Annual Financial Report - 5 of 8

RNS Number : 0806S

HSBC Holdings PLC

06 March 2019

 

Capital
	Page
Capital overview	148
Capital management	148
Capital	149
Risk-weighted assets	150
Leverage ratio	151

Capital overview

Capital ratios
	At
	31 Dec		1 Jan		31 Dec1
	2018		2018		2017
	%		%		%
CRD IV transitional
Common equity tier 1 ratio	14.0		14.6		14.5
Tier 1 ratio	17.0		17.4		17.3
Total capital ratio	20.0		21.0		20.9
CRD IV end point
Common equity tier 1 ratio	14.0		14.6		14.5
Tier 1 ratio	16.6		16.5		16.4
Total capital ratio	19.4		18.3		18.3

Total regulatory capital and risk-weighted assets
	At
	31 Dec		1 Jan		31 Dec1
	2018		2018		2017
	$m		$m		$m
CRD IV transitional
Common equity tier 1 capital	121,022		127,310		126,144
Additional tier 1 capital	26,120		24,810		24,810
Tier 2 capital	26,096		31,014		31,429
Total regulatory capital	173,238		183,134		182,383
Risk-weighted assets	865,318		872,089		871,337
CRD IV end point
Common equity tier 1 capital	121,022		127,310		126,144
Additional tier 1 capital	22,525		16,531		16,531
Tier 2 capital	24,511		15,997		16,413
Total regulatory capital	168,058		159,838		159,088
Risk-weighted assets	865,318		872,089		871,337

RWAs by risk types
	RWAs		Capital required2
	$bn		$bn
Credit risk	691.1		55.3
Counterparty credit risk	47.3		3.8
Market risk	35.8		2.8
Operational risk	91.1		7.3
At 31 Dec 2018	865.3		69.2

For footnotes, see page 151.

Capital management

(Audited)

Our objective in the management of Group capital is to maintain appropriate levels 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. We aim 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 helps enable 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 ICAAP is an assessment of the Group's capital position, outlining both 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 capital.

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

Planning and performance

Capital and risk-weighted asset ('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 the plan.

The responsibility for global capital allocation principles rests with the Group Chief Financial Officer. 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 returns above internal hurdle levels have been identified and in order to meet their regulatory and economic capital needs.

We manage business returns by using a  return on tangible equity ('RoTE') measure and a return on average risk-weighted assets ('RoRWA') measure.

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.

HSBC closely monitors and considers future regulatory change. 
In December 2017, the Basel Committee on Banking Supervision ('Basel') published revisions to the Basel III framework, which introduces considerable change across the regulatory framework. Following a recalibration, Basel also published the final changes to the market risk RWA regime, the Fundamental Review of the Trading Book ('FRTB'), in January 2019.

Basel has announced that the package will be implemented on 
1 January 2022, with a five-year transitional provision for the output floor, commencing at a rate of 50%. The final standards will need to be transposed into the relevant local law before coming into effect.

HSBC continues to evaluate the final package. Given that the package contains a significant number of national discretions, the possible impact is uncertain.

Stress testing

In addition to annual internal stress tests, 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 Prudential Regulation Authority ('PRA'), the Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority, as well as stress tests undertaken in other jurisdictions. We take into account the results of regulatory stress testing and our internal stress tests when assessing our internal capital requirements. The outcome of stress testing exercises carried out by the PRA also feeds into a PRA buffer under 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

Own funds disclosure
(Audited)
		At
		31 Dec		31 Dec1
		2018		2017
Ref*		$m		$m
	Common equity tier 1 ('CET1') capital: instruments and reserves
1	Capital instruments and the related share premium accounts	22,384		18,932
	-  ordinary shares	22,384		18,932
2	Retained earnings	121,180		124,679
3	Accumulated other comprehensive income (and other reserves)	3,368		9,433
5	Minority interests (amount allowed in consolidated CET1)	4,854		4,905
5a	Independently reviewed interim net profits net of any foreseeable charge or dividend	3,697		608
6	Common equity tier 1 capital before regulatory adjustments	155,483		158,557
	Common equity tier 1 capital: regulatory adjustments
7	Additional value adjustments	(1,180	)	(1,146	)
8	Intangible assets (net of related deferred tax liability)	(17,323	)	(16,872	)
10	Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)	(1,042	)	(1,181	)
11	Fair value reserves related to gains or losses on cash flow hedges	135		208
12	Negative amounts resulting from the calculation of expected loss amounts	(1,750	)	(2,820	)
14	Gains or losses on liabilities at fair value resulting from changes in own credit standing	298		3,731
15	Defined-benefit pension fund assets	(6,070	)	(6,740	)
16	Direct and indirect holdings of own CET1 instruments	(40	)	(40	)
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)	(7,489	)	(7,553	)
28	Total regulatory adjustments to common equity tier 1	(34,461	)	(32,413	)
29	Common equity tier 1 capital	121,022		126,144
	Additional tier 1 ('AT1') capital: instruments
30	Capital instruments and the related share premium accounts	22,367		16,399
31	-  classified as equity under IFRSs	22,367		16,399
33	Amount of qualifying items and the related share premium accounts subject to phase out from AT1	2,297		6,622
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	1,516		1,901
35	-  of which: instruments issued by subsidiaries subject to phase out	1,298		1,374
36	Additional tier 1 capital before regulatory adjustments	26,180		24,922
	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	N/A		(52	)
	-  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	N/A		(52	)
43	Total regulatory adjustments to additional tier 1 capital	(60	)	(112	)
44	Additional tier 1 capital	26,120		24,810
45	Tier 1 capital	147,142		150,954
	Tier 2 capital: instruments and provisions
46	Capital instruments and the related share premium accounts	25,056		16,880
47	Amount of qualifying items and the related share premium accounts subject to phase out from T2	N/A		4,746
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	1,673		10,306
49	-  of which: instruments issued by subsidiaries subject to phase out	1,585		10,236
51	Tier 2 capital before regulatory adjustments	26,729		31,932
	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)	(593	)	(463	)
57	Total regulatory adjustments to tier 2 capital	(633	)	(503	)
58	Tier 2 capital	26,096		31,429
59	Total capital	173,238		182,383

*     The references identify the lines prescribed in the European Banking Authority ('EBA') template, which are applicable and where there is a value.

For footnotes, see page 151.

Throughout 2018, we complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing.

At 31 December 2018, our Common equity tier 1 ('CET1') ratio decreased to 14.0% from 14.5% at 31 December 2017.

CET1 capital decreased during the year by $5.1bn, mainly as a result of:

•    unfavourable foreign currency translation differences of $5.5bn;

•    the $2.0bn share buy-back;

•    a $1.2bn increase in threshold deductions as a result of an increase in the value of our material holdings; and

•    an increase in the deduction for intangible assets of $1.1bn.

These decreases were partly offset by:

•    capital generation through profits, net of dividends and scrip of $3.1bn; and

•    a $1.2bn day one impact from transition to IFRS 9, mainly due to classification and measurement changes.

Our Pillar 2A requirement at 31 December 2018, as per the PRA's Individual Capital Guidance based on a point-in-time assessment, was 2.9% of RWAs, of which 1.6% was met by CET1. On 1 January 2019, our Pillar 2A requirement increased to 3.0% of RWAs, of which 1.7% must be met by CET1.

On 4 May 2018, HSBC changed the way in which some of its capital securities are recognised in regulatory capital. The securities were previously recognised as grandfathered tier 2 capital and are now treated as fully eligible tier 2 instruments.

Risk-weighted assets

RWAs

RWAs fell by $6.0bn in the year, which included a drop of $23.4bn due to foreign currency translation differences. Excluding foreign currency translation differences, the $17.4bn increase comprised growth of $27.6bn from asset size and of $2.9bn from changes in asset quality, less a $9.2bn fall due to changes in methodology and policy and a $3.9bn decrease due to model updates.

The following comments describe RWA movements in 2018, excluding foreign currency translation differences.

Asset size

Asset size movements of $41.5bn were principally driven by lending growth in CMB, RBWM and GB&M. In CMB and GB&M, corporate lending made the largest contribution, primarily in Hong Kong, reflecting our strategic focus on loan business in the region and customer demand. RBWM's $6.5bn increase in book size mainly stemmed from mortgage business in Asia and Europe, which was boosted by expanding broker relationships in the UK.

In Corporate Centre, there was a fall of $11.3bn. This included reductions in legacy portfolios of $9.1bn and a decline in money market placements and balances with correspondent banks, which was primarily in Hong Kong. Market risk exposures reduced by $2.8bn, mostly due to lower exposures and rate volatility in France.

Asset quality

Mainly as a result of changes in portfolio mix, RWAs increased by $4.0bn across CMB, GB&M, GPB and RBWM, significantly in Europe and North America. These rises were mitigated by the impact of improved risk parameters in Corporate Centre, predominantly in Asia.

Model updates

Extending our counterparty credit risk exposure models to exposures in Asia and North America reduced RWAs by $4.3bn and $2.4bn respectively.

This was partly offset by increases of $1.6bn, due to updates to UK retail and corporate models, $1.1bn due to a new receivables finance model in Germany, and $0.4bn due to a redeveloped residential mortgage model in Hong Kong.

Methodology and policy

The $10.0bn decrease reported in internal updates derived from management initiatives, including refinements to risk parameters and improved collateral recognition. This was partly offset by a $0.8bn increase in external updates from IFRS 9 implementation effects on credit risk and deferred tax in Corporate Centre.

RWAs by global business
	RBWM		CMB		GB&M		GPB		Corporate Centre		Total
	$bn		$bn		$bn		$bn		$bn		$bn
Credit risk	99.6		296.9		172.0		13.8		108.8		691.1
Counterparty credit risk	-		-		45.1		0.2		2.0		47.3
Market risk	-		-		32.4		-		3.4		35.8
Operational risk	27.3		24.3		31.5		2.8		5.2		91.1
At 31 Dec 2018	126.9		321.2		281.0		16.8		119.4		865.3
Credit risk	94.2		277.3		180.2		13.0		120.5		685.2
Counterparty credit risk	-		-		52.4		0.2		1.9		54.5
Market risk	-		-		35.9		-		3.0		38.9
Operational risk	27.3		23.7		30.8		2.8		8.1		92.7
At 31 Dec 2017	121.5		301.0		299.3		16.0		133.5		871.3

RWAs by geographical region
		Europe		Asia		MENA		North America		Latin America		Total
	Footnotes	$bn		$bn		$bn		$bn		$bn		$bn
Credit risk		219.5		291.9		47.0		103.1		29.6		691.1
Counterparty credit risk		27.3		9.2		1.0		8.3		1.5		47.3
Market risk	3	24.0		23.3		1.9		8.5		1.4		35.8
Operational risk		27.3		39.5		6.8		11.7		5.8		91.1
At 31 Dec 2018		298.1		363.9		56.7		131.6		38.3		865.3
Credit risk		225.9		284.2		47.7		101.2		26.2		685.2
Counterparty credit risk		27.8		13.0		1.1		10.9		1.7		54.5
Market risk	3	29.0		23.5		3.3		7.1		1.0		38.9
Operational risk		28.9		37.1		7.1		12.1		7.5		92.7
At 31 Dec 2017		311.6		357.8		59.2		131.3		36.4		871.3

For footnotes, see page 151.

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 31 Dec 2017	121.5		301.0		263.4		16.0		130.5		38.9		871.3
Asset size	6.5		30.8		4.2		0.2		(11.3	)	(2.8	)	27.6
Asset quality	0.4		2.0		0.9		0.7		(1.1	)	-		2.9
Model updates	1.3		1.7		(6.9	)	-		-		-		(3.9	)
-  portfolios moving onto internal ratings based ('IRB') approach	0.6		0.8		(0.3	)	-		-		-		1.1
-  new/updated models	0.7		0.9		(6.6	)	-		-		-		(5.0	)
Methodology and policy	0.7		(2.4	)	(7.3	)	0.1		-		(0.3	)	(9.2	)
-  internal updates	0.9		(2.6	)	(7.3	)	0.1		(0.8	)	(0.3	)	(10.0	)
-  external updates - regulatory	(0.2	)	0.2		-		-		0.8		-		0.8
Foreign exchange movements	(3.5	)	(11.9	)	(5.7	)	(0.2	)	(2.1	)	-		(23.4	)
Total RWA movement	5.4		20.2		(14.8	)	0.8		(14.5	)	(3.1	)	(6.0	)
RWAs at 31 Dec 2018	126.9		321.2		248.6		16.8		116.0		35.8		865.3

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 31 Dec 2017	282.6		334.3		55.9		124.2		35.4		38.9		871.3
Asset size	(0.4	)	23.2		0.4		2.6		4.6		(2.8	)	27.6
Asset quality	2.3		(0.9	)	0.1		1.3		0.1		-		2.9
Model updates	2.9		(4.5	)	-		(2.3	)	-		-		(3.9	)
-  portfolios moving onto IRB approach	1.4		(0.2	)	-		(0.1	)	-		-		1.1
-  new/updated models	1.5		(4.3	)	-		(2.2	)	-		-		(5.0	)
Methodology and policy	(2.4	)	(5.4	)	(0.2	)	(0.7	)	(0.2	)	(0.3	)	(9.2	)
-  internal updates	(2.4	)	(5.8	)	(0.6	)	(0.9	)	-		(0.3	)	(10.0	)
-  external updates - regulatory	-		0.4		0.4		0.2		(0.2	)	-		0.8
Foreign exchange movements	(10.9	)	(6.1	)	(1.4	)	(2.0	)	(3.0	)	-		(23.4	)
Total RWA movement	(8.5	)	6.3		(1.1	)	(1.1	)	1.5		(3.1	)	(6.0	)
RWAs at 31 Dec 2018	274.1		340.6		54.8		123.1		36.9		35.8		865.3

Leverage ratio

		At
		31 Dec		1 Jan		31 Dec1
		2018		2018		2017
Ref*		$bn		$bn		$bn
20	Tier 1 capital	143.5		143.8		142.7
21	Total leverage ratio exposure	2,614.9		2,556.4		2,557.1
		%		%		%
22	Leverage ratio	5.5		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	2,464.4		2,351.2		2,351.4
		%		%		%
	UK leverage ratio - quarterly average	5.8		6.2		6.1
	UK leverage ratio - quarter end	6.0		6.1		6.1

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

Our leverage ratio calculated in accordance with the Capital Requirements Directive IV ('CRD IV') was 5.5% at 31 December 2018, down from 5.6% at 31 December 2017. The increase in exposure was primarily due to growth in customer lending and financial investments.

The Group's UK leverage ratio at 31 December 2018 was 6.0%. This measure excludes qualifying central bank balances from the calculation of exposure.

At 31 December 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 translated into capital values of $12.7bn and $4.7bn respectively. We exceeded these leverage requirements.

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication, at least annually, of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2018 is published on our website, www.hsbc.com, under 'Investor Relations'.

Footnotes to capital, leverage and risk- weighted assets
1	All figures presented as reported under IAS 39 at 31 December 2017.
2	'Capital requirement' represents the minimum total capital charge set at 8% of RWAs by article 92 of the Capital Requirements Regulation.
3	RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

 

END

 

 

ACSEAKDKEELNEFF