Last checked at 20 Mar 2015 16:59
Consolidated income statement
for the year ended 31 December 2014
2014 | 2013 | 2012 | ||||
Notes | US$m | US$m | US$m | |||
Interest income | 50,955 | 51,192 | 56,702 | |||
Interest expense | (16,250) | (15,653) | (19,030) | |||
Net interest income | 34,705 | 35,539 | 37,672 | |||
Fee income | 19,545 | 19,973 | 20,149 | |||
Fee expense | (3,588) | (3,539) | (3,719) | |||
Net fee income | 15,957 | 16,434 | 16,430 | |||
Trading income excluding net interest income | 4,853 | 6,643 | 4,408 | |||
Net interest income on trading activities | 1,907 | 2,047 | 2,683 | |||
Net trading income | 6,760 | 8,690 | 7,091 | |||
Changes in fair value of long-term debt issued and related derivatives | 508 | (1,228) | (4,327) | |||
Net income from other financial instruments designated at fair value | 1,965 | 1,996 | 2,101 | |||
Net income/(expense) from financial instruments designated at fair value | 2 | 2,473 | 768 | (2,226) | ||
Gains less losses from financial investments | 1,335 | 2,012 | 1,189 | |||
Dividend income | 311 | 322 | 221 | |||
Net insurance premium income | 3 | 11,921 | 11,940 | 13,044 | ||
Gains on disposal of US branch network, US cards business and Ping AnInsurance (Group) Company of China, Ltd | - | - | 7,024 | |||
Other operating income | 1,131 | 2,632 | 2,100 | |||
Total operating income | 74,593 | 78,337 | 82,545 | |||
Net insurance claims and benefits paid and movement in liabilities to policyholders | 4 | (13,345) | (13,692) | (14,215) | ||
Net operating income before loan impairment charges and other credit risk provisions | 61,248 | 64,645 | 68,330 | |||
Loan impairment charges and other credit risk provisions | 5 | (3,851) | (5,849) | (8,311) | ||
Net operating income | 57,397 | 58,796 | 60,019 | |||
Employee compensation and benefits | 6 | (20,366) | (19,196) | (20,491) | ||
General and administrative expenses | (18,565) | (17,065) | (19,983) | |||
Depreciation and impairment of property, plant and equipment | (1,382) | (1,364) | (1,484) | |||
Amortisation and impairment of intangible assets | 21 | (936) | (931) | (969) | ||
Total operating expenses | (41,249) | (38,556) | (42,927) | |||
Operating profit | 5 | 16,148 | 20,240 | 17,092 | ||
Share of profit in associates and joint ventures | 20 | 2,532 | 2,325 | 3,557 | ||
Profit before tax | 18,680 | 22,565 | 20,649 | |||
Tax expense | 8 | (3,975) | (4,765) | (5,315) | ||
Profit for the year | 14,705 | 17,800 | 15,334 | |||
Profit attributable to shareholders of the parent company | 13,688 | 16,204 | 14,027 | |||
Profit attributable to non-controlling interests | 1,017 | 1,596 | 1,307 | |||
US$ | US$ | US$ | ||||
Basic earnings per ordinary share | 10 | 0.69 | 0.84 | 0.74 | ||
Diluted earnings per ordinary share | 10 | 0.69 | 0.84 | 0.74 |
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
Consolidated statement of comprehensive income
for the year ended 31 December 2014
2014 | 2013 | 2012 | ||||
US$m | US$m | US$m | ||||
Profit for the year | 14,705 | 17,800 | 15,334 | |||
Other comprehensive income/(expense) | ||||||
Items that will be reclassified subsequently to profit or loss when specificconditions are met: | ||||||
Available-for-sale investments2 | 2,972 | (1,718) | 5,070 | |||
- fair value gains/(losses) | 4,794 | (1,787) | 6,396 | |||
- fair value gains reclassified to the income statement | (1,672) | (1,277) | (1,872) | |||
- amounts reclassified to the income statement in respect of impairmentlosses | 374 | 286 | 1,002 | |||
- income taxes | (524) | 1,060 | (456) | |||
Cash flow hedges | 188 | (128) | 109 | |||
- fair value gains | 1,512 | 776 | 552 | |||
- fair value gains reclassified to the income statement | (1,244) | (894) | (423) | |||
- income taxes | (80) | (10) | (20) | |||
Share of other comprehensive income/(expense) of associates andjoint ventures | 80 | (71) | 533 | |||
- share for the year | 78 | (35) | 311 | |||
- reclassified to income statement on disposal | 2 | (36) | 222 | |||
Exchange differences | (8,903) | (1,372) | 1,017 | |||
- foreign exchange gains reclassified to income statement on disposal of aforeign operation | (21) | (290) | (1,128) | |||
- other exchange differences | (8,917) | (1,154) | 2,145 | |||
- Income tax attributable to exchange differences | 35 | 72 | - | |||
Items that will not be reclassified subsequently to profit or loss: | ||||||
Remeasurement of defined benefit asset/liability | 1,985 | (458) | (195) | |||
- before income taxes | 2,419 | (601) | (391) | |||
- income taxes | (434) | 143 | 196 | |||
Other comprehensive income for the year, net of tax | (3,678) | (3,747) | 6,534 | |||
Total comprehensive income for the year | 11,027 | 14,053 | 21,868 | |||
Attributable to: | ||||||
- shareholders of the parent company | 9,245 | 12,644 | 20,455 | |||
- non-controlling interests | 1,782 | 1,409 | 1,413 | |||
Total comprehensive income for the year | 11,027 | 14,053 | 21,868 |
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
Consolidated balance sheet
at 31 December 2014
2014 | 2013 | |||
Notes | US$m | US$m | ||
Assets | ||||
Cash and balances at central banks | 129,957 | 166,599 | ||
Items in the course of collection from other banks | 4,927 | 6,021 | ||
Hong Kong Government certificates of indebtedness | 27,674 | 25,220 | ||
Trading assets | 12 | 304,193 | 303,192 | |
Financial assets designated at fair value | 15 | 29,037 | 38,430 | |
Derivatives | 16 | 345,008 | 282,265 | |
Loans and advances to banks3 | 112,149 | 120,046 | ||
Loans and advances to customers3 | 974,660 | 992,089 | ||
Reverse repurchase agreements - non-trading | 17 | 161,713 | 179,690 | |
Financial investments | 18 | 415,467 | 425,925 | |
Prepayments, accrued income and other assets | 23 | 75,176 | 76,842 | |
Current tax assets | 1,309 | 985 | ||
Interests in associates and joint ventures | 20 | 18,181 | 16,640 | |
Goodwill and intangible assets | 21 | 27,577 | 29,918 | |
Deferred tax assets | 8 | 7,111 | 7,456 | |
Total assets at 31 December | 2,634,139 | 2,671,318 | ||
Liabilities and equity | ||||
Liabilities | ||||
Hong Kong currency notes in circulation | 27,674 | 25,220 | ||
Deposits by banks3 | 77,426 | 86,507 | ||
Customer accounts3 | 1,350,642 | 1,361,297 | ||
Repurchase agreements - non-trading | 17 | 107,432 | 164,220 | |
Items in the course of transmission to other banks | 5,990 | 6,910 | ||
Trading liabilities | 24 | 190,572 | 207,025 | |
Financial liabilities designated at fair value | 25 | 76,153 | 89,084 | |
Derivatives | 16 | 340,669 | 274,284 | |
Debt securities in issue | 26 | 95,947 | 104,080 | |
Accruals, deferred income and other liabilities | 27 | 53,396 | 52,341 | |
Current tax liabilities | 1,213 | 607 | ||
Liabilities under insurance contracts | 28 | 73,861 | 74,181 | |
Provisions | 29 | 4,998 | 5,217 | |
Deferred tax liabilities | 8 | 1,524 | 910 | |
Subordinated liabilities | 30 | 26,664 | 28,976 | |
Total liabilities at 31 December | 2,434,161 | 2,480,859 | ||
Equity | ||||
Called up share capital | 35 | 9,609 | 9,415 | |
Share premium account | 11,918 | 11,135 | ||
Other equity instruments | 11,532 | 5,851 | ||
Other reserves | 20,244 | 26,742 | ||
Retained earnings | 137,144 | 128,728 | ||
Total shareholders' equity | 190,447 | 181,871 | ||
Non-controlling interests | 34 | 9,531 | 8,588 | |
Total equity at 31 December | 199,978 | 190,459 | ||
Total liabilities and equity at 31 December | 2,634,139 | 2,671,318 |
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
D J Flint, Group Chairman
Consolidated statement of cash flows
for the year ended 31 December 2014
2014 | 2013 | 2012 | ||||
Notes | US$m | US$m | US$m | |||
Cash flows from operating activities | ||||||
Profit before tax | 18,680 | 22,565 | 20,649 | |||
Adjustments for: | ||||||
- net gain from investing activities | (1,928) | (1,458) | (2,094) | |||
- share of profits in associates and joint ventures | (2,532) | (2,325) | (3,557) | |||
- (gain)/loss on disposal of associates, joint ventures, subsidiaries and businesses | 9 | (1,173) | (7,024) | |||
- other non-cash items included in profit before tax | 36 | 11,262 | 11,995 | 19,778 | ||
- change in operating assets | 36 | 25,877 | (148,899) | (116,521) | ||
- change in operating liabilities | 36 | (93,814) | 164,757 | 89,070 | ||
- elimination of exchange differences4 | 24,571 | 4,479 | (3,626) | |||
- dividends received from associates | 757 | 694 | 489 | |||
- contributions paid to defined benefit plans | (681) | (962) | (733) | |||
- tax paid | (3,573) | (4,696) | (5,587) | |||
Net cash generated from/(used in) operating activities | (21,372) | 44,977 | (9,156) | |||
Cash flows from investing activities | ||||||
Purchase of financial investments | (384,199) | (363,979) | (342,974) | |||
Proceeds from the sale and maturity of financial investments | 382,837 | 342,539 | 329,926 | |||
Purchase of property, plant and equipment | (1,477) | (1,952) | (1,318) | |||
Proceeds from the sale of property, plant and equipment | 88 | 441 | 241 | |||
Net cash inflow/(outflow) from disposal of customer and loan portfolios | (1,035) | 6,518 | - | |||
Net purchase of intangible assets | (903) | (834) | (1,008) | |||
Net cash inflow from disposal of US branch network and US cards business | - | - | 20,905 | |||
Proceeds from disposal of Ping An | - | 7,413 | 1,954 | |||
Net cash inflow/(outflow) from disposal of other subsidiaries, businesses,associates and joint ventures | (242) | 3,295 | (269) | |||
Net cash outflow from acquisition of or increase in stake of associates | (30) | (26) | (1,804) | |||
Net cash generated from/(used in) investing activities | (4,961) | (6,585) | 5,653 | |||
Cash flows from financing activities | ||||||
Issue of ordinary share capital | 267 | 297 | 594 | |||
Net sales/(purchases) of own shares for market-making and investmentpurposes | (96) | (32) | (25) | |||
Issue of other equity instruments | 5,681 | - | - | |||
Redemption of preference shares | (234) | - | - | |||
Subordinated loan capital issued | 3,500 | 1,989 | 37 | |||
Subordinated loan capital repaid | (3,163) | (1,662) | (1,754) | |||
Net cash inflow/(outflow) from change in stake in subsidiaries | - | - | (14) | |||
Dividends paid to shareholders of the parent company | (6,611) | (6,414) | (5,925) | |||
Dividends paid to non-controlling interests | (639) | (586) | (572) | |||
Dividends paid to holders of other equity instruments | (573) | (573) | (573) | |||
Net cash used in financing activities | (1,868) | (6,981) | (8,232) | |||
Net increase/(decrease) in cash and cash equivalents | (28,201) | 31,411 | (11,735) | |||
Cash and cash equivalents at 1 January | 346,281 | 315,308 | 325,449 | |||
Exchange differences in respect of cash and cash equivalents | (16,779) | (438) | 1,594 | |||
Cash and cash equivalents at 31 December | 36 | 301,301 | 346,281 | 315,308 |
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
Other reserves | ||||||||||||||||||||||
Called up share capital | Share premium | Other equity instru- ments11 | Retained earnings5,6 | Available- for-sale fair value reserve | Cash flow hedging reserve | Foreign exchange reserve | Merger reserve5,7 | Total share- holders' equity | Non- controlling interests | Total equity | ||||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||||
At 1 January 2014 | 9,415 | 11,135 | 5,851 | 128,728 | 97 | (121) | (542) | 27,308 | 181,871 | 8,588 | 190,459 | |||||||||||
Profit for the year | − | − | − | 13,688 | − | − | − | − | 13,688 | 1,017 | 14,705 | |||||||||||
Other comprehensive income (net of tax) | − | − | − | 2,066 | 2,025 | 189 | (8,723) | − | (4,443) | 765 | (3,678) | |||||||||||
- available-for-sale investments | − | − | − | − | 2,025 | − | − | − | 2,025 | 947 | 2,972 | |||||||||||
- cash flow hedges | − | − | − | − | − | 189 | − | − | 189 | (1) | 188 | |||||||||||
- remeasurement of defined benefit asset/liability | − | − | − | 1,986 | − | − | − | − | 1,986 | (1) | 1,985 | |||||||||||
- share of other comprehensive income of associates and joint ventures | − | − | − | 80 | − | − | − | − | 80 | − | 80 | |||||||||||
- exchange differences | − | − | − | − | − | − | (8,723) | − | (8,723) | (180) | (8,903) | |||||||||||
Total comprehensive income for the year | − | − | − | 15,754 | 2,025 | 189 | (8,723) | − | 9,245 | 1,782 | 11,027 | |||||||||||
Shares issued under employee remuneration and share plans | 60 | 917 | − | (710) | − | − | − | − | 267 | − | 267 | |||||||||||
Shares issued in lieu of dividends and amounts arising thereon | 134 | (134) | − | 2,709 | − | − | − | − | 2,709 | − | 2,709 | |||||||||||
Capital securities issued | − | − | 5,681 | − | − | − | − | − | 5,681 | − | 5,681 | |||||||||||
Dividends to shareholders8 | − | − | − | (9,893) | − | − | − | − | (9,893) | (712) | (10,605) | |||||||||||
Cost of share-based payment arrangements | − | − | − | 732 | − | − | − | − | 732 | − | 732 | |||||||||||
Other movements | − | − | − | (176) | 21 | (10) | − | − | (165) | (127) | (292) | |||||||||||
At 31 December 2014 | 9,609 | 11,918 | 11,532 | 137,144 | 2,143 | 58 | (9,265) | 27,308 | 190,447 | 9,531 | 199,978 | |||||||||||
At 1 January 2013 | 9,238 | 10,084 | 5,851 | 120,347 | 1,649 | 13 | 752 | 27,308 | 175,242 | 7,887 | 183,129 | |||||||||||
Profit for the year | − | − | − | 16,204 | − | − | − | − | 16,204 | 1,596 | 17,800 | |||||||||||
Other comprehensive income (net of tax) | − | − | − | (561) | (1,577) | (128) | (1,294) | − | (3,560) | (187) | (3,747) | |||||||||||
- available-for-sale investments | − | − | − | − | (1,577) | − | − | − | (1,577) | (141) | (1,718) | |||||||||||
- cash flow hedges | − | − | − | − | − | (128) | − | − | (128) | − | (128) | |||||||||||
- remeasurement of defined benefit asset/liability | − | − | − | (490) | − | − | − | − | (490) | 32 | (458) | |||||||||||
- share of other comprehensive income of associates and joint ventures | − | − | − | (71) | − | − | − | − | (71) | − | (71) | |||||||||||
- exchange differences | − | − | − | − | − | − | (1,294) | − | (1,294) | (78) | (1,372) | |||||||||||
Total comprehensive income for the year | − | − | − | 15,643 | (1,577) | (128) | (1,294) | − | 12,644 | 1,409 | 14,053 | |||||||||||
Shares issued under employee remuneration and share plans | 60 | 1,168 | − | (931) | − | − | − | − | 297 | − | 297 | |||||||||||
Shares issued in lieu of dividends and amounts arising thereon | 117 | (117) | − | 2,523 | − | − | − | − | 2,523 | − | 2,523 | |||||||||||
Dividends to shareholders8 | − | − | − | (9,510) | − | − | − | − | (9,510) | (718) | (10,228) | |||||||||||
Cost of share-based payment arrangements | − | − | − | 630 | − | − | − | − | 630 | − | 630 | |||||||||||
Other movements | − | − | − | 26 | 25 | (6) | − | − | 45 | 10 | 55 | |||||||||||
At 31 December 2013 | 9,415 | 11,135 | 5,851 | 128,728 | 97 | (121) | (542) | 27,308 | 181,871 | 8,588 | 190,459 | |||||||||||
Other reserves | ||||||||||||||||||||||
Called up share capital | Share premium | Other equity instru- ments | Retained earnings5,6 | Available- for-sale fair value reserve | Cash flow hedging reserve | Foreign exchange reserve | Merger reserve5,7 | Total share- holders' equity | Non- controlling interests | Total equity | ||||||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | ||||||||||||
At 1 January 2012 | 8,934 | 8,457 | 5,851 | 111,868 | (3,361) | (95) | (237) | 27,308 | 158,725 | 7,368 | 166,093 | |||||||||||
Profit for the year | - | - | - | 14,027 | - | - | - | - | 14,027 | 1,307 | 15,334 | |||||||||||
Other comprehensive income (net of tax) | - | - | - | 321 | 5,010 | 108 | 989 | - | 6,428 | 106 | 6,534 | |||||||||||
- available-for-sale investments | - | - | - | - | 5,010 | - | - | - | 5,010 | 60 | 5,070 | |||||||||||
- cash flow hedges | - | - | - | - | - | 108 | - | - | 108 | 1 | 109 | |||||||||||
- remeasurement of defined benefit asset/liability | - | - | - | (212) | - | - | - | - | (212) | 17 | (195) | |||||||||||
- share of other comprehensive income of associatesand joint ventures | - | - | - | 533 | - | - | - | - | 533 | - | 533 | |||||||||||
- exchange differences | - | - | - | - | - | - | 989 | - | 989 | 28 | 1,017 | |||||||||||
- | ||||||||||||||||||||||
- | ||||||||||||||||||||||
Total comprehensive income for the year | - | - | - | 14,348 | 5,010 | 108 | 989 | - | 20,455 | 1,413 | 21,868 | |||||||||||
Shares issued under employee remuneration andshare plans | 119 | 1,812 | - | (1,337) | - | - | - | - | 594 | - | 594 | |||||||||||
Shares issued in lieu of dividends and amounts arising thereon | 185 | (185) | - | 2,429 | - | - | - | - | 2,429 | - | 2,429 | |||||||||||
Dividends to shareholders8 | - | - | - | (8,042) | - | - | - | - | (8,042) | (707) | (8,749) | |||||||||||
Cost of share-based payment arrangements | - | - | - | 988 | - | - | - | - | 988 | - | 988 | |||||||||||
Other movements | - | - | - | 93 | - | - | - | - | 93 | (187) | (94) | |||||||||||
At 31 December 2012 | 9,238 | 10,084 | 5,851 | 120,347 | 1,649 | 13 | 752 | 27,308 | 175,242 | 7,887 | 183,129 | |||||||||||
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
HSBC Holdings balance sheet
at 31 December 2014
2014 | 2013 | |||
Notes | US$m | US$m | ||
Assets | ||||
Cash at bank and in hand: | ||||
- balances with HSBC undertakings | 249 | 407 | ||
Derivatives | 16 | 2,771 | 2,789 | |
Loans and advances to HSBC undertakings | 43,910 | 53,344 | ||
Financial investments in HSBC undertakings | 4,073 | 1,210 | ||
Prepayments, accrued income and other assets | 125 | 133 | ||
Current tax assets | 472 | 245 | ||
Investments in subsidiaries | 22 | 96,264 | 92,695 | |
Deferred tax assets | 8 | - | 13 | |
Total assets at 31 December | 147,864 | 150,836 | ||
Liabilities and equity | ||||
Liabilities | ||||
Amounts owed to HSBC undertakings | 2,892 | 11,685 | ||
Financial liabilities designated at fair value | 25 | 18,679 | 21,027 | |
Derivatives | 16 | 1,169 | 704 | |
Debt securities in issue | 26 | 1,009 | 2,791 | |
Accruals, deferred income and other liabilities | 1,398 | 1,327 | ||
Current tax liabilities | - | 48 | ||
Deferred tax liabilities | 8 | 17 | - | |
Subordinated liabilities | 30 | 17,255 | 14,167 | |
Total liabilities | 42,419 | 51,749 | ||
Equity | ||||
Called up share capital | 35 | 9,609 | 9,415 | |
Share premium account | 11,918 | 11,135 | ||
Other equity instruments | 11,476 | 5,828 | ||
Other reserves | 37,456 | 37,303 | ||
Retained earnings | 34,986 | 35,406 | ||
Total equity | 105,445 | 99,087 | ||
Total liabilities and equity at 31 December | 147,864 | 150,836 |
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
D J Flint, Group Chairman
HSBC Holdings statement of cash flows
for the year ended 31 December 2014
2014 | 2013 | |||
Notes | US$m | US$m | ||
Cash flows from operating activities | ||||
Profit before tax | 6,228 | 17,725 | ||
Adjustments for: | ||||
- non-cash items included in profit before tax | 36 | 52 | 74 | |
- change in operating assets | 36 | 1,854 | (10,795) | |
- change in operating liabilities | 36 | (9,914) | (1,061) | |
- tax received | 133 | 156 | ||
Net cash generated from/(used in) operating activities | (1,647) | 6,099 | ||
Cash flows from investing activities | ||||
Net cash outflow from acquisition of or increase in stake of subsidiaries | (1,603) | (665) | ||
Repayment of capital from subsidiaries | 3,505 | - | ||
Net cash used in investing activities | 1,902 | (665) | ||
Cash flows from financing activities | ||||
Issue of ordinary share capital | 924 | 1,192 | ||
Issue of other equity instruments | 5,635 | - | ||
Sales of own shares to meet share awards and share option awards | - | 44 | ||
Subordinated loan capital issued | 3,500 | 1,989 | ||
Subordinated loan capital repaid | (1,654) | (1,618) | ||
Debt securities repaid | (1,634) | - | ||
Dividends paid on ordinary shares | (6,611) | (6,414) | ||
Dividends paid to holders of other equity instruments | (573) | (573) | ||
Net cash generated from/(used in) financing activities | (413) | (5,380) | ||
Net increase in cash and cash equivalents | (158) | 54 | ||
Cash and cash equivalents at 1 January | 407 | 353 | ||
Cash and cash equivalents at 31 December | 36 | 249 | 407 |
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
HSBC Holdings statement of changes in equity
for the year ended 31 December 2014
Other reserves | ||||||||||||||||
Called up share capital | Share premium | Other equity instru- ments1 | Retained 1 earnings9 | Available- for-sale fair value reserve | Other paid-in capital10 | Merger and other reserves7 | Total share- holders' equity | |||||||||
US$m | US$m | US$m | US$m | US$m | US$m | US$m | US$m | |||||||||
At 1 January 2014 | 9,415 | 11,135 | 5,828 | 35,406 | 124 | 2,052 | 35,127 | 99,087 | ||||||||
Profit for the year | - | - | - | 6,527 | - | - | - | 6,527 | ||||||||
Other comprehensive income (net of tax) | - | - | - | - | 116 | - | - | 116 | ||||||||
- available-for-sale investments | - | - | - | - | 152 | - | - | 152 | ||||||||
- income tax | - | - | - | - | (36) | - | - | (36) | ||||||||
Total comprehensive income for the year | - | - | - | 6,527 | 116 | - | - | 6,643 | ||||||||
Shares issued under employee share plans | 60 | 917 | - | (53) | - | - | - | 924 | ||||||||
Shares issued in lieu of dividends and amounts arising thereon | 134 | (134) | - | 2,709 | - | - | - | 2,709 | ||||||||
Capital securities issued | - | - | 5,648 | - | - | - | - | 5,648 | ||||||||
Dividends to shareholders8 | - | - | - | (9,893) | - | - | - | (9,893) | ||||||||
Tax credit on distributions | - | - | - | 104 | - | - | - | 104 | ||||||||
Own shares adjustment | - | - | - | 103 | - | - | - | 103 | ||||||||
Exercise and lapse of share options | - | - | - | (37) | - | 37 | - | - | ||||||||
Cost of share-based payment arrangements | - | - | - | 74 | - | - | - | 74 | ||||||||
Income taxes on share-based payments | - | - | - | (2) | - | - | - | (2) | ||||||||
Equity investments granted to employees of subsidiaries under employee share plans | - | - | - | 48 | - | - | - | 48 | ||||||||
At 31 December 2014 | 9,609 | 11,918 | 11,476 | 34,986 | 240 | 2,089 | 35,127 | 105,445 | ||||||||
At 1 January 2013 | 9,238 | 10,084 | 5,828 | 24,707 | 114 | 1,929 | 35,127 | 87,027 | ||||||||
Profit for the year | - | - | - | 17,882 | - | - | - | 17,882 | ||||||||
Other comprehensive income (net of tax) | - | - | - | - | 10 | - | - | 10 | ||||||||
- available-for-sale investments | - | - | - | - | 2 | - | - | 2 | ||||||||
- income tax | - | - | - | - | 8 | - | - | 8 | ||||||||
Total comprehensive income for the year | - | - | - | 17,882 | 10 | - | - | 17,892 | ||||||||
Shares issued under employee share plans | 60 | 1,168 | - | (36) | - | - | - | 1,192 | ||||||||
Shares issued in lieu of dividends and amounts arising thereon | 117 | (117) | - | 2,523 | - | - | - | 2,523 | ||||||||
Dividends to shareholders8 | - | - | - | (9,510) | - | - | - | (9,510) | ||||||||
Tax credit on distributions | - | - | - | 42 | - | - | - | 42 | ||||||||
Own shares adjustment | - | - | - | 222 | - | - | - | 222 | ||||||||
Exercise and lapse of share options | - | - | - | (123) | - | 123 | - | - | ||||||||
Cost of share-based payment arrangements | - | - | - | 49 | - | - | - | 49 | ||||||||
Income taxes on share-based payments | - | - | - | - | - | - | - | - | ||||||||
Equity investments granted to employees of subsidiaries under employee share plans | - | - | - | (350) | - | - | - | (350) | ||||||||
At 31 December 2013 | 9,415 | 11,135 | 5,828 | 35,406 | 124 | 2,052 | 35,127 | 99,087 | ||||||||
Dividends per ordinary share at 31 December 2014 were US$0.49 (2013: US$0.48; 2012: US$0.41).
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
Footnotes to the Financial Statements
1 The audited sections of 'Risk' on pages 111 to 237 and the audited sections of 'Capital' on pages 238 to 262 are also an integral part of these financial statements.
2 Available-for-sale investments include nil in respect of the investment in Ping An classified as 'Assets held for sale' (2013: nil; 2012: US$: 737m).
3 From 1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-trading reverse repos were included within 'Loans and advances to banks' and 'Loans and advances to customers' and non-trading repos were included within 'Deposits by banks' and 'Customer accounts'. Comparativedata have been re-presented accordingly. Non-trading reverse repos and repos have been presented as separate lines in the balance sheet to align disclosure with market practice and provide more meaninful information in relation to loans and advances. The extent to which reverse repos and repos represent loans to/from customers and banks is set out in Note 17 on the Financial Statements.
4 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.
5 Cumulative goodwill amounting to US$5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including US$3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of US$1,669m has been charged against retained earnings.
6 Retained earnings include 85,337,430 (US$641m) of own shares held within HSBC's Insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets (2013: 85,997,271 (US$915m); 2012: 86,394,826 (US$874m)).
7 Statutory share premium relief under Section 131 of the Companies Act 1985 (the 'Act') was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003 and the shares issued were recorded at their nominal value only. In HSBC's consolidated financial statements the fair value differences of US$8,290m in respect of HSBC France and US$12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited ('HOHU'), following a number of intra-group reorganisations. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and US$15,796m was recognised in the merger reserve. The merger reserve includes the deduction of US$614m in respect of costs relating to the rights issue, of which US$149m was subsequently transferred to the income statement. Of this US$149m, US$121m was a loss arising from accounting for the agreement with the underwriters as a contingent forward contract. The merger reserve excludes the loss of US$344m on a forward foreign exchange contract associated with hedging the proceeds of the rights issue.
8 Including distributions paid on preference shares and capital securities classified as equity under IFRSs.
9 Retained earnings include 179,419 (US$3m) (2013: 330,030 (US$5m)) of own shares held to fund employee share plans.
10 Other paid-in capital arises from the exercise and lapse of share options granted to employees of HSBC Holdings subsidiaries.
11 During September 2014, HSBC Holdings issued US$2,250m, US$1,500m and €1,500m of Perpetual Subordinated Contingent Convertible Capital Securities, on which there were US$13m of external issuance costs and US$33m of intra-group issuance costs which are classified as equity under IFRSs.
1 Basis of preparation and significant accounting policies
(a) Compliance with International Financial Reporting Standards
International Financial Reporting Standards ('IFRSs') comprise accounting standards issued or adopted by the International Accounting Standards Board ('IASB') and interpretations issued or adopted by the IFRS Interpretations Committee ('IFRS IC').
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in accordance with IFRSs as issued by the IASB and as endorsed by the EU. EU-endorsed IFRSs could differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs were not to be endorsed by the EU.
At 31 December 2014, there were no unendorsed standards effective for the year ended 31 December 2014 affecting these consolidated and separate financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC's financial statements for the year ended 31 December 2014 are prepared in accordance with IFRSs as issued by the IASB.
Standards adopted during the year ended 31 December 2014
There were no new standards applied during the year ended 31 December 2014.
On 1 January 2014, HSBC applied 'Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)', which clarified the requirements for offsetting financial instruments and addressed inconsistencies in current practice when applying the offsetting criteria in IAS 32 'Financial Instruments: Presentation'. The amendments were applied retrospectively and did not have a material effect on HSBC's financial statements.
During 2014, HSBC adopted a number of interpretations and amendments to standards which had an insignificant effect on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.
(b) Differences between IFRSs and Hong Kong Financial Reporting Standards
There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms of their application to HSBC and consequently there would be no significant differences had the financial statements been prepared in accordance with Hong Kong Financial Reporting Standards. The Notes on the Financial Statements, taken together with the Report of the Directors, include the aggregate of all disclosures necessary to satisfy IFRSs and Hong Kong reporting requirements.
(c) Future accounting developments
In addition to the projects to complete financial instrument accounting, discussed below, the IASB is working on projects on insurance and lease accounting which could represent significant changes to accounting requirements in the future.
Standards and amendments issued by the IASB and endorsed by the EU but effective after 31 December 2014
During 2014, the EU endorsed the amendments issued by IASB through the Annual Improvements to IFRSs 2010-2012 Cycle and the 2011-2013 Cycle, and a narrow-scope amendment to IAS 19 'Employee Benefits'. HSBC has not early applied any of the amendments effective after 31 December 2014 and it expects they will have an immaterial effect, when applied, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.
Standards and amendments issued by the IASB but not endorsed by the EU
In May 2014, the IASB issued IFRS 15 'Revenue from Contracts with Customers'. The standard is effective for annual periods beginning on or after 1 January 2017 with early application permitted. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for obligations as they are satisfied. The standard should be applied retrospectively, with certain practical expedients available. HSBC is currently assessing the impact of this standard but it is not practicable to quantify the effect as at the date of the publication of these financial statements.
In July 2014, the IASB issued IFRS 9 'Financial Instruments', which is the comprehensive standard to replace IAS 39 'Financial Instruments: Recognition and Measurement', and includes requirements for classification and measurement of financial assets and liabilities, impairment of financial assets and hedge accounting.
Classification and measurement
The classification and measurement of financial assets will depend on the entity's business model for their management and their contractual cash flow characteristics and result in financial assets being measured at amortised cost, fair value through other comprehensive income ('FVOCI') or fair value through profit or loss. In many instances, the classification and measurement outcomes will be similar to IAS 39, although differences will arise, for example, since IFRS 9 does not apply embedded derivative accounting to financial assets, and equity securities will be measured at fair value through profit or loss or, in limited circumstances, at fair value through other comprehensive income. The combined effect of the application of the business model and the contractual cash flow characteristics tests may result in some differences in the population of financial assets measured at amortised cost or fair value compared with IAS 39. The classification of financial liabilities is essentially unchanged, except that, forcertain liabilities measured at fair value, gains or losses relating to changes in the entity's own credit risk are to be included in other comprehensive income.
Impairment
The impairment requirements apply to financial assets measured at amortised cost and FVOCI, and lease receivables and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of commitments and guarantees) is required for expected credit losses ('ECL') resulting from default events that are possible within the next 12 months ('12 month ECL'). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL').
The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument, rather than by considering an increase in ECL.
The assessment of credit risk, and the estimation of ECL, are required to be unbiased and probability-weighted, and should incorporate all available information which is relevant to the assessment, including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is intended to be more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile. It will also tend to result in an increase in the total level of impairment allowances, since all financial assets will be assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population for which there is objective evidence of impairment in accordance with IAS 39.
Hedge accounting
The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. The standard does not explicitly address macro hedge accounting strategies, which are being considered in a separate project. To remove the risk of any conflict between existing macro hedge accounting practice and the new general hedge accounting requirements, IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting.
Transition
The classification and measurement and impairment requirements are applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods. Hedge accounting is generally applied prospectively from that date.
The mandatory application date for the standard as a whole is 1 January 2018, but it is possible to apply the revised presentation for certain liabilities measured at fair value from an earlier date. HSBC intends to revise the presentation of fair value gains and losses relating to the entity's own credit risk on certain liabilities as soon as permitted by EU law. If this presentation was applied at 31 December 2014, the effect would be to increase profit before tax with the opposite effect on other comprehensive income based on the change in fair value attributable to changes in HSBC's credit risk for the year, with no effect on net assets. Further information on change in fair value attributable to changes in credit risk, including HSBC's credit risk, is disclosed in Note 25.
HSBC is assessing the impact that the rest of IFRS 9 will have on the financial statements through a Group-wide project which has been in place since 2012, but due to the complexity of the classification and measurement, impairment, and hedge accounting requirements and their inter-relationships, it is not possible at this stage to quantify the potential effect.
(d) Changes to the presentation of the Financial Statements and Notes on the Financial Statements
In order to make the financial statements and notes thereon easier to understand, HSBC has changed the location and the wording used to describe certain accounting policies within the notes, removed certain immaterial disclosures and changed the order of certain sections. In applying materiality to financial statement disclosures, we consider both the amount and nature of each item. The main changes to the presentation of the financial statements and notes thereon in 2014 are as follows:
· Consolidated balance sheet and Consolidated statement of changes in equity: rationalised certain line items disclosure to focus on material information.
· Credit risk: changed the order and presentation of certain disclosures to remove duplication and focus on material information.
· In 2013, the financial statements included Note 2 'Summary of significant accounting policies'. In 2014, the accounting policies have been placed, whenever possible, within the relevant Notes on the Financial Statements, and the changes in wording are intended to more clearly set out the accounting policies. These changes in the wording do not represent changes in accounting policies.
· Critical accounting policies: replaced 'Critical accounting policies' with 'Critical accounting estimates and judgements' and placed them within the relevant notes alongside the significant accounting policy to which they relate. The new approach meets the reporting requirements of IAS 1 'Presentation of Financial Statements' and of the US Securities and Exchange Commission.
· Note 6 'Employee compensation and benefits': rationalised to remove duplication and focus on material information.
· Note 38 'Lease commitments': rationalised to focus on material information.
· In 2013, the financial statements included Note 13 Analysis of financial assets and liabilities by measurement basis and Note 23 'Property, Plant and equipment'. In 2014, separate notes for these areas have been removed and relevant information incorporated into other notes.
· In 2013, the financial statements included Note 20 'Transfers of financial assets' and Note 36 Assets charged as security for liabilities and collateral accepted as security for assets. In 2014, the relevant information for these areas has been included in a single Note 19 'Assets charged as security for liabilities, assets transferred and collateral accepted as security for assets'.
From 1 January 2014, HSBC has chosen to present non-trading reverse repos and repos separately on the face of the balance sheet. These items are classified for accounting purposes as loans and receivables or financial liabilities measured at amortised cost. Previously, they were presented on an aggregate basis together with other loans or deposits measured at amortised cost under the following headings in the consolidated balance sheet: 'Loans and advances to banks', 'Loans and advances to customers', 'Deposits by banks' and 'Customer accounts'. The separate presentation aligns disclosure of reverse repos and repos with market practice and provides more meaningful information in relation to loans and advances. Further explanation is provided in Note 17.
From 1 January 2014, the geographical region 'Asia' replaced the geographical regions previously reported as 'Hong Kong' and 'Rest of Asia-Pacific'. This better aligns with internal information used to manage the business. Comparative data have been re-presented. Further explanation is provided in Note 11.
(e) Presentation of information
Disclosures under IFRS 4 'Insurance Contracts' and IFRS 7 'Financial Instruments: Disclosures' concerning the nature and extent of risks relating to insurance contracts and financial instruments have been included in the audited sections of the 'Report of the Directors: Risk' on pages 111 to 237.
Capital disclosures under IAS 1 'Presentation of Financial Statements' have been included in the audited sections of 'Report of the Directors: Capital' on pages 238 to 262.
Disclosures relating to HSBC's securitisation activities and structured products have been included in the audited section of 'Report of the Directors: Risk' on pages 111 to 237.
In accordance with HSBC's policy to provide disclosures that help investors and other stakeholders understand the Group's performance, financial position and changes thereto, the information provided in the Notes on the Financial Statements and the Report of the Directors goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements and listing rules. In particular, HSBC provides additional disclosures having regard to the recommendations of the Enhanced Disclosures Task Force ('EDTF') report 'Enhancing the Risk Disclosures of Banks' issued in October 2012. The report aims to help financial institutions identify areas that investors had highlighted needed better and more transparent information about banks' risks, and how these risks relate to performance measurement and reporting. In addition, HSBC follows the British Bankers' Association Code for Financial Reporting Disclosure ('the BBA Code'). The BBA Code aims to increase the quality and comparability of UK banks' disclosures and sets out five disclosure principles together with supporting guidance. In line with the principles of the BBA Code, HSBC assesses good practice recommendations issued from time to time by relevant regulators and standard setters and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.
In publishing the parent company financial statements together with the Group financial statements, HSBC Holdings has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its individual income statement and related notes.
HSBC's consolidated financial statements are presented in US dollars because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business. The US dollar is also HSBC Holdings' functional currency because the US dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events and conditions of its subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.
(f) Critical accounting estimates and judgements
The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items listed below, it is possible that the outcomes in the next financial year could differ from those on which management's estimates are based, resulting in materially different conclusions from those reached by management for the purposes of the 2014 Financial Statements. Management's selection of HSBC's accounting policies which contain critical estimates and judgements is listed below; it reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved:
· Impairment of loans and advances: Note 1(k);
· Deferred tax assets: Note 8;
· Valuation of financial instruments: Note 13;
· Impairment of interests in associates: Note 20;
· Goodwill impairment: Note 21;
· Provisions: Note 29.
(g) Going concern
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.
(h) Consolidation and related disclosures
HSBC controls and consequently consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Control is initially assessed based on consideration of all facts and circumstances, and is subsequently reassessed when there are significant changes to the initial setup.
Where an entity is governed by voting rights, HSBC would consolidate when it holds, directly or indirectly, the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power over the relevant activities or holding the power as agent or principal.
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured at the fair value of the consideration, including contingent consideration, given at the date of exchange. Acquisition-related costs are recognised as an expense in the income statement in the period in which they are incurred. The acquired identifiable assets, liabilities and contingent liabilities are generally measured at their fair values at the date of acquisition. Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of non-controlling interest and the fair value of HSBC's previously held equity interest, if any, over the net of the amounts of the identifiable assets acquired and the liabilities assumed. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. For acquisitions achieved in stages, the previously held equity interest is remeasured at the acquisition-date fair value with the resulting gain or loss recognised in the income statement.
All intra-HSBC transactions are eliminated on consolidation.
The consolidated financial statements of HSBC also include the attributable share of the results and reserves of joint ventures and associates, based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurred between the date of financial statements available and 31 December.
(i) Foreign currencies
Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange at the balance sheet date. Any resulting exchange differences are included in the income statement. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated into the functional currency using the rate of exchange at the date the fair value was determined. Any foreign exchange component of a gain or loss on a non-monetary item is recognised either in other comprehensive income or in the income statement depending where the gain or loss on the underlying non-monetary item is recognised.
In the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated into the Group's presentation currency at the rate of exchange at the balance sheet date, while their results are translated into US dollars at the average rates of exchange for the reporting period. Exchange differences arising from the retranslation of opening foreign currency net assets, and the retranslation of the results for the reporting period from the average rate to the exchange rate at the period end, are recognised in other comprehensive income. Exchange differences on a monetary item that is part of a net investment in a foreign operation are recognised in the income statement of the separate financial statements and in other comprehensive income in consolidated financial statements. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement as a reclassification adjustment.
(j) Loans and advances to banks and customers
These include loans and advances originated by HSBC, not classified as held for trading or designated at fair value. They are recognised when cash is advanced to a borrower and are derecognised when either the borrower repays its obligations, or the loans are sold, or substantially all the risks and rewards of ownership are transferred. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method, less impairment allowance.
Loans and advances are reclassified to 'Assets held for sale' when they meet the criteria presented in Note 23; however, their measurement continues to be in accordance with this policy.
HSBC may commit to underwrite loans on fixed contractual terms for specified periods of time. Where the loan arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. On drawdown, the loan is classified as held for trading. Where HSBC intends to hold the loan, a provision on the loan commitment is only recorded where it is probable that HSBC will incur a loss. On inception of the loan, the loan to be held is recorded at its fair value and subsequently measured at amortised cost. For certain transactions, such as leveraged finance and syndicated lending activities, the cash advanced may not be the best evidence of the fair value of the loan. For these loans, where the initial fair value is lower than the cash amount advanced, the difference is charged to the income statement in other operating income. The write-down will be recovered over the life of the loan, through the recognition of interest income, unless the loan becomes impaired.
(k) Impairment of loans and advances and available-for-sale financial assets
Critical accounting estimates and judgementsImpairment of loans and advances Loan impairment allowances represent management's best estimate of losses incurred in the loan portfolios at the balance sheet date. Management is required to exercise judgement in making assumptions and estimates when calculating loan impairment allowances on both individually and collectively assessed loans and advances. The largest concentration of collectively assessed loan impairment allowances are in North America, where they were US$2.4bn, representing 38% (2013: US$3.8bn; 47%) of the Group's total collectively assessed loan impairment allowances and 19% (2013:25%) of the Group's total impairment allowances. Of the North American collective impairment allowances approximately 71% (2013: 79%) related to the US CML portfolio. Collective impairment allowances are subject to estimation uncertainty, in part because it is not practicable to identify losses on an individual loan basis due to the large number of individually insignificant loans in the portfolio. The estimation methods include the use of statistical analyses of historical information, supplemented with significant management judgement, to assess whether current economic and credit conditions are such that the actual level of incurred losses is likely to be greater or less than historical experience. Where changes in economic, regulatory or behavioural conditions result in the most recent trends in portfolio risk factors being not fully reflected in the statistical models, risk factors are taken into account by adjusting the impairment allowances derived solely from historical loss experience. Risk factors include loan portfolio growth, product mix, unemployment rates, bankruptcy trends, geographical concentrations, loan product features, economic conditions such as national and local trends in housing markets, the level of interest rates, portfolio seasoning, account management policies and practices, changes in laws and regulations, and other influences on customer payment patterns. Different factors are applied in different regions and countries to reflect local economic conditions, laws and regulations. The methodology and the assumptions used in calculating impairment losses are reviewed regularly in the light of differences between loss estimates and actual loss experience. For example, roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they remain appropriate. For individually assessed loans, judgement is required in determining whether there is objective evidence that a loss event has occurred and, if so, the measurement of the impairment allowance. In determining whether there is objective evidence that a | |
loss event has occurred, judgement is exercised in evaluating all relevant information on indicators of impairment, including the consideration of whether payments are contractually past-due and the consideration of other factors indicating deterioration in the financial condition and outlook of borrowers affecting their ability to pay. A higher level of judgement is required for loans to borrowers showing signs of financial difficulty in market sectors experiencing economic stress, particularly where the likelihood of repayment is affected by the prospects for refinancing or the sale of a specified asset. For those loans where objective evidence of impairment exists, management determine the size of the allowance required based on a range of factors such as the realisable value of security, the likely dividend available on liquidation or bankruptcy, the viability of the customer's business model and the capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations. HSBC might provide loan forbearance to borrowers experiencing financial difficulties by agreeing to modify the contractual payment terms of loans in order to improve the management of customer relationships, maximise collection opportunities or avoid default or repossession. Where forbearance activities are significant, higher levels of judgement and estimation uncertainty are involved in determining their effects on loan impairment allowances. Judgements are involved in differentiating the credit risk characteristics of forbearance cases, including those which return to performing status following renegotiation. Where collectively assessed loan portfolios include significant levels of loan forbearance, portfolios are segmented to reflect their specific credit risk characteristics, and estimates are made of the incurred losses inherent within each forbearance portfolio segment. Forbearance activities take place in both retail and wholesale loan portfolios, but our largest concentration is in the US, in HSBC Finance's CML portfolio. The exercise of judgement requires the use of assumptions which are highly subjective and very sensitive to the risk factors, in particular to changes in economic and credit conditions across a large number of geographical areas. Many of the factors have a high degree of interdependency and there is no single factor to which our loan impairment allowances as a whole are sensitive, though they are particularly sensitive to general economic and credit conditions in North America. For example, a 10% increase in impairment allowances on collectively assessed loans and advances in North America would have increased loan impairment allowances by US$0.2bn at 31 December 2014 (2013: US$0.4bn). |
Losses for impaired loans are recognised when there is objective evidence that impairment of a loan or portfolio of loans has occurred. Impairment allowances that are calculated on individual loans or on groups of loans assessed collectively, are recorded as charges to the income statement and are recorded against the carrying amount of impaired loans on the balance sheet. Losses which may arise from future events are not recognised.
Individually assessed loans and advances
The factors considered in determining whether a loan is individually significant for the purposes of assessing impairment include the size of the loan, the number of loans in the portfolio, and the importance of the individual loan relationship, and how this is managed. Loans that meet these criteria will be individually assessed for impairment, except when volumes of defaults and losses are sufficient to justify treatment under a collective assessment methodology (see below).
Loans considered as individually significant are typically to corporate and commercial customers, are for larger amounts and are managed on an individual basis. For these loans, HSBC considers on a case-by-case basis at each balance sheet date whether there is any objective evidence that a loan is impaired. The criteria used to make this assessment include:
- known cash flow difficulties experienced by the borrower;
- contractual payments of either principal or interest being past due for more than 90 days;
- the probability that the borrower will enter bankruptcy or other financial realisation;
- a concession granted to the borrower for economic or legal reasons relating to the borrower's financial difficulty that results in forgiveness or postponement of principal, interest or fees, where the concession is not insignificant; and
- there has been deterioration in the financial condition or outlook of the borrower such that its ability to repay is considered doubtful.
For loans where objective evidence of impairment exists, impairment losses are determined considering the following factors:
- HSBC's aggregate exposure to the customer;
- the viability of the customer's business model and their capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations;
- the amount and timing of expected receipts and recoveries;
- the likely dividend available on liquidation or bankruptcy;
- the extent of other creditors' commitments ranking ahead of, or pari passu with, HSBC and the likelihood of other creditors continuing to support the company;
- the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident;
- the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
- the likely costs of obtaining and selling collateral as part of foreclosure;
- the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local currency; and
- when available, the secondary market price of the debt.
The determination of the realisable value of security is based on the market value at the time the impairment assessment is performed. The value is not adjusted for expected future changes in market prices, though adjustments are made to reflect local conditions such as forced sale discounts.
Impairment losses are calculated by discounting the expected future cash flows of a loan, which includes expected future receipts of contractual interest, at the loan's original effective interest rate and comparing the resultant present value with the loan's current carrying amount. The impairment allowances on individually significant accounts are reviewed at least quarterly and more regularly when circumstances require.
Collectively assessed loans and advances
Impairment is assessed collectively to cover losses which have been incurred but have not yet been identified on loans subject to individual assessment or for homogeneous groups of loans that are not considered individually significant. Retail lending portfolios are generally assessed for impairment collectively as the portfolios are generally large homogeneous loan pools.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for a collective impairment assessment. These credit risk characteristics may include country of origination, type of business involved, type of products offered, security obtained or other relevant factors. This assessment captures impairment losses that HSBC has incurred as a result of events occurring before the balance sheet date, which HSBC is not able to identify on an individual loan basis, and that can be reliably estimated. When information becomes available which identifies losses on individual loans within the group, those loans are removed from the group and assessed individually.
The collective impairment allowance is determined after taking into account:
- historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product);
- the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an appropriate allowance against the individual loan; and
- management's judgement as to whether current economic and credit conditions are such that the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested by historical experience.
The period between a loss occurring and its identification is estimated by management for each identified portfolio based on economic and market conditions, customer behaviour, portfolio management information, credit management techniques and collection and recovery experiences in the market. As it is assessed empirically on a periodic basis, the estimated period may vary over time as these factors change.
Homogeneous groups of loans and advances
Statistical methods are used to determine collective impairment losses for homogeneous groups of loans not considered individually significant. Losses in these groups of loans are recorded individually when individual loans are removed from the group and written off. The methods that are used to calculate collective allowances are:
- When appropriate empirical information is available, HSBC utilises roll-rate methodology, which employs statistical analyses of historical data and experience of delinquency and default to reliably estimate the amount of the loans that will eventually be written off as a result of the events occurring before the balance sheet date but which HSBC is not able to identify individually. Individual loans are grouped using ranges of past due days; statistical analysis is then used to estimate the likelihood that loans in each range will progress through the various stages of delinquency and become irrecoverable. Additionally, individual loans are segmented based on their credit characteristics as described above. In applying this methodology, adjustments are made to estimate the periods of time between a loss event occurring and its discovery, for example through a missed payment, (known as the emergence period) and the period of time between discovery and write-off (known as the outcome period). Current economic conditions are also evaluated when calculating the appropriate level of allowance required to cover inherent loss. In certain highly developed markets, sophisticated models also take into account behavioural and account management trends as revealed in, for example, bankruptcy and rescheduling statistics.
- When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll-rate methodology, HSBC adopts a basic formulaic approach based on historical loss rate experience, or a discounted cash flow model. Where a basic formulaic approach is undertaken, the period between a loss event occurring and its identification is explicitly estimated by local management, and is typically between six and twelve months.
The inherent loss within each portfolio is assessed on the basis of statistical models using historical data observations, which are updated periodically to reflect recent portfolio and economic trends. When the most recent trends arising from changes in economic, regulatory or behavioural conditions are not fully reflected in the statistical models, they are taken into account by adjusting the impairment allowances derived from the statistical models to reflect these changes as at the balance sheet date.
Write-off of loans and advances
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the loan impairment allowance account accordingly. The write-back is recognised in the income statement.
Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans as part of an orderly realisation are recorded as 'Assets held for sale' and reported in 'Other assets' if those assets are classified as held for sale. The asset acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Impairments and reversal of previous impairments are recognised in the income statement in 'Other operating income', together with any realised gains or losses on disposal.
Renegotiated loans
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past due, but are treated as up to date loans for measurement purposes once a minimum number of payments required have been received. They are segregated from other parts of the loan portfolio for the purposes of collective impairment assessment, to reflect their risk profile. Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification until maturity or derecognition.
A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement made on substantially different terms or if the terms of an existing agreement are modified such that the renegotiated loan is substantially a different financial instrument. Any new agreements arising due to derecognition events will continue to be disclosed as renegotiated loans and are assessed for impairment as above.
Impairment of available-for-sale financial assets
Available-for-sale financial assets are assessed at each balance sheet date for objective evidence of impairment. If such evidence exists as a result of one or more events that occurred after the initial recognition of the financial asset (a 'loss event') and that loss event has an impact which can be reliably measured on the estimated future cash flows of the financial asset an impairment loss is recognised.
If the available-for-sale financial asset is impaired, the difference between its acquisition cost (net of any principal repayments and amortisation) and its current fair value, less any previous impairment loss recognised in the income statement, is recognised in the income statement.
Impairment losses are recognised in the income statement within 'Loan impairment charges and other credit risk provisions' for debt instruments and within 'Gains less losses from financial investments' for equities. The impairment methodologies for available-for-sale financial assets are set out in more detail below:
- Available-for-sale debt securities. In assessing objective evidence of impairment at the reporting date, HSBC considers all available evidence, including observable data or information about events specifically relating to the securities which may result in a shortfall in the recovery of future cash flows. Financial difficulties of the issuer, as well as other factors such as information about the issuers' liquidity, business and financial risk exposures, levels of and trends in default for similar financial assets, national and local economic trends and conditions, and the fair value of collateral and guarantees may be considered individually, or in combination, to determine if there is objective evidence of impairment.
In addition, the performance of underlying collateral and the extent and depth of market price declines is relevant when assessing objective evidence of impairment of available-for-sale ABSs. The primary indicators of potential impairment are considered to be adverse fair value movements and the disappearance of an active market for a security, while changes in credit ratings are of secondary importance.
- Available-for-sale equity securities.Objective evidence of impairment may include specific information about the issuer as detailed above, but may also include information about significant changes in technology, markets, economics or the law that provides evidence that the cost of the equity securities may not be recovered.
A significant or prolonged decline in the fair value of the equity below its cost is also objective evidence of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is evaluated against the continuous period in which the fair value of the asset has been below its original cost at initial recognition.
Once an impairment loss has been recognised, the subsequent accounting treatment for changes in the fair value of that asset differs depending on the type of asset:
- for an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognised in the income statement when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, the decline in the fair value of the financial asset is recognised in other comprehensive income. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, or the instrument is no longer impaired, the impairment loss is reversed through the income statement;
- for an available-for-sale equity security, all subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised in other comprehensive income. Impairment losses recognised on the equity security are not reversed through the income statement. Subsequent decreases in the fair value of the available-for-sale equity security are recognised in the income statement to the extent that further cumulative impairment losses have been incurred.
(l) Funding fair value adjustment
In line with evolving market practice HSBC revised its estimation methodology for valuing the uncollateralised derivative portfolios by introducing a funding fair value adjustment ('FFVA'). The FFVA adjustment reflects the estimated present value of the future market funding cost or benefit associated with funding uncollateralised derivative exposure at rates other than the Overnight Index Swap ('OIS') rate, which is the benchmark rate used for valuing collateralised derivatives. The impact of FFVA adoption in 2014 was a US$263m reduction in net trading income, reflecting the incorporation of a funding spread over Libor. Further details have been provided in Note 13 to the Financial Statements.
(m) Operating income
Interest income and expense
Interest income and expense for all financial instruments except for those classified as held for trading or designated at fair value (except for debt securities issued by HSBC and derivatives managed in conjunction with those debt securities) are recognised in 'Interest income' and 'Interest expense' in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.
Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Non-interest income and expense
Fee income is earned from a diverse range of services provided by HSBC to its customers. Fee income is accounted for as follows:
- income earned on the execution of a significant act is recognised as revenue when the act is completed (for example, fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as an arrangement for the acquisition of shares or other securities);
- income earned from the provision of services is recognised as revenue as the services are provided (for example, asset management, portfolio and other management advisory and service fees); and
- income which forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in 'Interest income'.
Net trading incomecomprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with the related interest income, expense and dividends.
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders have approved the dividend for unlisted equity securities.
The accounting policies for net income/(expense) from financial instruments designated at fair value and for net insurance premium income are disclosed in Note 2 and Note 3.