HSBC Holdings Regulatory News (HSBA)

1 Capital figures and ratios at 31 December 2019 are calculated in accordance with the revised Capital Requirements Regulation, as implemented ('CRR II'). Prior period capital figures are reported under the Capital Requirements Regulation and Directive ('CRD IV'). Unless otherwise stated, all figures are calculated using the EU's regulatory transitional arrangements for IFRS 9 'Financial Instruments' in article 473a of the Capital Requirements Regulation.

2 'Capital required' represents the minimum total capital charge set at 8% of risk-weighted assets by article 92 of the Capital Requirements Regulation.

(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 helps enable 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 Group'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 risks include credit, market, operational, pensions, insurance, structural foreign exchange, residual risk and interest rate risk in the banking book.

For further details, please refer to our Pillar 3 Disclosures at 31 December 2019.

* The references identify the lines prescribed in the European Banking Authority ('EBA') template, which are applicable and where there is a value.

Throughout 2019, we complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing.

At 31 December 2019, our common equity tier 1 ('CET1') ratio increased to 14.7% from 14.0% at 31 December 2018.

CET1 capital increased during the year by $2.9bn, mainly as a result of:

• capital generation of $6.0bn through profits;

• a fall in the deduction for goodwill and other intangible assets of $4.9bn. This was primarily due to $7.3bn of goodwill impairment, partly offset by an increase in internally generated software;

• a $1.5bn increase in FVOCI reserve; and

• favourable foreign currency translation differences of $1.0bn.

These increases were partly offset by:

• dividends and scrip of $9.0bn;

• share buy-backs of $1.0bn; and

• an increase in the deduction for excess expected loss $0.7bn.

Our Pillar 2A requirement at 31 December 2019, as per the PRA's Individual Capital Requirement based on a point-in-time assessment, was 3.0% of RWAs, of which 1.7% was met by CET1.

Risk-weighted assets ('RWAs') decreased by $21.9bn during the year. The $26.9bn decrease (excluding foreign currency translation differences) comprised the movements described by the following comments.

Asset size

The $9.0bn rise in RWAs due to asset size movements was the result of lending growth largely in CMB, RBWM and GB&M, partly offset by reductions due to active portfolio management in GB&M and CMB. In CMB, a $9.5bn RWA increase arose from growth of $14.4bn principally in Asia and Europe, which was partly offset by active portfolio management measures totalling $4.9bn, largely in Europe. In RBWM, the $7.5bn RWA increase was the result of lending growth, whereas the fall of $1.6bn in GB&M resulted from management actions of $12.3bn, mainly in Europe, Asia and North America, which offset growth of $10.7bn. A $4.0bn decrease in Corporate Centre was primarily due to disposals from the legacy portfolio, and a $2.4bn fall in market risk levels mainly resulted from reduced exposures.

Asset quality

The $3.7bn growth as a result of changes in asset quality included a $3.3bn increase in CMB RWAs, most notably in Asia, and a $0.6bn increase in GB&M RWAs, predominantly in Europe. These movements were primarily due to changes in portfolio mix.

Model updates

The $7.7bn reduction in RWAs from model updates included a $4.8bn fall in GB&M and CMB RWAs, largely due to global corporate model updates, and a $2.3bn decrease in GPB RWAs, reflecting changes to Private Banking models in Asia and North America. The $0.6bn decrease in RBWM RWAs was mainly due to updates to UK retail models.

Methodology and policy

The $32.2bn fall in RWAs due to methodology and policy changes was primarily due to management initiatives of $25.9bn, largely in CMB and GB&M. These included risk parameter refinements and securitisation transactions.

A change to our best estimate of expected loss on corporate exposures further reduced RWAs by $6.3bn, primarily in CMB's UK portfolio. The $3.7bn decrease in market risk RWAs derived mainly from increased diversification benefits following regulatory approval to expand the scope of consolidation. In addition, an approved change to operational risk methodology caused a $0.9bn fall in RWAs across all global businesses.

These decreases were partly offset by a $4.5bn increase in tangible fixed assets within Corporate Centre as a result of implementing IFRS 16 'Leases', recognising right-of-use assets in relation to leases previously classified as 'operating leases'.

1 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

* The references identify the lines prescribed in the EBA template.

1 UK leverage ratio denotes the Group's leverage ratio calculated under the PRA's UK leverage framework and excludes qualifying central bank balances from the calculation of exposure.

Our leverage ratio calculated in accordance with the Capital Requirements Regulation was 5.3% at 31 December 2019, down from 5.5% at 31 December 2018. The increase in exposure was primarily due to growth in customer lending and financial investments.

At 31 December 2019, our UK minimum leverage ratio requirement of 3.25% under the PRA's UK leverage framework was supplemented by an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.2%. These additional buffers translated into capital values of $17.7bn, and $5.4bn respectively. We exceeded these leverage requirements.

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2019 is published on our website, www.hsbc.com/investors.