a
repayment is due, a borrower cannot refinance by borrowing to repay
existing debt. In situations where it is identified that a borrower
is expected not to be able either to repay a bullet/balloon payment
or to be capable of refinancing their existing debt on commercial
terms then the customer will either default on the repayment or it
is likely that the bank may need to refinance the loan on terms it
would not normally offer in the ordinary course of business. In
either circumstance this gives rise to a loss event and the loan
will be considered credit impaired.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances and
financial investments, see Note 1.2(g) on the Financial
Statements.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and
advances, see Note 1.2(g) on the Financial Statements.
Personal lending
Property collateral for residential mortgages is repossessed and
sold on behalf of the borrower only when the debt recovery
procedures have been unsuccessful. Any portion of the balance not
covered following the realisation of security is written-off.
Unsecured personal lending products are normally written off, when
there is no realistic prospect of full recovery.
Wholesale lending
Wholesale loans and advances are written off where normal
collection procedures have been unsuccessful to the extent that
there appears no realistic prospect of repayment. These procedures
may include a referral of the business relationship to a debt
recovery company. Debt reorganisation will be considered at all
times and may involve, in exceptional circumstances and in the
absence of any viable alternative, a partial write-off in exchange
for a commitment to repay the remaining balance.
In the event of bankruptcy or similar proceedings, write-off for
both personal and wholesale lending may occur earlier than at the
periods stated above. Collections procedures may continue after
write-off .
Credit risk in 2022
At 31 December 2022 we introduced enhancements in the SICR
approach in relation to capturing relative movements in PD. The
enhanced approach captured relative movements in PD since
origination, which resulted in a significant migration to stage 2
from loans to customers gross carrying amounts in stage 1.
The volume of stage 1 customer accounts with lower absolute
levels of credit risk who have exhibited some amount of relative
increase in PD since origination have migrated into stage 2, and
accounts originated with higher absolute levels of credit risk with
no or insignificant increases in PD since origination have been
transferred to stage 1, with no material overall change in
risk.
The impact on ECL is immaterial due to the offsetting ECL
impacts of stage migrations and to the low LTV profiles applicable
to these customers.
The enhancement of the SICR approach constitutes an improvement
towards more responsive models that better reflect the SICR since
origination. This includes consideration of the current cost of
living pressures, as markets adjust to the higher interest-rate
environment.
For our retail portfolios, we adopted the EBA 'Guidelines on the
application of definition of default' during 2022 and, for our
wholesale portfolios, these guidelines were adopted during 2021.
Adoption of these guidelines did not have a material impact on our
portfolios and comparative disclosures have not been restated.
More detailed analysis of ECL can be found on pages 33 to
54.
A summary of our current policies and practices regarding credit
risk is set out on pages 26 to 27.
Climate risk
Our climate scenarios
In 2022, we have considered four bespoke scenarios that were
designed to articulate our view of the range of potential outcomes
for global climate change. In our climate scenario analysis, we
consider, separately: transition risk arising from the process of
moving to a net zero economy, including changes in policy,
technology, consumer behaviour and stakeholder perception, which
will each impact borrowers' operating income, financing
requirements and asset values; and physical risk arising from the
increased frequency and severity of weather events, such as
hurricanes and floods, or chronic shifts in weather patterns, which
will each impact property values, repair costs and lead to business
interruptions.
These scenarios, which reflect different levels of physical and
transition risk and are varied by severity and probability, were:
the Net Zero scenario, which aligns to the HSBC Group ambition to
transition to net zero and is consistent with the Paris Agreement;
the Current Commitments scenario, which assumes that climate action
is limited to the current governmental commitments and pledges; the
Downside Transition Risk scenario, which assumes that climate
action is delayed until 2030; and the Downside Physical Risk
scenario, which assumes climate action is limited to current
governmental policies.
We consider our Current Commitments scenario as the most likely
scenario to transpire over the next five years. Under the Current
Commitments scenario, we expect immaterial levels of losses
relating to transition risks. However, the rise in global warming
will lead to increasing levels of physical risk losses in later
years. Based on this scenario the potential impact on expected
credit losses is not considered material over the next five years,
as the impacts of climate risk will emerge later in the following
decades.
Summary of credit risk
The disclosure below presents the gross carrying/nominal amount
of financial instruments to which the impairment requirements in
IFRS 9 are applied and the associated allowance for ECL.
The following table provides an overview of the group and bank's
credit risk exposure. As the majority of the group's financial
instruments are held by the bank, the remaining IFRS 7 credit
disclosures are provided on a group only basis.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied
(Audited)
------------------------------ ---------------------------------- -------------------------------- ----------------------------------
At 31 Dec 2022 At 31 Dec 2021
------------- ------------------------------------------------------------------ --------------------------------------------------------------------
Gross Allowance Allowance
carrying/nominal for Gross carrying/nominal for
amount ECL(1) amount ECL(1)
The group GBPm GBPm GBPm GBPm
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
Loans and
advances to
customers at
amortised
cost 206,055 (1,912) 197,381 (1,855)
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
- personal 138,626 (872) 131,318 (767)
-------------
- corporate
and
commercial 64,955 (1,035) 63,927 (1,085)
-------------
- non-bank
financial
institutions 2,474 (5) 2,136 (3)
------------- ------------------------------ ---------------------------------- --------------------------------
Loans and
advances to
banks at
amortised
cost 6,359 (2) 1,914 -
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
Other
financial
assets
measured at
amortised
cost 109,137 (5) 122,133 (1)
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
- cash and
balances at
central
banks 94,407 - 112,478 -
-------------
- items in
the course
of
collection
from other
banks 353 - 299 -
- reverse
repurchase
agreements -
non-trading 7,406 - 7,988 -
-------------
- financial 5,160 - - -
investments
-
prepayments,
accrued
income and
other
assets(2) 1,811 (5) 1,368 (1)
------------- ------------------------------ ---------------------------------- --------------------------------
Total gross
carrying
amount
on-balance
sheet 321,551 (1,919) 321,428 (1,856)
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
Loans and
other credit
related
commitments 67,628 (91) 67,394 (73)
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
- personal 42,059 (9) 39,889 (9)
-------------
- corporate
and
commercial 24,669 (82) 26,843 (64)
-------------
- non-bank
financial
institutions 900 - 662 -
------------- ------------------------------ ---------------------------------- --------------------------------
Financial
guarantees 1,148 (6) 1,102 (3)
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
- personal 342 - 317 -
-------------
- corporate
and
commercial 518 (6) 490 (2)
-------------
- non-bank
financial
institutions 288 - 295 (1)
------------- ------------------------------ ---------------------------------- --------------------------------
Total nominal
amount
off-balance
sheet(3) 68,776 (97) 68,496 (76)
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
390,327 (2,016) 389,924 (1,932)
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
Memorandum
Memorandum allowance
allowance for
Fair value for ECL(4) Fair value ECL(4)
GBPm GBPm GBPm GBPm
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
Debt
instruments
measured at
'FVOCI' 10,932 (1) 14,377 (2)
------------- ------------------------------ ---------------------------------- -------------------------------- ----------------------------------
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 that are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets' as presented within the consolidated balance
sheet on page 81 includes both financial and non-financial
assets.
3 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
4 Debt instruments measured at FVOCI continue to be measured at
fair value with the allowance for ECL as a memorandum item. Change
in ECL is recognised in 'Change in expected credit losses and other
credit impairment charges' in the income statement.
Summary of financial instruments to which the impairment requirements
in IFRS 9 are applied (continued)
(Audited)
------------------------------ ---------------------------------- -------------------------------- --------------------------------
At 31 Dec 2022 At 31 Dec 2021
------------------------------------------------------------------ ------------------------------------------------------------------
Gross
carrying/ Allowance
nominal for Gross carrying/nominal Allowance
amount ECL(1) amount for ECL(1)
The bank GBPm GBPm GBPm GBPm
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
Loans and
advances to
customers at
amortised
cost 201,389 (1,723) 192,880 (1,672)
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
- personal 135,110 (742) 128,069 (667)
-------------
- corporate
and
commercial 55,681 (976) 55,892 (1,002)
-------------
- non-bank
financial
institutions 10,598 (5) 8,919 (3)
------------- ------------------------------ ---------------------------------- --------------------------------
Loans and
advances to
banks at
amortised
cost 9,306 (2) 4,405 -
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
Other
financial
assets
measured at
amortised
cost 108,967 (5) 121,966 (1)
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
- cash and
balances at
central
banks 94,407 - 112,477 -
-------------
- items in
the course
of
collection
from other
banks 154 - 132 -
- reverse
repurchase
agreements -
non-trading 7,406 - 7,988 -
-------------
- financial 5,160 - - -
investments
-
prepayments,
accrued
income and
other
assets(2) 1,840 (5) 1,369 (1)
------------- ------------------------------ ---------------------------------- --------------------------------
Total gross
carrying
amount
on-balance
sheet 319,662 (1,730) 319,251 (1,673)
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
Loans and
other credit
related
commitments 54,324 (88) 53,687 (71)
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
- personal 31,527 (8) 29,223 (7)
-------------
- corporate
and
commercial 21,916 (80) 23,887 (64)
-------------
- non-bank
financial
institutions 881 - 577 -
------------- ------------------------------ ---------------------------------- --------------------------------
Financial
guarantees 1,148 (6) 1,102 (3)
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
- personal 342 - 317 -
-------------
- corporate
and
commercial 518 (6) 490 (2)
-------------
- non-bank
financial
institutions 288 - 295 (1)
------------- ------------------------------ ---------------------------------- --------------------------------
Total nominal
amount
off-balance
sheet(3) 55,472 (94) 54,789 (74)
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
375,134 (1,824) 374,040 (1,747)
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
Memorandum
Memorandum allowance
allowance for
Fair value for ECL(4) Fair value ECL(4)
GBPm GBPm GBPm GBPm
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
Debt
instruments
measured at
'FVOCI' 10,932 (1) 14,377 (2)
------------- ------------------------------ ---------------------------------- -------------------------------- --------------------------------
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 that are subject to
the impairment requirements of IFRS 9. 'Prepayments, accrued income
and other assets' as presented within the bank's balance sheet on
page 84 includes both financial and non-financial assets.
3 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
4 Debt instruments measured at FVOCI continue to be measured at
fair value with the allowance for ECL as a memorandum item. Change
in ECL is recognised in 'Change in expected credit losses and other
credit impairment charges' in the income statement.
4
The following table provides an overview of the group's credit
risk by stage and industry, and the associated ECL coverage. The
financial assets recorded in each stage have the following
characteristics:
-- Stage 1: These financial assets are unimpaired and without
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 on these financial assets since initial recognition for
which a lifetime ECL is recognised.
-- Stage 3: There is objective evidence of impairment, and the
financial assets are therefore considered to be in default or
otherwise credit-impaired on which a lifetime ECL is
recognised.
-- POCI: Financial assets that are purchased or originated at a
deep discount are seen to reflect the incurred credit losses on
which a lifetime ECL is recognised.
--
Summary of credit risk (excluding debt instruments measured at FVOCI)
by stage distribution and ECL coverage by industry sector at
31 December 2022
(Audited)
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(1)
---------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------ -------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3 1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
Loans
and advances
to customers
at amortised
cost 154,818 46,693 4,521 23 206,055 (248) (941) (722) (1) (1,912) 0.2 2.0 16.0 4.3 0.9
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
* personal 106,745 31,041 840 - 138,626 (112) (571) (189) - (872) 0.1 1.8 22.5 - 0.6
-------------------------------------- ----------- ----------- --------------- ----------- -----------
* corporate and commercial 45,739 15,520 3,673 23 64,955 (134) (368) (532) (1) (1,035) 0.3 2.4 14.5 4.3 1.6
-------------------------------------- ----------- ----------- --------------- ----------- -----------
* non-bank financial institutions 2,334 132 8 - 2,474 (2) (2) (1) - (5) 0.1 1.5 12.5 - 0.2
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
Loans
and advances
to banks
at amortised
cost 6,354 1 4 - 6,359 - - (2) - (2) - - 50.0 - -
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
Other
financial
assets
measured
at amortised
cost 108,987 126 24 - 109,137 - (1) (4) - (5) - 0.8 16.7 - -
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
Loan and
other
credit-related
commitments 62,581 4,806 241 - 67,628 (29) (37) (25) - (91) - 0.8 10.4 - 0.1
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
* personal 41,614 358 87 - 42,059 (9) - - - (9) - - - - -
-------------------------------------- ----------- ----------- --------------- ----------- -----------
* corporate and commercial 20,120 4,395 154 - 24,669 (20) (37) (25) - (82) 0.1 0.8 16.2 - 0.3
-------------------------------------- ----------- ----------- --------------- ----------- -----------
* financial 847 53 - - 900 - - - - - - - - - -
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
Financial
guarantee
and similar
contracts 983 147 18 - 1,148 - - (6) - (6) - - 33.3 - 0.5
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
* personal 335 7 - - 342 - - - - - - - - - -
-------------------------------------- ----------- ----------- --------------- ----------- -----------
* corporate and commercial 407 93 18 - 518 - - (6) - (6) - - 33.3 - 1.2
-------------------------------------- ----------- ----------- --------------- ----------- -----------
* financial 241 47 - - 288 - - - - - - - - - -
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
At 31
Dec 2022 333,723 51,773 4,808 23 390,327 (277) (979) (759) (1) (2,016) 0.1 1.9 15.8 4.3 0.5
-------------------------------------- -------------------------- -------------- -------------- ------------ -------------------------- -------------- -------------- -------------- -------------- -------------- ----------- ----------- --------------- ----------- -----------
1 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
Unless identified at an earlier stage, all financial assets are
deemed to have suffered a significant increase in credit risk when
they are 30 days past due and are transferred from Stage 1 to Stage
2. The following disclosure presents the ageing of Stage 2
financial assets. It distinguishes those assets that are classified
as
Stage 2 when they are less than 30 days past due (1-29 DPD) from
those that are due to ageing and are more than 30 days past due (30
and >DPD). Past due financial instrument are those loans where
customers have failed to make payments in accordance with the
contractual terms of their facilities.
Stage 2 days past due analysis at 31 December 2022
(Audited)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross carrying amount Allowance for ECL ECL coverage %
------------------------------------------------------------------------ -------------------------------------------------------------------------- ----------------------------------------------------------
Stage of of of Stage of of of Stage of of of
2 which: which: which: 2 which: which: which: 2 which: which: which:
1 to 30 1 to 30 1 to 30
Up-to- 29 and Up-to- 29 and Up-to- 29 and
date(1) DPD(2) > DPD(2) date(1) DPD(2) > DPD(2) date(1) DPD(2) > DPD(2)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % %
------------------------------- -------------- ------------------ ---------------- ------------------ -------------- ------------------ ------------------ ------------------ ----------- ----------- --------------- ---------------
Loans and advances
to customers
at amortised
cost: 46,693 46,050 386 257 (941) (819) (70) (52) 2.0 1.8 18.1 20.2
------------------------------- -------------- ------------------ ---------------- ------------------ -------------- ------------------ ------------------ ------------------ ----------- ----------- --------------- ---------------
* personal 31,041 30,689 236 116 (571) (465) (61) (45) 1.8 1.5 25.8 38.8
------------------------------- ----------- ----------- --------------- ---------------
* corporate and commercial 15,520 15,230 150 140 (368) (352) (9) (7) 2.4 2.3 6.0 5.0
------------------------------- ----------- ----------- --------------- ---------------
* non-bank financial 132 131 - 1 (2) (2) - - 1.5 1.5 - -
------------------------------- -------------- ------------------ ---------------- ------------------ -------------- ------------------ ------------------ ------------------ ----------- ----------- --------------- ---------------
Loans and advances
to banks at
amortised cost 1 1 - - - - - - - - - -
------------------------------- -------------- ------------------ ---------------- ------------------ -------------- ------------------ ------------------ ------------------ ----------- ----------- --------------- ---------------
Other financial
assets measured
at amortised
cost 126 126 - - (1) (1) - - 0.8 0.8 - -
------------------------------- -------------- ------------------ ---------------- ------------------ -------------- ------------------ ------------------ ------------------ ----------- ----------- --------------- ---------------
1 Wholesale portfolios are included under Up-to-date.
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 (continued)
(Audited)
Gross carrying/nominal Allowance for ECL ECL coverage %
amount(1)
------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------
Stage Stage Stage POCI Total Stage Stage Stage POCI Total Stage Stage Stage POCI Total
1 2 3 1 2 3 1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % % %
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
Loans
and advances
to customers
at amortised
cost 174,917 18,436 4,008 20 197,381 (315) (692) (843) (5) (1,855) 0.2 3.8 21.0 25.0 0.9
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
- personal 126,904 3,361 1,053 - 131,318 (122) (353) (292) - (767) 0.1 10.5 27.7 - 0.6
-------------------------------------- ---------- ------------- ------------- ------------- ----------
* corporate and commercial 45,957 15,000 2,950 20 63,927 (191) (338) (551) (5) (1,085) 0.4 2.3 18.7 25.0 1.7
-------------------------------------- ---------- ------------- ------------- ------------- ----------
* non-bank financial institutions 2,056 75 5 - 2,136 (2) (1) - - (3) 0.1 1.3 - - 0.1
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
Loans
and advances
to banks
at amortised
cost 1,914 - - - 1,914 - - - - - - - - - -
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
Other
financial
assets
measured
at amortised
cost 122,085 32 16 - 122,133 (1) - - - (1) - - - - -
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
Loan and
other
credit-related
commitments 63,642 3,492 260 - 67,394 (32) (26) (15) - (73) 0.1 0.7 5.8 - 0.1
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
- personal 39,527 287 75 - 39,889 (8) (1) - - (9) - 0.3 - - -
-------------------------------------- ---------- ------------- ------------- ------------- ----------
* corporate and commercial 23,524 3,134 185 - 26,843 (24) (25) (15) - (64) 0.1 0.8 8.1 - 0.2
-------------------------------------- ---------- ------------- ------------- ------------- ----------
- financial 591 71 - - 662 - - - - - - - - - -
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
Financial
guarantee
and similar
contracts 963 123 16 - 1,102 (1) - (2) - (3) 0.1 - 12.5 - 0.3
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
- personal 308 9 - - 317 - - - - - - - - - -
-------------------------------------- ---------- ------------- ------------- ------------- ----------
* corporate and commercial 393 81 16 - 490 - - (2) - (2) - - 12.5 - 0.4
-------------------------------------- ---------- ------------- ------------- ------------- ----------
- financial 262 33 - - 295 (1) - - - (1) 0.4 - - - 0.3
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
At 31
Dec 2021 363,521 22,083 4,300 20 389,924 (349) (718) (860) (5) (1,932) 0.1 3.3 20.0 25.0 0.5
-------------------------------------- ------------------------ -------------- -------------- ------------- ------------------------ -------------- --------------- -------------- --------------- -------------- ---------- ------------- ------------- ------------- ----------
1 Represents the maximum amount at risk should the contracts be
fully drawn upon and clients default.
Stage 2 days past due analysis at 31 December 2021 (continued)
(Audited)
Gross carrying amount Allowance for ECL ECL coverage %
------------------------------------------------------------------------ ------------------------------------------------------------------------------ ----------------------------------------------------------
Stage of of of Stage of of of Stage of of of
2 which: which: which: 2 which: which: which: 2 which: which: which:
30 30 30
1 to and 1 to and 1 to and
Up-to-date(1) 29 DPD(2) > DPD(2) Up-to-date(1) 29 DPD(2) > DPD(2) Up-to-date(1) 29 DPD(2) > DPD(2)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % % % %
-------------------------------------- ----------------- ----------------- ---------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------- ------------- ------------- -------------
Loans and
advances to
customers
at amortised
cost: 18,436 17,815 394 227 (692) (616) (42) (34) 3.8 3.5 10.7 15.0
-------------------------------------- ----------------- ----------------- ---------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------- ------------- ------------- -------------
* personal 3,361 3,045 210 106 (353) (286) (36) (31) 10.5 9.4 17.1 29.2
-------------------------------------- ------------- ------------- ------------- -------------
* corporate and commercial 15,000 14,695 184 121 (338) (329) (6) (3) 2.3 2.2 3.3 2.5
-------------------------------------- ------------- ------------- ------------- -------------
* non-bank financial institutions 75 75 - - (1) (1) - - 1.3 1.3 - -
-------------------------------------- ----------------- ----------------- ---------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------- ------------- ------------- -------------
Loans and
advances to
banks at amortised
cost - - - - - - - - - - - -
-------------------------------------- ----------------- ----------------- ---------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------- ------------- ------------- -------------
Other financial
assets measured
at amortised
cost 32 32 - - - - - - - - - -
-------------------------------------- ----------------- ----------------- ---------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------- ------------- ------------- -------------
1 Wholesale portfolios are included under Up-to-date.
2 The days past due amounts presented above are on a contractual
basis and include the benefit of any customer relief payment
holidays granted.
Credit exposure
Maximum exposure to credit risk
(Audited)
'Maximum exposure to credit risk'
table
The following table presents our
maximum exposure before taking account
of any collateral held or other
credit enhancements (unless such
enhancements meet accounting offsetting
requirements). The table excludes
financial instruments whose carrying
amount best represents the net exposure
to credit risk; and it excludes
equity securities as they are not
subject to credit risk. For the
financial assets recognised on the
balance sheet, the maximum exposure
to credit risk equals their carrying
amount and is net of the allowance
for ECL; for financial guarantees
and similar contracts granted, it
is the maximum amount that we would
have to pay if the guarantees were
called upon. For loan commitments
and other credit-related commitments,
it is generally the full amount
of the committed facilities.
The offset in the table relates
to amounts where there is a legally
enforceable right of offset in the
event of counterparty default and
where, as a result, there is a net
exposure for credit risk purposes.
However, as there is no intention
to settle these balances on a net
basis under normal circumstances,
they do not qualify for net presentation
for accounting purposes. No offset
has been applied to off-balance
sheet collateral. In the case of
derivatives the offset column also
includes collateral received in
cash and other financial assets.
=========================================
The following table provides information on balance sheet items,
offsets, and loan and other credit-related commitments.
The offset on derivatives remains in line with the movements in
maximum exposure amounts.
Other credit risk mitigants
While not disclosed as an offset in the following 'Maximum
exposure to credit risk' table, other arrangements are in place
which reduce our maximum exposure to credit risk. These include a
charge over collateral on borrowers' specific assets such as
residential properties and collateral held in the form of financial
instruments that are not held on balance sheet. See Note 22 for
further details of collateral in respect of certain loans and
advances and derivatives.
Maximum exposure to credit risk
(Audited) At 31 Dec 2022 At 31 Dec 2021
------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------
Maximum Offset Net Maximum
exposure exposure Offset Net
The group GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- ----------------------- -----------------------
Loans and
advances to
customers
held at
amortised cost 204,143 (2,786) 201,357 195,526 (2,457) 193,069
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- ----------------------- -----------------------
- personal 137,754 - 137,754 130,551 - 130,551
---------------
- corporate and
commercial 63,920 (2,752) 61,168 62,842 (2,395) 60,447
---------------
- non-bank
financial
institutions 2,469 (34) 2,435 2,133 (62) 2,071
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- -----------------------
Loans and
advances to
banks
at amortised
cost 6,357 - 6,357 1,914 - 1,914
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- ----------------------- -----------------------
Other financial
assets held
at amortised
cost 109,256 - 109,256 122,258 - 122,258
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- ----------------------- -----------------------
- cash and
balances at
central
banks 94,407 - 94,407 112,478 - 112,478
---------------
- items in the
course of
collection
from other
banks 353 - 353 299 - 299
- reverse
repurchase
agreements
- non-trading 7,406 - 7,406 7,988 - 7,988
---------------
- financial
investments 5,160 - 5,160 - - -
- other assets 1,930 - 1,930 1,493 - 1,493
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- -----------------------
Derivatives 546 (522) 24 64 (49) 15
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- ----------------------- -----------------------
Total
on-balance
sheet exposure
to credit risk 320,302 (3,308) 316,994 319,762 (2,506) 317,256
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- ----------------------- -----------------------
Total
off-balance
sheet 74,057 - 74,057 73,654 - 73,654
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- ----------------------- -----------------------
- financial
guarantees and
similar
contracts 3,665 - 3,665 3,286 - 3,286
---------------
- loan and
other
credit-related
commitments 70,392 - 70,392 70,368 - 70,368
--------------- ------------------------------------ ---------------------- ---------------------- -------------------------------------- -----------------------
Concentration of exposures
(Audited)
The diversification of our lending portfolio and our broad range
of businesses and products ensured that we did not overly depend on
any one business segment to generate growth in 2022.
Loans and advances to customers and banks held at amortised
cost
The table on page 31 analyses loans and advances by industry
sector to show any concentration of credit risk exposures.
Other financial assets held at amortised cost
Financial investments
Our holdings of government and government agency debt
securities, corporate debt securities, asset-backed securities and
other securities were spread across a range of issuers in 2022 with
93% (2021: 95%) invested in government or government agency debt
securities.
Items in the course of collection from other banks
Settlement risk arises in any situations where a payment in
cash, securities or equities is made with the expectation of a
corresponding receipt of cash, securities or equities. Daily
settlement limits are established for counterparties to cover the
aggregate of transactions with each counterparty on any single
day.
The group substantially mitigates settlement risk on many
transactions, particularly those involving securities, by settling
through assured payment systems, or on a delivery-versus-payment
basis.
Measurement uncertainty and sensitivity analysis of ECL
estimates
(Audited)
Amid a deterioration in the economic and geopolitical
environment, management judgements and estimates continued to be
subject to a high degree of uncertainty in relation to assessing
economic scenarios for impairment allowances in 2022.
Inflation, economic contraction and high interest rates combined
with an unstable geopolitical environment and the effects of a
global supply chain disruption have contributed to elevated degrees
of uncertainty during the year.
At 31 December 2022, as a result of this uncertainty, additional
stage 1 and 2 allowances have been recognised while management
judgements and estimates continue to reflect a degree of caution
both in the selection of economic scenarios and their weightings,
and in the use of management judgemental adjustments, described in
more detail below.
The recognition and measurement of ECL involves the use of
significant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions to
credit risk models to estimate future credit losses, and
probability-weight the results to
determine an unbiased ECL estimate. Management judgemental
adjustments are used to address late-breaking events, data and
model limitations, model deficiencies and expert credit
judgements.
At 31 December 2022, there was a reduction in management
judgemental adjustments compared with 31 December 2021. Adjustments
related to Covid-19 and for sector-specific risks were reduced as
scenarios and modelled outcomes better reflected the key risks at
31 December 2022.
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 Group's top and emerging risks.
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.
The consensus Upside scenario is constructed to be consistent
with a 5% probability. The two Downside scenarios were given a
combined probability weighting of 35%. The Central Scenario is
assigned the remaining 60%. This weighting scheme is deemed
appropriate for the unbiased estimation of ECL in most
circumstances. However, management may depart from this probability
based scenario weighting approach when the economic outlook is
determined to be particularly uncertain and risks are elevated.
Description of consensus economic scenarios
The economic assumptions presented in this section have been
formed by the HSBC Group with reference to external forecasts
specifically for the purpose of calculating ECL.
Global economic growth is slowing and economic forecasts in the
fourth quarter deteriorated in most markets. In North America and
Europe, high inflation and rising interest rates have reduced real
household incomes, dampening consumption and investment and
lowering growth expectations. The effect of higher interest rate
expectations and lower growth are evident in asset price
expectations, with house price forecasts, in particular,
significantly lower.
Economic forecasts are subject to a high degree of uncertainty.
At the end of 2022, risks to the economic outlook included the
persistence of inflation and the consequences that has for monetary
policy. Rapid changes to public policy also increased forecast
uncertainty. In Europe, risks relating to energy pricing and supply
security remain significant. Geopolitical risks also remain
significant and include prolonged and escalating Russia-Ukraine
war, continued differences between the US and other countries with
China over a range of economic and strategic issues and the
evolution of UK's relationship with the EU.
The scenarios used to calculate ECL in the Annual Report and
Accounts 2022 are described below.
The consensus Central scenario
HSBC UK's Central scenario reflects a low growth and higher
inflation environment. The scenario features an initial period of
below-trend GDP growth in most markets as inflation and tighter
monetary policy causes a squeeze on business margins and
households' real disposable income. Growth returns to its long term
expected trend in later years as the BoE brings inflation back to
target.
Our Central scenario assumes that inflation peaked at the end of
2022 but remains high through 2023 before moderating as energy
prices and supply chain disruptions abate. The BoE is expected to
keep interest rates elevated until inflation returns to target in
2024.
UK GDP is expected to decline by 0.8% in 2023 in the Central
scenario and the average rate of UK GDP growth is 1.1% over the
five-year forecast period.
The key features of our Central scenario are:
-- Economic activity in UK continues to weaken.
-- Unemployment rise moderately from historic lows as economic
activity slows. Labour markets remain fairly tight across the
UK.
-- Inflation is expected to remain elevated in the UK driven by
energy and food prices. Inflation is subsequently expected to
converge back towards the BoE's target over the next two years of
the forecast.
-- Policy interest rates will continue to rise in the near term
but at a slower pace. Interest rates will stay elevated but start
to ease as inflation returns to target.
The Central scenario was first created with forecasts available
in November, and reviewed continually until late December.
The following table describes key macroeconomic variables and
the probability assigned in the consensus Central scenario applied
at 31 December 2022 and 31 December 2021.
Central scenario
Average Average
2023 Q1-2027 2022 Q1-2026
Q4 Q4
---------------------------------- ----------------------------------
UK% UK%
------------------- ---------------------------------- ----------------------------------
GDP growth rate 1.1 2.5
Unemployment 4.3 4.3
Inflation Rate 3.1 1.2
House price growth 0.4 3.5
Probability 60 60
------------------- ---------------------------------- ----------------------------------
The graph compares the Central scenario at year end 2021 with
economic expectations at the end of 2022.
GDP growth: Comparison of Central scenarios
Note: Real GDP shown as year-on-year percentage change.
The consensus Upside scenario
Compared with the consensus Central scenario, the consensus
Upside scenario features stronger recovery in economic activity in
the near term, before converging to long-run trend
expectations.
The scenario is consistent with a number of key upside risk
themes. These include faster resolution of supply chain issues; a
rapid and peaceful conclusion to the Russia-Ukraine war; and
improved relations between the UK and the EU.
The following table describes key macroeconomic variables and
the probability assigned in the consensus Upside scenario.
Consensus Upside scenario best
outcome
UK%
------------------- -------------------------------------
GDP growth rate 4.4 (4Q24)
Unemployment 3.5 (4Q23)
------------------- -------------------------------------
House price growth 4.2 (1Q23)
------------------- -------------------------------------
Inflation rate 0.7 (1Q24)
Probability 5
------------------- -------------------------------------
Note: Extreme point in the consensus Upside is 'best outcome' in
the scenario, for example the highest GDP growth and the lowest
unemployment rate, in first two years of the scenario. The date on
which the extreme is reached is indicated in parenthesis. For
inflation, lower inflation is interpreted as the 'best'
outcome.
Downside scenarios
Downside scenarios explore the intensification and
crystallisation of a number of key economic and financial
risks.
High inflation and the tighter monetary policy response have
become key concerns for global growth. Supply chain disruptions
intensify, exacerbated by an escalation in the spread of Covid-19,
and rising geopolitical tensions drive inflation higher.
There also remains a risk that energy and food prices rise
further due to the Russia-Ukraine war, putting further pressure on
household budgets and firms' costs.
The possibility of inflation expectations becoming detached from
BoE targets also remains a risk. A wage-price spiral triggered by
higher inflation and pandemic-related labour supply shortages
across could put sustained upward pressure on wages, aggravating
cost pressures and the squeeze on household real incomes and
corporate margins. In turn, it raises the risk of a more forceful
policy response from the BoE, a steeper trajectory for interest
rates and ultimately, deep economic recession.
The risks relating to Covid-19 remain are centred on the
emergence of a new variant with greater vaccine resistance that
necessitates the imposition of stringent public health
policies.
The geopolitical environment also present risks, including:
-- a prolonged Russia-Ukraine war with escalation beyond Ukraine's borders;
-- the deterioration of the trading relationship between the UK
and the EU over the Northern Ireland Protocol; and
-- continued differences between the US and other countries with
China, which could affect sentiment and restrict global economic
activity.
The consensus Downside scenario
In the consensus Downside scenario, economic activity is
considerably weaker compared with the Central scenario. In this
scenario, GDP growth weakens below the Central scenario,
unemployment rates rise and asset prices fall. The scenario
features a temporary supply side shock that keeps inflation higher
than the baseline, before the effects of weaker demand begin to
dominate, leading to a fall in commodity prices and to lower
inflation.
The following table describes key macroeconomic variables and
the probability assigned in the Consensus Downside scenario.
Consensus Downside scenario worst
outcome
Worst
outcome
2021-2025
-------------------------------
UK%
--------------------- -------------------------------
(3.5)
GDP growth rate (3Q23)
--------------------- -------------------------------
Unemployment 5.8 (2Q24)
(10.1)
House price growth (2Q24)
--------------------- -------------------------------
(0.4)
Inflation rate (min) (4Q24)
--------------------- -------------------------------
Inflation rate (max) 10.8 (1Q23)
--------------------- -------------------------------
Probability 25
--------------------- -------------------------------
Note: Extreme point in the consensus Downside is 'worst outcome'
in the scenario, for example lowest GDP growth and the highest
unemployment rate, in first two years of the scenario. The date on
which the extreme is reached is indicated in parenthesis. Due to
the nature of the shock to inflation in the downside scenarios,
both the lowest and the highest points are shown in the table.
Downside 2 scenarios
The Downside 2 scenario features a deep global recession and
reflects management's view of the tail of the economic
distribution. It incorporates the crystallisation of a number of
risks simultaneously, including further escalation of the
Russia-Ukraine war, worsening of supply chain disruptions and the
emergence of a vaccine-resistant Covid-19 variant that necessitates
a stringent public health policy response.
This scenario features an initial supply-side shock that pushes
up inflation and interest rates higher. This impulse is expected to
prove short lived as a large downside demand pressure causes
commodity prices to correct sharply and global price inflation to
fall as a severe and prolonged recession takes hold.
The table below describes key macroeconomic variables and the
probability in the Downside 2 scenario.
Downside 2 scenario worst outcome
UK%
--------------------- -------------------------------------
GDP growth rate (6.9) (3Q23)
Unemployment 8.7 (2Q24)
House price growth (22.9) (2Q24)
--------------------- -------------------------------------
Inflation rate (min) (2.3) (2Q24)
--------------------- -------------------------------------
Inflation rate (max) 13.5 (2Q23)
--------------------- -------------------------------------
Probability 10
--------------------- -------------------------------------
Note: extreme point in Downside 2 is 'worst outcome' in the
scenario, for example lowest GDP growth and the highest
unemployment rate, in first two years of the scenario. The date on
which the extreme is reached is indicated in parenthesis. Due to
the nature of the shock to inflation in the downside scenarios,
both the lowest and the highest points are shown in the table.
Scenario weighting
In reviewing the economic conjuncture, the level of uncertainty
and risk, management has considered UK specific factors. This has
led management to assign scenario probabilities that are tailored
to its view of uncertainty.
Key consideration around uncertainty attached to the Central
scenario projections focused on:
-- the risks to gas supply security in Europe and subsequent
impact on inflation and commodity prices and growth;
-- further tightening of monetary policy and impact on borrowing
costs in interest rate sensitive sectors, such as housing; and
-- the ongoing risks to global supply chains.
In the UK, the surge in price inflation and a squeeze on
household real incomes have led to strong monetary policy responses
from the BoE. Higher interest rates have increased recession risks
and the prospects for outright decline in house prices. The UK
faces additional challenges from the rise in energy prices and
accompanying deterioration in the terms of trade. For the UK, the
consensus Upside and Central scenarios had a combined weighting of
65%.
Following graph shows the historical and forecasted GDP growth
rate for the various economic scenarios in UK:
Critical accounting estimates and judgements
The calculation of ECL under IFRS 9 involves significant
judgements, assumptions and estimates. The level of estimation
uncertainty and judgement has remained elevated since 31 December
2021, including judgements relating to:
-- the selection and weighting of economic scenarios, given
rapidly changing economic conditions and a wide distribution of
economic forecasts. There is judgement in making assumptions about
the effects of inflation and interest, global growth, supply chain
disruption; and
-- estimating the economic effects of those scenarios on ECL,
particularly as the historical relationship between macroeconomic
variables and defaults might not reflect the dynamics of current
macroeconomic conditions.
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 2022, and management
judgemental adjustments were still required to support modelled
outcomes.
HSBC Group 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 2022.
For our wholesale portfolios, a global methodology is used for
the estimation of the term structure of PD and 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 the forward
economic guidance proportionate to the probability-weighted outcome
and the Central scenario outcome of the performing population.
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 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.
This includes refining model inputs and outputs and using
adjustments to ECL based on management judgement and higher-level
quantitative analysis for impacts that are difficult to model.
The effect of management judgemental adjustments are 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 26). 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.
The drivers of management judgemental adjustments continue to
evolve with the economic environment, and as new risks emerge.
Adjustments related to Covid-19 and for sector-specific risks were
reduced as scenarios and modelled outcomes better reflected
management expectations at 31 December 2022.
Management judgemental adjustments made in estimating the
scenario-weighted reported ECL at 31 December 2022 are set out in
the following table.
Management judgemental adjustments
to ECL at 31 December
2022(1)
Retail Wholesale Total
GBPm GBPm GBPm
Low-risk counterparties
(banks,
sovereigns and
government entities) - - -
--------------------------- ------------------- ------------------- -------------------
Corporate lending
adjustments - 114 114
Retail lending adjustments 130 - 130
--------------------------- ------------------- ------------------- -------------------
Total 130 114 244
--------------------------- ------------------- ------------------- -------------------
Management judgemental adjustments
to ECL at 31 December
2021(1)
Retail Wholesale Total
GBPm GBPm GBPm
Low-risk counterparties
(banks, sovereigns
and government entities) - 3 3
--------------------------- ------------------- --------------------- ---------------------
Corporate lending
adjustments - 314 314
Retail lending adjustments 142 - 142
Total 142 317 459
--------------------------- ------------------- --------------------- ---------------------
1 Management judgemental adjustments presented in the table
reflect increases or (decreases) to ECL, respectively.
At 31 December 2022, wholesale management judgemental
adjustments were an ECL increase of GBP114m, comprising GBP47m
relating to Wholesale portfolios and GBP67m relating to Retail SME
portfolios (31 December 2021: GBP317m increase including GBP33m
from retail SME).
-- These principally reflect the outcome of management
judgements for high-risk and vulnerable sectors, supported by
credit experts' input, portfolio risk metrics and quantitative
analyses.
-- The decrease in adjustments impact relative to 31 December
2021 was mostly driven by the impact of the deterioration in
macroeconomic scenarios on modelled outcomes that has reduced the
dislocation between management expectations and the modelled
outcomes, and reduced risks in Corporate Real Estate, particularly
in relation to hotel exposures.
At 31 December 2022, retail management judgemental adjustments
were an ECL increase of GBP130m (31 December 2021: GBP142m
increase).
-- Macroeconomic adjustments increased ECL by GBP56m (31
December 2021: GBP28m), primarily inflation-related adjustments
where inflation and interest rates result in affordability risks
were not fully captured by the modelled output, with a number of
other smaller retail lending adjustments relating to data and
models.
-- Other retail lending adjustments increased ECL by GBP74m (31
December 2021: GBP73m). These were primarily to address areas such
as model recalibration and redevelopment, and data limitations.
-- Pandemic-related economic recovery adjustments of GBP41m at
31 December 2021 were removed during 2022 as scenarios
stabilised.
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. Due to the range and specificity of the credit factors
to which the ECL is sensitive, it is not possible to provide a
meaningful alternative sensitivity analysis for a consistent set of
risks across all defaulted obligors.
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 analysis
The wholesale and retail sensitivity analysis is stated
inclusive of management judgemental adjustments, as appropriate to
each scenario. The results tables exclude 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 to the
current period, because they reflect different risk profiles
relative with the Consensus scenarios for the period end.
Wholesale analysis
IFRS 9 ECL sensitivity to future
economic conditions(1,2)
2022 2021
GBPm GBPm
----------------------------- ----- -----
ECL of financial instruments
subject to significant
measurement uncertainty
at 31 Dec(1)
----------------------------- ----- -----
Reported ECL 559 584
----------------------------- ----- -----
Consensus scenarios
----------------------------- ----- -----
Central scenario 458 455
----------------------------- ----- -----
Upside scenario 354 371
----------------------------- ----- -----
Downside scenario 606 598
Downside 2 scenario 1,604 1,295
----------------------------- ----- -----
1 ECL sensitivity includes off-balance sheet financial
instruments that are subject to significant measurement
uncertainty.
2 Excludes defaulted obligors. For a detailed breakdown of
performing and non-performing wholesale portfolio exposures, see
page 44.
Real estate and services sectors account for the majority of ECL
sensitivity due to higher exposure to these sectors.
Retail analysis
IFRS 9 ECL sensitivity to future
economic conditions(1)
2022 2021
GBPm GBPm
-------------------------- ----- -----
ECL of loans and advances
to customers at
31 Dec
-------------------------- ----- -----
Reported ECL 860 738
-------------------------- ----- -----
Consensus scenarios
-------------------------- ----- -----
Central scenario 799 636
-------------------------- ----- -----
Upside scenario 715 562
-------------------------- ----- -----
Downside scenario 848 769
Downside 2 scenario 1,443 1,514
-------------------------- ----- -----
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
Mortgages reflected the lowest level of ECL sensitivity across
most markets as collateral values remain resilient. Credit cards
and other unsecured lending are more sensitive to economic
forecasts, which have improved in 2022.
Reconciliation of changes in gross carrying/nominal amount and
allowances for loans and advances to banks and customers including
loan commitments and financial guarantees
The following disclosure provides a reconciliation by stage of
the group's gross carrying/nominal amount and allowances for loans
and advances to banks and customers, including loan commitments and
financial guarantees.
The transfers of financial instruments 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 CRR/PD movements of the financial
instruments transferring stage. This is captured, along with other
credit quality movements in the 'changes in risk parameters -
credit quality' line item.
Changes in 'New financial assets originated or purchased',
'Assets derecognised (including final repayments)' and 'Changes to
risk parameters - further lending/repayment' 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 Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
At 1 Jan 2022 240,386 (348) 22,039 (718) 4,283 (860) 20 (5) 266,728 (1,931)
Transfers of
financial
instruments: (34,718) (175) 32,900 245 1,818 (70) - - - -
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
- transfers from
Stage 1 to Stage
2 (57,652) 177 57,652 (177) - - - - - -
------------------
- transfers from
Stage 2 to Stage
1 23,349 (337) (23,349) 337 - - - - - -
------------------
- transfers to
Stage 3 (638) 3 (2,125) 153 2,763 (156) - - - -
------------------
- transfers from
Stage 3 223 (18) 722 (68) (945) 86 - - - -
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------
Net remeasurement
of ECL arising
from transfer of
stage - 214 - (264) - (3) - - - (53)
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Changes due to
modifications not
derecognised - - - - - - - - - -
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
New financial
assets
originated or
purchased 55,066 (154) - - - - - - 55,066 (154)
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Changes to Risk
parameters -
further
lending/repayment (10,027) 76 333 13 (46) 105 3 - (9,737) 194
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Changes to risk
parameters -
credit
quality - 70 - (214) - (449) - 4 - (589)
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Changes to model
used for ECL
calculation - 4 - (138) - 12 - - - (122)
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Asset derecognised
(including final
repayments) (30,601) 36 (3,700) 98 (781) 20 - - (35,082) 154
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Assets written
off - - - - (490) 490 - - (490) 490
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Credit related
modifications that
resulted in
derecognition - - - - - - - - - -
Others(2) 3,850 - - - - - - - 3,850 -
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
At 31 Dec 2022 223,956 (277) 51,572 (978) 4,784 (755) 23 (1) 280,335 (2,011)
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
ECL
release/(charge)
for the period 246 (505) (315) 4 (570)
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Recoveries 71
Others 22
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
Total change in
ECL for the
period (477)
------------------ ---------------- ----------------------- ---------------- ------------------ ---------------- -------------------- ------------------ -------------------- ------------------ ----------------------
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 Gross
carrying/ carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/
nominal Allowance nominal for nominal for nominal for nominal Allowance
amount for ECL amount ECL amount ECL amount ECL amount for ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 Jan 2021 226,574 (559) 35,528 (1,728) 3,850 (1,091) 38 (23) 265,990 (3,401)
Transfers of
financial
instruments: 7,393 (717) (8,936) 855 1,543 (138) - - - -
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
- transfers from
Stage 1 to Stage
2 (13,961) 92 13,961 (92) - - - - - -
-----------------
- transfers from
Stage 2 to Stage
1 21,731 (787) (21,731) 787 - - - - - -
-----------------
- transfers to
Stage 3 (591) 5 (1,541) 218 2,132 (223) - - - -
-----------------
- transfers from
Stage 3 214 (27) 375 (58) (589) 85 - - - -
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- --------------------
Net remeasurement
of ECL arising
from transfer of
stage - 461 - (83) - (1) - - - 377
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Changes due to
modifications
not
derecognised - - - - (1) - - - (1) -
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
New financial
assets
originated or
purchased 46,099 (114) - - - - - - 46,099 (114)
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Changes to Risk
parameters -
further
lending/
repayment (12,643) 132 (1,305) 182 (119) 182 (18) 4 (14,085) 500
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Changes to risk
parameters -
credit
quality - 432 - (66) - (406) - 14 - (26)
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Changes to model
used for ECL
calculation - (13) - (40) - - - - - (53)
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Asset
derecognised
(including final
repayments) (27,037) 30 (3,248) 162 (417) 21 - - (30,702) 213
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Assets written
off - - - - (573) 573 - - (573) 573
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Credit related
modifications
that
resulted in
derecognition - - - - - - - - - -
Others - - - - - - - - - -
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
At 31 Dec 2021 240,386 (348) 22,039 (718) 4,283 (860) 20 (5) 266,728 (1,931)
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
ECL
release/(charge)
for the period 928 155 (204) 18 897
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Recoveries 100
Others (24)
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
Total change in
ECL for the
period 973
----------------- ---------------- ------------------------ ---------------- ------------------- ------------------ -------------------- ----------------- --------------------- -------------------- -----------------------
1 The Reconciliation excludes loans and advances to other HSBC
Group companies. As at 31 December 2022, these amounted to GBP0.5bn
(2021: GBP0.8bn) and were classified as Stage 1 with no ECL.
2 GBP3.8bn of gross carrying amounts of stage 1 loans and
advances to banks, representing the balance maintained as at 30
June 2022 with the BoE to support BACS along with Faster Payments
and the cheque-processing Image Clearing System in the UK
transferred to 'Loans and advances to banks'. The corresponding
balance as at 31 December 2021 was reported under 'Cash and
balances at central banks'. Comparatives have not been
restated.
Credit quality of financial instruments
(Audited)
We assess the credit quality of all financial instruments that
are subject to credit risk. The credit quality of financial
instruments is a-point-in-time assessment of PD, whereas Stages 1
and 2 are determined based on relative deterioration of credit
quality since initial recognition. Accordingly, for
non-credit-impaired financial
instruments there is no direct relationship between the credit
quality assessment and Stages 1 and 2, though typically the lower
credit quality bands exhibit a higher proportion in Stage 2.
The five credit quality classifications defined above each
encompass a range of granular internal credit rating grades
assigned to wholesale and retail lending businesses and the
external ratings attributed by external agencies to debt
securities, as shown in the table on page 27.
Distribution of financial instruments by credit quality
(Audited)
Gross carrying/notional amount
-------------------------------------------------------------------------------------------
Allowance
Credit for
Strong Good Satis-factory Sub-standard impaired Total ECL Net
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
In-scope for
IFRS 9
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Loans and
advances to
customers
held at
amortised
cost 129,503 32,452 34,283 5,273 4,544 206,055 (1,912) 204,143
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
- personal 120,776 8,640 7,397 973 840 138,626 (872) 137,754
--------------
- corporate
and
commercial 7,696 23,612 25,679 4,272 3,696 64,955 (1,035) 63,920
--------------
- non-bank
financial
institutions 1,031 200 1,207 28 8 2,474 (5) 2,469
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- --------------------
Loans and
advances to
banks
held at
amortised
cost 6,355 - - - 4 6,359 (2) 6,357
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Cash and
balances at
central
banks 94,407 - - - - 94,407 - 94,407
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Items in the
course of
collection
from other
banks 353 - - - - 353 - 353
Reverse
repurchase
agreements
- non-trading 7,406 - - - - 7,406 - 7,406
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Financial
investments 5,160 - - - - 5,160 - 5,160
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Other assets 1,457 126 201 3 24 1,811 (5) 1,806
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
- endorsements
and
acceptances - 32 15 3 1 51 (2) 49
--------------
- accrued
income and
other 1,457 94 186 - 23 1,760 (3) 1,757
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- --------------------
Debt
instruments
measured at
FVOCI(1) 12,384 - - - - 12,384 (1) 12,383
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Out-of-scope
for IFRS 9
Derivatives 508 29 7 1 1 546 - 546
Total gross
carrying
amount
on balance
sheet 257,533 32,607 34,491 5,277 4,573 334,481 (1,920) 332,561
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Percentage of
total credit
quality 77.0% 9.7% 10.3% 1.6% 1.4% 100.0% - -
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Loan and other
credit
related
commitments 42,289 14,141 10,407 550 241 67,628 (91) 67,537
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Financial
guarantees 642 186 264 38 18 1,148 (6) 1,142
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
In-scope:
Irrecoverable
loan
commitments
and financial
guarantees 42,931 14,327 10,671 588 259 68,776 (97) 68,679
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Loan and other
credit
related
commitments 740 1,072 923 100 20 2,855 - 2,855
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Performance
and other
guarantees 385 889 1,137 87 32 2,530 (7) 2,523
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Out-of-scope:
Revocable
loan
commitments
and
Non-financial
guarantees 1,125 1,961 2,060 187 52 5,385 (7) 5,378
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
Total nominal
amount off
balance
sheet 44,056 16,288 12,731 775 311 74,161 (104) 74,057
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
At 31 Dec 2022 301,589 48,895 47,222 6,052 4,884 408,642 (2,024) 406,618
-------------- ------- ---------------- ---------------- ------------------- ---------------- ------- -------------------- ---------------
In-scope for
IFRS 9
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Loans and
advances to
customers
held at
amortised
cost 124,378 25,978 36,519 6,478 4,028 197,381 (1,855) 195,526
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
- personal 117,587 6,460 5,764 454 1,053 131,318 (767) 130,551
--------------
- corporate
and
commercial 5,797 19,367 29,775 6,018 2,970 63,927 (1,085) 62,842
--------------
- non-bank
financial
institutions 994 151 980 6 5 2,136 (3) 2,133
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- -------------------
Loans and
advances to
banks
held at
amortised
cost 1,914 - - - - 1,914 - 1,914
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Cash and
balances at
central
banks 112,478 - - - - 112,478 - 112,478
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Items in the
course of
collection
from other
banks 299 - - - - 299 - 299
Reverse
repurchase
agreements
- non-trading 7,988 - - - - 7,988 - 7,988
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Financial - - - - - - - -
investments
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Other assets 1,085 110 156 1 16 1,368 (1) 1,367
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
- endorsements
and
acceptances 7 52 18 1 - 78 - 78
--------------
- accrued
income and
other 1,078 58 138 - 16 1,290 (1) 1,289
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- -------------------
Debt
instruments
measured at
FVOCI(1) 14,273 - - - - 14,273 (2) 14,271
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Out-of-scope
for IFRS 9
Derivatives 53 8 3 - - 64 - 64
Total gross
carrying
amount
on balance
sheet 262,468 26,096 36,678 6,479 4,044 335,765 (1,858) 333,907
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Percentage of
total credit
quality 78.2% 7.8% 10.9% 1.9% 1.2% 100.0% - -
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Loan and other
credit
related
commitments 42,690 12,513 10,983 948 260 67,394 (73) 67,321
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Financial
guarantees 623 170 237 56 16 1,102 (3) 1,099
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
In-scope:
Irrecoverable
loan
commitments
and financial
guarantees 43,313 12,683 11,220 1,004 276 68,496 (76) 68,420
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Loan and other
credit
related
commitments 553 1,198 1,167 105 24 3,047 - 3,047
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Performance
and other
guarantees 383 677 1,029 84 19 2,192 (5) 2,187
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Out-of-scope:
Revocable
loan
commitments
and
Non-financial
guarantees 936 1,875 2,196 189 43 5,239 (5) 5,234
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
Total nominal
amount off
balance
sheet 44,249 14,558 13,416 1,193 319 73,735 (81) 73,654
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
At 31 Dec 2021 306,717 40,654 50,094 7,672 4,363 409,500 (1,939) 407,561
-------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ------------------- -----------------
1 For the purposes of this disclosure gross carrying value is
defined as the amortised cost of a financial asset, before
adjusting for any loss allowance. As such, the gross carrying value
of debt instruments at FVOCI as presented above will not reconcile
to the balance sheet as it excludes fair value gains and
losses.
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage allocation
(Audited)
Gross carrying/notional amount
-------------------------------------------------------------------------------------------------------------------------------------------------
Allowance
Sub- Credit for
Strong Good Satisfactory standard impaired Total ECL Net
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Loans and
advances to
customers at
amortised
cost 129,503 32,452 34,283 5,273 4,544 206,055 (1,912) 204,143
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
- Stage 1 105,529 24,826 23,794 669 - 154,818 (248) 154,570
---------------
- Stage 2 23,974 7,626 10,489 4,604 - 46,693 (941) 45,752
---------------
- Stage 3 - - - - 4,521 4,521 (722) 3,799
---------------
- POCI - - - - 23 23 (1) 22
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ----------------------
Loans and
advances to
banks at
amortised cost 6,355 - - - 4 6,359 (2) 6,357
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
- Stage 1 6,354 - - - - 6,354 - 6,354
---------------
- Stage 2 1 - - - - 1 - 1
---------------
- Stage 3 - - - - 4 4 (2) 2
---------------
- POCI - - - - - - - -
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ----------------------
Other financial
assets
measured at
amortised
cost 108,783 126 201 3 24 109,137 (5) 109,132
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
- Stage 1 108,737 105 145 - - 108,987 - 108,987
---------------
- Stage 2 46 21 56 3 - 126 (1) 125
---------------
- Stage 3 - - - - 24 24 (4) 20
---------------
- POCI - - - - - - - -
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ----------------------
Loan and other
credit-related
commitments 42,289 14,141 10,407 550 241 67,628 (91) 67,537
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
- Stage 1 41,874 12,551 8,030 126 - 62,581 (29) 62,552
---------------
- Stage 2 415 1,590 2,377 424 - 4,806 (37) 4,769
---------------
- Stage 3 - - - - 241 241 (25) 216
---------------
- POCI - - - - - - - -
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ----------------------
Financial
guarantees 642 186 264 38 18 1,148 (6) 1,142
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
- Stage 1 632 182 166 3 - 983 - 983
---------------
- Stage 2 10 4 98 35 - 147 - 147
---------------
- Stage 3 - - - - 18 18 (6) 12
---------------
- POCI - - - - - - - -
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ----------------------
At 31 Dec 2022 287,572 46,905 45,155 5,864 4,831 390,327 (2,016) 388,311
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Debt
instruments at
FVOCI(1) 12,384 - - - - 12,384 (1) 12,383
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
- Stage 1 12,384 - - - - 12,384 (1) 12,383
---------------
- Stage 2 - - - - - - - -
---------------
- Stage 3 - - - - - - - -
---------------
- POCI - - - - - - - -
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ----------------------
At 31 Dec 2022 12,384 - - - - 12,384 (1) 12,383
--------------- ---------------------- ------------------ ------------------------ --------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Distribution of financial instruments to which the impairment requirements
in IFRS 9 are applied, by credit quality and stage allocation (continued)
(Audited)
Gross carrying/notional amount
------------------------------------------------------------------------------------------------------------------------------------------------
Allowance
Sub- Credit for
Strong Good Satisfactory standard impaired Total ECL Net
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
Loans and
advances to
customers at
amortised
cost 124,378 25,978 36,519 6,478 4,028 197,381 (1,855) 195,526
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 124,221 24,837 25,096 763 - 174,917 (315) 174,602
---------------
- stage 2 157 1,141 11,423 5,715 - 18,436 (692) 17,744
---------------
- stage 3 - - - - 4,008 4,008 (843) 3,165
---------------
- POCI - - - - 20 20 (5) 15
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- -----------------------
Loans and
advances to
banks at
amortised cost 1,914 - - - - 1,914 - 1,914
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 1,914 - - - - 1,914 - 1,914
---------------
- stage 2 - - - - - - - -
---------------
- stage 3 - - - - - - - -
---------------
- POCI - - - - - - - -
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- -----------------------
Other financial
assets
measured at
amortised
cost 121,850 110 156 1 16 122,133 (1) 122,132
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 121,850 109 126 - - 122,085 (1) 122,084
---------------
- stage 2 - 1 30 1 - 32 - 32
---------------
- stage 3 - - - - 16 16 - 16
---------------
- POCI - - - - - - - -
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- -----------------------
Loan and other
credit-related
commitments 42,690 12,513 10,983 948 260 67,394 (73) 67,321
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 42,688 12,344 8,516 94 - 63,642 (32) 63,610
---------------
- stage 2 2 169 2,467 854 - 3,492 (26) 3,466
---------------
- stage 3 - - - - 260 260 (15) 245
---------------
- POCI - - - - - - - -
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- -----------------------
Financial
guarantees 623 170 237 56 16 1,102 (3) 1,099
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 623 169 155 16 - 963 (1) 962
---------------
- stage 2 - 1 82 40 - 123 - 123
---------------
- stage 3 - - - - 16 16 (2) 14
---------------
- POCI - - - - - - - -
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- -----------------------
At 31 Dec 2021 291,455 38,771 47,895 7,483 4,320 389,924 (1,932) 387,992
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
Debt
instruments at
FVOCI(1) 14,273 - - - - 14,273 (2) 14,271
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
- stage 1 14,273 - - - - 14,273 (2) 14,271
---------------
- stage 2 - - - - - - - -
---------------
- stage 3 - - - - - - - -
---------------
- POCI - - - - - - - -
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- -----------------------
At 31 Dec 2021 14,273 - - - - 14,273 (2) 14,271
--------------- ----------------------- ------------------ ----------------------- ---------------------------- --------------------- --------------------- ----------------------- ---------------------
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)
We determine 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 .
Forbearance
The following table shows the gross carrying amounts of HSBC
UK's holdings of forborne 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
forborne loans.
A summary of our current policies and practices for forbearance
is set out in 'Credit risk management' on page 26.
Forborne loans and advances to customers at amortised costs by stage
allocation
Non-Performing Total
Performing - Forborne -Forborne Forborne
------------------------------------------------------------------ -------------------------------------------- ---------------------
Stage Stage POCI Stage POCI Total
1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
Gross
carrying
amount
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
Personal - 159 - 376 - 535
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
- first lien
residential
mortgages - 23 - 235 - 258
- credit
cards - 63 - 45 - 108
-------------
- other
personal
lending
which is
unsecured - 73 - 96 - 169
Wholesale - 587 - 1,032 23 1,642
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
- corporate
and
commercial - 587 - 1,031 23 1,641
-------------
- non-bank
financial
institutions - - - 1 - 1
------------- --------------------- --------------------- -------------------- --------------------- ---------------------
At 31 Dec
2022 - 746 - 1,408 23 2,177
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
Allowance for
ECL
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
Personal - (31) - (97) - (128)
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
- first lien
residential
mortgages - (1) - (30) - (31)
- credit
cards - (13) - (28) - (41)
-------------
- other
personal
lending
which is
unsecured - (17) - (39) - (56)
Wholesale - (21) - (115) (1) (137)
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
- corporate
and
commercial - (21) - (115) (1) (137)
At 31 Dec
2022 - (52) - (212) (1) (265)
------------- --------------------- --------------------- -------------------- --------------------- --------------------- ---------------------
Gross
carrying
amount
------------- ---------------------- ---------------------- -------------------- -------------------- ---------------------- --------------------
Personal - - - 510 - 510
------------- ---------------------- ---------------------- -------------------- -------------------- ---------------------- --------------------
- first lien
residential
mortgages - - - 340 - 340
- credit
cards - - - 105 - 105
-------------
- other
personal
lending
which is
unsecured - - - 65 - 65
Wholesale 196 79 - 1,158 20 1,453
------------- ---------------------- ---------------------- -------------------- -------------------- ---------------------- --------------------
- corporate
and
commercial 196 79 - 1,158 20 1,453
-------------
- non-bank - - - - - -
financial
institutions
------------- ---------------------- ---------------------- -------------------- -------------------- ----------------------
At 31 Dec
2021(1) 196 79 - 1,668 20 1,963
------------- ---------------------- ---------------------- -------------------- -------------------- ---------------------- --------------------
Allowance for
ECL
------------- ---------------------- ---------------------- -------------------- -------------------- ---------------------- --------------------
Personal - - - (92) - (92)
------------- ---------------------- ---------------------- -------------------- -------------------- ---------------------- --------------------
- first lien
residential
mortgages - - - (47) - (47)
- credit
cards - - - (27) - (27)
-------------
- other
personal
lending
which is
unsecured - - - (18) - (18)
Wholesale (3) (2) - (122) (5) (132)
------------- ---------------------- ---------------------- -------------------- -------------------- ---------------------- --------------------
- corporate
and
commercial (3) (2) - (122) (5) (132)
At 31 Dec
2021(1) (3) (2) - (214) (5) (224)
------------- ---------------------- ---------------------- -------------------- -------------------- ---------------------- --------------------
1 Following the adoption of the EBA 'Guidelines on the
application of definition of default' loans are identified as
forborne and classified as either performing or non-performing when
we modify the contractual terms due to financial difficulty of the
borrower both in Retail and Wholesale lending. At 31 December 2022,
we reported GBP746m (31 December 2021: GBP79m) of performing
forborne loans. The increase of GBP667m is mainly driven by the
inclusion of non-payment related concessions in the forbearance
assessment since 1 January 2022.
Wholesale lending
This section provides further detail on the products in
wholesale loans and advances to customers and banks. Product
granularity is also provided by stage. Additionally, this section
provides a reconciliation of the opening 1 January 2022 to 31
December 2022 closing gross carrying/nominal amounts and the
associated allowance for ECL.
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
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------ -------------- -------------- -------------- ------------- -------------- -------------- -------------- -------------- -------------- --------------
Corporate and commercial 45,739 15,520 3,673 23 64,955 (134) (368) (532) (1) (1,035)
------------------------------------------ -------------- -------------- -------------- ------------- -------------- -------------- -------------- -------------- -------------- --------------
* agriculture, forestry and fishing 3,018 889 152 - 4,059 (5) (26) (26) - (57)
------------------------------------------
* mining and quarrying 507 140 34 - 681 (1) (1) (7) - (9)
------------------------------------------
* manufacturing 6,070 1,444 420 - 7,934 (11) (24) (88) - (123)
------------------------------------------
* electricity, gas, steam and air-con
ditioning supply 942 56 1 - 999 (1) (1) - - (2)
------------------------------------------
* water supply, sewerage, waste manag
ement and
remediation 737 88 8 - 833 (1) (1) (2) - (4)
------------------------------------------
* construction 2,256 898 234 - 3,388 (10) (24) (37) - (71)
------------------------------------------
* wholesale and retail trade, repair
of motor vehicles
and motorcycles 5,915 5,137 837 - 11,889 (22) (121) (113) - (256)
------------------------------------------
* transportation and storage 1,522 358 80 - 1,960 (4) (7) (6) - (17)
------------------------------------------
* accommodation and food 3,840 2,359 341 - 6,540 (12) (56) (25) - (93)
------------------------------------------
* publishing, audiovisual and broadca
sting 1,870 435 125 23 2,453 (10) (18) (9) (1) (38)
------------------------------------------
* real estate 8,265 2,009 551 - 10,825 (22) (29) (109) - (160)
------------------------------------------
* professional, scientific and techni
cal activities 3,349 378 132 - 3,859 (11) (21) (18) - (50)
------------------------------------------
* administrative and support services 3,880 651 260 - 4,791 (8) (17) (34) - (59)
------------------------------------------
- - - - - - - - - -
* public administration and defence, c
ompulsory social
security
------------------------------------------
* education 670 98 69 - 837 (3) (3) (17) - (23)
------------------------------------------
* health and care 1,275 273 122 - 1,670 (4) (10) (6) - (20)
------------------------------------------
* arts, entertainment and recreation 700 108 92 - 900 (3) (4) (27) - (34)
------------------------------------------
* other services 919 199 215 - 1,333 (6) (5) (8) - (19)
------------------------------------------
* activities of households 1 - - - 1 - - - - -
* government 3 - - - 3 - - - - -
Non-bank financial institutions 2,334 132 8 - 2,474 (2) (2) (1) - (5)
------------------------------------------ -------------- -------------- -------------- ------------- -------------- -------------- -------------- -------------- -------------- --------------
Loans and advances to banks 6,354 1 4 - 6,359 - - (2) - (2)
------------------------------------------ -------------- -------------- -------------- ------------- -------------- -------------- -------------- -------------- -------------- --------------
At 31 Dec 2022 54,427 15,653 3,685 23 73,788 (136) (370) (535) (1) (1,042)
------------------------------------------ -------------- -------------- -------------- ------------- -------------- -------------- -------------- -------------- -------------- --------------
Total wholesale credit-related commitments and financial guarantees
by stage distribution
Nominal amount Allowance for ECL
----------------------------------------------------------------- ----------------------------------------------------------------------
Stage Stage Stage Stage Stage Stage
1 2 3 POCI Total 1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- -------- ---------------- ------------- ------------ -------- ------------ ------------ ------------- ------------ -------------
Corporate
and
commercial 20,527 4,488 172 - 25,187 (20) (37) (31) - (88)
----------- -------- ---------------- ------------- ------------ -------- ------------ ------------ ------------- ------------ -------------
Financial 1,088 100 - - 1,188 - - - - -
----------- -------- ---------------- ------------- ------------ -------- ------------ ------------ ------------- ------------ -------------
At 31 Dec
2022 21,615 4,588 172 - 26,375 (20) (37) (31) - (88)
----------- -------- ---------------- ------------- ------------ -------- ------------ ------------ ------------- ------------ -------------
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
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------ --------------- ------------- --------------- ------------- -------------- --------------- -------------- --------------- -------------- ---------------
Corporate and commercial 45,957 15,000 2,950 20 63,927 (191) (338) (551) (5) (1,085)
------------------------------------------ --------------- ------------- --------------- ------------- -------------- --------------- -------------- --------------- -------------- ---------------
* agriculture, forestry and fishing 3,476 459 149 - 4,084 (5) (14) (11) - (30)
------------------------------------------
* mining and quarrying 402 193 71 - 666 (1) (1) (8) - (10)
------------------------------------------
* manufacturing 5,586 1,275 209 - 7,070 (13) (27) (42) - (82)
------------------------------------------
* electricity, gas, steam and air-con
ditioning supply 480 19 1 - 500 (3) - - - (3)
------------------------------------------
* water supply, sewerage, waste manag
ement and
remediation 687 42 25 - 754 (2) (1) (7) - (10)
------------------------------------------
* construction 2,401 887 137 - 3,425 (8) (16) (29) - (53)
------------------------------------------
* wholesale and retail trade, repair
of motor vehicles
and motorcycles 8,956 1,720 355 - 11,031 (17) (25) (99) - (141)
------------------------------------------
* transportation and storage 1,376 471 82 - 1,929 (4) (12) (10) - (26)
------------------------------------------
* accommodation and food 898 6,326 655 - 7,879 (35) (118) (24) - (177)
------------------------------------------
* publishing, audiovisual and broadca
sting 2,039 325 100 20 2,484 (21) (19) (47) (5) (92)
------------------------------------------
* real estate 8,701 1,302 534 - 10,537 (43) (15) (148) - (206)
------------------------------------------
* professional, scientific and techni
cal activities 3,435 311 143 - 3,889 (9) (14) (18) - (41)
------------------------------------------
* administrative and support services 3,624 757 190 - 4,571 (15) (23) (39) - (77)
------------------------------------------
* public administration and defence,
compulsory social
security 1 - - - 1 - - - - -
------------------------------------------
* education 696 123 44 - 863 (2) (5) (13) - (20)
------------------------------------------
* health and care 1,277 397 111 - 1,785 (5) (11) (20) - (36)
------------------------------------------
* arts, entertainment and recreation 557 216 100 - 873 (4) (26) (25) - (55)
------------------------------------------
* other services 1,140 177 44 - 1,361 (4) (11) (11) - (26)
------------------------------------------
* activities of households 1 - - - 1 - - - - -
* assets backed securities 224 - - - 224 - - - - -
------------------------------------------ --------------- ------------- --------------- ------------- -------------- --------------- -------------- --------------- --------------
Non-bank financial institutions 2,056 75 5 - 2,136 (2) (1) - - (3)
------------------------------------------ --------------- ------------- --------------- ------------- -------------- --------------- -------------- --------------- -------------- ---------------
Loans and advances to banks 1,914 - - - 1,914 - - - - -
------------------------------------------ --------------- ------------- --------------- ------------- -------------- --------------- -------------- --------------- -------------- ---------------
At 31 Dec 2021 49,927 15,075 2,955 20 67,977 (193) (339) (551) (5) (1,088)
------------------------------------------ --------------- ------------- --------------- ------------- -------------- --------------- -------------- --------------- -------------- ---------------
Total wholesale credit-related commitments and financial guarantees
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
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- ----------- ----------- ------------ ------------ ----------- -------------- ------------- ------------- ------------ --------------
Corporate
and
commercial 23,917 3,215 201 - 27,333 (24) (25) (17) - (66)
----------- ----------- ----------- ------------ ------------ ----------- -------------- ------------- ------------- ------------ --------------
Financial 853 104 - - 957 (1) - - - (1)
----------- ----------- ----------- ------------ ------------ ----------- -------------- ------------- ------------- ------------ --------------
At 31 Dec
2021 24,770 3,319 201 - 28,290 (25) (25) (17) - (67)
----------- ----------- ----------- ------------ ------------ ----------- -------------- ------------- ------------- ------------ --------------
Wholesale lending - 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 Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
At 1 Jan 2022 73,650 (218) 18,378 (364) 3,156 (568) 20 (5) 95,204 (1,155)
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Transfers of
financial
instruments (6,143) (113) 4,472 155 1,671 (42) - - - -
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
- transfers from
stage 1 to stage
2 (20,060) 58 20,060 (58) - - - - - -
-------------------
- transfers from
stage 2 to stage
1 14,289 (160) (14,289) 160 - - - - - -
-------------------
- transfers to
stage 3 (562) 3 (1,711) 66 2,273 (69) - - - -
-------------------
- transfers from
stage 3 190 (14) 412 (13) (602) 27 - - - -
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- --------------------
Net remeasurement
of ECL arising
from transfer
of stage - 72 - (127) - (2) - - - (57)
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Changes due to
modifications
not derecognised - - - - - - - - - -
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
New financial
assets originated
or purchased 14,489 (43) - - - - - - 14,489 (43)
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Changes to risk
parameters -
further
lending/repayments (665) 27 (332) 15 (159) 96 3 - (1,153) 138
Change in risk
parameters -
credit
quality - 105 - (50) - (312) - 4 - (253)
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Changes to models
used for ECL
calculation - 5 - (53) - - - - - (48)
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Asset derecognised
(including final
repayments) (9,919) 9 (2,352) 17 (565) 16 - - (12,836) 42
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Assets written
off - - - - (246) 246 - - (246) 246
Other(2) 3,850 - - - - - - - 3,850 -
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
At 31 Dec 2022 75,262 (156) 20,166 (407) 3,857 (566) 23 (1) 99,308 (1,130)
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
ECL
release/(charge)
for the period 175 (198) (202) 4 (221)
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Recoveries 7
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Others 22
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Total change
in ECL for the
period (192)
------------------- ------------------- -------------------- ------------------- ------------------- ------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Wholesale lending - reconciliation of changes in gross carrying/nominal
amount and allowances for loans and advances to banks and
customers including loan commitments and financial guarantees (continued)
(Audited)
Non-credit impaired Credit impaired
---------------------------------------------------------------------------------- ------------------------------------------------------------------------------------
Stage 1 Stage 2 Stage 3 POCI Total
---------------------------------------- ---------------------------------------- ------------------------------------------ ---------------------------------------- ----------------------------------------
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
At 1 Jan 2021 70,942 (380) 28,352 (834) 2,581 (699) 37 (23) 101,912 (1,936)
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Transfers of
financial
instruments 5,352 (191) (6,246) 238 894 (47) - - - -
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
- transfers from
stage 1 to stage
2 (9,402) 52 9,402 (52) - - - - - -
-------------------
- transfers from
stage 2 to stage
1 14,957 (236) (14,957) 236 - - - - - -
-------------------
- transfers to
stage
3 (320) 3 (891) 61 1,211 (64) - - - -
-------------------
- transfers from
stage 3 117 (10) 200 (7) (317) 17 - - - -
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- --------------------
Net remeasurement
of ECL arising
from
transfer of stage - 105 - (25) - (1) - - - 79
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Changes due to
modifications
not derecognised - - - - (1) - - - (1) -
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
New financial
assets
originated or
purchased 13,368 (59) - - - - - - 13,368 (59)
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Changes to risk
parameters -
further
lending/repayments (7,196) 58 (2,064) 110 91 166 (17) 4 (9,186) 338
Change in risk
parameters
- credit quality - 253 - 181 - (230) - 14 - 218
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Changes to models
used for ECL
calculation - (13) - (40) - - - - - (53)
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Asset derecognised
(including final
repayments) (8,816) 9 (1,664) 6 (181) 15 - - (10,661) 30
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Assets written off - - - - (228) 228 - - (228) 228
Other - - - - - - - - - -
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
At 31 Dec 2021 73,650 (218) 18,378 (364) 3,156 (568) 20 (5) 95,204 (1,155)
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
ECL
release/(charge)
for the period 355 232 (52) 18 553
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Recoveries 12
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Others (23)
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
Total change in
ECL for the period 542
------------------- ------------------ -------------------- ------------------ -------------------- -------------------- -------------------- ------------------ -------------------- -------------------- ------------------
1 The reconciliation excludes loans and advances to other HSBC
Group companies. As at 31 December 2022, these amounted to GBP0.5bn
(2021: GBP0.8bn) and were classified as Stage 1 with no ECL.
2 GBP3.8bn of gross carrying amounts of stage 1 loans and
advances to banks, representing the balance maintained as at 30
June 2022 with the BoE to support BACS along with Faster Payments
and the cheque-processing Image Clearing System in the UK
transferred to 'Loans and advances to banks'. The corresponding
balance as at 31 December 2021 was reported under 'Cash and
balances at central banks'. Comparatives have not been
restated.
Commercial real estate
Commercial real estate lending includes the financing of
corporate, institutional and high net worth customers who are
investing primarily in income-producing assets and, to a lesser
extent, in their construction and development. Our exposure mainly
comprises the financing of investment assets, the redevelopment of
existing stock and the augmentation of both commercial and
residential markets to support economic growth.
Commercial real estate lending
------------------
2022 2021
GBPm GBPm
------------------------- ------------------ ------------------
Gross loans and advances
------------------------- ------------------ ------------------
Stage 1 9,471 9,551
------------------------- ------------------ ------------------
Stage 2 2,293 1,855
------------------------- ------------------ ------------------
Stage 3 583 575
------------------------- ------------------ ------------------
POCI - -
------------------------- ------------------ ------------------
At 31 Dec 12,347 11,981
------------------------- ------------------ ------------------
- of which: forborne
loans(1) 178 229
------------------------- ------------------ ------------------
Allowance for ECL (179) (201)
------------------------- ------------------ ------------------
1 Forborne gross loans and advances at 31 December 2021 have not
been restated and agree with the policies and disclosures presented
in the Annual Report and Accounts 2021.
Refinance risk in commercial real estate
Commercial real estate lending tends to require the repayment of
a significant proportion of the principal at maturity. Typically, a
customer will arrange repayment through the acquisition of a new
loan to settle the existing debt. Refinance risk is the risk that a
customer, being unable to repay the debt on maturity, fails to
refinance it at commercial rates. We monitor our commercial real
estate portfolio closely, assessing indicators for signs of
potential issues with refinancing.
Commercial real estate gross loans
and advances maturity
analysis
2022 2021
GBPm GBPm
< 1 year 6,903 6,831
---------------- -----------------
1-2 years 2,920 2,718
---------- ---------------- -----------------
2-5 years 1,979 1,978
---------- ---------------- -----------------
> 5 years 545 454
---------- ---------------- -----------------
At 31 Dec 12,347 11,981
---------- ---------------- -----------------
Collateral and other credit enhancement held
(Audited)
Although collateral can be an important mitigants of credit
risk, it is HSBC UK's practice to lend on the basis of the
customer's ability to meet their obligations out of their cash flow
resources rather than rely on the value of security offered.
Depending on the customer's standing and the type of product,
facilities may be provided unsecured.
For other lending a charge over collateral is obtained and
considered in determining the credit decision and pricing. In the
event of a default, the group may utilise the collateral as a
source of repayment.
Depending on its form, collateral can have a significant
financial effect in mitigating exposure to credit risk . 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 LTV is very
low.
Collateral on loans and advances
Collateral held is analysed separately for commercial real
estate and for other corporate and commercial and financial
(non-bank) lending. The following tables include off-balance sheet
loan commitments, primarily undrawn credit lines.
The collateral measured in the following tables consists of
fixed first charges on real estate, and charges over cash and
marketable financial instruments. The values in the tables
represent the expected market value on an open market basis. No
adjustment has been made to the collateral for any expected costs
of recovery. Marketable securities are measured at their fair
value.
Other types of collateral such as unsupported guarantees and
floating charges over the assets of a customer's business are not
measured in the following tables. While such mitigants have value,
often providing rights in insolvency, their assignable value is not
sufficiently certain and they are therefore assigned no value for
disclosure purposes.
The LTV ratios presented are calculated by directly associating
loans and advances with the collateral that individually and
uniquely supports each facility. When collateral assets are shared
by multiple loans and advances, whether specifically or, more
generally, by way of an all monies charge, the collateral value is
pro-rated across the loans and advances protected by the
collateral.
For credit-impaired loans, the collateral values cannot be
directly compared with impairment allowances recognised. The LTV
figures use open market values with no adjustments. Impairment
allowances are calculated on a different basis, by considering
other cash flows and adjusting collateral values for costs of
realising collateral as explained further on page 90.
Commercial real estate loans and advances
The value of commercial real estate collateral is determined by
using a combination of external and internal valuations and
physical inspections.
Facilities of a working capital nature are generally not secured
by a first fixed charge, and are therefore disclosed as not
collateralised.
Wholesale lending: commercial real
estate loans and advances including
loan commitments by level of collateral
(by stage)
(Audited)
2022 2021
Gross Gross
carrying/nominal ECL carrying/nominal ECL
amount coverage amount coverage
GBPm % GBPm %
-------------
Stage 1
--------------------
Not collateralised 4,151 0.4 4,739 0.5
-------------------- --------------- ------------------------ -------------
Fully collateralised 7,769 0.1 8,813 0.2
-------------------- --------------- ------------------------ -------------
LTV ratio:
-------------------- ------------------------ -------------
- less than
50% 2,305 0.2 2,923 0.2
---------------
- 51% to 75% 4,753 0.1 4,282 0.2
---------------
- 76% to 90% 375 0.2 1,175 0.2
---------------
- 91% to 100% 336 0.2 433 0.1
-------------------- --------------- ------------------------
Partially collateralised
(A): 1,588 0.1 1,412 0.1
-------------------- --------------- ------------------------ -------------
- collateral
value on A 920 644
-------------------- ------------------------ -------------
Total 13,508 0.2 14,964 0.3
-------------------- --------------- ------------------------ -------------
Stage 2
-------------------- ------------------------ -------------
Not collateralised 1,855 1.5 1,314 0.9
-------------------- --------------- ------------------------ -------------
Fully collateralised 1,624 1.0 714 1.2
-------------------- --------------- ------------------------ -------------
LTV ratio:
-------------------- ------------------------ -------------
- less than
50% 515 1.0 390 1.0
---------------
- 51% to 75% 981 0.9 283 1.4
---------------
- 76% to 90% 115 1.5 32 0.7
---------------
- 91% to 100% 13 0.4 9 3.9
-------------------- --------------- ------------------------
Partially collateralised
(B): 139 1.0 270 0.4
-------------------- --------------- ------------------------ -------------
- collateral
value on B 112 165
-------------------- ------------------------ -------------
Total 3,618 1.2 2,298 1.0
-------------------- --------------- ------------------------ -------------
Stage 3
-------------------- ------------------------ -------------
Not collateralised 245 35.2 301 41.9
-------------------- --------------- ------------------------ -------------
Fully collateralised 287 5.6 240 3.6
-------------------- --------------- ------------------------ -------------
LTV ratio:
-------------------- ------------------------ -------------
- less than
50% 44 4.5 26 2.5
---------------
- 51% to 75% 220 0.5 170 2.6
---------------
- 76% to 90% 9 20.7 8 4.0
---------------
- 91% to 100% 14 78.2 36 9.0
-------------------- --------------- ------------------------
Partially collateralised
(C): 64 29.6 72 32.8
-------------------- --------------- ------------------------ -------------
- collateral
value on C 34 40
-------------------- ------------------------ -------------
Total 596 20.3 613 25.8
-------------------- --------------- ------------------------ -------------
POCI
-------------------- ------------------------ -------------
Not collateralised - - - -
-------------------- --------------- ------------------------ -------------
Fully collateralised - - - -
-------------------- --------------- ------------------------ -------------
LTV ratio:
-------------------- ------------------------ -------------
- less than - - - -
50%
---------------
- 51% to 75% - - - -
---------------
- 76% to 90% - - - -
---------------
- 91% to 100% - - - -
-------------------- --------------- ------------------------
Partially collateralised - - - -
(D):
-------------------- --------------- ------------------------ -------------
- collateral - -
value on D
-------------------- ------------------------ -------------
Total - - - -
-------------------- --------------- ------------------------ -------------
At 31 Dec 17,722 1.1 17,875 1.2
-------------------- --------------- ------------------------ -------------
Wholesale lending: commercial real
estate loans and advances including
loan commitments by level of collateral
(Audited)
2022 2021
Gross Gross
carrying/nominal ECL carrying/nominal ECL
amount coverage amount coverage
GBPm % GBPm %
Rated CRR/PD1
to 7
--------------------- ---------------
Not collateralised 5,995 0.7 6,047 0.5
--------------------- --------------- ------------------------
Fully collateralised 9,386 0.3 9,509 0.2
--------------------- --------------- ------------------------
Partially collateralised
(A): 1,727 0.2 1,679 0.2
--------------------- --------------- ------------------------
- collateral
value on A 1,032 805
--------------------- --------------- ------------------------
Total 17,108 0.4 17,235 0.3
--------------------- --------------- ------------------------
Rated CRR/PD
8
--------------------- --------------- ------------------------
Not collateralised 11 3.8 5 45.1
--------------------- --------------- ------------------------
Fully collateralised 7 8.3 18 24.0
--------------------- --------------- ------------------------
LTV ratio:
--------------------- --------------- ------------------------
- less than
50% 3 6.9 10 24.5
---------------
- 51% to 75% 2 20.2 6 22.7
---------------
- 76% to 90% - - - -
---------------
- 91% to 100% 2 3.6 2 13.0
--------------------- --------------- ------------------------
Partially collateralised
(B): - - 4 12.1
--------------------- --------------- ------------------------
- collateral
value on B - 3
--------------------- --------------- ------------------------
Total 18 6.2 27 26.3
--------------------- --------------- ------------------------
Rated CRR/PD9
to 10
--------------------- --------------- ------------------------
Not collateralised 245 35.2 301 41.9
--------------------- --------------- ------------------------
Fully collateralised 287 5.6 240 3.6
--------------------- --------------- ------------------------
LTV ratio:
--------------------- --------------- ------------------------
- less than
50% 44 4.5 26 2.5
---------------
- 51% to 75% 220 0.5 170 2.6
---------------
- 76% to 90% 9 20.7 8 4.0
---------------
- 91% to 100% 14 78.2 36 9.0
--------------------- --------------- ------------------------
Partially collateralised
(C): 64 29.6 72 32.8
--------------------- --------------- ------------------------
- collateral
value on C 34 40
--------------------- --------------- ------------------------
Total 596 20.3 613 25.8
--------------------- --------------- ------------------------
At 31 Dec 17,722 1.1 17,875 1.2
--------------------- --------------- ------------------------
.
Other corporate, commercial and financial
(non-bank) loans and advances
(Audited)
Other corporate, commercial and financial (non-bank) loans are
analysed separately in the following table. For financing
activities in other corporate and commercial lending that are not
predominantly commercial real estate-oriented, collateral value is
not strongly correlated to principal repayment performance.
Collateral values are generally refreshed when an obligor's
general credit performance deteriorates and we have to assess the
likely performance of secondary sources of repayment should it
prove necessary to rely on them.
Accordingly, the following table reports values only for
customers with CRR 8-10, recognising that these loans and advances
generally have valuations that are comparatively recent.
Wholesale lending: other corporate,
commercial and financial
(non-bank) loans and advances including
loan commitments by
level of collateral (by stage)
(Audited)
2022 2021
Gross Gross
carrying/ carrying/
nominal ECL nominal ECL
amount coverage amount coverage
GBPm % GBPm %
------------------ ---------------
Stage 1
------------------ --------------- -------------
Not collateralised 41,567 0.3 42,837 0.3
------------------ --------------- -------------------- -------------
Fully collateralised 11,291 0.1 10,840 0.2
------------------ --------------- -------------------- -------------
LTV ratio:
------------------ --------------- -------------------- -------------
- less than
50% 4,108 0.1 3,163 0.2
---------------
- 51% to 75% 4,157 0.1 4,844 0.2
---------------
- 76% to 90% 1,334 0.1 1,442 0.1
---------------
- 91% to 100% 1,692 0.1 1,391 0.1
------------------ --------------- --------------------
Partially collateralised
(A): 5,210 0.1 6,317 0.1
------------------ --------------- -------------------- -------------
- collateral
value on A 2,803 3,515
------------------ --------------- -------------------- -------------
Total 58,068 0.2 59,994 0.3
------------------ --------------- -------------------- -------------
Stage 2
------------------ -------------------- -------------
Not collateralised 9,798 2.8 9,350 2.6
------------------ --------------- -------------------- -------------
Fully collateralised 5,079 1.3 5,473 1.4
------------------ --------------- -------------------- -------------
LTV ratio:
------------------ -------------------- -------------
- less than
50% 2,160 1.1 2,109 1.5
---------------
- 51% to 75% 2,121 1.4 2,857 1.2
---------------
- 76% to 90% 478 1.9 343 2.1
---------------
- 91% to 100% 320 1.3 164 1.6
------------------ --------------- --------------------
Partially collateralised
(B): 1,876 1.2 1,344 1.8
------------------ --------------- -------------------- -------------
- collateral
value on B 981 690
------------------ --------------- -------------------- -------------
Total 16,753 2.2 16,167 2.1
------------------ --------------- -------------------- -------------
Stage 3
------------------ -------------------- -------------
Not collateralised 2,466 14.1 1,533 20.0
------------------ --------------- -------------------- -------------
Fully collateralised 571 4.3 819 3.0
------------------ --------------- -------------------- -------------
LTV ratio:
-------------------- -------------
- less than
50% 143 3.5 142 4.2
---------------
- 51% to 75% 276 6.0 562 1.1
---------------
- 76% to 90% 83 0.9 69 11.5
---------------
- 91% to 100% 69 3.7 46 9.2
------------------ --------------- --------------------
Partially collateralised
(C): 245 25.7 200 39.0
------------------ --------------- -------------------- -------------
- collateral
value on C 128 115
------------------ --------------- -------------------- -------------
Total 3,282 13.3 2,552 16.0
------------------ --------------- -------------------- -------------
POCI
------------------ -------------------- -------------
Not collateralised 23 2.8 20 22.7
------------------ --------------- -------------------- -------------
Fully collateralised - - - -
------------------ --------------- -------------------- -------------
LTV ratio:
------------------ -------------------- -------------
- less than - - - -
50%
---------------
- 51% to 75% - - - -
---------------
- 76% to 90% - - - -
---------------
- 91% to 100% - - - -
------------------ --------------- --------------------
Partially Collateralised - - - -
(D):
------------------ --------------- -------------------- -------------
- collateral - -
value on D
------------------ --------------- -------------------- -------------
Total 23 2.8 20 22.7
------------------ --------------- -------------------- -------------
At 31 Dec 78,126 1.2 78,733 1.2
------------------ --------------- -------------------- -------------
Wholesale lending: other corporate,
commercial and financial (non-bank)
loans and advances including loan
commitments by level of collateral
rated CRR/PD 8 to 10 only
(Audited)
2022 2021
Gross
Gross carrying/
carrying/nominal ECL nominal ECL
amount coverage amount coverage
GBPm % GBPm %
Rated CRR/PD
8
Not collateralised 189 6.2 807 4.4
---------------------- --------------- ---------------------
Fully collateralised 57 7.9 84 13.2
---------------------- --------------- ---------------------
LTV ratio:
- less than
50% 16 4.4 28 12.7
---------------
- 51% to 75% 21 6.7 29 22.5
---------------
- 76% to 90% 18 12.4 17 5.6
---------------
- 91% to 100% 2 6.8 10 2.4
---------------------- --------------- ---------------------
Partially collateralised
(A): 20 5.8 102 8.0
---------------------- --------------- ---------------------
- collateral
value on A 3 29
---------------------- ---------------------
Total 266 6.5 993 5.5
---------------------- --------------- ---------------------
Rated CRR/PD
9 to 10
Not collateralised 2,489 14.0 1,553 20.0
---------------------- --------------- ---------------------
Fully collateralised 571 4.3 819 3.0
---------------------- --------------- ---------------------
LTV ratio:
- less than
50% 143 3.5 142 4.2
---------------
- 51% to 75% 276 6.0 562 1.1
---------------
- 76% to 90% 83 0.9 69 11.5
---------------
- 91% to 100% 69 3.7 46 9.2
---------------------- --------------- ---------------------
Partially collateralised
(B): 245 25.7 200 39.0
---------------------- --------------- ---------------------
- collateral
value on B 128 115
---------------------- ---------------------
Total 3,305 13.2 2,572 16.1
---------------------- --------------- ---------------------
At 31 Dec 3,571 12.7 3,565 13.1
---------------------- --------------- ---------------------
.
Other credit risk exposures
(Audited)
In addition to collateralised lending, other credit enhancements
are employed and methods used to mitigate credit risk arising from
financial assets. These are described in more detail below:
-- Some securities issued by governments, banks and other
financial institutions benefit from additional credit enhancement
provided by government guarantees that cover the assets;
-- Debt securities issued by banks and financial institutions
include asset-backed securities and similar instruments which are
supported by underlying pools of financial assets;
-- The group's maximum exposure to credit risk includes
financial guarantees and similar 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.
Personal lending
We provide a broad range of secured and unsecured personal
lending products to meet customer needs. Personal lending includes
advances to customers for asset purchases such as residential
property where the loans are secured by the assets being acquired.
We also offer unsecured lending products such as overdrafts, credit
cards and personal loans.
At 31 December 2022, we introduced enhancements in the SICR
approach in relation to capturing relative movements in PD. The
enhanced approach captured relative movements in PD since
origination, which resulted in a significant migration to stage 2
from loans to customers gross carrying amounts in stage 1.
The volume of stage 1 customer accounts with lower absolute
levels of credit risk who have exhibited some amount of relative
increase in PD since origination have migrated into stage 2,
and
accounts originated with higher absolute levels of credit risk
with no or insignificant increases in PD since origination have
been transferred back to stage 1, with no material overall change
in risk.
The impact on ECL is immaterial due to the offsetting ECL
impacts of stage migrations and the low LTV profiles applicable to
these customers.
The enhancement of the SICR approach constitutes an improvement
towards more responsive models that better reflect the SICR since
origination. This includes consideration of the current cost of
living pressures, as markets adjust to the higher interest rate
environment.
The following table shows the levels of personal lending
products in the various portfolios.
Total personal lending for loans and advances to customers at amortised
costs by stage distribution
Gross carrying amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------------------ ---------------------- ------------------ ------------------------ ---------------------- ---------------------- ----------------------
By portfolio
------------------ ------------------ ---------------------- ------------------ ------------------------ ---------------------- ---------------------- ----------------------
First lien
residential
mortgages 96,757 28,200 546 125,503 (10) (113) (62) (185)
------------------ ------------------ ---------------------- ------------------ ------------------------ ---------------------- ---------------------- ----------------------
- of which:
interest
only (including
offset) 14,979 3,637 90 18,706 (2) (37) (10) (49)
Other personal
lending 9,988 2,841 294 13,123 (102) (458) (127) (687)
------------------ ------------------ ---------------------- ------------------ ------------------------ ---------------------- ---------------------- ----------------------
- other 5,892 1,591 198 7,681 (56) (187) (73) (316)
- credit cards 4,096 1,250 96 5,442 (46) (271) (54) (371)
At 31 Dec 2022 106,745 31,041 840 138,626 (112) (571) (189) (872)
------------------ ------------------ ---------------------- ------------------ ------------------------ ---------------------- ---------------------- ----------------------
At 31 December 2022, the stage 2 personal lending balances
increased by GBP27.7bn to GBP31.0bn compared with
31 December 2021. This increase is largely due to enhancement in
the SICR approach to capture relative movements in PD since
origination and also, to a lesser extent, it takes into
consideration cost of living pressures. The modest impact on ECL is
driven by a combination of changes in PDs applied and low LTV
customer profiles.
Total personal credit-related commitments and financial guarantees
by stage distribution
Nominal amount Allowance for ECL
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-----
At 31
Dec
2022 41,949 365 87 42,401 (9) - - (9)
----- ---------------- -------------------- --------------------- ---------------- ------------------------ ---------------------- ---------------------- ------------------------
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
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- --------------------- ----------------------- ------------------- ------------------------ ----------------------- ----------------------- -----------------------
By portfolio
First lien
residential
mortgages 115,464 1,927 686 118,077 (20) (42) (101) (163)
------------------- --------------------- ----------------------- ------------------- ------------------------ ----------------------- ----------------------- -----------------------
- of which:
interest
only (including
offset) 17,371 1,189 71 18,631 (3) (16) (18) (37)
Other personal
lending 11,440 1,434 367 13,241 (102) (311) (191) (604)
------------------- --------------------- ----------------------- ------------------- ------------------------ ----------------------- ----------------------- -----------------------
- other 6,199 778 245 7,222 (52) (118) (115) (285)
- credit cards 5,241 656 122 6,019 (50) (193) (76) (319)
At 31 Dec 2021 126,904 3,361 1,053 131,318 (122) (353) (292) (767)
------------------- --------------------- ----------------------- ------------------- ------------------------ ----------------------- ----------------------- -----------------------
Total personal credit-related commitments and financial guarantees
by stage distribution (continued)
Nominal amount Allowance for ECL
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ --------------------- --------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
At 31
Dec
2021 39,835 296 75 40,206 (8) (1) - (9)
------------------ --------------------- --------------------- ------------------ ------------------------ ------------------------ ---------------------- ------------------------
Mortgage lending
We offer a wide range of mortgage products designed to meet
customer needs, including capital repayment, interest-only and
offset mortgages. Internal credit policies prescribe the range of
acceptable residential property LTV thresholds with the maximum
upper limit for new loans set between 50% and 95%, depending on the
product type and loan amount.
We have continued to see net growth in our Mortgage business of
GBP7.4bn in 2022. We have maintained strong presence in the market
through 2022 while, where appropriate, strengthening our
affordability controls and credit policy to reflect the more
uncertain economic outlook.
The quality of our mortgage book remained strong, with low
levels of impairment allowances. The average LTV ratio on new
lending was 67%, compared with an estimated 50% for the overall
mortgage portfolio.
Exposure to interest-only mortgage loans
The following information is presented for the bank's HSBC
branded interest-only mortgage loans. This excludes offset
mortgages in first direct and private banking mortgages.
At the end of 2022, the average LTV ratio of the interest-only
mortgage loans was 41%, and 99% had a LTV ratio of 75% or less.
Of the interest-only mortgage loans that expired in 2020, 83%
were repaid within 12 months of expiry with a total of 96% being
repaid within 24 months of expiry. For those expiring during 2021,
95% were repaid within 12 months of expiry. The increase of the
amount fully repaid within the 12 months is explained by the
extensions granted as part of the FCA guidance on helping
borrowers with maturing interest-only mortgages during the
pandemic, which reduced the repayment rates within 12 months for
cases maturing in 2022. Following the end of these extensions in
October 2021, repayment levels have now returned to levels similar
to 2019.
The exposure of interest-only mortgage loans at the end of 2022
is GBP12bn and the maturity profile is as follows:
HSBC interest-only mortgage loans
GBPm
--------------------
Expired interest-only mortgage
loans(1) 111
--------------------
Interest-only mortgage loans
by maturity
- 2023 182
--------------------
- 2024 178
--------------------
- 2025 249
--------------------
- 2026 318
--------------------
- 2027-2031 2,450
--------------------
- post 2031 8,507
--------------------
At 31 Dec 2022 11,995
--------------------
1 Includes interest-only mortgages which have reached their
contractual maturity date, but were unsettled at the end of
2022.
Exposure to offset mortgage in first direct
The offset mortgage in first direct is a flexible way for our
customers to take control of their finances. It works by grouping
together the customer's mortgage, savings and current accounts to
off-set their credit and debit balances against their mortgage
exposure which at the end of 2022 was GBP4.6bn with an average LTV
ratio of 32% .
Personal lending - reconciliation of changes in gross carrying/nominal
amount and allowances for loans and advances to customers including
loan commitments and financial guarantees
(Audited)
------------------ -------------------
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross Gross Gross Gross Gross
carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance carrying/ Allowance
nominal for nominal for nominal for nominal for nominal for
amount ECL amount ECL amount ECL amount ECL amount ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 Jan 2022 166,739 (130) 3,657 (354) 1,128 (292) - - 171,524 (776)
------------------- ---------------- ------------------- ------------------- ------------------ -------------------
Transfers of
financial
instruments (28,575) (62) 28,428 90 147 (28) - - - -
------------------- ---------------- ------------------- ------------------- ------------------ -------------------
- transfers from
stage
1 to stage 2 (37,592) 119 37,592 (119) - - - - - -
- transfers from
stage
2 to stage 1 9,060 (177) (9,060) 177 - - - - - -
- transfers to
stage
3 (76) - (414) 87 490 (87) - - - -
- transfers from
stage
3 33 (4) 310 (55) (343) 59 - - - -
------------------------------- ------------------- ------------------- -------------- ------------------- -------------- ------------------ -------------------------------
Net remeasurement
of
ECL arising from
transfer
of stage - 142 - (137) - (1) - - - 4
New financial
assets
originated or
purchased 40,577 (111) - - - - - - 40,577 (111)
------------------- ---------------- ------------------- ------------------- ------------------ -------------------
Changes to risk
parameters
- further
lending/repayments (9,365) 49 669 (2) 112 9 - - (8,584) 56
Change in risk
parameters
- credit quality - (35) - (164) - (137) - - - (336)
------------------- ---------------- ------------------- ------------------- ------------------ -------------------
Changes to models
used
for ECL
calculation - (1) - (85) - 12 - - - (74)
------------------- ---------------- ------------------- ------------------- ------------------ -------------------
Asset derecognised
(including final
repayments) (20,682) 27 (1,348) 81 (216) 4 - - (22,246) 112
------------------- ---------------- ------------------- ------------------- ------------------ -------------------
Assets written off - - - - (244) 244 - - (244) 244
At 31 Dec 2022 148,694 (121) 31,406 (571) 927 (189) - - 181,027 (881)
------------------- ---------------- ------------------- ------------------- ------------------ -------------------
ECL
release/(charge)
for the period 71 (307) (113) - (349)
------------------- ------------------- ------------------- ------------------ -------------------
Recoveries 64
Others -
------------------- ------------------- ------------------- ------------------ -------------------
Total change in ECL
for the period (285)
------------------- ------------------- ------------------- ------------------ -------------------
At 1 Jan 2021 155,635 (176) 7,173 (894) 1,270 (395) - - 164,078 (1,465)
-------------------- ------------------ -------------------- ------------------ --------------------
Transfers of
financial
instruments 2,041 (527) (2,690) 617 649 (90) - - - -
------------------- -------------------- ------------------ -------------------- ------------------ --------------------
- transfers from
stage
1 to stage 2 (4,559) 40 4,559 (40) - - - - - -
-------------------
- transfers from
stage
2 to stage 1 6,774 (551) (6,774) 551 - - - - - -
-------------------
- transfers to
stage
3 (271) 2 (650) 157 921 (159) - - - -
-------------------
- transfers from
stage
3 97 (18) 175 (51) (272) 69 - - - -
------------------- -------------------- ------------------ -------------------- ------------------
Net remeasurement
of
ECL arising from
transfer
of stage - 356 - (58) - - - - - 298
New financial
assets
originated or
purchased 32,731 (55) - - - - - - 32,731 (55)
-------------------- ------------------ -------------------- ------------------ --------------------
Changes to risk
parameters
- further
lending/repayments (5,447) 72 758 72 (210) 18 - - (4,899) 162
Change in risk
parameters
- credit quality - 179 - (247) - (176) - - - (244)
-------------------- ------------------ -------------------- ------------------ --------------------
Changes to models - - - - - - - - - -
used
for ECL
calculation
------------------- -------------------- ------------------ -------------------- ------------------ --------------------
Asset derecognised
(including final
repayments) (18,221) 21 (1,584) 156 (236) 6 - - (20,041) 183
------------------- -------------------- ------------------ -------------------- ------------------ --------------------
Assets written off - - - - (345) 345 - - (345) 345
At 31 Dec 2021 166,739 (130) 3,657 (354) 1,128 (292) - - 171,524 (776)
-------------------- ------------------ -------------------- ------------------ --------------------
ECL
release/(charge)
for the period 573 (77) (152) - 344
------------------- -------------------- ------------------ -------------------- ------------------ --------------------
Recoveries 88
Others (1)
-------------------- ------------------ -------------------- ------------------ --------------------
Total change in ECL
for the period 431
------------------- -------------------- ------------------ -------------------- ------------------ --------------------
Collateral on loans and advances
(Audited)
The following table provides a quantification of the value of
fixed charges we hold over specific assets where we have a history
of enforcing, and are able to enforce, collateral in satisfying a
debt in the event of the borrower failing to meet its
contractual
obligations, and where the collateral is cash or can be realised
by sale in an established market. The collateral valuation excludes
any adjustments for obtaining and selling the collateral and, in
particular, loans shown as not collateralised or partially
collateralised may also benefit from other forms of credit
mitigants.
Personal lending: residential mortgage loans including loan commitments
by level of collateral
(Audited)
2022 2021
Gross carrying/nominal ECL Gross carrying/nominal ECL
amount coverage amount coverage
GBPm % GBPm %
Stage 1
------------------------------------- ---------------
Fully
collateralised 108,895 - 121,888 -
-------------------------------------
LTV ratio:
- less than
50% 57,630 - 58,971 -
- 51% to 60% 18,852 - 20,559 -
- 61% to 70% 16,506 - 18,722 -
- 71% to 80% 10,468 - 17,460 -
- 81% to 90% 4,853 - 5,723 -
- 91% to 100% 586 - 453 -
Partially
collateralised
(A): 263 - 253 -
-------------------------------------
LTV ratio:
- 101% to 110% 58 - 75 -
- 111% to 120% 50 - 43 -
- greater than
120% 155 - 135 -
- collateral
value on A 191 169
-------------------------------------
Total 109,158 - 122,141 -
-------------------------------------
Stage 2
-------------------------------------
Fully
collateralised 28,245 0.4 1,978 2.1
------------------------------------- ---------------
LTV ratio:
- less than
50% 8,471 0.6 1,346 1.6
- 51% to 60% 5,224 0.4 288 2.5
- 61% to 70% 7,008 0.3 192 3.2
- 71% to 80% 4,856 0.3 125 4.8
- 81% to 90% 2,384 0.2 23 5.6
- 91% to 100% 302 0.2 4 1.9
Partially
collateralised
(B): 40 0.3 2 9.0
------------------------------------- ---------------
LTV ratio:
- 101% to 110% 8 1.3 1 0.4
- 111% to 120% 8 - - -
- greater than
120% 24 0.1 1 11.1
- collateral
value on B 31 1
-------------------------------------
Total 28,285 0.4 1,980 2.1
------------------------------------- ---------------
Stage 3
-------------------------------------
Fully
collateralised 551 11.0 695 14.3
------------------------------------- ---------------
LTV ratio:
- less than
50% 362 9.2 463 13.0
- 51% to 60% 91 9.7 92 14.0
- 61% to 70% 40 15.9 58 16.2
- 71% to 80% 27 19.7 50 19.1
- 81% to 90% 9 24.5 15 26.9
- 91% to 100% 22 22.5 17 18.6
Partially
collateralised
(C): 10 6.2 5 26.3
------------------------------------- ---------------
LTV ratio:
- 101% to 110% 9 3.6 3 20.7
- 111% to 120% - - - -
- greater than
120% 1 11.9 2 33.4
- collateral
value on C 3 4
-------------------------------------
Total 561 10.9 700 14.4
------------------------------------- ---------------
At 31 Dec 138,004 0.1 124,821 0.1
------------------------------------- ---------------
Treasury risk
Overview
Treasury risk is the risk of having insufficient capital,
liquidity or funding resources to meet financial obligations and
satisfy regulatory requirements, as well as the risk to our
earnings or capital due to structural and transactional foreign
exchange exposures and changes in market interest rates, together
with pension and insurance risk.
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
both consolidated and local regulatory requirements at all
times.
Our policy is underpinned by our risk management framework. The
risk management 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, structural and transactional foreign exchange risk, and
interest rate risk in the banking book.
For further details, refer to our Pillar 3 Disclosures at 31
December 2022.
Treasury Risk Management
Key developments in 2022
-- Our CET1 ratio decreased from 15.3% at 31 December 2021 to
13.5% at 31 December 2022. This included a 1.7 percentage point
decrease due to new regulatory requirements.
-- The Group Board approved a new IRRBB strategy in September,
with the objective of increasing our stabilisation of NII with
consideration given to any capital or other constraints, and then
adopting a managed approach based on interest rates and outlook. We
intend to adopt a similar approach in HSBC UK.
-- We took steps to reduce the duration risk of our Treasury
hold-to-collect-and-sell portfolio, which is accounted for at FVOCI
primarily to reduce the capital impact from rising interest rates.
This risk reduction lowered the hold-to-collect-and-sell stressed
value at risk ('SVaR') exposure of this portfolio from GBP555m at
the end of 2021 to GBP507m at the end of 2022.
-- We implemented a new hold-to-collect business model to better
reflect our management strategy to stabilise NII. This portfolio of
HQLA will continue to form a part of our liquid asset buffer going
forward, as well as being a hedge to our structural interest rate
risk.
-- We enhanced the monitoring and forecasting of our capital
positions as a result of the Russia-Ukraine war, although there
were no material capital or liquidity direct impacts from the
increased uncertainty on the forward economic outlook. There was
also limited direct impact on our pension plan, as it had limited
direct investments in Russia or Ukraine.
-- We contributed towards the Group's inaugural resolvability
self-assessment to meet the Bank of England requirements, which
came into effect on 1 January 2022. This was incorporated into the
Bank of England publication of their findings from the first
assessment of the resolvability of the eight major UK firms as part
of the Resolvability Assessment Framework.
-- During the periods of high market volatility and turbulence
in the UK gilt market, we enhanced the monitoring of our pension
plan.The trustee funding level remained stable through the market
volatility as a result of its proactive pension scheme management,
low risk investment strategy and limited leverage in its liability
funds.
-- Inflationary pressures have also impacted the pension plan in
several ways, including investment strategy, actuarial factors,
pension indexation and members' behaviours. We have worked with
Performance & Reward and the trustee of the pension plan to
ensure the impact to the plan and members is understood and
monitored. Refinements were made to the inflation hedging strategy
to ensure it continues to be effective in the current high
inflation environment.
Governance and structure
The Chief Risk Officer is the accountable risk steward, and the
Chief Financial Officer is the risk owner, for all treasury
risks.
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 ALCO, overseen by Treasury Risk Management and the
HSBC UK Risk Management Meeting.
Pension risk is overseen by a pension risk management meeting,
chaired by the accountable risk steward.
Capital, liquidity and funding risk management
Assessment and risk appetite
Our capital management is supported by a capital management
framework. The framework incorporates key capital risk appetites
including CET1, total capital, MREL, and leverage ratio.
Our ICAAP is an assessment of our 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, structural foreign exchange,
interest rate risk in the banking book and group risk. Climate risk
is also considered as part of the ICAAP, and we are continuing to
develop our approach. The ICAAP supports the determination of our
capital risk appetite and target ratios, as well as enables the
assessment and determination of capital requirements by the
PRA.
We aim to ensure that management has oversight of our liquidity
and funding risks through robust governance, in line with our risk
management framework. We manage liquidity and funding risk in
accordance with globally consistent policies, procedures and
reporting standards.
Group policies require us to meet internal minimum requirements
and any applicable regulatory requirements at all times. These
requirements are assessed through our ILAAP, which ensures that we
have robust strategies, policies, processes and systems for the
identification, measurement, management and monitoring of liquidity
risk over an appropriate set of time horizons, including intra-day.
The ILAAP informs the setting of our risk tolerance and risk
appetite. It also assesses the capability to manage liquidity and
funding effectively.
The ICAAP and ILAAP are approved by the HSBC UK board and
subject to robust review and challenge by the Group to ensure
consistency of approach and application of the Group's policies and
controls.
Planning and performance
Capital and RWA plans form part of the annual financial resource
plan that is approved by the Board. Capital and RWA forecasts are
produced 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 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 also 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. In addition, we use a wider set of measures to
manage an appropriate funding and liquidity profile, including
wholesale funding 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, particularly those related to
the UK's implementation of the outstanding measures to be
implemented from the Basel III reforms ('Basel 3.1').
Regulatory developments
Our capital adequacy ratios have been affected by regulatory
developments in 2022, including changes to IRB modelling
requirements and the UK's implementation of the revisions to the
CRR II. The PRA's final rules on NSFR were implemented and have
been reflected in disclosures since the first quarter of 2022.
Further details can be found in the 'Regulatory developments'
section of the HSBC UK's Pillar 3 Disclosures at 31 December
2022.
Regulatory reporting processes and controls
The quality of regulatory reporting remains a key priority for
management and regulators. We are progressing with a comprehensive
programme to strengthen our processes, improve consistency and
enhance controls across our prudential regulatory reporting. We
commissioned a number of independent external reviews, some at the
request of our regulators, including one on our credit risk RWA
reporting process, which concluded in December 2022. These reviews
have so far resulted in enhancements to our RWAs and the LCR
through improvements in reporting accuracy, which have been
reflected in our year-end regulatory reported ratios. Our
prudential regulatory reporting programme is being phased over a
number of years, prioritising RWA, capital and liquidity reporting
in the early stages of the programme. While this programme
continues, there may be further impacts on some of our regulatory
ratios, such as the CET1, LCR and NSFR, as we implement recommended
changes and continue to enhance our controls across the
process.
Stress testing and recovery planning
We use stress testing to inform management of the capital and
liquidity needed to withstand internal and external shocks,
including a global economic downturn. Stress testing results are
also used to inform risk mitigation actions, allocation of
financial resources, and recovery and resolution planning, as well
as 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 by the Bank of England. The results
of regulatory stress testing and our internal stress tests are used
when assessing our internal capital and liquidity requirements
through the ICAAP and ILAAP. The outcomes of stress testing
exercises carried out by the Bank of England feed into the setting
of regulatory minimum ratios and buffers.
We maintain a recovery plan which sets out potential options
management could take in a range of stress scenarios that could
result in a breach of capital or liquidity buffers. The recovery
plan sets out the framework and governance arrangements to support
restoring HSBC UK to a stable and viable position, and so lowering
the probability of failure from either idiosyncratic
company-specific stress or systemic market-wide issues. Our
recovery plan provides 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 we can stabilise our
financial position and recover from financial losses in a stress
environment.
We also have capabilities, resources and arrangements in place
to address the unlikely event that we might not be recoverable and
would therefore need to be resolved by the Bank of England. We
contributed to the Group's inaugural resolvability assessment
framework ('RAF') self-assessment during 2021 to meet the Bank of
England's requirements, which came into effect on 1 January
2022.
Overall, our recovery and resolution planning helps safeguard
our financial and operational stability. The Group is committed to
further developing its recovery and resolution capabilities,
including in relation to the BoE's resolvability assessment
framework.
Measurement of interest rate risk in the banking book
processes
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse
impact to earnings or capital due to changes in market interest
rates. It is generated by our non-traded assets and liabilities,
specifically loans, deposits and financial instruments that are not
held for trading intent or held to hedge positions held with
trading intent. Interest rate risk that can be economically hedged
may be transferred to the Markets Treasury business. Hedging is
generally executed through interest rate derivatives or fixed-rate
government bonds. Any interest rate risk that Markets Treasury
cannot economically hedge is not transferred and will remain within
the global business where the risks originate.
The Treasury function uses a number of measures to monitor and
control interest rate risk in the banking book, including:
-- Net Interest Income sensitivity;
-- Economic Value of Equity sensitivity; and
-- Non-Trading Value at Risk.
Net interest income sensitivity
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected NII under varying
interest rate scenarios (i.e. simulation modelling), where all
other economic variables are held constant. This monitoring is
undertaken at an entity level, where HSBC UK calculates both
one-year and five-year NII sensitivities across a range of interest
rate scenarios.
NII sensitivity figures represent the effect of pro forma
movements in projected yield curves based on a static balance sheet
size and structure. The exception to this is where the size of the
balances or repricing is deemed interest rate sensitive, for
example, early prepayment of mortgages. These sensitivity
calculations do not incorporate actions that would be taken by
Markets Treasury or in the business that originates the risk to
mitigate the effect of interest rate movements.
The NII sensitivity calculations assume that interest rates of
all maturities move by the same amount in the 'up-shock' scenario.
The sensitivity calculations in the 'down-shock' scenarios reflect
no floors to the shocked market rates. However, customer
product-specific interest rate floors are recognised where
applicable.
Economic value of equity sensitivity
EVE represents the present value of the future banking book cash
flows that could be distributed to equity holders under a managed
run-off scenario. This equates to the current book value of equity
plus the present value of future NII in this scenario. EVE can be
used to assess the economic capital required to support interest
rate risk in the banking book. An EVE sensitivity represents the
expected movement in EVE due to pre-specified interest rate shocks,
where all other economic variables are held constant. Operating
entities are required to monitor EVE sensitivities as a percentage
of capital resources.
Further details of HSBC UK's risk management of interest rate
risk in the banking book can be found in the HSBC UK's Pillar 3
Disclosures as at December 2022.
Non-trading Value at Risk
Non-trading portfolios comprise positions that primarily arise
from the interest rate management of our retail and commercial
banking assets and liabilities, financial investments measured
at fair value through other comprehensive income, debt instruments
measured at amortised cost, and exposures arising from our
insurance operations.
The following table summarises the main risk types where
non-trading market risks reside, and the market risk measures used
to monitor and limit exposures.
Non-Trading risk
* Interest rates
* Credit spreads
Value at risk | Sensitivity
| Stress testing
Value at Risk of the non-trading portfolios
(Audited)
Non-trading VaR includes the interest rate risk in the banking
book transferred to and managed by Markets Treasury and the
exposures generated by the portfolio of high-quality liquid assets
held by Markets Treasury to meet liquidity requirements.
The non-trading VaR increased materially during 2022 from
GBP24.3m to end the year at GBP42.5m and was predominately driven
by interest rate risk. The steady increase in market volatility led
to an increase in the VaR, despite reductions in outright positions
reaching an average level of ca. GBP40m in August. September saw a
further increase in VaR due to a recalibration of the model with
the VaR peaking for the year. The volatile market conditions driven
by continued geopolitical events, change in the UK fiscal stance
and concerns over high inflation led the Markets Treasury business
to materially reduce the outright interest rate risk sensitivity
and VaR fell in line back to average levels.
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 HSBC UK's non-trading VaR for the year is shown in the table
below.
Non-trading VaR, 99% 1 day
(Audited)
Credit Interest Portfolio
spread Rates Diversifi-cation(1) Total(2)
GBPm GBPm GBPm GBPm
Balance at
31 Dec 2022 1.4 42.1 (1.0) 42.5
------------------ ---------------- -------------------- ----------------
Average 1.4 38.2 (0.9) 38.7
------------------ ---------------- -------------------- ----------------
Maximum 2.1 83.4 84.3
------------------ ---------------- -------------------- ----------------
Minimum 0.9 24.5 24.3
------------------ ---------------- -------------------- ----------------
Balance at
31 Dec 2021 1.9 24.5 (2.1) 24.3
------------------- ----------------- ------------------- -----------------
Average 1.8 26.7 (1.2) 27.3
------------------- ----------------- ------------------- -----------------
Maximum 2.6 34.1 35.6
------------------- ----------------- ------------------- -----------------
Minimum 1.5 16.6 16.6
------------------- ----------------- ------------------- -----------------
1 Portfolio diversification is the market risk dispersion effect
of holding a portfolio containing different risk types. It
represents the reduction in unsystematic market risk that occurs
when combining a number of different risk types, for example,
interest rate and credit risk together in one portfolio. It is
measured as the difference between the sum of the VaR by individual
risk type and the combined total VaR. A negative number represents
the benefit of portfolio diversification. As the maximum occurs on
different days for different risk types, it is not meaningful to
calculate a portfolio diversification benefit for this measure.
2 The total VaR is non-additive across risk types due to diversification effects.
Other risks
Non-trading book foreign exchange exposures
Structural foreign exchange exposures
Structural foreign exchange exposures arise from net assets or
capital investments in foreign operations, together with any
associated hedging. A foreign operation is defined as a subsidiary,
associate, joint arrangement or branch where the activities are
conducted in a currency other than that of the reporting entity. An
entity's functional reporting currency is normally that of the
primary economic environment in which the entity operates. HSBC UK
does not have any net assets or capital investments in foreign
operations.
Transactional foreign exchange exposures
Transactional foreign exchange risk arises primarily from
day-to-day transactions in the banking book generating profit and
loss or FVOCI reserves in a currency other than our reporting
currency. Transactional foreign exchange exposure generated through
profit and loss is periodically transferred to Markets and
Securities Services and managed within limits with the exception of
limited residual foreign exchange exposure arising from timing
differences or for other reasons. Transactional foreign exchange
exposure generated through OCI reserves is managed by the Markets
Treasury business within agreed appetite.
Pension risk management process
In the UK, all future pension benefits are provided on a defined
contribution basis. A defined benefit pension plan remains in
respect of past service. The defined benefit pension plan is
sectionalised to ensure no entities outside the ring-fence
participate in the same section as HSBC UK. In the defined
contribution pension plan, the contributions that HSBC UK is
required to make are known, while the ultimate pension benefit will
vary, typically with investment returns achieved by investment
choices made by the employee. While the market risk to HSBC UK of
the defined contribution plan is low, the bank is still exposed to
operational and reputational risk.
In the defined benefit pension plan, the level of pension
benefit is known. Therefore, the level of contributions required by
HSBC UK will vary due to a number of risks, including:
-- investments delivering a return below that required to provide the projected plan benefits;
-- the prevailing economic environment leading to corporate
failures, thus triggering write-downs in asset values (both equity
and debt);
-- a change in either interest rates or inflation, causing an
increase in the value of the plan liabilities; and
-- plan members living longer than expected (known as longevity risk).
Pension risk is assessed using an economic capital model that
takes into account potential variations in these factors. The
impact of these variations on both pension assets and pension
liabilities is assessed using a one-in-200-year stress test.
Scenario analysis and other stress tests are also used to support
pension risk management.
To fund the benefits associated with HSBC UK's defined benefit
plan, HSBC UK make contributions in accordance with advice from
actuaries and in consultation with the plan's trustees where
relevant. Contributions are required when the plan's assets are
considered insufficient to cover the existing pension liabilities.
Contributions are typically revised once every three years.
The defined benefit plan invests contributions in a range of
investments designed to limit the risk of assets failing to meet
the plan's liabilities. Any changes in expected returns from the
investments may also change future contribution requirements. In
pursuit of these long-term objectives, an overall target allocation
is established for asset classes of the defined benefit plan. Bonds
and derivatives are allocated to match expected benefit outflows so
as to reduce interest, inflation and currency risk. Each permitted
asset class has its own benchmarks, such as property valuation
indices or liability characteristics. The benchmarks are reviewed
on a manager by manager basis at least once every three to five
years and more frequently if required by circumstances. The process
takes account of changes in the plan's liabilities. The most
significant benchmark is the interest rate and inflation hedging
programme and this was last reviewed during 2022. The assets are
invested in a diverse range of assets to reduce any concentrations
of risk.
In addition, the defined benefit plan holds longevity swap
contracts. These arrangements provide long term protection to the
defined benefit plan against costs resulting from pensioners or
their dependants living longer than initially expected and as
at
31 December 2022 cover approximately 60% of the pensioner
liabilities.
Capital Risk in 2022
Capital overview
Capital adequacy metrics(1)
At 31 Dec
2022 2021
-----------------
Available capital (GBPm)
-----------------
Common equity tier 1
capital 12,519 12,813
----------------- ------------------
Tier 1 capital 14,771 15,067
----------------- ------------------
Total regulatory capital 17,847 18,067
----------------- ------------------
Risk-weighted assets
(GBPm)
----------------- ------------------
Credit risk 80,740 72,817
----------------- ------------------
Counterparty credit risk 204 129
----------------- ------------------
Market risk 101 170
----------------- ------------------
Operational risk 11,368 10,607
----------------- ------------------
Total risk-weighted
assets 92,413 83,723
----------------- ------------------
Capital ratios (%)
----------------- ------------------
Common equity tier 1 13.5 15.3
----------------- ------------------
Total tier 1 16.0 18.0
----------------- ------------------
Total capital 19.3 21.6
----------------- ------------------
Leverage ratio
Total leverage ratio
exposure measure (GBPm) 251,500 358,221
----------------- ------------------
Leverage ratio (%) 5.9 4.2
----------------- ------------------
1 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'.Prior period leverage ratios are reported on the basis
of the disclosure rules in force at that time and include claims on
central banks. Current period leverage metrics exclude central bank
claims in accordance with the UK leverage rules hat were
implemented on-1 January 2022.
References to EU regulations and directives (including technical
standards) should, as applicable, be read as references to the UK's
version of such regulation or directive, as onshored into UK law
under the EU (Withdrawal) Act 2018, and as may be subsequently
amended under UK law.
Capital figures and ratios in the previous table are calculated
in accordance with the CRR II. Where applicable, they also reflect
government relief schemes intended to mitigate the impact of the
Covid-19 pandemic.
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, including in the end point figures.
Without their application, our CET1 ratio would be 13.5%. 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 ECL in the non-credit-impaired book thereafter.
Any add-back must be tax affected and accompanied by a
recalculation of capital deduction thresholds, exposure and
RWAs.
The impact is calculated separately for portfolios using the STD
and IRB approaches. For IRB portfolios, there is no add-back to
capital unless loan loss allowances exceed regulatory 12-month
expected losses.
The EU's CRR 'Quick Fix' relief package increased the 2022
scalar relief that banks may take for loan loss allowances
recognised since 1 January 2020 on the non-credit-impaired book
from 25% to 75%.
In the current period, the add-back to the capital base amounted
to GBP35m under the STD approach. At 31 December 2021, the add-back
to the capital base was GBP16m under the STD approach.
Own funds
CET1 ratio decreased to 13.5% from 15.3% at December 2021. We
had built up capital in anticipation of regulatory changes which
reduced our CET1 ratio by 1.7%, due to an increase in RWAs from
revised IRB modelling requirements and a 10% floor on mortgage risk
weights (1.2%), and a decrease in CET1 capital due to the reversal
of the beneficial treatment of software assets (0.5%). During the
year, we generated capital from profits net of dividends which was
offset by a decrease in FVOCI reserves and RWA growth.
At 31 December 2022 our Pillar 2A requirement, in accordance
with the PRA's Individual Capital Requirement based on a
point-in-time assessment, is 3.97% of RWAs, of which 2.23% was met
by CET1 capital. Throughout 2022, we complied with the PRA's
regulatory capital adequacy requirements.
Own funds disclosure
(Audited) At
31 Dec 31 Dec
2022 2021
Ref* GBPm GBPm
CET1 capital: instruments and reserves
---- ----------------------------
Capital instruments and the related share premium
1 accounts 9,015 9,015
--------------------------- ----------------------------
- ordinary shares 9,015 9,015
----
2 Retained earnings 12,078 11,463
--------------------------- ----------------------------
3 Accumulated other comprehensive income (and other (2,556) (544)
reserves)
5a Independently reviewed interim net profits net of 896 1,125
any foreseeable charge or dividend
--------------------------- ----------------------------
6 CET1 capital before regulatory adjustments 19,433 21,059
28 Total regulatory adjustments to common equity tier (6,914) (8,246)
1
--------------------------- ----------------------------
29 CET1 capital 12,519 12,813
36 Additional tier 1 capital before regulatory 2,252 2,254
adjustments
44 Additional tier 1 capital 2,252 2,254
--------------------------- ----------------------------
45 Tier 1 Capital (T1 = CET1 + AT1) 14,771 15,067
51 Tier 2 capital before regulatory adjustments 3,076 3,000
58 Tier 2 capital 3,076 3,000
--------------------------- ----------------------------
59 Total capital 17,847 18,067
--------------------------- ----------------------------
* The references identify the lines prescribed in the EBA
template, which are applicable and where there is a value.
Risk-weighted assets
RWA movement by business by key driver
Credit risk, counterparty
credit risk and operational
risk
Corporate Market Total
WPB CMB GBM Centre risk RWAs
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- -------------------- ------------------------ ------------------------------- ------------------
RWAs at 1
Jan 2022 24,705 56,918 367 1,563 170 83,723
Asset size 609 3,831 140 703 (69) 5,214
---------------------- -------------------- ------------------------ ------------------------------- ------------------------
Asset
quality (432) (2,402) - 90 - (2,744)
Methodology
and policy 8,071 (1,280) 1 (572) - 6,220
---------------------- -------------------- ------------------------ ------------------------------- ------------------------
- internal
updates (34) (920) 1 (82) - (1,035)
- external
updates -
regulatory 8,105 (360) - (490) - 7,255
Total RWA
movement 8,248 149 141 221 (69) 8,690
---------------------- -------------------- ------------------------ ------------------------------- ------------------------
RWAs at 31
Dec 2022 32,953 57,067 508 1,784 101 92,413
---------------------- -------------------- ------------------------ ------------------------------- ------------------------
.
RWAs increased by GBP8.7bn during the year mainly from
regulatory changes of GBP7.3bn and lending growth of GBP5.2bn,
partially offset by reductions due to movements in asset quality
GBP2.7bn.
Methodology and policy
Regulatory changes caused a GBP8.1bn RWA increase in WPB due to
revised IRB modelling requirements, the UK's implementation of CRR
II rules and the 10% floor on mortgage risk weights. This increase
was partly offset by the reversal of the beneficial changes to the
treatment of software assets in Corporate Centre, and a reduction
in CMB due to IRB modelling.
CMB RWAs decreased by GBP0.9bn due to risk parameter refinements
and data quality improvements that was partially offset by an
increase on account of reporting process and control enhancements
as a result of independent external regulatory reviews.
Asset size
CMB corporate loan growth increased RWAs by GBP3.8bn, increased
mortgage lending contributed most of the GBP0.6bn increase in WPB
and an increase in lending to other HSBC Group entities caused
Corporate Centre RWAs to increase by GBP0.7bn.
Asset quality
Asset quality changes led to a GBP2.7bn fall in RWAs mainly in
CMB and WPB due to credit migrations and changes in the underlying
portfolio mix. .
Leverage ratio
Our leverage ratio, calculated in accordance with the PRA's UK
leverage framework implemented on 1 January 2022 (excluding the
central bank claims), was 5.9% at 31 December 2022. The equivalent
leverage ratio at December 2021 was 6.3%. The decrease is driven by
growth in the balance sheet and decline in the FVOCI reserve and
reversal of the beneficial treatment of software assets in Tier 1
capital.
The leverage ratio reported at 31 December 2021 was 4.2%, based
on the disclosure rules in force at that time. The 1.7% increase
was primarily due to the exclusion of central bank claims following
the implementation of the UK leverage ratio framework from
1 January 2022.
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 2022 is published on HSBC Group's website, www.hsbc.com,
under 'Investors'.
Liquidity and funding risk in 2022
Liquidity metrics
During 2022, we were above regulatory minimum levels. We
maintain sufficient unencumbered liquid assets to comply with
regulatory requirements. The average liquidity value of these
liquid assets is shown in the table below along with the LCR level
on a EC basis.
We maintain sufficient stable funding relative to the required
stable funding assessed using the NSFR.
Our liquidity and funding position for 2022 is analysed in the
following sections. The LCR and NSFR ratios presented in the below
table are based on average values. The LCR is the average of the
preceding 12 months and NSFR is the average of preceding four
quarters. Prior period numbers have also been restated for
consistency.
HSBC UK liquidity group(1)
Average for
2022 2021
LCR (%) 226 222
HQLA (GBPm) 110,722 103,943
Net outflows (GBPm) 48,946 46,807
NSFR (%) 164 176
1 HSBC UK liquidity group comprises: HSBC UK Bank plc, Marks and
Spencer Financial Services plc, HSBC Trust Company (UK) Limited and
HSBC Private Bank (UK) Limited. It is managed as a single operating
entity, in line with the application of UK liquidity regulation as
agreed with the PRA.
At 31 December 2022, HSBC UK's LCR was above regulatory minimum.
2022 average LCR has marginally increased by 4% as compared to
2021, retaining a strong liquidity position and reflecting stable
commercial surplus during the year.
Liquid assets
We had an average total of GBP110,722m of highly liquid
unencumbered LCR eligible liquid assets (2021 Average: GBP103,943m)
held in a range of asset classes and currencies. Of these, 99% were
eligible as level 1 (Average 2021: 99%).
The below tables reflects the composition of the average
liquidity pool by asset type and currency for 2022 and 2021:
Liquidity Level Level
pool Cash 1 2
GBPm GBPm GBPm GBPm
--------------------------- ------------ ------------ --------------
Cash and balance
at central bank 97,199 97,199 - -
--------------------------- ------------ ------------ --------------
Central and local
government bonds 11,417 - 10,850 567
--------------------------- ------------ ------------ --------------
Regional government
PSE 218 - 218 -
--------------------------- ------------ ------------ --------------
International organisation
and MDBs 957 - 957 -
--------------------------- ------------ ------------ --------------
Covered bonds 930 - 261 669
--------------------------- ------------ ------------ --------------
Other 1 - - 1
--------------------------- ------------ ------------ --------------
Average Total
for 2022 110,722 97,199 12,286 1,237
--------------------------- ------------ ------------ --------------
Average Total for
2021 103,943 93,783 9,523 637
--------------------------- ------------------ ------------ ------------ --------------
GBP $ EUR Other Total
GBPm GBPm GBPm GBPm GBPm
Average Liquidity
Pool for 2022 103,757 4,453 1,341 1,171 110,722
Average Liquidity
Pool for 2021 97,012 4,732 1,341 858 103,943
Sources of funding
Our primary sources of funding are customer current accounts and
customer savings deposits payable on demand or at short notice. The
following 'Funding sources and uses' table provides a consolidated
view of how our balance sheet is funded, and should be read in
light of the LFRF, which requires we manage liquidity and funding
risk on a stand-alone basis.
The table analyses our consolidated balance sheet according to
the assets that primarily arise from operating activities and the
sources of funding primarily supporting these activities. In 2022,
the level of customer accounts exceeded the level of loans and
advances to customers. The positive funding gap was predominantly
deployed in liquid assets, cash and balances with central banks and
financial investments, as required by the LFRF.
Funding Sources Funding Uses
(Audited) 2022 2021 (Audited) 2022 2021
GBPm GBPm GBPm GBPm
------------------
Sources Uses
Loans and
advances to
Customer accounts 281,095 281,870 customers 204,143 195,526
------------------ ---------------- ------------------
Loans and
advances to
Deposits by banks 10,721 11,180 banks 6,357 1,914
------------------ ---------------- ------------------
Reverse
Repurchase repurchase
agreements agreements
- non-trading 9,333 10,438 - non-trading 7,406 7,988
------------------ ---------------- ------------------
Debt securities
in issue 1,299 900
Cash collateral, Cash collateral,
margin margin
and settlement and settlement
accounts 315 2 accounts 231 294
Subordinated Financial
liabilities 12,349 12,487 investments 16,092 14,377
Cash and
balances with
Total equity 22,226 23,805 Central banks 94,407 112,478
Other balance
sheet Other balance
liabilities 5,103 5,381 sheet assets 13,805 13,486
------------------ ---------------- ------------------
At 31 Dec 342,441 346,063 At 31 Dec 342,441 346,063
------------------ ---------------- ------------------
Market risk
Overview
Market risk is the risk of adverse financial impact on trading
activities arising from changes in market parameters such as
interest rates and foreign exchange rates.
Market risk management
Key developments in 2022
There were no material changes to our policies and practices for
the management of market risk in 2022.
Market risk governance
(Audited)
The following table summarises the market risk measures used to
monitor and limit exposures within HSBC UK. Trading portfolio
market risk exposures within the entity are not material, primarily
because customer facing trades within Markets business are hedged
on a one for one basis and trading book within Markets Treasury
business is limited to short dated cash management.
Trading risk
* Foreign exchange
* Interest rates
VaR | Sensitivity | Stress
testing
Market risk is managed and controlled through limits approved by
the Group Chief Risk Officer for HSBC Holdings plc. These limits
are allocated across business lines and to the Group's legal
entities, including HSBC UK. The level of limits set is based on
the overall risk appetite for HSBC UK being cascaded down to the
individual entities and the limits required for the individual
desks to be able to execute their stated business strategy under
the HSBC UK ring-fencing Exceptions Policy. The market risk limits
are endorsed by HSBC UK Risk Management Meeting. HSBC UK 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. The Traded Risk
function enforces the controls around trading in permissible
instruments approved for HSBC UK as well as following completion of
the new product approval process.
Key Risk Management processes
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with HSBC UK strategy
and risk appetite as well as operating within the HSBC Group's risk
appetite for the entity. We use a range of tools to monitor and
limit market risk exposures including sensitivity analysis, VaR,
and stress testing.
VaR is a technique that estimates the potential losses on market
risk positions as a result of movements in market rates and prices
over a specified time horizon and to a given level of confidence.
The use of VaR is integrated into market risk management and is
calculated for all trading positions. HSBC UK does not have a
market risk internal model approval and therefore, VaR is not used
for any regulatory return but only used for internal management
information.
Trading book VaR is not used for calculating capital
requirements arising from market risk within HSBC UK. Therefore
there is no back testing of trading book VaR.
Defined benefit pension scheme
Market risk also arises within HSBC UK's defined benefit pension
plan to the extent that the obligations of the plan are not fully
matched by assets
Climate risk
Overview
Climate risks have the potential to cause both financial and
non-financial impacts for HSBC UK. Financial impacts could
materialise, for example, through greater transactional losses
and/or increased capital requirements. 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 help achieve the HSBC Group's climate
ambition.
We remain aligned to the HSBC Group climate ambition to align
HSBC Group's own operations and supply chain to net zero by 2030.
The HSBC Group announced in March 2022 that it intends to publish a
climate transition plan in 2023, and committed to a science-aligned
phase-down of fossil fuel finance, and a review of its wider
financing and investment policies critical to achieving net zero by
2050. This follows the HSBC Group's thermal coal phase out policy,
which was announced in 2021. HSBC UK does not have material coal
financing exposures.
Key Developments in 2022
-- HSBC UK's risk appetite statement was approved by the HSBC UK
Board and includes the measures we intend to take to enable our
climate ambition and meet our commitments. In HSBC UK, our measures
are focused on the oversight and management of climate risks in the
WPB and CMB portfolios.
-- We completed the BoE's CBES assessment as part of our
regulatory commitments to the PRA, and have incorporated HSBC
specific recommendations into our ongoing approach. We also
completed an Internal Scenario Analysis exercise, with the outputs
of both exercises being used to further develop and enhance our
climate stress testing and scenario capabilities, and improve our
understanding of our risk exposures for use in risk management and
business decision making.
-- The CBES stress testing exercise helped us to understand the
impacts of transition risk in our residential mortgage book, as
well as energy efficiency of properties by using EPC ratings. We
have also embedded physical risk data into our mortgage risk
management activities, to be able to help identify 'at risk'
properties, which is primarily those at risk of flooding.
Governance and structure
The HSBC UK Board takes overall responsibility for our climate
strategy, overseeing executive management in developing the
approach, execution and associated reporting.
Our Chief Risk Officer is responsible for climate financial
risks under the UK Senior Managers Regime. The Chief Risk Officer
attends HSBC UK Board meetings and is a member of the Executive
Committee and, where appropriate, provides verbal or written
updates on climate risk.
The HSBC UK Risk Management Meeting and the HSBC UK Risk
Committee receive regular updates on our climate risk profile and
progress of our climate risk programme.
Key risk management processes
We are integrating climate risk into the policies, processes and
controls across many areas of our organisation, and we will
continue to update these as our climate risk management
capabilities mature over time. In 2022, we incorporated climate
considerations into our mortgage origination processes for our
retail business and new money request processes for our wholesale
business.
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 2022
The Operational and Resilience Risk sub-function seeks to
provide robust Risk Steward oversight of the management of risk by
our businesses, functions and legal entities. This includes
effective and timely independent challenge and the provision of
expert advice. During the year, we carried out a number of
initiatives to keep pace with geopolitical, regulatory and
technology changes and to strengthen the management of resilience
risk:
-- We updated our risk taxonomy and control libraries, and
refreshed risk and control assessments.
-- We implemented heightened monitoring and reporting of cyber,
third party, business continuity and payment/sanctions risks
resulting from the Russia-Ukraine war and enhanced controls and key
processes where needed.
-- We provided analysis and reporting of non-financial risks
providing easy to access risk and control information and metrics
that enabled management to focus on non-financial risks in their
decision making and appetite setting.
-- We aimed to further strengthen our non-financial risk
governance and improved our coverage and risk steward oversight of
data privacy and change execution.
Governance and structure
The Operational and Resilience Risk target operating model
provides a globally 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 nine sub-risk types related to:
failure to manage third parties; technology and cybersecurity;
transaction processing; failure to protect people and places from
physical malevolent acts; business interruption and incident risk;
data risk; change execution risk; building unavailability; and
workplace safety.
Performance against risk appetite and key escalations for
resilience risk are reported to the HSBC UK Risk Management Meeting
(chaired by the HSBC UK Chief Risk Officer) and further escalated
to the Non-Financial Risk Management Board (chaired by the Group
Chief Risk and Compliance Officer) as required, with a further
escalation path to the Group Risk Management Meeting and the Group
Risk Committee.
Key risk management process
Operational resilience is our ability to anticipate, prevent,
adapt, respond to, recover and learn from operational disruption
while minimising customer and market impact. Resilience is
determined by assessing whether we are able to continue to provide
our most important services, within an agreed level. This is
achieved via day-to-day oversight, periodic and ongoing assurance,
such as deep dive review and controls testing, which may result in
challenges being raised to the business by Risk Stewards. Further
challenge is also raised in the form of quarterly Risk Steward
opinion papers to formal governance. We accept we will not be able
to prevent all disruption but we prioritise investment to
continually improve the response and recovery strategies for our
most important business services.
Business operations continuity
We continue to monitor the situation in Russia and Ukraine, and
remain ready to take measures to help ensure business continuity,
should the situation require. There has been no significant impact
to our services in nearby markets where we operate. Publications
from the UK Government, EU Commission and the National Grid,
amongst others, advised on potential plans for power cuts and
energy restrictions across the UK and Continental Europe during the
winter period. In light of potential disruption, businesses and
functions in these markets are reviewing existing plans and
responses to minimise the impact.
Regulatory compliance risk
Overview
Regulatory compliance risk is the risk associated with breaching
our duty to clients and other counterparties, inappropriate market
conduct and breaching related financial services regulatory
standards. Regulatory compliance risk arises from the failure to
observe relevant laws, codes, rules and regulations and can
manifest itself in poor market or customer outcomes and lead to
fines, penalties and reputational damage to our business.
Regulatory compliance risk management
Key developments in 2022
The structure of HSBC UK's Compliance function is largely
unchanged over the prior year and in 2022, we have continued to
embed the structural changes from last year integrating regulatory
compliance and financial crime risk management under the HSBC UK
Chief Compliance Officer.
The implementation of our purpose-led conduct approach concluded
and is now considered 'business as usual'. Further work on
embedding Conduct principles in tandem with implementation of
Consumer Duty requirements will continue in 2023. The mapping of
regulations to our risks and controls continued and will continue
throughout 2023 alongside new tooling to support enterprise-wide
horizon scanning of new regulatory obligations and regulatory
reporting inventories. We have sought to integrate climate risk
into regulatory compliance policies and processes, with
enhancements made to the Product Governance Framework and Controls
in order to help ensure the effective consideration of Climate and
in particular Greenwashing risks.
Regulatory developments
Financial service providers continue to operate to stringent
regulatory and supervisory requirements, particularly in the areas
of capital and liquidity management, conduct of business, financial
crime, internal control frameworks, the use of models and the
integrity of financial services delivery.
Within this intense regulatory agenda, there continues to be
ongoing focus by regulators to improve outcomes for banks'
consumers, particularly vulnerable ones, as well as in markets. The
following are areas of particular focus:
-- Higher levels of consumer protection in retail financial
markets, with publication of the final policy on Consumer Duty by
the FCA.
-- Improving the ring-fencing regime in order to better serve
customers and address future risks.
-- Measures contained in the Financial Services and Markets Bill
intended to address issues arising from the UK's departure from the
EU.
-- A number of significant initiatives being carried out by
government and regulators intended to open up competition,
innovation and access to payments and further support customer
protections.
-- Improving the approach to managing AML risk between member
firms of the Banking Framework Agreement and the Post Office.
-- Ensuring fair treatment of vulnerable customers, including those in financial difficulties.
-- Improving diversity and inclusion across all banks' activities.
-- Climate-related financial disclosures.
The competitive landscape in which HSBC UK operates may be
impacted by future regulatory changes and government
intervention.
We continue to engage in the development of new and amended
regulations in the UK to ensure that the implications have been
fully considered by regulators and the wider industry. We also
continue to work with the UK authorities and regulatory bodies to
discuss any impacts on customers and markets.
Conduct of business
At HSBC UK 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. As part of this we have carried out a
number of activities during 2022:
-- We understood and serviced our customer's ongoing needs and
continued to champion a strong conduct and customer-focused
culture.
-- We demonstrated this through our risk steward leadership of
the Consumer Duty Programme. Closely linked to our conduct agenda,
the first phase of the Duty will be delivered in July 2023 and has
been designed to help ensure good outcomes for our customers across
all retail products and services.
-- We improved our digital capabilities by helping to develop
and promote early adoption of the Global Conduct MI tool, which
will help enable us to demonstrate the effective management of our
non-financial and conduct risks.
-- We integrated the PLCA through the completion of
business-line and functional applicability assessments, helping to
ensure that our HSBC UK implementation plan was robust and of
sufficient quality to influence the necessary change.
-- In April we launched our 'Conduct Knowledge Centre', a
one-stop shop of tools and guidance for both the first and second
lines of business on their conduct responsibilities.
-- Outside of the requirements of the PLCA, we developed the
visibility of conduct risks for DBS, focusing on control
management. This will enable DBS to provide a richer picture in
terms of their Conduct Risk Profile.
-- We continued with the integration of climate risk into HSBC
UK's wider risk management approach, recognising the importance of
strengthened controls and oversight for our related activities.
-- We continued to embed conduct within our business line
processes and through our Non-Financial and Financial Risk Steward
activities.
-- We continued our focus on culture and behaviours as a driver of good conduct Outcomes.
-- We focused oversight on the effectiveness of HSBC UK Conduct
Governance, to promote visibility and read across of Conduct issues
in all business lines and the efficient, consistent escalation of
issues.
-- We delivered our latest annual global mandatory training
course on conduct to reinforce the importance of conduct for all
colleagues and delivered bespoke and focused conduct training and
guidance to all of our risk steward colleagues.
The Board continues to maintain oversight of conduct matters
through the Risk Committee.
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, fraud, bribery and corruption,
tax evasion, sanctions breaches, and terrorist and proliferation
financing. Financial crime risk arises from day-to-day banking
operations involving customers, third parties and employees.
Financial Crime Risk Management
Key developments in 2022
We continuously review the effectiveness of our financial crime
risk management framework, which includes consideration of the
complex and dynamic nature of sanctions compliance risk. In 2022,
we adapted our policies, procedures and controls to respond to the
unprecedented volume and diverse set of sanctions and trade
restrictions imposed against Russia following its war with
Ukraine.
We also continued to make progress with several key financial
crime risk management initiatives, including:
-- Following the successful delivery of our intelligence-led,
dynamic risk assessment for WPB in November 2021, deployment of
this tool for CMB followed in February 2022. 4Q22 saw the
introduction of credit card data into the DRA which enables it to
provide a more holistic view of our customers' behaviour.
Implementation of the DRA in HSBC UK has resulted in more
Suspicious Activity Reports filed compared to the previous
Transaction Monitoring system.
-- We have reconfigured our Transaction Screening capability in
readiness for the global change to payment systems formatting under
ISO20022 requirements, and enhanced transaction screening
capabilities by implementing automated alert discounting.
-- We continued to strengthen the first party lending fraud
framework, reviewed and published an updated fraud policy and
associated control library, while also continuing to invest in new
fraud detection technologies.
-- Enhancing our screening and non-screening controls to aid in
the identification of potential sanctions risk related to Russia,
as well as risk arising from export control restrictions.
-- A project was initiated to identify likely Money Mule
activity and intercept suspected payments in near 'real-time'
across both WPB and CMB.
Key risk management processes
We will not tolerate knowingly conducting business with
individuals or entities believed to be engaged in illicit activity.
We require everybody in HSBC UK to play their role in maintaining
effective systems and controls to prevent and detect financial
crime. Where we believe we have identified suspected illicit
activity or vulnerabilities in our control framework, we will take
appropriate mitigating action.
We manage financial crime risk because it is the right thing to
do to protect our customers, shareholders, staff, the communities
in which we operate, as well as the integrity of the financial
system on which we all rely. We operate in a highly regulated
industry in which these same policy goals are codified in law and
regulation. We are committed to complying with the laws and
regulations of all of the markets in which we operate, where we
apply a global minimum standard that seeks to promote the highest
standards. In cases where material differences exist between the
laws and regulations of these markets, our policy adopts the
highest standard while acknowledging the primacy of local law.
We continue to assess the effectiveness of our end-to-end
financial crime risk management framework, and invest in enhancing
our operational control capabilities and technology solutions to
deter and detect criminal activity. We have simplified our
framework by streamlining and de-duplicating policy requirements.
We also strengthened our financial crime risk taxonomy and control
libraries and our investigative and monitoring capabilities through
technology deployments. We developed more targeted metrics, and
have also enhanced our 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. In 2022, our
focus remained on measures to improve the overall effectiveness of
the global financial crime framework, notably by providing input
into legislative reform activities in the UK. We did this by
contributing to the development of responses to consultation papers
focused on how financial crime risk management frameworks can be
optimised to achieve more effective outcomes in detecting and
deterring illicit activity.
Independent Reviews
In August 2022, the Board of Governors of the Federal Reserve
System terminated the 2012 cease-and-desist order, with immediate
effect. The order was the final regulatory enforcement action that
HSBC entered into in 2012. In June 2021, the UK Financial Conduct
Authority ('FCA') had already determined that no further Skilled
Person work was required under section 166 of the Financial
Services and Markets Act.
The HSBC UK Risk Committee provides oversight of financial crime
risk matters on behalf of the HSBC UK Board, including matters
relating to anti-money laundering, sanctions, terrorist financing
and proliferation financing.
Model risk
Overview
Model risk is the risk of inappropriate or incorrect business
decisions arising from the use of models that have been
inadequately designed, implemented or used, or from models that do
not perform in line with expectations and predictions.
Model risk arises in both financial and non-financial contexts
whenever business decision making includes reliance on models.
Key developments in 2022
In 2022, we continued to make improvements in our model risk
management processes amid regulatory changes in model
requirements.
Initiatives during the year included:
-- In response to regulatory capital changes, we redeveloped,
validated and submitted to the PRA some of our internal
ratings-based ('IRB') models. These new models have been built to
enhanced standards using improved data as a result of investment in
processes and systems.
-- We welcomed the PRA Consultation Paper (CP6/22) 'Model Risk
Management principles for banks' published in June 2022 and
provided input to the HSBC response, sent to the PRA in October
2022, with its final version expected to be published in
mid-2023.
-- We made further enhancements to our control framework for our
models to address the control weaknesses that emerged as a result
of significant increases in adjustments and overlays that were
applied to compensate for the impact of the macroeconomic
volatility on models.
-- Our businesses and functions were more involved in the
development and management of models. They continued with an
enhanced focus on key model risk drivers such as data quality and
model methodology.
-- We delivered further training on model risk to front-line
teams to improve their awareness of model risk and their adherence
to the governance framework.
-- Working with the businesses and functions, Model Risk Control
Assessments were refreshed to ensure they continue to be a true
reflection of the Model Risk landscape.
-- We further embedded the model risk appetite measures, which
will help our businesses and functions manage model risk more
effectively.
-- We continued the transformation of the Model Risk Management
team, with further updates to the model validation processes,
including systems and process enhancements. We also made further
changes to the model inventory system to provide businesses and
functions with improved functionality and more detailed information
related to model risk.
Governance and structure
The HSBC UK Model Risk Committee is chaired by the Chief Risk
Officer and provides oversight of model risk. The committee
includes senior leaders and risk owners across the lines of
business, functions 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 judgmental scorecards
for a range of business applications. These activities include
customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
Responsibility for managing model risk is delegated from the RMM to
the HSBC UK Model Risk Committee, which is chaired by the Chief
Risk 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 risk
management information, risk appetite metrics and top and emerging
risks.
We regularly review the effectiveness of these processes,
including the model oversight forum structure, to help ensure
appropriate understanding and ownership of model risk is embedded
in the businesses and functions.
Corporate Governance Report
Corporate governance statement
The Company is committed to high standards of corporate
governance. As a subsidiary of HSBC Holdings plc which complies
with the provisions of the UK Corporate Governance Code, the
Company adopted the HSBC Group's Subsidiary Accountability
Framework ('SAF') in 2021. The SAF Principles set out HSBC Holdings
plc's high level expectations for corporate governance arrangements
in its subsidiaries. The Board considers the SAF to be sufficiently
comprehensive and robust and has, therefore, chosen not to adopt
another corporate governance code.
During the year ended 31 December 2022 and up to the date of
this report, the Company complied with the SAF and HSBC Group
policies, frameworks and procedures in addition to its relevant
legal and regulatory governance requirements, including the PRA
Rulebook for Ring-Fenced Bodies.
Role of the Board
The role of the Board of Directors is to provide entrepreneurial
leadership of the Company within a framework of prudent and
effective controls which enables risks to be assessed and managed.
The Board is collectively responsible for: the long-term success of
the Company and delivery of sustainable value to its shareholders;
setting and approving the Company's strategy, risk appetite
statement, and management's capital and operating plans to achieve
the strategic objectives.
The Board comprises a majority of independent non-executive
directors. The roles of the Chairman and CEO are separate; the
Chairman leads the Board and is responsible for its effectiveness:
and the CEO leads the day-to-day management of the Company and
execution of strategy.
During the year, the Board completed its annual Board
Effectiveness Review. The Board considered the outcome of this
review and endorsed actions to be undertaken to further optimise
and enhance governance. All enhancements suggested in the 2021
review were considered to have been completed.
In 2022 the Board held six routine meetings and an additional
three ad-hoc meetings to consider matters of a time sensitive
nature. The Board received information from management between
meetings and Directors have full access to all relevant information
on a timely basis, access to the advice of the company secretary
and are entitled to obtain independent external advice at the
Company's expense.
Details of the stakeholder engagement and management may be
found in 'Stakeholder engagement' on page 8.
Culture and values
Through its work, the Board supports the Company's purpose and
values outlined on page 5 of the Strategic report by ensuring that
the Company conducts its business in a way consistent with its
purpose and values, treating customers fairly and openly, doing
business with the right customers and in the right way, is a
responsible employer, acts responsibly towards the communities in
which it operates and considers its other stakeholders.
Board of Directors
All Directors are subject to annual re-election by the
shareholder at the Company's Annual General Meeting.
The Directors who served during the year ended 31 December 2022
and up to date of this report are shown below:
Dame Clara Furse
Chairman and Independent non-executive Director
Chairman of the Chairman's Nominations and Remuneration
Committee and Chairman
Appointed to the Board: April 2017
Clara is a non-executive director of Vodafone Group plc and
Assicurazioni Generali S.p.A. She is a member of the Panel of
Senior Advisors to Chatham House. In March 2021 she became Chair of
the UK Voluntary Carbon Markets Forum, establishing a group that
aims to operationalise a global, high integrity market for
voluntary carbon credits; an essential component of an accelerated
and economically productive transition to net zero. Former
appointments include: non-executive director of Amadeus IT Group
S.A.; external member of the Bank of England's Financial Policy
Committee; lead independent director of the UK's Department for
Work and Pensions; Chief Executive of the London Stock Exchange;
Group Chief Executive of Credit Lyonnais Rouse; member of the
Shanghai International Financial Advisory Council and non-executive
director of Euroclear plc, LCH Clearnet Group Ltd., Fortis SA,
Nomura Holdings and the Legal & General Group.
James Coyle
Independent non-executive Director
Chairman of the Audit Committee, Member of the Risk Committee
and Chairman's Nominations and Remuneration Committee
Appointed to the Board: May 2018
James is chairman of Marks & Spencer Unit Trust Management
Limited and a non-executive director of Marks and Spencer Financial
Services plc and chairman of HSBC Trust Company (UK) Limited. He is
also senior independent director and chairman of the Audit
Committee of Pollen Street PLC, and deputy chairman of the
Oversight Board and member of the Audit Governance Board of
Deloitte LLP. Former appointments include: chairman of the board
and chairman of the Audit and Risk Committee of World First UK
Limited; chairman of Supply@ME Capital PLC, chairman of the Audit
and Risk Committee of Scottish Water, member of Committees of the
Financial Reporting Council, Group Financial Controller for Lloyds
Banking Group; Group Chief Accountant of Bank of Scotland; member
of the Audit Committee of the British Bankers Association;
non-executive director of the Scottish Building Society; and a
non-executive director and chairman of the Audit Committee of
Vocalink plc.
David Lister
Independent non-executive Director
Member of the Risk Committee and from 15 January 2022, the Audit
Committee
Appointed to the Board: May 2018
David is a non-executive director and chairman of HSBC Private
Bank (UK) Limited, Marks and Spencer Financial Services plc and FDM
Group (Holdings) plc. He is also a director of The Caledonian Club
Trust Limited and a member of the board of governors at Nuffield
Health. His former appointments include: non-executive director of
Interxion Holding N.V., non-executive director of CIS General
Insurance Limited, Weatherbys Limited and the Department for Work
and Pensions; trustee of The Tech Partnership Limited; and Group
Chief Information Officer at each of National Grid, Royal Bank of
Scotland, Reuters and Boots.
John David Stuart (known as Ian Stuart)
Executive Director and Chief Executive Officer
Chairman of the Board's Executive Committee
Appointed to the Board: May 2017
Ian has been Chief Executive Officer and director of HSBC UK
Bank plc since May 2017 and is an Executive Committee member of
HSBC Holdings plc. He joined the HSBC Group as a Group General
Manager and Head of Commercial Banking Europe in 2014, having
previously led the corporate and banking businesses in Barclays and
Natwest. He started his career at the Bank of Scotland and has
worked in financial services for over four decades. Ian is also a
non-executive director of UK Finance Limited, a business ambassador
for Meningitis Now and a member of the Economic Crime Strategic
Board.
Mridul Hegde CB
Independent non-executive Director
Chair of the Risk Committee, Member of the Audit Committee and
the Chairman's Nominations and Remuneration Committee
Appointed to the Board: February 2018
Mridul is a member of Ernst & Young LLP Public Interest
Board and UK Audit Board. Mridul's former appointments include:
non-executive director of the UK Municipal Bonds Agency and member
of its Risk and Audit Committee; and senior roles at the Financial
Reporting Council and HM Treasury, where she was Director of
Financial Stability during the 2008 financial crisis and prior to
that, Director of Public Spending.
Philippe Leslie Van de Walle (known as Leslie
Van de Walle)
Independent non-executive Director
Member of the Chairman's Nominations and Remuneration Committee,
the Audit Committee and Member of the Risk Committee until 20 July
2022
Appointed to the Board: February 2018
Leslie is the non-executive chairman of Robert Walters plc and a
non-executive chairman of Greencore Group plc. His former
appointments include: non-executive and chairman of Euromoney
Institutional Investor plc, non-executive director and deputy
chairman of Crest Nicholson Holdings plc, senior independent
director and chairman of the Remuneration Committee of DCC plc, SIG
plc and Weener Plastic Packaging Group. In his executive career,
Leslie was the Group CEO of United Biscuits plc and Rexam plc; and
Executive Vice President Global Retail and Chairman, Europe of
Royal Dutch Shell plc.
Marie Claire Baird (known as Claire Baird)
Executive Director and Chief Financial Officer
Member of the Executive Committee
Appointed to the Board: 6 January 2022
Claire Baird was appointed Chief Financial Officer for HSBC UK
Bank plc in January 2022, in addition to her existing role as CFO
for Global Wealth and Personal Banking ('WPB'). Claire is a member
of the Global WPB, HSBC UK and Global Finance executive committees.
Prior to joining HSBC, Claire spent 18 years with RBS/NatWest
Group, most recently as finance director for Personal Banking,
Deputy CFO for Royal Bank of Scotland (RBS' Scottish banking
subsidiary) and as a non-executive director of Coutts & Co
(RBS' private bank). Previous roles include finance director for
Services & Functions, Head of Global Finance Services, and -
for Ulster Bank (RBS' Irish/Northern Irish subsidiaries), she was
Group Financial Controller and Head of Finance, Retail Banking.
Ekaterina Platonova (known as Kate Platonova)
Non-executive Director
Appointed to the Board: 19 October 2022
Kate was appointed Group Chief Data and Analytics Officer of
HSBC Group Management Services in March 2022. She joined HSBC in
2017 and has held the roles of; Chief Data Architect (2017-2019),
Chief Technical Domain Architect (2019-2020) and Chief Data and
Architecture Officer (2020-2022). Kate is responsible for the
effective use of data and technology to enable the business to
understand, anticipate and meet the needs of our customers. Prior
to joining HSBC in 2017, she held various technology roles in
Morgan Stanley, Barclays Capital and JPMorgan Chase. Kate's areas
of interest are cybersecurity, quantum computing and advancements
in Machine Learning and Artificial Intelligence.
Jenny Goldie-Scot
Independent non-executive Director
Member of the Risk Committee
Appointed to the Board: 19 July 2022
Jenny has spent the bulk of her career in investment banking
operations and finance in senior leadership roles at Morgan
Stanley, both in the UK and the US. She has had a specific focus on
system and process transformation and her last role was leading a
large digital transformation for Google LLC in California. Jenny
has previously served on the board of LCH Clearnet plc where she
was chair of the Nomination Committee.
Janet Henry
Non-executive Director
Appointed to the Board: 1 November 2022
Janet was appointed as HSBC's Global Chief Economist in August
2015 and is responsible for all HSBC's economic forecasts and
thematic economic research output globally. She is a Governor of
the UK's National Institute of Economic and Social Research and a
member of the World Economic Forum's Chief Economists Community.
Janet joined HSBC in 1996 in Hong Kong where she worked as an Asian
economist. She was previously HSBC's Chief European Economist. She
is also a director of 3 College Fields Management Company
Limited.
Other Directors that served during
the year
Rosemary Leith - Independent Non-executive Director. Resigned
from the Board on 16 February 2022
Company Secretary
Nicola Black:
Appointed: May 2017
Board activities during 2022
The Board's key areas of focus during 2022 were aligned to the
four pillars of the refreshed strategic plan. In overseeing
management's execution against these four pillars, the Board
considers whether the actions being taken will deliver improvements
in customer experience and support the ambition to transform the
bank into one that is truly customer-centric:
-- Focus on our Strengths - the Board considered the
transformation plans for Wealth Management, first direct and the
Branch Network. It also received regular updates on the bank's
implementation of the FCA's Consumer Duty.
-- Energise for growth - the Board reviewed management's
progress in activating hybrid working and how this would enhance
the bank's culture through the lenses of customer, colleagues and
conduct. It also considered plans to develop HSBC UK's Societal
Purpose.
-- Digitise at scale - the Board reviewed the changes that had
been made to enhance IT and Cloud governance, as well as
longer-term proposals to adopt the Cloud. Consideration was also
given to the bank's Fraud strategy and capabilities. The Board was
kept informed about the UK's plans for the financial services
industry's transformation of Wholesale Cash and Payments
arrangements.
-- Transition to net zero - the Board received an update on
progress being made against the bank's Climate Strategy and
Plan.
The Board routinely invites senior management from Risk,
Compliance and Legal to meetings to support the discharge of its
responsibilities. The non-executive Directors meet privately with
the CEO ahead of every Board meeting and hold an in-camera session
at the end of every meeting to consider the effectiveness of the
meeting, the papers and presentations.
The Board met nine times during 2022.
Board committees
The Board has established committees to assist it in discharging
its responsibilities. Each Board committee operates within Terms of
Reference approved by the Board that set out the scope of the
delegation and responsibilities, the membership and operation of
the committee and its reporting requirements to the Board. The
Chairs of the Board committees report to each Board meeting on
their activities.
During the year and up to the date of this report, the Board's
committees were as follows:
Audit Committee
Role
The Audit Committee has been delegated responsibility for
oversight of financial reporting related matters and internal
financial controls. All the members of the committee are
independent non-executive directors.
Committee activities during 2022
During the year, the committee reviewed and provided oversight
on: the HSBC UK group's financial reporting; the integrity of
financial statements and disclosures, and management's application
of key accounting policies and significant accounting judgements;
the transformation plans and cost management; the financial and
regulatory reporting control environment; financial performance;
liquidity, funding and capital adequacy monitoring; the Company's
Financial Resource Plan; the nature and scope of Internal Audit
reviews; the effectiveness of the internal financial reporting
control systems; the effectiveness of the Internal Audit function;
and the external audit process.
To support the discharge of its responsibilities, the committee
routinely invites senior management from Finance, Internal Audit
and the External Auditor to its meetings. The committee also meets
separately with the External Audit Partner and Internal Audit at
least twice each year without any management present.
The committee met six times in 2022.
Risk Committee
The Risk Committee has been delegated responsibility for
oversight and monitoring of risk related matters impacting the
Company; risk governance; and internal control systems (other than
internal financial control systems). All the members of the
committee are independent non-executive directors.
Committee activities during 2022
During the year, the committee has, amongst other matters:
provided oversight over risk-related matters including financial
and non-financial risk; assessed the Company's risk profile and how
risks are mitigated and controlled; considered current and
forward-looking risk exposures; the Company's risk appetite and
tolerance to inform the Company's strategy and business plans and
made recommendations to the Board; reviewed the Company's Internal
Capital Adequacy Assessment Process and Internal Liquidity Adequacy
Assessment Process and stress testing, including the Annual
Cyclical Scenario standalone submission, and made recommendations,
as appropriate, to the Board; considered the risk management
framework and effectiveness of the non-financial internal control
systems; assessed data risk; reviewed reports from Compliance and
Legal; received updates on the FCA's Consumer Duty; and considered
the effectiveness of the Chief Risk Officer and risk management
function.
The committee routinely invites senior management from Risk,
Compliance, Finance, Legal, Internal Audit and the External Auditor
to support the discharge of its delegated responsibilities. It also
meets twice a year in a private session with each of the Chief Risk
Officer, Internal Auditor and External Audit Partner without any
management present.
The committee met seven times in 2022.
Chairman's Nominations and Remuneration Committee
Role
The Chairman's Nominations and Remuneration Committee ('CNRC')
has been delegated responsibilities from the Board in relation to
nomination and remuneration for the Company and its subsidiaries.
The committee keeps the composition of the Board and its committees
under constant review and strives to ensure that the membership,
both individually and collectively, has the skills, knowledge and
experience necessary to oversee, challenge and support management
in the achievement of the bank's strategic and business objectives.
The committee also ensures that HSBC UK's Board Diversity and
Inclusion Policy ("Policy") is taken into consideration in the
succession planning, selection, nomination, operation and
evaluation of the Board. The Policy sets out an ambition of 33% of
the Board to be female and a minimum of one Board Director from an
ethnic minority background. The current composition of the Board
exceeds both of these targets. All the members of the committee are
independent non-executive directors.
Committee activities during 2022
In undertaking its responsibilities, the committee has, amongst
other things, during the year, considered: the Board succession
plan; reviewed and recommended changes to the Board's structure,
size and composition, including skills, knowledge and diversity of
the Board; assessed the independence of non-executive Directors by
reference to the criteria in legislation and regulation and, in
particular, the PRA Rulebook for Ring-fenced Bodies; and ensured
that the remuneration framework and pay review decisions are made
in line with the business strategy, objectives, values and
long-term interests of the Company.
The committee regularly invites the CEO and senior management in
HR to attend meetings to support the discharge of its delegated
responsibilities.
The committee met six times during 2022.
Executive Committee
Role
The Board delegates the management and day-to-day running of the
Company to the Executive Committee which exercises all the powers,
authorities and discretions of the Board in accordance with such
policies and directions as the Board or HSBC Group may from time to
time determine. The Executive Committee operates as a general
management committee with the Chair being the CEO. Membership
comprises the Executive Directors and the CEO's senior management
team.
Committee activities during 2022
To support this committee in discharging its responsibilities,
it has sub-delegated specific responsibilities to other committees
or meetings of executive management. There is a regular Risk
Management Meeting of the Executive Committee, chaired by the CRO,
to establish, maintain and periodically review the policy and
guidelines for the management of risk within the group. The Risk
Management Meeting also considers financial crime risk management
to ensure effective enterprise wide management of financial crime
risk within the group and to support the CEO in discharging his
financial crime risk responsibilities.
The committee met eight times in 2022.
Conflicts of interest and indemnification
of Directors
The Company's Articles of Association grants the Board the
authority to approve Directors' conflicts and potential conflicts
of interest.The Board has adopted a Conflicts of Interest policy
and procedures for considering and authorising conflicts. A review
of authorised situational conflicts, including the terms of
authorisation, is undertaken by the Board annually.
In accordance with the Companies Act 2006 and the Company's
Articles of Association, all directors are entitled to be
indemnified out of the assets of the Company in respect of claims
from third parties that may arise in connection with the
performance of their functions. Such qualifying third party
indemnity provisions have been in place during the financial year
under review, and remain in place, but have not been utilised by
the Directors. All Directors have the benefit of directors' and
officers' liability insurance.
Internal control
The Board is responsible for establishing a framework of
controls to enable the assessment and management of risk and sets
the Company's Risk Appetite Statement. This is discharged through
reviewing the effectiveness of risk management and internal control
systems and by determining the appetite and tolerance levels for
the types of risks the Company is willing to take in order to
achieve its strategic objectives for its long-term success and the
benefit of its stakeholders. For more information, please refer to
'Internal Control' in 'How we manage our risks' section on page
18.
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 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. Further information on Diversity and Inclusion is
included on page 6.
Auditor
PricewaterhouseCoopers LLP is the external auditor to the
Company. Following a tender process for the audit of HSBC Holdings
plc and its subsidiaries that took place in 2022, it was
recommended that PricewaterhouseCoopers LLP be reappointed as
auditors for HSBC Group entities effective for periods ending on or
after 1 January 2025. A resolution proposing the reappointment of
PricewaterhouseCoopers LLP as auditor of the bank and giving
authority to the Audit Committee to determine its remuneration will
be submitted to the forthcoming AGM.
Statement on Going Concern
The Board, having made appropriate enquiries, is satisfied that
the group as a whole has adequate resources to continue operations
for a period of at least 12 months from the date of this report,
and it, therefore, continues to adopt the going concern basis in
preparing the financial statements.
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. These considerations
include stressed scenarios that reflect the uncertainty in
structural changes from the Covid-19 pandemic, the Russia-Ukraine
war, disrupted supply chains globally, climate change and other top
and emerging risks, as well as from the related impacts on
profitability, capital and liquidity.
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;
-- Reports and updates regarding regulatory and internal stress testing;
-- 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.
The objectives, policies and processes for managing credit,
liquidity and market risk are set out in the 'Risk section' of the
'Report of the Directors' on pages 15 to 70.
Directors' Report Disclosures table
The following table sets out the disclosures required by the
Companies Act 2006, the Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 (as updated by Companies
(Miscellaneous Reporting) Regulations 2018) and other applicable
regulations, which are incorporated by reference in this Directors'
Report:
Page
Stakeholder Engagement Stakeholder engagement
and Section 172 on
page 8
Employee Engagement Stakeholder engagement
and Section 172 on
page 8
Employee Health Strategic report 'Supporting
and Safety our employees' on
page 6
Diversity & Inclusion Strategic report 'Supporting
our employees' on
page 6 and Corporate
Governance Report
on page 65
Results and Dividends Financial summary
on pages 10 to 14
and Note 6 of the
Financial statements
on
page 102
Segmental Analysis Strategic report on
pages 11 to 13 and
Note 1.1(f) of the
Financial statements
on page 87
Future Developments Strategic report 'Our
strategy' on pages
5 to 7
Share Capital Note 23 of the Financial
statements on page
119
Risk Factors Report of the Directors
on pages 17 to 71
Directors' Emoluments Note 3 of the Financial
statements on page
99
Opportunities Strategic report on
and Threats pages 5 to 7 and Risk
report on pages 17
to 64
Directors Corporate Governance
Report on page 65
Subsidiaries Note 29 of the Financial
and Joint Ventures statements on pages
124 to 125
Director Indemnities Corporate Governance
Report on page 65
Post Balance Note 28 of the Financial
Sheet Events statements page 124
The Report of the Directors comprising pages 17 to 71 was
approved by the Board on 20 February 2023 and is signed on its
behalf by:
Nicola Black
Company Secretary
HSBC UK Bank plc
Registered number 9928412
Statement of directors' responsibilities in respect of the financial
statements
The directors are responsible for preparing the Strategic
Report, the Report of the Directors 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 international accounting standards. In
preparing the group and company financial statements, the directors
have also elected to comply with International Financial Reporting
Standards issued by the International Accounting Standards Board
(IFRSs issued by IASB).
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 applicable UK-adopted international accounting
standards and IFRSs issued by IASB 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
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 international accounting
standards and IFRSs issued by IASB, 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 Report of the Directors 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.
In the case of each director in office at the date the
directors' report is approved:
-- so far as the director is aware, there is no relevant audit
information of which the group's and company's auditors are
unaware; and
-- they have taken all the steps that they ought to have taken
as a director in order to make themselves aware of any relevant
audit information and to establish that the group's and company's
auditors are aware of that information.
Approved by the Board on 20 February 2023 and signed on its
behalf by:
Nicola Black
Company Secretary
HSBC UK Bank plc
Registered number 9928412
Independent auditors' report to the members of HSBC UK Bank plc
Report on the audit of the financial statements
Opinion
In our opinion, HSBC UK Bank plc's group financial statements
and parent company financial statements (the 'financial
statements'):
-- give a true and fair view of the state of the group's and of
the parent company's affairs as at 31 December 2022 and of the
group's profit and the group's and parent company's cash flows for
the year then ended;
-- have been properly prepared in accordance with UK-adopted
international accounting standards as applied in accordance with
the provisions of the Companies Act 2006; and
-- have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the
Annual Report and Accounts 2022 (the "Annual Report"), which
comprise:
-- the consolidated income statement for the year ended 31 December 2022;
-- the consolidated statement of comprehensive income for the year ended 31 December 2022;
-- the consolidated balance sheet as at 31 December 2022;
-- the consolidated statement of cash flows for the year ended 31 December 2022;
-- the consolidated statement of changes in equity for the year ended 31 December 2022;
-- the parent company balance sheet as at 31 December 2022;
-- the parent company statement of cash flows for the year ended 31 December 2022;
-- the parent company statement of changes in equity for the year then ended; and
-- the notes to the financial statements, which include a
description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit
Committee.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in note 1.1(a) to the financial statements, the
group and parent company, in addition to applying UK-adopted
international accounting standards, have also applied international
financial reporting standards ('IFRSs') as issued by the
International Accounting Standards Board ('IASB').
In our opinion, the group and parent company 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 4, we have provided no
non-audit services to the parent company or its controlled
undertakings in the period under audit.
Our audit approach
Overview
Audit scope
-- HSBC UK Bank plc is a member of the HSBC Group, the ultimate
parent company of which is HSBC Holdings plc. HSBC UK Bank plc
operates in the UK;
-- We performed an audit of the complete financial information
of one reporting unit namely HSBC UK Bank plc;
-- For four further reporting units, namely Marks and Spencer
Financial Services plc ('M&S'), HSBC Invoice Finance (UK)
Limited ('HIF'), HSBC Equipment Finance (UK) Limited ('HEF') and
Neon Portfolio Distribution DAC ('Neon'), specific audit procedures
were performed over selected account balances; and
-- As part of the audit, we performed additional risk
assessment, giving consideration to relevant internal and external
factors including climate change.
Key audit matters
-- Expected Credit Loss ('ECL') provision for loans and advances (group and parent).
-- Valuation of the defined benefit pension surplus (group and parent).
Materiality
-- Overall group materiality: GBP202m (2021: GBP106m) based on
5% of adjusted profit before tax.
-- Overall parent company materiality: GBP200m (2021: GBP97m)
based on 5% of adjusted profit before tax.
-- Performance materiality: GBP151m (2021: GBP79m) (group) and
GBP150m (2021: GBP73m) (parent 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.
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.
Recognition of income under Effective Interest Rate ('EIR')
accounting, which was a key audit matter last year, is no longer
included because of the increase in our overall materiality and a
reduction in the size of the associated asset therefore reducing
the risk of material misstatement over the course of 2022.
Otherwise, the key audit matters below are consistent with last
year.
Expected credit losses ('ECL') provision for loans and advances (group
and parent)
Determining expected credit losses We held discussions with the Audit
('ECL') involves management judgement Committee covering governance and
and is subject to a high degree of controls over ECL. We discussed a
estimation uncertainty. number of areas including:
Management makes various assumptions * The severity of macroeconomic scenarios, and their
when estimating ECL. The significant related probability weightings;
assumptions that we focused on in
our audit included those with greater
levels of management judgement and * The valuation of credit impaired exposures, with
for which variations had the most focus on assumptions made in the recoverability of
significant impact on ECL. These significant wholesale exposures;
included:
* Assumptions made in determining forward looking
economic scenarios and their probability weightings * The redevelopment of retail probability of default
(specifically the central and downside scenarios models; and
given these have the most material impact on ECL);
and
* The disclosures made in relation to ECL.
* Estimating expected cash flows and collateral
valuations to assess the ECL of credit impaired
wholesale exposures.
Models are also important to the
determination of ECL and during the
year the retail probability of default
('PD') models were redeveloped.
The level of estimation uncertainty
and judgement has remained high during
2022 as a result of the uncertain
macroeconomic and geopolitical environment,
high levels of inflation and a rising
interest rate environment. This leads
to uncertainty around judgements
made in determining the severity
and probability weighting of macroeconomic
variable forecasts across the different
economic scenarios used in ECL models,
and in the estimation of expected
cash flows and collateral valuations
on credit impaired stage 3 exposures.
We assessed the design and effectiveness of controls and governance
over the estimation of ECLs. We observed management's review and challenge
governance forums for (1) the determination of macroeconomic scenarios
and their probability weightings, and (2) the assessment of ECL for
Retail and Wholesale portfolios, including the assessment of ECL calculated
on the largest credit-impaired stage 3 exposures.
We also tested controls over:
* The input of critical data elements into source
systems and the flow and transformation of critical
data elements from source systems to impairment
models and management judgemental adjustments;
* Credit reviews that determine credit risk ratings
(CRRs) for wholesale customers;
* Independent model validation and monitoring;
* The calculation and approval of management
judgemental adjustments to modelled outcomes;
* The identification of credit-impairment triggers; and
* The calculation and approval of significant
individual impairments relating to the largest
wholesale credit-impaired exposures.
We involved our economic experts in assessing the significant assumptions
made in determining the severity and probability weighting of macroeconomic
forecasts, with particular focus on the downside and consensus central
scenarios. These assessments considered the sensitivity of ECLs to
variations in the severity and probability weighting of macroeconomic
variables for different economic scenarios. We involved our modelling
specialists in assessing the appropriateness of the significant assumptions
and methodologies used for models. 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.
We involved our valuation specialists to assist in testing the valuation
of collateral for a sample of wholesale credit-impaired exposures.
In addition, we performed substantive testing over:
* The compliance of ECL methodologies and assumptions
with the requirements of IFRS 9;
* The assumptions and methodology underpinning the
redeveloped retail PD models and independently
replicated these models;
* The appropriateness and application of the
quantitative and qualitative criteria used to assess
significant increases in credit risk;
* A sample of critical data elements used in the year
end ECL calculation;
* A sample of CRRs applied to wholesale exposures; and
* A sample of calculations made in estimating expected
cash flows for certain credit-impaired wholesale
exposures.
We evaluated and tested the credit risk disclosures made in the financial
statements.
Note 1: Basis of preparation and significant accounting policies 1.2(g)
Impairment of amortised cost and FVOCI financial assets, page 90.
Summary of credit risk, page 29.
Measurement uncertainty and sensitivity analysis of ECL estimates,
page 33.
Valuation of defined benefit pension surplus
The defined benefit pension scheme We discussed the results of the work
is in a net surplus position as at performed by our team (including
31 December 2022 consistent with actuarial experts). This included
the prior year. how the key assumptions compared
Defined benefit obligation ('DBO') to our independently compiled expected
The valuation of the DBO is dependent ranges and the assessment of the
on a number of actuarial assumptions. modelling methodology adopted by
We consider the discount rate, inflation management's actuarial expert.
rate and mortality rates to be the We discussed with the Audit Committee
most significant assumptions used the changes in methodology including
in determining the DBO. the rounding convention for financial
Management uses an actuarial expert assumptions and updates to the mortality
to determine the valuation of the assumptions to factor in the impact
DBO using a number of market-based of Covid-19.
inputs and other financial and demographic For the complex scheme assets, our
assumptions. discussions included:
Changes in these assumptions can * The results of audit work which included our
have a material impact on the valuation assessment of the valuation methodology adopted by
due to the long duration of the pension management's experts when valuing, infrastructure
liabilities and as such the valuation loan notes and the property portfolios; and
is considered to be highly judgemental.
Pension Assets
The pension scheme asset consists * The results of the additional audit procedures which
of various classes of pension assets, we performed to corroborate the reasonableness of the
some of which are more complex to valuations independently obtained from the PIV
value and therefore higher risk. investment managers.
These include, infrastructure loan
notes, directly held property and
some more complex pooled investment
vehicles ('PIVs').
Valuation experts are used to determine
the value of certain classes of complex
pension assets including the valuation
of infrastructure loan notes and
directly held property. The valuation
of complex pooled investment vehicles
is obtained from the investment managers.
The estimation of fair value for
more complex pension assets is subjective
and relies on valuation models as
well as unobservable inputs. Therefore,
significant judgement is required
to estimate fair values.
We tested controls over:
* The determination of the actuarial assumptions used
in calculating the valuation of the DBO and the
approval of those assumptions by management; and
* The valuation of plan assets.
Our substantive testing over the defined benefit obligation included
the following:
* Evaluated the objectivity and competence of
management's actuarial expert involved in the
valuation of the DBO;
* Engaged our actuarial experts to assess the
reasonableness of the judgements made by management
and management's actuarial expert in determining the
key financial and demographic assumptions used in the
calculation of the DBO;
* Assessed the reasonableness of the assumptions using
independently compiled expected ranges based on
market observable indices and our market experience;
and
* Evaluated the appropriateness of the pension
disclosures within the financial statements,
including the disclosure regarding the sensitivity of
assumptions by comparing them to the output of our
audit work.
Our substantive testing over pension assets included the following:
* Obtained independent confirmations to support the
investment valuations from the investment managers
for material investment balances;
* Engaged our valuation experts to independently review
a sample of more complex investments including
directly held property and infrastructure loan notes;
and
* In respect of more complex pooled investment vehicles,
we performed one or more of the following additional
procedures:
* For fair values based on net asset valuation
statements from fund managers, we inspected these
statements;
* Agreed valuation statements from fund managers to
audited fund financial statements where they were
available;
* Reviewed the investment managers' controls reports in
respect of valuation controls;
* Reviewed transaction prices close to the year end for
the fund where they were available.
Note 1: Basis of preparation and significant accounting policies 1.2(h)
Employee compensation and benefits, page 93.
Note 3: Employee compensation and benefit, page 95.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
group and the parent company, the accounting processes and
controls, and the industry in which they operate.
We performed a risk assessment, giving consideration to relevant
internal and external factors, including climate change, economic
risks, relevant accounting and regulatory developments, HSBC's
strategy and any changes taking place within the group. We also
considered our knowledge and experience obtained in prior year
audits.
We evaluated and challenged management's assessment of the
impact of climate change risk, which is set out on page 62,
including their conclusion that there is no material impact on the
financial statements. In making this evaluation we considered
management's use of stress testing and scenario analysis to arrive
at the conclusion that there is no material impact on the financial
statements. We considered management's assessment on the areas in
the financial statements most likely to be impacted by climate
risk, including:
-- the impact on ECL on loans and advances to customers, for both physical and transition risk;
-- the forecast cashflows from management's five year business
plan and long term growth rates used in estimating recoverable
amounts as part of impairment assessments of investments in
subsidiaries, goodwill and intangible assets; and
-- the impact of climate related terms on the solely payments of
principal and interest test for classification and measurement of
loans and advances to customers.
Using our risk assessment, we continually assessed risks and
changed the scope of our audit where necessary.
HSBC UK Bank plc is structured into three divisions being Wealth
and Personal Banking ('WPB'), Commercial Banking ('CMB') and Global
Banking and Markets ('GBM'). The divisions operate across a number
of subsidiary entities in the United Kingdom. The consolidated
financial statements are an aggregation of the subsidiary entities
('reporting units'). Each reporting unit submits their financial
information to the group in the form of a consolidation pack, which
gets aggregated within the group's main consolidation and financial
reporting system.
In establishing the overall approach to the group audit, we
scoped our work using the balances included in the consolidation
pack and determined the type of work that needed to be performed
over the reporting units.
As a result of our group scoping, we determined that an audit of
the complete financial information of HSBC UK Bank plc was
necessary, owing to its financial significance.
We then considered the significance of other reporting units in
relation to primary statement account balances. In doing this we
also considered the presence of any significant audit risks and
other qualitative factors (including history of misstatements
through fraud or error). For four reporting units, specific audit
procedures were performed over selected significant account
balances as follows; for HIF these were 'Loans and advances to
customers', 'Customer accounts', and 'Items in the course of
collection from other Banks'; for HEF this was 'Loans and advances
to customers'; for M&S these were 'Loans and advances to
customers', 'Customer accounts', 'Prepayments, accrued income and
other assets', 'Change in expected credit losses and other credit
impairment charges'; and for Neon this was 'Debt securities in
issue'. For the remainder of the reporting units, the risk of
material misstatement was mitigated through group audit procedures
including testing of entity level controls and subsidiary level
analytical review procedures.
Additionally audit procedures were performed on certain
group-level account balances including goodwill.
We utilised centralised teams and a shared service centre to
assist with certain aspects of our audit where it was more
efficient to do so. This included the coordination of data requests
and the testing of a number of controls, IT and operational
processes, and central items such as payroll. We oversaw the
nature, timing and extent of the work performed by this team and
received results through a memorandum of work performed.
For all in-scope reporting units apart from M&S, the group
audit engagement partner was also the partner overseeing the audit
work performed. For the M&S reporting unit, a separate
component team performed the audit of the in-scope balances, as
instructed by the group engagement team. We held regular meetings
with the component team auditing the M&S reporting unit as part
of our oversight of their work. In these meetings, we discussed the
significant risks identified and how these risks were addressed by
the component team through the procedures performed. We also
performed a review of the documentation of the testing performed
over a number of areas, including significant risks to ensure these
were aligned with our expectations.
For the parent company, we determined our scope of work using
our risk assessment and parent company materiality level. Based on
these, we assessed the level of testing required on each financial
statement line item in order to be able to give an opinion on the
parent company financial statements. We utilised work performed
over the HSBC UK Bank plc reporting unit as part of the group
audit, performing further work where necessary, and testing parent
company balances such as investments in subsidiaries.
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:
Overall materiality GBP202m (2021: GBP106m) GBP200m (2021: GBP97m)
How we determined 5% of adjusted profit before 5% of adjusted profit before
it tax tax
Rationale for Adjusted profit before tax is the primary measure used
benchmark applied by shareholders in assessing the performance of the
group and the parent company and removes the impact
of significant items that distort year-on-year comparisons.
In determining overall materiality, we have made adjustments,
including for the impact of certain customer redress
and restructuring programmes as they are large items
unrelated to the underlying performance of the group
and parent company. The benchmark used in 2021 was a
4-year average of adjusted profit reflecting the significant
impact that Covid-19 had on profitability.
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 GBP5m-GBP192m.
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% (2021: 75%) of
overall materiality, amounting to GBP151m (2021: GBP79m) for the
group financial statements and GBP150m (2021: GBP73m) for the
parent 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 GBP10m (group
audit) (2021: GBP5m) and GBP10m (parent company audit) (2021:
GBP5m) 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 parent 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 risks to
the financial and operating performance of the group.
-- Understanding and evaluating the group's financial forecasts
and the group's 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 parent 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 parent 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 the
Report of the Directors for the year ended 31 December 2022 is
consistent with the financial statements and has been prepared in
accordance with applicable legal requirements.
In light of the knowledge and understanding of the group and
parent company and their environment obtained in the course of the
audit, we did not identify any material misstatements in the
Strategic report and the 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, the directors are responsible for the preparation
of the financial statements in accordance with the applicable
framework and for being satisfied that they give a true and fair
view. The directors are also responsible for such internal control
as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the group's and the parent company's
ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
group or the parent company or to cease operations, or have no
realistic alternative but to do so.
Auditors' responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors' report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
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 Consumer Credit Act 1974, the Financial
Conduct Authority's ('FCA') regulations, the Prudential Regulation
Authority's ('PRA') regulations 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 expenditure, and management bias in accounting
estimates and judgements. 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:
-- Challenging estimates and judgements made by management in
their significant accounting estimates, in particular in relation
to the expected credit loss provisions of loans and advances to
customers (see related key audit matter).
-- Identifying and testing journal entries, including those
posted with certain descriptions, posted and approved by the same
individual, backdated journals, posted by infrequent and unexpected
users, posted to reverse revenue after year end and posted with
unusual account combinations.
-- Agreeing financial statement disclosures to underlying
supporting documentation, review of correspondence with regulators
including the FCA and PRA, review of correspondence with the
group's external legal advisors, enquiries of management, enquiries
of legal counsel and review of internal audit reports in so far as
they related to the financial statements.
There are inherent limitations in the audit procedures described
above. 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 parent company's members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other
purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not obtained all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- certain disclosures of Directors' remuneration specified by law are not made; or
-- the parent company financial statements are not in agreement
with the accounting records and returns.
We have no exceptions to report arising from this
responsibility.
Appointment
Following the recommendation of the Audit Committee, we were
appointed by the members on 7 August 2017 to audit the financial
statements for the year ended 31 December 2017 and subsequent
financial periods. The period of total uninterrupted engagement
is
6 years, covering the years ended 31 December 2017 to 31
December 2022.
Other matter
As required by the Financial Conduct Authority Disclosure
Guidance and Transparency Rule 4.1.14R, these financial statements
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 has been prepared using the single
electronic format specified in the ESEF RTS.
Hamish Anderson (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
20 February 2023
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END
ACSSEEFFFEDSEDE
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February 21, 2023 06:55 ET (11:55 GMT)
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