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Annual Financial Report - 4 of 7

8th Mar 2017 16:18

RNS Number : 9101Y
HSBC Holdings PLC
08 March 2017
 
Capital
 
 
Page
Capital overview
127
Capital management
127
Capital
128
Risk-weighted assets
129
Leverage ratio
131
Capital highlights
•
Our common equity tier 1 ('CET1') ratio of 13.6% was up from 11.9% at the end of 2015, mainly due to a change in the regulatory treatment of Bank of Communications Co., Limited ('BoCom').
•
Our CET1 capital base reduced during the year by $14.3bn, driven by unfavourable foreign currency movements of $7.7bn, a $5.6bn reduction due to the BoCom change, and the $2.5bn share buy-back.
•
A decrease in RWAs in 2016 of $245.8bn from continued implementation of RWA-reduction initiatives, the BoCom change and favourable foreign currency movements, supported the increase in capital ratios.
Capital overview
Capital ratios
 
 
 
 
 
At 31 Dec
 
 
2016
2015
 
Footnote
%
%
CRD IV end point
 
 
 
Common equity tier 1 ratio
1
13.6
11.9
CRD IV transitional
 
 
 
Common equity tier 1 ratio
1
13.6
11.9
Tier 1 ratio
 
16.1
13.9
Total capital ratio
 
20.1
17.2
Total regulatory capital and risk-weighted assets
 
 
At 31 Dec
 
 
2016
2015
 
Footnote
$m
$m
CRD IV end point
 
 
 
Common equity tier 1 capital
1
115,984
130,863
CRD IV transitional
 
 
 
Common equity tier 1 capital
1
116,552
130,863
Additional tier 1 capital
 
21,470
22,440
Tier 2 capital
 
34,336
36,530
Total regulatory capital
 
172,358
189,833
Transitional risk-weighted assets
1
857,181
1,102,995
1
Due to transitional provisions in the threshold deduction our CET1 and RWAs are different for transitional and end point. At 31 December 2016, end point RWAs were $855.8bn.
RWAs by risk types
 
 
 
RWAs
Capital required 1
 
$bn
$bn
Credit risk
655.7
52.5
Counterparty credit risk
62.0
5.0
Market risk
41.5
3.3
Operational risk
98.0
7.8
At 31 Dec 2016
857.2
68.6
1
'Capital required' represents the Pillar 1 capital charge at 8% of RWAs.
 
Capital management
(Audited)
Our objective in the management of Group capital is to maintain appropriate levels of capital to support our business strategy, and meet our regulatory and stress testing related requirements.
Approach and policy
Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. It is our objective to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times. Our policy on capital management is underpinned by a capital management framework and our internal capital adequacy assessment process ('ICAAP'), which enables us to manage our capital in a consistent manner. The framework incorporates a number of different capital measures calculated on an economic capital and regulatory capital basis. The internal capital adequacy assessment process brings together regulatory and internal capital resources and requirements with HSBC's business model, strategy, performance and planning, risks to capital, and the implications of stress testing to assess the bank's capital position.
Our assessment of capital adequacy is aligned to our assessment of risks. These include credit, market, operational, pensions, insurance, structural foreign exchange risk, residual risks and interest rate risk in the banking book.
Planning and performance
Capital plans and RWA plans form part of the Annual Operating Plan that is approved by the Board. Revised RWA forecasts are submitted to the GMB on a monthly basis and reported RWAs are monitored against plan.
The responsibility for global capital allocation principles and decisions rests with the Group Finance Director. Through our internal governance processes, we seek to maintain discipline over our investment and capital allocation decisions, and seek to ensure that returns on investment meet the Group's management objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where above hurdle returns have been identified and their regulatory and economic capital needs.
We manage business returns by use of a return on risk-weighted assets ('RoRWA') measure. In 2016, we augmented this through the introduction of financial information and metrics on the consumption of, and returns on, capital by global business to support management's assessment of business performance and the allocation of capital resources. We plan to further embed this in 2017.
Risks to capital
Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs and/or capital position. The downside or upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary.
Stress testing
In addition to an annual internal stress test, the Group is subject to supervisory stress testing in many jurisdictions. Supervisory stress testing requirements are increasing in frequency and in the granularity with which the results are required. These exercises include the programmes of the PRA, the FRB, the EBA, the ECB and the HKMA, as well as stress tests undertaken in other jurisdictions. We take into account the results of all such regulatory stress testing and our internal stress test when assessing our internal capital requirements. The outcome of stress testing exercises carried out by the PRA will also feed
HSBC Holdings plc Annual Report and Accounts 2016
127
Report of the Directors | Capital
into a PRA buffer under the Pillar 2 requirements, where required.
Capital generation
HSBC Holdings is the provider of equity capital to its subsidiaries and also provides them with non-equity capital
 
where necessary. These investments are substantially funded by HSBC Holdings' own capital issuance and profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investment in subsidiaries.
Capital
Transitional own funds disclosure
(Audited)
 
 
At 31 Dec
 
 
2016
2015
Ref*
 
$m
$m
 
Common equity tier 1 ('CET1') capital: instruments and reserves
 
 
1
Capital instruments and the related share premium accounts
21,310
20,858
 
- ordinary shares
21,310
20,858
2
Retained earnings1
125,442
122,304
3
Accumulated other comprehensive income (and other reserves)1
560
8,832
5
Minority interests (amount allowed in consolidated CET1)
3,878
3,519
5a
Independently reviewed interim net profits net of any foreseeable charge or dividend1
(1,899
)
8,670
6
Common equity tier 1 capital before regulatory adjustments
149,291
164,183
 
Common equity tier 1 capital: regulatory adjustments
 
 
7
Additional value adjustments
(1,358
)
(1,151
)
8
Intangible assets (net of related deferred tax liability)
(15,037
)
(20,650
)
10
Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)
(1,696
)
(1,204
)
11
Fair value reserves related to gains or losses on cash flow hedges
(52
)
(52
)
12
Negative amounts resulting from the calculation of expected loss amounts
(4,025
)
(4,920
)
14
Gains or losses on liabilities at fair value resulting from changes in own credit standing
1,052
(495
)
15
Defined-benefit pension fund assets
(3,680
)
(4,009
)
16
Direct and indirect holdings of own CET1 instruments
(1,573
)
(839
)
19
Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions)
(6,370
)
-
28
Total regulatory adjustments to common equity tier 1
(32,739
)
(33,320
)
29
Common equity tier 1 capital
116,552
130,863
 
Additional tier 1 ('AT1') capital: instruments
 
 
30
Capital instruments and the related share premium accounts
11,259
9,261
31
- classified as equity under IFRSs
11,259
9,261
33
Amount of qualifying items and the related share premium accounts subject to phase out from AT1
7,946
8,972
34
Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties
2,419
4,388
35
- of which: instruments issued by subsidiaries subject to phase out
1,522
2,842
36
Additional tier 1 capital before regulatory adjustments
21,624
22,621
 
Additional tier 1 capital: regulatory adjustments
 
 
37
Direct and indirect holdings of own AT1 instruments
(60
)
(60
)
41b
Residual amounts deducted from AT1 capital with regard to deduction from tier 2 ('T2') capital during the transitional period
(94
)
(121
)
 
- direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities
(94
)
(121
)
43
Total regulatory adjustments to additional tier 1 capital
(154
)
(181
)
44
Additional tier 1 capital
21,470
22,440
45
Tier 1 capital (T1 = CET1 + AT1)
138,022
153,303
 
Tier 2 capital: instruments and provisions
 
 
46
Capital instruments and the related share premium accounts
16,732
15,863
47
Amount of qualifying items and the related share premium accounts subject to phase out from T2
5,695
6,645
48
Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in CET1 or AT1) issued by subsidiaries and held by third parties
12,323
14,344
49
- of which: instruments issued by subsidiaries subject to phase out
12,283
14,330
51
Tier 2 capital before regulatory adjustments
34,750
36,852
 
Tier 2 capital: regulatory adjustments
 
 
52
Direct and indirect holdings of own T2 instruments
(40
)
(40
)
55
Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions)
(374
)
(282
)
57
Total regulatory adjustments to tier 2 capital
(414
)
(322
)
58
Tier 2 capital
34,336
36,530
59
Total capital (TC = T1 + T2)
172,358
189,833
*
The references identify the lines prescribed in the EBA template, which are applicable and where there is a value.
1
In the comparative period, profits and other comprehensive income have been reallocated from row 2 into rows 5a and 3 respectively. In addition, retained earnings and profits pertaining to the deconsolidation of insurance and other entities have been reallocated from row 3 to rows 2 and 5a.
128
HSBC Holdings plc Annual Report and Accounts 2016
Throughout 2016, we complied with the Prudential Regulation Authority's ('PRA') regulatory capital adequacy requirements, including those relating to stress testing.
Following a clarification of policy by the PRA, at 30 September 2016 the regulatory treatment of our investment in BoCom changed from proportional consolidation of RWAs to a deduction from capital (subject to regulatory thresholds). The revised regulatory treatment is more consistent with our financial reporting treatment, aligning with the equity method of accounting, and better reflects our relationship with BoCom, including the nature of our obligations and financial commitments.
CET1 capital decreased during the year by $14.3bn, primarily because of:
•
unfavourable foreign currency translation differences of$7.8bn;
•
a $5.6bn reduction from the change in treatment of BoCom; and
•
the $2.5bn share buy-back.
These decreases were partly offset by:
•
$2.4bn from the sale of our operations in Brazil.
 
Risk-weighted assets
RWAs
RWAs decreased in 2016 by $245.8bn, of which $38.1bn was due to foreign currency translation differences. RWA initiatives reduced RWAs by $143.2bn, partly offset by book size movements increasing RWAs by $38.7bn. The change of regulatory treatment of our investment in BoCom reduced RWAs by $120.9bn.
The following comments describe RWA movements in 2016, excluding foreign currency translation differences.
RWA initiatives
The main drivers of these reductions were:
•
$69.8bn as a result of reduced exposures, refined calculations and process improvements;
•
$41.8bn from the sale of our activities in Brazil; and
•
$31.6bn through the continued reduction in Legacy Credit and US run-off portfolios.
Book size
Book size movements increased RWAs by $38.7bn, principally from:
•
increased corporate lending in GB&M and CMB, increasing RWAs by $32bn in Asia and Europe;
•
movements in market parameters increasing counterparty credit risk and market risk by $11.7bn; and
•
offset by a decrease in operational risk RWAs of $3.4bn reflecting the decrease of average income over three years.
RWAs by global business
 
RBWM
CMB
GB&M
GPB
Corporate Centre
Total
 
$bn
$bn
$bn
$bn
$bn
$bn
Credit risk
84.6
250.6
170.8
12.2
137.5
655.7
Counterparty credit risk
-
-
59.1
0.2
2.7
62.0
Market risk
-
-
38.5
-
3.0
41.5
Operational risk
30.5
25.3
32.0
2.9
7.3
98.0
At 31 Dec 2016
115.1
275.9
300.4
15.3
150.5
857.2
 
 
 
 
 
 
 
Credit risk
99.7
278.1
189.6
14.4
294.1
875.9
Counterparty credit risk
-
-
64.3
0.3
4.6
69.2
Market risk
-
-
40.7
-
1.8
42.5
Operational risk
31.0
24.1
35.7
3.3
21.3
115.4
At 31 Dec 2015
130.7
302.2
330.3
18.0
321.8
1,103.0
RWAs by geographical region
 
Europe
Asia
MENA
North
America
Latin
America
Total
 
$bn
$bn
$bn
$bn
$bn
$bn
Credit risk
205.8
260.0
49.0
118.5
22.4
655.7
Counterparty credit risk
30.9
16.1
1.2
12.6
1.2
62.0
Market risk1
30.8
21.3
1.4
6.8
0.5
41.5
Operational risk
30.9
36.6
7.5
12.8
10.2
98.0
At 31 Dec 2016
298.4
334.0
59.1
150.7
34.3
857.2
 
 
 
 
 
 
 
Credit risk
231.6
373.6
59.2
156.4
55.1
875.9
Counterparty credit risk
31.9
17.1
2.0
14.6
3.6
69.2
Market risk
30.5
21.9
1.5
6.5
1.6
42.5
Operational risk
33.2
47.1
7.9
14.1
13.1
115.4
At 31 Dec 2015
327.2
459.7
70.6
191.6
73.4
1,103.0
1
RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
HSBC Holdings plc Annual Report and Accounts 2016
129
Report of the Directors | Capital
RWA movement by global business by key driver
 
Credit risk, counterparty credit risk and operational risk
 
 
 
RBWM
CMB
GB&M
GPB
Corporate Centre
Market
risk
Total
RWAs
 
$bn
$bn
$bn
$bn
$bn
$bn
$bn
RWAs at 1 Jan 2016
130.8
302.1
289.6
18.0
320.0
42.5
1,103.0
RWA movements
RWA initiatives
(10.1
)
(39.0
)
(48.1
)
(0.3
)
(39.8
)
(5.9
)
(143.2
)
Foreign exchange movement
(4.1
)
(15.7
)
(10.1
)
(0.7
)
(7.5
)
-
(38.1
)
Acquisitions and disposals
-
-
-
-
-
-
-
Book size
0.7
16.6
22.9
(1.5
)
(4.9
)
4.9
38.7
Book quality
(1.5
)
7.7
8.5
-
0.3
-
15.0
Model updates
(0.9
)
-
(0.1
)
-
-
-
(1.0
)
- portfolios moving onto IRB1 approach
-
-
(0.1
)
-
-
-
(0.1
)
- new/updated models
(0.9
)
-
-
-
-
-
(0.9
)
Methodology and policy
0.2
4.2
(0.8
)
(0.2
)
(120.6
)
-
(117.2
)
- internal updates
1.0
4.2
(0.8
)
(0.2
)
(1.0
)
-
3.2
- external updates - regulatory
(0.8
)
-
-
-
(119.6
)
-
(120.4
)
Total RWA movement
(15.7
)
(26.2
)
(27.7
)
(2.7
)
(172.5
)
(1.0
)
(245.8
)
RWAs at 31 Dec 2016
115.1
275.9
261.9
15.3
147.5
41.5
857.2
1
Internal ratings based.
RWA movement by geographical region by key driver
 
Credit risk, counterparty credit risk and operational risk
 
 
 
Europe
Asia
MENA
North
America
Latin
America
Market risk
Total RWAs
 
$bn
$bn
$bn
$bn
$bn
$bn
$bn
RWAs at 1 Jan 2016
296.7
437.8
69.1
185.0
71.9
42.5
1,103.0
RWA movements
RWA initiatives
(28.4
)
(19.1
)
(3.6
)
(43.6
)
(42.6
)
(5.9
)
(143.2
)
Foreign exchange movement
(26.9
)
(7.8
)
(6.5
)
0.9
2.2
-
(38.1
)
Acquisitions and disposals
-
-
-
-
-
-
-
Book size
20.4
12.6
(1.4
)
0.2
2.0
4.9
38.7
Book quality
4.1
7.6
0.2
2.8
0.3
-
15.0
Model updates
0.2
-
-
(1.2
)
-
-
(1.0
)
- portfolios moving onto IRB1 approach
(0.1
)
-
-
-
-
-
(0.1
)
- new/updated models
0.3
-
-
(1.2
)
-
-
(0.9
)
Methodology and policy
1.5
(118.4
)
(0.1
)
(0.2
)
-
-
(117.2
)
- internal updates
2.6
0.6
(0.1
)
(0.2
)
0.3
-
3.2
- external updates - regulatory
(1.1
)
(119.0
)
-
-
(0.3
)
-
(120.4
)
Total RWA movement
(29.1
)
(125.1
)
(11.4
)
(41.1
)
(38.1
)
(1.0
)
(245.8
)
RWAs at 31 Dec 2016
267.6
312.7
57.7
143.9
33.8
41.5
857.2
1
Internal ratings based.
130
HSBC Holdings plc Annual Report and Accounts 2016
Leverage ratio
Leverage ratio
 
 
At 31 Dec
 
 
2016
2015
Ref*
 
$bn
$bn
21
Total leverage ratio exposure
2,354.4
2,794.4
20
Tier 1 capital (end point)
127.3
140.2
22
Leverage ratio
5.4
%
5.0%
EU-23
Choice on transitional arrangements for the definition of the capital measure
Fully phased in
Fully phased in
 
Total leverage ratio exposure - quarterly average
2,438.7
2,869.4
 
Leverage ratio - quarterly average
5.4
%
5.0%
*
The references identify the lines prescribed in the EBA template.
Our leverage ratio calculated on CRR basis was 5.4% at 31 December 2016, up from 5.0% at 31 December 2015. This was mainly due to a reduction in the exposure measure resulting from the change in regulatory treatment of our investment in BoCom.
The Group's UK leverage ratio on a modified basis, excluding qualifying central bank balances, was 5.7%. This modification to the leverage ratio exposure measure was made following recommendations by the Bank of England's Financial Policy Committee.
The Financial Policy Committee has stated that it intends to recalibrate the leverage ratio in 2017 to take account of this modification. HSBC's UK leverage ratio on a modified basis should be considered in this context.
 
At 31 December 2016, our UK minimum leverage ratio requirement of 3% was supplemented by an additional leverage ratio buffer of 0.2%. This additional buffer translates to a value of $5bn. The countercyclical leverage ratio buffer results in no capital impact. We comfortably exceeded these leverage requirements.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make firms more transparent by requiring publication, at least annually, of wide-ranging information on their risks, capital and management. Pillar 3 Disclosures 2016 is published on our website, www.hsbc.com, under Investor Relations.
HSBC Holdings plc Annual Report and Accounts 2016
131
This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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