Annual Financial Report - 50c of 56

RNS Number : 6490S

HSBC Holdings PLC

18 March 2016

 

18  Assets charged as security for liabilities, assets transferred and collateral accepted as security for assets

Financial assets pledged to secure liabilities

		2015		2014
		$m		$m
Treasury bills and other eligible securities		5,941		5,170
Loans and advances to banks		15,582		17,294
Loans and advances to customers		88,927		77,960
Debt securities		69,470		138,991
Equity securities		4,644		11,373
Other		213		6,079
Assets pledged at 31 December		184,777		256,867

The above table shows assets over which a charge has been granted to secure liabilities on a legal and contractual basis. The total amount may be greater than the book value of assets utilised as collateral for funding purposes or to cover liabilities, for example, in the case of securitisations and covered bonds where the amount of liabilities issued plus any mandatory over-collateralisation is less than the book value of financial assets available for funding or collateral purposes in the relevant pool of assets. This is also the case where financial assets are placed with a custodian or a settlement agent which has a floating charge over all the financial assets placed to secure any liabilities under settlement accounts.

These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending, repurchase agreements and derivative margining. HSBC places both cash and non-cash collateral in relation to derivative transactions.

Assets transferred

Accounting policy

Derecognition of financial assets Financial assets are derecognised when the contractual rights to receive cash flows from the assets have expired; or when HSBC has transferred its contractual right to receive the cash flows of the financial assets, and either: ·  substantially all the risks and rewards of ownership have been transferred; or ·  HSBC has neither retained nor transferred substantially all the risks and rewards, but has not retained control.

The financial assets shown above include amounts transferred to third parties that do not qualify for derecognition, notably debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements. As the substance of these transactions is secured borrowings, the asset collateral continues to be recognised in full and the related liability reflecting the Group's obligation to repurchase the transferred assets for a fixed price at a future date is also recognised on the balance sheet. As a result of these transactions, the Group is unable to use, sell or pledge the transferred assets for the duration of the transaction. The Group remains exposed to interest rate risk and credit risk on these pledged instruments. The counterparty's recourse is not limited to the transferred assets.

Transferred financial assets not qualifying for full derecognition and associated financial liabilities

		Carrying        amount of assets before            transfer		Carrying        amount of     transferred                assets		Carrying        amount of        associated            liabilities		Fair             value of     transferred                assets		Fair             value of        associated            liabilities		Net             position
		$m		$m		$m		$m		$m		$m
At 31 December 2015
Repurchase agreements				36,153		35,913
Securities lending agreements				5,275		5,704
Other sales (recourse to transferred asset only)				2,717		2,768		2,720		2,726		(6)
Securitisations recognised to the extent of continuing involvement		17,427		5		2		5		2		3
At 31 December 2014
Repurchase agreements				78,541		79,141
Securities lending agreements				13,177		10,643
Other sales (recourse to transferred asset only)				3,775		4,049		4,007		4,018		(11)
Securitisations recognised to the extent of continuing involvement		17,427		11		5		11		5		6

 

Collateral accepted as security for assets

The fair value of assets accepted as collateral in relation to reverse repo, securities borrowing and derivative margining that HSBC is permitted to sell or repledge in the absence of default was $222,065m (2014: $269,019m). The fair value of any such collateral sold or repledged was $139,532m (2014: $163,342m). HSBC is obliged to return equivalent securities.

These transactions are conducted under terms that are usual and customary to standard securities borrowing, reverse repurchase agreements and derivative margining.

19  Interests in associates and joint ventures

Accounting policy

Investments in which HSBC, together with one or more parties, has joint control of an arrangement set up to undertake an economic activity are classified as joint ventures. HSBC classifies investments in entities over which it has significant influence, and that are neither subsidiaries (Note 21) nor joint ventures, as associates. Investments in associates and interests in joint ventures are recognised using the equity method. Under this method, such investments are initially stated at cost, including attributable goodwill, and are adjusted thereafter for the post-acquisition change in HSBC's share of net assets. Goodwill arises on the acquisition of interests in joint ventures and associates when the cost of investment exceeds HSBC's share of the net fair value of the associate's or joint venture's identifiable assets and liabilities. Investments in associates and joint ventures are tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisitions of interests in joint ventures and associates is not tested separately for impairment. Profits on transactions between HSBC and its associates and joint ventures are eliminated to the extent of HSBC's interest in the respective associates or joint ventures. Losses are also eliminated to the extent of HSBC's interest in the associates or joint ventures unless the transaction provides evidence of an impairment of the asset transferred.

 

Critical accounting estimates and judgements

Impairment of interests in associates Impairment testing involves significant judgement in determining the value in use, and in particular estimating the present values of cash flows expected to arise from continuing to hold the investment. The most significant judgements relate to the impairment testing of our investment in Bank of Communications ('BoCom'). Key assumptions used in estimating BoCom's value in use, the sensitivity of the value in use calculation to different assumptions and a sensitivity analysis that shows the changes in key assumptions that would reduce the excess of value in use over the carrying amount (the 'headroom') to nil are described below.

Associates

At 31 December 2015, the carrying amount of HSBC's interests in associates was $18,900m (2014: $17,940m).

Principal associates of HSBC

		2015				2014
		Carrying                    amount		Fair                          value1		Carrying                     amount		Fair                          value1
		$m		$m		$m		$m
Listed
Bank of Communications Co., Limited		15,344		9,940		14,590		13,140
The Saudi British Bank		3,021		3,957		2,811		6,220
At 31 December		18,365		13,897		17,401		19,360

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).

		At 31 December 2015
		Country of         incorporation           and principal   place of business		Principal                      activity		HSBC's                     interest                   in equity                       capital		Issued                        equity                       capital
Bank of Communications Co., Limited		PRC1		Banking services		19.03%		RMB74,263m
The Saudi British Bank		Saudi Arabia		Banking services		40.00%		SR15,000m

1   People's Republic of China.

Details of all HSBC associates and joint ventures, as required under Section 409 of the Companies Act 2006, are set out on pages 468 to 469.

HSBC had $15,344m (2014: $14,590m) of interests in associates listed in Hong Kong.

Bank of Communications Co., Limited

HSBC's investment in BoCom was equity accounted with effect from August 2004. Its significant influence in BoCom was established as a result of representation on the Board of Directors and, in accordance with the Technical Cooperation and Exchange Programme, HSBC is assisting in the maintenance of financial and operating policies and a number of staff have been seconded to assist in this process.

Impairment testing

At 31 December 2015, the fair value of HSBC's investment in BoCom had been below the carrying amount for approximately 44 months, apart from a short period in 2013 and briefly during the first half of 2015. As a result, the Group performed an impairment test on the carrying amount of the investment in BoCom. The test confirmed that there was no impairment at 31 December 2015.

At 31 December 2015

At 31 December 2014

VIU

Carrying                  value

Fair                  value

VIU

Carrying                  value

Fair                  value

$bn

$bn

$bn

$bn

$bn

$bn

Bank of Communications Co., Limited

17.0

15.3

9.9

15.7

14.6

13.1

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. An imputed capital maintenance charge ('CMC') is calculated to reflect the expected regulatory capital requirements, and is calculated as a deduction 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 regulatory capital requirements. Management judgement is required in estimating the future cash flows of BoCom.

Key assumptions in VIU calculation

Long-term growth rate: the growth rate used was 5% (2014: 5%) for periods after 2018 and does not exceed forecast GDP growth in mainland China.

Long-term asset growth rate: the growth rate used was 4% (2014: 4%) for periods after 2018 and this is the rate of growth required for an assumed 5% long-term growth rate in profit.

Discount rate: the discount rate of 13% (2014: 13%) is derived from a range of values obtained by applying a Capital Asset Pricing Model ('CAPM') calculation for BoCom, using market data. Management supplements this by comparing the rates derived from the CAPM with discount rates available from external sources, and HSBC's discount rate for evaluating investments in mainland China. The discount rate used is within the range of 10.1% to 14.2% (2014: 11.4% to 14.2%) indicated by the CAPM and external sources.

Loan impairment charge as a percentage of customer advances: the ratio used ranges from 0.71% to 0.78% (2014: 0.73% to 1%) in the short- to medium-term and is based on the forecasts disclosed by external analysts. It was assumed that the long‑term ratio will stabilise at a rate of 0.70% (2014: 0.65%) which is slightly higher than the historical rate of 0.65%.

Risk-weighted assets as a percentage of total assets: the ratio used was 67% for all forecast periods (2014: 70% to 72% in the short- to medium-term and 70% in the long-term). This is consistent with the forecasts disclosed by external analysts.

Cost-income ratio: the ratio used was 41% (2014: ranged from 40.0% to 42.4%) in the short- to medium-term. The ratios were consistent with the short- to medium-term range forecasts of 40.3% to 40.7% (2014: 37.2% to 44.5%) disclosed by external analysts.

Sensitivity analyses were performed on each key assumption to ascertain the impact of reasonably possible changes in assumptions. The following change to each key assumption used on its own in the VIU calculation would reduce the headroom to nil.

Key assumption	Changes to key assumption to reduce headroom to nil
·   Long-term growth rate ·   Long-term asset growth rate ·   Discount rate ·   Loan impairment charge as a percentage of customer advances ·   Risk-weighted assets as a percentage of total assets ·   Cost-income ratio	·   Decrease by 62 basis points ·   Increase by 62 basis points ·   Increase by 82 basis points ·   Increase by 13 basis points ·   Increase by 5.4% ·   Increase by 2.8%

The following table illustrates the effect on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change will occur at the same time.

		Favourable change			Current model		Unfavourable change
		$bn	$bn		$bn		$bn	$bn
At 31 December 2015
Carrying amount: $15.3bn
Long-term growth rate		+100bps			5%		-210bps
VIU		20.3			17.0		12.3
Increase/(decrease) in VIU		3.2					(4.7)
Long-term asset growth rate		-50bps			4%		+100bps
VIU		18.2			17.0		14.3
Increase/(decrease) in VIU		1.2					(2.8)
Discount rate		-150bps			13%		+110bps
VIU		21.2			17.0		14.9
Increase/(decrease) in VIU		4.2					(2.1)
Loan impairment charge as a percentage of customer advances		70bps throughout			2015-18: 0.71% - 0.78% 2019 onwards: 0.70%		2015-18: 0.85% 2019 onwards: 0.75%
VIU		17.2			17.0		16.4
Increase/(decrease) in VIU		0.1					(0.7)
Risk-weighted assets as a percentage of total assets		-350bps			67% throughout		+10bps
VIU		18.2			17.0		17.0
Increase/(decrease) in VIU		1.2					(0.0)
Cost income ratio		-250bps			41% throughout		+120bps
VIU		18.5			17.0		16.35
Increase/(decrease) in VIU		1.5					(0.7)
At 31 December 2014
Carrying amount: $14.6bn
Long-term growth rate		+50bp	+100bp		5%		-50bp	-100bp
VIU		17.0	18.6		15.7		14.5	13.4
Increase/(decrease) in VIU		1.3	2.9				(1.2)	(2.3)
Discount rate		-50bp	-100bp		13%		+50bp	+100bp
VIU		16.8	18.1		15.7		14.7	13.9
Increase/(decrease) in VIU		1.1	2.4				(1.0)	(1.8)
Loan impairment charge as a percentage of customer advances		0.65% throughout			2014-18: 0.73% - 1% 2019 onwards: 0.65%		1% from 2014-18 2019 onwards: 0.65%
VIU		16.2			15.7		14.9
Increase/(decrease) in VIU		0.5					(0.8)
Risk-weighted assets as a percentage of total assets		-100bp	-200bp		2014-18: 70% - 72% 2019 onwards: 70.0%		+100bp	+200bp
VIU		16.0	16.3		15.7		15.4	15.1
Increase/(decrease) in VIU		0.3	0.6				(0.3)	(0.6)
Cost income ratio		-50bp	-100bp		2014-18: 40.0% - 42.4% 2019 onwards: 42.4%		+50bp	+100bp
VIU		16.0	16.3		15.7		15.4	15.1
Increase/(decrease) in VIU		0.3	0.6				(0.3)	(0.6)

Based on the forecasts disclosed by external analysts, management estimates that the reasonably possible range of VIU is $12.4bn to $22.7bn.

Selected financial information of BoCom

The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2015, HSBC included the associate's results on the basis of financial statements made up for the 12 months ended 30 September 2015, taking into account changes in the subsequent period from 1 October 2015 to 31 December 2015 that would have materially affected the results.

Selected balance sheet information of BoCom

		At 30 September
		2015		2014
		$m		$m
Cash and balances at central banks		144,702		150,306
Loans and advances to banks and other financial institutions		110,915		79,960
Loans and advances to customers		560,503		547,706
Other financial assets		244,722		178,883
Other assets		49,246		45,140
Total assets		1,110,088		1,001,995
Deposits by banks and other financial institutions		261,211		209,935
Customer accounts		691,959		663,745
Other financial liabilities		46,932		28,860
Other liabilities		29,329		25,361
Total liabilities		1,029,431		927,901
Total equity		80,657		74,094

Reconciliation of BoCom's total shareholders' equity to the carrying amount in HSBC's consolidated financial statements as at 31 December

		At 30 September
		2015		2014
		$m		$m
HSBC's share of total shareholders' equity		14,824		14,040
Add: Goodwill and other intangible assets		520		550
Carrying amount		15,344		14,590

Selected income statement information of BoCom

		For the 12 months ended 30 September
		2015		2014
		$m		$m
Net interest income		22,397		22,030
Net fee and commission income		5,432		4,792
Loan impairment charges		(3,772)		(3,509)
Depreciation and amortisation		(1,012)		(920)
Tax expense		(2,976)		(3,102)
Profit for the year		10,634		10,626
Other comprehensive income		377		217
Total comprehensive income		11,011		10,843
Dividends received from BoCom		624		597

Summarised aggregate financial information in respect of all associates excluding BoCom

		2015		2014
		$m		$m
Carrying amount		3,556		3,350
HSBC's share of:
- total assets		21,645		20,099
- total liabilities		18,166		16,837
- revenues		821		801
- profit or loss from continuing operations		508		519
- other comprehensive income		-		2
- total comprehensive income		508		521

 

Joint ventures

At 31 December 2015, the carrying amount of HSBC's interests in joint ventures was $239m (2014: $241m).

Associates and joint ventures

For the year ended 31 December 2015, HSBC's share of associates and joint ventures' tax on profit was $575m (2014: $600m). This is included within 'Share of profit in associates and joint ventures' in the income statement.

Movements in interests in associates and joint ventures

		2015		2014
		$m		$m
At 1 January		18,181		16,640
Additions		3		30
Disposals		(8)		(133)
Share of results		2,556		2,532
Dividends		(879)		(757)
Exchange differences		(718)		(212)
Share of other comprehensive income of associates and joint ventures		(9)		78
Other movements		13		3
At 31 December1		19,139		18,181

1   Includes goodwill of $593m (2014: $621m).

 

END

 

 

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