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Half-year Report 2 of 2

29th Aug 2018 16:16

RNS Number : 1808Z
HSBC Holdings PLC
29 August 2018
 
Financial summary
Financial summary
 
Page
Use of non-GAAP financial measures
18
Adjusted performance
18
Significant items
18
Foreign currency translation differences
18
Changes from 1 January 2018
18
Summary consolidated income statement
19
Group performance by income and expense item
20
Net interest income
20
Net fee income
21
Net income from financial instruments measured at fair value through profit and loss
22
Gains less losses from financial investments
23
Net insurance premium income
23
Other operating income
24
Net insurance claims and benefits paid and movement in liabilities to policyholders
24
Change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions
25
Operating expenses
26
Share of profit in associates and joint ventures
27
Tax expense
27
Summary consolidated balance sheet
28
Balance sheet commentary compared with 1 January 2018
28
Use of non-GAAP financial measures
Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements starting on page 76.
To measure our performance we also use non-GAAP financial measures, including those derived from our reported results that eliminate factors that distort period-on-period comparisons. The 'adjusted performance' measure used throughout this report is described below, and where others are used they are described. All non-GAAP financial measures are reconciled to the closest reported financial measure.
The global business segmental results on pages 30 to 36 are presented on an adjusted basis in accordance with IFRS 8 'Operating Segments' as detailed in 'Basis of preparation' on page 30.
Adjusted performance
Adjusted performance is computed by adjusting reported results for the effects of foreign currency translation differences and significant items, which both distort period-on-period comparisons.
We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant and providing insight into how management assesses period-on-period performance.
Significant items
'Significant items' refers collectively to the items that management and investors would ordinarily identify and consider separately to understand better the underlying trends in the business.
The tables on pages 33 to 36 and pages 40 to 42 detail the effects of significant items on each of our global business segments and geographical regions in 1H18, and 1H17 and 2H17.
Foreign currency translation differences
Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2018. We exclude them to derive constant currency data, allowing us to assess balance sheet and income statement performance on a like-for-like basis and better understand the underlying trends in the business.
 
Foreign currency translation differences
Foreign currency translation differences for the half-year to 30 June 2018 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:
•
the income statements for the half-years to 30 June 2017 and 31 December 2017 at the average rates of exchange for the half-year to 30 June 2018; and
•
the balance sheets at 30 June 2017 and 31 December 2017 at the prevailing rates of exchange on 30 June 2018.
No adjustment has been made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates. When reference is made to foreign currency translation differences in tables or commentaries, comparative data reported in the functional currencies of HSBC's operations has been translated at the appropriate exchange rates applied in the current period on the basis described above.
Changes from 1 January 2018
IFRS 9
HSBC adopted the requirements of IFRS 9 'Financial Instruments' on 1 January 2018, with the exception of the provisions relating to the presentation of gains and losses on financial liabilities designated at fair value, which were adopted on 1 January 2017. The impact of transitioning to IFRS 9 at 1 January 2018 on the consolidated financial statements of HSBC was a decrease in net assets of $1.6bn, arising from:
•
a decrease of $2.2bn from additional impairment allowances;
•
a decrease of $0.9bn from our associates reducing their net assets;
•
an increase of $1.1bn from the remeasurement of financial assets and liabilities as a consequence of classification changes, mainly from revoking fair value accounting designations for certain long-dated issued debt instruments; and
•
an increase in net deferred tax assets of $0.4bn.
The effect of IFRS 9 on the carrying value of investments in associates has been updated from the effect disclosed in our Annual Report and Accounts 2017 and in our Report on Transition to IFRS 9 'Financial Instruments' 1 January 2018 as a result of those entities publicly reporting their expected transition impacts. This resulted in a further decrease in net assets of $0.6bn, net of tax.
Refer to 'Standards applied during the half-year to 30 June 2018' on page 82 and Note 14 'Effect of reclassification upon adoption of IFRS 9' for further detail. A Report on Transition to IFRS 9 'Financial Instruments' detailing the impact of the initial application was issued on 27 February 2018.
Income statement presentation
The classification and measurement requirements under IFRS 9, which was adopted from 1 January 2018, are based on an entity's assessment of both the business model for managing the assets and the contractual cash flow characteristics of the assets. The standard contains a classification for items measured mandatorily at fair value through profit or loss as a residual category. Given its residual nature, the presentation of the income statement has been updated to present separately items in this category which are of a dissimilar nature or function, in line with IAS 1 'Presentation of Financial Statements' requirements. Comparative data has been re-presented. There is no net impact on total operating income.
18
HSBC Holdings plc Interim Report 2018
Prior to 2018, foreign exchange exposure on some financial instruments designated at fair value was presented in the same line in the income statement as the underlying fair value movement on these instruments. In 2018 we have grouped the presentation of the entire effect of foreign exchange exposure in profit or loss and presented it within 'net income from financial
 
instruments held for trading or managed on a fair value basis'. Comparative data has been re-presented. There is no net impact on total operating income and the impact on 'changes in fair value of long-term debt and related derivatives' is $(276)m in 1H17 and $(241)m in 2H17.
Summary consolidated income statement
 
Half-year to
 
 
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
Footnotes
$m
$m
$m
Net interest income
 
15,100
13,777
14,399
Net fee income
 
6,767
6,491
6,320
Net income from financial instruments held for trading or managed on a fair value basis
 
4,883
4,232
4,194
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss
 
(222
)
1,499
1,337
Changes in fair value of long-term debt and related derivatives
 
(126
)
204
(49
)
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
 
345
N/A
N/A
Gains less losses from financial investments
 
124
691
459
Dividend income
 
41
49
57
Net insurance premium income
 
5,776
4,811
4,968
Other operating income/(expense)
 
359
526
(189
)
Total operating income
 
33,047
32,280
31,496
Net insurance claims and benefits paid and movement in liabilities to policyholders
 
(5,760
)
(6,114
)
(6,217
)
Net operating income before change in expected credit losses and other credit impairment charges
15
27,287
26,166
25,279
Change in expected credit losses and other credit impairment charges
 
(407
)
N/A
N/A
Loan impairment charges and other credit risk provisions
 
N/A
(663
)
(1,106
)
Net operating income
 
26,880
25,503
24,173
Total operating expenses
 
(17,549
)
(16,443
)
(18,441
)
Operating profit
 
9,331
9,060
5,732
Share of profit in associates and joint ventures
 
1,381
1,183
1,192
Profit before tax
 
10,712
10,243
6,924
Tax expense
 
(2,296
)
(2,195
)
(3,093
)
Profit for the period
 
8,416
8,048
3,831
Attributable to:
 
- ordinary shareholders of the parent company
 
7,173
6,999
2,684
- preference shareholders of the parent company
 
45
45
45
- other equity holders
 
530
466
559
- non-controlling interests
 
668
538
543
Profit for the period
 
8,416
8,048
3,831
 
 
$
$
$
Basic earnings per share
 
0.36
0.35
0.13
Diluted earnings per share
 
0.36
0.35
0.13
Dividend per ordinary share (declared in the period)
 
0.31
0.31
0.20
 
 
%
%
%
Post-tax return on average total assets
 
0.6
0.7
0.3
Return on average risk-weighted assets
23
2.5
2.4
1.6
Return on average ordinary shareholders' equity (annualised)
 
8.7
8.8
5.9
Return on average tangible equity (annualised)
17
9.7
9.9
6.8
Average foreign exchange translation rates to $:
 
 
 
 
$1: £
 
0.727
0.795
0.759
$1: €
 
0.827
0.924
0.851
For footnotes, see page 45.
HSBC Holdings plc Interim Report 2018
19
Financial summary
Group performance by income and expense item
For further financial performance data for each global business and geographical region, see pages 30 to 36, and 38 to 42, respectively.
Net interest income
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
Footnotes
$m
$m
$m
Interest income
23,422
19,727
21,268
Interest expense
(8,322
)
(5,950
)
(6,869
)
Net interest income
24
15,100
13,777
14,399
Average interest-earning assets
1,839,603
1,690,585
1,761,076
%
%
%
Gross interest yield
25
2.57
2.35
2.40
Less: cost of funds
(1.07
)
(0.84
)
(0.92
)
Net interest spread
26
1.50
1.51
1.48
Net interest margin
27
1.66
1.64
1.62
For footnotes, see page 45.
In 1H18, our net interest margin was 1.66%, compared with 1.64% in 1H17, including the effects of customer redress programmes and foreign currency translation.
Summary of interest income by type of asset
 
 
Half-year to
 
 
30 Jun 2018
30 Jun 2017
31 Dec 2017
 
 
Average
balance
Interest
income
Yield
Average
balance
Interest
income
Yield
Average
balance
Interest
income
Yield
 
Footnotes
$m
$m
%
$m
$m
%
$m
$m
%
Short-term funds and loans and advances to banks
 
240,804
1,116
0.93
225,031
923
0.83
247,040
1,107
0.89
Loans and advances to customers
 
966,481
16,036
3.35
870,652
13,955
3.23
933,261
14,796
3.15
Reverse repurchase agreements - non-trading
 
198,154
1,589
1.62
170,984
949
1.12
176,491
1,242
1.40
Financial investments
 
385,907
4,220
2.21
403,043
3,637
1.82
376,787
3,803
2.00
Other interest-earning assets
 
48,257
461
1.93
20,875
263
2.53
27,497
320
2.31
Total interest-earning assets
 
1,839,603
23,422
2.57
1,690,585
19,727
2.35
1,761,076
21,268
2.40
Trading assets and financial assets designated or mandatorily measured at fair value
28, 29
201,696
2,775
2.77
N/A
N/A
N/A
N/A
N/A
N/A
Trading assets and financial assets designated at fair value
 
N/A
N/A
N/A
181,316
1,972
2.19
191,943
2,273
2.35
Expected credit losses provision
 
(7,739
)
N/A
N/A
N/A
N/A
N/A
N/A
Impairment allowance
 
N/A
N/A
N/A
(8,099
)
(7,587
)
Non-interest-earning assets
 
617,148
623,410
 
 
610,076
 
 
Total
 
2,650,708
26,197
1.99
2,487,212
21,699
1.76
2,555,508
23,541
1.83
For footnotes, see page 45.
Summary of interest expense by type of liability and equity
 
 
Half-year to
 
 
30 Jun 2018
30 Jun 2017
31 Dec 2017
 
 
Average
balance
Interest
expense
Cost
Average
balance
Interest
expense
Cost
Average
balance
Interest
expense
Cost
 
Footnotes
$m
$m
%
$m
$m
%
$m
$m
%
Deposits by banks
30
45,142
226
1.01
45,288
227
1.01
49,353
224
0.90
Financial liabilities designated at fair value - own debt issued
31
55,056
685
2.51
60,505
609
2.03
60,626
652
2.13
Customer accounts
32
1,138,617
3,463
0.61
1,071,352
2,514
0.47
1,118,104
2,891
0.51
Repurchase agreements - non-trading
 
159,293
1,488
1.88
134,184
674
1.01
138,899
991
1.42
Debt securities in issue
 
124,847
1,969
3.18
108,540
1,511
2.81
108,812
1,619
2.95
Other interest-bearing liabilities
 
48,649
491
2.04
7,345
415
11.42
6,678
492
14.59
Total interest-bearing liabilities
 
1,571,604
8,322
1.07
1,427,214
5,950
0.84
1,482,472
6,869
0.92
Trading liabilities and financial liabilities designated at fair value (excluding own debt issued)
31, 33
140,485
1,804
2.59
147,168
1,094
1.50
160,276
1,231
1.52
Non-interest bearing current accounts
 
211,839
190,644
203,459
Total equity and other non-interest bearing liabilities
 
726,780
722,186
709,301
Total
 
2,650,708
10,126
0.77
2,487,212
7,044
0.57
2,555,508
8,100
0.63
For footnotes, see page 45.
20
HSBC Holdings plc Interim Report 2018
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
46
-
(111
)
- customer redress programmes
46
-
(108
)
- currency translation on significant items
-
(3
)
Currency translation
(367
)
(70
)
Total
46
(367
)
(181
)
Reported net interest income for 1H18 was $15.1bn, an increase of $1.3bn or 10% compared with 1H17. This included the favourable effects of a release related to customer redress programmes and foreign currency translation of $0.4bn.
Excluding these, net interest income increased by $0.9bn, mainly in Asia, notably in Hong Kong and mainland China, partly offset by a fall in Europe, notably in the UK.
Net interest margin of 1.66% increased by 3 basis points ('bps') compared with 2017, including the effects of customer redress programmes and foreign currency translation, which contributed to an increase of 1bp. Net interest margin, excluding the effects of customer redress programmes and foreign currency translation, increased by 2bps. This reflected higher yields on customer lending, notably in Asia driven by rate rises in Hong Kong, together with higher yields on surplus liquidity in most regions. These were partly offset by higher customer account costs, notably in Asia driven by rate rises in Hong Kong, and higher Group debt costs.
Compared with 1H17, net interest margin increased by 2bps, including the effects of customer redress programmes and foreign currency translation.
Interest income
Interest income increased by $3.7bn compared with 1H17 and includes the favourable effects of a release related to customer redress programmes and foreign currency translation of $0.6bn. Excluding these, interest income increased by $3.1bn, driven by higher income from loans and advances to customers, surplus liquidity and reverse repurchase agreements.
Interest income on loans and advances to customers was $2.1bn higher. The increase arose in:
•
Asia, from higher balances and yields in term lending, notably in Hong Kong; and
•
Latin America, from higher balances and yields in term lending, notably in Mexico driven by interest rate rises.
 
These increases were partly offset by decreases in North America, primarily resulting from the completed run-off of our US Consumer and Mortgage Lending ('CML') portfolio, although yields in term lending increased.
Interest income on surplus liquidity was $0.8bn higher, primarily in Asia and North America, following central bank rate rises.
Interest income on reverse repurchase agreements was $0.6bn higher, driven by higher yields in North America and balance growth in Europe. This increase was more than offset by an increase in the cost of repurchase agreements.
Interest expense
Reported interest expense increased by $2.4bn compared with 1H17, including the adverse effects of a release relating to customer redress programmes and foreign currency translation of $0.1bn. Excluding these, interest expense increased by $2.2bn. This was mainly as a result of the increased cost of customer accounts, repurchase agreements and Group debt.
Interest expense on customer accounts increased by $0.9bn, as average balances grew in most regions, mainly in:
•
Asia, notably in Hong Kong, reflecting balance growth and the effect of rate rises;
•
Europe, as a result of the effect of rate rises in the UK and balance growth; and
•
Latin America, notably in Mexico, reflecting increases in central bank rates.
Interest expense on repurchase agreements rose by $0.8bn, reflecting higher costs in North America as the US yield curve steepened and higher yields in Europe from a portfolio shift towards longer tenor repos.
Interest expense on debt issued rose by $0.5bn, reflecting a rise in the cost of debt, and an increase in average balances from new debt issued by HSBC Holdings to meet regulatory requirements.
Net fee income
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Account services
1,156
1,123
1,121
Funds under management
1,149
1,061
1,127
Cards
965
930
1,064
Credit facilities
897
873
845
Broking income
710
564
627
Unit trusts
613
516
494
Underwriting
431
485
344
Global custody
378
326
366
Imports/exports
362
379
357
Remittances
361
372
387
Insurance agency commission
233
209
201
Other
1,214
1,068
1,014
Fee income
8,469
7,906
7,947
Less: fee expense
(1,702
)
(1,415
)
(1,627
)
Net fee income
6,767
6,491
6,320
HSBC Holdings plc Interim Report 2018
21
Financial summary
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
-
-
-
Currency translation
(214
)
(54
)
Total
-
(214
)
(54
)
Net fee income increased by $0.3bn compared with 1H17. This included the effect of foreign currency translation which increased net fee income by $0.2bn.
Excluding the effect of foreign currency translation, net fee income increased by $0.1bn, reflecting increases in fee income from broking and unit trusts in RBWM, partly offset by lower underwriting fees and corporate finance (disclosed within 'Other' in table above) in GB&M.
Fee income from broking and unit trusts increased by $0.2bn and from funds under management increased by $0.1bn, notably in Hong Kong, from increased investor confidence.
 
Fee income from cards also increased, mainly in Asia due to increased customer activity, partly offset by the reclassification from cards to interbank and clearing fees mentioned below.
Other fee income increased due in part to an increase in interbank and clearing fees in the UK and Mexico, following the reclassification of interchange fee income from cards with effect from 1 January 2018.
These increases were partly offset by lower fee income from underwriting and corporate finance, as a result of lower issuances in DCM and reduced client activity.
In addition, fee expense increased by $0.3bn, in part from cards due to increased customer activity in Asia.
Net income from financial instruments measured at fair value through profit and loss
 
 
Half-year to
 
 
30 Jun
30 Jun
31 Dec
 
 
2018
2017
2017
 
Footnotes
$m
$m
$m
Trading activities
34
5,190
4,157
3,974
Other trading income - hedge ineffectiveness
 
(17
)
36
(38
)
- on cash flow hedges
 
(8
)
4
(10
)
- on fair value hedges
 
(9
)
32
(28
)
Fair value movement on non-qualifying hedges
 
(210
)
10
96
Other instruments designated and managed on a fair value basis and related derivatives
 
(80
)
29
162
Net income from financial instruments held for trading or managed on a fair value basis
 
4,883
4,232
4,194
Financial assets held to meet liabilities under insurance and investment contracts
 
(240
)
1,709
1,502
Liabilities to customers under investment contracts
 
18
(210
)
(165
)
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss
 
(222
)
1,499
1,337
Changes in fair value of long-term debt and related derivatives
34
(126
)
204
(49
)
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
 
345
N/A
N/A
Net income from financial instruments measured at fair value through profit or loss
 
4,880
5,935
5,482
For footnote, see page 45.
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
(160
)
(259
)
(3
)
- disposals, acquisitions and investment in new businesses
(8
)
-
-
- fair value movement on financial instruments
(152
)
(245
)
-
- currency translation on significant items
(14
)
(3
)
Currency translation
(249
)
(83
)
Total
(160
)
(508
)
(86
)
Net income from financial instruments measured at fair value of $4.9bn was $1.1bn lower than in 1H17, and included a favourable effect of foreign currency translation, and significant items relating to favourable fair value movements on financial instruments, including non-qualifying hedges and debit valuation adjustments. The reduction reflected the following:
•
Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss decreased by $1.7bn due to adverse fair value movements of $0.2bn, compared with a favourable movement of $1.5bn in 1H17. This reflected gains in 1H17 in Asia, notably in Hong Kong and Singapore from favourable performance in equities and unit trusts, compared
 
with less favourable conditions in 1H18. In France, revenue fell from a reversal of gains in 1H17 on investment contracts.
•
Net income arising from financial assets held to meet liabilities under insurance and investment contracts results in a corresponding movement in liabilities to customers, reflecting the extent to which they participate in the investment performance of the associated asset portfolio. These offsetting movements are recorded in 'Net income/(expense) arising from liabilities to customers under investment contracts' and 'Net insurance claims and benefits paid and movement in liabilities to policyholders'.
•
Changes in fair value of long-term debt and related derivatives reflected an adverse movement of $0.1bn in 1H18, compared with a favourable movement of $0.2bn in 1H17.
22
HSBC Holdings plc Interim Report 2018
These movements were driven by changes in interest rates between the periods, notably in USD and GBP.
These reductions were partly offset by:
•
Net income from financial instruments held for trading or managed on a fair value basis, which increased by $0.7bn, driven by favourable foreign currency translation ($0.2bn), and by higher revenue from trading activities, partly offset by an adverse impact of ($0.1bn) of significant items, including fair value movements on non-qualifying hedges. Revenue from trading activities increased, due to a number of accounting reclassifications under IFRS 9, partly offset in GB&M:
-
a change in accounting treatment on 1 January 2018 of issued debt securities, which resulted in the change in fair value movements relating to changes in credit spreads on structured liabilities being reported in other comprehensive income. This compared with an expense of $0.3bn recognised in trading activities in 2017;
-
a reclassification on 1 January 2018 of stock lending and borrowing instruments in Hong Kong from 'amortised cost' to 'held for trading'. This resulted in the income relating to these instruments no longer being recognised in net interest income, and instead being recognised in trading activities. See Note 14 on the Financial Statements for further details;
 
-
a reclassification of a net expense related to structured notes to Other instruments designated and managed on a fair value basis and related derivatives; and
-
a favourable foreign exchange revaluation in mainland China on capital denominated in USD, as a result of strengthening of the USD against the RMB.
These increases were partly offset by:
-
a decrease in revenue from trading activities in GB&M. This was primarily in Europe, as our Global Markets business experienced lower client activity in Europe, notably in Rates, partly offset by an increase in the US from higher metals and emerging markets trading activity.
•
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss is a new revenue category under IFRS 9 and recorded revenue of $0.3bn in 1H18. This revenue was mainly in the UK, reflecting gains on debt securities, as well as gains in GB&M on disposal of investments and fair value movements on underlying equities.
The majority of our financial liabilities designated at fair value are fixed-rate, long-term debt issuances, and are managed in conjunction with interest rate swaps as part of our interest rate management strategy. These liabilities are discussed further on page 44 of the Annual Report and Accounts 2017.
Gains less losses from financial investments
 
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Net gains from disposal
124
712
536
- debt securities
114
287
116
- equity securities
N/A
419
419
- other financial investments
10
6
1
Impairment of available-for-sale equity securities
N/A
(21
)
(77
)
Gains less losses from financial investments
124
691
459
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
-
312
122
- disposals, acquisitions and investment in new businesses
-
312
122
- currency translation on significant items
-
-
Currency translation
(22
)
(6
)
Total
-
290
116
Gains less losses from financial investments of $0.1bn decreased by $0.6bn compared with 1H17. This was partly due to the non-recurrence of the gain on disposal of our membership interest in Visa Inc. in the US of $0.3bn, a significant item in 1H17.
 
The remaining decrease was mainly in Corporate Centre, which included net losses related to disposals in legacy credit, and lower gains on the disposal of available-for-sale assets in Balance Sheet Management, notably in Europe and Asia. We also recorded lower disposal gains in GB&M in France and the UK.
Net insurance premium income
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Gross insurance premium income
6,078
5,551
5,251
Reinsurance premiums
(302
)
(740
)
(283
)
Net insurance premium income
5,776
4,811
4,968
HSBC Holdings plc Interim Report 2018
23
Financial summary
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
-
-
-
Currency translation
(126
)
(30
)
Total
-
(126
)
(30
)
Net insurance premium income of $5.8bn was $1.0bn higher compared with 1H17, and included the effects of currency translation.
 
This was driven by higher new business volumes, particularly in Hong Kong and France, and lower reinsurance ceded in Hong Kong.
Other operating income
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Rent received
84
87
84
Gains/(losses) recognised on assets held for sale
(30
)
131
83
Gains on investment properties
23
27
21
Gains on disposal of property, plant and equipment, intangible assets and non-financial investments
6
1
45
Change in present value of in-force long-term insurance business
363
151
(127
)
Other
(87
)
129
(295
)
Other operating income/(expense)
359
526
(189
)
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
(134
)
52
(205
)
- disposals, acquisitions and investment in new businesses
(134
)
46
(206
)
- currency translation on significant items
6
1
Currency translation
(90
)
(46
)
Total
(134
)
(38
)
(251
)
Other operating income of $0.4bn fell by $0.2bn compared with 1H17. We recorded net losses on assets held for sale in 1H18, compared with net gains in 1H17. The movement largely related to 1H17 gains on the disposal of our holding in VocaLink and of our operations in Lebanon.
In Other, we recorded losses on the early redemption of subordinated debt linked to the US run-off portfolio ($0.1bn), and net losses related to asset sales in legacy credit. This was partly offset by a small gain on financial guarantees in relation to asset-backed securities.
 
These decreases were partly offset by a $0.2bn increase from favourable movements in the present value of in-force ('PVIF') long-term insurance business, driven by the future sharing of investment returns with policyholders, primarily in Hong Kong, and an increase in the value of new business, partly offset by adverse movements from changes in assumptions on investment returns and updates to lapse rate assumptions, primarily in Hong Kong.
Net insurance claims and benefits paid and movement in liabilities to policyholders
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Gross
5,879
6,795
6,413
Less reinsurers' share
(119
)
(681
)
(196
)
Net total
5,760
6,114
6,217
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
-
-
-
Currency translation
(169
)
(27
)
Total
-
(169
)
(27
)
24
HSBC Holdings plc Interim Report 2018
Net insurance claims and benefits paid and movement in liabilities to policyholders of $5.8bn were $0.4bn lower compared with 1H17, and included the effects of currency translation.
This was primarily due to lower returns on financial assets supporting policyholders where the policyholder is subject to part or all of the investment risk, reflecting weaker equity market performance in Hong Kong and France compared with 1H17.
 
These decreases were partly offset by the impact of higher policy surrender payments, higher net premium income and lower reinsurance ceded in Hong Kong.
The gains or losses recognised on the financial assets measured at fair value that are held to support these insurance contract liabilities are reported in 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss' on page 22.
Change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions35 
 
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Loans and advances to banks and customers
508
779
1,213
- new allowances net of allowance releases
769
1,065
1,571
- recoveries of amounts previously written off
(261
)
(286
)
(358
)
Loan commitments and guarantees
(7
)
(53
)
3
Other financial assets
(5
)
6
11
Debt instruments measured at fair value through other comprehensive income
(89
)
N/A
N/A
Available-for-sale debt securities
N/A
(69
)
(121
)
Change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions
407
663
1,106
For footnotes, see page 45.
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
-
-
-
Currency translation
6
(7
)
Total
-
6
(7
)
Changes in expected credit losses and other credit impairment charges ('ECL') of $0.4bn in 1H18 remained at low levels, and reflected charges in RBWM and CMB, partly offset by net releases in GB&M and Corporate Centre.
In 1H17, loan impairment charges and other credit risk provisions ('LICs') of $0.7bn were primarily in RBWM and CMB. The effects of currency translation between the periods were minimal.
First half of 2018
In 1H18, ECL in RBWM of $0.5bn primarily comprised new allowances in Mexico ($0.2bn), the UK ($0.1bn) and Hong Kong ($0.1bn) and mainly related to unsecured lending balances. The overall allowance for ECL remained broadly unchanged compared with 1 January 2018, as these new allowances broadly offset releases, mainly from write-offs.
In CMB, ECL charges of $0.1bn were mainly in MENA ($0.1bn), reflecting challenging economic conditions in the region, which resulted in charges against a small number of clients across multiple sectors in Turkey, the UAE and Qatar. There were also smaller charges in Mexico and France related to specific exposures. These increases were partly offset by releases of $0.1bn in the US and Canada relating to specific customers in various sectors.
In GB&M, a net ECL release of $0.1bn was driven by the US ($0.2bn) relating to a small number of clients, notably within the
 
oil and gas sector. These releases were partly offset by charges against two large corporate exposures in the UK in the retail and construction sectors.
In Corporate Centre, a net ECL release of $90m related to Legacy Credit in the UK following disposals in the portfolio.
First half of 2017
In 1H17, LICs in RBWM were $0.6bn, of which the largest portion of the charge was in Mexico ($0.2bn), reflecting our strategic growth in unsecured lending, together with an associated rise in delinquency, and in the UK ($0.1bn), primarily against our unsecured lending exposure. LICs in RBWM also included charges in Asia ($0.1bn), mainly in Hong Kong and Malaysia, and in MENA ($0.1bn).
In CMB, LICs of $0.1bn were driven by an increase in allowances in Hong Kong ($0.2bn), related to a small number of clients in a number of sectors, partly offset by releases in the US and Canada, notably in the oil and gas sector, as well as in the UK related to an exposure in the construction sector.
In GB&M, LICs of $41m were primarily in Hong Kong against a small number of specific customers in various sectors, partly offset by releases in the US, notably in the mining sector.
In Corporate Centre, a net LICs release of $53m was mainly related to our legacy credit portfolio in the UK.
HSBC Holdings plc Interim Report 2018
25
Financial summary
Operating expenses
Operating expenses by category
 
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Employee compensation and benefits
8,836
8,680
8,635
Premises and equipment (excluding depreciation and impairment)
1,733
1,711
1,819
General and administrative expenses
6,034
5,189
6,988
Administrative expenses
16,603
15,580
17,442
Depreciation and impairment of property, plant and equipment
568
567
599
Amortisation and impairment of intangible assets
378
296
400
Operating expenses
17,549
16,443
18,441
Staff numbers (full-time equivalents)
 
At
 
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
Retail Banking and Wealth Management
129,999
127,469
129,402
Commercial Banking
43,529
44,659
44,871
Global Banking and Markets
47,298
46,270
45,725
Global Private Banking
6,922
8,069
7,250
Corporate Centre
1,447
6,490
1,439
Total staff numbers
229,195
232,957
228,687
Significant items and currency translation
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Significant items
1,179
1,938
1,928
- costs to achieve
-
1,670
1,332
- costs of structural reform
211
180
240
- customer redress programmes
100
299
356
- disposals, acquisitions and investment in new businesses
3
10
43
- gain on partial settlement of pension obligation
-
-
(188
)
- restructuring and other related costs
24
-
-
- settlements and provisions in connection with legal and regulatory matters
841
(322
)
124
-
currency translation on significant items
101
21
Currency translation
(690
)
(217
)
Total
1,179
1,248
1,711
Reported operating expenses of $17.5bn were $1.1bn or 7% higher than in 1H17. This included a reduction in significant items of $0.8bn, which was broadly offset by adverse currency translation. Significant items comprised:
•
the non-recurrence of costs to achieve of $1.7bn in 1H17; and
•
customer redress programme costs of $0.1bn in 1H18, compared with $0.3bn in 1H17.
These were partly offset by:
•
settlements and provisions in connection with legal matters of $0.8bn in 1H18, compared with a net release of $0.3bn in 1H17.
Excluding significant items and currency translation, operating expenses of $16.4bn were $1.2bn or 8% higher than in 1H17. The increase primarily reflected investments to grow the business ($0.5bn), notably in RBWM and GB&M, and in digital capabilities across all of our global businesses ($0.2bn), as well as an increase in variable pay ($0.2bn). The impact of our cost-saving efficiencies more than offset inflation and investment in regulatory programmes and compliance.
 
We have maintained our momentum to grow the business, including:
•
in RBWM, investment in digital capabilities and marketing to help deliver improved customer services and investments to grow the business, including front-line sales capacity and technology, mainly in the UK, Hong Kong, cards in China (including the Pearl River Delta), and in the US as part of the US turnaround strategy;
•
in GB&M, notably in Securities Services and Global Markets, and in HSBC Qianhai Securities, our Chinese joint venture; and
•
in CMB, enhanced propositions in HSBCnet, Trade Transaction Tracker and Digital Business Banking in Hong Kong.
Our total investment in regulatory programmes and compliance was $1.6bn, up $0.1bn or 6% from 1H17. This reflected the continued focus on our Global Standards programme to help ensure that the changes that we have made are effective and sustainable. These costs included spend incurred to deliver the programmes, as well as recurring costs to maintain the activities.
The number of employees expressed in FTEs at 30 June 2018 was 229,195, an increase of 508 since 31 December 2017. This was primarily driven by investments in business growth programmes.
26
HSBC Holdings plc Interim Report 2018
Share of profit in associates and joint ventures
 
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Share of profit in associates
1,371
1,173
1,176
- Bank of Communications Co., Limited
1,072
938
925
- The Saudi British Bank
264
231
191
- other
35
4
60
Share of profit in joint ventures
10
10
16
Share of profit in associates and joint ventures
1,381
1,183
1,192
Our share of profit in associates and joint ventures was $1.4bn in 1H18, an increase of $0.2bn or 17% and included favourable effects of foreign currency translation movements of $0.1bn. The remaining increase mainly reflected an increase in our share of profit from Bank of Communications Co., Limited ('BoCom').
We recorded a higher share of profit from Barrowgate Limited, partly as 1H17 included property revaluation losses. We also recognised a higher share of income from The Saudi British Bank ('SABB'), reflecting improved performance.
At 30 June 2018, we performed an impairment review of our investment in BoCom and concluded that it was not impaired,
 
based on our value in use calculation (see Note 9 on the Financial Statements for further details).
In future periods, the value in use may increase or decrease depending on the effect of changes to model inputs. It is expected that the carrying amount will increase due to retained profits earned by BoCom. At the point where the carrying amount exceeds the value in use, HSBC will determine whether an impairment exists. If so, we would continue to recognise our share of BoCom's profit or loss, but the carrying amount would be reduced to equal the value in use, with a corresponding reduction in income, unless the market value has increased to a level above the carrying amount.
Tax expense
 
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Profit before tax
10,712
10,243
6,924
Tax expense
(2,296
)
(2,195
)
(3,093
)
Profit after tax
8,416
8,048
3,831
Effective tax rate
21.4%
21.4%
44.7%
The effective tax rate for 1H18 of 21.4% was in line with the 21.4% in 1H17 and lower than the 44.7% for 2H17, principally due to the impact of US tax reform in 2H17 that did not recur in 1H18.
HSBC Holdings plc Interim Report 2018
27
Financial summary
Summary consolidated balance sheet
At
30 Jun
1 Jan
31 Dec
2018
201836
2017
$m
$m
$m
Assets
Cash and balances at central banks
189,842
180,621
180,624
Trading assets
247,892
254,410
287,995
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
40,678
39,746
N/A
Financial assets designated at fair value
N/A
N/A
29,464
Derivatives
227,972
219,818
219,818
Loans and advances to banks
83,924
82,559
90,393
Loans and advances to customers
973,443
949,737
962,964
Reverse repurchase agreements - non-trading
208,104
201,553
201,553
Financial investments
386,436
383,499
389,076
Other assets
249,023
206,487
159,884
Total assets
2,607,314
2,518,430
2,521,771
Liabilities and equity
Liabilities
Deposits by banks
64,792
64,492
69,922
Customer accounts
1,356,307
1,360,227
1,364,462
Repurchase agreements - non-trading
158,295
130,002
130,002
Trading liabilities
83,845
80,864
184,361
Financial liabilities designated at fair value
151,985
144,006
94,429
Derivatives
222,961
216,821
216,821
Debt securities in issue
81,708
66,536
64,546
Liabilities under insurance contracts
86,918
85,598
85,667
Other liabilities
209,209
173,660
113,690
Total liabilities
2,416,020
2,322,206
2,323,900
Equity
Total shareholders' equity
183,607
188,644
190,250
Non-controlling interests
7,687
7,580
7,621
Total equity
191,294
196,224
197,871
Total liabilities and equity
2,607,314
2,518,430
2,521,771
For footnote, see page 45.
Selected financial information
 
At
 
30 Jun
31 Dec
 
2018
2017
 
$m
$m
Called up share capital
10,159
10,160
Capital resources
176,610
182,383
Undated subordinated loan capital
1,969
1,969
Preferred securities and dated subordinated loan capital
35,673
42,147
Risk-weighted assets
865,467
871,337
Financial statistics
 
 
Loans and advances to customers as a percentage of customer accounts
71.8
70.6
Average total shareholders' equity to average total assets
7.16
7.33
Net asset value per ordinary share at period end ($)
8.10
8.35
Number of $0.50 ordinary shares in issue (millions)
19,963
20,321
Closing foreign exchange translation rates to $:
 
 
$1: £
0.760
0.740
$1: €
0.859
0.834
A more detailed consolidated balance sheet is contained in the Financial Statements on page 78.
Balance sheet commentary compared with 1 January 2018
The effect of transitioning to IFRS 9 'Financial Instruments' on 1 January 2018 was a reduction in our total assets of $3.3bn from 31 December 2017, and the reclassification of certain items within the balance sheet. The commentary that follows compares our balance sheet at 30 June 2018 with that at 1 January 2018.
At 30 June 2018 our total assets were $2.6tn, an increase of $89bn or 4% on a reported basis and $134bn or 5% on a constant currency basis.
We increased our balance sheet by targeting lending growth, notably in Asia, which grew by $30bn or 7% on a constant
 
currency basis, as we continued to focus on loan growth in the region.
Our ratio of customer advances to customer accounts was 72%, up from 70% at 1 January 2018, reflecting targeted lending growth. Loans and advances to customers increased on a reported basis by $24bn, and customer accounts decreased by $4bn. These changes included adverse currency translation of $19bn on loans and advances to customers, and $24bn on customer accounts.
Excluding the effects of currency translation, loans and advances to customers increased by $43bn or 5%, and customer accounts increased by $20bn or 2%.
28
HSBC Holdings plc Interim Report 2018
Assets
Cash and balances at central banks increased by $9bn or 5%, reflecting the redeployment of our commercial surplus in the US to maximise returns.
Trading assets decreased by $7bn or 3%, reflecting lower equity security holdings, notably in the UK. This was partly offset by increased debt securities held in the US.
Reverse repurchase agreements - non-trading increased by $7bn or 3%, notably in the UK and France, mainly driven by customer demand in our Markets business. This was partly offset by a reduction in the US reflecting the redeployment of our commercial surplus.
Derivative assets increased by $8bn or 4%, primarily in the UK reflecting revaluation movements as a result of changes in exchange rates, partly offset by adverse movements in yield curves in France. The increase in derivative assets was partly offset by an increase in derivative liabilities.
Other assets grew by $43bn or 21%, primarily due to an increase in settlement accounts in the UK, the US and Hong Kong from higher trading activity compared with the seasonal reduction in December 2017. We also saw cash collateral increase, reflecting higher derivative balances.
Loans and advances
Loans and advances to customers increased by $24bn on a reported basis compared with 1 January 2018, notably in Asia. This included an adverse effect of foreign currency translation of $19bn.
Excluding the effects of currency translation, loans and advances to customers increased by $43bn or 5%. This growth was primarily in Asia (up $30bn) in GB&M (up $11bn) and CMB (up $11bn), reflecting higher term lending in Hong Kong from our continued strategic focus on loan growth in the region, as well as an increase in customer demand. In RBWM, we continued to increase lending, primarily in Hong Kong (up $6bn) reflecting our strategy to maintain our leading position in mortgages and loans in Hong Kong.
Customer lending increased in Europe by $8bn, notably in UK mortgages (up $4bn), reflecting our focus on broker-originated mortgages. We also grew balances in CMB in the UK by $4bn driven by higher term lending and overdraft balances, primarily to mid-market and large corporate clients.
In North America, loans and advances to customers increased by $1bn, primarily from increased lending to both existing and new clients in Canada, partly offset by higher maturities in GB&M in the US.
Liabilities
Repurchase agreements - non-trading increased by $28bn or 22%, primarily in the UK and the US, mainly driven by an increased use of repurchase agreements for funding in our Markets business.
Financial liabilities designated at fair value increased by $8bn or 6%, driven by debt issuances in France and Taiwan, an increase in equity-linked notes and commercial deposits in Hong Kong, and favourable fair value movements on debt securities in the UK resulting from exchange rate movements.
Derivative liabilities increased by $6bn or 3%, which is consistent with the increase in derivative assets, since the underlying risk is broadly matched.
Debt securities in issue increased by $15bn or 23%, reflecting an increase in commercial paper, primarily USD denominated. In addition, there was an increase in senior MREL issuances in the period.
Other liabilities increased by $36bn or 20%, primarily due to an increase in settlement accounts in the UK and the US from higher seasonal trading activity compared with December.
Customer accounts
Customer accounts decreased by $4bn on a reported basis, and included the adverse effect of foreign currency translation of
 
$24bn. Excluding this, customer accounts increased by $20bn or 2%. This growth was notably in Europe (up $16bn) in GB&M (up $12bn), primarily reflecting higher GLCM deposits as we priced competitively to facilitate higher stable funding. The increase in RBWM balances (up $3bn) was driven by the UK, primarily in current accounts.
In Asia, we grew customer accounts by $8bn, notably in RBWM (up $4bn) and also in GB&M (up $3bn) reflecting higher customer inflows. This was partly offset by a managed reduction of balances in GPB (down $1bn), reflecting active redeployment of client deposits to maximise their returns.
Customer accounts growth was partly offset in North America (down $4bn), notably in the US, reflecting a reduction in RBWM following repricing of a portfolio of savings accounts, and in Corporate Centre from lower time deposits. In addition, customer accounts fell in Canada in CMB and GB&M due to the effect of US tax reform and resulting repatriation of balances to the US, and seasonal reductions.
Equity
Total shareholders' equity decreased by $5bn or 3% compared with 1 January 2018. The effects of profits generated in the period were more than offset by an increase in accumulated foreign exchange losses, the dividends paid to shareholders, the effects of the $2.0bn share buy-back announced in May 2018 and the redemption of Tier 1 instruments.
Customer accounts by country
At
30 Jun
31 Dec
2018
2017
$m
$m
Europe
507,066
505,182
- UK
404,129
401,733
- France
43,057
45,833
- Germany
20,500
17,355
- Switzerland
8,477
7,936
- other
30,903
32,325
Asia
656,620
657,395
- Hong Kong
477,728
477,104
- Mainland China
42,100
45,991
- Singapore
40,592
41,144
- Australia
20,231
20,212
- Taiwan
15,835
13,459
- Malaysia
14,113
14,027
- India
12,915
13,228
- Indonesia
4,169
4,211
- other
28,937
28,019
Middle East and North Africa
34,207
34,658
- United Arab Emirates
16,215
16,602
- Egypt
3,983
3,912
- Turkey
3,502
3,772
- other
10,507
10,372
North America
135,736
143,432
- US
84,541
89,887
- Canada
43,313
45,510
- other
7,882
8,035
Latin America
22,678
23,795
- Mexico
17,784
17,809
- other
4,894
5,986
At end of period
1,356,307
1,364,462
Risk-weighted assets
Risk-weighted assets totalled $865.5bn at 30 June 2018, a $5.8bn decrease in the first half of the year that includes a reduction of $13.9bn due to foreign currency translation differences. The $8.1bn increase (excluding foreign currency translation differences) was mainly due to an increase in asset size of $10.5bn and changes in asset quality of $3.7bn, less decreases due to model updates of $5.3bn.
HSBC Holdings plc Interim Report 2018
29
Global businesses
Global businesses
 
Page
Summary
30
Basis of preparation
30
Analysis of adjusted results by global business
30
Reconciliation of reported and adjusted items
32
Reconciliation of reported and adjusted items - global businesses
33
Reconciliation of reported and adjusted items - risk weighted assets
36
Supplementary tables for RBWM and GPB
36
Funds under management
37
Summary
The Group Chief Executive and the rest of the Group Management Board ('GMB') review operating activity on a number of bases, including by global business and geographical region. Global businesses are our reportable segments under IFRS 8 'Operating segments'.
Basis of preparationGlobal business results are assessed by the Chief Operating Decision Maker on the basis of adjusted performance that removes the effects of significant items and currency translation from reported results. We therefore present these results on an adjusted basis. 1H17 and 2H17 adjusted performance information is presented on a constant currency basis as described on page 18.As required by IFRS 8, reconciliations of the total adjusted global business results of the Group reported results are presented on page 30.
 
Supplementary reconciliations from reported to adjusted results by global business are presented on pages 32 to 35 for information purposes.Global business performance is also assessed using Return on Tangible Equity ('ROTE') excluding significant items and the UK bank levy. A reconciliation of global business ROTE excluding significant items and the UK bank levy to the Group's ROTE is provided in the Reconciliations of non-GAAP financial measures 30 June 2018.Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to operational business lines and geographical regions. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to global businesses are included in Corporate Centre.Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-Group elimination items for the global businesses are presented in Corporate Centre.The expense of the UK bank levy is included in the Europe geographical region as HSBC regards the levy as a cost of being headquartered in the UK. For the purposes of the presentation by global business, the cost of the levy is included in Corporate Centre.The results of geographical regions are presented on a reported basis.Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA, by the location of the branch responsible for reporting the results or providing funding.
A description of the global businesses is provided in the Overview section, pages 3 and 12 to 15.
Analysis of adjusted results by global business
HSBC adjusted profit before tax and balance sheet data
Half-year to 30 Jun 2018
RetailBanking andWealthManagement
CommercialBanking
GlobalBanking andMarkets
GlobalPrivateBanking
Corporate Centre
Total
Footnote
$m
$m
$m
$m
$m
$m
Net operating income/(expense) before change in expected credit losses and other credit impairment charges
15
11,065
7,439
8,265
929
(163
)
27,535
- external
9,092
7,319
9,498
800
826
27,535
- inter-segment
1,973
120
(1,233
)
129
(989
)
-
of which: net interest income/(expense)
7,661
5,189
2,489
446
(731
)
15,054
Change in expected credit losses and other credit impairment charges
(543
)
(55
)
97
4
90
(407
)
Net operating income
10,522
7,384
8,362
933
(73
)
27,128
Total operating expenses
(6,909
)
(3,273
)
(4,794
)
(743
)
(651
)
(16,370
)
Operating profit/(loss)
3,613
4,111
3,568
190
(724
)
10,758
Share of profit/(loss) in associates and joint ventures
17
-
-
-
1,364
1,381
Adjusted profit before tax
3,630
4,111
3,568
190
640
12,139
%
%
%
%
%
%
Share of HSBC's adjusted profit before tax
29.9
33.9
29.4
1.6
5.2
100.0
Adjusted cost efficiency ratio
62.4
44.0
58.0
80.0
(399.4
)
59.5
Adjusted balance sheet data
$m
$m
$m
$m
$m
$m
Loans and advances to customers (net)
351,114
329,300
250,058
40,902
2,069
973,443
Interests in associates and joint ventures
391
-
-
-
22,181
22,572
Total external assets
474,507
363,939
1,054,181
46,133
668,554
2,607,314
Customer accounts
635,598
355,650
291,711
63,593
9,755
1,356,307
Adjusted risk-weighted assets
124,059
315,064
284,553
16,984
122,158
862,818
30
HSBC Holdings plc Interim Report 2018
HSBC adjusted profit before tax and balance sheet data (continued)
Half-year to 30 Jun 2017
 
 
RetailBanking andWealthManagement
CommercialBanking
GlobalBanking andMarkets
GlobalPrivateBanking
Corporate Centre
Total
 
Footnote
$m
$m
$m
$m
$m
$m
Net operating income before loan impairment charges and other credit risk provisions
15
10,283
6,622
8,192
874
986
26,957
- external
8,825
6,679
8,727
733
1,993
26,957
- inter-segment
1,458
(57
)
(535
)
141
(1,007
)
-
of which: net interest income
6,920
4,423
2,307
407
103
14,160
Loan impairment (charges)/recoveries and othercredit risk provisions
(565
)
(109
)
(40
)
(1
)
58
(657
)
Net operating income
9,718
6,513
8,152
873
1,044
26,300
Total operating expenses
(6,311
)
(2,949
)
(4,609
)
(729
)
(597
)
(15,195
)
Operating profit
3,407
3,564
3,543
144
447
11,105
Share of profit/(loss) in associates and joint ventures
(10
)
-
-
-
1,269
1,259
Adjusted profit before tax
3,397
3,564
3,543
144
1,716
12,364
%
%
%
%
%
%
Share of HSBC's adjusted profit before tax
27.5
28.8
28.7
1.2
13.8
100.0
Adjusted cost efficiency ratio
61.4
44.5
56.3
83.4
60.5
56.4
Adjusted balance sheet data
$m
$m
$m
$m
$m
$m
Loans and advances to customers (net)
324,604
304,204
244,144
38,436
7,753
919,141
Interests in associates and joint ventures
378
-
-
-
20,929
21,307
Total external assets
440,751
331,670
1,030,547
44,769
648,313
2,496,050
Customer accounts
618,263
341,681
268,447
68,214
14,778
1,311,383
Adjusted risk-weighted assets
115,676
287,965
305,511
16,455
142,497
868,104
Half-year to 31 Dec 2017
Net operating income/(expense) before loan impairment charges and other credit risk provisions
15
10,280
6,883
7,386
866
323
25,738
- external
8,487
6,978
8,126
734
1,413
25,738
- inter-segment
1,793
(95
)
(740
)
132
(1,090
)
-
of which: net interest income/(expense)
7,249
4,814
2,655
428
(583
)
14,563
Loan impairment (charges)/recoveries and other credit risk provisions
(415
)
(382
)
(432
)
(16
)
132
(1,113
)
Net operating income
9,865
6,501
6,954
850
455
24,625
Total operating expenses
(6,755
)
(3,128
)
(4,567
)
(698
)
(1,582
)
(16,730
)
Operating profit/(loss)
3,110
3,373
2,387
152
(1,127
)
7,895
Share of profit in associates and joint ventures
27
-
-
-
1,203
1,230
Adjusted profit before tax
3,137
3,373
2,387
152
76
9,125
%
%
%
%
%
%
Share of HSBC's adjusted profit before tax
34.4
37.0
26.2
1.7
0.7
100.0
Adjusted cost efficiency ratio
65.7
45.4
61.8
80.6
489.8
65.0
Adjusted balance sheet data
$m
$m
$m
$m
$m
$m
Loans and advances to customers (net)
338,511
310,087
247,805
39,763
7,379
943,545
Interests in associates and joint ventures
363
-
-
-
22,121
22,484
Total external assets
458,384
341,091
962,267
45,330
670,727
2,477,799
Customer accounts
628,854
356,542
277,751
65,446
11,070
1,339,663
Adjusted risk-weighted assets
119,548
294,714
295,670
15,893
129,133
854,958
For footnote, see page 45.
HSBC Holdings plc Interim Report 2018
31
Global businesses
Reconciliation of reported and adjusted items
Adjusted results reconciliation
 
 
Half-year to
 
 
30 Jun 2018
30 Jun 2017
31 Dec 2017
 
 
Adjusted
Significant items
Reported
Adjusted
Currency translation
Significant items
Reported
Adjusted
Currency translation
Significant items
Reported
 
Footnote
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
Revenue
15
27,535
(248
)
27,287
26,957
(897
)
106
26,166
25,738
(261
)
(198
)
25,279
ECL
 
(407
)
-
(407
)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
LICs
 
N/A
N/A
N/A
(657
)
(6
)
-
(663
)
(1,113
)
7
-
(1,106
)
Operating expenses
 
(16,370
)
(1,179
)
(17,549
)
(15,195
)
690
(1,938
)
(16,443
)
(16,730
)
217
(1,928
)
(18,441
)
Share of profit
in associates
and joint ventures
 
1,381
-
1,381
1,259
(76
)
-
1,183
1,230
(38
)
-
1,192
Profit/(loss) before tax
 
12,139
(1,427
)
10,712
12,364
(289
)
(1,832
)
10,243
9,125
(75
)
(2,126
)
6,924
For footnote, see page 45.
Adjusted balance sheet reconciliation
 
At
 
30 Jun 2018
31 Dec 2017
 
Reported and Adjusted
Adjusted
Currency translation
Reported
 
$m
$m
$m
$m
Loans and advances to customers (net)
973,443
943,545
19,419
962,964
Interests in associates and joint ventures
22,572
22,484
260
22,744
Total external assets
2,607,314
2,477,799
43,972
2,521,771
Customer accounts
1,356,307
1,339,663
24,799
1,364,462
Adjusted profit reconciliation
 
 
Half-year to
 
 
30 Jun
30 Jun
31 Dec
 
 
2018
2017
2017
 
Footnote
$m
$m
$m
Adjusted profit before tax
 
12,139
12,364
9,125
Significant items
 
(1,427
)
(1,832
)
(2,126
)
- customer redress programmes
 
(54
)
(299
)
(464
)
- disposals, acquisitions and investment in new businesses
 
(145
)
348
(127
)
- fair value movements on financial instruments
37
(152
)
(245
)
-
- costs to achieve
 
-
(1,670
)
(1,332
)
- costs of structural reform
 
(211
)
(180
)
(240
)
- gain on partial settlement of pension obligation
 
-
-
188
- restructuring and other related costs
 
(24
)
-
-
- settlements and provisions in connection with legal and regulatory matters
 
(841
)
322
(124
)
- currency translation on significant items
 
 
(108
)
(27
)
Currency translation
 
 
(289
)
(75
)
Reported profit before tax
 
10,712
10,243
6,924
For footnote, see page 45.
32
HSBC Holdings plc Interim Report 2018
Reconciliation of reported and adjusted items - global businesses
Supplementary analysis of significant items by global business is presented below.
Half-year to 30 Jun 2018
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Corporate Centre
Total
Footnotes
$m
$m
$m
$m
$m
$m
Revenue
15
Reported
11,058
7,485
8,330
929
(515
)
27,287
Significant items
7
(46
)
(65
)
-
352
248
- customer redress programmes
-
(46
)
-
-
-
(46
)
- disposals, acquisitions and investment in new businesses
7
-
-
-
135
142
- fair value movements on financial instruments
37
-
-
(65
)
-
217
152
Adjusted
11,065
7,439
8,265
929
(163
)
27,535
ECL
Reported
(543
)
(55
)
97
4
90
(407
)
Adjusted
(543
)
(55
)
97
4
90
(407
)
Operating expenses
Reported
(7,020
)
(3,281
)
(4,702
)
(787
)
(1,759
)
(17,549
)
Significant items
111
8
(92
)
44
1,108
1,179
- costs of structural reform
1
2
16
-
192
211
- customer redress programmes
94
6
-
-
-
100
- disposals, acquisitions and investment in new businesses
-
-
-
3
-
3
- restructuring and other related costs
-
-
-
-
24
24
- settlements and provisions in connection with legal and regulatory matters
16
-
(108
)
41
892
841
Adjusted
(6,909
)
(3,273
)
(4,794
)
(743
)
(651
)
(16,370
)
Share of profit in associates and joint ventures
Reported
17
-
-
-
1,364
1,381
Adjusted
17
-
-
-
1,364
1,381
Profit before tax
Reported
3,512
4,149
3,725
146
(820
)
10,712
Significant items
118
(38
)
(157
)
44
1,460
1,427
- revenue
7
(46
)
(65
)
-
352
248
- operating expenses
111
8
(92
)
44
1,108
1,179
Adjusted
3,630
4,111
3,568
190
640
12,139
Loans and advances to customers (net)
Reported
351,114
329,300
250,058
40,902
2,069
973,443
Adjusted
351,114
329,300
250,058
40,902
2,069
973,443
Customer accounts
Reported
635,598
355,650
291,711
63,593
9,755
1,356,307
Adjusted
635,598
355,650
291,711
63,593
9,755
1,356,307
For footnotes, see page 45.
HSBC Holdings plc Interim Report 2018
33
Global businesses
Reconciliation of reported results to adjusted items - global businesses (continued)
Half-year to 30 Jun 2017
RetailBanking and Wealth Management
Commercial Banking
GlobalBanking and Markets
Global Private Banking
Corporate Centre
Total
Footnotes
$m
$m
$m
$m
$m
$m
Revenue
15
Reported
10,282
6,407
7,548
858
1,071
26,166
Currency translation
240
215
355
29
58
897
Significant items
(239
)
-
289
(13
)
(143
)
(106
)
- disposals, acquisitions and investment in new businesses
(239
)
-
-
(12
)
(107
)
(358
)
- fair value movement on financial instruments
37
-
-
275
-
(30
)
245
- currency translation on significant items
-
-
14
(1
)
(6
)
7
Adjusted
10,283
6,622
8,192
874
986
26,957
LICs
Reported
(556
)
(118
)
(41
)
(1
)
53
(663
)
Currency translation
(9
)
9
1
-
5
6
Adjusted
(565
)
(109
)
(40
)
(1
)
58
(657
)
Operating expenses
Reported
(6,617
)
(2,858
)
(4,155
)
(704
)
(2,109
)
(16,443
)
Currency translation
(228
)
(103
)
(213
)
(27
)
(119
)
(690
)
Significant items
534
12
(241
)
2
1,631
1,938
-
costs of structural reform
-
-
1
-
179
180
- costs to achieve
197
12
97
2
1,362
1,670
- customer redress programmes
299
-
-
-
-
299
- disposals, acquisitions and investment in new businesses
-
-
-
-
10
10
- settlements and provisions in connection with legal and regulatory matters
-
-
(322
)
-
-
(322
)
-
currency translation on significant items
38
-
(17
)
-
80
101
Adjusted
(6,311
)
(2,949
)
(4,609
)
(729
)
(597
)
(15,195
)
Share of profit in associates and joint ventures
Reported
(11
)
-
-
-
1,194
1,183
Currency translation
1
-
-
-
75
76
Adjusted
(10
)
-
-
-
1,269
1,259
Profit before tax
Reported
3,098
3,431
3,352
153
209
10,243
Currency translation
4
121
143
2
19
289
Significant items
295
12
48
(11
)
1,488
1,832
- revenue
(239
)
-
289
(13
)
(143
)
(106
)
- operating expenses
534
12
(241
)
2
1,631
1,938
Adjusted
3,397
3,564
3,543
144
1,716
12,364
Loans and advances to customers (net)
Reported
324,464
305,018
243,989
38,601
7,766
919,838
Currency translation
140
(814
)
155
(165
)
(13
)
(697
)
Adjusted
324,604
304,204
244,144
38,436
7,753
919,141
Customer accounts
Reported
619,858
341,596
267,274
68,226
15,004
1,311,958
Currency translation
(1,595
)
85
1,173
(12
)
(226
)
(575
)
Adjusted
618,263
341,681
268,447
68,214
14,778
1,311,383
For footnotes, see page 45.
34
HSBC Holdings plc Interim Report 2018
Reconciliation of reported results to adjusted items - global businesses (continued)
Half-year to 31 Dec 2017
RetailBanking and Wealth Management
Commercial Banking
GlobalBanking and Markets
Global Private Banking
Corporate Centre
Total
Footnotes
$m
$m
$m
$m
$m
$m
Revenue
15
Reported
10,237
6,713
7,069
865
395
25,279
Currency translation
36
64
114
10
37
261
Significant items
7
106
203
(9
)
(109
)
198
- customer redress programmes
3
103
2
-
-
108
- disposals, acquisitions and investment in new businesses
4
-
99
(8
)
(11
)
84
- fair value movements on financial instruments
37
-
-
98
-
(98
)
-
- currency translation on significant items
-
3
4
(1
)
-
6
Adjusted
10,280
6,883
7,386
866
323
25,738
LICs
Reported
(424
)
(378
)
(418
)
(15
)
129
(1,106
)
Currency translation
9
(4
)
(14
)
(1
)
3
(7
)
Adjusted
(415
)
(382
)
(432
)
(16
)
132
(1,113
)
Operating expenses
Reported
(7,117
)
(3,143
)
(4,568
)
(882
)
(2,731
)
(18,441
)
Currency translation
(39
)
(28
)
(69
)
(10
)
(71
)
(217
)
Significant items
401
43
70
194
1,220
1,928
- costs of structural reform
6
3
7
-
224
240
- costs to achieve
73
32
143
1
1,083
1,332
- customer redress programmes
338
16
2
-
-
356
- disposals, acquisitions and investment in new businesses
-
-
-
31
12
43
- gain on partial settlement of pension obligation
(26
)
(9
)
(9
)
(3
)
(141
)
(188
)
- settlements and provisions in connection with legal and regulatory matters
-
-
(54
)
164
14
124
- currency translation on significant items
10
1
(19
)
1
28
21
Adjusted
(6,755
)
(3,128
)
(4,567
)
(698
)
(1,582
)
(16,730
)
Share of profit in associates and joint ventures
Reported
29
-
-
-
1,163
1,192
Currency translation
(2
)
-
-
-
40
38
Adjusted
27
-
-
-
1,203
1,230
Profit before tax
Reported
2,725
3,192
2,083
(32
)
(1,044
)
6,924
Currency translation
4
32
31
(1
)
9
75
Significant items
408
149
273
185
1,111
2,126
- revenue
7
106
203
(9
)
(109
)
198
- operating expenses
401
43
70
194
1,220
1,928
Adjusted
3,137
3,373
2,387
152
76
9,125
Loans and advances to customers (net)
Reported
346,148
316,533
252,474
40,326
7,483
962,964
Currency translation
(7,637
)
(6,446
)
(4,669
)
(563
)
(104
)
(19,419
)
Adjusted
338,511
310,087
247,805
39,763
7,379
943,545
Customer accounts
Reported
639,592
362,908
283,943
66,512
11,507
1,364,462
Currency translation
(10,738
)
(6,366
)
(6,192
)
(1,066
)
(437
)
(24,799
)
Adjusted
628,854
356,542
277,751
65,446
11,070
1,339,663
For footnotes, see page 45.
HSBC Holdings plc Interim Report 2018
35
Global businesses
Reconciliation of reported and adjusted risk-weighted assets
 
At 30 Jun 2018
 
Retail
Banking and
WealthManagement
CommercialBanking
GlobalBanking andMarkets
Global PrivateBanking
Corporate Centre
Total
 
$bn
$bn
$bn
$bn
$bn
$bn
Risk-weighted assets
 
 
 
 
 
 
Reported
124.1
315.1
284.5
17.0
124.8
865.5
Disposals
-
-
-
-
(2.7
)
(2.7
)
- Brazil operations
-
-
-
-
(2.7
)
(2.7
)
Adjusted
124.1
315.1
284.5
17.0
122.1
862.8
 
 
 
 
 
 
 
 
At 30 Jun 2017
Risk-weighted assets
 
 
 
 
 
 
Reported
116.6
289.2
306.1
16.4
147.8
876.1
Currency translation
(0.9
)
(1.2
)
(0.6
)
-
(0.1
)
(2.8
)
Disposals
-
-
-
-
(5.2
)
(5.2
)
- Brazil operations
-
-
-
-
(5.2
)
(5.2
)
Adjusted
115.7
288.0
305.5
16.4
142.5
868.1
 
At 31 Dec 2017
Risk-weighted assets
 
 
 
 
 
 
Reported
121.5
301.0
299.3
16.0
133.5
871.3
Currency translation
(2.0
)
(6.3
)
(3.6
)
(0.1
)
(1.6
)
(13.6
)
Disposals
-
-
-
-
(2.7
)
(2.7
)
- Brazil operations
-
-
-
-
(2.7
)
(2.7
)
Adjusted
119.5
294.7
295.7
15.9
129.2
855.0
Supplementary tables for RBWM and GPB
A breakdown of RBWM by business unit is presented below to reflect the basis of how the revenue performance of the business units is assessed and managed.
For GPB, a key measure of business performance is client assets, which is also presented below.
RBWM - summary (adjusted basis)
 
 
Consists of
 
 
Total
RBWM
Banking
operations
Insurance manufacturing
Asset
management
 
Footnote
$m
$m
$m
$m
Half-year to 30 Jun 2018
 
 
 
 
 
Net operating income before change in expected credit losses and other credit impairment charges
15
11,065
9,523
988
554
- net interest income
 
7,661
6,653
1,008
-
- net fee income/(expense)
 
2,795
2,548
(307
)
554
- other income
 
609
322
287
-
ECL
 
(543
)
(543
)
-
-
Net operating income
 
10,522
8,980
988
554
Total operating expenses
 
(6,909
)
(6,326
)
(220
)
(363
)
Operating profit
 
3,613
2,654
768
191
Share of profit in associates and joint ventures
 
17
-
17
-
Profit before tax
 
3,630
2,654
785
191
 
 
 
 
 
 
Half-year to 30 Jun 2017
 
 
 
 
 
Net operating income before loan impairment charges and other
credit risk provisions
15
10,283
8,584
1,165
534
- net interest income
 
6,920
5,938
982
-
- net fee income/(expense)
 
2,577
2,338
(269
)
508
- other income
 
786
308
452
26
LICs
 
(565
)
(565
)
-
-
Net operating income
 
9,718
8,019
1,165
534
Total operating expenses
 
(6,311
)
(5,748
)
(207
)
(356
)
Operating profit
 
3,407
2,271
958
178
Share of profit in associates and joint ventures
 
(10
)
1
(11
)
-
Profit before tax
 
3,397
2,272
947
178
36
HSBC Holdings plc Interim Report 2018
RBWM - summary (adjusted basis) (continued)
Half-year to 31 Dec 2017
 
 
 
 
 
Net operating income before loan impairment charges and other
credit risk provisions
15
10,280
8,926
813
541
- net interest income
 
7,249
6,212
1,037
-
- net fee income/(expense)
 
2,654
2,367
(231
)
518
- other income
 
377
347
7
23
LICs
 
(415
)
(415
)
-
-
Net operating income
 
9,865
8,511
813
541
Total operating expenses
 
(6,755
)
(6,202
)
(199
)
(354
)
Operating profit
 
3,110
2,309
614
187
Share of profit in associates and joint ventures
 
27
5
22
-
Profit before tax
 
3,137
2,314
636
187
For footnote, see page 45.
Insurance manufacturing for RBWM excluded other global businesses which contributed net operating income of $144m (1H17: $120m; 2H17:$77m) and profit before tax of $119m (1H17: $92m; 2H17: $50m) to overall insurance manufacturing. In 1H18 insurance manufacturing net operating income for RBWM included $919m within Wealth Management (1H17: $1,117m; 2H17: $759m) and $69m within other products (1H17: $48m; 2H17: $54m).
In total, insurance manufacturing generated $1,828m of annualised new business premiums (1H17: $1,493m; 2H17: $1,235m) of which $1,767m (1H17: $1,448m; 2H17: $1,220m) related to RBWM.
Distribution of insurance products by HSBC channels contributed $597m of net fee income (1H17: $557m; 2H17: $482m) of which RBWM channels earned $517m (1H17: $480m;2H17: $434m). Of this total income, $367m (1H17: $344m; 2H17: $288m) was in respect of HSBC manufactured products and a corresponding fee expense is therefore recognised within insurance manufacturing.
GPB - reported client assets38
 
 
Half-year to
 
 
30 Jun
30 Jun
31 Dec
 
 
2018
2017
2017
 
Footnote
$bn
$bn
$bn
Opening balance
 
330
298
316
Net new money
 
6
1
(1
)
- of which: areas targeted for growth
 
9
8
7
Value change
 
(3
)
12
9
Disposals
 
-
(9
)
(1
)
Exchange and other
 
(3
)
14
7
Closing balance
39
330
316
330
For footnote, see page 45.
GPB - reported client assets by geography
 
At
 
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
 
$bn
$bn
$bn
Europe
161
155
161
Asia
131
119
130
North America
38
42
39
Closing balance
330
316
330
Funds under management
 
At
 
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
 
$bn
$bn
$bn
Global Asset Management
456
440
462
Global Private Banking
262
243
258
Affiliates
4
4
4
Other
224
202
219
Funds under management
946
889
943
 
 
 
 
 
Half-year to
 
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
 
$bn
$bn
$bn
At beginning of period
943
831
889
Net new money
11
(6
)
8
Value change
6
39
38
Exchange and other
(14
)
25
8
At end of period
946
889
943
HSBC Holdings plc Interim Report 2018
37
Geographical regions
Geographical regions
 
Page
Analysis of reported results by geographical regions
38
Reconciliation of reported and adjusted items - geographical regions
40
Analysis by country
43
Analysis of reported results by geographical regions
HSBC reported profit/(loss) before tax and balance sheet data
 
 
Half-year to 30 Jun 2018
 
 
Europe
Asia
MENA
North America
Latin America
Intra-HSBCitems
Total
 
Footnotes
$m
$m
$m
$m
$m
$m
$m
Net interest income
 
3,527
7,821
864
1,747
1,039
102
15,100
Net fee income
 
2,110
3,139
320
930
268
-
6,767
Net income from financial instruments held for trading or managed on a fair value basis
 
1,926
1,981
147
456
384
(11
)
4,883
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss
 
(141
)
(79
)
-
-
(2
)
-
(222
)
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
 
424
(16
)
(1
)
19
10
(91
)
345
Other income/(expense)
40
1,025
1,666
26
260
(103
)
(2,460
)
414
Net operating income before change in expected credit losses and other credit impairment charges
15
8,871
14,512
1,356
3,412
1,596
(2,460
)
27,287
Change in expected credit losses and other credit impairment charges/(recoveries)
 
(187
)
(116
)
(103
)
234
(235
)
-
(407
)
Net operating income
 
8,684
14,396
1,253
3,646
1,361
(2,460
)
26,880
Total operating expenses
 
(8,592
)
(6,110
)
(686
)
(3,604
)
(1,017
)
2,460
(17,549
)
Operating profit
 
92
8,286
567
42
344
-
9,331
Share of profit in associates and joint ventures
 
18
1,094
269
-
-
-
1,381
Profit before tax
 
110
9,380
836
42
344
-
10,712
 
 
%
%
%
%
%
 
%
Share of HSBC's profit before tax
 
1.0
87.6
7.8
0.4
3.2
 
100.0
Cost efficiency ratio
 
96.9
42.1
50.6
105.6
63.7
 
64.3
Balance sheet data
 
$m
$m
$m
$m
$m
$m
$m
Loans and advances to customers (net)
 
374,264
445,692
29,106
104,361
20,020
-
973,443
Total assets
 
1,198,988
1,042,326
57,336
417,317
48,201
(156,854
)
2,607,314
Customer accounts
 
507,066
656,620
34,207
135,736
22,678
-
1,356,307
Risk-weighted assets
41
301,253
363,977
58,043
132,970
36,991
-
865,467
 
 
 
 
 
 
 
 
 
 
 
Half-year to 30 Jun 2017
Net interest income
 
3,470
6,765
858
1,770
1,010
(96
)
13,777
Net fee income
 
2,175
2,819
316
929
252
-
6,491
Net income from financial instruments held for trading or managed on a fair value basis
2,010
1,517
118
274
217
96
4,232
Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss
 
401
1,070
-
-
28
-
1,499
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
 
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Other income
40
847
615
70
523
42
(1,930
)
167
Net operating income before loan impairment charges and other credit risk provisions
15
8,903
12,786
1,362
3,496
1,549
(1,930
)
26,166
Loan impairment charges and other credit risk provisions
 
19
(448
)
(122
)
137
(249
)
-
(663
)
Net operating income
 
8,922
12,338
1,240
3,633
1,300
(1,930
)
25,503
Total operating expenses
 
(8,361
)
(5,640
)
(673
)
(2,683
)
(1,016
)
1,930
(16,443
)
Operating profit
 
561
6,698
567
950
284
-
9,060
Share of profit in associates and joint ventures
 
11
932
237
3
-
-
1,183
Profit before tax
 
572
7,630
804
953
284
-
10,243
 
 
%
%
%
%
%
 
%
Share of HSBC's profit before tax
 
5.6
74.5
7.8
9.3
2.8
 
100.0
Cost efficiency ratio
 
93.9
44.1
49.4
76.7
65.6
 
62.8
Balance sheet data
 
$m
$m
$m
$m
$m
$m
$m
Loans and advances to customers (net)
 
364,943
400,505
28,489
105,996
19,905
-
919,838
Total assets
 
1,148,654
975,165
57,781
436,175
46,834
(172,166
)
2,492,443
Customer accounts
 
479,079
635,809
34,794
139,770
22,506
-
1,311,958
Risk-weighted assets
41
311,690
347,019
59,329
137,274
38,641
-
876,118
38
HSBC Holdings plc Interim Report 2018
HSBC reported profit/(loss) before tax and balance sheet data (continued)
 
 
Half-year to 31 Dec 2017
 
 
Europe
Asia
MENA
North America
Latin
America
Intra-HSBC
items
Total
 
Footnotes
$m
$m
$m
$m
$m
$m
$m
Net interest income
 
3,500
7,388
894
1,671
1,088
(142
)
14,399
Net fee income/(expense)
 
1,986
2,812
303
951
268
-
6,320
Net income from financial instruments held for trading or managed on a fair value basis
 
2,056
1,412
62
253
269
142
4,194
Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss
 
368
933
-
-
36
-
1,337
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
 
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Other income/(expense)
40
607
475
39
342
15
(2,449
)
(971
)
Net operating income before loan impairment charges and other credit risk provisions
15
8,517
13,020
1,298
3,217
1,676
(2,449
)
25,279
Loan impairment charges and other credit risk provisions
 
(677
)
(122
)
(85
)
52
(274
)
-
(1,106
)
Net operating income
 
7,840
12,898
1,213
3,269
1,402
(2,449
)
24,173
Total operating expenses
 
(10,304
)
(6,150
)
(721
)
(2,622
)
(1,093
)
2,449
(18,441
)
Operating profit/(loss)
 
(2,464
)
6,748
492
647
309
-
5,732
Share of profit/(loss) in associates and joint ventures
 
28
951
205
1
7
-
1,192
Profit/(loss) before tax
 
(2,436
)
7,699
697
648
316
-
6,924
 
 
%
%
%
%
%
 
%
Share of HSBC's profit before tax
 
(35.3
)
111.2
10.1
9.4
4.6
 
100.0
Cost efficiency ratio
 
121.0
47.2
55.5
81.5
65.2
 
72.9
Balance sheet data
 
$m
$m
$m
$m
$m
$m
$m
Loans and advances to customers (net)
 
381,547
425,971
28,050
107,607
19,789
-
962,964
Total assets
 
1,169,515
1,008,498
57,469
391,292
48,413
(153,416
)
2,521,771
Customer accounts
 
505,182
657,395
34,658
143,432
23,795
-
1,364,462
Risk-weighted assets
41
311,612
357,808
59,196
131,276
36,372
-
871,337
For footnotes, see page 45.
HSBC Holdings plc Interim Report 2018
39
Geographical regions
Reconciliation of reported and adjusted items - geographical regions
Reconciliation of reported results to adjusted performance - geographical regions
Half-year to 30 Jun 2018
Europe
Asia
MENA
NorthAmerica
LatinAmerica
Total
UK
HongKong
Footnotes
$m
$m
$m
$m
$m
$m
$m
$m
Revenue
15
Reported
42
8,871
14,512
1,356
3,412
1,596
27,287
6,813
9,155
Significant items
141
(20
)
(2
)
96
33
248
143
7
- customer redress programmes
(46
)
-
-
-
-
(46
)
(46
)
-
- disposals, acquisitions and investment in new businesses
-
-
-
103
39
142
-
-
- fair value movements on financial instruments
37
187
(20
)
(2
)
(7
)
(6
)
152
189
7
Adjusted
42
9,012
14,492
1,354
3,508
1,629
27,535
6,956
9,162
ECL
Reported
(187
)
(116
)
(103
)
234
(235
)
(407
)
(156
)
(20
)
Adjusted
(187
)
(116
)
(103
)
234
(235
)
(407
)
(156
)
(20
)
Operating expenses
Reported
42
(8,592
)
(6,110
)
(686
)
(3,604
)
(1,017
)
(17,549
)
(6,768
)
(3,179
)
Significant items
213
-
-
966
-
1,179
135
1
- costs of structural reform
209
2
-
-
-
211
178
2
- customer redress programmes
100
-
-
-
-
100
100
-
- disposals, acquisitions and investment in new businesses
3
-
-
-
-
3
-
-
- restructuring and other related costs
21
-
-
3
-
24
21
-
- settlements and provisions in connection with legal and regulatory matters
(120
)
(2
)
-
963
-
841
(164
)
(1
)
Adjusted
42
(8,379
)
(6,110
)
(686
)
(2,638
)
(1,017
)
(16,370
)
(6,633
)
(3,178
)
Share of profit in associates and joint ventures
Reported
18
1,094
269
-
-
1,381
18
20
Adjusted
18
1,094
269
-
-
1,381
18
20
Profit before tax
Reported
110
9,380
836
42
344
10,712
(93
)
5,976
Significant items
354
(20
)
(2
)
1,062
33
1,427
278
8
- revenue
141
(20
)
(2
)
96
33
248
143
7
- operating expenses
213
-
-
966
-
1,179
135
1
Adjusted
464
9,360
834
1,104
377
12,139
185
5,984
Loans and advances to customers (net)
Reported
374,264
445,692
29,106
104,361
20,020
973,443
290,469
283,265
Adjusted
374,264
445,692
29,106
104,361
20,020
973,443
290,469
283,265
Customer accounts
Reported
507,066
656,620
34,207
135,736
22,678
1,356,307
404,129
477,728
Adjusted
507,066
656,620
34,207
135,736
22,678
1,356,307
404,129
477,728
 
 
Mainland China
US
Mexico
 
 
$m
$m
$m
Revenue
 
 
 
 
Reported
 
1,458
2,422
1,109
Significant items
 
-
97
(4
)
- disposals, acquisitions and investment in new businesses
 
-
103
-
- fair value movements on financial instruments
37
-
(6
)
(4
)
Adjusted
 
1,458
2,519
1,105
For footnotes, see page 45.
40
HSBC Holdings plc Interim Report 2018
Reconciliation of reported results to adjusted performance - geographical regions (continued)
Half-year to 30 Jun 2017
Europe
Asia
MENA
North
America
Latin
America
Total
UK
Hong
Kong
Footnotes
$m
$m
$m
$m
$m
$m
$m
$m
Revenue
15
Reported
42
8,903
12,786
1,362
3,496
1,549
26,166
6,559
7,959
Currency translation
42
910
119
(16
)
32
(113
)
897
660
(64
)
Significant items
3
123
1
(238
)
5
(106
)
(2
)
56
- disposals, acquisitions and investment in new businesses
(90
)
-
-
(268
)
-
(358
)
(78
)
-
- fair value movements on financial instruments
37
88
121
1
30
5
245
71
56
- currency translation on significant items
5
2
-
-
-
7
5
-
Adjusted
42
9,816
13,028
1,347
3,290
1,441
26,957
7,217
7,951
LICs
Reported
19
(448
)
(122
)
137
(249
)
(663
)
32
(388
)
Currency translation
1
(1
)
-
3
3
6
2
3
Adjusted
20
(449
)
(122
)
140
(246
)
(657
)
34
(385
)
Operating expenses
Reported
42
(8,361
)
(5,640
)
(673
)
(2,683
)
(1,016
)
(16,443
)
(6,659
)
(2,950
)
Currency translation
42
(715
)
(81
)
13
(19
)
77
(690
)
(535
)
24
Significant items
1,327
359
14
213
25
1,938
1,232
167
- costs of structural reform
180
-
-
-
-
180
180
-
- costs to achieve
1,072
355
15
203
25
1,670
986
168
- customer redress programmes
299
-
-
-
-
299
299
-
- disposals, acquisitions and investment in new businesses
2
-
-
8
-
10
-
-
- settlement and provisions in connection with legal and regulatory matters
(322
)
-
-
-
-
(322
)
(322
)
-
- currency translation on significant items
96
4
(1
)
2
-
101
89
(1
)
Adjusted
42
(7,749
)
(5,362
)
(646
)
(2,489
)
(914
)
(15,195
)
(5,962
)
(2,759
)
Share of profit in associates and joint ventures
Reported
11
932
237
3
-
1,183
11
(12
)
Currency translation
2
74
-
-
-
76
2
-
Adjusted
13
1,006
237
3
-
1,259
13
(12
)
Profit before tax
Reported
572
7,630
804
953
284
10,243
(57
)
4,609
Currency translation
198
111
(3
)
16
(33
)
289
129
(37
)
Significant items
1,330
482
15
(25
)
30
1,832
1,230
223
- revenue
3
123
1
(238
)
5
(106
)
(2
)
56
- operating expenses
1,327
359
14
213
25
1,938
1,232
167
Adjusted
2,100
8,223
816
944
281
12,364
1,302
4,795
Loans and advances to customers (net)
Reported
364,943
400,505
28,489
105,996
19,905
919,838
284,701
252,994
Currency translation
4,981
(1,408
)
(900
)
(633
)
(2,737
)
(697
)
3,998
(1,276
)
Adjusted
369,924
399,097
27,589
105,363
17,168
919,141
288,699
251,718
Customer accounts
Reported
479,079
635,809
34,794
139,770
22,506
1,311,958
378,800
467,278
Currency translation
6,283
(2,048
)
(813
)
(727
)
(3,270
)
(575
)
5,237
(2,358
)
Adjusted
485,362
633,761
33,981
139,043
19,236
1,311,383
384,037
464,920
 
 
Mainland China
US
Mexico
 
 
$m
$m
$m
Revenue
 
 
 
 
Reported
 
1,224
2,626
1,012
Currency translation
 
97
-
15
Significant items
 
2
(244
)
5
- disposals, acquisitions and investment in new businesses
 
-
(269
)
-
- fair value movements on financial instruments
37
2
25
5
- currency translation on significant items
 
-
-
-
Adjusted
 
1,323
2,382
1,032
For footnotes, see page 45.
HSBC Holdings plc Interim Report 2018
41
Geographical regions
Reconciliation of reported results to adjusted performance - geographical regions (continued)
Half-year to 31 Dec 2017
Europe
Asia
MENA
NorthAmerica
LatinAmerica
Total
UK
HongKong
Footnotes
$m
$m
$m
$m
$m
$m
$m
$m
Revenue
15
Reported
42
8,517
13,020
1,298
3,217
1,676
25,279
6,363
8,158
Currency translation
42
381
41
(16
)
(10
)
(131
)
261
320
(27
)
Significant items
73
(1
)
-
145
(19
)
198
67
(107
)
- customer redress programmes
108
-
-
-
-
108
108
-
- disposals, acquisitions and investment in new businesses
(8
)
(27
)
-
138
(19
)
84
-
(126
)
- fair value movements on financial instruments
37
(34
)
27
-
7
-
-
(47
)
19
- currency translation on significant items
7
(1
)
-
-
-
6
6
-
Adjusted
42
8,971
13,060
1,282
3,352
1,526
25,738
6,750
8,024
LICs
Reported
(677
)
(122
)
(85
)
52
(274
)
(1,106
)
(524
)
(8
)
Currency translation
(22
)
(1
)
1
-
15
(7
)
(19
)
-
Adjusted
(699
)
(123
)
(84
)
52
(259
)
(1,113
)
(543
)
(8
)
Operating expenses
Reported
42
(10,304
)
(6,150
)
(721
)
(2,622
)
(1,093
)
(18,441
)
(8,427
)
(3,181
)
Currency translation
42
(302
)
(32
)
15
5
93
(217
)
(255
)
10
Significant items
1,601
284
17
(11
)
37
1,928
1,350
139
- costs of structural reform
240
-
-
-
-
240
230
-
- costs to achieve
836
268
19
168
41
1,332
780
123
- customer redress programmes
356
-
-
-
-
356
356
-
- disposals, acquisitions and investment in new businesses
34
-
-
9
-
43
-
-
- gain on partial settlement of pension obligation
-
-
(188
)
-
(188
)
-
-
- settlements and provisions in connection with legal and regulatory matters
107
17
-
-
-
124
(40
)
17
- currency translation on significant items
28
(1
)
(2
)
-
(4
)
21
24
(1
)
Adjusted
42
(9,005
)
(5,898
)
(689
)
(2,628
)
(963
)
(16,730
)
(7,332
)
(3,032
)
Share of profit in associates and joint ventures
Reported
28
951
205
1
7
1,192
27
20
Currency translation
-
40
-
-
(2
)
38
-
-
Adjusted
28
991
205
1
5
1,230
27
20
Profit before tax
Reported
(2,436
)
7,699
697
648
316
6,924
(2,561
)
4,989
Currency translation
57
48
-
(5
)
(25
)
75
46
(17
)
Significant items
1,674
283
17
134
18
2,126
1,417
32
- revenue
73
(1
)
-
145
(19
)
198
67
(107
)
- operating expenses
1,601
284
17
(11
)
37
1,928
1,350
139
Adjusted
(705
)
8,030
714
777
309
9,125
(1,098
)
5,004
Loans and advances to customers (net)
Reported
381,547
425,971
28,050
107,607
19,789
962,964
295,518
268,965
Currency translation
(10,183
)
(5,349
)
(726
)
(1,971
)
(1,190
)
(19,419
)
(7,671
)
(1,056
)
Adjusted
371,364
420,622
27,324
105,636
18,599
943,545
287,847
267,909
Customer accounts
Reported
505,182
657,395
34,658
143,432
23,795
1,364,462
401,733
477,104
Currency translation
(13,689
)
(6,631
)
(692
)
(2,234
)
(1,553
)
(24,799
)
(10,436
)
(1,873
)
Adjusted
491,493
650,764
33,966
141,198
22,242
1,339,663
391,297
475,231
 
 
Mainland China
US
Mexico
 
 
$m
$m
$m
Revenue
 
 
 
 
Reported
 
1,156
2,250
1,147
Currency translation
 
54
-
(42
)
Significant items
 
98
145
-
- disposals, acquisitions and investment in new businesses
 
99
139
-
- fair value movements on financial instruments
37
-
6
-
- currency translation on significant items
 
(1
)
-
-
Adjusted
 
1,308
2,395
1,105
For footnotes, see page 45.
42
HSBC Holdings plc Interim Report 2018
Analysis by country
Profit/(loss) before tax by priority growth market within global businesses
 
RetailBanking andWealthManagement
CommercialBanking
Global Bankingand Markets
Global PrivateBanking
CorporateCentre
Total
Footnotes
$m
$m
$m
$m
$m
$m
Europe
 
186
1,261
641
(61
)
(1,917
)
110
- UK
43
185
1,082
473
3
(1,836
)
(93
)
of which: HSBC Holdings
44
(314
)
(193
)
(154
)
(44
)
(1,168
)
(1,873
)
- France
 
(5
)
77
(15
)
6
(64
)
(1
)
- Germany
 
8
39
54
5
(5
)
101
- Switzerland
 
(1
)
2
-
(65
)
18
(46
)
- other
 
(1
)
61
129
(10
)
(30
)
149
Asia
 
3,218
2,216
2,018
198
1,730
9,380
- Hong Kong
 
3,067
1,621
915
177
196
5,976
- Australia
 
48
56
83
-
31
218
- India
 
2
77
187
-
169
435
- Indonesia
 
(1
)
36
43
-
19
97
- mainland China
 
(68
)
145
299
(2
)
1,175
1,549
- Malaysia
 
61
39
93
-
20
213
- Singapore
 
40
47
116
22
52
277
- Taiwan
 
43
12
71
-
19
145
- other
 
26
183
211
1
49
470
Middle East and North Africa
 
71
70
377
4
314
836
- Egypt
 
11
38
99
-
20
168
- UAE
 
60
33
159
4
(2
)
254
- Saudi Arabia
 
-
-
-
-
269
269
- other
 
-
(1
)
119
-
27
145
North America
 
(54
)
503
490
5
(902
)
42
- US
 
(103
)
241
461
6
(975
)
(370
)
- Canada
 
17
240
67
-
65
389
- other
 
32
22
(38
)
(1
)
8
23
Latin America
 
91
99
199
-
(45
)
344
- Mexico
 
103
56
103
-
6
268
- other
 
(12
)
43
96
-
(51
)
76
Half-year to 30 Jun 2018
 
3,512
4,149
3,725
146
(820
)
10,712
 
 
 
 
 
 
 
 
Europe
 
(68
)
1,136
1,042
(22
)
(1,516
)
572
- UK
43
(110
)
943
613
8
(1,511
)
(57
)
of which: HSBC Holdings
44
(326
)
(151
)
(256
)
(36
)
(1,063
)
(1,832
)
- France
 
27
96
201
4
(84
)
244
- Germany
 
11
36
95
4
19
165
- Switzerland
 
-
-
-
(39
)
1
(38
)
- other
 
4
61
133
1
59
258
Asia
 
2,736
1,585
1,625
148
1,536
7,630
- Hong Kong
 
2,539
1,092
648
129
201
4,609
- Australia
 
58
51
34
-
17
160
- India
 
10
96
187
-
167
460
- Indonesia
 
(20
)
49
53
-
10
92
- mainland China
 
-
74
253
(2
)
996
1,321
- Malaysia
 
32
21
82
-
15
150
- Singapore
 
61
64
107
21
38
291
- Taiwan
 
25
6
66
-
21
118
- other
 
31
132
195
-
71
429
Middle East and North Africa
 
87
114
291
-
312
804
- Egypt
 
14
27
78
-
24
143
- UAE
 
71
38
144
-
38
291
- Saudi Arabia
 
-
-
-
-
237
237
- other
 
2
49
69
-
13
133
North America
 
274
481
270
27
(99
)
953
- US
 
224
221
200
27
(135
)
537
- Canada
 
27
247
57
-
24
355
- other
 
23
13
13
-
12
61
Latin America
 
69
115
124
-
(24
)
284
- Mexico
 
57
61
69
-
(13
)
174
- other
 
12
54
55
-
(11
)
110
Half-year to 30 Jun 2017
 
3,098
3,431
3,352
153
209
10,243
For footnotes, see page 45.
HSBC Holdings plc Interim Report 2018
43
Geographical regions
Profit/(loss) before tax by priority growth market within global businesses (continued)
 
 
Retail
Banking and
Wealth
Management
Commercial
Banking
Global Banking
and Markets
Global Private
Banking
Corporate
Centre
Total
 
Footnote
$m
$m
$m
$m
$m
$m
Europe
 
(91
)
763
(265
)
(209
)
(2,634
)
(2,436
)
- UK
 
(67
)
596
(421
)
(31
)
(2,638
)
(2,561
)
of which: HSBC Holdings
44
(332
)
(221
)
(483
)
(53
)
(1,643
)
(2,732
)
- France
 
(39
)
108
27
1
(72
)
25
- Germany
 
10
25
46
5
20
106
- Switzerland
 
(2
)
7
1
(153
)
1
(146
)
- other
 
7
27
82
(31
)
55
140
Asia
 
2,636
1,809
1,510
137
1,607
7,699
- Hong Kong
 
2,500
1,368
709
128
284
4,989
- Australia
 
64
50
74
(1
)
18
205
- India
 
11
63
175
-
207
456
- Indonesia
 
(4
)
27
45
-
20
88
- mainland China
 
(44
)
87
134
(2
)
992
1,167
- Malaysia
 
53
29
80
-
13
175
- Singapore
 
8
30
95
13
26
172
- Taiwan
 
18
4
41
(1
)
19
81
- other
 
30
151
157
-
28
366
Middle East and North Africa
 
57
85
302
-
253
697
- Egypt
 
12
42
86
-
22
162
- UAE
 
39
15
124
-
10
188
- Saudi Arabia
 
-
-
-
-
204
204
- other
 
6
28
92
-
17
143
North America
 
31
451
401
40
(275
)
648
- US
 
(58
)
214
294
39
(309
)
180
- Canada
 
34
206
75
-
19
334
- other
 
55
31
32
1
15
134
Latin America
 
92
84
135
-
5
316
- Mexico
 
82
44
89
-
1
216
- other
 
10
40
46
-
4
100
Half-year to 31 Dec 2017
 
2,725
3,192
2,083
(32
)
(1,044
)
6,924
For footnote, see page 45.
44
HSBC Holdings plc Interim Report 2018
Footnotes to pages 2 to 44
1
Full-time equivalent staff.
2
Based on 2017 Transaction Banking product total revenue (including Payments, Cash Management, Trade Finance, FX and Securities Services) compared with US and European peers. Source: HSBC Research.
3
Based on 2017 total revenue in Asia among major international and regional banks in Asia. Peers include Standard Chartered, DBS, Citi, UOB, OCBC, Maybank and CIMB. Source: Company accounts.
4
Revenue from international clients is derived from an allocation of adjusted revenue based on internal management information. International clients are businesses and individuals with an international presence.
5
Adjusted basis, geographical view; Group total and regional % composition excludes Holdings; regional % composition calculated with regional figures that include intra-Group revenues.
6
Eight scale markets are Hong Kong, UK, Mexico, Pearl River Delta, Singapore, Malaysia, UAE and Saudi Arabia.
7
Commitment by 2025; on track to deliver 2025 target (see HSBC ESG Update November 2017).
8
Top 3 or improvement by 2 ranks; measured by customer recommendation for RBWM and customer satisfaction for CMB among relevant competitors.
9
Based on Sustainalytics.
10
'Costs to achieve' comprise those specific costs relating to the achievement of the strategic actions set out in the Investor Update in June 2015. They comprise costs incurred between 1 July 2015 and 31 December 2017.
11
Costs relating to 'Settlements and provisions in connection with legal and regulatory matters', a significant item in 1H18 includes a 1Q18 provision in relation to the DoJ's civil claims relating to its investigation of HSBC's
legacy RMBS origination and securitisation activities from 2005 to 2007. Refer to Note 12 'Legal proceedings and regulatory matters' for further details.
12
'Other personal lending' includes personal non-residential closed-end loans and personal overdrafts.
13
'Investment distribution' includes Investments, which comprises mutual funds (HSBC manufactured and third party), structured products and securities trading, and wealth insurance distribution, consisting of HSBC manufactured and third-party life, pension and investment insurance products.
14
'Other' mainly includes the distribution and manufacturing (where applicable) of retail and credit protection insurance.
15
Net operating income before change in expected credit losses and other credit impairment charges/Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
16
Adjusted return on average risk-weighted assets ('Adjusted RoRWA') is used to measure the performance of RBWM, CMB, GB&M and GPB. Adjusted RoRWA is calculated using annualised profit before tax and reported average risk-weighted assets at constant currency adjusted for the effects of significant items.
17
Return on average tangible equity ('RoTE') is calculated as Profit Attributable to Ordinary Shareholders (based on annualised Reported PBT, as adjusted for tax, insurance balances, certain capital securities and associates) divided by allocated Average Tangible Shareholders' Equity. In 1H18, Group RoTE on this basis was 9.7%. RoTE excluding significant items and the UK bank levy adjusts RoTE for the effects of significant items after tax, the UK bank levy and other items. This is the RoTE measure used at the global business level. In 1H18, Group RoTE excluding significant items and the UK bank levy was 11.5%. The reconciling items between Group RoTE and Group RoTE excluding significant items and the UK bank levy in 1H18 were significant items (1.83% points), the UK bank levy (0.06% points) and other items (-0.12% points). The RoTE presented for the half-year to 31 December 2017 relates to full-year 2017 performance.
18
'Markets products, Insurance and Investments and Other' includes revenue from Foreign Exchange, insurance manufacturing and distribution, interest rate management and global banking products.
19
In 1H18, GB&M included an adverse fair value movement of $331m on the widening of credit spreads on structured liabilities (1H17: favourable fair value movement of $197m; 2H16: adverse fair value movement of $317m).
20
'Other' in GB&M includes net interest earned on free capital held in this global business not assigned to products, allocated funding costs and gains resulting from business disposals. Within the management view of total operating income, notional tax credits are allocated to the businesses to reflect the economic benefit generated by certain activities which is not reflected within operating income; for example, notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. In order to reflect the total operating income on an IFRS basis, the offset to these tax credits is included within 'Other'.
21
Central Treasury includes revenue relating to BSM of $1.3bn (1H17: $1.5bn; 2H17:$1.2bn), interest expense of $758m (1H17: $644m; 2H17: $617m) and adverse valuation differences on issued long-term debt and associated swaps of $365m (1H17: gains of $53m; 2H17: gains of $25m). Revenue relating to BSM includes other internal allocations, including notional tax credits to reflect the economic benefit generated by certain activities which are not reflected within operating income, such as notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. In order to reflect the total operating income on an IFRS basis, the offset to these tax credits is included in other Central Treasury.
 
 
 
 
 
22
Other miscellaneous items in Corporate Centre includes internal allocations relating to legacy credit.
23
Return on average risk-weighted assets is calculated using annualised profit before tax and reported average risk-weighted assets.
24
Net trading income includes the revenues of internally funded trading assets, while the related costs are reported in net interest income. In our global business results, the total cost of funding trading assets is included within Corporate Centre net trading income as an interest expense. In the statutory presentation, internal interest income and expenses are eliminated.
25
Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA').
26
Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing funds.
27
Net interest margin is net interest income expressed as an annualised percentage of AIEA.
28
Interest income on trading assets is reported as 'Net income/(expense) from financial instruments held for trading or managed on a fair value basis' in the
consolidated income statement.
29
Interest income on financial assets designated and otherwise mandatorily measured at fair value is reported as 'Net income/(expense) from financial instruments held for trading or managed on a fair value basis' in the consolidated income statement.
30
Including interest-bearing bank deposits only.
31
Interest expense on financial liabilities designated at fair value is reported as 'Net income/(expense) from financial instruments held for trading or managed on a fair value basis' in the consolidated income statement, other than interest on own debt, which is reported in 'Interest expense'.
32
Including interest-bearing customer accounts only.
33
Interest expense on trading liabilities is reported as 'Net income/(expense) from financial instruments held for trading or managed on a fair value basis' in the
consolidated income statement.
34
Prior to 2018, foreign exchange exposure on some financial instruments designated at fair value was presented in the same line in the income statement as the underlying fair value movement on these instruments. In 2018, we have grouped the presentation of the entire effect of foreign exchange exposure in profit or loss and presented it within 'net income from financial instruments held for trading or managed on a fair value basis'. Comparative data have been re-presented. There is no net impact on total operating income and the impact on 'changes in fair value of long-term debt and related derivatives' is $(241)m in 2H17 and $(276)m in 1H17.
35
1H18 ECL are prepared on an IFRS 9 basis and 1H17/2H17 LICs are prepared on an IAS 39 basis and are not comparable.
36
Balances at 1 January 2018 have been prepared in accordance with accounting policies referred to on page 82; 31 December 2017 balances have not been re-presented.
37
Excludes items where there are substantial offsets in the income statement for the same period.
38
'Client assets' are translated at the rates of exchange applicable for their respective period-ends, with the effects of currency translation reported separately. The main components of client assets are funds under management, which are not reported on the Group's balance sheet, and customer deposits, which are reported on the Group's balance sheet.
39
'Client assets' includes $295bn of client assets in areas targeted for growth (1H16: $266bn; 2H16: $262bn).
40
Other income in this context comprises where applicable net income/expense from other financial instruments designated at fair value, gains less losses from financial investments, dividend income, net insurance premium income and other operating income less net insurance claims and benefits paid and movement in liabilities to policyholders.
41
RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
42
Amounts are non-additive across geographical regions and global businesses due to inter-company transactions within the Group.
43
UK includes results from the ultimate holding company, HSBC Holdings plc, and the separately incorporated group of service companies ('ServCo Group').
44
Excludes intra-Group dividend income.
 
 
HSBC Holdings plc Interim Report 2018
45
Risk
Risk
 
Page
Areas of special interest
46
Key developments in the first half of 2018
46
Credit risk profile
46
Liquidity and funding risk profile
64
Market risk profile
66
Operational risk profile
69
Insurance manufacturing operations risk profile
69
A summary of our current policies and practices regarding the management of risk is set out in the 'Risk management' section on pages 66 to 81 of the Annual Report and Accounts 2017.
Areas of special interest
During 1H18, we considered a number of areas because of the effect they may have on the Group. While these areas have been considered as part of our top and emerging risks, we have placed particular focus in this section on the UK's withdrawal from the European Union, and on HSBC's foreign exchange deferred prosecution agreement.
Process of UK withdrawal from the EU
The UK is due to formally leave the EU in March 2019. Before then, the UK and the EU have to finalise the Article 50 Withdrawal Agreement, which will need to be approved by their respective Parliaments. A comprehensive trade deal will not be concluded within this time frame. A period of transition until 31 December 2020 has therefore been agreed between the UK and the EU. However, there will be no legal certainty until this is enshrined in the Withdrawal Agreement, in autumn 2018 at the earliest.
Our objective in all scenarios is to continue to meet customers' needs and minimise disruption. This will require adjustments to our cross-border banking model, with affected business transferring from the UK to our existing subsidiary in France or other European subsidiaries, as appropriate.
Given the complexity of negotiations, we have put in place a robust contingency plan. It is based on a scenario whereby the UK exits the EU, without the existing passporting or regulatory equivalence framework that supports cross-border business. When negotiation positions become clearer, we will update our contingency plan.
Foreign exchange deferred prosecution agreement
In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the US Department of Justice ('DoJ') (the 'FX DPA'), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. This concluded the DoJ's investigation into HSBC's historical foreign exchange activities. Under the terms of the FX DPA, HSBC has a number of ongoing obligations, including continuing to cooperate with authorities and implementing enhancements to its internal controls and procedures in its Global Markets business, which will be the subject of annual reports to the DoJ. In addition, HSBC agreed to pay a financial penalty and restitution.
HSBC is committed to ensuring fair outcomes for customers and to protecting the orderly and transparent operation of the markets. We have already invested significant resources and taken a number of steps to improve our policies, procedures and controls designed to promote and ensure high standards of conduct.
Key developments in the first half of 2018
There were no material changes to the policies and practices for the management of risk, as described in the Annual Report and Accounts 2017, in 1H18 except for the following:
•
We continued to strengthen the controls that manage our operational risks, as described on page 68 under 'Operational risk profile'.
 
•
The Board oversight of conduct matters and whistleblowing arrangements have been transitioned to the Group Risk Committee and Group Audit Committee, respectively, following the demise of the Conduct & Values Committee during 1H18. For information on initiatives implemented in 1H18 to raise our standards in relation to the conduct of our business, see page 68 under 'Conduct of business'. For further details on whistleblowing, see page 23 of our Environmental, Social and Governance (ESG) Update - April 2018.
•
We are on track to integrate the majority of the Global Standards programme financial crime risk core capabilities into our day-to-day operations by the end of 2018, and expect to complete the closure of the programme infrastructure in early 2019. We will continue to take steps to further refine and strengthen our defences against financial crime by applying advanced analytics and artificial intelligence. For further details on the Global Standards programme, see page 13 of the Annual Report and Accounts 2017.
Credit risk profile
 
Page
Credit risk in the first half of 2018
46
Summary of credit risk
47
Measurement uncertainty and sensitivity analysis of ECL estimates
49
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers
52
Credit quality of financial instruments
52
Personal lending
55
Wholesale lending
56
Supplementary information
58
Securitisation exposures and other structured products
58
Selected 2017 credit risk disclosures
59
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.
Comparative credit tables at 1 January 2018 reflecting the adoption of IFRS 9 as published in our Report on transition to IFRS 9 'Financial Instruments' 1 January 2018 have been included where available. Comparative credit tables at 31 December 2017 from our Interim Report 2017 which do not reflect the adoption of IFRS 9 have been disclosed separately on pages 58 to 63 as they are not directly comparable.
Refer to 'Standards applied during the half-year to 30 June 2018' on page 82 and Note 14 Effect of reclassification upon adoption of IFRS 9 for further detail.
There were no material changes to the policies and practices for the management of credit risk in 1H18.
A summary of our current policies and practices for the management of credit risk is set out in 'Credit risk management' on page 72 of the Annual Report and Accounts 2017.
Credit risk in the first half of 2018
IFRS 9 gross loans and advances to customers of $982.2bn have increased from $959.1bn at 1 January 2018; this increase includes adverse foreign exchange movements of $19.3bn. Loans and advances to banks of $83.9bn have increased from $82.6bn at 1 January 2018; this includes adverse foreign exchange movements of $1.6bn. Personal and wholesale lending movements are disclosed on pages 55 to 56 .
The income statement 'change in expected credit losses and other credit impairment charges' for the period were $0.4bn.
Income statement movements are analysed further on page 25.
46
HSBC Holdings plc Interim Report 2018
Summary of credit risk
The disclosure below 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. Due to the forward-looking nature of IFRS 9, the scope of financial instruments on which ECL are recognised is greater than the scope of IAS 39.
The following tables analyse loans by industry sector and represent the concentration of exposures on which credit risk is managed.
 
The IFRS 9 allowance for ECL has decreased from $10.2bn at 1 January 2018 to $9.5bn at 30 June 2018; this decrease includes favourable foreign exchange movements of $0.4bn.
The IFRS 9 allowance for ECL at 30 June 2018 comprises $8.8bn in respect of assets held at amortised cost, $0.5bn in respect of loan commitments and financial guarantees, and $0.2bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
 
 
At 30 Jun 2018
 At 1 Jan 2018
 
 
Gross carrying/nominal amount
Allowance for ECL1
Gross carrying/nominal amount
Allowance for ECL1
 
Footnotes
$m
$m
$m
$m
Loans and advances to customers at amortised cost
 
982,178
(8,735
)
959,080
(9,343
)
- personal
 
382,927
(2,895
)
375,069
(3,047
)
- corporate and commercial
 
538,982
(5,561
)
520,137
(6,053
)
- non-bank financial institutions
 
60,269
(279
)
63,874
(243
)
Loans and advances to banks at amortised cost
 
83,939
(15
)
82,582
(23
)
Other financial assets measured at amortised cost
 
613,129
(56
)
557,864
(114
)
- cash and balances at central banks
 
189,845
(3
)
180,624
(3
)
- items in the course of collection from other banks
 
8,081
-
6,628
-
- Hong Kong Government certificates of indebtedness
 
35,754
-
34,186
-
- reverse repurchase agreements - non-trading
 
208,104
-
201,553
-
- financial investments
 
62,772
(16
)
59,539
(16
)
- prepayments, accrued income and other assets
2
108,573
(37
)
75,334
(95
)
Total gross carrying amount on balance sheet
 
1,679,246
(8,806
)
1,599,526
(9,480
)
Loans and other credit related commitment
 
523,015
(319
)
501,361
(376
)
- personal
 
203,854
(9
)
196,093
(14
)
- corporate and commercial
 
259,319
(301
)
262,391
(355
)
- financial
 
59,842
(9
)
42,877
(7
)
Financial guarantee and similar contracts
 
91,103
(205
)
89,382
(161
)
- personal
 
1,003
(3
)
791
(4
)
- corporate and commercial
 
76,384
(198
)
78,102
(153
)
- financial
 
13,716
(4
)
10,489
(4
)
Total nominal amount off balance sheet
3
614,118
(524
)
590,743
(537
)
 
 
2,293,364
(9,330
)
2,190,269
(10,017
)
 
 
 
 
 
 
 
 
Fair value
Memorandum allowance for ECL4
Fair value
Memorandum allowance forECL4
 
 
$m
$m
$m
$m
Debt instruments measured at fair value through other comprehensive income
 
321,940
(152
)
322,163
(184
)
For footnotes, see page 70.
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: Unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised.
Stage 2: A significant increase in credit risk has been experienced since initial recognition on which a lifetime ECL is recognised.
 
Stage 3: Objective evidence of impairment, and are therefore considered to be in default or otherwise credit-impaired on which a lifetime ECL is recognised.
POCI: Purchased or originated at a deep discount that reflects the incurred credit losses on which a lifetime ECL is recognised.
HSBC Holdings plc Interim Report 2018
47
Risk
Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at30 June 2018
 
Gross carrying/nominal amout3
 
Allowance for ECL
 
ECL coverage %
 
 
Stage 1
Stage 2
Stage 3
POCI5
Total
Stage 1
Stage 2
Stage 3
POCI5
Total
Stage 1
Stage 2
Stage 3
POCI5
Total
 
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
%
%
%
%
%
Loans and advances to customers at amortised cost
898,871
68,775
14,218
314
982,178
(1,284
)
(2,005
)
(5,320
)
(126
)
(8,735
)
0.1
2.9
37.4
40.1
0.9
-
personal
361,909
16,519
4,499
-
382,927
(585
)
(1,148
)
(1,162
)
-
(2,895
)
0.2
6.9
25.8
-
0.8
-
corporate and commercial
480,550
48,673
9,445
314
538,982
(655
)
(812
)
(3,968
)
(126
)
(5,561
)
0.1
1.7
42.0
40.1
1.0
-
non-bank financial institutions
56,412
3,583
274
-
60,269
(44
)
(45
)
(190
)
-
(279
)
0.1
1.3
69.3
-
0.5
Loans and advances to banks at amortised cost
83,588
335
16
-
83,939
(11
)
(2
)
(2
)
-
(15
)
-
0.6
12.5
-
-
Other financial assets measured at amortised cost
611,524
1,525
79
1
613,129
(27
)
(4
)
(25
)
-
(56
)
-
0.3
31.6
-
-
Loan and other credit-related commitments
504,160
18,231
613
11
523,015
(119
)
(134
)
(66
)
-
(319
)
-
0.7
10.8
-
0.1
-
personal
201,751
1,869
234
-
203,854
(9
)
-
-
-
(9
)
-
-
-
-
-
-
corporate and commercial
243,401
15,528
379
11
259,319
(101
)
(134
)
(66
)
-
(301
)
-
0.9
17.4
-
0.1
-
financial
59,008
834
-
-
59,842
(9
)
-
-
-
(9
)
-
-
-
-
-
Financial guarantee and similar contracts
81,186
9,136
762
19
91,103
(48
)
(62
)
(95
)
-
(205
)
0.1
0.7
12.5
-
0.2
-
personal
993
5
5
-
1,003
(1
)
-
(2
)
-
(3
)
0.1
-
40.0
-
0.3
-
corporate and commercial
66,899
8,715
751
19
76,384
(43
)
(62
)
(93
)
-
(198
)
0.1
0.7
12.4
-
0.3
-
financial
13,294
416
6
-
13,716
(4
)
-
-
-
(4
)
-
-
-
-
-
At 30 Jun 2018
2,179,329
98,002
15,688
345
2,293,364
(1,489
)
(2,207
)
(5,508
)
(126
)
(9,330
)
0.1
2.3
35.1
36.5
0.4
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 and are transferred from stage 1 to stage 2. The disclosure below presents the ageing of stage 2
 
financial assets by those less than 30 and greater than 30 days past due and therefore presents those financial assets classified as stage 2 due to ageing (30 days past due) and those identified at an earlier stage (less than 30 days past due).
Stage 2 days past due analysis at 30 June 2018
 
Gross carrying amount
Allowance for ECL
ECL coverage %
 
 
Of which:
Of which:
 
Of which:
Of which:
 
Of which:
Of which:
 
Stage 2
1 to 29 DPD6
30 and > DPD6
Stage 2
1 to 29 DPD6
30 and > DPD6
Stage 2
1 to 29 DPD6
30 and > DPD6
 
$m
$m
$m
$m
$m
$m
%
%
%
Loans and advances to customers at amortised cost
68,775
2,816
1,905
(2,005
)
(202
)
(245
)
2.9
7.2
12.9
-
personal
16,519
2,027
1,239
(1,148
)
(173
)
(213
)
6.9
8.5
17.2
-
corporate and commercial
48,673
758
665
(812
)
(29
)
(32
)
1.7
3.8
4.8
-
non-bank financial institutions
3,583
31
1
(45
)
-
-
1.3
-
-
Loans and advances to banks at amortised cost
335
1
17
(2
)
-
-
0.6
-
-
Other financial assets measured at amortised cost
1,525
13
12
(4
)
-
-
0.3
-
-
For footnotes, see page 70.
48
HSBC Holdings plc Interim Report 2018
Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
1 January 2018 (continued)
 
Gross carrying/nominal amount3
 
Allowance for ECL
 
ECL coverage %
 
 
Stage 1
Stage 2
Stage 3
POCI5
Total
Stage 1
Stage 2
Stage 3
POCI5
Total
Stage 1
Stage 2
Stage 3
POCI5
Total
 
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
%
%
%
%
%
Loans and advances to customers at amortised cost
871,566
72,658
13,882
974
959,080
(1,309
)
(2,201
)
(5,591
)
(242
)
(9,343
)
0.2
3.0
40.3
24.8
1.0
-
personal
354,305
16,354
4,410
-
375,069
(581
)
(1,156
)
(1,310
)
-
(3,047
)
0.2
7.1
29.7
-
0.8
-
corporate and commercial
456,837
53,262
9,064
974
520,137
(701
)
(1,037
)
(4,073
)
(242
)
(6,053
)
0.2
1.9
44.9
24.8
1.2
-
non-bank financial institutions
60,424
3,042
408
-
63,874
(27
)
(8
)
(208
)
-
(243
)
-
0.3
51.0
-
0.4
Loans and advances to banks at amortised cost
81,027
1,540
15
-
82,582
(17
)
(4
)
(2
)
-
(23
)
-
0.3
13.3
-
-
Other financial assets
measured at amortised cost
556,185
1,517
155
7
557,864
(28
)
(4
)
(82
)
-
(114
)
-
0.3
52.9
-
-
Loan and other credit related commitments
475,986
24,330
999
46
501,361
(126
)
(183
)
(67
)
-
(376
)
-
0.8
6.7
-
0.1
-
personal
194,320
1,314
459
-
196,093
(13
)
(1
)
-
-
(14
)
-
0.1
-
-
-
-
corporate and commercial
240,854
20,951
540
46
262,391
(108
)
(180
)
(67
)
-
(355
)
-
0.9
12.4
-
0.1
-
financial
40,812
2,065
-
-
42,877
(5
)
(2
)
-
-
(7
)
-
0.1
-
-
-
Financial guarantee and similar contracts
77,921
11,014
413
34
89,382
(36
)
(47
)
(78
)
-
(161
)
-
0.4
18.9
-
0.2
-
personal
768
18
5
-
791
-
(2
)
(2
)
-
(4
)
-
11.1
40.0
-
0.5
-
corporate and commercial
67,596
10,064
408
34
78,102
(35
)
(44
)
(74
)
-
(153
)
0.1
0.4
18.1
-
0.2
-
financial
9,557
932
-
-
10,489
(1
)
(1
)
(2
)
-
(4
)
-
0.1
-
-
-
At 1 Jan 2018
2,062,685
111,059
15,464
1,061
2,190,269
(1,516
)
(2,439
)
(5,820
)
(242
)
(10,017
)
0.1
2.2
37.6
22.8
0.5
Stage 2 days past due analysis at 1 January 2018
 
Gross carrying amount
Allowance for ECL
ECL coverage %
 
Stage 2
Of which:
Of which:
Stage 2
Of which:
Of which:
Stage 2
Of which:
Of which:
 
 
1 to 29DPD6
30 and > DPD6
 
1 to 29DPD6
30 and > DPD6
 
1 to 29DPD6
30 and > DPD6
 
$m
$m
$m
$m
$m
$m
%
%
%
Loans and advances to customers at amortised cost
72,658
2,393
2,447
(2,201
)
(261
)
(261
)
3.0
10.9
10.7
-
personal
16,354
1,683
1,428
(1,156
)
(218
)
(230
)
7.1
13.0
16.1
-
corporate and commercial
53,262
684
977
(1,037
)
(42
)
(31
)
1.9
6.1
3.2
-
non-bank financial institutions
3,042
26
42
(8
)
(1
)
-
0.3
3.8
-
Loans and advances to banks at amortised cost
1,540
7
66
(4
)
(2
)
-
0.3
28.6
-
Other financial assets measured at amortised cost
1,517
133
46
(4
)
-
(1
)
0.3
-
2.2
For footnotes, see page 70.
Measurement uncertainty and sensitivity analysis of ECL
The recognition and measurement of expected credit losses ('ECL') is highly complex and involves the use of significant judgement and estimation. This includes the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of IFRS 9.
Methodology
For most portfolios, HSBC has adopted the use of three economic scenarios, representative of our view of forecast economic conditions, sufficient to calculate unbiased ECL. They represent a 'most likely outcome' (the Central scenario) and two, less likely, 'outer' scenarios, referred to as the 'Upside' and 'Downside' scenarios. Each outer scenario is consistent with a probability of 10%, while the Central scenario is assigned the remaining 80%. This weighting scheme is deemed appropriate for the computation of unbiased ECL. Key scenario assumptions are set using the average of forecasts from external economists, helping to ensure
 
the IFRS 9 scenarios are unbiased and maximise the use of independent information.
For the Central scenario, HSBC sets key assumptions - such as GDP growth, inflation, unemployment and policy interest rates - using either the average of external forecasts (commonly referred to as consensus forecasts) for most economies or market prices. An external provider's global macro model, conditioned to follow the consensus forecasts, projects the other paths required as inputs to credit models. This external provider model is subject to HSBC's risk governance framework, with oversight by a specialist internal unit.
The Upside and Downside scenarios are designed to be cyclical, in that GDP growth, inflation and unemployment usually revert back to the Central scenario after the first three years for major economies. We determine the maximum divergence of GDP growth from the Central scenario using the 10th and the 90th percentile of the entire distribution of forecast outcomes for major economies. Using externally available forecast distributions helps ensure independence in scenario construction. While key economic variables are set with reference to external distributional
HSBC Holdings plc Interim Report 2018
49
Risk
forecasts, we also align the overall narrative of the scenarios to the macroeconomic risks described in HSBC's top and emerging risks. This ensures that scenarios remain consistent with the more qualitative assessment of risks captured in top and emerging risks. We project additional variable paths using the external provider's global macro model.
The Central, Upside and Downside scenarios, selected with reference to external forecast distributions using the above approach, are termed the 'Consensus Economic Scenarios'.
To generate the three scenarios, the following are applied:
•
Economic risk assessment - We develop a shortlist of the upside and downside economic and political risks most relevant to HSBC and the IFRS 9 measurement objective. These include local and global economic and political risks which together affect economies that materially matter to HSBC, namely the UK, eurozone, Hong Kong, China and the US. We compile this list by monitoring developments in the global economy, by reference to HSBC's top and emerging risks, and by consulting external and internal subject matter experts.
•
Scenario generation - For the Central scenario, we obtain a pre-defined set of economic forecasts from the average taken from the consensus forecast survey of professional forecasters. Paths for the two outer scenarios are benchmarked to the Central scenario and reflect the economic risk assessment. Scenario probabilities reflect management judgement and are informed by data analysis of past recessions, transitions in and out of recession, and the current economic outlook. The key assumptions made, and the accompanying paths, represent our 'best estimate' of a scenario at a specified probability. Suitable narratives are developed for the Central scenario and the paths of the two outer scenarios.
•
Variable enrichment - We expand each scenario through enrichment of variables. This includes the production of more than 400 variables that are required to calculate ECL. The external provider expands these scenarios by using as inputs the agreed scenario narratives and the variables aligned to these narratives. Scenarios, once expanded, continue to be benchmarked to the latest events and information. Late- breaking events could lead to the revision of scenarios to reflect management judgement.
The Upside and Downside scenarios are generated at year-end and are only updated during the year if economic conditions change significantly. The Central scenario is generated every quarter. In quarters where only the Central scenario is updated, Wholesale outer scenarios are adjusted such that the relationship between the Central scenario and outer scenarios in the quarter is consistent with that observed at the last full scenario generation. In Retail, three scenarios are run annually to establish the effect of non-linearity for each portfolio. This effect is then applied in each quarter with the understanding that the non-linearity of response to economic conditions should not change, unless a significant change in economic conditions occurs.
HSBC recognises that the Consensus Economic Scenario approach, using three scenarios, will be insufficient in certain
 
economic environments. Additional analysis may be requested at management's discretion, including the production of extra scenarios. We anticipate there will be only limited instances when the standard approach will not apply. But we had occasion to invoke this additional step at 1 January 2018, due to the specific uncertainties facing the UK economy, resulting in the recognition of additional ECL, a 'management overlay' for economic uncertainty. At 30 June 2018, the UK economy continued to face similar levels of uncertainty and, accordingly, the management overlay has been retained. Details on the management overlay are on page 52.
Central scenario
HSBC's Central scenario is characterised by steady growth over the forecast period 2018-2023. Global GDP growth is expected to be 3% on average over the period which is marginally higher than the average growth rate over 2011-2016. GDP growth rate is forecast at 3.2% in 2018 and 3.1% in 2019. The elevated growth rates through 2018-19 are considered temporary in nature, and global growth reverts to a trend rate of 2.9% by the third year of the five-year projection. Across the key markets, we note that:
•
Expected average rates of growth over the 2018-2023 period are lower than those experienced in the recent past for the UK, China, Canada and the UAE. For the UK, this forecast reflects current views on the UK's exit from the EU, while for China, this suggests rebalancing at a pace in line with expectations.
•
The US, Hong Kong and Mexico are expected to display similar average rates of GDP growth over the forecast period to recent historical experience. Above-trend growth is expected in the US and Hong Kong in 2018, supported by cyclical factors.
•
French GDP forecasts are stronger for the forecast period compared with recent history. Supportive factors include the recent cyclical upswing, longer-term expectations of reform and eurozone recovery.
Inflation is expected to be higher in 2018 across most of our key markets compared with 2017, but is expected to converge back towards central bank targets with varying speed over the projection period. As a consequence, US and eurozone central banks are expected to raise rates very gradually. Similarly, in the UK, the Bank of England is expected to raise interest rates slowly. Policy interest rates in advanced economies are expected to remain below their historical long-term averages over the five-year forecast horizon.
Unemployment rates displayed considerable positive cyclical momentum in 2017 across our key markets and such momentum is expected to continue to underpin labour market performance in the forecast period. Central scenario forecasts of the unemployment rate are stable and, for some markets, at historical lows.
Stabilisation of oil prices in 2017, helped by the Organization of Petroleum Exporting Countries' output cuts and a fall in inventory, has enabled a stronger price outlook to develop. Despite this, Central scenario oil price forecasts remain range-bound between $60-$62 per barrel over the forecast period.
Central scenario (average 3Q18-2Q23)
 
UK
France
Hong
Kong
Mainland
China
UAE
US
Canada
Mexico
GDP growth rate (%)
1.7
1.6
2.7
6.0
3.3
2.1
1.8
2.5
Inflation (%)
2.1
1.6
2.4
2.5
2.9
2.0
1.9
3.6
Unemployment (%)
4.8
7.7
3.2
4.0
4.2
4.0
6.1
3.8
House price growth (%)
2.9
2.8
4.1
5.6
3.9
3.4
3.1
5.7
 
 
 
 
 
 
 
 
 
Upside scenario
Globally, real GDP growth rises in the first two years of the Upside scenario before converging to the Central scenario. Improved confidence, accommodative monetary policy, fiscal expansion
 
across major economies, including tax reform in the US, and diminished political risk are the key themes that support the Upside scenario.
50
HSBC Holdings plc Interim Report 2018
Upside scenario (average 2018-2022)
 
UK
France
Hong
Kong
Mainland
China
UAE
US
Canada
Mexico
GDP growth rate (%)
2.5
1.9
2.8
6.0
4.0
2.7
2.2
3.2
Inflation (%)
2.5
1.8
2.9
2.7
3.3
2.4
2.2
3.9
Unemployment (%)
4.8
8.3
3.2
3.7
3.6
4.1
6.1
3.6
House price growth (%)
4.0
4.6
4.0
6.9
7.7
4.9
4.3
6.8
The Upside scenario was generated for the adoption of IFRS 9 on 1 Jan 2018
Downside scenario
Globally, real GDP growth declines for two years in the Downside scenario before recovering to the Central scenario. House price growth either stalls or contracts, and equity markets correct abruptly. The global slowdown in demand drives commodity
 
prices lower and inflation falls. Central banks remain accommodative. This is consistent with the risk themes of rising protectionism, central bank policy uncertainty, mainland China choosing to rebalance at a faster pace, and an absence of fiscal support.
Downside scenario (average 2018-2022)
 
UK
France
Hong
Kong
Mainland
China
UAE
US
Canada
Mexico
GDP growth rate (%)
1.2
1.1
2.0
5.5
3.0
1.3
1.6
2.1
Inflation (%)
1.8
1.2
2.2
2.0
2.6
1.8
1.9
3.1
Unemployment (%)
5.6
9.0
3.8
4.2
4.6
5.1
6.7
4.5
House price growth (%)
0.9
0.8
1.7
3.0
4.5
1.1
0.6
5.4
The Downside scenario was generated for the adoption of IFRS 9 on 1 Jan 2018
How economic scenarios are reflected in the wholesale calculation of ECL
HSBC has developed a globally consistent methodology for the application of forward economic guidance ('FEG') in the calculation of ECL. This involves the incorporation of FEG into the estimation of the term structure of probability of default ('PD') and loss given default ('LGD'). For PDs, we consider the correlation of FEG to default rates for a particular industry in a country. For LGD calculations, we consider the correlation of FEG to collateral values and realisation rates for a particular country and industry. PDs and LGDs are estimated for the entire term structure of each instrument.
For stage 3 impaired loans, LGD estimates take into account independent recovery valuations provided by external consultants where available, or internal forecasts corresponding to anticipated economic conditions and individual company conditions. In estimating the ECL on impaired loans that are considered individually not to be significant, HSBC incorporates FEG via the application of a scalar. The scalar reflects the ratio of the probability-weighted outcome to the Central scenario outcome for non-stage 3 populations.
How economic scenarios are reflected in the retail calculation of ECL
The impact of FEG on PD is modelled at a portfolio level. Historical relationships between observed default rates and macroeconomic variables are integrated into ECL by using economic response models. The impact of FEG on PD is modelled over a period equal to the remaining maturity of underlying asset(s). The impact on LGD is modelled for mortgage portfolios by forecasting future loan-to-value ('LTV') profiles for the remaining maturity of the asset, by using national-level forecasts of the house price index ('HPI') and applying the corresponding LGD expectation.
Effect of multiple economic scenarios on ECL
The ECL recognised in the financial statements reflect the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, based on the economic scenarios described above, including management overlays where required. The probability-weighted amount is typically a higher number than would result from using only the Central (most likely) economic scenario. Expected losses typically have a non-linear relationship to the many factors which influence credit losses,
 
such that more favourable macroeconomic factors do not reduce defaults as much as less favourable macroeconomic factors increase defaults. The probability-weighted ECL are 3% higher than the ECL prepared using only Central scenario assumptions, reflecting the relatively stable and benign economic outlook across most markets.
UK economic uncertainty
A management overlay of $245m has been included in the 30 June 2018 ECL, adding to the result from the consensus economic scenarios; $150m of this relates to Wholesale, and $95m to Retail, to address the current economic uncertainty in the UK. This overlay was raised at transition on 1 January 2018 and reflected management's judgement that the consensus economic scenarios did not fully reflect the high degree of uncertainty in estimating the distribution of ECL for UK portfolios. Management considers that the overlay remains appropriate at 30 June 2018. At transition, in arriving at the overlay, the following risks were considered and alternative scenarios modelled to understand potential impacts:
•
Alternative scenario (a) - While the Central scenario reflects current consensus forecasts, there is the potential for large forecast revisions in the coming quarters, as economic and political events unfold. The consensus Downside scenario was modelled as an alternative to the consensus Central scenario to understand the impact of a significant downward shift in consensus forecasts.
•
Alternative scenario (b) - Management modelled a further downside scenario of similar severity to (but of longer duration than) the consensus Downside scenario, to reflect the risk that in a downside scenario there may be a longer-term impact on growth than that currently envisaged.
•
Alternative scenario (c) - Finally, management modelled an alternative, severe downside scenario reflecting a deeper cyclical shock, resulting in a steep depreciation in sterling and an increase in inflation, with an associated monetary policy response.
The following table compares the core macroeconomic variables under the consensus Central and Upside scenarios, shown as five- year averages, to the most severe assumptions relating to the consensus and alternative scenarios:
HSBC Holdings plc Interim Report 2018
51
Risk
UK
 
GDP growth %
Unemployment level %
Consensus upside (five-year average)
2.5
4.8
Consensus central (five-year average)
1.8
5.2
Consensus downside (central under Alternative (a)) (most severe value)
0.1
6.3
Alternative (b) (most severe value)
(1
)
7.2
Alternative (c) (most severe value)
(2.4
)
8.9
These scenarios were generated for the adoption of IFRS 9 on 1 Jan 2018
The management overlay adjusts the ECL calculated on the UK consensus economic scenarios to reflect the alternative scenarios described above, within the 10:80:10 weighting scheme, as follows: half the impact of Alternative scenario (a) is included, in effect giving equal weighting within the central band to consensus Central and consensus Downside assumptions. For the downside, the overlay has the effect of replacing the consensus Downside with Alternative scenario (b) but including a small risk of Alternative scenario (c).
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers
The disclosure below provides a reconciliation of the Group's gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees. The reconciliation excludes the movement in other financial assets measured at amortised cost and debt instruments measured at FVOCI. The 30 June 2018 gross carrying amount and allowance for ECL for these financial
 
instruments is presented in the 'summary of financial instruments to which the impairment requirements in IFRS 9 are applied' disclosure on page 47.
The change in ECL and other credit impairment charges recognised in the income statement of $407m includes $501m presented in the reconciliation below and a net release of $94m for other financial assets measured at amortised cost and debt instruments measured at FVOCI.
The transfers of financial instruments represents 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 in ECL due to these transfers. Net new lending comprises new originations, assets derecognised, further lending and repayments. The ECL impacts of changes to risk parameters is estimated at $0.2bn (release) for stage 1, $0.2bn (charge) for stage 2 and $1.0bn (charge) for stage 3.
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 2018
1,506,500
(1,488
)
109,542
(2,435
)
15,309
(5,738
)
1,054
(242
)
1,632,405
(9,903
)
Transfers of financial instruments:
(2,401
)
(430
)
(408
)
635
2,809
(205
)
-
-
-
-
- transfers from Stage 1 to Stage 2
(41,853
)
120
41,853
(120
)
-
-
-
-
-
-
- transfers from Stage 2 to Stage 1
40,963
(537
)
(40,963
)
537
-
-
-
-
-
-
- transfers to Stage 3
(1,730
)
18
(2,126
)
263
3,856
(281
)
-
-
-
-
- transfers from Stage 3
219
(31
)
828
(45
)
(1,047
)
76
-
-
-
-
Net remeasurement of ECL arising from transfer of stage
-
360
-
(347
)
-
(36
)
-
-
-
(23
)
Net new lending and changes to risk parameters
94,406
13
(11,384
)
(155
)
(1,000
)
(614
)
(526
)
17
81,496
(739
)
Changes to models used for ECL calculation
-
-
-
-
-
-
-
-
-
-
Assets written off
-
-
-
-
(1,154
)
1,133
(1
)
1
(1,155
)
1,134
Foreign exchange and other
(30,700
)
83
(1,273
)
99
(355
)
(23
)
(183
)
98
(32,511
)
257
At 30 Jun 2018
1,567,805
(1,462
)
96,477
(2,203
)
15,609
(5,483
)
344
(126
)
1,680,235
(9,274
)
ECL income statement (charge)/release for the period
 
373
 
(502
)
 
(650
)
 
17
 
(762
)
Recoveries
 
 
 
 
 
 
 
 
 
261
Total ECL income statement charge for the period
 
 
 
 
 
 
 
 
 
(501
)
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 the probability of default of financial instruments, whereas IFRS 9 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 IFRS 9 stages 1 and 2, though typically the lower credit quality bands exhibit a higher proportion in stage 2.
52
HSBC Holdings plc Interim Report 2018
Quality classification definitions
•
'Strong' exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default.
•
'Good' exposures demonstrate a good capacity to meet financial commitments, with low default risk.
•
'Satisfactory' exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk.
•
'Sub-standard' exposures require varying degrees of special attention and default risk is of greater concern.
•
'Credit-impaired' exposures have been assessed as impaired.
The five credit quality classifications defined above each encompass a range of granular internal credit rating grades assigned to wholesale and retail lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the table below. Under IAS 39 retail lending credit
 
quality was disclosed based on expected-loss percentages. Under IFRS 9 retail lending credit quality is now disclosed based on a 12-month probability-weighted 'PD'. The credit quality classifications for wholesale lending are unchanged and are based on internal credit risk ratings.
Credit quality classification
 
 
Debt securities and other bills
Wholesale lending
Retail lending
 
 
External
credit rating
Internal
credit rating
12-month Basel probability of
default %
Internal
credit rating
12-month probability- weighted PD %
Quality classification
 
 
 
 
 
 
Strong
 
A- and above
CRR1 to CRR2
0.000-0.169
Band 1 and 2
0.000-0.500
Good
 
BBB+ to BBB-
CRR3
0.170-0.740
Band 3
0.501-1.500
Satisfactory
 
BB+ to B and unrated
CRR4 to CRR5
0.741-4.914
Band 4 and 5
1.501-20.000
Sub-standard
 
B- to C
CRR6 to CRR8
4.915-99.999
Band 6
20.001-99.999
Credit-impaired
 
Default
CRR9 to CRR10
100.000
Band 7
100.000
Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation
 
 
Gross carrying/notional amount
Allowance for ECL
Net
 
 
Strong
Good
Satisfactory
Sub-standard
Credit impaired
Total
 
Footnote
$m
$m
$m
$m
$m
$m
$m
$m
Loans and advances to customers at amortised cost
 
476,789
247,732
225,242
17,939
14,476
982,178
(8,735
)
973,443
- stage 1
 
473,248
232,695
187,698
5,230
-
898,871
(1,284
)
897,587
- stage 2
 
3,541
15,037
37,514
12,683
-
68,775
(2,005
)
66,770
- stage 3
 
-
-
-
-
14,218
14,218
(5,320
)
8,898
- POCI
 
-
-
30
26
258
314
(126
)
188
Loans and advances to banks at amortised cost
 
71,844
8,350
3,701
28
16
83,939
(15
)
83,924
- stage 1
 
71,791
8,188
3,596
13
-
83,588
(11
)
83,577
- stage 2
 
53
162
105
15
-
335
(2
)
333
- stage 3
 
-
-
-
-
16
16
(2
)
14
- POCI
 
-
-
-
-
-
-
-
-
Other financial assets measured at amortised cost
 
561,643
28,126
23,026
254
80
613,129
(56
)
613,073
- stage 1
 
561,611
27,737
22,080
96
-
611,524
(27
)
611,497
- stage 2
 
32
389
946
158
-
1,525
(4
)
1,521
- stage 3
 
-
-
-
-
79
79
(25
)
54
- POCI
 
-
-
-
-
1
1
-
1
Loan and other credit-related commitments
 
302,478
141,520
73,771
4,622
624
523,015
(319
)
522,696
- stage 1
 
300,681
137,817
64,643
1,019
-
504,160
(119
)
504,041
- stage 2
 
1,797
3,703
9,128
3,603
-
18,231
(134
)
18,097
- stage 3
 
-
-
-
-
613
613
(66
)
547
- POCI
 
-
-
-
-
11
11
-
11
Financial guarantees and similar contracts
 
35,579
30,601
21,773
2,369
781
91,103
(205
)
90,898
- stage 1
 
35,067
28,271
17,319
529
-
81,186
(48
)
81,138
- stage 2
 
512
2,330
4,454
1,840
-
9,136
(62
)
9,074
- stage 3
 
-
-
-
-
762
762
(95
)
667
- POCI
 
-
-
-
-
19
19
-
19
At 30 Jun 2018
 
1,448,333
456,329
347,513
25,212
15,977
2,293,364
(9,330
)
2,284,034
 
 
 
 
 
 
 
 
 
 
Debt instruments at FVOCI
7
Stage 1
 
296,478
13,483
9,572
2,401
-
321,934
(34
)
321,900
Stage 2
 
110
297
105
832
-
1,344
(107
)
1,237
Stage 3
 
-
-
-
-
51
51
(11
)
40
POCI
 
-
-
-
-
22
22
-
22
At 30 Jun 2018
 
296,588
13,780
9,677
3,233
73
323,351
(152
)
323,199
For footnote, see page 70.
HSBC Holdings plc Interim Report 2018
53
Risk
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
Satisfactory
Sub-standard
Credit- impaired
Total
Allowance for ECL
 Net
 
Footnote
$m
$m
$m
$m
$m
$m
$m
$m
Loans and advances to customers at amortised cost
 
479,067
227,146
220,089
17,922
14,856
959,080
(9,343
)
949,737
- stage 1
 
475,881
211,084
180,002
4,599
-
871,566
(1,309
)
870,257
- stage 2
 
3,186
16,062
40,087
13,323
-
72,658
(2,201
)
70,457
- stage 3
 
-
-
-
-
13,882
13,882
(5,591
)
8,291
- POCI
 
-
-
-
-
974
974
(242
)
732
Loans and advances to banks at amortised cost
 
70,959
7,692
3,890
26
15
82,582
(23
)
82,559
- stage 1
 
70,024
7,351
3,642
10
-
81,027
(17
)
81,010
- stage 2
 
935
341
248
16
-
1,540
(4
)
1,536
- stage 3
 
-
-
-
-
15
15
(2
)
13
- POCI
 
-
-
-
-
-
-
-
-
Other financial assets measured at amortised cost
 
469,898
47,347
39,595
862
162
557,864
(114
)
557,750
- stage 1
 
469,691
47,019
38,929
546
-
556,185
(28
)
556,157
- stage 2
 
207
328
666
316
-
1,517
(4
)
1,513
- stage 3
 
-
-
-
-
155
155
(82
)
73
- POCI
 
-
-
-
-
7
7
-
7
Loan and other credit-related commitments
 
297,683
121,508
74,694
6,431
1,045
501,361
(376
)
500,985
- stage 1
 
294,958
115,008
64,429
1,591
-
475,986
(126
)
475,860
- stage 2
 
2,725
6,500
10,265
4,840
-
24,330
(183
)
24,147
- stage 3
 
-
-
-
-
999
999
(67
)
932
- POCI
 
-
-
-
-
46
46
-
46
Financial guarantees and similar contracts
 
35,537
27,084
23,366
2,948
447
89,382
(161
)
89,221
- stage 1
 
33,558
25,009
18,095
1,259
-
77,921
(36
)
77,885
- stage 2
 
1,979
2,075
5,271
1,689
-
11,014
(47
)
10,967
- stage 3
 
-
-
-
-
413
413
(78
)
335
- POCI
 
-
-
-
-
34
34
-
34
At 1 Jan 2018
 
1,353,144
430,777
361,634
28,189
16,525
2,190,269
(10,017
)
2,180,252
 
 
 
 
 
 
 
 
 
 
Debt instruments at FVOCI
7
 
 
 
 
 
 
 
 
Stage 1
 
297,753
6,678
12,941
2,450
-
319,822
(28
)
319,794
Stage 2
 
208
108
147
1,826
-
2,289
(142
)
2,147
Stage 3
 
-
-
-
-
584
584
(14
)
570
POCI
 
-
-
-
-
-
-
-
-
At 1 Jan 2018
 
297,961
6,786
13,088
4,276
584
322,695
(184
)
322,511
For footnote, see page 70.
Renegotiated loans and forbearance
The following table shows the gross carrying amounts of the Group's holdings of renegotiated loans and advances to customers by industry sector and by stages. Wholesale renegotiated loans are classified as stage 3 until there is sufficient
 
evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period, and there are no other indicators of impairment. Personal renegotiated loans are deemed to remain credit-impaired until repayment or derecognition.
Renegotiated loans and advances to customers at amortised cost by stage distribution
 
Stage 1
Stage 2
Stage 3
POCI
Total
 
$m
$m
$m
$m
$m
Gross carrying amount
 
 
 
 
 
Personal
-
-
2,280
-
2,280
- first lien residential mortgages
-
-
1,677
-
1,677
- other personal lending
-
-
603
-
603
Wholesale
1,096
1,335
4,499
219
7,149
- corporate and commercial
1,077
1,334
4,274
219
6,904
- non-bank financial institutions
19
1
225
-
245
At 30 Jun 2018
1,096
1,335
6,779
219
9,429
Allowance for ECL
 
 
 
 
 
Personal
-
-
(394
)
-
(394
)
- first lien residential mortgages
-
-
(198
)
-
(198
)
- other personal lending
-
-
(196
)
-
(196
)
Wholesale
(11
)
(45
)
(1,561
)
(78
)
(1,695
)
- corporate and commercial
(11
)
(45
)
(1,399
)
(78
)
(1,533
)
- non-bank financial institutions
-
-
(162
)
-
(162
)
At 30 Jun 2018
(11
)
(45
)
(1,955
)
(78
)
(2,089
)
54
HSBC Holdings plc Interim Report 2018
Personal lending
This section provides further detail on the regions, countries and products driving the increase in personal loans and advances to customers, with the impact of foreign exchange separately identified. Additionally, Hong Kong and UK mortgage book LTV data is provided.
Further product granularity is also provided by stage, with geographical data presented for loans and advances to customers, loan and other credit-related commitments, and financial guarantee and similar contracts.
Total personal lending of $383bn has increased by $7.9bn from $375bn since the Group transitioned to IFRS 9 on 1 January 2018. This increase includes adverse foreign exchange movements of $7.9bn. Excluding foreign exchange movements, there was growth of $15.7bn primarily driven by Asia ($8.7bn) and Europe ($6.2bn). The allowance for ECL attributable to personal lending, excluding off-balance sheet commitments and guarantees, has decreased slightly from 1 January 2018 to $2.9bn from $3.0bn. This is primarily driven by favourable foreign exchange movements and the stable credit environment.
Excluding foreign exchange movements, the total personal lending increase is primarily driven by mortgage balances, which grew by $11bn. Mortgages in Asia grew by $6.2bn, notably in Hong Kong
 
($4.1bn) and to a lesser extent in Australia ($1.6bn), as a result of continued business growth initiatives and property market growth. In Europe, mortgages grew by $3.9bn, notably in the UK ($4.2bn), driven by stronger acquisition performance, including the expanded use of broker relationships.
The quality of both our Hong Kong and UK mortgage books remained high, with negligible defaults and impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 49%, compared with an estimated 36% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 63%, compared with an estimated 49% for the overall mortgage portfolio. In 2018, we aligned our global approach in relation to LTV reporting; this resulted in Hong Kong and the UK changing from a simple average to a balance weighted average. These will no longer be comparable to previously reported amounts.
Excluding foreign exchange movement, other personal lending balances have increased by $4.7bn since 1 January 2018. Loans and overdrafts grew by $1.9bn in Hong Kong, and $2.6bn in the UK, Switzerland and France combined. Credit cards decreased by $0.7bn in Hong Kong and $0.4bn in the UK.
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
272,106
8,315
2,931
283,352
(38
)
(77
)
(457
)
(572
)
-
of which:
 
 
 
 
 
 
 
 
interest only (including offset)
27,585
1,056
183
28,824
(3
)
(16
)
(59
)
(78
)
affordability (including US adjustable rate mortgages)
14,702
2,603
556
17,861
(2
)
(3
)
(4
)
(9
)
Other personal lending
89,803
8,204
1,568
99,575
(547
)
(1,071
)
(705
)
(2,323
)
- other
67,255
4,309
1,064
72,628
(228
)
(387
)
(440
)
(1,055
)
- credit cards
20,109
3,734
433
24,276
(315
)
(669
)
(248
)
(1,232
)
- second lien residential mortgages
1,046
120
66
1,232
(2
)
(11
)
(13
)
(26
)
- motor vehicle finance
1,393
41
5
1,439
(2
)
(4
)
(4
)
(10
)
At 30 Jun 2018
361,909
16,519
4,499
382,927
(585
)
(1,148
)
(1,162
)
(2,895
)
By geography
 
 
 
 
 
 
 
 
Europe
164,459
4,741
1,864
171,064
(165
)
(299
)
(442
)
(906
)
-
of which: UK
135,921
3,439
1,247
140,607
(151
)
(267
)
(236
)
(654
)
Asia
150,290
5,689
710
156,689
(183
)
(379
)
(189
)
(751
)
-
of which: Hong Kong
100,245
2,898
180
103,323
(68
)
(237
)
(39
)
(344
)
MENA
5,712
388
435
6,535
(75
)
(104
)
(273
)
(452
)
North America
36,261
4,687
1,208
42,156
(28
)
(86
)
(139
)
(253
)
Latin America
5,187
1,014
282
6,483
(134
)
(280
)
(119
)
(533
)
At 30 Jun 2018
361,909
16,519
4,499
382,927
(585
)
(1,148
)
(1,162
)
(2,895
)
Total personal lending for loans and other credit-related commitments and financial guarantee and similar contracts 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
Europe
54,665
475
56
55,196
(7
)
-
(2
)
(9
)
-
of which: UK
52,526
292
48
52,866
(4
)
-
-
(4
)
Asia
126,239
951
2
127,192
-
-
-
-
-
of which: Hong Kong
96,329
413
-
96,742
-
-
-
-
MENA
3,524
68
59
3,651
(1
)
-
-
(1
)
North America
14,310
294
116
14,720
(1
)
-
-
(1
)
Latin America
4,006
86
6
4,098
(1
)
-
-
(1
)
At 30 Jun 2018
202,744
1,874
239
204,857
(10
)
-
(2
)
(12
)
HSBC Holdings plc Interim Report 2018
55
Risk
Wholesale lending
This sections provides further detail on the regions, countries and products driving the increase in wholesale loans and advances to customers and banks, with the impact of foreign exchange separately identified. Additional product granularity is also provided by stage with geographical data presented for loans and advances to customers and banks, loan and other credit-related commitments and financial guarantees and similar contracts.
Total wholesale lending of $683bn has increased by $16.6bn from $667bn since the Group transitioned to IFRS 9 on 1 January 2018; this increase includes adverse foreign exchange movements of
 
$13bn. Excluding foreign exchange movements, the total wholesale lending growth was driven by a $29bn increase in corporate and commercial balances. The primary driver of this increase was Asia ($20.3bn), most notably in Hong Kong ($13bn),
Singapore ($2.2bn) and India ($1.7bn). Other notable increases were observed in the UK ($4.4bn), the UAE ($2.3bn) and Canada ($1.3bn). The allowance for ECL attributable to wholesale lending, excluding off-balance sheet commitments and guarantees of $5.8bn, has decreased from $6.3bn on 1 January 2018. This is primarily driven by releases related to the Group's oil and gas sector and by favourable foreign exchange movements.
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
480,550
48,673
9,445
314
538,982
(655
)
(812
)
(3,968
)
(126
)
(5,561
)
- agriculture, forestry and fishing
5,501
1,141
259
15
6,916
(12
)
(31
)
(109
)
(2
)
(154
)
- mining and quarrying
10,489
2,144
679
2
13,314
(23
)
(85
)
(175
)
(2
)
(285
)
- manufacture
91,272
9,407
1,878
103
102,660
(124
)
(150
)
(1,001
)
(37
)
(1,312
)
- electricity, gas, steam and air-conditioning supply
14,051
1,765
122
59
15,997
(15
)
(50
)
(17
)
(33
)
(115
)
- water supply, sewerage, waste management and remediation
3,111
145
238
-
3,494
(4
)
(7
)
(15
)
-
(26
)
- construction
14,136
1,370
1,013
37
16,556
(27
)
(17
)
(501
)
(36
)
(581
)
- wholesale and retail trade, repair of motor vehicles and motorcycles
84,947
13,227
1,871
42
100,087
(94
)
(106
)
(873
)
(12
)
(1,085
)
- transportation and storage
24,592
1,671
421
41
26,725
(34
)
(49
)
(87
)
(1
)
(171
)
- accommodation and food
18,076
2,347
316
4
20,743
(41
)
(50
)
(86
)
(2
)
(179
)
- publishing, audiovisual and broadcasting
18,711
1,260
224
1
20,196
(47
)
(15
)
(63
)
-
(125
)
- real estate
113,056
7,089
1,102
3
121,250
(85
)
(66
)
(535
)
-
(686
)
- professional, scientific and technical activities
23,020
1,650
308
-
24,978
(30
)
(28
)
(104
)
-
(162
)
- administrative and support services
22,497
2,107
456
3
25,063
(31
)
(44
)
(146
)
(1
)
(222
)
- public administration and defence, compulsory social security
1,108
227
8
-
1,343
-
(2
)
(5
)
-
(7
)
- education
1,693
240
18
-
1,951
(7
)
(6
)
(7
)
-
(20
)
- health and care
5,306
630
157
3
6,096
(10
)
(18
)
(60
)
-
(88
)
- arts, entertainment and recreation
4,794
777
62
-
5,633
(10
)
(11
)
(33
)
-
(54
)
- other services
14,315
623
274
1
15,213
(56
)
(55
)
(148
)
-
(259
)
- activities of households
151
648
-
-
799
-
-
-
-
-
- extra-territorial organisations and bodies activities
907
4
39
-
950
-
-
(3
)
-
(3
)
- government
7,942
121
-
-
8,063
(5
)
(1
)
-
-
(6
)
- asset-backed securities
875
80
-
-
955
-
(21
)
-
-
(21
)
Non-bank financial institutions
56,412
3,583
274
-
60,269
(44
)
(45
)
(190
)
-
(279
)
Loans and advances to banks
83,588
335
16
-
83,939
(11
)
(2
)
(2
)
-
(15
)
At 30 Jun 2018
620,550
52,591
9,735
314
683,190
(710
)
(859
)
(4,160
)
(126
)
(5,855
)
By geography
 
 
 
 
 
 
 
 
 
 
Europe
195,378
19,734
5,338
106
220,556
(381
)
(531
)
(1,902
)
(49
)
(2,863
)
-
of which: UK
137,939
15,627
3,896
15
157,477
(307
)
(470
)
(1,213
)
(2
)
(1,992
)
Asia
326,286
19,312
1,721
100
347,419
(163
)
(99
)
(957
)
(27
)
(1,246
)
-
of which: Hong Kong
194,677
12,515
847
70
208,109
(80
)
(58
)
(402
)
(26
)
(566
)
MENA
25,302
4,007
1,740
56
31,105
(56
)
(93
)
(1,000
)
(45
)
(1,194
)
North America
56,722
8,894
656
-
66,272
(35
)
(114
)
(148
)
-
(297
)
Latin America
16,862
644
280
52
17,838
(75
)
(22
)
(153
)
(5
)
(255
)
At 30 Jun 2018
620,550
52,591
9,735
314
683,190
(710
)
(859
)
(4,160
)
(126
)
(5,855
)
56
HSBC Holdings plc Interim Report 2018
Total wholesale lending for loans and other credit-related commitments and financial guarantee and similar contracts by
stage distribution
 
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
310,300
24,243
1,130
30
335,703
(144
)
(196
)
(159
)
-
(499
)
Financial
72,302
1,250
6
-
73,558
(13
)
-
-
-
(13
)
At 30 Jun 2018
382,602
25,493
1,136
30
409,261
(157
)
(196
)
(159
)
-
(512
)
By geography
 
 
 
 
 
 
Europe
152,182
6,414
664
30
159,290
(80
)
(64
)
(97
)
-
(241
)
-
of which: UK
88,193
2,268
451
5
90,917
(50
)
(50
)
(75
)
-
(175
)
Asia
89,072
5,706
185
-
94,963
(42
)
(16
)
(26
)
-
(84
)
-
of which: Hong Kong
35,312
2,518
169
-
37,999
(10
)
(6
)
(23
)
-
(39
)
MENA
16,602
2,917
197
-
19,716
(15
)
(24
)
(31
)
-
(70
)
North America
120,514
10,316
89
-
130,919
(15
)
(92
)
(4
)
-
(111
)
Latin America
4,232
140
1
-
4,373
(5
)
-
(1
)
-
(6
)
At 30 Jun 2018
382,602
25,493
1,136
30
409,261
(157
)
(196
)
(159
)
-
(512
)
HSBC Holdings plc Interim Report 2018
57
Risk
Supplementary information
The disclosure below 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
898,871
68,775
14,218
314
982,178
(1,284
)
(2,005
)
(5,320
)
(126
)
(8,735
)
- RBWM
326,386
22,104
5,534
-
354,024
(577
)
(1,151
)
(1,184
)
-
(2,912
)
- CMB
299,854
27,408
6,252
254
333,768
(500
)
(614
)
(3,223
)
(121
)
(4,458
)
- GB&M
233,956
15,371
1,895
59
251,281
(191
)
(199
)
(837
)
(5
)
(1,232
)
- GPB
36,718
3,772
509
1
41,000
(13
)
(10
)
(76
)
-
(99
)
- Corporate Centre
1,957
120
28
-
2,105
(3
)
(31
)
-
-
(34
)
Loans and advances to banks at amortised cost
83,588
335
16
-
83,939
(11
)
(2
)
(2
)
-
(15
)
- RBWM
6,197
23
9
-
6,229
-
-
-
-
-
- CMB
1,888
3
-
-
1,891
(1
)
-
-
-
(1
)
- GB&M
20,987
261
4
-
21,252
(8
)
(2
)
(1
)
-
(11
)
- GPB
120
-
-
-
120
-
-
-
-
-
- Corporate Centre
54,396
48
3
-
54,447
(2
)
-
(1
)
-
(3
)
Other financial assets measured at amortised cost
611,524
1,525
79
1
613,129
(27
)
(4
)
(25
)
-
(56
)
- RBWM
49,397
432
14
-
49,843
(12
)
-
(1
)
-
(13
)
- CMB
17,701
623
45
1
18,370
(6
)
(3
)
(24
)
-
(33
)
- GB&M
280,074
445
15
-
280,534
(2
)
(1
)
-
-
(3
)
- GPB
1,407
2
1
-
1,410
-
-
-
-
-
- Corporate Centre
262,945
23
4
-
262,972
(7
)
-
-
-
(7
)
Total gross carrying amount on balance sheet at 30 Jun 2018
1,593,983
70,635
14,313
315
1,679,246
(1,322
)
(2,011
)
(5,347
)
(126
)
(8,806
)
Loans and other credit related commitments
504,160
18,231
613
11
523,015
(119
)
(134
)
(66
)
-
(319
)
- RBWM
176,526
2,028
264
-
178,818
(11
)
(7
)
(8
)
-
(26
)
- CMB
73,961
6,377
147
11
80,496
(57
)
(47
)
(28
)
-
(132
)
- GB&M
203,285
8,494
163
-
211,942
(50
)
(79
)
(19
)
-
(148
)
- GPB
30,118
1,212
2
-
31,332
-
-
-
-
-
- Corporate Centre
20,270
120
37
-
20,427
(1
)
(1
)
(11
)
-
(13
)
Financial guarantee and similar contracts
81,186
9,136
762
19
91,103
(48
)
(62
)
(95
)
-
(205
)
- RBWM
872
2
9
-
883
(2
)
(3
)
(5
)
-
(10
)
- CMB
25,366
4,589
487
19
30,461
(18
)
(26
)
(75
)
-
(119
)
- GB&M
52,252
4,516
162
-
56,930
(25
)
(33
)
(13
)
-
(71
)
- GPB
1,164
1
2
-
1,167
(2
)
-
(2
)
-
(4
)
- Corporate Centre
1,532
28
102
-
1,662
(1
)
-
-
-
(1
)
Total nominal amount off balance sheet at 30 Jun 2018
585,346
27,367
1,375
30
614,118
(167
)
(196
)
(161
)
-
(524
)
 
 
 
 
 
 
 
 
 
 
 
RBWM
15,866
-
-
-
15,866
(5
)
-
-
-
(5
)
CMB
2,152
-
-
-
2,152
(2
)
-
-
-
(2
)
GB&M
3,214
-
-
-
3,214
(8
)
-
-
-
(8
)
GPB
-
-
-
-
-
-
-
-
-
-
Corporate Centre
299,734
904
54
16
300,708
(19
)
(107
)
(11
)
-
(137
)
Debt instruments measured at FVOCI at
30 Jun 2018
320,966
904
54
16
321,940
(34
)
(107
)
(11
)
-
(152
)
58
HSBC Holdings plc Interim Report 2018
Securitisation exposures and other structured products
The following table summarises the carrying amount of our asset-backed securities ('ABSs') exposure by categories of collateral. It includes assets held in the GB&M legacy credit portfolio with a carrying value of $6.8bn (31 December 2017: $9bn).
 
At 30 June 2018, the FVOCI reserve in respect of ABSs was a deficit of $205m (31 December 2017: deficit of $519m). For 2018, the impairment write-back in respect of ABSs was $107m (31 December 2017: $53m).
Carrying amount of HSBC's consolidated holdings of ABSs
Trading
Financial Investments at FVOCI
Held at amortised cost
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
Total
Of whichheld through consolidatedstructured entities
Footnote
$m
$m
$m
$m
$m
$m
Mortgage-related assets
1,528
13,107
14,898
71
29,604
376
- sub-prime residential
17
729
-
16
762
117
- US Alt-A residential
-
199
3
-
202
116
- US Government agency and sponsored enterprises: MBSs
8
134
12,018
13,961
-
26,113
-
- UK buy-to-let residential
-
-
-
-
-
-
- other residential
1,092
24
889
-
2,005
12
- commercial property
285
137
45
55
522
131
Leveraged finance-related assets
336
133
-
323
792
264
Student loan-related assets
132
1,946
-
24
2,102
1,918
Auto finance related assets
222
-
3
-
225
-
Other assets
1,279
800
1
3
2,083
227
At 30 Jun 2018
3,497
15,986
14,902
421
34,806
2,785
For footnote, see page 70.
Selected 2017 credit risk disclosures
The disclosures below were included in our 2017 external reports and do not reflect the adoption of IFRS 9. As these tables are not
 
directly comparable to the current 2018 credit risk tables, which are disclosed on an IFRS 9 basis, these 2017 disclosures have been shown below and not adjacent to 2018 tables.
Summary of credit risk
 
At 31 Dec 2017
 
$bn
At end of period
 
Maximum exposure to credit risk
3,030
- total assets subject to credit risk
2,306
- off-balance sheet commitments subject to credit risk
724
Gross loans and advances
1,060
- personal lending
376
- wholesale lending
684
Impaired loans
15
- personal lending
5
- wholesale lending
10
 
 
Impaired loans as a % of gross loans and advances
%
Personal lending
1.3
Wholesale lending
1.5
Total
1.5
 
$bn
Impairment allowances
7.5
- personal lending
1.7
- wholesale lending
5.8
Loans and advances net of impairment allowances
1,053
 
Half-year to
 
30 Jun 2017
31 Dec 2017
 
$bn
$bn
Loan impairment charges
0.7
1.3
- personal lending
0.5
0.5
- wholesale lending
0.2
0.8
Other credit risk provisions
(0.1
)
(0.1
)
 
0.6
1.2
HSBC Holdings plc Interim Report 2018
59
Risk
Distribution of total financial instruments exposed to credit risk by credit quality
 
Neither past due nor impaired
Past duebut not impaired
Impaired
Totalgrossamount
Impairmentallowances
Total
 
Strong
Good
Satisfactory
Sub-standard
 
$m
$m
$m
$m
$m
$m
$m
$m
$m
At 31 Dec 2017
1,635,086
336,212
293,685
23,084
8,716
16,341
2,313,124
(7,532
)
2,305,592
 
%
%
%
%
%
%
%
 
 
 
70.7
14.5
12.7
1.0
0.4
0.7
100.0
 
 
Distribution of loans and advances held at amortised cost by credit quality
 
Neither past due nor impaired
Past duebut notimpaired
Impaired
Totalgrossamount
Impairment allowances
Total
 
Strong
Good
Satis-factory
Sub-standard
 
$m
$m
$m
$m
$m
$m
$m
$m
$m
At 31 Dec 2017
580,934
231,369
208,306
16,153
8,609
15,470
1,060,841
(7,484
)
1,053,357
Loans and advances to customers
503,759
222,343
204,162
16,114
8,600
15,470
970,448
(7,484
)
962,964
- personal
324,960
26,612
14,549
780
4,658
4,922
376,481
(1,719
)
374,762
- corporate and commercial
140,382
176,745
176,661
14,784
3,422
10,254
522,248
(5,494
)
516,754
- non-bank financial institutions
38,417
18,986
12,952
550
520
294
71,719
(271
)
71,448
Loans and advances to banks
77,175
9,026
4,144
39
9
-
90,393
-
90,393
Impaired loans by industry sector and geographical region
 
Europe
Asia
MENA
NorthAmerica
LatinAmerica
Total
 
$m
$m
$m
$m
$m
$m
Non-renegotiated impaired loans
4,551
1,645
870
1,180
452
8,698
- personal
1,648
475
227
665
280
3,295
- corporate and commercial
2,895
1,146
639
508
172
5,360
- financial
8
24
4
7
-
43
Renegotiated impaired loans
3,491
604
1,079
1,426
172
6,772
- personal
381
125
120
958
43
1,627
- corporate and commercial
2,926
478
895
466
129
4,894
- financial
184
1
64
2
-
251
At 31 Dec 2017
8,042
2,249
1,949
2,606
624
15,470
Impaired loans % of total gross loans and advances
2.0%
0.5%
5.4%
2.2%
2.6%
1.5%
Renegotiated loans and advances to customers by industry sector
 
First lien residential mortgages
Other
personal lending
Corporate
and commercial
Non-bank financial institutions
Total
 
$m
$m
$m
$m
$m
Neither past due nor impaired
476
268
2,082
257
3,083
Past due but not impaired
58
49
120
-
227
Impaired
1,329
298
4,894
251
6,772
At 31 Dec 2017
1,863
615
7,096
508
10,082
Impairment allowances on renegotiated loans
165
127
1,584
151
2,027
Renegotiated loans and advances to customers by geographical region
 
Europe
Asia
MENA
North
America
LatinAmerica
Total
 
$m
$m
$m
$m
$m
$m
At 31 Dec 2017
5,667
921
1,622
1,604
268
10,082
60
HSBC Holdings plc Interim Report 2018
Loan impairment
Loan impairment charge to the income statement by industry sector
 
Europe
Asia
MENA
NorthAmerica
LatinAmerica
Total
 
$m
$m
$m
$m
$m
$m
Personal
103
143
53
8
240
547
- first lien residential mortgages
26
4
-
(11
)
(18
)
1
- other personal
77
139
53
19
258
546
Corporate and commercial
(69
)
286
47
(102
)
21
183
- manufacturing and international trade and services
65
231
34
(18
)
8
320
- commercial real estate and other property-related
(92
)
33
23
3
1
(32
)
- other commercial
(42
)
22
(10
)
(87
)
12
(105
)
Financial
10
18
20
1
-
49
Total loan impairment charge for thehalf-year to 30 Jun 2017
44
447
120
(93
)
261
779
 
 
 
 
 
 
 
Personal
37
100
39
24
212
412
- first lien residential mortgages
(20
)
(5
)
5
11
(9
)
(18
)
- other personal
57
105
34
13
221
430
Corporate and commercial
688
12
36
(61
)
69
744
- manufacturing and international trade and services
249
5
61
36
51
402
- commercial real estate and other property-related
292
(12
)
(27
)
6
(1
)
258
- other commercial
147
19
2
(103
)
19
84
Financial
56
(1
)
2
-
-
57
Total loan impairment charge for thehalf-year to 31 Dec 2017
781
111
77
(37
)
281
1,213
Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region
 
Europe
Asia
MENA
NorthAmerica
LatinAmerica
Total
 
%
%
%
%
%
%
Half-year to 30 Jun 2017
 
 
 
 
 
 
New allowances net of allowance releases
0.11
0.26
0.91
(0.10
)
3.30
0.25
Recoveries
(0.08
)
(0.03
)
(0.09
)
(0.07
)
(0.46
)
(0.07
)
Total charge for impairment losses
0.03
0.23
0.82
(0.17
)
2.84
0.18
Amount written off net of recoveries
0.27
0.12
0.82
0.20
2.32
0.26
 
 
 
 
 
 
 
Half-year to 31 Dec 2017
 
 
 
 
 
 
New allowances net of allowance releases
0.55
0.09
0.68
-
3.28
0.34
Recoveries
(0.11
)
(0.03
)
(0.18
)
(0.07
)
(0.38
)
(0.08
)
Total charge for impairment losses
0.44
0.06
0.50
(0.07
)
2.90
0.26
Amount written off net of recoveries
0.21
0.15
1.88
0.35
2.64
0.31
Movement in impairment allowances on loans and advances to customers and banks
 
Half-year to 30 Jun 2017
 
Banks
individually
assessed
Customers
 
 
Individually
assessed
Collectively
assessed
Total
 
$m
$m
$m
$m
At the beginning of the period
-
4,932
2,918
7,850
Amounts written off
-
(648
)
(756
)
(1,404
)
Recoveries of loans and advances previously written off
-
63
223
286
Charge to income statement
-
270
509
779
Exchange and other movements
2
109
(59
)
52
At the end of the period
2
4,726
2,835
7,563
Impairment allowances as a % of loans and advances
-
0.5%
0.3%
0.8%
 
 
 
 
 
 
Half-year to 31 Dec 2017
At the beginning of the period
2
4,726
2,835
7,563
Amounts written off
-
(820
)
(949
)
(1,769
)
Recoveries of loans and advances previously written off
-
56
302
358
Charge to income statement
-
844
369
1,213
Exchange and other movements
(2
)
154
(33
)
119
At the end of the period
-
4,960
2,524
7,484
Impairment allowances as a % of loans and advances
-
0.5%
0.3%
0.8%
HSBC Holdings plc Interim Report 2018
61
Risk
Wholesale lending
Total wholesale lending for loans and advances to banks and customers9
 
Gross Loans
Impairment Allowance
 
$m
$m
Corporate and commercial
522,248
(5,494
)
- agriculture, forestry and fishing
6,302
(122
)
- mining and quarrying
10,911
(450
)
- manufacture
115,531
(1,390
)
- electricity, gas, steam and air-conditioning supply
17,397
(88
)
- water supply, sewerage, waste management and remediation
2,806
(3
)
- construction
15,443
(540
)
- wholesale and retail trade, repair of motor vehicles and motorcycles
98,079
(1,361
)
- transportation and storage
24,258
(131
)
- accommodation and food
16,971
(138
)
- publishing, audiovisual and broadcasting
18,405
(83
)
- real estate
114,349
(638
)
- professional, scientific and technical activities
18,094
(95
)
- administrative and support services
19,960
(138
)
- public administration and defence, compulsory social security
221
-
- education
1,490
(7
)
- health and care
5,688
(34
)
- arts, entertainment and recreation
3,003
(14
)
- other services
20,354
(235
)
- activities of households
-
-
- extra-territorial organisations and bodies activities
-
-
- government
11,728
(8
)
- asset-backed securities
1,258
(19
)
Non-bank financial institutions
71,719
(271
)
Loans and advances to banks
90,393
-
At 31 Dec 2017
684,360
(5,765
)
By geography
 
 
Europe
228,775
(2,469
)
-
of which: UK
163,393
(1,589
)
Asia
332,680
(1,402
)
-
of which: Hong Kong
197,232
(639
)
MENA
29,142
(1,131
)
North America
76,661
(579
)
Latin America
17,102
(184
)
At 31 Dec 2017
684,360
(5,765
)
For footnote, see page 70.
Personal lending
Total personal lending gross loans
 
Europe
Asia
MENA
North
America
Latin
America
Total
UK
Hong Kong
Total as a
% of total
gross loans
 
$m
$m
$m
$m
$m
$m
$m
$m
First lien residential mortgages
126,685
109,502
2,375
37,330
2,281
278,173
119,770
70,279
26.2
- of which:
 
 
 
 
 
 
 
 
 
interest only (including offset)
35,242
873
65
92
-
36,272
33,468
-
3.4
affordability (including US adjustable-rate mortgages)
409
3,111
-
13,742
-
17,262
-
3
1.6
Other personal lending
43,329
40,880
4,496
5,227
4,376
98,308
19,790
27,868
9.3
- other
32,995
29,400
2,663
2,919
2,205
70,182
10,039
19,977
6.7
- credit cards
10,235
11,435
1,531
1,037
1,642
25,880
9,751
7,891
2.4
- second lien residential mortgages
99
21
2
1,233
-
1,355
-
-
0.1
- motor vehicle finance
-
24
300
38
529
891
-
-
0.1
At 31 Dec 2017
170,014
150,382
6,871
42,557
6,657
376,481
139,560
98,147
35.5
For footnote, see page 70.
62
HSBC Holdings plc Interim Report 2018
Total personal lending impairment allowances
 
Europe
Asia
MENA
North
America
Latin
America
Total
UK
Hong Kong
 
$m
$m
$m
$m
$m
$m
$m
$m
First lien residential mortgages
262
30
68
148
16
524
145
-
Other personal lending
341
237
259
60
298
1,195
257
86
- other
230
109
132
17
151
639
147
36
- credit cards
111
128
122
30
140
531
110
50
- second lien residential mortgages
-
-
-
13
-
13
-
-
- motor vehicle finance
-
-
5
-
7
12
-
-
At 31 Dec 2017
603
267
327
208
314
1,719
402
86
Impairment allowances % of impaired loans
29.7%
44.5%
94.2%
12.8%
97.2%
34.9%
28.3%
62.3%
Supplementary information
Gross loans and advances to customers by country
 
First lien residential mortgages
Other personal
Property-related
Commercial, international trade and other
Total
 
$m
$m
$m
$m
$m
Europe
126,685
43,329
33,938
180,656
384,608
- UK 
119,770
19,790
26,012
131,938
297,510
- France
2,910
16,650
6,255
28,440
54,255
- Germany
1
234
361
10,485
11,081
- Switzerland
839
5,776
491
1,284
8,390
- other
3,165
879
819
8,509
13,372
Asia
109,502
40,880
86,410
190,851
427,643
- Hong Kong
70,279
27,868
66,668
104,876
269,691
- Australia
12,444
838
2,851
10,815
26,948
- India
1,185
441
1,110
6,437
9,173
- Indonesia
64
322
164
4,107
4,657
- mainland China
8,877
1,170
5,674
25,202
40,923
- Malaysia
3,003
3,385
2,144
5,676
14,208
- Singapore
5,760
4,952
4,727
13,073
28,512
- Taiwan
4,877
822
19
5,342
11,060
- other
3,013
1,082
3,053
15,323
22,471
Middle East and North Africa (excluding Saudi Arabia)
2,375
4,496
2,508
20,132
29,511
- Egypt
-
283
39
1,342
1,664
- Turkey
206
1,035
265
2,702
4,208
- UAE
1,880
1,682
1,727
11,172
16,461
- other
289
1,496
477
4,916
7,178
North America
37,330
5,227
16,916
48,925
108,398
- US
17,415
2,278
11,092
34,790
65,575
- Canada
18,639
2,731
5,429
13,583
40,382
- other
1,276
218
395
552
2,441
Latin America
2,281
4,376
1,875
11,756
20,288
- Mexico
2,129
3,044
1,702
8,735
15,610
- other
152
1,332
173
3,021
4,678
At 31 Dec 2017
278,173
98,308
141,647
452,320
970,448
Carrying amount of HSBC's consolidated holdings of ABSs
 
Trading
Available for sale
Held to maturity
Designated at fair value through profit or loss
Loans and receivables
Total
Of whichheld through consolidatedSEs
 
$m
$m
$m
$m
$m
$m
$m
Mortgage-related assets
1,767
14,221
13,965
-
1,762
31,715
1,826
- sub-prime residential
22
918
-
-
32
972
484
- US Alt-A residential
-
1,102
3
-
-
1,105
1,041
- US Government agency and sponsored enterprises: MBSs
331
11,750
13,962
-
-
26,043
-
- other residential
814
181
-
-
1,595
2,590
75
- commercial property
600
270
-
-
135
1,005
226
Leveraged finance-related assets
128
373
-
-
45
546
283
Student loan-related assets
155
2,198
-
-
-
2,353
2,158
Other assets
1,266
731
-
2
3,553
5,552
428
At 31 Dec 2017
3,316
17,523
13,965
2
5,360
40,166
4,695
HSBC Holdings plc Interim Report 2018
63
Risk
Liquidity and funding risk profile
Liquidity risk is the risk that we do not have sufficient financial resources to meet our obligations as they fall due. Liquidity risk arises from mismatches in the timing of cash flows.
Funding risk is the risk that funding considered to be sustainable, and therefore used to fund assets, is not sustainable over time. Funding risk arises when illiquid asset positions cannot be funded at the expected terms when required.
There were no material changes to the policies and practices for the management of liquidity and funding risk in 1H18.
A summary of our current policies and practices regarding the management of Liquidity and funding risk is set out on pages 73 and 74 of the Annual Report and Accounts 2017.
Liquidity and funding in the first half of 2018
HSBC requires all operating entities to comply with its liquidity and funding risk management framework ('LFRF') on a standalone basis and to meet regulatory and internal minimums at all times. The liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR') are key components of the LFRF.
The liquidity and funding position of the Group remained strong in 1H18 as illustrated below. The liquidity value is lower than carrying value due to adjustments applied to comply with the European Commission or other local regulators.
 
At
 
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
 
$bn
$bn
$bn
High quality liquid assets (liquidity value)
540
459
513
Net outflows
342
329
360
Liquidity coverage ratio
158%
139%
142%
The increase in the LCR is driven by the growth in high quality liquid assets in the UK in the period leading up to structural ringfencing on 1 July 2018.
Each principal operating entity reported a NSFR above 100%, highlighting a surplus of stable funding.
Management of liquidity and funding risk
Liquidity coverage ratio
At 30 June 2018, all the Group's principal operating entities were well above regulatory minimums and above the internally expected levels established by the Board.
The following table displays the individual LCR levels for our principal operating entities on a European Commission LCR basis. This basis may vary from local LCR measures due to differences in the way non-EU regulators have implemented the Basel III recommendations.
Principal operating entities' LCRs
 
 
At
 
 
30 Jun
30 Jun
31 Dec
 
 
2018
2017
2017
 
Footnotes
%
%
%
HSBC UK liquidity group
10
153
126
139
The Hongkong and Shanghai Banking Corporation - Hong Kong Branch
11
154
158
151
The Hongkong and Shanghai Banking Corporation - Singapore Branch
11
203
151
181
HSBC Bank USA
 
126
137
132
HSBC France
 
169
159
149
Hang Seng Bank
 
196
235
204
HSBC Bank Canada
 
110
131
123
HSBC Bank China
 
160
151
162
HSBC Bank Middle East - UAE Branch
 
165
207
197
HSBC Mexico
 
154
158
215
HSBC Private Bank
 
292
173
220
For footnotes, see page 70.
 
Net stable funding ratio
We are required to maintain sufficient stable funding. The NSFR measures stable funding relative to required stable funding, and reflects a bank's funding profile (funding with a term of more than a year). It is designed to complement the LCR.
At 30 June 2018, the Group's principal operating entities were above the internally expected levels established by the Board and applicable under the LFRF. The table below displays the NSFR levels for the principal HSBC operating entities.
Principal operating entities' NSFRs
 
 
At
 
 
30 Jun
30 Jun
31 Dec
 
 
2018
2017
2017
 
Footnotes
%
%
%
HSBC UK liquidity group
10
127
113
108
The Hongkong and Shanghai Banking Corporation - Hong Kong Branch
11
130
155
144
The Hongkong and Shanghai Banking Corporation - Singapore Branch
11
117
112
117
HSBC Bank USA
 
122
132
129
HSBC France
 
112
119
116
Hang Seng Bank
 
154
159
155
HSBC Bank Canada
 
125
136
136
HSBC Bank China
 
149
133
148
HSBC Bank Middle East - UAE Branch
 
142
143
143
HSBC Mexico
 
121
119
123
HSBC Private Bank
 
176
181
185
For footnotes, see page 70.
Depositor concentration and term funding maturity concentration
The LCR and NSFR metrics assume a stressed outflow based on a portfolio of depositors within retail, corporate and financial deposit segments. The validity of these assumptions is challenged if the portfolio of depositors is not large enough to avoid depositor concentration.
Operating entities are exposed to term refinancing concentration risk if the current maturity profile results in future maturities being overly concentrated in any defined period.
At 30 June 2018, all principal operating entities were within the internally expected levels set for depositor concentration and term funding maturity concentration established by the Board.
Liquid assets of HSBC's principal operating entities
The table below shows the liquidity value of the unencumbered liquid assets of HSBC's principal operating entities at the period end as a six-monthly average. At 30 June 2018, 85% of the liquid assets eligible for inclusion in the Group consolidated LCR were classified as Level 1.
64
HSBC Holdings plc Interim Report 2018
Liquid assets of HSBC's principal entities
 
 
Recognised
at 30 Jun 2018
1H18 Average
Recognised at
30 Jun 2017
1H17 Average
Recognised at
31 Dec 2017
2H17 Average
 
Footnotes
$m
$m
$m
$m
$m
$m
HSBC UK liquidity group
10
 
 
 
 
 
 
Level 1
 
166,913
160,088
148,740
141,032
161,036
156,623
Level 2a
 
7,763
6,364
7,362
4,610
2,914
4,795
Level 2b
 
16,582
17,296
18,691
14,635
18,777
19,919
The Hongkong and Shanghai Banking Corporation - Hong Kong
Branch
11
 
 
 
 
 
 
Level 1
 
75,436
78,496
74,658
85,848
77,217
77,295
Level 2a
 
28,656
24,991
23,949
24,218
26,848
25,841
Level 2b
 
1,153
1,988
4,736
4,454
5,528
6,056
Hang Seng Bank
 
 
 
 
 
 
 
Level 1
 
32,551
30,531
33,077
35,639
31,091
31,485
Level 2a
 
2,739
3,151
1,864
1,863
3,287
3,077
Level 2b
 
142
146
200
200
197
199
HSBC Bank USA
 
 
 
 
 
 
 
Level 1
 
57,413
53,383
67,401
69,031
65,131
60,090
Level 2a
 
15,612
14,869
11,500
15,178
13,690
13,226
Level 2b
 
-
13
18
3
39
32
Total of HSBC's other principal entities
12
 
 
 
 
 
 
Level 1
 
80,566
84,508
87,869
87,662
88,281
86,372
Level 2a
 
8,003
8,447
7,363
7,013
7,899
7,810
Level 2b
 
407
691
1,060
722
1,003
886
For footnotes, see page 70.
Sources of funding
Our primary sources of funding are customer current accounts and savings deposits payable on demand or at short notice. We issue wholesale securities (secured and unsecured) 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 uses' table provides a view of how our consolidated balance sheet is funded. In practice, operating entities are required to manage liquidity and funding risk on a stand-alone basis.
 
The table analyses 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 1H18, 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.
Loans and advances to banks continued to exceed deposits by banks, meaning the Group remained a net unsecured lender to the banking sector.
Funding sources
 
 
At
 
 
30 Jun
31 Dec
 
 
2018
2017
 
Footnotes
$m
$m
Customer accounts
13
1,356,307
1,364,462
Deposits by banks
13
64,792
69,922
Repurchase agreements - non-trading
 
158,295
130,002
Debt securities in issue
 
81,708
64,546
Accruals, deferred income and other liabilities
13
89,449
N/A
- cash collateral, margin and settlement accounts
 
89,449
N/A
Liabilities of disposal groups held for sale
 
685
1,286
Subordinated liabilities
 
22,604
19,826
Financial liabilities designated at fair value
 
151,985
94,429
Liabilities under insurance contracts
 
86,918
85,667
Trading liabilities
13
83,845
184,361
- repos
 
1,957
2,255
- stock lending
 
11,314
8,363
- settlement accounts
 
N/A
11,198
- other trading liabilities
 
70,574
162,545
Total equity
 
191,294
197,871
 
 
2,287,882
2,212,372
Funding uses
 
 
At
 
 
30 Jun
31 Dec
 
 
2018
2017
 
Footnotes
$m
$m
Loans and advances to customers
13
973,443
962,964
Loans and advances to banks
13
83,924
90,393
Reverse repurchase agreements- non-trading
 
208,104
201,553
Prepayments, accrued income and other assets
13, 14
80,521
N/A
- cash collateral, margin and settlement accounts
 
80,521
N/A
Assets held for sale
 
739
781
Trading assets
14
247,892
287,995
- reverse repos
 
14,224
10,224
- stock borrowing
 
11,995
6,895
- settlement accounts
 
N/A
15,258
- other trading assets
 
221,673
255,618
Financial investments
 
386,436
389,076
Cash and balances with central banks
 
189,842
180,624
Net deployment in other balance sheet assets and liabilities
 
116,981
98,986
 
 
2,287,882
2,212,372
For footnotes, see page 70.
HSBC Holdings plc Interim Report 2018
65
Risk
Market risk profile
Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce our income or the value of our portfolios.
There were no material changes to the policies and practices for the management of market risk in 1H18.
A summary of our current policies and practices for the management of market risk is set out in 'Market risk management' on page 77 of the Annual Report and Accounts 2017.
Market risk in the first half of 2018
Generally robust global economic sentiment has supported most stock markets. However, geopolitical tensions continue to exist and evolve, creating uncertainties that have the propensity to create market volatility. These include the disputes relating to trade tariffs and the ongoing negotiations over the UK's withdrawal from the EU.
The US Federal Reserve, ahead of other central banks, started gradual monetary tightening by raising interest rates and
signalling further rate increases in 2018. Against the backdrop of rising inflation expectations, bond yields started to increase but continue to remain flat and low by historical standards. In the eurozone, the European Central Bank announced the end of its bond-buying programme by the end of the year and pushed back expectations of an increase in rates during 2018.
 
In China, debt levels remain high. The Chinese authorities have committed to containing leverage with regulatory and monetary tightening. Currency weakness remains amid a looser policy stance, as the threat of further trade tariffs from the US looms.
Trading value at risk ('VaR') was lower during 1H18. The trading VaR composition changed during the half-year, when the interest rate trading VaR increased relative to equity and credit spread trading VaR. The increase in the interest rate VaR component resulted in this asset class being the largest contributor to the overall trading VaR. The changes in the interest rate and credit spread trading VaR components reflect changes in exposures.
Non-trading VaR increased during 1H18 due to a lengthening in duration caused by higher interest rates, especially in the US, and a reduction in portfolio diversification.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets. The VaR for trading activity at 30 June 2018 was lower than at 31 December 2017. The decrease in trading VaR from the equity and credit spread trading VaR components was partially offset by an increase in the interest rate and foreign exchange trading VaR components. The effects of portfolio diversification reduced the overall trading VaR.
The Group trading VaR for the half-year is shown in the table below.
Trading VaR, 99% 1 day
 
Foreign exchange
and commodity
Interest
rate
Equity
Credit
spread
Portfoliodiversification15
Total
 
$m
$m
$m
$m
$m
$m
Half-year to 30 Jun 2018
9.9
39.2
17.0
18.1
(34.2
)
50.0
Average
10.4
36.9
25.9
23.5
(37.5
)
59.2
Maximum
21.8
48.2
33.8
35.2
 
71.2
Minimum
5.6
28.9
16.8
12.2
 
43.9
 
 
 
 
 
 
 
Half-year to 30 Jun 2017
16.5
36.4
15.2
21.7
(42.8
)
47.0
Average
10.5
42.3
11.3
10.8
(28.8
)
46.1
Maximum
16.5
67.1
16.5
23.8
 
70.8
Minimum
5.4
30.4
9.1
5.1
 
36.6
 
 
 
 
 
 
 
Half-year to 31 Dec 2017
7.4
31.0
32.6
31.1
(38.4
)
63.7
Average
10.2
34.2
21.8
19.8
(36.9
)
49.1
Maximum
23.0
45.7
32.6
31.8
 
63.7
Minimum
4.9
27.2
14.7
11.1
 
39.5
For footnote, see page 70.
The risks not in VaR ('RNIV') framework covers risks from exposures in the HSBC trading book that are not captured well by the VaR model. The VaR-based RNIVs are included within the metrics for each asset class.
Back-testing
There were no back-testing exceptions against hypothetical profit and loss for the Group in 1H18.
Non-trading portfolios
Value at risk of the non-trading portfolios
Non-trading VaR of the Group includes contributions from all global businesses. There is no commodity risk in the non-trading portfolios. The VaR for non-trading activity at 30 June 2018
 
was higher than at 31 December 2017. The non-trading credit spread component, reflecting reduced exposures, was offset by an increase in the interest rate component and a decrease in portfolio diversification effects during the period under review.
Non-trading VaR also includes the interest rate risk of non-trading financial instruments held in portfolios managed by Balance Sheet Management ('BSM'). The management of interest rate risk in the banking book is described further in 'Non-trading interest rate risk' below, including the role of BSM.
Non-trading VaR excludes the insurance operations which are discussed further on page 68.
The Group non-trading VaR for the half-year is shown in the table below.
66
HSBC Holdings plc Interim Report 2018
Non-trading VaR, 99% 1 day
 
Interest
rate
Credit
spread
Portfolio diversification15
Total
 
$m
$m
$m
$m
Half-year to 30 Jun 2018
94.6
35.3
(24.9
)
105.0
Average
102.2
56.7
(32.8
)
126.1
Maximum
129.3
96.0
 
154.1
Minimum
85.5
27.6
 
96.5
 
 
 
 
 
Half-year to 30 Jun 2017
102.7
48.9
(36.5
)
115.1
Average
136.6
46.3
(37.2
)
145.7
Maximum
164.1
69.3
 
182.1
Minimum
98.8
31.3
 
102.1
 
 
 
 
 
Half-year to 31 Dec 2017
88.5
46.7
(38.9
)
96.3
Average
102.0
43.3
(35.3
)
110.0
Maximum
118.8
71.9
 
135.0
Minimum
88.5
24.5
 
93.3
For footnote, see page 70.
Non-trading VaR excludes equity risk on securities held at fair value, structural foreign exchange risk and interest rate risk on fixed-rate securities issued by HSBC Holdings. The sections below describe the scope of HSBC's management of market risks in non-trading books.
Third-party assets in BSM
Third-party assets in BSM decreased by 1% during the first half of 2018. Cash and balances at central banks increased by $14bn,
 
predominantly in North America due in part to reduced reverse repo activity. Other notable items were an increase in Loans and Advances to banks of $5.9bn, predominately in Asia driven by market environment at half-year, resulting in an increase of money markets and term lending operations. Other Assets increased by $5.9bn reflective of an increase in cash collateral requirements in North America.
Third-party assets in BSM
 
At
 
30 Jun
31 Dec
 
2018
2017
 
$m
$m
Cash and balances at central banks
176,163
161,715
Trading assets
923
637
Loans and advances:
- to banks
42,006
36,047
- to customers
808
3,202
Reverse repurchase agreements
13,650
38,842
Financial investments
307,347
309,908
Other
10,615
4,648
 
551,512
554,999
Interest rate risk in the banking book
Interest rate risk in the banking book is the risk of capital or earnings volatility due to changes in market interest rates.
Our policies regarding the funds transfer pricing process and the management of interest rate risk in the banking book are described on pages 73 and 76, respectively, of the Annual Report and Accounts 2017.
The Group utilises sensitivity of net interest income to assess the overall level of interest rate risk in the banking book. This measure reflects all interest rate risk in the banking book, including that transferred to BSM.
Sensitivity of net interest income
The tables below set out the assessed impact to a hypothetical base case projection of our net interest income ('NII') (excluding insurance) under the following scenarios:
•
an immediate shock of 25bps to the current market-implied path of interest rates across all currencies on 1 July 2018 (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 2018 (effects over one year and five years).
The sensitivities shown represent our assessment of the change to a hypothetical base case NII, assuming a static balance sheet and no management actions from BSM. They incorporate the effect of
 
interest rate behaviouralisation, managed rate product pricing assumptions and customer behaviour; for example, prepayment of mortgages or customer migration from non-interest bearing to interest bearing deposit accounts under the specific interest rate scenarios. The scenarios represent interest rate shocks to the current market implied path of rates.
The NII sensitivities shown are indicative and based on simplified scenarios. Immediate interest rate rises of 25bps and 100bps would increase projected net interest income for the 12 months to 30 June 2019 by $812m and $3,031m, respectively. Conversely, falls of 25bps and 100bps would decrease projected net interest income for the 12 months to 30 June 2019 by $731m and $3,434m, respectively.
The sensitivity of NII for 12 months has decreased by $268m and $767m comparing June 2018 with December 2017 in the + and - 100bps parallel shocks, respectively. This decrease was driven by movements in US dollar and HK dollar sensitivities, primarily due to changes in balance sheet composition, increased pass-on assumptions for deposits, and the migration of non interest-bearing liabilities to interest-bearing liabilities as interest rates have increased. By contrast, sterling NII sensitivity has increased, because of higher liquidity linked to UK structural reform.
The change in NII sensitivity for five years is also driven by the factors above.
The structural sensitivity arising from the four global businesses, excluding Global Markets, is positive in a rising rate environment
HSBC Holdings plc Interim Report 2018
67
Risk
and negative in a falling rate environment. Both BSM and Global Markets have NII sensitivity profiles that offset this to some degree. The tables do not include BSM management actions or changes in Global Markets' net trading income that may further limit the offset.
 
The NII sensitivity results should not be interpreted as predictive of future performance. The limitations of this analysis are discussed within the 'Risk management' section on page 76 of the Annual Report and Accounts 2017.
NII sensitivity to an instantaneous change in yield curves (12 months)
 
US dollar
HK dollar
Sterling
Euro
Other
Total
 
$m
$m
$m
$m
$m
$m
Change in Jul 2018 to Jun 2019 (based on balance sheet at
30 June 2018)
 
 
 
 
 
 
+25bps
107
206
218
82
199
812
-25bps
(67
)
(210
)
(291
)
(5
)
(158
)
(731
)
+100bps
285
634
862
502
748
3,031
-100bps
(652
)
(958
)
(1,046
)
(41
)
(737
)
(3,434
)
Change in Jan 2018 to Dec 2018 (based on balance sheet at 31 December 2017)
 
 
 
 
 
 
+25bps
227
179
147
50
203
806
-25bps
(287
)
(305
)
(181
)
8
(160
)
(925
)
+100bps
845
711
600
412
731
3,299
-100bps
(1,444
)
(1,425
)
(631
)
31
(732
)
(4,201
)
NII sensitivity to an instantaneous change in yield curves (5 years)
 
Year 1
Year 2
Year 3
Year 4
Year 5
Total
 
$m
$m
$m
$m
$m
$m
Change in July 2018 to Jun 2019 (based on balance sheet at
30 June 2018)
 
 
 
 
 
 
+25bps
812
1,111
1,311
1,405
1,493
6,132
-25bps
(731
)
(1,087
)
(1,155
)
(1,315
)
(1,400
)
(5,688
)
+100bps
3,031
4,123
4,792
5,186
5,532
22,664
-100bps
(3,434
)
(4,692
)
(4,957
)
(5,536
)
(5,906
)
(24,525
)
Change in Jan 2018 to Dec 2018 (based on balance sheet at 31 December 2017)
 
 
 
 
 
 
+25bps
806
1,153
1,326
1,439
1,506
6,231
-25bps
(925
)
(872
)
(1,154
)
(1,271
)
(1,381
)
(5,603
)
+100bps
3,299
4,463
5,105
5,542
5,759
24,098
-100bps
(4,201
)
(4,538
)
(5,102
)
(5,498
)
(5,813
)
(25,152
)
Sensitivity of capital and reserves
Financial assets at fair value through Other Comprehensive Income reserves are included as part of common equity tier 1 ('CET1') capital. We measure the potential downside risk to the CET1 ratio due to interest rate and credit spread risk in this portfolio by the portfolio's stressed VaR, using a 99% confidence level and an assumed holding period of one quarter. At 30 June 2018, the stressed VaR of the portfolio was $3.3bn.
We monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a monthly basis by assessing the
 
expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. These particular exposures form only a part of our overall interest rate exposures.
The following table describes the sensitivity of our cash flow hedge reported reserves to the stipulated movements in yield curves and the maximum and minimum month-end figures of December 2017 and June 2018. The sensitivities are indicative and based on simplified scenarios.
Sensitivity of cash flow hedging reported reserves to interest rate movements
 
 
Impact in the preceding 6 months
 
 
Maximum
Minimum
 
$m
$m
$m
At 30 Jun 2018
 
 
 
+100bps parallel move in all yield curves
(628
)
(684
)
(628
)
As a percentage of total shareholders' equity
(0.34)%
(0.37)%
(0.34)%
-100bps parallel move in all yield curves
720
792
720
As a percentage of total shareholders' equity
0.39%
0.43%
0.39%
 
 
 
 
At 30 Jun 2017
 
 
 
+100bps parallel move in all yield curves
(839
)
(1,051
)
(839
)
As a percentage of total shareholders' equity
(0.4)%
(0.6)%
(0.4)%
-100bps parallel move in all yield curves
860
1,080
860
As a percentage of total shareholders' equity
0.50%
0.60%
0.50%
 
 
 
 
At 31 Dec 2017
 
 
 
+100bps parallel move in all yield curves
(684
)
(839
)
(684
)
As a percentage of total shareholders' equity
(0.4)%
(0.4)%
(0.4)%
-100bps parallel move in all yield curves
720
860
720
As a percentage of total shareholders' equity
0.38%
0.45%
0.38%
68
HSBC Holdings plc Interim Report 2018
Operational risk profile
Operational risk is the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems, or from external events.
During 1H18, we continued to strengthen the operational risk management framework ('ORMF') and system of record. The ORMF sets out our approach to the management of non-financial risks, allowing us to focus on the risks that matter the most and the associated controls to manage those risks.
Responsibility for minimising operational risk lies with HSBC's employees. They are required to manage the operational risks of the business and operational activities for which they are responsible.
A summary of our current policies and practices for the management of operational risk is set out in 'Operational risk management' on page 77 of the Annual Report and Accounts 2017.
Operational risk exposures in the first half of 2018
In 1H18, we continued to strengthen the controls that manage our most material risks. Among other measures, we:
•
further enhanced our controls to help ensure that we know our customers, ask the right questions, monitor transactions and escalate concerns to detect, prevent and deter financial crime risk;
•
implemented a number of initiatives to raise our standards in relation to the conduct of our business as described below in 'Conduct of business';
•
increased monitoring and enhanced detective controls to manage fraud risks which arise from new technologies and new ways of banking;
•
strengthened internal security controls to help prevent cyber-attacks;
•
improved controls and security to protect customers when using digital channels; and
•
enhanced our third-party risk management capability to help enable the consistent risk assessment of any third-party service.
Conduct of business
In 2018, we are continuing to embed conduct considerations and our conduct framework throughout our risk management, across the Group, with conduct issue identification and resolution reported to senior governance forums within each of the global businesses, functions and HSBC Operations Services and Technology. The Board maintains oversight of conduct matters through the Group Risk Committee.
1H18 initiatives have included:
•
development of conduct focused annual objectives for Senior Executives and conduct focused long‑term incentives for Executive Directors;
•
a continued programme of newsletter, corporate intranet and new live-streamed conduct related communications;
•
preparation of our 4th annual global mandatory training course on conduct for all employees;
•
inclusion of conduct considerations in the design and implementation of our digital products and services; and
•
continued development of our global surveillance capabilities across all business lines, with primary focus on Global Banking and Markets, further strengthening our ability to monitor complex trading behaviours, and detect suspicious trading activity and potential misconduct.
 
There has been focus on support for vulnerable, or potentially vulnerable, customers with ongoing development of business-line led enhancements in specific markets including process changes to help appointed representatives of vulnerable customers operate accounts on their behalf more easily, procedures for early intervention to support customers in, or approaching, financial difficulty, and a pilot scheme to improve financial inclusion.
Insurance manufacturing operations
risk profile
The majority of the risk in our insurance business derives from manufacturing activities and can be categorised as financial risk and insurance risk. Financial risks include market risk, credit risk and liquidity risk. Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (HSBC).
A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture are provided on page 82 of the Annual Report and Accounts 2017.
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 2017.
Insurance manufacturing operations risk profile in the first half of 2018
The risk profile of our insurance manufacturing businesses is measured using an economic capital approach. Assets and liabilities are measured on a market value basis, and a capital requirement is defined to ensure that there is a less than one in 200 chance of insolvency over a one-year time horizon, given the risks to which the businesses are exposed. The methodology for the economic capital calculation is largely aligned to the pan-European Solvency II insurance capital regulations. The economic capital coverage ratio (economic net asset value divided by the economic capital requirement) is a key risk appetite measure. The business has a current appetite to remain globally above 140% with a tolerance to 110%. In addition to economic capital, the regulatory solvency ratio is also a metric used to manage risk appetite on an entity basis.
The risk profile of our remaining life insurance manufacturing businesses did not change materially during 1H18. The increase in policyholder liabilities during the period to $86.9bn (31 December 2017: $85.7bn) is primarily a result of increased net premium income and investment returns recognised in policyholder liabilities.
The following table shows the composition of assets and liabilities by contract type.
HSBC Holdings plc Interim Report 2018
69
Risk
 
 
 
Balance sheet of insurance manufacturing subsidiaries by type of contract16
 
 
 
With
DPF
Unit-
linked
Other contracts17
Shareholder
assets and
liabilities
Total
 
 
Footnotes
$m
$m
$m
$m
$m
 
Financial assets
 
67,140
8,334
15,743
6,615
97,832
 
- trading assets
 
-
-
-
-
-
 
- financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
18,389
8,072
3,094
1,168
30,723
 
- derivatives
 
195
-
10
4
209
 
- financial investments at amortised cost
18
33,321
47
11,340
3,761
48,469
 
- financial investments at FVOCI
18
11,491
-
476
1,449
13,416
 
- other financial assets
19
3,744
215
823
233
5,015
 
Reinsurance assets
 
1,021
121
1,362
-
2,504
 
PVIF
20
-
-
-
6,847
6,847
 
Other assets and investment properties
 
1,941
5
248
1,112
3,306
 
Total assets at 30 Jun 2018
 
70,102
8,460
17,353
14,574
110,489
 
Liabilities under investment contracts designated at fair value
 
-
1,708
3,874
-
5,582
 
Liabilities under insurance contracts
 
68,527
6,684
11,707
-
86,918
 
Deferred tax
21
181
23
15
979
1,198
 
Other liabilities
 
-
-
-
4,520
4,520
 
Total liabilities
 
68,708
8,415
15,596
5,499
98,218
 
Total equity
 
-
-
-
12,271
12,271
 
Total equity and liabilities at 30 Jun 2018
 
68,708
8,415
15,596
17,770
110,489
 
 
 
 
 
 
 
 
 
Financial assets
 
65,112
9,081
14,849
6,662
95,704
 
- trading assets
 
-
-
-
-
-
 
- financial assets designated at fair value
 
15,533
8,814
2,951
1,259
28,557
 
- derivatives
 
286
-
13
41
340
 
- financial investments - HTM
18
29,302
-
6,396
3,331
39,029
 
- financial investments - AFS
18
15,280
-
4,836
1,877
21,993
 
- other financial assets
19
4,711
267
653
154
5,785
 
Reinsurance assets
 
1,108
274
1,154
-
2,536
 
PVIF
20
-
-
-
6,610
6,610
 
Other assets and investment properties
 
1,975
2
164
1,126
3,267
 
Total assets at 31 Dec 2017
 
68,195
9,357
16,167
14,398
108,117
 
Liabilities under investment contracts designated at fair value
 
-
1,750
3,885
-
5,635
 
Liabilities under insurance contracts
 
67,137
7,548
10,982
-
85,667
 
Deferred tax
21
14
6
9
1,230
1,259
 
Other liabilities
 
-
-
-
3,325
3,325
 
Total liabilities
 
67,151
9,304
14,876
4,555
95,886
 
Total equity
 
-
-
-
12,231
12,231
 
Total equity and liabilities at 31 Dec 2017
 
67,151
9,304
14,876
16,786
108,117
For footnotes, see page 70.
70
HSBC Holdings plc Interim Report 2018
Footnotes to Risk
Credit risk profile
1
The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
2
Includes only those financial instruments which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 78 includes both financial and non-financial assets.
3
Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
4
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 in expected credit losses and other credit impairment charges' in the income statement.
5
Purchased or originated credit-impaired ('POCI').
6
Days past due ('DPD'). Up to date accounts in Stage 2 are not shown in amounts.
7
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 as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.
8
US mortgage-backed securities.
9
The disclosure is a comparative for the 2018 'Total wholesale lending for loans and advances to banks and customers by stage distribution table' and was not presented in the 2017 Interim Report.
Liquidity and funding risk profile
10
The HSBC UK Liquidity Group shown comprises four legal entities: HSBC Bank plc (including all overseas branches, and special purpose entities consolidated by HSBC Bank plc for Financial Statement purposes), Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA in the UK. In adopting the NSFR (BCBS 295) as a key internal risk management metric, the HSBC Group has, until such time that the NSFR becomes a binding regulatory requirement on the Group or the operating entity locally, permitted entities to reduce the amount of Required Stable Funding Requirement (RSF) for listed equities where the valuation risk has been hedged through an exchange traded daily cash margined derivative, due to management's view as to the speed at which these assets could be monetised under stress and the mitigation of the valuation risk. At 30 June 2018, only HBEU were applying a lower RSF to such equities. The NSFRs presented seek to reflect the internal management view of funding risk.
11
The Hongkong and Shanghai Banking Corporation - Hong Kong branch and The Hongkong and Shanghai Banking Corporation - Singapore branch represent the material activities of The Hongkong and Shanghai Banking Corporation. Each branch is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.
12
The total shown for other principal HSBC operating entities represents the combined position of all the other operating entities overseen directly by the Risk Management Meeting of the Group Management Board.
13
Balances at 30 June 2018 have been prepared in accordance with the accounting policies referred to on page 83. Cash collateral, margin and settlement accounts previously presented as 'Loans and advances to banks' and 'Loans and advances to customers' at 31 December 2017 have been re-presented in 'Prepayments, accrued income and other assets'. Similarly, amounts previously presented as 'Trading liabilities', 'Deposits by banks' and 'Customer accounts' have been re-presented in 'Accruals, deferred income and other liabilities'. These changes were made to ensure consistent presentation of all such balances, including those required by IFRS 9 as described in the footnote below. Comparative data has not been re-presented. 
14
Balances at 30 June 2018 have been prepared in accordance with the acounting policies referred to on page 83. Cash collateral, margin and settlement accounts have been reclassified from 'Trading assets' to 'Prepayments, accrued income and other assets' as a result of the assessment of business model in accordance with IFRS 9 which was adopted at 1 January 2018. Comparative data has not been re-presented.
 
Market risk profile
15
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.
Insurance manufacturing operations risk profile
16
Does not include associates (SABB Takaful Company and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited).
17
'Other contracts' includes term assurance, credit life insurance, universal life insurance and certain investment contracts not included in the 'Unit-linked' or 'With DPF' columns.
18
Financial investments at amortised cost or fair value through profit and loss or other comprehensive income.
19
Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
20
Present value of in-force long-term insurance business.
21
'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
HSBC Holdings plc Interim Report 2018
71
Capital
Capital
 
Page
Capital overview
72
Capital
72
Risk-weighted assets
73
Leverage ratio
74
Regulatory disclosures
74
Our objective in managing Group capital is to maintain appropriate levels of capital to support our business strategy, meet regulatory and stress testing requirements, and respect capital providers' payment priorities.
A summary of our policies and practices regarding capital management, measurement and allocation is provided on page 117 of the Annual Report and Accounts 2017.
Capital overview
Capital ratios
 
At
 
30 Jun1
1 Jan1
31 Dec2
 
2018
2018
2017
 
%
%
%
CRD IV transitional
 
 
 
Common equity tier 1 ratio
14.2
14.6
14.5
Tier 1 ratio
17.0
17.4
17.3
Total capital ratio
20.4
21.0
20.9
CRD IV end point
 
 
 
Common equity tier 1 ratio
14.2
14.6
14.5
Tier 1 ratio
16.6
16.5
16.4
Total capital ratio
19.8
18.3
18.3
For footnotes, see page 73.
 
Total regulatory capital and risk-weighted assets
 
At
 
30 Jun1
1 Jan1
31 Dec2
 
2018
2018
2017
 
$m
$m
$m
CRD IV transitional
 
Common equity tier 1 capital
122,757
127,310
126,144
Additional tier 1 capital
24,328
24,810
24,810
Tier 2 capital
29,525
31,014
31,429
Total regulatory capital
176,610
183,134
182,383
Risk-weighted assets
865,467
872,089
871,337
 
 
 
 
CRD IV end point
 
 
 
Common equity tier 1 capital
122,757
127,310
126,144
Additional tier 1 capital
20,704
16,531
16,531
Tier 2 capital
27,731
15,997
16,413
Total regulatory capital
171,192
159,838
159,088
Risk-weighted assets
865,467
872,089
871,337
For footnotes, see page 73.
RWAs by risk type
 
RWAs
Capital required3
 
$bn
$bn
Credit risk
688.2
55.0
Counterparty credit risk
47.6
3.8
Market risk
37.0
3.0
Operational risk
92.7
7.4
At 30 Jun 2018
865.5
69.2
For footnote, see page 73.
Capital
Own funds disclosure
 
 
At
 
 
30 Jun1
1 Jan1
31 Dec2
 
 
2018
2018
2017
Ref*
 
$m
$m
$m
6
Common equity tier 1 capital before regulatory adjustments
156,069
158,923
158,557
28
Total regulatory adjustments to common equity tier 1
(33,312
)
(31,613
)
(32,413
)
29
Common equity tier 1 capital
122,757
127,310
126,144
36
Additional tier 1 capital before regulatory adjustments
24,388
24,922
24,922
43
Total regulatory adjustments to additional tier 1 capital
(60
)
(112
)
(112
)
44
Additional tier 1 capital
24,328
24,810
24,810
45
Tier 1 capital
147,085
152,120
150,954
51
Tier 2 capital before regulatory adjustments
30,048
31,517
31,932
57
Total regulatory adjustments to tier 2 capital
(523
)
(503
)
(503
)
58
Tier 2 capital
29,525
31,014
31,429
59
Total capital
176,610
183,134
182,383
60
Total risk-weighted assets
865,467
872,089
871,337
 
Capital ratios
%
%
%
61
Common equity tier 1 ratio
14.2
14.6
14.5
62
Tier 1 ratio
17.0
17.4
17.3
63
Total capital ratio
20.4
21.0
20.9
*
The references identify the lines prescribed in the EBA template.
For footnotes, see page 73.
72
HSBC Holdings plc Interim Report 2018
At 30 June 2018, our CET1 capital ratio decreased to 14.2% from 14.5% at 31 December 2017.
CET1 capital decreased in 1H18 by $3.4bn, mainly as a result of:
•
$3.5bn of unfavourable foreign currency translation differences;
•
the $2.0bn share buy-back; and
•
a $1.0bn increase in threshold deductions as a result of an increase in the value of our material holdings and a decrease in the CET1 capital base.
These decreases were partly offset by:
•
$2.5bn of capital generation through profits, net of cash and scrip dividends; and
•
a $1.2bn IFRS 9 day one transitional impact, mainly due to classification and measurement changes.
Risk-weighted assets
RWAs
RWAs decreased by $5.8bn in the first half of the year, including a decrease of $13.9bn due to foreign currency translation differences. The $8.1bn increase (excluding foreign currency
 
translation differences) was mainly due to an increase in asset size of $10.5bn and changes in asset quality of $3.7bn, less decreases due to model updates of $5.3bn.
The following comments describe RWA movements excluding foreign currency translation differences.
Asset size
Asset size movements were principally driven by lending growth in CMB, RBWM and GB&M which increased RWAs by $19.5bn, mainly in Asia.
This growth was partly offset by reductions in legacy portfolios of $7.4bn, and a $1.7bn reduction in market risk exposures.
Asset quality
RWAs increased by $3.7bn mainly as a result of changes in portfolio mix in CMB, GB&M and GPB.
Model updates
Implementing new counterparty credit risk exposure models in Asia and the US reduced RWAs by $4.3bn and $2.4bn respectively.
This was partly offset by a rise of $1.6bn mainly from updates to retail and corporate models.
RWAs by global business
 
RBWM
CMB
GB&M
GPB
Corporate Centre
Total
 
$bn
$bn
$bn
$bn
$bn
$bn
Credit risk
96.8
291.4
174.5
13.9
111.6
688.2
Counterparty credit risk
-
-
46.0
0.2
1.4
47.6
Market risk
-
-
33.2
-
3.8
37.0
Operational risk
27.3
23.7
30.8
2.9
8.0
92.7
At 30 Jun 2018
124.1
315.1
284.5
17.0
124.8
865.5
RWAs by geographical region
 
 
Europe
Asia
MENA
NorthAmerica
LatinAmerica
Total
 
Footnote
$bn
$bn
$bn
$bn
$bn
$bn
Credit risk
 
218.9
293.4
46.8
102.2
26.9
688.2
Counterparty credit risk
 
27.1
9.6
1.0
8.5
1.4
47.6
Market risk
4
26.4
23.9
3.1
10.2
1.2
37.0
Operational risk
 
28.9
37.1
7.1
12.1
7.5
92.7
At 30 Jun 2018
 
301.3
364.0
58.0
133.0
37.0
865.5
For footnote, see page 73.
RWA movement by global businesses 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 31 Dec 2017
121.5
301.0
263.4
16.0
130.5
38.9
871.3
Asset size
2.4
15.1
2.1
0.4
(7.8
)
(1.7
)
10.5
Asset quality
0.6
2.0
0.7
0.6
(0.2
)
-
3.7
Model updates
0.7
0.9
(6.9
)
-
-
-
(5.3
)
- portfolios moving onto IRB approach
-
-
(0.4
)
-
-
-
(0.4
)
- new/updated models
0.7
0.9
(6.5
)
-
-
-
(4.9
)
Methodology and policy
1.0
2.7
(4.7
)
0.1
0.3
(0.2
)
(0.8
)
- internal updates
1.2
2.5
(4.7
)
0.1
(0.5
)
(0.2
)
(1.6
)
- external updates - regulatory
(0.2
)
0.2
-
-
0.8
-
0.8
Foreign exchange movements
(2.1
)
(6.6
)
(3.3
)
(0.1
)
(1.8
)
-
(13.9
)
Total RWA movement
2.6
14.1
(12.1
)
1.0
(9.5
)
(1.9
)
(5.8
)
RWAs at 30 Jun 2018
124.1
315.1
251.3
17.0
121.0
37.0
865.5
HSBC Holdings plc Interim Report 2018
73
Capital | Directors' responsibility statement
RWA movement by geographical region by key driver
 
Credit risk, counterparty credit risk and operational risk
 
 
 
Europe
Asia
MENA
NorthAmerica
LatinAmerica
Market
risk
Total
RWAs
 
$bn
$bn
$bn
$bn
$bn
$bn
$bn
RWAs at 31 Dec 2017
282.6
334.3
55.9
124.2
35.4
38.9
871.3
Asset size
(7.8
)
15.8
0.1
1.8
2.3
(1.7
)
10.5
Asset quality
1.9
1.3
(0.4
)
0.7
0.2
-
3.7
Model updates
1.5
(4.6
)
-
(2.2
)
-
-
(5.3
)
- portfolios moving onto IRB approach
-
(0.4
)
-
-
-
-
(0.4
)
- new/updated models
1.5
(4.2
)
-
(2.2
)
-
-
(4.9
)
Methodology and policy
2.4
(2.5
)
0.2
(0.5
)
(0.2
)
(0.2
)
(0.8
)
- internal updates
2.4
(3.0
)
(0.2
)
(0.6
)
-
(0.2
)
(1.6
)
- external updates - regulatory
-
0.5
0.4
0.1
(0.2
)
-
0.8
Foreign exchange movements
(5.7
)
(4.2
)
(0.9
)
(1.2
)
(1.9
)
-
(13.9
)
Total RWA movement
(7.7
)
5.8
(1.0
)
(1.4
)
0.4
(1.9
)
(5.8
)
RWAs at 30 Jun 2018
274.9
340.1
54.9
122.8
35.8
37.0
865.5
Leverage ratio
 
 
30 Jun1
1 Jan1
31 Dec2
 
 
2018
2018
2017
Ref*
 
$bn
$bn
$bn
20
Tier 1 capital
143.5
143.8
142.7
21
Total leverage ratio exposure
2,664.1
2,556.4
2,557.1
 
 
%
%
%
22
Leverage ratio
5.4
5.6
5.6
EU-23
Choice of transitional arrangements for the definition of the capital measure
 Fully phased-in
Fully phased-in
Fully phased-in
 
UK leverage ratio exposure - quarterly average
2,467.4
2,351.2
2,351.4
 
%
%
%
 
UK leverage ratio - quarterly average
5.9
6.2
6.1
 
UK leverage ratio - quarter end
5.9
6.1
6.1
*
The references identify the lines prescribed in the EBA template.
For footnotes, see page 73.
Our leverage ratio calculated in accordance with CRD IV was 5.4% at 30 June 2018, down from 5.6% at 31 December 2017, mainly due to balance sheet growth.
The Group's UK leverage ratio at 30 June 2018 on a modified basis, excluding qualifying central bank balances, was 5.9%.
At 30 June 2018, our UK minimum leverage ratio requirement of 3.25% was supplemented by an additional leverage ratio buffer of 0.5% and a countercyclical leverage ratio buffer of 0.2%. These additional buffers translate into capital values of $12.8bn and $3.9bn, respectively. We exceeded these leverage requirements.
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 moretransparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 30 June 2018 is expected to be published on or around 6 August 2018 on our website, www.hsbc.com, under 'Investor Relations'.
 
Footnotes to capital, leverage and risk-weighted assets
1
Unless otherwise stated, all figures are calculated using the EU's regulatory transitional arrangements for IFRS 9 in article 473a of the Capital Requirements Regulation.
2
All figures presented as reported under IAS 39 at 31 December 2017.
3
'Capital requirement' represents the minimum total capital charge set at 8% of RWAs by article 92 of the Capital Requirements Regulation.
4
RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
74
HSBC Holdings plc Interim Report 2018
Directors' responsibility statement
The Directors1, who are required to prepare the financial statements on a going concern basis unless it is not appropriate, are satisfied that the Group has the resources to continue in business for the foreseeable future and that the financial statements continue to be prepared on a going concern basis.
The Directors confirm that to the best of their knowledge:
•
the financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU;
•
this Interim Report 2018 gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
•
this Interim Report 2018 includes a fair review of the information required by:
-
DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of: important events that have occurred during the first six months of the financial year ending 31 December 2018 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
-
DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being: related party transactions that have taken place in the first six months of the financial year ending 31 December 2018 and that have materially affected the financial position or performance of HSBC during that period; and any changes in the related parties transactions described in the Annual Report and Accounts 2017 that could materially affect the financial position or performance of HSBC during the first six months of the financial year ending 31 December 2018.
On behalf of the Board
Mark E Tucker
Group Chairman
6 August 2018
 
1
Kathleen Casey*, Laura Cha*, Henri de Castries*, Lord Evans of Weardale*, John Flint, Irene Lee*, Iain Mackay, Heidi Miller*, Marc Moses, David Nish*, Jonathan Symonds*, Jackson Tai*, Mark Tucker and Pauline van der Meer Mohr*.
*
Independent non-executive Director.
HSBC Holdings plc Interim Report 2018
75
Independent Review Report by PricewaterhouseCoopers LLP to HSBC Holdings plc | Shareholder information
Independent review report to HSBC Holdings plc
Report on the interim condensed consolidated financial statements
Our conclusion
We have reviewed HSBC Holdings plc's interim condensed consolidated financial statements (the 'financial statements') in the interim report of HSBC Holdings plc for the six-month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The financial statements, which are prepared by HSBC Holdings plc comprise:
•
the consolidated income statement and consolidated statement of comprehensive income for the six months then ended;
•
the consolidated balance sheet as at 30 June 2018;
•
the consolidated statement of cash flows for the period then ended;
•
the consolidated statement of changes in equity for the period then ended; and
•
the notes to the financial statements and certain other information1.
As disclosed in Note 1 to the financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards ('IFRSs') as adopted by the European Union.
Responsibilities for the financial statements and the review
Our responsibilities and those of the directors
The interim report, including the financial statements is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the financial statements in the interim report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the remaining other financial information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London, United Kingdom
6 August 2018
 
1
Certain other information comprises the following tables: "HSBC adjusted profit before tax and balance sheet data" (excluding adjusted risk-weighted assets), "Adjusted results reconciliation", "Adjusted balance sheet reconciliation", "Adjusted profit reconciliation", "Reconciliation of gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees" and "Distribution of financial instruments to which the impairment requirements of IFRS 9 are applied, by credit quality and stage allocation".
76
HSBC Holdings plc Interim Report 2018
Financial Statements
 
Page
Consolidated income statement
77
Consolidated statement of comprehensive income
78
Consolidated balance sheet
79
Consolidated statement of cash flows
80
Consolidated statement of changes in equity
81
Consolidated income statement
Half-year to
30 Jun
30 Jun
31 Dec
 
 
2018
2017
2017
Notes
$m
$m
$m
Net interest income
 
15,100
13,777
14,399
- interest income
23,422
19,727
21,268
- interest expense
(8,322
)
(5,950
)
(6,869
)
Net fee income
 
6,767
6,491
6,320
- fee income
 
8,469
7,906
7,947
- fee expense
 
(1,702
)
(1,415
)
(1,627
)
Net income from financial instruments held for trading or managed on a fair value basis10, 11
 
4,883
4,232
4,194
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss10
 
(222
)
1,499
1,337
Changes in fair value of long-term debt and related derivatives11
(126
)
204
(49
)
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss10
345
N/A
N/A
Gains less losses from financial investments
124
691
459
Dividend income
41
49
57
Net insurance premium income
5,776
4,811
4,968
Other operating income/(expense)
359
526
(189
)
Total operating income
33,047
32,280
31,496
Net insurance claims and benefits paid and movement in liabilities to policyholders
(5,760
)
(6,114
)
(6,217
)
Net operating income before change in expected credit losses and other credit impairment charges
27,287
26,166
25,279
Change in expected credit losses and other credit impairment charges
 
(407
)
N/A
N/A
Loan impairment charges and other credit risk provisions
N/A
(663
)
(1,106
)
Net operating income
26,880
25,503
24,173
Employee compensation and benefits
(8,836
)
(8,680
)
(8,635
)
General and administrative expenses
(7,767
)
(6,900
)
(8,807
)
Depreciation and impairment of property, plant and equipment
(568
)
(567
)
(599
)
Amortisation and impairment of intangible assets and goodwill
(378
)
(296
)
(400
)
Total operating expenses
(17,549
)
(16,443
)
(18,441
)
Operating profit
9,331
9,060
5,732
Share of profit in associates and joint ventures
1,381
1,183
1,192
Profit before tax
10,712
10,243
6,924
Tax expense
(2,296
)
(2,195
)
(3,093
)
Profit for the period
8,416
8,048
3,831
Attributable to:
 
 
- ordinary shareholders of the parent company
7,173
6,999
2,684
- preference shareholders of the parent company
 
45
45
45
- other equity holders
 
530
466
559
- non-controlling interests
668
538
543
Profit for the period
 
8,416
8,048
3,831
$
$
$
Basic earnings per ordinary share
4
0.36
0.35
0.13
Diluted earnings per ordinary share
4
0.36
0.35
0.13
The accompanying notes on pages 82 to 110, the sections in 'Global businesses and regions' (excluding adjusted risk-weighted assets) on pages 30 to 32, and the following disclosures in the Risk section on pages 52 to 60, form an integral part of these financial statements: 'Distribution of financial instruments to which the impairment requirements of IFRS 9 are applied, by credit quality and stage allocation', 'Reconciliation of gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees', 'Distribution of total financial instruments exposed to credit risk by credit quality (at 31 December 2017)', 'Distribution of loans and advances held at amortised cost by credit quality (at 31 December 2017)', and 'Movement in impairment allowances on loans and advances to customers and banks (2017)'.
For footnotes, see page 81.
HSBC Holdings plc Interim Report 2018
77
Financial Statements (unaudited)
Consolidated statement of comprehensive income
Half-year to
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
$m
$m
$m
Profit for the period
8,416
8,048
3,831
Other comprehensive income/(expense)
 
 
 
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
 
 
 
Available-for-sale investments
N/A
484
(338
)
- fair value gains/(losses)
N/A
1,447
(220
)
- fair value gains reclassified to the income statement
N/A
(848
)
(185
)
- amounts reclassified to the income statement in respect of impairment losses
N/A
20
73
- income taxes
N/A
(135
)
(6
)
Debt instruments at fair value through other comprehensive income
(265
)
N/A
N/A
- fair value losses
(658
)
N/A
N/A
- fair value gains transferred to the income statement on disposal
329
N/A
N/A
- expected credit losses recognised in income statement
(91
)
N/A
N/A
- income taxes
155
N/A
N/A
Cash flow hedges
(68
)
24
(216
)
- fair value losses
(276
)
(881
)
(165
)
- fair value gains/(losses) reclassified to the income statement
184
894
(61
)
- income taxes
24
11
10
Share of other comprehensive expense of associates and joint ventures
(57
)
(6
)
(37
)
- share for the period
(57
)
(6
)
(37
)
Exchange differences
(4,252
)
5,269
3,808
- other exchange differences
(4,252
)
5,270
3,669
- income tax attributable to exchange differences
-
(1
)
139
Items that will not be reclassified subsequently to profit or loss:
 
 
 
Remeasurement of defined benefit asset/liability
297
1,708
711
- before income taxes1
421
2,253
1,187
- income taxes
(124
)
(545
)
(476
)
Changes in fair value of financial liabilities designated at fair value due to movement in own credit risk
1,345
(1,156
)
(868
)
- before income taxes
1,653
(1,398
)
(1,011
)
- income taxes
(308
)
242
143
Equity instruments designated at fair value through other comprehensive income
(30
)
N/A
N/A
- fair value losses
(26
)
N/A
N/A
- income taxes
(4
)
N/A
N/A
Other comprehensive income/(expense) for the period, net of tax
(3,030
)
6,323
3,060
Total comprehensive income for the period
5,386
14,371
6,891
Attributable to:
 
 
 
- ordinary shareholders of the parent company
4,229
13,241
5,673
- preference shareholders of the parent company
45
45
45
- other equity holders
530
466
559
- non-controlling interests
582
619
614
Total comprehensive income for the period
5,386
14,371
6,891
For footnote, see page 81.
78
HSBC Holdings plc Interim Report 2018
Consolidated balance sheet
 
 
At
 
 
30 Jun
1 Jan
31 Dec
 
 
2018
20189
2017
 
Notes
$m
$m
$m
Assets
 
 
 
 
Cash and balances at central banks
189,842
180,621
180,624
Items in the course of collection from other banks
8,081
6,628
6,628
Hong Kong Government certificates of indebtedness
35,754
34,186
34,186
Trading assets
 
247,892
254,410
287,995
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
 
40,678
39,746
N/A
Financial assets designated at fair value
 
N/A
N/A
29,464
Derivatives
7
227,972
219,818
219,818
Loans and advances to banks
83,924
82,559
90,393
Loans and advances to customers
973,443
949,737
962,964
Reverse repurchase agreements - non-trading
208,104
201,553
201,553
Financial investments
8
386,436
383,499
389,076
Prepayments, accrued income and other assets
153,048
114,777
67,191
Current tax assets
1,106
1,006
1,006
Interests in associates and joint ventures
9
22,572
21,802
22,744
Goodwill and intangible assets
23,722
23,374
23,453
Deferred tax assets
 
4,740
4,714
4,676
Total assets
2,607,314
2,518,430
2,521,771
Liabilities and equity
 
 
 
Liabilities
 
 
 
Hong Kong currency notes in circulation
35,754
34,186
34,186
Deposits by banks
64,792
64,492
69,922
Customer accounts
1,356,307
1,360,227
1,364,462
Repurchase agreements - non-trading
158,295
130,002
130,002
Items in the course of transmission to other banks
8,086
6,850
6,850
Trading liabilities2, 3
 
83,845
80,864
184,361
Financial liabilities designated at fair value
151,985
144,006
94,429
Derivatives
7
222,961
216,821
216,821
Debt securities in issue
81,708
66,536
64,546
Accruals, deferred income and other liabilities
134,774
99,926
45,907
Current tax liabilities
1,609
928
928
Liabilities under insurance contracts
86,918
85,598
85,667
Provisions
10
4,199
4,295
4,011
Deferred tax liabilities
 
2,183
1,614
1,982
Subordinated liabilities
22,604
25,861
19,826
Total liabilities
2,416,020
2,322,206
2,323,900
Equity
 
 
 
Called up share capital
10,159
10,160
10,160
Share premium account
9,774
10,177
10,177
Other equity instruments
20,573
22,250
22,250
Other reserves
2,193
6,643
7,664
Retained earnings
140,908
139,414
139,999
Total shareholders' equity
183,607
188,644
190,250
Non-controlling interests
7,687
7,580
7,621
Total equity
191,294
196,224
197,871
Total liabilities and equity
2,607,314
2,518,430
2,521,771
For footnotes, see page 81.
HSBC Holdings plc Interim Report 2018
79
Financial Statements (unaudited)
Consolidated statement of cash flows
Half-year to
30 Jun
30 Jun
31 Dec
2018
2017
2017
$m
$m
$m
Profit before tax
10,712
10,243
6,924
Adjustments for non-cash items:
 
 
Depreciation and amortisation
946
863
999
Net gain from investing activities
85
(764
)
(388
)
Share of profit in associates and joint ventures
(1,381
)
(1,183
)
(1,192
)
Loss on disposal of associates, joint ventures, subsidiaries and businesses
-
(79
)
-
Change in expected credit losses gross of recoveries and other credit impairment charges
680
N/A
N/A
Loan impairment losses gross of recoveries and other credit risk provisions
N/A
1,018
1,585
Provisions including pensions
1,244
186
731
Share-based payment expense
274
267
233
Other non-cash items included in profit before tax
(899
)
(157
)
(224
)
Change in operating assets
(89,986
)
(115,324
)
(53,715
)
Change in operating liabilities
84,594
109,828
54,080
Elimination of exchange differences4
(11,816
)
(16,208
)
(5,081
)
Dividends received from associates
126
589
151
Contributions paid to defined benefit plans
(103
)
(351
)
(334
)
Tax paid
(1,116
)
(810
)
(2,365
)
Net cash from operating activities
(6,640
)
(11,882
)
1,404
Purchase of financial investments
(227,256
)
(175,346
)
(181,918
)
Proceeds from the sale and maturity of financial investments
225,295
233,711
184,641
Net cash flows from the purchase and sale of property, plant and equipment
(520
)
(314
)
(853
)
Net cash inflow from disposal of customer and loan portfolios
(542
)
5,044
1,712
Net investment in intangible assets
(751
)
(514
)
(771
)
Net cash inflow on disposal of subsidiaries, businesses, associates and joint ventures
(19
)
141
24
Net cash from investing activities
(3,793
)
62,722
2,835
Issue of ordinary share capital and other equity instruments
4,150
3,727
1,469
Cancellation of shares
(986
)
(1,000
)
(2,000
)
Net (purchases)/sales of own shares for market-making and investment purposes
43
(49
)
(18
)
Redemption of preference shares and other equity instruments
(6,078
)
-
-
Subordinated loan capital repaid
(4,020
)
(520
)
(3,054
)
Dividends paid to shareholders of the parent company and non-controlling interests
(4,965
)
(3,266
)
(5,739
)
Net cash from financing activities
(11,856
)
(1,108
)
(9,342
)
Net increase/(decrease) in cash and cash equivalents
(22,289
)
49,732
(5,103
)
Cash and cash equivalents at the beginning of the period
337,412
274,550
335,828
Exchange differences in respect of cash and cash equivalents
(5,415
)
11,546
6,687
Cash and cash equivalents at the end of the period
309,708
335,828
337,412
For footnote, see page 81.
80
HSBC Holdings plc Interim Report 2018
Consolidated statement of changes in equity
Other reserves
Called up sharecapitaland share premium5
Otherequityinstru-ments6,7
Retainedearnings
Financial assets at FVOCI reserve8
Cashflowhedgingreserve
Foreignexchangereserve
Mergerreserve
Total share-holders' equity
Non-controllinginterests
Total equity
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
At 31 Dec 2017
20,337
22,250
139,999
(350
)
(222
)
(19,072
)
27,308
190,250
7,621
197,871
Impact on transition to IFRS 9
-
-
(585
)
(1,021
)
-
-
-
(1,606
)
(41
)
(1,647
)
At 1 Jan 2018
20,337
22,250
139,414
(1,371
)
(222
)
(19,072
)
27,308
188,644
7,580
196,224
Profit for the period
-
-
7,748
-
-
-
-
7,748
668
8,416
Other comprehensive income (net of tax)
-
-
1,589
(273
)
(66
)
(4,194
)
-
(2,944
)
(86
)
(3,030
)
- debt instruments at fair value through other comprehensive income
-
-
-
(264
)
-
-
-
(264
)
(1
)
(265
)
- equity instruments designated at fair value through other comprehensive income
-
-
-
(9
)
-
-
-
(9
)
(21
)
(30
)
- cash flow hedges
-
-
-
-
(66
)
-
-
(66
)
(2
)
(68
)
- changes in fair value of financial liabilities designated at fair value arising from changes in own credit risk
-
-
1,346
-
-
-
-
1,346
(1
)
1,345
- remeasurement of defined benefit asset/liability
-
-
300
-
-
-
-
300
(3
)
297
- share of other comprehensive income of associates and joint ventures
-
-
(57
)
-
-
-
-
(57
)
-
(57
)
- exchange differences
-
-
-
-
-
(4,194
)
-
(4,194
)
(58
)
(4,252
)
Total comprehensive income for the period
-
-
9,337
(273
)
(66
)
(4,194
)
-
4,804
582
5,386
Shares issued under employee remuneration and share plans
582
-
(570
)
-
-
-
-
12
-
12
Shares issued in lieu of dividends and amounts arising thereon
-
-
606
-
-
-
-
606
-
606
Capital securities issued
-
4,150
-
-
-
-
-
4,150
-
4,150
Dividends to shareholders
-
-
(6,904
)
-
-
-
-
(6,904
)
(461
)
(7,365
)
Redemption of securities
-
(5,827
)
(237
)
-
-
-
-
(6,064
)
-
(6,064
)
Cost of share-based payment arrangements
-
-
274
-
-
-
-
274
-
274
Cancellation of shares
(986
)
-
(1,014
)
-
-
-
-
(2,000
)
-
(2,000
)
Other movements
-
-
2
83
-
-
-
85
(14
)
71
At 30 Jun 2018
19,933
20,573
140,908
(1,561
)
(288
)
(23,266
)
27,308
183,607
7,687
191,294
At 1 Jan
Other reserves
At 1 Jan
Called upshare capitaland share premium
Otherequityinstru-ments6
Retainedearnings
Available- for-salefair valuereserve
Cashflowhedgingreserve
Foreign exchange reserve
Mergerreserve
Totalshare-holders'equity
Non-controllinginterests
Totalequity
At 1 Jan
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
At 1 Jan 2017
22,715
17,110
136,795
(477
)
(27
)
(28,038
)
27,308
175,386
7,192
182,578
Profit for the period
-
-
7,510
-
-
-
-
7,510
538
8,048
Other comprehensive income (net of tax)
-
-
536
468
16
5,222
-
6,242
81
6,323
- available-for-sale investments
-
-
-
468
-
-
-
468
16
484
- cash flow hedges
-
-
-
-
16
-
-
16
8
24
- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk
-
-
(1,156
)
-
-
-
-
(1,156
)
-
(1,156
)
- remeasurement of defined benefit asset/liability1
-
-
1,698
-
-
-
-
1,698
10
1,708
- share of other comprehensive income of associates and joint ventures
-
-
(6
)
-
-
-
-
(6
)
-
(6
)
- exchange differences
-
-
-
-
-
5,222
-
5,222
47
5,269
Total comprehensive income for the period
-
-
8,046
468
16
5,222
-
13,752
619
14,371
Shares issued under employee remuneration and share plans
542
-
(535
)
-
-
-
-
7
-
7
Shares issued in lieu of dividends and amounts arising thereon
-
-
2,771
-
-
-
-
2,771
-
2,771
Capital securities issued
-
3,720
-
-
-
-
-
3,720
-
3,720
Dividends to shareholders
-
-
(6,795
)
-
-
-
-
(6,795
)
(420
)
(7,215
)
Cost of share-based payment arrangements
-
-
267
-
-
-
-
267
-
267
Cancellation of shares
(1,000
)
-
-
-
-
-
-
(1,000
)
-
(1,000
)
Other movements
-
-
288
-
-
-
-
288
(1
)
287
At 30 Jun 2017
22,257
20,830
140,837
(9
)
(11
)
(22,816
)
27,308
188,396
7,390
195,786
For footnotes, see page 81.
HSBC Holdings plc Interim Report 2018
81
Financial Statements (unaudited)
Consolidated statement of changes in equity (continued)
Other reserves
Called upshare capitaland share premium
Otherequityinstru-ments6
Retainedearnings
Available- for-salefair valuereserve
Cashflowhedgingreserve
Foreign exchange reserve
Mergerreserve
Totalshare-holders'equity
Non-controllinginterests
Totalequity
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
At 1 Jul 2017
22,257
20,830
140,837
(9
)
(11
)
(22,816
)
27,308
188,396
7,390
195,786
Profit for the period
-
-
3,288
-
-
-
-
3,288
543
3,831
Other comprehensive income(net of tax)
-
-
(208
)
(337
)
(210
)
3,744
-
2,989
71
3,060
- available-for-sale investments
-
-
-
(337
)
-
-
-
(337
)
(1
)
(338
)
- cash flow hedges
-
-
-
-
(210
)
-
-
(210
)
(6
)
(216
)
- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk
-
-
(868
)
-
-
-
-
(868
)
-
(868
)
- remeasurement of defined benefit asset/liability1
-
-
697
-
-
-
-
697
14
711
- share of other comprehensive income of associates and joint ventures
-
-
(37
)
-
-
-
-
(37
)
-
(37
)
- exchange differences
-
-
-
-
-
3,744
-
3,744
64
3,808
Total comprehensive income for the period
-
-
3,080
(337
)
(210
)
3,744
-
6,277
614
6,891
Shares issued under employee remuneration and share plans
80
-
(31
)
-
-
-
-
49
-
49
Shares issued in lieu of dividends and amounts arising thereon
-
-
435
-
-
-
-
435
-
435
Capital securities issued
-
1,420
-
-
-
-
-
1,420
-
1,420
Dividends to shareholders
-
-
(4,756
)
-
-
-
-
(4,756
)
(240
)
(4,996
)
Cost of share-based payment arrangements
-
-
233
-
-
-
-
233
-
233
Cancellation of shares
(2,000
)
-
-
-
-
-
-
(2,000
)
-
(2,000
)
Other movements
-
-
201
(4
)
(1
)
-
-
196
(143
)
53
At 31 Dec 2017
20,337
22,250
139,999
(350
)
(222
)
(19,072
)
27,308
190,250
7,621
197,871
Footnotes to financial statements
1
As a result of the remeasurement of the defined benefit pension obligation of the HSBC Bank (UK) Pension Scheme there was an actuarial gain of $2,024m in 1H17 and an actuarial loss of $294m in 2H17.
2
Includes structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association. These are insured by the Federal Deposit Insurance Corporation, a US Government agency, up to $250,000 per depositor. Structured deposits are presented in 'Accruals, deferred income and other liabilities' from 1 January 2018. Comparatives have not been restated. See note 14 for further detail.
3
Structured liabilities have moved from 'Trading liabilities' to 'Financial liabilities designated at fair value'. Comparatives have not been restated. See note 14 for further detail.
4
Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.
5
In May 2018, HSBC announced a share buy-back of $2.0bn. At 30 June 2018 $1.0bn of shares had been bought back and cancelled.
6
During 2018, HSBC Holdings issued $4,150m of perpetual subordinated contingent convertible capital securities, on which there were $8m of external issuance costs, $34m of intra-group issuance costs and $8m of tax benefits, which are classified as equity under IFRSs. During 1H17, HSBC Holdings issued $3,000m and SGD1,000m of perpetual subordinated contingent convertible capital securities, on which there were $10m of external issuance costs, $27m of intra-group issuance costs and $7m of tax benefits, which are classified as equity under IFRSs. During 2H17 HSBC Holdings issued €1,250m of perpetual subordinated contingent convertible capital securities, on which there were $4m of external issuance costs, $10m of intra-group issuance costs and $3m of tax benefits, which are classified as equity under IFRSs.
 
7
During 2018, HSBC Holdings redeemed its $2,200m 8.125% perpetual subordinated capital securities and its $3,800m 8.000% perpetual subordinated capital securities, Series 2, on which there were $172m of external issuance costs, which are classified as equity under IFRSs.
8
The $350m at 31 December 2017 represents the IAS 39 Available-for-sale fair value reserve as at 31 December 2017.
9
Balances at 1 January 2018 have been prepared in accordance with accounting policies referred to on page 82. 31 December 2017 balances have not been re-presented.
10
The classification and measurement requirements under IFRS 9, which was adopted from 1 January 2018, are based on an entity's assessment of both the business model for managing the assets and the contractual cash flow characteristics of the assets. The standard contains a classification for items measured mandatorily at fair value through profit or loss as a residual category. Given its residual nature, the presentation of the income statement has been updated to separately present items in this category which are of a dissimilar nature or function, in line with IAS 1 'Presentation of financial statements' requirements. Comparative data has been re-presented. There is no net impact on total operating income.
11
Prior to 2018 foreign exchange exposure on some financial instruments designated at fair value was presented in the same line in the income statement as the underlying fair value movement on these instruments. In 2018 we have grouped the presentation of the entire effect of foreign exchange exposure in profit or loss and presented it within 'net income from financial instruments held for trading or managed on a fair value basis'. Comparative data have been re-presented. There is no net impact on total operating income and the impact on 'changes in fair value of long-term debt and related derivatives' is $(276)m in 1H17 and $(241)m in 2H17.
82
HSBC Holdings plc Interim Report 2018
Notes on the Financial Statements
 
 
Page
 
 
 
Page
1
Basis of preparation and significant accounting policies
83
 
9
Interests in associates and joint ventures
99
2
Net fee income
88
 
10
Provisions
100
3
Dividends
88
 
11
Contingent liabilities, contractual commitments and guarantees
101
4
Earnings per share
89
 
12
Legal proceedings and regulatory matters
101
5
Fair values of financial instruments carried at fair value
90
 
13
Transactions with related parties
107
6
Fair values of financial instruments not carried at fair value
97
 
14
Effects of reclassification upon adoption of IFRS 9
108
7
Derivatives
97
 
15
Events after the balance sheet date
112
8
Financial investments
98
 
16
Interim Report 2018 and statutory accounts
112
1
Basis of preparation and significant accounting policies
(a)
Compliance with International Financial Reporting Standards
The interim condensed consolidated financial statements of HSBC have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board ('IASB') and as endorsed by the EU. Therefore they include an explanation of events and transactions that are significant to an understanding of the changes in the financial position and performance of HSBC since the end of 2017. These financial statements should be read in conjunction with the Annual Report and Accounts 2017, the information about the application of IFRS 9 'Financial Instruments' set out below and the new policies for financial instruments as described on pages 16 to 20 of our Report on Transition to IFRS 9 'Financial Instruments' 1 January 2018.
At 30 June 2018, there were no unendorsed standards effective for the half-year to 30 June 2018 affecting these financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC.
Standards applied during the half-year to 30 June 2018
HSBC has adopted the requirements of IFRS 9 from 1 January 2018, with the exception of the provisions relating to the presentation of gains and losses on financial liabilities designated at fair value, which were adopted from 1 January 2017. This includes the adoption of 'Prepayment Features with Negative Compensation (Amendments to IFRS 9)' which is effective for annual periods beginning on or after 1 January 2019, with early adoption permitted. The effect of its adoption is not considered to be significant. IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting, which HSBC has exercised. The classification and measurement and impairment requirements are applied retrospectively by adjusting the opening balance sheet at the date of initial application. As permitted by IFRS 9, HSBC has not restated comparatives. Adoption reduced net assets at 1 January 2018 by $1,647m as set out in Note 14.
The effect of IFRS 9 on the carrying value of investments in associates has been updated along with the related deferred tax and this has resulted in a change of $643m from the previously disclosed impact.
In addition, HSBC has adopted the requirements of IFRS 15 'Revenue from contracts with customers' and a number of interpretations and amendments to standards which have had an insignificant effect on the consolidated financial statements of HSBC.
IFRS 9 transitional requirements
The transition requirements of IFRS 9 have necessitated a review of the designation of financial instruments at fair value. IFRS 9 requires that the designation is revoked where there is no longer an accounting mismatch at 1 January 2018 and permits designations to be revoked or additional designations created at 1 January 2018 if there are accounting mismatches at that date. As a result:
•
fair value designations for financial liabilities have been revoked where the accounting mismatch no longer exists, as required byIFRS 9; and
•
fair value designations have been revoked for certain long-dated securities where accounting mismatches continue to exist, but where HSBC has revoked the designation as permitted by IFRS 9 since it will better mitigate the accounting mismatch by undertaking fair value hedge accounting.
The results of these changes are included in the reconciliation set out in Note 14.
Changes in accounting policy
While not necessarily required by the adoption of IFRS 9, the following voluntary changes in accounting policy and presentation have been made as a result of reviews carried out in conjunction with its adoption. The effect of presentational changes at 1 January 2018 is included in the reconciliation set out in Note 14 and comparatives have not been restated.
•
We have considered market practices for the presentation of certain financial liabilities which contain both deposit and derivative components. We have concluded that a change in accounting policy and presentation from 'trading customer accounts and other debt securities in issue' would be appropriate, since it would better align with the presentation of similar financial instruments by peers and therefore provide more relevant information about the effect of these financial liabilities on our financial position and performance. As a result, rather than being classified as held for trading, we will designate these financial liabilities as at fair value through profit or loss since they are managed and their performance evaluated on a fair value basis. A further consequence of this change in presentation is that the effects of changes in the liabilities' credit risk will be presented in 'Other comprehensive income' with the remaining effect presented in profit or loss in accordance with Group accounting policy adopted in 2017 (following the adoption of the requirements in IFRS 9 relating to the presentation of gains and losses on financial liabilities designated at fair value).
•
Cash collateral, margin and settlement accounts have been reclassified from 'Trading assets' and 'Loans and advances to banks and customers' to 'Prepayments, accrued income and other assets' and from 'Trading liabilities' and 'Deposits by banks' and 'Customer accounts' to 'Accruals, deferred income and other liabilities'. The change in presentation for financial assets is in accordance with IFRS 9 and the change in presentation for financial liabilities is considered to provide more relevant information, given the change in presentation for the financial assets. The change in presentation for financial liabilities has had no effect on measurement of these items and therefore on retained earnings or profit for any period.
HSBC Holdings plc Interim Report 2018
83
Notes on the Financial Statements (unaudited)
•
Certain stock borrowing assets have been reclassified from 'Loans and advances to banks and customers' to 'Trading assets'. The change in measurement is a result of the determination of the global business model for this activity and will align the presentation throughout the Group.
•
Prior to 2018, foreign exchange exposure on some financial instruments designated at fair value was presented in the same line in the income statement as the underlying fair value movement on these instruments. In 2018, we have grouped the presentation of the entire effect of foreign exchange exposure in profit or loss and presented it within 'Net income from financial instruments held for trading or managed on a fair value basis'. Comparative data has been re-presented.
Differences between IAS 39 and IFRS 9
Classification and measurement
Key similarities and differences between IAS 39 and IFRS 9 for the classification and measurement of financial assets are set out below. There are no differences for financial liabilities, except for the presentation of gains and losses on financial liabilities designated at fair value and the requirements to reconsider fair value designation on transition to IFRS 9.
 
IAS 39
IFRS 9
Classification criteria
Financial assets are measured at amortised cost (loans & receivables and held to maturity), FVOCI (AFS), or fair value through profit or loss (derivatives and trading) based on the nature of the instrument and the purpose for which it is held. Embedded derivatives are separated from their host contract unless the contract as a whole is measured at fair value through profit or loss. The fair value option applies where there are non-closely related embedded derivatives that are not bifurcated, financial instruments are managed on a fair value basis or where measuring at fair value through profit or loss would reduce or eliminate an accounting mismatch. AFS is the default category.
Debt instruments are measured at amortised cost or FVOCI based on their contractual terms and the business model in which they are held as set out in the accounting policies above. The concept of embedded derivatives does not apply to financial assets. Therefore, the fair value option only applies where it would reduce or eliminate an accounting mismatch. Fair value through profit or loss is the default category.
Equity securities are measured at fair value through profit or loss unless, where permitted by IFRS 9, the option has been exercised to measure at FVOCI.
Presentation
Upon disposal of AFS securities (debt instruments and equity securities) the cumulative gains or losses in other comprehensive income are recognised in profit or loss.
Upon disposal of debt instruments measured at FVOCI the cumulative gains or losses in other comprehensive income are recognised in profit or loss. Cumulative gains or losses in other comprehensive income are not recognised in profit or loss on the disposal of equity securities measured at FVOCI.
A reconciliation of presentational and measurement differences resulting from the adoption of IFRS 9 at 1 January 2018 is set out inNote 14.
In general:
•
loans and advances to banks and to customers and non-trading reverse repurchase agreements that are classified as loans and receivables under IAS 39 are measured at amortised cost under IFRS 9;
•
financial assets designated at fair value through profit and loss ('FVPL') remain at FVPL, because it is required under IFRS 9 or the designation will continue;
•
debt securities classified as available for sale are measured at amortised cost or FVOCI, with a small minority at FVPL either because of their contractual cash flow characteristics or the business model within which they are held;
•
debt securities classified as held to maturity are measured at amortised cost;
•
treasury and other eligible bills classified as available for sale are measured at amortised cost or FVOCI depending upon the business model in which they are held; and
•
all equity securities remain measured at fair value. A significant majority have fair value movements shown in profit or loss, while a minority have fair value movements presented in other comprehensive income. The equity securities for which fair value movements are shown in other comprehensive income are business facilitation and other similar investments where HSBC holds the investments other than to generate a capital return.
Impairment
The recognition and measurement of impairment is intended to be more forward-looking than under IAS 39 and the resulting impairment charge may be more volatile. The adoption has resulted in an increase in the total level of impairment allowances as set out in Note 14, since all financial assets are assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is larger than the population for which there is objective evidence of impairment in accordance with IAS 39.
84
HSBC Holdings plc Interim Report 2018
Key similarities and differences between IAS 39 and IFRS 9
 
IAS 39
IFRS 9
 
 
Scope
For amortised cost assets, impairment is recognised when there is objective evidence of impairment. Losses are measured by comparing the carrying amount with the discounted future cash flows. Losses which may arise from future events are not recognised.
For available-for-sale financial assets, impairment is recognised when there is objective evidence of a shortfall in the recovery of future cash flows. Impairment is measured as the decrease in fair value below the original cost at initial recognition.
The same recognition and measurement requirements apply to both amortised cost and FVOCI financial assets. Impairment is not recognised on equity securities which are measured at FVOCI. Impairment is recognised for all financial assets in scope at either 12-month ECL or lifetime ECL. All reasonable and supportable information, including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date is used in measuring ECL.
Application
Accounting policies generally make a distinction between individually significant loans and homogeneous groups of loans which are assessed collectively.
The distinction between individual and collective assessment is less relevant. In general, whether loans are managed through wholesale credit risk systems or retail credit risk systems is relevant because of differences in the types of information available and the way credit risk is managed.
Impaired/Stage 3
The criteria used to determine whether there is objective evidence of impairment are the same for individually significant loans assessed under IAS 39 and for IFRS 9.
The determination of the realisable value of security is based on the most recently updated market value at the time the impairment assessment is performed and is not adjusted for expected future changes in market prices.
Statistical methods are used to determine impairment losses on a collective basis for homogeneous groups of loans that are not considered individually significant using either roll rate methodologies or historical loss rate experience for loans. Under these methodologies, impairment allowances are recognised at a portfolio level. However, loans are classified as impaired for presentation purposes when they are more than 90 days past due or have been renegotiated for credit risk reasons. For retail loans, an exception is made for individual loans that are in arrears by more than 90 days but have been individually assessed to have no indications of impairment, and these are not classified as impaired.
The stage 3 population is consistent with impaired loans under IAS 39 which are considered individually significant.
For wholesale loans, individual discounted cash flow calculations continue to be performed. However, the net realisable value of security is adjusted for expected future changes in market and the losses reflecting cash flows under different scenarios are probability-weighted to determine the ECL rather than using the best estimate of cash flows.
For the retail population, stage 3 is determined by considering the relevant objective evidence, primarily whether contractual payments of either principal or interest are past due for more than 90 days, or a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition, or the loan is otherwise considered to be in default.
The impairment allowance is determined by the same calculation used for stage 2, with the probability of default set to 1. The result may, therefore, not be the same as that determined by the IAS 39 statistical methods and the population disclosed as stage 3 will not necessarily correspond with that disclosed as impaired in accordance with IAS 39.
Stage 2
This is not an IAS 39 concept.
An assessment of whether credit risk has increased significantly since initial recognition, resulting in transfer to stage 2, is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared to that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale. However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due. In addition, wholesale loans that are individually assessed, typically corporate and commercial customers, and included on a watch or worry list are included in stage 2. For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default which encompasses a wide range of information including the obligor's customer risk rating, macroeconomic condition forecasts and credit transition probabilities. Significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at reporting date (or that the origination PD has doubled in the case of origination CRR greater than 3.3). The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates. The quantitative measure of significance varies depending on the credit quality at origination as follows:
HSBC Holdings plc Interim Report 2018
85
Notes on the Financial Statements (unaudited)
 
IAS 39
IFRS 9
 
Origination CRR
Significance trigger - PD to increase by
0.1-1.2
15bps
 
2.1-3.3
30bps
 
Greater than 3.3 and not impaired
 
2x
For loans originated prior to the implementation of IFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle ('TTC') PDs and TTC migration probabilities, consistent with the instrument's underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration-based thresholds as set out in the table below:
Origination CRR
Additional significance criteria - Number of CRR grade notches of deterioration required to identify as significant credit deterioration (stage2) ≥
0.1
5 notches
1.1-4.2
4 notches
4.3-5.1
3 notches
5.2-7.1
2 notches
7.2-8.2
1 notches
8.3
0 notches
For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores which incorporate all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies loans with a PD higher than would be expected from loans that are performing as originally expected and higher than that which would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.
Stage 1
This is not an IAS 39 concept. However, incurred but not yet identified impairment is assessed on loans for which no evidence of impairment has been specifically identified by estimating a collective allowance determined after taking into account factors including the estimated period between impairment occurring and the loss being identified. This is assessed empirically on a periodic basis and may vary over time. Similarly, for homogeneous groups of loans and advances which are assessed under IAS 39 on a collective basis, the inherent loss is determined using risk factors including the period of time between loss identification and write-off which is regularly benchmarked against actual outcomes.
Financial assets which are not considered to have significantly increased in credit risk have loss allowances measured at an amount equal to 12-month ECL. This 12-month time horizon is likely to be equal to or longer than the period estimated under IAS 39 (typically between 6 and 12 months).
Movement between stages
This is not an IAS 39 concept.
Financial assets can be transferred between the different categories depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans will continue to be in stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that are assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.
86
HSBC Holdings plc Interim Report 2018
 
IAS 39
IFRS 9
Measurement of ECL
Loan impairment allowances represent management's best estimate of losses incurred in the loan portfolios at the balance sheet date.
The assessment of credit risk, and the estimation of ECL, are unbiased and probability-weighted, and incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.In general, HSBC calculates ECL using three main components: a probability of default; a loss given default; and the exposure at default ('EAD').The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively.The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money.Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which HSBC is exposed to credit risk. For wholesale overdrafts, credit risk management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of the next substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility. However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit HSBC's exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period HSBC remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.HSBC will in general apply three forward-looking global economic scenarios determined with reference to external forecast distributions, the Consensus Economic Scenario approach. This approach is considered sufficient to calculate unbiased expected loss in most economic environments. Further information about this methodology is included in 'Measurement of uncertainty and sensitivity analysis of ECL' from page 49.
(b)
Use of estimates and judgements
Management believes that HSBC's critical accounting estimates and judgements are those which relate to impairment of amortised cost and FVOCI financial assets, goodwill impairment, the valuation of financial instruments, deferred tax assets, provisions for liabilities and interests in associates. The implementation of IFRS 9 resulted in a change to the assessment of the critical accounting estimates and judgements related to impairment of financial assets.
In determining ECL, management is required to exercise judgement in defining what is considered to be a significant increase in credit risk and in making assumptions and estimates to incorporate relevant information about past events, current conditions and forecasts of economic conditions. Judgement has been applied in determining the lifetime and point of initial recognition of revolving facilities.
The PD, LGD and EAD models which support these determinations are reviewed regularly in light of differences between loss estimates and actual loss experience, but given that IFRS 9 requirements have only just been applied, there has been little time available to make these comparisons. Therefore, the underlying models and their calibration, including how they react to forward-looking economic conditions, remain subject to review and refinement. This is particularly relevant for lifetime PDs, which have not been previously used in regulatory modelling and for the incorporation of 'Upside scenarios' which have not generally been subject to experience gained through stress testing.
The exercise of judgement in making estimations requires the use of assumptions which are highly subjective and very sensitive to the risk factors, in particular to changes in economic and credit conditions across a large number of geographical areas. Many of the factors have a high degree of interdependency and there is no single factor to which loan impairment allowances as a whole are sensitive. Pages 49 to 52 set out the assumptions underlying the Central scenario and information about how scenarios are developed in relation to the Group's top and emerging risks and its judgements, informed by consensus forecasts of professional industry forecasters. The adjustment from the ECL determined by using the Central scenario alone, which is used to calculate an unbiased expected loss, provides an indication of the overall sensitivity of ECL to different economic assumptions. There were no other changes in the current period to the critical accounting estimates and judgements applied in 2017, which are stated on pages 30, 31 and 196 of the Annual Report and Accounts 2017.
HSBC Holdings plc Interim Report 2018
87
Notes on the Financial Statements (unaudited)
(c)
Composition of Group
There were no material changes in the composition of the Group in the half-year to 30 June 2018.
(d)
Future accounting developments
In January 2016, the IASB issued IFRS 16 'Leases' with an effective date for annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to that in which finance leases are currently accounted for under IAS 17 'Leases'. Lessees will recognise a 'right of use' asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease, and the financial liability measured at amortised cost. Lessor accounting remains substantially the same as under IAS 17. HSBC is currently assessing the impact of IFRS 16, and it is not practicable to quantify the effect at the date of the publication of these financial statements.
IFRS 17 'Insurance contracts' was issued in May 2017 and sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. IFRS 17 is effective from 1 January 2021 and HSBC is considering its impact.
(e)
Going concern
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources.
(f)
Accounting policies
Except as described above, the accounting policies applied by HSBC for these interim condensed consolidated financial statements are consistent with those described on pages 186 to 194 of the Annual Report and Accounts 2017, as are the methods of computation.
2
Net fee income
 
Half-year to
 
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
Net fee income by product
$m
$m
$m
Account services
1,156
1,123
1,121
Funds under management
1,149
1,061
1,127
Cards
965
930
1,064
Credit facilities
897
873
845
Broking income
710
564
627
Unit trusts
613
516
494
Underwriting
431
485
344
Global custody
378
326
366
Imports/exports
362
379
357
Remittances
361
372
387
Insurance agency commission
233
209
201
Other
1,214
1,068
1,014
Fee income
8,469
7,906
7,947
Less: fee expense
(1,702
)
(1,415
)
(1,627
)
Net fee income
6,767
6,491
6,320
Net fee income by global business
 
 
 
Retail Banking and Wealth Management
2,795
2,516
2,640
Commercial Banking
1,874
1,774
1,744
Global Banking and Markets
1,745
1,875
1,614
Global Private Banking
389
355
349
Corporate Centre
(36
)
(29
)
(27
)
3
Dividends
On 6 August 2018, the Directors declared a second interim dividend of $0.10 per ordinary share in respect of the financial year ending 31 December 2018. This distribution amounts to approximately $2,015m and will be payable on 27 September 2018. No liability is recognised in the financial statements in respect of this dividend.
88
HSBC Holdings plc Interim Report 2018
Dividends paid to shareholders of HSBC Holdings plc
 
Half-year to
 
30 Jun 2018
30 Jun 2017
31 Dec 2017
 
Pershare
Total
Settledin scrip
Pershare
Total
Settledin scrip
Pershare
Total
Settledin scrip
 
$
$m
$m
$
$m
$m
$
$m
$m
Dividends paid on ordinary shares
In respect of previous year:
- fourth interim dividend
0.21
4,197
393
0.21
4,169
1,945
-
-
-
In respect of current year:
- first interim dividend
0.10
2,007
213
0.10
2,005
826
-
-
-
- second interim dividend
-
-
-
-
-
-
0.10
2,014
193
- third interim dividend
-
-
-
-
-
-
0.10
2,005
242
Total
0.31
6,204
606
0.31
6,174
2,771
0.20
4,019
435
Total dividends on preference shares classified as equity (paid quarterly)
31.00
45
31.00
45
31.00
45
Total coupons on capital securities classified as equity
 
655
 
 
576
 
 
692
 
Dividends to shareholders
 
6,904
 
 
6,795
 
 
4,756
 
Total coupons on capital securities classified as equity
 
 
 
 
Half-year to
 
 
 
 
30 Jun
30 Jun
31 Dec
 
 
 
 
2018
2017
2017
 
 
First
Per
Total
Total
Total
 
Footnotes
call date
security
$m
$m
$m
Perpetual subordinated capital securities
1
 
 
 
- $2,200m issued at 8.125%
Apr 2013
$2.032
89
89
90
- $3,800m issued at 8.000%
Dec 2015
$2.000
76
152
152
Perpetual subordinated contingent convertible securities
2
- $1,500m issued at 5.625%
Jan 2020
$56.250
42
42
42
- $2,000m issued at 6.875%
 
Jun 2021
$68.750
69
69
69
- $2,250m issued at 6.375%
 
Sep 2024
$63.750
72
72
71
- $2,450m issued at 6.375%
Mar 2025
$63.750
78
78
78
- $3,000m issued at 6.000%
 
May 2027
$60.000
90
-
90
- €1,500m issued at 5.250%
 
Sep 2022
€52.500
48
42
47
- €1,000m issued at 6.000%
Sep 2023
€60.000
37
32
36
- SGD1,000m issued at 4.700%
 
Jun 2022
SGD47.000
18
-
17
- €1,250m issued at 4.750%
 
July 2029
€47.500
36
-
-
Total
655
576
692
1
Discretionary coupons are paid quarterly on the perpetual subordinated capital securities, in denominations of $25 per security.
2
Discretionary coupons are paid twice a year on the perpetual subordinated contingent convertible securities, in denominations of 1,000 per security in each security's issuance currency.
In March 2018, HSBC issued both $2,350m of 6.250% perpetual subordinated contingent convertible securities and $1,800m of 6.500% perpetual subordinated contingent convertible securities. These contingent convertible securities are classified as equity under IFRSs. Discretionary coupons are paid semi-annually on these contingent convertible securities and none were declared in 1H18. On 4 May 2018, HSBC gave notice to redeem the $2,200m and $3,800m perpetual subordinated capital securities, and from this point the instruments ceased to meet the classification requirements to be recognised as equity. Therefore, the final coupons of $25m and $68m, which were paid respectively upon redemption, are not included in the above.
4
Earnings per share
Profit attributable to ordinary shareholders of the parent company
 
Half-year to
 
30 Jun
30 Jun
31 Dec
 
2018
2017
2017
 
$m
$m
$m
Profit attributable to shareholders of the parent company
7,748
7,510
3,288
Dividend payable on preference shares classified as equity
(45
)
(45
)
(45
)
Coupon payable on capital securities classified as equity
(530
)
(466
)
(559
)
Profit attributable to ordinary shareholders of the parent company
7,173
6,999
2,684
HSBC Holdings plc Interim Report 2018
89
Notes on the Financial Statements (unaudited)
Basic and diluted earnings per share
 
 
Half-year to
 
 
30 Jun 2018
30 Jun 2017
31 Dec 2017
Profit
Numberof shares
Amount per share
Profit
Numberof shares
Amount per share
Profit
Numberof shares
Amount per share
Footnote
$m
(millions)
$
$m
(millions)
$
$m
(millions)
$
Basic
1
7,173
19,998
0.36
6,999
19,916
0.35
2,684
20,027
0.13
Effect of dilutive potential ordinary shares
86
90
104
Diluted
1
7,173
20,084
0.36
6,999
20,006
0.35
2,684
20,131
0.13
1
Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
5
Fair values of financial instruments carried at fair value
The accounting policies, control framework and hierarchy used to determine fair values at 30 June 2018 are consistent with those applied for the Annual Report and Accounts 2017, amended as per IFRS 9.
Financial instruments carried at fair value and bases of valuation
 
 
Valuation techniques
 
 
Quoted
market price
 Level 1
Using
observable
inputs
Level 2
With significant
unobservable
inputs
Level 3
Total
 
$m
$m
$m
$m
Recurring fair value measurements
 
 
 
 
At 30 Jun 2018
 
 
 
 
Assets
 
 
 
 
Trading assets
173,848
67,497
6,547
247,892
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
25,021
10,651
5,006
40,678
Derivatives
1,756
223,746
2,470
227,972
Financial investments
244,816
76,637
2,228
323,681
Liabilities
 
 
 
 
Trading liabilities
62,875
20,895
75
83,845
Financial liabilities designated at fair value
5,549
142,081
4,355
151,985
Derivatives
1,558
219,533
1,870
222,961
 
At 31 Dec 2017
 
 
 
 
Assets
 
 
 
 
Trading assets
181,168
101,775
5,052
287,995
Financial assets designated at fair value
24,622
3,382
1,460
29,464
Derivatives
1,017
216,357
2,444
219,818
Financial investments
227,943
104,692
3,432
336,067
Liabilities
 
 
 
 
Trading liabilities
62,710
117,451
4,200
184,361
Financial liabilities designated at fair value
4,164
90,265
-
94,429
Derivatives
1,635
213,242
1,944
216,821
Transfers between Level 1 and Level 2 fair values
 
Assets
Liabilities
 
Financial investments
Trading assets
Designated and otherwise mandatorily measured at fair value through profit or loss
Derivatives
Trading liabilities
Designated at fair value
Derivatives
 
$m
$m
$m
$m
$m
$m
$m
At 30 Jun 2018
 
 
 
 
 
 
 
Transfers from Level 1 to Level 2
12
233
2
1
42
-
-
Transfers from Level 2 to Level 1
13,163
5,143
-
128
2,261
-
138
 
 
 
 
 
 
 
 
 
Assets
Liabilities
 
Available
for sale
Held for trading
Designated
at fair value
through profit
or loss
Derivatives
Held for trading
Designated
at fair value through profit or loss
Derivatives
 
$m
$m
$m
$m
$m
$m
$m
At 31 Dec 2017
 
 
 
 
 
 
 
Transfers from Level 1 to Level 2
2,231
1,507
-
-
35
-
-
Transfers from Level 2 to Level 1
11,173
1,384
-
-
683
-
-
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.
90
HSBC Holdings plc Interim Report 2018
Fair value adjustments
Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. HSBC classifies fair value adjustments as either 'risk-related' or 'model-related'. The majority of these adjustments relate to GB&M. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.
Global Banking and Markets fair value adjustments
 
At
 
30 Jun 2018
31 Dec 2017
 
GB&M
Corporate Centre
GB&M
Corporate Centre
 
$m
$m
$m
$m
Type of adjustment
 
 
 
 
Risk-related
1,062
57
1,078
79
- bid-offer
439
3
413
5
- uncertainty
112
3
91
8
- credit valuation adjustment
410
46
420
59
- debit valuation adjustment
(144
)
-
(82
)
-
- funding fair value adjustment
226
5
233
7
- other
19
-
3
-
Model-related
(21
)
3
92
13
- model limitation
(28
)
3
92
6
- other
7
-
-
7
Inception profit (Day 1 P&L reserves)1 
80
-
106
-
 
1,121
60
1,276
92
1
See Note 7 on the Financial Statements on page 96.
Fair value adjustments decreased by $187m during 1H18. The most significant movement was an absolute reduction of $123m in respect of the model limitation adjustments following model enhancements and new positions which gave rise to an offsetting adjustment.
A description of HSBC's risk-related and model-related adjustments is provided on pages 208 and 209 of the Annual Report and Accounts 2017.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3
 
Assets
Liabilities
 
Financial investments
Trading assets
Designated and otherwise mandatorily measured at fair value through profit or loss
Derivatives
Total
Trading liabilities
Designated at fair value1
Derivatives
Total
 
$m
$m
$m
$m
$m
$m
$m
$m
$m
Private equity including strategic investments
457
27
4,388
-
4,872
17
-
-
17
Asset-backed securities
1,022
1,223
4
-
2,249
-
-
-
-
Loans held for securitisation
-
-
50
-
50
-
-
-
-
Structured notes
-
3
-
-
3
58
4,355
-
4,413
Derivatives with monolines
-
-
-
75
75
-
-
-
-
Other derivatives
-
-
-
2,395
2,395
-
-
1,869
1,869
Other portfolios
749
5,294
564
-
6,607
-
-
1
1
At 30 Jun 2018
2,228
6,547
5,006
2,470
16,251
75
4,355
1,870
6,300
Private equity including strategic investments
2,012
38
1,458
-
3,508
20
-
-
20
Asset-backed securities
1,300
1,277
-
-
2,577
-
-
-
-
Loans held for securitisation
-
24
-
-
24
-
-
-
-
Structured notes
-
3
-
-
3
4,180
-
-
4,180
Derivatives with monolines
-
-
-
113
113
-
-
-
-
Other derivatives
-
-
-
2,331
2,331
-
-
1,944
1,944
Other portfolios
120
3,710
2
-
3,832
-
-
-
-
At 31 Dec 2017
3,432
5,052
1,460
2,444
12,388
4,200
-
1,944
6,144
1
Designated at fair value through profit or loss.
The basis for determining the fair value of the financial instruments in the table above is explained on page 210 of the Annual Report and Accounts 2017.
HSBC Holdings plc Interim Report 2018
91
Notes on the Financial Statements (unaudited)
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
 
 
Assets
Liabilities
 
 
Financial investments
Trading assets
Designated and otherwise mandatorily measured at fair value through profit or loss
Derivatives
Trading liabilities
Designated at fair value
Derivatives
 
Footnote
$m
$m
$m
$m
$m
$m
$m
At 1 Jan 2018
 
1,767
5,080
3,957
2,444
93
4,107
1,949
 
 
 
 
 
 
 
 
 
Total gains/(losses) recognised in profit or loss
 
253
228
245
126
(2
)
(460
)
(185
)
- net income from financial instruments held for trading or managed on a fair value basis
 
-
228
-
126
(2
)
-
(185
)
- net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss
 
-
-
-
-
-
(460
)
-
- changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
 
-
-
245
-
-
-
-
- gains less losses from financial investments at fair value through other comprehensive income
 
253
-
-
-
-
-
-
- expected credit loss charges and other credit impairment charges
 
-
-
-
-
-
-
-
-
fair value gains transferred to the income statement on disposal
 
-
-
-
-
-
-
-
Total gains/(losses) recognised in other comprehensive income
1
64
(201
)
(92
)
(56
)
(2
)
(72
)
(34
)
- financial investments: fair value gains/(losses)
 
57
-
-
-
-
-
-
- cash flow hedges: fair value gains/(losses)
 
-
-
6
6
-
-
2
- fair value gains transferred to the income statement on disposal
 
-
-
-
-
-
-
-
- exchange differences
 
7
(201
)
(98
)
(62
)
(2
)
(72
)
(36
)
Purchases
 
242
4,032
1,202
-
2
46
-
New issuances
 
-
975
-
-
5
1,309
-
Sales
 
(24
)
(1,212
)
(98
)
-
(4
)
-
-
Settlements
 
(70
)
(1,682
)
(213
)
137
-
(172
)
317
Transfers out
 
(373
)
(941
)
(31
)
(199
)
(17
)
(479
)
(235
)
Transfers in
 
369
268
36
18
-
76
58
At 30 Jun 2018
 
2,228
6,547
5,006
2,470
75
4,355
1,870
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 Jun 2018
 
-
(47
)
177
44
(5
)
82
(111
)
- net income from financial instruments held for trading or managed on a fair value basis
 
-
(47
)
-
44
(5
)
-
(111
)
- net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss
 
-
-
-
-
-
82
-
- changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
 
-
-
177
-
-
-
-
- loan impairment recoveries and other credit risk provisions
 
-
-
-
-
-
-
-
92
HSBC Holdings plc Interim Report 2018
Movement in Level 3 financial instruments (continued)
 
 
Assets
Liabilities
 
 
Available
for sale
Held for
trading
Designated
at fair value
through profit
or loss
Derivatives
Held for
trading
Designated
at fair value
through profit
or loss
Derivatives
 
Footnote
$m
$m
$m
$m
$m
$m
$m
At 1 Jan 2017
 
3,476
6,489
730
2,752
3,582
37
2,300
Total gains/(losses) recognised in profit or loss
 
329
(78
)
43
(50
)
103
(4
)
39
- trading income/(expense) excluding net interest income
 
-
(78
)
-
(50
)
103
-
39
- net income/(expense) from other financial instruments designated at fair value
 
-
-
43
-
-
(4
)
-
- gains less losses from financial investments
 
306
-
-
-
-
-
-
- loan impairment charges and other credit risk provisions
 
23
-
-
-
-
-
-
Total gains/(losses) recognised in other comprehensive income
1
(84
)
62
4
99
82
1
62
- available-for-sale investments: fair value gains
 
(150
)
-
-
-
-
-
-
- cash flow hedges: fair value gains
 
-
-
-
(30
)
-
-
(38
)
- exchange differences
 
66
62
4
129
82
1
100
Purchases
 
50
635
321
-
-
-
-
New issuances
 
-
-
-
-
977
-
-
Sales
 
(536
)
(2,161
)
(1
)
-
(12
)
-
-
Settlements
 
(10
)
(297
)
(28
)
(53
)
(433
)
-
67
Transfers out
 
(470
)
(35
)
(2
)
(164
)
(271
)
(33
)
(425
)
Transfers in
 
694
189
-
85
22
-
20
At 30 Jun 2017
 
3,449
4,804
1,067
2,669
4,050
1
2,063
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 Jun 2017
 
23
28
23
(48
)
228
-
106
- trading income/(expense) excluding net interest income
 
-
28
-
(48
)
228
-
106
- net income/(expense) from other financial instruments designated at fair value
 
-
-
23
-
-
-
-
- loan impairment recoveries and other credit risk provisions
 
23
-
-
-
-
-
-
At 1 Jul 2017
 
3,449
4,804
1,067
2,669
4,050
1
2,063
Total gains/(losses) recognised in profit or loss
 
22
(110
)
(150
)
202
51
(1
)
361
- trading income/(expense) excluding net interest income
 
-
(110
)
-
202
51
-
361
- net income/(expense) from other financial instruments designated at fair value
 
-
-
(150
)
-
-
(1
)
-
- gains less losses from financial investments
 
7
-
-
-
-
-
-
- loan impairment charges and other credit risk provisions
 
15
-
-
-
-
-
-
Total gains/(losses) recognised in other comprehensive income
1
155
44
3
89
87
-
58
- available-for-sale investments: fair value gains
 
120
-
-
-
-
-
-
- cash flow hedges: fair value gains
 
-
(1
)
3
7
-
-
3
- exchange differences
 
35
45
-
82
87
-
55
Purchases
 
150
868
806
2
5
-
23
New issuances
 
-
-
-
1
938
-
-
Sales
 
(403
)
(1,060
)
(129
)
(8
)
-
-
(12
)
Settlements
 
(59
)
(34
)
(138
)
(7
)
(565
)
-
(190
)
Transfers out
 
(95
)
(114
)
(1
)
(721
)
(407
)
-
(605
)
Transfers in
 
213
654
2
217
41
-
246
At 31 Dec 2017
 
3,432
5,052
1,460
2,444
4,200
-
1,944
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2017
 
(7
)
(138
)
(169
)
266
(345
)
-
(503
)
- trading income/(expense) excluding net interest income
 
-
(138
)
-
266
(345
)
-
(503
)
- net income/(expense) from other financial instruments designated at fair value
 
-
-
(169
)
-
-
-
-
- loan impairment recoveries and other credit risk provisions
 
(7
)
-
-
-
-
-
-
1
Included in 'Available-for-sale investments: fair value gains/(losses)' for prior years and 'financial investments: fair value gains/(losses)' in the current year and 'Exchange differences' in the consolidated statement of comprehensive income.
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of Levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.
HSBC Holdings plc Interim Report 2018
93
Notes on the Financial Statements (unaudited)
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
The following table shows the sensitivity of Level 3 fair values to reasonably possible alternative assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
 
 
Reflected in
profit or loss
Reflected in other
comprehensive income
 
 
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
 
Footnote
$m
$m
$m
$m
Derivatives, trading assets and trading liabilities
1
320
(270
)
-
-
Financial assets and liabilities designated and otherwise mandatorily measured at fair value
 
344
(279
)
-
-
Financial investments
 
48
(51
)
15
(10
)
At 30 Jun 2018
 
712
(600
)
15
(10
)
 
Derivatives, trading assets and trading liabilities
1
249
(202
)
-
-
Financial assets and liabilities designated at fair value
 
68
(54
)
-
-
Financial investments: available for sale
 
76
(40
)
166
(132
)
At 30 Jun 2017
 
393
(296
)
166
(132
)
 
Derivatives, trading assets and trading liabilities
1
372
(253
)
-
-
Financial assets and liabilities designated at fair value
 
89
(74
)
-
-
Financial investments: available for sale
 
53
(30
)
128
(149
)
At 31 Dec 2017
 
514
(357
)
128
(149
)
1
Derivatives, 'trading assets and trading liabilities' are presented as one category to reflect the manner in which these financial instruments are risk-managed.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
 
Reflected in
profit or loss
Reflected in other
comprehensive income
 
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
 
$m
$m
$m
$m
Private equity including strategic investments
357
(288
)
-
-
Asset-backed securities
71
(40
)
15
(10
)
Loans held for securitisation
1
(1
)
-
-
Structured notes
15
(12
)
-
-
Derivatives with monolines
-
-
-
-
Other derivatives
200
(166
)
-
-
Other portfolios
68
(93
)
-
-
At 30 Jun 2018
712
(600
)
15
(10
)
 
Private equity including strategic investments
133
(91
)
116
(86
)
Asset-backed securities
38
(24
)
41
(38
)
Loans held for securitisation
1
(1
)
-
-
Structured notes
10
(7
)
-
-
Derivatives with monolines
1
(1
)
-
-
Other derivatives
171
(127
)
-
-
Other portfolios
39
(45
)
9
(8
)
At 30 Jun 2017
393
(296
)
166
(132
)
 
Private equity including strategic investments
142
(105
)
117
(102
)
Asset-backed securities
66
(39
)
3
(39
)
Loans held for securitisation
1
(1
)
-
-
Structured notes
12
(9
)
-
-
Derivatives with monolines
-
-
-
-
Other derivatives
249
(150
)
-
-
Other portfolios
44
(53
)
8
(8
)
At 31 Dec 2017
514
(357
)
128
(149
)
The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval.
Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable
proxy and historical data.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the table above reflects the most
favourable or the most unfavourable change from varying the assumptions individually.
94
HSBC Holdings plc Interim Report 2018
Key unobservable inputs to Level 3 financial instruments
The table below lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs at 30 June 2018. The core range of inputs is the estimated range within which 90% of the inputs fall.
There has been no change to the key unobservable inputs to Level 3 financial instruments and inter-relationships therein, which are detailed on pages 213 and 214 of the Annual Report and Accounts 2017.
Quantitative information about significant unobservable inputs in Level 3 valuations
 
 
Fair value
Valuation technique
Key unobservable inputs
 
 
 
 
Assets
Liabilities
Full range of inputs
Core range of inputs
 
Footnotes
$m
$m
Lower
Higher
Lower
Higher
Private equity including strategic investments
 
4,872
17
See footnote 3
See footnote 3
Asset-backed securities
 
2,249
-
 
 
 
 
 
 
- CLO/CDO
1
336
-
Market proxy
Prepayment rate
2%
7%
2%
7%
 
 
 
-
Market proxy
Bid quotes
0
102
72
100
- other ABSs
 
1,913
-
Market proxy
Bid quotes
0
107
56
97
Loans held for securitisation
 
50
-
 
 
 
 
 
 
Structured notes
 
3
4,413
 
 
 
 
 
 
- equity-linked notes
 
-
4,268
Model - option model
Equity volatility
7%
59%
11%
37%
 
 
 
Model - option model
Equity correlation
19%
93%
34%
79%
- fund-linked notes
 
-
26
Model - option model
Fund volatility
5%
17%
5%
17%
- FX-linked notes
 
-
100
Model - option model
FX volatility
4%
21%
4%
11%
- other
 
3
19
 
 
 
 
 
 
Derivatives with monolines
 
75
-
Model - discounted cash flow
Credit spread
1%
4%
1%
4%
Other derivatives
 
2,395
1,869
 
 
 
 
 
 
- interest rate derivatives:
 
 
 
 
 
 
 
 
 
securitisation swaps
 
281
652
Model - discounted
cash flow
Prepayment rate
6%
7%
6%
7%
long-dated swaptions
 
1,074
28
Model - option model
IR volatility
12%
35%
13%
33%
other
 
266
135
 
 
 
 
 
 
- FX derivatives
 
 
 
 
 
 
 
 
 
FX options
 
158
122
Model - option model
FX volatility
1%
26%
6%
10%
other
 
85
84
 
 
 
 
 
 
- equity derivatives
 
 
 
 
 
 
 
 
 
long-dated single stock options
 
305
380
Model - option model
Equity volatility
5%
82%
6%
60%
other
 
187
298
 
 
 
 
 
 
- credit derivatives
 
 
 
 
 
 
 
 
 
other
 
39
170
 
 
 
 
 
 
Other portfolios
 
6,607
1
 
 
 
 
 
 
- structured certificates
 
3,013
-
Model - discounted
cash flow
Credit volatility
2%
4%
2%
4%
- EM corporate debt
 
39
-
 
 
- other
2
3,555
1
 
 
 
 
 
 
At 30 Jun 2018
 
16,251
6,300
 
 
 
 
 
 
HSBC Holdings plc Interim Report 2018
95
Notes on the Financial Statements (unaudited)
Quantitative information about significant unobservable inputs in Level 3 valuations (continued)
 
 
Fair value
Valuation technique
 
 
 
 
 
Assets
Liabilities
Key unobservable inputs
Full range of inputs
Core range of inputs
 
Footnotes
$m
$m
Lower
Higher
Lower
Higher
Private equity including strategic investments
 
3,508
20
See footnote 3
See footnote 3
n/a
n/a
n/a
n/a
Asset-backed securities
 
2,577
 
 
 
 
 
 
 
- CLO/CDO
1
520
 
Market proxy
Prepayment rate
2%
7%
2%
7%
 
 
 
 
Market proxy
Bid quotes
0
101
6
53
- other ABSs
 
2,057
 
Market proxy
Bid quotes
0
103
34
98
Loans held for securitisation
 
24
-
 
 
 
 
 
 
Structured notes
 
3
4,180
 
 
 
 
 
 
- equity-linked notes
 
-
4,077
Model - option model
Equity volatility
7%
47%
14%
30%
 
 
-
 
Model - option model
Equity correlation
33%
95%
45%
72%
- fund-linked notes
 
-
7
Model - option model
Fund volatility
6%
15%
6%
15%
- FX-linked notes
 
-
76
Model - option model
FX volatility
3%
20%
4%
13%
- other
 
3
20
 
 
 
 
 
 
Derivatives with monolines
 
113
-
Model - discounted
cash flow
Credit spread
0.4%
3%
1%
3%
Other derivatives
 
2,331
1,944
 
 
 
 
 
 
- interest rate derivatives
 
 
 
 
 
 
 
 
 
securitisation swaps
 
285
806
Model - discounted
cash flow
Prepayment rate
20%
90%
20%
90%
long-dated swaptions
 
1,244
66
Model - option model
IR volatility
8%
41%
15%
31%
other
 
302
145
 
 
 
 
 
 
- FX derivatives
 
 
 
 
 
 
 
 
 
FX options
 
86
83
Model - option model
FX volatility
0.7%
50%
5%
11%
other
 
135
129
 
 
 
 
 
 
- equity derivatives
 
 
 
 
 
 
 
 
 
long-dated single stock options
 
158
359
Model - option model
Equity volatility
7%
84%
15%
44%
other
 
96
329
 
 
 
 
 
 
- Credit derivatives
 
 
 
 
 
 
 
 
 
Other
 
25
27
 
 
 
 
 
 
Other portfolios
 
3,832
-
 
 
 
 
 
 
- structured certificates
 
3,014
-
Model - discounted
cash flow
Credit volatility
2%
4%
2%
4%
- EM corporate debt
 
85
-
Market proxy
Bid quotes
100
100
100
100
- other
2
733
-
 
 
 
 
 
 
At 31 Dec 2017
 
12,388
6,144
 
 
 
 
 
 
1
Collateralised loan obligation/collateralised debt obligation.
2
'Other' includes a range of smaller asset holdings.
3
See notes on page 213 of the Annual Report and Accounts 2017.
96
HSBC Holdings plc Interim Report 2018
6
Fair values of financial instruments not carried at fair value
The bases for measuring the fair values of loans and advances to banks and customers, financial investments, deposits by banks, customer accounts, debt securities in issue, subordinated liabilities and non-trading repurchase and reverse repurchase agreements are explained on pages 215 and 216 of the Annual Report and Accounts 2017.
Fair values of financial instruments not carried at fair value on the balance sheet
 
At 30 Jun 2018
At 31 Dec 2017
 
Carrying
amount
Fair
value
Carrying
amount
Fair
value
 
$m
$m
$m
$m
Assets
 
 
 
 
Loans and advances to banks
83,924
83,902
90,393
90,391
Loans and advances to customers
973,443
974,646
962,964
964,205
Reverse repurchase agreements - non-trading
208,104
208,156
201,553
201,538
Financial investments - at amortised cost
62,755
61,930
52,919
54,087
Liabilities
 
 
 
 
Deposits by banks
64,792
64,791
69,922
69,892
Customer accounts
1,356,307
1,356,275
1,364,462
1,364,625
Repurchase agreements - non-trading
158,295
158,303
130,002
129,996
Debt securities in issue
81,708
81,970
64,546
65,138
Subordinated liabilities
22,604
26,417
19,826
24,095
Other financial instruments not carried at fair value are typically short term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value.
7
Derivatives
Notional contract amounts and fair values of derivatives by product contract type held by HSBC
 
Notional contract amount
Fair value amount
 
Assets and Liabilities
Assets
Liabilities
 
Trading
Hedging
Trading
Hedging
Total
Trading
Hedging
Total
 
$m
$m
$m
$m
$m
$m
$m
$m
Foreign exchange
7,389,043
29,761
100,818
401
101,219
96,192
744
96,936
Interest rate
22,569,400
179,968
205,654
1,659
207,313
204,042
2,535
206,577
Equities
561,103
-
10,270
-
10,270
10,038
-
10,038
Credit
358,277
-
3,592
-
3,592
4,036
-
4,036
Commodity and other
78,504
-
1,421
-
1,421
1,217
-
1,217
Gross total fair values
30,956,327
209,729
321,755
2,060
323,815
315,525
3,279
318,804
Offset
(95,843
)
(95,843
)
At 30 Jun 2018
30,956,327
209,729
321,755
2,060
227,972
315,525
3,279
222,961
 
 
 
 
 
 
 
 
 
Foreign exchange
6,215,518
28,768
78,089
428
78,517
74,915
853
75,768
Interest rate
19,751,577
178,289
235,430
1,365
236,795
229,989
3,042
233,031
Equities
590,156
-
9,353
-
9,353
11,845
-
11,845
Credit
391,798
-
4,692
-
4,692
5,369
-
5,369
Commodity and other
59,716
-
886
-
886
1,233
-
1,233
Gross total fair values
27,008,765
207,057
328,450
1,793
330,243
323,351
3,895
327,246
Offset
(110,425
)
(110,425
)
At 31 Dec 2017
27,008,765
207,057
328,450
1,793
219,818
323,351
3,895
216,821
The notional contract amounts of derivatives held for trading purposes and derivatives designated in qualifying hedge accounting indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. Derivative assets and liabilities decreased during 1H18, reflecting changes in foreign exchange rates and yield curve movements.
HSBC Holdings plc Interim Report 2018
97
Notes on the Financial Statements (unaudited)
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is shown in the following table.
Unamortised balance of derivatives valued using models with significant unobservable inputs
 
 
Half-year to
 
 
30 Jun
30 Jun
31 Dec
2018
2017
2017
Footnote
$m
$m
$m
Unamortised balance at beginning of period
 
106
99
110
Deferral on new transactions
 
86
101
90
Recognised in the income statement during the period:
 
(90
)
(92
)
(95
)
- amortisation
 
(52
)
(46
)
(39
)
- subsequent to unobservable inputs becoming observable
 
(1
)
(1
)
(1
)
- maturity, termination or offsetting derivative
 
(37
)
(45
)
(55
)
Exchange differences
 
(2
)
6
4
Other
 
(20
)
(4
)
(3
)
Unamortised balance at end of period
1
80
110
106
1
This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
The notional contract amounts of derivatives held for hedge accounting purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedging purposes by product type
 
At 30 Jun 2018
At 31 Dec 2017
 
Cash flow
hedges
Fair value
hedges
Cash flow
hedges
Fair value
hedges
 
$m
$m
$m
$m
Foreign exchange
24,746
15
22,741
1,027
Interest rate
55,197
124,771
65,575
112,714
Total
79,943
124,786
88,316
113,741
The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with foreign currency borrowings. At 30 June 2018 the notional contract values of outstanding financial instruments designated as hedges of net investments in foreign operations were $5,000m (31 December 2017: $5,000m).
8
Financial investments
Carrying amounts of financial investments
 
 
30 Jun
31 Dec
 
 
2018
2017
 
Footnotes
$m
$m
Financial investments measured at fair value through other comprehensive income
 
323,681
N/A
- treasury and other eligible bills
 
77,370
N/A
- debt securities
 
244,469
N/A
- equity securities
 
1,741
N/A
- other instruments
1
101
N/A
Debt instruments measured at amortised cost
2
62,755
N/A
- treasury and other eligible bills
 
307
N/A
- debt securities
 
62,448
N/A
Available-for-sale securities at fair value
 
N/A
336,157
- treasury and other eligible bills
 
N/A
78,851
- debt securities
 
N/A
253,389
- equity securities
 
N/A
3,917
Held to maturity securities at amortised cost
 
N/A
52,919
- debt securities
2
N/A
52,919
At the end of the period
3
386,436
389,076
1
'Other Instruments' are comprised of loans and advances.
2
Fair value $61.9bn (31 December 2017: $54.1bn).
3
Categories of financial instruments are disclosed under IFRS 9 at 30 June 2018. These are not directly comparable with 31 December 2017, where the instruments were categorised in accordance with IAS 39.
98
HSBC Holdings plc Interim Report 2018
9
Interests in associates and joint ventures
At 30 June 2018, the carrying amount of HSBC's interests in associates and joint ventures was $22,572m (31 December 2017: $22,744m).
Principal associates of HSBC
 
At
 
30 Jun 2018
31 Dec 2017
 
Carrying
amount
Fair
value1
Carrying
amount
Fair
value1
 
$m
$m
$m
$m
Bank of Communications Co., Limited
17,890
10,830
18,057
10,491
The Saudi British Bank
3,568
5,048
3,618
4,320
1
Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).
Bank of Communications Co., Limited
Impairment testing
At 30 June 2018, the fair value of HSBC's investment in Bank of Communications Co., Limited ('BoCom') had been below the carrying amount for approximately six years. As a result, the Group performed an impairment test on the carrying amount of the investment in BoCom, which confirmed there was no impairment at 30 June 2018.
 
At
 
30 Jun 2018
31 Dec 2017
 
VIU
Carrying
value
Fair
value
VIU
Carrying
value
Fair
value
 
$bn
$bn
$bn
$bn
$bn
$bn
Bank of Communications Co., Limited
18.2
17.9
10.8
18.3
18.1
10.5
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a value in use ('VIU') calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's estimates of earnings. Cash flows beyond the short to medium term are then extrapolated in perpetuity using a long-term growth rate to derive a terminal value, which comprises the majority of the VIU. An imputed capital maintenance charge ('CMC') is calculated to reflect expected regulatory capital requirements, and is deducted from forecast cash flows. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected minimum regulatory capital requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other factors (including qualitative factors) to ensure that the inputs to the VIU calculation remain appropriate. Significant management judgement is required in estimating the future cash flows of BoCom.
Key assumptions in VIU calculation
The assumptions we used in our VIU calculation were:
•
Long-term profit growth rate: 3% (31 December 2017: 3%) for periods after 2021, which does not exceed forecast GDP growth in mainland China and is within the range forecast by external analysts.
•
Long-term asset growth rate: 3% (31 December 2017: 3%) for periods after 2021, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%.
•
Discount rate: 11.85% (31 December 2017: 11.85%), which is based on a capital asset pricing model ('CAPM') calculation for BoCom, using market data. Management also compares rates derived from the CAPM with discount rates from external sources. The discount rate used is within the range of 11.3% to 12.7% (31 December 2017: 10.2% to 13.4%) indicated by external sources.
•
Loan impairment charge as a percentage of customer advances: ranges from 0.70% to 0.72% (31 December 2017: 0.66% to 0.82%) in the short to medium term, and is based on the forecasts disclosed by external analysts. For periods after 2021, the ratio is 0.70%(31 December 2017: 0.70%), slightly higher than the historical average.
•
Risk-weighted assets as a percentage of total assets: 62% (31 December 2017: 62%) for all forecast periods. This is slightly higher than BoCom's recent actual results.
•
Cost-income ratio: ranges from 37.3% to 38.0% (31 December 2017: 37.1% to 38.0%) in the short to medium term. This is consistent with the forecasts disclosed by external analysts.
The following changes to each key assumption on its own used in the VIU calculation would be necessary to reduce headroom to nil:
Key assumption
Changes to key assumption to reduce headroom to nil
•
Long-term profit growth rate
Decrease by 13 basis points
•
Long-term asset growth rate
Increase by 11 basis points
•
Discount rate
Increase by 15 basis points
•
Loan impairment charge as a percentage of customer advances
Increase by 2 basis points
•
Risk-weighted assets as a percentage of total assets
Increase by 74 basis points
•
Cost-income ratio
Increase by 50 basis points
HSBC Holdings plc Interim Report 2018
99
Notes on the Financial Statements (unaudited)
10
Provisions
 
Restructuringcosts
Legal proceedingsand regulatorymatters
Customerremediation
Otherprovisions
Total
 
$m
$m
$m
$m
$m
Provisions (excluding contractual commitments)
 
 
 
 
 
At 31 Dec 2017
334
1,501
1,454
469
3,758
Additions
44
1,053
172
54
1,323
Amounts utilised
(96
)
(352
)
(457
)
(57
)
(962
)
Unused amounts reversed
(47
)
(237
)
(70
)
(59
)
(413
)
Unwinding of discounts
-
-
-
3
3
Exchange and other movements
(10
)
56
(19
)
(59
)
(32
)
At 30 Jun 2018
225
2,021
1,080
351
3,677
Contractual commitments1
At 31 Dec 2017
253
Impact on transition to IFRS 9
284
Net change in expected credit loss provision
(15
)
At 30 Jun 2018
522
Total provisions
At 31 Dec 2017
4,011
At 30 Jun 2018
4,199
1
The contractual commitments provision at 31 December 2017 represented IAS 37 provisions on off-balance sheet loan commitments and guarantees for which expected credit losses are provided following transition to IFRS 9 on 1 January 2018. Further analysis of the movement in the expected credit loss provision is disclosed within the 'Reconciliation of gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees' table on page 53.
Further details of 'Legal proceedings and regulatory matters' are set out in Note 12. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim); or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. 'Regulatory matters' refers to investigations, reviews and other actions carried out by, or in response to, the actions of regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.
Customer remediation refers to HSBC's activities to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action. Further details of customer remediation are set out in this note.
Further disclosure on 'ECL on undrawn loan commitments and financial guarantees' can be found in the Credit Risk section of the Overview. This provision results from the adoption of IFRS 9 and has no comparatives.
Payment protection insurance
At 30 June 2018, a provision of $842m (2017: $1,174m) related to the estimated liability for redress in respect of the possible mis-selling of payment protection insurance ('PPI') policies in previous years. Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amount to $5.1bn, of which $4.3bn has been paid to 30 June 2018.
The estimated liability for redress is calculated on the basis of the total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on the historically observed redress per policy.
A total of 5.4 million PPI policies have been sold since 2000, generating estimated revenues of $3.6bn. The gross written premiums on these policies were approximately $4.7bn. At 30 June 2018, the estimated total complaints expected to be received were 2.2 million, representing 41% of total policies sold. It is estimated that contact will be made with regard to 2.6 million policies, representing 49% of total policies sold. This estimate includes inbound complaints as well as the Group's proactive contact exercise on certain policies ('outbound contact').
The following table details the cumulative number of complaints received to 30 June 2018 and the number of claims expected in the future:
Cumulative PPI complaints received to 30 June 2018 and future claims expected
 
Footnotes
Cumulativeto 30 Jun 2018
Future
expected
Inbound complaints (000s of policies)
1
1,647
292
Outbound contact (000s of policies)
 
685
-
Response rate to outbound contact
 
44%
n/a
Average uphold rate per claim
2
77%
83%
Average redress per claim ($)
 
2,674
3,079
Complaints to the Financial Ombudsman Service ('FOS') (000s of policies)
 
159
15
Average uphold rate per FOS complaint
 
39%
33%
1
Excludes invalid claims for which no PPI policy exists.
2
Claims include inbound and responses to outbound contact.
A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $268m.
100
HSBC Holdings plc Interim Report 2018
11
Contingent liabilities, contractual commitments and guarantees
 
At
 
30 Jun
31 Dec
 
2018
2017
 
$m
$m
Guarantees and contingent liabilities:
 
 
- financial guarantees and other similar contracts
91,104
89,762
- other contingent liabilities
796
616
At the end of the period
91,900
90,378
Commitments:
 
 
- documentary credits and short-term trade-related transactions
7,571
8,776
- forward asset purchases and forward deposits placed
12,235
4,295
- standby facilities, credit lines and other commitments to lend
691,353
672,518
At the end of the period
711,159
685,589
The table above discloses the nominal principal amounts, which represent the maximum amounts at risk should the contracts be fully drawn upon and clients default. As a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements. The expected credit loss provision relating to guarantees and commitments under IFRS 9 is disclosed in Note 10.
Approximately half the guarantees have a term of less than one year, while guarantees with terms of more than one year are subject to HSBC's annual credit review process.
Contingent liabilities arising from legal proceedings, regulatory and other matters against Group companies are disclosed in Notes 10and 12.
12
Legal proceedings and regulatory matters
HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 1 of the Annual Report and Accounts 2017. While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 30 June 2018 (see Note 10). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff ('Madoff') was arrested in December 2008 and later pleaded guilty to running a Ponzi scheme. His firm, Bernard L. Madoff Investment Securities LLC ('Madoff Securities'), is being liquidated in the US by a trustee (the 'Trustee').
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was $8.4bn, including fictitious profits reported by Madoff.
Based on information available to HSBC, the funds' actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time HSBC serviced the funds are estimated to have totalled approximately $4bn. Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities' fraud.
US/UK litigation: The Trustee has brought lawsuits against various HSBC companies in the US Bankruptcy Court and in the High Court of England and Wales, seeking recovery of transfers from Madoff Securities to HSBC in an amount not yet pleaded or determined. HSBC and other parties to the action have moved to dismiss the Trustee's US actions. The US Bankruptcy Court granted HSBC's motion to dismiss with respect to certain of the Trustee's claims in November 2016. In September 2017, the US Court of Appeals for the Second Circuit (the 'Second Circuit Court of Appeals') agreed to hear the Trustee's appeal of the US Bankruptcy Court's decision. Briefing on the appeal was completed in May 2018, and this matter is currently pending.
The deadline by which the Trustee must serve HSBC with his English action has been extended to September 2018 for UK-based defendants and November 2018 for all other defendants.
Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, 'Fairfield') (in liquidation since July 2009) have brought lawsuits in the US and the British Virgin Islands against fund shareholders, including HSBC companies that acted as nominees for clients, seeking restitution of redemption payments. In October 2016, the liquidators for Fairfield (the 'Fairfield Liquidators') filed a motion seeking leave to amend their complaints in the US Bankruptcy Court. In January 2017, the defendants moved to dismiss and oppose the Fairfield Liquidators' motion. These motions are pending.
In December 2014, SPV Optimal SUS Ltd ('SPV OSUS'), the purported assignee of the Madoff-invested company, Optimal Strategic US Equity Ltd, filed a lawsuit in New York state court against various HSBC companies and others, seeking damages on various alleged grounds, including breach of fiduciary duty and breach of trust. In April 2018, SPV OSUS filed an amended complaint and HSBC transferred the case to the US District Court for the Southern District of New York (the 'New York District Court'), where the matter is currently pending. In July 2018, the defendants filed a motion to dismiss the amended complaint.
Bermuda litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (together, 'Kingate') brought an action against HSBC Bank Bermuda Limited ('HBBM') for recovery of funds held in Kingate's accounts, fees and dividends. This action is pending, but is not expected to move forward until the resolution of the Trustee's US actions against Kingate and HBBM.
HSBC Holdings plc Interim Report 2018
101
Notes on the Financial Statements (unaudited)
Thema Fund Limited and Hermes International Fund Limited ('Hermes') each brought three actions in 2009 asserting a number of alleged claims against various HSBC companies. In March 2018, the parties reached a settlement with respect to all three sets of actions, and these actions were subsequently dismissed in April 2018.
Cayman Islands litigation: In February 2013, Primeo Fund Limited ('Primeo') (in liquidation since April 2009) brought an action against HSBC Securities Services Luxembourg ('HSSL') and Bank of Bermuda (Cayman) Limited, alleging breach of contract and breach of fiduciary duty and claiming damages and equitable compensation. The trial concluded in February 2017 and, in August 2017, the court dismissed all claims against the defendants. In September 2017, Primeo appealed to the Court of Appeal of the Cayman Islands, where the matter is pending.
Luxembourg litigation: In April 2009, Herald Fund SPC ('Herald') (in liquidation since July 2013) brought an action against HSSL before the Luxembourg District Court, seeking restitution of cash and securities Herald purportedly lost because of Madoff Securities' fraud, or money damages. The Luxembourg District Court dismissed Herald's securities restitution claim, but reserved Herald's cash restitution claim and its claim for money damages. Herald has appealed this judgment to the Luxembourg Court of Appeal, where the matter is pending.
In October 2009, Alpha Prime Fund Limited and, in December 2014, Senator Fund SPC ('Senator'), each brought an action against HSSL before the Luxembourg District Court, seeking the restitution of securities, or the cash equivalent, or money damages. Both actions have been temporarily suspended at the plaintiffs' request. In April 2015, Senator commenced a separate action against the Luxembourg branch of HSBC Bank plc asserting identical claims before the Luxembourg District Court. HSSL has also been named as a defendant in various actions by shareholders in Primeo Select Fund, Herald, Herald (Lux) SICAV and Hermes. Most of these actions have been dismissed, suspended or postponed.
Ireland litigation: In November 2013, Defender Limited brought an action against HSBC Institutional Trust Services (Ireland) Limited ('HTIE') and others, alleging breach of contract and claiming damages and indemnification for fund losses. The trial is scheduled to begin in October 2018.
SPV OSUS's action against HTIE and HSBC Securities Services (Ireland) Limited alleging breach of contract and claiming damages and indemnification for fund losses was dismissed by the Irish High Court in October 2015, on the basis of a preliminary issue. In March 2017, the Irish Court of Appeal affirmed the dismissal, on the same basis. In July 2018, following a further appeal by SPV OSUS, the Irish Supreme Court affirmed the dismissal, on a final basis.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the proceedings have been brought. Based upon the information currently available, management's estimate of the possible aggregate damages that might arise as a result of all claims in the various Madoff-related proceedings is up to or exceeding $500m, excluding costs and interest. Due to uncertainties and limitations of this estimate, the ultimate damages could differ significantly from this amount.
US mortgage securitisation activity and litigation
HSBC Bank USA N.A. ('HSBC Bank USA') was a sponsor or seller of loans used to facilitate whole loan securitisations underwritten by HSBC Securities (USA) Inc. ('HSI'). From 2005 to 2007, HSBC Bank USA purchased and sold approximately $24bn of such loans to HSI, which were subsequently securitised and sold by HSI to third parties. The outstanding principal balance was approximately $3.9bn as at 30 June 2018. HSBC notes that the scale of its mortgage securitisation activities was more limited in relation to a number of other banks in the industry. In addition, HSI served as an underwriter on securitisations issued by HSBC Finance Corporation ('HSBC Finance') or third parties, and HSBC Bank USA served as trustee on behalf of various mortgage securitisation trusts.
Mortgage foreclosure and trustee matters: HSBC Bank USA has taken title to a number of foreclosed homes as trustee on behalf of various mortgage securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws relating to property upkeep and tenants' rights. While HSBC believes and continues to maintain that these obligations and any related liabilities are those of the servicer of each trust, HSBC continues to receive significant adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of 'HSBC, as trustee'.
Beginning in June 2014, a number of lawsuits were filed in state and federal courts in New York and Virginia against HSBC Bank USA as trustee of more than 280 mortgage securitisation trusts. These lawsuits are brought on behalf of the trusts by a putative class of investors including, among others, BlackRock and PIMCO funds. The complaints allege that the trusts have sustained losses in collateral value of approximately $38bn. The lawsuits seek unspecified damages resulting from alleged breaches of the US Trust Indenture Act, breach of fiduciary duty, negligence, breach of contract and breach of the common law duty of trust. HSBC's motions to dismiss in several of these lawsuits were, for the most part, denied. In February 2018, one of these matters was dismissed on procedural grounds. The plaintiff in that action has appealed the decision and has also filed another proceeding in New York state court, which is currently stayed pending appeal. The motion for class certification filed by certain plaintiffs has been denied, as has their request for a review of that decision by the Second Circuit Court of Appeals.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
Loan repurchase matters: Since 2013, HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC ('Decision One'), an indirect subsidiary of HSBC Finance, have been named as defendants in various mortgage loan repurchase actions brought by trustees of mortgage securitisation trusts. One of the two remaining actions against HSBC Bank USA was dismissed on appeal in December 2017, and the plaintiffs have submitted a request for further review which remains pending. The second remaining action is currently pending.
HSBC Mortgage Corporation (USA) Inc. and Decision One were also named as defendants in two separate actions filed by Residential Funding Company LLC ('RFC'), a mortgage loan purchase counterparty, seeking unspecified damages in connection with approximately 25,000 mortgage loans. In May 2018, HSBC reached settlements with RFC to resolve both actions, and these actions have subsequently been dismissed.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
102
HSBC Holdings plc Interim Report 2018
RMBS investigations: Since 2010, various HSBC entities have received subpoenas and requests for information from the US Department of Justice (the 'DoJ') and the Massachusetts Attorney General, seeking the production of documents and information regarding HSBC's involvement in certain residential mortgage-backed securities ('RMBS') transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. In November 2014, HSBC North America Holdings Inc. ('HNAH'), on behalf of itself and various subsidiaries including, but not limited to, HSBC Bank USA, HSI Asset Securitization Corp., HSI, HSBC Mortgage Corporation (USA) Inc., HSBC Finance and Decision One, received a subpoena from the US Attorney's Office for the District of Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act ('FIRREA'), concerning the origination, financing, purchase, securitisation and servicing of sub-prime and non-sub-prime residential mortgages. HSBC continues to cooperate with these investigations, which are at or nearing completion.
In July 2018, HSBC reached a settlement-in-principle to resolve the DoJ's civil claims relating to its investigation of HSBC's legacy RMBS origination and securitisation activities from 2005 to 2007. Under the terms of the settlement, HSBC will pay the DoJ a civil money penalty of $765m. The settlement-in-principle is subject to the negotiation of definitive documentation, and there can be no assurance that HSBC and the DoJ will agree on the final documentation.
Separately, HSBC has also resolved the Massachusetts Attorney General's civil investigation of HSBC's legacy RMBS origination and securitisation activities from 2005 to 2007.
The settlement-in-principle with the DoJ and resolution with the Massachusetts Attorney General do not preclude litigation brought by other parties and HSBC may be subject to additional claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market.
Anti-money laundering and sanctions-related matters
In 2010, HSBC Bank USA entered into a consent cease-and-desist order with the Office of the Comptroller of the Currency ('OCC'), and HNAH entered into a consent cease-and-desist order with the Federal Reserve Board ('FRB'). In 2012, HSBC Bank USA further entered into an enterprise-wide compliance consent order with the OCC (each an 'Order' and together, the 'Orders'). These Orders required improvements to establish an effective compliance risk management programme across HSBC's US businesses, including risk management related to the Bank Secrecy Act ('BSA') and AML compliance. In 2012, an additional consent order was entered into with the OCC that required HSBC Bank USA to correct the circumstances noted in the OCC's report and imposed restrictions on HSBC Bank USA acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, without the OCC's approval.
In June 2018, the OCC terminated the 2010 consent cease-and-desist order and the 2012 enterprise-wide compliance consent order after determining that HSBC Bank USA had satisfied the requirements of those respective orders. The 2010 consent cease-and-desist order entered into with the FRB and the 2012 additional consent order entered into with the OCC remain open.
In December 2012, HSBC Holdings, HNAH and HSBC Bank USA entered into agreements with US and UK government and regulatory agencies regarding past inadequate compliance with the BSA, AML and sanctions laws. Among those agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with, among others, the DoJ (the 'AML DPA'); and HSBC Holdings consented to a cease-and-desist order, and HSBC Holdings and HNAH consented to a civil money penalty order with the FRB. HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions, as well as an undertaking with the UK FCA to comply with certain forward-looking AML and sanctions-related obligations. In addition, HSBC Bank USA entered into civil money penalty orders with the Financial Crimes Enforcement Network of the US Treasury Department ('FinCEN') and the OCC.
Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling $1.9bn to US authorities and undertook various further obligations, including, among others, to retain an independent compliance monitor (who is, for FCA purposes, a 'skilled person' under section 166 of the Financial Services and Markets Act) to produce annual assessments of the Group's AML and sanctions compliance programme (the 'Monitor'). Under the 2012 cease-and-desist order issued by the FRB, the Monitor also serves as an independent consultant to conduct annual assessments. In February 2018, the Monitor delivered his fourth annual follow-up review report.
Through his country-level reviews, the Monitor identified potential AML and sanctions compliance issues that HSBC is reviewing further with the DoJ, FRB and/or FCA. In particular, the DoJ is investigating HSBC's handling of a corporate customer's accounts. In addition, FinCEN as well as the Civil Division of the US Attorney's Office for the Southern District of New York are investigating the collection and transmittal of third-party originator information in certain payments instructed over HSBC's proprietary payment systems. The FCA is also conducting an investigation into HSBC Bank plc's compliance with UK money laundering regulations and financial crime systems and controls requirements. HSBC is cooperating with all of these investigations.
In December 2017, the AML DPA expired and the charges deferred by the AML DPA were dismissed. The Monitor will continue working in his capacity as a skilled person and independent consultant for a period of time at the FCA's and FRB's discretion. The role of the Monitor and his fourth annual follow-up review report, as well as the AML DPA and related agreements and consent orders, are discussed on pages 65 and 78 of the Annual Report and Accounts 2017.
These settlements with US and UK authorities have led to private litigation and do not preclude further private litigation related to HSBC's compliance with applicable BSA, AML and sanctions laws or other regulatory or law enforcement actions for BSA, AML, sanctions or other matters not covered by the various agreements.
In May 2014, a shareholder derivative action was filed by a shareholder of HSBC Holdings purportedly on behalf of HSBC Holdings, HSBC Bank USA, HNAH and HSBC USA Inc. (the 'Nominal Corporate Defendants') in New York state court against certain current and former directors and officers of those HSBC companies (the 'Individual Defendants'). The complaint alleges that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the AML DPA. In November 2015, the New York state court granted the Nominal Corporate Defendants' motion to dismiss. The plaintiff has appealed that decision.
In July 2014, a claim was filed in the Ontario Superior Court of Justice against HSBC Holdings and a former employee purportedly on behalf of a class of persons who purchased HSBC common shares and American Depositary Shares between July 2006 and July 2012. The complaint, which seeks monetary damages of up to CA$20bn, alleges that the defendants made statutory and common law misrepresentations in documents released by HSBC Holdings and its wholly owned indirect subsidiary, HSBC Bank Canada, relating to HSBC's compliance with BSA, AML, sanctions and other laws. In September 2017, the Ontario Superior Court of Justice dismissed the statutory claims against HSBC Holdings and the former employee for lack of jurisdiction, and stayed the common law misrepresentation
HSBC Holdings plc Interim Report 2018
103
Notes on the Financial Statements (unaudited)
claim against HSBC Holdings on the basis of forum non-conveniens. In October 2017, the plaintiff appealed to the Court of Appeal for Ontario and, in July 2018, that appeal was dismissed.
Since November 2014, a number of lawsuits have been filed in federal courts in the United States against various HSBC companies and others on behalf of plaintiffs who are, or are related to, victims of terrorist attacks in the Middle East or of cartel violence in Mexico. In each case, it is alleged that the defendants aided and abetted the unlawful conduct of various sanctioned parties in violation of the US Anti-Terrorism Act. Four actions are pending in federal court in New York and one action is pending in federal court in Florida. In July 2018, in one case, the New York District Court granted HSBC's motion to dismiss, while in a different case, the magistrate judge issued a recommendation that the New York District Court should deny the defendants' motion to dismiss. Motions to dismiss remain pending in the two other cases in the New York District Court. The federal court in Florida also dismissed the case before it in July 2018, but granted the plaintiff leave to file an amended complaint.
In July 2018, a claim was issued against HSBC Holdings in the High Court of England and Wales alleging that HSBC Holdings made untrue and/or misleading statements and/or omissions in public statements between 2007 and 2012 regarding compliance by the HSBC Group with AML, anti-terrorist financing and sanctions laws, regulations and requirements, and the regulatory compliance of the HSBC Group more generally.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
Tax-related investigations
Various tax administration, regulatory and law enforcement authorities around the world, including in the US, Belgium, Argentina, India and Spain are conducting investigations and reviews of HSBC Private Bank (Suisse) SA ('HSBC Swiss Private Bank') and other HSBC companies, in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.
HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain HSBC companies and employees, including those associated with HSBC Swiss Private Bank and an HSBC company in India, acted appropriately in relation to certain customers who may have had US tax reporting obligations. In connection with these investigations, HSBC Swiss Private Bank, with due regard for Swiss law, has produced records and other documents to the DoJ. In August 2013, the DoJ informed HSBC Swiss Private Bank that it was not eligible for the 'Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks' since a formal investigation had previously been authorised. These investigations remain pending.
In November 2014, HSBC Swiss Private Bank was placed under formal criminal examination in Belgium for alleged tax-related offences. In June 2017, Belgian authorities also placed HSBC Holdings and HSBC Private Bank Holdings (Suisse) SA, a Swiss holding company, under formal criminal examination. HSBC is cooperating with this ongoing investigation.
In November 2014, the Argentine tax authority initiated a criminal action against various individuals, including current and former HSBC employees. The criminal action includes allegations of tax evasion, conspiracy to launder undeclared funds and an unlawful association among HSBC Swiss Private Bank, HSBC Bank Argentina, HSBC Bank USA and certain HSBC employees, which allegedly enabled numerous HSBC customers to evade their Argentine tax obligations. HSBC is cooperating with this ongoing investigation.
In February 2015, the Indian tax authority issued a summons and request for information to an HSBC company in India. In August 2015 and November 2015, HSBC companies received notices issued by two offices of the Indian tax authority, alleging that the Indian tax authority had sufficient evidence to initiate prosecution against HSBC Swiss Private Bank and an HSBC company in Dubai for allegedly abetting tax evasion of four different Indian individuals and/or families and requesting that the HSBC companies show cause as to why such prosecution should not be initiated. HSBC Swiss Private Bank and the HSBC company in Dubai have responded to the show cause notices. HSBC is cooperating with this ongoing investigation.
As at 30 June 2018, HSBC has recognised a provision for these various matters in the amount of $632m. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these investigations and reviews. Based on the information currently available, management's estimate of the possible aggregate penalties that might arise as a result of the matters in respect of which it is practicable to form estimates is up to or exceeding $1.5bn, including amounts for which a provision has been recognised. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from this amount.
In light of the media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings.
Mossack Fonseca & Co.
HSBC has received requests for information from various regulatory and law enforcement authorities around the world concerning persons and entities believed to be linked to Mossack Fonseca & Co., a service provider of personal investment companies. HSBC is cooperating with the relevant authorities.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the UK, the US, the EU and Switzerland, are conducting investigations and reviews related to certain past submissions made by panel banks and the processes for making submissions in connection with the setting of Libor, Euribor and other benchmark interest rates and screens used to price certain derivative products. HSBC has been the subject of regulatory demands for information and is cooperating with those investigations and reviews.
In December 2016, the European Commission (the 'Commission') issued a decision finding that HSBC, among other banks, engaged in anti-competitive practices in connection with the pricing of euro interest rate derivatives in early 2007. The Commission imposed a fine on HSBC based on a one-month infringement. HSBC has appealed the decision.
US dollar Libor: Beginning in 2011, HSBC and other panel banks have been named as defendants in a number of private lawsuits filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including US antitrust and racketeering laws, the US Commodity Exchange Act ('US CEA') and state law. The lawsuits include individual and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the New York District Court.
104
HSBC Holdings plc Interim Report 2018
The New York District Court has issued a number of decisions dismissing certain of the claims in response to motions filed by the defendants. The original decisions resulted in the dismissal of the plaintiffs' federal and state antitrust claims, racketeering claims and certain unjust enrichment claims. The dismissal of the antitrust claims was appealed to the Second Circuit Court of Appeals, which reversed the decisions in May 2016. In July 2016, the defendants filed a joint motion to dismiss the antitrust claims on additional grounds not previously addressed by the court and, in December 2016, the New York District Court granted in part and denied in part the motion, leaving only certain antitrust claims to be litigated. Certain plaintiffs appealed the December 2016 order to the Second Circuit Court of Appeals, and that appeal is pending. Additionally, in February 2017, the New York District Court granted the defendants' motion to dismiss certain of the remaining antitrust claims against defendants, including HSBC Bank USA, that did not serve on the US dollar Libor submission panel.
Separately in October 2016, the New York District Court granted a motion to dismiss claims brought by certain individual plaintiffs for lack of personal jurisdiction. Certain plaintiffs appealed that dismissal to the Second Circuit Court of Appeals, which reversed the dismissal in February 2018 and remanded the case to the New York District Court for further consideration of the personal jurisdiction issues, where this matter is pending.
In the New York District Court, the cases with remaining claims that have survived the defendants' motions to dismiss were stayed while the court considered motions to certify classes in several putative class actions that are pending against HSBC's co-defendants. In February 2018, the New York District Court granted in part the class certification motion in one of the cases and denied the class certification motions in two of the cases. As a result of these rulings, certain limited discovery can proceed in the pending cases that have survived the defendants' motions to dismiss.
In 2017, HSBC reached agreements with plaintiffs to resolve three putative class actions brought on behalf of persons who purchased US dollar Libor-indexed bonds, persons who purchased US Libor-indexed-exchange-traded instruments and US-based lending institutions that made or purchased US dollar Libor-indexed loans. In February 2018, HSBC reached an agreement with plaintiffs to resolve a putative class action brought on behalf of persons who purchased US dollar Libor-indexed interest rate swaps and other instruments directly from the defendant banks and their affiliates. In May 2018, HSBC reached an agreement with plaintiffs to resolve a putative class action brought on behalf of persons who purchased US dollar Libor-indexed interest rate swaps and other instruments from certain financial institutions that are not the defendant banks or their affiliates. These settlements are all subject to final court approval.
Euribor: In November 2013, HSBC and other panel banks were named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euro futures contracts and other financial instruments allegedly related to Euribor. The complaint alleges, among other things, misconduct related to Euribor in violation of US antitrust laws, the US CEA and state law. In December 2016, HSBC reached an agreement with plaintiffs to resolve this action, subject to court approval, and in May 2018 the court granted final approval of the settlement.
Singapore Interbank Offered Rate ('SIBOR'), Singapore Swap Offer Rate ('SOR') and Australia Bank Bill Swap Rate ('BBSW'): In July 2016 and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York District Court on behalf of persons who transacted in products related to the SIBOR, SOR and BBSW benchmark rates. The complaints allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law. In October 2017, the defendants moved to dismiss the SIBOR and SOR case, and this motion remains pending. The defendants moved to dismiss the BBSW case in February 2017 and filed a renewed motion to dismiss on standing and capacity to sue grounds in February 2018, and these motions also remain pending.
US dollar International Swaps and Derivatives Association fix ('ISDAfix'): In September 2014, HSBC and other panel banks were named as defendants in a number of putative class actions consolidated in the New York District Court on behalf of persons who transacted in interest rate derivatives or purchased or sold financial instruments that were either tied to ISDAfix rates or were executed shortly before, during, or after the time of the daily ISDAfix setting window. The consolidated complaint alleges, among other things, misconduct related to these activities in violation of US antitrust laws, the US CEA and state law. In June 2017, HSBC reached an agreement with plaintiffs to resolve this consolidated action, and the court granted final approval of the settlement in June 2018.
Canadian Dealer Offered Rate: In January 2018, various HSBC companies, among other banks, were named as defendants in a putative class action filed in the New York District Court in relation to the Canadian Dealer Offered Rate. The claim, which is at an early stage, asserts various breaches of US laws, including US antitrust and racketeering laws, the US CEA, and common law. The defendants filed a motion to dismiss in July 2018, and this motion remains pending.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
Supranational, sovereign and agency bonds
In April 2017, various HSBC companies, among other banks, were added as defendants in a putative class action alleging a conspiracy to manipulate the market for US dollar-denominated supranational, sovereign and agency bonds between 2005 and 2015 in violation of US antitrust laws. In November 2017, the plaintiffs filed an amended consolidated complaint which omitted certain HSBC defendants. The remaining HSBC defendants moved to dismiss the amended consolidated complaint, and this motion remains pending.
Beginning in November 2017, various HSBC companies and other financial institutions were named as defendants in putative class actions issued in the Superior Court and Federal Court in Canada making similar allegations under Canadian law. The Superior Court action has now lapsed; accordingly, the Federal Court action will proceed.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
Foreign exchange rate investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the EU, Switzerland, Brazil, South Korea and South Africa, are conducting civil and criminal investigations and reviews into trading by HSBC and others on the foreign exchange markets. HSBC is cooperating with these investigations and reviews.
In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the Criminal Division of the DoJ (the 'FX DPA'), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. This concluded the DoJ's investigation into HSBC's historical foreign exchange activities. Under the terms of the FX DPA, HSBC has a number of ongoing obligations, including continuing to cooperate with authorities and implementing enhancements to its internal controls and procedures in
HSBC Holdings plc Interim Report 2018
105
Notes on the Financial Statements (unaudited)
its Global Markets business, which will be the subject of annual reports to the DoJ. In addition, HSBC agreed to pay a financial penalty and restitution.
In December 2016, HSBC Bank plc entered into a settlement with Brazil's Administrative Council of Economic Defense ('CADE') in connection with its investigation into 15 banks, including HSBC Bank plc, as well as 30 individuals, relating to practices in the offshore foreign exchange market. Under the terms of the settlement, HSBC Bank plc agreed to pay a financial penalty to CADE. CADE has also publicly announced that it is initiating a separate investigation into the onshore foreign exchange market and has identified a number of banks, including HSBC, as subjects of its investigation.
In February 2017, the Competition Commission of South Africa referred a complaint for proceedings before the South African Competition Tribunal against 18 financial institutions, including HSBC Bank plc, for alleged misconduct related to the foreign exchange market in violation of South African antitrust laws. In April 2017, HSBC filed an exception to the complaint based on a lack of jurisdiction and statute of limitations. In January 2018, the South African Competition Tribunal approved the provisional referral of additional financial institutions, including HSBC Bank USA, to the proceedings. These proceedings are at an early stage.
In late 2013 and early 2014, HSBC and other banks were named as defendants in various putative class actions consolidated in the New York District Court. The consolidated complaint alleged, among other things, that the defendants conspired to manipulate the WM/Reuters foreign exchange benchmark rates. In September 2015, HSBC reached an agreement with plaintiffs to resolve the consolidated action, subject to court approval. In December 2015, the court granted preliminary approval of the settlement, and HSBC made payment of the agreed settlement amount into an escrow account. The settlement remains subject to final approval by the court.
In June 2015, a putative class action was filed in the New York District Court making similar allegations on behalf of Employee Retirement Income Security Act of 1974 ('ERISA') plan participants. The court dismissed the claims in the ERISA action; and in July 2018, the Second Circuit Court of Appeals affirmed the dismissal. In May 2015, another complaint was filed in the US District Court for the Northern District of California making similar allegations on behalf of retail customers. HSBC filed a motion to transfer that action from California to New York, which was granted in November 2015. In August 2017, the retail customer plaintiffs filed an amended complaint, and the defendants moved to dismiss. The motion was denied in most respects, and discovery is underway. In April and June 2017, putative class actions making similar allegations on behalf of purported 'indirect' purchasers of foreign exchange products were filed in New York. Those plaintiffs subsequently filed a consolidated amended complaint. HSBC moved to dismiss the complaint in August 2017, and that motion was granted in March 2018. The plaintiffs have moved for leave to file an amended complaint, and that motion remains pending. It is possible that additional actions will be initiated against HSBC in relation to its historical foreign exchange activities.
As at 30 June 2018, the provision recognised by HSBC for these and similar matters has been reduced to reflect the payment of a financial penalty and restitution pursuant to the FX DPA and the remeasurement of provisions relating to other matters. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from the amount provided.
Precious metals fix-related investigations and litigation
Various regulators and competition and law enforcement authorities, including in the US and the EU, are conducting investigations and reviews relating to HSBC's precious metals operations and trading. HSBC is cooperating with these investigations and reviews. In November 2014, the Antitrust Division and Criminal Fraud Section of the DoJ issued a document request to HSBC Holdings, seeking the voluntary production of certain documents in connection with a criminal investigation that the DoJ is conducting of alleged anti-competitive and manipulative conduct in precious metals trading. In January 2016, the Antitrust Division of the DoJ informed HSBC that it was closing its investigation.
Gold: Beginning in March 2014, numerous putative class actions were filed in the New York District Court and the US District Courts for the District of New Jersey and the Northern District of California, naming HSBC and other members of The London Gold Market Fixing Limited as defendants. The complaints allege that, from January 2004 to June 2013, the defendants conspired to manipulate the price of gold and gold derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. The defendants' motion to dismiss the consolidated action was granted in part and denied in part in October 2016. In June 2017, the court granted the plaintiffs leave to file a third amended complaint, which names a new defendant. The court has denied the pre-existing defendants' request for leave to file a joint motion to dismiss, and discovery has been stayed.
Beginning in December 2015, numerous putative class actions under Canadian law were filed in the Ontario and Quebec Superior Courts of Justice against various HSBC companies and other financial institutions. The plaintiffs allege that, among other things, from January 2004 to March 2014, the defendants conspired to manipulate the price of gold and gold derivatives in violation of the Canadian Competition Act and common law. These actions are at an early stage.
Silver: Beginning in July 2014, numerous putative class actions were filed in the US District Courts for the Southern and Eastern Districts of New York, naming HSBC and other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 2007 to December 2013, the defendants conspired to manipulate the price of silver and silver derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. The defendants' motion to dismiss the consolidated action was granted in part and denied in part in October 2016. In June 2017, the court granted the plaintiffs leave to file a third amended complaint, which names several new defendants. The court has denied the pre-existing defendants' request for leave to file a joint motion to dismiss, and discovery has been stayed.
In April 2016, two putative class actions under Canadian law were filed in the Ontario and Quebec Superior Courts of Justice against various HSBC companies and other financial institutions. The plaintiffs in both actions allege that, from January 1999 to August 2014, the defendants conspired to manipulate the price of silver and silver derivatives in violation of the Canadian Competition Act and common law. The Ontario action is at an early stage. The Quebec action has been temporarily stayed.
Platinum and palladium: Between late 2014 and early 2015, numerous putative class actions were filed in the New York District Court, naming HSBC and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The complaints allege that, from January 2008 to November 2014, the defendants conspired to manipulate the price of platinum group metals ('PGM') and PGM-based financial products for their collective benefit in violation of US antitrust laws and the US CEA. In March 2017, the defendants' motion to dismiss the second amended consolidated complaint was granted in part and denied in part. In June 2017, the plaintiffs filed a third amended complaint. The defendants filed a joint motion to dismiss which remains pending.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
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HSBC Holdings plc Interim Report 2018
Treasury auctions
In January 2017, the DoJ requested information from HSBC and reportedly other banks regarding US Treasury securities trading practices. HSBC is cooperating with this ongoing investigation. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Credit default swap litigation
In June 2017, various HSBC companies, among others, were named as defendants in an individual action filed in the New York District Court, alleging violations of federal and state antitrust laws and breaches of common law in relation to the credit default swap market. The defendants filed a joint motion to dismiss, which remains pending. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Fédération Internationale de Football Association ('FIFA') related investigations
HSBC has received enquiries from the DoJ regarding its banking relationships with certain individuals and entities that are or may be associated with FIFA. The DoJ is investigating whether multiple financial institutions, including HSBC, permitted the processing of suspicious or otherwise improper transactions or failed to observe applicable AML laws and regulations. HSBC is cooperating with the DoJ's investigation. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Hiring practices investigation
The US Securities and Exchange Commission (the 'SEC') is investigating multiple financial institutions, including HSBC, in relation to hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific. HSBC has received various requests for information and is cooperating with the SEC's investigation. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Stanford litigation
In January 2018, HSBC Bank plc received a letter of claim from the Antiguan Joint Liquidators of Stanford International Bank Ltd ('SIB') asserting various claims in connection with HSBC Bank plc's role as a correspondent bank to SIB from 2003 to 2009. HSBC Bank plc denies the allegations and is preparing its response.
HSBC Bank plc continues to defend putative class action lawsuits in the US District Court for the Northern District of Texas against HSBC Bank plc, among others. The complaints, filed by the Official Stanford Investors Committee and a putative class of persons who held monies on deposit and/or certificates of deposit issued by SIB, allege various fraudulent transfer, statutory and tort claims. In November 2017, the court denied the class plaintiffs' motion for class certification, and permission to appeal that decision was denied in April 2018.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant.
Mexican government bond litigation
In March 2018, various HSBC companies, among others, were named as defendants in several putative class actions brought in the New York District Court relating to the Mexican government bond ('MGB') market. These actions allege generally that defendants conspired to fix MGB prices between January 2006 and April 2017 in violation of federal antitrust laws. In July 2018, these actions were consolidated in the New York District Court. This consolidated action is at a very early stage. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Film finance litigation
In July and November 2015, respectively, two actions were brought against HSBC Private Bank (UK) Limited in the High Court of England and Wales seeking damages on various alleged grounds, including breach of duty by HSBC Private Bank (UK) Limited in the provision of certain historical services relating to the participation by the claimants in certain film finance transactions. These actions are ongoing.
It is possible that additional actions or investigations will be initiated against HSBC Private Bank (UK) Limited as a result of its historical involvement in the provision of certain film finance related services.
Based on the facts currently known, it is not practicable to predict the resolution of these matters, including the timing or possible aggregate impact, which could be significant.
13
Transactions with related parties
There were no changes in the related party transactions described in the Annual Report and Accounts 2017 that have had a material effect on the financial position or performance of HSBC in the half-year to 30 June 2018. All related party transactions that took place in the half-year to 30 June 2018 were similar in nature to those disclosed in the Annual Report and Accounts 2017.
HSBC Holdings plc Interim Report 2018
107
Notes on the Financial Statements (unaudited)
14
Effect of reclassification upon adoption of IFRS 9
Reconciliation of consolidated balance sheet at 31 December 2017 and 1 January 2018
 
 
 
 
 
IFRS 9 reclassification to
 
IFRS 9 re-measurement including expected credit losses4
IFRS 9 carrying amount at1 Jan 2018
 
 
 
IAS 39 carrying amount at31 Dec 2017
Other changes in classification
Fair value through profit and loss
Fair valuethrough other comprehensive income
Amortised cost
Carrying amount post reclassification
 
Footnotes
IFRS 9 measurement category
$m
$m
$m
$m
$m
$m
$m
$m
Assets
 
 
 
 
 
 
 
 
 
 
Cash and balances at central banks
 
Amortised cost
180,624
-
-
-
-
180,624
(3
)
180,621
Items in the course of collection from other banks
 
Amortised cost
6,628
-
-
-
-
6,628
-
6,628
Hong Kong Government certificates of indebtedness
 
Amortised cost
34,186
-
-
-
-
34,186
-
34,186
Trading assets
1, 3
FVPL
287,995
4,329
9
-
(37,924
)
254,409
1
254,410
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
2, 5, 6, 7
FVPL
29,464
313
10,055
(3
)
(115
)
39,714
32
39,746
Derivatives
 
FVPL
219,818
-
-
-
-
219,818
-
219,818
Loans and advances to banks
1, 2, 3
Amortised cost
90,393
(7,099
)
(712
)
-
-
82,582
(23
)
82,559
Loans and advances to customers
1, 2, 3
Amortised cost
962,964
(7,458
)
(3,903
)
-
24
951,627
(1,890
)
949,737
Reverse repurchase agreements -
non-trading
 
Amortised cost
201,553
-
-
-
-
201,553
-
201,553
Financial investments
5, 13
FVOCI
332,240
-
(3,131
)
83
(7,026
)
322,166
(3
)
322,163
6, 13
FVOCI
3,917
-
(2,104
)
-
-
1,813
-
1,813
5
Amortised cost
52,919
-
-
(80
)
7,141
59,980
(457
)
59,523
Prepayments, accrued income and other assets
1, 7
Amortised cost
67,191
9,915
(214
)
-
37,900
114,792
(15
)
114,777
Current tax assets
 
N/A
1,006
-
-
-
-
1,006
-
1,006
Interests in associates and joint ventures
8
N/A
22,744
-
-
-
-
22,744
(942
)
21,802
Goodwill and intangible assets
9
N/A
23,453
-
-
-
-
23,453
(79
)
23,374
Deferred tax assets
 
N/A
4,676
-
-
-
-
4,676
38
4,714
Total assets
 
 
2,521,771
-
-
-
-
2,521,771
(3,341
)
2,518,430
For footnotes, see page 110.
108
HSBC Holdings plc Interim Report 2018
Reconciliation for consolidated balance sheet at 31 December 2017 and 1 January 2018 (continued)
 
 
 
 
 
 
IFRS 9 reclassification to
Carrying amount post reclassification
IFRS 9 remeasure-ment including expected credit losses4
IFRS 9 carrying amount at1 Jan 2018
 
 
IAS 39 carrying amount at31 Dec 2017
Other changes in classif-ication
Fair value through profit and loss
Fair valuethrough other compre-hensive income
Amortised cost
 
Footnotes
IAS 39 measure-ment category
IFRS 9 measure-ment category
$m
$m
$m
$m
$m
$m
$m
$m
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Hong Kong currency notes in circulation
 
Amortised cost
Amortised cost
34,186
-
-
-
-
34,186
-
34,186
Deposits by banks
1
Amortised cost
Amortised cost
69,922
(5,430
)
-
-
-
64,492
-
64,492
Customer accounts
1
Amortised cost
Amortised cost
1,364,462
(4,235
)
-
-
-
1,360,227
-
1,360,227
Repurchase agreements -
non-trading
 
Amortised cost
Amortised cost
130,002
-
-
-
-
130,002
-
130,002
Items in the course of transmission to other banks
 
Amortised cost
Amortised cost
6,850
-
-
-
-
6,850
-
6,850
Trading liabilities
1, 11
FVPL
FVPL
184,361
(103,497
)
-
-
-
80,864
-
80,864
Financial liabilities designated at fair value
9, 10, 11
FVPL
FVPL
94,429
59,267
-
-
(9,699
)
143,997
9
144,006
Derivatives
 
FVPL
FVPL
216,821
-
-
-
-
216,821
-
216,821
Debt securities in issue
10
Amortised cost
Amortised cost
64,546
-
-
-
2,095
66,641
(105
)
66,536
Accruals, deferred income and other liabilities
1, 10
Amortised cost
Amortised cost
45,907
53,895
-
-
124
99,926
-
99,926
Current tax liabilities
 
N/A
N/A
928
-
-
-
-
928
-
928
Liabilities under insurance contracts
9
N/A
N/A
85,667
-
-
-
-
85,667
(69
)
85,598
Provisions
 
N/A
N/A
4,011
-
-
-
-
4,011
284
4,295
Deferred tax liabilities
14
N/A
N/A
1,982
-
-
-
-
1,982
(368
)
1,614
Subordinated liabilities
10
Amortised cost
Amortised cost
19,826
-
-
-
7,480
27,306
(1,445
)
25,861
Total liabilities
 
 
 
2,323,900
-
-
-
-
2,323,900
(1,694
)
2,322,206
For footnotes, see page 110.
 
 
IAS 39 carrying amount at
31 Dec 2017
IFRS 9 reclassification
Carrying amount post reclassification
IFRS 9 remeasurement including expected credit losses
Carrying amount at 1 Jan 2018
 
Footnotes
$m
$m
$m
$m
$m
Equity
 
 
 
 
 
 
Called up share capital
 
10,160
-
10,160
-
10,160
Share premium account
 
10,177
-
10,177
-
10,177
Other equity instruments
 
22,250
-
22,250
-
22,250
Other reserves
12
7,664
(960
)
6,704
(61
)
6,643
Retained earnings
14
139,999
960
140,959
(1,545
)
139,414
Total Shareholders Equity
 
190,250
-
190,250
(1,606
)
188,644
Non-controlling interests
 
7,621
-
7,621
(41
)
7,580
Total equity
 
197,871
-
197,871
(1,647
)
196,224
For footnotes, see page 110.
HSBC Holdings plc Interim Report 2018
109
Notes on the Financial Statements (unaudited)
Reconciliation of impairment allowance under IAS 39 and provision under IAS 37 to expected credit losses under IFRS 9
 
Reclassification to
Remeasurement
Total
 
Fair value through profit and loss
Fair valuethrough other comprehensive income
Amortised cost
Stage 3
Stage 1 & Stage 2
 
IAS 39 measurement category
$m
$m
$m
$m
$m
$m
Financial assets at amortised cost
 
 
 
 
 
 
 
IAS 39 impairment allowance at 31 Dec 2017
 
 
 
 
 
 
7,532
Cash and balances at central banks
Amortised cost
(Loans and receivables)
-
-
-
-
3
3
Items in the course of collection from other banks
Amortised cost
(Loans and receivables)
-
-
-
-
-
-
Hong Kong Government certificates of indebtedness
Amortised cost
(Loans and receivables)
-
-
-
-
-
-
Loans and advances to banks
Amortised cost
(Loans and receivables)
-
-
-
1
22
23
Loans and advances to customers
Amortised cost
(Loans and receivables)
(31
)
-
-
629
1,261
1,859
Reverse repurchase agreements - non-trading
Amortised cost
(Loans and receivables)
-
-
-
-
-
-
Financial investments
Amortised cost
(Held to maturity)
-
-
3
-
13
16
Prepayments, accrued income and other assets
Amortised cost
(Loans and receivables)
-
-
-
-
47
47
Expected credit loss
allowance at 1 Jan 2018
 
 
 
 
 
 
9,480
Loan commitments and financial guarantee contracts
 
 
 
 
 
 
 
IAS 37 provisions at
31 Dec 2017
 
 
 
 
 
 
253
Provisions (loan commitments and financial guarantees)
N/A
N/A
N/A
N/A
74
210
284
Expected credit loss
provision at 1 Jan 2018
 
 
 
 
 
 
537
The pre-tax net asset impact of additional impairment allowances on adoption of IFRS 9 is $2,232m; $1,948m in respect of financial assets at amortised cost and $284m related to loan commitments and financial guarantee contracts. The total expected credit loss allowance at 1 January 2018 was $9,480m in respect of financial assets at amortised cost and $537m related to loan commitments and financial guarantee contracts.
110
HSBC Holdings plc Interim Report 2018
Notes on the Financial Statements (unaudited) | Shareholder information
Footnotes to 'Effect of reclassification upon adoption of IFRS 9'
1
Cash collateral, margin and settlement accounts of $37,900m have been reclassified from 'Trading assets' to 'Prepayments, accrued income and other assets' as a result of the assessment of the business model in accordance with IFRS 9.
Cash collateral, margin and settlement accounts previously presented as 'Loans and advances to banks' of $5,939m and 'Loans and advances to customers' of $3,976m have been re-presented in 'Prepayments, accrued income and other assets' to ensure consistent presentation of all such balances. Cash collateral, margin and settlement accounts previously presented as 'Trading liabilities' of $44,230m, 'Deposits by banks' of $5,430m and 'Customer accounts' of $4,235m have been re-presented in 'Accruals, deferred income and other liabilities'. This change in presentation for financial liabilities is considered to provide more relevant information, given the change in presentation for the financial assets. These changes in presentation for financial assets and liabilities have had no effect on measurement of these items and therefore on 'Retained earnings'.
2
'Loans and advances to customers' of $3,903m and 'Loans and advances to banks' of $712m did not meet the 'solely payments of principal and interest' ('SPPI') requirement for amortised cost classification under IFRS 9. As a result, these financial assets were reclassified to 'Financial assets designated and otherwise mandatorily measured at fair value through profit or loss'.
3
Stock borrowing assets of $4,642m have been reclassified from 'Loans and advances to banks and customers' to 'Trading assets'. The change in measurement is a result of the determination of the global business model for this activity and will align the presentation throughout the Group. 
4
IFRS 9 ECL have decreased net assets by $2,232m, principally comprising of $1,890m reduction in the carrying value of assets classified as 'Loans and advances to customers' and $284m increase in 'Provisions' relating to expected credit losses on loan commitments and financial guarantee contracts.
5
Debt instruments of $3,131m previously classified as available for sale under IAS 39 did not meet the SPPI requirement for FVOCI classification. As a result, these financial assets were classified as 'Financial assets designated and otherwise mandatorily measured at fair value through profit or loss' upon adoption of IFRS 9. Debt instruments of $7,026m previously classified as available for sale under IAS 39, have been reclassified to amortised cost as a result of 'hold to collect' business model classification under IFRS 9. This resulted in a $441m downward remeasurement of the financial assets now measured at amortised cost excluding expected credit losses.
6
$2,104m of available for sale non-traded equity instruments have been reclassified as 'Financial assets designated and otherwise mandatorily measured at fair value through profit or loss' in accordance with IFRS 9. The Group has elected to apply the FVOCI option under IFRS 9 for the remaining $1,813m.
7
$214m of other financial assets measured at amortised cost under IAS 39 did not meet the SPPI requirement for amortised cost classification under IFRS 9. As a result, these financial assets were classified as 'Financial assets designated and otherwise mandatorily measured at fair value through profit or loss'.
8
'Interests in associates and joint ventures' includes the consequential downward remeasurement of our interests in associates and joint ventures as a result of these entities applying IFRS 9 of $942m. The effect of IFRS 9 on the carrying value of investments in associates has been updated from the estimate disclosed in our Annual Report and Accounts 2017 as a result of those entities publicly reporting their expected transition impacts.
 
9
Changes in the classification and measurement of financial assets held in our insurance business and the recognition of ECL under IFRS 9 has resulted in secondary impacts on the present value of in-force long-term insurance business ('PVIF') and liabilities to holders of insurance and investment contracts. The gross carrying value of PVIF reported in 'Goodwill and intangible assets' and liabilities reported in 'Liabilities under insurance contracts' has decreased by $79m and $69m respectively. Liabilities reported under 'Financial liabilities designated at fair value' have increased by $9m.
10
As permitted by IFRS 9, fair value designations have been revoked for certain long-dated liabilities where the accounting mismatch will be better mitigated by undertaking fair value hedge accounting, resulting in reclassifications of $7,110m from 'Financial liabilities designated at fair value' to 'Subordinated liabilities' measured at amortised cost and $2,095m from 'Financial liabilities designated at fair value' to 'Debt securities in issue' measured at amortised cost. A further $124m of associated accrued interest has been reclassified to 'Accruals, deferred income and other liabilities'. In addition, as required by IFRS 9, fair value designations have been revoked where accounting mismatches no longer exist, resulting in a further $370m of 'Subordinated liabilities' being measured at amortised cost. Together, these changes result in the financial liabilities now being measured at amortised cost, decreasing 'Debt securities in issue' by $105m and 'Subordinated Liabilities' by $1,445m.
11
We have considered market practices for the presentation of $59,267m of financial liabilities which contain both deposit and derivative components. We have concluded that a change in accounting policy and presentation from 'Trading liabilities' would be appropriate, since it would better align with the presentation of similar financial instruments by peers and therefore provide more relevant information about the effect of these financial liabilities on our financial position and performance. As a result, rather than being classified as held for trading, we will designate these financial liabilities as at fair value through profit or loss since they are managed and their performance evaluated on a fair value basis. Consequently, changes in fair value of these instruments attributable to changes in own credit risk are recognised in other comprehensive income rather than profit or loss. For the half-year to 30 June 2017, a restatement would have increased 'Net income from financial instruments held for trading or managed on a fair value basis' by $346m (half-year to 31 December 2017: $199m) and increased tax expense by $104m (half-year to 31 December 2017: $64m), with an equivalent net decrease in other comprehensive income.
12
While IFRS 9 ECL has no effect on the carrying value of FVOCI financial assets, which remain measured at fair value, the adoption of IFRS 9 results in a transfer from the FVOCI reserve (formerly AFS reserve) to retained earnings to reflect the cumulative impairment recognised in profit or loss in accordance with IFRS 9 (net of impairment losses previously recognised in profit or loss under IAS 39). The amount transferred from 'Other reserves' to 'Retained earnings' was $61m. The resulting cumulative expected credit losses recognised in 'Retained earnings' on financial assets measured at FVOCI on adoption of IFRS 9 is $184m. In addition, the cumulative AFS reserve relating to financial investments reclassified to 'Financial assets designated and otherwise mandatorily measured at fair value through profit or loss' in accordance with IFRS 9 has been transferred to retained earnings.
13
Measurement refers to that under IAS 39 and IFRS 9. Financial investments measured under fair value through other comprehensive income were measured as available for sale instruments under IAS 39.
14
The effect of IFRS 9 remeasurement has been updated from the estimate disclosed in our Annual Report and Accounts 2017 as a result of our associates publicly reporting their transition impacts. 
HSBC Holdings plc Interim Report 2018
111
Notes on the Financial Statements (unaudited)
15
Events after the balance sheet date
A second interim dividend in respect of the financial year ending 31 December 2018 was declared by the Directors on 6 August 2018, as described in Note 3.
16
Interim Report 2018 and statutory accounts
The information in this Interim Report 2018 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. This Interim Report 2018 was approved by the Board of Directors on 6 August 2018. The statutory accounts of HSBC Holdings plc for the year ended 31 December 2017 have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The Group's auditor, PricewaterhouseCoopers LLP ('PwC') has reported on those accounts. Its report was unqualified, did not include a reference to any matters to which PwC drew attention by way of emphasis without qualifying its report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
112
HSBC Holdings plc Interim Report 2018
Shareholder information
 
 
 
Page
 
 
 
Page
1
Directors' interests
113
 
11
Final results
118
2
Employee share plans
116
 
12
Corporate governance
118
3
Share buy-back
116
 
13
Changes in Directors' details
119
4
Other equity instruments
117
 
14
Going concern basis
120
5
Notifiable interests in share capital
117
 
15
Telephone and online share dealing service
120
6
Dealings in HSBC Holdings listed securities
117
 
16
Stock symbols
120
7
First interim dividend for 2018
117
 
17
Copies of the Interim Report 2018 and shareholder enquiries and communications
120
8
Second interim dividend for 2018
118
 
 
9
Proposed interim dividends for 2018
118
 
 
 
 
10
Earnings release
118
 
 
 
 
1
Directors' interests
According to the register of Directors' interests maintained by HSBC Holdings pursuant to section 352 of the Securities and Futures Ordinance of Hong Kong, at 30 June 2018 (or date of retirement from the Board if earlier) the Directors of HSBC Holdings had the following interests, all beneficial unless otherwise stated, in the shares or debentures of HSBC and its associates:
Directors' interests - shares and debentures
 
 
 
At 30 Jun 2018
 
Footnotes
At1 Jan 2018
Beneficial
owner
Child
under 18
or spouse
Jointly with another person
Trustee
Total
interests4
HSBC Holdings ordinary shares
 
 
 
 
 
 
 
Phillip Ameen
1,4
5,000
5,000
-
-
-
5,000
Kathleen Casey
1
9,125
9,320
-
-
-
9,320
Laura Cha
 
18,200
10,200
8,000
-
-
18,200
Henri de Castries
 
17,116
17,474
-
-
-
17,474
Lord Evans of Weardale
 
12,892
12,892
-
-
-
12,892
Joachim Faber
4
66,605
93,221
-
-
-
93,221
John Flint
2,4
533,118
719,405
 
 
 
719,405
Stuart Gulliver
2,4
3,711,169
3,503,563
176,885
-
 
3,680,448
Irene Lee
 
10,588
10,809
-
-
-
10,809
John Lipsky
1,4
16,165
16,165
-
-
-
16,165
Iain Mackay
2
442,118
756,668
-
-
-
756,668
Heidi Miller
1
4,200
4,285
-
-
-
4,285
Marc Moses
2
1,207,068
1,475,567
-
-
-
1,475,567
David Nish
 
50,000
-
50,000
-
-
50,000
Jonathan Symonds
 
42,821
37,936
4,885
-
-
42,821
Jackson Tai
1,3
44,825
13,945
10,350
21,675
-
45,970
Mark Tucker
 
276,000
281,785
-
-
-
281,785
Pauline van der Meer Mohr
 
15,000
15,000
-
-
-
15,000
1
Phillip Ameen has an interest in 1,000, Kathleen Casey has an interest in 1,864, John Lipsky has an interest in 3,233, Heidi Miller has an interest in 857 and Jackson Tai has an interest in 9,194 listed American Depositary Shares ('ADSs'), which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.
2
Executive Directors' other interests in HSBC Holdings ordinary shares arising from the HSBC Holdings savings-related share option plans and the HSBC Share Plan 2011 are set out on the following pages. At 30 June 2018, the aggregate interests under the Securities and Futures Ordinance of Hong Kong in HSBC Holdings ordinary shares, including interests arising through employee share plans, were: John Flint - 1,281,533; Stuart Gulliver - 6,712,018; Iain Mackay - 2,505,919; and Marc Moses - 3,218,740. Each Director's total interests represents less than 0.04% of the shares in issue and 0.04% of the shares in issue excluding treasury shares.
3
Jackson Tai's holding includes a non-beneficial interest in 10,350 shares of which he is custodian.
4
Stuart Gulliver retired from the Board on 20 February 2018. Phillip Ameen, Joachim Faber and John Lipsky retired from the Board on 20 April 2018. Their total interests are as at their retirement date. All figures are as at 30 June 2018 or on the retirement of the Director unless otherwise stated. John Flint's opening interests are as at 21 February 2018, the date he joined the Board.
Savings-related share option plan
HSBC Holdings savings-related share option plan
 
 
 
 
 
HSBC Holdings
ordinary shares
 
Date of
award
Exercise
price (£)
Exercisable
Held at
Held at
from
until
1 Jan 2018
30 Jun 2018
John Flint
22 September 2015
4.0472
1 November 2018
30 April 2019
4,447
4,447
Iain Mackay
23 September 2014
5.1887
1 November 2017
30 April 2018
3,469
-
There are no performance criteria for savings-related share options. No changes have been made to the terms of these awards since they were made. See page 114 for more details on the savings-related share option plans. The market value per ordinary share at 30 June 2018 was £7.1075. The highest and lowest market values per ordinary share during the half-year to 30 June 2018 were £7.9605 and £6.6205. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the relevant date. Under the Securities and Futures Ordinance of Hong Kong, the options are categorised as unlisted physically settled equity derivatives.
HSBC Holdings plc Interim Report 2018
113
Shareholder information
HSBC Share Plan 2011
Conditional awards of deferred shares
Vesting of deferred share awards is normally subject to the Director remaining an employee on the vesting date. The awards may vest at an earlier date in certain circumstances. Under the Securities and Futures Ordinance of Hong Kong, interests in conditional share awards are categorised as the interests of the beneficial owner.
Deferred share awards
 
 
 
 
HSBC Holdings ordinary shares
 
Date of
award
 
Year in
which
awards
may vest
Awards held at
Awards made during
the period to 30 Jun 2018
Awards vested during
the period to 30 Jun 20181
Awards
held at
 
Footnotes
1 Jan
2018
Number
Monetary value
Number
Monetary value
30 Jun
20181
 
 
 
 
 
 
£000
 
£000
 
John Flint7
11 Mar 2013
2
2018
73,793
-
-
75,339
532
-
2 Mar 2015
3
2016-2018
27,717
-
-
28,298
196
-
29 Feb 2016
4
2017-2019
96,595
-
-
49,417
346
49,203
27 Feb 2017
6
2020-2024
104,104
-
-
-
-
106,286
26 Feb 2018
5
2018
-
86,366
623
86,366
623
-
26 Feb 2018
8
2021-2025
-
166,014
1,201
-
-
166,014
Stuart Gulliver7
11 Mar 2013
2
2018
105,221
-
-
-
-
105,221
2 Mar 2015
3
2016-2018
26,996
-
-
-
-
26,996
29 Feb 2016
4
2017-2019
52,648
-
-
-
-
52,648
Iain Mackay
11 Mar 2013
2
2018
72,742
-
-
74,266
524
-
2 Mar 2015
3
2016-2018
18,123
-
-
18,503
128
-
29 Feb 2016
4
2017-2019
52,427
-
-
26,821
188
26,705
26 Feb 2018
5
2018
-
184,406
1,330
184,406
1,330
-
Marc Moses
11 Mar 2013
2
2018
70,672
-
-
72,153
509
-
2 Mar 2015
3
2016-2018
21,606
-
-
22,509
156
-
29 Feb 2016
4
2017-2019
40,581
-
-
20,760
145
20,671
26 Feb 2018
5
2018
-
187,724
1,354
187,724
1,354
-
1
Includes additional shares arising from dividend equivalents.
2
Awards granted in March 2013 are subject to service conditions and satisfactory completion of the AML DPA, as determined by the Committee. The AML DPA condition ended on the fifth anniversary of the award date.
3
At the date of the award (2 March 2015) the market value per share was £5.83. Shares equivalent in number to those that vest under the award (net of tax liabilities) must be retained for six months from the vesting date. On 14 March 2018, the third tranche of the award vested. On that date, the market value per share was £6.9321.
4
At the date of the award (29 February 2016), the market value per share was £4.60. Shares equivalent in number to those that vest under the award (net of tax liabilities) must be retained for six months from the vesting date. On 13 March 2018, the second tranche of the award vested. On that date, the market value per share was £7.0074. The balance will vest in 2019.
5
The non-deferred award vested immediately on 26 February 2018. Shares equivalent in number to those that vest under the award (net of tax liabilities) must be retained for one year from the vesting date. At the date of vesting, the market value per share was £7.2146.
6
At the date of the award (27 February 2017), the market value per share was £6.50. Shares equivalent in number to those that vest under the award (net of tax liabilities) must be retained for six months from the vesting date. The award will vest in five equal annual tranches commencing in March 2020.
7
Stuart Gulliver retired from the Board on 20 February 2018. His total interests are as at his retirement date. John Flint's opening interests are as at 21 February 2018, the date he joined the Board.
8 The number of shares was determined using a market value per share of £7.234. Shares equivalent in number to those that vest under the award (net of tax liabilities) must be retained for one year from the vesting date. The award will vest in five equal annual tranches commencing in March 2021.
Conditional awards under the Group Performance Share Plan
The Group Performance Share Plan ('GPSP') is a plan designed to offer long-term incentives governed by the rules of the HSBC Share Plan 2011. Vesting of GPSP awards is normally subject to the Director remaining an employee on the vesting date. Any shares (net of tax) which the Director becomes entitled to on the vesting date are subject to a retention requirement until cessation of employment. Under the Securities and Futures Ordinance of Hong Kong, interests in awards are categorised as beneficial.
114
HSBC Holdings plc Interim Report 2018
Group Performance Share Plan
 
 
 
 
HSBC Holdings ordinary shares
 
Date of
award
Footnote
Year in
which
awards
may vest
Awards
held at
Awards made during
the period to 30 Jun 2018
Awards vested during
the period to 30 Jun 20181
Awards
held at
 
1 Jan2018
Number
Monetary value
Number
Monetary value
30 Jun
20181
 
 
 
 
 
 
£000
 
£000
 
John Flint2
11 Mar 2013
3
2018
85,156
-
-
86,941
614
-
10 Mar 2014
 
2019
147,082
-
-
-
-
150,165
2 Mar 2015
 
2020
30,851
-
-
-
-
31,497
29 Feb 2016
 
2021
53,396
-
-
-
-
54,516
Stuart Gulliver2
11 Mar 2013
 
2018
539,599
-
-
-
-
539,599
10 Mar 2014
 
2019
750,611
-
-
-
-
750,611
2 Mar 2015
 
2020
442,452
-
-
-
-
442,452
29 Feb 2016
 
2021
480,795
-
-
-
-
480,795
Iain Mackay
11 Mar 2013
3
2018
251,812
-
-
257,091
1,815
-
10 Mar 2014
 
2019
439,686
-
-
-
-
448,903
2 Mar 2015
 
2020
236,992
-
-
-
-
241,960
29 Feb 2016
 
2021
268,976
-
-
-
-
274,614
Marc Moses
11 Mar 2013
3
2018
280,591
-
-
286,473
2,022
-
10 Mar 2014
 
2019
439,643
-
-
-
-
448,859
2 Mar 2015
 
2020
236,992
-
-
-
-
241,960
29 Feb 2016
 
2021
268,976
-
-
-
-
274,614
1
Includes additional shares arising from dividend equivalents.
2
Stuart Gulliver retired from the Board on 20 February 2018. His total interests are as at his retirement date. John Flint's opening interests are as at 21 February 2018, the date he joined the Board.
3 On 12 March 2018, the deferred awards granted in 2013 vested. On that date, the market value per share was £7.06.
Long-term incentive awards
The long-term incentive award is an award of shares with a three-year performance period. At the end of this performance period and subject to the award terms the number of shares that vest will be determined based on an assessment of performance against financial and non-financial measures. Subject to that assessment, the shares will vest in five equal annual instalments. On vesting, awards are subject to a retention period of up to one year. Under the Securities and Futures Ordinance of Hong Kong, interests in awards are categorised as beneficial.
Long-term incentive awards
 
 
 
HSBC Holdings ordinary shares
 
Date of
award
Year in
which
awards
may vest
Awards held at
Awards made during
the period to 30 Jun 2018
Awards vested during
the period to 30 Jun 2018
Awards
held at
 
1 Jan
2018
Number
Monetary value
Number
Monetary value
30 Jun
20181
 
 
 
 
 
£000
 
£000
 
Stuart Gulliver2
27 Feb 2017
2020-2024
633,278
-
-
-
-
633,278
Iain Mackay
27 Feb 2017
2020-2024
354,255
-
-
-
-
361,681
26 Feb 2018
2021-2025
-
395,388
2,859
 
 
395,388
Marc Moses
27 Feb 2017
2020-2024
354,255
-
-
-
-
361,681
26 Feb 2018
2021-2025
-
395,388
2,859
-
-
395,388
1
At the date of award, 26 February 2018, the market value per share was £7.234.
2
Stuart Gulliver retired from the Board on 20 February 2018. His total interests are as at his retirement date.
No Directors held any short position (as defined in the Securities and Futures Ordinance of Hong Kong) in the shares or debentures of HSBC Holdings and its associated corporations. Save as stated in the tables above, none of the Directors had an interest in any shares or debentures of HSBC Holdings or any associates at the beginning or at the end of the period, and none of the Directors or members of their immediate families were awarded or exercised any right to subscribe for any shares or debentures in any HSBC corporation during the period. Since 30 June 2018, the interests of each of the following Directors have increased by the number of HSBC Holdings ordinary shares shown against their name:
Increase in Directors' interests since 30 June 2018
 
 
 
Footnotes
HSBC Holdings
ordinary shares
Beneficial owner
 
 
Kathleen Casey
1, 2
95
Henri de Castries
2
177
John Flint
3
3,977
Irene Lee
2
109
Iain Mackay
3
13,749
Heidi Miller
1, 2
40
Marc Moses
3
13,688
1
Kathleen Casey has an interest in 1,883 and Heidi Miller has an interest in 865 ADSs, which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.
2
Additional shares arising from scrip dividends.
3
Comprises dividend equivalents on deferred share awards, GPSP awards and long-term incentive awards granted under the HSBC Share Plan 2011.
HSBC Holdings plc Interim Report 2018
115
Shareholder information
2
Employee share plans
Share options and discretionary awards of shares are granted under HSBC share plans to help align the interests of employees with those of shareholders. The following are particulars of outstanding options, including those held by employees working under employment contracts that are regarded as 'continuous contracts' for the purposes of the Hong Kong Employment Ordinance. The options were granted for nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services, or in excess of the individual limit for each share plan. No options were cancelled by HSBC during the period to 30 June 2018.
A summary, for each plan, of the total number of options which were granted, exercised or lapsed during the period is shown in the table below. Particulars of options held by Directors of HSBC Holdings are set out on page 111. Further details required to be disclosed pursuant to Chapter 17 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited are available on our website at www.hsbc.com, and on the website of The Stock Exchange of Hong Kong Limited at www.hkex.com.hk. Copies may be obtained upon request from the Group Company Secretary, 8 Canada Square, London E14 5HQ.
All-employee share plans
The HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International are all-employee share plans under which eligible employees have been granted options to acquire HSBC Holdings ordinary shares. There are no outstanding options under the HSBC Holdings Savings-Related Share Option Plan: International and the plan ceased on 31 January 2018. The HSBC International Employee Share Purchase Plan was introduced in 2013 and now includes employees based in 27 jurisdictions.
For options granted under the HSBC Holdings Savings-Related Share Option Plan, employees save up to £500 each month over a period of three or five years. Employees may elect within six months following the third or fifth anniversary of the commencement of the relevant savings contract, to use these savings, to exercise the options. Alternatively, the employee may elect to have the savings, plus (where applicable) any interest or bonus, repaid in cash. In the case of redundancy, ceasing employment on grounds of injury or ill health, retirement, the transfer of the employing business to another party, or a change of control of the employing company, options may be exercised before completion of the relevant savings contract. In certain limited circumstances, in accordance with the plan rules, the exercise period of options granted under the all-employee share plans may be extended.
The terms set out in the preceding paragraph also applied to options granted up to April 2012 under the HSBC Holdings Savings-Related Share Option Plan: International, with the exception that contributions were capped at the equivalent of £250 each month.
Under the HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International, the option exercise price has been determined by reference to the average market value of the ordinary shares on the five business days immediately preceding the invitation date, then applying a discount of 20%. Where applicable, the US dollar, Hong Kong dollar and euro exercise prices were converted from the sterling exercise price at the applicable exchange rate on the working day preceding the relevant invitation date. The HSBC Holdings Savings-Related Share Option Plan will terminate on 23 May 2025 (at which time the plan may be extended with approval from Shareholders) unless the Directors resolve to terminate the plan at an earlier date.
HSBC Holdings All-employee Share Option Plans
 
 
 
 
HSBC Holdings ordinary shares
Dates of award
Exercise price
Exercisable
 
At 1 Jan
2018
Granted in period
Exercised in period
Lapsed in period
At 30 Jun
 2018
from
to
from
to
from
to
Footnotes
Savings-Related Share Option Plan
1
 
 
 
 
 
24 Apr 2012
21 Sep
2017
(£)
4.0472
(£)
5.9640
1 Aug 2017
30 April 2023
 
64,566,103
-
1,890,314
2,330,378
60,345,411
Savings-Related Share Option Plan: International
2
 
 
 
 
 
24 Apr
2012
 
(£)
4.4621
 
1 Aug 2017
31 Jan
2018
 
38,829
-
25,295
13,534
-
24 Apr
2012
 
($)
7.1456
 
1 Aug 2017
31 Jan
2018
 
17,873
-
11,064
6,809
-
24 Apr
2012
 
(€)
5.3532
 
1 Aug 2017
31 Jan
2018
 
10,539
-
8,486
2,053
-
24 Apr
2012
 
(HK$)
55.4701
 
1 Aug
2017
31 Jan
2018
 
36,309
-
20,631
15,678
-
1
The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.2456.
2
The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.7119.
3
Share buy-back
On 9 May 2018, HSBC Holdings commenced a share buy-back of its ordinary shares of $0.50 each for up to a maximum consideration of $2.0bn. This buy-back will conclude no later than 31 October 2018 (subject to regulatory approval remaining in place). The purpose of the buy-back is to reduce HSBC's number of outstanding ordinary shares. The nominal value of ordinary shares purchased as at 30 June 2018 was £54,503,896.50 and the aggregate consideration paid by HSBC was £790,070,974. The table that follows outlines details of the ordinary shares purchased on a monthly basis from 9 May to 30 June 2018. At 30 June 2018, the total number of shares purchased was 109,007,793, representing 0.54% of the ordinary shares in issue and 0.55% of the shares (excluding treasury shares). All shares purchased were subsequently cancelled.
116
HSBC Holdings plc Interim Report 2018
Share buy-back
 
Number
of shares
Highest price
paid per share
Lowest price
paid per share
Average price paid per share
Aggregate
price paid
 
 
£
£
£
£
May-18
43,843,281
7.4990
7.1340
7.3027
320,172,904
Jun-18
65,164,512
7.3910
7.0030
7.2110
469,898,070
 
109,007,793
 
 
 
790,070,974
4
Other equity instruments
Additional tier 1 capital - contingent convertible securities
HSBC continues to issue contingent convertible securities that are included in its capital base as fully CRD IV compliant additional tier 1 capital securities on an end point basis. These securities are marketed principally and subsequently allotted to corporate investors and fund managers. The net proceeds of the issuances are used for HSBC's general corporate purposes and to further strengthen its capital base to meet requirements under CRD IV. These securities bear a fixed rate of interest until their initial call dates. After the initial call dates, if they are not redeemed, the securities will bear interest at rates fixed periodically in advance for five-year periods based on credit spreads, fixed at issuance, above prevailing market rates. Interest on the contingent convertible securities will be due and payable only at the sole discretion of HSBC, and HSBC has sole and absolute discretion at all times to cancel for any reason (in whole or part) any interest payment that would otherwise be payable on any payment date. Distributions will not be paid if they are prohibited under UK banking regulations or if the company has insufficient reserves or fails to meet the solvency conditions defined in the securities' terms.
The contingent convertible securities are undated and are repayable at the option of HSBC in whole at the initial call date or on any fifth anniversary after this date. In addition, the securities are repayable at the option of HSBC in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the PRA. These securities rank pari passu with HSBC's dollar and sterling preference shares and therefore rank ahead of ordinary shares. The contingent convertible securities will be converted into fully paid ordinary shares of HSBC at a predetermined price, should HSBC's consolidated end point CET1 ratio fall below 7.0%. Therefore, in accordance with the terms of the securities, if the end point CET1 ratio breaches the 7.0% trigger, the securities will convert into ordinary shares at fixed contractual conversion prices in the issuance currencies of the relevant securities, equivalent to £2.70 at the prevailing rate of exchange on the issuance date, subject to anti-dilution adjustments.
Additional tier 1 capital instruments issued during 2018
 
Nominal
Issue price
Market price
Net price
Issue date
 
$m
%
%
%
 
2,350m 6.25% perpetual subordinated contingent convertible securities
2,350
100.00
98.25
100.00
23 March, 2018
1,800m 6.50% perpetual subordinated contingent convertible securities
1,800
100.00
99.60
100.00
23 March, 2018
5
Notifiable interests in share capital
At 30 June 2018, HSBC Holdings had received the following notification of major holdings of voting rights pursuant to the requirements of Rule 5 of the UK Disclosure Guidance and Transparency Rules:
•
BlackRock, Inc. gave notice on 22 May 2018 that on 21 May 2018 it had an indirect interest in HSBC Holdings of 1,167,291,912 ordinary shares, qualifying financial instruments with 94,198,726 voting rights that may be acquired if the instruments are exercised or converted, and financial instruments with similar economic effect to qualifying financial instruments which refer to 10,781,765 voting rights. These represented 5.81%, 0.46% and 0.05%, respectively, of the total voting rights at 21 May 2018.
•
Ping An Asset Management Co., Ltd. gave notice on 6 December 2017 that on 4 December 2017 it had an indirect interest in HSBC Holdings ordinary shares of 1,007,946,172, representing 5.04% of the total voting rights at that date.
At 30 June 2018, as recorded in the register maintained by HSBC Holdings pursuant to section 336 of the Securities and Futures Ordinance of Hong Kong:
•
BlackRock, Inc. gave notice on 22 May 2018 that on 17 May 2018 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,382,665,285 shares and a short position of 6,264,297 representing 6.78% and 0.03%, respectively, of the ordinary shares in issue at 17 May 2018.
•
JPMorgan Chase & Co. gave notice on 1 March 2018 that on 26 February 2018 it had the following interests in HSBC Holdings ordinary shares: a long position of 777,156,316 shares, a short position of 135,523,161 shares, and a lending pool of 443,282,346 shares. These represented 3.82%, 0.66% and 2.17%, respectively, of the ordinary shares in issue at 26 February 2018.
•
Ping An Asset Management Co., Ltd. gave notice on 13 February 2018 that on 9 February 2018 it had a long position of 1,253,254,972 shares, representing 6.17% of the ordinary shares in issue at 9 February 2018.
6
Dealings in HSBC Holdings listed securities
HSBC has policies and procedures that, except where permitted by statute and regulation, prohibit it undertaking specified transactions in respect of its securities listed on The Stock Exchange of Hong Kong Limited ('HKEx'). Except for the share buy-back and dealings as intermediaries or as trustees by subsidiaries of HSBC Holdings, neither HSBC Holdings nor any of its subsidiaries has purchased, sold or redeemed any of its securities listed on HKEx during the half-year ended 30 June 2018.
7
First interim dividend for 2018
The first interim dividend for 2018 of $0.10 per ordinary share was paid on 5 July 2018.
HSBC Holdings plc Interim Report 2018
117
Shareholder information
8
Second interim dividend for 2018
On 6 August 2018, the Directors declared a second interim dividend in respect of 2018 of $0.10 per ordinary share. The ordinary shares in London, Hong Kong, Paris and Bermuda, and the American Depositary Shares ('ADSs') in New York, will be quoted ex-dividend on 16 August 2018. The dividend will be payable on 27 September 2018 to holders of record on 17 August 2018.
The dividend will be payable in US dollars, sterling or Hong Kong dollars, or a combination of these currencies, at the forward exchange rates quoted by HSBC Bank plc in London at or about 11.00am on 17 September 2018. A scrip dividend will also be offered. Particulars of these arrangements will be sent to shareholders on or about 29 August 2018 and elections must be received by 13 September 2018.
The dividend will be payable on ordinary shares held through Euroclear France, the settlement and central depositary system for Euronext Paris, on 27 September 2018 to the holders of record on 17 August 2018. The dividend will be payable in US dollars or as a scrip dividend. Particulars of these arrangements will be announced through Euronext Paris on 9 August 2018, 24 August 2018 and 28 September 2018.
The dividend will be payable on ADSs, each of which represents five ordinary shares, on 27 September 2018 to holders of record on 17 August 2018. The dividend of $0.50 per ADS will be payable by the depositary in US dollars or as a scrip dividend of new ADSs. Particulars of these arrangements will be sent to holders on or about 29 August 2018 and elections will be required to be made by 7 September 2018. Alternatively, the cash dividend may be invested in additional ADSs by participants in the dividend reinvestment plan operated by the depositary.
Any person who has acquired ordinary shares registered on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register but who has not lodged the share transfer with the Principal Registrar, the Hong Kong or Bermuda Branch Registrar should do so before 4.00pm local time on 17 August 2018 in order to receive the dividend.
Ordinary shares may not be removed from or transferred to the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 17 August 2018. Any person wishing to remove ordinary shares to or from each register must do so before 4.00pm local time on 16 August 2018.
Transfers of ADSs must be lodged with the depositary by 11.00am local time on 17 August 2018 in order to receive the dividend.
Dividend on preference shares
A quarterly dividend of $15.50 per 6.20% non-cumulative US dollar preference share, Series A ('Series A dollar preference share'), (equivalent to a dividend of $0.3875 per Series A American Depositary Share, each of which represents one-fortieth of a Series A dollar preference share), and £0.01 per Series A sterling preference share is payable on 15 March, 15 June, 15 September and 15 December 2018 for the quarter then ended at the sole and absolute discretion of the Board of HSBC Holdings plc. Accordingly, the Board of HSBC Holdings plc has declared a quarterly dividend be payable on 17 September 2018 to holders of record on 30 August 2018.
9
Proposed interim dividends for 2018
The Board has adopted a policy of paying quarterly dividends on the ordinary shares, under which it is intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. The proposed timetables for dividends payable on the ordinary shares in respect of 2018 that have not yet been declared are as follows:
Interim dividends for 2018 not yet declared
 
Footnote
Third interimdividend for 2018
Fourth interimdividend for 2018
Announcement
2 Oct 2018
19 Feb 2019
Shares quoted ex-dividend in London, Hong Kong, New York, Paris and Bermuda
11 Oct 2018
21 Feb 2019
Record date in London, Hong Kong, New York, Paris and Bermuda
1
12 Oct 2018
22 Feb 2019
Payment date
21 Nov 2018
8 Apr 2019
1
Removals from or transfers to the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register will not be permitted on these dates.
10
Earnings release
An earnings release for the three-month period ending 30 September 2018 is expected to be issued on 29 October 2018.
11
Final results
The results for the year to 31 December 2018 are expected to be announced on 19 February 2019.
12
Corporate governance
HSBC is subject to corporate governance requirements in both the UK and Hong Kong. Throughout the six months ended 30 June 2018, HSBC complied with the applicable provisions of the UK Corporate Governance Code and also the requirements of the Hong Kong Corporate Governance Code. The UK Corporate Governance Code is available at www.frc.org.uk and the Hong Kong Corporate Governance Code is available at www.hkex.com.hk.
Under the Hong Kong Code, the audit committee should be responsible for the oversight of all risk management and internal control systems, unless expressly addressed by a separate Risk Committee. HSBC's Group Risk Committee is responsible for oversight of internal control, other than internal control over financial reporting, and risk management systems.
The Board has codified obligations for transactions in HSBC Group securities in accordance with the requirements of the Market Abuse Regulation and the rules governing the listing of securities on the HKEx, save that the HKEx has granted waivers from strict compliance with the rules that take into account accepted practices in the UK, particularly in respect of employee share plans.
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HSBC Holdings plc Interim Report 2018
Following specific enquiry, all Directors have confirmed that they have complied with their obligations in respect of transacting in Group securities throughout the period.
There have been no material changes to the information disclosed in the Annual Report and Accounts 2017 in respect of the remuneration of employees, remuneration policies, bonus and share option plans and training schemes. Details of the number of employees are provided on page 26.
13
Changes in Directors' details
Changes in current Directors' details since the date of the Annual Report and Accounts 2017 which are required to be disclosed pursuant to Rule 13.51(2) and Rule 13.51B(1) of the Hong Kong Listing Rules are set out below.
On 25 June 2018, the Group announced that Iain Mackay will retire as Executive Director and Group Finance Director. His successor was announced as Ewen Stevenson. Retirement and appointment dates will be confirmed in due course.
Phillip Ameen
Retired from the Board on 20 April 2018.
Kathleen Casey
Resigned as a member of the Financial System Vulnerabilities Committee on 20 April 2018.
Appointed as a member of the Nomination & Corporate Governance Committee on 20 April 2018.
Henri de Castries
Appointed as a member of the Nomination & Corporate Governance Committee on 20 April 2018.
Appointed as a non-executive director of Argus Media Limited on 1 June 2018.
Laura Cha
Appointed as a member of the Financial System Vulnerabilities Committee on 20 April 2018.
Resigned as a member of the Conduct & Values Committee (following its demise) on 20 April 2018.
Resigned as a member of the Philanthropic & Community Investment Oversight Committee (following its demise) on 20 April 2018.
Resigned as a non-executive director of China Telecom Corporation Limited on 28 May 2018.
Resigned as Hong Kong Delegate to the 12th National People's Congress of China on 5 March 2018.
Appointed as Chair of Hong Kong Exchanges and Clearing Limited on 25 April 2018.
Appointed as a non-executive director of London Metal Exchange on 26 April 2018 (a subsidiary of Hong Kong Exchanges and Clearing Limited).
Resigned as Chairman of Financial Services Development Council, Hong Kong on 10 July 2018.
Jonathan Evans
Appointed as a member of the Nomination & Corporate Governance Committee on 20 April 2018.
Resigned as a member of the Conduct & Values Committee (following its demise) on 20 April 2018.
Resigned as a member of the Philanthropic & Community Investment Oversight Committee (following its demise) on 20 April 2018.
Joachim Faber
Retired from the Board on 20 April 2018.
John Flint
Appointed to the Board on 21 February 2018.
Stuart Gulliver
Retired from the Board on 20 February 2018.
Irene Lee
Appointed as a member of the Nomination & Corporate Governance Committee on 20 April 2018.
Appointed as a member of the Remuneration Committee on 20 April 2018.
Resigned as a non-executive director of CLP Holdings Limited on 4 May 2018.
Appointed as a member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority on 28 May 2018.
John Lipsky
Retired from the Board on 20 April 2018.
Pauline van der Meer Mohr
Resigned as a member of the Conduct & Values Committee (following its demise) on 20 April 2018.
Appointed as a member of the Group Risk Committee on 20 April 2018.
Resigned as a member of the supervisory board of ASML Holdings N.V. on 25 April 2018.
Appointed as a non-executive director of Mylan NV on 29 June 2018.
Heidi Miller
Appointed as a member of the Nomination & Corporate Governance Committee on 20 April 2018.
David Nish
Appointed as a member of the Nomination & Corporate Governance Committee on 20 April 2018.
Jonathan Symonds
Resigned as a member of the Conduct & Values Committee (following its demise) on 20 April 2018.
Appointed as a member of the Group Risk Committee on 20 April 2018.
Appointed as an adviser to Board and an adviser to CEO of Mesoblast Limited on 19 January 2018.
Appointed as non-executive director of Rubius Therapeutics Inc. on 1 April 2018.
Resigned as Chairman and non-executive director of HSBC Bank Plc on 6 August 2018.
Appointed as Deputy Group Chairman of HSBC Holdings Plc on 6 August 2018.
Jackson Tai
Appointed as a member of the Nomination & Corporate Governance Committee on 20 April 2018.
HSBC Holdings plc Interim Report 2018
119
Shareholder information
14
Going concern basis
As mentioned in Note 1 'Basis of preparation and significant accounting policies' on page 82, the financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources.
In particular, HSBC's principal activities, business and operating models, strategic direction and top and emerging risks are addressed in the Overview section; a financial summary, including a review of the consolidated income statement and consolidated balance sheet, is provided in the Interim Management Report section; HSBC's objectives, policies and processes for managing credit, liquidity and market risk are described in the Risk section of the Annual Report and Accounts 2017; and HSBC's approach to capital management and allocation is described in the Capital section of the Annual Report and Accounts 2017.
15
Telephone and online share dealing service
For shareholders on the Principal Register who are resident in the UK, with a UK postal address, and who hold an HSBC Bank plc personal current account, the HSBC InvestDirect share dealing service is available for buying and selling HSBC Holdings ordinary shares. Details are available from: HSBC InvestDirect, Forum 1, Parkway, Whiteley PO15 7PA; or UK telephone: +44 (0) 3456 080848, or from an overseas telephone: +44 (0) 1226 261090; or website: www.hsbc.co.uk/shares.
16
Stock symbols
HSBC Holdings plc ordinary shares trade under the following stock symbols:
London Stock Exchange
HSBA
Hong Kong Stock Exchange
5
New York Stock Exchange (ADS)
HSBC
Euronext Paris
HSB
Bermuda Stock Exchange
HSBC.BH
17
Copies of the Interim Report 2018 and shareholder enquiries and communications
Further copies of the Interim Report 2018 may be obtained from Global Communications, HSBC Holdings plc, 8 Canada Square, London E14 5HQ, United Kingdom; from Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong; or from US Communications, HSBC Bank USA, N.A., 1 West 39th Street, 9th Floor, New York, NY 10018, USA. The Interim Report 2018 may also be downloaded from the HSBC website, www.hsbc.com.
Shareholders may at any time choose to receive corporate communications in printed form or to receive notifications of their availability on HSBC's website. To receive notifications of the availability of a corporate communication on HSBC's website by email, or to revoke or amend an instruction to receive such notifications by email, go to www.hsbc.com/ecomms. If you provide an email address to receive electronic communications from HSBC, we will also send notifications of your dividend entitlements by email. If you received a notification of the availability of this document on HSBC's website and would like to receive a printed copy or, if you would like to receive future corporate communications in printed form, please write or send an email (quoting your shareholder reference number) to the appropriate Registrar at the address given below. Printed copies will be provided without charge.
Any enquiries relating to your shareholdings on the share register (for example transfers of shares, change of name or address, lost share certificates or dividend cheques) should be sent to the Registrar at the address given below. The Registrars offer an online facility, Investor Centre, which enables shareholders to manage their shareholding electronically.
Principal Register
Hong Kong Overseas Branch Register
Bermuda Overseas Branch Register
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Computershare Hong Kong Investor
Services Limited
Rooms 1712-1716, 17th Floor
Hopewell Centre
183 Queen's Road East
Hong Kong
Investor Relations Team
HSBC Bank Bermuda Limited
37 Front Street
Hamilton HM 11
Bermuda
Telephone: +44 (0) 370 702 0137
Email: via website
Web: www.investorcentre.co.uk/contactus
Telephone: +852 2862 8555
Web: www.investorcentre.com/hk
Telephone: +1 441 299 6737
Web: www.investorcentre.com/bm
Any enquiries relating to ADSs should be sent to the depositary at:
The Bank of New York Mellon
Shareowner Services
PO Box 505000
Louisville, KY 40233-5000
USA
Telephone (US): +1 877 283 5786
Telephone (international): +1 201 680 6825
Web: www.mybnymdr.com
120
HSBC Holdings plc Interim Report 2018
Any enquiries relating to shares held through Euroclear France, the settlement and central depositary system for NYSE Euronext Paris, should be sent to the paying agent:
CACEIS Corporate Trust
14, rue Rouget de Lisle
92130 Issy-les-Moulineaux
France
Telephone: +33 1 57 78 34 28
Website: www.caceis.com
A Chinese translation of this and future documents may be obtained on request from the Registrar. Please also contact the Registrar if you have received a Chinese translation of this document and do not wish to receive such translations in future.
Persons whose shares are held on their behalf by another person may have been nominated to receive communications from HSBC pursuant to section 146 of the UK Companies Act 2006 ('nominated person'). The main point of contact for a nominated person remains the registered shareholder (for example your stockbroker, investment manager, custodian or other person who manages the investment on your behalf). Any changes or queries relating to a nominated person's personal details and holding (including any administration thereof) must continue to be directed to the registered shareholder and not HSBC's Registrar. The only exception is where HSBC, in exercising one of its powers under the UK Companies Act 2006, writes to nominated persons directly for a response.
Cautionary statement regarding forward-
looking statements
This Interim Report 2018 contains certain forward-looking statements with respect to HSBC's financial condition, results of operations and business, including the strategic priorities and 2020 financial, investment and capital targets described herein.
Statements that are not historical facts, including statements about HSBC's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'targets', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.
Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC's Directors, officers or employees to third parties, including financial analysts.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:
•
Changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks' policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status of public or private defined benefit pensions; consumer perception as to the continuing availability of credit and price competition in the market segments we serve; and deviations from the market and economic assumptions that form the basis for our ECL measurements.
 
•
Changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms.
•
Factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; our success in addressing operational, legal and regulatory, and litigation challenges; and the other risks and uncertainties we identify in 'top and emerging risks' on pages 16 and 17.
Certain defined terms
Unless the context requires otherwise, 'HSBC Holdings' means HSBC Holdings plc and 'HSBC', the 'Group', 'we', 'us' and 'our' refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. When used in the terms 'shareholders' equity' and 'total shareholders' equity', 'shareholders' means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations '$m', '$bn' and '$tn' represent millions, billions (thousands of millions) and trillions of US dollars, respectively.
HSBC Holdings plc Interim Report 2018
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Shareholder information
Abbreviations
Currencies
 
CA$
Canadian dollar
€
Euro
HK$
Hong Kong dollar
RMB
Chinese renminbi
SGD
Singapore dollar
$
United States dollar
Abbreviation
 
1H17
First half of 2017
1H18
First half of 2018
1Q17
First quarter of 2017
1Q18
First quarter of 2018
2H17
Second half of 2017
2Q17
Second quarter of 2017
2Q18
Second quarter of 2018
4Q17
Fourth quarter of 2017
A
 
ABS
Asset-backed security
ADS
American Depositary Share
AFS
Available for sale
AIEA
Average interest-earning assets
AML
Anti-money laundering
AML DPA
Five-year deferred prosecution agreement with the US Department of Justice, entered into in December 2012
ASEAN
Association of Southeast Asian Nations
B
 
Basel Committee
Basel Committee on Banking Supervision
Basel III
Basel Committee's reforms to strengthen global capital and liquidity rules
BoCom
Bank of Communications Co., Limited, one of China's largest banks
BoE
Bank of England
Bps
Basis points. One basis point is equal to one hundredth of a percentage point
BSA
Bank Secrecy Act (US)
BSM
Balance Sheet Management
C
 
C&L
Credit and Lending
CAPM
Capital asset pricing model
CDO
Collateralised debt obligation
CEA
Commodity Exchange Act (US)
CET1
Common equity tier 1
CLO
Collateralised loan obligation
CMB
Commercial Banking, a global business
CMC
Capital maintenance charge
CML
Consumer and Mortgage Lending (US)
CRD
Capital Requirements Directive
CRR
Capital Requirements Regulation
D
 
DCM
Debt Capital Markets
Decision One
Decision One Mortgage Company LLC
DoJ
Department of Justice (US)
DPA
Deferred prosecution agreement (US)
DPF
Discretionary participation feature of insurance and investment contracts
E
 
EBA
European Banking Authority
EC
European Commission
ECL
Expected credit losses
EU
European Union
Euribor
European interbank offered rate
F
 
FCA
Financial Conduct Authority (UK)
FICC
Fixed Income, Currencies and Commodities
FOS
Financial Ombudsman Service
 
FRB
Federal Reserve Board (US)
FTE
Full-time equivalent staff
FVOCI
Fair value through other comprehensive income
FVPL
Fair value through profit and loss
FX
Foreign exchange
FX DPA
Three-year deferred prosecution agreement with the US Department of Justice, entered into in January 2018
G
 
GAAP
Generally accepted accounting practice
GB&M
Global Banking and Markets, a global business
GDP
Gross domestic product
GLCM
Global Liquidity and Cash Management
Global Markets
HSBC's capital markets services in Global Banking and Markets
GMB
Group Management Board
GPB
Global Private Banking, a global business
GPSP
Group Performance Share Plan
Group
HSBC Holdings together with its subsidiary undertakings
GTRF
Global Trade and Receivables Finance
H
 
HKEx
The Stock Exchange of Hong Kong Limited
HNAH
HSBC North America Holdings Inc.
Hong Kong
Hong Kong Special Administrative Region of the People's Republic of China
HSBC
HSBC Holdings together with its subsidiary undertakings
HSBC Bank
HSBC Bank plc
HSBC Bank Middle East
HSBC Bank Middle East Limited
HSBC Bank USA
HSBC Bank USA, N.A., HSBC's retail bank in the US
HSBC Finance
HSBC Finance Corporation, the US consumer finance company (formerly Household International, Inc.)
HSBC France
HSBC's French banking subsidiary, formerly CCF S.A.
HSBC Holdings
HSBC Holdings plc, the parent company of HSBC
HSBC Private Bank Suisse
HSBC Private Bank (Suisse) SA, HSBC's private bank in Switzerland
HSBC USA
The sub-group, HSBC USA Inc and HSBC Bank USA, consolidated for liquidity purposes
HSI
HSBC Securities (USA) Inc.
HSSL
HSBC Securities Services (Luxembourg)
HTIE
HSBC Institutional Trust Services (Ireland) Limited
HTM
Held to maturity
I
 
IAS
International Accounting Standards
IASB
International Accounting Standards Board
IFRSs
International Financial Reporting Standards
Investor Update
The Investor Update in June 2015
IRB
Internal ratings-based
ISDA
International Swaps and Derivatives Association
L
 
LCR
Liquidity coverage ratio
LFRF
Liquidity and funding risk management framework
LGD
Loss given default
Libor
London interbank offered rate
LICs
Loan impairment charges and other credit risk provisions
LTV
Loan to value
M
 
Madoff Securities
Bernard L Madoff Investment Securities LLC
Mainland China
People's Republic of China excluding Hong Kong
and Macau
MBS
US mortgage-backed security
MENA
Middle East and North Africa
MREL
EU minimum requirements for own funds and eligible liabilities
N
 
NII
Net interest income
NSFR
Net stable funding ratio
122
HSBC Holdings plc Interim Report 2018
O
 
OCC
Office of the Comptroller of the Currency (US)
ORMF
Operational risk management framework
P
 
PBT
Profit before tax
PPI
Payment protection insurance product
PRA
Prudential Regulation Authority (UK)
PRD
Pearl River Delta (China)
Premier
HSBC Premier, HSBC's premium personal global banking service
PVIF
Present value of in-force long-term insurance business
PwC
PricewaterhouseCoopers LLP and its network of firms
R
 
RBWM
Retail Banking and Wealth Management, a global business
Repo
Sale and repurchase transaction
Reverse repo
Security purchased under commitments to sell
RMBS
Residential mortgage-backed securities
RNIV
Risk not in VaR
RoE
Return on equity
RoRWA
Return on average risk-weighted assets
RoTE
Return on tangible equity
RWAs
Risk-weighted assets
S
 
SEC
Securities and Exchange Commission (US)
 
ServCo group
Separately incorporated group of service companies planned in response to UK ringfencing proposals
T
 
The Hongkong and Shanghai Banking Corporation
The Hongkong and Shanghai Banking Corporation Limited, the founding member of HSBC
U
 
UAE
United Arab Emirates
UK
United Kingdom
US
United States of America
US run-off portfolio
Includes the run-off CML residential mortgage loan portfolio of HSBC Finance on an IFRSs management basis
V
 
VaR
Value at risk
VIU
Value in use
HSBC Holdings plc Interim Report 2018
123
This document comprises the Interim Report 2018 and information herein has been filed on Form 6-K with the US Securities and Exchange Commission for HSBC Holdings plc and its subsidiary and associated undertakings.
HSBC Holdings PLC
Incorporated in England with limited liability. Registered in England: number 617987
Registered Office and Group Head Office
8 Canada Square, London E14 5HQ, United Kingdom
Web: www.hsbc.com
© Copyright HSBC Holdings plc 2018
All rights reserved
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Holdings plc.
Published by Group Finance, HSBC Holdings plc, London
Designed by Superunion, London (cover and 'Overview' section) and by Group Finance, HSBC Holdings plc, London (rest of the Interim Report 2018)
Photography
Cover and inside front cover-page 1: Getty Images
Pages 2-3: Terry Tam, The Hongkong and Shanghai Banking Corporation Limited, Hong Kong
Page 4 (Group Chairman): Charles Best
Page 5 (Group Chief Executive): Global Communications, HSBC Holdings plc
Pages 6-7: David George, HSBC Bank Egypt S.A.E., Cairo, Egypt
Pages 12-15: Ramit Soni, The Hongkong and Shanghai Banking Corporation Limited, Mumbai, India
Pages 16-17: Global Communications, HSBC Holdings plc
Inside back cover: Laurie Mae Gucilatar, HSBC Electronic Data Processing (Philippines), Inc., Quezon City, Philippines
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
END
 
 
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