REG - HSBC Holdings PLC - Annual Financial Report - Part 6
21/02/2024 16:45
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RNS Number : 9459D HSBC Holdings PLC 21 February 2024
Personal lending - residential mortgage loans including loan commitments by
level of collateral for key countries/territories by stage
(continued)
(Audited)
Gross carrying/nominal amount ECL coverage
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
$m $m $m $m % % % %
Fully collateralised by LTV ratio 310,705 39,906 2,097 352,708 - 0.6 9.9 0.1
- less than 50% 154,337 12,250 1,077 167,664 - 0.7 7.2 0.1
- 51% to 70% 102,191 16,989 537 119,717 - 0.5 9.5 0.1
- 71% to 80% 25,458 6,770 212 32,440 - 0.5 14.7 0.2
- 81% to 90% 17,106 3,388 147 20,641 - 0.5 17.8 0.2
- 91% to 100% 11,613 509 124 12,246 - 1.1 18.1 0.3
Partially collateralised (A): LTV > 100% 6,964 143 133 7,240 - 6.9 46.9 1.0
- collateral value on A 6,521 123 79 6,723
Total at 31 Dec 2022 317,669 40,049 2,230 359,948 - 0.6 12.1 0.2
of which: UK
Fully collateralised by LTV ratio 134,044 34,541 676 169,261 - 0.4 11.1 0.1
- less than 50% 70,936 10,387 448 81,771 - 0.6 9.4 0.1
- 51% to 70% 43,617 14,943 158 58,718 - 0.4 11.6 0.1
- 71% to 80% 12,849 5,922 33 18,804 - 0.3 19.7 0.1
- 81% to 90% 5,922 2,918 10 8,850 - 0.2 24.5 0.1
- 91% to 100% 720 371 27 1,118 - 0.2 22.5 0.6
Partially collateralised (B): LTV > 100% 329 49 12 390 - 0.3 9.8 0.3
- collateral value on B 237 38 4 279
Total UK at 31 Dec 2022 134,373 34,590 688 169,651 - 0.4 11.1 0.1
of which: Hong Kong
Fully collateralised by LTV ratio 94,949 981 237 96,167 - - 0.1 -
- less than 50% 44,740 577 105 45,422 - - - -
- 51% to 70% 28,123 256 37 28,416 - - 0.3 -
- 71% to 80% 4,167 37 25 4,229 - - 0.1 -
- 81% to 90% 7,883 51 27 7,961 - 0.1 - -
- 91% to 100% 10,036 60 43 10,139 - 0.2 - -
Partially collateralised (C): LTV > 100% 6,441 47 1 6,489 - 0.2 0.3 -
- collateral value on C 6,146 44 1 6,191
Total Hong Kong at 31 Dec 2022 101,390 1,028 238 102,656 - - 0.1 -
Supplementary information
Wholesale lending - loans and advances to customers at amortised cost by
country/territory
Gross carrying amount Allowance for ECL
Corporate and commercial of which: real estate and construction(1) Non-bank financial institutions Total Corporate and commercial of which: real estate and construction(1) Non-bank financial institutions Total
$m $m $m $m $m $m $m $m
UK 105,536 17,852 18,343 123,879 (1,451) (246) (231) (1,682)
- of which: HSBC UK Bank plc (ring-fenced bank) 80,248 17,060 9,372 89,620 (1,212) (212) (66) (1,278)
- of which: HSBC Bank plc (non-ring-fenced bank) 24,791 792 8,971 33,762 (240) (34) (165) (405)
- of which: Other trading entities 497 - - 497 1 - - 1
France 27,017 4,796 5,701 32,718 (636) (53) (18) (654)
Germany 6,667 240 632 7,299 (74) - - (74)
Switzerland 1,168 423 378 1,546 (12) (1) - (12)
Hong Kong 125,340 48,594 19,319 144,659 (3,099) (2,147) (57) (3,156)
Australia 12,685 4,443 1,564 14,249 (49) (1) - (49)
India 10,856 2,083 5,315 16,171 (47) (7) (4) (51)
Indonesia 3,100 162 411 3,511 (136) (58) - (136)
Mainland China 28,655 6,709 7,775 36,430 (313) (212) (11) (324)
Malaysia 5,797 1,137 258 6,055 (69) (15) - (69)
Singapore 15,845 3,458 948 16,793 (321) (40) (1) (322)
Taiwan 4,512 30 81 4,593 - - - -
Egypt 899 45 86 985 (128) (10) (1) (129)
UAE 13,740 1,979 823 14,563 (543) (296) - (543)
US 26,993 5,143 9,155 36,148 (239) (101) (58) (297)
Mexico 11,326 865 1,349 12,675 (320) (19) (5) (325)
Other 27,519 3,496 2,294 29,813 (366) (80) (18) (384)
At 31 Dec 2023 427,655 101,455 74,432 502,087 (7,803) (3,286) (404) (8,207)
Wholesale lending - loans and advances to customers at amortised cost by
country/territory (continued)
Gross carrying amount Allowance for ECL
Corporate and commercial of which: real estate and construction Non-bank financial institutions Total Corporate and commercial of which: real estate and construction Non-bank financial institutions Total
$m $m $m $m $m $m $m $m
UK 104,775 18,747 12,662 117,437 (1,522) (420) (131) (1,653)
- of which: HSBC UK Bank plc (ring-fenced bank) 78,249 17,121 2,980 81,229 (1,247) (279) (6) (1,253)
- of which: HSBC Bank plc (non-ring-fenced bank) 26,526 1,625 9,682 36,208 (275) (141) (125) (400)
France 27,571 4,607 4,152 31,723 (621) (49) (4) (625)
Germany 6,603 252 713 7,316 (154) - (3) (157)
Switzerland 988 635 298 1,286 (8) - - (8)
Hong Kong 144,256 58,531 20,798 165,054 (2,997) (1,980) (35) (3,032)
Australia 11,641 3,339 1,157 12,798 (97) (1) - (97)
India 9,052 1,901 4,267 13,319 (80) (26) (10) (90)
Indonesia 3,214 206 226 3,440 (187) (5) - (187)
Mainland China 31,790 7,499 8,908 40,698 (327) (174) (30) (357)
Malaysia 5,986 1,351 180 6,166 (133) (38) - (133)
Singapore 15,905 4,031 1,192 17,097 (387) (44) (1) (388)
Taiwan 4,701 36 65 4,766 (1) - - (1)
Egypt 1,262 111 101 1,363 (117) (6) (1) (118)
UAE 13,503 2,091 149 13,652 (674) (342) - (674)
US 28,249 6,491 8,640 36,889 (214) (95) (26) (240)
Mexico 9,784 1,081 717 10,501 (334) (34) (1) (335)
Other 33,922 3,676 2,699 36,621 (467) (79) (15) (482)
At 31 Dec 2022 453,202 114,585 66,924 520,126 (8,320) (3,293) (257) (8,577)
1 Real estate lending within this disclosure corresponds solely to the
industry of the borrower. Commercial real estate on page 183 includes
borrowers in multiple industries investing in income-producing assets and, to
a lesser extent, their construction and development.
Personal lending - loans and advances to customers at amortised cost by
country/territory
Gross carrying amount Allowance for ECL
First lien residential mortgages Other personal of which: credit cards Total First lien residential mortgages Other personal of which: credit cards Total
$m $m $m $m $m $m $m $m
UK 168,469 19,503 8,056 187,972 (209) (697) (339) (906)
- of which: HSBC UK Bank plc (ring-fenced bank) 164,878 17,884 7,975 182,762 (205) (692) (336) (897)
- of which: HSBC Bank plc (non-ring-fenced 3,226 141 81 3,367 (3) (5) (2) (8)
bank)
- of which: Other trading entities 365 1,478 - 1,843 (1) - (1) (1)
France(1) 436 7,476 1 7,912 (13) (8) - (21)
Germany - 165 - 165 - - - -
Switzerland 1,770 5,466 - 7,236 (1) (20) - (21)
Hong Kong 107,182 31,248 9,663 138,430 (2) (417) (286) (419)
Australia 23,001 446 396 23,447 (5) (19) (18) (24)
India 1,537 680 185 2,217 (4) (16) (12) (20)
Indonesia 58 288 137 346 (2) (11) (7) (13)
Mainland China 7,503 754 287 8,257 (3) (49) (39) (52)
Malaysia 2,313 2,115 882 4,428 (23) (87) (36) (110)
Singapore 8,151 5,589 521 13,740 - (38) (17) (38)
Taiwan 5,607 1,370 309 6,977 - (17) (4) (17)
Egypt - 341 89 341 - (1) (1) (1)
UAE 1,957 1,325 440 3,282 (10) (62) (24) (72)
US 18,340 673 199 19,013 (15) (19) (14) (34)
Mexico 8,778 6,215 2,465 14,993 (176) (757) (297) (933)
Other 5,807 2,959 1,050 8,766 (108) (78) (42) (186)
At 31 Dec 2023 360,909 86,613 24,680 447,522 (571) (2,296) (1,136) (2,867)
Personal lending - loans and advances to customers at amortised costs by
country/territory (continued)
Gross carrying amount Allowance for ECL
First lien residential mortgages Other personal of which: credit cards Total First lien residential mortgages Other personal of which: credit cards Total
$m $m $m $m $m $m $m $m
UK 154,519 16,793 6,622 171,312 (227) (838) (449) (1,065)
- of which: HSBC UK Bank plc (ring-fenced bank) 151,188 15,808 6,556 166,996 (222) (828) (447) (1,050)
- of which: HSBC Bank plc (non-ring-fenced 3,331 985 66 4,316 (5) (10) (2) (15)
bank)
France(1) 30 76 9 106 (14) (8) - (22)
Germany - 234 - 234 - - - -
Switzerland 1,378 5,096 - 6,474 - (20) - (20)
Hong Kong 101,478 31,409 8,644 132,887 (1) (352) (258) (353)
Australia 21,372 456 396 21,828 (11) (18) (18) (29)
India 1,078 590 162 1,668 (4) (18) (13) (22)
Indonesia 70 278 141 348 (1) (17) (12) (18)
Mainland China 9,305 921 378 10,226 (3) (61) (49) (64)
Malaysia 2,292 2,437 843 4,729 (27) (92) (31) (119)
Singapore 7,501 6,264 422 13,765 - (35) (14) (35)
Taiwan 5,428 1,189 284 6,617 - (18) (5) (18)
Egypt - 310 83 310 - (2) (1) (2)
UAE 2,104 1,339 426 3,443 (14) (84) (41) (98)
US 16,847 704 213 17,551 (10) (31) (23) (41)
Mexico 6,124 4,894 1,615 11,018 (145) (593) (196) (738)
Other 7,295 5,071 1,150 12,366 (118) (108) (51) (226)
At 31 Dec 2022 336,821 78,061 21,388 414,882 (575) (2,295) (1,161) (2,870)
1 Included in other personal lending at 31 December 2023 is $7,424m
(31 December 2022: nil) guaranteed by Crédit Logement.
Summary of financial instruments to which the impairment requirements in IFRS
9 are applied - by global business
Gross carrying/nominal amount Allowance for ECL
Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
$m $m $m $m $m $m $m $m $m $m
- WPB 630,661 54,069 4,233 - 688,963 (621) (1,551) (977) - (3,149)
- CMB 464,893 66,688 12,698 49 544,328 (508) (1,336) (4,995) (23) (6,862)
- GBM 696,377 14,247 3,002 32 713,658 (119) (199) (1,161) (7) (1,486)
- Corporate Centre 75,805 37 6 - 75,848 (1) (13) - - (14)
Total gross carrying amount on-balance sheet at 31 Dec 2023 1,867,736 135,041 19,939 81 2,022,797 (1,249) (3,099) (7,133) (30) (11,511)
- WPB 253,333 3,811 333 - 257,477 (22) - (2) - (24)
- CMB 142,206 16,238 877 - 159,321 (100) (101) (102) - (303)
- GBM 250,007 10,752 314 4 261,077 (38) (34) (7) - (79)
- Corporate Centre 149 - - - 149 - - - - -
Total nominal amount off-balance sheet at 31 Dec 2023 645,695 30,801 1,524 4 678,024 (160) (135) (111) - (406)
- WPB 124,747 406 - - 125,153 (14) (17) - - (31)
- CMB 86,021 405 - - 86,426 (9) (18) - - (27)
- GBM 88,229 173 1 - 88,403 (13) (6) (1) - (20)
- Corporate Centre 2,201 165 - - 2,366 (1) (18) - - (19)
Debt instruments measured at FVOCI at 301,198 1,149 1 - 302,348 (37) (59) (1) - (97)
31 Dec 2023
- WPB 593,424 53,302 3,959 - 650,685 (602) (1,586) (980) - (3,168)
- CMB 440,638 82,087 13,072 112 535,909 (484) (1,620) (4,988) (38) (7,130)
- GBM 700,267 20,577 3,344 17 724,205 (116) (463) (1,116) - (1,695)
- Corporate Centre 83,491 188 8 - 83,687 (3) (13) - - (16)
Total gross carrying amount on-balance sheet at 1,817,820 156,154 20,383 129 (1,205) (3,682) (7,084) (38) (12,009)
1,994,486
31 Dec 2022
- WPB 239,357 4,388 770 - 244,515 (25) (1) - - (26)
- CMB 130,342 20,048 642 - 151,032 (83) (136) (81) - (300)
- GBM 229,507 12,059 209 - 241,775 (39) (56) (17) - (112)
- Corporate Centre 248 1 - - 249 - - - - -
Total nominal amount off-balance sheet at 599,454 36,496 1,621 - 637,571 (147) (193) (98) - (438)
31 Dec 2022
- WPB 112,591 1,066 - 1 113,658 (17) (17) - - (34)
- CMB 71,445 735 - - 72,180 (9) (14) - - (23)
- GBM 75,228 434 - 1 75,663 (10) (8) - - (18)
- Corporate Centre 3,347 299 - - 3,646 (31) (19) (1) - (51)
Debt instruments measured at FVOCI at 262,611 2,534 - 2 265,147 (67) (58) (1) - (126)
31 Dec 2022
Loans and advances to customers and banks - other supplementary information
Gross carrying amount of which: stage 3 and POCI Allowance for ECL of which: stage 3 and POCI Change in ECL Write-offs Recoveries
$m $m $m $m $m $m $m
First lien residential mortgages 360,909 2,212 (571) (269) (10) (53) 10
- second lien residential mortgages 396 21 (8) (5) (1) (1) 2
- guaranteed loans in respect of residential property 8,593 90 (20) (14) 2 (8) 2
- other personal lending which is secured 29,481 157 (42) (24) 8 (2) 2
- credit cards 24,680 352 (1,136) (203) (577) (571) 108
- other personal lending which is unsecured 21,251 659 (1,048) (331) (380) (663) 99
- motor vehicle finance 2,212 14 (42) (8) (61) (28) 3
Other personal lending 86,613 1,293 (2,296) (585) (1,009) (1,273) 216
Personal lending 447,522 3,505 (2,867) (854) (1,019) (1,326) 226
- agriculture, forestry and fishing 7,181 312 (130) (64) (21) (9) -
- mining and quarrying 7,223 325 (101) (83) 27 (49) -
- manufacturing 85,333 1,899 (1,143) (860) (355) (273) 11
- electricity, gas, steam and air-conditioning supply 14,355 255 (119) (88) (26) (10) -
- water supply, sewerage, waste management and remediation 3,262 102 (63) (51) (44) (2) -
- real estate and construction 101,455 5,883 (3,286) (2,561) (1,358) (1,191) 6
- wholesale and retail trade, repair of motor vehicles and motorcycles 79,121 2,362 (1,341) (1,134) (124) (447) 12
- transportation and storage 21,456 445 (230) (160) (87) (42) -
- accommodation and food 15,874 1,058 (257) (112) (33) (26) -
- publishing, audiovisual and broadcasting 19,731 210 (173) (50) (106) (73) -
- professional, scientific and technical activities 26,753 740 (401) (306) (262) (110) 1
- administrative and support services 22,203 597 (268) (174) 39 (137) -
- public administration and defence, compulsory social security 1,042 - - - - - -
- education 1,460 46 (15) (4) (1) (22) -
- health and care 4,236 183 (56) (26) 40 (7) -
- arts, entertainment and recreation 1,961 99 (42) (31) 15 (8) -
- other services 8,355 318 (153) (90) 22 (181) 12
- activities of households 694 - - - - - -
- extra-territorial organisations and bodies activities 101 - - - - - -
- government 5,827 205 (12) (10) (15) - -
- asset-backed securities 32 - (13) - - - -
Corporate and commercial 427,655 15,039 (7,803) (5,804) (2,289) (2,587) 42
Non-bank financial institutions 74,432 810 (404) (322) (168) (9) -
Wholesale lending 502,087 15,849 (8,207) (6,126) (2,457) (2,596) 42
Loans and advances to customers 949,609 19,354 (11,074) (6,980) (3,476) (3,922) 268
Loans and advances to banks 112,917 2 (15) (2) 53 - -
At 31 Dec 2023 1,062,526 19,356 (11,089) (6,982) (3,423) (3,922) 268
Loans and advances to customers and banks - other supplementary information
(continued)
Gross carrying amount of which: stage 3 and POCI Allowance for ECL of which: stage 3 and POCI Change in ECL Write-offs Recoveries
$m $m $m $m $m $m $m
First lien residential mortgages 336,821 2,042 (575) (270) 180 (48) 26
- second lien residential mortgages 379 6 (6) (3) 9 (1) 4
- guaranteed loans in respect of residential property 1,367 125 (34) (30) (11) (9) 2
- other personal lending which is secured 32,106 206 (55) (30) (16) (5) 1
- credit cards 21,388 260 (1,161) (160) (638) (471) 126
- other personal lending which is unsecured 20,880 687 (1,008) (305) (655) (660) 119
- motor vehicle finance 1,941 13 (31) (7) 39 (18) 5
Other personal lending 78,061 1,297 (2,295) (535) (1,272) (1,164) 257
Personal lending 414,882 3,339 (2,870) (805) (1,092) (1,212) 283
- agriculture, forestry and fishing 6,571 261 (122) (68) (32) (42) -
- mining and quarrying 8,120 233 (172) (146) (24) (46) -
- manufacturing 87,460 2,065 (1,153) (896) (191) (171) 3
- electricity, gas, steam and air-conditioning supply 16,478 277 (108) (67) (75) (16) -
- water supply, sewerage, waste management and remediation 2,993 26 (21) (13) 3 (1) -
- real estate and construction 114,585 5,651 (3,293) (2,232) (1,630) (310) 8
- wholesale and retail trade, repair of motor vehicles and motorcycles 82,429 2,810 (1,666) (1,344) (344) (667) 8
- transportation and storage 24,686 556 (248) (153) (13) (82) 1
- accommodation and food 17,174 789 (244) (82) 103 (29) -
- publishing, audiovisual and broadcasting 18,388 277 (117) (59) 9 (47) 1
- professional, scientific and technical activities 17,935 542 (272) (200) (81) (31) 1
- administrative and support services 25,077 980 (408) (293) (27) (27) 1
- public administration and defence, compulsory social security 1,180 - (1) - 5 - -
- education 1,593 87 (31) (22) 1 (3) -
- health and care 3,902 266 (90) (67) (30) (7) 1
- arts, entertainment and recreation 1,862 146 (77) (57) 1 (17) -
- other services 12,471 589 (274) (219) 120 (92) 7
- activities of households 744 - - - - - -
- extra-territorial organisations and bodies activities 47 - - - 1 - 1
- government 9,475 270 (10) (7) (5) - -
- asset-backed securities 32 - (13) - (4) - -
Corporate and commercial 453,202 15,825 (8,320) (5,925) (2,213) (1,588) 32
Non-bank financial institutions 66,924 469 (257) (137) (165) (1) 1
Wholesale lending 520,126 16,294 (8,577) (6,062) (2,378) (1,589) 33
Loans and advances to customers 935,008 19,633 (11,447) (6,867) (3,470) (2,801) 316
Loans and advances to banks 104,544 82 (69) (22) (53) - -
At 31 Dec 2022 1,039,552 19,715 (11,516) (6,889) (3,523) (2,801) 316
HSBC Holdings
(Audited)
Risk in HSBC Holdings is overseen by the HSBC Holdings Asset and Liability
Management Committee. The major risks faced by HSBC Holdings are credit risk,
liquidity risk and market risk (in the form of interest rate risk and foreign
exchange risk).
Credit risk in HSBC Holdings primarily arises from transactions with Group
subsidiaries.
In HSBC Holdings, the maximum exposure to credit risk arises from two
components:
- financial assets on the balance sheet, where maximum exposure equals
the carrying amount (see page 338); and
- financial guarantees and other guarantees, where the maximum
exposure is the maximum that we would have to pay if the guarantees were
called upon (see Note 34).
In the case of our derivative asset balances (see page 338), there is a
legally enforceable right of offset in the event of counterparty default and
where, as a result, there is a net exposure for credit risk purposes. However,
as there is no intention to settle these balances on a net basis under normal
circumstances, they do not qualify for net presentation for accounting
purposes. These offsets also include collateral received in cash and other
financial assets.
The total offset relating to our derivative asset balances was $3.0bn at
31 December 2023 (2022: $3.1bn).
The credit quality of loans and advances and financial investments, both of
which consist of intra-Group lending and US Treasury bills and bonds,
is assessed as 'strong', with 100% of the exposure being neither past due nor
impaired (2022: 100%). For further details of credit quality classification,
see page 148.
Treasury risk
Contents
203 Overview
203 Treasury risk management
205 Other Group risks
206 Capital risk in 2023
210 Liquidity and funding risk in 2023
213 Structural foreign exchange risk in 2023
214 Interest rate risk in the banking book in 2023
Overview
Treasury risk is the risk of having insufficient capital, liquidity or funding
resources to meet financial obligations and satisfy regulatory requirements,
including the risk of adverse impact on earnings or capital due to structural
and transactional foreign exchange exposures, as well as changes in market
interest rates, together with pension and insurance risk.
Treasury risk arises from changes to the respective resources and risk
profiles driven by customer behaviour, management decisions or the external
environment.
Approach and policy
(Audited)
Our objective in the management of treasury risk is to maintain appropriate
levels of capital, liquidity, funding, foreign exchange and market risk to
support our business strategy, and meet our regulatory and stress
testing-related requirements.
Our approach to treasury management is driven by our strategic and
organisational requirements, taking into account the regulatory, economic and
commercial environment. We aim to maintain a strong capital and liquidity base
to support the risks inherent in our business and invest in accordance with
our strategy, meeting both consolidated and local regulatory requirements at
all times.
Our policy is underpinned by our risk management framework. The risk
management framework incorporates a number of measures aligned to our
assessment of risks for both internal and regulatory purposes. These risks
include credit, market, operational, pensions, structural and transactional
foreign exchange risk, and interest rate risk in the banking book.
For further details, refer to our Pillar 3 Disclosures at 31 December 2023.
Treasury risk management
Key developments in 2023
- Following high-profile banking failures in the first quarter of
2023, we reviewed our liquidity monitoring and metric assumptions as part of
our internal liquidity adequacy assessment process cycle to ensure they
continued to cover observed and emerging risks.
- In 2023, we reverted to a policy of paying quarterly dividends, with
the Board approving three interim dividends of $0.10 per share. We announced
$7bn of share buy-backs during 2023.
- Effective July 2023, the Bank of England's Financial Policy
Committee doubled the UK countercyclical capital buffer rate from 1% to 2%, in
line with the usual 12‑month implementation lag. This change increased our
CET1 requirement by 0.2 percentage points.
- We further stabilised our net interest income against a backdrop of
fluctuating interest rate expectations as the trajectory of inflation for
major economies was reassessed.
- Following the acquisition of SVB UK in the first quarter of 2023, we
launched HSBC Innovation Banking in June, which combined the expertise of SVB
UK with the reach of our international network. We are in the process of
integrating HSBC Innovation Banking into the Group. The acquisition was funded
from existing resources, and the impacts on our Group LCR and CET1 ratio were
minimal.
- In the fourth quarter of 2023, we reclassified our retail banking
operations in France as held for sale, recognising a $2.0bn loss. In the first
quarter, we had recognised a $2.1bn partial reversal of impairment for this
business. The net result for the year was a favourable $0.1bn impact. On 1
January 2024, we completed the sale of this business with no material
incremental impact on CET1.
- Having entered into an agreement to sell our banking business in
Canada in 2022, the transaction is expected to complete at the end of the
first quarter of 2024. The associated gain on sale is expected to add
approximately 1.2 percentage points to the CET1 ratio as it stood at
31 December 2023.
For quantitative disclosures on capital ratios, own funds and risk-weighted
assets ('RWAs'), see pages 206 to 207. For quantitative disclosures on
liquidity and funding metrics, see pages 210 to 211. For quantitative
disclosures on interest rate risk in the banking book, see pages 214 to 216.
Governance and structure
The Global Head of Traded and Treasury Risk Management and Risk Analytics is
the accountable risk steward for all treasury risks. The Group Treasurer is
the risk owner for all treasury risks, with the exception of pension risk and
insurance risk. The Group Treasurer co-owns pension risk with the Group Head
of Performance, Reward and Employee Relations. Insurance risk is owned by the
Chief Executive Officer for Global Insurance.
Capital risk, liquidity risk, interest rate risk in the banking book,
structural foreign exchange risk and transactional foreign exchange risk are
the responsibility of the Group Executive Committee and the Group Risk
Committee ('GRC'). Global Treasury actively manages these risks on an ongoing
basis, supported by the Holdings Asset and Liability Management Committee
('ALCO') and local ALCOs, overseen by Treasury Risk Management and Risk
Management Meetings.
Pension risk is overseen by a network of local and regional pension risk
management meetings. The Global Pensions Risk Management Meeting provides
oversight of all pension plans sponsored by HSBC globally, and is chaired by
the accountable risk steward. Insurance risk is overseen by the Global
Insurance Risk Management Meeting, chaired by the Chief Risk and Compliance
Officer for Global Insurance.
Capital, liquidity and funding risk management processes
Assessment and risk appetite
Our capital management policy is supported by a global capital management
framework. The framework sets out our approach to determining key capital risk
appetites including CET1, total capital, minimum requirements for own funds
and eligible liabilities ('MREL'), the leverage ratio and double leverage. Our
internal capital adequacy assessment process ('ICAAP') is an assessment of the
Group's capital position, outlining both regulatory and internal capital
resources and requirements resulting from HSBC's business model, strategy,
risk profile and management, performance and planning, risks to capital, and
the implications of stress testing. Our assessment of capital adequacy is
driven by an assessment of risks. These risks include credit, market,
operational, pensions, insurance, structural foreign exchange, interest rate
risk in the banking book and Group risk. Climate risk is also considered as
part of the ICAAP, and we are continuing to develop our approach. The Group's
ICAAP supports the determination of the consolidated capital risk appetite and
target ratios, as well as enables the assessment and determination of capital
requirements by regulators. Subsidiaries prepare ICAAPs in line with global
guidance, while considering their local regulatory regimes to determine their
own risk appetites and ratios.
HSBC Holdings is the provider of MREL to its subsidiaries, including equity
and non-equity capital. These investments are funded by HSBC Holdings' own
equity capital and MREL-eligible debt. MREL includes own funds and liabilities
that can be written down or converted into capital resources in order to
absorb losses or recapitalise a bank in the event of its failure. In line with
our existing structure and business model, HSBC has three resolution groups -
the European resolution group, the Asian resolution group and the US
resolution group. There are some smaller entities that fall outside these
resolution groups.
HSBC Holdings seeks to maintain a prudent balance between the composition of
its capital and its investments in subsidiaries.
As a matter of long-standing policy, the holding company group retains a
substantial holdings capital buffer comprising cash and other high-quality
liquid assets, which at 31 December 2023 was in excess of $27bn, within risk
appetite.
We aim to ensure that management has oversight of our liquidity and funding
risks at Group and entity level through robust governance, in line with our
risk management framework. We manage liquidity and funding risk at an
operating entity level in accordance with globally consistent policies,
procedures and reporting standards. This ensures that obligations can be met
in a timely manner, in the jurisdiction where they fall due.
Operating entities are required to meet internal minimum requirements and any
applicable regulatory requirements at all times. These requirements are
assessed through our internal liquidity adequacy assessment process ('ILAAP'),
which ensures that operating entities have robust strategies, policies,
processes and systems for the identification, measurement, management and
monitoring of liquidity risk over an appropriate set of time horizons,
including intra-day. The ILAAP informs the validation of risk tolerance and
the setting of risk appetite. It also assesses the capability to manage
liquidity and funding effectively in each major entity. These metrics are set
and managed locally but are subject to robust global review and challenge to
ensure consistency of approach and application of the Group's policies and
controls.
Planning and performance
Capital and RWA plans form part of the annual financial resource plan that is
approved by the Board. Capital and RWA forecasts are submitted to the Group
Executive Committee on a monthly basis, and capital and RWAs are monitored and
managed against the plan. The responsibility for global capital allocation
principles rests with the Group Chief Financial Officer, supported by the
Group Capital Management Meeting. This is a specialist forum addressing
capital management, reporting into Holdings ALCO.
Through our internal governance processes, we seek to strengthen discipline
over our investment and capital allocation decisions, and to ensure that
returns on investment meet management's objectives. Our strategy is to
allocate capital to businesses and entities to support growth objectives where
returns above internal hurdle levels have been identified and in order to meet
their regulatory and economic capital needs. We evaluate and manage business
returns by using a return on average tangible equity measure and a related
economic profit measure.
Funding and liquidity plans also form part of the financial resource plan that
is approved by the Board. The Board-level appetite measures are the liquidity
coverage ratio ('LCR') and net stable funding ratio ('NSFR'), together with an
internal liquidity metric. In addition, we use a wider set of measures to
manage an appropriate funding and liquidity profile, including legal entity
depositor concentration limits, intra-day liquidity, forward-looking funding
assessments and other key measures.
Risks to capital and liquidity
Outside the stress testing framework, other risks may be identified that have
the potential to affect our RWAs, capital and/or liquidity position. Downside
and Upside scenarios are assessed against our management objectives, and
mitigating actions are assigned as necessary. We closely monitor future
regulatory developments and continue to evaluate the impact of these upon our
capital and liquidity requirements, particularly those related to the UK's
implementation of the outstanding measures to be implemented from the Basel
III reforms ('Basel 3.1').
Regulatory developments
Future changes to our ratios will occur with the implementation of Basel 3.1.
The Prudential Regulation Authority ('PRA') has published its consultation
paper on the UK's implementation, with a proposed implementation date of
1 July 2025. The PRA has also published a set of near-final rules in relation
to some Basel 3.1 elements. We are currently assessing the impact of
implementation.
The RWA output floor under Basel 3.1 is proposed to be subject to a
four-and-a-half year transitional provision. Any impact from the output floor
is expected be towards the end of the transition period.
Regulatory reporting processes and controls
The quality of regulatory reporting remains a key priority for management and
regulators. We are progressing with a comprehensive programme to strengthen
our global processes, improve consistency and enhance controls across
regulatory reports.
The ongoing programme of work focuses on our material regulatory reports and
is being phased over a number of years. This programme includes data
enhancement, transformation of the reporting systems and an uplift to the
control environment over the report production process.
While this programme continues, there may be further impacts on some of our
regulatory ratios, such as the CET1, LCR and NSFR, as we implement recommended
changes and continue to enhance our controls across the process.
Stress testing and recovery and resolution planning
The Group uses stress testing to inform management of the capital and
liquidity needed to withstand internal and external shocks, including a global
economic downturn or a systems failure. Stress testing results are also used
to inform risk mitigation actions, input into global business performance
measures through tangible equity allocation, and recovery and resolution
planning, as well as to re-evaluate business plans where analysis shows
capital, liquidity and/or returns do not meet their target.
In addition to a range of internal stress tests, we are subject to supervisory
stress testing in many jurisdictions. These include the programmes of the Bank
of England ('BoE'), the US Federal Reserve Board, the European Banking
Authority, the European Central Bank and the Hong Kong Monetary Authority. The
results of regulatory stress testing and our internal stress tests are used
when assessing our internal capital and liquidity requirements through the
ICAAP and ILAAP. The outcomes of stress testing exercises carried out by the
PRA and other regulators feed into the setting of regulatory minimum ratios
and buffers.
We maintain recovery plans for the Group and material entities, which set out
potential options management could take in a range of stress scenarios that
could result in a breach of capital or liquidity buffers.
The Group recovery plan sets out the framework and governance arrangements to
support restoring HSBC to a stable and viable position, and so lowering the
probability of failure from either idiosyncratic company-specific stress or
systemic market-wide issues. Our material entities' recovery plans provide
detailed actions that management would consider taking in a stress scenario
should their positions deteriorate and threaten to breach risk appetite and
regulatory minimum levels. This is to help ensure that HSBC entities can
stabilise their financial position and recover from financial losses in a
stress environment.
The Group also has capabilities, resources and arrangements in place to
address the unlikely event that HSBC might not be recoverable and would
therefore need to be resolved by regulators. The Group and the BoE publicly
disclosed the status of HSBC's progress against the BoE's Resolvability
Assessment Framework in June 2022, following the submission of HSBC's
inaugural resolvability self-assessment in October 2021. HSBC has continued to
enhance its resolvability capabilities since this time and submitted its
second self-assessment in October 2023. A subsequent update was provided to
the BoE in January 2024. Further public disclosure by the Group and the BoE as
to HSBC's progress against the Resolvability Assessment Framework will be made
in June 2024.
Overall, HSBC's recovery and resolution planning helps safeguard the Group's
financial and operational stability. The Group is committed to further
developing its recovery and resolution capabilities, including in relation to
the Resolvability Assessment Framework.
Measurement of interest rate risk in the banking book processes
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse impact to
earnings or capital due to changes in market interest rates. It is generated
by our non-traded assets and liabilities, specifically loans, deposits and
financial instruments that are not held for trading intent or in order to
hedge positions held with trading intent. Interest rate risk that can be
economically hedged may be transferred to Global Treasury. Hedging is
generally executed through interest rate derivatives or fixed-rate government
bonds. Any interest rate risk that Global Treasury cannot economically hedge
is not transferred and will remain within the global business where the risks
originate.
Global Treasury uses a number of measures to monitor and control interest rate
risk in the banking book, including:
- net interest income sensitivity;
- banking net interest income sensitivity; and
- economic value of equity sensitivity.
Net interest income and banking net interest income sensitivity
A principal part of our management of non-traded interest rate risk is to
monitor the sensitivity of expected net interest income ('NII') under varying
interest rate scenarios (i.e. simulation modelling), where all other economic
variables are held constant. This monitoring is undertaken at an entity and
Group level, where a range of interest rate scenarios are monitored on a
one-year basis.
NII sensitivity figures represent the effect of pro forma movements in
projected yield curves based on a static balance sheet size and structure,
except for certain mortgage products where balances are impacted by interest
rate sensitive prepayments. These sensitivity calculations do not incorporate
actions that would be taken by Global Treasury or in the business that
originates the risk to mitigate the effect of interest rate movements.
The NII sensitivity calculations assume that interest rates of all maturities
move by the same amount in the 'up-shock' scenario. The sensitivity
calculations in the 'down-shock' scenarios reflect no floors to the shocked
market rates. However, customer product-specific interest rate floors are
recognised where applicable.
During 2023, we introduced an additional metric to measure and manage the
sensitivity of our NII to interest rate shocks. In addition to NII
sensitivity, we now also monitor banking NII sensitivity. HSBC has a
significant quantity of trading book assets that are funded by banking book
liabilities, and the NII sensitivity measure does not include the sensitivity
of the internal transfer income from this funding. Banking NII sensitivity
includes an adjustment on top of NII sensitivity to reflect this. Going
forwards, this will be our primary metric for monitoring and management of
interest rate risk in the banking book.
Economic value of equity sensitivity
Economic value of equity ('EVE') represents the present value of the future
banking book cash flows that could be distributed to equity holders under a
managed run-off scenario. This equates to the current book value of equity
plus the present value of future NII in this scenario. An EVE sensitivity
represents the expected movement in EVE due to pre-specified interest rate
shocks, where all other economic variables are held constant. Operating
entities are required to monitor EVE sensitivities as a percentage of capital
resources.
Further details of HSBC's risk management of interest rate risk in the banking
book can be found in the Group's Pillar 3 Disclosures at 31 December 2023.
Other Group risks
Non-trading book foreign exchange exposures
Structural foreign exchange exposures
Structural foreign exchange exposures arise from net assets or capital
investments in foreign operations, together with any associated hedging. A
foreign operation is defined as a subsidiary, associate, joint arrangement or
branch where the activities are conducted in a currency other than that of the
reporting entity. An entity's functional reporting currency is normally that
of the primary economic environment in which the entity operates.
Exchange differences on structural exposures are recognised in other
comprehensive income ('OCI'). We use the US dollar as our presentation
currency in our consolidated financial statements because the US dollar and
currencies linked to it form the major currency bloc in which we transact and
fund our business. Therefore, our consolidated balance sheet is affected by
exchange differences between the US dollar and all the non-US dollar
functional currencies of underlying foreign operations.
Our structural foreign exchange exposures are managed with the primary
objective of ensuring, where practical, that our consolidated capital ratios
and the capital ratios of individual banking subsidiaries are largely
protected from the effect of changes in exchange rates. We hedge structural
foreign exchange positions where it is capital efficient to do so, and subject
to approved limits. This is achieved through a combination of net investment
hedges and economic hedges. Hedging positions are monitored and rebalanced
periodically to manage RWA or downside risks associated with HSBC's foreign
currency investments.
For further details of our structural foreign exchange exposures, see page
213.
Transactional foreign exchange exposures
Transactional foreign exchange risk arises primarily from day-to-day
transactions in the banking book generating profit and loss or fair value
through other comprehensive income ('FVOCI') reserves in a currency other than
the reporting currency of the operating entity. Transactional foreign exchange
exposure generated through profit and loss is periodically transferred to
Markets and Securities Services and managed within limits, with the exception
of limited residual foreign exchange exposure arising from timing differences
or for other reasons. Transactional foreign exchange exposure generated
through OCI reserves is managed by Global Treasury within approved appetite.
HSBC Holdings risk management
As a financial services holding company, HSBC Holdings has limited market risk
activities. Its activities predominantly involve maintaining sufficient
capital resources to support the Group's diverse activities; allocating these
capital resources across the Group's businesses; earning dividend and interest
income on its investments in the businesses; payment of operating expenses;
providing dividend payments to its equity shareholders and interest payments
to providers of debt capital; and maintaining a supply of short-term liquid
assets for deployment under extraordinary circumstances.
The main market risks to which HSBC Holdings is exposed are banking book
interest rate risk and foreign currency risk. Exposure to these risks arises
from short-term cash balances, funding positions held, loans to subsidiaries,
investments in long-term financial assets, financial liabilities including
debt capital issued, and structural foreign exchange hedges. The objective of
HSBC Holdings' market risk management strategy is to manage volatility in
capital resources, cash flows and distributable reserves that could be caused
by movements in market parameters. Market risk for HSBC Holdings is monitored
by Holdings ALCO in accordance with its risk appetite statement.
HSBC Holdings uses interest rate swaps and cross-currency interest rate swaps
to manage the interest rate risk and foreign currency risk arising from its
long-term debt issues. It also uses forward foreign exchange contracts to
manage its structural foreign exchange exposures.
For quantitative disclosures on interest rate risk in the banking book, see
pages 214 to 216.
Pension risk management processes
Our global pensions strategy is to move from defined benefit to defined
contribution plans, where local law allows and it is considered competitive to
do so. Our most material defined benefit plans have been closed to new
entrants for many years, and the majority (including the largest plan in the
UK) are also closed to future accrual.
In defined contribution pension plans, the contributions that HSBC is required
to make are known, while the ultimate pension benefit will vary, typically
with investment returns achieved by investment choices made by the employee.
While the market risk to HSBC of defined contribution plans is low, the Group
is still exposed to operational and reputational risk.
In defined benefit pension plans, the level of pension benefit is known.
Therefore, the level of contributions required by HSBC will vary due to a
number of risks, including:
- investments delivering a return below the level required to provide
the projected plan benefits;
- the prevailing economic environment leading to corporate failures,
thus triggering write-downs in asset values (both equity and debt);
- a change in either interest rates or inflation expectations, causing
an increase in the value of plan liabilities; and
- plan members living longer than expected (known as longevity risk).
Pension risk is assessed using an economic capital model that takes into
account potential variations in these factors. The impact of these variations
on both pension assets and pension liabilities is assessed using a
one-in-200-year stress test. Scenario analysis and other stress tests are also
used to support pension risk management, including the review of de-risking
opportunities.
To fund the benefits associated with defined benefit plans, sponsoring Group
companies, and in some instances employees, make regular contributions in
accordance with advice from actuaries and in consultation with the plan's
fiduciaries where relevant. These contributions are normally set to ensure
that there are sufficient funds to meet the cost of the accruing benefits for
the future service of active members. However, higher contributions are
required when plan assets are considered insufficient to cover the existing
pension liabilities. Contribution rates are typically revised annually or once
every three years, depending on the plan.
The defined benefit plans invest contributions in a range of investments
designed to limit the risk of assets failing to meet a plan's liabilities. Any
changes in expected returns from the investments may also change future
contribution requirements. In pursuit of these long-term objectives, an
overall target allocation is established between asset classes of the defined
benefit plan. In addition, each permitted asset class has its own benchmarks,
such as stock-market or property valuation indices or liability
characteristics. The benchmarks are reviewed at least once every three to five
years and more frequently if required by local legislation or circumstances.
The process generally involves an extensive asset and liability review.
In addition, some of the Group's pension plans hold longevity swap contracts.
These arrangements provide long-term protection to the relevant plans against
costs resulting from pensioners or their dependants living longer than
initially expected. The most sizeable plan to do this is the HSBC Bank (UK)
Pension Scheme, which holds longevity swaps covering approximately 50% of the
plan's pensioner liabilities.
Capital risk in 2023
Capital overview
Capital adequacy metrics
At
31 Dec 31 Dec
2023 2022
Risk-weighted assets ('RWAs') ($bn)
Credit risk 683.9 679.1
Counterparty credit risk 35.5 37.1
Market risk 37.5 37.6
Operational risk 97.2 85.9
Total RWAs 854.1 839.7
Capital on a transitional basis ($bn)
Common equity tier 1 ('CET1') capital 126.5 119.3
Tier 1 capital 144.2 139.1
Total capital 171.2 162.4
Capital ratios on a transitional basis (%)
Common equity tier 1 ratio 14.8 14.2
Tier 1 ratio 16.9 16.6
Total capital ratio 20.0 19.3
Capital on an end point basis ($bn)
Common equity tier 1 ('CET1') capital 126.5 119.3
Tier 1 capital 144.2 139.1
Total capital 167.1 157.2
Capital ratios on an end point basis (%)
Common equity tier 1 ratio 14.8 14.2
Tier 1 ratio 16.9 16.6
Total capital ratio 19.6 18.7
Liquidity coverage ratio ('LCR')
Total high-quality liquid assets ($bn) 647.5 647.0
Total net cash outflow ($bn) 477.1 490.8
LCR (%) 136 132
Net stable funding ratio ('NSFR')
Total available stable funding ($bn) 1,601.9 1,552.0
Total required stable funding ($bn) 1,202.4 1,138.4
NSFR (%) 133 136
References to EU regulations and directives (including technical standards)
should, as applicable, be read as references to the UK's version of such
regulation or directive, as onshored into UK law under the European Union
(Withdrawal) Act 2018, and as may be subsequently amended under UK law.
Capital figures and ratios in the previous table are calculated in accordance
with the regulatory requirements of the Capital Requirements Regulation and
Directive, the CRR II regulation and the PRA Rulebook ('CRR II'). The table
presents them under the
transitional arrangements in CRR II for capital instruments and after their
expiry, known as the end point.
The liquidity coverage ratio is based on the average month-end value over the
preceding 12 months. The net stable funding ratio is the average of the
preceding four quarters.
Regulatory numbers and ratios are as presented at the date of reporting. Small
changes may exist between these numbers and ratios and those submitted in
regulatory filings. Where differences are significant, we may restate in
subsequent periods.
Own funds disclosure
(Audited) At
31 Dec 31 Dec
2023 2022
Ref* $m $m
Common equity tier 1 ('CET1') capital: instruments and reserves
1 Capital instruments and the related share premium accounts 22,964 23,406
- ordinary shares 22,964 23,406
2,3 Retained earnings, accumulated other comprehensive income (and other 128,419 121,609
reserves)(1)
5 Minority interests (amount allowed in consolidated CET1) 3,917 4,444
5a Independently reviewed net profits net of any foreseeable charge or dividend 10,568 8,633
6 Common equity tier 1 capital before regulatory adjustments(1) 165,868 158,092
28 Total regulatory adjustments to common equity tier(1) (39,367) (38,801)
29 Common equity tier 1 capital 126,501 119,291
36 Additional tier 1 capital before regulatory adjustments 17,732 19,836
43 Total regulatory adjustments to additional tier 1 capital (70) (60)
44 Additional tier 1 capital 17,662 19,776
45 Tier 1 capital 144,163 139,067
51 Tier 2 capital before regulatory adjustments 28,148 24,779
57 Total regulatory adjustments to tier 2 capital (1,107) (1,423)
58 Tier 2 capital 27,041 23,356
59 Total capital 171,204 162,423
* The references identify lines prescribed in the PRA template, which
are applicable and where there is a value.
1 On adoption of IFRS 17 'Insurance Contracts', comparative data
previously published under IFRS 4 'Insurance Contracts' have been restated for
2022, with no impact on CET1 and total capital.
At 31 December 2023, our CET1 capital ratio increased to 14.8% from 14.2% at
31 December 2022, reflecting an increase in CET1 capital of $7.2bn, partly
offset by an increase in RWAs of $14.4bn. The key drivers of the overall rise
in our CET1 ratio during the year were:
- a 1.0 percentage point increase from capital generation, mainly
through profits less dividends and share buy-backs;
- a 0.3 percentage point reduction due to an increase in regulatory
deductions, primarily for expected excess loss and intangible assets; and
- a 0.1 percentage point decrease from the adverse impact of foreign
exchange fluctuations and the increase in the underlying RWAs.
The impairment of BoCom had an insignificant impact on our capital and CET1
ratio. This is because the impairment charge had a partially offsetting
reduction in threshold deductions from regulatory capital. For regulatory
capital purposes, our share of BoCom's profits is not capital accretive,
although the dividends we receive from BoCom are capital accretive.
Our Pillar 2A requirement at 31 December 2023, as per the PRA's Individual
Capital Requirement based on a point-in-time assessment, was equivalent to
2.6% of RWAs, of which 1.5% was required to be met by CET1. Throughout 2023,
we complied with the PRA's regulatory capital adequacy requirements.
Risk-weighted assets
RWAs by global business
WPB CMB(1) GBM(1) Corporate Centre Total
RWAs
$bn $bn $bn $bn $bn
Credit risk 155.3 319.1 131.5 78.0 683.9
Counterparty credit risk 1.9 1.5 32.0 0.1 35.5
Market risk 1.3 1.0 22.2 13.0 37.5
Operational risk 34.4 32.9 32.8 (2.9) 97.2
At 31 Dec 2023 192.9 354.5 218.5 88.2 854.1
At 31 Dec 2022 182.9 342.4 225.9 88.5 839.7
1 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.
RWAs by legal entities(1)
HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc HSBC Bank Canada Grupo Financiero HSBC, S.A. Other trading entities Holding companies, shared service centres and intra-Group eliminations Total
de C.V. RWAs
$bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
Credit risk 110.7 73.4 314.0 17.1 59.3 27.1 25.9 48.0 8.4 683.9
Counterparty credit risk 0.3 17.8 8.7 0.7 3.1 0.5 0.7 3.7 - 35.5
Market risk(2) 0.2 22.7 27.4 2.8 2.6 0.8 0.7 1.6 9.3 37.5
Operational risk 18.0 17.6 46.6 3.7 7.2 3.5 5.3 6.3 (11.0) 97.2
At 31 Dec 2023 129.2 131.5 396.7 24.3 72.2 31.9 32.6 59.6 6.7 854.1
At 31 Dec 2022 110.9 127.0 407.0 22.5 72.5 31.9 26.7 60.3 8.1 839.7
1 Balances are on a third-party Group consolidated basis.
2 Market risk RWAs are non-additive across the legal entities due to
diversification effects within the Group.
RWA movement by global business by key driver
Credit risk, counterparty credit risk and operational risk
WPB CMB(1) GBM(1) Corporate Centre Market Total
risk RWAs
$bn $bn $bn $bn $bn $bn
RWAs at 1 Jan 2023 181.2 341.3 202.3 77.3 37.6 839.7
Asset size(2) 15.6 3.2 3.2 2.6 1.6 26.2
Asset quality 2.8 1.5 (0.6) (1.2) - 2.5
Model updates (1.3) (0.1) (0.3) - (0.9) (2.6)
Methodology and policy (6.2) (1.8) (7.5) (3.5) (0.9) (19.9)
Acquisitions and disposals (1.3) 8.0 (0.7) 0.1 0.1 6.2
Foreign exchange movements(3) 0.8 1.4 (0.1) (0.1) - 2.0
Total RWA movement 10.4 12.2 (6.0) (2.1) (0.1) 14.4
RWAs at 31 Dec 2023 191.6 353.5 196.3 75.2 37.5 854.1
1 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.
2 The movements in asset size include the increase in operational risk
RWAs, which was driven by revenue.
3 Credit risk foreign exchange movements in this disclosure are computed
by retranslating the RWAs into US dollars based on the underlying
transactional currencies.
RWA movement by legal entities by key driver(1)
Credit risk, counterparty credit risk and operational risk
HSBC UK Bank plc HSBC Bank plc The Hongkong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc HSBC Bank Canada Grupo Financiero HSBC, S.A. Other trading entities Holding companies, shared service centres and intra-Group eliminations Market risk Total RWAs
de C.V.
$bn $bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
RWAs at 1 Jan 2023 110.8 106.5 378.4 20.8 69.5 31.1 26.2 58.0 0.8 37.6 839.7
Asset size(2) 5.1 0.2 5.8 1.8 0.4 (0.2) 2.9 12.1 (3.5) 1.6 26.2
Asset quality 2.3 (0.9) (1.9) (1.0) 0.8 0.3 (0.5) 3.3 0.1 - 2.5
Model updates (1.0) (0.3) (0.4) 0.1 - - - (0.1) - (0.9) (2.6)
Methodology and policy (4.0) 0.8 (11.2) (0.3) (1.1) (0.7) 0.2 (2.5) (0.2) (0.9) (19.9)
Acquisitions and disposals 9.5 (0.2) (0.1) - - - - (3.2) 0.1 0.1 6.2
Foreign exchange movements(3) 6.3 2.7 (1.3) 0.1 - 0.6 3.1 (9.6) 0.1 - 2.0
Total RWA movement 18.2 2.3 (9.1) 0.7 0.1 - 5.7 - (3.4) (0.1) 14.4
RWAs at 31 Dec 2023 129.0 108.8 369.3 21.5 69.6 31.1 31.9 58.0 (2.6) 37.5 854.1
1 Balances are on a third-party Group consolidated basis.
2 The movements in asset size include the increase in operational risk
RWAs, which was driven by revenue.
3 Credit risk foreign exchange movements in this disclosure are computed
by retranslating the RWAs into US dollars based on the underlying
transactional currencies.
Risk-weighted assets ('RWAs') rose by $14.4bn during the year, driven by an
increase of $34.4bn from increased lending, higher operational risk RWAs,
business acquisitions and foreign exchange movements. These were partly offset
by a reduction of $19.9bn due to methodology and policy changes.
Asset size
Asset size RWAs increased by $26.2bn, including a $10.4bn rise in operational
risk RWAs driven by growth in NII.
WPB RWAs increased by $15.6bn, notably due to an expansion of retail lending
in Asia, the UK and Mexico, additional sovereign exposures in Asia and other
trading entities, including a $2.9bn rise in operational risk RWAs.
CMB RWAs increased by $3.2bn, reflecting an increase in operational risk RWAs
of $5.2bn and additional sovereign exposures across various entities. This was
partly offset by a net decrease in corporate lending in Asia, the US and
Europe.
GBM RWAs increased by $3.2bn, mainly from the $4.0bn rise in operational risk
RWAs and additional sovereign exposures across various entities. This was
partly offset by a fall in lending in Asia and Europe.
Corporate Centre RWAs rose by $2.6bn, primarily due to an increase in
corporate exposures in Saudi Awwal Bank ('SAB').
Asset quality
Asset quality contributed to an RWA increase of $2.5bn due to credit risk
rating migrations and portfolio mix changes, notably in Asia, the US and
Europe.
Model updates
Model updates decreased RWAs by $2.6bn, mainly due to a change in our risk
approach to multilateral development banks' exposures, following approval for
change from the PRA, the implementation of the exposure at default mortgage
model in the UK, and changes to the incremental risk charge model.
Methodology and policy
The decrease of RWAs from methodology and policy of $19.9bn was mainly driven
by a decline of $7.7bn from regulatory changes related to the risk-weighting
of residential mortgages in Hong Kong, and credit risk parameter refinements
mainly in Asia and Europe.
Acquisitions and disposals
The increase in RWAs from acquisitions and disposals of $6.2bn was primarily
due to a rise of $9.6bn from the acquisition of SVB UK. This was partly offset
by a decline of $3.2bn from the disposal of our business in Oman.
Foreign currency movements increased total RWAs by $2.0bn.
Leverage ratio(1)
At
31 Dec 31 Dec
2023 2022
$bn $bn
Tier 1 capital (leverage) 144.2 139.1
Total leverage ratio exposure 2,574.8 2,417.2
% %
Leverage ratio 5.6 5.8
1 Leverage ratio calculation is in line with the PRA's UK leverage
rules. This includes IFRS 9 transitional arrangement and excludes central bank
claims.
Our leverage ratio was 5.6% at 31 December 2023, down from 5.8% at 31
December 2022. The increase in the leverage exposure was primarily due to
growth in the balance sheet, which led to a fall of 0.4 percentage points in
the leverage ratio. This was partly offset by a rise of 0.2 percentage points
due to an increase in tier 1 capital.
At 31 December 2023, our UK minimum leverage ratio requirement of 3.25% was
supplemented by a leverage ratio buffer of 0.9%, which consists of an
additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio
buffer of 0.2%. These buffers translated into capital values of $18.0bn and
$5.1bn respectively.
Regulatory and other developments
In September 2023, the PRA announced changes to the UK implementation of Basel
3.1 with a new proposed implementation date of 1 July 2025. For further
details related to the November 2022 consultation, see page 6 of our Pillar 3
Disclosures at 31 December 2022. We are currently assessing the impact of the
consultation paper and the associated implementation challenges (including
data provision) on our RWAs upon initial implementation. The RWA output floor
under Basel 3.1 is now proposed to be subject to a four-and-a-half year
transitional provision. Any impact from the output floor is expected to be
towards the end of the transition period.
Regulatory transitional arrangements for IFRS 9 'Financial Instruments'
We have adopted the regulatory transitional arrangements of the Capital
Requirements Regulation for IFRS 9, including paragraph four of article 473a.
These allow banks to add back to their capital base a proportion of the impact
that IFRS 9 has upon their loan loss allowances. Our capital and ratios are
presented under these arrangements throughout the tables in this section,
including the end point figures.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market discipline and
aims to make financial services firms more transparent by requiring
publication of wide-ranging information on their risks, capital and
management.
For further details, see our Pillar 3 Disclosures at 31 December 2023, which
is expected to be published on or around 21 February 2024 at
www.hsbc.com/investors.
Liquidity and funding risk in 2023
Liquidity metrics
At 31 December 2023, all of the Group's material operating entities were above
the required regulatory minimum liquidity and funding levels.
Each entity maintains sufficient unencumbered liquid assets to comply with
local and regulatory requirements.
Each entity maintains a sufficient stable funding profile and is assessed
using the NSFR or other appropriate metrics.
In addition to regulatory metrics, we use a wide set of measures to manage our
liquidity and funding profile.
The Group liquidity and funding position on an average basis is analysed in
the following sections.
Operating entities' liquidity(1)
At 31 December 2023
LCR HQLA Net outflows NSFR
% $bn $bn %
$bn
HSBC UK Bank plc (ring-fenced bank)(2) 201 118 59 158
HSBC Bank plc (non-ring-fenced bank)(3) 148 132 89 116
The Hongkong and Shanghai Banking Corporation - Hong Kong branch(4) 192 147 77 127
HSBC Singapore(5) 292 26 9 174
Hang Seng Bank 254 52 21 163
HSBC Bank China 170 24 14 139
HSBC Bank USA 172 82 48 131
HSBC Continental Europe (6,7) 158 83 52 137
HSBC Bank Middle East Ltd - UAE branch 281 13 5 163
HSBC Canada 164 21 13 129
HSBC Mexico 149 8 5 124
At 31 December 2022
HSBC UK Bank plc (ring-fenced bank)(2) 226 136 60 164
HSBC Bank plc (non-ring-fenced bank)(3) 143 128 90 115
The Hongkong and Shanghai Banking Corporation - Hong Kong branch(4) 179 147 82 130
HSBC Singapore(5) 247 21 9 173
Hang Seng Bank 228 50 22 156
HSBC Bank China 183 23 13 132
HSBC Bank USA 164 85 52 131
HSBC Continental Europe(6) 151 55 37 132
HSBC Bank Middle East Ltd - UAE branch 239 12 5 158
HSBC Canada 149 22 15 122
HSBC Mexico 155 8 5 129
1 The LCR and NSFR ratios presented
in the above table are based on average values. The LCR is the average of the
preceding 12 months. The NSFR is the average of the preceding four quarters.
2 HSBC UK Bank plc refers to the
HSBC UK liquidity group, which comprises five legal entities: HSBC UK Bank
plc, Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd,
HSBC Innovation Bank Limited and HSBC Trust Company (UK) Limited, managed as a
single operating entity, in line with the application of UK liquidity
regulation as agreed with the PRA.
3 HSBC Bank plc includes overseas
branches and special purpose entities consolidated by HSBC for financial
statements purposes.
4 The Hongkong and Shanghai Banking
Corporation - Hong Kong branch represents the material activities of The
Hongkong and Shanghai Banking Corporation Limited. It is monitored and
controlled for liquidity and funding risk purposes as a stand-alone operating
entity.
5 HSBC Singapore includes HSBC Bank Singapore Limited and The Hongkong
and Shanghai Banking Corporation - Singapore branch. Liquidity and funding
risk is monitored and controlled at country level in line with the local
regulator's approval.
6 In response to the requirement for
an intermediate parent undertaking in line with the EU Capital Requirements
Directive ('CRD V'), HSBC Continental Europe acquired control of HSBC Germany
and HSBC Bank Malta on 30 November 2022. The averages for LCR and NSFR include
the impact of the inclusion of the two entities from November 2022.
7 HSBC Continental Europe NSFR
includes the impact of the sale of our retail banking operations in France.
Consolidated liquidity metrics
Net stable funding ratio
We manage funding risk based on the PRA's NSFR rules. The Group's NSFR at 31
December 2023, calculated from the average of the four preceding quarters
average, was 133%.
At(1)
31 Dec 30 Jun 31 Dec
2023 2023 2022
$bn $bn $bn
Total available stable funding ($bn) 1,602 1,575 1,552
Total required stable funding ($bn) 1,202 1,172 1,138
NSFR ratio (%) 133 134 136
1 Group NSFR numbers above are based on average values. The NSFR number is
the average of the preceding four quarters.
Liquidity coverage ratio
At 31 December 2023, the average high-quality liquid assets ('HQLA') held at
entity level amounted to $795bn (31 December 2022: $812bn). The Group
consolidation methodology includes a deduction to reflect the impact of
limitations in the transferability of entity liquidity around the Group. That
resulted in an adjustment of $147bn to LCR HQLA and $7bn to LCR inflows on an
average basis. Furthermore, this methodology was enhanced in 2023 to consider
more accurately non-convertible currencies.
At(1)
31 Dec 30 Jun 31 Dec
2023 2023 2022
$bn $bn $bn
High-quality liquid assets (in entities) 795 796 812
EC Delegated Act adjustment for transfer (154) (172) (174)
restrictions(2)
Group LCR HQLA 648 631 647
Net outflows 477 478 491
Liquidity coverage ratio (%) 136 132 132
1 Group LCR numbers above are based on average values. The LCR is the
average of the preceding 12 months.
2 This includes adjustments made to high-quality liquid assets and inflows
in entities to reflect liquidity transfer restrictions.
Liquid assets
After the $147bn deduction, the average Group LCR HQLA of $648bn (31 December
2022: $647bn) was held in a range of asset classes and currencies. Of these,
97% were eligible as level 1 (31 December 2022: 97%).
The following tables reflect the composition of the average liquidity pool by
asset type and currency at 31 December 2023.
Liquidity pool by asset type(1)
Liquidity pool Cash Level 1(2) Level 2(2)
$bn $bn $bn $bn
Cash and balance at central bank 310 310 - -
Central and local government bonds 319 - 303 16
Regional government public sector entities 2 - 2 -
International organisation and multilateral developments banks 10 - 10 -
Covered bonds 6 - 2 4
Other 1 - - 1
Total at 31 Dec 2023 648 310 317 21
Total at 31 Dec 2022 647 344 284 19
1 Group liquid assets numbers are based on average values.
2 As defined in EU regulations, level 1 assets means 'assets of
extremely high liquidity and credit quality', and level 2 assets means 'assets
of high liquidity and credit quality'.
Liquidity pool by currency(1)
$ £ € HK$ Other Total
$bn $bn $bn $bn $bn $bn
Liquidity pool at 31 Dec 2023 184 173 112 51 128 648
Liquidity pool at 31 Dec 2022 167 191 98 54 137 647
1 Group liquid assets numbers are based on average values.
Sources of funding
Our primary sources of funding are customer current accounts and savings
deposits payable on demand or at short notice. We issue secured and unsecured
wholesale securities to supplement customer deposits, meet regulatory
obligations and to change the currency mix, maturity profile or location of
our liabilities.
The following 'Funding sources' and 'Funding uses' tables provide a view of
how our consolidated balance sheet is funded. In practice, all the principal
operating entities are required to manage liquidity and funding risk on a
stand-alone basis.
The tables analyse our consolidated balance sheet according to the assets that
primarily arise from operating activities and the sources of funding primarily
supporting these activities. Assets and liabilities that do not arise from
operating activities are presented at a net balancing source or deployment of
funds.
Funding sources
(Audited)
2023 2022(1)
$m $m
Customer accounts 1,611,647 1,570,303
Deposits by banks 73,163 66,722
Repurchase agreements - non-trading 172,100 127,747
Debt securities in issue 93,917 78,149
Cash collateral, margin and settlement accounts 85,255 88,476
Liabilities of disposal groups held for sale(2) 108,406 114,597
Subordinated liabilities 24,954 22,290
Financial liabilities designated at fair value 141,426 127,321
Insurance contract liabilities 120,851 108,816
Trading liabilities 73,150 72,353
- repos 12,198 16,254
- stock lending 3,322 3,541
- other trading liabilities 57,630 52,558
Total equity 192,610 185,197
Other balance sheet liabilities 341,198 387,315
At 31 Dec 3,038,677 2,949,286
Funding uses
(Audited)
2023 2022(1)
$m $m
Loans and advances to customers 938,535 923,561
Loans and advances to banks 112,902 104,475
Reverse repurchase agreements - non-trading 252,217 253,754
Cash collateral, margin and settlement accounts 89,911 82,984
Assets held for sale(2) 114,134 115,919
Trading assets 289,159 218,093
- reverse repos 16,575 14,798
- stock borrowing 14,609 10,706
- other trading assets 257,975 192,589
Financial investments 442,763 364,726
Cash and balances with central banks 285,868 327,002
Other balance sheet assets 513,188 558,772
At 31 Dec 3,038,677 2,949,286
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data.
2 'Liabilities of disposal groups held for sale' includes $82bn and 'Assets
held for sale' includes $88bn in respect of the planned sale of our banking
business in Canada. 'Liabilities of disposal groups held for sale' includes
$26bn and 'Assets of disposal groups held for sale' includes $28bn in respect
of the sale of our retail banking operations in France.
Wholesale term debt maturity profile
The maturity profile of our wholesale term debt obligations is set out in the
following table. The balances in the table are not directly comparable with
those in the consolidated balance sheet because the
table presents gross cash flows relating to principal payments and not the
balance sheet carrying value, which includes debt securities and subordinated
liabilities measured at fair value.
Wholesale funding cash flows payable by HSBC under financial liabilities by
remaining contractual maturities(1)
Due not Due over Due over Due over Due over Due over Due over Due over Total
more than 1 month 3 months 6 months 9 months 1 year 2 years 5 years
1 month but not more than but not more than but not more than but not more but not more than but not more than
3 months 6 months 9 months than 2 years 5 years
1 year
$m $m $m $m $m $m $m $m $m
Debt securities issued 17,620 9,798 14,284 13,226 12,226 20,882 64,010 50,045 202,091
- unsecured CDs and CP 6,400 6,777 7,601 6,429 6,513 1,179 1,073 925 36,897
- unsecured senior MTNs 8,190 1,160 4,365 3,627 3,267 12,903 54,984 41,007 129,503
- unsecured senior structured notes 2,307 1,491 1,617 2,513 1,978 2,924 2,793 5,910 21,533
- secured covered bonds - - - - - - 1,275 - 1,275
- secured asset-backed commercial paper 426 - - - - - - - 426
- secured ABS 22 44 62 58 55 188 861 539 1,829
- others 275 326 639 599 413 3,688 3,024 1,664 10,628
Subordinated liabilities - 2,013 - - - 3,358 4,282 27,234 36,887
- subordinated debt securities - 2,000 - - - 3,358 4,282 25,441 35,081
- preferred securities - 13 - - - - - 1,793 1,806
At 31 Dec 2023 17,620 11,811 14,284 13,226 12,226 24,240 68,292 77,279 238,978
Debt securities issued 11,959 11,266 12,532 8,225 8,212 26,669 52,435 52,952 184,250
- unsecured CDs and CP 3,821 6,017 7,088 4,137 3,123 1,264 707 1,004 27,161
- unsecured senior MTNs 5,973 2,351 3,534 1,363 3,238 19,229 44,023 44,021 123,732
- unsecured senior structured notes 1,264 1,421 1,247 1,850 1,627 4,463 2,609 5,990 20,471
- secured covered bonds - - - - - - 602 - 602
- secured asset-backed commercial paper 690 - - - - - - - 690
- secured ABS 15 28 40 38 36 123 656 220 1,156
- others 196 1,449 623 837 188 1,590 3,838 1,717 10,438
Subordinated liabilities - - 11 160 - 2,000 5,581 25,189 32,941
- subordinated debt securities - - 11 160 - 2,000 5,581 23,446 31,198
- preferred securities - - - - - - - 1,743 1,743
At 31 Dec 2022 11,959 11,266 12,543 8,385 8,212 28,669 58,016 78,141 217,191
1 Excludes financial liabilities of disposal groups.
Structural foreign exchange risk in 2023
Structural foreign exchange exposures represent net assets or capital
investments in subsidiaries, branches, joint arrangements or associates,
together with any associated hedges, the functional currencies of which are
currencies other than the US dollar. Exchange differences on structural
exposures are usually recognised in 'other comprehensive income'.
Net structural foreign exchange exposures
2023
Currency of structural exposure Net investment in foreign operations (excl non-controlling interest) Net investment hedges Structural foreign exchange exposures (pre-economic hedges) Economic hedges - structural FX hedges(1) Economic hedges - equity securities (AT1)(2) Net structural foreign exchange exposures
$m $m $m $m $m $m
Hong Kong dollars 39,014 (5,792) 33,222 (7,979) - 25,243
Pounds sterling 46,661 (16,415) 30,246 - (1,275) 28,971
Chinese renminbi 33,809 (3,299) 30,510 (1,066) - 29,444
Euros 15,673 (515) 15,158 - (1,384) 13,774
Canadian dollars 5,418 (1,076) 4,342 - - 4,342
Indian rupees 6,286 (2,110) 4,176 - - 4,176
Mexican pesos 4,883 - 4,883 - - 4,883
Saudi riyals 4,312 - 4,312 - - 4,312
UAE dirhams 4,995 (613) 4,382 (2,761) - 1,621
Malaysian ringgit 2,754 - 2,754 - - 2,754
Singapore dollars 2,345 (224) 2,121 - - 2,121
Australian dollars 2,362 - 2,362 - - 2,362
Taiwanese dollars 2,212 (1,127) 1,085 - - 1,085
Indonesian rupiah 1,535 (512) 1,023 - - 1,023
Swiss francs 1,191 (526) 665 - - 665
Korean won 1,354 (864) 490 - - 490
Thai baht 1,022 - 1,022 - - 1,022
Egyptian pound 959 - 959 - - 959
Qatari rial 834 (215) 619 (299) - 320
Argentinian peso 794 - 794 - - 794
Vietnamese dong 872 - 872 - - 872
Others, each less than $700m 4,386 (487) 3,899 - - 3,899
At 31 Dec 183,671 (33,775) 149,896 (12,105) (2,659) 135,132
2022(3)
Hong Kong dollars 39,191 (4,597) 34,594 (8,363) - 26,231
Pounds sterling 39,298 (14,000) 25,298 - (1,205) 24,093
Chinese renminbi 35,712 (3,532) 32,180 - 31,186
(994)
Euros 14,436 13,659 - (2,402) 11,257
(777)
Canadian dollars 4,402 3,591 - - 3,591
(811)
Indian rupees 4,967 (1,380) 3,587 - - 3,587
Mexican pesos 3,932 - 3,932 - - 3,932
Saudi riyals 4,182 4,073 - - 4,073
(109)
UAE dirhams 4,534 3,803 (2,285) - 1,518
(731)
Malaysian ringgit 2,715 - 2,715 - - 2,715
Singapore dollars 2,517 2,159 - 1,600
(358) (559)
Australian dollars 2,264 - 2,264 - - 2,264
Taiwanese dollars 2,058 (1,140) 918 - - 918
Indonesian rupiah 1,453 984 - - 984
(469)
Swiss francs 1,233 506 - - 506
(727)
Korean won 1,283 466 - - 466
(817)
Thai baht 908 - 908 - - 908
Egyptian pound 746 - 746 - - 746
Qatari rial 785 585 - 308
(200) (277)
Argentinian peso 1,010 - 1,010 - - 1,010
Vietnamese dong 665 - 665 - - 665
Others, each less than $700m 4,470 3,975 - 3,939
(495) (36)
At 31 Dec 172,761 (30,143) 142,618 (11,955) (4,166) 126,497
1 Represents hedges that do not qualify as net investment hedges for
accounting purposes.
2 Represents foreign currency-denominated preference share and AT1
instruments. These are accounted for at historical cost under IFRS Accounting
Standards and do not qualify as net investment hedges for accounting purposes.
The gain or loss arising from changes in the US dollar value of these
instruments is recognised on redemption in retained earnings.
3 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.
For a definition of structural foreign exchange exposures, see page 205.
Interest rate risk in the banking book in 2023
Net interest income and banking net interest income
We have introduced a new metric to analyse sensitivity of our income to
interest rate shocks. In addition to NII sensitivity, we are also disclosing
banking NII sensitivity. HSBC has trading book assets that are funded by
banking book liabilities and the NII sensitivity measure does not include the
sensitivity of the internal transfer income from this funding. Banking NII
sensitivity includes an adjustment on top of NII sensitivity to reflect this.
The currency split of banking NII sensitivities includes the impact of vanilla
foreign exchange swaps to optimise cash management across the Group.
In this disclosure we present the banking NII sensitivity alongside the NII
sensitivity. Over time we expect to phase out NII sensitivity once the
appropriate prior period comparables are available for banking NII
sensitivity.
The following tables set out the assessed impact to a hypothetical base case
projection of our NII and banking NII under an immediate shock of 100bps to
the current market-implied path of interest rates across all currencies on 1
January 2024 (effects in the first, second and third years). For example, Year
3 shows the impact of an immediate rate shock on the NII and banking NII
projected for the third year.
The sensitivities shown represent a hypothetical simulation of the base case
income, assuming a static balance sheet (specifically no assumed migration
from current account to term deposits), and no management actions from Global
Treasury. This also incorporates the effect of interest rate
behaviouralisation, hypothetical managed rate product pricing assumptions,
prepayment of mortgages and deposit stability. The sensitivity calculations
exclude pensions, insurance, and interests in associates.
The sensitivity analysis performed in the case of a down-shock does not
include floors to market rates, and it does not include floors on some
wholesale assets and liabilities. However, floors have been maintained for
deposits and loans to customers where this is contractual or where negative
rates would not be applied.
As market and policy rates move, the degree to which these changes are passed
on to customers will vary based on a number of factors, including the absolute
level of market rates, regulatory and contractual frameworks, and competitive
dynamics. To aid comparability between markets, we have simplified the basis
of preparation for our disclosure and have used a 50% pass-on assumption for
major entities on certain interest-bearing deposits. Our pass-through asset
assumptions are largely in line with our contractual agreements or established
market practice, which typically results in a significant portion of interest
rate changes being passed on.
An immediate interest rate rise of 100bps would increase projected NII for the
12 months to 31 December 2024 by $1.1bn and banking NII by $2.8bn. An
immediate interest rate fall of 100bps would decrease projected NII for the 12
months to 31 December 2024 by $1.6bn and banking NII by $3.4bn.
The sensitivity of NII for 12 months as at 31 December 2023 decreased by
$2.5bn in the plus 100bps parallel shock and by $2.4bn in the minus 100bps
parallel shock, when compared with 31 December 2022. The key drivers of the
reduction in NII sensitivity are the increase in stabilisation activities in
line with our strategy, as well as deposit migration.
For further details of measurement of interest rate risk in the banking book,
see page 205.
NII sensitivity to an instantaneous change in yield curves (12 months) - Year
1 sensitivity by currency
Currency
$ HK$ £ € Other Total
$m $m $m $m $m $m
Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023)
+100bps parallel (1,155) 148 325 503 1,232 1,053
-100bps parallel 1,004 (230) (432) (522) (1,391) (1,571)
Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022)
+100bps parallel (267) 413 1,026 674 1,689 3,535
-100bps parallel 236 (476) (1,177) (765) (1,787) (3,969)
NII sensitivity to an instantaneous down 100bps parallel change in yield
curves - Year 2 and Year 3 sensitivity by currency
Currency
$ HK$ £ € Other Total
$m $m $m $m $m $m
Change in NII (based on balance sheet at 31 December 2023)
Year 2 (Jan 2025 to Dec 2025) 488 (431) (768) (552) (1,733) (2,996)
Year 3 (Jan 2026 to Dec 2026) 213 (499) (1,269) (624) (1,861) (4,040)
Change in NII (based on balance sheet at 31 December 2022)
Year 2 (Jan 2024 to Dec 2024) (43) (532) (1,580) (810) (1,979) (4,944)
Year 3 (Jan 2025 to Dec 2025) (404) (636) (1,954) (839) (2,092) (5,925)
Banking NII sensitivity to an instantaneous change in yield curves (12 months)
- Year 1 sensitivity by currency
Currency
$ HK$ £ € Other Total
$m $m $m $m $m $m
Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023)
+100bps parallel 343 411 496 285 1,297 2,832
-100bps parallel (494) (493) (602) (304) (1,460) (3,353)
Banking NII sensitivity to an instantaneous down 100bps parallel change in
yield curves - Year 2 and Year 3 sensitivity by currency
Currency
$ HK$ £ € Other Total
$m $m $m $m $m $m
Change in banking NII (based on balance sheet at 31 December 2023)
Year 2 (Jan 2025 to Dec 2025) (1,015) (693) (938) (333) (1,798) (4,777)
Year 3 (Jan 2026 to Dec 2026) (1,289) (761) (1,439) (405) (1,926) (5,820)
Non-trading value at risk
Non-trading portfolios comprise positions that primarily arise from the
interest rate management of our retail and commercial banking assets and
liabilities, financial investments measured at fair value through other
comprehensive income, debt instruments measured at amortised cost, and
exposures arising from our insurance operations.
Value at risk of non-trading portfolios
Value at risk ('VaR') is a technique for estimating potential losses on risk
positions as a result of movements in market rates and prices over a specified
time horizon and to a given level of confidence. The use of VaR is integrated
into the market risk management of non-trading portfolios to have a complete
picture of risk, complementing risk sensitivity analysis.
Our models are predominantly based on historical simulation that incorporates
the following features:
- historical market rates and prices, which are calculated with
reference to interest rates, credit spreads and the associated volatilities;
- potential market movements that are calculated with reference to
data from the past two years; and
- calculations to a 99% confidence level and using a one-day holding
period.
Although a valuable guide to risk, VaR is used for non-trading portfolios with
awareness of its limitations. For example:
- The use of historical data as a proxy for estimating future market
moves may not encompass all potential market events, particularly those that
are extreme in nature. As the model is calibrated on the last 500 business
days, it does not adjust instantaneously to a change in the market regime.
- The use of a one-day holding period for risk management purposes of
non-trading books is only an indication of exposure and not indicative of the
time period required to hedge or liquidate positions.
- The use of a 99% confidence level by definition does not take into
account losses that might occur beyond this level of confidence.
The interest rate risk on the fixed-rate securities issued by HSBC Holdings is
not included in the Group non-trading VaR. The management of this risk is
described on page 217.
Non-trading VaR also excludes the equity risk on securities held at fair value
and non-trading book foreign exchange risk.
The daily levels of total non-trading VaR in 2023 are set out in the graph
below.
Daily VaR (non-trading portfolios), 99% 1 day ($m)
The Group non-trading VaR for 2023 is shown in the table below.
Non-trading VaR, 99% 1 day
(Audited)
Interest Credit Portfolio Total(2)
diversification(1)
rate spread
$m $m $m $m
Balance at 31 Dec 2023 173.8 112.8 (104.2) 182.4
Average 156.2 84.2 (63.7) 176.6
Maximum 201.9 116.4 224.3
Minimum 108.8 55.2 127.0
Interest Credit Portfolio Total(2)
diversification(1)
rate spread
$m $m $m $m
Balance at 31 Dec 2022 159.8 56.6 (45.3) 171.1
Average 134.6 56.9 (35.9) 155.6
Maximum 225.5 84.7 265.3
Minimum 98.3 43.4 106.3
1 Portfolio diversification is the market risk dispersion effect of
holding a portfolio containing different risk types. It represents the
reduction in unsystematic market risk that occurs when combining a number of
different risk types - such as interest rate and credit spreads - together
in one portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative number
represents the benefit of portfolio diversification. As the maximum and
minimum occurs on different days for different risk types, it is not
meaningful to calculate a portfolio diversification benefit for these
measures.
2 The total VaR is non-additive across risk types due to
diversification effects.
The VaR for non-trading activity increased by $11m from $171m at 31 December
2022 to $182m at 31 December 2023 due to relatively small changes in risk
profile over the year. The average portfolio diversification effect between
interest rate and credit spread exposure increased during the year, with the
offset increasing to $104m from $45m.
Sensitivity of capital and reserves
Global Treasury maintains a portfolio of high-quality liquid assets for
contingent liquidity and NII stabilisation purposes, which is in part
accounted for under a hold-to-collect-and-sell business model. This
hold-to-collect-and-sell portfolio, together with any associated derivatives
in designated hedge accounting relationships, is accounted for at fair value
through other comprehensive income and has an impact on CET1. The portfolio
represents the vast majority of our hold-to-collect-and-sell capital risk and
is risk managed with a variety of tools, including risk sensitivities and
value at risk measures.
The table below measures the sensitivity of the value of this portfolio to an
instantaneous 100 basis point increase in interest rates, based on the risk
sensitivity of a shift in value for a 1 basis point ('bps') parallel movement
in interest rates.
Sensitivity of hold-to-collect-and-sell reserves to interest rate movements
$m
At 31 Dec 2023
+100 basis point parallel move in all yield curves (2,264)
As a percentage of total shareholders' equity (1.22)%
At 31 Dec 2022
+100 basis point parallel move in all yield curves (1,199)
As a percentage of total shareholders' equity (0.64)%
The increase in the sensitivity of the portfolio during 2023 was mainly driven
by an increase in NII stabilisation in line with our strategy. The figures in
the table above do not take into account the effects of interest rate
convexity. The portfolio mostly comprises vanilla sovereign bonds in a variety
of currencies, and the primary risk is interest rate duration risk, although
the portfolio also generates asset swap, credit spread and asset spread risks
that are managed within appetite as part of our risk management framework. A
minus 100bps shock would lead to an approximately symmetrical gain.
Alongside our monitoring of the hold-to-collect-and-sell reserve sensitivity,
we also monitor the sensitivity of reported cash flow hedging reserves to
interest rate movements on a yearly basis by assessing the expected reduction
in valuation of cash flow hedges due to parallel movements of plus or minus
100bps in all yield curves.
The following table describes the sensitivity of our cash flow hedging
reserves to the stipulated movements in yield curves at the
year end. The sensitivities are indicative and based on simplified scenarios.
These particular exposures form only a part of our overall interest rate
exposure. We apply flooring on negative rates in the minus 100bps scenario in
this assessment. Due to increases in interest rates in most markets, the
effect of this flooring is immaterial at the end of 2023.
Comparing 31 December 2023 with 31 December 2022, the sensitivity of the cash
flow hedging reserve increased by $1,537m in the plus 100bps scenario and
increased by $1,562m in the minus 100bps scenario. The increase in the
sensitivity of this reserve was mainly driven by an increase in our NII
stabilisation. Our exposure to fixed rate pound sterling hedges continued to
be the largest in size and in terms of year-on-year increase. Hong Kong dollar
and euro hedges contributed to the majority of the rest of the increase in
exposure, partly offset by a reduction in the size of US dollar hedges.
Sensitivity of cash flow hedging reported reserves to interest rate movements
$m
At 31 Dec 2023
+100 basis point parallel move in all yield curves (3,436)
As a percentage of total shareholders' equity (1.85)%
-100 basis point parallel move in all yield curves 3,474
As a percentage of total shareholders' equity 1.87%
At 31 Dec 2022
+100 basis point parallel move in all yield curves (1,899)
As a percentage of total shareholders' equity (1.01)%
-100 basis point parallel move in all yield curves 1,912
As a percentage of total shareholders' equity 1.02%
Third-party assets in Markets Treasury
Third-party assets in Markets Treasury increased by 5% compared with 31
December 2022. The net increase of $38bn is partly reflective of higher
commercial surpluses during the year, with the
increase of $76bn in 'Financial Investments' and the decrease of $39bn in
'Cash and balances at central banks' largely driven by NII stabilisation
activity.
Third-party assets in Markets Treasury
2023 2022
$m $m
Cash and balances at central banks 278,289 317,479
Trading assets 238 498
Loans and advances:
- to banks 78,667 67,612
- to customers 1,083 2,102
Reverse repurchase agreements 45,419 53,016
Financial investments 396,259 319,852
Other 34,651 36,192
At 31 Dec 834,606 796,751
Defined benefit pension plans
Market risk arises within our defined benefit pension plans to the extent that
the obligations of the plans are not fully matched by assets with determinable
cash flows.
For details of our defined benefit plans, including asset allocation, see Note
5 on the financial statements, and for pension risk management, see page 206.
Additional market risk measures applicable only to the parent company
HSBC Holdings monitors and manages foreign exchange risk and interest rate
risk. In order to manage interest rate risk, HSBC Holdings uses the projected
sensitivity of its NII to future changes in yield curves.
Foreign exchange risk
HSBC Holdings' foreign exchange exposures derive almost entirely from the
execution of structural foreign exchange hedges on behalf of the Group. At 31
December 2023, HSBC Holdings had forward foreign exchange contracts of $33.8bn
(2022: $30.1bn) to manage the Group's structural foreign exchange exposures.
For further details of our structural foreign exchange exposures, see page
213.
Sensitivity of net interest income
HSBC Holdings monitors NII sensitivity in the first, second and third years,
reflecting the longer-term perspective on interest rate risk management
appropriate to a financial services holding company. These sensitivities
assume that any issuance where HSBC Holdings has an option to redeem at a
future call date is called at this date.
The tables below set out the effect on HSBC Holdings' future NII of an
immediate shock of +/-100bps to the current market-implied path of interest
rates across all currencies on 1 January 2024.
The NII sensitivities shown are indicative and based on simplified scenarios.
An immediate interest rate rise of 100bps would decrease projected NII for the
12 months to 31 December 2024 by $233m. Conversely, an immediate fall of
100bps would increase projected NII for the 12 months to 31 December 2024
$233m.
Overall the NII sensitivity is mainly driven by floating liabilities funding
equity (non-interest bearing) investments in subsidiaries.
During 2023, HSBC Holdings hedged $3.6bn of previously unhedged issuances,
which increased the negative NII sensitivity to positive parallel shifts in
interest rates. In year 1, that impact is offset by a shorter repricing
profile of assets.
As of the Annual Report and Accounts 2023, HSBC Holdings is no longer
disclosing the interest rate repricing gap table, as the sensitivity of net
interest income table captures HSBC Holdings' exposure to interest rate risk
and is aligned to the way we disclose interest rate risk internally to key
management.
NII sensitivity to an instantaneous change in yield curves (12 months) - Year
1 sensitivity by currency
$ HK$ £ € Other Total
$m $m $m $m $m $m
Change in Jan 2024 to Dec 2024 (based on balance sheet at 31 December 2023)
+100bps parallel (258) - 12 5 8 (233)
-100bps parallel 258 - (12) (5) (8) 233
Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 December 2022)
+100bps parallel (265) - 16 9 - (240)
-100bps parallel 265 - (16) (9) - 240
NII sensitivity to an instantaneous down 100bps parallel change in yield
curves - Year 2 and Year 3 sensitivity by currency
$ HK$ £ € Other Total
$m $m $m $m $m $m
Change in NII (based on balance sheet at 31 December 2023)
Year 2 (Jan 2025 to Dec 2025) 219 - (12) 1 (9) 199
Year 3 (Jan 2026 to Dec 2026) 218 - (12) - (10) 196
Change in NII (based on balance sheet at 31 December 2022) -
Year 2 (Jan 2024 to Dec 2024) 182 - (12) (8) - 162
Year 3 (Jan 2025 to Dec 2025) 160 - (10) (7) - 143
The figures represent hypothetical movements in NII based on our projected
yield curve scenarios, HSBC Holdings' current interest rate risk profile and
assumed changes to that profile during the next three years. The sensitivities
represent our assessment of the change to a
hypothetical base case based on a static balance sheet assumption, and do not
take into account the effect of actions that could be taken to mitigate this
interest rate risk.
Market risk
Contents
218 Overview
218 Market risk management
219 Market risk in 2023
219 Trading portfolios
220 Market risk balance sheet linkages
Overview
Market risk is the risk of an adverse financial impact on trading activities
arising from changes in market parameters such as interest rates, foreign
exchange rates, asset prices, volatilities, correlations and credit spreads.
Market risk arises from both trading portfolios and non-trading portfolios.
For further details of market risk in non-trading portfolios, see page 215 of
the Annual Report and Accounts 2023.
Market risk management
Key developments in 2023
There were no material changes to our policies and practices for the
management of market risk in 2023.
Governance and structure
The following diagram summarises the main business areas where trading market
risks reside and the market risk measures used to monitor and limit exposures.
Trading risk
- Foreign exchange and commodities
- Interest rates
- Credit spreads
- Equities
GBM
Value at risk | Sensitivity | Stress testing
The objective of our risk management policies and measurement techniques is to
manage and control market risk exposures to optimise return on risk while
maintaining a market profile consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by the Group
Chief Risk and Compliance Officer for HSBC Holdings. These limits are
allocated across business lines and to the Group's legal entities. Each major
operating entity has an independent market risk management and control
sub-function, which is responsible for measuring, monitoring and reporting
market risk exposures against limits on a daily basis. Each operating entity
is required to assess the market risks arising in its business and to transfer
them either to its local Markets and Securities Services or Markets Treasury
unit for management, or to separate books managed under the supervision of the
local ALCO. The Traded Risk function enforces the controls around trading in
permissible instruments approved for each site as well as changes that follow
completion of the new product approval process. Traded Risk also restricts
trading in the more complex derivative products to only those offices with
appropriate levels of product expertise and control systems.
Key risk management processes
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures while maintaining
a market profile consistent with our risk appetite.
We use a range of tools to monitor and limit market risk exposures including
sensitivity analysis, VaR and stress testing.
Sensitivity analysis
Sensitivity analysis measures the impact of movements in individual market
factors on specific instruments or portfolios, including interest rates,
foreign exchange rates and equity prices. We use sensitivity measures to
monitor the market risk positions within each risk type. Granular sensitivity
limits are set for trading desks with consideration of market liquidity,
customer demand and capital constraints, among other factors.
Value at risk
(Audited)
VaR is a technique for estimating potential losses on risk positions as a
result of movements in market rates and prices over a specified time horizon
and to a given level of confidence. The use of VaR is integrated into market
risk management and calculated for all trading positions regardless of how we
capitalise them. Where we do not calculate VaR explicitly, we use alternative
tools as summarised in the 'Stress testing' section below.
Our models are predominantly based on historical simulation that incorporates
the following features:
- historical market rates and prices, which are calculated with
reference to foreign exchange rates, commodity prices, interest rates, equity
prices and the associated volatilities;
- potential market movements that are calculated with reference to
data from the past two years; and
- calculations to a 99% confidence level and using a one-day holding
period.
The models also incorporate the effect of option features on the underlying
exposures. The nature of the VaR models means that an increase in observed
market volatility will lead to an increase in VaR without any changes in the
underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR is used with awareness of its
limitations. For example:
- The use of historical data as a proxy for estimating future market
moves may not encompass all potential market events, particularly those that
are extreme in nature. As the model is calibrated on the last 500 business
days, it does not adjust instantaneously to a change in the market regime.
- The use of a one-day holding period for risk management purposes of
trading books assumes that this short period is sufficient to hedge or
liquidate all positions.
- The use of a 99% confidence level by definition does not take into
account losses that might occur beyond this level of confidence.
- VaR is calculated on the basis of exposures outstanding at the close
of business and therefore does not reflect intra-day exposures.
Risk not in VaR framework
The risks not in VaR ('RNIV') framework captures and capitalises material
market risks that are not adequately covered in the VaR model.
Risk factors are reviewed on a regular basis and are either incorporated
directly in the VaR models, where possible, or quantified through either the
VaR-based RNIV approach or a stress test approach within the RNIV framework.
While VaR-based RNIVs are calculated by using historical scenarios,
stress-type RNIVs are estimated on the basis of stress scenarios whose
severity is calibrated to be in line with the capital adequacy requirements.
The outcome of the VaR-based RNIV approach is included in the overall VaR
calculation but excluded from the VaR measure used for regulatory
back-testing.
Stress-type RNIVs include a deal contingent derivatives capital charge to
capture risk for these transactions and a de-peg risk measure to capture risk
to pegged and heavily managed currencies.
Stress testing
Stress testing is an important procedure that is integrated into our market
risk management framework to evaluate the potential impact on portfolio values
of more extreme, although plausible, events or movements in a set of financial
variables. In such scenarios, losses can be much greater than those predicted
by VaR modelling. Stress testing and reverse stress testing provide senior
management with insights regarding the 'tail risk' beyond VaR.
Stress testing is implemented at legal entity, regional and overall Group
levels. A set of scenarios is used consistently across all regions within the
Group. Market risk stress testing incorporates both historical and
hypothetical events. Market risk reverse stress tests are designed to identify
vulnerabilities in our portfolios by looking for scenarios that lead to loss
levels considered severe for the relevant portfolio. These scenarios may be
local or idiosyncratic in nature and complement the systematic top-down stress
testing.
The risk appetite around potential stress losses for the Group is set and
monitored against limits.
Trading portfolios
Trading portfolios comprise positions held for client servicing and
market-making, with the intention of short-term resale and/or to hedge risks
resulting from such positions.
Back-testing
We routinely validate the accuracy of our VaR models by back-testing the VaR
metric against both actual and hypothetical profit and loss. Hypothetical
profit and loss excludes non-modelled items such as fees, commissions and
revenue of intra-day transactions.
The hypothetical profit and loss reflects the profit and loss that would be
realised if positions were held constant from the end of one trading day to
the end of the next. This measure of profit and loss does not align with how
risk is dynamically hedged, and is not therefore necessarily indicative of the
actual performance of the business.
The number of hypothetical loss back-testing exceptions, together with a
number of other indicators, is used to assess model performance and to
consider whether enhanced internal monitoring of a VaR model is required. We
back-test our VaR at set levels of our Group entity hierarchy.
Market risk in 2023
During 2023, global financial markets were mainly driven by the inflation
outlook, interest rate expectations and recession risks, coupled with banking
failures in March, and rising geopolitical tensions in the Middle East from
October. Major central banks maintained restrictive monetary policies, and
bond markets experienced a volatile year. After rising significantly in the
second and third quarters of 2023, US treasury bond yields fell during the
fourth quarter, as lower inflation pressures led markets to expect that key
rates would be cut in 2024. The interest rate outlook was also a major driver
of performance in global equity markets, alongside resilient corporate
earnings and positive sentiment in the technology sector. Equities in
developed markets advanced significantly amid low volatility, while
performance in emerging markets was more subdued. In foreign exchange markets,
the US dollar fluctuated against other major currencies, mostly in line with
US Federal Reserve policy and bond yields expectations. Investor sentiment
remained resilient in credit markets. High-yield and investment-grade credit
spreads narrowed, in general, as fears of contagion in the banking sector in
the first quarter of 2023 abated, and economic growth remained resilient
throughout the year.
We continued to manage market risk prudently during 2023. Sensitivity
exposures and VaR remained within appetite as the business pursued its core
market-making activity in support of our customers. Market risk was managed
using a complementary set of risk measures and limits, including stress
testing and scenario analysis.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR was predominantly generated by the Markets and Securities Services
business.
Trading VaR as at 31 December 2023 increased by $3.3m compared with 31
December 2022. Interest rate risk factors were the major contributors to VaR
at the end of December 2023. The VaR increase during 2023 peaked in September,
and was mainly driven by:
- interest rate risk exposures in currencies held across the Fixed
Income and Foreign Exchange business lines to facilitate client-driven
activity; and
- the effects of relatively large short-term interest rate shocks for
key currencies, which are captured in the VaR scenario window.
These factors were partly offset by lower losses from equity risks and
interest rate risks that were captured within the RNIV framework.
The daily levels of total trading VaR during 2023 are set out in the graph
below.
Daily VaR (trading portfolios), 99% 1 day ($m)
The Group trading VaR for the year is shown in the table below.
Trading VaR, 99% 1 day(1)
(Audited)
Foreign Interest Equity Credit Portfolio diversification(2) Total(3)
exchange and commodity rate spread
$m $m $m $m $m $m
Balance at 31 Dec 2023 13.4 55.9 15.2 7.2 (38.9) 52.8
Average 16.2 53.9 19.0 11.6 (40.8) 59.8
Maximum 24.6 86.0 27.8 16.5 98.2
Minimum 9.3 25.5 13.4 6.6 34.4
Balance at 31 Dec 2022 15.4 40.0 18.6 11.9 (36.4) 49.5
Average 13.6 29.6 16.1 16.8 (34.0) 42.1
Maximum 29.2 73.3 24.8 27.9 78.3
Minimum 5.7 20.2 11.5 9.1 29.1
1 Trading portfolios comprise positions arising from the market-making
and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect of
holding a portfolio containing different risk types. It represents the
reduction in unsystematic market risk that occurs when combining a number of
different risk types - such as interest rate, equity and foreign exchange -
together in one portfolio. It is measured as the difference between the sum
of the VaR by individual risk type and the combined total VaR. A negative
number represents the benefit of portfolio diversification. As the maximum and
minimum occurs on different days for different risk types, it is not
meaningful to calculate a portfolio diversification benefit for these
measures.
3 The total VaR is non-additive across risk types due to
diversification effects.
The table below shows trading VaR at a 99% confidence level compared with
trading VaR at a 95% confidence level at 31 December 2023. This comparison
facilitates the benchmarking of the trading VaR, which can be stated at
different confidence levels, with financial institution peers. The 95% VaR is
unaudited.
Comparison of trading VaR, 99% 1 day vs trading VaR, 95% 1 day
Trading VaR, 99% 1 day Trading VaR, 95% 1 day
$m $m
Balance at 31 Dec 2023 52.8 35.3
Average 59.8 36.8
Maximum 98.2 53.3
Minimum 34.4 21.0
Balance at 31 Dec 2022 49.5 31.7
Average 42.1 24.6
Maximum 78.3 49.0
Minimum 29.1 17.5
Back-testing
During 2023, the Group experienced no back-testing exceptions on losses
against actual or hypothetical profit and losses.
Market risk balance sheet linkages
The following balance sheet lines in the Group's consolidated position are
subject to market risk:
Trading assets and liabilities
The Group's trading assets and liabilities are in almost all cases originated
by GBM. Other than a limited number of exceptions, these assets and
liabilities are treated as traded risk for the purposes of market risk
management. The exceptions primarily arise in Global Banking where the
short-term acquisition and disposal of assets are linked to other
non-trading-related activities such as loan origination.
Derivative assets and liabilities
We undertake derivative activity for three primary purposes: to create risk
management solutions for clients, to manage the portfolio risks arising from
client business, and to manage and hedge our own risks. Most of our derivative
exposures arise from sales and trading activities within GBM. The assets and
liabilities included in trading VaR give rise to a large proportion of the
income included in net income from financial instruments held for trading or
managed on a fair value basis. Adjustments to trading income such as valuation
adjustments are not measured by the trading VaR model.
For information on the accounting policies applied to financial instruments at
fair value, see Note 1 on the financial statements.
Climate risk TCFD
Contents
221 Overview
222 Climate risk management
223 Embedding our climate risk approach
225 Insights from climate scenario analysis
Overview
Our climate risk approach is aligned to the framework outlined by the
Taskforce on Climate-related Financial Disclosures ('TCFD'), which identifies
two primary drivers of climate risk:
- physical risk, which arises from the increased frequency and
severity of extreme weather events, such as hurricanes and floods, or chronic
gradual shifts in weather patterns or rises in the sea level; and
- transition risk, which arises from the process of moving to a net
zero economy, including changes in government policy and legislation,
technology, market demand, and reputational implications triggered by a change
in stakeholder expectations, action or inaction.
In addition to these primary drivers of climate risk, we have also identified
the following thematic issues related to climate risk, which are most likely
to materialise in the form of reputational, regulatory compliance and
litigation risks:
- net zero alignment risk, which arises from the risk of HSBC failing
to meet its net zero commitments or failing to meet external expectations
related to net zero, because of inadequate ambition and/or plans, poor
execution, or inability to adapt to changes in the external environment; and
- the risk of greenwashing, which arises from the act of knowingly or
unknowingly making inaccurate, unclear, misleading or unsubstantiated claims
regarding sustainability to our stakeholders.
Approach
We recognise that the physical impacts of climate change and the transition to
a net zero economy can create significant financial risks for companies,
investors and the financial system. HSBC may be affected by climate risks
either directly or indirectly through our relationships with our customers,
which could result in both financial and non-financial impacts.
Our climate risk approach aims to effectively manage the material climate
risks that could impact our operations, financial performance and stability,
and reputation. It is informed by the evolving expectations of our regulators.
We are developing our climate risk capabilities across our businesses, by
prioritising sectors, portfolios and counterparties with the highest impacts.
We continue to make progress in enhancing our climate risk capabilities, and
recognise it is a long-term iterative process.
We aim to regularly review our approach to increase coverage and incorporate
maturing data, climate analytics capabilities, frameworks and tools, as well
as respond to emerging industry best practice and climate risk regulations.
This includes updating our approach to reflect how the risks associated with
climate change continue to evolve in the real world, and maturing how we embed
climate risk factors into strategic planning, transactions and decision making
across our businesses.
Our climate risk approach is aligned to our Group-wide risk management
framework and three lines of defence model, which sets out how we identify,
assess and manage our risks. For further details of the three lines of defence
framework, see page 138.
The tables below provide an overview of the climate risk drivers and thematic
issues considered within HSBC's climate risk approach.
Physical Acute Increased frequency and severity of weather events causing disruption to - Decreased real estate values or stranded assets Short term
business operations
- Decreased household income and wealth Medium term
- Increased costs of legal and compliance Long term
- Increased public scrutiny
- Decreased profitability
- Lower asset performance
Chronic Longer-term shifts in climate patterns (e.g. sustained higher temperatures,
sea level rise, shifting monsoons or chronic heat waves)
Transition Policy and legal Mandates on, and regulation of products and services and/or policy support for
low-carbon alternatives. Litigation from parties who have suffered loss and
damage from climate impacts
Technology Replacement of existing products with lower emissions options
End-demand (market) Changing consumer demand from individuals and corporates
Reputational Increased scrutiny following a change in stakeholder perceptions of
climate-related action or inaction
Net zero alignment risk Net zero ambition risk Failing to set or adapt our net zero ambition and broader business strategy in
alignment with key stakeholder expectations, latest scientific understanding
and commercial objectives.
Net zero execution risk Failing to meet our net zero targets due to taking insufficient or ineffective
actions, or due to the actions of clients, suppliers and other stakeholders.
Net zero reporting risk Failing to report emissions baselines and targets, and performance against
these accurately due to data, methodology and model limitations.
Risk of greenwashing Firm Making inaccurate, unclear, misleading, or unsubstantiated claims in relation
to our sustainability commitments and targets, as well as the reporting of our
performance towards them.
Product Making inaccurate, unclear, misleading or unsubstantiated claims in relation
to products or services offered to clients that have stated sustainability
objectives, characteristics, impacts or features.
Client Making inaccurate, unclear, misleading or unsubstantiated claims as a
consequence of our relationships with clients or transactions we undertake
with them, where their sustainability commitments or related performance are
misrepresented or are not aligned to our own commitments.
In 2023, we updated our climate risk materiality assessment, to understand how
climate risk may impact across HSBC's risk taxonomy. The assessment focused on
a 12-month time horizon, as well as time horizons for the short-term,
medium-term and long-term periods. We define short term as time periods up to
2025; medium term as between 2026 and 2035; and long term as between 2036 and
2050. These time periods align to the Climate Action 100+ disclosure framework
v1.2. The table below provides a summary of how climate risk may impact a
subset of HSBC's principal risks.
The assessment is refreshed annually, and the results may change as our
understanding of climate risk and how it impacts HSBC evolve (for further
details, see 'Impact on reporting and financial statements' on page 44).
In addition to this assessment, we also consider climate risk in our emerging
risk reporting and scenario analysis (for further details, see 'Top and
emerging risks' on page 38).
Physical risk ● ● ● ● ●
Transition risk ● ● ● ● ● ●
1 Our climate risk approach identifies thematic issues such as HSBC net
zero alignment risk and the risk of greenwashing, which are most likely to
materialise in the form of reputational, regulatory compliance and litigation
risks.
Climate risk management
Key developments in 2023
Our climate risk programme continues to support the development of our climate
risk management capabilities. The following outlines key developments in 2023:
- We updated our climate risk management approach to incorporate net
zero alignment risk and developed guidance on how climate risk should be
managed for non-financial risk types.
- We enhanced our climate risk materiality assessment to consider
longer time horizons.
- We enhanced our approach to assessing the impact of climate change
on capital, focusing on credit and market risks.
- We further developed our risk metrics to monitor our performance
against our net zero targets for both financed emissions and own operations.
- We enhanced our internal climate scenario analysis, including
through improvements to our use of customer transition plan data. For further
details of scenario analysis, see page 65.
- We have updated our merger and acquisition process to consider
potential climate and sustainability-related targets, net zero transition
plans and climate strategy, and how this relates to HSBC.
While we have made progress in enhancing our climate risk framework, further
work remains. This includes the need to develop additional metrics and tools
to measure our exposure to climate-related risks, and to incorporate these
tools within decision making.
Governance and structure
The Board takes overall supervisory responsibility for our ESG strategy,
overseeing executive management in developing the approach, execution and
associated reporting.
The ESG Committee supports the development and delivery of our ESG strategy,
key policies and material commitments by providing oversight, coordination and
management of ESG commitments and initiatives. It is co-chaired by the Group
Chief Sustainability Officer and the Group Chief Financial Officer.
The Sustainability Execution Committee has oversight of the environmental
strategy, including the commercial execution and operationalisation through
the sustainability execution programme, which is a Group-wide programme
established to enable the delivery of our sustainability agenda.
The Group Reputational Risk Committee considers climate-related matters
arising from customers, transactions and third parties that either present a
serious potential reputational risk to the Group or merit a Group-led decision
to ensure a consistent approach to reputational risk management across the
regions, global businesses and global functions.
The Group Risk Management Meeting and the Group Risk Committee receive regular
updates on our climate risk profile and progress of our climate risk
programme.
The Group Chief Risk and Compliance Officer is the senior manager responsible
for the management of climate risk under the UK Senior Managers Regime, which
involves holding overall accountability for the Group's climate risk
programme.
The Environmental Risk Oversight Forum (formerly the Climate Risk Oversight
Forum) oversees risk activities relating to climate and sustainability risk
management, including the transition and physical risks from climate change.
Equivalent forums have been established at a regional level.
For further details of the Group's ESG governance structure, see page 88.
Risk appetite
Our climate risk appetite forms part of the Group's risk appetite statement
and supports the business in delivering our net zero ambition effectively and
sustainably.
Our climate risk appetite statement is approved and overseen by the Board. It
is supported by risk appetite metrics and tolerance thresholds. We have also
defined additional key management information metrics. Both the risk appetite
statement and key management information metrics are reported on a quarterly
basis for oversight by the Group Risk Management Meeting and the Group Risk
Committee.
Policies, processes and controls
We continue to integrate climate risk into policies, processes and controls
across many areas of our organisation, and we will continue to update these as
our climate risk management capabilities mature over time. For further details
of how we manage climate risk across our global businesses, see page 65.
Embedding our climate risk approach
The table below provides further details of how we have embedded the
management of climate risk across key risk types. For further details of our
internal scenario analysis, see 'Insights from climate scenario analysis' on
page 225.
Wholesale credit risk We have metrics in place to monitor the exposure of our wholesale corporate
lending portfolio to six high transition risk sectors, as shown in the below
table. As at 31 December 2023, the overall exposure to six high transition
risk sectors was $112bn. The sector classifications are based on internal HSBC
definitions and can be judgemental in nature. The sector classifications are
subject to the remediation of ongoing data quality challenges. This data will
be enhanced and refined in future years.
Our relationship managers engage with our key wholesale customers through a
transition engagement questionnaire (formerly the transition and physical risk
questionnaire) to gather information and assess the alignment of our wholesale
customers' business models to net zero and their exposure to physical and
transition risks. We use the responses to the questionnaire to create a
climate risk score for our key wholesale customers.
Our credit policies require that relationship managers comment on climate risk
factors in credit applications for new money requests and annual credit
reviews. Our credit policies also require manual credit risk rating overrides
if climate is deemed to have a material impact on credit risk under 12 months
if not already captured under the original credit risk rating.
Key developments to our framework in 2023 include expanding the scope of our
transition engagement questionnaire to capture new countries, territories and
sectors.
Key challenges for further embedding climate risk into credit risk management
relate to the availability of adequate physical risk data to assess impacts to
our wholesale customers.
Wholesale
loan
exposure
to high
transitio
n risk
sectors
at 31
December
2023(1)
Units Automotive Chemicals Construction and building materials Metals and mining Oil and gas Power and utilities Total 2023
Exposure to sector(1, 2, 3, 4) $bn 21 17 20 14 18 22 112
Sector weight as a proportion of high transition risk sectors % 18 16 18 13 16 19 100
1
Amounts
shown in
the table
also
include
green and
other
sustainab
le
finance
loans,
which
support
the
transitio
n to the
net zero
economy.
The
methodolo
gy for
quantifyi
ng our
exposure
to high
transitio
n risk
sectors
and
the
transitio
n risk
metrics
will
evolve
over time
as more
data
becomes
available
and is
incorpora
ted in
our risk
managemen
t systems
and
processes
.
2
Counterpa
rties are
allocated
to the
high
transitio
n risk
sectors
via a
two-step
approach.
Firstly,
where the
main
business
of a
group of
connected
counterpa
rties is
in a high
transitio
n risk
sector,
all
lending
to the
group
is
included
in one
high
transitio
n risk
sector
irrespect
ive of
the
sector of
each
individua
l obligor
within
the
group.
Secondly,
where the
main
business
of
a group
of
connected
counterpa
rties is
not in a
high
transitio
n risk
sector,
only
lending
to
individua
l
obligors
in the
high
transitio
n risk
sectors
is
included.
The main
business
of a
group of
connected
counterpa
rties is
identifie
d by the
industry
that
generates
the
majority
of
revenue
within a
group.
Customer
revenue
data
utilised
during
this
allocatio
n process
is the
most
recent
readily
available
and will
not align
to our
own
reporting
period.
3 These
disclosur
es cover
the whole
of the
value
chain of
the
sector.
For
details
of
financed
emissions
coverage,
please
refer to
page 53.
4 The
six high
transitio
n risk
sectors
make up
17.4% of
total
wholesale
loans and
advances
to
customer
and banks
of
$644bn.
Amounts
include
assets
held for
sale.
Retail credit risk We have implemented policies and tools to manage climate risk across our
retail mortgage markets.
Our retail credit risk management policy requires each mortgage market to
conduct an annual review of their climate risk management procedures,
including perils and data sources, to ensure they remain fit for purpose. In
2023 we introduced a global 'soft trigger' monitoring and review process for
physical risk exposure where a market reaches or exceeds a set threshold, as
this ensures markets are actively considering their balance sheet risk
exposure to peril events.
Within our mortgage portfolios, properties or areas with potentially
heightened physical risk are identified and assessed locally and potential
exposure is monitored through quarterly metrics. We have also set risk
appetite metrics for physical risk in our largest mortgage markets, the UK and
Hong Kong, as well as those with local regulatory requirements, including
Singapore.
The UK is our largest mortgage market, which as at September 2023 made up
40.0% of our global mortgage portfolio. We estimate that 0.2% of our UK retail
mortgage portfolio is at very high risk of flooding and 3.5% is at high risk.
This is based on approximately 94.2% climate risk data coverage by value of
our UK portfolio as at September 2023.
In the UK we also monitor the energy performance certificate ('EPC') ratings
of individual properties in our mortgage portfolio. As at September 2023,
approximately 64.5% of properties within the portfolio by value had a valid
EPC dated within the last 10 years. Of these, 40.0% of properties had a
current rating of A to C, and 97.0% had the potential to reach these rating
bands, if appropriate energy efficiency improvement measures are taken.
For both flood risk and EPC data, we disclose the end of September 2023
position. This is due to the time required for the data to be processed and
our reliance on the government's public EPC data, which usually lags one month
behind.
The table below outlines the UK retail mortgage portfolio tenor as at the end
of December 2023 (by balance split by remaining term). This table shows that
the majority of our portfolio tenor is greater than five years, and that the
average remaining loan term in the UK is 21.5 years.
Residenti
al
mortgages
tenor
(remainin
g
mortgage
term by
balance
$m)(1)
Tenor Remaining mortgage balance ($m)
<1 years 382
1 to 5 years 3,469
>5 years 157,643
Weighted average of remaining mortgage term (years) 21.50
The
average
term for
new
mortgages
in the UK
is 25
years,
although
the
average
life of a
loan is
approxima
tely five
years due
to
refinanci
ng.
Despite
this,
our
strategic
approach
to
climate
risk
considers
present
day and
long-term
risk
given
customers
may
remain
over the
whole
loan
term.
For
further
details
of flood
risk and
the EPC
breakdown
of our UK
retail
mortgage
portfolio
, see our
ESG Data
Pack at
www.hsbc.
com/esg.
1 The
table
includes
instances
where
individua
l
propertie
s have
multiple
associate
d
accounts
and
balances.
These are
aggregate
d to a
property
level and
the
longest
term
remaining
is taken
as the
tenor.
Treasury risk As part of our ICAAP in 2023, we enhanced our approach for assessing the
impact of climate change on capital, focusing on credit and market risks. As
part of our ILAAP, we conducted an initial analysis to identify the potential
climate risk exposures across key liquidity risk drivers.
We updated our treasury risk policies to ensure that the impact of climate
risk is considered when assessing applicable treasury risks. We regularly
discuss climate-related topics that may impact Global Treasury through
climate-relevant governance forums, including the Treasury Risk Management
Climate Risk Oversight Forum and the Group Treasury Sustainability Committee.
Treasury portfolios are also included within the scope of the internal climate
scenario analysis and the Hong Kong Monetary Authority's climate risk stress
test, with potential quantitative impacts on relevant hold-to-collect-and-sell
positions estimated.
Pensions risk
We conduct an annual exercise to monitor the exposure of our largest pension
plans to climate risk.
Our pension policies have also been updated to explicitly reflect climate
considerations.
Insurance risk
We have an evolving programme to support the identification and management of
climate risk. In 2023, we updated our sustainability procedures to align with
the Group's updated energy and thermal coal-phase out policy.
Traded risk We have implemented metrics and thresholds to monitor exposure to high
physical and transition risk sectors for the different asset classes in the
Markets and Securities Services ('MSS') business. The metrics use a risk
taxonomy that categorises countries/territories and sectors into high, medium
and low risk, for which we have set corresponding thresholds. We have
implemented these metrics for key entities. In addition, we have identified
key regions and business lines that contribute the most to the total MSS
high-climate sensitive exposures and developed reports to monitor trends and
pockets of risks.
We have developed tools to provide a better understanding of key profit and
loss drivers under different climate scenarios along different dimensions such
as risk factors and business lines. These reports are available to traded risk
managers to help monitor and understand how climate-sensitive exposures are
impacted under different scenarios. Stress testing results have been presented
to senior management for visibility during dedicated review and challenge
sessions to provide awareness on the impact to the MSS portfolio and
underlying business lines.
Reputational risk We manage the reputational impact of climate risk through our broader
reputational risk framework, supported by our sustainability risk policies and
metrics.
Our sustainability risk policies set out our appetite for financing activities
in certain sectors. Our thermal coal phase-out and energy policies aim to
drive down greenhouse gas emissions while supporting a just transition.
Our global network of sustainability risk managers provides local policy
guidance to relationship managers for the oversight of policy compliance and
in support of implementation across our wholesale banking activities. For
further details of our sustainability risk policies, see the ESG review on
page 42.
We have developed risk appetite metrics to monitor our performance against our
financed emissions targets. For further details of our targets, see page 57.
Regulatory compliance risk Our policies set the Group-wide standards that are required to manage the risk
of breaches of our regulatory duty to customers, including those related to
climate risk, ensuring fair customer outcomes are achieved. To make sure our
responsibilities are met in this regard, our policies are subject to
continuous review and enhancement. We are also focused on the ongoing
development and improvement of our monitoring capabilities, ensuring
appropriate alignment to the broader focus on regulatory compliance risks.
Regulatory Compliance is particularly focused on mitigating climate risks
inherent to the product lifecycle. To support this, we have enhanced a number
of processes including:
- ensuring Regulatory Compliance provides risk oversight and review of
new product marketing materials with any reference to climate, sustainability
and ESG;
- developing our product marketing controls to ensure climate claims
are robustly evidenced and substantiated within product marketing materials;
and
- clarifying and improving product marketing framework, procedures and
associated guidance, to ensure product-related marketing materials comply with
both internal and external standards, and are subject to robust governance.
Regulatory Compliance operates an ESG and Climate Risk Working Group to track
and monitor the integration and embedding of climate risk management into the
functions' activities, while monitoring regulatory and legislative changes
across the ESG and climate risk agenda. Regulatory Compliance also continues
to be an active member of the Group's Environmental Risk Oversight Forums.
Resilience risk Our Enterprise Risk Management function is responsible for overseeing the
identification and assessment of physical and transition climate risks that
may impact on the organisation's operational and resilience capabilities.
We have developed metrics to assess how physical risk may impact our critical
properties. In 2023, we also developed an energy and travel risk appetite
metric for our own operations to establish and monitor progress against our
net zero ambitions.
Our resilience risk policies are subject to continuous improvement to remain
relevant to evolving climate risks. New developments relevant to our own
operations are reviewed to ensure climate risk considerations are effectively
captured.
Model risk The impact of climate risk on model risk is driven by the increasing number of
climate risk models and the expanding model use cases. Review and challenge of
models mitigates some risk but given the nascent nature of climate modelling
and the lack of benchmarks, the validation of model assumptions and results
remains a key challenge.
Model Risk has published a new climate risk and ESG model category standard,
which sets out minimum control requirements for identifying, measuring and
managing model risk for climate-related models.
We completed independent model validation for a number of models used for
financed emissions calculations and climate scenario analysis using both
qualitative and quantitative assessments of modelling decisions and outputs.
Financial reporting risk We have expanded the scope of financial reporting risk to explicitly include
oversight over accuracy and completeness of ESG and climate reporting. In
2023, we updated the risk appetite statement to reference our ESG and
climate-related disclosures. We also updated our internal controls to
incorporate requirements for addressing the risk of misstatement in ESG and
climate reporting. To support this, we have developed a framework to guide
control implementation over ESG and climate reporting disclosures, which
includes areas such as process and data governance, and risk assessment.
As the landscape for ESG and climate-related disclosures develops, we continue
to focus on horizon scanning and interpretation of relevant external reporting
requirements, to ensure a timely response for producing the required
disclosures. As the volume and nature of these requirements continue to
evolve, the level of risk is heightened. Part of our response to this
heightened risk includes undertaking a range of assurance procedures over
these disclosures.
Challenges
While we have continued to develop our climate risk framework, our remaining
challenges include:
- the diverse range of internal and external data sources and data
structures needed for climate-related reporting, which introduces data
accuracy and reliability risks;
- data limitations on customer assets and supply chains, and
methodology gaps, which hinder our ability to assess physical risks
accurately;
- industry-wide data gaps on customer emissions and transition plan
and methodology gaps, which limit our ability to assess transition risks
accurately; and
- limitations in our management of net zero alignment risk is due to
known and unknown factors, including the limited accuracy and reliability of
data, merging methodologies, and the need to develop new tools to better
inform decision making.
Insights from climate scenario analysis
Scenario analysis supports our strategy by assessing our potential exposures
to risks and vulnerabilities under a range of climate scenarios. It helps to
build our awareness of climate change, plan for the future and meet our
growing regulatory requirements.
In 2023, we enhanced our internal climate scenario analysis exercise by
focusing our efforts on generating more granular insights for key sectors and
regions to support core decision-making processes, and to respond to our
regulatory requirements. We also produced several climate stress tests for
regulators around the world, including the Hong Kong Monetary Authority
('HKMA') and the Central Bank of the United Arab Emirates.
We continue to enhance our climate scenario analysis exercises so that we can
have a more comprehensive understanding of climate headwinds, risks and
opportunities to support our strategic planning and actions.
In climate scenario analysis, we consider, jointly, both physical risks and
transition risks. For further details about these risks, see 'Climate risk' on
page 221.
We also analyse how these climate risks impact principal risk types within our
organisation, including credit and traded market risks, non-financial risks,
and pension risk.
Our climate scenarios
In our 2023 climate scenario analysis exercises, we explored five scenarios
that were created to examine the potential impacts from climate change for the
Group and its entities.
The analysis considered the key regions in which we operate, and assessed the
impact on our balance sheet across three distinct timeframes: short term up to
2025; medium term from 2026 to 2035; and long term from 2036 to 2050. The time
horizons are aligned to the Climate Action 100+ framework v1.2.
We created our internal scenarios using external publicly available climate
scenarios as a reference, including those produced by the Network for Greening
the Financial System ('NGFS'), the Intergovernmental Panel on Climate Change
('IPCC') and the International Energy Agency. Using these external scenarios
as a template, we adapted them by incorporating the unique climate risks and
vulnerabilities to which our organisation and customers across different
business sectors and regions are exposed. This helped us produce the
scenarios, which vary by severity to analyse how climate risks will impact our
portfolios.
Our scenarios were:
- the Net Zero scenario, which is consistent with the Paris Agreement.
This assumes that there will be orderly but considerable climate action,
limiting global warming to no more than 1.5°C by 2100, when compared with
pre-industrial levels;
- the Current Commitments scenario, which assumes that climate action
is limited to current governmental committed policies, including already
implemented actions, leading to global temperature rises of 2.4°C by 2100.
This slow transition scenario helps us to determine the actions we need to
take to reach our net zero ambition while operating in a world that is not net
zero;
- the Delayed Transition Risk scenario, which assumes that climate
action is delayed until 2030 with a late disorderly transition to net zero but
stringent and rapid enough to limit global warming to under 2°C by 2100. This
scenario allows us to stress test severe but plausible transition risk
impacts;
- the Downside Physical Risk scenario, which assumes climate action is
limited to currently implemented governmental policies, leading to extreme
global warming with global temperatures increasing by greater than 4°C by
2100. This scenario allows us to assess physical risks associated with climate
change; and
-
the Near Term scenario, which assumes both a sharp increase in policies that
drive a disorderly transition towards net zero and a sharp increase in extreme
climate events over a five-year period until 2027. This scenario focused on
our business in Asia.
We have chosen these scenarios to provide a holistic view that will supplement
the Group's current and future strategic thinking. They reflect inputs from
our key stakeholders and experts across the Group, and have been reviewed
through internal governance.
Our scenarios reflect different levels of physical and transition risks over a
variety of time periods. The scenario assumptions include varying levels of
governmental climate policy changes, macroeconomic factors and technological
developments. However, these scenarios rely on the development of technologies
that are still unproven, such as global hydrogen production to decarbonise
aviation and shipping.
The nature of the scenarios, our developing capabilities, and limitations of
the analysis lead to outcomes that are indicative of climate change headwinds,
although they are not a direct forecast.
Developments in climate science, data, methodology and scenario analysis
techniques will help us shape our approach further. We therefore expect this
view to change over time.
Characteristics of our scenarios
Scenarios
Net zero Current Commitments Delayed Transition Risk Downside Near Term
Physical Risk
Scenario outcomes Rise in global temperatures by 2100 (vs pre-industrial levels) 1.5˚c 2.4˚c 1.6˚c 4.2˚c 1.4˚c
Focus horizon Medium term Short/medium term Medium/long term Medium/long term Short/medium term
Underlying assumptions based on global averages Assumed variation in global climate policies Low Medium High Low High
Assumed pace of technology change and adoption Fast Gradual Accelerates from 2030 None Base
d on
exis
ting
tech
nolo
gy
Assumed socioeconomic impact High Moderate Very high Very high Very
high
(in long term)
2030 2050 2030 2050 2030 2050 2030 2050 2027
Assumed carbon price 161 623 34 91 34 558 6 6 193
($/tCO(2))
Assumed change in energy consumption (% change after 2022) (10)% (16)% 12% 17% 12% (11)% 5% 24% (14)%
Assumed change in CO(2) emissions (% change after 2022) (37)% (100)% (7)% (33)% (7)% (89)% 3% 11% (34)%
Scenario risk characteristics Climate Physical q Lower u Moderate q Lower p Higher p Higher
risk
Transition p Higher u Moderate p Higher q Lower p Higher
Our methodology
For our scenario analysis, we used models to assess how transition and
physical risks may impact our portfolios under different scenarios. Our models
incorporate a range of climate-specific metrics that will have an impact on
our customers, including expected production volumes, revenue, costs and
capital expenditure.
We assess how these metrics interplay with economic factors such as carbon
prices, which represent the cost effect of climate-related policies that aim
to discourage carbon-emitting activities and encourage low-carbon solutions.
The expected result of higher carbon prices is a reduction in emissions as
high-emission activities become uneconomical. We also assume carbon prices
will vary from country to country.
The models for our wholesale corporate lending portfolio consider our
customers' individual climate transition plans where available, while we
refine and deepen our assessment of these plans. These results feed into the
calculation of our risk-weighted assets and expected credit loss ('ECL')
projections. For our real estate portfolio models, we focus on physical risk
factors, including property locations, perils and insurance coverage when
assessing the overall credit risk impact to the portfolio. The results are
reviewed by our sector specialists who, subject to our governance procedures,
make bespoke adjustments to our results based on their expert judgement where
relevant.
Our models support the calculation of outputs that inform us about the level
of climate-related ECL provisions required under IFRS 9, and also support the
shaping of our climate-related capital approach under ICAAP. In 2023, in
addition to incorporating our customers' transition plans, we enhanced our
credit risk models for the wholesale portfolio by updating our assumptions
regarding how we expect state-supported companies to be impacted, and improved
how we model the impact of emissions on company financial forecasts.
Modelling limitations
We continue to look for ways of enhancing our methodology to improve the
effectiveness of our climate scenario analyses. There are industry-wide
limitations, particularly on data availability, although our models are
designed to produce outputs that can support our assessment of the level of
our climate resilience.
Climate scenario analysis requires considerable amounts of data, although data
is only available for a subset of our counterparties. As a result, we have to
extrapolate the results observed in the subset to the wider population or
dataset. We do not capture the second order impacts of climate risk exposures
within our modelling approach, such as impacts on our counterparties from
their supply chains.
We continue to enhance our capabilities by incorporating lessons learnt from
previous exercises and feedback from key stakeholders, including regulators.
For a broad overview of the models that we use for our climate scenario
analysis, as well as graphs that show how global carbon prices and carbon
emissions will differ under our climate scenarios, see our ESG Data Pack at
www.hsbc.com/esg.
Analysing the outputs of climate scenario analysis
Climate scenario analysis allows us to model how different potential climate
pathways may affect and impact the resilience of our customers and our
portfolios, particularly in respect of credit losses. As the following chart
shows, losses are influenced by their exposure
to a variety of climate risks under different climate scenarios.
1 The counterfactual scenario is modelled on a scenario where there would
be no losses due to climate change.
2 The dotted line in the chart shows the impact of modelled expected
credit losses following our strategic responses to reduce the effect of
climate risks under the Net Zero scenario.
3 The projections shown in this chart were modelled during 2023 and are
not intended to reflect the final 31 December 2023 position that is disclosed
elsewhere in the Annual Report and Accounts 2023.
While climate-related losses are expected to remain minimal in the short term,
they are likely to increase compared with the counterfactual scenario in the
medium and longer term, driven by the transition to a net zero economy.
These losses are lower in the Net Zero orderly transition scenario, than in
the Delayed Transition Risk scenario where climate action begins later and is
more rapid and disruptive as our customers will have less time to restructure
their business models and reduce their carbon emissions. As the dotted line in
the graph shows, losses in these scenarios can be mitigated through active
management approaches, which include identifying new climate-related business
opportunities and adapting our portfolios to reduce exposure to climate risks
and losses.
By building a more climate-resilient balance sheet, we can reduce impairment
risks and improve longer-term stability.
Under the Current Commitments scenario, we expect lower levels of losses
relating to transition risks, although we would expect an increase in the
effects of climate-related physical risks over the longer term. If the world
does not align with a net zero path, physical risks in the medium to long term
are expected to continue to rise due to the increasing frequency of extreme
weather events.
The Near Term scenario
Our Near Term scenario allowed us to explore the combined impacts of a
disorderly transition towards net zero and extreme acute physical events
occurring simultaneously. The scenario was designed to meet HKMA regulatory
requirements and will help us to improve how we assess short-term impacts
across the Group. As part of the HKMA exercise, our initial analysis was
focused on our portfolio in Asia.
The exercise allowed us to understand the extent to which a stressed scenario
exhibiting both high physical and transition risks in the near term could
immediately impact our customers across all our sectors.
In the following sections, we assess the impacts to our banking portfolios
under different climate scenarios.
How climate change is impacting our wholesale lending portfolio
In our internal climate scenario analysis, we assessed the impact of
climate-related risks on our corporate counterparties under different climate
scenarios, which we measured by reviewing the modelled effect on our ECL.
The climate scenario analysis exercise for the wholesale lending portfolio was
designed to examine our climate risks and vulnerabilities, primarily in the
short and medium term. We focused on the Current Commitment scenario,
believing it to be the scenario most likely to unfold in this timeframe, and
the Net Zero scenario, which allows us to assess the resilience of our
strategy and to identify specific climate-related opportunities.
Within our wholesale lending portfolio, customers in higher emitting sectors
continue to be most exposed to larger climate-related losses.
For each sector in both scenarios, we calculated the projected ECL increase as
at 2035, where we compared the increase in ECL under the scenario against a
counterfactual scenario that incorporates no climate change.
We use the sector's exposure at default ('EAD'), which represents the size of
our exposure to potential losses from customer defaults. This helps to
identify which sectors are the most material to us in terms of the impact of
climate change.
The table below shows the relative size of exposures at default in 2023 and
the increase in cumulative ECL under each scenario compared with a
counterfactual scenario by 2035 (expressed as a multiple).
Impact on wholesale lending portfolios
Wholesale sectors Exposure at default (2023) ECL increase(1)
Current Commitments Net Zero
Conglomerates and industrials n <1.1x <2.75x
Construction and building materials n <1.25x <2.25x
Chemicals n <1.1x <1.75x
Power and utilities n <1.1x <1.75x
Oil and gas n <1.1x <1.25x
Automotive n <1.25x <1.75x
Land transport and logistics n <1.1x <2.75x
Agriculture & soft commodities n <1.1x <2.5x
Metals and mining n <1.1x >3x
Aviation n <1.1x <1.5x
Marine n <1.1x <1.5x
1 Increase in cumulative ECL compared with counterfactual by 2035
expressed as a multiple.
We have continued to incorporate information from our customers' transition
plans to consider more detailed information on how they and their sector will
be impacted under different climate scenarios.
The levels of ECL observed across our wholesale lending portfolio are driven
by: our customers' carbon emissions; the presence of realistic transition
plans; the amount of capital investment required to support their transition;
and the degree to which their competitive environment impacts their ability to
pass on carbon costs.
In 2022, we used scenario analysis to assess the impacts on our corporate
counterparties across the sectors that are most affected by climate-related
risks.
In 2023, we enhanced our approach in some key high-emitting sectors, which
includes the construction and building materials, power and utilities, and oil
and gas sectors. The analysis below provides a more detailed view of the
anticipated impacts on these portfolios and our customers, improving our
understanding of climate risks and potential opportunities.
The construction and building materials sector faces an increase in losses
because it includes companies with high emissions from manufacturing
processes, such as steel or cement, or from their supply chains, which will
increase cost pressures due to carbon taxes. The sector also has a high
proportion of customers without transition plans.
Although our scenario analysis showed that companies with transition plans
performed better on average, their plans typically fall short of requirements
needed to meet net zero targets. Overall, we believe there are significant
lending opportunities for us to help support our customers as they transition
to a lower carbon economy while meeting their growing business demands.
These opportunities include the exploration of less carbon-intensive fuel
sources, electrification, the integration of carbon capture and storage, and
the adoption of new technologies in the search to reduce emissions.
In the power and utilities sector, our analysis showed that rising costs from
increased carbon prices and the capital expenditure required to support
transition requirements, infrastructure improvements and decommissioning
costs, alongside greater downstream energy demands, will potentially lead to
higher debt levels and worsening counterparty risk ratings for customers.
As technologies mature, the capital cost of some renewables infrastructure is
expected to fall, becoming cheaper than non-renewable sources due to improved
efficiencies. This will reduce the required expenditure for companies.
In the oil and gas sector, customers that commit to renewable energy should
benefit from the additional greener revenue streams, which will help mitigate
the impact of reduced profitability from fossil fuels and heightened carbon
prices, enabling them to sustain their gross margins. This sector has
relatively lower projected losses as a large proportion of customers provided
transition plans with granular information about their climate-related
impacts.
We have the opportunity to ease potential negative impacts as transition risks
increase by supporting our customers to diversify into more renewable and
greener revenue streams, and invest in emission-reducing technologies.
How climate change is impacting our retail mortgage portfolio
As part of our 2023 internal climate scenario analysis, we completed a
detailed climate risk assessment for the UK, Hong Kong, mainland China and
Australia, which together represent 75% of the balances in our global retail
mortgage portfolio.
Our analysis shows that over the longer term, we expect minimal losses to
materialise when considering the Current Commitments scenario. Although the
severity of climate perils is expected to worsen over time, our overall losses
also remain low under a Downside Physical Risk scenario.
In 2023, we widened the scope of our climate modelling to include new markets,
such as mainland China, and increased the peril coverage within markets
already covered.
In our analysis of the retail mortgage portfolio, we reassessed the physical
perils that could impact the value of properties, which include flooding,
wildfire and windstorms. The underlying peril data we use has been enhanced to
include updated and higher resolution flood maps where available. We have also
worked with external vendors to improve outputs from peril projections and to
increase the granularity of data to provide more detailed insights into the
impact of climate risks across our portfolio of properties, in particular the
impact of wildfires.
Our scenario analysis methodology was enriched further in 2023 by combining
the impacts of physical risk with transition risks, including rising energy
costs and impacts from direct government legislation such as homeowner energy
efficiency upgrades in the UK. We have enhanced our modelling by considering
customers' affordability incorporating increased debt servicing costs and the
impacts on property valuations. As insurance remains a key mitigator against
climate losses, we further refined our assumptions including the assessment of
insurance availability for properties that experience frequent climate events.
Projected peril risk
Flooding has the potential to drive significant impacts at an aggregate level
but this is localised to specific areas that are close to water sources such
as rivers or the coast, or areas that are located in valleys where surface
water can 'pool'.
The 'Exposure to flooding' table below shows that the majority of properties
located in four of our largest markets are predicted to experience zero to low
risk of flooding, with flood depths of less than 0.5 metres, under a
1-in-100-year event in each of the scenarios.
Flood depths outlined here do not consider building type and property floor
level, which would potentially further mitigate the impacts. However, they are
considered within our climate risk modelling and loss projections.
The table below sets out the proportion of properties with projected flood
depths in a 1-in-100-year severity flood event, under the Current Commitments
and Downside Physical Risk scenarios.
Exposure to flooding (%)(1)
Scenarios
Number of properties(2) Flood depth (metres) Baseline flood risk 2023(3) Current Commitments 2050 Downside Physical Risk 2050 (%)
(%) (%)
UK 0-0.5 97.4 97.4 96.9
n 0.5-1.5 2.4 2.5 2.8
>1.5 0.2 0.2 0.3
Hong Kong 0-0.5 85.3 81.4 79.5
n 0.5-1.5 14.6 18.4 20.4
>1.5 0.1 0.1 0.1
Australia 0-0.5 95.7 95.4 95.3
n 0.5-1.5 2.9 3.0 3.1
>1.5 1.5 1.5 1.5
Mainland China 0-0.5 88.0 86.5 84.7
0.5-1.5 11.1 12.5 12.7
n >1.5 0.9 1.0 2.7
1 Severe flood events include river and surface flooding and coastal
inundation. The table compares 2050 snapshots under the Current Commitments
and Downside Physical Risk scenarios with a baseline view in 2023. We do
expect to see changes to our flood depth distributions as climate risk data is
refreshed.
2 The size of the bubbles represents the size of the portfolios, in terms
of number of properties where exposure to flooding data is available, relative
to one another.
3 Baseline flood risk is the flood risk for a 1 in 100 year event, based
on current peril data.
How climate change is impacting our commercial real estate portfolios
We assessed our commercial real estate customers' vulnerability to various
perils, including flooding and windstorms. Our commercial real estate
portfolio is globally diversified with larger concentrations in Hong Kong, the
UK and the US.
Geographical location is a key determinant in our exposure to potential
physical risk events, which can lead to higher ECL due to the cost of
repairing damage as well as impact property valuations in areas where physical
risk events are increasing in frequency.
The 'Exposure to peril' table below shows the proportion of our commercial
real estate portfolio exposed to specific physical perils in our key markets.
Exposure to peril (%)(1)
Exposure at default(2) Coastal inundation (%) Cyclone wind Surface water flooding (%) Riverine flooding
(%) (%)
Hong Kong n 2.0 94.8 19.0 10.0
UK n 15.8 0.0 16.5 7.1
US n 10.1 81.5 11.4 28.6
1 Proportion of our commercial real estate portfolio exposed to specific
physical perils in the Downside Physical scenario.
2 The size of the bubbles represents the size of the portfolios, in terms
of EAD, relative to one another.
Overall, and in line with our 2022 disclosure, our commercial real estate
portfolio remains resilient to climate risk, with the more severe impacts
mitigated by insurance coverage.
Our most significant credit exposure is in Hong Kong, a region with material
physical risk exposures to wind and flooding due to strong tropical cyclones.
The impact on prospective credit losses remains low, due to stringent building
standards and existing measures in place against flooding and storm surges.
Our largest exposure to transition risk is within our UK portfolio. Under the
Net Zero scenario, we assessed the impacts of the UK government consultation
on non-domestic rental properties being required to hold an energy performance
certificate rating of at least 'B' by 2030. To meet these proposed minimum
standards, more than 80% of the properties in our portfolio would potentially
need to be retrofitted, which would increase impairments and lead to a small
uplift in ECL for this portfolio.
In 2023, as part of the scenario analysis exercise for the Central Bank of the
United Arab Emirates, we also assessed in more detail the climate risk impacts
on our UAE portfolio. Our findings showed that many properties could become
chronically exposed to permanent inundation over time due to their relatively
low elevation above sea level.
How we assess climate risk impacts on other risk types
We use climate scenario analysis to assess the impacts on other risks beyond
credit risk. These include traded market risks, non-financial risks and
pension risk.
Traded market risk
In 2023, we explored the potential impacts of climate risks on our trading and
banking portfolio under the Delayed Transition Risk and Downside Physical Risk
scenarios.
The analysis considered all relevant asset classes including interest rates,
exchange rates, corporate and sovereign bonds and equities. The analysis
applied shocks reflecting the impact of abrupt increases in carbon prices or
physical risk perils resulting in structural economic impacts that affect the
productivity of high-risk sectors at a country level.
We have developed tools to provide us with a more granular understanding of
the key profit and loss drivers under different climate scenarios. These can
be viewed by risk factor, business line or at trading desk level to help
traded risk managers to monitor and understand how climate sensitive exposures
are impacted.
Sovereign credit risk
We assessed the impacts of climate risks on sovereign debt under the different
climate scenarios. In particular, our models considered the impacts of climate
change on a country's GDP, the amount of headroom sovereign nations have in
terms of their fiscal and external reserves, and their dependency and exposure
to particular corporate sectors.
Pension risk
We modelled balance sheet and income statement projections for the main
pension plans. Our modelling capability has been enhanced to incorporate
climate-specific modelling over a longer timeframe, with the initial exercise
being focused on assessing the impacts of a disruptive transition to net zero
using the Delayed Transition scenario.
Non-financial risk
We assessed the potential impacts of errors in sustainable lending volumes
contained within our ESG disclosures as part of our financial reporting risks.
To understand our regulatory compliance risks we assessed any
misrepresentations within the marketing of our ESG funds.
Use of climate scenario analysis outputs
Climate scenario analysis plays a crucial role helping us to identify and
understand the impact of climate-related risks and potential opportunities as
we navigate the transition to net zero.
Scenario analysis results have been used to support the Group's ICAAP. This is
an internal assessment of the capital the Group needs to hold to meet the
risks identified on a current and projected basis, including climate risk.
In addition, scenario analysis informs our risk appetite statement metrics. As
an example, it supports the calibration of physical risk metrics for our
retail mortgage portfolios and it is used to consider climate impact in our
IFRS 9 assessment.
From a financial planning perspective, internal climate scenario analysis
results are used to assess whether additional short-term climate-specific ECL
are required within our financial plan.
Next steps
We plan to continue to enhance our capabilities for climate scenario analysis
including addressing model limitations and data gaps and developing our
assessment of liquidity, resilience and insurance risks. We also plan to use
the results for decision making, particularly in:
- client engagement, by identifying climate opportunities and
vulnerabilities in specific regions and sectors such as renewables, carbon
capture technologies and electric vehicles, and using this information to
engage and support clients in their transition to net zero;
- portfolio steering, by using scenario analysis outputs to inform how
to reallocate our portfolio to maximise returns and mitigate risk while
achieving our net zero targets; and
- looking beyond climate change by building capabilities to assess our
resilience to wider environmental risks.
Understanding the resilience of our critical properties
Climate change poses a physical risk to the buildings that we occupy as an
organisation, including our offices, retail branches and data centres, both in
terms of loss and damage, and business interruption.
We measure the impacts of climate and weather events to our buildings on an
ongoing basis using historical, current and scenario modelled forecast data.
In 2023, there were 27 major storms that had a minor impact on five premises
with no impact on the availability of our buildings.
We use stress testing to evaluate the potential for impact on our owned or
leased premises. Our scenario stress test, conducted in 2023, analysed how
eight climate change-related hazards could impact 1,000 of our critical and
important buildings. These hazards were coastal inundation, extreme heat,
extreme winds, wildfires, riverine flooding, pluvial flooding, soil movement
due to drought, and surface water flooding.
The 2023 stress test modelled climate change with IPCC's Taking the Highway
scenario (SSP5-8.5), which projects that the rise in global temperatures will
likely exceed 4°C by 2100. It also modelled a less severe IPCC Middle of the
Road scenario (SSP2-4.5), which projects that global warming will likely be
limited to 2°C.
Key findings from the Taking the Highway scenario included that by 2050, 20 of
our 1,000 critical and important buildings will have a high potential for
impact due to climate change, with insurance-related losses estimated to be in
excess of 10% of the insured value of the buildings.
These include 16 retail properties primarily impacted by extreme temperatures
and four data centres, where three face the risk of water stress and one faces
extreme temperatures and water stress. This could lead to failure of
mechanical cooling equipment or soil movement resulting from drought.
A further 248 properties have the potential to be impacted by climate change,
albeit to a lesser extent, with insurance-related losses estimated at between
5% and 10% of the insured value of our buildings. The principal risks are
temperature extremes and water stress.
A key finding from the Middle of the Road scenario showed that the total
number of buildings at risk reduced from 20 to 13. The highlighted facilities
are still at risk from the same perils of extreme temperature and water stress
by 2050.
This forward-looking data along with historical data helps inform real estate
planning. We will continue to enhance our understanding of how extreme weather
events impact our building portfolio as climate risk assessment tools improve
and evolve. We buy insurance for property damage and business interruption and
consider insurance as a loss mitigation strategy depending on its availability
and price.
We regularly review and enhance our building selection process and global
engineering standards and will continue to assess historical claims data to
help ensure our building selection and design standards address the potential
impacts of climate change.
Resilience risk
Overview
Resilience risk is the risk of sustained and significant business disruption
from execution, delivery, physical security or safety events, causing the
inability to provide critical services to our customers, affiliates and
counterparties. Resilience risk arises from failures or inadequacies in
processes, people, systems or external events.
Resilience risk management
Key developments in 2023
During the year, we carried out several initiatives to keep pace with
geopolitical, regulatory and technology changes, and strengthened the
management of resilience risk:
- We focused on enhancing our understanding of our risk and control
environment, by updating our risk taxonomy and control libraries, and
refreshing risk and control assessments.
- We continued to recognise that our customers are impacted by service
disruptions, and responded to these urgently and aimed to recover with minimum
delay. We continued to initiate post-incident review processes to prevent
recurrence. Where we identify that investment is required to further enhance
the Group's operational resilience capabilities, findings are fed into the
Group's financial planning, helping to ensure we continue to meet the
expectations of our customers and our regulators.
- We continued to monitor markets affected by the Russia-Ukraine and
Israel-Hamas wars, as well as other geopolitical events, for any potential
impact they may have on our colleagues and operations.
- We strengthened the way third-party risk is overseen and managed
across all non-financial risks, and enhanced the processes, framework and
reporting capabilities used by our global businesses, functions and regions.
- We provided analysis and easy-to-access risk and control information
and metrics to enable management to focus on non-financial risks in their
decision making and appetite setting.
- We further strengthened our non-financial risk governance and senior
leadership, and improved our coverage and risk steward oversight for data risk
and change execution.
We prioritise our efforts on material risks and areas undergoing strategic
growth, aligning our location strategy to this need. We also remotely provide
oversight and stewardship, including support of chief risk officers, in
territories where we have no physical presence.
Governance and structure
The Enterprise Risk Management target operating model provides a globally
consistent view across resilience risks, strengthening our risk management
oversight while operating effectively as part of a simplified non-financial
risk structure.
We view resilience risk across seven sub-risk types related to: third-party
risk; technology and cybersecurity risk; transaction processing risk; business
interruption and incident risk; data risk; change execution risk; and
facilities availability, safety and security risk.
Risk appetite and key escalations for resilience risk are reported to the
Non-Financial Risk Management Board, chaired by the Group Chief Risk and
Compliance Officer, with an escalation path to the Group Risk Management
Meeting and Group Risk Committee.
Key risk management processes
Operational resilience is our ability to anticipate, prevent, adapt, respond
to, recover and learn from operational disruption while minimising customer
and market impact. Resilience is determined by assessing whether we can
continue to provide our important business services, within an agreed impact
tolerance. This is achieved via day-to-day oversight and periodic and ongoing
assurance, such as deep dive reviews and controls testing, which may result in
challenges being raised to the business by risk stewards. Further challenge is
also raised in the form of risk steward opinion papers to formal governance.
We accept we will not be able to prevent all disruption but we must prioritise
investment to continually improve the response and recovery strategies for our
important business services and important group business services to meet
regulatory expectations.
Business operations continuity
We continue to monitor the Russia-Ukraine and Israel-Hamas wars, and remain
ready to take measures to ensure business continuity in affected markets
should the situations require. There have been no significant disruptions to
our services, although businesses and functions in nearby markets continually
review their plans and responses to minimise any potential impacts.
Regulatory compliance risk
Overview
Regulatory compliance risk is the risk associated with breaching our duty to
clients and other counterparties, inappropriate market conduct (including
unauthorised trading) and breaching related financial services regulatory
standards. Regulatory compliance risk arises from the failure to observe
relevant laws, codes, rules and regulations and can manifest itself in poor
market or customer outcomes and lead to fines, penalties and reputational
damage to our business.
Regulatory compliance risk management
Key developments in 2023
The dedicated programme to embed our updated purpose-led conduct approach has
concluded. Work to map applicable regulations to our risks and controls
continued in 2023, alongside the adoption of new tooling to support
enterprise-wide horizon scanning for new regulatory obligations and supporting
wider work on regulatory reporting enhancements. Climate risk has been
integrated into regulatory compliance policies and processes, with
enhancements made to the product governance framework and controls to ensure
the effective consideration of climate - and in particular the risk of
greenwashing - risks.
Governance and structure
The Compliance function has now been restructured and integrated into a
combined Risk and Compliance function with the appointment
of a Group Head of Regulatory Compliance reporting directly into the
Group Chief Risk and Compliance Officer. Regulatory Compliance and Financial
Crime teams work together and with relevant stakeholders to achieve good
conduct outcomes, and provide enterprise-wide support on the compliance risk
agenda in close collaboration with colleagues from the Group Risk and
Compliance function.
Key risk management processes
The Global Regulatory Compliance capability is responsible for setting global
policies, standards and risk appetite to guide the Group's management of
regulatory compliance risk. It also devises the required frameworks, support
processes and tooling to protect against regulatory compliance risks. The
Group capability provides oversight, review and challenge of the global
market, regional and line of business teams to help them identify, assess and
mitigate regulatory compliance risks, where required. The Group's regulatory
compliance risk policies are regularly reviewed. Global policies and
procedures require the identification and escalation of any actual or
potential regulatory breaches, and relevant events and issues are escalated to
the Group's Non-Financial Risk Management Board, the Group Risk Management
Meeting and the Group Risk Committee, as appropriate. The Group Head of
Regulatory Compliance reports to the Group Chief Risk and Compliance Officer,
and attends the Risk and Compliance Executive Committee, the Group Risk
Management Meeting and the Group Risk Committee.
Financial crime risk
Overview
Financial crime risk is the risk that HSBC's products and services will be
exploited for criminal activity. This includes fraud, bribery and corruption,
tax evasion, sanctions and export control violations, money laundering,
terrorist financing and proliferation financing. Financial crime risk arises
from day-to-day banking operations involving customers, third parties and
employees.
Financial crime risk management
Key developments in 2023
We regularly review the effectiveness of our financial crime risk management
framework, which includes continued consideration of the complex and dynamic
nature of sanctions compliance and export control risk. We continued to
respond to the financial sanctions and trade restrictions that have been
imposed on Russia, including methods used to limit sanctions evasion.
We continued to make progress with several key financial crime risk management
initiatives, including:
- We deployed our intelligence-led, dynamic risk assessment capability
for customer account monitoring in additional entities and global businesses,
including in the UK, the Channel Islands and the Isle of Man, Hong Kong and
the UAE.
- We deployed a next generation capability to increase our monitoring
coverage on correspondent banking activity.
- We successfully introduced the required changes to our transaction
screening capability to accommodate the global change to payment systems
formatting under ISO 20022 requirements.
- We made enhancements in response to the rapidly evolving and complex
global payments landscape and refined our digital assets and currencies
strategy.
Governance and structure
The structure of the Financial Crime function remained substantively unchanged
in 2023, although we continued to review the effectiveness of our governance
framework to manage financial crime risk. The Group Head of Financial Crime
and Group Money Laundering Reporting Officer continues to report to the Group
Chief Risk and Compliance Officer, while the Group Risk Committee retains
oversight of matters relating to financial crime.
Key risk management processes
We will not tolerate knowingly conducting business with individuals or
entities believed to be engaged in criminal activity. We require everybody in
HSBC to play their role in maintaining effective systems and controls to
prevent and detect financial crime. Where we believe we have identified
suspected criminal activity or vulnerabilities in our control framework, we
will take appropriate mitigating action.
We manage financial crime risk because it is the right thing to do to protect
our customers, shareholders, staff, the communities in which we operate, as
well as the integrity of the financial system on which we all rely. We operate
in a highly regulated industry in which these same policy goals are codified
in law and regulation.
We are committed to complying with the laws and regulations of all the markets
in which we operate and applying a consistently high financial crime standard
globally.
We continue to assess the effectiveness of our end-to-end financial crime risk
management framework, and invest in enhancing our operational control
capabilities and technology solutions to deter and detect criminal activity.
We have simplified our framework and consolidated previously separate
financial crime policies into a single policy to drive consistency and provide
a more holistic assessment of financial crime risk. We further strengthened
our financial crime risk
taxonomy and control libraries and our monitoring capabilities through
technology deployments. We developed more targeted metrics, and continued to
seek to enhance our governance and reporting. We are committed to working in
partnership with the wider industry and the public sector in managing
financial crime risk and we participate in numerous public-private
partnerships and information sharing initiatives around the world. In 2023,
our focus remained on measures to improve the overall effectiveness of the
global financial crime framework, notably by providing input into legislative
and regulatory reform activities. We did this by contributing to the
development of responses to consultation papers focused on how financial crime
risk management frameworks can deliver more effective outcomes in detecting
and deterring criminal activity. Through our work with the Wolfsberg Group and
the Institute of International Finance, we supported the efforts of the global
standard setter, the Financial Action Task Force. In addition, we participated
in a number of public events related to enhancing public-private partnerships,
payment transparency, asset recovery, tackling forestry crimes, wildlife
trafficking and human trafficking.
Model risk
Overview
Model risk is the risk of the potential for adverse consequences from model
errors or the inappropriate use of modelled outputs to inform business
decisions.
Model risk arises in both financial and non-financial contexts whenever
business decision making includes reliance on models.
Key developments in 2023
In 2023, we continued to make improvements in our model risk management
processes amid regulatory changes in model requirements.
Initiatives during the year included:
- Following regulatory feedback on a number of our model submissions
for our internal ratings-based ('IRB') approach for credit risk, internal
model method ('IMM') for counterparty credit risk and internal model approach
('IMA') for market risk, we implemented approved models for IMM and IMA
alongside an approved IRB model for UK mortgages. We began a programme of work
to address feedback from the PRA and other regulators on the IRB models for
wholesale credit.
- We made changes to our VaR model in response to multiple breaches
that had been observed from market volatility resulting from changes in
monetary policy in major markets.
- We introduced a new procedure to ensure any new tool developed using
generative AI would require validation by Model Risk Management before its
use.
- We enhanced our frameworks and controls as climate risk and AI and
machine learning models become more embedded in business processes.
- Following the publication of Supervisory Statement 1/23 - the PRA's
guiding principles for how model risks should be managed across the industry -
we began a programme of work to seek to meet the enhanced model risk
management requirements, with representation from all global businesses and
key functions, including Internal Audit.
Governance and structure
Model risk governance committees at the Group, business and functional levels
provide oversight of model risk. The committees include senior leaders from
the three global businesses and the Group Risk and Compliance function, and
focus on model-related concerns and are supported by key model risk metrics.
We also have Model Risk Committees in our geographical regions focused on
local delivery and requirements. The Group-level Model Risk Committee is
chaired by the Group Chief Risk and Compliance Officer, and the heads of key
businesses participate in these meetings.
Key risk management processes
We use a variety of modelling approaches, including regression, simulation,
sampling, machine learning and judgemental scorecards for a range of business
applications. These activities include customer selection, product pricing,
financial crime transaction monitoring, creditworthiness evaluation and
financial reporting. Global responsibility for managing model risk is
delegated from the Board to the Group Chief Risk and Compliance Officer, who
authorises the Group Model Risk Committee. This committee regularly reviews
our model risk management policies and procedures, and requires the first line
of defence to demonstrate comprehensive and effective controls based on a
library of model risk controls provided by Model Risk Management. Model Risk
Management also reports on model risk to senior management and the Group Risk
Committee on a regular basis through the use of the risk map, risk appetite
metrics and top and emerging risks.
We regularly review the effectiveness of these processes, including the model
risk committee structure, to help ensure appropriate understanding and
ownership of model risk is embedded in the businesses and functions.
Insurance manufacturing operations risk
Contents
233 Overview
233 Insurance manufacturing operations risk management
234 Insurance manufacturing operations risk in 2023
234 Measurement
235 Key risk types
235 - Market risk
236 - Credit risk
236 - Liquidity risk
237 - Insurance underwriting risk
Overview
The key risks for our insurance manufacturing operations are market risk, in
particular interest rate and equity, credit risk and insurance underwriting
risk. These have a direct impact on the financial results and capital
positions of the insurance operations. Liquidity risk, while significant in
other parts of the Group, is less material for our insurance operations.
HSBC's insurance business
We sell insurance products through a range of channels including our branches,
insurance sales forces, direct channels and third-party distributors. The
majority of sales are through an integrated bancassurance model that provides
insurance products principally for customers with whom we have a banking
relationship, although the proportion of sales through other sources such as
independent financial advisers, tied agents and digital platforms is
increasing.
For the insurance products we manufacture, the majority of sales are savings,
universal life and protection contracts.
We choose to manufacture these insurance products in HSBC subsidiaries based
on an assessment of operational scale and risk appetite. Manufacturing
insurance allows us to retain the risks and rewards associated with writing
insurance contracts by keeping part of the underwriting profit and investment
income within the Group.
We have life insurance manufacturing subsidiaries in eight markets, which are
Hong Kong, Singapore, mainland China, France, UK, Malta, Mexico and Argentina.
In addition, we have: an interest in a life insurance manufacturing associate
in India; a captive insurance entity in Bermuda that insures the non-financial
risks of the wider Group; and a reinsurance entity in Bermuda.
Where we do not have the risk appetite or operational scale to be an
effective insurance manufacturer, we engage with a small number of leading
external insurance companies in order to provide insurance products to our
customers. These arrangements are generally structured with our exclusive
strategic partners and earn the Group a combination of commissions, fees and a
share of profits. We distribute insurance products in all of our geographical
regions.
This section focuses only on the risks relating to the insurance products we
manufacture.
Insurance manufacturing operations risk management
Key developments in 2023
The insurance manufacturing subsidiaries follow the Group's risk management
framework. In addition, there are specific policies and practices relating to
the risk management of insurance contracts, which did not change materially
over 2023. During the year, there was continued market volatility observed
across interest rates, equity and credit markets and foreign exchange rates.
This was predominantly driven by geopolitical factors and wider inflationary
concerns. One key area of risk management focus during 2023 was the
implementation of the new accounting standard, IFRS 17 'Insurance Contracts',
which became effective on 1 January 2023. Given the fundamental change the new
accounting standard represented in insurance accounting, and the complexity of
the new standard, this presented additional financial reporting and model
risks for the Group, which were managed via the IFRS 17 implementation
project. Other areas of focus were the ongoing integration of the insurance
business that was acquired through AXA Singapore in 2022 into the Group's risk
management framework, the establishment of a reinsurance entity in Bermuda and
controls supporting IFRS 17 implementation.
Governance and structure
(Audited)
Insurance manufacturing risks are managed to a defined risk appetite, which
is aligned to the Group's risk appetite and risk management framework,
including its three lines of defence model. For details of the Group's
governance framework, see page 137. The Global Insurance Risk Management
Meeting oversees the control framework globally and is accountable to the WPB
Risk Management Meeting on risk matters relating to the insurance business.
The monitoring of the risks within our insurance operations is carried out by
Insurance Risk teams. The Group's risk stewardship functions support the
Insurance Risk teams in their respective areas of expertise.
Stress and scenario testing
(Audited)
Stress testing forms a key part of the risk management framework for the
insurance business. We participate in local and Group-wide regulatory stress
tests, as well as internally developed stress and scenario tests, including
Group internal stress test exercises.
The results of these stress tests and the adequacy of management action plans
to mitigate these risks are considered in the Group's ICAAP and the entities'
regulatory Own Risk and Solvency Assessments, which are produced by all
material entities.
Key risk management processes
Market risk
(Audited)
All our insurance manufacturing subsidiaries have market risk mandates and
limits that specify the investment instruments in which they are permitted to
invest and the maximum quantum of market risk that they may retain. They
manage market risk by using, among others, some or all of the techniques
listed below, depending on the nature of the contracts written:
- We are able to adjust bonus rates to manage the liabilities to
policyholders for products with participating features. The effect is that a
significant proportion of the market risk is borne by the policyholder.
- We use asset and liability matching where asset portfolios are
structured to support projected liability cash flows. The Group manages its
assets using an approach that considers asset quality, diversification, cash
flow matching, liquidity, volatility and target investment return. We use
models to assess the effect of a range of future scenarios on the values of
financial assets and associated liabilities, and ALCOs employ the outcomes in
determining how best to structure asset holdings to support liabilities.
- We use derivatives and other financial instruments to protect
against adverse market movements.
- We design new products to mitigate market risk, such as changing the
investment return sharing proportion between policyholders and the
shareholder.
Credit risk
(Audited)
Our insurance manufacturing subsidiaries also have credit risk mandates and
limits within which they are permitted to operate, which consider the credit
risk exposure, quality and performance of their investment portfolios. Our
assessment of the creditworthiness of issuers and counterparties is based
primarily upon internationally recognised credit ratings and other publicly
available information.
Stress testing is performed on investment credit exposures using credit spread
sensitivities and default probabilities.
We use a number of tools to manage and monitor credit risk. These include a
credit report containing a watch-list of investments with current credit
concerns, primarily investments that may be at risk of future impairment or
where high concentrations to counterparties are present in the investment
portfolio. Sensitivities to credit spread risk are assessed and monitored
regularly.
Capital and liquidity risk
(Audited)
Capital risk for our insurance manufacturing subsidiaries is assessed in the
Group's ICAAP based on their financial capacity to support the risks to which
they are exposed. Capital adequacy is assessed on both the Group's economic
capital basis, and the relevant local insurance regulatory basis.
Risk appetite buffers are set to ensure that the operations are able to remain
solvent, allowing for business-as-usual volatility and extreme but plausible
stress events.
Liquidity risk is less material for the insurance business. It is managed by
cash flow matching and maintaining sufficient cash resources, investing in
high credit-quality investments with deep and liquid markets, monitoring
investment concentrations and restricting them where appropriate, and
establishing committed contingency borrowing facilities.
Insurance manufacturing subsidiaries complete quarterly liquidity risk reports
and an annual review of the liquidity risks to which they are exposed.
Insurance underwriting risk
Our insurance manufacturing subsidiaries primarily use the following
frameworks and processes to manage and mitigate insurance underwriting risks:
- a formal approval process for launching new products or making
changes to products;
- a product pricing and profitability framework, which requires
initial and ongoing assessment of the adequacy of premiums charged on new
insurance contracts to meet the risks associated with them;
- a framework for customer underwriting;
- reinsurance, which cedes risks to third-party reinsurers to keep
risks within risk appetite, reduce volatility and improve capital efficiency;
and
- oversight by financial reporting committees in each of our entities
of the methodology and assumptions that underpin IFRS 17 reporting.
Insurance manufacturing operations risk in 2023
Measurement
The following tables show the composition of the fair value of underlying
items of the Group's participating contracts at the reporting date.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Life direct participating and investment DPF contracts(1) Life Other Shareholder assets Total
other contracts(2) contracts(3) and liabilities
At 31 Dec 2023 $m $m $m $m $m
Financial assets 113,605 3,753 5,812 7,696 130,866
- trading assets - - - - -
- financial assets designated and otherwise mandatorily measured at fair 100,427 3,593 4,177 1,166 109,363
value through profit or loss
- derivatives 258 10 - 6 274
- financial investments - at amortised cost 1,351 67 1,157 4,772 7,347
- financial assets at fair value through other comprehensive income 8,859 - 5 693 9,557
- other financial assets 2,710 83 473 1,059 4,325
Insurance contract assets 13 213 - - 226
Reinsurance contract assets - 4,871 - - 4,871
Other assets and investment properties 2,782 164 35 1,636 4,617
Total assets at 31 Dec 2023 116,400 9,001 5,847 9,332 140,580
Liabilities under investment contracts designated at fair value - - 5,103 - 5,103
Insurance contract liabilities 116,389 3,961 - - 120,350
Reinsurance contract liabilities - 819 - - 819
Deferred tax - 1 - 3 4
Other liabilities - - - 6,573 6,573
Total liabilities 116,389 4,781 5,103 6,576 132,849
Total equity - - - 7,731 7,731
Total liabilities and equity at 31 Dec 2023 116,389 4,781 5,103 14,307 140,580
Balance sheet of insurance manufacturing subsidiaries by type of contract
(continued)
(Audited)
Life direct participating and investment DPF contracts(1) Life Other Shareholder assets Total
other contracts(2) contracts(3) and liabilities
At 31 Dec 2022(4) $m $m $m $m $m
Financial assets 102,539 4,398 6,543 7,109 120,589
- trading assets - - - - -
- financial assets designated and otherwise mandatorily measured at fair 89,671 3,749 4,916 1,088 99,424
value through profit or loss
- derivatives 432 9 21 15 477
- financial investments - at amortised cost 981 165 1,221 4,660 7,027
- financial assets at fair value through other comprehensive income 9,030 - - 569 9,599
- other financial assets 2,425 475 385 777 4,062
Insurance contract assets 4 130 - - 134
Reinsurance contract assets - 4,413 - - 4,413
Other assets and investment properties 2,443 60 30 1,666 4,199
Total assets at 31 Dec 2022(4) 104,986 9,001 6,573 8,775 129,335
Liabilities under investment contracts designated at fair value - - 5,374 - 5,374
Insurance contract liabilities 104,662 3,766 - - 108,428
Reinsurance contract liabilities - 748 - - 748
Deferred tax 23 - - 2 25
Other liabilities - - - 7,524 7,524
Total liabilities 104,685 4,514 5,374 7,526 122,099
Total equity - - - 7,236 7,236
Total liabilities and equity at 31 Dec 2022(4) 104,685 4,514 5,374 14,762 129,335
1 'Life direct participating and investment DPF contracts' are
substantially measured under the variable fee approach measurement model.
2 'Life other contracts' are measured under the general measurement
model and mainly includes protection insurance contracts as well as
reinsurance contracts. The reinsurance contracts primarily provide
diversification benefits over the life direct participating and investment
discretionary participation feature ('DPF') contracts.
3 'Other contracts' includes investment contracts for which HSBC does
not bear significant insurance risk.
4 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
Key risk types
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting HSBC's capital
or profit. Market factors include interest rates, equity and growth assets,
credit spreads and foreign exchange rates.
Our exposure varies depending on the type of contract issued. Our most
significant life insurance products are contracts with participating features.
These products typically include some form of capital guarantee or guaranteed
return on the sums invested by the policyholders, to which bonuses are added
if allowed by the overall performance of the funds. These funds are primarily
invested in fixed interest, with a proportion allocated to other asset classes
to provide customers with the potential for enhanced returns.
Participating products expose HSBC to the risk of variation in asset returns,
which will impact our participation in the investment performance.
In addition, in some scenarios the asset returns can become insufficient to
cover the policyholders' financial guarantees, in which case the shortfall has
to be met by HSBC. Amounts are held against the cost of such guarantees,
calculated by stochastic modelling in the larger entities.
The cost of such guarantees are generally not material and are absorbed by the
insurance fulfilment cash flows.
For unit-linked contracts, market risk is substantially borne by the
policyholder, but some market risk exposure typically remains, as fees earned
are related to the market value of the linked assets.
Sensitivities
(Audited)
The following table provides the impacts on the CSM, profit after tax and
equity of our insurance manufacturing subsidiaries from reasonably possible
effects of changes in selected interest rate, credit spread, equity price,
growth assets and foreign exchange rate scenarios for the year. These
sensitivities are prepared in accordance with current IFRS Accounting
Standards and are based on changing one assumption at a time with other
variables being held constant, which in practice could be correlated.
Due in part to the impact of the cost of guarantees and hedging strategies,
which may be in place, the relationship between the CSM, profit after tax and
total equity and the risk factors is non-linear. Therefore, the results
disclosed should not be extrapolated to measure sensitivities to different
levels of stress. For the same reason, the impact of the stress is not
necessarily symmetrical on the upside and downside. The sensitivities are
stated before allowance for management actions, which may mitigate the effect
of changes in the market environment.
The method used for deriving sensitivity information and significant market
risk factors remain consistent between 2022 and 2023. In 2022, due to a lower
CSM level, some portfolios generated onerous contracts in the 100bps up
scenarios for interest rate and credit spread sensitivities, generating income
statement losses and equity reductions in those scenarios. This was less
prevalent in 2023 as the base CSMs were higher from changing market conditions
and changes in lapse rate assumptions.
Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk
factors(1)
(Audited)
2023 2022(2)
Effect on profit after tax Effect on CSM Effect on total equity Effect on profit after tax Effect on CSM Effect on total equity
$m $m $m $m $m $m
+100 basis point parallel shift in yield curves 66 (92) 32 (210) (82) (240)
- Insurance and reinsurance contracts 69 (92) 69 (214) (82) (214)
- Financial instruments (3) - (37) 4 - (26)
-100 basis point parallel shift in yield curves (137) (390) (103) (49) (57) (19)
- Insurance and reinsurance contracts (133) (390) (133) (41) (57) (41)
- Financial instruments (4) - 30 (8) - 22
+100 basis point shift in credit spreads (11) (884) (45) (324) (843) (354)
- Insurance and reinsurance contracts (9) (884) (9) (322) (843) (322)
- Financial Instruments (2) - (36) (2) - (32)
-100 basis point shift in credit spreads 104 806 138 119 1,133 149
- Insurance and reinsurance contracts 102 806 102 117 1,133 117
- Financial instruments 2 - 36 2 - 32
10% increase in growth assets(3) 78 436 78 68 400 68
- Insurance and reinsurance contracts 43 436 43 38 400 38
- Financial instruments 35 - 35 30 - 30
10% decrease in growth assets(3) (85) (507) (86) (81) (560) (81)
- Insurance and reinsurance contracts (49) (507) (49) (49) (560) (49)
- Financial instruments (36) - (36) (32) - (32)
10% appreciation in US dollar exchange rate against local functional currency 117 390 117 95 272 95
- Insurance and reinsurance contracts 27 390 27 20 272 20
- Financial instruments 90 - 90 75 - 75
10% depreciation in US dollar exchange rate against local functional currency (117) (390) (117) (95) (272) (95)
- Insurance and reinsurance contracts (27) (390) (27) (20) (272) (20)
- Financial instruments (90) - (90) (75) - (75)
1 Sensitivities presented for 'Insurance and reinsurance Contracts'
includes the impact of the sensitivity stress on underlying assets held to
support insurance and reinsurance contracts. Sensitivities presented for
'Financial instruments' includes the impact of the sensitivity stress on other
financial instruments, primarily shareholder assets.
2 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
3 'Growth assets' primarily comprise equity securities and investment
properties. Variability in growth asset fair value constitutes a market risk
to HSBC insurance manufacturing subsidiaries.
Credit risk
(Audited)
Description and exposure
Credit risk is the risk of financial loss if a customer or counterparty fails
to meet their obligation under a contract. It arises in two main areas for our
insurance manufacturers:
- risk associated with credit spread volatility and default by debt
security counterparties after investing premiums to generate a return for
policyholders and shareholders; and
- risk of default by reinsurance counterparties and non-reimbursement
for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of these items
are shown in the table on page 234.
The credit quality of the reinsurers' share of liabilities under insurance
contracts is assessed as 'satisfactory' or higher (as defined on page 148),
with 100% of the exposure being neither past due nor impaired (2022: 100%).
Credit risk on assets supporting unit-linked liabilities is predominantly
borne by the policyholders. Therefore, our exposure is primarily
related to liabilities under non-linked insurance and investment contracts and
shareholders' funds. The credit quality of insurance financial assets is
included in the table on page 172.
The risk associated with credit spread volatility is to a large extent
mitigated by holding debt securities to maturity, and sharing a degree of
credit spread experience with policyholders.
Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though solvent, either
does not have sufficient financial resources available to meet its obligations
when they fall due, or can secure them only at excessive cost. Liquidity risk
may be able to be shared with policyholders for products with participating
features.
The remaining maturity of insurance contract liabilities is included in Note 4
on page 362.
The amounts of insurance contract liabilities that are payable on demand are
set out by the product grouping below:
Amounts payable on demand
(Audited)
2023 2022(1)
Amounts payable on demand Carrying amount for these contracts Amounts payable on demand Carrying amount for these contracts
$m $m $m $m
Life direct participating and investment DPF contracts 107,287 116,389 100,273 104,669
Life other contracts 2,765 3,961 2,813 3,759
At 31 Dec 110,052 120,350 103,086 108,428
1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
Insurance underwriting risk
Description and exposure
Insurance underwriting risk is the risk of loss through adverse experience, in
either timing or amount, of insurance underwriting parameters (non-economic
assumptions). These parameters include mortality, morbidity, longevity, lapse
and expense rates. Lapse risk exposure on products with premium financing
increased over the year as rising interest rates led to an increase in the
cost of financing for customers.
The principal risk we face is that, over time, the cost of the contract,
including claims and benefits, may exceed the total amount of premiums and
investment income received.
The tables on pages 234 analyse our life insurance underwriting risk exposures
by composition of the fair value of the underlying items.
The insurance underwriting risk profile and related exposures remain largely
consistent with those observed at 31 December 2022.
Sensitivities
(Audited)
The following table shows the sensitivity of the CSM, profit and total equity
to reasonably foreseeable changes in non-economic assumptions across all our
insurance manufacturing subsidiaries.
These sensitivities are prepared in accordance with current IFRS Accounting
Standards, which have changed following the adoption of IFRS 17 'Insurance
Contracts', effective from 1 January 2023. Further information about the
adoption of IFRS 17 is provided on page 342.
Mortality and morbidity risk is typically associated with life insurance
contracts. The effect on profit of an increase in mortality or morbidity
depends on the type of business being written.
Sensitivity to lapse rates depends on the type of contracts being written. An
increase in lapse rates typically has a negative effect on CSM (and therefore
expected future profits) due to the loss of future income on the lapsed
policies. However, some contract lapses have a positive effect on profit due
to the existence of policy surrender charges.
Expense rate risk is the exposure to a change in the allocated cost
of administering insurance contracts. To the extent that increased expenses
cannot be passed on to policyholders, an increase in expense rates will have
a negative effect on our profits. This risk is generally greatest for our
smaller entities.
The impact of changing insurance underwriting risk factors is primarily
absorbed within the CSM, unless contracts are onerous in which case the impact
is directly to profits. The impact of changes to the CSM is released to
profits over the expected coverage periods of the related insurance contracts.
Sensitivity of HSBC's insurance manufacturing subsidiaries to insurance
underwriting risk factors
(Audited)
Effect on CSM (gross)(1) Effect on profit after tax (gross)(1) Effect on profit after tax (net)(2) Effect on total equity (gross)(1) Effect on total equity (net)(2)
At 31 Dec 2023 $m $m $m $m $m
10% increase in mortality and/or morbidity rates (392) (49) (24) (49) (24)
10% decrease in mortality and/or morbidity rates 440
22 30 22 30
10% increase in lapse rates (316) (33) (24) (33) (24)
10% decrease in lapse rates 348
22 29 22 29
10% increase in expense rates (68) (9) (6) (9) (6)
10% decrease in expense rates
69 8 11 8 11
At 31 Dec 2022(3)
10% increase in mortality and/or morbidity rates
(354) (23) (21) (23) (21)
10% decrease in mortality and/or morbidity rates 374
16 18 16 18
10% increase in lapse rates
(225) (23) (23) (23) (23)
10% decrease in lapse rates 232
22 22 22 22
10% increase in expense rates
(59) (7) (7) (7) (7)
10% decrease in expense rates
60 4 5 4 5
1 The 'gross' sensitivities impacts are provided before considering
the impacts of reinsurance contracts held as risk mitigation.
2 The 'net' sensitivities impacts are provided after considering the
impacts of reinsurance contracts held as risk mitigation.
3 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which
replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated
accordingly.
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