REG - HSBC Holdings PLC - Annual Financial Report - Part 10
21/02/2024 16:45
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RNS Number : 9503D HSBC Holdings PLC 21 February 2024
Notes on the financial statements
Contents
341 1 Basis of preparation and material accounting policies
355 2 Net fee income
356 3 Net income/(expense) from financial instruments measured at fair value through
profit or loss
356 4 Insurance business
363 5 Employee compensation and benefits
368 6 Auditor's remuneration
368 7 Tax
371 8 Dividends
372 9 Earnings per share
372 10 Segmental analysis
375 11 Trading assets
375 12 Fair values of financial instruments carried at fair value
382 13 Fair values of financial instruments not carried at fair value
383 14 Financial assets designated and otherwise mandatorily measured at fair value
through profit or loss
384 15 Derivatives
389 16 Financial investments
390 17 Assets pledged, collateral received and assets
transferred
391 18 Interests in associates and joint ventures
395 19 Investments in subsidiaries
397 20 Structured entities
399 21 Goodwill and intangible assets
Goodwill and intangible assets
400 22 Prepayments, accrued income and other assets
401 23 Assets held for sale, liabilities of disposal groups held for sale and
business acquisitions
404 24 Trading liabilities
404 25 Financial liabilities designated at fair value
404 26 Debt securities in issue
405 27 Accruals, deferred income and other liabilities
405 28 Provisions
406 29 Subordinated liabilities
408 30 Maturity analysis of assets, liabilities and off-balance sheet commitments
413 31 Offsetting of financial assets and financial liabilities
415 32 Interest rate benchmark reform
415 33 Called up share capital and other equity instruments
417 34 Contingent liabilities, contractual commitments and guarantees
417 35 Finance lease receivables
418 36 Legal proceedings and regulatory matters
421 37 Related party transactions
423 38 Effects of adoption of IFRS 17
427 39 Events after the balance sheet date
427 40 HSBC Holdings' subsidiaries, joint ventures and associates
1 Basis of preparation and material accounting policies
1.1 Basis of preparation
(a) Compliance with International Financial Reporting
Standards
The consolidated financial statements of HSBC and the separate financial
statements of HSBC Holdings comply with UK-adopted international accounting
standards and with the requirements of the Companies Act 2006, and have also
applied international financial reporting standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union. These
financial statements are also prepared in accordance with International
Financial Reporting Standards as issued by the International Accounting
Standards Board ('IFRS Accounting Standards'), including interpretations
issued by the IFRS Interpretations Committee, as there are no applicable
differences from IFRS Accounting Standards for the periods presented. There
were no unendorsed standards effective for the year ended 31 December 2023
affecting these consolidated and separate financial statements.
Standards adopted during the year ended 31 December 2023
IFRS 17 'Insurance Contracts'
On 1 January 2023, the Group adopted the requirements of IFRS 17 'Insurance
Contracts' retrospectively with comparatives restated from the transition
date, 1 January 2022. At transition, the Group's total equity reduced by
$10,459m.
On adoption of IFRS 17, balances based on IFRS 4, including the present value
of in-force long-term insurance business ('PVIF') asset in relation to the
upfront recognition of future profits of in-force insurance contracts, were
derecognised. Insurance contract liabilities have been remeasured under
IFRS 17 based on groups of insurance contracts, which include the fulfilment
cash flows comprising the best estimate of the present value of the future
cash flows (for example premiums and payouts for claims, benefits and
expenses), together with a risk adjustment for non-financial risk, as well as
the contractual service margin ('CSM'). The CSM represents the unearned
profits that will be released and systematically recognised in insurance
revenue as services are provided over the expected coverage period.
In addition, the Group has made use of the option under the standard to
re-designate certain eligible financial assets held to support insurance
contract liabilities, which were predominantly measured at amortised cost, as
financial assets measured at fair value through profit or loss, with
comparatives restated from the transition date. The effects of adoption of
IFRS 17 are set out in Note 38 with a description of the policy in Note
1.2(j).
The key differences between IFRS 4 and IFRS 17 are summarised in the following
table:
Balance sheet - Insurance contract liabilities for non-linked life insurance contracts - Insurance contract liabilities are measured for groups of insurance
are calculated by local actuarial principles. Liabilities under unit-linked contracts at current value, comprising the fulfilment cash flows and the CSM.
life insurance contracts are at least equivalent to the surrender or transfer
value, by reference to the value of the relevant underlying funds or indices. - The fulfilment cash flows comprise the best estimate of the present
Grouping requirements follow local regulations. value of the future cash flows, together with a risk adjustment for
non-financial risk.
- An intangible asset for the PVIF is recognised, representing the upfront
recognition of future profits associated with in-force insurance contracts. - The CSM represents the unearned profit.
Profit emergence/ recognition - The value of new business is reported as revenue on Day 1 as an - The CSM is systematically recognised in revenue as services are provided
increase in PVIF. over the expected coverage period of the group of contracts (i.e. no Day 1
profit).
- The impact of the majority of assumption changes is recognised
immediately in the income statement. - Contracts are measured using the general measurement model ('GMM') or
the variable fee approach ('VFA') model for insurance contracts with direct
- Variances between actual and expected cash flows are recognised in the participation features upon meeting the eligibility criteria. Under the VFA
period they arise. model, the Group's share of the investment experience and assumption changes
are absorbed by the CSM and released over time to profit or loss. For
contracts measured under GMM, the Group's share of the investment volatility
is recorded in profit or loss as it arises.
- Losses from onerous contracts are recognised in the income statement
immediately.
Investment return assumptions (discount rate) - PVIF is calculated based on long-term investment return assumptions - Under the market consistent approach, expected future investment spreads
based on assets held. It therefore includes investment margins expected to be are not included in the investment return assumption. Instead, the discount
earned in future. rate includes an illiquidity premium that reflects the nature of the
associated insurance contract liabilities.
Expenses - Total expenses to acquire and maintain the contract over its lifetime - Projected lifetime expenses that are directly attributable costs are
are included in the PVIF calculation. included in the insurance contract liabilities and recognised in the insurance
service result.
- Expenses are recognised across operating expenses and fee expense as
incurred and the allowances for those expenses are released from the PVIF - Non-attributable costs are reported in operating expenses.
simultaneously.
Transition
In applying IFRS 17 for insurance contracts retrospectively, the full
retrospective approach ('FRA') has been used unless it was impracticable. When
the FRA is impracticable such as when there is a lack of sufficient and
reliable data, an entity has an accounting policy choice to use either the
modified retrospective approach ('MRA') or the fair value approach ('FVA').
The Group has applied the FRA for new business from 2018 at the earliest,
subject to practicability, and the FVA for the majority of contracts for which
the FRA is impracticable.
Under the FVA, the valuation of insurance liabilities on transition is based
on the applicable requirements of IFRS 13 'Fair Value Measurement'. This
requires consideration of the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date (an exit price). The CSM is calculated as
the difference between what a market participant would demand for assuming the
unexpired risk associated with insurance contracts, including required profit,
and the fulfilment cash flows that are determined using IFRS 17 principles.
In determining the fair value, the Group considered the estimated profit
margin that a market participant would demand in return for assuming the
insurance liabilities with the consideration of the level of capital that a
market participant would be required to hold, and the discount rate with an
allowance for an illiquidity premium that takes into account the level of
'matching' between the Group's assets and related liabilities. These
assumptions were set taking into account the assumptions that a hypothetical
market participant operating in each local jurisdiction would consider.
Amendments to IAS 12 'International Tax Reform - Pillar Two Model Rules'
On 23 May 2023, the International Accounting Standards Board ('IASB') issued
amendments to IAS 12 'International Tax Reform - Pillar Two Model Rules',
which became effective immediately and were approved for adoption by all
members of the UK Endorsement Board on 19 July 2023 and by the European Union
on 8 November 2023. On 20 June 2023, legislation was substantively enacted in
the UK to introduce the OECD's Pillar Two global minimum tax rules and a UK
qualified domestic minimum top-up tax, with effect from 1 January 2024. The
Group has applied the IAS 12 exception from recognising and disclosing
information on associated deferred tax assets and liabilities.
There were no other new standards or amendments to standards that had an
effect on these financial statements.
(b) Differences between IFRS Accounting Standards and Hong Kong
Financial Reporting Standards
There are no significant differences between IFRS Accounting Standards and
Hong Kong Financial Reporting Standards in terms of their application to HSBC,
and consequently there would be no significant differences had the financial
statements been prepared in accordance with Hong Kong Financial Reporting
Standards. The 'Notes on the financial statements', taken together with the
'Report of the Directors', include the aggregate of all disclosures necessary
to satisfy IFRS Accounting Standards and Hong Kong Financial Reporting
Standards.
(c) Future accounting developments
Minor amendments to IFRS Accounting Standards
The IASB has published a number of minor amendments to IFRS Accounting
Standards that are effective from 1 January 2024. HSBC expects they will have
an insignificant effect, when adopted, on the consolidated financial
statements of HSBC and the separate financial statements of HSBC Holdings.
Additionally, in August 2023, the IASB published amendments to IAS 21 'Lack of
Exchangeability' effective from 1 January 2025. The Group is undertaking an
assessment of the potential impact, which is not expected to be significant.
(d) Foreign currencies
HSBC's consolidated financial statements are presented in US dollars because
the US dollar and currencies linked to it form the major currency bloc in
which HSBC transacts and funds its business. The US dollar is also HSBC
Holdings' functional currency because the US dollar and currencies linked to
it are the most significant currencies relevant to the underlying
transactions, events and conditions of its subsidiaries, as well as
representing a significant proportion of its funds generated from financing
activities.
Transactions in foreign currencies are recorded at the rate of exchange at the
date of the transaction. Assets and liabilities denominated in foreign
currencies are translated at the rate of exchange at the balance sheet date,
except non-monetary assets and liabilities measured at historical cost, which
are translated using the rate of exchange at the initial transaction date.
Exchange differences are included in other comprehensive income or in the
income statement depending on where the gain or loss on the underlying item is
recognised. Except for subsidiaries operating in hyperinflationary economies
(see Note 1.2(p)), in the consolidated financial statements, the assets and
liabilities of branches, subsidiaries, joint ventures and associates whose
functional currency is not US dollars are translated into the Group's
presentation currency at the rate of exchange at the balance sheet date, while
their results are translated into US dollars at the average rates of exchange
for the reporting period. Exchange differences arising are recognised in other
comprehensive income. On disposal of a foreign operation, exchange differences
previously recognised in other comprehensive income are reclassified to the
income statement.
(e) Presentation of information
Certain disclosures required by IFRS Accounting Standards have been included
in the sections marked as ('Audited') in the Annual Report and Accounts 2023
as follows:
- Disclosures concerning the nature and extent of risks relating to
insurance contracts and financial instruments are included in the 'Risk
review' on pages 135 to 237.
- The 'Own funds disclosure' is included in the 'Risk review' on page
207.
HSBC follows the UK Finance Disclosure Code. The UK Finance Disclosure Code
aims to increase the quality and comparability of UK banks' disclosures and
sets out five disclosure principles together with supporting guidance agreed
in 2010. In line with the principles of the UK Finance Disclosure Code, HSBC
assesses good practice recommendations issued from time to time by relevant
regulators and standard setters, and will assess the applicability and
relevance of such guidance, enhancing disclosures where appropriate.
(f) Critical estimates and judgements
The preparation of financial information requires the use of estimates and
judgements about future conditions. In view of the inherent uncertainties and
the high level of subjectivity involved in the recognition or measurement of
items, highlighted as the 'critical estimates and judgements' in section 1.2
below, it is possible that the outcomes in the next financial year could
differ from those on which management's estimates are based. This could result
in materially different estimates and judgements from those reached by
management for the purposes of these financial statements. Management's
selection of HSBC's accounting policies that contain critical estimates and
judgements reflects the materiality of the items to which the policies are
applied and the high degree of judgement and estimation uncertainty involved.
Management has considered the impact of climate-related risks on HSBC's
financial position and performance. While the effects of climate change are a
source of uncertainty, as at 31 December 2023 management did not consider
there to be a material impact on our critical judgements and estimates from
the physical, transition and other climate-related risks in the short to
medium term. In particular management has considered the known and observable
potential impacts of climate-related risks of associated judgements and
estimates in our value in use calculations.
(g) Going concern
The financial statements are prepared on a going concern basis, as the
Directors are satisfied that the Group and parent company have the resources
to continue in business for the foreseeable future. In making this assessment,
the Directors have considered a wide range of information relating to present
and future conditions, including future projections of profitability,
liquidity, capital requirements and capital resources.
These considerations include stressed scenarios that reflect the uncertainty
in the macroeconomic environment following rising inflation, slower Chinese
economic activity, and disrupted supply chains as a result of the ongoing
Russia-Ukraine and Israel-Hamas wars. They also included other top and
emerging risks, including climate change, as well as the related impacts on
profitability, capital and liquidity.
1.2 Summary of material accounting policies
(a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, HSBC consolidates when it holds
- directly or indirectly - the necessary voting rights to pass resolutions by
the governing body. In all other cases, the assessment of control is more
complex and requires judgement of other factors, including having exposure to
variability of returns, power to direct relevant activities, and whether power
is held as agent or principal.
Business combinations are accounted for using the acquisition method. The
amount of non-controlling interest is measured either at fair value or at the
non-controlling interest's proportionate share of the acquiree's identifiable
net assets. This election is made for each business combination.
HSBC Holdings' investments in subsidiaries are stated at cost less impairment
losses.
Impairment testing is performed where there is an indication of impairment, by
comparing the recoverable amount of the relevant investment to its carrying
amount. Indicators of impairment include both external and internal sources of
information. Similarly, assessments are made as to whether an impairment loss
recognised in prior periods may no longer exist or may have decreased. Where
this is the case, such an impairment loss is reversed if there has been a
change in the estimate used to determine the relevant recoverable amount since
the last impairment loss was recognised, and to the extent that it does not
increase the carrying amount above that had no impairment loss been previously
recognised.
Critical estimates and judgements
Investments in subsidiaries are tested for impairment when there is an
indication that the investment may be impaired, which involves estimations of
value in use reflecting management's best estimate of the future cash flows of
the investment and the rates used to discount these cash flows, both of which
are subject to uncertain factors as follows:
- The accuracy of forecast cash flows is subject to a high degree of - The future cash flows of each investment are sensitive to the cash flows
uncertainty in volatile market conditions. Where such circumstances are projected for the periods for which detailed forecasts are available and to
determined to exist, management re-tests for impairment or reversal more assumptions regarding the long-term pattern of sustainable cash flows
frequently than once a year when indicators exist. This ensures that the thereafter. Forecasts are compared with actual performance and verifiable
assumptions on which the cash flow forecasts are based continue to reflect economic data, but they reflect management's view of future business prospects
current market conditions and management's best estimate of future business at the time of the assessment.
prospects.
- The rates used to discount future expected cash flows can have a
significant effect on their valuation, and are based on the costs of equity
assigned to the investment. The cost of equity percentage is generally derived
from a capital asset pricing model and the market implied cost of equity,
which incorporates inputs reflecting a number of financial and economic
variables, including the risk-free interest rate in the country concerned and
a premium for the risk of the business being evaluated. These variables are
subject to fluctuations in external market rates and economic conditions
beyond management's control.
- Key assumptions used in estimating impairment in subsidiaries and their
reversal where relevant are described in Note 19.
Goodwill
Goodwill is allocated to cash-generating units ('CGUs') for the purpose of
impairment testing, which is undertaken at the lowest level at which goodwill
is monitored for internal management purposes. HSBC's CGUs are based on its
main legal entities subdivided by global business, except for Global Banking
and Markets, for which goodwill is monitored on a global basis.
Impairment testing is performed at least once a year, or whenever there is an
indication of impairment, by comparing the recoverable amount of a CGU with
its carrying amount.
Goodwill is included in a disposal group if the disposal group is a CGU to
which goodwill has been allocated or it is an operation within such a CGU. The
amount of goodwill included in a disposal group is measured on the basis of
the relative values of the operation disposed of and the portion of the CGU
retained.
Critical estimates and judgements
The review of goodwill and non-financial assets (see Note 1.2(n)) for
impairment reflects management's best estimate of the future cash flows of the
CGUs and the rates used to discount these cash flows, both of which are
subject to uncertain factors as follows:
- The accuracy of forecast cash flows is subject to a high degree of - The future cash flows of the CGUs are sensitive to the cash flows
uncertainty in volatile market conditions. Where such circumstances are projected for the periods for which detailed forecasts are available and to
determined to exist, management re-tests goodwill for impairment more assumptions regarding the long-term pattern of sustainable cash flows
frequently than once a year when indicators of impairment exist. This ensures thereafter. Forecasts are compared with actual performance and verifiable
that the assumptions on which the cash flow forecasts are based continue to economic data, but they reflect management's view of future business prospects
reflect current market conditions and management's best estimate of future at the time of the assessment.
business prospects.
- The rates used to discount future expected cash flows can have a
significant effect on their valuation, and are based on the costs of equity
assigned to individual CGUs. The cost of equity percentage is generally
derived from a capital asset pricing model and market implied cost of equity,
which incorporates inputs reflecting a number of financial and economic
variables, including the risk-free interest rate in the country concerned and
a premium for the risk of the business being evaluated. These variables are
subject to fluctuations in external market rates and economic conditions
beyond management's control.
- Key assumptions used in estimating goodwill and non-financial asset
impairment are described in Note 21.
The Group does not consider there to be a significant risk of a material
adjustment to the carrying amount of goodwill in the next financial year, but
does consider this to be an area that is inherently judgemental.
HSBC sponsored structured entities
HSBC is considered to sponsor another entity if, in addition to ongoing
involvement with the entity, it had a key role in establishing that entity or
in bringing together relevant counterparties so the transaction that is the
purpose of the entity could occur. HSBC is generally not considered a sponsor
if the only involvement with the entity is merely administrative.
Interests in associates and joint arrangements
Joint arrangements are investments in which HSBC, together with one or more
parties, has joint control. Depending on HSBC's rights and obligations, the
joint arrangement is classified as either a joint operation or a joint
venture.
HSBC classifies investments in entities over which it has significant
influence, and which are neither subsidiaries nor joint arrangements, as
associates.
HSBC recognises its share of the assets, liabilities and results in a joint
operation. Investments in associates and interests in joint ventures are
recognised using the equity method. The attributable share of the results and
reserves of joint ventures and associates is included in the consolidated
financial statements of HSBC based on either financial statements made up to
31 December or pro-rated amounts adjusted for any material transactions or
events occurring between the date the financial statements are available and
31 December.
Investments in associates and joint ventures are assessed at each reporting
date and tested for impairment when there is an indication that the investment
may be impaired, by comparing the recoverable amount of the relevant
investment to its carrying amount. Goodwill on acquisitions of interests in
joint ventures and associates is not tested separately for impairment, but is
assessed as part of the carrying amount of the investment. Previously
recognised impairments are assessed for reversal when there are indicators
that they may no longer exist or have decreased. Any reversal, which may arise
only from changes in estimates used to determine the prior impairment loss, is
recognised to the extent that it does not increase the carrying amount above
that had no impairment loss been previously recognised.
Critical estimates and judgements
The most significant critical estimates relate to the assessment of impairment
of our investment in Bank of Communications Co., Limited ('BoCom'), which
involves estimations of value in use:
- The value in use calculation uses discounted cash flow projections based
on management's best estimate of future earnings available to ordinary
shareholders prepared in accordance with IAS 36 'Impairment of Assets'.
- Key assumptions used in estimating BoCom's value in use and the
sensitivity of the value in use calculations to different assumptions are
described in Note 18.
(b) Income and expense
Operating income
Interest income and expense
Interest income and expense for all financial instruments, excluding those
classified as held for trading or designated at fair value, are recognised in
'Interest income' and 'Interest expense' in the income statement using the
effective interest method. However, as an exception to this, interest on debt
instruments issued by HSBC for funding purposes that are designated under the
fair value option to reduce an accounting mismatch and on derivatives managed
in conjunction with those debt instruments is included in interest expense.
Interest on credit-impaired financial assets is recognised by applying the
effective interest rate to the amortised cost (i.e. gross carrying amount of
the asset less allowance for expected credit losses).
Non-interest income and expense
HSBC generates fee income from services provided at a fixed price over time,
such as account service and card fees, or when HSBC delivers a specific
transaction at a point in time, such as broking services and import/export
services. With the exception of certain fund management and performance fees,
all other fees are generated at a fixed price. Fund management and performance
fees can be variable depending on the size of the customer portfolio and
HSBC's performance as fund manager. Variable fees are recognised when all
uncertainties are resolved. Fee income is generally earned from short-term
contracts with payment terms that do not include a significant financing
component.
HSBC acts as principal in the majority of contracts with customers, with the
exception of broking services. For most brokerage trades, HSBC acts as agent
in the transaction and recognises broking income net of fees payable to other
parties in the arrangement.
HSBC recognises fees earned on transaction-based arrangements at a point in
time when it has fully provided the service to the customer. Where the
contract requires services to be provided over time, income is recognised on a
systematic basis over the life of the agreement.
Where HSBC offers a package of services that contains multiple non-distinct
performance obligations, such as those included in account service packages,
the promised services are treated as a single performance obligation. If a
package of services contains distinct performance obligations, the
corresponding transaction price is allocated to each performance obligation
based on the estimated stand-alone selling prices.
Dividend income is recognised when the right to receive payment is
established. This is the ex-dividend date for listed equity securities, and
usually the date when shareholders approve the dividend for unlisted equity
securities.
Net income/(expense) from financial instruments measured at fair value through
profit or loss includes the following:
- 'Net income from financial instruments held for trading or managed
on a fair value basis': This comprises net trading income, which includes all
gains and losses from changes in the fair value of financial assets and
financial liabilities held for trading and other financial instruments managed
on a fair value basis, together with the related interest income, expense and
dividends, excluding the effect of changes in the credit risk of liabilities
managed on a fair value basis. It also includes all gains and losses from
changes in the fair value of derivatives that are managed in conjunction with
financial assets and liabilities measured at fair value through profit or
loss.
- 'Net income/(expense) from assets and liabilities of insurance
businesses, including related derivatives, measured at fair value through
profit or loss': This includes all gains and losses from changes in the fair
value, together with related interest income, expense and dividends in respect
of financial assets and liabilities measured at fair value through profit or
loss, and those derivatives managed in conjunction with the above that can be
separately identifiable from other trading derivatives.
- 'Changes in fair value of designated debt instruments and related
derivatives': Interest paid on debt instruments and interest cash flows on
related derivatives is presented in interest expense where doing so reduces an
accounting mismatch.
- 'Changes in fair value of other financial instruments mandatorily
measured at fair value through profit or loss': This includes interest on
instruments that fail the solely payments of principal and interest test, see
(d) below.
The accounting policies for insurance service result and insurance finance
income/(expenses) are disclosed in Note 1.2(j).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fair value. Fair value
is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The fair value of a financial instrument on initial
recognition is generally its transaction price (that is, the fair value of the
consideration given or received). However, if there is a difference between
the transaction price and the fair value of financial instruments whose fair
value is based on a quoted price in an active market or a valuation technique
that uses only data from observable markets, HSBC recognises the difference as
a trading gain or loss at inception (a 'day 1 gain or loss'). In all other
cases, the entire day 1 gain or loss is deferred and recognised in the income
statement over the life of the transaction until the transaction matures, is
closed out, the valuation inputs become observable or HSBC enters into an
offsetting transaction. The fair value of financial instruments is generally
measured on an individual basis. However, in cases where HSBC manages a group
of financial assets and liabilities according to its net market or credit risk
exposure, the fair value of the group of financial instruments is measured on
a net basis but the underlying financial assets and liabilities are presented
separately in the financial statements, unless they satisfy the IFRS
offsetting criteria.
Critical estimates and judgements
The majority of valuation techniques employ only observable market data.
However, certain financial instruments are classified on the basis of
valuation techniques that feature one or more significant market inputs that
are unobservable, and for them, the measurement of fair value is more
judgemental:
- An instrument in its entirety is classified as valued using significant - Details on the Group's Level 3 financial instruments and the sensitivity
unobservable inputs if, in the opinion of management, greater than 5% of the of their valuation to the effect of applying reasonably possible alternative
instrument's valuation is driven by unobservable inputs. assumptions in determining their fair value are set out in Note 12.
- 'Unobservable' in this context means that there is little or no current
market data available from which to determine the price at which an arm's
length transaction would be likely to occur. It generally does not mean that
there is no data available at all upon which to base a determination of fair
value (consensus pricing data may, for example, be used).
(d) Financial instruments measured at amortised cost
Financial assets that are held to collect the contractual cash flows and which
contain contractual terms that give rise on specified dates to cash flows that
are solely payments of principal and interest are measured at amortised cost.
Such financial assets include most loans and advances to banks and customers
and some debt securities. In addition, most financial liabilities are measured
at amortised cost. HSBC accounts for regular way amortised cost financial
instruments using trade date accounting. The carrying amount of these
financial assets at initial recognition includes any directly attributable
transactions costs.
HSBC may commit to underwriting loans on fixed contractual terms for specified
periods of time. When the loan arising from the lending commitment is expected
to be sold shortly after origination, the commitment to lend is recorded as a
derivative. When HSBC intends to hold the loan, the loan commitment is
included in the impairment calculations set out below.
Non-trading reverse repurchase, repurchase and similar agreements
When debt securities are sold subject to a commitment to repurchase them at a
predetermined price ('repos'), they remain on the balance sheet and a
liability is recorded in respect of the consideration received. Securities
purchased under commitments to resell ('reverse repos') are not recognised on
the balance sheet and an asset is recorded in respect of the initial
consideration paid. Non-trading repos and reverse repos are measured at
amortised cost. The difference between the sale and repurchase price or
between the purchase and resale price is treated as interest and recognised in
net interest income over the life of the agreement.
Contracts that are economically equivalent to reverse repo or repo agreements
(such as sales or purchases of debt securities entered into together with
total return swaps with the same counterparty) are accounted for similarly to,
and presented together with, reverse repo or repo agreements.
(e) Financial assets measured at fair value through other
comprehensive income
Financial assets managed within a business model that is achieved by both
collecting contractual cash flows and selling and which contain contractual
terms that give rise on specified dates to cash flows that are solely payments
of principal and interest are measured at fair value through other
comprehensive income ('FVOCI'). These comprise primarily debt securities. They
are recognised on trade date when HSBC enters into contractual arrangements to
purchase and are generally derecognised when they are either sold or redeemed.
They are subsequently remeasured at fair value with changes therein (except
for those relating to impairment, interest income and foreign currency
exchange gains and losses) recognised in other comprehensive income until the
assets are sold. Upon disposal, the cumulative gains or losses in other
comprehensive income are recognised in the income statement as 'Gains less
losses from financial instruments'. Financial assets measured at FVOCI are
included in the impairment calculations set out below and impairment is
recognised in profit or loss.
(f) Equity securities measured at fair value with fair value
movements presented in other comprehensive income
The equity securities for which fair value movements are shown in other
comprehensive income are business facilitation and other similar investments
where HSBC holds the investments other than to generate a capital return.
Dividends from such investments are recognised in profit or loss. Gains or
losses on the derecognition of these equity securities are not transferred to
profit or loss. Otherwise, equity securities are measured at fair value
through profit or loss.
(g) Financial instruments designated at fair value through
profit or loss
Financial instruments, other than those held for trading, are classified in
this category if they meet one or more of the criteria set out below and are
so designated irrevocably at inception:
- The use of the designation removes or significantly reduces an
accounting mismatch.
- A group of financial assets and liabilities or a group of financial
liabilities is managed and its performance is evaluated on a fair value basis,
in accordance with a documented risk management or investment strategy.
- The financial liability contains one or more non-closely related
embedded derivatives.
Designated financial assets are recognised when HSBC enters into contracts
with counterparties, which is generally on trade date, and are normally
derecognised when the rights to the cash flows expire or are transferred.
Designated financial liabilities are recognised when HSBC enters into
contracts with counterparties, which is generally on settlement date, and are
normally derecognised when extinguished. Subsequent changes in fair values are
recognised in the income statement in 'Net income from financial instruments
held for trading or managed on a fair value basis' or 'Net income/(expense)
from assets and liabilities of insurance businesses, including related
derivatives, measured at fair value through profit or loss' or 'Changes in
fair value of designated debt and related derivatives' except for the effect
of changes in the liabilities' credit risk, which is presented in 'Other
comprehensive income', unless that treatment would create or enlarge an
accounting mismatch in profit or loss.
Under the above criteria, the main classes of financial instruments designated
by HSBC are:
- Debt instruments for funding purposes that are designated to reduce
an accounting mismatch: The interest and/or foreign exchange exposure on
certain fixed-rate debt securities issued has been matched with the interest
and/or foreign exchange exposure on certain swaps as part of a documented risk
management strategy.
- Financial assets and financial liabilities under unit-linked and
non-linked investment contracts: A contract under which HSBC does not accept
significant insurance risk from another party is not classified as an
insurance contract, other than investment contracts with discretionary
participation features ('DPF'), but is accounted for as a financial liability.
Customer liabilities under linked and certain non-linked investment contracts
issued by insurance subsidiaries are determined based on the fair value of the
assets held in the linked funds or by a valuation method. The related
financial assets and liabilities are managed and reported to management on a
fair value basis. Designation at fair value of the financial assets and
related liabilities allows changes in fair values to be recorded in the income
statement and presented in the same line.
- Financial liabilities that contain both deposit and derivative
components: These financial liabilities are managed and their performance
evaluated on a fair value basis.
(h) Derivatives
Derivatives are financial instruments that derive their value from the price
of underlying items such as equities, interest rates or other indices.
Derivatives are recognised initially and are subsequently measured at fair
value through profit or loss. Derivatives are classified as assets when their
fair value is positive or as liabilities when their fair value is negative.
This includes embedded derivatives in financial liabilities, which are
bifurcated from the host contract when they meet the definition of a
derivative on a stand-alone basis.
Where the derivatives are managed with debt securities issued by HSBC that are
designated at fair value where doing so reduces an accounting mismatch, the
contractual interest is shown in 'Interest expense' together with the interest
payable on the issued debt.
Hedge accounting
When derivatives are not part of fair value designated relationships, if held
for risk management purposes they are designated in hedge accounting
relationships where the required criteria for documentation and hedge
effectiveness are met. HSBC uses these derivatives or, where allowed, other
non-derivative hedging instruments in fair value hedges, cash flow hedges or
hedges of net investments in foreign operations as appropriate to the risk
being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of gains and losses
on derivatives and other hedging instruments, but results in recognising
changes in the fair value of the hedged assets or liabilities attributable to
the hedged risk that would not otherwise be recognised in the income
statement. If a hedge relationship no longer meets the criteria for hedge
accounting, hedge accounting is discontinued and the cumulative adjustment to
the carrying amount of a hedged item for which the effective interest rate
method is used is amortised to the income statement on a recalculated
effective interest rate, unless the hedged item has been derecognised, in
which case it is recognised in the income statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments is recognised
in other comprehensive income and the ineffective portion of the change in
fair value of derivative hedging instruments that are part of a cash flow
hedge relationship is recognised immediately in the income statement within
'Net income from financial instruments held for trading or managed on a fair
value basis'. The accumulated gains and losses recognised in other
comprehensive income are reclassified to the income statement in the same
periods in which the hedged item affects profit or loss. When a hedge
relationship is discontinued, or partially discontinued, any cumulative gain
or loss recognised in other comprehensive income remains in equity until the
forecast transaction is recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss
previously recognised in other comprehensive income is immediately
reclassified to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar
way to cash flow hedges. The effective portion of gains and losses on the
hedging instrument is recognised in other comprehensive income and other gains
and losses are recognised immediately in the income statement. Gains and
losses previously recognised in other comprehensive income are reclassified to
the income statement on the disposal, or part-disposal, of the foreign
operation.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic hedges of
assets and liabilities for which hedge accounting was not applied.
(i) Impairment of amortised cost and FVOCI financial assets
Expected credit losses ('ECL') are recognised for loans and advances to banks
and customers, non-trading reverse repurchase agreements, other financial
assets held at amortised cost, debt instruments measured at FVOCI, and certain
loan commitments and financial guarantee contracts. At initial recognition, an
allowance (or provision in the case of some loan commitments and financial
guarantees) is recognised for ECL resulting from possible default events
within the next 12 months, or less, where the remaining life is less than 12
months ('12-month ECL'). In the event of a significant increase in credit
risk, an allowance (or provision) is recognised for ECL resulting from all
possible default events over the expected life of the financial instrument
('lifetime ECL'). Financial assets where 12-month ECL is recognised are
considered to be 'stage 1'; financial assets which are considered to have
experienced a significant increase in credit risk are in 'stage 2'; and
financial assets for which there is objective evidence of impairment, and so
are considered to be in default or otherwise credit impaired are in 'stage 3'.
Purchased or originated credit-impaired financial assets ('POCI') are treated
differently as set out below.
Credit impaired (stage 3)
HSBC determines that a financial instrument is credit impaired and in stage 3
by considering relevant objective evidence, primarily whether contractual
payments of either principal or interest are past due for more than 90 days,
there are other indications that the borrower is unlikely to pay such as that
a concession has been granted to the borrower for economic or legal reasons
relating to the borrower's financial condition, or the loan is otherwise
considered to be in default.
If such unlikeliness to pay is not identified at an earlier stage, it is
deemed to occur when an exposure is 90 days past due. Therefore, the
definitions of credit impaired and default are aligned as far as possible so
that stage 3 represents all loans that are considered defaulted or otherwise
credit impaired.
Interest income is recognised by applying the effective interest rate to the
amortised cost (i.e. gross carrying amount less allowance for ECL).
Write-off
Financial assets (and the related impairment allowances) are normally written
off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, this is generally after receipt of any
proceeds from the realisation of security. In circumstances where the net
realisable value of any collateral has been determined and there is no
reasonable expectation of further recovery, write-off may be earlier.
Forbearance
Loans are identified as forborne and classified as either performing or
non-performing when HSBC modifies the contractual terms due to financial
difficulty of the borrower. Non-performing forborne loans are stage 3 and
classified as non-performing until they meet the curing criteria, as specified
by applicable credit risk policy (for example, when the loan is no longer in
default and no other indicators of default have been present for at least 12
months). Any amount written off as a result of any modification of contractual
terms upon entering forbearance would not be reversed.
The Group applies the EBA Guidelines on the application of definition of
default for our retail portfolios, which affect credit risk policies and our
reporting in respect of the status of loans as credit impaired principally due
to forbearance (or curing thereof). Further details are provided under
'Forborne loans and advances' on page 148.
Performing forborne loans are initially stage 2 and remain classified as
forborne until they meet applicable curing criteria (for example, they
continue to not be in default and no other indicators of default are present
for a period of at least 24 months). At this point, the loan is either stage 1
or stage 2 as determined by comparing the risk of a default occurring at the
reporting date (based on the modified contractual terms) and the risk of a
default occurring at initial recognition (based on the original, unmodified
contractual terms).
A forborne loan is derecognised if the existing agreement is cancelled and a
new agreement is made on substantially different terms, or if the terms of an
existing agreement are modified such that the forborne loan is a substantially
different financial instrument. Any new loans that arise following
derecognition events in these circumstances would generally be classified as
POCI and will continue to be disclosed as forborne.
Loan modifications other than forborne loans
Loan modifications that are not identified as forborne are considered to be
commercial restructurings. Where a commercial restructuring results in a
modification (whether legalised through an amendment to the existing terms or
the issuance of a new loan contract) such that HSBC's rights to the cash flows
under the original contract have expired, the old loan is derecognised and the
new loan is recognised at fair value. The rights to cash flows are generally
considered to have expired if the commercial restructuring is at market rates
and no payment-related concession has been provided. Modifications of certain
higher credit risk wholesale loans are assessed for derecognition, having
regard to changes in contractual terms that either individually or in
combination are judged to result in a substantially different financial
instrument. Mandatory and general offer loan modifications that are not
borrower specific, for example market-wide customer relief programmes,
generally do not result in derecognition, but their stage allocation is
determined considering all available and supportable information under our ECL
impairment policy. Changes made to these financial instruments that are
economically equivalent and required by interest rate benchmark reform do not
result in the derecognition or a change in the carrying amount of the
financial instrument, but instead require the effective interest rate to be
updated to reflect the change of the interest rate benchmark.
Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial
recognition is performed at each reporting period by considering the change in
the risk of default occurring over the remaining life of the financial
instrument. The assessment explicitly or implicitly compares the risk of
default occurring at the reporting date compared with that at initial
recognition, taking into account reasonable and supportable information,
including information about past events, current conditions and future
economic conditions. The assessment is unbiased, probability-weighted, and to
the extent relevant, uses forward-looking information consistent with that
used in the measurement of ECL. The analysis of credit risk is multifactor.
The determination of whether a specific factor is relevant and its weight
compared with other factors depends on the type of product, the
characteristics of the financial instrument and the borrower, and the
geographical region. Therefore, it is not possible to provide a single set of
criteria that will determine what is considered to be a significant increase
in credit risk, and these criteria will differ for different types of lending,
particularly between retail and wholesale. However, unless identified at an
earlier stage, all financial assets are deemed to have suffered a significant
increase in credit risk when 30 days past due. In addition, wholesale loans
that are individually assessed, which are typically corporate and commercial
customers, and included on a watch or worry list, are included in stage 2.
For wholesale portfolios, the quantitative comparison assesses default risk
using a lifetime probability of default ('PD'), which encompasses a wide range
of information including the obligor's customer risk rating ('CRR'),
macroeconomic condition forecasts and credit transition probabilities. For
origination CRRs up to 3.3, significant increase in credit risk is measured by
comparing the average PD for the remaining term estimated at origination with
the equivalent estimation at the reporting date. The quantitative measure of
significance varies depending on the credit quality at origination as follows:
0.1-1.2 15bps
2.1-3.3 30bps
For CRRs greater than 3.3 that are not impaired, a significant increase in
credit risk is considered to have occurred when the origination PD has
doubled. The significance of changes in PD was informed by expert credit risk
judgement, referenced to historical credit migrations and to relative changes
in external market rates.
For loans originated prior to the implementation of IFRS 9, the origination PD
does not include adjustments to reflect expectations of future macroeconomic
conditions since these are not available without the use of hindsight. In the
absence of this data, origination PD must be approximated assuming
through-the-cycle PDs and through-the-cycle migration probabilities,
consistent with the instrument's underlying modelling approach and the CRR at
origination. For these loans, the quantitative comparison is supplemented with
additional CRR deterioration-based thresholds, as set out in the table below:
0.1 5 notches
1.1-4.2 4 notches
4.3-5.1 3 notches
5.2-7.1 2 notches
7.2-8.2 1 notch
8.3 0 notch
Further information about the 23-grade scale used for CRR can be found on page
148.
For retail portfolios, default risk is assessed using a reporting date
12-month PD derived from internal models, which incorporate all available
information about the customer. This PD is adjusted for the effect of
macroeconomic forecasts for periods longer than 12 months and is considered
to be a reasonable approximation of a lifetime PD measure. Retail exposures
are first segmented into homogenous portfolios, generally by country, product
and brand. Within each portfolio, the stage 2 accounts are defined as accounts
with an adjusted 12-month PD greater than the average 12-month PD of loans in
that portfolio 12 months before they become 30 days past due. The expert
credit risk judgement is that no prior increase in credit risk is significant.
This portfolio-specific threshold therefore identifies loans with a PD higher
than would be expected from loans that are performing as originally expected
and higher than that which would have been acceptable at origination. It
therefore approximates a comparison of origination to reporting date PDs.
We continue to refine the retail transfer criteria approach for certain
portfolios as additional data becomes available, in order to utilise a more
relative approach. These enhancements take advantage of the increase in
origination-related data in the assessment of significant increases in credit
risk by comparing remaining lifetime PD to the comparable remaining term
lifetime PD at origination based on portfolio-specific origination segments.
Unimpaired and without significant increase in credit risk (stage 1)
ECL resulting from default events that are possible within the next 12 months
('12-month ECL') are recognised for financial instruments that remain in stage
1.
Purchased or originated credit impaired
Financial assets that are purchased or originated at a deep discount that
reflects the incurred credit losses are considered to be POCI. This population
includes new financial instruments recognised in most cases following the
derecognition of forborne loans. The amount of change in lifetime ECL for a
POCI loan is recognised in profit or loss until the POCI loan is derecognised,
even if the lifetime ECL are less than the amount of ECL included in the
estimated cash flows on initial recognition.
Movement between stages
Financial assets can be transferred between the different categories (other
than POCI) depending on their relative increase in credit risk since initial
recognition. Financial instruments are transferred out of stage 2 if their
credit risk is no longer considered to be significantly increased since
initial recognition based on the assessments described above. In the case of
non-performing forborne loans, such financial instruments are transferred out
of stage 3 when they no longer exhibit any evidence of credit impairment and
meet the curing criteria as described above.
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and
probability-weighted, and incorporate all available information which is
relevant to the assessment including information about past events, current
conditions and reasonable and supportable forecasts of future events and
economic conditions at the reporting date. In addition, the estimation of ECL
should take into account the time value of money and considers other factors
such as climate-related risks.
In general, HSBC calculates ECL using three main components: a probability of
default ('PD'), a loss given default ('LGD') and the exposure at default
('EAD').
The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD.
Lifetime ECL is calculated using the lifetime PD instead. The
12-month and lifetime PDs represent the probability of default occurring over
the next 12 months and the remaining maturity of the instrument respectively.
The EAD represents the expected balance at default, taking into account the
repayment of principal and interest from the balance sheet date to the default
event together with any expected drawdowns of committed facilities. The LGD
represents expected losses on the EAD given the event of default, taking into
account, among other attributes, the mitigating effect of collateral value at
the time it is expected to be realised and the time value of money.
HSBC makes use of the IRB framework where possible, with recalibration to meet
the differing IFRS 9 requirements as set out in the following table:
PD - Through the cycle (represents long-run average PD throughout a full - Point in time (based on current conditions, adjusted to take into
economic cycle) account estimates of future conditions that will impact PD)
- The definition of default includes a backstop of 90+ days past due - Default backstop of 90+ days past due for all portfolios
EAD - Cannot be lower than current balance - Amortisation captured for term products
LGD - Downturn LGD (consistent losses expected to be suffered during a severe - Expected LGD (based on estimate of loss given default including the
but plausible economic downturn) expected impact of future economic conditions such as changes in value of
collateral)
- Regulatory floors may apply to mitigate risk of underestimating downturn
LGD due to lack of historical data - No floors
- Discounted using cost of capital - Discounted using the original effective interest rate of the loan
- All collection costs included - Only costs associated with obtaining/selling collateral included
Other - Discounted back from point of default to balance sheet date
While 12-month PDs are recalibrated from IRB models where possible, the
lifetime PDs are determined by projecting the 12-month PD using a term
structure. For the wholesale methodology, the lifetime PD also takes into
account credit migration, i.e. a customer migrating through the CRR bands over
its life.
The ECL for wholesale stage 3 is determined primarily on an individual basis
using a discounted cash flow ('DCF') methodology. The expected future cash
flows are based on estimates as of the reporting date, reflecting reasonable
and supportable assumptions and projections of future recoveries and expected
future receipts of interest.
Collateral is taken into account if it is likely that the recovery of the
outstanding amount will include realisation of collateral based on its
estimated fair value of collateral at the time of expected realisation, less
costs for obtaining and selling the collateral.
The cash flows are discounted at a reasonable approximation of the original
effective interest rate. For significant cases, cash flows under up to four
different scenarios are probability-weighted by reference to the status of the
borrower, economic scenarios applied more generally by the Group and judgement
in relation to the likelihood of the work-out strategy succeeding or
receivership being required. For less significant cases where an individual
assessment is undertaken, the effect of different economic scenarios and
work-out strategies results in an ECL calculation based on a most likely
outcome which is adjusted to capture losses resulting from less likely but
possible outcomes. For certain less significant cases, the bank may use a
LGD-based modelled approach to ECL assessment, which factors in a range of
economic scenarios.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of the financial
asset. The maximum period considered when measuring ECL (be it 12-month or
lifetime ECL) is the maximum contractual period over which HSBC is exposed to
credit risk. However, where the financial instrument includes both a drawn and
undrawn commitment and the contractual ability to demand repayment and cancel
the undrawn commitment does not serve to limit HSBC's exposure to credit risk
to the contractual notice period, the contractual period does not determine
the maximum period considered. Instead, ECL is measured over the period HSBC
remains exposed to credit risk that is not mitigated by credit risk management
actions. This applies to retail overdrafts and credit cards, where the period
is the average time taken for stage 2 exposures to default or close as
performing accounts, determined on a portfolio basis and ranging from between
two and six years. In addition, for these facilities it is not possible to
identify the ECL on the loan commitment component separately from the
financial asset component. As a result, the total ECL is recognised in the
loss allowance for the financial asset unless the total ECL exceeds the gross
carrying amount of the financial asset, in which case the ECL is recognised as
a provision. For wholesale overdraft facilities, credit risk management
actions are taken no less frequently than on an annual basis.
Forward-looking economic inputs
HSBC applies multiple forward-looking global economic scenarios determined
with reference to external forecast distributions representative of its view
of forecast economic conditions. This approach is considered sufficient to
calculate unbiased expected credit losses in most economic environments. In
certain economic environments, additional analysis may be necessary and may
result in additional scenarios or adjustments, to reflect a range of possible
economic outcomes sufficient for an unbiased estimate. The detailed
methodology is disclosed in 'Measurement uncertainty and sensitivity analysis
of ECL estimates' on page 156.
Critical estimates and judgements
The calculation of the Group's ECL under IFRS 9 requires the Group to make a
number of judgements, assumptions and estimates. The most significant are set
out below:
- Defining what is considered to be a significant increase in credit risk - The section 'Measurement uncertainty and sensitivity analysis of ECL
estimates', marked as audited from page 156, sets out the assumptions used in
- Determining the lifetime and point of initial recognition of overdrafts determining ECL, and provides an indication of the sensitivity of the result
and credit cards to the application of different weightings being applied to different economic
assumptions
- Selecting and calibrating the PD, LGD and EAD models, which support the
calculations, including making reasonable and supportable judgements about how
models react to current and future economic conditions
- Selecting model inputs and economic forecasts, including determining
whether sufficient and appropriately weighted economic forecasts are
incorporated to calculate unbiased expected credit loss
- Making management adjustments to account for late-breaking events, model
and data limitations and deficiencies, and expert credit judgements
- Selecting applicable recovery strategies for certain wholesale
credit-impaired loans
(j) Insurance contracts
A contract is classified as an insurance contract where the Group accepts
significant insurance risk from another party by agreeing to compensate that
party if it is adversely affected by a specified uncertain future event. An
insurance contract may also transfer financial risk, but is accounted for as
an insurance contract if the insurance risk is significant. In addition, the
Group issues investment contracts with DPF, which are also accounted under
IFRS 17 'Insurance Contracts'.
Aggregation of insurance contracts
Individual insurance contracts that are managed together and subject to
similar risks are identified as a portfolio. Contracts that are managed
together usually belong to the same product group, and have similar
characteristics such as being subject to a similar pricing framework or
similar product management, and are issued by the same legal entity. If a
contract is exposed to more than one risk, the dominant risk of the contract
is used to assess whether the contract features similar risks. Each portfolio
is further separated by the contract's expected profitability. The portfolios
are split by their profitability into: (i) contracts that are onerous at
initial recognition; (ii) contracts that at initial recognition have no
significant possibility of becoming onerous subsequently; and (iii) the
remaining contracts. These profitability groups are then divided by issue
date, with most contracts the Group issues after the transition date being
grouped into calendar quarter cohorts. For multi-currency groups of contracts,
the Group considers its groups of contracts as being denominated in a single
currency.
The measurement of the insurance contract liability is based on groups of
insurance contracts as established at initial recognition, and will include
fulfilment cash flows as well as the CSM representing the unearned profit. The
Group has elected to update the estimates used in the measurement on a
year-to-date basis.
Fulfilment cash flows
The fulfilment cash flows comprise the following:
Best estimates of future cash flows
The cash flows within the contract boundary of each contract in the Group
include amounts expected to be collected from premiums and payouts for claims,
benefits and expenses, and are projected using a range of scenarios and
assumptions in an unbiased way based on the Group's demographic and operating
experience along with external mortality data where the Group's own experience
data is not sufficiently large in size to be credible.
Adjustment for the time value of money and financial risks associated with the
future cash flows
The estimates of future cash flows are adjusted to reflect the time value of
money (i.e. discounting) and the financial risks to derive an expected present
value. The Group generally makes use of stochastic modelling techniques in the
estimation for products with options and guarantees.
A bottom-up approach is used to determine the discount rate to be applied to a
given set of expected future cash flows. This is derived as the sum of the
risk-free yield and an illiquidity premium. The risk-free yield is determined
based on observable market data, where such markets are considered to be deep,
liquid and transparent. When information is not available, management
judgement is applied to determine the appropriate risk-free yield. Illiquidity
premiums reflect the liquidity characteristics of the associated insurance
contracts.
Risk adjustment for non-financial risk
The risk adjustment reflects the compensation required for bearing the
uncertainty about the amount and timing of future cash flows that arises from
non-financial risk. It is calculated as a 75th percentile level of stress over
a one-year period. The level of the stress is determined with reference to
external regulatory stresses and internal economic capital stresses.
For the main insurance manufacturing entity in these locations, the one-year
75th percentile level of stress corresponds to the following percentiles based
on an ultimate view of risk over all future years:
- Asia-Pacific (Hong Kong): 60th percentile (2022: 59th percentile).
- Europe (France): 60th percentile (2022: 60th percentile).
- Latin America (Mexico): 65th percentile (2022: 66th percentile).
The Group does not disaggregate changes in the risk adjustment between
insurance service result (comprising insurance revenue and insurance service
expense) and insurance finance income or expenses. All changes are included in
the insurance service result.
Measurement models
The variable fee approach ('VFA') measurement model is used for most of the
contracts issued by the Group, which is mandatory upon meeting the following
eligibility criteria at inception:
- the contractual terms specify that the policyholder participates in
a share of a clearly identified pool of underlying items;
- the Group expects to pay to the policyholder a substantial share of
the fair value returns on the underlying items. The Group considers that a
substantial share is a majority of returns; and
- the Group expects a substantial proportion of any change in the
amounts to be paid to the policyholder to vary with the change in fair value
of the underlying items. The Group considers that a substantial proportion is
a majority proportion of change on a present value probability-weighted
average of all scenarios.
For some contracts measured under VFA, the other comprehensive income ('OCI')
option is used. The OCI option is applied where the underlying items held by
the Group are not accounted for at fair value through profit or loss. Under
this option, only the amount that matches income or expenses recognised in
profit or loss on underlying items is included in finance income or expenses
for these insurance contracts, and hence results in the elimination of
accounting mismatches. The remaining amount of finance income or expenses for
these insurance contracts issued for the period is recognised in OCI. In
addition, the risk mitigation option is used for a number of economic offsets
against the instruments that meet specific requirements.
The remaining contracts issued and the reinsurance contracts held are
accounted for under the general measurement model ('GMM').
CSM and coverage units
The CSM represents the unearned profit and results in no income or expense at
initial recognition when the group of contracts is profitable. The CSM is
adjusted at each subsequent reporting period for changes in fulfilment cash
flows relating to future service (e.g. changes in non-economic assumptions,
including mortality and morbidity rates). For initial recognition of onerous
groups of contracts and when groups of contracts become onerous subsequently,
losses are recognised in insurance service expense immediately.
For groups of contracts measured using the VFA, changes in the Group's share
of the underlying items, and economic experience and economic assumption
changes adjust the CSM, whereas these changes do not adjust the CSM under the
GMM, but are recognised in profit or loss as they arise. However, under the
risk mitigation option for VFA contracts, the changes in the fulfilment cash
flows and the changes in the Group's share in the fair value return on
underlying items that the instruments mitigate are not adjusted in CSM but
recognised in profit or loss. The risk mitigating instruments are primarily
reinsurance contracts held.
The CSM is systematically recognised in insurance revenue to reflect the
insurance contract services provided, based on the coverage units of the group
of contracts. Coverage units are determined by the quantity of benefits and
the expected coverage period of the contracts.
The Group identifies the quantity of the benefits provided as follows:
- Insurance coverage: This is based on the expected net policyholder
insurance benefit at each period after allowance for decrements, where net
policyholder insurance benefit refers to the amount of sum assured less the
fund value or surrender value.
- Investment services (including both investment-return service and
investment-related service): This is based on a constant measure basis which
reflects the provision of access for the policyholder to the facility.
For contracts that provide both insurance coverage and investment services,
coverage units are weighted according to the expected present value of the
future cash outflows for each service.
Insurance service result
Insurance revenue reflects the consideration to which the Group expects to be
entitled in exchange for the provision of coverage and other insurance
contract services (excluding any investment components). Insurance service
expenses comprise the incurred claims and other incurred insurance service
expenses (excluding any investment components), and losses on onerous groups
of contracts and reversals of such losses.
Insurance finance income and expenses
Insurance finance income and expenses comprise the change in the carrying
amount of the group of insurance contracts arising from the effects of the
time value of money, financial risk and changes therein. For VFA contracts,
changes in the fair value of underlying items (excluding additions and
withdrawals) are recognised in insurance finance income or expenses.
(k) Employee compensation and benefits
Share-based payments
HSBC enters into both equity-settled and cash-settled share-based payment
arrangements with its employees as compensation for the provision of their
services.
The vesting period for these schemes may commence before the legal grant date
if the employees have started to render services in respect of the award
before the legal grant date, where there is a shared understanding of the
terms and conditions of the arrangement. Expenses are recognised when the
employee starts to render service to which the award relates.
Cancellations result from the failure to meet a non-vesting condition during
the vesting period, and are treated as an acceleration of vesting recognised
immediately in the income statement. Failure to meet a vesting condition by
the employee is not treated as a cancellation, and the amount of expense
recognised for the award is adjusted to reflect the number of awards expected
to vest.
Post-employment benefit plans
HSBC operates a number of pension schemes including defined benefit, defined
contribution and post-employment benefit schemes.
Payments to defined contribution schemes are charged as an expense as the
employees render service.
Defined benefit pension obligations are calculated using the projected unit
credit method. The net charge to the income statement mainly comprises the
service cost and the net interest on the net defined benefit asset or
liability, and is presented in operating expenses. Remeasurements of the net
defined benefit asset or liability, which comprise actuarial gains and losses,
return on plan assets excluding interest and the effect of the asset ceiling
(if any, excluding interest), are recognised immediately in other
comprehensive income. The net defined benefit asset or liability represents
the present value of defined benefit obligations reduced by the fair value of
plan assets (see Note 1.2(c)), after applying the asset ceiling test, where
the net defined benefit surplus is limited to the present value of available
refunds and reductions in future contributions to the plan.
The costs of obligations arising from other post-employment plans are
accounted for on the same basis as defined benefit pension plans.
Critical estimates and judgements
The most significant critical estimates relate to the determination of key
assumptions applied in calculating the defined benefit pension obligation for
the principal plan.
- A range of assumptions could be applied, and different assumptions could
significantly alter the defined benefit obligation and the amounts recognised
in profit or loss or OCI.
- The calculation of the defined benefit pension obligation includes
assumptions with regard to the discount rate, inflation rate, pension payments
and deferred pensions, pay and mortality. Management determines these
assumptions in consultation with the plan's actuaries.
- Key assumptions used in calculating the defined benefit pension
obligation for the principal plan and the sensitivity of the calculation to
different assumptions are described in Note 5.
(l) Tax
Income tax comprises current tax and deferred tax. Income tax is recognised in
the income statement except to the extent that it relates to items recognised
in other comprehensive income or directly in equity, in which case the tax is
recognised in the same statement as the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the
year and on any adjustment to tax payable in respect of previous years. HSBC
provides for potential current tax liabilities that may arise on the basis of
the amounts expected to be paid to the tax authorities.
Deferred tax is recognised on temporary differences between the carrying
amounts of assets and liabilities in the balance sheet, and the amounts
attributed to such assets and liabilities for tax purposes. Deferred tax is
calculated using the tax rates expected to apply in the periods in which the
assets will be realised or the liabilities settled.
In assessing the probability and sufficiency of future taxable profit,
management considers the availability of evidence to support the recognition
of deferred tax assets, taking into account the inherent risks in long-term
forecasting, including climate change-related, and drivers of recent history
of tax losses where applicable. Management also considers the future reversal
of existing taxable temporary differences and tax planning strategies,
including corporate reorganisations.
Current and deferred tax are calculated based on tax rates and laws enacted,
or substantively enacted, by the balance sheet date.
Critical estimates and judgements
The recognition of deferred tax assets depends on judgements and estimates.
- Specific judgements supporting deferred tax assets are described in - The recognition of deferred tax assets is sensitive to estimates of
Note 7. future cash flows projected for periods for which detailed forecasts are
available and to assumptions regarding the long-term pattern of cash flows
thereafter, on which forecasts of future taxable profit are based, and which
affect the expected recovery periods and the pattern of utilisation of tax
losses and tax credits. See Note 7 for further detail.
The Group does not consider there to be a significant risk of a material
adjustment to the carrying amount of deferred tax assets in the next financial
year, but does consider this to be an area that is inherently judgemental.
(m) Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow of economic
benefits will be required to settle a present legal or constructive obligation
that has arisen as a result of past events and for which a reliable estimate
can be made.
Critical estimates and judgements
The recognition and measurement of provisions requires the Group to make a
number of judgements, assumptions and estimates. The most significant are set
out below:
- Determining whether a present obligation exists. Professional advice is - Provisions for legal proceedings and regulatory matters remain very
taken on the assessment of litigation and similar obligations. sensitive to the assumptions used in the estimate. There could be a wider
range of possible outcomes for any pending legal proceedings, investigations
- Provisions for legal proceedings and regulatory matters typically or inquiries. As a result it is often not practicable to quantify a range of
require a higher degree of judgement than other types of provisions. When possible outcomes for individual matters. It is also not practicable to
matters are at an early stage, accounting judgements can be difficult because meaningfully quantify ranges of potential outcomes in aggregate for these
of the high degree of uncertainty associated with determining whether a types of provisions because of the diverse nature and circumstances of such
present obligation exists, and estimating the probability and amount of any matters and the wide range of uncertainties involved.
outflows that may arise. As matters progress, management and legal advisers
evaluate on an ongoing basis whether provisions should be recognised, revising
previous estimates as appropriate. At more advanced stages, it is typically
easier to make estimates around a better defined set of possible outcomes.
Contingent liabilities, contractual commitments and guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit
pledged as collateral security, and contingent liabilities related to legal
proceedings or regulatory matters, are not recognised in the financial
statements but are disclosed unless the probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts that are not classified as
insurance contracts are recorded initially at their fair value, which is
generally the fee received or present value of the fee receivable.
(n) Impairment of non-financial assets
Software under development is tested for impairment at least annually. Other
non-financial assets are property, plant and equipment, intangible assets
(excluding goodwill) and right-of-use assets. They are tested for impairment
at the individual asset level when there is indication of impairment at that
level, or at the CGU level for assets that do not have a recoverable amount at
the individual asset level. In addition, impairment is also tested at the CGU
level when there is indication of impairment at that level. For this purpose,
CGUs are considered to be the principal operating legal entities divided by
global business.
Impairment testing compares the carrying amount of the non-financial asset or
CGU with its recoverable amount, which is the higher of the fair value less
costs of disposal or the value in use. The carrying amount of a CGU comprises
the carrying amount of its assets and liabilities, including non-financial
assets that are directly attributable to it and non-financial assets that can
be allocated to it on a reasonable and consistent basis. Non-financial assets
that cannot be allocated to an individual CGU are tested for impairment at an
appropriate grouping of CGUs. The recoverable amount of the CGU is the higher
of the fair value less costs of disposal of the CGU, which is determined by
independent and qualified valuers where relevant, and the value in use, which
is calculated based on appropriate inputs (see Note 21).
When the recoverable amount of a CGU is less than its carrying amount, an
impairment loss is recognised in the income statement to the extent that the
impairment can be allocated on a pro-rata basis to the non-financial assets by
reducing their carrying amounts to the higher of their respective individual
recoverable amount or nil. Impairment is not allocated to the financial assets
in a CGU.
Impairment losses recognised in prior periods for non-financial assets are
reversed when there has been a change in the estimate used to determine the
recoverable amount. The impairment loss is reversed to the extent that the
carrying amount of the non-financial assets would not exceed the amount that
would have been determined (net of amortisation or depreciation) had no
impairment loss been recognised in prior periods.
Critical estimates and judgements
The review of goodwill and other non-financial assets for impairment reflects
management's best estimate of the future cash flows of the CGUs and the rates
used to discount these cash flows, both of which are subject to uncertain
factors as described in the 'Critical estimates and judgements' in Note
1.2(a).
The Group does not consider there to be a significant risk of a material
adjustment to the carrying amount of goodwill and non-financial assets in the
next financial year, but does consider this to be an area that is inherently
judgemental.
(o) Non-current assets and disposal groups held for sale
HSBC classifies non-current assets or disposal groups (including assets and
liabilities) as held for sale when their carrying amounts will be recovered
principally through sale rather than through continuing use. To be classified
as held for sale, the non-current asset or disposal group must be available
for immediate sale in its present condition subject only to terms that are
usual and customary for sales of such assets (or disposal groups), and the
sale must be highly probable. For a sale to be highly probable, the
appropriate level of management must be committed to a plan to sell the asset
(or disposal group) and an active programme to locate a buyer and complete the
plan must have been initiated. Further, the asset (or disposal group) must be
actively marketed for sale at a price that is reasonable in relation to its
current fair value. In addition, the sale should be expected to qualify as a
completed sale within one year from the date of classification and actions
required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn.
Held for sale assets and disposal groups are measured at the lower of their
carrying amount and fair value less costs to sell except for those assets and
liabilities that are not within the scope of the measurement requirements of
IFRS 5. If the carrying amount of the non-current asset (or disposal group) is
greater than the fair value less costs to sell, an impairment loss for any
initial or subsequent write-down of the asset or disposal group to fair value
less costs to sell is recognised. Any such impairment loss is first allocated
against the non-current assets that are in scope of IFRS 5 for measurement.
This first reduces the carrying amount of any goodwill allocated to the
disposal group, and then to the other non-current assets of the disposal group
pro rata on the basis of the carrying amount of each asset in the disposal
group. Thereafter, any impairment loss in excess of the carrying amount of the
non-current assets in scope of IFRS 5 for measurement is recognised against
the total assets of the disposal group.
Critical judgements
The classification as held for sale depends on certain judgements:
Management judgement is required in determining whether the IFRS 5 held for
sale criteria are met, including whether a sale is highly probable and
expected to complete within one year of classification. The exercise of
judgement will normally consider the likelihood of successfully securing any
necessary regulatory or governmental approvals, which are almost always
required for sales of banking businesses, and sanctions risk. For large and
complex plans, judgement will also include an assessment of the enforceability
of any binding sale agreement, the nature and magnitude of any disincentives
for non-performance, and the ability of the counterparty to undertake
necessary pre-completion preparatory work, comply with conditions precedent,
and otherwise be able to comply with contractual undertakings to achieve
completion within the expected timescale. Once classified as held for sale,
judgement is required to be applied on a continuous basis to ensure that
classification remains appropriate in future accounting periods.
(p) Hyperinflationary accounting
Hyperinflationary accounting is applied to those subsidiary operations in
countries where the three-year cumulative inflation rate is approaching or
exceeding 100%. In 2023, this affected the Group's operations in Argentina and
Türkiye. The Group applies IAS 29 to the underlying financial information of
relevant subsidiaries to restate their local currency results and financial
position so as to be stated in terms of the measuring unit current at the end
of the reporting period. Those restated results are translated into the
Group's presentation currency of US dollars for consolidation at the closing
rate at the balance sheet date. Group comparatives are not restated for
inflation and consequential adjustments to the opening balance sheet in
relation to hyperinflationary subsidiaries are presented in other
comprehensive income. The hyperinflationary gain or loss in respect of the net
monetary position of the relevant subsidiary is included in profit or loss.
When applying hyperinflation accounting for the first time, the underlying
financial information is restated in terms of the measuring unit current at
the end of the reporting period as if the relevant economy had always been
hyperinflationary. Group comparatives are not restated for such historical
adjustments.
2 Net fee income
Net fee income by global business
2023
Wealth and Commercial Banking Global Banking and Markets Corporate Centre Total
Personal
Banking
$m $m $m $m $m
Funds under management 1,763 71 539 - 2,373
Cards 2,385 353 38 - 2,776
Credit facilities 103 856 615 - 1,574
Broking income 463 22 592 - 1,077
Account services 402 788 347 - 1,537
Unit trusts 727 10 1 - 738
Underwriting - 3 583 - 586
Global custody 128 6 730 - 864
Remittances 86 389 347 1 823
Imports/exports - 470 154 - 624
Insurance agency commission 280 18 - - 298
Other 1,433 1,161 2,458 (2,706) 2,346
Fee income 7,770 4,147 6,404 (2,705) 15,616
Less: fee expense (2,416) (210) (3,858) 2,713 (3,771)
Net fee income 5,354 3,937 2,546 8 11,845
2022(1)
Wealth and Commercial Global Corporate Total
Personal Banking Banking(2) Banking and Centre
Markets(2)
$m $m $m $m $m
Funds under management 1,765 107 500 (12) 2,360
Cards 2,146 313 32 - 2,491
Credit facilities 100 783 591 - 1,474
Broking income 576 40 635 - 1,251
Account services 337 730 344 1 1,412
Unit trusts 682 14 - - 696
Underwriting 1 2 443 (5) 441
Global custody 140 19 762 - 921
Remittances 72 380 346 1 799
Imports/exports - 493 141 - 634
Insurance agency commission 283 16 1 - 300
Other 1,330 1,102 2,376 (2,463) 2,345
Fee income 7,432 3,999 6,171 (2,478) 15,124
Less: fee expense (2,128) (212) (3,459) 2,445 (3,354)
Net fee income 5,304 3,787 2,712 (33) 11,770
2021
Wealth and Commercial Global Corporate Total
Personal Banking Banking Banking and Centre
Markets
$m $m $m $m $m
Funds under management 1,984 126 546 - 2,656
Cards 1,949 240 23 1 2,213
Credit facilities 103 833 690 1 1,627
Broking income 863 69 669 - 1,601
Account services 429 677 340 6 1,452
Unit trusts 1,065 23 - - 1,088
Underwriting 4 6 1,009 (2) 1,017
Global custody 167 24 787 - 978
Remittances 75 357 343 - 775
Imports/exports 1 474 145 - 620
Insurance agency commission 324 17 - - 341
Other 1,305 1,077 2,503 (2,465) 2,420
Fee income 8,269 3,923 7,055 (2,459) 16,788
Less: fee expense (2,375) (284) (3,452) 2,420 (3,691)
Net fee income 5,894 3,639 3,603 (39) 13,097
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year
ended 31 December 2022 have been restated accordingly. Comparative data for
the year ended 31 December 2021 are prepared on an IFRS 4 basis.
2 In the first quarter of 2023, following an internal review to assess
which global businesses were best suited to serve our customers' respective
needs, a portfolio of our customers within our entities in Latin America was
transferred from GBM to CMB for reporting purposes. Comparative data have been
re-presented accordingly.
Net fee income included $6,971m of fees earned on financial assets that were
not at fair value through profit or loss, other than amounts included in
determining the effective interest rate (2022: $6,410m; 2021: $6,742m),
$1,872m of fees payable on financial liabilities that were not at fair value
through profit or loss, other than amounts included in determining the
effective interest rate (2022: $1,613m; 2021: $1,520m), $3,452m of fees
earned on trust and other fiduciary activities (2022: $3,492m; 2021: $3,849m)
and $333m of fees payable relating to trust and other fiduciary activities
(2022: $370m; 2021: $305m).
3 Net income/(expense) from financial instruments measured at fair value through
profit or loss
2023 2022(1) 2021
$m $m $m
Net income/(expense) arising on:
Net trading activities 20,391 2,372 6,668
Other instruments managed on a fair value basis (3,730) 7,906 1,076
Net income from financial instruments held for trading or managed on a fair 16,661 10,278 7,744
value basis
Financial assets held to meet liabilities under insurance and investment 8,086 (14,392) 4,134
contracts
Liabilities to customers under investment contracts (199) 561 (81)
Net income/(expense) from assets and liabilities of insurance businesses, 7,887 (13,831) 4,053
including related derivatives, measured at fair value through profit or loss
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year
ended 31 December 2022 have been restated accordingly. Comparative data for
the year ended 31 December 2021 are prepared on an IFRS 4 basis.
HSBC Holdings
2023 2022 2021
$m $m $m
Net income/(expense) arising on:
- trading activities (546) 2,094 87
- other instruments managed on a fair value basis 1,609 35 23
Net income from financial instruments held for trading or managed on a fair 1,063 2,129 110
value basis
Derivatives managed in conjunction with HSBC Holdings-issued debt securities 426 (1,529) (625)
Other changes in fair value (1,894) 3,673 974
Changes in fair value of designated debt and related derivatives (1,468) 2,144 349
Changes in fair value of other financial instruments mandatorily measured at 3,692 (2,409) (420)
fair value through profit or loss
Year ended 31 Dec 3,287 1,864 39
4 Insurance business
Insurance service result
Year ended 31 Dec 2023 Year ended 31 Dec 2022¹
Life direct participating and investment DPF contracts(2) Life other contracts(3) Total Life direct participating and investment DPF contracts(2) Life other contracts(3) Total
$m $m $m $m $m $m
Insurance revenue
Amounts relating to changes in liabilities for remaining coverage 1,626 470 2,096 1,399 446 1,845
Contractual service margin recognised for services provided 975 151 1,126 781 151 932
Change in risk adjustment for non-financial risk for risk expired 21 15 36 17 17 34
Expected incurred claims and other insurance service expenses 594 304 898 528 278 806
Other 36 - 36 73 - 73
Recovery of insurance acquisition cash flows 109 54 163 102 30 132
Total insurance revenue 1,735 524 2,259 1,501 476 1,977
Insurance service expenses
Incurred claims and other insurance service expenses (615) (292) (907) (573) (280) (853)
Losses and reversal of losses on onerous contracts (32) (77) (109) (84) (86) (170)
Amortisation of insurance acquisition cash flows (109) (54) (163) (102) (30) (132)
Adjustments to liabilities for incurred claims (1) (1) (2) (2) (11) (13)
Total insurance service expenses (757) (424) (1,181) (761) (407) (1,168)
Total insurance service results 978 100 1,078 740 69 809
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
2 'Life direct participating and investment DPF contracts' are substantially
measured under the variable fee approach measurement model.
3 'Life other contracts' are measured under the general measurement model
and excludes reinsurance contracts.
Net investment return
Year ended 31 Dec 2023 Year ended 31 Dec 2022¹
Life direct participating and investment DPF contracts Life other contracts Total Life direct participating Life other contracts Total
and
investment DPF contracts
$m $m $m $m $m $m
Investment return
Amounts recognised in profit or loss(2) 7,663 214 7,877 (13,520) (181) (13,701)
Amounts recognised in OCI(3) 493 - 493 (2,392) - (2,392)
Total investment return (memorandum) 8,156 214 8,370 (15,912) (181) (16,093)
Net finance income/(expense)
Changes in fair value of underlying items of direct participating contracts (7,995) - (7,995) 15,937 - 15,937
Effect of risk mitigation option (35) - (35) 99 - 99
Interest accreted - (127) (127) - (80) (80)
Effect of changes in interest rates and other financial assumptions (12) (121) (133) - 233 233
Effect of measuring changes in estimates at current rates and adjusting the - (10) (10) - 3 3
CSM at rates on initial recognition
Total net finance income/(expense) from insurance contracts (8,042) (258) (8,300) 16,036 156 16,192
Represented by:
Amounts recognised in profit or loss (7,551) (258) (7,809) 13,643 156 13,799
Amounts recognised in OCI (491) - (491) 2,393 - 2,393
Total net investment results 114 (44) 70 124 (25) 99
Represented by:
Amounts recognised in profit or loss 112 (44) 68 123 (25) 98
Amounts recognised in OCI 2 - 2 1 - 1
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
2 Total Group 'Net income/(expense) from assets and liabilities of
insurance business, including related derivatives, measured at fair value
through profit or loss' of $7,886m gain (2022: $13,831m loss) includes returns
on assets and liabilities supporting insurance policies of $7,627m (2022:
$13,949m loss) and on shareholder assets of $259m (2022: $118m gain).
Investment returns of $7,877m (2022: $13,701m loss) include gains of $7,627m
(2022: $13,949m loss) on underlying assets supporting insurance liabilities
reported in 'Net income/(expense) from assets and liabilities of insurance
businesses, including related derivatives, measured at fair value through
profit or loss', $257m gains (2022: $248m gain) reported in 'Net interest
income' and $7m loss (2022: nil) reported in 'Other operating income'.
3 'Amounts recognised in OCI' gross of tax for the year ended 31 December
2023 included fair value gains of $497m (2022: $2,396m loss) and impairment of
$4m (2022: $4m impairment reversals).
Reconciliation of amounts included in other comprehensive income for financial
assets measured at fair value through other comprehensive income - assets
supporting contracts measured under the modified retrospective approach
2023 2022
$m $m
Balance at 1 Jan (973) 622
Net change in fair value 451 (2,099)
Net amount reclassified to profit or loss (6) (2)
Related income tax (115) 543
Foreign exchange and other (27) (37)
Balance at 31 Dec (670) (973)
Movements in carrying amounts of insurance contracts - analysis by remaining
coverage and incurred claims
Year ended 31 Dec 2023
Life direct participating and investment DPF contracts Life other contracts
Liabilities for remaining coverage: Liabilities for remaining coverage:
Excluding loss component Loss component Incurred claims Total Excluding loss component Loss component Incurred claims Total Total
$m $m $m $m $m $m $m $m $m
Opening assets (5) - - (5) (187) 21 35 (131) (136)
Opening liabilities 104,676 114 355 105,145 3,359 109 203 3,671 108,816
Net opening balance at 1 Jan 2023 104,671 114 355 105,140 3,172 130 238 3,540 108,680
Changes in the statement of profit or loss and other comprehensive income
Insurance revenue
Contracts under the fair value approach (508) - - (508) (196) - - (196) (704)
Contracts under the modified retrospective approach (148) - - (148) (22) - - (22) (170)
Other contracts(2) (1,079) - - (1,079) (306) - - (306) (1,385)
Total insurance revenue (1,735) - - (1,735) (524) - - (524) (2,259)
Insurance service expenses
Incurred claims and other insurance service expenses - (6) 621 615 - (24) 316 292 907
Amortisation of insurance acquisition cash flows 109 - - 109 54 - - 54 163
Losses and reversal of losses on onerous contracts - 32 - 32 - 77 - 77 109
Adjustments to liabilities for incurred claims - - 1 1 - - 1 1 2
Total insurance service expenses 109 26 622 757 54 53 317 424 1,181
Investment components (8,104) - 8,104 - (818) - 818 - -
Insurance service result (9,730) 26 8,726 (978) (1,288) 53 1,135 (100) (1,078)
Net finance (income)/expense from insurance contracts(3) 8,042 - - 8,042 254 3 1 258 8,300
Other movements recognised in the statement of profit or loss 513 (5) (214) 294 (8) 4 (13) (17) 277
Effect of movements in exchange rates 942 1 6 949 25 (2) 8 31 980
Total changes in the statement of profit or loss and other comprehensive (233) 22 8,518 8,307 (1,017) 58 1,131 172 8,479
income
Cash flows
Premiums received 12,616 - - 12,616 1,256 - - 1,256 13,872
Claims and other insurance service expenses paid, including investment (15) - (8,502) (8,517) 1 - (1,112) (1,111) (9,628)
components, and other cash flows
Insurance acquisition cash flows (522) - - (522) (282) - - (282) (804)
Total cash flows 12,079 - (8,502) 3,577 975 - (1,112) (137) 3,440
Other movements 14 (14) - - (9) (13) 22 - -
Net closing balance at 31 Dec 2023 116,531 122 371 117,024 3,121 175 279 3,575 120,599
Closing assets (15) 1 1 (13) (279) (16) 56 (239) (252)
Closing liabilities 116,546 121 370 117,037 3,400 191 223 3,814 120,851
Net closing balance at 31 Dec 2023 116,531 122 371 117,024 3,121 175 279 3,575 120,599
Movements in carrying amounts of insurance contracts - analysis by remaining
coverage and incurred claims (continued)
Year ended 31 Dec 2022(1)
Life direct participating and investment DPF contracts Life other contracts
Liabilities for remaining coverage: Liabilities for remaining coverage:
Excluding loss component Loss component Incurred claims Total Excluding loss component Loss component Incurred claims Total Total
$m $m $m $m $m $m $m $m $m
Opening assets - - - - (159) 7 36 (116) (116)
Opening liabilities 114,952 93 226 115,271 3,825 67 144 4,036 119,307
Net opening balance at 1 Jan 2022 114,952 93 226 115,271 3,666 74 180 3,920 119,191
Changes in the statement of profit or loss and other comprehensive income
Insurance revenue
Contracts under the fair value approach (571) - - (571) (234) - - (234) (805)
Contracts under the modified retrospective approach (147) - - (147) (24) - - (24) (171)
Other contracts(2) (783) - - (783) (218) - - (218) (1,001)
Total insurance revenue (1,501) - - (1,501) (476) - - (476) (1,977)
Insurance service expenses
Incurred claims and other insurance service expenses - 5 568 573 - (6) 286 280 853
Amortisation of insurance acquisition cash flows 102 - - 102 30 - - 30 132
Losses and reversal of losses on onerous contracts - 84 - 84 - 86 - 86 170
Adjustments to liabilities for incurred claims - - 2 2 - - 11 11 13
Total insurance service expenses 102 89 570 761 30 80 297 407 1,168
Investment components (5,487) - 5,487 - (549) - 549 - -
Insurance service result (6,886) 89 6,057 (740) (995) 80 846 (69) (809)
Net finance (income)/expense from insurance contracts(3) (16,038) - 2 (16,036) (154) 2 (4) (156) (16,192)
Effect of movements in exchange rates (2,159) (4) (11) (2,174) (88) (2) (3) (93) (2,267)
Total changes in the statement of profit or loss and other comprehensive (25,083) 85 6,048 (18,950) (1,237) 80 839 (318) (19,268)
income
Cash flows
Premiums received 12,740 - - 12,740 882 - - 882 13,622
Claims and other insurance service expenses paid, including investment - - (5,783) (5,783) - - (880) (880) (6,663)
components, and other cash flows
Insurance acquisition cash flows (423) - - (423) (162) - - (162) (585)
Total cash flows 12,317 - (5,783) 6,534 720 - (880) (160) 6,374
Acquisition of subsidiaries and other movements 2,485 (64) (136) 2,285 23 (24) 99 98 2,383
Net closing balance at 31 Dec 2022 104,671 114 355 105,140 3,172 130 238 3,540 108,680
Closing assets (5) - - (5) (187) 21 35 (131) (136)
Closing liabilities 104,676 114 355 105,145 3,359 109 203 3,671 108,816
Net closing balance at 31 Dec 2022 104,671 114 355 105,140 3,172 130 238 3,540 108,680
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
2 'Other contracts' are those contracts measured by applying IFRS 17 from
inception of the contracts. These include contracts measured under the full
retrospective approach at transition and contracts incepted after transition
and excludes reinsurance contracts.
3 'Net finance (income)/expense from insurance contracts' expense of
$8,300m (2022: $16,192m income) comprises expense of $7,809m (2022: $13,799m
income) recognised in the statement of profit or loss and expense of $491m
(2022: $2,393m income) recognised in the statement of other comprehensive
income.
Movements in carrying amounts of insurance contracts - analysis by measurement
component
Year ended 31 Dec 2023
Life direct participating and investment DPF contracts Life other contracts
Estimates of present value of future cash flows and risk adjustment Contractual service margin Estimates of present value of future cash flows and risk adjustment Contractual service margin
Contracts under the fair value approach Contracts under the modified retros- Other contracts(2) Total Contracts under the fair value approach Contracts under the modified retros- Other contracts(2) Total Total
pective approach pective approach
$m $m $m $m $m $m $m $m $m $m $m
Opening assets (18) - 10 (5) (308) 86 - 91 (131) (136)
3
Opening liabilities 96,174 4,364 792 3,815 3,162 325 18 166 3,671
105,145 108,816
Net opening balance at 96,156 4,367 792 3,825 2,854 411 18 257 3,540
105,140 108,680
1 Jan 2023
Changes in the statement of profit or loss and other comprehensive
income
Changes that relate to current services
Contractual service margin recognised for services provided - (188) (70) (717) (975) - (69) (6) (76) (151) (1,126)
Change in risk adjustment for non-financial risk expired (21) - - - (21) (15) - - - (15) (36)
Experience adjustments - - - 21 (12) - - - (12) 9
21
Changes that relate to future services
Contracts initially recognised in the year (1,606) - - 1,619 13 (176) - - 207 31 44
Changes in estimates that adjust the contractual service margin (771) 368 (33) 436 - 26 (53) - -
21 6
Changes in estimates that result in losses and reversal of losses on - - - 19 - - - 46 65
onerous 19 46
contracts
Changes that relate to past services
Adjustments to liabilities for incurred claims - - - 1 - - - 1 2
1 1
Other movements recognised in insurance service result (36) - - - (36) - - - - - (36)
Insurance service result (2,393) 180 (103) 1,338 (978) (135) (43) - 78 (100) (1,078)
Net finance (income)/expense from insurance contracts(3) 8,042 - - - 8,042 11 - 12 258 8,300
235
Other movements recognised in the statement of profit or loss 133 (1) 17 294 (43) 6 - 20 (17) 277
145
Effect of movements in exchange rates 27 37 949 - 12 18 31 980
883 2 1
Total changes in the statement of profit or loss and other 6,677 315 (77) 1,392 8,307 (14) 128 172 8,479
comprehensive 57 1
income
Cash flows
Premiums received 12,616 - - - 12,616 1,256 - - - 1,256 13,872
Claims, other insurance service expenses paid (including investment (8,517) - - - (8,517) (1,111) - - - (1,111) (9,628)
components) and other cash flows
Insurance acquisition cash flows (522) - - - (522) (282) - - - (282) (804)
Total cash flows 3,577 - - - 3,577 (137) - - - (137) 3,440
Net closing balance at 106,410 4,682 715 5,217 2,774 397 19 385 3,575
117,024 120,599
31 Dec 2023
Closing assets (30) - 14 (13) (339) 36 - 64 (239) (252)
3
Closing liabilities 106,440 4,679 715 5,203 3,113 361 19 321 3,814
117,037 120,851
Net closing balance at 106,410 4,682 715 5,217 2,774 397 19 385 3,575
117,024 120,599
31 Dec 2023
Movements in carrying amounts of insurance contracts - analysis by measurement
component (continued)
Year ended 31 Dec 2022(1)
Life direct participating and investment DPF contracts Life other contracts
Estimates of present value of future cash flows and risk Contractual service margin Estimates of present value of future cash flows and risk Contractual service margin
adjustment adjustment
Contracts under the fair value approach Contracts under the modified retros- Other contracts(2) Total Contracts under the fair value approach Contracts under the modified retros- Other contracts(2) Total Total
pective approach pective approach
$m $m $m $m $m $m $m $m $m $m $m
Opening assets - - - - - (236) 57 - 63 (116) (116)
Opening liabilities 105,861 5,823 704 2,883 115,271 3,532 331 26 147 4,036 119,307
Net opening balance at 1 Jan 2022 105,861 5,823 704 2,883 115,271 3,296 388 26 210 3,920 119,191
Changes in the statement of profit or loss and other
comprehensive income
Changes that relate to current services
Contractual service margin recognised for services provided - (297) (69) (415) (781) - (69) (6) (76) (151) (932)
Change in risk adjustment for non-financial risk expired (17) - - - (17) (17) - - - (17) (34)
Experience adjustments 45 - - - 45 2 - - - 2 47
Changes that relate to future services
Contracts initially recognised in the year (1,092) - - 1,101 9 (110) - - 117 7 16
Changes in estimates that adjust contractual service margin 820 (1,349) 208 321 - (7) 23 - (16) - -
Changes in estimates that result in losses and reversal of 75 - - - 75 79 - - - 79 154
losses on onerous
contracts
Changes that relate to past services
Adjustments to liabilities for incurred claims 2 - - - 2 11 - - - 11 13
Other movements recognised in insurance service result (73) - - - (73) - - - - - (73)
Insurance service result (240) (1,646) 139 1,007 (740) (42) (46) (6) 25 (69) (809)
Net finance (income)/expense from insurance contracts(3) (16,025) (10) - (1) (16,036) (169) 7 - 6 (156) (16,192)
Effect of movements in exchange rates (2,082) (16) (51) (25) (2,174) (74) (17) (2) - (93) (2,267)
Total changes in the statement of profit or loss and other (18,347) (1,672) 88 981 (18,950) (285) (56) (8) 31 (318) (19,268)
comprehensive
income
Cash flows
Premiums received 12,740 - - - 12,740 882 - - - 882 13,622
Claims, other insurance service expenses paid (including (5,783) - - - (5,783) (880) - - - (880) (6,663)
investment
components) and other cash flows
Insurance acquisition cash flows (423) - - - (423) (162) - - - (162) (585)
Total cash flows 6,534 - - - 6,534 (160) - - - (160) 6,374
Acquisition of subsidiaries and other movements 2,108 216 - (39) 2,285 3 79 - 16 98 2,383
Net closing balance at 96,156 4,367 792 3,825 105,140 2,854 411 18 257 3,540 108,680
31 Dec 2022
Closing assets (18) 3 - 10 (5) (308) 86 - 91 (131) (136)
Closing liabilities 96,174 4,364 792 3,815 105,145 3,162 325 18 166 3,671 108,816
Net closing balance at 96,156 4,367 792 3,825 105,140 2,854 411 18 257 3,540 108,680
31 Dec 2022
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
2 'Other contracts' are those contracts measured by applying IFRS 17 from
inception of the contracts. These include contracts measured under the full
retrospective approach at transition and contracts incepted after transition
and excludes reinsurance contracts.
3 'Net finance (income)/expense from insurance contracts' expense of
$8,300m (2022: $16,192m income) comprises expense of $7,809m (2022: $13,799m
income) recognised in the statement of profit or loss and expense of $491m
(2022: $2,393m income) recognised in the statement of other comprehensive
income.
Effect of contracts initially recognised in the year
Year ended 31 Dec 2023 Year ended 31 Dec 2022(1)
Profitable contracts issued Onerous contracts issued Total Profitable contracts issued Onerous contracts issued Total
$m $m $m $m $m $m
Life direct participating and investment DPF contracts
Estimates of present value of cash outflows 12,418 215 12,633 9,714 123 9,837
- insurance acquisition cash flows 602 21 623 401 16 417
- claims and other insurance service expenses payable 11,816 194 12,010 9,313 107 9,420
Estimates of present value of cash inflows (14,074) (204) (14,278) (10,844) (115) (10,959)
Risk adjustment for non-financial risk 37 2 39 29 1 30
Contractual service margin 1,619 - 1,619 1,101 - 1,101
Losses recognised on initial recognition - (13) (13) - (9) (9)
Life other contracts
Estimates of present value of cash outflows 1,116 464 1,580 640 111 751
- insurance acquisition cash flows 106 50 156 57 9 66
- claims and other insurance service expenses payable 1,010 414 1,424 583 102 685
Estimates of present value of cash inflows (1,350) (438) (1,788) (778) (105) (883)
Risk adjustment for non-financial risk 27 5 32 21 1 22
Contractual service margin 207 - 207 117 - 117
Losses recognised on initial recognition - (31) (31) - (7) (7)
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
Present value of expected future cash flows of insurance contract liabilities
and contractual service margin
Less than 1 year 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years 10-20 years Over 20 years Total
$m $m $m $m $m $m $m $m $m
Insurance liability future cash flows
Life direct participating and investment DPF contracts (2,620) (545) 2,321 2,419 3,344 11,695 23,351 65,897
105,862
Life other contracts 1,276 362 (347) 4 (45) 36 102 1,628 3,016
Insurance liability future cash flows at 31 Dec 2023 (1,344) (183) 1,974 2,423 3,299 11,731 23,453 67,525
108,878
Remaining contractual service margin
Life direct participating and investment DPF contracts 917 848 783 722 666 2,597 2,653 1,428 10,614
Life other contracts 172 113 84 74 61 141 115 41 801
Remaining contractual service margin at 31 Dec 2023 1,089 961 867 796 727 2,738 2,768 1,469 11,415
Insurance liability future cash flows
Life direct participating and investment DPF contracts (5,049) (1,891) 180 1,417 1,685 9,585 30,108 59,762 95,797
Life other contracts 695 770 395 (13) 38 172 182 859 3,098
Insurance liability future cash flows at 31 Dec 2022(1) (4,354) (1,121) 575 1,404 1,723 9,757 30,290 60,621 98,895
Remaining contractual service margin
Life direct participating and investment DPF contracts 757 689 638 590 547 2,177 2,293 1,293 8,984
Life other contracts 194 64 56 48 42 134 99 49 686
Remaining contractual service margin at 31 Dec 2022(1) 951 753 694 638 589 2,311 2,392 1,342 9,670
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
Discount rates
The discount rates applied to expected future cash flows are determined
through a bottom-up approach as set out in Note 1.2(j) 'Summary of material
accounting policies - Insurance contracts' on page 351. The blended average of
discount rates used within our most material manufacturing entities are as
follows:
HSBC Life (International) Ltd Hang Seng Insurance Co Ltd HSBC Assurances
Vie (France)
HK$ US$ HK$ US$ €
At 31 Dec 2023
10-year discount rate (%) 4.02 4.47 4.16 4.62 2.96
20-year discount rate (%) 4.21 4.91 4.34 5.06 2.97
At 31 Dec 2022
10-year discount rate (%) 4.56 4.59 4.70 4.80 3.66
20-year discount rate (%) 4.63 4.96 4.76 5.17 3.33
5 Employee compensation and benefits
2023 2022 2021
$m $m $m
Employee compensation and benefits(1) 18,220 18,003 18,742
Capitalised wages and salaries(2) 1,403 1,285 870
Gross employee compensation and benefits for the year ended 31 Dec 19,623 19,288 19,612
Consists of:
Wages and salaries 17,359 16,970 17,072
Social security costs 1,507 1,403 1,503
Post-employment benefits 757 915 1,037
Year ended 31 Dec 19,623 19,288 19,612
1 In 2023 and 2022, employee compensation and benefits are presented in
the income statement net of software capitalisation costs and costs included
in the insurance contract fulfilment cash flow liabilities under IFRS 17. In
2021, employee compensation and benefits are presented net of software
capitalisation costs in the income statement.
2 Comprises $1,043m (2022: $922m; 2021: $870m) software capitalisation
costs and $360m (2022: $363m; 2021: n/a) costs included in the insurance
contract fulfilment cash flow liabilities under IFRS 17.
Average number of persons employed by HSBC during the year by global
business(1)
2023 2022 2021
Wealth and Personal Banking 132,336 135,676 138,026
Commercial Banking 46,826 48,004 44,992
Global Banking and Markets 48,043 48,597 48,179
Corporate Centre 347 365 359
Year ended 31 Dec 227,552 232,642 231,556
1 Average number of persons employed represents the number of persons with
contracts of service with the Group.
Average number of persons employed by HSBC during the year by legal entity(1)
2023 2022 2021
HSBC UK Bank plc 20,415 20,501 21,447
HSBC Bank plc 14,809 15,405 16,823
The Hongkong and Shanghai Banking Corporation Limited 54,321 54,792 55,253
HSBC Bank Middle East Limited 3,316 3,338 3,429
HSBC North America Holdings Inc. 6,046 6,749 8,197
HSBC Bank Canada 4,354 4,241 4,369
Grupo Financiero HSBC, S.A. de C.V. 14,412 14,484 14,529
Other trading entities(2) 9,247 10,026 10,442
Holding companies, shared service centres and intra-Group eliminations 100,632 103,106 97,067
Year ended 31 Dec 227,552 232,642 231,556
1 Average number of persons employed represents the number of persons with
contracts of service with the Group.
2 Other trading entities includes entities located in Oman, Türkiye,
Egypt and Saudi Arabia.
Reconciliation of total incentive awards granted to income statement charge
2023 2022 2021
$m $m $m
Total incentive awards approved for the current year 3,774 3,359 3,495
Less: deferred bonuses awarded, expected to be recognised in future periods (353) (343) (379)
Total incentives awarded and recognised in the current year 3,421 3,016 3,116
Add: current year charges for deferred bonuses from previous years 375 239 270
Other (56) (22) 4
Income statement charge for incentive awards 3,740 3,233 3,390
Share-based payments
'Wages and salaries' includes the effect of share-based payments arrangements,
of which $482m was equity settled (2022: $400m; 2021: $467m), as follows:
2023 2022 2021
$m $m $m
Conditional share awards 499 402 479
Savings-related and other share award option plans 23 22 27
Year ended 31 Dec 522 424 506
HSBC share awards
Deferred share awards (including annual incentive awards, long-term incentive An assessment of performance over the relevant period ending on 31 December is
('LTI') awards delivered in shares) used to determine the amount of the award to be granted.
- Deferred awards generally require employees to remain in employment over
the vesting period and are generally not subject to performance conditions
after the grant date. An exception to these are LTI awards, which are subject
to performance conditions.
- Deferred share awards generally vest over a period of three, four, five
or seven years.
- Vested shares may be subject to a retention requirement post-vesting.
- Awards are generally subject to malus and clawback provisions.
International Employee Share Purchase Plan ('ShareMatch') The plan was first introduced in Hong Kong in 2013 and now includes employees
based in 30 jurisdictions.
- Shares are purchased in the market
each quarter up to a maximum value of £750, or the equivalent in local
currency.
- Matching awards are added at a
ratio of one free share for every three purchased. In mainland China, matching
awards are settled in cash.
- Matching awards vest subject to
continued employment and the retention of the purchased shares for a maximum
period of two years and nine months.
Movement on HSBC share awards
2023 2022
Number Number
(000s) (000s)
Conditional share awards outstanding at 1 Jan 126,246 109,364
Additions during the year 72,289 90,190
Released in the year (70,054) (67,718)
Forfeited in the year (3,458) (5,590)
Conditional share awards outstanding at 31 Dec 125,023 126,246
Weighted average fair value of awards granted ($) 5.84 5.60
HSBC share option plans
Savings-related share option plans ('Sharesave') - From 2014, employees eligible for the UK plan could save up to £500 per
month with the option to use the savings to acquire shares.
- These are generally exercisable within six months following either the
third or fifth anniversary of the commencement of a three-year or five-year
contract, respectively.
- The exercise price is set at a 20% (2022: 20%) discount to the market
value immediately preceding the date of invitation.
Calculation of fair values
The fair values of share options are calculated using a Black-Scholes model.
The fair value of a share award is based on the share price at the date of the
grant.
Movement on HSBC share option plans
Savings-related
share option plans
Number WAEP(1)
(000s) £
Outstanding at 1 Jan 2023 115,651 2.89
Granted during the year(2) 23,382 4.70
Exercised during the year(3) (49,007) 2.73
Expired during the year (3,832) 3.78
Forfeited during the year (2,200) 2.88
Outstanding at 31 Dec 2023 83,994 3.42
- of which exercisable 7,165 2.70
Weighted average remaining contractual life (years) 2.41
Outstanding at 1 Jan 2022 123,197 2.85
Granted during the year(2) 8,928 4.24
Exercised during the year(3) (3,483) 3.49
Expired during the year (9,047) 3.55
Forfeited during the year (3,944) 2.79
Outstanding at 31 Dec 2022 115,651 2.89
- of which exercisable 4,029 4.11
Weighted average remaining contractual life (years) 2.26
1 Weighted average exercise price.
2 The weighted average fair value of options granted during the year
was $1.92 (2022: $1.45).
3 The weighted average share price at the date the options were
exercised was $7.39 (2022: $6.22).
Post-employment benefit plans
The Group operates pension plans throughout the world for its employees.
'Pension risk management processes' on page 206 contains details of the
policies and practices associated with these pension plans, some of which are
defined benefit plans. The largest defined benefit plan is the HBUK section of
the HSBC Bank (UK) Pension Scheme ('the principal plan'), created as a result
of the HSBC Bank (UK) Pension Scheme being fully sectionalised in 2018 to meet
the requirements of the Banking Reform Act. For further details of how the
trustee of the HSBC Bank (UK) Pension Scheme manages climate risk, see
'Managing climate risk' on page 65.
HSBC holds on its balance sheet the net surplus or deficit, which is the
difference between the fair value of plan assets and the discounted value of
scheme liabilities at the balance sheet date for each plan. Surpluses are only
recognised to the extent that they are recoverable through reduced
contributions in the future or through potential future refunds from the
schemes. In assessing whether a surplus is recoverable, HSBC has considered
its current right to obtain a future refund or a reduction in future
contributions together with the rights of third parties such as trustees.
The principal plan
The principal plan has a defined benefit section and a defined contribution
section. The defined benefit section was closed to future benefit accrual in
2015, with defined benefits earned by employees at that date continuing to be
linked to their salary while they remain employed by HSBC. The plan is
overseen by an independent corporate trustee, who has a fiduciary
responsibility for the operation of the plan. Its assets are held separately
from the assets of the Group.
The investment strategy of the plan is to hold the majority of assets in
bonds, with the remainder in a diverse range of investments. It also includes
some interest rate swaps to reduce interest rate risk, inflation swaps to
reduce inflation risk and longevity swaps to reduce the impact of longer life
expectancy.
The principal plan is subject to the statutory funding objective requirements
of the UK Pensions Act 2004, which requires that it be funded to at least the
level of technical provisions (an actuarial estimate of the assets needed to
provide for the benefits already built up under the plan). Where a funding
valuation is carried out and identifies a deficit, the employer and trustee
are required to agree to a deficit recovery plan.
The latest funding valuation of the plan at 31 December 2019 was carried out
by Colin G Singer of Willis Towers Watson Limited, who is a Fellow of the UK
Institute and Faculty of Actuaries, using the projected unit credit method. At
that date, the market value of the plan's assets was £31.1bn ($41.1bn) and
this exceeded the value placed on its liabilities on an ongoing basis by
£2.5bn ($3.3bn), giving a funding level of 109%. These figures include
defined contribution assets amounting to £2.4bn ($3.2bn). The main
differences between the assumptions used for assessing the defined benefit
liabilities for this funding valuation and those used for IAS 19 are that an
element of prudence is contained in the funding valuation assumptions for
discount rate, inflation rate and life expectancy. The funding valuation is
used to judge the amount of cash contributions the Group needs to put into the
pension scheme. It will always be different to the IAS 19 accounting surplus,
which is an accounting rule concerning employee benefits and shown on the
balance sheet of our financial statements. The next funding valuation, with an
effective date of 31 December 2022, is currently underway and will be
concluded no later than the regulatory deadline of 31 March 2024. The plan is
estimated to remain in a comfortable surplus relative to the funding
liabilities as at the end of 2022, based on assumptions consistent with those
used to determine the funding liabilities for the 2019 valuation.
The actuary also assessed the value of the liabilities if the plan were to
have been stopped and an insurance company asked to secure all future pension
payments. This is generally larger than the amount needed on the ongoing basis
described above because an insurance company would use more prudent
assumption, which would allow for reserves and include an explicit allowance
for the future administrative expenses of the plan. Under this approach, the
amount of assets needed was estimated to be £33bn ($44bn) at 31 December
2019.
The trust deed gives the ability for HSBC UK to take a refund of surplus
assets after the plan has been run down such that no further beneficiaries
remain. In assessing whether a surplus is recoverable, HSBC UK has considered
its right to obtain a future refund together with the rights of third parties
such as trustees. On this basis, any net surplus in the HBUK section of the
plan is recognised in HSBC UK's financial statements and the Group's financial
statements.
Income statement charge/(credit)
2023 2022 2021
$m $m $m
Defined benefit pension plans (151) 42 243
Defined contribution pension plans 874 845 767
Pension plans 723 887 1,010
Defined benefit and contribution healthcare plans 34 28 27
Year ended 31 Dec 757 915 1,037
Net assets/(liabilities) recognised on the balance sheet in respect of defined
benefit plans
Fair value of Present value of Effect of limit on plan surpluses Total
plan assets defined benefit obligations
$m $m $m $m
Defined benefit pension plans 33,897 6,886
(27,011) -
Defined benefit healthcare plans 107 (296)
(403) -
At 31 Dec 2023 34,004 6,590
(27,414) -
Total employee benefit liabilities (within Note 27 'Accruals, deferred income (1,160)
and other liabilities')
Total employee benefit assets (within Note 22 'Prepayments, accrued income and 7,750
other assets')
Defined benefit pension plans 32,171 6,478
(25,693) -
Defined benefit healthcare plans 96
(388) - (292)
At 31 Dec 2022 32,267 6,186
(26,081) -
Total employee benefit liabilities (within Note 27 'Accruals, deferred income (1,096)
and other liabilities')
Total employee benefit assets (within Note 22 'Prepayments, accrued income and 7,282
other assets')
HSBC Holdings
Employee compensation and benefit expense in respect of HSBC Holdings'
employees in 2023 amounted to $15m (2022: $41m). The average number of persons
employed during 2023 was 29 (2022: 42). A small number of employees are
members of defined benefit pension plans. These employees are members of the
HSBC Bank (UK) Pension Scheme. HSBC Holdings pays contributions to such plan
for its own employees in accordance with the schedules of contributions
determined by the trustees of the plan and recognises these contributions as
an expense as they fall due.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value of plan assets Present value of defined benefit obligations Effect of the asset ceiling Net defined benefit asset/(liability)
Principal(1) Other Principal(1) Other Principal(1) Other Principal(1) Other
plans
plans
plans
plans
plan plan plan plan
$m $m $m $m $m $m $m $m
At 1 Jan 2023 25,121 7,050 (18,787) (6,906) - - 6,334 144
Service cost - - (10) (150) - - (10) (150)
- current service cost - - (14) (135) - - (14) (135)
- past service cost and gains/(losses) from settlements - 4 (15) - - 4 (15)
Net interest income/(cost) on the net defined benefit 1,247 298 (925) (286) - - 322 12
asset/(liability)
Remeasurement effects recognised in other comprehensive income (225) 110 7 (300) - - (218) (190)
- return on plan assets (excluding interest income) (225) 110 - - - - (225) 110
- actuarial gains/(losses) financial assumptions - - (123) (327) - - (123) (327)
- actuarial gains/(losses) demographic assumptions - - 357 17 - - 357 17
- actuarial gains/(losses) experience adjustments - - (227) 10 - - (227) 10
- other changes - - - - - - - -
Exchange differences 1,472 228 (1,098) (190) - - 374 38
Benefits paid (1,063) (548) 1,063 629 - - - 81
Other movements(2) 38 169 (32) (26) - - 6 143
At 31 Dec 2023 26,590 7,307 (19,782) (7,229) - - 6,808 78
At 1 Jan 2022 41,384 10,047 (32,255) (10,022) - (23) 9,129 2
Service cost - - (30) (170) - - (30) (170)
- current service cost - - (12) (161) - - (12) (161)
- past service cost and losses from settlements - - (18) (9) - - (18) (9)
Net interest income/(cost) on the net defined benefit 703 198 (546) (202) - (1) 157 (5)
asset/(liability)
Remeasurement effects recognised in other comprehensive income (11,505) (2,181) 9,532 2,360 - (3) (1,973) 176
- return on plan assets (excluding interest income) (11,505) (2,181) - - - - (11,505) (2,181)
- actuarial gains/(losses) financial assumptions - - 10,543 2,383 - - 10,543 2,383
- actuarial gains/(losses) demographic assumptions - - (123) 24 - - (123) 24
- actuarial gains/(losses) experience adjustments - - (888) (47) - - (888) (47)
- other changes - - - - - (3) - (3)
Exchange differences (4,288) (180) 3,325 35 - 2 (963) (143)
Benefits paid (1,222) (616) 1,222 686 - - - 70
Other movements(2) 49 (218) (35) 407 - 25 14 214
At 31 Dec 2022 25,121 7,050 (18,787) (6,906) - - 6,334 144
1 For further details of the principal plan, see page 365.
2 Other movements include contributions by HSBC, contributions by
employees, administrative costs and taxes paid by plan.
HSBC expects to make $113m of contributions to defined benefit pension plans
during 2024, consisting of $nil for the principal plan and $113m for other
plans. Benefits expected to be paid from the plans to retirees over each of
the next five years, and in aggregate for the five years thereafter, are as
follows:
Benefits expected to be paid from plans
2024 2025 2026 2027 2028 2029-2033
$m $m $m $m $m $m
The principal plan(1,2) 1,125 1,160 1,196 1,234 1,273 6,988
Other plans(1) 465 473 456 478 476 2,403
1 The duration of the defined benefit obligation is 12.9 years for the
principal plan under the disclosure assumptions adopted (2022: 13.2 years) and
10.3 years for all other plans combined (2022: 10.2 years).
2 For further details of the principal plan, see page 365.
Fair value of plan assets by asset classes
31 Dec 2023 31 Dec 2022
Value Quoted No quoted Thereof Value Quoted No quoted Thereof
HSBC(1)
HSBC(1)
market price market price market price market price
in active in active in active in active
market market market market
$m $m $m $m $m $m $m $m
The principal plan(2)
Fair value of plan assets 26,590 15,006 11,584 547 25,121 13,915 11,206 510
- equities(3) 83 - 83 - 112 - 112 -
- bonds fixed income 5,262 4,739 523 - 5,285 4,822 463 -
- bonds index-linked 10,300 10,300 - - 9,479 9,479 - -
- derivatives 1,061 - 1,061 547 1,203 - 1,203 510
- property 830 - 830 - 842 - 842 -
- pooled investment vehicles 9,087 - 9,087 - 8,586 - 8,586 -
- other (33) (33) - - (386) (386) - -
Other plans
Fair value of plan assets 7,307 5,361 1,946 39 7,050 5,848 1,202 37
- equities 556 556 - 3 639 486 153 2
- bonds fixed income 3,624 3,623 1 5 3,571 3,472 99 4
- bonds index-linked 90 90 - - 58 58 - -
- bonds other 447 415 32 - 1,357 1,007 350 -
- derivatives 2 (1) 3 - 4 (1) 5 -
- property 112 108 4 - 109 104 5 -
- other 2,476 570 1,906 31 1,312 722 590 31
1 The fair value of plan assets includes derivatives entered into with
HSBC Bank plc as detailed in Note 37.
2 For further details of the principal plan, see page 365.
3 Includes $83m (2022: $112m) in relation to private equities.
Post-employment defined benefit plans' principal actuarial financial
assumptions
HSBC determines the discount rates to be applied to its obligations in
consultation with the plans' local actuaries, on the basis of current average
yields of high-quality (AA-rated or equivalent) debt instruments with
maturities consistent with those of the defined benefit obligations.
Key actuarial assumptions for the principal plan(1)
Discount rate Inflation rate (RPI) Inflation rate (CPI) Rate of increase for pensions Rate of pay increase
% % % % %
UK
At 31 Dec 2023 4.65 3.23 2.67 3.14 3.42
At 31 Dec 2022 4.93 3.39 2.84 3.27 3.34
1 For further details of the principal plan, see page 365.
Mortality tables and average life expectancy at age 60 ( )for the principal
plan(1)
Mortality Life expectancy at age 60 for Life expectancy at age 60 for
table a male member currently: a female member currently:
Aged 60 Aged 40 Aged 60 Aged 40
UK
At 31 Dec 2023 SAPS S3(2) 26.2 27.7 28.3 29.8
At 31 Dec 2022 SAPS S3 27.1 28.6 28.4 29.9
1 For further details of the principal plan, see page 365.
2 Self-administered pension scheme ('SAPS') S3 table, with different
tables and multipliers adopted based on gender, pension amount and member
status, reflecting the Scheme's actual mortality experience. Improvements are
projected in accordance with the Continuous Mortality Investigation's CMI 2022
core projection model with an initial addition to improvement of 0.25% per
annum, a long-term rate of improvement of 1.25% per annum, a 0% weighting to
2020 and 2021 mortality experience, and a 25% weighting to 2022 mortality
experience reflecting updated long-term view on mortality improvements
post-pandemic.
The effect of changes in key assumptions on the principal plan(1)
Impact on HBUK section of the
HSBC Bank (UK) Pension Scheme obligation(2)
Financial impact of increase Financial impact of decrease
2023 2022 2023 2022
$m $m $m $m
Discount rate - increase/decrease of 0.25% (599) (582) 631 612
Inflation rate (RPI and CPI) - increase/decrease of 0.25% 500 466 (497) (446)
Pension payments and deferred pensions - increase/decrease of 0.25% 622 551 (590) (519)
Pay - increase/decrease of 0.25% 8 10 (6) (10)
Change in mortality - increase/decrease of 1 year 613 470 (613) (489)
1 For further details of the principal plan, see page 365.
2 Sensitivities allow for HSBC UK's convention of rounding pension
assumptions during 2023 to the nearest 0.01% (2022: 0.01%).
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method (present value of the defined benefit
obligation calculated with the projected unit credit method at the end of the
reporting period) has been applied as when calculating the defined benefit
asset recognised in the balance sheet. The methods and types of assumptions
used in preparing the sensitivity analysis did not change compared with the
prior period.
Directors' emoluments
Details of Directors' emoluments, pensions and their interests are disclosed
in the Directors' remuneration report on page 279.
6 Auditor's remuneration
2023 2022 2021
$m $m $m
Audit fees payable to PwC(1) 109.8 97.6 88.1
Other audit fees payable 2.2 1.6 2.0
Year ended 31 Dec 112.0 99.2 90.1
Fees payable by HSBC to PwC
2023 2022 2021
$m $m $m
Fees for HSBC Holdings' statutory audit(2) 24.1 21.9 19.5
Fees for other services provided to HSBC 131.8 126.2 109.9
- audit of HSBC's subsidiaries 85.7 75.7 68.6
- audit-related assurance services(3) 26.0 26.4 18.7
- other assurance services(4,5) 20.1 24.1 22.6
Year ended 31 Dec 155.9 148.1 129.4
1 Audit fees payable to PwC in 2023 included adjustments made to the
prior year audit fee after finalisation of the 2022 financial statements.
2 Fees payable to PwC for the statutory audit of the consolidated
financial statements of HSBC and the separate financial statements of HSBC
Holdings. They include amounts payable for services relating to the
consolidation returns of HSBC Holdings' subsidiaries, which are clearly
identifiable as being in support of the Group audit opinion.
3 Including services for assurance and other services that relate to
statutory and regulatory filings, including interim reviews.
4 Including permitted services relating to attestation reports on
internal controls of a service organisation primarily prepared for and used by
third-party end users, including comfort letters.
5 Includes reviews of PRA regulatory reporting
returns.
No fees were payable by HSBC to PwC as principal auditor for the following
types of services: internal audit services and services related to litigation,
recruitment and remuneration.
Fees payable by HSBC's associated pension schemes to PwC
2023 2022 2021
$000 $000 $000
Audit of HSBC's associated pension schemes 297 480 382
Year ended 31 Dec 297 480 382
No fees were payable by HSBC's associated pension schemes to PwC as principal
auditor for the following types of services: internal audit services, other
assurance services, services related to corporate finance transactions,
valuation and actuarial services, litigation, recruitment and remuneration,
and information technology.
In addition to the above, the estimated fees paid to PwC by third parties
associated with HSBC amounted to $12.3m (2022: $13.1m; 2021: $6.3m). In these
cases, HSBC was connected with the contracting party and may therefore have
been involved in appointing PwC. These fees arose from services such as
auditing mutual funds managed by HSBC and reviewing the financial position of
corporate concerns that borrow from HSBC.
Fees payable for non-audit services for HSBC Holdings are not disclosed
separately because such fees are disclosed on a consolidated basis for the
Group.
7 Tax
Tax expense
2023 2022 2021
$m $m $m
Current tax(1) 5,718 2,984 3,250
- for this year 5,737 3,264 3,182
- adjustments in respect of prior years (19) (280) 68
Deferred tax 71 (2,175) 963
- origination and reversal of temporary differences 19 (2,278) 874
- effect of changes in tax rates 17 (293) 132
- adjustments in respect of prior years 35 396 (43)
Year ended 31 Dec(2) 5,789 809 4,213
1 Current tax included Hong Kong profits tax of $1,328m (2022: $604m;
2021: $813m). The Hong Kong tax rate applying to the profits of subsidiaries
assessable in Hong Kong was 16.5% (2022: 16.5%; 2021: 16.5%).
2 In addition to amounts recorded in the income statement, a tax credit of
$41m (2022: credit of $145m) was recorded directly to equity.
Tax reconciliation
The tax charged to the income statement differs from the tax charge that would
apply if all profits had been taxed at the UK corporation tax rate as follows:
2023 2022 2021
$m % $m % $m %
Profit before tax 30,348 17,058 18,906
Tax expense
Taxation at UK corporation tax rate of 23.5% (2022: 19.0%, 2021: 19.0%) 7,132 23.5 3,241 19.0 3,592 19.0
Impact of differently taxed overseas profits in overseas locations (612) (2.0) 459 2.7 280 1.5
UK banking surcharge 350 1.2 283 1.7 332 1.8
Items increasing tax charge in 2023:
- impairment of interest in associate 705 2.3 - - - -
- local taxes and overseas withholding taxes 419 1.4 346 2.0 360 1.9
- impacts of hyperinflation 348 1.1 171 1.0 68 0.4
- other permanent disallowables 227 0.7 363 2.1 414 2.2
- bank levy 112 0.4 59 0.3 93 0.5
- impact of changes in tax rates 17 0.1 (293) (1.7) 132 0.7
- adjustments in respect of prior period 16 0.1 116 0.7 25 0.1
- tax impact of sale of French retail banking business - - 115 0.7 (434) (2.3)
- impact of differences between French tax basis and IFRSs - - - - 434 2.3
Items reducing tax charge in 2023:
- non-taxable income and gains (1,189) (3.9) (825) (4.8) (641) (3.4)
- effect of profits in associates and joint ventures (571) (1.9) (504) (3.1) (414) (2.2)
- movements in provisions for uncertain tax positions (472) (1.6) 27 0.2 15 0.1
- accounting gain on acquisition of SVB UK (442) (1.5) - - - -
- deductions for AT1 coupon payments (229) (0.7) (246) (1.4) (270) (1.4)
- movements in unrecognised deferred tax (22) (0.1) (2,503) (14.7) 227 1.1
Year ended 31 December 5,789 19.1 809 4.7 4,213 22.3
The Group's profits are taxed at different rates depending on the country or
territory in which the profits arise. The key applicable tax rates for 2023
include Hong Kong (16.5%), the US (21%) and the UK (23.5%). If the Group's
profits were taxed at the statutory rates of the countries in which the
profits arose, then the tax rate for the year would have been 22.6% (2022:
23.3%).
The effective tax rate for the year of 19.1% was higher than in the previous
year (2022: 4.7%). The effective tax rate for the year was increased by 2.3%
by the non-taxable impairment of the Group's interest in BoCom, reduced by
1.6% by the release of provisions for uncertain tax positions and reduced by
1.5% by the non-taxable accounting gain on the acquisition of SVB UK. The
effective tax rate for 2022 was reduced by 14.7% as a result of the
recognition of previously unrecognised losses in the UK of $2.2bn and France
of $0.3bn, in light of improved forecast profitability.
On 20 June 2023, legislation was substantively enacted in the UK to introduce
the 'Pillar Two' global minimum tax model rules of the OECD's Inclusive
Framework on Base Erosion and Profit Shifting ('BEPS') and a UK qualified
domestic minimum top-up tax, with effect from 1 January 2024. Under these
rules, a top-up tax liability arises where the effective tax rate of the
Group's operations in a jurisdiction, calculated using principles set out in
the Pillar Two legislation, is below 15%. Any resulting tax is payable by HSBC
Holdings plc, being the Group's ultimate parent, to HMRC. In response to the
OECD's Pillar Two global minimum tax rules, many national governments have
announced their intention to introduce domestic minimum tax rules that are
closely aligned to the OECD's Pillar Two model rules. Where such qualifying
domestic minimum tax rules are introduced, they may be expected to have the
effect of increasing local tax liabilities to the 15% minimum rate,
eliminating the top-up tax liability payable in the UK by HSBC Holdings plc in
such cases. Based on the Group's forecasts, top-up tax liabilities are
expected to arise in approximately 10 jurisdictions as a result of low or 0%
statutory tax rates, in particular in respect of the Group's banking
operations in Bermuda and the Channel Islands. Additionally, the application
of local tax laws in Hong Kong and mainland China, particularly with regard to
the non-taxation of dividend income and income on government bonds, has
typically resulted in effective tax rates of below 15%. This is expected to
create future top-up tax liabilities in these jurisdictions, which have
statutory tax rates of 16.5% and 25%, respectively. The application of the
Pillar Two global minimum tax rules and the introduction of new domestic
minimum tax regimes are currently forecast to increase the Group's annual
effective tax rate by around 0.5 and 1.0 percentage points.
Accounting for taxes involves some estimation because tax law is uncertain and
its application requires a degree of judgement, which authorities may dispute.
Liabilities are recognised based on best estimates of the probable outcome,
taking into account external advice where appropriate. Exposures relating to
legacy tax cases were reassessed during 2023, resulting in a credit of $472m
to the income statement. We do not expect significant liabilities to arise in
excess of the amounts provided. HSBC only recognises current and deferred tax
assets where recovery is probable.
Movement of deferred tax assets and liabilities
Loan Unused tax Financial assets at FVOCI Cash flow hedges Retirement obligations Other Total
impairment losses and
provisions tax credits
$m $m $m $m $m $m $m
Assets 1,062 4,397 850 1,271 - 3,048 10,628
Liabilities - - - - (1,673) (1,567) (3,240)
At 1 Jan 2023 1,062 4,397 850 1,271 (1,673) 1,481 7,388
Income statement (39) 102 541 1 (114) (562) (71)
Other comprehensive income - - (598) (974) 99 399 (1,074)
Foreign exchange and other adjustments 135 45 83 121 (126) 15 273
At 31 Dec 2023 1,158 4,544 876 419 (1,814) 1,333 6,516
Assets(1) 1,158 4,544 876 419 - 2,933 9,930
Liabilities(1) - - - - (1,814) (1,600) (3,414)
Assets(2) 1,151 2,001 382 154 - 1,744 5,432
Liabilities(2) - - - - (2,819) (475) (3,294)
At 1 Jan 2022 1,151 2,001 382 154 (2,819) 1,269 2,138
Income statement 7 2,425 (1,127) 1 217 652 2,175
Other comprehensive income - - 2,281 1,159 692 (1,260) 2,872
Foreign exchange and other adjustments (686) 237 820 203
(96) (29) (43)
At 31 Dec 2022 1,062 4,397 850 1,271 (1,673) 1,481 7,388
Assets(1) 1,062 4,397 850 1,271 - 3,048 10,628
Liabilities(1) - - - - (1,673) (1,567) (3,240)
1 After netting off balances within countries, the balances as
disclosed in the accounts are as follows: deferred tax assets of $7,754m
(2022: $8,360m) and deferred tax liabilities of $1,238m (2022: $972m).
2 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data.
In applying judgement in recognising deferred tax assets, management has
assessed all relevant information, including future business profit
projections and the track record of meeting forecasts. Management's assessment
of the likely availability of future taxable profits against which to recover
deferred tax assets is based on the most recent financial forecasts approved
by management, which cover a five-year period and are extrapolated where
necessary, and takes into consideration the reversal of existing taxable
temporary differences and past business performance. When forecasts are
extrapolated beyond five years, a number of different scenarios are
considered, reflecting different downward risk adjustments, in order to assess
the sensitivity of our recognition and measurement conclusions in the context
of such longer-term forecasts.
The Group's net deferred tax asset of $6.5bn (2022: $7.4bn) included $3.3bn
(2022: $4.0bn) of deferred tax assets relating to the UK, $3.1bn (2022:
$3.3bn) of deferred tax assets relating to the US and a net deferred asset of
$0.9bn (2022: $1.0bn) in France.
The UK deferred tax asset of $3.3bn excluded a $1.9bn deferred tax liability
arising on the UK pension scheme surplus, the reversal of which is not taken
into account when estimating future taxable profits. The UK deferred tax
assets are supported by forecasts of taxable profit, also taking into
consideration the history of profitability in the relevant businesses. The
majority of the deferred tax asset relates to tax attributes which do not
expire and are forecast to be recovered within four years and as such are less
sensitive to changes in long-term profit forecasts.
The net US deferred tax asset of $3.1bn included $1.3bn related to US tax
losses, of which $1.0bn expire in 10 to 15 years. Management expects the US
deferred tax asset to be substantially recovered within 14 years, with the
majority recovered in the first nine years.
The net deferred tax asset in France of $0.9bn included $0.7bn related to tax
losses, which are expected to be substantially recovered within 12 years.
Unrecognised deferred tax
The amount of gross temporary differences, unused tax losses and tax credits
for which no deferred tax asset is recognised in the balance sheet was $10.4bn
(2022: $9.2bn). This amount included unused US state tax losses of $4.0bn
(2022: $4.1bn) which are forecast to expire before they are recovered and
unused UK tax losses of $4.5bn (2022: $3.5bn), which arose prior to 1 April
2017 and can only be recovered against future taxable profits of HSBC
Holdings. No deferred tax was recognised on these losses due to the absence of
convincing evidence regarding the availability of sufficient future taxable
profits against which to recover them. Deferred tax asset recognition is
reassessed at each balance sheet date based on the available evidence. Of the
total amounts unrecognised, $5.1bn (2022: $3.6bn) had no expiry date, $0.5bn
(2022: $1.2bn) was scheduled to expire within 10 years and the remaining
balance is expected to expire after 10 years.
Deferred tax is not recognised in respect of the Group's investments in
subsidiaries and branches where HSBC is able to control the timing of
remittance or other realisation and where remittance or realisation is not
probable in the foreseeable future. The aggregate temporary differences
relating to unrecognised deferred tax liabilities arising on investments in
subsidiaries and branches was $14.4bn (2022: $11.7bn) and the corresponding
unrecognised deferred tax liability was $0.7bn (2022: $0.7bn).
8 Dividends
Dividends to shareholders of the parent company
2023 2022 2021
Per Total Per Total Per Total
share share share
$ $m $ $m $ $m
Dividends paid on ordinary shares
In respect of previous year:
- second interim dividend 0.23 4,589 0.18 3,576 0.15 3,059
In respect of current year:
- first interim dividend 0.10 2,001 0.09 1,754 0.07 1,421
- second interim dividend 0.10 1,956 - - - -
- third interim dividend 0.10 1,946 - - - -
Total 0.53 10,492 0.27 5,330 0.22 4,480
Total dividends on preference shares classified as equity (paid quarterly)(1) - - - - 4.99 7
Total coupons on capital securities classified as equity 1,101 1,214 1,303
Dividends to shareholders 11,593 6,544 5,790
1 HSBC Holdings called $1,450m 6.20% non-cumulative US dollar preference
shares on 10 December 2020. The security was redeemed and cancelled on 13
January 2021.
Total coupons on capital securities classified as equity
2023 2022 2021
Total Total Total
First call date Per security $m $m $m
Perpetual subordinated contingent convertible securities(1)
$2,000m issued at 6.875%(2) Jun 2021 $68.750 - - 69
$2,250m issued at 6.375% Sep 2024 $63.750 143 143 143
$2,450m issued at 6.375% Mar 2025 $63.750 156 156 156
$3,000m issued at 6.000% May 2027 $60.000 180 180 180
$2,350m issued at 6.250%(3) Mar 2023 $62.500 52 147 147
$1,800m issued at 6.500% Mar 2028 $65.000 117 117 117
$1,500m issued at 4.600% Dec 2030 $46.000 69 69 69
$1,000m issued at 4.000%(4) Mar 2026 $40.000 40 40 20
$1,000m issued at 4.700%(5) Mar 2031 $47.000 47 47 24
$2,000m issued at 8.000%(6) Mar 2028 $80.000 80 - -
€1,500m issued at 5.250%(7) Sep 2022 €52.500 - 76 93
€1,000m issued at 6.000%(8) Sep 2023 €60.000 56 63 70
€1,250m issued at 4.750% Jul 2029 €47.500 64 65 72
£1,000m issued at 5.875% Sep 2026 £58.750 72 70 80
SGD1,000m issued at 4.700%(9) Jun 2022 SGD47.000 - 14 35
SGD750m issued at 5.000%(10) Sep 2023 SGD50.000 25 27 28
Total 1,101 1,214 1,303
1 Discretionary coupons are paid semi-annually, based on the
denominations of each security.
2 This security was called by HSBC Holdings on 15 April 2021 and was
redeemed and cancelled on 1 June 2021.
3 This security was called by HSBC Holdings on 30 January 2023 and was
redeemed and cancelled on 23 March 2023.
4 This security was issued by HSBC Holdings on 9 March 2021. The first
call period commences six calendar months prior to the reset date of
9 September 2026.
5 This security was issued by HSBC Holdings on 9 March 2021. The first
call period commences six calendar months prior to the reset date of
9 September 2031.
6 This security was issued by HSBC Holdings on 7 March 2023. The first
call period commences six calendar months prior to the reset date of
7 September 2028.
7 This security was called by HSBC Holdings on 9 August 2022 and was
redeemed and cancelled on 16 September 2022.
8 This security was called by HSBC Holdings on 3 August 2023 and was
redeemed and cancelled on 29 September 2023.
9 This security was called by HSBC Holdings on 4 May 2022 and was
redeemed and cancelled on 8 June 2022.
10 This security was called by HSBC Holdings on 3 August 2023 and was
redeemed and cancelled on 25 September 2023.
10
On 21 February 2024, the Directors approved a fourth interim dividend in
respect of the financial year ended 31 December 2023 of $0.31 per ordinary
share, a distribution of approximately $5,913m. The fourth interim dividend
for 2023 will be payable on 25 April 2024 to holders on the Principal Register
in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas
Branch Register on 8 March 2024. No liability was recorded in the financial
statements in respect of the fourth interim dividend for 2023.
On 4 January 2024, HSBC paid a coupon on its €1,250m subordinated capital
securities, representing a total distribution of €30m ($33m). No liability
was recorded in the balance sheet at 31 December 2023 in respect of this
coupon payment.
9 Earnings per share
Basic earnings per ordinary share is calculated by dividing the profit
attributable to ordinary shareholders of the parent company by the weighted
average number of ordinary shares outstanding, excluding own shares held.
Diluted earnings per ordinary share is calculated by dividing the basic
earnings, which require no adjustment for the effects of dilutive potential
ordinary shares, by the weighted average number of ordinary shares
outstanding, excluding own shares held, plus the weighted average number of
ordinary shares that would be issued on conversion of dilutive potential
ordinary shares.
Basic and diluted earnings per share
2023 2022¹ 2021
Profit Number Per Profit Number Per Profit Number Per
of shares share of shares share of shares share
$m (millions) $ $m (millions) $ $m (millions) $
Basic(2) 22,432 19,478 1.15 14,346 19,849 0.72 12,607 20,197 0.62
Effect of dilutive potential ordinary shares 122 137 105
Diluted(2) 22,432 19,600 1.14 14,346 19,986 0.72 12,607 20,302 0.62
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year
ended 31 December 2022 have been restated accordingly. Comparative data for
the year ended 31 December 2021 are prepared on an IFRS 4 basis.
2 Weighted average number of ordinary shares outstanding (basic) or
assuming dilution (diluted).
The number of anti-dilutive employee share options excluded from the weighted
average number of dilutive potential ordinary shares was
23 million (2022: 9.4 million; 2021: 8.6 million).
10 Segmental analysis
The Group Chief Executive, supported by the rest of the Group Executive
Committee ('GEC'), is considered the Chief Operating Decision Maker ('CODM')
for the purposes of identifying the Group's reportable segments. Global
business results are assessed by the CODM on the basis of constant currency
performance that removes the effects of currency translation from reported
results. Therefore, we disclose these results on a constant currency basis as
required by IFRS Accounting Standards. The 2022 and 2021 income statements are
converted at the average rates of exchange for 2023, and the balance sheets at
31 December 2022 and 31 December 2021 at the prevailing rates of exchange on
31 December 2023.
Our operations are closely integrated and, accordingly, the presentation of
data includes internal allocations of certain items of income and expense.
These allocations include the costs of certain support services and global
functions to the extent that they can be meaningfully attributed to global
businesses. While such allocations have been made on a systematic and
consistent basis, they necessarily involve a degree of subjectivity. Costs
that are not allocated to global businesses are included in Corporate Centre.
Where relevant, income and expense amounts presented include the results of
inter-segment funding along with inter-company and inter-business line
transactions. All such transactions are undertaken on arm's length terms.
Measurement of segmental assets, liabilities, income and expenses is in
accordance with the Group's accounting policies. Shared costs are included in
segments on the basis of actual recharges. The intra-Group elimination items
for the global businesses are presented in Corporate Centre.
Resegmentation
In the first quarter of 2023, following an internal review to assess which
global businesses were best suited to serve our customers' respective needs, a
portfolio of our Global Banking customers within our entities in Latin America
was transferred from Global Banking and Markets to Commercial Banking for
reporting purposes. Comparative data have been re-presented accordingly.
Similar smaller transfers from Global Banking and Markets to Commercial
Banking were also undertaken within our entities in Australia and Indonesia,
where comparative data have not been re-presented.
Our global businesses
We provide a comprehensive range of banking and related financial services to
our customers in our three global businesses. The products and services
offered to customers are organised by these global businesses.
- Wealth and Personal Banking ('WPB') provides a full range of retail
banking and wealth products to our customers from personal banking to ultra
high net worth individuals. Typically, customer offerings include retail
banking products, such as current and savings accounts, mortgages and personal
loans, credit cards, debit cards and local and international payment services.
We also provide wealth management services, including insurance and investment
products, global asset management services, investment management and private
wealth solutions for customers with more sophisticated and international
requirements.
- Commercial Banking ('CMB') offers a broad range of products and
services to serve the needs of our commercial customers, including small and
medium-sized enterprises, mid-market enterprises and corporates. These include
credit and lending, international trade and receivables finance, treasury
management and liquidity solutions (payments and cash management and
commercial cards), commercial insurance and investments. CMB also offers
customers access to products and services offered by other global businesses,
such as Global Banking and Markets, which include foreign exchange products,
raising capital on debt and equity markets and advisory services.
- Global Banking and Markets ('GBM') provides tailored financial
solutions to major government, corporate and institutional clients and private
investors worldwide. The client-focused business lines deliver a full range of
banking capabilities, including financing, advisory and transaction services,
a markets business that provides services in credit, rates, foreign exchange,
equities, money markets and securities services, and principal investment
activities.
HSBC constant currency profit before tax and balance sheet data
2023
Wealth and Personal Banking Commercial Global Corporate Centre Total
Banking(3) Banking and
Markets(3)
$m $m $m $m $m
Net operating income/(expense) before change in expected credit losses and 27,275 22,867 16,115 (199) 66,058
other credit impairment charges(2)
- external 19,107 24,209 28,021 (5,279) 66,058
- inter-segment 8,168 (1,342) (11,906) 5,080 -
- of which: net interest income/(expense)(4) 20,492 17,147 7,141 (8,984) 35,796
Change in expected credit losses and other credit impairment charges (1,058) (2,062) (326) (1) (3,447)
Net operating income/(expense) 26,217 20,805 15,789 (200) 62,611
Total operating expenses (14,738) (7,524) (9,865) 57 (32,070)
Operating profit/(loss) 11,479 13,281 5,924 (143) 30,541
Share of profit/(loss) in associates and joint ventures less impairment(5) 65 (1) - (257) (193)
Constant currency profit before tax 11,544 13,280 5,924 (400) 30,348
% % % % %
Share of HSBC's constant currency profit before tax 38.0 43.8 19.5 (1.3) 100.0
Constant currency cost efficiency ratio 54.0 32.9 61.2 28.6 48.5
Constant currency balance sheet data $m $m $m $m $m
Loans and advances to customers (net) 454,878 309,422 173,966 269 938,535
Interests in associates and joint ventures 551 28 111 26,654 27,344
Total external assets 937,079 632,406 1,331,395 137,797 3,038,677
Customer accounts 804,863 475,666 330,522 596 1,611,647
2022¹
Net operating income/(expense) before change in expected credit losses and 20,884 16,283 14,602 (1,898) 49,871
other credit impairment charges(2)
- external 18,299 16,973 18,744 (4,145) 49,871
- inter-segment 2,585 (690) (4,142) 2,247 -
- of which: net interest income/(expense)(4) 15,971 11,763 4,696 (2,668) 29,762
Change in expected credit losses and other credit impairment charges (1,186) (1,862) (573) (9) (3,630)
Net operating income/(expense) 19,698 14,421 14,029 (1,907) 46,241
Total operating expenses (14,248) (6,894) (9,338) (1,822) (32,302)
Operating profit/(loss) 5,450 7,527 4,691 (3,729) 13,939
Share of profit/(loss) in associates and joint ventures 30 - (2) 2,574 2,602
Constant currency profit/(loss) before tax 5,480 7,527 4,689 (1,155) 16,541
% % % % %
Share of HSBC's constant currency profit before tax 33.1 45.6 28.3 (7.0) 100.0
Constant currency cost efficiency ratio 68.2 42.3 64.0 (96.0) 64.8
Constant currency balance sheet data $m $m $m $m $m
Loans and advances to customers (net) 434,122 316,863 190,202 361 941,548
Interests in associates and joint ventures 514 33 93 28,143 28,783
Total external assets 893,867 620,193 1,341,575 152,049 3,007,684
Customer accounts 793,310 472,424 332,303 458 1,598,495
HSBC constant currency profit before tax and balance sheet data (continued)
2021
Wealth and Personal Banking Commercial Global Corporate Total
Banking Banking and Centre
Markets
$m $m $m $m $m
Net operating income/(expense) before change in expected credit losses and 20,972 12,699 13,086 (678) 46,079
other credit impairment charges(2)
- external 20,787 12,685 14,533 (1,926) 46,079
- inter-segment 185 14 (1,447) 1,248 -
- of which: net interest income/(expense)(4) 13,445 8,467 3,419 (714) 24,617
Change in expected credit losses and other credit impairment charges 195 339 221 3 758
Net operating income/(expense) 21,167 13,038 13,307 (675) 46,837
Total operating expenses (15,338) (6,691) (9,255) (960) (32,244)
Operating profit/(loss) 5,829 6,347 4,052 (1,635) 14,593
Share of profit in associates and joint ventures 36 1 - 2,770 2,807
Constant currency profit/(loss) before tax 5,865 6,348 4,052 1,135 17,400
% % % % %
Share of HSBC's constant currency profit before tax 33.7 36.5 23.3 6.5 100.0
Constant currency cost efficiency ratio 73.1 52.7 70.7 (141.6) 70.0
Constant currency balance sheet data $m $m $m $m $m
Loans and advances to customers (net) 473,304 340,603 196,193 712 1,010,812
Interests in associates and joint ventures 493 31 101 27,036 27,661
Total external assets 905,024 605,696 1,171,909 178,074 2,860,703
Customer accounts 834,767 495,492 322,306 622 1,653,187
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year
ended 31 December 2022 have been restated accordingly. Comparative data for
the year ended 31 December 2021 are prepared on an IFRS 4 basis.
2 Net operating income before change in expected credit losses and other
credit impairment charges, also referred to as revenue.
3 In the first quarter of 2023, following an internal review to assess
which global businesses were best suited to serve our customers' respective
needs, a portfolio of our customers within our entities in Latin America was
transferred from GBM to CMB for reporting purposes. Comparative data have been
re-presented accordingly.
4 Net interest expense recognised in Corporate Centre includes $8.7bn
(2022: $2.5bn; 2021: undisclosed) of interest expense in relation to the
internal cost to fund trading and fair value net assets; and the funding cost
of foreign exchange swaps in our Markets Treasury function. In the second
quarter of 2023, we implemented a consistent reporting approach across the
most material entities that contribute to our trading and fair value net
assets, which resulted in an increase to the associated funding costs reported
through the intersegment elimination in Corporate Centre.
5 Includes an impairment loss of $3.0bn recognised in respect of the
Group's investment in BoCom. See Note 18 on page 391.
Reported external net operating income is attributed to countries and
territories on the basis of the location of the branch responsible for
reporting the results or advancing the funds:
2023 2022¹ 2021
$m $m $m
Reported external net operating income/(expense) by country/territory(2) 66,058 50,620 49,552
- UK 11,027 11,710 10,909
- Hong Kong 20,185 15,454 14,245
- US 3,816 3,893 3,795
- France 4,208 (177) 2,179
- other countries/territories 26,822 19,740 18,424
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year
ended 31 December 2022 have been restated accordingly. Comparative data for
the year ended 31 December 2021 are prepared on an IFRS 4 basis.
2 Net operating income before change in expected credit losses and
other credit impairment charges, also referred to as revenue.
Constant currency results reconciliation
2023 2022¹ 2021
Reported and constant currency Constant currency Currency translation Reported Constant currency Currency translation Reported
$m $m $m $m $m $m $m
Revenue(2) 66,058 49,871 (749) 50,620 46,079 (3,473) 49,552
ECL (3,447) (3,630) (46) (3,584) 758 (170) 928
Operating expenses (32,070) (32,302) 399 (32,701) (32,244) 2,376 (34,620)
Share of profit in associates and joint ventures less impairment(3) (193) 2,602 (121) 2,723 2,807 (239) 3,046
Profit before tax 30,348 16,541 (517) 17,058 17,400 (1,506) 18,906
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year
ended 31 December 2022 have been restated accordingly. Comparative data for
the year ended 31 December 2021 are prepared on an IFRS 4 basis.
2 Net operating income before change in expected credit losses and other
credit impairment charges, also referred to as revenue.
3 Includes an impairment loss of $3.0bn recognised in respect of the
Group's investment in BoCom. See Note 18 on page 391.
Constant currency balance sheet reconciliation
2023 2022¹ 2021
Reported and constant currency Constant currency Currency translation Reported Constant currency Currency translation Reported
$m $m $m $m $m $m $m
Loans and advances to customers (net) 938,535 941,548 (17,987) 923,561 1,010,812 35,002 1,045,814
Interests in associates and joint ventures 27,344 28,783 471 29,254 27,661 1,948 29,609
Total external assets 3,038,677 3,007,684 (58,398) 2,949,286 2,860,703 97,236 2,957,939
Customer accounts 1,611,647 1,598,495 (28,192) 1,570,303 1,653,187 57,387 1,710,574
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year
ended 31 December 2022 have been restated accordingly. Comparative data for
the year ended 31 December 2021 are prepared on an IFRS 4 basis.
Notable items
2023 2022 2021
$m $m $m
Year ended 31 Dec
Notable items
Revenue
Disposals, acquisitions and related costs(1,2) 1,298 (2,737) -
Fair value movements on financial instruments(3) 14 (618) (221)
Restructuring and other related costs - (247) (307)
Disposal losses on Markets Treasury repositioning (977) - -
Operating expenses
Disposals, acquisitions and related costs (321) (18) -
Impairment of non-financial items - - (587)
Restructuring and other related costs(4) 136 (2,882) (1,836)
Impairment of interests in associates(5) (3,000) - -
1 Includes the impact of the sale of our retail banking operations in
France.
2 Includes the provisional gain of $1.6bn recognised in respect of the
acquisition of SVB UK.
3 Fair value movements on non-qualifying hedges in HSBC Holdings.
4 Amounts in 2023 relate to reversals of restructuring provisions
recognised during 2022.
5 Relates to an impairment loss of $3.0bn recognised in respect of the
Group's investment in BoCom. See Note 18 on page 391.
11 Trading assets
2023 2022
$m $m
Treasury and other eligible bills 24,433 22,897
Debt securities 106,108 78,126
Equity securities 123,663 88,026
Trading securities 254,204 189,049
Loans and advances to banks(1) 9,761 8,769
Loans and advances to customers(1) 25,194 20,275
Year ended 31 Dec 289,159 218,093
1 Loans and advances to banks and customers include reverse repos,
stock borrowing and other accounts.
12 Fair values of financial instruments carried at fair value
Control framework
Fair values are subject to a control framework designed to ensure that they
are either determined or validated by a function independent of the risk
taker.
Where fair values are determined by reference to externally quoted prices or
observable pricing inputs to models, independent price determination or
validation is used. For inactive markets, HSBC sources alternative market
information, with greater weight given to information that is considered to be
more relevant and reliable. Examples of the factors considered are price
observability, instrument comparability, consistency of data sources,
underlying data accuracy and timing of prices.
For fair values determined using valuation models, the control framework
includes development or validation by independent support functions of the
model logic, inputs, model outputs and adjustments. Valuation models are
subject to a process of due diligence before becoming operational and are
calibrated against external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss analysis
process and are disaggregated into high-level categories including portfolio
changes, market movements and other fair value adjustments.
The majority of financial instruments measured at fair value are in GBM. GBM's
fair value governance structure comprises its Finance function, Valuation
Committees and a Valuation Committee Review Group. Finance is responsible for
establishing procedures governing valuation and ensuring fair values are in
compliance with accounting standards. The fair values are reviewed by the
Valuation Committees, which consist of independent support functions. These
committees are overseen by the Valuation Committee Review Group, which
considers all material subjective valuations.
Financial liabilities measured at fair value
In certain circumstances, HSBC records its own debt in issue at fair value,
based on quoted prices in an active market for the specific instrument. When
quoted market prices are unavailable, the own debt in issue is valued using
valuation techniques, the inputs for which are either based on quoted prices
in an inactive market for the instrument or are estimated by comparison with
quoted prices in an active market for similar instruments. In both cases, the
fair value includes the effect of applying the credit spread that is
appropriate to HSBC's liabilities. The change in fair value of issued debt
securities attributable to the Group's own credit spread is computed as
follows: for each security at each reporting date, an externally verifiable
price is obtained or a price is derived using credit spreads for similar
securities for the same issuer. Then, using discounted cash flow, each
security is valued using an appropriate market discount curve. The difference
in the valuations is attributable to the Group's own credit spread. This
methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments are reported as
financial liabilities designated at fair value. The credit spread applied to
these instruments is derived from the spreads at which HSBC issues structured
notes.
Gains and losses arising from changes in the credit spread of liabilities
issued by HSBC, recorded in other comprehensive income, reverse over the
contractual life of the debt, provided that the debt is not repaid at a
premium or a discount.
Fair value hierarchy
Fair values of financial assets and liabilities are determined according to
the following hierarchy:
- Level 1 - valuation technique using quoted market price. These are
financial instruments with quoted prices for identical instruments in active
markets that HSBC can access at the measurement date.
- Level 2 - valuation technique using observable inputs. These are
financial instruments with quoted prices for similar instruments in active
markets or quoted prices for identical or similar instruments in inactive
markets and financial instruments valued using models where all significant
inputs are observable.
- Level 3 - valuation technique with significant unobservable inputs.
These are financial instruments valued using valuation techniques where one or
more significant inputs are unobservable.
-
Financial instruments carried at fair value and bases of valuation
2023 2022(1)
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
$m $m $m $m $m $m $m $m
Recurring fair value measurements at 31 Dec
Assets
Trading assets 202,020 82,833 4,306 289,159 148,592 64,684 4,817 218,093
Financial assets designated and otherwise mandatorily measured at fair value 27,030 63,825 19,788 110,643 23,146 59,548 17,407 100,101
through profit or loss
Derivatives 931 226,714 2,069 229,714 2,917 279,278 1,964 284,159
Financial investments 215,228 76,591 2,618 294,437 181,659 71,040 2,961 255,660
Liabilities
Trading liabilities 53,354 19,318 478 73,150 44,787 27,092 474 72,353
Financial liabilities designated at fair value 1,266 129,232 10,928 141,426 1,125 115,764 10,432 127,321
Derivatives 1,918 230,285 2,569 234,772 2,399 280,443 2,920 285,762
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data.
The table below provides the fair value levelling of assets held for sale and
liabilities of disposal groups that have been classified as held for sale in
accordance with IFRS 5. For further details, see Note 23.
Financial instruments carried at fair value and bases of valuation - assets
and liabilities held for sale
2023 2022
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
$m $m $m $m $m $m $m $m
Recurring fair value measurements at 31 Dec
Assets
Trading assets 2,403 61 - 2,465 2,932 244 - 3,176
Financial assets designated and otherwise mandatorily measured at fair value - 15 49 64 - 14 47 61
through profit or loss
Derivatives - 528 - 528 - 866 - 866
Financial investments 9,357 - 28 9,385 11,184 - - 11,184
Liabilities
Trading liabilities 1,352 64 - 1,417 2,572 182 - 2,754
Financial liabilities designated at fair value - 2,370 - 2,370 - 3,523 - 3,523
Derivatives - 615 - 615 - 813 - 813
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
Financial Trading Designated and otherwise Derivatives Trading Designated Derivatives
investments assets mandatorily measured liabilities at fair value
at fair value
$m $m $m $m $m $m $m
At 31 Dec 2023
Transfers from Level 1 to Level 2 13,200 8,066 - 54 - -
1,709
Transfers from Level 2 to Level 1 9,975 5,758 - 309 - -
2,477
At 31 Dec 2022
Transfers from Level 1 to Level 2 4,721 5,284 - 113 - -
2,565
Transfers from Level 2 to Level 1 8,208 5,964 - 233 - -
3,340
Transfers between levels of the fair value hierarchy are deemed to occur at
the end of each quarterly reporting period. Transfers into and out of levels
of the fair value hierarchy are primarily attributable to observability of
valuation inputs and price transparency.
Fair value adjustments
We adopt the use of fair value adjustments when we take into consideration
additional factors not incorporated within the valuation model that would
otherwise be considered by a market participant. We classify fair value
adjustments as either 'risk-related' or 'model-related'. The majority of these
adjustments relate to GBM. Movements in the amount of fair value adjustments
do not necessarily translate in equivalent movements of profits or losses
within the income statement, as these movements can be compensated by other
related profits or loss effects. For example, as models are enhanced, fair
value adjustments may no longer be required. Similarly, fair value adjustments
will decrease when the related positions are unwound, but this may not result
in profit or loss.
Global Banking and Markets fair value adjustments
2023 2022
GBM Corporate GBM Corporate
Centre Centre
$m $m $m $m
Type of adjustment
Risk-related 692 41 650 40
- bid-offer 414 - 426 -
- uncertainty 75 3 86 -
- credit valuation adjustment 164 35 245 35
- debit valuation adjustment (54) - (175) -
- funding fair value adjustment 93 3 68 5
Model-related 63 - 61 -
- model limitation 63 - 61 -
Inception profit (Day 1 P&L reserves) 86 - 97 -
At 31 Dec 841 41 808 40
The increase in fair value adjustments was predominantly driven by the
reduction in the debit valuation adjustment including a consideration of the
overlap with the funding fair value adjustment. This was partly offset by
reductions from changes to exposure, and tightening of credit and liquidity
market spreads.
Bid-offer
IFRS 13 'Fair Value Measurement' requires the use of the price within the
bid-offer spread that is most representative of fair value. Valuation models
will typically generate mid-market values. The bid-offer adjustment reflects
the extent to which bid-offer costs would be incurred if substantially all
residual net portfolio market risks were closed using available hedging
instruments or by disposing of or unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable from market data and/or
the choice of model itself may be more subjective. In these circumstances, an
adjustment may be necessary to reflect the likelihood that market participants
would adopt more conservative values for uncertain parameters and/or model
assumptions than those used in HSBC's valuation model.
Credit and debit valuation adjustments
The credit valuation adjustment ('CVA') is an adjustment to the valuation of
over-the-counter ('OTC') derivative contracts to reflect the possibility that
the counterparty may default and that HSBC may not receive the full market
value of the transactions.
The debit valuation adjustment ('DVA') is an adjustment to the valuation of
OTC derivative contracts to reflect the possibility that HSBC may default, and
that it may not pay the full market value of the transactions. The DVA
considers the overlap with the funding fair value adjustment.
HSBC calculates a separate CVA and DVA for each legal entity, and for each
counterparty to which the entity has exposure. With the exception of central
clearing parties, all third-party counterparties are included in the CVA and
DVA calculations, and these adjustments are not netted across Group entities.
HSBC calculates the CVA by applying the probability of default ('PD') of the
counterparty, conditional on the non-default of HSBC, to HSBC's expected
positive exposure to the counterparty and multiplying the result by the loss
expected in the event of default. Conversely, HSBC calculates the DVA by
applying the PD of HSBC, conditional on the non-default of the counterparty,
to the expected positive exposure of the counterparty to HSBC and multiplying
the result by the loss expected in the event of default. Both calculations
are performed over the life of the potential exposure.
For most products HSBC uses a simulation methodology, which incorporates a
range of potential exposures over the life of the portfolio, to calculate the
expected positive exposure to a counterparty. The simulation methodology
includes credit mitigants, such as counterparty netting agreements and
collateral agreements with the counterparty.
The methodologies do not, in general, account for 'wrong-way risk'. Wrong-way
risk is an adverse correlation between the counterparty's probability of
default and the mark-to-market value of the underlying transaction. The risk
can either be general, perhaps related to the currency of the issuer country,
or specific to the transaction concerned. When there is significant wrong-way
risk, a trade-specific approach is applied to reflect this risk in the
valuation.
Funding fair value adjustment
The funding fair value adjustment ('FFVA') is calculated by applying future
market funding spreads to the expected future funding exposure of any
uncollateralised component of the OTC derivative portfolio. The expected
future funding exposure is calculated by a simulation methodology, where
available, and is adjusted for events that may terminate the exposure, such as
the default of HSBC or the counterparty.
Model limitation
Models used for portfolio valuation purposes may be based upon a simplified
set of assumptions that do not capture all current and future material market
characteristics. In these circumstances, model limitation adjustments are
adopted.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted when the fair value estimated by a
valuation model is based on one or more significant unobservable inputs. The
accounting for inception profit adjustments is discussed in Note 1.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with
significant unobservable inputs - Level 3
Assets Liabilities
Financial investments Trading assets Designated and otherwise mandatorily measured at fair value through profit or Derivatives Total Trading liabilities Designated at fair value Derivatives Total
loss
$m $m $m $m $m $m $m $m $m
Private equity including strategic investments 507 7 17,640 - 18,154 - 1 - 1
Asset-backed securities 309 128 8 - 445 - - - -
Structured notes - - 3 - 3 - 10,331 - 10,331
Other derivatives - - - 2,069 2,069 - - 2,569 2,569
Other portfolios 1,802 4,171 2,137 - 8,110 478 596 - 1,074
At 31 Dec 2023 2,618 4,306 19,788 2,069 28,781 478 10,928 2,569 13,975
Private equity including strategic investments 647 19 15,653 - 16,319 92 - - 92
Asset-backed securities 438 208 95 - 741 - - - -
Structured notes - - - - - - 10,432 - 10,432
Other derivatives - - - 1,964 1,964 - - 2,920 2,920
Other portfolios 1,876 4,590 1,659 - 8,125 382 - - 382
At 31 Dec 2022 2,961 4,817 17,407 1,964 27,149 474 10,432 2,920 13,826
Level 3 instruments are present in both ongoing and legacy businesses. Loans
held for securitisation, derivatives with monolines, certain 'other
derivatives' and predominantly all Level 3 asset-backed securities are legacy
positions. HSBC has the capability to hold these positions.
Private equity including strategic investments
The fair value of a private equity investment (including strategic
investments) is estimated on the basis of an analysis of the investee's
financial position and results, risk profile, prospects and other factors; by
reference to market valuations for similar entities quoted in an active
market; the price at which similar companies have changed ownership; or from
published net asset values ('NAV') received. If necessary, adjustments are
made to the NAV of funds to obtain the best estimate of fair value.
Asset-backed securities
While quoted market prices are generally used to determine the fair value of
the asset-backed securities ('ABSs'), valuation models are used to
substantiate the reliability of the limited market data available and to
identify whether any adjustments to quoted market prices are required. For
certain ABSs, such as residential mortgage-backed securities, the valuation
uses an industry standard model with assumptions relating to prepayment
speeds, default rates and loss severity based on collateral type, and
performance, as appropriate. The valuations output is benchmarked for
consistency against observable data for securities of a similar nature.
Structured notes
The fair value of Level 3 structured notes is derived from the fair value of
the underlying debt security, and the fair value of the embedded derivative is
determined as described in the paragraph below on derivatives. These
structured notes comprise principally equity-linked notes issued by HSBC,
which provide the counterparty with a return linked to the performance of
equity securities and other portfolios.
Examples of the unobservable parameters include long-dated equity volatilities
and correlations between equity prices, and interest and foreign exchange
rates.
Derivatives
OTC derivative valuation models calculate the present value of expected future
cash flows, based upon 'no arbitrage' principles. For many vanilla derivative
products, the modelling approaches used are standard across the industry. For
more complex derivative products, there may be some differences in market
practice. Inputs to valuation models are determined from observable market
data wherever possible, including prices available from exchanges, dealers,
brokers or providers of consensus pricing. Certain inputs may not be
observable in the market directly, but can be determined from observable
prices via model calibration procedures or estimated from historical data or
other sources.
Reconciliation of fair value measurements in Level 3 of the fair value
hierarchy
Movement in Level 3 financial instruments
Assets Liabilities
Financial investments Trading assets Designated and otherwise mandatorily measured at fair value through profit or Derivatives Trading liabilities Designated at fair value Derivatives
loss
$m $m $m $m $m $m $m
At 1 Jan 2023 2,961 4,817 17,407 1,964 474 10,432 2,920
Total gains/(losses) recognised in profit or loss (44) 266 921 692 75 97 910
- net income/(losses) from financial instruments held for trading or managed - 266 - 692 75 97 910
on a fair value basis
- changes in fair value of other financial instruments mandatorily measured - - 921 - - - -
at fair value through profit or loss
- gains less losses from financial investments at fair value through other (44) - - - - - -
comprehensive income
Total gains/(losses) recognised in other comprehensive income ('OCI')(1) 28 108 87 81 24 523 111
- financial investments: fair value gains/(losses) (44) - - - - 335 -
- exchange differences 72 108 87 81 24 188 111
Purchases 353 2,276 3,555 - 291 - -
New issuances - 2 - - 2 5,389 -
Sales (290) (2,478) (658) - (320) (2) -
Settlements (352) (872) (1,886) (1,018) (74) (3,258) (1,565)
Transfers out (662) (922) (156) (240) (45) (2,881) (358)
Transfers in 624 1,109 518 590 51 628 551
At 31 Dec 2023 2,618 4,306 19,788 2,069 478 10,928 2,569
Unrealised gains/(losses) recognised in profit or loss relating to assets and - (152) 82 737 - (433) (903)
liabilities held at 31 Dec 2023
- net income/(losses) from financial instruments held for trading or managed - (152) - 737 - - (903)
on a fair value basis
- changes in fair value of other financial instruments mandatorily measured - - 82 - - (433) -
at fair value through profit or loss
At 1 Jan 2022 3,389 2,662 14,238 2,478 785 7,880 3,088
IFRS 17 impacts (12) - 1,468 - - - -
At 1 Jan 2022 (as restated) 3,377 2,662 15,706 2,478 785 7,880 3,088
Total gains/(losses) recognised in profit or loss (4) (245) 132 390 (52) (1,334) 1,014
- net income/(losses) from financial instruments held for trading or managed - (245) - 390 (52) - 1,014
on a fair value basis
- changes in fair value of other financial instruments mandatorily measured - - 132 - - (1,334) -
at fair value through profit or loss
- gains less losses from financial investments at fair value through other (4) - - - - - -
comprehensive income
Total gains/(losses) recognised in other comprehensive income ('OCI')(1) (325) (137) (217) (219) (11) (345) (226)
- financial investments: fair value gains/(losses) (202) - - - - 82 -
- exchange differences (123) (137) (217) (219) (11) (427) (226)
Purchases 1,048 3,436 4,410 - 178 - -
New issuances 1 - - - 8 4,183 -
Sales (240) (1,102) (801) - (152) (94) -
Settlements (464) (1,273) (1,883) (918) (644) 182 (993)
Transfers out (489) (442) (76) (409) (18) (1,296) (632)
Transfers in 57 1,918 136 642 380 1,256 669
At 31 Dec 2022 2,961 4,817 17,407 1,964 474 10,432 2,920
Unrealised gains/(losses) recognised in profit or loss relating to assets and - (100) (158) 707 2 100 2,779
liabilities held at 31 Dec 2022
- net income/(losses) from financial instruments held for trading or managed - (100) - 707 2 - 2,779
on a fair value basis
- changes in fair value of other financial instruments mandatorily measured - - (158) - - 100 -
at fair value through profit or loss
1 Included in 'financial investments: fair value gains/(losses)' in
the current year and 'exchange differences' in the consolidated statement of
comprehensive income.
Transfers between levels of the fair value hierarchy are deemed to occur at
the end of each quarterly reporting period. Transfers into and out of levels
of the fair value hierarchy are primarily attributable to observability of
valuation inputs and price transparency.
Effect of changes in significant unobservable assumptions to reasonably
possible alternatives
Sensitivity of fair values to reasonably possible alternative assumptions
2023 2022
Reflected in profit or loss Reflected in OCI Reflected in profit or loss Reflected in OCI
Favourable Un- Favourable Un- Favourable Un- Favourable Un-
changes favourable changes favourable changes favourable changes favourable
changes changes changes changes
$m $m $m $m $m $m $m $m
Derivatives, trading assets and trading liabilities(1) 492 (531) - - 264 (291) - -
Financial assets and liabilities designated and otherwise mandatorily measured 1,092 (1,100) - - 981 (978) - -
at fair value through profit or loss
Financial investments 13 (12) 61 (66) 11 (11) 65 (55)
At 31 Dec 1,597 (1,643) 61 (66) 1,256 (1,280) 65 (55)
1 'Derivatives, trading assets and trading liabilities' are presented
as one category to reflect the manner in which these instruments are
risk-managed.
The sensitivity analysis aims to measure a range of fair values consistent
with the application of a 95% confidence interval. Methodologies take account
of the nature of the valuation technique employed, as well as the availability
and reliability of observable proxy and historical data.
When the fair value of a financial instrument is affected by more than one
unobservable assumption, the above table reflects the most favourable or the
most unfavourable change from varying the assumptions individually.
Key unobservable inputs to Level 3 financial instruments
The following table lists key unobservable inputs to Level 3 financial
instruments and provides the range of those inputs at 31 December 2023.
Quantitative information about significant unobservable inputs in Level 3
valuations
Fair value 2023 2022
Assets Liabilities Key valuation Key unobservable Full range Full range
techniques inputs of inputs of inputs
$m $m Lower Higher Lower Higher
Private equity including strategic investments 18,154 1 See below See below
Asset-backed securities 445 -
- collateralised loan/debt obligation 44 - Market proxy Bid quotes - 94 - 92
- other ABSs 401 - Market proxy Bid quotes - 220 - 99
Structured notes 3 10,331
- equity-linked notes 3 7,054 Model - Option model Equity volatility 6% 154% 6% 142%
Model - Option model Equity correlation 34% 100% 32% 99%
- Foreign exchange-linked notes - 1,733 Model - Option model Foreign exchange volatility 1% 34% 3% 37%
- other - 1,544
Derivatives 2,069 2,569
- interest rate derivatives 864 784
securitisation swaps 146 136 Model - Discounted cash flow Prepayment rate 5% 10% 5% 10%
long-dated swaptions 57 69 Model - Option model Interest rate volatility 11% 37% 8% 53%
other 661 579
- Foreign exchange derivatives 308 427
Foreign exchange options 255 356 Model - Option model Foreign exchange volatility 1% 31% 1% 46%
other 53 71
- equity derivatives 600 981
long-dated single stock options 391 609 Model - Option model Equity volatility 6% 110% 7% 153%
other 209 372
- credit derivatives 297 377
Other portfolios 8,110 1,074
- repurchase agreements 1,090 310 Model - Discounted cash flow Interest rate curve 3% 8% 1% 9%
- bonds 3,278 1 Market proxy Mid quotes - 101 - 102
- other(1) 3,742 763
At 31 Dec 2023 28,781 13,975
1 'Other' includes a range of smaller asset holdings.
The range of values above shows the highest and lowest unobservable inputs
that have been used to value significant Level 3 exposures and reflects the
diversity of the underlying financial instruments in scope and subsequent
differentiation in pricing.
Private equity including strategic investments
Given the bespoke nature of the analysis in respect of each private equity
holding, it is not practical to quote a range of key unobservable inputs. The
valuation approach includes using a range of inputs that include
company-specific financials, traded comparable companies multiples, published
net asset values and qualitative assumptions, which are not directly
comparable or quantifiable.
Prepayment rates
Prepayment rates are a measure of the anticipated future speed at which a loan
portfolio will be repaid in advance of the due date. They vary according to
the nature of the loan portfolio and expectations of future market conditions,
and may be estimated using a variety of evidence, such as prepayment rates
implied from proxy observable security prices, current or historical
prepayment rates and macroeconomic modelling.
Market proxy
Market proxy pricing may be used for an instrument when specific market
pricing is not available but there is evidence from instruments with common
characteristics. In some cases it might be possible to identify a specific
proxy, but more generally evidence across a wider range of instruments will be
used to understand the factors that influence current market pricing and the
manner of that influence.
Volatility
Volatility is a measure of the anticipated future variability of a market
price. It varies by underlying reference market price, and by strike and
maturity of the option. Certain volatilities, typically those of a
longer-dated nature, are unobservable and are estimated from observable data.
The range of unobservable volatilities reflects the wide variation in
volatility inputs by reference market price.
Correlation
Correlation is a measure of the inter-relationship between two market
variables and is expressed as a number between minus one and one. It is used
to value more complex instruments where the payout is dependent upon more than
one market variable. There is a wide range of instruments for which
correlation is an input, and consequently a wide range of both same-asset
correlations and cross-asset correlations is used. In general, the range of
same-asset correlations will be narrower than the range of cross-asset
correlations.
Unobservable correlations may be estimated based upon a range of evidence,
including consensus pricing services, HSBC trade prices, proxy correlations
and examination of historical price relationships. The range of unobservable
correlations quoted in the table reflects the wide variation in correlation
inputs by market variable pair.
Credit spread
Credit spread is the premium over a benchmark interest rate required by the
market to accept lower credit quality. In a discounted cash flow model, the
credit spread increases the discount factors applied to future cash flows,
thereby reducing the value of an asset. Credit spreads may be implied from
market prices and may not be observable in more illiquid markets.
Inter-relationships between key unobservable inputs
Key unobservable inputs to Level 3 financial instruments may not be
independent of each other. As described above, market variables may be
correlated. This correlation typically reflects the manner in which different
markets tend to react to macroeconomic or other events. Furthermore, the
effect of changing market variables on the HSBC portfolio will depend on
HSBC's net risk position in respect of each variable.
HSBC Holdings
Basis of valuing HSBC Holdings' financial assets and liabilities measured at
fair value
2023 2022
$m $m
Valuation technique using observable inputs: Level 2
Assets at 31 Dec
- derivatives 3,344 3,801
- designated and otherwise mandatorily measured at fair value through profit 59,879 52,322
or loss
Liabilities at 31 Dec
- designated at fair value 43,638 32,123
- derivatives 6,090 6,922
13 Fair values of financial instruments not carried at fair value
Fair values of financial instruments not carried at fair value and bases of
valuation
Fair value
Carrying Quoted market Observable Significant Total
amount price Level 1 inputs Level 2 unobservable
inputs Level 3
$m $m $m $m $m
At 31 Dec 2023
Assets
Loans and advances to banks 112,902 2 111,263 1,479 112,744
Loans and advances to customers 938,535 - 13,258 911,124 924,382
Reverse repurchase agreements - non-trading 252,217 - 252,243 - 252,243
Financial investments - at amortised cost 148,326 115,383 30,765 440 146,588
Liabilities
Deposits by banks 73,163 - 73,176 - 73,176
Customer accounts 1,611,647 - 1,611,795 - 1,611,795
Repurchase agreements - non-trading 172,100 - 172,081 - 172,081
Debt securities in issue 93,917 - 93,196 706 93,902
Subordinated liabilities 24,954 - 27,151 - 27,151
At 31 Dec 2022(1)
Assets
Loans and advances to banks 104,475 4 103,641 814 104,459
Loans and advances to customers 923,561 - 8,791 903,107 911,898
Reverse repurchase agreements - non-trading 253,754 - 253,668 - 253,668
Financial investments - at amortised cost 109,066 84,087 21,850 475 106,412
Liabilities
Deposits by banks 66,722 - 66,831 - 66,831
Customer accounts 1,570,303 - 1,570,209 - 1,570,209
Repurchase agreements - non-trading 127,747 - 127,500 - 127,500
Debt securities in issue 78,149 - 76,640 381 77,021
Subordinated liabilities 22,290 - 22,723 - 22,723
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year
ended 31 December 2022 have been restated accordingly. Comparative data for
the year ended 31 December 2021 are prepared on an IFRS 4 basis.
Fair values of financial instruments not carried at fair value and bases of
valuation - assets and disposal groups held for sale
Fair value
Carrying amount Quoted market price Level 1 Observable inputs Level 2 Significant unobservable inputs Level 3 Total
$m $m $m $m $m
At 31 Dec 2023
Assets
Loans and advances to banks 10,487 - 10,487 - 10,487
Loans and advances to customers 73,376 - 90 72,200 72,290
Reverse repurchase agreements - non-trading 2,723 - 2,723 - 2,723
Financial investments - at amortised cost 7,624 7,530 - 5 7,535
Liabilities
Deposits by banks 78 - 78 - 78
Customer accounts 85,950 - 86,475 - 86,475
Repurchase agreements - non-trading 2,768 - 2,768 - 2,768
Debt securities in issue 9,084 - 8,820 - 8,820
Subordinated liabilities 8 - 7 - 7
At 31 Dec 2022
Assets
Loans and advances to banks 253 - 257 - 257
Loans and advances to customers 80,687 - 111 78,048 78,159
Reverse repurchase agreements - non-trading 4,646 - 4,646 - 4,646
Financial investments - at amortised cost 6,165 6,042 - - 6,042
Liabilities
Deposits by banks 64 - 64 - 64
Customer accounts 85,274 - 85,303 - 85,303
Repurchase agreements - non-trading 3,266 - 3,266 - 3,266
Debt securities in issue 12,928 - 12,575 - 12,575
Subordinated liabilities 8 - 7 - 7
Other financial instruments not carried at fair value are typically short term
in nature and reprice to current market rates frequently. Accordingly, their
carrying amount is a reasonable approximation of fair value. They include cash
and balances at central banks, items in the course of collection from and
transmission to other banks, Hong Kong Government certificates of indebtedness
and Hong Kong currency notes in circulation, all of which are measured at
amortised cost.
Valuation
Fair value is an estimate of the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. This may be different from the
theoretical economic value attributed from an instrument's cash flows over its
expected future life. Our valuation methodologies and assumptions in
determining fair values for which no observable market prices are available
may differ from those of other companies.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and customers,
loans are segregated into portfolios of similar characteristics. Fair values
are based on observable market transactions, when available. When they are
unavailable, fair values are estimated using valuation models incorporating a
range of input assumptions. These assumptions may include: value estimates
from third-party brokers reflecting over-the-counter trading activity;
forward-looking discounted cash flow models, taking account of expected
customer prepayment rates, using assumptions that HSBC believes are consistent
with those that would be used by market participants in valuing such loans;
recent origination pricing for similar loans; and trading inputs from other
market participants including observed primary and secondary trades. From time
to time, we may engage a third-party valuation specialist to measure the fair
value of a pool of loans.
The fair value of loans reflects expected credit losses at the balance sheet
date and estimates of market participants' expectations of credit losses over
the life of the loans, and the fair value effect of repricing between
origination and the balance sheet date. For credit-impaired loans, fair value
is estimated by discounting the future cash flows over the time period they
are expected to be recovered.
Financial investments
The fair values of listed financial investments are determined using bid
market prices. The fair values of unlisted financial investments are
determined using valuation techniques that incorporate the prices and future
earnings streams of equivalent quoted securities.
Deposits by banks and customer accounts
The fair values of on-demand deposits are approximated by their carrying
amount. For deposits with longer-term maturities, fair values are estimated
using discounted cash flows, applying current rates offered for deposits of
similar remaining maturities.
Debt securities in issue and subordinated liabilities
Fair values in debt securities in issue and subordinated liabilities are
determined using quoted market prices at the balance sheet date where
available, or by reference to quoted market prices for similar instruments.
Repurchase and reverse repurchase agreements - non-trading
Fair values of repurchase and reverse repurchase agreements that are held on a
non-trading basis provide approximate carrying amounts. This is due to the
fact that balances are generally short dated.
HSBC Holdings
The methods used by HSBC Holdings to determine fair values of financial
instruments for the purposes of measurement and disclosure are described
above.
Fair values of HSBC Holdings' financial instruments not carried at fair value
on the balance sheet
2023 2022
Carrying amount Fair value(1) Carrying amount Fair value(1)
$m $m $m $m
Assets at 31 Dec
Loans and advances to HSBC undertakings 27,354 27,878 26,765 26,962
Financial investments - at amortised cost 19,558 19,531 19,466 19,314
Liabilities at 31 Dec
Debt securities in issue 65,239 65,172 66,938 65,364
Subordinated liabilities 24,439 26,651 19,727 20,644
1 Fair values (other than Level 1 financial investments) were
determined using valuation techniques with observable inputs (Level 2).
14 Financial assets designated and otherwise mandatorily measured at fair value
through profit or loss
2023 2022¹
Designated at fair value Mandatorily measured at fair value Total Designated at fair value Mandatorily measured at Total
fair value
$m $m $m $m $m $m
Securities 2,353 101,152 103,505 3,096 91,936 95,032
- treasury and other eligible bills 695 724 1,419 649 869 1,518
- debt securities 1,658 60,045 61,703 2,447 56,633 59,080
- equity securities - 40,383 40,383 - 34,434 34,434
Loans and advances to banks and customers 371 5,495 5,866 - 3,455 3,455
Other - 1,272 1,272 - 1,614 1,614
At 31 Dec 2,724 107,919 110,643 3,096 97,005 100,101
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data.
15 Derivatives
Notional contract amounts and fair values of derivatives by product contract
type held by HSBC
Notional contract amount Fair value - Assets Fair value - Liabilities
Trading Hedging Trading Hedging Total Trading Hedging Total
$m $m $m $m $m $m $m $m
Foreign exchange 9,463,768 63,547 99,014 935 99,949 99,949 780 100,729
Interest rate 14,853,397 361,312 223,534 5,119 228,653 225,443 4,080 229,523
Equities 677,149 - 14,427 - 14,427 17,603 - 17,603
Credit 153,606 - 1,351 - 1,351 1,861 - 1,861
Commodity and other 90,007 - 1,820 - 1,820 1,542 - 1,542
Gross total fair values 25,237,927 424,859 340,146 6,054 346,200 346,398 4,860 351,258
Offset (Note 31) (116,486) (116,486)
At 31 Dec 2023 25,237,927 424,859 340,146 6,054 229,714 346,398 4,860 234,772
Foreign exchange 8,434,453 38,924 122,206 525 122,731 123,088 166 123,254
Interest rate 15,213,232 276,589 285,449 5,066 290,515 287,876 3,501 291,377
Equities 570,410 - 9,325 - 9,325 9,176 - 9,176
Credit 183,995 - 1,091 - 1,091 1,264 - 1,264
Commodity and other 78,414 - 1,484 - 1,484 1,678 - 1,678
Gross total fair values 24,480,504 315,513 419,555 5,591 425,146 423,082 3,667 426,749
Offset (Note 31) (140,987) (140,987)
At 31 Dec 2022 24,480,504 315,513 419,555 5,591 284,159 423,082 3,667 285,762
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data.
The notional contract amounts of derivatives held for trading purposes and
derivatives designated in hedge accounting relationships indicate the nominal
value of transactions outstanding at the balance sheet date. They do not
represent amounts at risk.
Derivative assets and liabilities decreased during 2023, driven by yield curve
movements and changes in foreign exchange rates.
Notional contract amounts and fair values of derivatives by product contract
type held by HSBC Holdings with subsidiaries
Notional contract amount Assets Liabilities
Trading Hedging Trading Hedging Total Trading Hedging Total
$m $m $m $m $m $m $m $m
Foreign exchange 66,711 - 486 - 486 1,705 - 1,705
Interest rate 33,480 92,268 1,730 1,128 2,858 747 3,638 4,385
At 31 Dec 2023 100,191 92,268 2,216 1,128 3,344 2,452 3,638 6,090
Foreign exchange 60,630 - 502 - 502 1,683 - 1,683
Interest rate 34,322 81,873 2,386 913 3,299 826 4,413 5,239
At 31 Dec 2022 94,952 81,873 2,888 913 3,801 2,509 4,413 6,922
Use of derivatives
For details regarding the use of derivatives, see page 220 under 'Market
risk'.
Trading derivatives
Most of HSBC's derivative transactions relate to sales and trading activities.
Sales activities include the structuring and marketing of derivative products
to customers to enable them to take, transfer, modify or reduce current or
expected risks. Trading activities include market-making and risk management.
Market-making entails quoting bid and offer prices to other market
participants for the purpose of generating revenue based on spread and volume.
Risk management activity is undertaken to manage the risk arising from client
transactions, with the principal purpose of retaining client margin. Other
derivatives classified as held for trading include non-qualifying hedging
derivatives.
Substantially all of HSBC Holdings' derivatives entered into with subsidiaries
are managed in conjunction with financial liabilities.
Hedge accounting derivatives
HSBC applies hedge accounting to manage the following risks: interest rate and
foreign exchange risks. Further details of how these risks arise and how they
are managed by the Group can be found in the 'Risk review'.
Hedged risk components
HSBC designates a portion of cash flows of a financial instrument or a group
of financial instruments for a specific interest rate or foreign currency risk
component in a fair value or cash flow hedge. The designated risks and
portions are either contractually specified or otherwise separately
identifiable components of the financial instrument that are reliably
measurable. Risk-free or benchmark interest rates generally are regarded as
being both separately identifiable and reliably measurable, except for the
Interest Rate Benchmark Reform Phase 2 transition where HSBC designates
alternative benchmark rates as the hedged risk which may not have been
separately identifiable upon initial designation, provided HSBC reasonably
expects it will meet the requirement within 24 months from the first
designation date. The designated risk components account for a significant
portion of the overall changes in fair value or cash flows of the hedged
items.
HSBC uses net investment hedges to hedge the structural foreign exchange risk
related to net investments in foreign operations including subsidiaries and
branches whose functional currencies are different from that of the parent.
When hedging with foreign exchange forward contracts, the spot rate component
of the foreign exchange risk is designated for an amount of net assets as the
hedged risk.
Sources of hedge ineffectiveness may arise from basis risk, including but not
limited to the discount rates used for calculating the fair value of
derivatives, hedges using instruments with a non-zero fair value, and notional
and timing differences between the hedged items and hedging instruments.
Fair value hedges
HSBC enters into fixed-for-floating-interest-rate swaps to manage the exposure
to changes in fair value caused by movements in market interest rates on
certain fixed-rate financial instruments that are not measured at fair value
through profit or loss, including debt securities held and issued.
HSBC hedging instrument by hedged risk
Hedging instrument
( ) Carrying amount ( )
Notional amount(1) Assets Liabilities Balance sheet presentation Change in fair value(2)
Hedged risk $m $m $m $m
Interest rate(3) 172,985 Derivatives (1,043)
3,729 2,965
At 31 Dec 2023 172,985 (1,043)
3,729 2,965
Interest rate(3) 162,062 Derivatives
4,973 2,573 4,064
At 31 Dec 2022 162,062
4,973 2,573 4,064
1 The notional contract amounts of derivatives designated in
qualifying hedge accounting relationships indicate the nominal value of
transactions outstanding at the balance sheet date. They do not represent
amounts at risk.
2 Used in effectiveness testing, which uses the full fair value change
of the hedging instrument not excluding any component.
3 The hedged risk 'interest rate' includes inflation risk.
HSBC hedged item by hedged risk
Hedged item Ineffectiveness
Carrying amount Accumulated fair value hedge adjustments included in carrying amount(1) Change in fair value(2) Recognised in profit and loss
Assets Liabilities Assets Liabilities Balance sheet presentation Profit and loss presentation
Hedged risk $m $m $m $m $m $m
Interest rate(3) 82,321 (2,282) Financial investments - measured at fair value through other comprehensive 2,053 5 Net income from financial instruments held for trading or managed on a fair
income value basis
514 32 Financial investments - measured at amortised cost 32
4,701 (18) Loans and advances to customers 122
- - Reverse repurchase agreements - non-trading 15
64,269 (2,147) Debt securities in issue (1,179)
- - Deposits by banks -
- - Subordinated liabilities 5
At 31 Dec 2023 87,536 64,269 (2,268) (2,147) 1,048 5
HSBC hedged item by hedged risk (continued)
Hedged item Ineffectiveness
Carrying amount Accumulated fair value hedge adjustments included in carrying amount(1) Change in fair value(2) Recognised in profit and loss
Assets Liabilities Assets Liabilities Balance sheet presentation Profit and loss presentation
Hedged risk $m $m $m $m $m $m
Interest rate(3) 82,792 (5,100) Financial investments - measured at fair value through other comprehensive (8,005) (59) Net income from financial instruments held for trading or managed on a fair
income value basis
3,415 (210) Loans and advances to customers (233)
519 (18) Reverse repurchase agreements - non-trading (17)
49,180 (2,006) Debt securities in issue 4,138
83 - Deposits by banks (5)
At 31 Dec 2022 86,726 49,263 (5,328) (2,006) (4,122) (59)
1 The accumulated amount of fair value adjustments remaining in the
statement of financial position for hedged items that have ceased to be
adjusted for hedging gains and losses were liabilities of $136m (2022: $252m)
for FVOCI assets and liabilities of $1,256m (2022: $916m) for debt issued.
2 Used in effectiveness testing, which comprise an amount attributable
to the designated hedged risk that can be a risk component.
3 The hedged risk 'interest rate' includes inflation risk.
HSBC Holdings hedging instrument by hedged risk
Hedging instrument
Carrying amount
Notional amount(1,2) Assets Liabilities Balance sheet presentation Change in fair value(3)
Hedged risk $m $m $m $m
Interest rate(4) 92,268 1,128 3,638 Derivatives
1,426
At 31 Dec 2023 92,268 1,128 3,638
1,426
Interest rate(4) 81,873 913 4,413 Derivatives (5,599)
At 31 Dec 2022 81,873 913 4,413 (5,599)
1 The notional contract amounts of derivatives designated in
qualifying hedge accounting relationships indicate the nominal value of
transactions outstanding at the balance sheet date. They do not represent
amounts at risk.
2 The notional amount of non-dynamic fair value hedges is equal to
$92,268m (2022: $81,873m), of which the weighted-average maturity date is
May 2029 and the weighted-average swap rate is 2.46% (2022: 2.33%). The
majority of these hedges are internal to the Group.
3 Used in effectiveness testing, comprising the full fair value change
of the hedging instrument not excluding any component.
4 The hedged risk 'interest rate' includes foreign exchange risk.
HSBC Holdings hedged item by hedged risk
Hedged item Ineffectiveness
Carrying amount Accumulated fair value hedge adjustments included in carrying amount(1) Change in fair value(2) Recognised in
profit and loss
Assets Liabilities Assets Liabilities Balance sheet presentation Profit and loss
presentation
Hedged risk $m $m $m $m $m $m
Interest rate(3) 80,889 (2,971) Debt securities (1,716) 29 Net income from financial instruments held for trading or managed on a fair
value basis
in issue
7,772 (490) Loans and advances to banks 319
At 31 Dec 2023 7,772 80,889 (490) (2,971) (1,397) 29
Interest rate(3) 68,223 (3,829) Debt securities 6,258 Net income from financial instruments held for trading or managed on a fair
in issue (34) value basis
6,812 (789) Loans and advances to banks
(693)
At 31 Dec 2022 6,812 68,223 (789) (3,829) 5,565
(34)
1 The accumulated amount of fair value adjustments remaining in the
statement of financial position for hedged items that have ceased to be
adjusted for hedging gains and losses were liabilities of $1,299m (2022:
$971m) for debt issued.
2 Used in effectiveness testing, comprising amount attributable to the
designated hedged risk that can be a risk component.
3 The hedged risk 'interest rate' includes foreign exchange risk.
For some debt securities held, HSBC manages interest rate risk in a dynamic
risk management strategy. The assets in scope of this strategy are
high-quality fixed-rate debt securities, which may be sold to meet liquidity
and funding requirements.
The interest rate risk of the HSBC fixed-rate debt securities issued is
managed in a non-dynamic risk management strategy.
Cash flow hedges
HSBC's cash flow hedging instruments consist principally of interest rate
swaps and cross-currency swaps that are used to manage the variability in
future interest cash flows of non-trading financial assets and liabilities,
arising due to changes in market interest rates and foreign-currency basis.
HSBC applies macro cash flow hedging for interest rate risk exposures on
portfolios of replenishing current and forecasted issuances of non-trading
assets and liabilities that bear interest at variable rates, including rolling
such instruments. The amounts and timing of future cash flows, representing
both principal and interest flows, are projected for each portfolio of
financial assets and liabilities on the basis of their contractual terms and
other relevant factors, including estimates of prepayments and defaults. The
aggregate cash flows representing both principal balances and interest cash
flows across all portfolios are used to determine the effectiveness and
ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.
HSBC also hedges the variability in future cash flows on foreign-denominated
financial assets and liabilities arising due to changes in foreign exchange
market rates with cross-currency swaps, which are considered dynamic hedges.
Hedging instrument by hedged risk
Hedging instrument Hedged item Ineffectiveness
Carrying amount Change in fair value(2) Change in fair value(3) Recognised in profit and loss Profit and loss presentation
Notional amount(1) Assets Liabilities Balance sheet presentation
Hedged risk $m $m $m $m $m $m
Foreign currency 29,772 935 257 Derivatives 977 977 - Net income from
financial instruments
held for trading or
managed on a fair
value basis
Interest rate 188,327 1,390 1,116 Derivatives 1,542 1,512 30
At 31 Dec 2023 218,099 2,325 1,373 2,519 2,489 30
Foreign currency 8,781 418 166 Derivatives 659 659 - Net income from financial instruments held for trading or managed on a fair
value basis
Interest rate 114,527 93 950 Derivatives (4,997) (4,973) (24)
At 31 Dec 2022 123,308 511 1,116 (4,338) (4,314) (24)
1 The notional contract amounts of derivatives designated in
qualifying hedge accounting relationships indicate the nominal value of
transactions outstanding at the balance sheet date. They do not represent
amounts at risk.
2 Used in effectiveness testing, comprising the full fair value change
of the hedging instrument not excluding any component.
3 Used in effectiveness assessment, comprising amount attributable to
the designated hedged risk that can be a risk component.
Reconciliation of equity and analysis of other comprehensive income by risk
type
Interest rate Foreign currency
$m $m
Cash flow hedging reserve at 1 Jan 2023 (3,387)
(421)
Fair value gains/(losses) 1,512
977
Fair value (gains)/losses reclassified from the cash flow hedge reserve to the
income statement in respect of:
Hedged items that have affected profit or loss(1) 2,196
(718)
Income taxes (937)
(29)
Others (285)
59
Cash flow hedging reserve at 31 Dec 2023 (901)
(132)
Cash flow hedging reserve at 1 Jan 2022 8
(205)
Fair value gains/(losses) (4,973)
659
Fair value (gains)/losses reclassified from the cash flow hedge reserve to the
income statement in respect of:
Hedged items that have affected profit or loss 325
(926)
Income taxes 1,123
28
Others 130
23
Cash flow hedging reserve at 31 Dec 2022 (3,387)
(421)
1 Hedged items that have affected profit or loss are primarily recorded
within interest income.
Net investment hedges
The Group applies hedge accounting in respect of certain net investments in
non-US dollar functional currency foreign operations for changes in spot
exchange rates only. Hedging could be undertaken for Group structural exposure
to changes in the US dollar to foreign currency exchange rates using forward
foreign exchange contracts or by financing with foreign currency borrowings.
An economic relationship exists between the hedged net investment and hedging
instrument due to the shared foreign currency risk exposure. For further
details of our structural foreign exchange exposures, see page 205.
The aggregate positions at the reporting date and the performance indicators
of both live and de-designated hedges are summarised below.
Hedges of net investment in foreign operations
Carrying amount Nominal Amounts recognised in OCI(1) Change in fair value(2) Hedge ineffectiveness recognised in income statement
amount
Derivative Derivative liabilities
assets
Description of hedged risk $m $m $m $m $m $m
2023
Pound sterling-denominated structural foreign exchange (404) 16,415 604 (843)
-
Swiss franc-denominated structural foreign exchange (23) 526 49 (62)
-
Hong Kong dollar-denominated structural foreign exchange - 5,792 - 2
-
Other structural foreign exchange(3) (96) 11,042 477 102
-
Total - (523) 33,775 1,130 (801)
-
2022
Pound sterling-denominated structural foreign exchange 264 - 14,000 1,447 1,573
-
Swiss franc-denominated structural foreign exchange - (21) 727 111 10
-
Hong Kong dollar-denominated structural foreign exchange - (19) 4,597
(2) (7) -
Other structural foreign exchange(3) - (117) 10,819 375 369
-
Total 264 (157) 30,143 1,931 1,945
-
1 Amount recognised in OCI for Swiss franc includes $110m (2022: $110m)
related to de-designated hedge.
2 Used in effectiveness assessment, comprising amount attributable to the
designated hedged risk that can be a risk component.
3 Other currencies include euro, New Taiwan dollar, Singapore dollar,
Canadian dollar, Omani rial, South Korean won, UAE dirham, Indian rupee,
Chinese renminbi, Kuwaiti dinar, Qatari riyal, Saudi riyal, Indonesian rupiah
and Philippine peso.
Interest rate benchmark reform: Amendments to IFRS 9 and IAS 39 'Financial
Instruments'
HSBC has applied both the first set of amendments ('Phase 1') and the second
set of amendments ('Phase 2') to IFRS 9 and IAS 39 applicable to hedge
accounting. The hedge accounting relationships that are affected by Phase 1
and Phase 2 amendments are presented in the balance sheet as 'Financial assets
designated and otherwise mandatorily measured at fair value through other
comprehensive income', 'Loans and advances to customers', 'Debt securities in
issue' and 'Deposits by banks'. The notional value of the derivatives impacted
by the Ibor reform, including those designated in hedge accounting
relationships, is disclosed in Note 32. For further details of Ibor
transition, see 'Ibor transition' on page 139.
For some of the Ibors included under the 'Other' header in the table below,
judgement has been needed to establish whether a transition is required, since
there are Ibor benchmarks that are subject to computation methodology
improvements and insertion of fallback provisions without full clarity being
provided by their administrators on whether these Ibor benchmarks will be
demised.
The notional amounts of interest rate derivatives designated in hedge
accounting relationships do not represent the extent of the risk exposure
managed by the Group but they are expected to be directly affected by
market-wide Ibor reform and in scope of Phase 1 amendments and are shown in
the table below. The cross-currency swaps designated in hedge accounting
relationships and affected by Ibor reform are not significant and have not
been presented below.
Hedging instrument impacted by Ibor reform
Hedging instrument
Impacted by Ibor reform Not impacted by Ibor reform Notional
amount(3)
€(1) £ $ Other(2) Total
$m $m $m $m $m $m $m
Fair value hedges 16,907 - - 4,384 21,291 151,694 172,985
Cash flow hedges 10,850 - - 3,504 14,354 173,973 188,327
At 31 Dec 2023 27,757 - - 7,888 35,645 325,667 361,312
Fair value hedges 12,756 - 2,015 12,643 27,414 134,648 162,062
Cash flow hedges 8,865 - - 27,830 36,695 77,832 114,527
At 31 Dec 2022 21,621 - 2,015 40,473 64,109 212,480 276,589
1 The notional contract amounts of euro interest rate derivatives
impacted by Ibor reform consist of hedges with a Euribor benchmark.
2 Other benchmarks impacted by Ibor reform consist mainly of Emirates
interbank offered rate, Mexican interbank equilibrium interest rate ('TIIE')
and Korean won-related derivatives. In 2022, the Hong Kong interbank offered
rate ('HIBOR') was included in 'Other' given that reform in the benchmark was
considered possible. At 31 December 2023, HIBOR was no longer expected to be
directly affected by Ibor reform following the successful transition of all
Libor settings and the HKMA's affirmation that there are no plans to
discontinue HIBOR. As a result HIBOR has been moved from 'Other' to 'Not
impacted by Ibor reform'.
3 The notional contract amounts of interest rate derivatives
designated in qualifying hedge accounting relationships indicate the nominal
value of transactions outstanding at the balance sheet date and they do not
represent amounts at risk.
3
Hedging instrument impacted by Ibor reform held by HSBC Holdings
Hedging instrument
Impacted by Ibor reform Not impacted by Ibor reform Notional amount
€ £ $ Other Total
$m $m $m $m $m $m $m
Fair value hedges 19,614 - - 583 20,197 72,071 92,268
At 31 Dec 2023 19,614 - - 583 20,197 72,071 92,268
Fair value hedges 15,210 - 2,000 1,336 18,546 63,327 81,873
At 31 Dec 2022 15,210 - 2,000 1,336 18,546 63,327 81,873
16 Financial investments
Carrying amount of financial investments
2023 2022¹
$m $m
Financial investments measured at fair value through other comprehensive 294,437 255,660
income
- treasury and other eligible bills 102,438 86,749
- debt securities 190,119 167,107
- equity securities 1,447 1,696
- other instruments 433 108
Debt instruments measured at amortised cost 148,326 109,066
- treasury and other eligible bills 30,733 34,507
- debt securities 117,593 74,559
At 31 Dec 442,763 364,726
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data.
Equity instruments measured at fair value through other comprehensive income
Fair value Dividends recognised
Type of equity instruments $m $m
Investments required by central institutions 609 27
Business facilitation 793 35
Others 45 2
At 31 Dec 2023 1,447 64
Investments required by central institutions 690 24
Business facilitation 954 28
Others 52 2
At 31 Dec 2022 1,696 54
Weighted average yields of investment debt securities
Up to 1 1 to 5 5 to 10 years Over 10 years
year years
Yield Yield Yield Yield
% % % %
Debt securities measured at fair value through other comprehensive income
US Treasury 2.1 2.0 2.0 2.4
US Government agencies 3.6 3.1 3.3 3.0
US Government-sponsored agencies 1.0 2.6 2.1 1.8
UK Government 0.2 2.8 0.8 2.5
Hong Kong Government 1.0 1.4 1.6 -
Other governments 3.2 3.5 3.3 2.9
Asset-backed securities 1.4 6.6 4.8 5.3
Corporate debt and other securities 5.5 3.1 3.1 2.4
Debt securities measured at amortised cost
US Treasury 8.9 3.7 3.7 2.1
US Government agencies 7.9 7.8 5.8 4.5
US Government-sponsored agencies 2.3 3.7 3.4 2.9
UK Government - - 0.9 4.5
Hong Kong Government - 2.6 - -
Other governments 2.7 3.5 5.3 -
Asset-backed securities 4.7 - 7.7 -
Corporate debt and other securities 2.6 2.6 3.5 5.2
The maturity distributions of ABSs are presented in the above table on the
basis of contractual maturity dates. The weighted average yield for each range
of maturities is calculated by dividing the annualised interest income for the
year ended 31 December 2023 by the book amount of debt securities at that
date. The yields do not include the effect of related derivatives.
HSBC Holdings
HSBC Holdings carrying amount of financial investments
2023 2022
$m $m
Debt instruments measured at amortised cost
- treasury and other eligible bills 15,629 12,796
- debt securities 3,929 6,670
At 31 Dec 19,558 19,466
Weighted average yields of investment debt securities
Up to 1 1 to 5 5 to 10 years Over 10 years
year years
Yield Yield Yield Yield
% % % %
Debt securities measured at amortised cost
US Treasury 3.2 4.3 - -
The weighted average yield for each range of maturities is calculated by
dividing the annualised interest income for the year ended 31 December 2023
by the book amount of debt securities at that date. The yields do not include
the effect of related derivatives.
17 Assets pledged, collateral received and assets transferred
Assets pledged(1)
Financial assets pledged as collateral
2023 2022
$m $m
Treasury bills and other eligible securities 20,504 18,364
Loans and advances to banks 13,636 10,198
Loans and advances to customers 27,490 27,627
Debt securities 88,367 60,542
Equity securities 40,280 26,902
Other 61,223 67,576
Assets pledged at 31 Dec 251,500 211,209
Assets pledged as collateral include all assets categorised as encumbered in
the disclosure on page 27 of the Pillar 3 Disclosures at 31 December 2023,
except for assets held for sale.
The amount of assets pledged to secure liabilities may be greater than the
book value of assets utilised as collateral. For example, in the case of
securitisations and covered bonds, the amount of liabilities issued plus
mandatory over-collateralisation is less than the book value of the pool of
assets available for use as collateral. This is also the case where assets are
placed with a custodian or a settlement agent that has a floating charge over
all the assets placed to secure any liabilities under settlement accounts.
These transactions are conducted under terms that are usual and customary for
collateralised transactions including, where relevant, standard securities
lending and borrowing, repurchase agreements and derivative margining. HSBC
places both cash and non-cash collateral in relation to derivative
transactions.
Hong Kong currency notes in circulation are secured by the deposit of funds in
respect of which the Hong Kong Government certificates of indebtedness are
held.
Financial assets pledged as collateral which the counterparty has the right to
sell or repledge
2023 2022
$m $m
Trading assets 77,847 56,894
Financial investments 39,324 27,841
At 31 Dec 117,171 84,735
Collateral received(1)
The fair value of assets accepted as collateral relating primarily to standard
securities lending, reverse repurchase agreements, swaps of securities and
derivative margining that HSBC is permitted to sell or repledge in the absence
of default was $495,653m (2022: $449,896m). The fair value of any such
collateral sold or repledged was $284,108m (2022: $228,245m).
HSBC is obliged to return equivalent securities. These transactions are
conducted under terms that are usual and customary to standard securities
lending, reverse repurchase agreements and derivative margining.
Assets transferred(1)
The assets pledged include transfers to third parties that do not qualify for
derecognition, notably secured borrowings such as debt securities held by
counterparties as collateral under repurchase agreements and equity securities
lent under securities lending agreements, as well as swaps of equity and debt
securities. For secured borrowings, the transferred asset collateral continues
to be recognised in full while a related liability, reflecting the Group's
obligation to repurchase the assets for a fixed price at a future date, is
also recognised on the balance sheet.
Where securities are swapped, the transferred asset continues to be recognised
in full. There is no associated liability as the non-cash collateral received
is not recognised on the balance sheet. The Group is unable to use, sell or
pledge the transferred assets for the duration of the transaction, and remains
exposed to interest rate risk and credit risk on these pledged assets.
Transferred financial assets not qualifying for full derecognition and
associated financial liabilities
Carrying amount of:
Transferred Associated
assets liabilities
$m $m
At 31 Dec 2023
Repurchase agreements 81,486 74,517
Securities lending agreements 46,663 3,826
At 31 Dec 2022
Repurchase agreements 52,604 48,501
Securities lending agreements 39,134 4,613
1 Excludes assets classified as held for sale.
18 Interests in associates and joint ventures
Carrying amount of HSBC's interests in associates and joint ventures
2023 2022
$m $m
Interests in associates 27,200 29,127
Interests in joint ventures 144 127
Interests in associates and joint ventures 27,344 29,254
Principal associates of HSBC
2023 2022
Carrying amount Fair value(1) Carrying amount Fair value(1)
$m $m $m $m
Bank of Communications Co., Limited 8,812 23,307 8,141
21,210
Saudi Awwal Bank 6,438 4,494 6,602
4,659
1 Principal associates are listed on recognised stock exchanges. The
fair values are based on the quoted market prices of the shares held (Level 1
in the fair value hierarchy).
At 31 Dec 2023
Jurisdiction of incorporation Principal activity HSBC's interest(1)
and principal place of %
business
Bank of Communications Co., Limited Mainland China Banking services 19.03
Saudi Awwal Bank Saudi Arabia Banking services 31.00
1 There has been no percentage change in HSBC's shareholding interest in
the principal associates when compared with 2022.
Share of profit in associates and joint ventures
2023 2022
$m $m
Bank of Communications Co., Limited 2,250 2,377
Saudi Awwal Bank 538 342
Other associates and joint ventures 19 4
Share of profit in associates and joint ventures 2,807 2,723
Less: Impairment of interest in BoCom (3,000) -
A list of all associates and joint ventures is set out in Note 40.
Bank of Communications Co., Limited
We maintain a 19.03% interest in Bank of Communications Co., Limited
('BoCom'). The Group's investment in BoCom is classified as an associate.
Significant influence in BoCom was established with consideration of all
relevant factors, including representation on BoCom's Board of Directors and
participation in a resource and experience sharing agreement ('RES'). Under
the RES, HSBC staff have been seconded to assist in the maintenance of BoCom's
financial and operating policies. Investments in associates are recognised
using the equity method of accounting in accordance with IAS 28 'Investments
in Associates and Joint Ventures', whereby the investment is initially
recognised at cost and adjusted thereafter for the post-acquisition change in
the Group's share of associate's net assets. An impairment test is required if
there is any indication of impairment.
Impairment testing
The fair value of the Group's investment in BoCom had been below the carrying
amount for approximately 12 years. We have previously disclosed that the
excess of the value in use ('VIU') calculation over its balance sheet value
has been marginal in recent years, and that reasonably possible changes in
assumptions could generate an impairment.
Recent macroeconomic, policy and industry-wide factors resulted in a wider
range of possible VIU calculation outcomes, and our VIU calculation uses both
historical experience and market participant views to estimate future cash
flows, relevant discount rates and associated capital assumptions. At 31
December 2023, the Group performed an impairment test on the carrying amount,
which resulted in an impairment of $3.0bn, as the recoverable amount as
determined by a VIU calculation was lower than the carrying value.
At 31 Dec 2023 At 31 Dec 2022
VIU Carrying value Fair value VIU Carrying value Fair value
$bn $bn $bn $bn $bn $bn
BoCom 21.2 21.2 8.8 23.5 23.3 8.1
The impairment test will be updated in future periods, reflecting updated
assumptions in the VIU impairment calculation. Going forward, the carrying
value will be aligned to the updated VIU calculation and capped at carrying
value that would have been determined had no impairment loss been recognised,
rather than at cost and adjusted thereafter for the post-acquisition change in
the Group's share of associate's net assets, and therefore there is a risk of
reversals or further impairments in future periods.
The VIU may increase or decrease depending on the effect of changes to model
inputs. The main model inputs are described below and are based on factors
observed at period-end. The factors that could result in increases or
reductions in the VIU include changes in BoCom's short-term performance, a
change in regulatory capital requirements or revisions to the forecast of
BoCom's future profitability.
If the Group did not have significant influence in BoCom, the investment would
be carried at fair value rather than the current carrying value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of
BoCom, determined by a VIU calculation, with its carrying value. The VIU
calculation uses discounted cash flow projections based on management's best
estimates of future earnings available to ordinary shareholders prepared in
accordance with IAS 36 'Impairment of Assets'. Significant management
judgement is required in arriving at the best estimate.
There are two main components to the VIU calculation. The first component is
management's best estimate of BoCom's earnings. Forecast earnings growth over
the short to medium term is lower than recent (within the last five years)
actual growth, and reflects the impact of recent macroeconomic, policy and
industry factors in mainland China. As a result of management's intent to
continue to retain its investment, earnings beyond the short to medium term
are then extrapolated into perpetuity using a long-term growth rate to derive
a terminal value, which comprises the majority of the VIU. The second
component is the capital maintenance charge ('CMC'), which is management's
forecast of the earnings that need to be withheld in order for BoCom to meet
capital requirements over the forecast period, meaning that CMC is deducted
when arriving at management's estimate of future earnings available to
ordinary shareholders. The CMC reflects the revised capital requirements
arising from revisions of the ratio of risk-weighted assets to total assets
assumption. The principal inputs to the CMC calculation include estimates of
asset growth, the ratio of risk-weighted assets to total assets and the
expected capital requirements. An increase in the CMC as a result of a change
to these principal inputs would reduce VIU. Additionally, management considers
other qualitative factors, to ensure that the inputs to the VIU calculation
remain appropriate.
Key assumptions in value in use calculation
We used a number of assumptions in our VIU calculation, in accordance with the
requirements of IAS 36:
- Long-term profit growth rate: 3% (2022: 3%) for periods after 2027,
which does not exceed forecast GDP growth in mainland China and is similar to
forecasts by external analysts.
- Long-term asset growth rate: 3% (2022: 3%) for periods after 2027,
which is the rate that assets are expected to grow to achieve long-term profit
growth of 3%.
- Discount rate: 9.00% (2022: 10.04%), which is based on a capital
asset pricing model ('CAPM'), using market data. The discount rate used is
within the range of 7.9% to 9.7% (2022: 8.4% to 10.4%) indicated by the CAPM,
and decreased as a consequence of a market-driven reduction in beta. While the
CAPM range sits at the lower end of the range adopted by selected external
analysts of 8.8% to 13.5% (2022: 8.8% to 13.5%), we continue to regard the
CAPM range as the most appropriate basis for determining this assumption.
- Expected credit losses ('ECL') as a percentage of loans and advances
to customers: ranges from 0.80% to 0.97% (2022: 0.99% to 1.05%) in the short
to medium term, reflecting reported credit experience in mainland China. For
periods after 2027, the ratio is 0.97% (2022: 0.97%), which is higher than
BoCom's average ECL as a percentage of loans and advances to customers in
recent years prior to the pandemic.
- Risk-weighted assets as a percentage of total assets: ranges from
62.0% to 63.7% (2022: 61.0% to 64.4%) in the short to medium term, reflecting
higher risk-weights in the short term followed by an expected reversion to
recent historical levels. For periods after 2027, the ratio is 62.0% (2022:
61.0%), which is similar to BoCom's actual results in recent years.
- Loans and advances to customers growth rate: ranges from 9.0% to
10.0% (2022: 7.1% to 11.0%) in the short to medium term, reflecting higher
growth rate in loans and advances to customers as a result of recent
macroeconomic, policy and industry factors in mainland China. Increases in the
forecast growth rate of loans and advances to customers results in higher
forecast ECL.
-
- Operating income growth rate: ranges from -0.4% to 9.7% (2022: 1.9%
to 7.7%) in the short to medium term, which is lower than BoCom's actual
results in recent years, and is impacted by projections of net interest income
in the short term as a consequence of recent macroeconomic, policy and
industry factors in mainland China.
- Cost-income ratio: ranges from 35.5% to 39.8% (2022: 35.5% to 36.3%)
in the short to medium term. These ratios are higher than BoCom's actual
results in recent years and forecasts disclosed by external analysts.
- Effective tax rate ('ETR'): ranges from 5.3% to 15.0% (2022: 4.4% to
15.0%) in the short to medium term, reflecting BoCom's actual results and an
expected increase towards the long-term assumption through the forecast
period. For periods after 2027, the rate is 15.0% (2022: 15.0%), which is
higher than the recent historical average, and aligned to the minimum tax rate
as proposed by the OECD/Group of 20 ('G20') Inclusive Framework on Base
Erosion and Profit Shifting.
- Capital requirements: capital adequacy ratio of 12.5% (2022: 12.5%)
and tier 1 capital adequacy ratio of 9.5% (2022: 9.5%), based on BoCom's
capital risk appetite and capital requirements respectively.
The following table further illustrates the impact on VIU of reasonably
possible changes to key assumptions. This reflects the sensitivity of the VIU
to each key assumption on its own and it is possible that more than one
favourable and/or unfavourable change may occur at the same time. Loans and
advances to customers growth rate has been added to the list of key
assumptions detailed in the table to reflect the greater potential variability
associated with the assumption as a result of recent macroeconomic, policy and
industry factors in mainland China. The selected rates of reasonably possible
changes to key assumptions are based on external analysts' forecasts,
statutory requirements and other relevant external data sources, which can
change period to period. Unless specified, favourable and unfavourable changes
are consistently applied throughout short-to-medium and long-term forecast
years, based on a straight-line average of the base case assumption.
Sensitivity of VIU to reasonably possible changes in key assumptions
Favourable change Unfavourable change
Increase in VIU VIU Decrease in VIU VIU
bps $bn $bn bps $bn $bn
At 31 Dec 2023
Long-term profit growth rate(1) 58 3.3 24.5 (79) (3.4) 17.8
Long-term asset growth rate(1) (79) 4.5 25.7 (4.0) 17.2
58
Discount rate (110) 4.5 25.7 280 (6.1) 15.1
Expected credit losses as a percentage 2023 to 2027: 78 2.9 24.1 2023 to 2027: 120 (4.4) 16.8
of loans and advances to customers 2028 onwards: 91 2028 onwards: 104
Risk-weighted assets as a percentage of total assets (150) 0.9 22.1 216 (1.6) 19.6
Loans and advances to customers growth rate (213) 3.2 24.4 207 (2.9) 18.3
Operating income growth rate 57 2.6 23.8 (81) (2.6) 18.6
Cost-income ratio (212) 0.8 22.0 (2.9) 18.3
99
Long-term effective tax rate (426) 1.6 22.8 1,000 (3.5) 17.7
Capital requirements - capital adequacy ratio - - 21.2 215 (7.5) 13.7
Capital requirements - tier 1 capital adequacy ratio - - 21.2 248 (3.7) 17.5
At 31 Dec 2022
Long-term profit growth rate(1) 75 3.6 27.1 20.8
(71) (2.7)
Long-term asset growth rate(1) 3.1 26.6 19.4
(71) 75 (4.1)
Discount rate 6.9 30.4 136 19.8
(164) (3.7)
Expected credit losses as a percentage 2022 to 2026: 95 1.9 25.4 2022 to 2026: 120 20.6
(2.9)
of loans and advances to customers 2027 onwards: 91 2027 onwards: 104
Risk-weighted assets as a percentage of total assets 0.1 23.6 239 21.2
(118) (2.3)
Loans and advances to customers growth rate 1.1 24.6 295 20.3
(75) (3.2)
Operating income growth rate 44 1.3 24.8 21.0
(83) (2.5)
Cost-income ratio 1.0 24.5 174 21.4
(122) (2.1)
Long-term effective tax rate 1.5 25.0 1,000 19.9
(426) (3.6)
Capital requirements - capital adequacy ratio - - 23.5 191 17.2
(6.3)
Capital requirements - tier 1 capital adequacy ratio - - 23.5 266 20.3
(3.2)
1 The favourable and unfavourable ranges of the long-term profit growth
rate and long-term asset growth rate assumptions reflect the close
relationship between these assumptions, which would result in offsetting
changes to each assumption.
Considering the interrelationship of the changes set out in the table above,
management estimates that the reasonably possible range of VIU is $13.1bn to
$28.8bn (2022: $16.9bn to $28.7bn), acknowledging that the fair value of the
Group's investment has ranged from $6.8bn to $11.6bn over the last five years
as at the date of the impairment tests. The possible range of VIU is based on
impacts set out in the table above arising from the favourable/unfavourable
change in the earnings in the short to medium term, the long-term expected
credit losses as a percentage of loans and advances to customers, and a 50bps
increase/decrease in the discount rate. All other long-term assumptions, and
the basis of the CMC have been kept unchanged when determining the reasonably
possible range of the VIU.
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year
ended 31 December 2023, HSBC included the associate's results on the basis of
the financial statements for the 12 months ended 30 September 2023, taking
into account any known changes in the subsequent period from 1 October 2023 to
31 December 2023 that would have materially affected the results.
Selected balance sheet information of BoCom
At 30 Sep At 31 Dec
2023 2022
$m $m
Cash and balances at central banks 112,800 116,942
Due from and placements with banks and other financial institutions 100,464 100,160
Loans and advances to customers 1,087,613 1,035,151
Other financial assets 587,949 583,898
Other assets 59,215 48,796
Total assets 1,948,041 1,884,947
Due to and placements from banks and other financial institutions 292,065 295,205
Deposits from customers 1,216,611 1,153,184
Other financial liabilities 251,246 249,230
Other liabilities 36,776 37,153
Total liabilities 1,796,698 1,734,772
Total equity 151,343 150,175
Reconciliation of BoCom's total shareholders' equity to the carrying amount in
HSBC's consolidated financial statements
At 30 Sep
2023 2022
$m $m
HSBC's share of total shareholders' equity 23,746 22,828
Goodwill originally arising on acquisition 464 479
Impairment (3,000) -
Carrying amount 21,210 23,307
Selected income statement information of BoCom
For the 9 months ended 30 Sep
2023 2022
$m $m
Net interest income 17,519 19,004
Net fee and commission income 4,815 5,181
Credit and impairment losses (6,836) (7,641)
Depreciation and amortisation (1,977) (1,785)
Tax expense (552) (436)
Profit for the year 9,835 10,102
Other comprehensive income 631 (37)
Total comprehensive income 10,466 10,065
Dividends received from BoCom 736 749
Saudi Awwal Bank
The Group's investment in Saudi Awwal Bank ('SAB') is classified as an
associate. HSBC is the largest shareholder in SAB with a shareholding of 31%.
Significant influence in SAB is established via representation on the Board of
Directors. Investments in associates are recognised using the equity method of
accounting in accordance with IAS 28, as described previously for BoCom.
Impairment testing
There were no indicators of impairment at 31 December 2023. The fair value of
the Group's investment in SAB of $6.4bn was above the carrying amount of
$4.7bn.
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