Annual Financial Report - 4 of 7

RNS Number : 9101Y

HSBC Holdings PLC

08 March 2017

 

Capital
	Page
Capital overview	127
Capital management	127
Capital	128
Risk-weighted assets	129
Leverage ratio	131

Capital highlights
•	Our common equity tier 1 ('CET1') ratio of 13.6% was up from 11.9% at the end of 2015, mainly due to a change in the regulatory treatment of Bank of Communications Co., Limited ('BoCom').
•	Our CET1 capital base reduced during the year by $14.3bn, driven by unfavourable foreign currency movements of $7.7bn, a $5.6bn reduction due to the BoCom change, and the $2.5bn share buy-back.
•	A decrease in RWAs in 2016 of $245.8bn from continued implementation of RWA-reduction initiatives, the BoCom change and favourable foreign currency movements, supported the increase in capital ratios.

Capital overview

Capital ratios
		At 31 Dec
		2016	2015
	Footnote	%	%
CRD IV end point
Common equity tier 1 ratio	1	13.6	11.9
CRD IV transitional
Common equity tier 1 ratio	1	13.6	11.9
Tier 1 ratio		16.1	13.9
Total capital ratio		20.1	17.2

Total regulatory capital and risk-weighted assets
		At 31 Dec
		2016		2015
	Footnote	$m		$m
CRD IV end point
Common equity tier 1 capital	1	115,984		130,863
CRD IV transitional
Common equity tier 1 capital	1	116,552		130,863
Additional tier 1 capital		21,470		22,440
Tier 2 capital		34,336		36,530
Total regulatory capital		172,358		189,833
Transitional risk-weighted assets	1	857,181		1,102,995

1	Due to transitional provisions in the threshold deduction our CET1 and RWAs are different for transitional and end point. At 31 December 2016, end point RWAs were $855.8bn.

RWAs by risk types
	RWAs		Capital required 1
	$bn		$bn
Credit risk	655.7		52.5
Counterparty credit risk	62.0		5.0
Market risk	41.5		3.3
Operational risk	98.0		7.8
At 31 Dec 2016	857.2		68.6

1	'Capital required' represents the Pillar 1 capital charge at 8% of RWAs.

 

Capital management

(Audited)

Our objective in the management of Group capital is to maintain appropriate levels of capital to support our business strategy, and meet our regulatory and stress testing related requirements.

Approach and policy

Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. It is our objective to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times. Our policy on capital management is underpinned by a capital management framework and our internal capital adequacy assessment process ('ICAAP'), which enables us to manage our capital in a consistent manner. The framework incorporates a number of different capital measures calculated on an economic capital and regulatory capital basis. The internal capital adequacy assessment process brings together regulatory and internal capital resources and requirements with HSBC's business model, strategy, performance and planning, risks to capital, and the implications of stress testing to assess the bank's capital position.

Our assessment of capital adequacy is aligned to our assessment of risks. These include credit, market, operational, pensions, insurance, structural foreign exchange risk, residual risks and interest rate risk in the banking book.

Planning and performance

Capital plans and RWA plans form part of the Annual Operating Plan that is approved by the Board. Revised RWA forecasts are submitted to the GMB on a monthly basis and reported RWAs are monitored against plan.

The responsibility for global capital allocation principles and decisions rests with the Group Finance Director. Through our internal governance processes, we seek to maintain discipline over our investment and capital allocation decisions, and seek to ensure that returns on investment meet the Group's management objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where above hurdle returns have been identified and their regulatory and economic capital needs.

We manage business returns by use of a return on risk-weighted assets ('RoRWA') measure. In 2016, we augmented this through the introduction of financial information and metrics on the consumption of, and returns on, capital by global business to support management's assessment of business performance and the allocation of capital resources. We plan to further embed this in 2017.

Risks to capital

Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs and/or capital position. The downside or upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary.

Stress testing

In addition to an annual internal stress test, the Group is subject to supervisory stress testing in many jurisdictions. Supervisory stress testing requirements are increasing in frequency and in the granularity with which the results are required. These exercises include the programmes of the PRA, the FRB, the EBA, the ECB and the HKMA, as well as stress tests undertaken in other jurisdictions. We take into account the results of all such regulatory stress testing and our internal stress test when assessing our internal capital requirements. The outcome of stress testing exercises carried out by the PRA will also feed

HSBC Holdings plc Annual Report and Accounts 2016	127

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Report of the Directors | Capital

into a PRA buffer under the Pillar 2 requirements, where required.

Capital generation

HSBC Holdings is the provider of equity capital to its subsidiaries and also provides them with non-equity capital

 

where necessary. These investments are substantially funded by HSBC Holdings' own capital issuance and profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investment in subsidiaries.

Capital

Transitional own funds disclosure
(Audited)
			At 31 Dec
			2016		2015
Ref*			$m		$m
		Common equity tier 1 ('CET1') capital: instruments and reserves
1		Capital instruments and the related share premium accounts	21,310		20,858
		- ordinary shares	21,310		20,858
2		Retained earnings1	125,442		122,304
3		Accumulated other comprehensive income (and other reserves)1	560		8,832
5		Minority interests (amount allowed in consolidated CET1)	3,878		3,519
5a		Independently reviewed interim net profits net of any foreseeable charge or dividend1	(1,899	)	8,670
6		Common equity tier 1 capital before regulatory adjustments	149,291		164,183
		Common equity tier 1 capital: regulatory adjustments
7		Additional value adjustments	(1,358	)	(1,151	)
8		Intangible assets (net of related deferred tax liability)	(15,037	)	(20,650	)
10		Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)	(1,696	)	(1,204	)
11		Fair value reserves related to gains or losses on cash flow hedges	(52	)	(52	)
12		Negative amounts resulting from the calculation of expected loss amounts	(4,025	)	(4,920	)
14		Gains or losses on liabilities at fair value resulting from changes in own credit standing	1,052		(495	)
15		Defined-benefit pension fund assets	(3,680	)	(4,009	)
16		Direct and indirect holdings of own CET1 instruments	(1,573	)	(839	)
19		Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions)	(6,370	)	-
28		Total regulatory adjustments to common equity tier 1	(32,739	)	(33,320	)
29		Common equity tier 1 capital	116,552		130,863
		Additional tier 1 ('AT1') capital: instruments
30		Capital instruments and the related share premium accounts	11,259		9,261
31		- classified as equity under IFRSs	11,259		9,261
33		Amount of qualifying items and the related share premium accounts subject to phase out from AT1	7,946		8,972
34		Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties	2,419		4,388
35		- of which: instruments issued by subsidiaries subject to phase out	1,522		2,842
36		Additional tier 1 capital before regulatory adjustments	21,624		22,621
		Additional tier 1 capital: regulatory adjustments
37		Direct and indirect holdings of own AT1 instruments	(60	)	(60	)
41b		Residual amounts deducted from AT1 capital with regard to deduction from tier 2 ('T2') capital during the transitional period	(94	)	(121	)
		- direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities	(94	)	(121	)
43		Total regulatory adjustments to additional tier 1 capital	(154	)	(181	)
44		Additional tier 1 capital	21,470		22,440
45		Tier 1 capital (T1 = CET1 + AT1)	138,022		153,303
		Tier 2 capital: instruments and provisions
46		Capital instruments and the related share premium accounts	16,732		15,863
47		Amount of qualifying items and the related share premium accounts subject to phase out from T2	5,695		6,645
48		Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in CET1 or AT1) issued by subsidiaries and held by third parties	12,323		14,344
49		- of which: instruments issued by subsidiaries subject to phase out	12,283		14,330
51		Tier 2 capital before regulatory adjustments	34,750		36,852
		Tier 2 capital: regulatory adjustments
52		Direct and indirect holdings of own T2 instruments	(40	)	(40	)
55		Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions)	(374	)	(282	)
57		Total regulatory adjustments to tier 2 capital	(414	)	(322	)
58		Tier 2 capital	34,336		36,530
59		Total capital (TC = T1 + T2)	172,358		189,833

*	The references identify the lines prescribed in the EBA template, which are applicable and where there is a value.

1	In the comparative period, profits and other comprehensive income have been reallocated from row 2 into rows 5a and 3 respectively. In addition, retained earnings and profits pertaining to the deconsolidation of insurance and other entities have been reallocated from row 3 to rows 2 and 5a.

128	HSBC Holdings plc Annual Report and Accounts 2016

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Throughout 2016, we complied with the Prudential Regulation Authority's ('PRA') regulatory capital adequacy requirements, including those relating to stress testing.

Following a clarification of policy by the PRA, at 30 September 2016 the regulatory treatment of our investment in BoCom changed from proportional consolidation of RWAs to a deduction from capital (subject to regulatory thresholds). The revised regulatory treatment is more consistent with our financial reporting treatment, aligning with the equity method of accounting, and better reflects our relationship with BoCom, including the nature of our obligations and financial commitments.

CET1 capital decreased during the year by $14.3bn, primarily because of:

•	unfavourable foreign currency translation differences of $7.8bn;

•	a $5.6bn reduction from the change in treatment of BoCom; and

•	the $2.5bn share buy-back.

These decreases were partly offset by:

•	$2.4bn from the sale of our operations in Brazil.

 

Risk-weighted assets

RWAs

RWAs decreased in 2016 by $245.8bn, of which $38.1bn was due to foreign currency translation differences. RWA initiatives reduced RWAs by $143.2bn, partly offset by book size movements increasing RWAs by $38.7bn. The change of regulatory treatment of our investment in BoCom reduced RWAs by $120.9bn.

The following comments describe RWA movements in 2016, excluding foreign currency translation differences.

RWA initiatives

The main drivers of these reductions were:

•	$69.8bn as a result of reduced exposures, refined calculations and process improvements;

•	$41.8bn from the sale of our activities in Brazil; and

•	$31.6bn through the continued reduction in Legacy Credit and US run-off portfolios.

Book size

Book size movements increased RWAs by $38.7bn, principally from:

•	increased corporate lending in GB&M and CMB, increasing RWAs by $32bn in Asia and Europe;

•	movements in market parameters increasing counterparty credit risk and market risk by $11.7bn; and

•	offset by a decrease in operational risk RWAs of $3.4bn reflecting the decrease of average income over three years.

RWAs by global business
	RBWM		CMB		GB&M		GPB		Corporate Centre		Total
	$bn		$bn		$bn		$bn		$bn		$bn
Credit risk	84.6		250.6		170.8		12.2		137.5		655.7
Counterparty credit risk	-		-		59.1		0.2		2.7		62.0
Market risk	-		-		38.5		-		3.0		41.5
Operational risk	30.5		25.3		32.0		2.9		7.3		98.0
At 31 Dec 2016	115.1		275.9		300.4		15.3		150.5		857.2
Credit risk	99.7		278.1		189.6		14.4		294.1		875.9
Counterparty credit risk	-		-		64.3		0.3		4.6		69.2
Market risk	-		-		40.7		-		1.8		42.5
Operational risk	31.0		24.1		35.7		3.3		21.3		115.4
At 31 Dec 2015	130.7		302.2		330.3		18.0		321.8		1,103.0

RWAs by geographical region
	Europe		Asia		MENA		North America		Latin America		Total
	$bn		$bn		$bn		$bn		$bn		$bn
Credit risk	205.8		260.0		49.0		118.5		22.4		655.7
Counterparty credit risk	30.9		16.1		1.2		12.6		1.2		62.0
Market risk1	30.8		21.3		1.4		6.8		0.5		41.5
Operational risk	30.9		36.6		7.5		12.8		10.2		98.0
At 31 Dec 2016	298.4		334.0		59.1		150.7		34.3		857.2
Credit risk	231.6		373.6		59.2		156.4		55.1		875.9
Counterparty credit risk	31.9		17.1		2.0		14.6		3.6		69.2
Market risk	30.5		21.9		1.5		6.5		1.6		42.5
Operational risk	33.2		47.1		7.9		14.1		13.1		115.4
At 31 Dec 2015	327.2		459.7		70.6		191.6		73.4		1,103.0

1	RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

HSBC Holdings plc Annual Report and Accounts 2016	129

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Report of the Directors | Capital

RWA movement by global business by key driver
	Credit risk, counterparty credit risk and operational risk
	RBWM		CMB		GB&M		GPB		Corporate Centre		Market risk		Total RWAs
	$bn		$bn		$bn		$bn		$bn		$bn		$bn
RWAs at 1 Jan 2016	130.8		302.1		289.6		18.0		320.0		42.5		1,103.0
RWA movements
RWA initiatives	(10.1	)	(39.0	)	(48.1	)	(0.3	)	(39.8	)	(5.9	)	(143.2	)
Foreign exchange movement	(4.1	)	(15.7	)	(10.1	)	(0.7	)	(7.5	)	-		(38.1	)
Acquisitions and disposals	-		-		-		-		-		-		-
Book size	0.7		16.6		22.9		(1.5	)	(4.9	)	4.9		38.7
Book quality	(1.5	)	7.7		8.5		-		0.3		-		15.0
Model updates	(0.9	)	-		(0.1	)	-		-		-		(1.0	)
- portfolios moving onto IRB1 approach	-		-		(0.1	)	-		-		-		(0.1	)
- new/updated models	(0.9	)	-		-		-		-		-		(0.9	)
Methodology and policy	0.2		4.2		(0.8	)	(0.2	)	(120.6	)	-		(117.2	)
- internal updates	1.0		4.2		(0.8	)	(0.2	)	(1.0	)	-		3.2
- external updates - regulatory	(0.8	)	-		-		-		(119.6	)	-		(120.4	)
Total RWA movement	(15.7	)	(26.2	)	(27.7	)	(2.7	)	(172.5	)	(1.0	)	(245.8	)
RWAs at 31 Dec 2016	115.1		275.9		261.9		15.3		147.5		41.5		857.2

1	Internal ratings based.

RWA movement by geographical region by key driver
	Credit risk, counterparty credit risk and operational risk
	Europe		Asia		MENA		North America		Latin America		Market risk		Total RWAs
	$bn		$bn		$bn		$bn		$bn		$bn		$bn
RWAs at 1 Jan 2016	296.7		437.8		69.1		185.0		71.9		42.5		1,103.0
RWA movements
RWA initiatives	(28.4	)	(19.1	)	(3.6	)	(43.6	)	(42.6	)	(5.9	)	(143.2	)
Foreign exchange movement	(26.9	)	(7.8	)	(6.5	)	0.9		2.2		-		(38.1	)
Acquisitions and disposals	-		-		-		-		-		-		-
Book size	20.4		12.6		(1.4	)	0.2		2.0		4.9		38.7
Book quality	4.1		7.6		0.2		2.8		0.3		-		15.0
Model updates	0.2		-		-		(1.2	)	-		-		(1.0	)
- portfolios moving onto IRB1 approach	(0.1	)	-		-		-		-		-		(0.1	)
- new/updated models	0.3		-		-		(1.2	)	-		-		(0.9	)
Methodology and policy	1.5		(118.4	)	(0.1	)	(0.2	)	-		-		(117.2	)
- internal updates	2.6		0.6		(0.1	)	(0.2	)	0.3		-		3.2
- external updates - regulatory	(1.1	)	(119.0	)	-		-		(0.3	)	-		(120.4	)
Total RWA movement	(29.1	)	(125.1	)	(11.4	)	(41.1	)	(38.1	)	(1.0	)	(245.8	)
RWAs at 31 Dec 2016	267.6		312.7		57.7		143.9		33.8		41.5		857.2

1	Internal ratings based.

130	HSBC Holdings plc Annual Report and Accounts 2016

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Leverage ratio

Leverage ratio
			At 31 Dec
			2016		2015
Ref*			$bn		$bn
21		Total leverage ratio exposure	2,354.4		2,794.4
20		Tier 1 capital (end point)	127.3		140.2
22		Leverage ratio	5.4	%	5.0%
EU-23		Choice on transitional arrangements for the definition of the capital measure	Fully phased in		Fully phased in
		Total leverage ratio exposure - quarterly average	2,438.7		2,869.4
		Leverage ratio - quarterly average	5.4	%	5.0%

*	The references identify the lines prescribed in the EBA template.

Our leverage ratio calculated on CRR basis was 5.4% at 31 December 2016, up from 5.0% at 31 December 2015. This was mainly due to a reduction in the exposure measure resulting from the change in regulatory treatment of our investment in BoCom.

The Group's UK leverage ratio on a modified basis, excluding qualifying central bank balances, was 5.7%. This modification to the leverage ratio exposure measure was made following recommendations by the Bank of England's Financial Policy Committee.

The Financial Policy Committee has stated that it intends to recalibrate the leverage ratio in 2017 to take account of this modification. HSBC's UK leverage ratio on a modified basis should be considered in this context.

 

At 31 December 2016, our UK minimum leverage ratio requirement of 3% was supplemented by an additional leverage ratio buffer of 0.2%. This additional buffer translates to a value of $5bn. The countercyclical leverage ratio buffer results in no capital impact. We comfortably exceeded these leverage requirements.

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make firms more transparent by requiring publication, at least annually, of wide-ranging information on their risks, capital and management. Pillar 3 Disclosures 2016 is published on our website, www.hsbc.com, under Investor Relations.

HSBC Holdings plc Annual Report and Accounts 2016	131

 

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