REG - HSBC Holdings PLC - Half Year Report - 2023 Interim Report - Part 3
01/08/2023 16:30
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RNS Number : 9033H HSBC Holdings PLC 01 August 2023
Risk
Contents
61 Key developments in the first half of 2023
61 Areas of special interest
64 Credit risk
93 Treasury risk
103 Market risk
104 Insurance manufacturing operations risk
We recognise that the primary role of risk management is to protect our
customers, business, colleagues, shareholders and the communities that we
serve, while ensuring we are able to support our strategy and provide
sustainable growth.
All our people are responsible for the management of risk, with the ultimate
accountability residing with the Board. Our Group Risk and Compliance
function, led by the Group Chief Risk and Compliance Officer, plays an
important role in reinforcing our culture and values. We are focused on
creating an environment that encourages our people to speak up and do the
right thing.
Group Risk and Compliance is independent from the global businesses, including
our sales and trading functions, to provide challenge, oversight and
appropriate balance in risk/reward decisions.
We aim to use a comprehensive risk management approach across the organisation
and across all risk types, underpinned by our culture and values. This is
outlined in our risk management framework, including the key principles and
practices that we employ in managing material risks, both financial and
non-financial. The framework fosters continuous monitoring, promotes risk
awareness, and encourages sound operational and strategic decision making. It
also supports a consistent approach to identifying, assessing, managing and
reporting the risks we accept and incur in our activities. We continue to
actively review and develop our risk management framework and enhance our
approach to managing risk through our activities with regard to: people and
capabilities; governance; reporting and management information; credit risk
management models; and data.
A summary of our current policies and practices regarding the management of
risk is set out in the 'Risk management' section on pages 132 to 135 of the
Annual Report and Accounts 2022.
Key developments in the first half of 2023
We continued to actively manage the risks related to macroeconomic and
geopolitical uncertainties, as well as other key risks described in this
section. In addition, we sought to enhance our risk management in the
following areas:
- We enhanced our management of concentration risk at country and single
customer group levels by implementing new frameworks to strengthen our control
of risk tolerance and appetite.
- We have continued to strengthen our third-party risk policy and enhanced
the way third-party risk is overseen and managed across all non-financial
risks. Our processes, framework and reporting capabilities have been enhanced
to improve the control and oversight of our material third parties, to help
maintain our operational resilience and meet new and evolving regulatory
requirements.
- We continued to make progress with our comprehensive regulatory
reporting programme to strengthen our global processes, improve consistency
and enhance controls.
- We continued our programme to enhance our framework for managing risks
associated with machine learning and artificial intelligence ('AI').
- Through our climate risk programme, we continued to embed climate
considerations throughout the organisation, including enhancing our approach
to assessing the impact of climate on capital, and continued the development
of risk metrics to manage our exposure to climate risk.
- We deployed industry-leading technology and advanced analytics
capabilities into new markets to improve our ability to identify suspicious
activities and prevent financial crime. We continue to monitor regulatory
changes.
- We continued to develop and enhance our electronic communication
policies and standards, to help ensure escalations and follow-up actions can
better focus on substantive issues.
Areas of special interest
During the first half of 2023, a number of areas were considered as part of
our top and emerging risks because of the effect they have on the Group. In
this section we have focused on risks related to geopolitical and
macroeconomic risk and the interbank offered rate ('Ibor') transition.
Geopolitical and macroeconomic risk
The Russia-Ukraine war has had far-reaching geopolitical and economic
implications. HSBC is monitoring the impacts of the war, and continues to
respond to the significant sanctions and trade restrictions imposed against
Russia by the UK, the US and the EU, as well as other countries. In response
to such sanctions and trade restrictions, as well as to asset flight, Russia
has implemented certain countermeasures. The global economy has largely
adapted to the imposition of significant sanctions and trade restrictions,
with European countries diversifying their energy sources to reduce their
dependence on Russian energy supplies.
Further sanctions-related matters, including sanctions evasion by parties in
third countries and Russian countermeasures may adversely impact the Group,
its customers and the markets in which it operates. Our business in Russia,
which principally serves multinational corporate clients headquartered in
other countries, is not accepting new business or customers and is
consequently on a declining trend. Following a strategic review in 2022, HSBC
Europe BV (a wholly-owned subsidiary of HSBC Bank plc) entered into an
agreement to sell its wholly-owned subsidiary HSBC Bank Russia (RR) (Limited
Liability Company), subject to regulatory and governmental approvals.
Global supply chain disruptions caused by the war in Ukraine have eased,
although inflation is likely to remain high in several regions as the demand
for services remains relatively strong. This has prompted central banks to
continue tightening monetary policies. Since the beginning of 2023, the US
Federal Reserve Board ('FRB') has delivered a cumulative 75 basis point
('bps') increase in the Federal Funds rate. The European Central Bank and the
Bank of England have each tightened their policy rates by 150 bps over the
same period. All three central banks and their counterparts in other developed
markets are expected to increase rates further in the near term. While the
peak in rates may be getting closer, as of early-July 2023, interest-rate
futures did not suggest that central banks in developed markets (with the
possible exception of the FRB) will begin to ease monetary policy until well
into 2024. This may change if inflation moderates more significantly than
expected, or if recession concerns increase. Some central banks in emerging
markets have already begun to ease on monetary policy.
Fiscal policies are likely to remain relatively generous in coming years as
demand increases for public spending on items including social welfare,
defence and decarbonisation initiatives. This may increasingly happen against
a backdrop of slower growth, volatile energy prices and high interest rates.
Financial markets are showing a degree of forbearance, with long-term yields
relatively contained. However, this may be tested by the acceleration in the
coming months of central bank sales of government securities accumulated over
several years of quantitative easing. Sovereigns with high public debt burdens
could come under renewed focus as investors question the sustainability of
that debt. We continue to monitor our risk profile closely in the context of
uncertainty over global macroeconomic policies.
Higher inflation and interest rate expectations around the world - and the
resulting economic uncertainty - have had an impact on expected credit losses
and other credit impairment charges ('ECL') during the first half of 2023. In
certain markets, the combined pressure of higher inflation and interest rates
may impact the ability of our customers to repay their debt. Our Central
scenario, which has the highest probability weighting in our IFRS 9 'Financial
Instruments' calculations of ECL, assumes low growth and a higher inflation
environment across many of our key markets.
The Central scenario has been assigned our standard weighting across all of
our major markets, reflecting narrowing forecast dispersion, reduced
uncertainty, and a view that forecasts now sufficiently capture the weak
growth outlook. Our approach to macroeconomic scenarios remained unchanged in
2Q23, but the shift in UK interest rate expectations in June resulted in
updates to key scenario variables. There remains continued uncertainty with
respect to the relationship between the economic drivers and the historical
loss experience, which has required adjustments to modelled ECL in cases where
we determined that our models were unable to capture the material underlying
risks. For retail portfolios where models do not sufficiently capture the
interest rate and inflation risks, there has been a globally consistent
approach developed that is utilised for assessing the affordability pressure
on potentially affected customers and the consequential impact this would have
on ECL. This is incorporated into ECL via management judgemental adjustments.
For further details of our Central and other scenarios, see 'Measurement
uncertainty and sensitivity analysis of ECL estimates' on page 69.
Given that key sectors of the global economy such as trade and manufacturing
are underperforming, and the risk of recessions remains, the demand for
Chinese exports may also diminish. While the mainland China commercial real
estate market showed signs of recovery and stabilisation in early 2023, recent
market data remains mixed, suggesting both an uncertain and protracted
recovery. China's government policy measures relating to the mainland China
commercial real estate market introduced in late 2022 have resulted in
improved financial support for onshore borrowers, although offshore financial
market conditions remain challenging in light of a continued shortage of
liquidity. Corporates operating in this sector are therefore facing continued
challenges and are becoming increasingly divided, with state-owned enterprises
and certain privately-owned enterprises likely to see some improvements in
their performances and allocations of investments and liquidity, while other
entities may still remain subject to performance uncertainty and material
market pressure. We will continue to monitor the sector closely, notably the
risk of further credit migration and idiosyncratic defaults.
Global tensions over trade, technology and ideology are manifesting themselves
in divergent regulatory standards and compliance regimes, presenting long-term
strategic challenges for multinational businesses.
The US-China relationship remains complex. In addition to the US, the UK, the
EU and other countries have also imposed certain sanctions and trade
restrictions on Chinese persons and companies. There is a continued risk of
additional sanctions and trade restrictions being imposed by the US and other
governments in relation to human rights, advanced technology, and other issues
with China, and this could create a more complex operating environment for the
Group and its customers.
China has in turn announced a number of its own sanctions and trade
restrictions that target, or provide authority to target, foreign individuals
and companies, and materials for technology production.
These and any future measures and countermeasures that may be taken by the US,
China and other countries may affect the Group, its customers and the markets
in which the Group operates.
The conclusion of the Windsor Framework between the UK and the EU introduced a
new system of checks on goods moving from the UK to Northern Ireland, and
removed a major area of friction. On 27 June 2023, the UK and the EU also
signed a memorandum of understanding on regulatory cooperation in financial
services, potentially paving the way for closer coordination of policymaking
for the sector.
Over the medium to long term, the UK's withdrawal from the EU may impact
markets and increase economic risk, particularly in the UK, which could
adversely impact our profitability and prospects for growth in this market. We
are monitoring the situation closely, including the potential impacts on our
customers.
As the geopolitical landscape evolves, compliance by multinational
corporations with their legal or regulatory obligations in one jurisdiction
may be seen as supporting the law or policy objectives of that jurisdiction
over another, creating additional compliance, reputational and political risks
for the Group. We maintain dialogue with our regulators in various
jurisdictions on the impact of legal and regulatory obligations on our
business and customers.
It remains the Group's policy to comply with all applicable laws and
regulations of all jurisdictions in which it operates, although geopolitical
risks and tensions, and potential ambiguities in the Group's compliance
obligations will continue to present challenges and risks for the Group. These
could have a material adverse impact on the Group's business, financial
condition, results of operations, prospects and strategy, as well as on the
Group's customers.
Expanding data privacy, national security and cybersecurity laws in a number
of markets could pose potential challenges to intra-Group data sharing. These
developments may affect our ability to manage financial crime risks across
markets due to limitations on cross-border transfers of personal information.
Ibor transition
Interbank offered rates ('Ibors') were previously used extensively to set
interest rates on different types of financial transactions and for valuation
purposes, risk measurement and performance benchmarking.
Following the UK's Financial Conduct Authority ('FCA') announcement in July
2017 that it would no longer continue to persuade or require panel banks to
submit rates for the London interbank offered rate ('Libor') after 2021, we
have been actively working to transition legacy contracts from Ibors to
products linked to near risk-free replacement rates ('RFRs') or alternative
reference rates.
The publication of sterling, Swiss franc, euro and Japanese yen Libor interest
rate benchmarks, as well as Euro Overnight Index Average ('Eonia'), and two US
dollar Libor settings ceased from the end of 2021. Following this, the
publication of all remaining settings of US dollar Libor ceased from 30 June
2023. To support any remaining contracts referencing these benchmarks, the FCA
has compelled the ICE Benchmark Administration Limited to publish the
three-month sterling Libor setting using an alternative 'synthetic'
methodology until 31 March 2024, and one-month, three-month and six-month US
dollar Libor settings until 30 September 2024. We continue to support our
customers in the transition of the limited number of outstanding contracts
relying on 'synthetic' Libor benchmarks in line with these dates.
Our Ibor transition programme - which is tasked with the development of RFR
products and the transition of legacy Ibor products - has implemented the
required processes, technology and RFR product capabilities in support of the
benchmark cessation events. As a result, the transition of the majority of
legacy contracts was undertaken successfully throughout 1H23 with the
remaining contracts expected to largely complete in 3Q23. Specifically, our
derivatives portfolio was largely transitioned through clearing house
conversion mechanisms, and the use of industry legal fall-back provisions at
cessation, leaving a limited number of trades that continue to be discussed
with customers. Our wholesale and private bank lending portfolios for both
uncommitted and committed facilities have been repapered with client consent,
albeit a small number of wholesale contracts will continue repapering
activities until their first interest rate fixing date after cessation. Where
applicable, our structured notes and certain MREL instruments of the Group are
being transitioned in line with jurisdictional legislative solutions and
through client and investor notification. In respect of HSBC's regulatory
capital and other MREL instruments that include references to legacy Ibors
(including indirect references) in their terms, HSBC expects to be able to
remediate or mitigate these risks by the relevant calculation dates, which may
occur post-cessation of the relevant Ibor. HSBC remains committed to seeking
to remediate or mitigate relevant risks relating to Ibor-demise, as
appropriate.
While the majority of our legacy contracts referencing demised Ibors have been
transitioned, as a result of other demising benchmarks or remaining contracts,
we continue to be exposed to, and actively monitor, risks including:
- regulatory compliance and conduct risks, as the use of 'synthetic' Libor
rates, transition of legacy contracts to RFRs or alternative rates, or sales
of products referencing RFRs, may not deliver fair client outcomes; and
- legal risk, as issues arising from the use of legislative solutions and
from legacy contracts that the Group is unable to transition may result in
unintended or unfavourable outcomes for clients and market participants, which
could potentially increase the risk of disputes.
While the level of risk has diminished in line with our process implementation
and continued transition of contracts, we will monitor these risks through the
remainder of the transition of legacy contracts. Throughout 2023, we plan to
continue to engage with our clients and investors to complete an orderly
transition of contracts
that reference the remaining demising Ibors. Additionally, plans and policies
are in place to help us to react to any future regulatory notification of the
intention to demise an interest rate benchmark.
Financial instruments impacted by Ibor reform
Interest Rate Benchmark Reform Phase 2, the amendments to IFRSs issued in
August 2020, represents the second phase of the IASB's project on the effects
of interest rate benchmark reform. The amendments address issues affecting
financial statements when changes are made to contractual cash flows and
hedging relationships.
Under these amendments, changes made to a financial instrument measured at
other than fair value through profit or loss that are economically equivalent
and required by interest rate benchmark reform, do not result in the
derecognition or a change in the carrying amount of the financial instrument.
Instead they require the effective interest rate to be updated to reflect the
change in the interest rate benchmark. In addition, hedge accounting will not
be discontinued solely because of the replacement of the interest rate
benchmark if the hedge meets other hedge accounting criteria.
Financial instruments impacted by Ibor reform
Financial instruments yet to transition to alternative benchmarks, by main
benchmark
USD Libor GBP Libor JPY Libor Others(1)
At 30 Jun 2023 $m $m $m $m
Non-derivative financial assets
Loans and advances to customers 22,805 154 - 6,571
Other financial assets 2,676 - - 1,914
Total non-derivative financial assets(2) 25,481 154 - 8,485
Non-derivative financial liabilities
Financial liabilities designated at fair value 688 1,871 1,096 -
Debt securities in issue 2,410 - - -
Other financial liabilities 1,896 - - 181
Total non-derivative financial liabilities 4,994 1,871 1,096 181
Derivative notional contract amount
Foreign exchange 389,263 - - 16,322
Interest rate 787,566 - - 181,389
Total derivative notional contract amount 1,176,829 - - 197,711
At 31 Dec 2022
Non-derivative financial assets
Loans and advances to customers 49,632 262 - 7,912
Other financial assets 4,716 42 - 1,562
Total non-derivative financial assets(2) 54,348 304 - 9,474
Non-derivative financial liabilities
Financial liabilities designated at fair value 17,224 1,804 1,179 -
Debt securities in issue 5,352 - - -
Other financial liabilities 2,988 - - 176
Total non-derivative financial liabilities 25,564 1,804 1,179 176
Derivative notional contract amount
Foreign exchange 140,223 - - 7,337
Interest rate 2,208,189 68 - 186,952
Total derivative notional contract amount 2,348,412 68 - 194,289
1 Comprises financial instruments referencing other significant
benchmark rates yet to transition to alternative benchmarks (euro Libor, SOR,
THBFIX, MIFOR, Sibor, CDOR and TIIE). An announcement was made by the South
African regulator during the first half of 2023 on the cessation of the
Johannesburg interbank average rate ('JIBAR'). Therefore, JIBAR is also
included in 'Others' during the current period.
2 Gross carrying amount excluding allowances for expected credit
losses.
The amounts in the above table relate to HSBC's main operating entities where
HSBC has material exposures impacted by Ibor reform, including in the UK, Hong
Kong, France, the US, Mexico, Canada, Singapore, the UAE, Bermuda, Australia,
Qatar, Germany, Thailand, India and Japan. The amounts provide an indication
of the extent of the Group's exposure to the Ibor benchmarks that are due to
be replaced. Amounts are in respect of financial instruments that:
- contractually reference an interest rate benchmark that is planned to
transition to an alternative benchmark;
- have a contractual maturity date beyond the date by which the reference
interest rate benchmark is expected to cease; and
- are recognised on HSBC's consolidated balance sheet.
-
Credit risk
64 Overview
64 Credit risk in the first half of 2023
65 Summary of credit risk
67 Stage 2 decomposition
68 Assets held for sale
69 Measurement uncertainty and sensitivity analysis of ECL estimates
77 Reconciliation of changes in gross carrying/nominal amount and allowances for
loans and advances to banks and customers
80 Credit quality of financial instruments
81 Personal lending
83 Wholesale lending
86 Commercial real estate
89 Supplementary information
Overview
Credit risk is the risk of financial loss if a customer or counterparty fails
to meet an obligation under a contract. Credit risk arises principally from
direct lending, trade finance and leasing business, but also from certain
other products, such as guarantees and derivatives.
Credit risk in the first half of 2023
There were no material changes to credit risk policy in the first half of
2023.
A summary of our current policies and practices for the management of credit
risk is set out in 'Credit risk management' on page 145 of the Annual Report
and Accounts 2022.
At 30 June 2023, gross loans and advances to customers and banks of $1,072bn
increased by $32.7bn, compared with 31 December 2022. This included
favourable foreign exchange movements of $12.3bn.
Excluding foreign exchange movements, growth was driven by a $29.3bn increase
in personal loans and advances to customers. This was partly offset by a
$6.4bn decrease in wholesale loans and advances to customers and a $2.6bn
decrease in loans and advances to banks.
The underlying increase in personal loans and advances to customers was driven
mainly by an increase in France (up $22.3bn) due to our retail banking
operations in France no longer being classified as assets held for sale. It
also comprised increases in Hong Kong (up $4.4bn), in the UK (up $1.8bn), in
Mexico (up $1.2bn) and in Australia (up $1.0bn) driven mainly by mortgage
growth. These were partly offset by a decrease in Oman (down $1.2bn) from the
reclassification of our business in the country into 'assets held for sale'.
The underlying decrease in wholesale loans and advances to customers was
driven mainly by lower commercial real estate exposures in Hong Kong (down
$8.3bn) and mainland China (down $1.5bn). It also comprised a decrease in Oman
(down $2.1bn) from the reclassification of our business in the country into
'assets held for sale'. These were partly offset by increases in France (up
$2.1bn) and in the UK (up $2.1bn). The increase in the UK included loans and
advances to customers of $7.1bn from HSBC Innovation Bank Limited (formerly
SVB UK).
At 30 June 2023, the allowance for ECL of $12.8bn increased by $0.2bn compared
with 31 December 2022, including adverse foreign exchange movements of $0.1bn.
The $12.8bn allowance comprised $12.3bn in respect of assets held at amortised
cost, $0.4bn in respect of loan commitments and financial guarantees, and
$0.1bn in respect of debt instruments measured at fair value through other
comprehensive income ('FVOCI').
Excluding foreign exchange movements, the allowance for ECL in relation to
loans and advances to customers increased by $0.1bn from 31 December 2022.
This was attributable to:
- a $0.1bn increase in wholesale loans and advances to customers, which
included a $0.4bn increase driven by stage 3, offset by a $0.3bn decrease
driven by stages 1 and 2; and
- broadly unchanged allowances for ECL in personal loans and advances to
customers across all stages.
In wholesale lending, mainland China's commercial real estate sector continued
to deteriorate in 2023, resulting in new and additional stage 3 charges.
In personal lending, stable allowances reflected customer resilience during
the period, despite significant inflationary pressures.
The Group ECL charge for the first six months of 2023 was $1.3bn, inclusive of
recoveries. This was driven by higher stage 3 charges, notably in the Hong
Kong commercial real estate sector, as well as continued economic uncertainty
and inflationary pressures.
The ECL charge comprised: $0.5bn in respect of personal lending, of which the
stage 3 charge was $0.3bn; and $0.8bn in respect of wholesale lending, of
which the stage 3 and POCI charge was $0.7bn.
Summary of credit risk
The following disclosure presents the gross carrying/nominal amount of
financial instruments to which the impairment requirements in IFRS 9 are
applied and the associated allowance for ECL.
The following tables analyse loans by industry sector and represent the
concentration of exposures on which credit risk is managed. The allowance for
ECL increased from $12.6bn at 31 December 2022 to $12.8bn at 30 June 2023.
Summary of financial instruments to which the impairment requirements in IFRS
9 are applied
At 30 Jun 2023 At 31 Dec 2022
Gross carrying/ Allowance for Gross Allowance for
nominal amount ECL(1) carrying/ ECL(1)
nominal amount
$m $m $m $m
Loans and advances to customers at amortised cost 971,296 (11,738) 935,008 (11,447)
- personal 453,447 (3,026) 414,882 (2,870)
- corporate and commercial 441,258 (8,401) 453,202 (8,320)
- non-bank financial institutions 76,591 (311) 66,924 (257)
Loans and advances to banks at amortised cost 100,995 (74) 104,544 (69)
Other financial assets measured at amortised cost 960,249 (489) 954,934 (493)
- cash and balances at central banks 307,734 (1) 327,005 (3)
- items in the course of collection from other banks 10,649 - 7,297 -
- Hong Kong Government certificates of indebtedness 42,407 - 43,787 -
- reverse repurchase agreements - non-trading 258,056 - 253,754 -
- financial investments 131,277 (27) 109,086 (20)
- assets held for sale(2) 80,244 (402) 102,556 (415)
- prepayments, accrued income and other assets(3) 129,882 (59) 111,449 (55)
Total gross carrying amount on-balance sheet 2,032,540 (12,301) 1,994,486 (12,009)
Loans and other credit-related commitments 649,526 (348) 618,788 (386)
- personal 253,764 (25) 244,006 (27)
- corporate and commercial 265,552 (301) 269,187 (340)
- financial 130,210 (22) 105,595 (19)
Financial guarantees 18,882 (51) 18,783 (52)
- personal 1,188 - 1,135 -
- corporate and commercial 13,613 (47) 13,587 (50)
- financial 4,081 (4) 4,061 (2)
Total nominal amount off-balance sheet(4) 668,408 (399) 637,571 (438)
2,700,948 (12,700) 2,632,057 (12,447)
Fair Memorandum Fair Memorandum
value allowance for value allowance for
ECL(5) ECL(5)
$m $m $m $m
Debt instruments measured at fair value through other comprehensive income 287,195 (125) 265,147 (126)
('FVOCI')
1 Total ECL is recognised in the loss allowance for the financial
asset unless total ECL exceeds the gross carrying amount of the financial
asset, in which case the ECL is recognised as a provision.
2 For further details on gross carrying amounts and allowances for ECL
related to assets held for sale, see 'Assets held for sale' on page 68.
3 Includes only those financial instruments that are subject to the
impairment requirements of IFRS 9. 'Prepayments, accrued income and other
assets', as presented within the consolidated balance sheet on page 110,
includes both financial and non-financial assets.
4 Represents the maximum amount at risk should the contracts be fully
drawn upon and clients default.
5 Debt instruments measured at FVOCI continue to be measured at fair
value with the allowance for ECL as a memorandum item. Change in ECL is
recognised in 'Change for expected credit losses and other credit impairment
charges' in the income statement.
The following table provides an overview of the Group's credit risk by stage
and industry, and the associated ECL coverage. The financial assets recorded
in each stage have the following characteristics:
- Stage 1: These financial assets are unimpaired and without a significant
increase in credit risk for which a 12-month allowance for ECL is recognised.
- Stage 2: A significant increase in credit risk has been experienced on
these financial assets since initial recognition for which a lifetime ECL is
recognised.
- Stage 3: There is objective evidence of impairment and the financial
assets are therefore considered to be in default or otherwise credit impaired
for which a lifetime ECL is recognised.
- POCI: Financial assets that are purchased or originated at a deep
discount are seen to reflect the incurred credit losses on which a lifetime
ECL is recognised.
Summary of credit risk (excluding debt instruments measured at FVOCI) by stage
distribution and ECL coverage by industry sector at
30 June 2023
Gross carrying/nominal amount(1) Allowance for ECL ECL coverage %
Stage 1 Stage 2 Stage 3 POCI(2) Total Stage 1 Stage 2 Stage 3 POCI(2) Total Stage 1 Stage 2 Stage 3 POCI(2) Total
$m $m $m $m $m $m $m $m $m $m % % % % %
Loans and advances to customers at amortised cost 808,376 142,843 20,016 61 971,296 (1,106) (3,269) (7,338) (25) (11,738) 0.1 2.3 36.7 41.0 1.2
- personal 391,701 58,160 3,586 - 453,447 (576) (1,567) (883) - (3,026) 0.1 2.7 24.6 - 0.7
- corporate and commer-cial 345,116 80,274 15,807 61 441,258 (468) (1,630) (6,278) (25) (8,401) 0.1 2.0 39.7 41.0 1.9
- non-bank financial institutions 71,559 4,409 623 - 76,591 (62) (72) (177) - (311) 0.1 1.6 28.4 - 0.4
Loans and advances to banks at amortised cost 99,623 1,288 84 - 100,995 (18) (33) (23) - (74) - 2.6 27.4 - 0.1
Other financial assets measured at amortised cost 945,902 13,580 757 10 960,249 (96) (147) (237) (9) (489) - 1.1 31.3 90.0 0.1
Loans and other credit-related commit-ments 610,072 37,849 1,605 - 649,526 (135) (150) (63) - (348) - 0.4 3.9 - 0.1
- personal 243,830 8,936 998 - 253,764 (22) (1) (2) - (25) - - 0.2 - -
- corporate and commer-cial 240,799 24,184 569 - 265,552 (105) (137) (59) - (301) - 0.6 10.4 - 0.1
- financial 125,443 4,729 38 - 130,210 (8) (12) (2) - (22) - 0.3 5.3 - -
Financial guarantees 16,135 2,535 212 - 18,882 (8) (12) (31) - (51) - 0.5 14.6 - 0.3
- personal 1,173 15 - - 1,188 - - - - - - - - - -
- corporate and commer-cial 11,698 1,704 211 - 13,613 (7) (10) (30) - (47) 0.1 0.6 14.2 - 0.3
- financial 3,264 816 1 - 4,081 (1) (2) (1) - (4) - 0.2 100.0 - 0.1
At 30 Jun 2023 198,095 22,674 71 (1,363) (3,611) (7,692) (34) (12,700) 0.1 1.8 33.9 47.9 0.5
2,480,108 2,700,948
1 Represents the maximum amount at risk should the contracts be fully
drawn upon and clients default.
2 Purchased or originated credit-impaired ('POCI').
Unless identified at an earlier stage, all financial assets are deemed to have
suffered a significant increase in credit risk when they are 30 days past due
('DPD') and are transferred from stage 1 to stage 2.
The following disclosure presents the ageing of stage 2 financial assets by
those less than 30 and greater than 30 DPD and therefore presents those
financial assets classified as stage 2 due to ageing (30 DPD) and those
identified at an earlier stage (less than 30 DPD).
Stage 2 days past due analysis at 30 June 2023
Gross carrying/nominal amount Allowance for ECL ECL coverage %
Stage 2 Up-to-date 1 to 29 30 and > Stage 2 Up-to-date 1 to 29 30 and > Stage 2 Up-to-date 1 to 29 30 and >
DPD(1,2) DPD(1,2) DPD(1,2) DPD(1,2) DPD(1,2) DPD(1,2)
$m $m $m $m $m $m $m $m % % % %
Loans and advances to customers at amortised cost 142,843 138,163 2,667 2,013 (3,269) (2,761) (261) (247) 2.3 2.0 9.8 12.3
- personal 58,160 55,633 1,656 871 (1,567) (1,134) (214) (219) 2.7 2.0 12.9 25.1
- corporate and commercial 80,274 78,356 1,006 912 (1,630) (1,555) (47) (28) 2.0 2.0 4.7 3.1
- non-bank financial institutions 4,409 4,174 5 230 (72) (72) - - 1.6 1.7 - -
Loans and advances to banks at amortised cost 1,288 1,286 - 2 (33) (33) - - 2.6 2.6 - -
Other financial assets measured at amortised cost 13,580 13,380 122 78 (147) (126) (7) (14) 1.1 0.9 5.7 17.9
1 Days past due ('DPD').
2 The days past due amounts presented above are on a contractual basis
and include the benefit of any customer relief payment holidays granted.
Summary of credit risk (excluding debt instruments measured at FVOCI) by stage
distribution and ECL coverage by industry sector at
31 December 2022
Gross carrying/nominal amount(1) Allowance for ECL ECL coverage %
Stage 1 Stage 2 Stage 3 POCI(2) Total Stage 1 Stage 2 Stage 3 POCI(2) Total Stage 1 Stage 2 Stage 3 POCI(2) Total
$m $m $m $m $m $m $m $m $m $m % % % % %
Loans and advances to customers at amortised cost 776,299 139,076 19,504 129 935,008 (1,092) (3,488) (6,829) (38) (11,447) 0.1 2.5 35.0 29.5 1.2
- personal 362,677 48,866 3,339 - 414,882 (561) (1,504) (805) - (2,870) 0.2 3.1 24.1 - 0.7
- corporate and commercial 351,885 85,492 15,696 129 453,202 (488) (1,907) (5,887) (38) (8,320) 0.1 2.2 37.5 29.5 1.8
- non-bank financial institutions 61,737 4,718 469 - 66,924 (43) (77) (137) - (257) 0.1 1.6 29.2 - 0.4
Loans and advances to banks at amortised cost 102,723 1,739 82 - 104,544 (18) (29) (22) - (69) - 1.7 26.8 - 0.1
Other financial assets 938,798 15,339 797 - 954,934 (95) (165) (233) - (493) - 1.1 29.2 - 0.1
measured at amortised cost
Loans and other credit-related commitments 583,383 34,033 1,372 - 618,788 (141) (180) (65) - (386) - 0.5 4.7 - 0.1
- personal 239,521 3,686 799 - 244,006 (26) (1) - - (27) - - - - -
- corporate and commercial 241,313 27,323 551 - 269,187 (111) (166) (63) - (340) - 0.6 11.4 - 0.1
- financial 102,549 3,024 22 - 105,595 (4) (13) (2) - (19) - 0.4 9.1 - -
Financial guarantees 16,071 2,463 249 - 18,783 (6) (13) (33) - (52) - 0.5 13.3 - 0.3
- personal 1,123 11 1 - 1,135 - - - - - - - - - -
- corporate and commercial 11,547 1,793 247 - 13,587 (5) (12) (33) - (50) - 0.7 13.4 - 0.4
- financial 3,401 659 1 - 4,061 (1) (1) - - (2) - 0.2 - - -
At 31 Dec 2022 192,650 22,004 129 (1,352) (3,875) (7,182) (38) (12,447) 0.1 2.0 32.6 29.5 0.5
2,417,274 2,632,057
1 Represents the maximum amount at risk should the contracts be fully
drawn upon and clients default.
2 Purchased or originated credit impaired ('POCI').
Stage 2 days past due analysis at 31 December 2022
Gross carrying amount Allowance for ECL ECL coverage %
Stage 2 Up-to-date 1 to 29 30 and > DPD(1,2) Stage 2 Up-to-date 1 to 29 30 and > DPD(1,2) Stage 2 Up-to-date 1 to 29 30 and > DPD(1,2)
DPD(1,2) DPD(1,2) DPD(1,2)
$m $m $m $m $m $m $m $m % % % %
Loans and advances to customers at amortised cost 139,076 134,680 2,410 1,986 (3,488) (3,017) (234) (237) 2.5 2.2 9.7 11.9
- personal 48,866 46,378 1,682 806 (1,504) (1,080) (214) (210) 3.1 2.3 12.7 26.1
- corporate and commercial 85,492 83,976 712 804 (1,907) (1,860) (20) (27) 2.2 2.2 2.8 3.4
- non-bank financial institutions 4,718 4,326 16 376 (77) (77) - - 1.6 1.8 - -
Loans and advances to banks at amortised cost 1,739 1,729 - 10 (29) (29) - - 1.7 1.7 - -
Other financial assets measured at amortised cost 15,339 15,103 140 96 (165) (141) (8) (16) 1.1 0.9 5.7 16.7
1 Days past due ('DPD').
2 The days past due amounts presented above are on a contractual basis
and include the benefit of any customer relief payment holidays granted.
Stage 2 decomposition
The following table presents the stage 2 decomposition of gross carrying
amount and allowances for ECL for loans and advances to customers. It also
sets out the reasons why an exposure is classified as stage 2 and therefore
presented as a significant increase in credit risk at 30 June 2023.
The quantitative classification shows gross carrying values and allowances for
ECL for which the applicable reporting date probability of default ('PD')
measure exceeds defined quantitative thresholds for retail and wholesale
exposures, as set out in Note 1.2 'Summary of significant accounting
policies', on page 342 of the Annual Report and Accounts 2022.
The qualitative classification primarily accounts for customer risk rating
('CRR') deterioration, watch-and-worry and retail management judgemental
adjustments.
A summary of our current policies and practices for the significant increase
in credit risk is set out in 'Summary of significant accounting policies' on
page 342 of the Annual Report and Accounts 2022.
Loans and advances to customers at 30 June 2023(1)
Gross carrying amount Allowance for ECL ECL coverage
Personal Corporate and commercial Non-bank financial institutions Total Personal Corporate and commercial Non-bank financial institutions Total Total
$m $m $m $m $m $m $m $m %
Quantitative 48,337 63,306 3,667 115,310 (1,369) (1,393) (67) (2,829) 2.5
Qualitative 9,756 16,454 717 26,927 (195) (230) (5) (430) 1.6
30 DPD backstop(2) 67 514 25 606 (3) (7) - (10) 1.7
Total stage 2 58,160 80,274 4,409 142,843 (1,567) (1,630) (72) (3,269) 2.3
Loans and advances to customers at 31 December 2022(1)
Gross carrying amount Allowance for ECL ECL coverage
Personal Corporate and commercial Non-bank financial institutions Total Personal Corporate and commercial Non-bank financial institutions Total Total
$m $m $m $m $m $m $m $m %
Quantitative 41,610 66,421 3,679 111,710 (1,302) (1,642) (66) (3,010) 2.7
Qualitative 7,209 18,555 878 26,642 (200) (262) (11) (473) 1.8
30 DPD backstop(2) 47 516 161 724 (2) (3) - (5) 0.7
Total stage 2 48,866 85,492 4,718 139,076 (1,504) (1,907) (77) (3,488) 2.5
1 Where balances satisfy more than one of the above three criteria for
determining a significant increase in credit risk, the corresponding gross
exposure and ECL have been assigned in order of categories presented.
2 Days past due ('DPD').
Assets held for sale
At 30 June 2023, the most material balances held for sale came from our
banking business in Canada. During the first half of 2023 the planned sale of
our retail banking operations in France became less certain and no longer met
the definition of held for sale.
'Loans and other credit-related commitments' and 'financial guarantees', as
reported in credit disclosures, also include exposures and allowances relating
to financial assets classified as 'assets held for sale'.
Loans and advances to customers and banks measured at amortised cost
At 30 Jun 2023 At 31 Dec 2022
Total gross loans and advances Allowance Total gross loans and advances Allowance
for ECL for ECL
$m $m $m $m
As reported 1,072,291 (11,812) 1,039,552 (11,516)
Reported in 'Assets held for sale' 60,739 (379) 81,221 (392)
Total 1,133,030 (12,191) 1,120,773 (11,908)
At 30 June 2023, gross loans and advances of our banking business in Canada
were $56.3bn, and the related allowances for ECL were $0.2bn.
Lending balances held for sale continue to be measured at amortised cost less
allowances for impairment and, therefore, such carrying amounts may differ
from fair value.
These lending balances are part of associated disposal groups that are
measured in their entirety at the lower of carrying amount and fair
value less costs to sell. Any difference between the carrying amount of these
assets and their sales price is part of the overall gain or loss on the
associated disposal group as a whole.
For further details of the carrying amount and the fair value at 30 June 2023
of loans and advances to banks and customers classified as held for sale, see
Note 15 on the interim condensed financial statements.
Gross loans and allowance for ECL on loans and advances to customers and banks
reported in 'Assets held for sale'
Banking business in Canada Retail banking operations in France Other(1) Total
Gross carrying value Allowance for ECL Gross carrying value Allowance for ECL Gross carrying value Allowance for ECL Gross carrying value Allowance for ECL
$m $m $m $m $m $m $m $m
Loans and advances to customers at amortised cost 56,178 (247) - - 3,410 (130) 59,588 (377)
- personal 26,908 (87) - - 1,463 (61) 28,371 (148)
- corporate and commercial 27,732 (155) - - 1,947 (69) 29,679 (224)
- non-bank financial institutions 1,538 (5) - - - - 1,538 (5)
Loans and advances to banks at amortised cost 76 - - - 1,075 (2) 1,151 (2)
At 30 Jun 2023 56,254 (247) - - 4,485 (132) 60,739 (379)
Loans and advances to customers at amortised cost 55,431 25,121 412 80,964
(234) (92) (62) (388)
- personal 26,637 22,691 305 49,633
(75) (88) (47) (210)
- corporate and commercial 27,128 2,379 107 29,614
(154) (4) (15) (173)
- non-bank financial institutions 1,666 51 - - - 1,717
(5) (5)
Loans and advances to banks at amortised cost 100 - - - 157 257
(4) (4)
At 31 Dec 2022 55,531 25,121 569 81,221
(234) (92) (66) (392)
1 Comprising assets held for sale relating to the planned merger of
our business in Oman, and the planned sales of our branch operations in Greece
and our business in Russia.
Measurement uncertainty and sensitivity analysis of ECL estimates
The recognition and measurement of ECL involves the use of significant
judgement and estimation. We form multiple economic scenarios based on
economic forecasts, apply these assumptions to credit risk models to estimate
future credit losses, and probability-weight the results to determine an
unbiased ECL estimate. Management judgemental adjustments are used to address
late-breaking events, data and model limitations, model deficiencies and
expert credit judgements.
At 30 June 2023, management recognised a reduction in uncertainty in most
markets. It was management's view that the Central scenario sufficiently
reflected the muted global economic environment and that the probability
weightings assigned to this scenario for each of our major markets should
increase and revert to the standard weight of 75%.
Methodology
At 30 June 2023, four economic scenarios were used to capture the current
economic environment and to articulate management's view of the range of
potential outcomes. Each scenario is updated with new forecasts and estimates
each quarter.
The Upside, Central and Downside scenarios are drawn from external consensus
forecasts, market data and distributional estimates of the entire range of
economic outcomes.
The fourth scenario, the Downside 2, represents management's view of severe
downside risks.
Economic scenarios produced to calculate ECL are aligned to HSBC's top and
emerging risks.
In June 2023, following a significant shift in UK policy interest rate
expectations, the Central scenario for the UK was updated and key economic and
financial variables were updated. Outer scenario economic variables for the UK
were changed in parallel with these Central scenario adjustments.
Description of economic scenarios
In the Central scenario, global economic forecasts have improved since 1Q23.
In western Europe and North America, GDP and employment have proved resilient
to higher inflation and interest rates, as well as the failure of several US
banks. In Hong Kong and mainland China, the post-pandemic reopening has led to
a faster than expected improvement in growth and expectations, which has now
been reflected in forecasts.
Stronger than expected growth means that inflation has declined at a slower
pace than projected. For many markets, inflation forecasts have been raised.
Further monetary tightening is also expected although interest rates are, in
most markets, thought to be at, or close to, their peak. The UK and China are
key exceptions.
In the UK, interest rates are expected to rise over the remainder of 2023.
There remains uncertainty around the speed and extent of the increases, which
may impose additional downside risks. In China, policy interest rates have
been cut.
The Upside and Downside scenarios are designed to encompass the potential
crystallisation of a number of key macro-financial risks. Higher inflation,
tighter monetary policy and financial conditions, and an escalation of
geopolitical risks pose key downside risks to the outlook. To the upside, a
swifter decline in inflation, a cut to interest rates and greater cooperation
between the US and China on trade and investment are assumed to drive faster
economic growth.
The scenarios used to calculate ECL are described below.
The consensus Central scenario
HSBC's Central scenario features a slowdown in GDP growth and a rise in
unemployment across our major markets in 2023, relative to 2022, with the
exception of Hong Kong and mainland China.
Global GDP forecasts have been raised in recent quarters due to
stronger-than-expected growth in 1Q23, underpinned by resilience in household
consumption. Nevertheless, the outlook for the remainder of 2023 and the
beginning of 2024 remains subdued as high inflation continues to erode
disposable income and curtail investment. In Hong Kong and mainland China,
higher growth expectations reflect the removal of pandemic-related
restrictions.
The Central scenario assumes that inflation gradually declines through 2023
and only reverts to central bank target ranges in 2025.
Global GDP is expected to grow by 2.0% in 2023 in the Central scenario. The
average rate of global GDP growth is expected to be 2.6% over the forecast
period, slightly below the 2.8% average five-year growth rate expectation
prior to the onset of the pandemic.
Across the key markets, the Central scenario assumes the following:
- GDP growth in mainland China is expected to continue at a rate above the
official target of 5% in 2023, with policy stimulus offsetting headwinds from
a weak property sector and lower external demand. In Hong Kong, the resumption
of international travel and tourism, and the recovery in mainland China are
expected to sustain the rapid rebound in GDP, led by the services sector and
high employment.
- In the UK, persistently high inflation and wage growth have caused a
significant reappraisal of interest rate expectations. A substantially higher
terminal rate for interest rates implies a bigger impact on confidence,
discretionary income and investment. We have sought to reflect this in an
updated Central scenario, which incorporates a recession for the UK that
begins in the second half of 2023 and persists into 2024.
- In the remainder of western Europe and North America, economic growth is
expected to slow in the second half of 2023, as tighter monetary policy and
elevated inflation squeeze corporate margins and households' real disposable
income. Tighter financial conditions are expected to weigh on credit growth.
- Unemployment is expected to rise gradually in most of our key markets
from 2022 levels as economic growth slows. It is forecast to fall in mainland
China and Hong Kong as the economic recovery continues.
- Inflation is expected to remain above central bank targets in our key
markets in 2023 as core inflation and food prices remain high. Inflation is
subsequently expected to converge back to central bank targets over the next
two years of the forecast. Mainland China is expected to be an exception as
inflation remains low throughout the forecast horizon.
- Policy interest rates in key markets are expected to peak later this
year following rapid tightening cycles over the past 18 months to bring
inflation rates back towards their targets. Thereafter, they are expected to
fall slowly and remain at higher levels than they were pre-pandemic. In the
UK, policy interest rates are forecast to rise until the end of the year and
remain high for an extended period of time.
- The Brent crude oil price is expected to average $77 per barrel in 2023,
before dropping back as demand weakens. Over the entire projection the oil
price is expected to average $69 per barrel.
The Central scenario was created from consensus forecasts available in May,
and market-based projections updated in June. For the UK, significant UK
variables, including GDP, unemployment and policy rates were updated in late
June.
The following table describes key macroeconomic variables in the consensus
Central scenario.
Consensus Central scenario
UK US Hong Kong Mainland China Canada France UAE Mexico
GDP (annual average growth rate, %)
2023 0.0 1.0 4.5 5.4 1.2 0.5 3.2 1.9
2024 (0.6) 0.9 3.2 4.9 1.0 1.0 3.8 1.7
2025 1.0 2.2 2.7 4.7 2.2 1.5 4.1 2.2
2026 1.6 2.1 2.6 4.6 2.0 1.6 3.7 2.2
2027 1.4 2.0 2.5 4.3 1.9 1.5 3.3 2.2
5-year average(1) 0.8 1.7 3.1 4.6 1.7 1.3 3.6 2.0
Unemployment rate (%)
2023 4.2 3.9 3.3 5.2 5.7 7.4 2.9 3.3
2024 4.7 4.6 3.2 5.1 6.1 7.4 2.6 3.6
2025 4.5 4.4 3.3 5.1 6.0 7.2 2.4 3.5
2026 4.4 4.2 3.2 5.1 5.8 7.3 2.4 3.5
2027 4.5 4.1 3.3 5.0 5.7 7.0 2.3 3.5
5-year average(1) 4.5 4.3 3.3 5.1 5.9 7.2 2.5 3.5
House prices (annual average growth rate, %)
2023 (1.3) 1.3 (6.4) (2.0) (12.9) 0.7 11.1 10.2
2024 (5.7) 1.1 0.4 5.5 (3.1) 0.6 4.4 5.3
2025 (1.9) 2.8 1.8 3.8 4.1 3.1 4.5 4.3
2026 3.2 2.6 3.0 2.9 2.8 3.8 3.9 4.0
2027 2.7 2.8 3.3 3.6 0.6 3.7 3.3 3.9
5-year average(1) (0.6) 2.2 1.8 3.5 (0.1) 2.5 4.5 4.8
Inflation (annual average growth rate, %)
2023 7.5 4.3 2.4 1.8 3.7 5.3 3.4 5.9
2024 2.8 2.6 2.3 2.3 2.2 2.6 2.2 4.2
2025 1.8 2.2 2.1 2.1 2.0 1.9 2.1 3.7
2026 1.9 2.2 2.2 2.1 2.0 1.9 2.1 3.6
2027 2.1 2.2 2.3 2.0 2.0 1.9 2.1 3.6
5-year average(1) 2.5 2.4 2.3 2.1 2.2 2.3 2.2 3.9
1 The five-year average is calculated over a projected period of 20
quarters from 3Q23 to 2Q28.
The graphs compare the respective Central scenario with current economic
expectations beginning in the second quarter of 2023.
GDP growth: Comparison of Central scenarios
UK
Note: Real GDP shown as year-on-year percentage change.
Hong Kong
Note: Real GDP shown as year-on-year percentage change.
US
Note: Real GDP shown as year-on-year percentage change.
Mainland China
Note: Real GDP shown as year-on-year percentage change.
The consensus Upside scenario
The consensus Upside scenario features stronger growth, lower unemployment and
a faster fall in inflation compared with the Central
scenario. Asset prices, including housing, also rise more quickly in this
scenario. Other upside risk themes include a de-escalation of geographical
tensions and looser financial conditions.
The following table describes key macroeconomic variables in the consensus
Upside scenario.
Consensus Upside scenario (3Q23-2Q28)
UK US Hong Kong Mainland China Canada France UAE Mexico
GDP level (%, start-to-peak)(1) 8.7 (2Q28) 14.7 (2Q28) 22.5 (2Q28) 33.3 (2Q28) 15.2 (2Q28) 10.1 (2Q28) 28.8 (2Q28) 17.3 (2Q28)
Unemployment rate (%, min)(2) 3.0 (2Q25) 3.0 (1Q24) 2.5 (2Q24) 4.6 (1Q24) 5.1 (2Q25) 6.2 (2Q25) 1.8 (2Q25) 2.8 (1Q24)
House price index (%, start-to-peak)(1) 5.7 (2Q28) 22.1 (2Q28) 17.2 (2Q28) 27.2 (2Q28) 13.7 (2Q28) 17.1 (2Q28) 28.3 (2Q28) 31.2 (2Q28)
Inflation rate (YoY % change, min)(3) 1.0 (2Q24) 1.3 (2Q24) 0.4 (2Q24) 0.6 (3Q24) 1.0 (3Q24) 1.4 (3Q24) 1.1 (3Q24) 2.8 (3Q24)
1 Cumulative change to the highest level of the series during the
20-quarter projection.
2 ( ) Lowest projected unemployment rate in the scenario.
3 Lowest projected year-on-year percentage change in inflation in the
scenario.
Downside scenarios
Downside scenarios explore the intensification and crystallisation of a number
of key economic and financial risks. High inflation and the monetary policy
response to it remain key concerns for global growth. While supply chain
disruptions caused by the Covid-19 pandemic and the Russia-Ukraine war are
easing, helping to reduce headline price inflation across many markets, core
inflation remains high. This reflects tight labour markets, which is putting
upward pressure on wages, and resilience in demand. In turn, it raises the
risk of a more forceful policy response from central banks, encompassing a
steeper trajectory for interest rates, a higher terminal rate and ultimately,
economic recession.
The rapid increase in interest rates has already led to a repricing of asset
valuations, as corporate and household borrowers face steep increases in debt
service costs. Policymakers have also raised
concerns that, following the collapse of several US regional banks, financial
conditions could tighten further, acting as another constraint on activity.
Insolvencies and default rates could rise sharply as businesses find it
difficult to refinance, and cash buffers diminish amid weaker demand.
In addition, mainland China's recovery from the pandemic may be weaker than
expected, with negative implications for global growth and Hong Kong in
particular.
In the consensus Downside scenario, economic activity is considerably weaker
compared with the Central scenario, driven by an intensification of
geopolitical risks that aggravate supply chain disruptions and cause global
energy and other commodity prices to rise. In this scenario, the economies of
our key markets experience moderate recession, unemployment rates increase,
and asset prices fall.
The following table describes key macroeconomic variables in the consensus
Downside scenario.
Consensus Downside scenario (3Q23-2Q28)
UK US Hong Kong Mainland China Canada France UAE Mexico
GDP level (%, start-to-trough)(1) (3.2) (3Q25) (3.1) (1Q24) (2.4) (1Q24) (1.2) (4Q23) (3.3) (1Q24) (0.4) (2Q24) 0.0 (3Q23) (2.2) (1Q24)
Unemployment rate (%, max)(2) 6.2 (4Q24) 6.1 (3Q24) 5.0 (2Q25) 6.3 (4Q24) 7.5 (1Q24) 8.5 (1Q24) 3.9 (1Q24) 4.4 (2Q24)
House price index (%, start-to-trough)(1) (16.6) (2Q25) (2.6) (1Q24) (2.9) (4Q23) 1.0 (3Q23) (16.1) (3Q24) (1.3) (2Q24) (1.9) (4Q23) 1.4 (3Q23)
Inflation rate (YoY % change, max)(3) 7.0 (3Q23) 4.1 (4Q23) 4.0 (2Q24) 4.3 (1Q24) 3.9 (1Q24) 5.6 (3Q23) 3.9 (4Q23) 6.6 (2Q24)
1 Cumulative change to the lowest level of the series during the
20-quarter projection.
2 The highest projected unemployment rate in the scenario.
3 The highest projected year-on-year percentage change in inflation in
the scenario.
Downside 2 scenario
The Downside 2 scenario features a deep global recession and reflects
management's view of the tail of the economic risk distribution. It
incorporates the simultaneous crystallisation of a number of risks. The
narrative features an escalation in geopolitical
tensions, which leads to further disruptions to supply chains. This creates
additional upward pressure on inflation, prompting central banks to keep
interest rates higher than in the Central scenario. However, demand
subsequently falls sharply and unemployment rises before inflation pressures
begin to subside.
The following table describes key macroeconomic variables in the Downside 2
scenario.
Downside 2 scenario (3Q23-2Q28)
UK US Hong Kong Mainland China Canada France UAE Mexico
GDP level (%, start-to-trough)(1) (7.7) (4Q24) (4.3) (2Q24) (6.9) (3Q24) (8.3) (2Q24) (5.9) (4Q24) (7.1) (3Q24) (5.4) (4Q24) (8.9) (4Q24)
Unemployment rate (%, max)(2) 9.0 (4Q24) 9.6 (2Q25) 6.3 (2Q24) 6.8 (2Q25) 12.2 (4Q24) 10.0 (3Q25) 4.4 (1Q24) 5.7 (4Q24)
House price index (%, start-to-trough)(1) (40.8) (3Q25) (15.3) (2Q24) (16.1) (4Q26) (21.4) (2Q25) (45.1) (2Q25) (12.1) (4Q25) (4.8) (4Q24) 1.3 (3Q23)
Inflation rate (YoY % change, max)(3) 10.3 (4Q23) 4.5 (4Q23) 4.5 (2Q24) 5.3 (1Q24) 5.0 (4Q23) 9.9 (4Q23) 4.4 (4Q23) 6.9 (2Q24)
1 Cumulative change to the lowest level of the series during the
20-quarter projection.
2 The highest projected unemployment rate in the scenario.
3 The highest projected year-on-year percentage change in inflation
in the scenario.
Scenario weightings
In reviewing the economic situation, as well as the level of uncertainty and
risk, management has considered both global and country-specific factors. This
has led management to assigning scenario probabilities that are tailored to
its view of uncertainty in individual markets.
In 2Q23, the level of certainty attached to the Central scenario was assessed
to have increased compared with previous quarters. It was noted that:
- the dispersion of external economic forecasts had narrowed;
- there has been stabilisation of a number of key risk drivers; and
- the current Central scenario forecasts were sufficiently reflective of
weak GDP growth prospects.
As a result, it was decided that having previously reduced the probability
weights assigned to the Central scenario for each of our major markets, the
weightings should increase and revert to the standard weight of 75%.
Scenario weightings for Hong Kong and mainland China, are now aligned to the
consensus probability distribution. The upside potential in other major
markets is considered to be limited by current inflation and monetary policy
trends. Management therefore assigned only 5% to the Upside scenario in these
markets. The remaining 20% weighting is assigned across our two Downside
scenarios to reflect the continued downside risks posed by inflation and
monetary policy.
For the UK, uncertainty generated by shifting interest rate expectations was
addressed with revisions to scenario variables.
The weighting assigned to the UK Central scenario therefore aligns to the
standard weight.
The following table describes the probabilities assigned in each scenario.
Scenario weightings, %
Standard weights UK US Hong Mainland China Canada France UAE Mexico
Kong
2Q23
Upside 10.0 5.0 5.0 10.0 10.0 5.0 5.0 5.0 5.0
Central 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0
Downside 10.0 15.0 15.0 10.0 10.0 15.0 15.0 15.0 15.0
Downside 2 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
4Q22
Upside 10.0 5.0 5.0 20.0 20.0 5.0 5.0 5.0 5.0
Central 75.0 60.0 70.0 55.0 55.0 70.0 60.0 70.0 70.0
Downside 10.0 25.0 20.0 20.0 20.0 15.0 25.0 20.0 20.0
Downside 2 5.0 10.0 5.0 5.0 5.0 10.0 10.0 5.0 5.0
The following graphs show the historical and forecasted GDP growth rate for
the various economic scenarios in our four largest markets.
US
UK
Hong Kong
Mainland China
Note: Real GDP shown as year-on-year percentage change.
Critical accounting estimates and judgements
The calculation of ECL under IFRS 9 involved significant judgements,
assumptions and estimates at 30 June 2023. These included:
- the selection of economic scenarios, given rapidly changing economic
conditions and a wide distribution of economic forecasts; and
- estimating the economic effects of those scenarios on ECL, particularly
the effect of interest rates and inflationary pressures on specific sectors.
How economic scenarios are reflected in ECL calculations
The methodologies for the application of forward economic guidance into the
calculation of ECL for wholesale and retail portfolios are set out on page 158
of the Annual Report and Accounts 2022. Models are used to reflect economic
scenarios on ECL estimates. These models are based largely on historical
observations and correlations with default.
Economic forecasts and ECL model responses to these forecasts are subject to a
degree of uncertainty. The models continue to be supplemented by management
judgemental adjustments where required.
Management judgemental adjustments
In the context of IFRS 9, management judgemental adjustments are typically
increases or decreases to the modelled ECL at either a customer, segment or
portfolio level to account for late-breaking events, model and data
limitations and deficiencies, and expert credit judgement applied during
management review and challenge. These include refining model inputs and
outputs, and using adjustments to ECL based on management judgement and higher
levels of quantitative analysis for impacts that are difficult to model. The
effects of management judgemental adjustments are considered for both balances
and ECL, and will consider any changes to stage allocation where appropriate.
This is in accordance with the internal adjustments framework.
The wholesale and retail management judgemental adjustments are presented as
part of the internal review and challenge committees, and are subject to a
further second line review, where significant. This is in line with the
governance process for IFRS 9 as set out on page 145 of the Annual Report
and Accounts 2022. We have internal governance in place to monitor management
judgemental adjustments regularly and, where possible, to reduce the reliance
on these through model recalibration or redevelopment, as appropriate.
The drivers of management judgemental adjustments continue to evolve with the
economic environment as new risks emerge.
At 30 June 2023, management judgemental adjustments reduced by $0.6bn compared
with 31 December 2022. Adjustments reflected macroeconomic uncertainty at a
portfolio and sector level, and operational limitations.
Management judgemental adjustments made in estimating the reported ECL at 30
June 2023 are set out in the following table.
Management judgemental adjustments to ECL at 30 June 2023(1)
Retail Wholesale Total
$bn $bn $bn
Banks, sovereigns, government entities and low-risk counterparties (0.1) (0.1)
Corporate lending adjustments - -
Retail lending inflation-related adjustments 0.1 0.1
Other macroeconomic-related adjustments -
Other retail lending adjustments 0.2 0.2
Total 0.3 (0.1) 0.2
Management judgemental adjustments to ECL at 31 December 2022(1)
Retail Wholesale Total
$bn $bn $bn
Banks, sovereigns, government entities and low-risk counterparties - -
Corporate lending adjustments 0.5 0.5
Retail lending inflation-related adjustments 0.1 0.1
Other macroeconomic-related adjustments 0.1 0.1
Other retail lending adjustments 0.2 0.2
Total 0.3 0.5 0.8
1 Management judgemental adjustments presented in the table reflect
increases or (decreases) to modelled ECL, respectively.
In the wholesale portfolio, management judgemental adjustments were a decrease
to modelled ECL of $50m (31 December 2022: $0.5bn increase).
- Adjustments to sovereigns, government entities and low-risk
counterparties were a decrease to modelled ECL of $83m at 30 June 2023 (31
December 2022: $22m increase), mostly to reflect amendments to data and
management judgemental adjustments to reflect geopolitical uncertainty and
late-breaking events.
- Adjustments to corporate exposures increased modelled ECL by $33m at 30
June 2023 (31 December 2022: $0.5bn increase). These included an increase to
modelled ECL of $190m, mostly due to management judgements to reflect
heightened uncertainty in specific sectors and geographies, including
adjustments to exposures to the real estate sector in mainland China and the
US, and offsetting adjustments to specific sectors in the UK.
Management judgemental adjustments were offset by a decrease to modelled ECL
of $157m to adjust for amendments to data and known model limitations. The
decrease in the adjustments compared with 31 December 2022 reflected a
crystallisation of downgrades and defaults for high-risk exposures, and the
effect of offsetting adjustments.
In the retail portfolio, management judgemental adjustments were an increase
to modelled ECL of $0.3bn at 30 June 2023 (31 December 2022: $0.3bn
increase).
- Inflation-related adjustments increased ECL by $0.1bn (31 December
2022: $0.1bn). These adjustments addressed where country-specific inflation
risks were not fully captured by the modelled output.
- Other retail lending adjustments increased ECL by $0.2bn (31 December
2022: $0.2bn increase), reflecting operational, data and model adjustments.
-
Economic scenarios sensitivity analysis of ECL estimates
Management considered the sensitivity of the ECL outcome against the economic
forecasts as part of the ECL governance process by recalculating the ECL under
each scenario described above for selected portfolios, applying a 100%
weighting to each scenario in turn. The weighting is reflected in both the
determination of a significant increase in credit risk and the measurement of
the resulting ECL.
The ECL calculated for the Upside and Downside scenarios should not be taken
to represent the upper and lower limits of possible ECL outcomes. The impact
of defaults that might occur in the future under different economic scenarios
is captured by recalculating ECL for loans at the balance sheet date.
There is a particularly high degree of estimation uncertainty in numbers
representing tail risk scenarios when assigned a 100% weighting.
For wholesale credit risk exposures, the sensitivity analysis excludes ECL and
financial instruments related to defaulted (stage 3) obligors. The measurement
of stage 3 ECL is relatively more sensitive to credit factors specific to the
obligor than future economic scenarios, and therefore the effect of
macroeconomic factors are not necessarily the key consideration when
performing individual assessments of ECL for obligors in default. Loans to
defaulted obligors are a small portion of the overall wholesale lending
exposure, even if representing the majority of the allowance for ECL. Due to
the range and specificity of
the credit factors to which the ECL is sensitive, it is not possible to
provide a meaningful alternative sensitivity analysis for a consistent set of
risks across all defaulted obligors.
For retail credit risk exposures, the sensitivity analysis includes ECL for
loans and advances to customers related to defaulted obligors. This is because
the retail ECL for secured mortgage portfolios, including loans in all stages,
is sensitive to macroeconomic variables.
Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated inclusive of
management judgemental adjustments, as appropriate to each scenario and scope
of sensitivity. The results tables exclude portfolios held by the insurance
and private banking businesses and small portfolios, and as such cannot be
directly compared with personal and wholesale lending presented in other
credit risk tables. In both the wholesale and retail analysis, the comparative
period results for Downside 2 scenarios are also not directly comparable with
the current period, because they reflect different risks relative to the
consensus scenarios for the period end.
For both retail and wholesale portfolios, the gross carrying amount and
nominal amount of financial instruments are the same under each scenario. For
exposures with similar risk profile and product characteristics, the
sensitivity impact is therefore largely the result of changes in macroeconomic
assumptions.
Wholesale analysis
IFRS 9 ECL sensitivity to future economic conditions(1,2)
Gross carrying and nominal amount Reported Consensus Central scenario ECL Consensus Upside scenario ECL Consensus Downside scenario ECL Downside 2 scenario ECL
ECL
By geography at 30 Jun 2023 $m $m $m $m $m $m
UK 424,186 940 811 587 1,098 2,965
US 196,193 295 263 258 359 755
Hong Kong 430,282 609 565 395 866 1,325
Mainland China 123,776 236 188 106 347 1,265
Canada(3) 83,083 127 540
94 74 50
Mexico 28,445 232
69 63 49 86
UAE 48,637
26 25 21 31 47
France 166,451 106
74 70 61 86
By geography at 31 Dec 2022
UK 421,685 769 624 484 833 2,240
US 190,858 277 241 227 337 801
Hong Kong 415,875 925 819 592 1,315 2,161
Mainland China 125,466 295 242 144 415 1,227
Canada(3) 83,274 126 148 579
80 60
Mexico 26,096 116 313
88 80 67
UAE 45,064
45 41 30 55 93
France 173,146 110 102 121 145
90
1 ECL sensitivity includes off-balance sheet financial instruments
that are subject to significant measurement uncertainty.
2 Includes low credit-risk financial instruments such as debt
instruments at FVOCI, which have high carrying amounts but low ECL under all
the above scenarios.
3 Classified as 'assets held for sale' at 31 December 2022 and 30 June
2023.
At 30 June 2023, the highest level of 100% scenario-weighted ECL was observed
in the UK and Hong Kong. This higher ECL impact was largely driven by
significant exposure in these regions. In the wholesale portfolio, off-balance
sheet financial instruments have a lower likelihood to be fully converted to a
funded exposure at the point of default, and consequently the ECL sensitivity
impact is lower in relation to its nominal amount when compared with an
on-balance sheet exposure with similar risk profile.
Compared with 31 December 2022, the Downside 2 ECL impact was higher in the UK
and lower in Hong Kong. In the UK, the increase in the Downside 2 ECL impact
was mostly reflective of the heightened macroeconomic uncertainty driven by
the high inflation and interest rate environment. In Hong Kong, the reduction
in the Downside 2 ECL impact reflected the crystallisation of defaults for
certain high-risk exposures and decrease of the associated downside
uncertainty.
Retail analysis
IFRS 9 ECL sensitivity to future economic conditions(1)
Gross carrying amount Reported Consensus Central scenario ECL Consensus Upside scenario ECL Consensus Downside scenario ECL Downside 2 scenario ECL
ECL
By geography at 30 Jun 2023 $m $m $m $m $m $m
UK
Mortgages 157,016 214 201 195 215 421
Credit cards 6,958 428 418 365 433 702
Other 8,156 403 374 272 452 727
Mexico
Mortgages 7,937 172 158 124 225 340
Credit cards 2,039 233 220 154 297 365
Other 4,110 494 479 400 557 629
Hong Kong
Mortgages 102,533 - - - - 1
Credit cards 8,249 268 254 216 385 496
Other 6,418 95 92 80 110 129
UAE
Mortgages 2,048 40 40 39 40 41
Credit cards 437 39 36 18 67 86
Other 700 19 17 11 24 29
France
Mortgages 21,112 51 50 50 51 52
Other 1,390 49 48 47 50 53
US
Mortgages 13,854 10 10 9 10 14
Credit cards 209 21 20 18 22 26
Canada(2)
Mortgages 25,353 60 58 56 64 99
Credit cards 307 10 10 9 12 12
Other 1,383 13 12 11 16 44
By geography at 31 Dec 2022
UK
Mortgages 147,306 204 188 183 189 399
Credit cards 6,518 455 434 396 442 719
Other 7,486 368 333 274 383 605
Mexico
Mortgages 6,319 152 127 102 183 270
Credit cards 1,616 198 162 97 233 289
Other 3,447 438 400 318 503 618
Hong Kong
Mortgages 100,107 1 1 - 1 1
Credit cards 8,003 261 227 180 417 648
Other 5,899 85 81 74 100 123
UAE
Mortgages 2,170 37 37 36 38 38
Credit cards 441 41 37 21 68 86
Other 718 17 17 15 19 22
France
Mortgages 21,440 51 50 50 51 52
Other 1,433 54 53 52 55 59
US
Mortgages 13,489 7 6 6 8 15
Credit cards 219 26 25 23 27 36
Canada(2)
Mortgages 25,163 45 44 43 46 58
Credit cards 299 10 9 8 11 11
Other 1,399 16 14 13 17 36
1 ECL sensitivities exclude portfolios utilising less complex
modelling approaches.
2 Classified as 'assets held for sale' at 31 December 2022 and 30 June
2023.
At 30 June 2023, the highest level of 100% scenario-weighted ECL was observed
in the UK, Mexico and Hong Kong. Mortgages reflected the lowest level of ECL
across most markets and scenarios, as collateral values remained resilient.
Hong Kong mortgages had low levels of reported ECL due to the credit quality
of the portfolio, and so ECL under the remaining scenarios were also
negligible. Credit cards and 'Other' portfolios contributed to the largest
proportion of ECL, as they generally have higher ECL and are more sensitive to
economic forecasts. ECL sensitivity in Mexico increased under each of the
scenarios aligned to the observed lending growth.
Group ECL sensitivity results
The ECL impact of the scenarios and management judgemental adjustments are
highly sensitive to movements in economic forecasts. Based upon the
sensitivity tables presented above, if the Group ECL balance (excluding
wholesale stage 3, which is assessed individually) was estimated solely on the
basis of the Central scenario, Upside scenario, Downside 1 scenario or the
Downside 2 scenario at 30 June 2023, it would increase/(decrease) as presented
in the below table.
Retail(1) Wholesale(1)
Total Group ECL at 30 Jun 2023 $bn $bn
Reported ECL 3.1 2.7
Scenarios
100% consensus Central scenario (0.1) (0.3)
100% consensus Upside scenario (0.6) (0.9)
100% consensus Downside scenario 0.5 0.8
100% Downside 2 scenario 1.9 5.5
Total Group ECL at 31 Dec 2022
Reported ECL 3.0 3.1
Scenarios
100% consensus Central scenario (0.2) (0.5)
100% consensus Upside scenario (0.6) (1.1)
100% consensus Downside scenario 0.4 0.8
100% Downside 2 scenario 1.8 5.5
1 On the same basis as retail and wholesale sensitivity analysis.
At 30 June 2023, the Group reported ECL increased by $0.1bn in retail and
decreased by $0.4bn in wholesale compared with 31 December 2022.
In both the retail and wholesale portfolios, the reduction in the Central
scenario ECL was observed due to a higher assigned weighting to the scenario
at 30 June 2023. For retail, there was minimal ECL change observed in the
remaining scenarios.
In the wholesale portfolio, the uncertainty in relation to high inflation and
interest rates was offset in some markets by the crystallisation of defaults
in Hong Kong and the decrease of the corresponding downside uncertainty.
Reconciliation of changes in gross carrying/nominal amount and allowances for
loans and advances to banks and customers
The following disclosure provides a reconciliation by stage of the Group's
gross carrying/nominal amount and allowances for loans and advances to banks
and customers, including loan commitments and financial guarantees. Movements
are calculated on a quarterly basis and therefore fully capture stage
movements between quarters. If movements were calculated on a year-to-date
basis they would only reflect the opening and closing position of the
financial instrument.
The transfers of financial instruments represent the impact of stage transfers
upon the gross carrying/nominal amount and associated allowance for ECL.
The net remeasurement of ECL arising from stage transfers represents the
increase or decrease due to these transfers, for example, moving from a
12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net
remeasurement excludes the underlying customer risk rating ('CRR')/probability
of default ('PD') movements of the financial instruments transferring stage.
This is captured, along with other credit quality movements in the 'changes in
risk parameters - credit quality' line item.
Changes in 'New financial assets originated or purchased', 'assets
derecognised (including final repayments)' and 'changes to risk parameters -
further lending/repayments' represent the impact from volume movements within
the Group's lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances for
loans and advances to banks and customers including
loan commitments and financial guarantees
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL
$m $m $m $m $m $m $m $m $m $m
At 1 Jan 2023 1,433,643 (1,257) 177,223 (3,710) 21,207 (6,949) 129 (38) 1,632,202 (11,954)
Transfers of financial instruments: (22,336) (491) 18,284 1,120 4,052 (629) - - - -
- transfers from stage 1 to stage 2 (82,829) 196 82,829 (196) - - - - - -
- transfers from stage 2 to stage 1 61,112 (665) (61,112) 665 - - - - - -
- transfers to stage 3 (1,045) 4 (4,146) 718 5,191 (722) - - - -
- transfers from stage 3 426 (26) 713 (67) (1,139) 93 - - - -
Net remeasurement of ECL arising from transfer of stage - 437 - (532) - (62) - - - (157)
New financial assets originated or purchased 207,739 (325) - - - - - - 207,739 (325)
Assets derecognised (including final repayments) (137,067) 113 (18,659) 163 (2,216) 170 (14) - (157,956) 446
Changes to risk parameters - further lending/repayments (47,927) 102 2,882 97 (65) 187 (44) 1 (45,154) 387
Changes to risk parameters - credit quality - 212 - (494) - (1,432) - 13 - (1,701)
Changes to models used for ECL calculation - (7) - (6) - - - - - (13)
Assets written off - - - - (1,378) 1,378 - - (1,378) 1,378
Foreign exchange 16,358 (47) 3,260 (107) 252 (90) - - 19,870 (244)
Other(1,2) 18,386 (4) 1,373 5 65 (28) (10) (1) 19,814 (28)
At 30 Jun 2023 1,468,796 (1,267) 184,363 (3,464) 21,917 (7,455) 61 (25) 1,675,137 (12,211)
ECL income statement change for the period 532 (772) (1,137) 14 (1,363)
Recoveries 136
Other (115)
Total ECL income statement change for the period (1,342)
At 30 Jun 2023 6 months ended 30 Jun 2023
Gross carrying/nominal amount Allowance for ECL release/(charge)
ECL
$m $m $m
As above 1,675,137 (12,211) (1,342)
Other financial assets measured at amortised cost 960,249 (489) (32)
Non-trading reverse purchase agreement commitments 65,562 - -
Performance and other guarantees not considered for IFRS 9 - - 25
Summary of financial instruments to which the impairment requirements in IFRS 2,700,948 (12,700) (1,349)
9 are applied/Summary consolidated income statement
Debt instruments measured at FVOCI 287,195 (125) 4
Total allowance for ECL/total income statement ECL change for the period n/a (12,825) (1,345)
1 Total includes $25.1bn of gross carrying loans and advances, which
were classified from assets held for sale, and a corresponding allowance for
ECL of $92m, reflecting the planned sale of our retail banking operations in
France no longer meeting the definition of held for sale. For further details,
see 'Assets held for sale' on page 68.
2 Total includes $3.9bn of gross carrying loans and advances to
customers and banks, which were classified to assets held for sale, and
corresponding allowance for ECL of $75m, reflecting the planned merger of our
business in Oman. For further details, see 'Assets held for sale' on page 68.
As shown in the previous table, the allowance for ECL for loans and advances
to customers and banks and relevant loan commitments and financial guarantees
increased by $257m during the period, from $11,954m at 31 December 2022 to
$12,211m at 30 June 2023.
This increase was driven by:
- $1,701m relating to underlying credit quality changes, including the
credit quality impact of financial instruments transferring between stages;
- foreign exchange and other movements of $272m;
- $157m relating to the net remeasurement impact of stage transfers; and
- $13m relating to changes to models used for ECL calculation.
These were partly offset by:
- $1,378m of assets written off; and
- $508m relating to volume movements, which included the ECL allowance
associated with new originations, assets derecognised and further pending
repayment.
The ECL charge for the period of $1,363m presented in the previous table
consisted of $1,701m relating to underlying credit quality changes, including
the credit quality impact of financial instruments transferring between
stages, $157m relating to the net remeasurement impact of stage transfers and
$13m relating to changes to models used for ECL calculation. These were partly
offset by $508m relating to underlying net book volume.
Reconciliation of changes in gross carrying/nominal amount and allowances for
loans and advances to banks and customers including
loan commitments and financial guarantees (continued)
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 POCI Total
Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL Gross carrying/ nominal amount Allowance for ECL
$m $m $m $m $m $m $m $m $m $m
At 1 Jan 2022 1,575,808 (1,552) 155,654 (3,323) 19,796 (6,928) 275 (64) 1,751,533 (11,867)
Transfers of financial instruments: (98,940) (794) 88,974 1,616 9,966 (822) - - - -
- transfers from stage 1 to (225,458) 469 225,458 (469) - - - - - -
stage 2
- transfers from stage 2 to 128,170 (1,211) (128,170) 1,211 - - - - - -
stage 1
- transfers to stage 3 (2,392) 9 (10,083) 1,132 12,475 (1,141) - - - -
- transfers from stage 3 740 (61) 1,769 (258) (2,509) 319 - - - -
Net remeasurement of ECL arising from transfer of stage - 735 - (948) - (148) - - - (361)
New financial assets originated or purchased 483,484 (547) - - - - 26 (2) 483,510 (549)
Assets derecognised (including final repayments) (318,585) 147 (37,900) 343 (2,806) 416 (98) - (359,389) 906
Changes to risk parameters - further lending/repayment (65,646) 225 (6,977) 92 (593) 258 (61) 5 (73,277) 580
Changes to risk parameters - credit quality - 400 - (1,671) - (3,019) - 32 - (4,258)
Changes to models used for ECL calculation - 4 - (151) - 13 - - - (134)
Assets written off - - - - (2,791) 2,791 (10) 10 (2,801) 2,801
Credit-related modifications that resulted in derecognition - - - - (32) 9 - - (32) 9
Foreign exchange (81,954) 59 (8,811) 170 (1,395) 323 (3) 1 (92,163) 553
Other(1,2) (60,524) 66 (13,717) 162 (938) 158 - (20) (75,179) 366
At 31 Dec 2022 1,433,643 (1,257) 177,223 (3,710) 21,207 (6,949) 129 (38) 1,632,202 (11,954)
ECL income statement change for the period 964 (2,335) (2,480) 35 (3,816)
Recoveries 316
Other (28)
Total ECL income statement change for the period(3) (3,528)
At 31 Dec 2022 12 months ended 31 Dec 2022
Gross carrying/nominal amount Allowance for ECL charge
ECL
$m $m $m
As above 1,632,202 (11,954) (3,528)
Other financial assets measured at amortised cost 954,934 (493) (38)
Non-trading reverse purchase agreement commitments 44,921 - -
Performance and other guarantees not considered for IFRS 9 - - 39
Summary of financial instruments to which the impairment requirements in IFRS 2,632,057 (12,447) (3,527)
9 are applied/Summary consolidated income statement
Debt instruments measured at FVOCI 265,147 (126) (57)
Total allowance for ECL/total income statement ECL change for the period n/a (12,573) (3,584)
1 Total includes $82.7bn of gross carrying loans and advances to
customers, which were classified to assets held for sale, and a corresponding
allowance for ECL of $426m, reflecting business disposals as disclosed on page
68.
2 Includes $8.9bn of gross carrying amounts of stage 1 loans and
advances to banks, representing the balance maintained with the Bank of
England to support Bacs along with Faster Payments and the cheque-processing
Image Clearing System in the UK. This balance was previously reported under
'Cash and balances at central banks'. Comparatives have not been restated.
3 The 31 December 2022 total ECL income statement change of $3,528m is
attributable to $1,069m for the six months ended 30 June 2022 and $2,459m to
the six months ended 31 December 2022.
Credit quality of financial instruments
We assess the credit quality of all financial instruments that are subject to
credit risk. The credit quality of financial instruments is a point-in-time
assessment of PD, whereas stages 1 and 2 are determined based on relative
deterioration of credit quality since initial recognition. Accordingly, for
non-credit-impaired financial instruments, there is no direct relationship
between the credit quality assessment and stages 1 and 2, though typically the
lower credit quality bands exhibit a higher proportion in stage 2.
The five credit quality classifications each encompass a range of granular
internal credit rating grades assigned to wholesale and personal lending
businesses and the external ratings attributed by external agencies to debt
securities, as shown in the following table. Personal lending credit quality
is disclosed based on a 12-month point-in-time PD adjusted for multiple
economic scenarios. The credit quality classifications for wholesale lending
are based on internal credit risk ratings.
Credit quality classification
Sovereign debt Other debt Wholesale lending Retail lending
securities securities and derivatives
and bills and bills
External credit External credit Internal credit 12-month Basel Internal credit 12 month probability- weighted PD %
rating rating rating probability of rating
default %
Quality classification(1,2)
Strong BBB and above A- and above CRR 1 to CRR 2 0 - 0.169 Band 1 and 2 0.000 - 0.500
Good BBB- to BB BBB+ to BBB- CRR 3 0.170 - 0.740 Band 3 0.501 - 1.500
Satisfactory BB- to B and unrated BB+ to B and unrated CRR 4 to CRR 5 0.741 - 4.914 Band 4 and 5 1.501 - 20.000
Sub-standard B- to C B- to C CRR 6 to CRR 8 4.915 - 99.999 Band 6 20.001 - 99.999
Credit impaired Default Default CRR 9 to CRR 10 100 Band 7 100
1 Customer risk rating ('CRR').
2 12-month point-in-time probability-weighted probability of default
('PD').
Distribution of financial instruments to which the impairment requirements in
IFRS 9 are applied, by credit quality and stage allocation
Gross carrying/nominal amount Allowance Net
for ECL
Strong Good Satisfac-tory Sub-standard Credit Total
impaired
$m $m $m $m $m $m $m $m
Loans and advances to customers at amortised cost 514,425 210,675 199,372 26,747 20,077 971,296 (11,738) 959,558
- stage 1 484,205 173,801 145,995 4,375 - 808,376 (1,106) 807,270
- stage 2 30,220 36,874 53,377 22,372 - 142,843 (3,269) 139,574
- stage 3 - - - - 20,016 20,016 (7,338) 12,678
- POCI - - - - 61 61 (25) 36
Loans and advances to banks at amortised cost 89,733 4,282 5,614 1,282 84 100,995 (74) 100,921
- stage 1 89,658 4,181 5,467 317 - 99,623 (18) 99,605
- stage 2 75 101 147 965 - 1,288 (33) 1,255
- stage 3 - - - - 84 84 (23) 61
- POCI - - - - - - - -
Other financial assets measured at amortised cost 814,096 80,611 60,807 3,968 767 960,249 (489) 959,760
- stage 1 813,916 78,629 53,012 345 - 945,902 (96) 945,806
- stage 2 180 1,982 7,795 3,623 - 13,580 (147) 13,433
- stage 3 - - - - 757 757 (237) 520
- POCI - - - - 10 10 (9) 1
Loans and other credit-related commitments 412,775 144,157 83,471 7,518 1,605 649,526 (348) 649,178
- stage 1 401,616 134,384 71,762 2,310 - 610,072 (135) 609,937
- stage 2 11,159 9,773 11,709 5,208 - 37,849 (150) 37,699
- stage 3 - - - - 1,605 1,605 (63) 1,542
- POCI - - - - - - - -
Financial guarantees 8,195 4,846 4,810 819 212 18,882 (51) 18,831
- stage 1 8,020 4,466 3,502 147 - 16,135 (8) 16,127
- stage 2 175 380 1,308 672 - 2,535 (12) 2,523
- stage 3 - - - - 212 212 (31) 181
- POCI - - - - - - - -
At 30 Jun 2023 1,839,224 444,571 354,074 40,334 22,745 2,700,948 (12,700) 2,688,248
Debt instruments at FVOCI(1)
- stage 1 278,748 12,202 7,362 - - 298,312 (74) 298,238
- stage 2 107 13 229 1,732 - 2,081 (50) 2,031
- stage 3 - - - - 5 5 (1) 4
- POCI - - - - 2 2 - 2
At 30 Jun 2023 278,855 12,215 7,591 1,732 7 300,400 (125) 300,275
1 For the purposes of this disclosure, gross carrying value is defined
as the amortised cost of a financial asset, before adjusting for any loss
allowance. As such, the gross carrying value of debt instruments at FVOCI will
not reconcile to the balance sheet as it excludes fair value gains and losses.
Distribution of financial instruments to which the impairment requirements in
IFRS 9 are applied, by credit quality and stage allocation
(continued)
Gross carrying/notional amount
Strong Good Satisfa-ctory Sub- standard Credit impaired Total Allowance for ECL Net
$m $m $m $m $m $m $m $m
Loans and advances to customers at amortised cost 492,711 196,735 196,486 29,443 19,633 935,008 (11,447) 923,561
- stage 1 458,706 170,055 142,408 5,130 - 776,299 (1,092) 775,207
- stage 2 34,005 26,680 54,078 24,313 - 139,076 (3,488) 135,588
- stage 3 - - - - 19,504 19,504 (6,829) 12,675
- POCI - - - - 129 129 (38) 91
Loans and advances to banks at amortised cost 92,675 4,833 5,643 1,311 82 104,544 (69) 104,475
- stage 1 92,377 4,465 5,466 415 - 102,723 (18) 102,705
- stage 2 298 368 177 896 - 1,739 (29) 1,710
- stage 3 - - - - 82 82 (22) 60
- POCI - - - - - - - -
Other financial assets measured at amortised cost 808,573 75,298 67,462 2,804 797 954,934 (493) 954,441
- stage 1 807,893 70,794 59,887 224 - 938,798 (95) 938,703
- stage 2 680 4,504 7,575 2,580 - 15,339 (165) 15,174
- stage 3 - - - - 797 797 (233) 564
- POCI - - - - - - - -
Loans and other credit-related commitments 402,972 132,402 74,410 7,632 1,372 618,788 (386) 618,402
- stage 1 398,120 121,581 60,990 2,692 - 583,383 (141) 583,242
- stage 2 4,852 10,821 13,420 4,940 - 34,033 (180) 33,853
- stage 3 - - - - 1,372 1,372 (65) 1,307
- POCI - - - - - - - -
Financial guarantees 8,281 4,669 4,571 1,013 249 18,783 (52) 18,731
- stage 1 8,189 4,245 3,488 149 - 16,071 (6) 16,065
- stage 2 92 424 1,083 864 - 2,463 (13) 2,450
- stage 3 - - - - 249 249 (33) 216
- POCI - - - - - - - -
At 31 Dec 2022 1,805,212 413,937 348,572 42,203 22,133 2,632,057 (12,447) 2,619,610
Debt instruments at FVOCI(1)
- stage 1 260,411 9,852 5,446 - - 275,709 (66) 275,643
- stage 2 243 105 284 1,910 - 2,542 (60) 2,482
- stage 3 - - - - 5 5 (1) 4
- POCI - - - - 2 2 - 2
At 31 Dec 2022 260,654 9,957 5,730 1,910 7 278,258 (127) 278,131
1 For the purposes of this disclosure, gross carrying value is defined
as the amortised cost of a financial asset, before adjusting for any loss
allowance. As such, the gross carrying value of debt instruments at FVOCI
will not reconcile to the balance sheet as it excludes fair value gains and
losses.
Personal lending
This section provides further details on the regions, countries and products
driving the increase in personal loans and advances to customers.
Additionally, Hong Kong and UK mortgage book
loan-to-value ('LTV') data are provided.
Further product granularity is also provided by stage, with geographical data
presented for loans and advances to customers, loans and other credit-related
commitments, and financial guarantees and similar contracts.
At 30 June 2023, total personal lending for loans and advances to customers of
$453.4bn increased by $38.5bn compared with 31 December 2022. This increase
included favourable foreign exchange movements of $9.2bn. Excluding foreign
exchange movements, the increase was mainly due to an increase of $22.3bn from
our retail banking operations in France being no longer classified as assets
held for sale. In addition, our personal lending increased by $4.4bn in Hong
Kong, $1.8bn in the UK, $1.2bn in Mexico and $1.0bn in Australia. This was
partly offset by a $1.2bn decline by the reclassification of our business in
Oman as held for sale.
The allowance for ECL attributable to personal lending, excluding off-balance
sheet loan commitments and guarantees, increased by $0.1bn to $3.0bn at 30
June 2023. This was mostly due to adverse foreign exchange movements.
Excluding foreign exchange movements, mortgage lending balances increased by
$9.9bn to $354.7bn at 30 June 2023. Mortgages grew by $4.0bn in Hong Kong,
$1.1bn in the UK, $1.1bn in Mexico, $1.0bn in Australia and $0.6m in the US.
In addition, mortgage lending balances increased by $2.2bn from the
recognition of our retail banking operations in France being no longer
classified as held for sale. This was partly offset by a $0.3bn decline by the
reclassification of our business in Oman as held for sale.
The allowance for ECL attributable to mortgages remained broadly stable at
$0.6bn when compared with 31 December 2022.
Total personal lending gross carrying amounts in stage 2 increased by $9.3bn
compared with 31 December 2022. Excluding favourable foreign exchange
movements of $2.2bn and the reversal of our retail banking operations in
France being classified as held for sale of $2.2bn, the increase was mainly
due to $5.0bn growth in HSBC UK. The rise in stage 2 balances was largely
explained by the deterioration in the economic outlook on account of rising
interest rates and inflationary pressures. This was partly offset by transfers
to stage 1.
The quality of both our Hong Kong and UK mortgage books remained high, with
low levels of impairment allowances. The average LTV ratio on new mortgage
lending in Hong Kong was 67%, compared with an estimated 54% for the overall
mortgage portfolio. The average LTV ratio on new lending in the UK was 64%,
compared with an estimated 52% for the overall mortgage portfolio.
Excluding foreign exchange movements, other personal lending balances
increased by $19.4bn compared with 31 December 2022. The increase of $20.1bn
was due to our retail banking operations in France being no longer classified
as held for sale. This was partly offset by a $0.9bn decline by the
reclassification of our business in Oman as held for sale. At 30 June 2023,
the allowance for ECL attributable to other personal lending remained broadly
stable at $2.4bn.
Total personal lending for loans and advances to customers by stage
distribution
Gross carrying amount Allowance for ECL
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
$m $m $m $m $m $m $m $m
By portfolio
First lien residential mortgages 305,349 47,161 2,224 354,734 (103) (224) (277) (604)
- of which: interest only (including offset) 20,236 7,348 227 27,811 (7) (29) (49) (85)
- affordability (including US adjustable rate mortgages) 15,200 373 262 15,835 (5) (1) (6) (12)
Other personal lending 86,352 10,999 1,362 98,713 (473) (1,343) (606) (2,422)
- second lien residential mortgages 335 13 25 373 (1) (2) (3) (6)
- guaranteed loans in respect of residential 17,703 1,803 172 19,678 (4) (6) (22) (32)
property
- other personal lending which is secured 31,567 538 165 32,270 (15) (9) (31) (55)
- credit cards 17,855 4,569 277 22,701 (227) (759) (180) (1,166)
- other personal lending which is unsecured 17,001 3,874 712 21,587 (213) (548) (363) (1,124)
- motor vehicle finance 1,891 202 11 2,104 (13) (19) (7) (39)
At 30 Jun 2023 391,701 58,160 3,586 453,447 (576) (1,567) (883) (3,026)
By legal entity
HSBC UK Bank plc 132,652 44,460 1,094 178,206 (150) (662) (249) (1,061)
HSBC Bank plc 25,924 3,528 331 29,783 (16) (26) (102) (144)
The Hong Kong and Shanghai Banking Corporation Limited 189,301 7,987 958 198,246 (140) (380) (162) (682)
HSBC Bank Middle East Limited 3,546 175 70 3,791 (35) (35) (44) (114)
HSBC North America Holdings Inc. 17,386 369 367 18,122 (9) (16) (10) (35)
Grupo Financiero HSBC, S.A. de C.V. 11,873 1,318 488 13,679 (197) (407) (236) (840)
Other trading entities 11,019 323 278 11,620 (29) (41) (80) (150)
At 30 Jun 2023 391,701 58,160 3,586 453,447 (576) (1,567) (883) (3,026)
Total personal lending for loans and other credit-related commitments and
financial guarantees by stage distribution
Nominal amount Allowance for ECL
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
$m $m $m $m $m $m $m $m
HSBC UK Bank plc 49,093 4,800 82 53,975 (12) (1) (2) (15)
HSBC Bank plc 2,343 41 3 2,387 - - - -
The Hong Kong and Shanghai Banking Corporation Limited 174,742 3,905 873 179,520 (3) - - (3)
HSBC Bank Middle East Limited 1,892 22 1 1,915 (1) - - (1)
HSBC North America Holdings Inc. 3,955 19 7 3,981 - - - -
HSBC Bank Canada 6,419 117 29 6,565 - - - -
Grupo Financiero HSBC, S.A. de C.V. 4,053 - - 4,053 (6) - - (6)
Other trading entities 2,506 47 3 2,556 - - - -
At 30 Jun 2023 245,003 8,951 998 254,952 (22) (1) (2) (25)
Total personal lending for loans and advances to customers by stage
distribution (continued)
Gross carrying amount Allowance for ECL
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
$m $m $m $m $m $m $m $m
By portfolio
First lien residential mortgages 294,919 39,860 2,042 336,821 (74) (231) (270) (575)
- of which: interest only (including offset) 19,636 4,485 169 24,290 (3) (46) (41) (90)
- affordability (including US adjustable rate mortgages) 14,773 369 240 15,382 (5) (3) (4) (12)
Other personal lending 67,758 9,006 1,297 78,061 (487) (1,273) (535) (2,295)
- second lien residential mortgages 353 20 6 379 (1) (2) (3) (6)
- guaranteed loans in respect of residential 1,121 121 125 1,367 (1) (3) (30) (34)
property
- other personal lending which is secured 31,306 594 206 32,106 (15) (10) (30) (55)
- credit cards 16,705 4,423 260 21,388 (225) (776) (160) (1,161)
- other personal lending which is unsecured 16,512 3,681 687 20,880 (234) (469) (305) (1,008)
- motor vehicle finance 1,761 167 13 1,941 (11) (13) (7) (31)
At 31 Dec 2022 362,677 48,866 3,339 414,882 (561) (1,504) (805) (2,870)
By legal entity
HSBC UK Bank plc 128,590 37,394 1,012 166,996 (135) (688) (227) (1,050)
HSBC Bank plc 6,377 740 127 7,244 (10) (18) (38) (66)
The Hong Kong and Shanghai Banking Corporation Limited 185,723 8,698 1,117 195,538 (138) (362) (187) (687)
HSBC Bank Middle East Limited 3,657 184 86 3,927 (26) (37) (52) (115)
HSBC North America Holdings Inc. 16,906 375 270 17,551 (12) (23) (6) (41)
Grupo Financiero HSBC, S.A. de C.V. 9,542 1,099 377 11,018 (213) (331) (194) (738)
Other trading entities 11,882 376 350 12,608 (27) (45) (101) (173)
At 31 Dec 2022 362,677 48,866 3,339 414,882 (561) (1,504) (805) (2,870)
Total personal lending for loans and other credit-related commitments and
financial guarantees by stage distribution (continued)
Nominal amount Allowance for ECL
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
$m $m $m $m $m $m $m $m
HSBC UK Bank plc 50,535 439 104 51,078 (11) - (12)
(1)
HSBC Bank plc 2,440 131 7 2,578 - - - -
The Hong Kong and Shanghai Banking Corporation Limited 170,104 2,916 634 173,654 - -
(2) (2)
HSBC Bank Middle East Limited 1,717 8 1 1,726 - -
(1) (1)
HSBC North America Holdings Inc. 3,914 24 17 3,955 - -
(1) (1)
HSBC Bank Canada 6,346 115 30 6,491 - - - -
Grupo Financiero HSBC, S.A. de C.V. 3,198 - - 3,198 - -
(9) (9)
Other trading entities 2,390 64 7 2,461 - -
(2) (2)
At 31 Dec 2022 240,644 3,697 800 245,141 (26) - (27)
(1)
Wholesale lending
This section provides further details on the regions, countries and industries
driving the decrease in wholesale loans and advances to customers and banks,
with the impact of foreign exchange separately identified. Industry
granularity is also provided by stage, with geographical data presented for
loans and advances to customers, banks, other credit commitments, financial
guarantees and similar contracts.
At 30 June 2023, wholesale lending for loans and advances to banks and
customers of $618.8bn decreased by $5.8bn since 31 December 2022. This
included adverse foreign exchange movements of $3.1bn.
Excluding foreign exchange movements, the total wholesale lending decrease of
$8.9bn was driven by a $15.7bn decrease in corporate and commercial balances.
This can be attributed to a $10.5bn decrease in Hong Kong, a $3.0bn decrease
in the UK and a $2.1bn decrease from the reclassification of our business in
Oman into 'assets held for sale'.
A further decline in wholesale lending was driven by a $2.6bn decrease in
loans and advances to banks, including a $5.0bn decrease in mainland China, a
$1.3bn decrease in the UAE, a $0.9bn decrease in Switzerland and a $0.6bn
decrease from the reclassification of our business in Oman into 'assets held
for sale'. These were partly offset by a $2.8bn increase in Hong Kong and a
$2.6bn increase in Singapore.
Loans and advances to non-bank financial institutions grew by $9.4bn,
including a $5.1bn increase in the UK and a $2.2bn increase in Hong Kong.
Loan commitments and financial guarantees increased by $21bn since
31 December 2022 to $413.5bn at 30 June 2023. Excluding favourable foreign
exchange movements of $6.3bn, loan commitments and financial guarantees grew
by $14.8bn. This can be mainly attributed to a $19.6bn increase in unsettled
reverse repurchase agreements, partly offset by a decrease of $7.9bn in loan
commitments with corporate and commercial customers.
The allowance for ECL attributable to loans and advances to banks and
customers of $8.8bn at 30 June 2023 increased from $8.6bn at 31 December 2022.
This included adverse foreign exchange movements of $64m.
Excluding foreign exchange movements, the total increase in the wholesale ECL
allowance for loans and advances to customers and banks was mostly driven by a
$47m growth in loans to non-bank financial institutions and a $24m rise in
corporate and commercial balances.
The allowance for ECL attributable to loan commitments and financial
guarantees at 30 June 2023 remained at $0.4bn from 31 December 2022.
Total wholesale lending for loans and advances to banks and customers by stage
distribution
Gross carrying 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
Corporate and commercial 345,116 80,274 15,807 61 441,258 (468) (1,630) (6,278) (25) (8,401)
- agriculture, forestry and fishing 5,075 1,714 310 - 7,099 (11) (46) (61) - (118)
- mining and quarrying 6,957 829 360 1 8,147 (6) (17) (117) (1) (141)
- manufacturing 68,475 15,594 1,932 24 86,025 (89) (213) (807) (22) (1,131)
- electricity, gas, steam and air-conditioning supply 13,690 1,510 298 - 15,498 (14) (24) (80) - (118)
- water supply, sewerage, waste management and remediation 2,345 636 29 - 3,010 (4) (14) (16) - (34)
- construction 10,550 2,324 843 - 13,717 (21) (43) (424) - (488)
- wholesale and retail trade, repair of motor vehicles and motorcycles 64,397 13,484 2,484 4 80,369 (90) (168) (1,237) (2) (1,497)
- transportation and storage 18,996 4,825 439 - 24,260 (23) (57) (142) - (222)
- accommodation and food 8,674 6,962 882 - 16,518 (25) (171) (87) - (283)
- publishing, audiovisual and broadcasting 16,602 1,552 311 - 18,465 (17) (48) (137) - (202)
- real estate 67,095 20,976 5,223 18 93,312 (75) (578) (2,322) - (2,975)
- professional, scientific and technical activities 16,679 2,128 647 - 19,454 (21) (67) (214) - (302)
- administrative and support services 21,010 4,453 935 14 26,412 (29) (83) (330) - (442)
- public administration and defence, compulsory social security 1,043 9 - - 1,052 - (1) - - (1)
- education 1,139 282 86 - 1,507 (3) (7) (26) - (36)
- health and care 3,285 595 165 - 4,045 (3) (26) (23) - (52)
- arts, entertainment and recreation 1,329 397 112 - 1,838 (4) (13) (42) - (59)
- other services 9,701 1,736 489 - 11,926 (31) (40) (207) - (278)
- activities of households 776 1 - - 777 - - - - -
- extra-territorial organisations and bodies activities - - - - - - - - - -
- government 7,278 254 262 - 7,794 (2) (1) (6) - (9)
- asset-backed securities 20 13 - - 33 - (13) - - (13)
Non-bank financial institutions 71,559 4,409 623 - 76,591 (62) (72) (177) - (311)
Loans and advances to banks 99,623 1,288 84 - 100,995 (18) (33) (23) - (74)
At 30 Jun 2023 516,298 85,971 16,514 61 618,844 (548) (1,735) (6,478) (25) (8,786)
By legal entity
HSBC UK Bank plc 70,737 24,049 4,161 - 98,947 (174) (593) (759) - (1,526)
HSBC Bank plc 83,612 10,101 2,959 3 96,675 (65) (168) (1,099) - (1,332)
The Hong Kong and Shanghai Banking Corporation Limited 286,821 40,313 7,357 54 334,545 (204) (677) (3,498) (22) (4,401)
HSBC Bank Middle East Limited 20,978 1,393 852 4 23,227 (12) (12) (620) (3) (647)
HSBC North America Holdings Inc. 29,482 6,792 260 - 36,534 (33) (197) (55) - (285)
Grupo Financiero HSBC, S.A. de C.V. 12,068 1,583 441 - 14,092 (36) (64) (242) - (342)
Other trading entities 12,569 1,740 484 - 14,793 (24) (24) (205) - (253)
Holding companies, shared service centres and intra-Group eliminations 31 - - - 31 - - - - -
At 30 Jun 2023 516,298 85,971 16,514 61 618,844 (548) (1,735) (6,478) (25) (8,786)
Total wholesale lending for loans and other credit-related commitments and
financial guarantees by stage distribution(1)
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
Corporate and commercial 252,497 25,888 780 - 279,165 (112) (147) (89) - (348)
Financial 128,707 5,545 39 - 134,291 (9) (14) (3) - (26)
At 30 Jun 2023 381,204 31,433 819 - 413,456 (121) (161) (92) - (374)
By legal entity
HSBC UK Bank plc 29,661 7,134 222 - 37,017 (23) (48) (44) - (115)
HSBC Bank plc 159,850 11,389 248 - 171,487 (14) (33) (32) - (79)
The Hong Kong and Shanghai Banking Corporation Limited 68,226 4,151 69 - 72,446 (49) (37) (10) - (96)
HSBC Bank Middle East Limited 5,889 732 10 - 6,631 (5) - - - (5)
HSBC North America Holdings Inc. 86,911 4,767 162 - 91,840 (19) (34) (2) - (55)
HSBC Bank Canada 26,695 2,826 100 - 29,621 (9) (7) (2) - (18)
Grupo Financiero HSBC, S.A. de C.V. 2,426 60 1 - 2,487 (1) (1) (1) - (3)
Other trading entities 1,546 374 7 - 1,927 (1) (1) (1) - (3)
At 30 Jun 2023 381,204 31,433 819 - 413,456 (121) (161) (92) - (374)
1 Included in loans and other credit-related commitments and financial
guarantees is $66bn relating to unsettled reverse repurchase agreements, which
once drawn are classified as 'Reverse repurchase agreements -
non-trading'.
Total wholesale lending for loans and advances to banks and customers by stage
distribution (continued)
Gross carrying 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
Corporate and commercial 351,885 85,492 15,696 129 453,202 (488) (1,907) (5,887) (38) (8,320)
- agriculture, forestry and fishing 4,805 1,505 261 - 6,571 (10) (44) (68) - (122)
- mining and quarrying 6,424 1,463 232 1 8,120 (5) (21) (145) (1) (172)
- manufacturing 70,144 15,251 2,016 49 87,460 (93) (164) (867) (29) (1,153)
- electricity, gas, steam and air-conditioning supply 14,402 1,799 277 - 16,478 (10) (31) (67) - (108)
- water supply, sewerage, waste management and remediation 2,690 277 26 - 2,993 (3) (5) (13) - (21)
- construction 9,678 2,742 791 7 13,218 (21) (51) (368) (3) (443)
- wholesale and retail trade, repair of motor vehicles and motorcycles 63,752 15,867 2,805 5 82,429 (97) (225) (1,341) (3) (1,666)
- transportation and storage 19,068 5,062 556 - 24,686 (30) (65) (153) - (248)
- accommodation and food 9,862 6,523 787 2 17,174 (23) (139) (81) (1) (244)
- publishing, audiovisual and broadcasting 16,574 1,537 249 28 18,388 (22) (36) (58) (1) (117)
- real estate 72,152 24,362 4,834 19 101,367 (86) (903) (1,861) - (2,850)
- professional, scientific and technical activities 15,164 2,229 542 - 17,935 (21) (51) (200) - (272)
- administrative and support services 20,592 3,505 962 18 25,077 (25) (90) (293) - (408)
- public administration and defence, compulsory social security 1,166 14 - - 1,180 - (1) - - (1)
- education 1,325 181 87 - 1,593 (4) (5) (22) - (31)
- health and care 2,993 643 266 - 3,902 (6) (17) (67) - (90)
- arts, entertainment and recreation 1,264 452 146 - 1,862 (4) (16) (57) - (77)
- other services 10,335 1,547 589 - 12,471 (25) (30) (219) - (274)
- activities of households 730 14 - - 744 - - - - -
- extra-territorial organisations and bodies activities 47 - - - 47 - - - - -
- government 8,699 506 270 - 9,475 (3) - (7) - (10)
- asset-backed securities 19 13 - - 32 - (13) - - (13)
Non-bank financial institutions 61,737 4,718 469 - 66,924 (43) (77) (137) - (257)
Loans and advances to banks 102,723 1,739 82 - 104,544 (18) (29) (22) - (69)
At 31 Dec 2022 516,345 91,949 16,247 129 624,670 (549) (2,013) (6,046) (38) (8,646)
By legal entity
HSBC UK Bank plc 64,930 18,856 4,439 28 88,253 (165) (445) (643) (1) (1,254)
HSBC Bank plc 83,174 9,175 2,631 3 94,983 (56) (181) (1,075) - (1,312)
The Hong Kong and Shanghai Banking Corporation Limited 292,022 50,708 6,934 80 349,744 (216) (1,074) (3,125) (24) (4,439)
HSBC Bank Middle East Limited 21,922 1,777 946 4 24,649 (11) (21) (684) (3) (719)
HSBC North America Holdings Inc. 30,816 6,861 211 - 37,888 (24) (194) (22) - (240)
Grupo Financiero HSBC, S.A. de C.V. 9,969 1,979 399 - 12,347 (48) (62) (225) - (335)
Other trading entities 13,343 2,593 687 14 16,637 (27) (36) (272) (10) (345)
At 31 Dec 2022 516,345 91,949 16,247 129 624,670 (549) (2,013) (6,046) (38) (8,646)
Total wholesale lending for loans and other credit-related commitments and
financial guarantees by stage distribution(1) (continued)
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
Corporate and commercial 252,860 29,116 798 - 282,774 (116) (178) (96) - (390)
Financial 105,950 3,683 23 - 109,656 (5) (14) (2) - (21)
At 31 Dec 2022 358,810 32,799 821 - 392,430 (121) (192) (98) - (411)
By legal entity
HSBC UK Bank plc 26,036 5,527 208 - 31,771 (24) (45) (38) - (107)
HSBC Bank plc 142,100 11,710 291 - 154,101 (16) (41) (47) - (104)
The Hong Kong and Shanghai Banking Corporation Limited 67,473 6,081 114 - 73,668 (54) (53) (9) - (116)
HSBC Bank Middle East Limited 6,683 231 14 - 6,928 (2) (2) - - (4)
HSBC North America Holdings Inc. 88,039 3,959 87 - 92,085 (13) (32) (2) - (47)
HSBC Bank Canada 24,395 4,671 84 - 29,150 (8) (15) - - (23)
Grupo Financiero HSBC, S.A. de C.V. 2,468 240 3 - 2,711 (1) - - - (1)
Other trading entities 1,616 380 20 - 2,016 (3) (4) (2) - (9)
At 31 Dec 2022 358,810 32,799 821 - 392,430 (121) (192) (98) - (411)
1 Included in loans and other credit-related commitments and financial
guarantees is $45bn relating to unsettled reverse repurchase agreements, which
once drawn are classified as 'Reverse repurchase agreements - non-trading'.
Commercial real estate
Commercial real estate lending includes the financing of corporate,
institutional and high net worth customers who are investing primarily in
income-producing assets and, to a lesser extent, in their construction and
development. The portfolio is globally diversified with larger concentrations
in Hong Kong, the UK, mainland China and the US.
Our global exposure is centred largely on cities with economic, political or
cultural significance. In more developed markets, our exposure mainly
comprises the financing of investment assets, the redevelopment of existing
stock and the augmentation of both commercial and residential markets to
support economic and population growth. In less developed commercial real
estate markets, our exposures comprise lending for development assets on
relatively short tenors with a particular focus on supporting larger, better
capitalised developers involved in residential construction or assets
supporting economic expansion.
Excluding favourable foreign exchange movements of $0.5bn, commercial real
estate lending decreased by $8.4bn, mainly from $5.7bn in Hong Kong due to
loan repayments, in addition to reclassifications of $0.5bn to assets held for
sale in the US.
Commercial real estate lending to customers
of which:
HSBC UK Bank plc HSBC Bank plc The Hong Kong and Shanghai Banking Corpora-tion Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc.(1,2) Grupo Financiero HSBC, S.A. de C.V. Other trading entities Total UK Hong Kong
$m $m $m $m $m $m $m $m $m $m
Gross loans and advances
Stage 1 12,827 4,181 42,242 1,118 1,918 877 839 64,002 13,621 30,218
Stage 2 1,385 650 13,588 313 2,662 65 44 18,707 1,553 10,447
Stage 3 593 214 3,712 173 63 34 45 4,834 731 3,385
POCI - - 18 - - - - 18 - 18
At 30 Jun 2023 14,805 5,045 59,560 1,604 4,643 976 928 87,561 15,905 44,068
- of which: forborne loans 272 154 1,227 378 508 58 - 2,597 410 1,138
Allowance for ECL (240) (144) (2,326) (68) (84) (21) (13) (2,896) (363) (2,121)
Gross loans and advances
Stage 1 11,409 5,083 46,700 1,094 2,096 832 906 68,120 12,209 35,905
Stage 2 2,763 828 16,311 323 3,249 43 91 23,608 3,008 11,068
Stage 3 702 277 3,320 264 - 28 57 4,648 827 3,029
POCI - - 19 - - - - 19 - 19
At 31 Dec 2022 14,874 6,188 66,350 1,681 5,345 903 1,054 96,395 16,044 50,021
- of which: forborne loans 215 143 763 449 428 47 23 2,068 336 654
Allowance for ECL (216) (153) (2,094) (153) (93) (24) (13) (2,746) (323) (1,878)
1 The figures for 30 June 2023 exclude gross loans and advances of $0.5bn,
and an associated allowance for ECL of $4m, corresponding to individual assets
which were reported as held for sale by HSBC North America Holdings Inc.
2 During 1Q23, we aligned the classification of commercial real estate
across the Group and re-presented commercial real estate exposure in HSBC
North America Holdings Inc. at 31 December 2022 as $5.3bn, which had a
corresponding ECL charge of $0.1bn.
Refinance risk in commercial real estate
Commercial real estate lending tends to require the repayment of a significant
proportion of the principal at maturity. Typically, a customer will arrange
repayment through the acquisition of a new loan to settle the existing debt.
Refinance risk is the risk that a customer, being
unable to repay the debt on maturity, fails to refinance it at commercial
terms. We monitor our commercial real estate portfolio closely, assessing
indicators for signs of potential issues with refinancing.
Commercial real estate gross loans and advances to customers maturity analysis
of which:
HSBC UK Bank plc HSBC Bank plc The Hong Kong and Shanghai Banking Corporation Limited HSBC Bank Middle East Limited HSBC North America Holdings Inc. Grupo Financiero HSBC, S.A. de C.V. Other trading entities Total UK Hong Kong
$m $m $m $m $m $m $m $m $m $m
< 1 year 4,522 1,684 23,350 403 1,363 279 828 32,429 5,393 18,929
1-2 years 4,296 717 16,651 290 1,164 234 10 23,362 4,321 13,013
2-5 years 5,416 1,745 16,763 526 2,099 378 34 26,961 5,609 10,080
> 5 years 571 899 2,796 385 17 85 56 4,809 582 2,046
At 30 Jun 2023 14,805 5,045 59,560 1,604 4,643 976 928 87,561 15,905 44,068
< 1 year 8,315 2,059 23,468 423 1,883 241 703 37,092 9,211 18,675
1-2 years 3,518 1,503 18,007 218 810 115 228 24,399 3,678 13,873
2-5 years 2,385 1,644 21,804 664 2,624 449 60 29,630 2,472 14,963
> 5 years 656 982 3,071 376 28 98 63 5,274 683 2,510
At 31 Dec 2022 14,874 6,188 66,350 1,681 5,345 903 1,054 96,395 16,044 50,021
The following table presents the Group's exposure to borrowers classified in
the commercial real estate sector where the ultimate parent is based in
mainland China, as well as all commercial real
estate exposures booked on mainland China balance sheets. The exposures at 30
June 2023 are split by country/territory and credit quality including
allowances for ECL by stage.
Mainland China commercial real estate
Hong Kong Mainland China Rest of the Group Total
$m $m $m $m
Loans and advances to customers(1) 7,835 4,700 960 13,495
Guarantees issued and others(2) 241 464 784
79
Total mainland China commercial real estate exposure at 30 Jun 2023 8,076 5,164 1,039 14,279
Distribution of mainland China commercial real estate exposure by credit
quality
- Strong 1,161 1,836 205 3,202
- Good 747 908 355 2,010
- Satisfactory 973 1,756 252 2,981
- Sub-standard 1,891 456 214 2,561
- Credit impaired 3,304 208 3,525
13
At 30 Jun 2023 8,076 5,164 1,039 14,279
Allowance for ECL by credit quality
- Strong - (2) - (2)
- Good - (3) (1) (4)
- Satisfactory (2) (87) (1) (90)
- Sub-standard (205) (17) (3) (225)
- Credit impaired (1,774) (82) - (1,856)
At 30 Jun 2023 (1,981) (191) (5) (2,177)
Allowance for ECL by stage distribution
- Stage 1 - (6) (1) (7)
- Stage 2 (207) (103) (4) (314)
- Stage 3 (1,774) (82) - (1,856)
At 30 Jun 2023 (1,981) (191) (5) (2,177)
ECL coverage % 24.5 3.7 0.5 15.2
1 Amounts represent gross carrying amount.
2 Amounts represent nominal amount for guarantees and other contingent
liabilities.
Mainland China commercial real estate (continued)
Hong Kong Mainland China Rest of the Group Total
$m $m $m $m
Loans and advances to customers(1) 9,129 5,752 860 15,741
Guarantees issued and others(2) 249 755 18 1,022
Total mainland China commercial real estate exposure at 31 Dec 2022 9,378 6,507 878 16,763
Distribution of mainland China commercial real estate exposure by credit
quality
- Strong 1,425 2,118 220 3,763
- Good 697 1,087 370 2,154
- Satisfactory 1,269 2,248 77 3,594
- Sub-standard 2,887 779 193 3,859
- Credit impaired 3,100 275 18 3,393
At 31 Dec 2022 9,378 6,507 878 16,763
Allowance for ECL by credit quality
- Strong (5) (5)
- -
- Good (8) (9)
- (1)
- Satisfactory (20) (81) (101)
-
- Sub-standard (458) (42) (503)
(3)
- Credit impaired (1,268) (105) (1,373)
-
At 31 Dec 2022 (1,746) (241) (1,991)
(4)
Allowance for ECL by stage distribution
- Stage 1 (9) (11)
(1) (1)
- Stage 2 (477) (127) (607)
(3)
- Stage 3 (1,268) (105) (1,373)
-
- POCI - -
- -
At 31 Dec 2022 (1,746) (241) (1,991)
(4)
ECL coverage % 18.6 3.7 0.5 11.9
1 Amounts represent gross carrying amount.
2 Amounts represent nominal amount for guarantees and other contingent
liabilities.
Commercial real estate financing refers to lending that focuses on commercial
development and investment in real estate and covers commercial, residential
and industrial assets. Commercial real estate financing can also be provided
to a corporate or financial entity for the purchase or financing of a property
which supports the overall operations of the business.
The exposures in the table are related to companies whose primary activities
are focused on residential, commercial and mixed-use real estate activities.
Lending is generally focused on tier 1 and 2 cities.
The table above shows 57% of total exposure with a credit quality of
'satisfactory' or above, which was unchanged compared with 31 December 2022.
Total 'credit impaired' exposures have nevertheless increased to 26% (31
December 2022: 21%), reflecting sustained stress in the China commercial real
estate market, including weakness in both property market fundamentals and
financing conditions for borrowers operating in this sector.
Allowances for ECL are substantially against unsecured exposures. For secured
exposures, allowances for ECL are minimal, reflecting the nature and value of
the security held.
Facilities booked in Hong Kong continue to represent the largest proportion of
mainland China commercial real estate exposures, although total exposures
reduced to $8.1bn, down $1.3bn since
31 December 2022, as a result of de-risking measures and repayments. This
portfolio remains relatively higher risk, with 36% (31 December 2022: 36%) of
exposure booked with a credit quality of 'satisfactory' or above and 41%
'credit impaired' (31 December 2022: 33%). This reflected a further credit
deterioration during the first half of the year. At 30 June 2023, the Group
had allowances for ECL of $2bn (31 December 2022: $1.7bn) held against
mainland China commercial real estate exposures booked in Hong Kong.
Approximately half of the unimpaired exposure in the Hong Kong portfolio is
lending to state-owned enterprises and relatively strong private-owned
enterprises. This is reflected in the relatively low ECL allowance in this
part of the portfolio.
Market conditions are likely to remain stressed with a protracted and
uncertain recovery as sentiment and domestic residential demand remain weak.
There is potential for a further deterioration in credit conditions during the
second half of the year given the heightened uncertainty around liquidity
support and ongoing weakness in property market fundamentals.
The Group has additional exposures to mainland China commercial real estate as
a result of lending to multinational corporates booked outside of mainland
China. These are not incorporated in the table above.
Supplementary information
The following disclosure presents the gross carrying/nominal amount of
financial instruments to which the impairment requirements in IFRS 9 are
applied by global business and the associated allowance for ECL.
Summary of financial instruments to which the impairment requirements in IFRS
9 are applied - by global business
Gross carrying/nominal amount Allowance for ECL
Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
$m $m $m $m $m $m $m $m $m $m
Loans and advances to customers at amortised cost 808,376 142,843 20,016 61 971,296 (1,106) (3,269) (7,338) (25) (11,738)
- WPB 403,926 58,906 4,107 - 466,939 (589) (1,575) (939) - (3,103)
- CMB 244,261 69,186 12,745 46 326,238 (423) (1,441) (5,103) (25) (6,992)
- GBM 159,915 14,718 3,164 15 177,812 (94) (240) (1,296) - (1,630)
- Corporate Centre 274 33 - - 307 - (13) - - (13)
Loans and advances to banks at amortised cost 99,623 1,288 84 - 100,995 (18) (33) (23) - (74)
- WPB 27,291 422 2 - 27,715 (4) (1) (2) - (7)
- CMB 26,328 331 - - 26,659 (4) - - - (4)
- GBM 43,273 423 82 - 43,778 (10) (32) (21) - (63)
- Corporate Centre 2,731 112 - - 2,843 - - - - -
Other financial assets measured at amortised cost 945,902 13,580 757 10 960,249 (96) (147) (237) (9) (489)
- WPB 163,096 3,946 275 - 167,317 (26) (75) (73) - (174)
- CMB 205,866 8,913 437 10 215,226 (45) (63) (160) (9) (277)
- GBM 500,442 644 41 - 501,127 (23) (9) (4) - (36)
- Corporate Centre 76,498 77 4 - 76,579 (2) - - - (2)
Total gross carrying amount on-balance sheet at 30 Jun 2023 1,853,901 157,711 20,857 71 2,032,540 (1,220) (3,449) (7,598) (34) (12,301)
Loans and other credit-related commitments 610,072 37,849 1,605 - 649,526 (135) (150) (63) - (348)
- WPB 242,869 9,324 984 - 253,177 (23) (1) (2) - (26)
- CMB 129,160 16,511 473 - 146,144 (80) (107) (60) - (247)
- GBM 237,911 12,014 148 - 250,073 (32) (42) (1) - (75)
- Corporate Centre 132 - - - 132 - - - - -
Financial guarantees 16,135 2,535 212 - 18,882 (8) (12) (31) - (51)
- WPB 1,245 14 - - 1,259 - - - - -
- CMB 7,291 1,818 121 - 9,230 (7) (4) (25) - (36)
- GBM 7,599 703 91 - 8,393 (1) (8) (6) - (15)
- Corporate Centre - - - - - - - - - -
Total nominal amount off-balance sheet at 30 Jun 2023 626,207 40,384 1,817 - 668,408 (143) (162) (94) - (399)
WPB 117,142 903 - 1 118,046 (12) (14) - - (26)
CMB 83,149 841 - 1 83,991 (11) (14) - - (25)
GBM 81,178 162 1 - 81,341 (13) (7) - - (20)
Corporate Centre 3,611 206 - - 3,817 (38) (16) - - (54)
Debt instruments measured at FVOCI at 30 Jun 2023 285,080 2,112 1 2 287,195 (74) (51) - - (125)
Summary of financial instruments to which the impairment requirements in IFRS
9 are applied - by global business (continued)
Gross carrying/nominal amount Allowance for ECL
Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total
$m $m $m $m $m $m $m $m $m $m
Loans and advances to customers at amortised cost 776,299 139,076 19,504 129 935,008 (1,092) (3,488) (6,829) (38) (11,447)
- WPB 372,691 49,045 3,501 - 425,237 (569) (1,510) (850) - (2,929)
- CMB 235,293 70,654 12,815 112 318,874 (444) (1,538) (4,896) (38) (6,916)
- GBM 167,990 19,334 3,188 17 190,529 (79) (427) (1,083) - (1,589)
- Corporate Centre 325 43 - - 368 - (13) - - (13)
Loans and advances to banks at amortised cost 102,723 1,739 82 - 104,544 (18) (29) (22) - (69)
- WPB 25,770 295 - - 26,065 (3) (1) - - (4)
- CMB 24,107 695 4 - 24,806 (5) - (2) - (7)
- GBM 46,778 606 78 - 47,462 (9) (28) (20) - (57)
- Corporate Centre 6,068 143 - - 6,211 (1) - - - (1)
Other financial assets measured at amortised cost 938,798 15,339 797 - 954,934 (95) (165) (233) - (493)
- WPB 194,963 3,962 458 - 199,383 (30) (75) (130) - (235)
- CMB 181,238 10,738 253 - 192,229 (35) (82) (90) - (207)
- GBM 485,499 637 78 - 486,214 (28) (8) (13) - (49)
- Corporate Centre 77,098 2 8 - 77,108 (2) - - - (2)
Total gross carrying amount on-balance sheet at 31 Dec 2022 1,817,820 156,154 20,383 129 1,994,486 (1,205) (3,682) (7,084) (38) (12,009)
Loans and other credit-related commitments 583,383 34,033 1,372 - 618,788 (141) (180) (65) - (386)
- WPB 238,161 4,377 769 - 243,307 (25) (1) - - (26)
- CMB 123,512 18,484 512 - 142,508 (78) (128) (55) - (261)
- GBM 221,462 11,171 91 - 232,724 (38) (51) (10) - (99)
- Corporate Centre 248 1 - - 249 - - - - -
Financial guarantees 16,071 2,463 249 - 18,783 (6) (13) (33) - (52)
- WPB 1,196 11 1 - 1,208 - - - - -
- CMB 6,830 1,564 130 - 8,524 (5) (8) (26) - (39)
- GBM 8,045 888 118 - 9,051 (1) (5) (7) - (13)
- Corporate Centre - - - - - - - - - -
Total nominal amount off-balance sheet at 31 Dec 2022 599,454 36,496 1,621 - 637,571 (147) (193) (98) - (438)
WPB 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 31 Dec 2022 262,611 2,534 - 2 265,147 (67) (58) (1) - (126)
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(1) Non-bank financial institutions Total Corporate and commercial of which: real estate(1) Non-bank financial institutions Total
$m $m $m $m $m $m $m $m
UK 107,700 14,800 18,507 126,207 (1,813) (358) (175) (1,988)
- of which: HSBC UK Bank plc (ring-fenced bank) 82,258 13,620 8,815 91,073 (1,487) (229) (37) (1,524)
- of which: HSBC Bank plc (non-ring-fenced bank) 25,442 1,180 9,692 35,134 (326) (129) (138) (464)
France 29,789 4,293 4,829 34,618 (564) (29) (5) (569)
Germany 7,329 240 864 8,193 (159) - (2) (161)
Switzerland 1,227 625 346 1,573 (11) - - (11)
Hong Kong 133,025 49,326 22,843 155,868 (3,203) (2,211) (37) (3,240)
Australia 12,165 3,637 1,253 13,418 (44) (1) (1) (45)
India 10,323 1,868 5,011 15,334 (54) (5) (7) (61)
Indonesia 3,449 122 317 3,766 (202) (1) - (202)
Mainland China 28,956 4,748 8,223 37,179 (277) (150) (22) (299)
Malaysia 5,212 1,005 290 5,502 (83) (10) - (83)
Singapore 16,009 3,253 1,170 17,179 (328) (10) - (328)
Taiwan 4,575 45 102 4,677 - - - -
Egypt 1,038 20 77 1,115 (108) (9) - (108)
UAE 11,964 1,129 689 12,653 (610) (61) - (610)
US 26,824 5,362 8,786 35,610 (242) (85) (43) (285)
Mexico 11,022 913 988 12,010 (340) (17) (3) (343)
Other 30,651 1,926 2,296 32,947 (363) (28) (16) (379)
At 30 Jun 2023 441,258 93,312 76,591 517,849 (8,401) (2,975) (311) (8,712)
UK 104,775 14,309 12,662 117,437 (1,522) (329) (131) (1,653)
- of which: HSBC UK Bank plc (ring-fenced bank) 78,249 13,041 2,980 81,229 (1,247) (193) (6) (1,253)
- of which: HSBC Bank plc (non-ring-fenced bank) 26,526 1,268 9,682 36,208 (275) (136) (125) (400)
France 27,571 4,216 4,152 31,723 (621) (36) (4) (625)
Germany 6,603 252 713 7,316 (154) - (3) (157)
Switzerland 988 635 298 1,286 (8) - - (8)
Hong Kong 144,256 56,093 20,798 165,054 (2,997) (1,965) (35) (3,032)
Australia 11,641 3,106 1,157 12,798 (97) (1) - (97)
India 9,052 1,711 4,267 13,319 (80) (22) (10) (90)
Indonesia 3,214 85 226 3,440 (187) (1) - (187)
Mainland China 31,790 5,752 8,908 40,698 (327) (167) (30) (357)
Malaysia 5,986 1,081 180 6,166 (133) (15) - (133)
Singapore 15,905 3,812 1,192 17,097 (387) (12) (1) (388)
Taiwan 4,701 20 65 4,766 (1) - - (1)
Egypt 1,262 77 101 1,363 (117) (5) (1) (118)
UAE 13,503 1,569 149 13,652 (674) (152) - (674)
US 28,249 5,714 8,640 36,889 (214) (94) (26) (240)
Mexico 9,784 903 717 10,501 (334) (24) (1) (335)
Other 33,922 2,032 2,699 36,621 (467) (27) (15) (482)
At 31 Dec 2022 453,202 101,367 66,924 520,126 (8,320) (2,850) (257) (8,577)
1 Real estate lending within this disclosure corresponds solely to the
industry of the borrower on the same basis as the 'Total wholesale lending for
loans and advances to banks and customers by stage distribution' on page 84.
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 164,322 18,452 7,483 182,774 (231) (841) (422) (1,072)
- of which: HSBC UK Bank plc (ring-fenced bank) 160,792 17,414 7,405 178,206 (227) (834) (420) (1,061)
- of which: HSBC Bank plc (non-ring-fenced bank) 3,530 1,038 78 4,568 (4) (7) (2) (11)
France(1) 2,243 20,163 329 22,406 (34) (70) (3) (104)
Germany - 176 - 176 - - - -
Switzerland 1,447 5,762 - 7,209 (1) (20) - (21)
Hong Kong 105,000 31,633 8,384 136,633 - (371) (265) (371)
Australia 22,062 439 383 22,501 (6) (21) (20) (27)
India 1,356 627 169 1,983 (5) (15) (11) (20)
Indonesia 66 285 140 351 (2) (11) (7) (13)
Mainland China 8,098 801 323 8,899 (3) (53) (42) (56)
Malaysia 2,275 2,073 795 4,348 (24) (86) (32) (110)
Singapore 8,060 5,433 436 13,493 - (38) (16) (38)
Taiwan 5,420 1,288 298 6,708 - (16) (4) (16)
Egypt - 295 81 295 - (2) (1) (2)
UAE 1,969 1,329 416 3,298 (19) (80) (38) (99)
US 17,458 664 197 18,122 (12) (24) (19) (36)
Mexico 8,079 5,599 2,136 13,678 (162) (677) (234) (839)
Other 6,879 3,694 1,131 10,573 (105) (97) (52) (202)
At 30 Jun 2023 354,734 98,713 22,701 453,447 (604) (2,422) (1,166) (3,026)
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 bank) 3,331 985 66 4,316 (5) (10) (2) (15)
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 as at 30 June 2023 is $18,403m
(31 December 2022: nil) guaranteed by Crédit Logement.
Treasury risk
93 Overview
93 Treasury risk management
95 Capital risk in the first half of 2023
98 Liquidity and funding risk in the first half of 2023
100 Sources of funding
101 Interest rate risk in the banking book in the first half of 2023
Overview
Treasury risk is the risk of having insufficient capital, liquidity or funding
resources to meet financial obligations and satisfy regulatory requirements,
together with the financial risks arising from the provision of pensions and
other post-employment benefits to staff and their dependants. Treasury risk
also includes the risk to our earnings or capital due to non-trading book
foreign exchange exposures and changes in market interest rates.
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
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 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, our internal
capital adequacy assessment process ('ICAAP') and our internal liquidity
adequacy assessment process ('ILAAP'). The risk 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, non-trading book foreign exchange risk, and interest rate risk in
the banking book.
A summary of our current policies and practices regarding the management of
treasury risk is set out on pages 202 to 217 of the Annual Report and
Accounts 2022.
Treasury risk management
Key developments in the first half of 2023
- All of the Group's material operating entities were above regulatory
minimum levels of capital, liquidity and funding at 30 June 2023.
- Following high-profile US and Swiss banking failures in the first
quarter of 2023, we validated our existing risk management practices including
stress testing and limit setting. We also reviewed our liquidity monitoring
and metric assumptions as part of our ILAAP cycle to ensure they continued to
cover observed and emerging risks.
- We continued to improve our analysis and understanding of the drivers of
capital volatility and the underlying sensitivities, ensuring these are
actively considered in our risk appetite and limit setting processes.
- As announced in the first quarter of 2023, we reverted to a policy of
paying quarterly dividends, with the Board approving an interim dividend of
$0.10 per share. On 10 May 2023, we initiated a share buy-back of up to $2bn
with an approximately 0.25 percentage point impact on the CET1 capital ratio.
This buy-back was completed in July 2023. The Board has announced a further
dividend of $0.10 per share, and intends to initiate a further share buy-back
of up to $2bn, which is expected to commence shortly.
- We enhanced the Group consolidation methodology regarding the liquidity
available to the Group from underlying subsidiaries. This resulted in a change
to the available liquidity reported in the liquidity coverage ratio ('LCR')
and increased the Group LCR by approximately 6%, on a spot basis, at 30 June
2023.
- As announced by the Bank of England's Financial Policy Committee, the UK
countercyclical capital buffer rate increased from 1% to 2%, effective July
2023 in line with the usual 12‑month implementation lag. The change is
expected to increase our CET1 requirement by approximately 0.2 percentage
points.
- We continued to increase the stabilisation of our net interest income
('NII') as interest rate expectations fluctuated, driven by central bank rate
increases and a reassessment of the trajectory of inflation in major
economies.
- Following the acquisition of SVB UK in the first quarter of 2023, we
launched HSBC Innovation Banking in June, combining the expertise of SVB UK
with our international network. We are in the process of integrating the
staff, assets and liabilities of SVB UK into the Group. The acquisition was
funded from existing resources, and the impact on our Group LCR and CET1 ratio
is minimal.
- During 1Q23, the significant interest rate rises in France resulted in
the completion of the planned sale of our retail banking operations in France
becoming less certain, as the capital required to be held by the buyer at
completion of the transaction was expected to increase significantly. As a
result, we were required to change the accounting classification of our retail
banking operations in France to no longer be classified as held for sale. The
impairment on classifying the disposal as held for sale, which had resulted in
an approximately 0.3 percentage point reduction in the Group's CET1 ratio last
year, was reversed. In June 2023, we agreed new terms for the sale of these
operations that will involve HSBC retaining a portfolio of loans. The
transaction remains subject to information and consultation processes with
respective works councils and regulatory approvals, and the parties aim to
complete the transaction on 1 January 2024. An estimated pre-tax loss of up to
$2.2bn would be recognised in the second half of 2023 if the retail operations
in France were reclassified as held for sale.
- We entered into an agreement to sell our banking business in Canada to
the Royal Bank of Canada in 2022. The transaction is now expected to complete
in the first quarter of 2024, subject to regulatory and governmental
approvals. We continue to classify our banking business in Canada as held for
sale. We remain committed to consider the payment of a special dividend of
$0.21 per share as a priority use of the proceeds from the sale of our banking
business in Canada in the first half of 2024. The remaining sale proceeds are
expected to accrue into CET1 capital. We intend to use any excess capital to
supplement share buy-backs.
For quantitative disclosures on capital ratios, own funds and RWAs, see pages
95 to 98. For quantitative disclosures on liquidity and funding metrics, see
pages 98 to 100. For quantitative disclosures on interest rate risk in the
banking book, see pages 101 to 102.
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'), leverage ratio and double leverage. Our
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. Subsidiaries prepare ICAAPs in line with global
guidance, while considering their local regulatory regimes to determine their
own risk appetites and ratios.
HSBC Holdings is the provider of equity capital and MREL-eligible debt to its
subsidiaries, and also provides them with non-equity capital where necessary.
These investments are funded by HSBC Holdings' own equity capital and
MREL-eligible debt. MREL includes own funds and liabilities that can be
written down or converted into capital resources in order to absorb losses or
recapitalise a bank in the event of its failure. In line with our existing
structure and business model, HSBC has three resolution groups - the European
resolution group, the Asian resolution group and the US resolution group.
There are some smaller entities that fall outside these resolution groups.
HSBC Holdings seeks to maintain a prudent balance between the composition of
its capital and its investments in subsidiaries.
As a matter of long-standing policy, the holding company retains a substantial
holdings capital buffer comprising high-quality liquid assets ('HQLA'), which
at 30 June 2023 was in excess of $26bn and 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 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 risk-weighted asset ('RWA') plans, as well as funding and
liquidity 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 the HSBC Holdings Asset Liability Management Committee.
The Board-level appetite measures for funding and liquidity are the 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.
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.
Risks to capital and liquidity
Outside the stress testing framework, other risks may be identified that have
the potential to affect our RWAs, capital and/or liquidity position. Downside
and Upside scenarios are assessed against our management objectives, and
mitigating actions are assigned as necessary. We closely monitor future
regulatory changes, and continue to evaluate the impact of these upon our
capital and liquidity requirements, particularly those related to the UK's
implementation of the outstanding measures to be implemented from the Basel
III reforms ('Basel 3.1').
Regulatory developments
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 January 2025. We currently do not foresee a material net impact on our
ratios from the initial implementation. The RWA output floor under Basel 3.1
is proposed to be subject to a five-year transitional provision. Any impact
from the output floor would be towards the end of the transition period.
The PRA has published a consultation paper to remove the CET1 deduction
requirement in the PRA Rulebook regarding non-performing exposures that are
treated as insufficiently covered by firms' accounting provisions. The changes
are anticipated to come into force in the second half of 2023, with an
estimated marginal increase to the capital base based on initial assessment.
Regulatory reporting processes and controls
The quality of regulatory reporting remains a key priority for management and
regulators. We are progressing with a comprehensive programme to strengthen
our processes, improve consistency and enhance controls across regulatory
reports, focusing on our prudential regulatory reporting and other priority
regulatory reports globally.
Our ongoing programme of work on our prudential regulatory reports is being
phased over a number of years, prioritising RWA, capital and liquidity
reporting. This programme includes both data enhancement and the
transformation of the reporting systems that they flow into. While this
programme continues, there may be further impacts on some of our regulatory
ratios, such as CET1, LCR and NSFR, as we implement recommended changes and
continue to enhance our controls. We are also establishing enhanced risk
stewardship and assurance over our regulatory reports and have developed a
strategic inventory and tooling to drive consistent standards and
accountability.
Stress testing and recovery and resolution planning
The Group uses stress testing to inform management of the capital and
liquidity needed to withstand internal and external shocks, including a global
economic downturn or a systems failure. Stress testing results are also used
to inform risk mitigation actions, allocation of financial resources, and
recovery and resolution planning, as well as to re-evaluate business plans
where analysis shows capital, liquidity and/or returns do not meet their
target.
In addition to a range of internal stress tests, we are subject to supervisory
stress testing in many jurisdictions. These include the programmes of the Bank
of England, the US Federal Reserve Board, the European Banking Authority, the
European Central Bank and the Hong Kong Monetary Authority. The results of
regulatory stress testing and our internal stress tests are used when
assessing our internal capital and liquidity requirements through the ICAAP
and ILAAP. The outcomes of stress testing exercises carried out by the PRA and
other regulators feed into the setting of regulatory minimum ratios and
buffers.
We maintain recovery plans for the Group and material entities, which set out
potential options management could take in a range of stress scenarios that
could result in a breach of capital or liquidity buffers. The Group recovery
plan sets out the framework and governance arrangements to support restoring
HSBC to a stable and viable position, and so lowering the probability of
failure from either idiosyncratic company-specific stress or systemic
market-wide issues. Our material entities' recovery plans provide detailed
actions that management would consider taking in a stress scenario should
their positions deteriorate and threaten to breach risk appetite and
regulatory minimum levels. This is to help ensure that HSBC entities can
stabilise their financial position and recover from financial losses in a
stress environment.
The Group also has capabilities, resources and arrangements in place to
address the unlikely event that HSBC might not be recoverable and would
therefore need to be resolved by regulators. The Group performed the inaugural
Resolvability Assessment Framework self-assessment during 2021 to meet the
Bank of England's requirements, which came into effect on 1 January 2022.
Overall, HSBC's recovery and resolution planning helps safeguard the Group's
financial and operational stability. The Group is committed to further
developing its recovery and resolution capabilities, including in relation to
the Bank of England's Resolvability Assessment Framework.
Measurement of interest rate risk in the banking book processes
Assessment and risk appetite
Interest rate risk in the banking book is the risk of an adverse impact to
earnings or capital due to changes in market interest rates. It is generated
by our non-traded assets and liabilities, specifically loans, deposits and
financial instruments that are not held for trading intent or in order to
hedge positions held with trading intent. Interest rate risk that can be
economically hedged may be transferred to Global Treasury.
Hedging is generally executed through interest rate derivatives or fixed-rate
government bonds. Any interest rate risk that Global Treasury cannot
economically hedge is not transferred and will remain within the global
business where the risks originate.
HSBC uses a number of measures to monitor and control interest rate risk in
the banking book, including:
- net interest income sensitivity; and
- economic value of equity sensitivity;
Net interest income sensitivity
A principal part of our management of non-traded interest rate risk is to
monitor the sensitivity of expected net interest income ('NII') under varying
interest rate scenarios (i.e. simulation modelling), where all other economic
variables are held constant. This monitoring is undertaken at an entity level,
where entities calculate both one-year and five-year NII sensitivities across
a range of interest rate scenarios.
NII sensitivity figures represent the effect of pro forma movements in
projected yield curves based on a static balance sheet size and structure,
except for certain mortgage products where balances are impacted by interest
rate sensitive prepayment. These sensitivity calculations do not incorporate
actions that would be taken by Global Treasury or in the business that
originates the risk to mitigate the effect of interest rate movements.
The NII sensitivity calculations assume that interest rates of all maturities
move by the same amount in the 'up-shock' scenario. The sensitivity
calculations in the 'down-shock' scenarios reflect no floors to the shocked
market rates. However, customer product-specific interest rate floors are
recognised where applicable.
Economic value of equity sensitivity
Economic value of equity ('EVE') represents the present value of the future
banking book cash flows that could be distributed to equity holders under a
managed run-off scenario. This equates to the current book value of equity
plus the present value of future NII in this scenario. EVE can be used to
assess the economic capital required to support interest rate risk in the
banking book. An EVE sensitivity represents the expected movement in EVE due
to pre-specified interest rate shocks, where all other economic variables are
held constant. Operating entities are required to monitor EVE sensitivities as
a percentage of capital resources.
Hold-to-collect-and-sell stressed value at risk
Hold-to-collect-and-sell stressed value at risk ('VaR') is a quantification of
the potential losses to a 99% confidence level of the portfolio of
high-quality liquid assets held under a hold-to-collect-and-sell business
model in the Markets Treasury business. The portfolio is accounted for at fair
value through other comprehensive income together with the derivatives held in
designated hedging relationships with these securities. The mark-to-market of
this portfolio therefore has an impact on CET1.
Stressed VaR is quantified based on the worst losses over a one-year period,
using a historical time series stretching back to the beginning of 2007, and
the assumed holding period is 60 days. At the end of June 2023, the stressed
VaR of the portfolio was $3.4bn (31 December 2022: $2.15bn). The increase was
primarily due to an increase in duration risk in this portfolio during the
period.
Capital risk in the first half of 2023
Capital overview
Capital adequacy metrics
At
30 Jun 31 Dec
2023 2022
Risk-weighted assets ('RWAs') ($bn)
Credit risk(1) 690.5 679.1
Counterparty credit risk(1) 38.6 37.1
Market risk 43.0 37.6
Operational risk 87.4 85.9
Total RWAs 859.5 839.7
Capital on a transitional basis ($bn)
Common equity tier 1 capital 126.4 119.3
Tier 1 capital 145.8 139.1
Total capital 170.0 162.4
Capital ratios on a transitional basis (%)
Common equity tier 1 ratio 14.7 14.2
Tier 1 ratio 17.0 16.6
Total capital ratio 19.8 19.3
Capital on an end point basis ($bn)
Common equity tier 1 capital 126.4 119.3
Tier 1 capital 145.8 139.1
Total capital 165.9 157.2
Capital ratios on an end point basis (%)
Common equity tier 1 ratio 14.7 14.2
Tier 1 ratio 17.0 16.6
Total capital ratio 19.3 18.7
Liquidity coverage ratio ('LCR')(2)
Total high-quality liquid assets ($bn) 631.2 647.0
Total net cash outflow ($bn) 477.7 490.8
LCR (%) 132.1 131.8
1 From 1 January 2023, RWAs related to free deliveries have been allocated
to credit risk, having previously been classified under counterparty credit
risk.
2 The LCR figures presented in the above table are based on average
values. The LCR is the average month-end values over the preceding 12 months.
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 table above are calculated in accordance
with the revised Capital Requirements Regulation and Directive, as implemented
('CRR II'). The table presents them under the transitional arrangements in CRR
II for capital instruments and after their expiry, known as the end point.
Regulatory numbers and ratios are as presented at the date of reporting. Small
changes may exist between these numbers and ratios and those subsequently
submitted in regulatory filings. Where differences are significant, we will
restate in subsequent periods.
Own funds
Own funds disclosure
At
30 Jun 31 Dec
2023 2022
Ref(*) $m $m
6 Common equity tier 1 capital before regulatory adjustments(1) 164,015 158,092
28 Total regulatory adjustments to common equity tier 1(1) (37,597) (38,801)
29 Common equity tier 1 capital 126,418 119,291
36 Additional tier 1 capital before regulatory adjustments 19,442 19,836
43 Total regulatory adjustments to additional tier 1 capital (60) (60)
44 Additional tier 1 capital 19,382 19,776
45 Tier 1 capital 145,800 139,067
51 Tier 2 capital before regulatory adjustments 25,668 24,779
57 Total regulatory adjustments to tier 2 capital (1,447) (1,423)
58 Tier 2 capital 24,221 23,356
59 Total capital 170,021 162,423
60 Total risk-weighted assets 859,545 839,720
Capital ratios % %
61 Common equity tier 1 ratio 14.7 14.2
62 Tier 1 ratio 17.0 16.6
63 Total capital ratio 19.8 19.3
* These are references to lines prescribed in the Pillar 3 'Own funds
disclosure' template.
1 On adoption of IFRS 17 'Insurance Contracts', comparative data
previously published under IFRS 4 'Insurance Contracts' have been restated
from the 1 January 2022 transition date, with no impact on CET1 and total
capital.
At 30 June 2023, our common equity tier 1 ('CET1') capital ratio increased to
14.7% from 14.2% at 31 December 2022, reflecting an increase in CET1 capital
of $7.1bn, partly offset by an increase in RWAs of $19.8bn. The key drivers of
the overall rise in our CET1 ratio during the period were:
- a 0.7 percentage point increase from the $7.0bn capital generation
through profits less dividends, adjusted for the $2.0bn share buy-back
announced with our 1Q23 results and completed in July 2023;
- a 0.3 percentage point increase from the reversal of the impairment
relating to the planned sale of our retail banking operations in France, and
the provisional gain on the acquisition of SVB UK;
- a 0.1 percentage point increase, driven by regulatory change that
reduced the risk weighting of residential mortgages in Hong Kong; and
- a 0.6 percentage point fall in the CET1 ratio, driven mainly by an
increase in the underlying RWAs and deductions for investment in financial
sector entities, intangible assets and excess expected loss.
At 30 June 2023, our Pillar 2A requirement, set by 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 met by CET1 capital. Throughout the first half
of 2023, we complied with the PRA's regulatory capital adequacy requirements.
Risk-weighted assets
RWAs by global business
WPB CMB(1) GBM(1) Corporate Total RWAs
Centre
$bn $bn $bn $bn $bn
Credit risk 152.1 324.1 135.8 78.5 690.5
Counterparty credit risk 1.7 1.1 34.7 1.1 38.6
Market risk 1.3 1.4 27.2 13.1 43.0
Operational risk 31.5 27.2 29.3 (0.6) 87.4
At 30 Jun 2023 186.6 353.8 227.0 92.1 859.5
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 Hong Kong 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 RWAs
de C.V.
$bn $bn $bn $bn $bn $bn $bn $bn $bn $bn
Credit risk 109.2 72.7 318.4 17.8 59.3 27.1 24.4 53.2 8.4 690.5
Counterparty credit risk 0.5 18.7 10.1 0.8 3.3 0.5 0.8 3.9 - 38.6
Market risk(2) 0.2 21.0 23.6 2.6 3.1 0.7 0.7 3.7 9.5 43.0
Operational risk 15.8 15.0 39.4 3.0 7.4 3.1 4.8 5.5 (6.6) 87.4
At 30 Jun 2023 125.7 127.4 391.5 24.2 73.1 31.4 30.7 66.3 11.3 859.5
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 principal entities due
to diversification effects within the Group.
RWA movement by global businesses by key driver
Credit risk, counterparty credit risk and operational risk
WPB CMB(1) GBM(1) Corporate Centre Market risk Total 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 7.8 (0.4) 1.1 4.6 6.6 19.7
Asset quality 0.5 (0.2) - (1.7) - (1.4)
Model updates (0.9) - - - (0.1) (1.0)
Methodology and policy (5.3) (0.7) (3.1) (1.2) (1.2) (11.5)
Acquisitions and disposals - 9.5 - - 0.1 9.6
Foreign exchange movements(2) 2.0 2.9 (0.5) - - 4.4
Total RWA movement 4.1 11.1 (2.5) 1.7 5.4 19.8
RWAs at 30 Jun 2023 185.3 352.4 199.8 79.0 43.0 859.5
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 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 Hong Kong 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 1.2 (0.4) 4.4 1.6 0.7 (0.7) 0.8 4.8 0.7 6.6 19.7
Asset quality 0.5 (1.1) (3.3) (0.5) 0.4 0.2 0.1 2.2 0.1 - (1.4)
Model updates (0.8) 0.1 (0.2) - - - - - - (0.1) (1.0)
Methodology and policy (1.7) (0.7) (8.1) (0.3) (0.6) (0.5) - 1.5 0.1 (1.2) (11.5)
Acquisitions and disposals 9.5 - - - - - - - - 0.1 9.6
Foreign exchange movements(2) 6.0 2.0 (3.3) - - 0.6 2.9 (3.9) 0.1 - 4.4
Total RWA movement 14.7 (0.1) (10.5) 0.8 0.5 (0.4) 3.8 4.6 1.0 5.4 19.8
RWAs at 30 Jun 2023 125.5 106.4 367.9 21.6 70.0 30.7 30.0 62.6 1.8 43.0 859.5
1 Balances are on a third-party Group consolidated basis.
2 Credit risk foreign exchange movements in this disclosure are
computed by retranslating the RWAs into US dollars based on the underlying
transactional currencies.
RWAs rose by $19.8bn during the first half of the year. Excluding foreign
currency translation differences of $4.4bn, RWAs increased by $15.4bn,
predominantly due to the acquisition of SVB UK, and RWA asset size growth.
This was partly offset by reductions due to a regulatory change to the risk
weighting of residential mortgages in Hong Kong.
Asset size
WPB RWAs rose by $7.8bn, primarily due to sovereign exposures in other trading
entities and retail lending and mortgage growth, mainly in Hong Kong, Mexico
and HSBC UK.
The $6.6bn increase in market risk RWAs was mainly attributed to heightened
market volatility impacting value at risk averages. Additional RWAs were
primarily driven by an incremental risk charge resulting from higher exposures
at risk and the hedges related to the agreed sale of our banking business in
Canada.
Corporate Centre RWAs rose by $4.6bn, which was driven by increased sovereign
exposures mainly in Asia, North America and HSBC Bank plc, and higher
thresholds for the recognition of significant investments in financial sector
entities in Asia.
GBM RWAs increased by $1.1bn, largely as a result of mark-to-market movements
in counterparty credit risk in HSBC Bank plc, Asia and Mexico. These movements
were partly offset by a decline in corporate exposures, mainly in Asia and
HSBC Bank plc.
The $0.4bn fall in CMB RWAs reflected lower corporate lending mainly in Asia
and HSBC Bank plc, which was partly offset by a rise in overdrafts in HSBC UK
and HSBC Bank plc.
The RWAs of our global businesses also included the RWAs of other trading
entities, which reflected an increase of $4.8bn, primarily due to increased
sovereign, corporate and central counterparty exposures.
Asset quality
The $1.4bn RWA decrease was mostly driven by portfolio mix changes, mainly in
Asia and HSBC Bank plc, which were partly offset by unfavourable movements due
to sovereign rating downgrades in Argentina and Egypt.
Model updates
The $1.0bn fall in RWAs was mainly due to the implementation of a new retail
mortgage model, notably in HSBC UK, and the application
of a new model for premium financing and wealth portfolio lending in Asia.
Acquisitions and disposals
The acquisition of SVB UK led to an RWA increase of $9.6bn.
Methodology and policy
Regulatory changes related to the risk weighting of residential mortgages in
Hong Kong led to a $7.7bn fall in RWAs in WPB.
A further decline of RWAs across our global businesses was caused by risk
parameter refinements, which was partly offset by changes to risk weights on
certain exposures in SAB.
Allocation methodology changes related to investments in insurance
subsidiaries led to a transfer of RWAs from Corporate Centre to WPB. In
addition, the transfer of Global Banking clients in Australia and Indonesia
increased RWAs in CMB, and decreased RWAs in GBM.
The $1.2bn decrease in market risk RWAs mainly reflected a change in
capitalisation methodology of white metals and a reduction in transactional
foreign exchange exposures relating to a pension surplus.
Leverage ratio(1)
At
30 Jun 31 Dec
2023 2022
$bn $bn
Tier 1 capital (leverage) 145.8 139.1
Total leverage ratio exposure 2,497.9 2,417.2
% %
Leverage ratio 5.8 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. At 30 June 2023, the IFRS 9 add-back to CET1 capital and the related
tax charge were immaterial.
Our leverage ratio was 5.8% at 30 June 2023, unchanged from 31 December 2022.
The increase in tier 1 capital was offset by a rise in the leverage exposure,
primarily due to growth in the balance sheet.
At 30 June 2023, our UK minimum leverage ratio requirement of 3.25% was
supplemented by a leverage ratio buffer of 0.9%, made up 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 $17.5bn and $5.0bn
respectively. We exceeded these leverage requirements.
Regulatory transitional arrangements for IFRS 9 'Financial Instruments'
We have adopted the regulatory transitional arrangements in CRR II for IFRS
9, including paragraph four of article 473a. 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. At 30
June 2023, the add-back to CET1 capital and the related tax charge were
immaterial.
Regulatory disclosures
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, refer to our Pillar 3 Disclosures at 30 June 2023, which
is expected to be published on or around 8 August 2023 at
www.hsbc.com/investors.
Liquidity and funding risk in the first half of 2023
Liquidity metrics
At 30 June 2023, all of the Group's material operating entities were above
regulatory minimum levels.
Each entity maintains sufficient unencumbered liquid assets to comply with
local and regulatory requirements. The liquidity value of these liquid assets
for each entity is shown in the following table along with the individual LCR
levels on a local regulatory requirements basis wherever applicable. Where
local regulatory requirements are not applicable, the PRA LCR is shown. The
local basis may differ from PRA measures due to differences in the way
regulators have implemented the Basel III standards.
Each entity maintains a sufficient stable funding profile and it is assessed
by using the PRA NSFR or other appropriate metrics.
In addition to regulatory metrics, HSBC uses a wide set of measures to manage
its liquidity and funding profile.
The Group liquidity and funding position on an average basis is analysed in
the following sections.
Operating entities' liquidity
At 30 Jun 2023
LCR(6) HQLA Net outflows NSFR(6)
% $bn $bn %
HSBC UK Bank plc (ring-fenced bank)(1) 213 131 61 162
HSBC Bank plc (non-ring-fenced bank)(2) 149 138 93 117
The Hongkong and Shanghai Banking Corporation - Hong Kong branch(3) 180 146 81 127
HSBC Singapore(4) 258 23 9 170
Hang Seng Bank 255 55 21 159
HSBC Bank China 177 25 14 135
HSBC Bank USA 169 81 48 130
HSBC Continental Europe(5) 159 70 44 136
HSBC Middle East - UAE branch 278 12 4 166
HSBC Canada 162 22 13 125
HSBC Mexico 144 8 6 125
At 31 Dec 2022
HSBC UK Bank plc (ring-fenced bank)(1) 226 136 60 164
HSBC Bank plc (non-ring-fenced bank)(2) 143 128 90 115
The Hongkong and Shanghai Banking Corporation - Hong Kong branch(3) 179 147 82 130
HSBC Singapore(4) 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(5) 151 55 37 132
HSBC Middle East - UAE branch 239 12 5 158
HSBC Canada 149 22 15 122
HSBC Mexico 155 8 5 129
1 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.
2 HSBC Bank plc includes overseas branches and special purpose
entities consolidated by HSBC for financial statements purposes.
3 The Hongkong and Shanghai Banking Corporation - Hong Kong branch
represents the material activities of The Hongkong and Shanghai Banking
Corporation. It is monitored and controlled for liquidity and funding risk
purposes as a stand-alone operating entity.
4 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.
5 In response to the requirement for an intermediate parent undertaking in
line with EU Capital Requirements Directive ('CRD V'), HSBC Continental Europe
acquired control of HSBC Germany and HSBC Bank Malta on 30 November 2022. The
averages for LCR and NSFR include the impact of the inclusion of the two
entities from November 2022.
6 The LCR and NSFR ratios presented in the above table are based on
average values. The LCR is the average of the preceding 12 months. The NSFR is
the average of the preceding four quarters. Prior period numbers have been
restated for consistency.
Consolidated liquidity metrics
Liquidity coverage ratio
At 30 June 2023, the average HQLA held at entity level amounted to $796bn (31
December 2022: $812bn), a decrease of $16bn. HSBC has maintained a revised
approach to the application of the requirements under the EC Delegated Act and
the PRA Rulebook. This approach was used to assess the limitations in the
fungibility of entity liquidity around the Group and resulted in an adjustment
of $165bn to LCR HQLA and $7bn to LCR inflows. The change in methodology was
designed to better incorporate local regulatory restrictions on the
transferability of liquidity.
At(1)
30 Jun 30 Jun 31 Dec
2023 2022 2022
$bn $bn $bn
High-quality liquid assets (in entities) 796 848 812
EC Delegated Act/PRA Rulebook adjustment(2) (172) (181) (174)
Group LCR HQLA 631 676 647
Net outflows 478 500 491
Liquidity coverage ratio 132% 135% 132%
1 Group LCR numbers above are based on average month-end values of the
preceding 12 months.
2 This includes adjustments made to high-quality liquidity assets and
inflows in entities to reflect liquidity transfer restrictions.
Liquid assets
After the $165bn adjustment, the Group LCR HQLA of $631bn (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 liquidity pool by asset
type and currency at 30 June 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 321 321 - -
Central and local government bonds 296 - 282 14
Regional government and public sector entities 2 - 2 -
International organisation and multilateral development banks 8 - 8 -
Covered bonds 3 - 1 2
Other 1 - - 1
Total at 30 Jun 2023 631 321 293 17
Total at 31 Dec 2022 647 344 284 19
1 Group liquid assets numbers are based on average month-end values
over the preceding 12 months.
2 As defined in EU and PRA regulation, 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 30 Jun 2023 173 179 104 48 127 631
Liquidity pool at 31 Dec 2022 167 191 98 54 137 647
1 Group liquid assets numbers are based on average month-end values over
the preceding 12 months.
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 as a net balancing source or deployment of
funds.
In 1H23, the level of customer accounts continued to exceed the level of loans
and advances to customers. The positive funding gap was predominantly deployed
in liquid assets.
Funding sources
At
30 Jun 31 Dec
2023 2022
$m $m
Customer accounts 1,595,769 1,570,303
Deposits by banks 68,709 66,722
Repurchase agreements - non-trading 170,110 127,747
Debt securities in issue 85,471 78,149
Cash collateral, margin and settlement accounts 104,521 88,476
Liabilities of disposal groups held for sale(1) 87,241 114,597
Subordinated liabilities 23,286 22,290
Financial liabilities designated at fair value 139,618 127,321
Insurance contract liabilities 115,756 108,816
Trading liabilities 81,228 72,353
- repos 16,727 16,254
- stock lending 3,890 3,541
- other trading liabilities 60,611 52,558
Total equity 191,651 185,197
Other balance sheet liabilities 378,116 387,315
3,041,476 2,949,286
Funding uses
At
30 Jun 31 Dec
2023 2022
$m $m
Loans and advances to customers 959,558 923,561
Loans and advances to banks 100,921 104,475
Reverse repurchase agreements - non-trading 258,056 253,754
Cash collateral, margin and settlement accounts 99,060 82,984
Assets held for sale(1) 95,480 115,919
Trading assets 255,387 218,093
- reverse repos 16,961 14,798
- stock borrowing 9,381 10,706
- other trading assets 229,045 192,589
Financial investments 407,933 364,726
Cash and balances with central banks 307,733 327,002
Other balance sheet assets 557,348 558,772
3,041,476 2,949,286
1 'Liabilities of disposal groups held for sale' includes $80bn and
'Assets held for sale' includes $87bn in respect of the planned sale of our
banking business in Canada.
Interest rate risk in the banking book in the first half of 2023
Net interest income sensitivity
The following tables set out the assessed impact to a hypothetical base case
projection of our net interest income ('NII'), excluding pensions, insurance
and investment in subsidiaries, under the following scenarios:
- an immediate shock of 25 basis points ('bps') to the current
market-implied path of interest rates across all currencies on 1 July 2023
(effects over one year and five years); and
- an immediate shock of 100bps to the current market-implied path of
interest rates across all currencies on 1 July 2023 (effects over one year and
five years).
The sensitivities shown represent a hypothetical simulation of the
base case NII, assuming a static balance sheet (specifically no assumed
migration from current account to term deposits), no management actions from
Global Treasury and a simplified 50% pass-on assumption applied for material
entities. This also incorporates the
effect of interest rate behaviouralisation, hypothetical managed rate
product pricing assumptions, prepayment of mortgages and deposit
stability. The sensitivity calculations exclude pensions, insurance and
investments in subsidiaries.
The NII sensitivity analysis performed in the case of a down-shock
does not include floors to market rates, and it does not include floors
on some wholesale assets and liabilities. However, floors have been
maintained for deposits and loans to customers where this is
contractual or where negative rates would not be applied.
As market and policy rates move, the degree to which these changes are passed
on to customers will vary based on a number of factors, including the absolute
level of market rates, regulatory and contractual frameworks, and competitive
dynamics in particular markets. 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.
Immediate interest rate rises of 25bps and 100bps would increase projected NII
for the 12 months to 30 June 2024 by $550m and $2,168m, respectively.
Conversely, falls of 25bps and 100bps would decrease projected NII for the 12
months to 30 June 2024 by $615m and $2,604m, respectively.
The sensitivity of NII for 12 months decreased by $1,367m in the plus 100bps
parallel shock and decreased by $1,365m in the minus 100bps parallel shock,
comparing 30 June 2023 with 31 December 2022.
The decrease in the sensitivity of NII for 12 months in the minus 100bps
parallel shock was mainly driven by management actions to stabilise NII,
coupled with deposit migration and reduction in the net interest-bearing
banking book.
The sensitivities broken down by currency in the tables below do not include
the impact of vanilla FX swaps used to optimise cash management across the
Group.
NII sensitivity to an instantaneous change in yield curves (12 months) - 1
year NII sensitivity by currency
Currency
US dollar HK dollar Sterling Euro Other Total
$m $m $m $m $m $m
Change in Jul 2023 to Jun 2024 (based on balance sheet at 30 Jun 2023)
+25bps (187) 125 140 147 325 550
-25bps 187 (132) (173) (165) (332) (615)
+100bps (747) 471 575 596 1,273 2,168
-100bps 695 (556) (703) (657) (1,383) (2,604)
Change in Jan 2023 to Dec 2023 (based on balance sheet at 31 Dec 2022)
+25bps (66) 107 245 167 431 884
-25bps 64 (115) (289) (194) (439) (973)
+100bps (267) 413 1,026 674 1,689 3,535
-100bps 236 (476) (1,177) (765) (1,787) (3,969)
NII sensitivity to an instantaneous change in yield curves (5 years) -
cumulative 5 years NII sensitivity by currency
Currency
US dollar HK dollar Sterling Euro Other Total
$m $m $m $m $m $m
Change in Jul 2023 to Jun 2028 (based on balance sheet at 30 Jun 2023)
+25bps (70) 804 1,816 900 2,130 5,580
-25bps 49 (911) (1,851) (918) (2,194) (5,825)
+100bps (694) 3,059 7,320 3,605 8,337 21,627
-100bps 43 (4,800) (7,444) (3,755) (8,991) (24,947)
Change in Jan 2023 to Dec 2027 (based on balance sheet at 31 Dec 2022)
+25bps 192 668 2,315 924 2,500 6,599
-25bps (282) (688) (2,336) (1,044) (2,498) (6,848)
+100bps 673 2,401 9,254 3,764 9,765 25,857
-100bps (1,522) (3,004) (9,454) (4,173) (10,317) (28,470)
NII sensitivity to an instantaneous change in yield curves (5 years) - NII
sensitivity by years
Year 1 Year 2 Year 3 Year 4 Year 5 Total
$m $m $m $m $m $m
Change in Jul 2023 to Jun 2028 (based on balance sheet at 30 Jun 2023)
+25bps 550 854 1,172 1,409 1,595 5,580
-25bps (615) (892) (1,221) (1,450) (1,647) (5,825)
+100bps 2,168 3,307 4,523 5,444 6,185 21,627
-100bps (2,604) (3,909) (5,310) (6,188) (6,936) (24,947)
Change in Jan 2023 to Dec 2027 (based on balance sheet at 31 Dec 2022)
+25bps 884 1,145 1,378 1,550 1,642 6,599
-25bps (973) (1,178) (1,420) (1,579) (1,699) (6,848)
+100bps 3,535 4,565 5,367 5,962 6,429 25,857
-100bps (3,969) (4,944) (5,925) (6,565) (7,067) (28,470)
Non-trading portfolios
Value at risk of the non-trading portfolios
Non-trading portfolios comprise positions that primarily arise from the
interest rate management of our retail and wholesale banking assets and
liabilities, financial investments measured at fair value through other
comprehensive income or at amortised cost, and exposures arising from our
insurance operations.
The VaR for non-trading activity was broadly unchanged at 30 June 2023,
compared with 31 December 2022. This followed increases in the second half of
2022 that were primarily due to higher duration risk exposures in Global
Treasury, as well as from more volatile interest rate tail scenarios.
Non-trading VaR includes non-trading financial instruments held in portfolios
managed by Markets Treasury. The management of interest rate risk in the
banking book is described further in 'Net interest income sensitivity' on page
95.
The Group non-trading VaR for the half-year to 30 June 2023 is shown in the
following table.
Non-trading VaR, 99% 1 day
Interest rate Credit spread Portfolio diversification(1) Total
$m $m $m $m
Half-year to 30 Jun 2023 156.3 84.3 173.9
(66.6)
Average 134.8 69.0 153.9
(49.8)
Maximum 158.9 84.3 185.7
Minimum 108.8 55.2 127.0
Half-year to 30 Jun 2022 113.3 53.3 120.8
(45.7)
Average 148.4 61.9 173.7
(36.7)
Maximum 225.5 84.7 265.3
Minimum 109.2 50.3 119.1
Half-year to 31 Dec 2022 159.8 56.6 171.1
(45.3)
Average 121.2 52.1 138.2
(35.1)
Maximum 159.8 59.1 183.7
Minimum 98.3 43.4 106.3
1 When VaR is calculated at a portfolio level, natural offsets in risk
can occur when compared with aggregating VaR at the asset class level. This
difference is called portfolio diversification. The asset class VaR maxima and
minima reported in the table occurred on different dates within the reporting
period. For this reason, we do not report an implied portfolio diversification
measure between the maximum (minimum) asset class VaR measures and the maximum
(minimum) total VaR measures in this table.
Non-trading VaR excludes equity risk on securities held at fair value,
non-trading book foreign exchange risk and the risks managed in HSBC Holdings
arising from long-term capital issuance.
HSBC's management of market risk in the non-trading book is described in the
'Treasury risk' section on page 93.
For disclosure of the stressed value at risk of the Markets Treasury
hold-to-collect-and-sell portfolio, see page 95. This portfolio of financial
instruments is measured at fair value through other comprehensive income and
is included in the non-trading VaR above. The stressed VaR quantitative
disclosure provides the discrete potential capital impact from this portfolio.
Market risk
Overview
Market risk is the risk of adverse financial impact on trading activities
arising from changes in market parameters such as interest rates, foreign
exchange rates, asset prices, volatilities, correlations and credit spreads.
Exposure to market risk is separated into two portfolios: trading portfolios
and non-trading portfolios.
Market risk in the first half of 2023
There were no material changes to the policies and practices for the
management of market risk in the first half of 2023.
A summary of our current policies and practices for the management of market
risk is set out in 'Market risk management' on page 218 of the Annual Report
and Accounts 2022.
During the first half of 2023, global financial markets continued to be driven
by the inflation outlook, expectations of monetary policy tightening and
recession risks, coupled with banking distress during March and negotiations
over the US debt ceiling in May. Major central banks maintained their
restrictive monetary policies throughout 1H23, while falling headline
inflation in the US led the Federal Reserve Board ('FRB') to signal that it
may be approaching the end of its tightening cycle. Short-term yields in key
interest rate markets rose during 2Q23, after falling rapidly in the wake of
the banking crisis in March. Sentiment in global equity markets was driven by
resilient corporate earnings and changes in the monetary policy outlook. Main
US indices reached their highest in over one year in 2Q23, with large gains in
the technology sector and relatively subdued volatility. In foreign exchange
markets, the US dollar fluctuated against most other major currencies, in
response to FRB monetary policy and due to movements in the bond markets.
Investor sentiment remained mostly resilient in credit markets. High-yield and
investment-grade credit spreads tended to narrow as the banking sector
stabilised and likelihood of a US debt downgrade receded.
We continued to manage market risk prudently in the first half of 2023.
Sensitivity exposures and VaR remained mostly 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 Markets and Securities Services.
Trading VaR at 30 June 2023 increased compared with 31 December 2022. The VaR
increase peaked in June 2023 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.
The Group trading VaR for the half-year is shown in the table below.
Trading VaR, 99% 1 day
Foreign exchange Interest Equity Credit Portfolio Total
and commodity rate spread diversification(1)
$m $m $m $m $m $m
Half-year to 30 Jun 2023 18.9 64.9 23.5 16.1 (55.6) 67.8
Average 16.7 51.9 17.5 11.1 (41.5) 55.7
Maximum 23.5 74.8 23.5 16.1 82.4
Minimum 10.6 33.9 14.9 7.7 42.2
Half-year to 30 Jun 2022 11.3 26.8 14.6 16.1 36.3
(32.5)
Average 14.2 26.3 14.5 19.1 39.1
(35.1)
Maximum 29.2 33.9 19.2 27.9 55.6
Minimum 5.7 20.3 11.5 12.0 29.1
Half-year to 31 Dec 2022 15.4 40.0 18.6 11.9 49.5
(36.4)
Average 13.0 32.7 17.7 14.6 45.0
(33.1)
Maximum 18.3 73.3 24.8 23.9 78.3
Minimum 9.1 20.2 13.9 9.1 34.0
1 When VaR is calculated at a portfolio level, natural offsets in risk
can occur when compared with aggregating VaR at the asset class level. This
difference is called portfolio diversification. The asset class VaR maxima and
minima reported in the table occurred on different dates within the reporting
period. For this reason, we do not report an implied portfolio diversification
measure between the maximum (minimum) asset class VaR measures and the maximum
(minimum) total VaR measures in this table.
The table below shows trading VaR at a 99% confidence level compared with
trading VaR at a 95% confidence level at 30 June 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, Trading VaR,
99% 1 day 95% 1 day
$m $m
Half-year to 30 Jun 2023
67.8 44.5
Average
55.7 34.5
Maximum
82.4 47.8
Minimum
42.2 26.2
Half-year to 30 Jun 2022
36.3 21.1
Average
39.1 22.1
Maximum
55.6 28.4
Minimum
29.1 17.5
Half-year to 31 Dec 2022
49.5 31.7
Average
45.0 27.1
Maximum
78.3 49.0
Minimum
34.0 20.1
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 related to intra-day transactions. The hypothetical profit and loss
reflects the profit and loss that would be realised if positions were
maintained and 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 or recalibration of the VaR
model is required. We back-test our VaR at set levels of our Group entity
hierarchy.
During the first half of 2023, the Group experienced no loss back-testing
exceptions against actual and hypothetical profit and losses.
Insurance manufacturing operations risk
Overview
The key risks for our insurance manufacturing operations are market risks, in
particular interest rate, growth asset and credit risks, as well as insurance
underwriting and operational risks. Liquidity risk, while significant for
other parts of the Group, is relatively minor for our insurance operations.
Insurance manufacturing operations risk in the first half of 2023
There have been no material changes to the policies and practices for the
management of risks arising in our insurance operations described in the
Annual Report and Accounts 2022.
A summary of our policies and practices regarding the risk management of
insurance operations, our insurance model and the main contracts we
manufacture is provided on page 233 of the Annual Report and Accounts 2022.
The risk profile of our insurance manufacturing operations are 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. The Group's economic capital
basis is largely aligned to European Solvency II regulations, other than in
Asia where it is based on the draft Hong Kong risk-based capital regulations.
Risk appetite buffers are set to ensure that the operations are able to remain
solvent on both bases, allowing for business-as-usual volatility and extreme
but plausible stress events. In addition, the insurance manufacturing
operations manage their market, liquidity, credit, underwriting and
non-financial risk exposures to Board-approved risk appetite limits. Overall,
at 30 June 2023, the majority of the capital and financial risk positions of
our insurance operations were within risk appetite. We continue to monitor
these risks closely in the current volatile economic climate.
The following table shows the composition of assets and liabilities by
contract type.
Balance sheet of insurance manufacturing subsidiaries by type of contract
Life direct participating and investment DPF contracts Life Other Shareholder assets Total
other(1) contracts(2) and liabilities
$m $m $m $m $m
Financial assets 109,737 4,245 5,734 7,204 126,920
- financial assets designated and otherwise mandatorily measured at fair 95,693 3,915 4,137 1,202 104,947
value through profit or loss
- derivatives 272 6 - 7 285
- financial investments - at amortised cost 1,296 87 1,200 4,338 6,921
- financial assets at fair value through other comprehensive income 9,099 - 3 621 9,723
- other financial assets 3,377 237 394 1,036 5,044
Insurance contract assets 5 174 - - 179
Reinsurance contract assets - 4,928 - - 4,928
Other assets and investment properties 2,717 67 31 1,394 4,209
Total assets at 30 Jun 2023 112,459 9,414 5,765 8,598 136,236
Liabilities under investment contracts designated at fair value - - 5,131 - 5,131
Insurance contract liabilities 111,427 3,868 - - 115,295
Reinsurance contract liabilities - 780 - - 780
Deferred tax 24 8 - 1 33
Other liabilities - - - 7,336 7,336
Total liabilities 111,451 4,656 5,131 7,337 128,575
Total equity - - - 7,661 7,661
Total liabilities and equity at 30 Jun 2023 111,451 4,656 5,131 14,998 136,236
Financial assets 102,539 4,398 6,543 7,109 120,589
- 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 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(3) 104,685 4,514 5,374 14,762 129,335
1 'Life other' mainly includes protection insurance contracts as well
as reinsurance contracts. The reinsurance contracts primarily provide
diversification benefits over the life participating and investment
discretionary participation feature ('DPF') contracts.
2 'Other contracts' includes investment contracts for which HSBC does
not bear significant insurance risk.
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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