Last checked at 21 Feb 2023 16:30
Personal lending - residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage | ||||||
(Audited) | ||||||
of which: | ||||||
Total | UK | Hong Kong | ||||
Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | |
$m | % | $m | % | $m | % | |
Stage 1 | ||||||
Fully collateralised | 310,705 | - | 134,044 | - | 94,949 | - |
LTV ratio: | ||||||
- less than 50% | 154,337 | - | 70,936 | - | 44,740 | - |
- 51% to 60% | 57,386 | - | 23,226 | - | 18,027 | - |
- 61% to 70% | 44,805 | - | 20,391 | - | 10,096 | - |
- 71% to 80% | 25,458 | - | 12,849 | - | 4,167 | - |
- 81% to 90% | 17,106 | - | 5,922 | - | 7,883 | - |
- 91% to 100% | 11,613 | - | 720 | - | 10,036 | - |
Partially collateralised (A): | 6,964 | - | 329 | - | 6,441 | - |
LTV ratio: | ||||||
- 101% to 110% | 6,127 | - | 73 | - | 5,953 | - |
- 111% to 120% | 570 | - | 61 | - | 482 | - |
- greater than 120% | 267 | 0.4 | 195 | - | 6 | - |
- collateral value on A | 6,521 | 237 | 6,146 | |||
Total | 317,669 | - | 134,373 | - | 101,390 | - |
Stage 2 | ||||||
Fully collateralised | 39,906 | 0.6 | 34,541 | 0.4 | 981 | - |
LTV ratio: | ||||||
- less than 50% | 12,250 | 0.7 | 10,387 | 0.6 | 577 | - |
- 51% to 60% | 7,372 | 0.5 | 6,402 | 0.4 | 171 | - |
- 61% to 70% | 9,617 | 0.4 | 8,541 | 0.3 | 85 | - |
- 71% to 80% | 6,770 | 0.5 | 5,922 | 0.3 | 37 | - |
- 81% to 90% | 3,388 | 0.5 | 2,918 | 0.2 | 51 | 0.1 |
- 91% to 100% | 509 | 1.1 | 371 | 0.2 | 60 | 0.2 |
Partially collateralised (B): | 143 | 6.9 | 49 | 0.3 | 47 | 0.2 |
LTV ratio: | ||||||
- 101% to 110% | 73 | 3.6 | 10 | 1.2 | 45 | 0.2 |
- 111% to 120% | 24 | 12.5 | 10 | - | 2 | - |
- greater than 120% | 46 | 9.1 | 29 | 0.1 | - | - |
- collateral value on B | 123 | 38 | 44 | |||
Total | 40,049 | 0.6 | 34,590 | 0.4 | 1,028 | - |
Stage 3 | ||||||
Fully collateralised | 2,097 | 9.9 | 676 | 11.1 | 237 | 0.1 |
LTV ratio: | ||||||
- less than 50% | 1,077 | 7.2 | 448 | 9.4 | 105 | - |
- 51% to 60% | 330 | 7.6 | 110 | 9.7 | 26 | 0.1 |
- 61% to 70% | 207 | 12.6 | 48 | 15.9 | 11 | 0.7 |
- 71% to 80% | 212 | 14.7 | 33 | 19.7 | 25 | 0.1 |
- 81% to 90% | 147 | 17.8 | 10 | 24.5 | 27 | - |
- 91% to 100% | 124 | 18.1 | 27 | 22.5 | 43 | - |
Partially collateralised (C): | 133 | 46.9 | 12 | 9.8 | 1 | 0.3 |
LTV ratio: | ||||||
- 101% to 110% | 37 | 24.3 | 10 | 3.7 | 1 | 0.4 |
- 111% to 120% | 17 | 32.7 | - | 64.9 | - | - |
- greater than 120% | 79 | 60.5 | 2 | 36.2 | - | - |
- collateral value on C | 79 | 4 | 1 | |||
Total | 2,230 | 12.1 | 688 | 11.1 | 238 | 0.1 |
At 31 Dec 2022 | 359,948 | 0.2 | 169,651 | 0.1 | 102,656 | - |
Personal lending - residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage (continued) | ||||||
(Audited) | ||||||
of which: | ||||||
Total | UK | Hong Kong | ||||
Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | Gross carrying/nominal amount | ECL coverage | |
$m | % | $m | % | $m | % | |
Stage 1 | ||||||
Fully collateralised | 377,454 | - | 168,737 | - | 98,020 | - |
LTV ratio: | ||||||
- less than 50% | 190,370 | - | 81,582 | - | 61,234 | - |
- 51% to 60% | 64,217 | - | 28,555 | - | 12,070 | - |
- 61% to 70% | 51,842 | - | 25,949 | - | 4,649 | - |
- 71% to 80% | 46,932 | 0.1 | 24,114 | - | 8,360 | - |
- 81% to 90% | 18,778 | 0.1 | 7,899 | - | 8,420 | - |
- 91% to 100% | 5,315 | 0.1 | 638 | - | 3,287 | - |
Partially collateralised (A): | 682 | 0.3 | 358 | - | 30 | - |
LTV ratio: | ||||||
- 101% to 110% | 254 | 0.6 | 104 | - | 26 | - |
- 111% to 120% | 98 | 0.4 | 60 | - | 1 | - |
- greater than 120% | 330 | 0.1 | 194 | - | 3 | - |
- collateral value on A | 484 | 235 | 28 | |||
Total | 378,136 | - | 169,095 | - | 98,050 | - |
Stage 2 | ||||||
Fully collateralised | 7,710 | 1.7 | 2,738 | 2.1 | 1,166 | - |
LTV ratio: | ||||||
- less than 50% | 4,380 | 1.5 | 1,846 | 1.6 | 905 | - |
- 51% to 60% | 1,317 | 1.4 | 397 | 2.4 | 106 | - |
- 61% to 70% | 1,016 | 1.6 | 282 | 3.0 | 34 | - |
- 71% to 80% | 725 | 2.3 | 175 | 4.7 | 50 | - |
- 81% to 90% | 208 | 4.3 | 32 | 5.6 | 58 | - |
- 91% to 100% | 64 | 4.1 | 6 | 1.9 | 13 | - |
Partially collateralised (B): | 24 | 13.6 | 3 | 7.7 | - | - |
LTV ratio: | ||||||
- 101% to 110% | 7 | 18.6 | 1 | 1.0 | - | - |
- 111% to 120% | 8 | 16.6 | - | - | - | - |
- greater than 120% | 9 | 6.7 | 2 | 11.1 | - | - |
- collateral value on B | 20 | 2 | - | |||
Total | 7,734 | 1.7 | 2,741 | 2.1 | 1,166 | - |
Stage 3 | ||||||
Fully collateralised | 2,853 | 11.5 | 954 | 14.2 | 68 | 0.3 |
LTV ratio: | ||||||
- less than 50% | 1,490 | 9.2 | 635 | 13.0 | 48 | 0.5 |
- 51% to 60% | 443 | 8.6 | 129 | 14.0 | 10 | 0.1 |
- 61% to 70% | 371 | 10.9 | 79 | 16.2 | 2 | 0.1 |
- 71% to 80% | 256 | 15.4 | 67 | 19.1 | 3 | - |
- 81% to 90% | 171 | 20.4 | 21 | 25.2 | 4 | - |
- 91% to 100% | 122 | 32.2 | 23 | 18.6 | 1 | - |
Partially collateralised (C): | 220 | 39.6 | 7 | 30.8 | - | - |
LTV ratio: | ||||||
- 101% to 110% | 56 | 27.5 | 4 | 22.3 | - | - |
- 111% to 120% | 29 | 29.2 | - | - | - | - |
- greater than 120% | 135 | 46.9 | 3 | 45.5 | - | - |
- collateral value on C | 143 | 6 | - | |||
Total | 3,073 | 13.5 | 961 | 14.4 | 68 | 0.3 |
At 31 Dec 2021 | 388,943 | 0.2 | 172,797 | 0.1 | 99,284 | - |
Supplementary information
Wholesale lending - loans and advances to customers at amortised cost by country/territory | ||||||||
Gross carrying amount | Allowance for ECL | |||||||
Corporate and commercial | Of which: real estate1 | Non-bank financial institutions | Total | Corporate and commercial | Of which: real estate1 | Non-bank financial institutions | Total | |
$m | $m | $m | $m | $m | $m | $m | $m | |
Europe | 146,236 | 19,814 | 18,198 | 164,434 | (2,376) | (370) | (139) | (2,515) |
- UK | 104,775 | 14,309 | 12,663 | 117,438 | (1,522) | (329) | (130) | (1,652) |
- France | 27,571 | 4,216 | 4,152 | 31,723 | (622) | (36) | (4) | (626) |
- Germany | 6,603 | 252 | 713 | 7,316 | (154) | - | (3) | (157) |
- Switzerland | 988 | 635 | 298 | 1,286 | (8) | - | - | (8) |
- other | 6,299 | 402 | 372 | 6,671 | (70) | (5) | (2) | (72) |
Asia | 245,872 | 73,164 | 38,863 | 284,735 | (4,361) | (2,197) | (77) | (4,438) |
- Hong Kong | 145,411 | 56,161 | 20,812 | 166,223 | (3,001) | (1,966) | (36) | (3,037) |
- Australia | 11,641 | 3,106 | 1,157 | 12,798 | (97) | (1) | - | (97) |
- India | 9,052 | 1,711 | 4,267 | 13,319 | (80) | (22) | (10) | (90) |
- Indonesia | 3,214 | 85 | 226 | 3,440 | (187) | (1) | - | (187) |
- mainland China | 31,790 | 5,752 | 8,908 | 40,698 | (328) | (167) | (30) | (358) |
- Malaysia | 5,986 | 1,081 | 180 | 6,166 | (133) | (15) | - | (133) |
- Singapore | 15,904 | 3,812 | 1,192 | 17,096 | (388) | (12) | (1) | (389) |
- Taiwan | 4,700 | 20 | 65 | 4,765 | (1) | - | - | (1) |
- other | 18,174 | 1,436 | 2,056 | 20,230 | (146) | (13) | - | (146) |
Middle East and North Africa (excluding Saudi Arabia) | 21,565 | 1,766 | 324 | 21,889 | (983) | (158) | (3) | (986) |
- Egypt | 1,261 | 77 | 101 | 1,362 | (117) | (5) | (1) | (118) |
- UAE | 13,503 | 1,569 | 149 | 13,652 | (673) | (152) | - | (673) |
- other | 6,801 | 120 | 74 | 6,875 | (193) | (1) | (2) | (195) |
North America | 28,619 | 5,783 | 8,791 | 37,410 | (230) | (102) | (37) | (267) |
- US | 28,249 | 5,714 | 8,640 | 36,889 | (214) | (94) | (26) | (240) |
- Canada2 | - | - | - | - | - | - | - | - |
- other | 370 | 69 | 151 | 521 | (16) | (8) | (11) | (27) |
Latin America | 12,064 | 907 | 763 | 12,827 | (374) | (24) | (1) | (375) |
- Mexico | 9,784 | 903 | 717 | 10,501 | (335) | (24) | (1) | (336) |
- other | 2,280 | 4 | 46 | 2,326 | (39) | - | - | (39) |
At 31 Dec 2022 | 454,356 | 101,434 | 66,939 | 521,295 | (8,324) | (2,851) | (257) | (8,581) |
Europe | 163,341 | 23,137 | 17,818 | 181,159 | (2,770) | (546) | (41) | (2,811) |
- UK | 115,386 | 16,233 | 11,306 | 126,692 | (1,855) | (489) | (32) | (1,887) |
- France | 34,488 | 5,520 | 4,391 | 38,879 | (654) | (47) | (2) | (656) |
- Germany | 6,746 | 306 | 987 | 7,733 | (120) | - | (3) | (123) |
- Switzerland | 1,188 | 731 | 688 | 1,876 | (8) | - | - | (8) |
- other | 5,533 | 347 | 446 | 5,979 | (133) | (10) | (4) | (137) |
Asia | 263,821 | 81,453 | 36,321 | 300,142 | (3,297) | (731) | (44) | (3,341) |
- Hong Kong | 162,684 | 62,792 | 20,182 | 182,866 | (1,585) | (624) | (7) | (1,592) |
- Australia | 9,937 | 2,596 | 717 | 10,654 | (108) | (3) | - | (108) |
- India | 8,221 | 1,786 | 4,003 | 12,224 | (84) | (29) | (8) | (92) |
- Indonesia | 3,436 | 86 | 226 | 3,662 | (246) | (2) | (1) | (247) |
- mainland China | 33,555 | 6,811 | 9,359 | 42,914 | (198) | (41) | (28) | (226) |
- Malaysia | 7,229 | 1,741 | 197 | 7,426 | (172) | (21) | - | (172) |
- Singapore | 16,401 | 4,158 | 782 | 17,183 | (792) | (5) | - | (792) |
- Taiwan | 6,291 | 31 | 47 | 6,338 | - | - | - | - |
- other | 16,067 | 1,452 | 808 | 16,875 | (112) | (6) | - | (112) |
Middle East and North Africa (excluding Saudi Arabia) | 21,963 | 1,555 | 376 | 22,339 | (1,207) | (158) | (3) | (1,210) |
- Egypt | 1,788 | 69 | 152 | 1,940 | (161) | (7) | - | (161) |
- UAE | 12,942 | 1,370 | 190 | 13,132 | (811) | (149) | - | (811) |
- other | 7,233 | 116 | 34 | 7,267 | (235) | (2) | (3) | (238) |
North America | 52,577 | 13,639 | 10,197 | 62,774 | (427) | (87) | (18) | (445) |
- US | 27,002 | 5,895 | 8,511 | 35,513 | (207) | (64) | (1) | (208) |
- Canada | 25,048 | 7,650 | 1,546 | 26,594 | (198) | (15) | (6) | (204) |
- other | 527 | 94 | 140 | 667 | (22) | (8) | (11) | (33) |
Latin America | 11,837 | 1,476 | 643 | 12,480 | (503) | (122) | (4) | (507) |
- Mexico | 9,561 | 1,475 | 618 | 10,179 | (452) | (122) | (4) | (456) |
- other | 2,276 | 1 | 25 | 2,301 | (51) | - | - | (51) |
At 31 Dec 2021 | 513,539 | 121,260 | 65,355 | 578,894 | (8,204) | (1,644) | (110) | (8,314) |
1 Real estate lending within this disclosure corresponds solely to the industry of the borrower. Commercial real estate on page 177 includes borrowers in multiple industries investing in income-producing assets and to a lesser extent, their construction and development.
2 Classified as held for sale at 31 December 2022.
Personal lending - loans and advances to customers at amortised cost by country/territory | ||||||||
Gross carrying amount | Allowance for ECL | |||||||
First lien residential mortgages | Other personal | Of which: credit cards | Total | First lien residential mortgages | Other personal | Of which: credit cards | Total | |
$m | $m | $m | $m | $m | $m | $m | $m | |
Europe | 159,063 | 23,830 | 6,665 | 182,893 | (265) | (874) | (451) | (1,139) |
- UK | 154,519 | 16,794 | 6,622 | 171,313 | (226) | (837) | (449) | (1,063) |
- France1 | 30 | 76 | 9 | 106 | (14) | (8) | - | (22) |
- Germany | - | 234 | - | 234 | - | - | - | - |
- Switzerland | 1,378 | 5,094 | - | 6,472 | - | (22) | - | (22) |
- other | 3,136 | 1,632 | 34 | 4,768 | (25) | (7) | (2) | (32) |
Asia | 151,058 | 44,610 | 11,805 | 195,668 | (50) | (640) | (423) | (690) |
- Hong Kong | 101,478 | 31,539 | 8,645 | 133,017 | (1) | (352) | (258) | (353) |
- Australia | 21,372 | 456 | 396 | 21,828 | (11) | (19) | (18) | (30) |
- India | 1,078 | 590 | 162 | 1,668 | (4) | (18) | (13) | (22) |
- Indonesia | 70 | 278 | 141 | 348 | (1) | (17) | (12) | (18) |
- mainland China | 9,305 | 921 | 378 | 10,226 | (3) | (62) | (49) | (65) |
- Malaysia | 2,292 | 2,437 | 843 | 4,729 | (27) | (93) | (31) | (120) |
- Singapore | 7,501 | 6,264 | 422 | 13,765 | - | (36) | (14) | (36) |
- Taiwan | 5,428 | 1,189 | 284 | 6,617 | - | (18) | (5) | (18) |
- other | 2,534 | 936 | 534 | 3,470 | (3) | (25) | (23) | (28) |
Middle East and North Africa (excluding Saudi Arabia) | 2,450 | 3,266 | 735 | 5,716 | (22) | (123) | (52) | (145) |
- Egypt | - | 310 | 83 | 310 | - | (2) | (1) | (2) |
- UAE | 2,104 | 1,340 | 426 | 3,444 | (14) | (83) | (41) | (97) |
- other | 346 | 1,616 | 226 | 1,962 | (8) | (38) | (10) | (46) |
North America | 17,907 | 866 | 256 | 18,773 | (91) | (35) | (24) | (126) |
- US | 16,847 | 704 | 213 | 17,551 | (10) | (30) | (23) | (40) |
- Canada2 | - | - | - | - | - | - | - | - |
- other | 1,060 | 162 | 43 | 1,222 | (81) | (5) | (1) | (86) |
Latin America | 6,343 | 5,619 | 1,927 | 11,962 | (146) | (626) | (212) | (772) |
- Mexico | 6,124 | 4,894 | 1,615 | 11,018 | (145) | (593) | (196) | (738) |
- other | 219 | 725 | 312 | 944 | (1) | (33) | (16) | (34) |
At 31 Dec 2022 | 336,821 | 78,191 | 21,388 | 415,012 | (574) | (2,298) | (1,162) | (2,872) |
Europe | 170,818 | 49,253 | 8,624 | 220,071 | (329) | (1,006) | (437) | (1,335) |
- UK | 163,549 | 19,154 | 8,213 | 182,703 | (223) | (823) | (434) | (1,046) |
- France1 | 3,124 | 22,908 | 366 | 26,032 | (38) | (91) | (3) | (129) |
- Germany | - | 282 | - | 282 | - | - | - | - |
- Switzerland | 1,367 | 6,615 | - | 7,982 | - | (75) | - | (75) |
- other | 2,778 | 294 | 45 | 3,072 | (68) | (17) | - | (85) |
Asia | 149,709 | 46,781 | 11,413 | 196,490 | (59) | (706) | (428) | (765) |
- Hong Kong | 98,019 | 32,996 | 8,154 | 131,015 | (1) | (338) | (217) | (339) |
- Australia | 21,149 | 504 | 427 | 21,653 | (5) | (33) | (32) | (38) |
- India | 981 | 543 | 181 | 1,524 | (10) | (30) | (20) | (40) |
- Indonesia | 76 | 272 | 147 | 348 | (1) | (20) | (14) | (21) |
- mainland China | 10,525 | 1,103 | 563 | 11,628 | (4) | (72) | (66) | (76) |
- Malaysia | 2,532 | 2,657 | 791 | 5,189 | (33) | (122) | (34) | (155) |
- Singapore | 7,811 | 6,649 | 367 | 14,460 | - | (40) | (13) | (40) |
- Taiwan | 5,672 | 1,188 | 271 | 6,860 | - | (17) | (5) | (17) |
- other | 2,944 | 869 | 512 | 3,813 | (5) | (34) | (27) | (39) |
Middle East and North Africa (excluding Saudi Arabia) | 2,262 | 3,157 | 761 | 5,419 | (26) | (146) | (60) | (172) |
- Egypt | - | 368 | 98 | 368 | - | (3) | (1) | (3) |
- UAE | 1,924 | 1,232 | 417 | 3,156 | (18) | (88) | (39) | (106) |
- other | 338 | 1,557 | 246 | 1,895 | (8) | (55) | (20) | (63) |
North America | 43,529 | 3,091 | 555 | 46,620 | (141) | (87) | (47) | (228) |
- US | 16,642 | 799 | 232 | 17,441 | (12) | (53) | (36) | (65) |
- Canada | 25,773 | 2,123 | 284 | 27,896 | (33) | (27) | (8) | (60) |
- other | 1,114 | 169 | 39 | 1,283 | (96) | (7) | (3) | (103) |
Latin America | 5,050 | 4,687 | 1,505 | 9,737 | (120) | (483) | (163) | (603) |
- Mexico | 4,882 | 4,006 | 1,172 | 8,888 | (119) | (450) | (148) | (569) |
- other | 168 | 681 | 333 | 849 | (1) | (33) | (15) | (34) |
At 31 Dec 2021 | 371,368 | 106,969 | 22,858 | 478,337 | (675) | (2,428) | (1,135) | (3,103) |
1 Included in other personal lending at 31 December 2022 is nil (31 December 2021: $19,972m) guaranteed by Crédit Logement as our retail banking business in France has been classified as held for sale.
2 Classified as held for sale at 31 December 2022.
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business | ||||||||||
Gross carrying/nominal amount | Allowance for ECL | |||||||||
Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | |
$m | $m | $m | $m | $m | $m | $m | $m | $m | $m | |
Loans and advances to customers at amortised cost | 777,543 | 139,130 | 19,505 | 129 | 936,307 | (1,095) | (3,491) | (6,829) | (38) | (11,453) |
- WPB | 373,889 | 49,096 | 3,502 | - | 426,487 | (572) | (1,512) | (850) | - | (2,934) |
- CMB | 232,296 | 69,784 | 12,794 | 112 | 314,986 | (435) | (1,529) | (4,891) | (38) | (6,893) |
- GBM | 171,033 | 20,207 | 3,209 | 17 | 194,466 | (88) | (437) | (1,088) | - | (1,613) |
- Corporate Centre | 325 | 43 | - | - | 368 | - | (13) | - | - | (13) |
Loans and advances to banks at amortised cost | 103,042 | 1,827 | 82 | - | 104,951 | (18) | (29) | (22) | - | (69) |
- WPB | 26,111 | 377 | - | - | 26,488 | (3) | (1) | - | - | (4) |
- CMB | 23,735 | 257 | 4 | - | 23,996 | (5) | - | (2) | - | (7) |
- GBM | 47,128 | 1,050 | 78 | - | 48,256 | (9) | (28) | (20) | - | (57) |
- Corporate Centre | 6,068 | 143 | - | - | 6,211 | (1) | - | - | - | (1) |
Other financial assets measured at amortised cost | 996,489 | 17,166 | 797 | 46 | 1,014,498 | (124) | (188) | (234) | (7) | (553) |
- WPB | 248,708 | 5,644 | 458 | 46 | 254,856 | (57) | (96) | (130) | (7) | (290) |
- CMB | 184,459 | 10,883 | 253 | - | 195,595 | (37) | (84) | (91) | - | (212) |
- GBM | 486,224 | 637 | 78 | - | 486,939 | (28) | (8) | (13) | - | (49) |
- Corporate Centre | 77,098 | 2 | 8 | - | 77,108 | (2) | - | - | - | (2) |
Total gross carrying amount on-balance sheet at 31 Dec 2022 | 1,877,074 | 158,123 | 20,384 | 175 | 2,055,756 | (1,237) | (3,708) | (7,085) | (45) | (12,075) |
Loans and other credit-related commitments | 583,383 | 34,033 | 1,372 | - | 618,788 | (141) | (180) | (65) | - | (386) |
- WPB | 238,161 | 4,377 | 769 | - | 243,307 | (25) | (1) | - | - | (26) |
- CMB | 121,909 | 18,376 | 512 | - | 140,797 | (78) | (128) | (55) | - | (261) |
- GBM | 223,065 | 11,279 | 91 | - | 234,435 | (38) | (51) | (10) | - | (99) |
- Corporate Centre | 248 | 1 | - | - | 249 | - | - | - | - | - |
Financial guarantees | 16,071 | 2,463 | 249 | - | 18,783 | (6) | (13) | (33) | - | (52) |
- WPB | 1,196 | 11 | 1 | - | 1,208 | - | - | - | - | - |
- CMB | 6,665 | 1,524 | 128 | - | 8,317 | (5) | (8) | (26) | - | (39) |
- GBM | 8,210 | 928 | 120 | - | 9,258 | (1) | (5) | (7) | - | (13) |
- Corporate Centre | - | - | - | - | - | - | - | - | - | - |
Total nominal amount off-balance sheet at 31 Dec 2022 | 599,454 | 36,496 | 1,621 | - | 637,571 | (147) | (193) | (98) | - | (438) |
WPB | 113,557 | 1,213 | - | 33 | 114,803 | (18) | (26) | - | (6) | (50) |
CMB | 70,728 | 736 | - | 4 | 71,468 | (9) | (15) | - | (1) | (25) |
GBM | 75,951 | 434 | - | 1 | 76,386 | (11) | (8) | - | - | (19) |
Corporate Centre | 3,347 | 299 | - | - | 3,646 | (31) | (19) | (1) | - | (51) |
Debt instruments measured at FVOCI at 31 Dec 2022 | 263,583 | 2,682 | - | 38 | 266,303 | (69) | (68) | (1) | (7) | (145) |
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business (continued) | ||||||||||
Gross carrying/nominal amount | Allowance for ECL | |||||||||
Stage 1 | Stage 2 | Stage 3 | POCI | Total | Stage 1 | Stage 2 | Stage 3 | POCI | Total | |
$m | $m | $m | $m | $m | $m | $m | $m | $m | $m | |
Loans and advances to customers at amortised cost | 918,936 | 119,224 | 18,797 | 274 | 1,057,231 | (1,367) | (3,119) | (6,867) | (64) | (11,417) |
- WPB | 469,477 | 17,285 | 5,211 | - | 491,973 | (664) | (1,247) | (1,276) | - | (3,187) |
- CMB | 267,517 | 76,798 | 11,462 | 245 | 356,022 | (571) | (1,369) | (4,904) | (53) | (6,897) |
- GBM | 181,247 | 25,085 | 2,124 | 29 | 208,485 | (132) | (493) | (687) | (11) | (1,323) |
- Corporate Centre | 695 | 56 | - | - | 751 | - | (10) | - | - | (10) |
Loans and advances to banks at amortised cost | 81,636 | 1,517 | - | - | 83,153 | (14) | (3) | - | - | (17) |
- WPB | 20,464 | 481 | - | - | 20,945 | (1) | (1) | - | - | (2) |
- CMB | 15,269 | 352 | - | - | 15,621 | (1) | - | - | - | (1) |
- GBM | 36,875 | 654 | - | - | 37,529 | (10) | (2) | - | - | (12) |
- Corporate Centre | 9,028 | 30 | - | - | 9,058 | (2) | - | - | - | (2) |
Other financial assets measured at amortised cost | 875,016 | 4,988 | 304 | 43 | 880,351 | (91) | (54) | (42) | (6) | (193) |
- WPB | 207,335 | 1,407 | 175 | 43 | 208,960 | (51) | (44) | (14) | (6) | (115) |
- CMB | 163,457 | 2,370 | 61 | - | 165,888 | (12) | (8) | (20) | - | (40) |
- GBM | 409,808 | 1,204 | 62 | - | 411,074 | (28) | (2) | (8) | - | (38) |
- Corporate Centre | 94,416 | 7 | 6 | - | 94,429 | - | - | - | - | - |
Total gross carrying amount on-balance sheet at 31 Dec 2021 | 1,875,588 | 125,729 | 19,101 | 317 | 2,020,735 | (1,472) | (3,176) | (6,909) | (70) | (11,627) |
Loans and other credit-related commitments | 594,473 | 32,389 | 775 | - | 627,637 | (165) | (174) | (40) | - | (379) |
- WPB | 235,722 | 2,111 | 153 | - | 237,986 | (37) | (3) | - | - | (40) |
- CMB | 126,728 | 17,490 | 555 | - | 144,773 | (80) | (118) | (37) | - | (235) |
- GBM | 231,890 | 12,788 | 67 | - | 244,745 | (48) | (53) | (3) | - | (104) |
- Corporate Centre | 133 | - | - | - | 133 | - | - | - | - | - |
Financial guarantees | 24,932 | 2,638 | 225 | - | 27,795 | (11) | (30) | (21) | - | (62) |
- WPB | 1,295 | 15 | 1 | - | 1,311 | - | (1) | - | - | (1) |
- CMB | 6,105 | 1,606 | 126 | - | 7,837 | (7) | (16) | (17) | - | (40) |
- GBM | 17,531 | 1,017 | 98 | - | 18,646 | (4) | (13) | (4) | - | (21) |
- Corporate Centre | 1 | - | - | - | 1 | - | - | - | - | - |
Total nominal amount off-balance sheet at 31 Dec 2021 | 619,405 | 35,027 | 1,000 | - | 655,432 | (176) | (204) | (61) | - | (441) |
WPB | 143,373 | 718 | - | 35 | 144,126 | (20) | (7) | - | (5) | (32) |
CMB | 86,247 | 471 | - | 10 | 86,728 | (11) | (1) | - | (1) | (13) |
GBM | 111,473 | 526 | - | 1 | 112,000 | (13) | (2) | - | - | (15) |
Corporate Centre | 4,038 | 311 | - | - | 4,349 | (25) | (11) | - | - | (36) |
Debt instruments measured at FVOCI at 31 Dec 2021 | 345,131 | 2,026 | - | 46 | 347,203 | (69) | (21) | - | (6) | (96) |
Loans and advances to customers and banks metrics | |||||||
Gross carrying amount | of which: stage 3 and POCI | Allowance for ECL | of which: stage 3 and POCI | Change in ECL | Write-offs | Recoveries | |
$m | $m | $m | $m | $m | $m | $m | |
First lien residential mortgages | 336,821 | 2,043 | (574) | (270) | 180 | (48) | 26 |
- second lien residential mortgages | 379 | 6 | (6) | (3) | 9 | (1) | 4 |
- guaranteed loans in respect of residential property | 1,367 | 125 | (34) | (30) | (11) | (9) | 2 |
- other personal lending which is secured | 32,106 | 206 | (55) | (30) | (16) | (8) | 1 |
- credit cards | 21,388 | 260 | (1,162) | (160) | (638) | (471) | 126 |
- other personal lending which is unsecured | 21,010 | 687 | (1,010) | (305) | (655) | (660) | 119 |
- motor vehicle finance | 1,941 | 13 | (31) | (7) | 39 | (18) | 5 |
Other personal lending | 78,191 | 1,297 | (2,298) | (535) | (1,272) | (1,167) | 257 |
Personal lending | 415,012 | 3,340 | (2,872) | (805) | (1,092) | (1,215) | 283 |
- agriculture, forestry and fishing | 6,571 | 261 | (122) | (68) | (32) | (42) | - |
- mining and quarrying | 8,194 | 233 | (172) | (146) | (24) | (46) | - |
- manufacturing | 87,503 | 2,065 | (1,153) | (896) | (191) | (171) | 3 |
- electricity, gas, steam and air-conditioning supply | 17,082 | 277 | (109) | (67) | (75) | (16) | - |
- water supply, sewerage, waste management and remediation | 2,993 | 26 | (21) | (13) | 3 | (1) | - |
- construction | 13,232 | 798 | (443) | (371) | (93) | (136) | 6 |
- wholesale and retail trade, repair of motor vehicles and motorcycles | 82,437 | 2,810 | (1,666) | (1,344) | (344) | (667) | 8 |
- transportation and storage | 24,845 | 556 | (249) | (153) | (13) | (82) | 1 |
- accommodation and food | 17,185 | 789 | (244) | (82) | 103 | (29) | - |
- publishing, audiovisual and broadcasting | 18,423 | 277 | (117) | (59) | 9 | (47) | 1 |
- real estate | 101,434 | 4,853 | (2,851) | (1,861) | (1,537) | (174) | 2 |
- professional, scientific and technical activities | 17,935 | 542 | (272) | (200) | (81) | (31) | 1 |
- administrative and support services | 25,077 | 980 | (408) | (293) | (27) | (27) | 1 |
- public administration and defence, compulsory social security | 1,180 | - | (1) | - | 5 | - | - |
- education | 1,614 | 87 | (31) | (22) | 1 | (3) | - |
- health and care | 3,964 | 266 | (90) | (67) | (30) | (7) | 1 |
- arts, entertainment and recreation | 1,862 | 146 | (77) | (57) | 1 | (17) | - |
- other services | 12,527 | 589 | (275) | (219) | 120 | (92) | 7 |
- activities of households | 744 | - | - | - | - | - | - |
- extra-territorial organisations and bodies activities | 47 | - | - | - | 1 | - | 1 |
- government | 9,475 | 270 | (10) | (7) | (5) | - | - |
- asset-backed securities | 32 | - | (13) | - | (4) | - | - |
Corporate and commercial | 454,356 | 15,825 | (8,324) | (5,925) | (2,213) | (1,588) | 32 |
Non-bank financial institutions | 66,939 | 469 | (257) | (137) | (165) | (1) | 1 |
Wholesale lending | 521,295 | 16,294 | (8,581) | (6,062) | (2,378) | (1,589) | 33 |
Loans and advances to customers | 936,307 | 19,634 | (11,453) | (6,867) | (3,470) | (2,804) | 316 |
Loans and advances to banks | 104,951 | 82 | (69) | (22) | (53) | - | - |
At 31 Dec 2022 | 1,041,258 | 19,716 | (11,522) | (6,889) | (3,523) | (2,804) | 316 |
Loans and advances to customers and banks metrics (continued) | |||||||
Gross carrying amount | of which: stage 3 and POCI | Allowance for ECL | of which: stage 3 and POCI | Change in ECL | Write-offs | Recoveries | |
$m | $m | $m | $m | $m | $m | $m | |
First lien residential mortgages | 371,368 | 3,045 | (675) | (416) | - | (70) | 31 |
- second lien residential mortgages | 395 | 37 | (14) | (9) | 12 | (1) | 6 |
- guaranteed loans in respect of residential property | 21,610 | 236 | (58) | (42) | (5) | (8) | 2 |
- other personal lending which is secured | 37,995 | 366 | (156) | (120) | (11) | (11) | 1 |
- credit cards | 22,858 | 338 | (1,135) | (214) | 172 | (751) | 153 |
- other personal lending which is unsecured | 22,478 | 915 | (1,039) | (421) | 135 | (659) | 156 |
- motor vehicle finance | 1,633 | 5 | (26) | (4) | (22) | (20) | 6 |
Other personal lending | 106,969 | 1,897 | (2,428) | (810) | 281 | (1,450) | 324 |
Personal lending | 478,337 | 4,942 | (3,103) | (1,226) | 281 | (1,520) | 355 |
- agriculture, forestry and fishing | 7,899 | 363 | (138) | (105) | 61 | (5) | - |
- mining and quarrying | 9,685 | 463 | (227) | (171) | 72 | (57) | (1) |
- manufacturing | 93,743 | 2,107 | (1,248) | (962) | 102 | (222) | 7 |
- electricity, gas, steam and air-conditioning supply | 16,618 | 78 | (68) | (31) | 5 | - | - |
- water supply, sewerage, waste management and remediation | 3,895 | 51 | (29) | (20) | 3 | (7) | - |
- construction | 13,954 | 843 | (508) | (440) | (13) | (94) | 9 |
- wholesale and retail trade, repair of motor vehicles and motorcycles | 94,944 | 3,005 | (2,107) | (1,937) | 163 | (238) | 15 |
- transportation and storage | 29,592 | 667 | (363) | (191) | 100 | (10) | 2 |
- accommodation and food | 23,376 | 1,200 | (423) | (111) | 12 | (17) | 6 |
- publishing, audiovisual and broadcasting | 18,471 | 250 | (184) | (100) | (12) | (4) | 1 |
- real estate | 121,260 | 2,473 | (1,644) | (775) | (674) | (152) | 5 |
- professional, scientific and technical activities | 19,685 | 637 | (238) | (172) | 97 | (39) | 1 |
- administrative and support services | 28,675 | 749 | (431) | (307) | 48 | (37) | - |
- public administration and defence, compulsory social security | 1,271 | - | (8) | - | 6 | - | 1 |
- education | 1,793 | 65 | (37) | (18) | 1 | (1) | - |
- health and care | 4,854 | 183 | (72) | (37) | 44 | (69) | 1 |
- arts, entertainment and recreation | 2,598 | 152 | (92) | (42) | 27 | (26) | - |
- other services | 12,297 | 448 | (373) | (246) | (59) | (109) | 6 |
- activities of households | 977 | - | - | - | - | - | - |
- extra-territorial organisations and bodies activities | 2 | - | - | - | 1 | - | 1 |
- government | 7,612 | - | (4) | - | (6) | - | - |
- asset-backed securities | 338 | - | (10) | - | 3 | - | - |
Corporate and commercial | 513,539 | 13,734 | (8,204) | (5,665) | (19) | (1,087) | 54 |
Non-bank financial institutions | 65,355 | 395 | (110) | (40) | 129 | (5) | - |
Wholesale lending | 578,894 | 14,129 | (8,314) | (5,705) | 110 | (1,092) | 54 |
Loans and advances to customers | 1,057,231 | 19,071 | (11,417) | (6,931) | 391 | (2,612) | 409 |
Loans and advances to banks | 83,153 | - | (17) | - | 22 | - | - |
At 31 Dec 2021 | 1,140,384 | 19,071 | (11,434) | (6,931) | 413 | (2,612) | 409 |
HSBC Holdings
(Audited)
Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability Management Committee. The major risks faced by HSBC Holdings are credit risk, liquidity risk and market risk (in the form of interest rate risk and foreign exchange risk).
Credit risk in HSBC Holdings primarily arises from transactions with Group subsidiaries and its investments in those subsidiaries.
In HSBC Holdings, the maximum exposure to credit risk arises from two components:
• financial instruments on the balance sheet (see page 332); and
• financial guarantees and similar contracts, where the maximum exposure is the maximum that we would have to pay if the guarantees were called upon (see Note 33).
In the case of our derivative balances, we have amounts with a legally enforceable right of offset in the case of counterparty default that are not included in the carrying value. These offsets also include collateral received in cash and other financial assets.
The total offset relating to our derivative balances was $3.1bn at 31 December 2022 (2021: $1.6bn).
The credit quality of loans and advances and financial investments, both of which consist of intra-Group lending and US Treasury bills and bonds, is assessed as 'strong', with 100% of the exposure being neither past due nor impaired (2021: 100%). For further details of credit quality classification, see page 146.
Treasury risk |
Contents
209 | Overview |
209 | Treasury risk management |
211 | Other Group risks |
212 | Capital risk in 2022 |
217 | Liquidity and funding risk in 2022 |
221 | Structural foreign exchange risk in 2022 |
222 | Interest rate risk in the banking book in 2022 |
Overview
Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural or transactional foreign exchange exposures and changes in market interest rates, together with pension and insurance risk.
Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment.
Approach and policy
(Audited)
Our objective in the management of treasury risk is to maintain appropriate levels of capital, liquidity, funding, foreign exchange and market risk to support our business strategy, and meet our regulatory and stress testing-related requirements.
Our approach to treasury management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital and liquidity base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory requirements at all times.
Our policy is underpinned by our risk management framework. The risk management framework incorporates a number of measures aligned to our assessment of risks for both internal and regulatory purposes. These risks include credit, market, operational, pensions, structural and transactional foreign exchange risk, and interest rate risk in the banking book.
For further details, refer to our Pillar 3 Disclosures at 31 December 2022.
Treasury risk management
Key developments in 2022
• All of the Group's material operating entities were above regulatory minimum levels of capital, liquidity and funding at 31 December 2022.
• Our CET1 position decreased from 15.8% at 31 December 2021 to 14.2% at 31 December 2022. This included a 0.8 percentage point impact from new regulatory requirements and a 0.7 percentage point decrease from the fall in the fair value of securities.
• The Board approved a new interest rate risk in the banking book ('IRRBB') strategy in September, with the objective of increasing our stabilisation of net interest income ('NII'), with consideration given to any capital or other constraints, and then adopting a managed approach based on interest rates and outlook.
• We took steps to reduce the duration risk of the Global Treasury hold-to-collect-and-sell portfolio, which is accounted for at fair value through other comprehensive income ('FVOCI'), primarily to dampen the capital impact from rising interest rates. This risk reduction lowered the hold-to-collect-and-sell stressed value at risk ('VaR') exposure of this portfolio from $3.63bn at the end of 2021 to $2.15bn at the end of 2022. For further details of the calculation of this exposure and the use of this metric in our interest rate risk management framework, see page 215.
• We implemented a new hold-to-collect business model to better reflect our management strategy to stabilise NII. This portfolio of high-quality liquid assets will form a material part of our liquid asset buffer going forward, as well as being a hedge to our structural interest rate risk.
• We enhanced monitoring and forecasting as a result of the Russia-Ukraine war, although there were no direct material capital or liquidity impacts.
• The HBUK section of the HSBC Bank (UK) Pension Scheme's trustee funding level remained stable during the volatility in the UK gilt markets in September and October, as a result of its proactive pension scheme management, low-risk investment strategy and limited leverage in its liability-driven investment funds. Refinements relating to the scheme's inflation hedging strategy ensured continued effectiveness in the high-inflation environment.
• HSBC Overseas Holdings (UK) Limited entered into an agreement to sell its banking business in Canada to Royal Bank of Canada, subject to regulatory and governmental approvals. The transaction is expected to complete in late 2023. As a consequence of the gain on the sale and disposal of risk-weighted assets ('RWAs') from our banking business in Canada, we expect an increase of approximately 1.3 percentage points in CET1 capital before any distribution. In addition, the hedging activity in respect to this transaction reduced the full-year 2022 ratio by 0.06 percentage point. This impact will revert on completion of sale.
• HSBC Continental Europe signed a framework agreement with Promontoria MMB SAS ('My Money Group') and its subsidiary Banque des Caraïbes SA for the sale of its retail banking business in France. The sale, which is subject to regulatory and governmental approvals, is anticipated to complete in the second half of 2023. The impact of classifying the disposal as held for sale resulted in a 0.3 percentage point reduction in the Group's CET1 ratio, which will be partly offset by the reduction in RWAs upon closing.
• We identified an error in the RWA calculations of the European resolution group whereby $35bn of non-capital MREL instruments issued by the Asian and US resolution groups and held by the European resolution group were excluded from these calculations and were only deducted from MREL, whereas the relevant UK legislation requires these instruments to be both risk-weighted and deducted from MREL. In rectifying this error, we changed our treatment of $35bn of non-capital MREL investments held by the European resolution group from entities outside its group to deduct them from the European resolution group's own funds rather than from solely its MREL, allowing us to exclude them from RWAs. The change in treatment significantly reduced the European resolution group's total capital and increased its leverage ratio at 31 December 2022, although the European resolution group has no capital requirements. For further details regarding MREL, see 'Assessment and risk appetite' on page 203.
• We performed our inaugural resolvability self-assessment to meet the Bank of England requirements, which came into effect on 1 January 2022. This was incorporated into the Bank of England's publication of its findings on its first assessment of the resolvability of the eight major UK firms, as part of the Resolvability Assessment Framework.
For quantitative disclosures on capital ratios, own funds and RWAs, see pages 205 to 207. For quantitative disclosures on liquidity and funding metrics, see pages 209 to 210. For quantitative disclosures on interest rate risk in the banking book, see pages 213 to 215.
Governance and structure
The Global Head of Traded and Treasury Risk Management and Risk Analytics is the accountable risk steward for all treasury risks. The Group Treasurer is the risk owner for all treasury risks, with the exception of pension risk and insurance risk. The Group Treasurer co-owns pension risk with the Group Head of Performance, Reward and Employee Relations. Insurance risk is owned by the Chief Executive Officer for Global Insurance.
Capital risk, liquidity risk, interest rate risk in the banking book, structural foreign exchange risk and transactional foreign exchange risk are the responsibility of the Group Executive Committee and the Group Risk Committee ('GRC'). Global Treasury actively manages these risks on an ongoing basis, supported by the Holdings Asset and Liability Management Committee ('ALCO') and local ALCOs, overseen by Treasury Risk Management and Risk Management Meetings.
Pension risk is overseen by a network of local and regional pension risk management meetings. The Global Pensions Risk Management Meeting provides oversight of all pension plans sponsored by HSBC globally, and is chaired by the accountable risk steward. Insurance risk is overseen by the Global Insurance Risk Management Meeting, chaired by the Chief Risk Officer for Global Insurance.
Capital, liquidity and funding risk management processes
Assessment and risk appetite
Our capital management policy is supported by a global capital management framework. The framework sets out our approach to determining key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities ('MREL'), the leverage ratio and double leverage. Our internal capital adequacy assessment process ('ICAAP') is an assessment of the Group's capital position, outlining both regulatory and internal capital resources and requirements resulting from HSBC's business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, interest rate risk in the banking book and Group risk. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach. The Group's ICAAP supports the determination of the consolidated capital risk appetite and target ratios, as well as enables the assessment and determination of capital requirements by regulators. Subsidiaries prepare ICAAPs in line with global guidance, while considering their local regulatory regimes to determine their own risk appetites and ratios.
HSBC Holdings is the provider of equity capital and MREL-eligible debt to its subsidiaries, and also provides them with non-equity capital where necessary. These investments are funded by HSBC Holdings' own equity capital and MREL-eligible debt. MREL includes own funds and liabilities that can be written down or converted into capital resources in order to absorb losses or recapitalise a bank in the event of its failure. In line with our existing structure and business model, HSBC has three resolution groups - the European resolution group, the Asian resolution group and the US resolution group. There are some smaller entities that fall outside these resolution groups.
HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investments in subsidiaries.
As a matter of long-standing policy, the holding company retains a substantial holdings capital buffer comprising high-quality liquid assets ('HQLA'), which at 31 December 2022 was in excess of $24bn.
We aim to ensure that management has oversight of our liquidity and funding risks at Group and entity level through robust governance, in line with our risk management framework. We manage liquidity and funding risk at an operating entity level in accordance with globally consistent policies, procedures and reporting standards. This ensures that obligations can be met in a timely manner, in the jurisdiction where they fall due.
Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through our internal liquidity adequacy assessment process ('ILAAP'), which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively in each major entity. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the Group's policies and controls.
Planning and performance
Capital and RWA plans form part of the annual financial resource plan that is approved by the Board. Capital and RWA forecasts are submitted to the Group Executive Committee on a monthly basis, and capital and RWAs are monitored and managed against the plan. The responsibility for global capital allocation principles rests with the Group Chief Financial Officer, supported by the Group Capital Management Meeting. This is a specialist forum addressing capital management, reporting into Holdings ALCO.
Through our internal governance processes, we seek to strengthen discipline over our investment and capital allocation decisions, and to ensure that returns on investment meet management's objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified and in order to meet their regulatory and economic capital needs. We evaluate and manage business returns by using a return on average tangible equity measure.
Funding and liquidity plans also form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'), together with an internal liquidity metric. In addition, we use a wider set of measures to manage an appropriate funding and liquidity profile, including legal entity depositor concentration limits, intra-day liquidity, forward-looking funding assessments and other key measures.
Risks to capital and liquidity
Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs, capital and/or liquidity position. Downside and Upside scenarios are assessed against our management objectives, and mitigating actions are assigned as necessary. We closely monitor future regulatory changes and continue to evaluate the impact of these upon our capital and liquidity requirements, particularly those related to the UK's implementation of the outstanding measures to be implemented from the Basel III reforms ('Basel 3.1').
Regulatory developments
Our capital adequacy ratios were affected by regulatory developments in 2022, including changes to internal-ratings based ('IRB') modelling requirements and the UK's implementation of the revisions to the Capital Requirements Regulation and Directive ('CRR II'). The PRA's final rules on NSFR were implemented and have been reflected in disclosures since the first quarter of 2022.
Future changes to our ratios will occur with the implementation of Basel 3.1. The PRA has published its consultation paper on the UK's implementation, with a proposed implementation date of 1 January 2025. We currently do not foresee a material net impact on our ratios from the initial implementation. The RWA output floor under Basel 3.1 is proposed to be subject to a five-year transitional provision. Any impact from the output floor would be towards the end of the transition period.
Regulatory reporting processes and controls
The quality of regulatory reporting remains a key priority for management and regulators. We are progressing with a comprehensive programme to strengthen our processes, improve consistency and enhance controls across our prudential regulatory reporting, focusing on PRA requirements initially. We commissioned a number of independent external reviews, some at the request of our regulators, including one on our credit risk RWA reporting process, which concluded in December 2022. These reviews have so far resulted in enhancements to our RWAs and the LCR through improvements in reporting accuracy, which have been reflected in our year-end regulatory reported ratios. Our prudential regulatory reporting programme is being phased over a number of years, prioritising RWA, capital and liquidity reporting in the early stages of the programme. While this programme continues, there may be further impacts on some of our regulatory ratios, such as the CET1, LCR and NSFR, as we implement recommended changes and continue to enhance our controls across the process.
Stress testing and recovery and resolution planning
The Group uses stress testing to inform management of the capital and liquidity needed to withstand internal and external shocks, including a global economic downturn or a systems failure. Stress testing results are also used to inform risk mitigation actions, allocation of financial resources, and recovery and resolution planning, as well as to re-evaluate business plans where analysis shows capital, liquidity and/or returns do not meet their target.
In addition to a range of internal stress tests, we are subject to supervisory stress testing in many jurisdictions. These include the programmes of the Bank of England, the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital and liquidity requirements through the ICAAP and ILAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators feed into the setting of regulatory minimum ratios and buffers.
We maintain recovery plans for the Group and material entities, which set out potential options management could take in a range of stress scenarios that could result in a breach of capital or liquidity buffers. The Group recovery plan sets out the framework and governance arrangements to support restoring HSBC to a stable and viable position, and so lowering the probability of failure from either idiosyncratic company-specific stress or systemic market-wide issues. Our material entities' recovery plans provide detailed actions that management would consider taking in a stress scenario should their positions deteriorate and threaten to breach risk appetite and regulatory minimum levels. This is to help ensure that HSBC entities can stabilise their financial position and recover from financial losses in a stress environment.
The Group also has capabilities, resources and arrangements in place to address the unlikely event that HSBC might not be recoverable and would therefore need to be resolved by regulators. The Group performed the inaugural Resolvability Assessment Framework self-assessment during 2021 to meet the Bank of England's requirements, which came into effect on 1 January 2022.
Overall, HSBC's recovery and resolution planning helps safeguard the Group's financial and operational stability. The Group is committed to further developing its recovery and resolution capabilities, including in relation to the Bank of England's Resolvability Assessment Framework.
Measurement of interest rate risk in the banking book processes
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities, specifically loans, deposits and financial instruments that are not held for trading intent or in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to Global Treasury. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Global Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate.
Global Treasury uses a number of measures to monitor and control interest rate risk in the banking book, including:
• net interest income sensitivity; and
• economic value of equity sensitivity.
Net interest income sensitivity
A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income ('NII') under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level, where entities calculate both one-year and five-year NII sensitivities across a range of interest rate scenarios.
NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure, except for certain mortgage products where balances are impacted by interest-rate sensitive prepayments. These sensitivity calculations do not incorporate actions that would be taken by Global Treasury or in the business that originates the risk to mitigate the effect of interest rate movements.
The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable.
Economic value of equity sensitivity
Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity holders under a managed run-off scenario. This equates to the current book value of equity plus the present value of future NII in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources.
Further details of HSBC's risk management of interest rate risk in the banking book can be found in the Group's Pillar 3 Disclosures at 31 December 2022.
Other Group risks
Non-trading book foreign exchange exposures
Structural foreign exchange exposures
Structural foreign exchange exposures arise from net assets or capital investments in foreign operations, together with any associated hedging. A foreign operation is defined as a subsidiary, associate, joint arrangement or branch where the activities are conducted in a currency other than that of the reporting entity. An entity's functional reporting currency is normally that of the primary economic environment in which the entity operates.
Exchange differences on structural exposures are recognised in other comprehensive income ('OCI'). We use the US dollar as our presentation currency in our consolidated financial statements because the US dollar and currencies linked to it form the major currency bloc in which we transact and fund our business. Therefore, our consolidated balance sheet is affected by exchange differences between the US dollar and all the non-US dollar functional currencies of underlying foreign operations.
Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates. We hedge structural foreign exchange positions where it is capital efficient to do so, and subject to approved limits. This is achieved through a combination of net investment hedges and economic hedges. Hedging positions are monitored and rebalanced periodically to manage RWA or downside risks associated with HSBC's foreign currency investments.
For further details of our structural foreign exchange exposures, see page 212.
Transactional foreign exchange exposures
Transactional foreign exchange risk arises primarily from day-to-day transactions in the banking book generating profit and loss or fair value through other comprehensive income ('FVOCI') reserves in a currency other than the reporting currency of the operating entity. Transactional foreign exchange exposure generated through profit and loss is periodically transferred to Markets and Securities Services and managed within limits with the exception of limited residual foreign exchange exposure arising from timing differences or for other reasons. Transactional foreign exchange exposure generated through OCI reserves is managed by Global Treasury within agreed appetite.
HSBC Holdings risk management
As a financial services holding company, HSBC Holdings has limited market risk activities. Its activities predominantly involve maintaining sufficient capital resources to support the Group's diverse activities; allocating these capital resources across the Group's businesses; earning dividend and interest income on its investments in the businesses; payment of operating expenses; providing dividend payments to its equity shareholders and interest payments to providers of debt capital; and maintaining a supply of short-term liquid assets for deployment under extraordinary circumstances.
The main market risks to which HSBC Holdings is exposed are banking book interest rate risk and foreign currency risk. Exposure to these risks arises from short-term cash balances, funding positions held, loans to subsidiaries, investments in long-term financial assets, financial liabilities including debt capital issued, and structural foreign exchange hedges. The objective of HSBC Holdings' market risk management strategy is to manage volatility in capital resources, cash flows and distributable reserves that could be caused by movements in market parameters. Market risk for HSBC Holdings is monitored by Holdings ALCO in accordance with its risk appetite statement.
HSBC Holdings uses interest rate swaps and cross-currency interest rate swaps to manage the interest rate risk and foreign currency risk arising from its long-term debt issues. It also uses forward foreign exchange contracts to manage its structural foreign exchange exposures.
For quantitative disclosures on interest rate risk in the banking book, see pages 213 to 215.
Pension risk management processes
Our global pensions strategy is to move from defined benefit to defined contribution plans, where local law allows and it is considered competitive to do so.
In defined contribution pension plans, the contributions that HSBC is required to make are known, while the ultimate pension benefit will vary, typically with investment returns achieved by investment choices made by the employee. While the market risk to HSBC of defined contribution plans is low, the Group is still exposed to operational and reputational risk.
In defined benefit pension plans, the level of pension benefit is known. Therefore, the level of contributions required by HSBC will vary due to a number of risks, including:
• investments delivering a return below that required to provide the projected plan benefits;
• the prevailing economic environment leading to corporate failures, thus triggering write-downs in asset values (both equity and debt);
• a change in either interest rates or inflation expectations, causing an increase in the value of plan liabilities; and
• plan members living longer than expected (known as longevity risk).
Pension risk is assessed using an economic capital model that takes into account potential variations in these factors. The impact of these variations on both pension assets and pension liabilities is assessed using a one-in-200-year stress test. Scenario analysis and other stress tests are also used to support pension risk management, including the review of de-risking opportunities.
To fund the benefits associated with defined benefit plans, sponsoring Group companies, and in some instances employees, make regular contributions in accordance with advice from actuaries and in consultation with the plan's fiduciaries where relevant. These contributions are normally set to ensure that there are sufficient funds to meet the cost of the accruing benefits for the future service of active members. However, higher contributions are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution rates are typically revised annually or once every three years, depending on the plan.
The defined benefit plans invest contributions in a range of investments designed to limit the risk of assets failing to meet a plan's liabilities. Any changes in expected returns from the investments may also change future contribution requirements. In pursuit of these long-term objectives, an overall target allocation is established between asset classes of the defined benefit plan. In addition, each permitted asset class has its own benchmarks, such as stock-market or property valuation indices or liability characteristics. The benchmarks are reviewed at least once every three to five years and more frequently if required by local legislation or circumstances. The process generally involves an extensive asset and liability review.
In addition, some of the Group's pension plans hold longevity swap contracts. These arrangements provide long-term protection to the relevant plans against costs resulting from pensioners or their dependants living longer than initially expected. The most sizeable plan to do this is the HSBC Bank (UK) Pension Scheme, which holds longevity swaps covering approximately 60% of the plan's pensioner liabilities.
Capital risk in 2022
Capital overview
Capital adequacy metrics | ||
At | ||
31 Dec | 31 Dec | |
2022 | 2021 | |
Risk-weighted assets ('RWAs') ($bn) | ||
Credit risk | 679.1 | 680.6 |
Counterparty credit risk | 37.1 | 35.9 |
Market risk | 37.6 | 32.9 |
Operational risk | 85.9 | 88.9 |
Total RWAs | 839.7 | 838.3 |
Capital on a transitional basis ($bn) | ||
Common equity tier 1 ('CET1') capital | 119.3 | 132.6 |
Tier 1 capital | 139.1 | 156.3 |
Total capital | 162.4 | 177.8 |
Capital ratios on a transitional basis (%) | ||
Common equity tier 1 ratio | 14.2 | 15.8 |
Tier 1 ratio | 16.6 | 18.6 |
Total capital ratio | 19.3 | 21.2 |
Capital on an end point basis ($bn) | ||
Common equity tier 1 ('CET1') capital | 119.3 | 132.6 |
Tier 1 capital | 139.1 | 155.0 |
Total capital | 157.2 | 167.5 |
Capital ratios on an end point basis (%) | ||
Common equity tier 1 ratio | 14.2 | 15.8 |
Tier 1 ratio | 16.6 | 18.5 |
Total capital ratio | 18.7 | 20.0 |
Liquidity coverage ratio ('LCR')1 | ||
Total high-quality liquid assets ($bn) | 647.0 | 688.2 |
Total net cash outflow ($bn) | 490.8 | 495.1 |
LCR ratio (%) | 131.8 | 139.0 |
Net stable funding ratio ('NSFR')1 | ||
Total available stable funding ($bn) | 1,552.0 | N/A |
Total required stable funding ($bn) | 1,138.4 | N/A |
NSFR ratio (%) | 136.3 | N/A |
1 The LCR and NSFR ratios presented in the above table are based on average value. The LCR is the average of the preceding 12 months. The NSFR is the average of the preceding four quarters. The prior periods for LCR have been restated for consistency. We have not restated the prior periods for NSFR as no comparatives are available.
References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK's version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law.
Capital figures and ratios in the previous table are calculated in accordance with the revised Capital Requirements Regulation and Directive, as implemented ('CRR II'). The table presents them under the transitional arrangements in CRR II for capital instruments and after their expiry, known as the end point. The end point figures in the table above include the benefit of the regulatory transitional arrangements in CRR II for IFRS 9, which are more fully described below. Where applicable, they also reflect government relief schemes intended to mitigate the impact of the Covid-19 pandemic.
At 31 December 2022, our common equity tier 1 ('CET1') capital ratio decreased to 14.2% from 15.8% at 31 December 2021. This primarily reflected a decrease of $13.3bn in our CET1 capital. The key drivers of the fall in our CET1 ratio were:
• a 0.8 percentage point impact from new regulatory requirements, which reduced CET1 capital by $3.5bn and increased risk-weighted assets ('RWAs') by $27.1bn at implementation;
• a 0.7 percentage point decrease from a $5.6bn fall in the fair value through other comprehensive income ('FVOCI');
• a 0.4 percentage point impact from RWA growth, offset by favourable foreign currency translations; and
• a 0.3 percentage point impact from the $2.0bn impairment on the reclassification of our French retail operations to held for sale.
Profits and other movements added $4.4bn to CET1 capital and a 0.7 percentage point to the CET1 ratio. This included capital deductions for deferred tax, dividends and the share buy-back.
Our Pillar 2A requirement at 31 December 2022, as per the PRA's Individual Capital Requirement based on a point-in-time assessment, was 2.6% of RWAs, of which 1.5% was required to be met by CET1. Structural foreign exchange risk is now capitalised in RWAs under Pillar 1 and assessed for Pillar 2A in the same manner as other risks.
Own funds disclosure | |||
(Audited) | At | ||
31 Dec | 31 Dec | ||
2022 | 2021 | ||
Ref* | $m | $m | |
Common equity tier 1 ('CET1') capital: instruments and reserves | |||
1 | Capital instruments and the related share premium accounts | 23,406 | 23,513 |
- ordinary shares | 23,406 | 23,513 | |
2 | Retained earnings1 | 127,155 | 121,059 |
3 | Accumulated other comprehensive income (and other reserves)1 | 4,105 | 8,273 |
5 | Minority interests (amount allowed in consolidated CET1) | 4,444 | 4,186 |
5a | Independently reviewed net profits net of any foreseeable charge or dividend | 8,633 | 5,887 |
6 | Common equity tier 1 capital before regulatory adjustments2 | 167,743 | 162,918 |
28 | Total regulatory adjustments to common equity tier2 | (48,452) | (30,353) |
29 | Common equity tier 1 capital | 119,291 | 132,565 |
36 | Additional tier 1 capital before regulatory adjustments | 19,836 | 23,787 |
43 | Total regulatory adjustments to additional tier 1 capital | (60) | (60) |
44 | Additional tier 1 capital | 19,776 | 23,727 |
45 | Tier 1 capital | 139,067 | 156,292 |
51 | Tier 2 capital before regulatory adjustments | 24,779 | 23,018 |
57 | Total regulatory adjustments to tier 2 capital | (1,423) | (1,524) |
58 | Tier 2 capital | 23,356 | 21,494 |
59 | Total capital | 162,423 | 177,786 |
* The references identify lines prescribed in the Prudential Regulatory Authority ('PRA') template, which are applicable and where there is a value.
1 To comply with new disclosures guidance from the PRA, with effect from 1 January 2022 we report changes in 'Retained earnings' during 2022 separately in 'Accumulated other comprehensive income'. As this change has no impact on CET1 capital, we have not restated prior periods.
2 From 30 September 2022, investments in non-financial institution subsidiaries or participations have been measured on an equity accounting basis in compliance with UK regulatory requirements. This change increased 'Common equity tier 1 capital before regulatory adjustments' and 'Total regulatory adjustments to common equity tier' by $13.2bn, with no impact on CET1 capital as at 31 December 2022. As this change has immaterial impact on CET1 capital as at 31 December 2021, we have not restated the comparatives.
Throughout 2022, we complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing.
Regulatory and other developments
We expect the recently announced reduction of the Hong Kong Monetary Authority's risk weight floor for residential mortgages from 25% to 15% to improve our CET1 ratio by 0.1 percentage points with effect from 1 January 2023. This reduction will be partly offset by a change to the sourcing and risk-weighting of balances we proportionally consolidate for our associates.
During 2023, our CET1 ratio will continue to be affected by strategic decisions we have taken.
Based on our capital position on 31 December 2022, we would expect that on completing the planned sale of our banking operations in Canada, branch operations in Greece, and our retail banking operations in France, we would improve our CET1 ratio by around 1.4 percentage points, net of the impact from foreign exchange hedges related to the proceeds from the planned sale of our Canada business. The exact timing and impact on our capital position of these transactions may change as the balance sheets being disposed evolve in 2023.
Risk-weighted assets
RWAs by global business | |||||
WPB | CMB | GBM | Corporate Centre | Total | |
$bn | $bn | $bn | $bn | $bn | |
Credit risk | 149.3 | 307.4 | 146.2 | 76.2 | 679.1 |
Counterparty credit risk | 0.9 | 0.7 | 33.8 | 1.7 | 37.1 |
Market risk | 1.6 | 1.1 | 23.6 | 11.3 | 37.6 |
Operational risk | 31.1 | 25.6 | 29.9 | (0.7) | 85.9 |
At 31 Dec 2022 | 182.9 | 334.8 | 233.5 | 88.5 | 839.7 |
At 31 Dec 2021 | 178.3 | 332.9 | 236.2 | 90.9 | 838.3 |
RWAs by geographical region | ||||||
Europe | Asia | MENA | North America | Latin America | Total | |
$bn | $bn | $bn | $bn | $bn | $bn | |
Credit risk | 180.3 | 330.2 | 49.8 | 87.4 | 31.4 | 679.1 |
Counterparty credit risk | 18.9 | 10.4 | 2.7 | 4.2 | 0.9 | 37.1 |
Market risk1 | 28.2 | 28.6 | 2.6 | 4.2 | 1.2 | 37.6 |
Operational risk | 23.8 | 40.1 | 5.9 | 10.7 | 5.4 | 85.9 |
At 31 Dec 2022 | 251.2 | 409.3 | 61.0 | 106.5 | 38.9 | 839.7 |
At 31 Dec 2021 | 261.1 | 396.3 | 60.2 | 110.4 | 35.9 | 838.3 |
1 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
RWA movement by global business by key driver | ||||||
Credit risk, counterparty credit risk and operational risk | ||||||
WPB | CMB | GBM | Corporate Centre | Market risk | Total RWAs | |
$bn | $bn | $bn | $bn | $bn | $bn | |
RWAs at 1 Jan 2022 | 176.6 | 332.0 | 215.9 | 80.9 | 32.9 | 838.3 |
Asset size | 6.5 | 13.7 | (3.5) | (0.6) | 4.8 | 20.9 |
Asset quality | 1.6 | (1.1) | 3.4 | (0.8) | - | 3.1 |
Model updates | (3.1) | 1.0 | (0.7) | (0.1) | - | (2.9) |
Methodology and policy | 11.6 | 8.9 | 4.7 | (0.9) | (0.1) | 24.2 |
Acquisitions and disposals | (2.0) | - | - | - | - | (2.0) |
Foreign exchange movements1 | (9.9) | (20.8) | (9.9) | (1.3) | - | (41.9) |
Total RWA movement | 4.7 | 1.7 | (6.0) | (3.7) | 4.7 | 1.4 |
RWAs at 31 Dec 2022 | 181.3 | 333.7 | 209.9 | 77.2 | 37.6 | 839.7 |
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 2022 | 236.5 | 371.0 | 57.9 | 105.1 | 34.9 | 32.9 | 838.3 |
Asset size | 1.5 | 3.9 | 3.6 | 1.9 | 5.2 | 4.8 | 20.9 |
Asset quality | (2.6) | 7.1 | - | (1.7) | 0.3 | - | 3.1 |
Model updates | (3.0) | 0.2 | 0.1 | (0.2) | - | - | (2.9) |
Methodology and policy | 11.2 | 10.5 | 1.4 | 1.0 | 0.2 | (0.1) | 24.2 |
Acquisitions and disposals | - | - | (0.2) | (1.8) | - | - | (2.0) |
Foreign exchange movements1 | (20.6) | (12.0) | (4.4) | (2.0) | (2.9) | - | (41.9) |
Total RWA movement | (13.5) | 9.7 | 0.5 | (2.8) | 2.8 | 4.7 | 1.4 |
RWAs at 31 Dec 2022 | 223.0 | 380.7 | 58.4 | 102.3 | 37.7 | 37.6 | 839.7 |
1 Foreign exchange movements in this disclosure are computed by retranslating the RWAs into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates.
Risk-weighted assets ('RWAs') rose by $1.4bn during the year. An increase of $43.3bn, driven by regulatory change and lending growth, was partly offset by a decrease of $41.9bn due to favourable foreign currency translation differences. At 31 December 2022, our cumulative RWA saves as part of our transformation programme were $128bn.
Asset size
The $20.9bn increase in RWAs due to asset size movement included an increase of $4.8bn in market risk RWAs, mostly attributable to heightened market risk volatility, and an increase in transactional and structural foreign exchange exposures. The $13.7bn increase in CMB RWAs reflected corporate loan growth in Europe, Asia and North America.
GBM RWAs fell by $3.5bn due to a reduction in counterparty credit risk of $2.8bn, driven by mark-to-market movements and management initiatives. Lower lending in Europe further reduced RWAs, which was partly offset by growth in Asia and Latin America.
WPB RWAs increased by $6.5bn, primarily due to lending growth in Asia and Latin America, largely in term lending and the mortgage portfolio.
Asset quality
The increase of $3.1bn RWAs was mostly driven by credit migration, primarily in Europe and Asia and partly offset against portfolio mix changes.
Model updates
The $3.1bn RWA decrease in WPB was mostly due to the implementation of a credit card model in Hong Kong and a retail model in France. A reduction of $1.6bn RWAs in GBM was driven by the introduction of a counterparty credit risk equity model in Europe. This was mostly offset by a $2.1bn increase in RWAs in GBM and CMB due to a commercial property loan model in Asia.
Methodology and policy
The $24.2bn increase in RWAs was driven by the regulatory changes of $27.1bn for revised IRB modelling requirements and the UK's implementation of the CRR II rules.
These increases were partly offset by reductions predominantly due to data enhancements driven by internal and external reviews of our regulatory reporting processes, and the reversal of the beneficial changes to the treatment of software assets in Corporate Centre.
Acquisitions and disposals
The $2.0bn RWA decrease was mainly due to the $1.8bn sale of WPB retail branches in US.
Leverage ratio1
At | ||
31 Dec | 31 Dec | |
2022 | 2021 | |
$bn | $bn | |
Tier 1 capital | 139.1 | 155.0 |
Total leverage ratio exposure | 2,417.2 | 2,962.7 |
% | % | |
Leverage ratio | 5.8 | 5.2 |
1 The CRR II regulatory transitional arrangements for IFRS 9 are applied in the leverage ratio calculation. This calculation is in line with the UK leverage rules that were implemented on 1 January 2022, and excludes central bank claims. Comparatives for 2021 are reported based on the disclosure rules in force at that time, and include claims on central banks.
Our leverage ratio was 5.8% at 31 December 2022, up from 5.2% at 31 December 2021. The improvement was mainly due to the exclusion of central bank claims following the implementation of the UK leverage ratio framework from 1 January 2022, and foreign exchange translation movement. This was partly offset by a decline in tier 1 capital.
At 31 December 2022, our UK minimum leverage ratio requirement of 3.25% was supplemented by a leverage ratio buffer of 0.8%, which consists of an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.1%. These buffers translated into capital values of $16.9bn and $2.4bn respectively. We exceeded these leverage requirements.
Regulatory transitional arrangements for IFRS 9 'Financial Instruments'
We have adopted the regulatory transitional arrangements in CRR II for IFRS 9, including paragraph four of article 473a. Our capital and ratios are presented under these arrangements throughout the tables in this section, including in the end point figures. Without their application, our CET1 ratio would be 14.2%.
The IFRS 9 regulatory transitional arrangements allow banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances. The impact is defined as:
• the increase in loan loss allowances on day one of IFRS 9 adoption; and
• any subsequent increase in ECL in the non-credit-impaired book thereafter.
Any add-back must be tax affected and accompanied by a recalculation of deferred tax, exposure and RWAs. The impact is calculated separately for portfolios using the standardised ('STD') and internal ratings-based ('IRB') approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.
The EU's CRR 'Quick Fix' relief package increased the 2022 scalar from 25% to 75% the relief that banks may take for loan loss allowances recognised since 1 January 2020 on thenon-credit-impaired book.
In the current period, the add-back to CET1 capital amounted to $0.4bn under the STD approach with a tax impact of $0.1bn. At 31 December 2021, the add-back to the capital base under the STD approach was $1.0bn with a tax impact of $0.2bn.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2022 is published on our website at www.hsbc.com/investors.
Liquidity and funding risk in 2022
Liquidity metrics
At 31 December 2022, all of the Group's material operating entities were above regulatory minimum liquidity and funding levels.
Each entity maintains sufficient unencumbered liquid assets to comply with local and regulatory requirements. The liquidity value of these assets for each entity is shown in the following table, along with the individual LCR ratio on a local regulatory requirements basis wherever applicable. Where local regulatory requirements are not applicable, the PRA LCR is shown. The local basis may differ from PRA measures due to differences in the way regulators have implemented the Basel III standards.
Each entity maintains a sufficient stable funding profile and is assessed using the NSFR or other appropriate metrics.
In addition to regulatory metrics, we use a wide set of measures to manage our liquidity and funding profile.
The Group liquidity and funding position on an average basis is analysed in the following sections.
Operating entities' liquidity1 | ||||
At 31 December 2022 | ||||
LCR | HQLA | Net outflows | NSFR | |
% | $bn $bn | $bn | % | |
HSBC UK Bank plc (ring-fenced bank)2 | 226 | 136 | 60 | 164 |
HSBC Bank plc (non-ring-fenced bank)3,4 | 143 | 128 | 90 | 115 |
The Hongkong and Shanghai Banking Corporation - Hong Kong branch5 | 179 | 147 | 82 | 130 |
HSBC Singapore6 | 247 | 21 | 9 | 173 |
Hang Seng Bank | 228 | 50 | 22 | 156 |
HSBC Bank China | 183 | 23 | 13 | 132 |
HSBC Bank USA | 164 | 85 | 52 | 131 |
HSBC Continental Europe 7,8 | 151 | 55 | 37 | 132 |
HSBC Bank Middle East Ltd - UAE branch | 239 | 12 | 5 | 158 |
HSBC Canada7 | 149 | 22 | 15 | 122 |
HSBC Mexico | 155 | 8 | 5 | 129 |
At 31 December 2021 | ||||
HSBC UK Bank plc (ring-fenced bank)2 | 222 | 143 | 64 | 176 |
HSBC Bank plc (non-ring-fenced bank)3,4 | 142 | 118 | 84 | 115 |
The Hongkong and Shanghai Banking Corporation - Hong Kong branch5 | 190 | 139 | 74 | 136 |
HSBC Singapore6 | 277 | 19 | 7 | 165 |
Hang Seng Bank | 200 | 48 | 24 | 145 |
HSBC Bank China | 155 | 23 | 15 | 143 |
HSBC Bank USA | 169 | 104 | 62 | 145 |
HSBC Continental Europe7 | 142 | 56 | 39 | 131 |
HSBC Bank Middle East Ltd - UAE branch | 203 | 12 | 6 | 154 |
HSBC Canada7 | 154 | 25 | 16 | 125 |
HSBC Mexico | 210 | 9 | 4 | 138 |
1 The LCR and NSFR ratios presented in the above table are based on average values. The LCR is the average of the preceding 12 months. The NSFR is the average of the preceding four quarters. Prior period numbers have been restated for consistency.
2 HSBC UK Bank plc refers to the HSBC UK liquidity group, which comprises four legal entities: HSBC UK Bank plc, Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA.
3 HSBC Bank plc includes overseas branches and special purpose entities consolidated by HSBC for financial statements purposes.
4 HSBC Bank plc implemented a strategic data enhancement that resulted in a reclassification of some securities. This reclassification drove a reduction in total HQLA and corresponding LCR as of 31 December 2022. Prior period numbers have been restated for consistency.
5 The Hongkong and Shanghai Banking Corporation - Hong Kong branch represents the material activities of The Hongkong and Shanghai Banking Corporation Limited.
6 HSBC Singapore includes HSBC Bank Singapore Limited and The Hongkong and Shanghai Banking Corporation - Singapore branch. Liquidity and funding risk is monitored and controlled at country level in line with the local regulator's approval. Prior period numbers have been restated for consistency.
7 HSBC Continental Europe and HSBC Canada represent the consolidated banking operations of the Group in France and Canada, respectively. HSBC Continental Europe and HSBC Canada are each managed as single distinct operating entities for liquidity purposes.
8 In response to the requirement for an intermediate parent undertaking in line with EU Capital Requirements Directive ('CRD V'), HSBC Continental Europe acquired control of HSBC Germany and HSBC Bank Malta on 30 November 2022. The averages for LCR and NSFR includes the impact of the inclusion of two entities for November 2022 and December 2022.
Consolidated liquidity metrics
Net stable funding ratio
From 1 January 2022, we started managing funding risk based on the PRA's NSFR rules. The Group's NSFR at 31 December 22, calculated from the average of the four preceding quarters average, was 136%.
At1 | |||
31 Dec | 30 Jun | 31 Dec | |
2022 | 2022 | 2021 | |
$bn | $bn | $bn | |
Total available stable funding ($bn) | 1,552 | 1,567 | N/A |
Total required stable funding ($bn) | 1,138 | 1,139 | N/A |
NSFR ratio (%) | 136 | 138 | N/A |
1 Group NSFR numbers above are based on average values. The NSFR number is the average of the preceding quarters.
Liquidity coverage ratio
At 31 December 2022, the average HQLA held at entity level amounted to $812bn (31 December 2021: $861bn). Since 2021, we have implemented a revised approach to the application of the requirements under the European Commission Delegated Regulation (EU) 2015/61 and PRA rule book. This revised approach was used to reflect the impact of limitations in the transferability of entity liquidity around the Group, and resulted in an adjustment of $165bn to LCR HQLA and $9bn to LCR inflows on an average basis. The change in methodology was designed to better incorporate local regulatory restrictions on the transferability of liquidity.
At1 | |||
31 Dec | 30 Jun | 31 Dec | |
2022 | 2022 | 2021 | |
$bn | $bn | $bn | |
High-quality liquid assets (in entities) | 812 | 848 | 861 |
EC Delegated Act adjustment for transfer restrictions2 | (174) | (181) | (176) |
Group LCR HQLA | 647 | 676 | 688 |
Net outflows | 491 | 500 | 495 |
Liquidity coverage ratio | 132% | 135% | 139% |
1 Group LCR numbers above are based on average values. The LCR is the average of the preceding 12 months.
2 This includes adjustments made to high-quality liquid assets and inflows in entities to reflect liquidity transfer restrictions.
Liquid assets
After the $165bn adjustment, the average Group LCR HQLA of $647bn (31 December 2021: $688bn) was held in a range of asset classes and currencies. Of these, 97% were eligible as level 1 (31 December 2021: 93%).
The following tables reflect the composition of the average liquidity pool by asset type and currency at 31 December 2022.
Liquidity pool by asset type1 | ||||
Liquidity pool | Cash | Level 12 | Level 22 | |
$bn | $bn | $bn | $bn | |
Cash and balance at central bank | 344 | 344 | - | - |
Central and local government bonds | 288 | - | 272 | 16 |
Regional government public sector entities | 2 | - | 2 | - |
International organisation and multilateral developments banks | 9 | - | 9 | - |
Covered bonds | 2 | - | - | 2 |
Other | 2 | - | 1 | 1 |
Total at 31 Dec 2022 | 647 | 344 | 284 | 19 |
Total at 31 Dec 2021 | 688 | 390 | 251 | 47 |
1 Group liquid assets numbers are based on average values.
2 As defined in EU regulations, level 1 assets means 'assets of extremely high liquidity and credit quality', and level 2 assets means 'assets of high liquidity and credit quality'.
Liquidity pool by currency1 | ||||||
$ | £ | € | HK$ | Other | Total | |
$bn | $bn | $bn | $bn | $bn | $bn | |
Liquidity pool at 31 Dec 2022 | 167 | 191 | 98 | 54 | 137 | 647 |
Liquidity pool at 31 Dec 2021 | 176 | 206 | 117 | 67 | 122 | 688 |
1 Group liquid assets numbers are based on average values.
Sources of funding
Our primary sources of funding are customer current accounts and savings deposits payable on demand or at short notice. We issue secured and unsecured wholesale securities to supplement customer deposits, meet regulatory obligations and to change the currency mix, maturity profile or location of our liabilities.
The following 'Funding sources' and 'Funding uses' tables provide a view of how our consolidated balance sheet is funded. In practice, all the principal operating entities are required to manage liquidity and funding risk on a stand-alone basis.
The tables analyse our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented at a net balancing source or deployment of funds.
Funding sources | ||
(Audited) | ||
2022 | 2021 | |
$m | $m | |
Customer accounts | 1,570,303 | 1,710,574 |
Deposits by banks | 66,722 | 101,152 |
Repurchase agreements - non-trading | 127,747 | 126,670 |
Debt securities in issue | 78,149 | 78,557 |
Cash collateral, margin and settlement accounts | 88,468 | 65,452 |
Liabilities of disposal groups held for sale1 | 114,597 | 9,005 |
Subordinated liabilities | 22,290 | 20,487 |
Financial liabilities designated at fair value | 127,327 | 145,502 |
Liabilities under insurance contracts Liabilities under insurance contracts | 114,844 | 112,745 |
Trading liabilities | 72,353 | 84,904 |
- repos | 16,254 | 11,004 |
- stock lending | 3,541 | 2,332 |
- other trading liabilities | 52,558 | 71,568 |
Total equity | 196,028 | 206,777 |
Other balance sheet liabilities
| 387,702 | 296,114 |
At 31 Dec | 2,966,530 | 2,957,939 |
Funding uses | ||
(Audited) | ||
2022 | 2021 | |
$m | $m | |
Loans and advances to customers | 924,854 | 1,045,814 |
Loans and advances to banks | 104,882 | 83,136 |
Reverse repurchase agreements - non-trading | 253,754 | 241,648 |
Cash collateral, margin and settlement accounts | 82,986 | 59,884 |
Assets held for sale1 | 115,919 | 3,411 |
Trading assets | 218,093 | 248,842 |
- reverse repos | 14,797 | 14,994 |
- stock borrowing | 10,706 | 8,082 |
- other trading assets | 192,590 | 225,766 |
Financial investments | 425,564 | 446,274 |
Cash and balances with central banks | 327,002 | 403,018 |
Other balance sheet assets | 513,476 | 425,912 |
At 31 Dec | 2,966,530 | 2,957,939 |
1 'Liabilities of disposal groups held for sale' includes $85bn and $27bn and 'Assets held for sale' includes $90bn and $23bn, in respect of planned sale of our banking business in Canada and planned sale of our retail banking operations in France respectively, that were classified as assets held for sale during 2022.
Wholesale term debt maturity profile
The maturity profile of our wholesale term debt obligations is set out in the following table. The balances in the table are not directly comparable with those in the consolidated balance sheet because the
table presents gross cash flows relating to principal payments and not the balance sheet carrying value, which includes debt securities and subordinated liabilities measured at fair value.
Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities1 | |||||||||
Due not more than 1 month | Due over 1 month but not more than 3 months | Due over 3 months but not more than 6 months | Due over 6 months but not more than 9 months | Due over 9 months but not more than 1 year | Due over 1 year but not more than 2 years | Due over 2 years but not more than 5 years | Due over 5 years | Total | |
$m | $m | $m | $m | $m | $m | $m | $m | $m | |
Debt securities issued | 11,959 | 11,266 | 12,532 | 8,225 | 8,212 | 26,669 | 52,435 | 52,952 | 184,250 |
- unsecured CDs and CP | 3,821 | 6,017 | 7,088 | 4,137 | 3,123 | 1,264 | 707 | 1,004 | 27,161 |
- unsecured senior MTNs | 5,973 | 2,351 | 3,534 | 1,363 | 3,238 | 19,229 | 44,023 | 44,021 | 123,732 |
- unsecured senior structured notes | 1,264 | 1,421 | 1,247 | 1,850 | 1,627 | 4,463 | 2,609 | 5,990 | 20,471 |
- secured covered bonds | - | - | - | - | - | - | 602 | - | 602 |
- secured asset-backed commercial paper | 690 | - | - | - | - | - | - | - | 690 |
- secured ABS | 15 | 28 | 40 | 38 | 36 | 123 | 656 | 220 | 1,156 |
- others | 196 | 1,449 | 623 | 837 | 188 | 1,590 | 3,838 | 1,717 | 10,438 |
Subordinated liabilities | - | - | 11 | 160 | - | 2,000 | 5,581 | 25,189 | 32,941 |
- subordinated debt securities | - | - | 11 | 160 | - | 2,000 | 5,581 | 23,446 | 31,198 |
- preferred securities | - | - | - | - | - | - | - | 1,743 | 1,743 |
At 31 Dec 2022 | 11,959 | 11,266 | 12,543 | 8,385 | 8,212 | 28,669 | 58,016 | 78,141 | 217,191 |
Debt securities issued | 17,602 | 14,593 | 9,293 | 9,249 | 5,233 | 25,058 | 55,388 | 56,639 | 193,055 |
- unsecured CDs and CP | 4,586 | 6,795 | 4,281 | 2,837 | 1,189 | 947 | 834 | 931 | 22,400 |
- unsecured senior MTNs | 8,542 | 4,140 | 2,633 | 2,078 | 2,074 | 14,932 | 45,063 | 45,259 | 124,721 |
- unsecured senior structured notes | 2,090 | 1,610 | 1,017 | 975 | 1,206 | 2,996 | 3,382 | 8,604 | 21,880 |
- secured covered bonds | - | 1,137 | - | 997 | - | 2,417 | 1,997 | - | 6,548 |
- secured asset-backed commercial paper | 956 | - | - | - | - | - | - | - | 956 |
- secured ABS | 1 | 133 | 33 | 31 | 193 | 896 | 1,696 | 98 | 3,081 |
- others | 1,427 | 778 | 1,329 | 2,331 | 571 | 2,870 | 2,416 | 1,747 | 13,469 |
Subordinated liabilities | - | - | 11 | - | - | 417 | 7,023 | 21,274 | 28,725 |
- subordinated debt securities | - | - | 11 | - | - | 417 | 7,023 | 19,427 | 26,878 |
- preferred securities | - | - | - | - | - | - | - | 1,847 | 1,847 |
At 31 Dec 2021 | 17,602 | 14,593 | 9,304 | 9,249 | 5,233 | 25,475 | 62,411 | 77,913 | 221,780 |
1 Excludes financial liabilities of disposal groups.
Structural foreign exchange risk in 2022
Structural foreign exchange exposures represent net assets or capital investments in subsidiaries, branches, joint arrangements or associates, together with any associated hedges, the functional currencies of which are currencies other than the US dollar. Exchange differences on structural exposures are usually recognised in 'other comprehensive income'.
Net structural foreign exchange exposures | ||||||
2022 | ||||||
Currency of structural exposure | Net investment in foreign operations (excl non-controlling interest) | Net investment hedges | Structural foreign exchange exposures (pre-economic hedges) | Economic hedges - structural FX hedges1 | Economic hedges - equity securities (AT1)2 | Net structural foreign exchange exposures |
$m | $m | $m | $m | $m | $m | |
Hong Kong dollars | 47,204 | (4,597) | 42,607 | (8,363) | - | 34,244 |
Pounds sterling | 39,535 | (14,000) | 25,535 | - | (1,205) | 24,330 |
Chinese renminbi | 35,801 | (3,532) | 32,269 | (994) | - | 31,275 |
Euros | 15,182 | (777) | 14,405 | - | (2,402) | 12,003 |
Canadian dollars | 4,402 | (811) | 3,591 | - | - | 3,591 |
Indian rupees | 4,967 | (1,380) | 3,587 | - | - | 3,587 |
Mexican pesos | 3,989 | - | 3,989 | - | - | 3,989 |
Saudi riyals | 4,182 | (109) | 4,073 | - | - | 4,073 |
UAE dirhams | 4,534 | (731) | 3,803 | (2,285) | - | 1,518 |
Malaysian ringgit | 2,715 | - | 2,715 | - | - | 2,715 |
Singapore dollars | 3,108 | (358) | 2,750 | - | (559) | 2,191 |
Australian dollars | 2,264 | - | 2,264 | - | - | 2,264 |
Taiwanese dollars | 2,058 | (1,140) | 918 | - | - | 918 |
Indonesian rupiah | 1,453 | (469) | 984 | - | - | 984 |
Swiss francs | 1,233 | (727) | 506 | - | - | 506 |
Korean won | 1,283 | (817) | 466 | - | - | 466 |
Thai baht | 908 | - | 908 | - | - | 908 |
Egyptian pound | 746 | - | 746 | - | - | 746 |
Qatari rial | 785 | (200) | 585 | (277) | - | 308 |
Argentinian peso | 968 | - | 968 | - | - | 968 |
Others, each less than $700m | 5,135 | (495) | 4,640 | (36) | - | 4,604 |
At 31 Dec | 182,452 | (30,143) | 152,309 | (11,955) | (4,166) | 136,188 |
2021 | ||||||
Hong Kong dollars | 44,714 | (4,992) | 39,722 | (7,935) | - | 31,787 |
Pounds sterling | 47,935 | (15,717) | 32,218 | - | (1,353) | 30,865 |
Chinese renminbi | 35,879 | - | 35,879 | (1,255) | - | 34,624 |
Euros | 14,671 | - | 14,671 | - | (4,262) | 10,409 |
Canadian dollars | 5,147 | (1,093) | 4,054 | - | - | 4,054 |
Indian rupees | 5,106 | - | 5,106 | - | - | 5,106 |
Mexican pesos | 3,598 | - | 3,598 | - | - | 3,598 |
Saudi riyals | 4,115 | - | 4,115 | - | - | 4,115 |
UAE dirhams | 4,155 | (700) | 3,455 | (1,985) | - | 1,470 |
Malaysian ringgit | 2,713 | - | 2,713 | - | - | 2,713 |
Singapore dollars | 2,339 | (680) | 1,659 | - | (1,298) | 361 |
Australian dollars | 2,300 | - | 2,300 | - | - | 2,300 |
Taiwanese dollars | 2,105 | (1,019) | 1,086 | - | - | 1,086 |
Indonesian rupiah | 1,748 | - | 1,748 | - | - | 1,748 |
Swiss francs | 1,107 | (809) | 298 | - | - | 298 |
Korean won | 1,219 | (696) | 523 | - | - | 523 |
Thai baht | 859 | - | 859 | - | - | 859 |
Egyptian pound | 1,051 | - | 1,051 | - | - | 1,051 |
Qatari rial | 725 | - | 725 | (332) | - | 393 |
Argentinian peso | 795 | - | 795 | - | - | 795 |
Others, each less than $700m | 5,242 | (200) | 5,042 | (36) | - | 5,006 |
At 31 Dec | 187,523 | (25,906) | 161,617 | (11,543) | (6,913) | 143,161 |
1 Represents hedges that do not qualify as net investment hedges for accounting purposes.
2 Represents foreign currency-denominated preference share and AT1 instruments. These are accounted for at historical cost under IFRSs and do not qualify as net investment hedges for accounting purposes. The gain or loss arising from changes in the US dollar value of these instruments is recognised on redemption in retained earnings.
For definition of structural foreign exchange exposures, see page 205.
Interest rate risk in the banking book in 2022
Net interest income sensitivity
The following tables set out the assessed impact to a hypothetical base case projection of our banking book NII under the following scenarios:
• an immediate shock of 25 basis points ('bps') to the current market-implied path of interest rates across all currencies on 1 January 2023 (effects over one year and five years); and
• an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2023 (effects over one year and five years).
The sensitivities shown represent a hypothetical simulation of the base case NII, assuming a static balance sheet (specifically no assumed migration from current account to term deposits), no management actions from Global Treasury and a simplified 50% pass-on assumption applied for material entities. This also incorporates the effect of interest rate behaviouralisation, hypothetical managed rate product pricing assumptions, prepayment of mortgages and deposit stability. The sensitivity calculations exclude pensions, insurance and investments in subsidiaries.
The NII sensitivity analysis performed in the case of a down-shock does not include floors to market rates, and it does not include floors on some wholesale assets and liabilities. However, floors have been maintained for deposits and loans to customers where this is contractual or where negative rates would not be applied.
As market and policy rates move, the degree to which these changes are passed on to customers will vary based on a number of factors, including the absolute level of market rates, regulatory and contractual frameworks, and competitive dynamics. To aid comparability between markets, we have simplified the basis of preparation for our disclosure, and have used a 50% pass-on assumption for major entities on certain interest bearing deposits. Our pass-through asset assumptions are largely in line with our contractual agreements or established market practice, which typically results in a significant portion of interest rate changes being passed on.
The one-year and five-year NII sensitivities in the down-shock scenarios decreased at 31 December 2022 at Group level when compared with 31 December 2021. This was driven by changes in the forecasted yield curves and changes in balance sheet composition.
Immediate interest rate rises of 25bps and 100bps would increase projected NII for the 12 months to 31 December 2023 by $884m and $3,535m, respectively. Immediate interest rate falls of 25bps and 100bps would decrease projected NII for the 12 months to 31 December 2023 by $973m and $3,969m, respectively.
The sensitivity of NII for 12 months decreased by $1,879m in the plus 100bps parallel shock and by $1,792m in the minus 100bps parallel shock, comparing 31 December 2022 with 31 December 2021. The decrease in the sensitivity of NII for 12 months in the plus 100bps parallel shock was mainly driven by changes in market pricing, reflecting current market expectations of main policy rates. The key drivers of the reduction in NII sensitivity are the reduced effects of flooring as rates have moved higher, deposit migration, and management actions.
The sensitivities broken down by currency in the tables below do not include the impact of vanilla foreign exchange swaps to optimise cash management across the Group.
For further details of measurement of interest rate risk in the banking book, see page 204.
NII sensitivity to an instantaneous change in yield curves (12 months) - 1 year NII sensitivity by currency | ||||||
Currency | ||||||
$ | HK$ | £ | € | Other | Total | |
$m | $m | $m | $m | $m | $m | |
Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022) | ||||||
+25bps parallel | (66) | 107 | 245 | 167 | 431 | 884 |
-25bps parallel | 64 | (115) | (289) | (194) | (439) | (973) |
+100bps parallel | (267) | 413 | 1,026 | 674 | 1,689 | 3,535 |
-100bps parallel | 236 | (476) | (1,177) | (765) | (1,787) | (3,969) |
Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 December 2021) | ||||||
+25bps parallel | 125 | 265 | 420 | 106 | 393 | 1,309 |
-25bps parallel | (257) | (536) | (594) | (170) | (395) | (1,952) |
+100bps parallel | 458 | 1,054 | 1,739 | 632 | 1,532 | 5,414 |
-100bps parallel | (466) | (1,020) | (2,070) | (595) | (1,610) | (5,761) |
.
NII sensitivity to an instantaneous change in yield curves (5 years) - Cumulative 5 years NII sensitivity by currency | ||||||
Currency | ||||||
$ | HK$ | £ | € | Other | Total | |
$m | $m | $m | $m | $m | $m | |
Change in Jan 2023 to Dec 2027 (based on balance sheet at 31 December 2022) | ||||||
+25bps parallel | 192 | 668 | 2,315 | 924 | 2,500 | 6,599 |
-25bps parallel | (282) | (688) | (2,336) | (1,044) | (2,498) | (6,848) |
+100bps parallel | 673 | 2,401 | 9,254 | 3,764 | 9,765 | 25,857 |
-100bps parallel | (1,522) | (3,004) | (9,454) | (4,173) | (10,317) | (28,470) |
Change in Jan 2022 to Dec 2026 (based on balance sheet at 31 December 2021) | ||||||
+25bps parallel | 1,026 | 1,410 | 3,333 | 827 | 2,510 | 9,106 |
-25bps parallel | (1,701) | (2,887) | (4,216) | (997) | (2,600) | (12,401) |
+100bps parallel | 3,922 | 4,870 | 13,389 | 3,919 | 9,841 | 35,941 |
-100bps parallel | (5,060) | (7,052) | (14,893) | (3,571) | (10,481) | (41,057) |
The net interest income sensitivities arising from the scenarios presented in the tables above are not directly comparable. This is due to timing differences relating to interest rate changes and the repricing of assets and liabilities.
NII sensitivity to an instantaneous change in yield curves (5 years) - NII sensitivity by years | ||||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total | |
$m | $m | $m | $m | $m | $m | |
Change in Jan 2023 to Dec 2027 (based on balance sheet at 31 December 2022) | ||||||
+25bps parallel | 884 | 1,145 | 1,378 | 1,550 | 1,642 | 6,599 |
-25bps parallel | (973) | (1,178) | (1,420) | (1,579) | (1,699) | (6,848) |
+100bps parallel | 3,535 | 4,565 | 5,367 | 5,962 | 6,429 | 25,857 |
-100bps parallel | (3,969) | (4,944) | (5,925) | (6,565) | (7,067) | (28,470) |
Change in Jan 2022 to Dec 2026 (based on balance sheet at 31 December 2021) | ||||||
+25bps parallel | 1,309 | 1,758 | 1,896 | 2,002 | 2,141 | 9,106 |
-25bps parallel | (1,952) | (2,324) | (2,593) | (2,687) | (2,845) | (12,401) |
+100bps parallel | 5,414 | 6,738 | 7,492 | 7,937 | 8,359 | 35,941 |
-100bps parallel | (5,761) | (7,664) | (8,675) | (9,354) | (9,603) | (41,057) |
Non-trading value at risk
Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments measured at fair value through other comprehensive income, debt instruments measured at amortised cost, and exposures arising from our insurance operations.
Value at risk of non-trading portfolios
Value at risk ('VaR') is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into the market risk management of non-trading portfolios to have a complete picture of risk, complementing risk sensitivity analysis.
Our models are predominantly based on historical simulation that incorporates the following features:
• historical market rates and prices, which are calculated with reference to interest rates, credit spreads and the associated volatilities;
• potential market movements that are calculated with reference to data from the past two years; and
• calculations to a 99% confidence level and using a one-day holding period.
Although a valuable guide to risk, VaR is used for non-trading portfolios with awareness of its limitations. For example:
• The use of historical data as a proxy for estimating future market moves may not encompass all potential market events, particularly those that are extreme in nature. As the model is calibrated on the last 500 business days, it does not adjust instantaneously to a change in the market regime.
• The use of a one-day holding period for risk management purposes of non-trading books is only an indication of exposure and not indicative of the time period required to hedge or liquidate positions.
• The use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence.
The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group non-trading VaR. The management of this risk is described on page 217. Non-trading VaR also excludes the equity risk on securities held at fair value and non-trading book foreign exchange risk.
The VaR for non-trading activity at 31 December 2022 was lower than at 31 December 2021.
The daily levels of total non-trading VaR in 2022 are set out in the graph below.
Daily VaR (non-trading portfolios), 99% 1 day ($m) |
The Group non-trading VaR for 2022 is shown in the table below.
Non-trading VaR, 99% 1 day | ||||
(Audited) | ||||
Interest rate | Credit spread | Portfoliodiversification1 | Total2 | |
$m | $m | $m | $m | |
Balance at 31 Dec 2022 | 159.8 | 56.6 | (45.3) | 171.1 |
Average | 134.6 | 56.9 | (35.9) | 155.6 |
Maximum | 225.5 | 84.7 | 265.3 | |
Minimum | 98.3 | 43.4 | 106.3 | |
Balance at 31 Dec 2021 | 216.4 | 70.3 | (66.3) | 220.4 |
Average | 200.7 | 76.9 | (40.3) | 237.3 |
Maximum | 248.7 | 99.3 | - | 298.8 |
Minimum | 163.3 | 64.7 | - | 193.5 |
1 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types - such as interest rate and credit spreads - together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
2 The total VaR is non-additive across risk types due to diversification effects.
The decrease at the end of February was primarily driven by Covid-19 scenarios moving out of the two-year historical scenario window used to calculate VaR. Non-trading VaR remained at relatively low levels throughout the next two quarters, with an increase in duration risk exposure in Global Treasury during November driving an increase in both interest rate and total VaR. The average portfolio diversification effect between interest rate and credit spread exposure remained relatively stable between 2021 and 2022.
Sensitivity of capital and reserves
Hold-to-collect-and-sell stressed VaR is a quantification of the potential losses to a 99% confidence level of the portfolio of high-quality liquid assets held under a hold-to-collect-and-sell business model in Global Treasury. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in designated hedging relationships with these securities. The mark-to-market of this portfolio therefore has an impact on CET1. Stressed VaR is quantified based on the worst losses over a one-year period going back to the beginning of 2007 and the assumed holding period is 60 days. At the end of December 2022, the stressed VaR of the portfolio was $2.15bn (2021: $3.63bn). The decrease was primarily due to actions taken to reduce the overall duration risk of the portfolio in order to dampen the capital impact from higher interest rates.
Alongside our monitoring of the stressed VaR of this portfolio, we also monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a yearly basis by assessing the expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves.
The following table describes the sensitivity of our cash flow hedge reported reserves to the stipulated movements in yield curves at the year end. The sensitivities are indicative and based on simplified scenarios. These particular exposures form only a part of our overall interest rate exposure. We apply flooring on negative rates in the minus 100bps scenario in this assessment. However, due to increases in interest rates in most major markets, the effect of this flooring is immaterial at the end of 2022.
Comparing 31 December 2022 with 31 December 2021, the sensitivity of the cash flow hedging reserve increased by $368m in the plus 100bps scenario and increased by $375m in the minus 100bps scenario. Although our largest exposure by currency remained fixed rate pound sterling hedges transacted in HSBC UK Bank plc, the increase in sensitivity during 2022 was driven by increases in hedge exposure in a variety of other currencies including US dollars and Hong Kong dollars.
Sensitivity of cash flow hedging reported reserves to interest rate movements | |
$m | |
At 31 Dec 2022 | |
+100 basis point parallel move in all yield curves | (1,899) |
As a percentage of total shareholders' equity | (1.01)% |
-100 basis point parallel move in all yield curves | 1,912 |
As a percentage of total shareholders' equity | 1.02% |
At 31 Dec 2021 | |
+100 basis point parallel move in all yield curves | (1,531) |
As a percentage of total shareholders' equity | (0.77)% |
-100 basis point parallel move in all yield curves | 1,537 |
As a percentage of total shareholders' equity | 0.78% |
Third-party assets in Markets Treasury
Third-party assets in Markets Treasury decreased by 3% compared with 31 December 2021. The net decrease of $22bn was partly reflective of a reduction in our commercial surplus during the year, as
well as the impact of foreign exchange rates and interest rates, as central banks tightened monetary policy during 2022. The increase of $31bn in 'Other' was largely driven by the reclassification of our banking business in Canada to held for sale.
Third-party assets in Markets Treasury | ||
2022 | 2021 | |
$m | $m | |
Cash and balances at central banks | 317,479 | 379,106 |
Trading assets | 498 | 329 |
Loans and advances: | ||
- to banks | 67,612 | 47,363 |
- to customers | 2,102 | 371 |
Reverse repurchase agreements | 53,016 | 47,067 |
Financial investments | 319,852 | 338,692 |
Other | 36,192 | 5,451 |
At 31 Dec | 796,751 | 818,379 |
Defined benefit pension plans
Market risk arises within our defined benefit pension plans to the extent that the obligations of the plans are not fully matched by assets with determinable cash flows.
For details of our defined benefit plans, including asset allocation, see Note 5 on the financial statements, and for pension risk management, see page 205.
.
Additional market risk measures applicable only to the parent company
HSBC Holdings monitors and manages foreign exchange risk and interest rate risk. In order to manage interest rate risk, HSBC Holdings uses the projected sensitivity of its NII to future changes in yield curves and the interest rate repricing gap tables.
During 2022, HSBC Holdings hedged $22.7bn of previously unhedged issuances. The impact can be observed in the NII sensitivity tables with a change from positive to negative sensitivities due to increases in interest rates.
Foreign exchange risk
HSBC Holdings' foreign exchange exposures derive almost entirely from the execution of structural foreign exchange hedges on behalf of the Group as its business-as-usual foreign exchange exposures are managed within tight risk limits. At 31 December 2022, HSBC Holdings had forward foreign exchange contracts of
$30.1bn (2021: $25.9bn) to manage the Group's structural foreign exchange exposures.
For further details of our structural foreign exchange exposures, see page 212.
Sensitivity of net interest income
HSBC Holdings monitors NII sensitivity over 12-month and five-year time horizons, reflecting the longer-term perspective on interest rate risk management appropriate to a financial services holding company. These sensitivities assume that any issuance where HSBC Holdings has an option to reimburse at a future call date is called at this date. The tables below set out the effect on HSBC Holdings' future NII of the following scenarios:
• an immediate shock of 25bps to the current market-implied path of interest rates across all currencies on 1 January 2023; and
• an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 January 2023.
The NII sensitivities shown are indicative and based on simplified scenarios. Immediate interest rate rises of 25bps and 100bps would decrease projected NII for the 12 months to 31 December 2023 by $60m and $240m respectively. Conversely, falls of 25bps and 100bps would increase projected NII for the 12 months to 31 December 2023 by $60m and $240m respectively.
NII sensitivity to an instantaneous change in yield curves (12 months) | ||||||
$ | HK$ | £ | € | Other | Total | |
$m | $m | $m | $m | $m | $m | |
Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022) | ||||||
+25bps | (66) | - | 4 | 2 | - | (60) |
-25bps | 66 | - | (4) | (2) | - | 60 |
+100bps | (265) | - | 16 | 9 | - | (240) |
-100bps | 265 | - | (16) | (9) | - | 240 |
Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 December 2021) | ||||||
+25bps | 16 | - | 8 | 4 | - | 29 |
-25bps | (16) | - | (8) | (4) | - | (28) |
+100bps | 65 | - | 31 | 16 | - | 113 |
-100bps | (64) | - | (31) | (14) | - | (109) |
NII sensitivity to an instantaneous change in yield curves (5 years) | ||||||
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total | |
$m | $m | $m | $m | $m | $m | |
Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022) | ||||||
+25bps | (60) | (41) | (36) | (37) | (38) | (212) |
-25bps | 60 | 41 | 36 | 37 | 38 | 212 |
+100bps | (240) | (162) | (143) | (148) | (154) | (847) |
-100bps | 240 | 162 | 143 | 148 | 154 | 847 |
Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 December 2021) | - | |||||
+25bps | 29 | 44 | 45 | 38 | 28 | 184 |
-25bps | (28) | (44) | (45) | (38) | (28) | (183) |
+100bps | 113 | 177 | 180 | 152 | 112 | 733 |
-100bps | (109) | (174) | (174) | (148) | (109) | (715) |
The figures represent hypothetical movements in NII based on our projected yield curve scenarios, HSBC Holdings' current interest rate risk profile and assumed changes to that profile during the next five years.
The sensitivities represent our assessment of the change to a hypothetical base case based on a static balance sheet assumption, and do not take into account the effect of actions that could be taken to mitigate this interest rate risk.
Interest rate repricing gap table
The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VaR, but is managed on a repricing gap basis. The following 'Repricing gap analysis of HSBC Holdings' table analyses the full term structure of interest rate mismatches within HSBC Holdings' balance sheet where debt issuances are reflected based on either the next repricing date if floating rate or the maturity/call date (whichever is first) if fixed rate.
Repricing gap analysis of HSBC Holdings | ||||||
Total | Up to 1 year | From over 1 to 5 years | From over 5 to 10 years | More than 10 years | Non-interest bearing | |
$m | $m | $m | $m | $m | $m | |
Cash at bank and in hand: | ||||||
- balances with HSBC undertakings | 2,590 | 2,590 | ||||
Derivatives | 2,811 | 2,811 | ||||
Loans and advances to HSBC undertakings | 76,516 | 22,545 | 29,759 | 20,347 | 2,000 | 1,865 |
Financial investments in HSBC undertakings | 26,194 | 22,917 | 3,268 | 9 | ||
Investments in subsidiaries | 163,211 | 5,425 | 8,395 | 600 | 148,791 | |
Other assets | 1,850 | 1,850 | ||||
Total assets | 273,172 | 53,477 | 41,422 | 20,947 | 2,000 | 155,326 |
Amounts owed to HSBC undertakings | (111) | (111) | ||||
Financial liabilities designated at fair values | (32,418) | (5,925) | (10,801) | (14,942) | (750) | |
Derivatives | (1,220) | (1,220) | ||||
Debt securities in issue | (67,483) | (11,244) | (34,917) | (19,322) | (2,000) | |
Other liabilities | (4,551) | (4,551) | ||||
Subordinated liabilities | (17,059) | (1,131) | (3,705) | (1,780) | (10,443) | |
Total equity | (150,330) | (2,446) | (11,096) | (8,721) | (128,067) | |
Total liabilities and equity | (273,172) | (20,746) | (60,519) | (44,765) | (13,193) | (133,949) |
Off-balance sheet items attracting interest rate sensitivity | (18,797) | (10,871) | 1,434 | 6,184 | 308 | |
Net interest rate risk gap at 31 Dec 2022 | 13,952 | (8,226) | (22,384) | (5,009) | 21,667 | |
Cumulative interest rate gap | 13,952 | 5,726 | (16,658) | (21,667) | ||
Cash at bank and in hand: | ||||||
- balances with HSBC undertakings | 2,590 | 2,590 | ||||
Derivatives | 2,811 | 2,811 | ||||
Loans and advances to HSBC undertakings | 76,516 | 22,545 | 29,759 | 20,347 | 2,000 | 1,865 |
Financial investments in HSBC undertakings | 26,194 | 22,917 | 3,268 | 9 | ||
Investments in subsidiaries | 163,211 | 5,425 | 8,395 | 600 | 148,791 | |
Other assets | 1,850 | 1,850 | ||||
Total assets | 273,172 | 53,477 | 41,422 | 20,947 | 2,000 | 155,326 |
Amounts owed to HSBC undertakings | (111) | (111) | ||||
Financial liabilities designated at fair values | (32,418) | (5,925) | (10,801) | (14,942) | (750) | |
Derivatives | (1,220) | (1,220) | ||||
Debt securities in issue | (67,483) | (11,244) | (34,917) | (19,322) | (2,000) | |
Other liabilities | (4,551) | (4,551) | ||||
Subordinated liabilities | (17,059) | (1,131) | (3,705) | (1,780) | (10,443) | |
Total equity | (150,330) | (2,446) | (11,096) | (8,721) | (128,067) | |
Total liabilities and equity | (273,172) | (20,746) | (60,519) | (44,765) | (13,193) | (133,949) |
Off-balance sheet items attracting interest rate sensitivity | (18,797) | (10,871) | 1,434 | 6,184 | 308 | |
Net interest rate risk gap at 31 Dec 20211 | 13,952 | (8,226) | (22,384) | (5,009) | 21,667 | |
Cumulative interest rate gap | 13,952 | 5,726 | (16,658) | (21,667) | ||
1 Investments in subsidiaries and equity have been allocated based on call dates for any callable bonds. The prior year figures have been amended to reflect this.
Market risk |
Contents
227 | Overview |
227 | Market risk management |
228 | Market risk in 2022 |
228 | Trading portfolios |
229 | Market risk balance sheet linkages |
Overview
Market risk is the risk of an adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads. Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios.
For further details of market risk in non-trading portfolios, page 214, of the Annual Report and Accounts 2022.
Market risk management
Key developments in 2022
There were no material changes to our policies and practices for the management of market risk in 2022.
Governance and structure
The following diagram summarises the main business areas where trading market risks reside and the market risk measures used to monitor and limit exposures.
Trading risk | |
• Foreign exchange and commodities • Interest rates • Credit spreads • Equities | |
GBM | |
Value at risk | Sensitivity | Stress testing |
The objective of our risk management policies and measurement techniques is to manage and control market risk exposures to optimise return on risk while maintaining a market profile consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by the Group Chief Risk and Compliance Officer for HSBC Holdings. These limits are allocated across business lines and to the Group's legal entities. Each major operating entity has an independent market risk management and control sub-function, which is responsible for measuring, monitoring and reporting market risk exposures against limits on a daily basis. Each operating entity is required to assess the market risks arising in its business and to transfer them either to its local Markets and Securities Services or Markets Treasury unit for management, or to separate books managed under the supervision of the local ALCO. The Traded Risk function enforces the controls around trading in permissible instruments approved for each site as well as changes that follow completion of the new product approval process. Traded Risk also restricts trading in the more complex derivative products to offices with appropriate levels of product expertise and robust control systems.
Key risk management processes
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite.
We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, VaR and stress testing.
Sensitivity analysis
Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates and equity prices. We use sensitivity measures to monitor the market risk positions within each risk type. Granular sensitivity limits are set for trading desks with consideration of market liquidity, customer demand and capital constraints, among other factors.
Value at risk
(Audited)
VaR is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and calculated for all trading positions regardless of how we capitalise them. Where we do not calculate VaR explicitly, we use alternative tools as summarised in the 'Stress testing' section below.
Our models are predominantly based on historical simulation that incorporates the following features:
• historical market rates and prices, which are calculated with reference to foreign exchange rates, commodity prices, interest rates, equity prices and the associated volatilities;
• potential market movements that are calculated with reference to data from the past two years; and
• calculations to a 99% confidence level and using a one-day holding period.
The models also incorporate the effect of option features on the underlying exposures. The nature of the VaR models means that an increase in observed market volatility will lead to an increase in VaR without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR is used with awareness of its limitations. For example:
• The use of historical data as a proxy for estimating future market moves may not encompass all potential market events, particularly those that are extreme in nature. As the model is calibrated on the last 500 business days, it does not adjust instantaneously to a change in the market regime.
• The use of a one-day holding period for risk management purposes of trading books assumes that this short period is sufficient to hedge or liquidate all positions.
• The use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence.
• VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not reflect intra-day exposures.
Risk not in VaR framework
The risks not in VaR ('RNIV') framework captures and capitalises material market risks that are not adequately covered in the VaR model.
Risk factors are reviewed on a regular basis and are either incorporated directly in the VaR models, where possible, or quantified through either the VaR-based RNIV approach or a stress test approach within the RNIV framework. While VaR-based RNIVs are calculated by using historical scenarios, stress-type RNIVs are estimated on the basis of stress scenarios whose severity is calibrated to be in line with the capital adequacy requirements. The outcome of the VaR-based RNIV approach is included in the overall VaR calculation but excluded from the VaR measure used for regulatory back-testing. In addition, the stressed VaR measure also includes risk factors considered in the VaR-based RNIV approach.
Stress-type RNIVs include a deal contingent derivatives capital charge to capture risk for these transactions and a de-peg risk measure to capture risk to pegged and heavily managed currencies.
Stress testing
Stress testing is an important procedure that is integrated into our market risk management framework to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be much greater than those predicted by VaR modelling.
Stress testing is implemented at legal entity, regional and overall Group levels. A set of scenarios is used consistently across all regions within the Group. The risk appetite around potential stress losses for the Group is set and monitored against a referral limit.
Market risk reverse stress tests are designed to identify vulnerabilities in our portfolios by looking for scenarios that lead to loss levels considered severe for the relevant portfolio. These scenarios may be quite local or idiosyncratic in nature, and complement the systematic top-down stress testing.
Stress testing and reverse stress testing provide senior management with insights regarding the 'tail risk' beyond VaR, for which our appetite is limited.
Trading portfolios
Trading portfolios comprise positions held for client servicing and market-making, with the intention of short-term resale and/or to hedge risks resulting from such positions.
Back-testing
We routinely validate the accuracy of our VaR models by back-testing the VaR metric against both actual and hypothetical profit and loss. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenue of intra-day transactions. The hypothetical profit and loss reflects the profit and loss that would be realised if positions were held constant from the end of one trading day to the end of the next. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore necessarily indicative of the actual performance of the business.
The number of hypothetical loss back-testing exceptions, together with a number of other indicators, is used to assess model performance and to consider whether enhanced internal monitoring of a VaR model is required. We back-test our VaR at set levels of our Group entity hierarchy.
Market risk in 2022
During 2022, financial markets were driven by concerns over high inflation and recession risks, against the backdrop of the Russia-Ukraine war and continued Covid-19-related pandemic restrictions in some countries. Throughout the year, several major central banks tightened their monetary policies at a faster pace than previously anticipated in order to counter rising inflation. As a result, bond markets sold off sharply and bond yields rose to multi-year highs. In addition, a change in the UK fiscal stance in late September led to the pound reaching record lows and to significant turmoil in the market for long-dated UK government bonds, which was exacerbated by rapid deleveraging of liability-driven investment funds used by pension schemes. There was pronounced volatility in equity valuations, with declines across most market sectors due to recession risks and tighter liquidity conditions. Foreign exchange markets were largely dominated by a strong US dollar, as a result of global geopolitical instability and the relatively fast pace of monetary tightening by the US Federal Reserve. Investor sentiment remained fragile in credit markets, with credit spreads in both investment-grade and high-yield debt benchmarks reaching their widest levels since the start of the Covid-19 pandemic.
We continued to manage market risk prudently during 2022. Sensitivity exposures and VaR remained within appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits, including stress testing and scenario analysis.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR was predominantly generated by the Markets and Securities Services business.
Trading VaR as at 31 December 2022 increased compared with 31 December 2021. The increase, which peaked in September 2022, was mainly driven by interest rate risk factors across business lines, although lower loss contributions from credit spread risks provided a partial offset. VaR returned to normal operating range in the fourth quarter of 2022.
The daily levels of total trading VaR during 2022 are set out in the graph below.
Daily VaR (trading portfolios), 99% 1 day ($m) |
The Group trading VaR for the year is shown in the table below.
Trading VaR, 99% 1 day1 | ||||||
(Audited) | ||||||
Foreign exchange and commodity | Interest rate | Equity | Credit spread | Portfolio diversification2 | Total3 | |
$m | $m | $m | $m | $m | $m | |
Balance at 31 Dec 2022 | 15.4 | 40.0 | 18.6 | 11.9 | (36.4) | 49.5 |
Average | 13.6 | 29.6 | 16.1 | 16.8 | (34.0) | 42.1 |
Maximum | 29.2 | 73.3 | 24.8 | 27.9 | 78.3 | |
Minimum | 5.7 | 20.2 | 11.5 | 9.1 | 29.1 | |
Balance at 31 Dec 2021 | 9.1 | 25.9 | 15.4 | 24.8 | (36.5) | 38.8 |
Average | 12.9 | 33.8 | 16.7 | 19.2 | (45.5) | 37.1 |
Maximum | 31.8 | 51.7 | 24.3 | 29.4 | 53.8 | |
Minimum | 6.7 | 18.5 | 12.1 | 12.2 | 27.7 | |
1 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types - such as interest rate, equity and foreign exchange - together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures.
3 The total VaR is non-additive across risk types due to diversification effects.
The table below shows trading VaR at a 99% confidence level compared with trading VaR at a 95% confidence level at 31 December 2022. This comparison facilitates the benchmarking
of the trading VaR, which can be stated at different confidence levels, with financial institution peers. The 95% VaR is unaudited.
Comparison of trading VaR, 99% 1 day vs trading VaR, 95% 1 day | ||
Trading VaR, 99% 1 day | Trading VaR, 95% 1 day | |
$m | $m | |
Balance at 31 Dec 2022 | 49.5 | 31.7 |
Average | 42.1 | 24.6 |
Maximum | 78.3 | 49.0 |
Minimum | 29.1 | 17.5 |
Balance at 31 Dec 2021 | 38.8 | 21.6 |
Average | 37.1 | 24.0 |
Maximum | 53.8 | 30.0 |
Minimum | 27.7 | 18.9 |
Back-testing
During 2022, the Group experienced 10 loss back-testing exceptions against hypothetical profit and losses, of which seven exceptions occurred in the second half of the year. The high number of hypothetical back-testing exceptions was primarily driven by the volatile market environment and a rapid shift in the global interest rate regime in 2022.
The hypothetical profit and loss reflects the profit and loss that would be realised if positions were held constant from the end of one trading day to the end of the next. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore indicative of the actual performance of the business. Accordingly, of the 10 loss back-testing exceptions against hypothetical profit and loss, only one corresponded to an actual profit and loss exception.
The Group experienced four loss back-testing exceptions against actual profit and losses during 2022. Losses were attributable to fair value adjustments that were adopted for factors not incorporated within valuation models, and from the impacts of restructuring of derivative exposures under our RWA optimisation programme.
Given the heightened number of hypothetical loss back-testing exceptions in the second half of 2022, we have undertaken a review of our VaR model assumptions and updated the risk parameters within the model.
Market risk balance sheet linkages
The following balance sheet lines in the Group's consolidated position are subject to market risk:
Trading assets and liabilities
The Group's trading assets and liabilities are in almost all cases originated by GBM. These assets and liabilities are treated as traded risk for the purposes of market risk management, other than a limited number of exceptions, primarily in Global Banking where the short-term acquisition and disposal of the assets are linked to other non-trading-related activities such as loan origination.
Derivative assets and liabilities
We undertake derivative activity for three primary purposes: to create risk management solutions for clients, to manage the portfolio risks arising from client business, and to manage and hedge our own risks. Most of our derivative exposures arise from sales and trading activities within GBM. The assets and liabilities included in trading VaR give rise to a large proportion of the income included in net income from financial instruments held for trading or managed on a fair value basis. Adjustments to trading income such as valuation adjustments are not measured by the trading VaR model.
For information on the accounting policies applied to financial instruments at fair value, see Note 1 on the financial statements.
Climate risk TCFD |
Contents
221 | Overview |
222 | Climate risk management |
223 | Wholesale credit risk |
224 | Retail credit risk |
225 | Resilience risk |
225 | Regulatory compliance risk |
225 | Reputational risk |
226 | Insights from climate scenario analysis |
Overview
Climate risk relates to the financial and non-financial impacts that may arise as a result of climate change and the move to a greener economy. Climate risk can materialise through:
• physical risk, which arises from the increased frequency and severity of weather events, such as hurricanes and floods, or chronic shifts in weather patterns;
• transition risk, which arises from the process of moving to a low-carbon economy, including changes in government or public policy, technology and end-demand; and
• greenwashing risk, which arises from the act of knowingly or unknowingly misleading stakeholders regarding our strategy relating to climate, the climate impact/benefit of a product or service, or the climate commitments or performance of our customers.
Approach and policy
We are affected by climate risks either directly or indirectly through our relationships with our customers, resulting in both financial and non-financial impacts.
We may face direct exposure to the physical impacts of climate change, which could negatively affect our day-to-day operations. Any detrimental impact to our customers from climate risk could negatively impact us either through credit losses on our loan book or losses on trading assets. We may also be impacted by reputational concerns related to the climate action or inaction of our customers. In addition, if we are perceived to mislead stakeholders on our business activities or if we fail to achieve our stated net zero ambitions, we could face greenwashing risk resulting in significant reputational damage and potential regulatory fines, impacting our revenue generating ability.
We have integrated climate risk into our existing risk taxonomy, and incorporated it within the risk management framework through the policies and controls for the existing risks where appropriate.
Our climate risk approach is aligned to our Group-wide risk management framework and three lines of defence model, which sets out how we identify, assess and manage our risks (for further details of our three lines of defence framework, see page 134). This approach provides the Board and senior management with visibility and oversight of our key climate risks.
Our initial approach to managing climate risk was focused on understanding physical and transition impacts across five priority risk types: wholesale credit risk, retail credit risk, reputational risk, resilience risk and regulatory compliance risk. In 2022, we expanded our scope to consider climate risk impacts on our other risk types in our risk taxonomy.
We consider greenwashing to be an important emerging risk that is likely to increase over time as we look to develop capabilities and products to achieve our net zero commitments, and work with our clients to help them transition to a low-carbon economy. To reflect this, our climate risk approach has been updated to include greenwashing risk, and guidance has been provided to the first and second lines of defence on the key risk factors, and how it should be managed.
Our ambition to achieve net zero in our financed emissions also exposes us to potential reputational, compliance and legal risks if we fail to effectively deliver on our ambition. Achieving this ambition is dependent on a number of known and unknown factors including the accuracy and reliability of data, emerging methodologies and the need to develop new tools to accurately assess emissions reductions. We have taken initial steps to develop our capabilities to monitor our exposures and set risk appetites, although, operationalising our ambition is dependent on data and methodologies maturing over time, and requires us to continue developing our internal processes and tools to help achieve our ambition.
The tables below provide an overview of the climate risk drivers considered within HSBC's climate risk framework. Primary risk drivers refer to risk drivers aligned to the Financial Stability Board's Task Force on Climate-related Financial Disclosures ('TCFD'), which sets a framework to help public companies and other organisations disclose climate-related risks and opportunities. Thematic risk drivers are bespoke to our internal climate risk framework.
The following table provides an overview of the physical and transition climate risk drivers.
Physical | Acute | Increased frequency and severity of weather events causing disruption to business operations | • Decreased real estate values or stranded assets • Decreased household income and wealth • Increased costs of legal and compliance • Increased public scrutiny • Decreased profitability • Lower asset performance |
Chronic | Longer-term shifts in climate patterns (e.g. sustained higher temperatures, sea level rise, shifting monsoons or chronic heat waves) | ||
Transition | Policy and legal | Mandates on, and regulation of products and services and/or policy support for low carbon alternatives. Litigation from parties who have suffered loss and damage from climate impacts | |
Technology | Replacement of existing products with lower emissions options | ||
End-demand (market) | Changing consumer demand from individuals and corporates | ||
Reputational | Increased scrutiny following a change in stakeholder perceptions of climate-related action or inaction | ||
The table below provides an overview of the drivers of greenwashing risk, which is considered to be a thematic risk driver within HSBC's framework.
Greenwashing | Firm | Failure to be accurate and transparent in communicating our progress against our net zero ambition |
Product | Not taking steps to ensure our 'green' and 'sustainable' products are developed and marketed appropriately | |
Client | Failing to check our products are being used for 'green' and 'sustainable' business activity and assessing the credibility of our customers' climate commitments and/or progress against key performance indicators | |
In February 2022, we refreshed a high-level assessment of how climate risk may impact HSBC taxonomy risk types over a 12-month horizon, and we conducted an assessment to understand which parts of our risk taxonomy could be impacted by greenwashing risk. The table below summarises the results of these exercises. Assessments were completed prior to year-end 2022 and do not take into account all of the factors that were considered in our assessment of climate risk impacts on the financial statements for the year ended 31 December 2022. The assessments will be refreshed annually, and, results may change as our understanding of climate risk and how it impacts HSBC evolves (for further details, see 'Impact on reporting and financial statements' on page 46). In addition to these assessments, we also consider climate risk in our emerging risk process, which considers potential impacts across longer time horizons (for further details, see 'Top and emerging risks' on page 135).
Financial risk | Wholesale credit risk | ● | ● | |
Retail credit risk | ● | ● | ||
Treasury risk - insurance risk | ● | ● | ||
Treasury risk - pension risk | ● | ● | ||
Traded risk | ● | ● | ||
Strategic business risk | ● | |||
Reputational risk | ● | ● | ||
Non-financial risk | Regulatory compliance risk | ● | ● | |
Resilience risk | ● | ● | ● | |
Model risk | ● | ● | ● | |
Financial crime risk | ● | ● | ● | |
Financial reporting risk | ● | ● | ||
Legal risk | ● | ● | ||
l | Relevant risk driver |
Climate risk management
Key developments in 2022
Our climate risk programme continues to support the development of our climate risk management capabilities. The following outlines key developments in 2022.
• We updated our climate risk management approach to cover all risk types in our risk taxonomy.
• We expanded the scope of climate-related training for employees to cover additional topics, such as greenwashing risk, and increased the availability of training to the broader workforce.
• We developed new metrics to monitor physical climate risk exposure in our mortgage portfolio in all our markets, based on locally available data.
• We enhanced our transition and physical risk questionnaire and scoring tool, which will help us improve our understanding of the impact of transition and physical risk on corporate clients in high climate transition risk sectors.
• We assessed transition plans for EU and OECD managed clients in scope of our thermal coal phase-out policy.
• We developed our first internal climate scenario exercise, where we used four scenarios that were designed to articulate our view of the range of potential outcomes for global climate change. For further details of our internal climate scenario analysis, see page 226.
While we have made progress in developing our climate risk framework, there remains significant work to fully integrate climate risk, including the need to provide additional skills for our colleagues and clients on climate risk topics, and develop further metrics to understand how climate risk can impact our risk taxonomy. We also need to continue to enhance our stress testing capabilities and expand our greenwashing risk framework. We have a dependency on data and systems in order to achieve these aims, which continue to be enhanced.
Governance and structure
The Board takes overall responsibility for our ESG strategy, overseeing executive management in developing the approach, execution and associated reporting.
The Group ESG Committee supports the development and delivery of our ESG strategy, key policies and material commitments by providing oversight, coordination and management of ESG commitments and initiatives. It is co-chaired by the Group Company Secretary and Chief Governance Officer, and Group Chief Sustainability Officer.
The Group Chief Risk and Compliance Officer is responsible for the management of climate-related financial risks under the UK Senior Managers Regime, which involves holding overall accountability for the Group's climate risk programme. The Climate Risk Oversight Forum oversees risk activities relating to climate risk management and the escalation of climate risks. It is supported by equivalent forums at regional level.
The Group Reputational Risk Committee considers matters arising from customers, transactions and third parties that either present a serious potential reputational risk to the Group or merit a Group-led decision to ensure a consistent risk management approach across the regions, global businesses and global functions.
The Group Risk Management Meeting and the Group Risk Committee receive regular updates on our climate risk profile and progress of our climate risk programme.
For further details on the Group's ESG governance structure, see page 86.
Risk appetite
Our climate risk appetite supports the oversight and management of the financial and non-financial risks from climate change, and supports the business to deliver our climate ambition in a safe and sustainable way. Our initial risk appetite focused on the oversight and management of climate risks in five priority areas, including exposure to high transition risk sectors in our wholesale portfolio and physical risk exposures in our retail portfolio. We have created metrics both at global and regional levels, where appropriate, to help manage our risk appetite. We continue to review our risk appetite regularly to capture the most material climate risks and will enhance our metrics over time, including to monitor risk exposures associated with our financed emissions reduction targets.
Policies, processes and controls
We are integrating climate risk into the policies, processes and controls across many areas of our organisation, and we will continue to update these as our climate risk management capabilities mature over time. In 2022, we incorporated climate considerations into our UK mortgage origination process for our retail business, and new money request process for our key wholesale businesses. We also continued to enhance our climate risk scoring tool, which will enable us to assess our customers' exposures to climate risk. We also published our updated energy policy, covering the broader energy system, including upstream oil and gas, oil and gas power generation, coal, hydrogen, renewables and hydropower, nuclear, biomass and energy from waste, and we updated our thermal coal phase-out policy after its initial publication in 2021. For further details of how we manage climate risk across our global businesses, see page 64.
Wholesale credit risk
Identification and assessment
In 2019, we initially identified six key sectors where our wholesale credit customers had the highest exposure to climate transition risk, based on their carbon emissions, which were: automotive; chemicals; construction and building materials; metals and mining; oil and gas; and power and utilities. For a majority of customers in these sectors, we use a transition and physical risk questionnaire to help assess and improve our understanding of the impact of climate change on our customers' business models and any related transition strategies. Relationship managers work with these customers to record questionnaire responses and also help identify potential business opportunities to support the transition. Since 2020, we have rolled out the questionnaire so that it includes the majority of our largest customers in the next highest climate transition risk sectors: agriculture; industrials; real estate; and transportation. In 2022, we continued to roll out the physical and transition risk questionnaire in these sectors by adding new countries to the scope of the questionnaire. Due to ongoing data and methodology challenges across the industry, our risk appetite metrics remained limited in their ability to monitor our risk profile.
In 2023, we intend to roll out the questionnaire to additional customers and enhance our scoring model. We will also continue engaging with peers and regulators to explore approaches for further integration of climate in credit risk models. We continue to develop processes and training to improve the quality and accuracy of the questionnaire responses.
Management
In 2022, we updated our credit risk policy to require that relationship managers comment on climate risk factors in credit applications for new money requests. We continued using a climate risk scoring tool, which provides a climate risk score for each customer based on questionnaire responses. The climate risk score is used to inform portfolio level management discussions, and are made available to relationship management teams and credit risk management teams. The scoring tool will be enhanced and refined over time as more data becomes available.
In 2023, we aim to further embed climate risk considerations in our credit risk management processes.
Aggregation and reporting
We report our exposure to the six high transition risk sectors in the wholesale portfolio, as well as our related RWAs internally.
We also report the proportion of questionnaire responses that have a board policy or management plan for transition risk. Our key wholesale credit exposures are included as part of our broader ESG management information dashboard, which is presented to the Group Executive Committee each quarter. In addition, a representative from the Wholesale Credit Risk Management function attends the Global Climate Risk Oversight Forum to ensure there is consideration of this risk type, and we report our exposure through the climate risk management information dashboard at this meeting.
Since 2019, we have received responses from customers within the six high transition risk sectors, which represent 59% of our exposure, an increase in coverage of 7% since last year. The table below presents a breakdown of our customer responses by sector.
The table below also captures our lending activity, including environmentally responsible and sustainable finance activities, to customers within the six high risk sectors. Green financing for large companies that work in high transition sectors is also included. The overall exposure has decreased to 17.7% (2021: 18.2%). We have restated the 2021 comparatives to reflect the new 2022 sector allocations and to remove certain off-balance sheet exposures that were previously included following improvements in our data and processes. For further details of how we designate counterparties as high transition risk, see footnote 2.
Wholesale loan exposure to transition risk sectors and customer questionnaire responses at 31 December 20221 |
Automotive | Chemicals | Construction and building materials | Metals and mining | Oil and gas | Power and utilities | Total | |
% | % | % | % | % | % | % | |
Wholesale loan exposure as % of total wholesale loans and advances to customers and banks2,3,4 | ≤ 3.0 | ≤ 3.3 | ≤ 3.2 | ≤ 2.1 | ≤ 2.6 | ≤ 3.5 | ≤ 17.7 |
Proportion of sector for which questionnaires were completed5 | 63 | 49 | 55 | 56 | 67 | 66 | 59 |
Proportion of questionnaire responses that reported either having a board policy or a management plan5 | 69 | 81 | 74 | 71 | 77 | 94 | 79 |
Sector weight as proportion of high transition risk sector5 | 16 | 19 | 18 | 12 | 15 | 20 | 100 |
1 The 2022 numbers reflect the new 2022 sector allocations and remove certain off-balance sheet exposures that were previously included following improvements in our data and processes. See the ESG Data Pack for comparative 2020 and 2021 data.
2 Amounts shown in the table also include green and other sustainable finance loans, which support the transition to the net zero economy. The methodology for quantifying our exposure to high transition risk sectors and the transition risk metrics will evolve over time as more data becomes available and is incorporated in our risk management systems and processes.
3 Counterparties are allocated to the high transition risk sectors via a two-step approach. Firstly, where the main business of a group of connected counterparties is in a high transition risk sector, all lending to the group is included in one high transition risk sector irrespective of the sector of each individual obligor within the group. Secondly, where the main business of a group of connected counterparties is not in a high transition risk sector, only lending to individual obligors in the high transition risk sectors is included. From 2022, for Global Banking and Markets clients and Commercial Banking clients, the main business of a group of connected counterparties is identified by the industry that generates the majority of revenue within a group. Customer revenue data utilised during this allocation process is the most recent readily available and will not align to our own reporting period. In prior periods for Global Banking and Markets clients, the main business of a group of connected counterparties was identified by the relationship manager for the group. For Commercial Banking clients, the main business of a group of connected counterparties was identified based on the largest industry of HSBC's total lending limits to the group.
4 Total wholesale loans and advances to customers and banks amount to $658bn (2021: $662bn). Amounts include loans and advances that are held for sale.
5 All percentages are weighted by exposure.
Retail credit risk
Identification and assessment
We continued to improve our identification and assessment of climate risk within our retail mortgage portfolio. We increased our investments in centrally available physical risk data and enhanced our internal risk assessment capabilities and models, in order to understand our physical risk exposure across a larger proportion of our global portfolio. We have also started to identify and monitor potential physical risk in the remainder of our global mortgage markets, using locally available data.
In 2022, we undertook an internal climate scenario analysis exercise to further our understanding and assessment of the potential impacts that physical risk could have on our mortgage portfolios. We completed detailed analysis for the UK, Hong Kong, Singapore and Australia, which together represent 73.8% of balances of the global mortgage portfolio. We also undertook a stress test for our portfolio in Singapore at the behest of the Monetary Authority of Singapore, and participated in the second round of the Bank of England's climate biennial exploratory scenario exercise, focusing on management actions. For further details of our approach and results of our scenario analysis, see the 'Insights on climate scenario analysis' section on page 226.
Management
We continued to review and update our retail credit risk management policies and processes to further embed climate risk, while monitoring local regulatory developments to ensure compliance.
In the UK, which has our largest retail mortgage portfolio, we integrated climate risk data into our decision-making framework as part of the mortgage origination process. We are actively managing our UK mortgage portfolio with a climate risk perspective, and in line with our risk appetite, taking conduct considerations into account in the lending decision-making process.
Our UK team is also proactively supporting customers by providing information on our public website relating to how physical risk and home energy efficiency ratings may impact their mortgage applications. This gives customers more insight when considering purchasing a property that may be susceptible to physical climate risk or which may not be energy efficient.
Aggregation and reporting
We manage and monitor the integration of climate risk in Wealth and Personal Banking through the WPB Risk Management Meeting and other senior leadership forums.
We assess the progress of the implementation of our strategic climate risk plans, and ensure that we update operational processes and risk management frameworks as our data and understanding of climate risk evolves. A senior representative from WPB Risk attends the Group Climate Risk Oversight Forum to ensure we maintain alignment with the Group strategy.
Monitoring climate risk
In 2022, each of our retail mortgage businesses defined metrics and began reporting on their potential balance sheet exposure to physical climate risk. Locally relevant data sources were used to identify properties or areas with potentially heightened climate risk. These climate risk exposure metrics are in the early stages of development and the underlying data and methodologies may require refinement in the future, although they provide an indicative view.
We continue to measure climate risk using third-party data in our most material mortgage market, which is the UK, where the primary physical risk facing properties is flooding. Using a risk methodology that considers a combination of the likelihood and severity of flood hazard affecting individual properties, we estimate that on a total value basis, and at present day risk levels, 3.5% of the UK retail mortgage portfolio is at high risk of flooding, and 0.2% is at a very high risk. This is based on approximately 93% coverage by value of our portfolio at the end of September 2022, and is reliant on flood data provided by Ambiental Risk Analytics.
In line with the UK government ambition to improve the energy performance certificate ('EPC') ratings of housing stock, we continue to identify the current and potential EPC ratings for individual properties within the UK mortgage portfolio.
At the end of September, we had approximately 62% of properties by value in our UK residential mortgage portfolio with a valid EPC certificate dated within the last 10 years. While 37.7% of these, with balances of $31.5bn, had a 'current' rating of A to C, 96.8% of them, with balances of $81.1bn, had the potential to improve to that level. We are working on improving the EPC data coverage, we currently do not have EPC data for properties in Northern Ireland.
For both flood risk and EPC data, we disclose the end of September position. This is due to the time required for the data to be processed by a third party and our reliance on the government's public EPC data.
Beyond the UK, we have strengthened our focus on the development of initiatives to support customers with their transition to more energy efficient homes.
The table below shows the maturity level of the UK retail mortgage portfolio at the end of December 2022, split by tenor.
Tenor | Loan by residual maturity ($bn) |
0.45 | |
1-5 years | 3.38 |
>5 years | 143.90 |
For further details of flood risk and the EPC breakdown of our UK retail mortgage portfolio, see our ESG Data Pack at www.hsbc.com/esg.
Resilience risk
Identification and assessment
Our Operational and Resilience Risk function is responsible for overseeing the identification and assessment of physical and transition climate risks that may impact on the organisation's operational and resilience capabilities.
We are developing a deeper understanding of the risks to which our properties are subject, and assess the mitigants to ensure ongoing operational resilience.
Management
Operational and Resilience Risk policies are reviewed and enhanced periodically so they remain relevant to evolving risks, including those linked to climate change. The capability of our colleagues is enhanced through training, periodic communications and dedicated guidance.
Aggregation and reporting
With our ambition to achieve net zero in our own operations, we are particularly focused on developing measures to facilitate proactive risk management and assess progress against this strategic target.
Operational and Resilience Risk is represented at the Group's Climate Risk Oversight Forum.
Regulatory compliance risk
Identification and assessment
Compliance continues to prioritise the identification and assessment of compliance risks that may arise from climate risk.
Throughout 2022, our focus remained on greenwashing risk, particularly with regard to the development and ongoing governance of new, changed or withdrawn climate and ESG products and services, and ensuring sales practices and marketing materials were clear, fair and not misleading.
To support the ongoing management and mitigation of greenwashing risk, Regulatory Compliance worked across all business lines to enhance our product controls. This improved our ability to identify, assess and manage product-related greenwashing risks throughout the product governance lifecycle. Examples of ongoing enhancements include:
• integrating the consideration and mitigation of climate and ESG risks within our existing product governance framework;
• enhancing our product templates and forms to ensure climate risk is actively considered and documented by the business within product review and creation; and
• clarifying and improving product governance policies, associated guidance and key governance terms of reference to ensure new climate and ESG products, as well as climate- and ESG-related amendments to existing products, comply with both internal and external standards, and are subject to robust governance.
Management
Our policies continue to set the Group-wide standards that are required to manage the risk of breaches of our regulatory duty to customers, including those related to climate risk, ensuring fair customer outcomes are achieved. Our product and customer lifecycle policies have been enhanced to ensure they take climate into consideration. They are reviewed on a periodic basis to ensure they remain relevant and up to date.
The Compliance function continues to focus on improving the capability of colleagues through training, communications and dedicated guidance, with a particular focus on ensuring colleagues remain up to date with changes in the evolving regulatory landscape.
Aggregation and reporting
The Compliance function continues to operate an ESG and Climate Risk Working Group to track and monitor the integration and embedding of climate risk within the management of regulatory compliance risks. The working group also continues to monitor ongoing regulatory and legislative changes across the ESG and climate risk agenda.
We have continued to develop our key climate risk-related metrics and indicators, aligned to the broader focus on regulatory compliance risks, to continually improve our risk monitoring capability. This has included the development of a climate-specific risk profile, alongside the introduction and improvement of existing metrics and indicators.
The Compliance function continues to be represented at the Group's Climate Risk Oversight Forums.
Reputational risk
Identification and assessment
We implement sustainability risk policies, including the Equator Principles, as part of our broader reputational risk framework. We focus on sensitive sectors that may have a high adverse impact on people or the environment, and in which we have a significant number of customers. A key area of focus is high-carbon sectors, which include oil and gas, power generation, mining, agricultural commodities and forestry. In 2022, we published our updated energy policy, covering the broader energy system, including upstream oil and gas, oil and gas power generation, hydrogen, renewables and hydropower, nuclear, biomass and energy from waste. We also updated our thermal coal phase-out policy after its initial publication in 2021.
Management
As the primary point of contact for our customers, our relationship managers are responsible for checking that our customers meet policies aimed at reducing carbon impacts. Our global network of more than 75 sustainability risk managers provides local policy support and expertise to relationship managers. Risk Strategy includes a team of reputational and sustainability risk specialists
that provides a higher level of guidance and is responsible for the oversight of policy compliance and implementation over wholesale banking activities.
For further details on our sustainability risk policies, see our ESG review on page 65.
Aggregation and reporting
Our Sustainability Risk Oversight Forum provides a Group-wide forum for senior members of our Group Risk and Compliance team and global businesses. It also oversees the development and implementation of sustainability risk policies. Cases involving complex sustainability risk issues related to customers, transactions or third parties are managed through the reputational risk and client selection governance process. We report annually on our implementation of the Equator Principles and the corporate loans, project-related bridge loans and advisory mandates completed under the principles. For the latest report, see: www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre. A representative from Reputational Risk attends the Group Climate Risk Forum to ensure consideration of this risk type.
Other risks
The following section outlines key developments that we made to embed climate considerations within other risk types in our risk taxonomy. All risk functions, including those not referenced below, performed a materiality assessment to determine the impact of climate risk on their risk framework.
Treasury risk
We established a treasury risk-specific climate risk governance forum to provide oversight over climate-related topics that may impact Global Treasury. We updated relevant treasury risk policies to strengthen our climate risk guidance and requirements pertaining to treasury risk. We undertook an initial assessment to understand the exposure of high transition risk sectors within our pension plans.
Traded risk
We established a climate stress testing-focused working group to coordinate the implementation of climate stress testing, and support the delivery of internal climate scenario analysis. As part of the annual limit review in 2022, we developed a set of climate metrics for Markets and Securities Services, which we plan to implement in 2023.
Insights from climate scenario analysis
Scenario analysis supports our strategy by assessing our position under a range of climate scenarios. It helps to build our awareness of climate change, plan for the future and meet our growing regulatory requirements.
Having run our first Group-wide climate change scenario analysis exercise in 2021, we produced several climate stress tests for global regulators in 2022, including the Monetary Authority of Singapore and the European Central Bank. We also conducted our first internal climate scenario analysis.
We continue to develop how we produce our climate scenario analysis exercises so that we can have a more comprehensive understanding of climate headwinds, risks and opportunities that will support our strategic planning and actions.
In climate scenario analysis, we consider, jointly:
• transition risk arising from the process of moving to a net zero economy, including changes in policy, technology, consumer behaviour and stakeholder perception, which could each impact borrowers' operating income, financing requirements and asset values; and
• physical risk arising from the increased frequency and severity of weather events, such as hurricanes and floods, or chronic shifts in weather patterns, which could each impact property values, repair costs and lead to business interruptions.
We also analyse how these climate risks impact how we manage other risks within our organisation, including credit and market risks, and on an exploratory basis, operational, liquidity, insurance and pension risks.
Our climate scenarios
In our 2022 internal climate scenario analysis exercise, we used four scenarios that were designed to articulate our view of the range of potential outcomes for global climate change. The analysis considered the key regions in which we operate, and assessed the impact on our balance sheet between the 2022 and 2050 time period. In the following sections, the time horizons are considered to cover three distinct time periods: short term is up to 2025; medium term is 2026 to 2035; and long term is 2036 to 2050. The timeframes chosen are aligned to the Climate Action 100+ disclosure framework.
These internal scenarios were formed with reference to external publicly available climate scenarios, including those produced by the Network for Greening the Financial System ('NGFS'), the Intergovernmental Panel on Climate Change and the International Energy Agency. Using these external scenarios as a template, we adapted them by incorporating our unique climate risks and vulnerabilities to which our organisation and customers across different business sectors and regions are exposed. This helped us produce the scenarios, which varied by severity and probability, to analyse how climate risks will impact our portfolios. Our scenarios were:
• the Net Zero scenario, which aligns with our net zero strategy and is consistent with the Paris Agreement, and which assumes that there will be rapid and considerable climate action, limiting global warming to no more than 1.5°C by 2100, when compared with pre-industrial levels;
• the Current Commitments scenario, which assumes that climate action is limited to the current governmental commitments and pledges, leading to global temperature rises of 2.4°C by 2100;
• the Downside Transition Risk scenario, which assumes that climate action is delayed until 2030, but will be rapid enough to limit global temperature rises to 1.5°C by 2100; and
• the Downside Physical Risk scenario, which assumes climate action is limited to current governmental policies, leading to extreme global warming with global temperatures increasing by 3.1°C by 2100.
We have chosen these scenarios as they are designed to identify, measure and assess our most material climate vulnerabilities through considering our global presence, business activities and exposures. Our scenarios reflect inputs from our businesses and experts, and have been reviewed and approved through internal governance.
Our four scenarios reflect different levels of physical and transition risks. The scenario assumptions include varying levels of governmental climate policy changes, macroeconomic factors and technological developments. However, these scenarios rely on the development of technologies that are still unproven, such as global hydrogen production to decarbonise aviation and shipping.
The nature of the scenarios, our developing capabilities, and limitations of the analysis lead to outcomes that are indicative of climate change headwinds, although they are not a direct forecast.
Developments in climate science, data, methodology and scenario analysis techniques will help us shape our approach further. We therefore expect this view to change over time.
For further details of our four internal climate scenarios, including a table including their key underlying assumptions, see our ESG Data Pack at www.hsbc.com/esg.
Our modelling approach
For our scenario analysis, we used models to assess how transition and physical risks may impact our portfolios under different scenarios. Our models incorporate a range of climate-specific metrics that will have an impact on our customers, including expected production volumes, revenue, unit costs and capital expenditure.
We also assess how these metrics interplay with economic factors such as carbon prices, which represent the cost effect of climate-related policies that aim to discourage carbon-emitting activities and encourage low-carbon solutions. The expected result of higher carbon prices is a reduction in emissions as high-emission activities become uneconomical. We also assume carbon prices will vary from country to country.
The models for our wholesale corporate lending portfolio consider metrics across each climate scenario, and from 2022 also incorporated our customers' individual climate transition plans as part of our climate scenario analysis. These results in turn feed into the calculation of our risk-weighted assets and expected credit loss projections. For our residential real estate portfolio models, we focus on physical risk factors, including property locations, perils and insurance coverage when assessing the overall credit risk impact to the portfolio. The results were reviewed by our sector specialists who, subject to our governance procedures, make bespoke adjustments to our results based on their expert judgement when relevant.
We continue to enhance our capabilities by incorporating lessons learnt from previous exercises and feedback from key stakeholders, including regulators.
For a broad overview of the models that we use for our climate scenario analysis, as well as graphs that show how global carbon prices and carbon emissions will differ under our climate scenarios, see our ESG Data Pack at www.hsbc.com/esg.
Analysing the outputs of the climate scenario analysis
Climate scenario analysis allows us to model how different potential climate pathways may affect our customers and portfolios, particularly in respect of credit losses. As the chart below shows, losses are influenced by their exposure to a variety of climate risks under different climate scenarios. Under the Current Commitments scenario, we expect moderate levels of losses relating to transition risks. However, the rise in global warming will lead to increasing levels of physical risk losses in later years.
1 The counterfactual scenario is modelled on a scenario where there will be no losses due to climate change.
2 The dotted lines in the chart show the impact of modelled expected credit losses following our strategic responses to reduce the effect of climate risks under the Net Zero and Downside Transition Risk scenarios.
A gradual transition towards net zero, as shown in the Net Zero scenario, still requires fundamental shifts in our customers' business models, and significant investments. This will have an impact on profitability, leading to higher credit risk in the transition period. A delayed transition will be even more disruptive due to lower levels of innovation that limits the ability to decarbonise effectively, and rising carbon prices that squeeze profit margins.
Overall, our scenario analysis shows that the level of potential credit losses can be mitigated if we support our customers in enhancing their climate transition plans.
In the following sections, we assess the impacts to our banking portfolios under different climate scenarios.
How climate change is impacting our wholesale lending portfolio
In our scenario analysis, we assessed the impact of climate-related risks on our corporate counterparties under different climate scenarios, which we measured by reviewing the modelled effect on our expected credit losses ('ECL').
We focused our analysis on the 11 wholesale sectors that we expect to be most impacted by climate risks. As at December 2021, these portfolios represented 27% of our wholesale lending portfolio.
For each sector in each scenario, we calculated a peak ECL increase, a metric showing the highest level of ECL modelled to be experienced during the 2022 to 2050 period. The peak ECL increase metric compares the multiplied levels of exposure in the scenario against a counterfactual scenario that incorporates no climate change.
We use the sector's exposure at default ('EAD'), which represents the relative size of our exposure to potential losses from customer defaults. This helps to demonstrate which sectors are the most material to us in terms of the impact of climate change.
Due to current limitations, we are unable to fully model the impact of physical risks on our corporate customers' supply chain. As a result, we have not included the Downside Physical Risk scenario in the following analysis, although we continue to develop our modelling capabilities.
Impact of climate risk on wholesale lending portfolios under modelled climate solutions
Relative size of exposures at default and increase in peak ECL under each scenario compared with the counterfactual scenario (expressed as a multiple).
Sector level | Exposure at default | Net Zero | Downside Transition Risk | Current Commitments |
Conglomerates and industrials | ♦ | >5x | ||
Power and utilities | ♦ | |||
Construction and building materials | ♦ | |||
Oil and gas | ♦ | |||
Chemicals | ♦ | |||
Automotive | ♦ | |||
Land transport and logistics | ♦ | >5x | ||
Aviation | ♦ | |||
Agriculture and soft commodities | ♦ | |||
Marine | ♦ | |||
Metals and mining | ♦ | >5x |
As the table above illustrates, we expect our ECL to rise most under the Net Zero or Downside Transition Risk scenarios. This is reflective of the high transition risks to which these sectors are exposed, and the potential impact of not having clear transition plans to mitigate these risks.
For many sectors, the impact of rising carbon prices will lead to increased credit losses. However, this will depend on individual companies to determine how much of the additional costs associated with carbon pricing will be absorbed by their suppliers or customers and demand for more economically viable substitute products that emerge.
The conglomerates and industrials sector, which includes large companies with business activities in multiple business segments, is the most impacted by climate change in each scenario. It also represents our largest climate-related exposure, and would potentially experience the highest increases in credit losses, largely due to the transition risks predominantly within the high-emitting and lower-profitability manufacturing segments.
Of our other largest and most impacted sectors, the power and utilities, construction and building materials, and chemicals sectors are subject to increased levels of transition risks due to their ongoing exposure to higher carbon emitting activities.
Within the analysis, there is a range of geographical outcomes, dictated by the varied pace of change in the transition to net zero, such as in Asia, where the quality of our customers' climate transition plans within our high-risk sectors lags behind other regions.
We use the results of our climate scenario analysis, including how different scenarios will impact on different sectors, to assess the impact of climate change risk mitigation on our clients, including our customers' creditworthiness. It informs us about climate risks in our wholesale portfolio, allowing us to identify and prioritise the sectors and sub-sectors that require the greatest support to transition. This also allow us to test the impact of actions that can support our customers' transition and our net zero ambition.
Our net zero ambition represents one of our four strategic pillars. For further details of our net zero ambition, see the 'Transition to net zero' section of the ESG review on page 47, including how we are supporting our customers transition to net zero on page 57.
How climate change is impacting our retail mortgage portfolio
As part of our internal climate scenario analysis, we carried out a detailed physical risk assessment of four of our retail mortgage markets - the UK, Hong Kong, Singapore and Australia - which represent 73.8% of balances in our retail mortgage portfolio.
We modelled defaults and losses under three physical risk scenarios. Under the Net Zero and Current Commitments scenarios, we project minimal losses over the modelled time horizon. However, under the Downside Physical Risk scenario, the mortgage book is expected to experience a moderate increase in defaults and losses, as the severity of perils is expected to worsen, although overall losses are still low.
The modelling, data and methodology in relation to climate scenario analysis is still evolving, so the results are not expected to be stable or consistent in the short to medium term, and are meant to give an indicative, directional assessment for strategic awareness only.
In our analysis of our retail mortgage portfolio, we assessed several physical perils that could impact the value of properties, including flooding, wildfire and windstorms. We also assessed the ability and willingness of borrowers to service their debts.
In 2022, we enhanced the methodology to factor in the negative impact on property valuations, as well as the impact of affordability due to repair costs, following physical risk events. We also considered the retail mortgage portfolio with and without insurance. The scenario assumptions reflected whether or not properties within the portfolio had buildings insurance coverage to pay for damage incurred from physical events. In addition, we addressed geolocation data deficiencies, implemented new models and incorporated more data, although the data and models used to estimate defaults and losses are still evolving.
1 Our internal climate scenarios are supported by the Intergovernmental Panel on Climate Change's Representative Concentration Pathways ('RCP') and are used as inputs into physical risk modelling. The Net Zero scenario is mostly aligned to the RCP 2.6 scenario; the Current Commitments scenario is mostly aligned to the RCP 4.5 scenario; and the Downside Physical Risk scenario is mostly aligned to the RCP 8.5 scenario.
The modelled impact on our portfolio projects losses will remain negligible under the Net Zero and Current Commitments scenarios by 2050. Under the Downside Physical Risk (with insurance) scenario, although losses are five times larger than under the Net Zero and Current Commitments scenario, they remain at low levels. This moderate increase is largely driven by the expected demise of Flood Re in the UK in 2039. Flood Re is a UK government-backed insurance scheme that ensures that properties at the highest risk of flooding can obtain buildings insurance. Under this scenario, properties ceded to the scheme become uninsurable post-2039. The proportion of our properties that were reinsured by Flood Re was less than 4% of the UK portfolio at December 2021. While overall modelled losses were low, a large proportion of these were driven by such properties.
One of the outcomes from the exercise was that the non-availability of insurance for impacted properties was a key contributor to losses. It was assumed that properties that are insurable, or where insurance is affordable, will largely maintain their insurance. We also assessed the impact of enhanced EPC legislation, although it was deemed to be immaterial.
In addition, we assessed the risk of tropical cyclones and related storm surges as they were deemed material in Hong Kong. However, defaults are expected to remain low through to 2050 due to buildings being designed to withstand high wind speeds and investment into sea defences. We also looked at wildfire in Australia, although the risk and severity is limited given our mortgage portfolio is predominantly located in metropolitan areas. Similarly, losses in Singapore were low in all the scenarios due to its geographical location and strong sea defences.
Projected peril risk
Flooding is usually localised to specific areas that are close to water sources such as rivers or the coast, areas that are located in particular valleys where surface water can 'pool', or urban areas with poor drainage following flash floods.
As the 'Exposure to flooding' table below shows, the majority of properties located in the four markets are predicted to experience zero to low risk of flooding, with flood depths of less than 0.5 metres, under a 1-in-100-year event in each of the scenarios, demonstrating the resilience of our portfolio.
Exposure to flooding | ||||
Proportion of properties with projected flood depths in a 1-in-100-year severity flood event (%)1 | ||||
Scenarios | ||||
Markets | Flood depth (metres) | Baseline flood risk | Net Zero | Downside Physical Risk |
2022 | 2050 | 2050 | ||
UK | >1.5 | 0.2 | 0.2 | 0.4 |
0.5-1.5 | 0.7 | 2.5 | 3.7 | |
0-0.5 | 99.1 | 97.3 | 95.9 | |
Hong Kong | >1.5 | 0.7 | 0.8 | 1.2 |
0.5-1.5 | 1.2 | 1.3 | 30.4 | |
0-0.5 | 98.1 | 97.9 | 68.4 | |
Singapore | >1.5 | 0 | 0 | 0.1 |
0.5-1.5 | 2.8 | 2.9 | 7.4 | |
0-0.5 | 97.2 | 97.1 | 92.5 | |
Australia | >1.5 | 0.6 | 0.6 | 0.7 |
0.5-1.5 | 1.2 | 1.2 | 2.6 | |
0-0.5 | 98.2 | 98.2 | 96.7 | |
1 Severe flood events include river and surface flooding and coastal inundation. The table compares 2050 snapshots under the Net Zero and Downside Physical Risk scenarios with a baseline view in 2022.
The most impacted market is Hong Kong, where over 30% of the locations would be susceptible to flood depths greater than 0.5 metres under the Downside Physical Risk scenario in 2050. This is primarily driven by higher coastal and storm surges. However, this did not take into account building type and property floor level, which we expect would reduce the impact of flooding for a large number of individual properties, given the majority of buildings in Hong Kong are high-rise apartments.
For the remainder of the markets, more than 90% of mortgage locations within each market are expected to experience flood depths of less than 0.5 metres in all scenarios, which would not be material.
How climate change is impacting our commercial real estate portfolios
We assessed the impact of various perils to which our commercial real estate customers could be vulnerable, including flooding and windstorms. Our commercial real estate portfolio is globally diversified with larger concentrations in Hong Kong, the UK and the US.
The impact of exposures to these perils can lead to increased ECL, largely due to the cost of repairs following damages caused by physical risk events or property valuation impacts caused by the increasing frequency of physical risk events.
The 'Exposure to peril' table below shows exposure of our commercial real estate portfolio within our largest markets to specific physical risk events. The 'peak multiplier increase in ECL' table shows for our largest markets the peak ECL increase modelled to be experienced during the 2022 to 2050 period. This is a metric which compares the multiplied levels of exposure in the scenario against a counterfactual scenario that incorporates no climate change. We use the sector's exposure at default, which represents the relative size of our exposure to potential losses from customer defaults within each jurisdiction.
Exposure to peril
Proportion of our portfolio exposed to main perils in key markets.
Coastal inundation | Cyclone wind | Surface water flooding | Riverine flooding | |
% | % | % | % | |
Hong Kong | 2 | 94 | 18 | 11 |
UK | 15 | 0 | 12 | 8 |
US | 16 | 83 | 15 | 28 |
Peak multiplier increase in ECL
Relative size of exposures at default ('EAD') and increase in peak ECL under each scenario compared with the counterfactual scenario (expressed as a multiple)
Exposure at default in 2021 | Net Zero | Current Commit-ments | Downside Transition Risk | Downside Physical Risk (with insurance) | Downside Physical Risk (without insurance) | |
Hong Kong | ♦ | |||||
UK | ♦ | |||||
US | ♦ |
The tables show that despite a varying degree of exposure to perils across our most significant markets, our portfolio continues to maintain a strong level of resilience to physical climate risks out to the long term. In addition, the impact of insurance coverage mitigates some of the risks under the most severe Downside Physical Risk climate scenario.
Our largest credit exposure is in Hong Kong, where our portfolio has material exposure to tropical cyclone winds. However, the resulting impact on prospective credit losses remains low in the medium to long term due to high building standards.
In the UK, in line with our retail portfolio, the main perils that drive potential credit losses relate to coastal, river and surface water flooding, although the impacts from these perils are not expected to cause significant damages. Around 20% of our financed properties are in London, and most are protected by the Thames Barrier. Under the Net Zero scenario, transition risks materialise from 2025 due to the costs of retrofitting requirements, and these are expected to lead to increased impairments.
In the US, the major perils are from coastal flooding, largely in the north-east of the country and in Florida, and from hurricane impact, including gust damage, heavy rainfall and storm surges. The intensity of these events are expected to increase in the future with a greater proportion of tropical cyclones falling within the highest categories. These will not only affect the regions that are currently exposed, but also new areas due to the projected poleward shift of future tropical cyclones. Building resilience and the future availability and affordability of insurance cover in these regions will be the key determinants of climate risks.
Understanding the resilience of our critical properties
Climate change poses a physical risk to the buildings that we occupy as an organisation, including our offices, retail branches and data centres, both in terms of loss and damage, and business interruption. We measure the impacts of climate and weather events to our buildings on an ongoing basis, using historical, current and scenario modelled forecast data. In 2022, there were 38 major storms that had no impact on the availability of our buildings.
We use stress testing to evaluate the potential for impact to our owned or leased premises. Our scenario stress test, conducted in 2022, analysed how seven different climate change-related hazards - comprising coastal inundation, extreme heat, extreme winds, wildfires, riverine flooding, soil movement due to drought, and surface water flooding - could impact 500 of our critical and important buildings.
The 2022 stress test covered all 500 buildings and modelled climate change with the NGFS's Hot house scenario that projects that the rise in the temperature of the world will likely exceed 4°C by 2100. It also modelled a less severe scenario that projects that global warming will likely be limited to 2°C, in line with the upper limit ambition of the Paris Agreement.
Key findings from the 4°C or greater Hot house scenario included:
• By 2050, 62 of the 500 critical and important buildings will have a high potential for impact due to climate change, with insurance-related losses estimated to be in excess of 10% of the insured value of our buildings.
• These included 40 locations that face the risk of coastal flooding due to sea levels rising and storm surges associated with typhoons and hurricanes. In addition, five locations face the risk of fluvial flooding due to surface water run-off caused by heavy rain. The remaining 17 locations are data centres where the predominant risk emanate from a mixture of temperature extremes and water stress, which could impact the mechanical cooling equipment or drought for which the specific direct physical impacts could be soil movement.
• A further 84 locations have the potential to be impacted by climate change, albeit to a lesser extent, with insurance-related losses estimated at between 5% and 10% of the insured value of our buildings. The principal risks are coastal flooding, drought, temperature extremes, and water stress.
A key finding from the 2°C, less severe scenario showed:
• The total number of buildings at risk reduces from 146 to 98, with the same 62 key facilities still at risk by 2050 from the same perils.
This forward-looking data will inform real estate planning. We will continue to improve our understanding of how extreme weather events impact our building portfolio as climate risk assessment tools improve and evolve. Additionally, we buy insurance for property damage and business interruption, and consider insurance as a loss mitigation strategy depending on its availability and price.
We regularly review and enhance our building selection process and global engineering standards, and will continue to assess historical claims data to help ensure our building selection and design standards reflect the potential impacts of climate change.
Resilience risk |
Overview
Resilience risk is the risk of sustained and significant business disruption from execution, delivery, physical security or safety events, causing the inability to provide critical services to our customers, affiliates, and counterparties. Resilience risk arises from failures or inadequacies in processes, people, systems or external events.
Resilience risk management
Key developments in 2022
The Operational and Resilience Risk sub-function provides robust risk steward oversight of the management of resilience risk by the Group businesses, functions and legal entities. This includes effective and timely independent challenge and expert advice. During the year, we carried out a number of initiatives to keep pace with geopolitical, regulatory and technology changes and to strengthen the management of resilience risk:
• We focused on enhancing our understanding of our risk and control environment, by updating our risk taxonomy and control libraries, and refreshing risk and control assessments.
• We implemented heightened monitoring and reporting of cyber, third-party, business continuity and payment/sanctions risks resulting from the Russia-Ukraine war, and enhanced controls and key processes where needed.
• We provided analysis and easy-to-access risk and control information and metrics to enable management to focus on non-financial risks in their decision making and appetite setting.
• We further strengthened our non-financial risk governance and senior leadership, and improved our coverage and risk steward oversight for data privacy and change execution.
We prioritise our efforts on material risks and areas undergoing strategic growth, aligning our location strategy to this need. We also remotely provide oversight and stewardship, including support of chief risk officers, in territories where we have no physical presence.
Governance and structure
The Operational and Resilience Risk target operating model provides a globally consistent view across resilience risks, strengthening our risk
management oversight while operating effectively as part of a simplified non-financial risk structure. We view resilience risk across nine sub-risk types related to: failure to manage third parties; technology and cybersecurity; transaction processing; failure to protect people and places from physical malevolent acts; business interruption and incident risk; data risk; change execution risk; building unavailability; and workplace safety.
Risk appetite and key escalations for resilience risk are reported to the Non-Financial Risk Management Board, chaired by the Group Chief Risk and Compliance Officer, with an escalation path to the Group Risk Management Meeting and Group Risk Committee.
Key risk management processes
Operational resilience is our ability to anticipate, prevent, adapt, respond to, recover and learn from operational disruption while minimising customer and market impact. Resilience is determined by assessing whether we are able to continue to provide our most important services, within an agreed level. This is achieved via day-to-day oversight and periodic and ongoing assurance, such as deep dive reviews and controls testing, which may result in challenges being raised to the business by risk stewards. Further challenge is also raised in the form of quarterly risk steward opinion papers to formal governance. We accept we will not be able to prevent all disruption but we prioritise investment to continually improve the response and recovery strategies for our most important business services.
Business operations continuity
We continue to monitor the situation in Russia and Ukraine, and remain ready to take measures to help ensure business continuity, should the situation require. There has been no significant impact to our services in nearby markets where the Group operates. Publications from the UK government, EU Commission and energy company National Grid, among others, advised on potential plans for power cuts and energy restrictions across the UK and continental Europe during the winter period. In light of potential disruption, businesses and functions in these markets are reviewing existing plans and responses to minimise the impact.
Regulatory compliance risk |
Overview
Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct and breaching related financial services regulatory standards. Regulatory compliance risk arises from the failure to observe relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business.
Regulatory compliance risk management
Key developments in 2022
The dedicated programme to embed our updated purpose-led conduct approach has concluded. Work to map applicable regulations to our risks and controls continues in 2023 alongside the adoption of new tooling to support enterprise-wide horizon scanning for new regulatory obligations and manage our regulatory reporting inventories. Climate risk has been integrated into regulatory compliance policies and processes, with enhancements made to the product governance framework and controls in order to ensure the effective consideration of climate - and in particular greenwashing - risks.
Governance and structure
The structure of the Compliance function is substantively unchanged and the Group Regulatory Conduct capability and Group Financial
Crime capability both continue to work closely with the regional chief compliance officers and their respective teams to help them identify and manage regulatory and financial crime compliance risks across the Group.
They also work together and with all relevant stakeholders to achieve good conduct outcomes and provide enterprise-wide support on the compliance risk agenda in collaboration with the Group's Risk function.
Key risk management processes
The Group Regulatory Conduct capability is responsible for setting global policies, standards and risk appetite to guide the Group's management of regulatory compliance risk. It also devises the required frameworks, support processes and tooling to protect against regulatory compliance risks. The Group capability provides oversight, review and challenge to the regional chief compliance officers and their teams to help them identify, assess and mitigate regulatory compliance risks, where required. The Group's regulatory compliance risk policies are regularly reviewed. Global policies and procedures require the identification and escalation of any actual or potential regulatory breaches, and relevant reportable events are escalated to the Group's Non-Financial Risk Management Board, the Group Risk Management Meeting and Group Risk Committee, as appropriate. The Group Head of Compliance reports to the Group Chief Risk and Compliance Officer and attends the Risk and Compliance Executive Committee, the Group Risk Management Meeting and the Group Risk Committee.
Financial crime risk |
Overview
Financial crime risk is the risk that HSBC's products and services will be exploited for criminal activity. This includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing. Financial crime risk arises from day-to-day banking operations involving customers, third parties and employees.
Financial crime risk management
Key developments in 2022
We regularly review the effectiveness of our financial crime risk management framework, which includes consideration of the complex and dynamic nature of sanctions compliance risk. In 2022, we adapted our policies, procedures and controls to respond to the unprecedented volume and diverse set of sanctions and trade restrictions imposed against Russia following its invasion of Ukraine.
We also continued to make progress with several key financial crime risk management initiatives, including:
• We enhanced our screening and non-screening controls to aid the identification of potential sanctions risk related to Russia, as well as risk arising from export control restrictions.
• We deployed a key component of our intelligence-led, dynamic risk assessment capability for customer account monitoring in additional UK entities, Mexico and Singapore, and have expanded coverage to include monitoring of customer credit card activity in the UK. Furthermore we have deployed a next generation capability for the monitoring of correspondent banking activity in Hong Kong and the UK.
• We reconfigured our transaction screening capability to be ready for the global change to payment systems formatting under ISO20022 requirements, and enhanced transaction screening capabilities by implementing automated alert discounting.
• We strengthened the first-party lending fraud framework, reviewed and published an updated fraud policy and associated control library, and continued to develop fraud detection tools.
Governance and structure
The structure of the Financial Crime function remained substantively unchanged in 2022, although we continued to review the effectiveness of our governance framework to manage financial crime risk. The Group Head of Financial Crime and Group Money Laundering Reporting Officer continues to report to the Group Chief Risk and Compliance Officer, while the Group Risk Committee retains oversight of matters relating to fraud, bribery and corruption, tax evasion, sanctions and export control breaches, money laundering, terrorist financing and proliferation financing.
Key risk management processes
We will not tolerate knowingly conducting business with individuals or entities believed to be engaged in criminal activity. We require everybody in HSBC to play their role in maintaining effective systems and controls to prevent and detect financial crime. Where we believe we have identified suspected criminal activity or vulnerabilities in our control framework, we will take appropriate mitigating action.
We manage financial crime risk because it is the right thing to do to protect our customers, shareholders, staff, the communities in which we operate, as well as the integrity of the financial system on which we all rely. We operate in a highly regulated industry in which these same policy goals are codified in law and regulation.
We are committed to complying with the laws and regulations of all the markets in which we operate and applying a consistently high financial crime standard globally.
We continue to assess the effectiveness of our end-to-end financial crime risk management framework, and invest in enhancing our operational control capabilities and technology solutions to deter and detect criminal activity. We have simplified our framework by streamlining and de-duplicating policy requirements. We also strengthened our financial crime risk taxonomy and control libraries and our investigative and monitoring capabilities through technology deployments. We developed more targeted metrics, and have also enhanced our governance and reporting.
We are committed to working in partnership with the wider industry and the public sector in managing financial crime risk and we participate in numerous public-private partnerships and information sharing initiatives around the world. In 2022, our focus remained on measures to improve the overall effectiveness of the global financial crime framework, notably by providing input into legislative and regulatory reform activities. We did this by contributing to the development of responses to consultation papers focused on how financial crime risk management frameworks can deliver more effective outcomes in detecting and deterring criminal activity, including tackling evolving criminal behaviours such as fraud. Through our work with the Wolfsberg Group and the Institute of International Finance, we supported the efforts of the global standard setter, the Financial Action Task Force. In addition, we participated in a number of public events related to tackling forestry crimes, wildlife trafficking and human trafficking.
Independent Reviews
In August 2022, the Board of Governors of the Federal Reserve System terminated its 2012 cease-and-desist order, with immediate effect. This order was the final remaining regulatory enforcement action that HSBC had entered into in 2012. In June 2021, the UK Financial Conduct Authority had already determined that no further skilled person work was required under section 166 of the Financial Services and Markets Act. The Group Risk Committee retains oversight of matters relating to financial crime, including any remaining remedial activity not yet completed as part of previous recommendations.
Model risk |
Overview
Model risk is the risk of inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions.
Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models.
Key developments in 2022
In 2022, we continued to make improvements in our model risk management processes amid regulatory changes in model requirements.
Initiatives during the year included:
• In response to regulatory capital changes, we redeveloped, independently validated and submitted to the PRA and other local regulators our models for the internal ratings-based ('IRB') approach for credit risk, internal model method ('IMM') for counterparty credit risk and internal model approach ('IMA') for market risk. These new models have been built to enhanced standards using improved data as a result of investment in processes and systems.
• We redeveloped and validated models impacted by the changes to the alternative rate setting mechanisms due to the Ibor transition.
• We embedded changes to address gaps in the control framework that emerged as a result of increases in adjustments and overlays that were applied to compensate for the impact of the Covid-19 pandemic, and the subsequent volatility due to the effects of the rise in global interest rates on the ECL models.
• We have increased the involvement of first line colleagues in businesses and functions in the development and management of models. We also put an enhanced focus on key model risk drivers such as data quality and model methodology.
• We have sought to enhance the reporting that supports the model risk appetite measures, to support our businesses and functions in managing model risk more effectively.
• We continued the transformation of the Model Risk Management team, with further enhancements to the independent model validation processes, including new systems and working practices. Key senior hires were made during the year to lead the business areas and regions to strengthen oversight and expertise within the function.
• We have completed independent validations of a suite of newly developed models for the forthcoming IFRS17 accounting standards for insurance.
• We have enhanced our model risk teams with specialist skills to manage the increased model risk in areas such as climate risk and models using advanced analytics and machine learning, as they become critical areas of focus that will grow in importance in 2023 and beyond.
Governance and structure
Model risk governance committees at the Group, business and functional levels provide oversight of model risk. The committees include senior leaders from the three global businesses and the Group Risk and Compliance function, and focus on model-related concerns and are supported by key model risk metrics. We also have Model Risk Committees in our geographical regions focused on local delivery and requirements. The Group-level Model Risk Committee is chaired by the Group Chief Risk and Compliance Officer, and the heads of key businesses participate in these meetings.
Key risk management processes
We use a variety of modelling approaches, including regression, simulation, sampling, machine learning and judgemental scorecards for a range of business applications. These activities include customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Global responsibility for managing model risk is delegated from the Board to the Group Chief Risk and Compliance Officer, who authorises the Group Model Risk Committee. This committee regularly reviews our model risk management policies and procedures, and requires the first line of defence to demonstrate comprehensive and effective controls based on a library of model risk controls provided by Model Risk Management. Model Risk Management also reports on model risk to senior management and the Group Risk Committee on a regular basis through the use of the risk map, risk appetite metrics and top and emerging risks.
We regularly review the effectiveness of these processes, including the model oversight committee structure, to help ensure appropriate understanding and ownership of model risk is embedded in the businesses and functions.
Insurance manufacturing operations risk |
Contents
233 | Overview |
233 | Insurance manufacturing operations risk management |
235 | Insurance manufacturing operations risk in 2022 |
235 | Measurement |
237 | Key risk types |
237 | - Market risk |
238 | - Credit risk |
238 | - Liquidity risk |
238 | - Insurance underwriting risk |
Overview
The key risks for our insurance manufacturing operations are market risk, in particular interest rate and equity, credit risk and insurance underwriting risk. These have a direct impact on the financial results and capital positions of the insurance operations. Liquidity risk, while significant in other parts of the Group, is relatively minor for our insurance operations.
HSBC's insurance business
We sell insurance products through a range of channels including our branches, insurance salesforces, direct channels and third-party distributors. The majority of sales are through an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship, although the proportion of sales through other sources such as independent financial advisers, tied agents and digital is increasing.
For the insurance products we manufacture, the majority of sales are savings, universal life and protection contracts.
We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the Group.
We have life insurance manufacturing subsidiaries in eight markets, which are Hong Kong, Singapore, mainland China, France, the UK, Malta, Mexico and Argentina. We also have a life insurance manufacturing associate in India.
Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a small number of leading external insurance companies in order to provide insurance products to our customers. These arrangements are generally structured with our exclusive strategic partners and earn the Group a combination of commissions, fees and a share of profits. We distribute insurance products in all of our geographical regions.
This section focuses only on the risks relating to the insurance products we manufacture.
Insurance manufacturing operations risk management
Key developments in 2022
The insurance manufacturing subsidiaries follow the Group's risk management framework. In addition, there are specific policies and practices relating to the risk management of insurance contracts, which have not changed materially over 2022. During the year, there was continued market volatility observed across interest rates, equity markets and foreign exchange rates. This was predominantly driven
by geopolitical factors and wider inflationary concerns. One area of key risk management focus was the implementation of the new accounting standard, IFRS17 'Insurance Contracts'. Given the fundamental nature of the impact of the accounting standard on insurance accounting, this presents additional financial reporting and model risks for the Group. Another area of focus was the acquisition early in 2022 of an insurance business in Singapore and the subsequent integration of that business into the Group's risk management framework.
Governance and structure
(Audited)
Insurance manufacturing risks are managed to a defined risk appetite, which is aligned to the Group's risk appetite and risk management framework, including its three lines of defence model. For details of the Group's governance framework, see page 133. The Global Insurance Risk Management Meeting oversees the control framework globally and is accountable to the WPB Risk Management Meeting on risk matters relating to the insurance business.
The monitoring of the risks within our insurance operations is carried out by Insurance Risk teams. The Group's risk stewardship functions support the Insurance Risk teams in their respective areas of expertise.
Stress and scenario testing
(Audited)
Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and Group-wide regulatory stress tests, as well as internally developed stress and scenario tests, including Group internal stress test exercises.
The results of these stress tests and the adequacy of management action plans to mitigate these risks are considered in the Group's ICAAP and the entities' regulatory Own Risk and Solvency Assessments ('ORSAs'), which are produced by all material entities.
Key risk management processes
Market risk
(Audited)
All our insurance manufacturing subsidiaries have market risk mandates and limits that specify the investment instruments in which they are permitted to invest and the maximum quantum of market risk that they may retain. They manage market risk by using, among others, some or all of the techniques listed below, depending on the nature of the contracts written:
• We are able to adjust bonus rates to manage the liabilities to policyholders for products with discretionary participating features ('DPF'). The effect is that a significant proportion of the market risk is borne by the policyholder.
• We use asset and liability matching where asset portfolios are structured to support projected liability cash flows. The Group manages its assets using an approach that considers asset quality, diversification, cash flow matching, liquidity, volatility and target investment return. We use models to assess the effect of a range of future scenarios on the values of financial assets and associated liabilities, and ALCOs employ the outcomes in determining how best to structure asset holdings to support liabilities.
• We use derivatives to protect against adverse market movements.
• We design new products to mitigate market risk, such as changing the investment return sharing proportion between policyholders and the shareholder.
Credit risk
(Audited)
Our insurance manufacturing subsidiaries also have credit risk mandates and limits within which they are permitted to operate, which consider the credit risk exposure, quality and performance of their investment portfolios. Our assessment of the creditworthiness of issuers and counterparties is based primarily upon internationally recognised credit ratings and other publicly available information.
Stress testing is performed on investment credit exposures using credit spread sensitivities and default probabilities.
We use a number of tools to manage and monitor credit risk. These include a credit report containing a watch-list of investments with current credit concerns, primarily investments that may be at risk of future impairment or where high concentrations to counterparties are present in the investment portfolio. Sensitivities to credit spread risk are assessed and monitored regularly.
Capital and liquidity risk
(Audited)
Capital risk for our insurance manufacturing subsidiaries is assessed in the Group's ICAAP based on their financial capacity to support the risks to which they are exposed. Capital adequacy is assessed on both the Group's economic capital basis, and the relevant local insurance regulatory basis.
Risk appetite buffers are set to ensure that the operations are able to remain solvent, allowing for business-as-usual volatility and extreme but plausible stress events. In certain cases, entities use reinsurance to manage capital risk.
Liquidity risk is relatively minor for the insurance business. It is managed by cash flow matching and maintaining sufficient cash resources, investing in high credit-quality investments with deep and liquid markets, monitoring investment concentrations and restricting them where appropriate, and establishing committed contingency borrowing facilities.
Insurance manufacturing subsidiaries complete quarterly liquidity risk reports and an annual review of the liquidity risks to which they are exposed.
Insurance underwriting risk
Our insurance manufacturing subsidiaries primarily use the following frameworks and processes to manage and mitigate insurance underwriting risks:
• a formal approval process for launching new products or making changes to products;
• a product pricing and profitability framework, which requires initial and ongoing assessment of the adequacy of premiums charged on new insurance contracts to meet the risks associated with them;
• a framework for customer underwriting;
• reinsurance, which cedes risks to third-party reinsurers to keep risks within risk appetite, reduce volatility and improve capital efficiency; and
• oversight of expense and reserve risks by entity Financial Reporting Committees.
•
Insurance manufacturing operations risk in 2022
Measurement
The following tables show the composition of assets and liabilities by contract type and by geographical region.
Balance sheet of insurance manufacturing subsidiaries by type of contract1 | |||||
(Audited) | |||||
With DPF | Unit-linked | Other contracts2 | Shareholderassets and liabilities | Total | |
$m | $m | $m | $m | $m | |
Financial assets | 89,907 | 8,144 | 21,467 | 9,086 | 128,604 |
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss | 30,950 | 7,992 | 3,899 | 1,543 | 44,384 |
- derivatives | 418 | - | 30 | 15 | 463 |
- financial investments at amortised cost | 46,142 | 43 | 16,114 | 4,805 | 67,104 |
- financial investments at fair value through other comprehensive income | 8,349 | - | 486 | 1,920 | 10,755 |
- other financial assets3 | 4,048 | 109 | 938 | 803 | 5,898 |
Reinsurance assets | 2,945 | 50 | 1,724 | 2 | 4,721 |
PVIF4 | - | - | - | 9,900 | 9,900 |
Other assets and investment properties | 2,521 | 2 | 225 | 957 | 3,705 |
Total assets | 95,373 | 8,196 | 23,416 | 19,945 | 146,930 |
Liabilities under investment contracts designated at fair value | - | 2,084 | 3,296 | - | 5,380 |
Liabilities under insurance contracts | 91,948 | 5,438 | 17,521 | - | 114,907 |
Deferred tax5 | 227 | 6 | 22 | 1,495 | 1,750 |
Other liabilities | - | - | - | 7,212 | 7,212 |
Total liabilities | 92,175 | 7,528 | 20,839 | 8,707 | 129,249 |
Total equity | - | - | - | 17,681 | 17,681 |
Total liabilities and equity at 31 Dec 2022 | 92,175 | 7,528 | 20,839 | 26,388 | 146,930 |
Financial assets | 88,969 | 8,881 | 19,856 | 9,951 | 127,657 |
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss | 30,669 | 8,605 | 3,581 | 1,827 | 44,682 |
- derivatives | 129 | 1 | 15 | 2 | 147 |
- financial investments at amortised cost | 42,001 | 61 | 14,622 | 4,909 | 61,593 |
- financial investments at fair value through other comprehensive income | 10,858 | - | 459 | 1,951 | 13,268 |
- other financial assets3 | 5,312 | 214 | 1,179 | 1,262 | 7,967 |
Reinsurance assets | 2,180 | 72 | 1,666 | 3 | 3,921 |
PVIF4 | - | - | - | 9,453 | 9,453 |
Other assets and investment properties | 2,558 | 1 | 206 | 820 | 3,585 |
Total assets | 93,707 | 8,954 | 21,728 | 20,227 | 144,616 |
Liabilities under investment contracts designated at fair value | - | 2,297 | 3,641 | - | 5,938 |
Liabilities under insurance contracts | 89,492 | 6,558 | 16,757 | - | 112,807 |
Deferred tax5 | 179 | 9 | 24 | 1,418 | 1,630 |
Other liabilities | - | - | - | 7,269 | 7,269 |
Total liabilities | 89,671 | 8,864 | 20,422 | 8,687 | 127,644 |
Total equity | - | - | - | 16,972 | 16,972 |
Total liabilities and equity at 31 Dec 2021 | 89,671 | 8,864 | 20,422 | 25,659 | 144,616 |
1 Balance sheet of insurance manufacturing operations is shown before elimination of inter-company transactions with HSBC non-insurance operations.
2 'Other contracts' includes term insurance, credit life insurance, universal life insurance and investment contracts not included in the 'Unit-linked' or 'With DPF' columns.
3 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
4 Present value of in-force long-term insurance business.
5 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
5
Balance sheet of insurance manufacturing subsidiaries by geographical region1,2 | ||||
(Audited) | ||||
Europe | Asia | Latin America | Total | |
$m | $m | $m | $m | |
Financial assets | 27,407 | 100,224 | 973 | 128,604 |
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss | 15,858 | 28,030 | 496 | 44,384 |
- derivatives | 292 | 171 | - | 463 |
- financial investments - at amortised cost | 383 | 66,674 | 47 | 67,104 |
- financial investments - at fair value through other comprehensive income | 9,505 | 861 | 389 | 10,755 |
- other financial assets3 | 1,369 | 4,488 | 41 | 5,898 |
Reinsurance assets | 183 | 4,533 | 5 | 4,721 |
PVIF4 | 1,296 | 8,407 | 197 | 9,900 |
Other assets and investment properties | 958 | 2,687 | 60 | 3,705 |
Total assets | 29,844 | 115,851 | 1,235 | 146,930 |
Liabilities under investment contracts designated at fair value | 1,143 | 4,237 | - | 5,380 |
Liabilities under insurance contracts | 24,076 | 89,904 | 927 | 114,907 |
Deferred tax5 | 288 | 1,440 | 22 | 1,750 |
Other liabilities | 2,166 | 4,992 | 54 | 7,212 |
Total liabilities | 27,673 | 100,573 | 1,003 | 129,249 |
Total equity | 2,171 | 15,278 | 232 | 17,681 |
Total liabilities and equity at 31 Dec 2022 | 29,844 | 115,851 | 1,235 | 146,930 |
Financial assets | 34,264 | 92,535 | 858 | 127,657 |
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss | 19,030 | 25,248 | 404 | 44,682 |
- derivatives | 65 | 82 | - | 147 |
- financial investments - at amortised cost | 1,161 | 60,389 | 43 | 61,593 |
- financial investments - at fair value through other comprehensive income | 12,073 | 817 | 378 | 13,268 |
- other financial assets3 | 1,935 | 5,999 | 33 | 7,967 |
Reinsurance assets | 213 | 3,703 | 5 | 3,921 |
PVIF4 | 1,098 | 8,177 | 178 | 9,453 |
Other assets and investment properties | 1,091 | 2,431 | 63 | 3,585 |
Total assets | 36,666 | 106,846 | 1,104 | 144,616 |
Liabilities under investment contracts designated at fair value | 1,396 | 4,542 | - | 5,938 |
Liabilities under insurance contracts | 30,131 | 81,840 | 836 | 112,807 |
Deferred tax5 | 250 | 1,357 | 23 | 1,630 |
Other liabilities | 2,711 | 4,523 | 35 | 7,269 |
Total liabilities | 34,488 | 92,262 | 894 | 127,644 |
Total equity | 2,178 | 14,584 | 210 | 16,972 |
Total liabilities and equity at 31 Dec 2021 | 36,666 | 106,846 | 1,104 | 144,616 |
1 HSBC has no insurance manufacturing subsidiaries in the Middle East and North Africa or North America.
2 Balance sheet of insurance manufacturing operations is shown before elimination of inter-company transactions with HSBC non-insurance operations.
3 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
4 Present value of in-force long-term insurance business.
5 'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
Key risk types
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting HSBC's capital or profit. Market factors include interest rates, equity and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with discretionary participating features ('DPF'). These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in fixed interest, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns.
DPF products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance.
In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by HSBC. Amounts are held against the cost of such guarantees, calculated by stochastic modelling in the larger entities.
The cost of such guarantees is accounted for as a deduction from the present value of in-force ('PVIF') asset, unless the cost of such guarantees is already explicitly allowed for within the insurance contract liabilities.
The following table shows the total reserve held for the cost of guarantees, the range of investment returns on assets supporting these products and the implied investment return that would enable the business to meet the guarantees.
The cost of guarantees decreased to $745m (2021: $938m), primarily due increases in interest rates during 2022.
For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets.
Financial return guarantees | |||||||
(Audited) | |||||||
2022 | 2021 | ||||||
Investment returns implied by guarantee | Long-term investment returns on relevant portfolios | Cost of guarantees | Investment returns implied by guarantee | Long-term investment returns on relevant portfolios | Cost of guarantees | ||
% | % | $m | % | % | $m | ||
Capital | - | 1.6-5.1 | 47 | - | 0.7-2.3 | 220 | |
Nominal annual return | 0.1-1.9 | 3.6-6.8 | 548 | 0.1-1.9 | 2.7-6.4 | 423 | |
Nominal annual return | 2.0-3.9 | 2.0-5.5 | 109 | 2.0-3.9 | 2.2-4.1 | 183 | |
Nominal annual return | 4.0-5.0 | 2.0-4.2 | 41 | 4.0-5.0 | 2.2-4.2 | 112 | |
At 31 Dec | 745 | 938 | |||||
Sensitivities
Changes in financial market factors, from the economic assumptions in place at the start of the year, had a negative impact on reported profit before tax of $988m (2021: $516m). The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the year and the total equity of our insurance manufacturing subsidiaries. These sensitivities are prepared in accordance with current IFRSs, which will change following the adoption of IFRS 17 'Insurance Contracts', effective from 1 January 2023. Further information about the adoption of IFRS 17 is provided on page 335.
Where appropriate, the effects of the sensitivity tests on profit after tax and equity incorporate the impact of the stress on the PVIF.
Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the profit
and total equity and the risk factors is non-linear, particularly in a low interest-rate environment. Therefore, the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not necessarily symmetrical on the upside and downside. The sensitivities are stated before allowance for management actions, which may mitigate the effect of changes in the market environment. The sensitivities presented allow for adverse changes in policyholder behaviour that may arise in response to changes in market rates. The differences between the impacts on profit after tax and equity are driven by the changes in value of the bonds measured at fair value through other comprehensive income, which are only accounted for in equity. The increased upward sensitivity and reduced downward sensitivity of profit after tax to a parallel shift in yield curves is driven by rising interest rates having reduced the sensitivity impact associated with the cost of guarantees in France.
Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk factors | ||||
(Audited) | ||||
2022 | 2021 | |||
Effect on profit after tax | Effect on total equity | Effect on profit after tax | Effect on total equity | |
$m | $m | $m | $m | |
+100 basis point parallel shift in yield curves | (100) | (236) | (2) | (142) |
-100 basis point parallel shift in yield curves | 35 | 177 | (154) | (9) |
10% increase in equity prices | 391 | 391 | 369 | 369 |
10% decrease in equity prices | (419) | (419) | (377) | (377) |
10% increase in US dollar exchange rate compared with all currencies | 98 | 98 | 80 | 80 |
10% decrease in US dollar exchange rate compared with all currencies | (98) | (98) | (80) | (80) |
Credit risk
(Audited)
Description and exposure
Credit risk is the risk of financial loss if a customer or counterparty fails to meet their obligation under a contract. It arises in two main areas for our insurance manufacturers:
• risk associated with credit spread volatility and default by debt security counterparties after investing premiums to generate a return for policyholders and shareholders; and
• risk of default by reinsurance counterparties and non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of these items are shown in the table on page 235.
The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'satisfactory' or higher (as defined on page 146), with 100% of the exposure being neither past due nor impaired (2021: 100%).
Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholders. Therefore, our exposure is primarily related to liabilities under non-linked insurance and investment
contracts and shareholders' funds. The credit quality of insurance financial assets is included in the table on page 165.
The risk associated with credit spread volatility is to a large extent mitigated by holding debt securities to maturity, and sharing a degree of credit spread experience with policyholders.
Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though solvent, either does not have sufficient financial resources available to meet its obligations when they fall due, or can secure them only at excessive cost. Liquidity risk may be able to be shared with policyholders for products with DPF.
The following table shows the expected undiscounted cash flows for insurance liabilities at 31 December 2022.
The profile of the expected maturity of insurance contracts at 31 December 2022 remained comparable with 2021.
The remaining contractual maturity of investment contract liabilities is included in Note 30 on page 396.
Expected maturity of insurance contract liabilities | |||||
(Audited) | |||||
Expected cash flows (undiscounted) | |||||
Within 1 year | 1-5 years | 5-15 years | Over 15 years | Total | |
$m | $m | $m | $m | $m | |
Unit-linked | 801 | 1,732 | 2,522 | 2,355 | 7,410 |
With DPF and Other contracts | 8,637 | 31,290 | 55,157 | 135,002 | 230,086 |
At 31 Dec 2022 | 9,438 | 33,022 | 57,679 | 137,357 | 237,496 |
Unit-linked | 1,346 | 2,605 | 3,159 | 2,293 | 9,403 |
With DPF and Other contracts | 8,803 | 31,334 | 51,891 | 94,168 | 186,196 |
At 31 Dec 2021 | 10,149 | 33,939 | 55,050 | 96,461 | 195,599 |
Insurance underwriting risk
Description and exposure
Insurance underwriting risk is the risk of loss through adverse experience, in either timing or amount, of insurance underwriting parameters (non-economic assumptions). These parameters include mortality, morbidity, longevity, lapse and expense rates. Lapse risk exposure on products with premium financing increased over the year as rising interest rates led to an increase in the cost of financing for customers.
The principal risk we face is that, over time, the cost of the contract, including claims and benefits, may exceed the total amount of premiums and investment income received.
The tables on pages 235 and 236 analyse our life insurance risk exposures by type of contract and by geographical region.
The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2021.
Sensitivities
(Audited)
The following table shows the sensitivity of profit and total equity to reasonably possible changes in non-economic assumptions across all our insurance manufacturing subsidiaries. These sensitivities are prepared in accordance with current IFRSs, which will change following the adoption of IFRS 17 'Insurance Contracts', effective from 1 January 2023. Further information about the adoption of IFRS 17 is provided on page 335.
Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in mortality or morbidity depends on the type of business being written.
Sensitivity to lapse rates depends on the type of contracts being written. An increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges.
Expense rate risk is the exposure to a change in the allocated cost of administering insurance contracts. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative effect on our profits. This risk is generally greatest for our smaller entities.
Sensitivity analysis | ||
(Audited) | ||
2022 | 2021 | |
$m | $m | |
Effect on profit after tax and total equity at 31 Dec | ||
Effect on profit after tax and total equity at 10% increase in mortality and/or morbidity rates | (105) | (112) |
Effect on profit after tax and total equity at 10% decrease in mortality and/or morbidity rates | 109 | 115 |
Effect on profit after tax and total equity at 10% increase in lapse rates | (121) | (115) |
Effect on profit after tax and total equity at 10% decrease in lapse rates | 124 | 129 |
Effect on profit after tax and total equity at 10% increase in expense rates | (89) | (108) |
Effect on profit after tax and total equity at 10% decrease in expense rates | 89 | 107 |