Last checked at 7 Mar 2018 16:18
Capital | |
| Page |
Capital overview | 117 |
Capital management | 117 |
Capital | 118 |
Risk-weighted assets | 119 |
Leverage ratio | 120 |
Capital overview |
Capital ratios | ||||
| At | |||
| 31 Dec | 31 Dec | ||
| 2017 | 2016 | ||
| % | % | ||
CRD IV transitional |
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| ||
Common equity tier 1 ratio | 14.5 | 13.6 | ||
Tier 1 ratio | 17.3 | 16.1 | ||
Total capital ratio | 20.9 | 20.1 | ||
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CRD IV end point |
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Common equity tier 1 ratio | 14.5 | 13.6 | ||
Tier 1 ratio | 16.4 | 14.9 | ||
Total capital ratio | 18.3 | 16.8 | ||
Total regulatory capital and risk-weighted assets | ||||
| At | |||
| 31 Dec | 31 Dec | ||
| 2017 | 2016 | ||
| $m | $m | ||
CRD IV transitional |
|
| ||
Common equity tier 1 capital | 126,144 | 116,552 | ||
Additional tier 1 capital | 24,810 | 21,470 | ||
Tier 2 capital | 31,429 | 34,336 | ||
Total regulatory capital | 182,383 | 172,358 | ||
Risk-weighted assets | 871,337 | 857,181 | ||
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CRD IV end point |
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Common equity tier 1 capital | 126,144 | 115,984 | ||
Additional tier 1 capital | 16,531 | 11,351 | ||
Tier 2 capital | 16,413 | 16,289 | ||
Total regulatory capital | 159,088 | 143,624 | ||
Risk-weighted assets | 871,337 | 855,762 | ||
RWAs by risk types | ||||
| RWAs | Capital required 1 | ||
| $bn | $bn | ||
Credit risk | 685.2 | 54.8 | ||
Counterparty credit risk | 54.5 | 4.4 | ||
Market risk | 38.9 | 3.1 | ||
Operational risk | 92.7 | 7.4 | ||
At 31 Dec 2017 | 871.3 | 69.7 | ||
1 | 'Capital required' represents the Pillar 1 capital charge at 8% of RWAs. |
Capital management |
(Audited)
Our objective in the management of Group capital is to maintain appropriate levels to support our business strategy, and meet our regulatory and stress testing related requirements.
Approach and policy
Our approach to capital 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 base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times. Our policy on capital management is underpinned by a capital management framework and our internal capital adequacy assessment process ('ICAAP'), which enables us to manage our capital in a consistent manner. The framework incorporates a number of different capital measures calculated on an economic capital and regulatory capital basis. The ICAAP is an assessment of the bank's capital position, outlining both regulatory and internal capital resources and requirements with HSBC's business model, strategy, performance and planning, risks to capital, and the implications of stress testing to capital.
Our assessment of capital adequacy is aligned to our assessment of risks. These include credit, market, operational, pensions, insurance, structural foreign exchange risk, residual risks and interest rate risk in the banking book.
Planning and performance
Capital and RWA plans form part of the Annual Operating Plan that is approved by the Board. Revised RWA forecasts are submitted to the GMB on a monthly basis, and reported RWAs are monitored against the plan.
The responsibility for global capital allocation principles rests with the Group Finance Director. Through our internal governance processes, we seek to maintain discipline over our investment and capital allocation decisions, and seek to ensure that returns on investment meet the Group's management objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where above hurdle returns have been identified and in order to meet their regulatory and economic capital needs.
We manage business returns by using a return on risk-weighted assets ('RoRWA') measure and a return on tangible equity ('RoTE') measure.
Risks to capital
Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs and/or capital position. The downside or upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary.
There are a number of regulatory changes on the horizon. The impacts of these are included in the Annual Operating Plan where the rules are sufficiently certain to estimate a reliable impact. Foremost among these changes are the final reforms to the Basel III package, which were published in December 2017. Due to the number of national discretions, the recalibration of the market risk framework and the need to transpose the requirements into national law, it remains too early to assess reliably the impact.
Stress testing
In addition to annual internal stress tests, the Group is subject to supervisory stress testing in many jurisdictions. Supervisory stress testing requirements are increasing in frequency and in the granularity with which the results are required. These exercises include the programmes of the Prudential Regulatory Authority ('PRA'), the Federal Reserve Board ('FRB'), the European Banking Authority ('EBA'), the European Central Bank ('ECB') and the Hong Kong Monetary Authority ('HKMA'), as well as stress tests undertaken in other jurisdictions. We take into account the results of regulatory stress testing and our internal stress tests when assessing our internal capital requirements. The outcome of stress testing exercises carried out by the PRA also feeds into a PRA buffer under Pillar 2 requirements, where required.
HSBC Holdings plc Annual Report and Accounts 2017 | 117 |
Report of the Directors | Capital
Capital generation
HSBC Holdings is the provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings'
own capital issuance and profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investment in subsidiaries.
Capital |
Transitional own funds disclosure | ||||||
(Audited) | ||||||
At | ||||||
31 Dec | 31 Dec | |||||
2017 | 2016 | |||||
Ref* | Footnotes | $m | $m | |||
Common equity tier 1 ('CET1') capital: instruments and reserves | ||||||
1 | Capital instruments and the related share premium accounts | 18,932 | 21,310 | |||
- ordinary shares | 18,932 | 21,310 | ||||
2 | Retained earnings | 1 | 124,679 | 129,552 | ||
3 | Accumulated other comprehensive income (and other reserves) | 9,433 | 560 | |||
5 | Minority interests (amount allowed in consolidated CET1) | 4,905 | 3,878 | |||
5a | Independently reviewed interim net profits net of any foreseeable charge or dividend | 1 | 608 | (6,009 | ) | |
6 | Common equity tier 1 capital before regulatory adjustments | 158,557 | 149,291 | |||
Common equity tier 1 capital: regulatory adjustments | ||||||
7 | Additional value adjustments | (1,146 | ) | (1,358 | ) | |
8 | Intangible assets (net of related deferred tax liability) | (16,872 | ) | (15,037 | ) | |
10 | Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) | (1,181 | ) | (1,696 | ) | |
11 | Fair value reserves related to gains or losses on cash flow hedges | 208 | (52 | ) | ||
12 | Negative amounts resulting from the calculation of expected loss amounts | (2,820 | ) | (4,025 | ) | |
14 | Gains or losses on liabilities at fair value resulting from changes in own credit standing | 3,731 | 1,052 | |||
15 | Defined-benefit pension fund assets | (6,740 | ) | (3,680 | ) | |
16 | Direct and indirect holdings of own CET1 instruments | (40 | ) | (1,573 | ) | |
19 | Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions) | (7,553 | ) | (6,370 | ) | |
28 | Total regulatory adjustments to common equity tier 1 | (32,413 | ) | (32,739 | ) | |
29 | Common equity tier 1 capital | 126,144 | 116,552 | |||
Additional tier 1 ('AT1') capital: instruments | ||||||
30 | Capital instruments and the related share premium accounts | 16,399 | 11,259 | |||
31 | - classified as equity under IFRSs | 16,399 | 11,259 | |||
33 | Amount of qualifying items and the related share premium accounts subject to phase out from AT1 | 6,622 | 7,946 | |||
34 | Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties | 1,901 | 2,419 | |||
35 | - of which: instruments issued by subsidiaries subject to phase out | 1,374 | 1,522 | |||
36 | Additional tier 1 capital before regulatory adjustments | 24,922 | 21,624 | |||
Additional tier 1 capital: regulatory adjustments | ||||||
37 | Direct and indirect holdings of own AT1 instruments | (60 | ) | (60 | ) | |
41b | Residual amounts deducted from AT1 capital with regard to deduction from tier 2 ('T2') capital during the transitional period | (52 | ) | (94 | ) | |
- direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities | (52 | ) | (94 | ) | ||
43 | Total regulatory adjustments to additional tier 1 capital | (112 | ) | (154 | ) | |
44 | Additional tier 1 capital | 24,810 | 21,470 | |||
45 | Tier 1 capital (T1 = CET1 + AT1) | 150,954 | 138,022 | |||
Tier 2 capital: instruments and provisions | ||||||
46 | Capital instruments and the related share premium accounts | 16,880 | 16,732 | |||
47 | Amount of qualifying items and the related share premium accounts subject to phase out from T2 | 4,746 | 5,695 | |||
48 | Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in CET1 or AT1) issued by subsidiaries and held by third parties | 10,306 | 12,323 | |||
49 | - of which: instruments issued by subsidiaries subject to phase out | 10,236 | 12,283 | |||
51 | Tier 2 capital before regulatory adjustments | 31,932 | 34,750 | |||
Tier 2 capital: regulatory adjustments | ||||||
52 | Direct and indirect holdings of own T2 instruments | (40 | ) | (40 | ) | |
55 | Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions) | (463 | ) | (374 | ) | |
57 | Total regulatory adjustments to tier 2 capital | (503 | ) | (414 | ) | |
58 | Tier 2 capital | 31,429 | 34,336 | |||
59 | Total capital (TC = T1 + T2) | 182,383 | 172,358 | |||
* | The references identify the lines prescribed in the EBA template, which are applicable and where there is a value. |
1 | In the comparative period, dividend paid has been reallocated from row 2 to row 5a. |
118 | HSBC Holdings plc Annual Report and Accounts 2017 |
CET1 capital increased during the year by $9.5bn, due to:
• | $3.7bn of capital generation through profits, net of dividends and scrip; |
• | $6.3bn of favourable foreign currency translation differences; |
• | regulatory netting of $1.5bn; |
• | a decrease of $1.3bn in the deduction for excess expected loss; and |
• | an increase of $1.0bn in the value of minority interests allowed in CET1. |
These increases were partly offset by:
• | the $3.0bn share buy-back; and |
• | a $1.2bn decrease as a result of the change in US tax legislation; this change also reduces RWAs by $3.1bn. |
Risk-weighted assets |
RWAs
RWAs increased by $14.1bn during the year, including an increase of $27.7bn due to foreign currency translation differences. The resulting decrease of $13.6bn (excluding foreign currency translation differences) was primarily due to RWA initiatives of $70.8bn and asset quality improvement of $4.6bn, less increases from asset size growth of $48.4bn, changes in methodology and policy of $8.2bn and model updates of $6.2bn.
The following comments describe RWA movements in 2017, excluding foreign currency translation differences.
RWA initiatives
Continued reduction in legacy credit and US run-off portfolios reduced RWAs by $21.3bn. Further savings mainly came from process improvements $13.7bn, exposure reductions $9.9bn, trade actions $9.7bn and refined calculations $8.3bn.
Asset size
Asset size movements principally represent $40.4bn of lending growth, mainly in GB&M and CMB in Asia and Europe, and new transactions and movements in market parameters increasing counterparty credit risk and market risk by $9.0bn.
Methodology and policy
Methodology and policy movements increased credit risk RWAs by $11.3bn, mainly as a result of changes to:
• | the treatment of non-performing exposures of $5.0bn; |
• | the netting of current accounts of $2.1bn; |
• | non-recourse purchased receivables of $1.6bn; and |
• | risk-weight floors for HK residential mortgages of $0.6bn. |
Market risk RWAs decreased by $3.7bn as a result of increased diversification following regulatory approval to consolidate additional companies.
RWAs by global business | ||||||||||||
|
RBWM | CMB | GB&M | GPB | Corporate Centre | Total | ||||||
| $bn | $bn | $bn | $bn | $bn | $bn | ||||||
Credit risk | 94.2 | 277.3 | 180.2 | 13.0 | 120.5 | 685.2 | ||||||
Counterparty credit risk | - | - | 52.4 | 0.2 | 1.9 | 54.5 | ||||||
Market risk | - | - | 35.9 | - | 3.0 | 38.9 | ||||||
Operational risk | 27.3 | 23.7 | 30.8 | 2.8 | 8.1 | 92.7 | ||||||
At 31 Dec 2017 | 121.5 | 301.0 | 299.3 | 16.0 | 133.5 | 871.3 | ||||||
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Credit risk | 84.6 | 250.6 | 170.8 | 12.2 | 137.5 | 655.7 | ||||||
Counterparty credit risk | - | - | 59.1 | 0.2 | 2.7 | 62.0 | ||||||
Market risk | - | - | 38.5 | - | 3.0 | 41.5 | ||||||
Operational risk | 30.5 | 25.3 | 32.0 | 2.9 | 7.3 | 98.0 | ||||||
At 31 Dec 2016 | 115.1 | 275.9 | 300.4 | 15.3 | 150.5 | 857.2 | ||||||
RWAs by geographical region | ||||||||||||
Europe | Asia | MENA | North America | Latin America | Total | |||||||
$bn | $bn | $bn | $bn | $bn | $bn | |||||||
Credit risk | 225.9 | 284.2 | 47.7 | 101.2 | 26.2 | 685.2 | ||||||
Counterparty credit risk | 27.8 | 13.0 | 1.1 | 10.9 | 1.7 | 54.5 | ||||||
Market risk1 | 29.0 | 23.5 | 3.3 | 7.1 | 1.0 | 38.9 | ||||||
Operational risk | 28.9 | 37.1 | 7.1 | 12.1 | 7.5 | 92.7 | ||||||
At 31 Dec 2017 | 311.6 | 357.8 | 59.2 | 131.3 | 36.4 | 871.3 | ||||||
Credit risk | 205.8 | 260.0 | 49.0 | 118.5 | 22.4 | 655.7 | ||||||
Counterparty credit risk | 30.9 | 16.1 | 1.2 | 12.6 | 1.2 | 62.0 | ||||||
Market risk1 | 30.8 | 21.3 | 1.4 | 6.8 | 0.5 | 41.5 | ||||||
Operational risk | 30.9 | 36.6 | 7.5 | 12.8 | 10.2 | 98.0 | ||||||
At 31 Dec 2016 | 298.4 | 334.0 | 59.1 | 150.7 | 34.3 | 857.2 | ||||||
1 | RWAs are non-additive across geographical regions due to market risk diversification effects within the Group. |
HSBC Holdings plc Annual Report and Accounts 2017 | 119 |
Report of the Directors | Capital | Corporate Governance
RWA movement by global business by key driver | ||||||||||||||
| Credit risk, counterparty credit risk and operational risk |
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RBWM | CMB | GB&M | GPB | Corporate Centre | Market risk | Total RWAs | |||||||
| $bn | $bn | $bn | $bn | $bn | $bn | $bn | |||||||
RWAs at 1 Jan 2017 | 115.1 | 275.9 | 261.9 | 15.3 | 147.5 | 41.5 | 857.2 | |||||||
RWA initiatives | (0.4 | ) | (13.8 | ) | (27.6 | ) | (0.2 | ) | (24.8 | ) | (4.0 | ) | (70.8 | ) |
Asset size | 4.4 | 16.7 | 21.9 | 0.8 | (0.6 | ) | 5.2 | 48.4 | ||||||
Asset quality | 0.2 | 1.5 | (6.1 | ) | 0.2 | (0.4 | ) | - | (4.6 | ) | ||||
Model updates | 1.1 | 5.0 | 0.3 | (0.1 | ) | - | (0.1 | ) | 6.2 | |||||
- portfolios moving onto IRB approach | 0.2 | - | - | (0.1 | ) | - | (0.1 | ) | - | |||||
- new/updated models | 0.9 | 5.0 | 0.3 | - | - | - | 6.2 | |||||||
Methodology and policy | (1.8 | ) | 3.6 | 4.8 | (0.5 | ) | 5.8 | (3.7 | ) | 8.2 | ||||
- internal updates | (2.5 | ) | 3.6 | 4.8 | (0.5 | ) | 5.8 | (3.7 | ) | 7.5 | ||||
- external updates - regulatory | 0.7 | - | - | - | - | - | 0.7 | |||||||
Acquisitions and disposals | (0.1 | ) | (0.4 | ) | - | - | (0.5 | ) | - | (1.0 | ) | |||
Foreign exchange movements | 3.0 | 12.5 | 8.2 | 0.5 | 3.5 | - | 27.7 | |||||||
Total RWA movement | 6.4 | 25.1 | 1.5 | 0.7 | (17.0 | ) | (2.6 | ) | 14.1 | |||||
RWAs at 31 Dec 2017 | 121.5 | 301.0 | 263.4 | 16.0 | 130.5 | 38.9 | 871.3 | |||||||
RWA movement by geographical region by key driver | ||||||||||||||
Credit risk, counterparty credit risk and operational risk | ||||||||||||||
Europe | Asia | MENA | North America | Latin America | Market risk | Total RWAs | ||||||||
$bn | $bn | $bn | $bn | $bn | $bn | $bn | ||||||||
RWAs at 1 Jan 2017 | 267.6 | 312.7 | 57.7 | 143.9 | 33.8 | 41.5 | 857.2 | |||||||
RWA initiatives | (26.6 | ) | (14.0 | ) | (1.4 | ) | (22.2 | ) | (2.6 | ) | (4.0 | ) | (70.8 | ) |
Asset size | 11.1 | 27.8 | (0.2 | ) | 1.0 | 3.5 | 5.2 | 48.4 | ||||||
Asset quality | 1.4 | (5.7 | ) | 1.1 | (2.3 | ) | 0.9 | - | (4.6 | ) | ||||
Model updates | 6.4 | 0.1 | - | (0.2 | ) | - | (0.1 | ) | 6.2 | |||||
- portfolios moving onto IRB approach | - | 0.1 | - | - | - | (0.1 | ) | - | ||||||
- new/updated models | 6.4 | - | - | (0.2 | ) | - | - | 6.2 | ||||||
Methodology and policy | 3.7 | 6.2 | (0.1 | ) | 2.1 | - | (3.7 | ) | 8.2 | |||||
- internal updates | 3.6 | 5.7 | (0.1 | ) | 2.0 | - | (3.7 | ) | 7.5 | |||||
- external updates - regulatory | 0.1 | 0.5 | - | 0.1 | - | - | 0.7 | |||||||
Acquisitions and disposals | - | - | (1.0 | ) | - | - | - | (1.0 | ) | |||||
Foreign exchange movements | 19.0 | 7.2 | (0.2 | ) | 1.9 | (0.2 | ) | - | 27.7 | |||||
Total RWA movement | 15.0 | 21.6 | (1.8 | ) | (19.7 | ) | 1.6 | (2.6 | ) | 14.1 | ||||
RWAs at 31 Dec 2017 | 282.6 | 334.3 | 55.9 | 124.2 | 35.4 | 38.9 | 871.3 | |||||||
Leverage ratio |
At | |||||
31 Dec | 31 Dec | ||||
2017 | 2016 | ||||
Ref* | $bn | $bn | |||
20 | Tier 1 capital | 142.7 | 127.3 | ||
21 | Total leverage ratio exposure | 2,557.1 | 2,354.4 | ||
% | % | ||||
22 | Leverage ratio | 5.6 | 5.4 | ||
EU-23 | Choice of transitional arrangements for the definition of the capital measure | Fully phased-in | Fully phased-in | ||
UK leverage ratio exposure - quarterly average | 2,351.4 | n/a | |||
% | % | ||||
UK leverage ratio - quarterly average | 6.1 | n/a | |||
UK leverage ratio - quarter end | 6.1 | 5.7 | |||
* | The references identify the lines prescribed in the EBA template. |
Our leverage ratio calculated in accordance with CRD IV was 5.6% at 31 December 2017, up from 5.4% at 31 December 2016. Growth in tier 1 capital was partly offset by a rise in exposure, primarily due to growth in customer advances, balances at central banks and trading assets.
In October 2017, following the FPC recommendation, the PRA increased the minimum requirement for the UK leverage ratio from 3% to 3.25%, following a change in its guidance to exclude central bank balances from the exposure measure.
At 31 December 2017, our UK minimum leverage ratio requirement of 3.25% was supplemented by an additional leverage ratio buffer of 0.4% and a countercyclical leverage ratio
buffer of 0.1%. These additional buffers translate into capital values of $10.3bn and $1.8bn respectively. We comfortably exceeded these leverage requirements.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make firms more transparent by requiring publication, at least annually, of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at December 2017 is published on our website, www.hsbc.com, under Investor Relations.
120 | HSBC Holdings plc Annual Report and Accounts 2017 |