Annual Financial Report - 53 of 60

RNS Number : 1675D

HSBC Holdings PLC

25 March 2014

 



23    Property, plant and equipment

	Freehold and leasehold land and buildings		Equipment,           fixtures    and fittings		Total
	US$m		US$m		US$m
Cost or fair value
At 1 January 2013 ........................................................................................	9,427		11,771		21,198
Additions at cost ..........................................................................................	1,022		958		1,980
Fair value adjustments ..................................................................................	149		-		149
Disposals ......................................................................................................	(329)		(666)		(995)
Other changes ..............................................................................................	(230)		(175)		(405)
At 31 December 2013 ..................................................................................	10,039		11,888		21,927
Accumulated depreciation and impairment
At 1 January 2013 ........................................................................................	(2,379)		(8,231)		(10,610)
Depreciation and impairment .......................................................................	(339)		(1,025)		(1,364)
Disposals ......................................................................................................	174		554		728
Other changes ..............................................................................................	111		55		166
At 31 December 2013 ..................................................................................	(2,433)		(8,647)		(11,080)
Net carrying amount at 31 December 2013 ..................................................	7,606		3,241		10,847
Cost or fair value
At 1 January 2012 ........................................................................................	9,209		11,650		20,859
Additions at cost ..........................................................................................	433		1,066		1,499
Fair value adjustments ..................................................................................	72		-		72
Disposals ......................................................................................................	(209)		(929)		(1,138)
Other changes ..............................................................................................	(78)		(16)		(94)
At 31 December 2012 ..................................................................................	9,427		11,771		21,198
Accumulated depreciation and impairment
At 1 January 2012 ........................................................................................	(2,057)		(7,937)		(9,994)
Depreciation and impairment .......................................................................	(354)		(1,130)		(1,484)
Disposals ......................................................................................................	97		857		954
Other changes ..............................................................................................	(65)		(21)		(86)
At 31 December 2012 ..................................................................................	(2,379)		(8,231)		(10,610)
Net carrying amount at 31 December 2012 ..................................................	7,048		3,540		10,588

Investment properties

Freehold and leasehold land and buildings include US$1,945m of investment properties at 31 December 2013 (31 December 2012: US$1,334m). Investment properties are valued on a market value basis as at 31 December each year by independent professional valuers who have recent experience in the location and type of properties. Investment properties in Hong Kong, the Macau Special Administrative Region and mainland China, which represent more than 75% by value of HSBC's investment properties subject to revaluation, were valued by DTZ Debenham Tie Leung Limited whose valuers are members of the Hong Kong Institute of Surveyors. Properties in other countries, which represent 25% by value of HSBC's investment properties, were valued by different independent professionally qualified valuers.

At 31 December 2013, the classification of land and buildings in Hong Kong in accordance with Hong Kong Companies Ordinance requirements was long leasehold US$1,309m (2012: US$1,319m), medium leasehold US$2,472m (2012: US$1,600m) and short leasehold US$2m (2012: US$3m).

24    Investments in subsidiaries

Principal subsidiaries of HSBC Holdings

	At 31 December 2013
	Country of incorporation or registration				HSBC's interest in equity capital %		Issued equity capital		Share                             class
Europe
HSBC Asset Finance (UK) Limited ......................	England				100		£265m		Ordinary £1
HSBC Bank A.S. ..................................................	Turkey				100		TRL652m		A-Common TRL1 B-Common TRL1
HSBC Bank plc ....................................................	England				100		£797m		Ordinary £1 Preferred Ordinary £1 Series 2 Third Dollar Preference US$0.01 Third Dollar Preference US$0.01
HSBC France .......................................................	France				99.99		€337m		Shares €5.00
HSBC Private Banking Holdings (Suisse) SA .........	Switzerland				100		CHF1,363m		Ordinary CHF1,000
HSBC Trinkaus & Burkhardt AG ..........................	Germany				80.62		€75.4m		Shares of no par value
Hong Kong
Hang Seng Bank Limited1 ....................................	Hong Kong				62.14		HK$9,559m		Ordinary HK$5.00
The Hongkong and Shanghai Banking Corporation Limited ............................................................	Hong Kong				100		HK$85,319m		Ordinary HK$2.50             CIP2 US$1.00            CRP3 US$1.00              NIP4 US$1.00
HSBC Life (International) Limited ......................	Bermuda				100		HK$4,178m		Ordinary HK$1.00
Rest of Asia-Pacific
HSBC Bank Australia Limited ..............................	Australia				100		A$811m		Ordinary no par value
HSBC Bank (China) Company Limited ................	PRC5				100		RMB15,400m		Ordinary CNY1.00
HSBC Bank Malaysia Berhad ...............................	Malaysia				100		RM115m		Ordinary RM0.50
HSBC Bank (Vietnam) Limited ............................	Vietnam				100	VND3,000,000m			Ordinary VND1.00
HSBC Bank (Taiwan) Limited ..............................	Taiwan				100		TWD30,000m		Ordinary TWD10.00
Middle East and North Africa
HSBC Bank Middle East Limited ..........................	Jersey				100		US$931m		Ordinary US$1.00            CRP3 US$1.00
HSBC Bank Egypt S.A.E. .....................................	Egypt				94.54		EGP2,796m		Ordinary EGP84.00
North America
HSBC Bank Canada ..............................................	Canada				100		C$1,225m		Common NPV6     Common of NPV6
HSBC Bank USA, N.A. ........................................	US				100		US$2m		Common US$100
HSBC Finance Corporation ..................................	US				100		-7		Common US$0.01
HSBC Securities (USA) Inc. ..................................	US				100		-7		Common US$0.05
Latin America
HSBC Bank Argentina S.A. ..................................	Argentina				99.99		ARS1,244m		Ordinary-A ARS1.00               Ordinary-B ARS1.00
HSBC Bank Brasil S.A. - Banco Múltiplo .............	Brazil				100		BRL6,402m		Shares of no par value
HSBC Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC ...................................	Mexico				99.99		MXN5,681m		Ordinary MXN2.00
1  Listed in Hong Kong.			5  People's Republic of China.
2  Cumulative Irredeemable Preference shares.			6  Preference shares of nil par value.
3  Cumulative Redeemable Preference shares.			7  Issued equity capital is less than US$1m.
4  Non-cumulative Irredeemable Preference shares.

Details of the debt, subordinated debt and preference shares issued by the principal subsidiaries to parties external to the Group are included in the Notes 28 'Debt securities in issue', 32 'Subordinated liabilities' and 37 'Non-controlling  interests', respectively.

All the above subsidiaries are included in the HSBC consolidated financial statements.

Details of all HSBC subsidiaries, as required under Section 409 of the Companies Act 2006, will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.

The principal countries of operation are the same as the countries of incorporation except for HSBC Bank Middle East Limited, which operates mainly in the Middle East and North Africa, and HSBC Life (International) Limited, which operates mainly in Hong Kong.

HSBC is structured as a network of regional banks and locally incorporated regulated banking entities. Each bank is separately capitalised in accordance with applicable prudential requirements and maintains a capital buffer consistent with the Group's risk appetite for the relevant country or region. Within the legal entity structure, HSBC Holdings is the primary provider of equity capital to its subsidiaries and non-equity capital where necessary. These investments are substantially funded by HSBC Holdings' own capital issuance and profit retention. During 2013 and 2012, none of the Group's subsidiaries experienced significant restrictions on paying dividends or repaying loans and advances. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, statutory reserves, and financial and operating performance.

The amount of guarantees by HSBC Holdings in favour of other HSBC Group entities is set out in Note 40.

Structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights

	Carrying value of total consolidated assets				Nature of SPE
	2013		2012
	US$bn		US$bn
Solitaire Funding Ltd ...........................................................	10.2		11.3		Securities investment conduit
Mazarin Funding Limited .....................................................	7.4		8.0		Securities investment conduit
Barion Funding Limited .......................................................	3.8		3.9		Securities investment conduit
Malachite Funding Limited ..................................................	3.0		3.4		Securities investment conduit
HSBC Home Equity Loan Corporation I ..............................	2.1		2.0		Securitisation
HSBC Home Equity Loan Corporation II ............................	1.6		2.2		Securitisation
Regency Assets Limited .......................................................	13.5		10.1		Conduit
Bryant Park Funding LLC ...................................................	0.4		0.9		Conduit

In addition to the above, HSBC consolidates a number of individually insignificant structured entities with total assets of US$26.1bn (2012: US$21.2bn). For further details, see Note 42.

In each of the above cases, HSBC controls and consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

Disposals

On 19 February 2013, we announced an agreement to sell HSBC Bank (Panama) S.A., resulting in the classification of the associated assets and liabilities as a disposal group held for sale. On 25 October 2013, we completed the disposal for total cash consideration of US$2.2bn, realising a gain on disposal of US$1.1bn within 'Other income'.

Subsidiaries with significant non-controlling interests

	2013		2012
Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests ............	37.86%		37.86%
Place of business .....................................................................................................................	Hong Kong		Hong Kong
	US$m		US$m
Profit attributable to non-controlling interests ........................................................................	1,332		1,009
Accumulated non-controlling interests of the subsidiary ..........................................................	4,591		3,894
Dividends paid to non-controlling interests .............................................................................	495		485
Summarised financial information:
-  total assets ..........................................................................................................................	145,380		137,024
-  total liabilities .....................................................................................................................	133,253		126,738
-  net operating income before loan impairment......................................................................	4,876		3,296
-  profit for the year ...............................................................................................................	3,517		2,664
-  total comprehensive income for the year.............................................................................	3,145		2,831

25   Assets held for sale and other assets

Assets held for sale

	2013		2012
	US$m		US$m
Disposal groups .......................................................................................................................	2,912		5,797
Non-current assets held for sale:	1,138		13,472
-  property, plant and equipment ............................................................................................	459		500
-  investment in Ping An ........................................................................................................	-		8,168
-  loans and advances to customers .........................................................................................	101		3,893
-  other ...................................................................................................................................	578		911
	4,050		19,269

Disposal groups

At 31 December 2013, the following businesses represented the majority of disposal groups held for sale:

·     Latin American businesses, including banking operations in Uruguay and Colombia. These operations had total assets held for sale of $2.0bn and total liabilities held for sale of $1.8bn.

·     Banking operations in Jordan, with total assets held for sale of $0.9bn and total liabilities held for sale of $1.0bn.

The following businesses that were held for sale at 31 December 2012 were sold in 2013, with losses recognised in other operating income:

·     The sale of the US life insurance business was completed on 29 March 2013 with a loss on disposal of US$99m.

·     The sale of the Latin America operations in Peru was completed on 4 October 2013, resulting in a cumulative loss until the point of disposal of US$18m.

·     The sale of the Latin America operations in Paraguay was completed on 29 November 2013, resulting in a cumulative loss until the point of disposal of US$21m.

The following businesses were held for sale wholly within the year ended 31 December 2013:

·     In the first quarter of 2013, we announced the disposal of HSBC Bank (Panama) S.A. at which point it was classified as held for sale. The sale was completed on 25 October 2013.  Further details are provided in Note 24.

·     In the first quarter of 2013, the private banking operations of HSBC Private Banking Holdings (Suisse) S.A. in Monaco were classified as held for sale. At this time, a loss on reclassification to held for sale of US$279m was recognised in the income statement following a write down in the value of goodwill allocated to the operation. On 11 July 2013, we announced that following a strategic review we had decided to retain this business. As a result of this decision all assets and liabilities of the business were reclassified to the relevant balance sheet categories. The loss on reclassification to held for sale was not reversed and remains a permanent reduction in the value of goodwill allocated to this operation.

Investment in Ping An

On 5 December 2012, we entered into an agreement to dispose of our entire shareholding in Ping An for US$9.4bn. The disposal was carried out in two tranches and the selling price for both tranches was fixed. The first tranche of shares was disposed of on 7 December 2012 at which point we recognised a gain on disposal of US$3.0bn. Following the first tranche of the disposal, our remaining shareholding was recognised as an available-for-sale investment. At 31 December 2012, the fair value of our remaining shareholding in Ping An, US$8.2bn, was included within assets held for sale above, with US$737m accumulated unrealised gains recorded in 'Other comprehensive income'.

The fixing of the sale price gave rise to a contingent forward sale contract, the fair value of which at 31 December 2012 was based on the difference between the agreed sale price and the market price for the shares, adjusted for an assessment of the probability of the transaction being completed. The adverse fair value of this contract was US$553m at 31 December 2012, recorded in 'Net trading income'.

On 6 February 2013, we completed the disposal of our remaining investment in Ping An realising a gain on derecognition of US$1,235m recorded in 'Gains less losses from financial investments'. This was partly offset by an adverse fair value movement of US$682m on the contingent forward sale contract in the period to the point of delivery of the remaining shares recorded in 'Net trading income', resulting in a net income statement gain before tax of US$553m.

Property, plant and equipment

The property, plant and equipment classified as held for sale is the result of repossessing property that had been pledged as collateral by customers. Substantially all of these assets are disposed of within 12 months of acquisition. The majority arose within the North America operating segment.

Loans and advances to customers

We completed the sale of the CML non-real estate personal loan portfolio with loan balances of US$3.4bn on 1 April 2013 and recognised a loss on sale of US$271m. We completed the sales of several tranches of real estate secured accounts with loan balances of US$5.7bn during 2013 and recognised a total loss on sale of US$153m in other operating income.

Other assets

	At 31 December
	2013		2012
	US$m		US$m
Bullion ....................................................................................................................................	22,929		26,508
Reinsurers' share of liabilities under insurance contracts (Note 30) ..........................................	1,408		1,407
Endorsements and acceptances ................................................................................................	11,624		12,032
Retirement benefit assets ........................................................................................................	2,140		2,846
Other accounts ........................................................................................................................	12,838		11,923
	50,939		54,716

26    Trading liabilities

	At 31 December
	2013              US$m		2012               US$m
Deposits by banks ...................................................................................................................	43,130		61,686
Customer accounts ..................................................................................................................	57,688		150,705
Other debt securities in issue (Note 28) ...................................................................................	32,155		31,198
Other liabilities - net short positions in securities ...................................................................	74,052		60,974
	207,025		304,563

At 31 December 2013, the cumulative amount of change in fair value attributable to changes in HSBC's credit risk was a loss of US$95m (2012: loss of US$29m).

Deposits by banks held for trading

	2013		2012
	US$m		US$m
Repos1 ....................................................................................................................................	7,810		26,740
Settlement accounts ................................................................................................................	7,764		7,647
Stock lending ..........................................................................................................................	8,409		4,523
Other ......................................................................................................................................	19,147		22,776
	43,130		61,686

Customer accounts held for trading

	2013		2012
	US$m		US$m
Repos1 ....................................................................................................................................	9,611		103,483
Settlement accounts ................................................................................................................	9,664		9,461
Stock lending ..........................................................................................................................	3,809		2,295
Other ......................................................................................................................................	34,604		35,466
	57,688		150,705

1  In 2013, GB&M changed the way it manages repo and reverse repo activities in the Credit and Rates businesses as set out on page 220 of the Liquidity and funding section. This led to a reduction in the amount of repos classified as trading liabilities.

27    Financial liabilities designated at fair value

HSBC

	At 31 December
	2013		2012
	US$m		US$m
Deposits by banks and customer accounts ................................................................................	315		496
Liabilities to customers under investment contracts ................................................................	13,491		12,456
Debt securities in issue (Note 28) ............................................................................................	53,363		53,209
Subordinated liabilities (Note 32) .............................................................................................	18,230		16,863
Preferred securities (Note 32) .................................................................................................	3,685		4,696
	89,084		87,720

The carrying amount at 31 December 2013 of financial liabilities designated at fair value was US$4,375m more than the contractual amount at maturity (2012: US$7,032m more). The cumulative amount of the change in fair value attributable to changes in credit risk was a loss of US$1,334m (2012: loss of US$88m).

HSBC Holdings

	At 31 December
	2013		2012
	US$m		US$m
Debt securities in issue (Note 28):
- owed to third parties .........................................................................................................	8,106		8,577
Subordinated liabilities (Note 32):
- owed to third parties .........................................................................................................	9,760		10,358
- owed to HSBC undertakings ..............................................................................................	3,161		4,260
	21,027		23,195

The carrying amount at 31 December 2013 of financial liabilities designated at fair value was US$2,309m more than the contractual amount at maturity (2012: US$3,199m more). The cumulative amount of the change in fair value attributable to changes in credit risk was a loss of US$859m (2012: loss of US$164m).

28    Debt securities in issue

	At 31 December
	2013		2012
	US$m		US$m
Bonds and medium-term notes ................................................................................................	146,116		155,661
Other debt securities in issue ....................................................................................................	43,482		48,207
	189,598		203,868
Of which debt securities in issue reported as:
- trading liabilities (Note 26) ...............................................................................................	(32,155)		(31,198)
- financial liabilities designated at fair value (Note 27) ........................................................	(53,363)		(53,209)
	104,080		119,461

The following table analyses the carrying amount of bonds and medium-term notes in issue at 31 December with original maturities greater than one year:

Bonds and medium-term notes

HSBC

	At 31 December
	2013		2012
	US$m		US$m
Fixed rate
Secured financing:
0.01% to 3.99%: until 2056 ................................................................................................	10,712		7,514
4.00% to 4.99%: until 2013 ................................................................................................	-		231
5.00% to 5.99%: until 2019 ................................................................................................	90		189
8.00% to 9.99%: until 2028 ................................................................................................	-		252
Other fixed rate senior debt:
0.01% to 3.99%: until 2078 ................................................................................................	48,219		48,620
4.00% to 4.99%: until 2046 ................................................................................................	16,862		18,722
5.00% to 5.99%: until 2041 ................................................................................................	11,097		14,766
6.00% to 6.99%: until 2046 ................................................................................................	4,775		5,207
7.00% to 7.99%: until 2026 ................................................................................................	470		713
8.00% to 9.99%: until 2036 ................................................................................................	153		199
10.00% or higher: until 2028 ..............................................................................................	35		108
	92,413		96,521
Variable interest rate
Secured financings - 0.01% to 13.99%: until 2068 ..................................................................	5,416		7,897
FHLB advances - 0.01% to 0.99%: until 2036 ........................................................................	1,000		1,000
Other variable interest rate senior debt - 0.01% to 12.99%: until 2057 ..................................	39,281		43,104
	45,697		52,001
Structured notes
Interest rate, equity, equity index or credit-linked ...................................................................	8,006		7,139
	146,116		155,661

HSBC Holdings

	At 31 December
	2013		2012
	US$m		US$m
Debt securities .........................................................................................................................	10,897		11,268
Of which debt securities in issue reported as:
-  financial liabilities designated at fair value (Note 27) .......................................................	(8,106)		(8,577)
	2,791		2,691
Fixed rate senior debt, unsecured
3.00% to 3.99%: until 2016 ................................................................................................	1,283		1,258
4.00% to 4.99%: until 2022 ................................................................................................	4,797		4,945
5.00% to 5.99%: until 2021 ................................................................................................	2,817		2,990
6.00% to 6.99%: until 2042 ................................................................................................	2,000		2,075
	10,897		11,268

29    Liabilities of disposal groups held for sale and other liabilities

Liabilities of disposal groups held for sale

	HSBC
	2013		2012
	US$m		US$m
Liabilities of disposal groups held for sale1 ...............................................................................	2,804		5,018

1  Further details in respect of liabilities of disposal groups held for sale is provided on page 521.

Other liabilities

	HSBC				HSBC Holdings
	2013		2012		2013		2012
	US$m		US$m		US$m		US$m
Amounts due to investors in funds consolidated by HSBC ...	1,008		564		-		-
Obligations under finance leases (Note 41) .........................	252		304		-		-
Endorsements and acceptances ...........................................	11,614		12,031		-		-
Other liabilities ..................................................................	17,547		20,963		61		30
	30,421		33,862		61		30

30    Liabilities under insurance contracts

	Gross		Reinsurers' share		Net
	US$m		US$m		US$m
2013
Non-linked insurance contracts1
At 1 January .................................................................................................	30,765		(952)		29,813
Benefits paid ................................................................................................	(3,014)		164		(2,850)
Increase in liabilities to policyholders ...........................................................	6,892		(367)		6,525
Disposals/transfers to held-for-sale ...............................................................	(52)		13		(39)
Exchange differences and other movements .................................................	(641)		24		(617)
At 31 December ...........................................................................................	33,950		(1,118)		32,832
Investment contracts with discretionary participation features
At 1 January .................................................................................................	24,374		-		24,374
Benefits paid ................................................................................................	(2,308)		-		(2,308)
Increase in liabilities to policyholders ...........................................................	3,677		-		3,677
Exchange differences and other movements2 ................................................	684		-		684
At 31 December ...........................................................................................	26,427		-		26,427
Linked life insurance contracts
At 1 January .................................................................................................	13,056		(455)		12,601
Benefits paid ................................................................................................	(1,976)		426		(1,550)
Increase in liabilities to policyholders ...........................................................	3,379		111		3,490
Exchange differences and other movements3 ................................................	(655)		(372)		(1,027)
At 31 December ...........................................................................................	13,804		(290)		13,514
Total liabilities to policyholders ...................................................................	74,181		(1,408)		72,773
2012
Non-linked insurance contracts1
At 1 January .................................................................................................	28,561		(899)		27,662
Benefits paid ................................................................................................	(1,905)		217		(1,688)
Increase in liabilities to policyholders ...........................................................	6,900		(537)		6,363
Disposals/transfers to held-for-sale ...............................................................	(2,130)		254		(1,876)
Exchange differences and other movements .................................................	(661)		13		(648)
At 31 December ...........................................................................................	30,765		(952)		29,813
Investment contracts with discretionary participation features
At 1 January .................................................................................................	21,488		-		21,488
Benefits paid ................................................................................................	(2,525)		-		(2,525)
Increase in liabilities to policyholders ...........................................................	3,645		-		3,645
Exchange differences and other movements2 ................................................	1,766		-		1,766
At 31 December ...........................................................................................	24,374		-		24,374
Linked life insurance contracts
At 1 January .................................................................................................	11,210		(903)		10,307
Benefits paid ................................................................................................	(1,810)		681		(1,129)
Increase in liabilities to policyholders ...........................................................	3,984		223		4,207
Disposals/transfers to held-for-sale ...............................................................	(26)		-		(26)
Exchange differences and other movements3 ................................................	(302)		(456)		(758)
At 31 December ...........................................................................................	13,056		(455)		12,601
Total liabilities to policyholders ...................................................................	68,195		(1,407)		66,788

1  Includes liabilities under non-life insurance contracts.

2  Includes movement in liabilities relating to discretionary profit participation benefits due to policyholders arising from net unrealised investment gains recognised in other comprehensive income.

3  Includes amounts arising under reinsurance agreements.

The increase in liabilities to policyholders represents the aggregate of all events giving rise to additional liabilities to policyholders in the year. The key factors contributing to the movement in liabilities to policyholders include death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders.

31   Provisions

	Restruc- turing costs		Contingent liabilities and contractual commitments		Legal proceedings and regulatory matters		Customer remediation		Other provisions		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 1 January 2013 ........................	251		301		1,667		2,387		646		5,252
Additional provisions/increase in provisions .............................	179		57		1,209		1,536		230		3,211
Provisions utilised ........................	(111)		(5)		(709)		(1,487)		(167)		(2,479)
Amounts reversed .........................	(65)		(66)		(340)		(94)		(126)		(691)
Unwinding of discounts .................	-		-		38		7		13		58
Exchange differences and other movements ...............................	17		(110)		(33)		33		(41)		(134)
At 31 December 2013 ................	271		177		1,832		2,382		555		5,217
At 1 January 2012 ........................	169		206		1,473		1,067		409		3,324
Additional provisions/increase in provisions .............................	434		73		2,779		2,473		376		6,135
Provisions utilised ........................	(320)		(2)		(2,510)		(1,022)		(153)		(4,007)
Amounts reversed .........................	(89)		(58)		(104)		(137)		(63)		(451)
Unwinding of discounts .................	-		-		42		1		5		48
Exchange differences and other movements ...............................	57		82		(13)		5		72		203
At 31 December 2012 ..................	251		301		1,667		2,387		646		5,252

Further details of legal proceedings and regulatory matters are set out in Note 43. 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 refer 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. In December 2012, HSBC made payments totalling US$1,921m to US authorities in relation to investigations regarding inadequate compliance with anti-money laundering and sanctions laws. Further details of the agreements reached with the US authorities are set out on page 558.

Customer remediation refers to activities carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action.

Payment protection insurance

An increase in provisions of US$756m was recognised during 2013 in respect of the estimated liability for redress regarding the mis-selling of payment protection insurance ('PPI') policies in previous years. Cumulative provisions made since the Judicial Review ruling in 2011 amount to US$3,153m, of which US$1,138m was paid in 2013 (2012: US$957m). At 31 December 2013, the provision amounted to US$946m (2012: US$1,321m).

The estimated liability for redress is calculated on the basis of 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 historically observed redress per policy.

A total of approximately 5.4m PPI policies have been sold by HSBC since 2000, generating estimated revenues of US$4.1bn at 2013 average exchange rates. The gross written premiums on these polices was approximately US$5.0bn at 2013 average exchange rates. At 31 December 2013, the estimated total complaints expected to be received was 1.5m, representing 29% of total policies sold. It is estimated that contact will be made with regard to 1.9m policies, representing 35% of total policies sold. This estimate includes inbound complaints as well as HSBC's proactive contact exercise on certain policies ('outbound contact').

The following table details the cumulative number of complaints received at 31 December 2013 and the number of claims expected in the future:

	Cumulative to 31 December                2013		Future         expected
Inbound complaints1 (000s of policies) ...................................................................................	1,022		240
Outbound contact (000s of policies) ........................................................................................	375		234
Response rate to outbound contact ..........................................................................................	49%		44%
Average uphold rate per claim2 ...............................................................................................	76%		72%
Average redress per claim (US$) ..............................................................................................	2,627		2,404

1  Excludes invalid claims where the complainant has not held a PPI policy.

2  Claims include inbound and responses to outbound contact.

The main assumptions involved in calculating the redress liability are the volume of inbound complaints, the projected period of inbound complaints, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint. The main assumptions are likely to evolve over time as root cause analysis continues, more experience is available regarding customer initiated complaint volumes received, and we handle responses to our ongoing outbound contact. A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately US$203m at 2013 average exchange rates. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately US$8m. In addition to these factors and assumptions, the extent of the required redress will also depend on the facts and circumstances of each individual customer's case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress for this matter. The decay rate implies that by the end of 2015 inbound claim volumes would mean that the redress programme is complete. However, this timing is subject to some level of uncertainty as the decay rate may change over time based on actual experience.

Interest rate derivatives

A provision of US$776m (2012: US$598m) was recognised relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK. Of this provision, US$453m related to the estimated redress payable to customers in respect of historical payments under derivative contracts, the remaining provision covered the expected write-off by the bank of open derivative contracts balances and estimated project costs. Following an FCA review of the sale of interest rate derivatives, HSBC agreed to pay redress to customers where mis-selling of these products occurred under the FCA's criteria. On 31 January 2013, the FCA announced the findings from their review of pilot cases completed by the banks. Following its review, the FCA clarified the eligibility criteria to ensure the programme is focused on those small businesses that were unlikely to understand the risks associated with those products. HSBC has also been working with the FCA and an independent 'skilled person' adviser to clarify the standards against which it should assess sales, and how redress should be calculated (for example, when it would be appropriate to assume a customer would have taken an alternative interest rate product). The extent to which HSBC is required to pay redress depends on the responses of contacted and other customers during the review period and the facts and circumstances of each individual case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress related to this programme. HSBC expects to make the main redress payments in respect of this programme in the near future.

Brazilian labour and fiscal claims

Within 'Legal proceedings and regulatory matters' above are labour and fiscal litigation provisions of US$500m (2012: US$506m) which include provisions in respect of labour and overtime litigation claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels and the facts and circumstances of each individual case.

32   Subordinated liabilities

HSBC

	At 31 December
	2013		2012
	US$m		US$m
Subordinated liabilities
At amortised cost ..........................................................................................................................	28,976		29,479
- subordinated liabilities ................................................................................................................	24,573		25,119
- preferred securities ....................................................................................................................	4,403		4,360
Designated at fair value (Note 27) .................................................................................................	21,915		21,559
- subordinated liabilities ................................................................................................................	18,230		16,863
- preferred securities ....................................................................................................................	3,685		4,696
	50,891		51,038
Subordinated liabilities
HSBC Holdings ..............................................................................................................................	22,308		20,569
Other HSBC ..................................................................................................................................	28,583		30,469
	50,891		51,038

Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. Where applicable, capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may step-up or become floating rate based on interbank rates.

Interest rates on the floating rate capital securities are generally related to interbank offered rates. On the remaining capital securities, interest is payable at fixed rates of up to 10.176%.

The balance sheet amounts disclosed below are presented on an IFRSs basis and do not reflect the amount that the instruments contribute to regulatory capital. The IFRSs accounting and regulatory treatments differ due to the inclusion of issuance costs and regulatory amortisation.

HSBC's subordinated liabilities

Tier 1 capital securities

Tier 1 capital securities are perpetual subordinated securities on which investors are entitled, subject to certain conditions, to receive distributions which are non-cumulative. Such securities do not generally carry voting rights but rank above ordinary shares for coupon payments and in the event of a winding-up.

Qualifying tier 1 capital securities in issue accounted for as liabilities

				At 31 December
		First call date		2013 US$m		2012 US$m
Tier 1 capital securities guaranteed by HSBC Holdings1
US$1,250m	4.61% non-cumulative step-up perpetual preferred securities2 ...............	Jun 2013		-		1,250
€1,400m	5.3687% non-cumulative step-up perpetual preferred securities3 ...........	Mar 2014		2,022		1,933
£500m	8.208% non-cumulative step-up perpetual preferred securities ..............	Jun 2015		825		806
€750m	5.13% non-cumulative step-up perpetual preferred securities ................	Mar 2016		1,129		1,033
US$900m	10.176% non-cumulative step-up perpetual preferred securities, series 2 ..............................................................................................................	Jun 2030		891		891
				4,867		5,913
Tier 1 capital securities guaranteed by HSBC Bank plc1
£300m	5.862% non-cumulative step-up perpetual preferred securities ..............	Apr 2020		534		480
£700m	5.844% non-cumulative step-up perpetual preferred securities ..............	Nov 2031		1,157		1,131
				1,691		1,611

1  See paragraph below, 'Guaranteed by HSBC Holdings or HSBC Bank plc'.

2  In June 2013, HSBC called its US$1,250m 4.61% non-cumulative step-up preferred securities at par.

3  In January 2014, HSBC gave notice that it will call and redeem the €1,400m 5.3687% non-cumulative step-up perpetual preferred securities at par in March 2014.

Guaranteed by HSBC Holdings or HSBC Bank plc

The six capital securities guaranteed on a subordinated basis by HSBC Holdings or HSBC Bank are non-cumulative step-up perpetual preferred securities issued by Jersey limited partnerships. The proceeds of the issues were on-lent to the respective guarantors by the limited partnerships in the form of subordinated notes. These preferred securities qualify as tier 1 capital for HSBC Group and the two capital securities guaranteed by HSBC Bank also qualify as tier 1 capital for HSBC Bank (on a solo and a consolidated basis).

These preferred securities, together with the guarantee, are intended to provide investors with economic rights equivalent to the rights that they would have had if they had purchased non-cumulative perpetual preference shares of the relevant issuer.

There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC's capital adequacy requirements or if HSBC Holdings or HSBC Bank have insufficient distributable reserves (as defined).

HSBC Holdings and HSBC Bank have individually covenanted that if prevented under certain circumstances from paying distributions on the preferred securities in full, they will not pay dividends or other distributions in respect of their ordinary shares, or effect repurchases or redemptions of their ordinary shares, until the distribution on the preferred securities has been paid in full.

With respect to preferred securities guaranteed by HSBC Holdings - if (i) HSBC's total capital ratio falls below the regulatory minimum ratio required, or (ii) the Directors expect, in view of the deteriorating financial condition of HSBC Holdings, that (i) will occur in the near term, then the preferred securities will be substituted by preference shares of HSBC Holdings which have economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together.

With respect to preferred securities guaranteed by HSBC Bank - if (i) any of the two issues of preferred securities are outstanding in April 2049 or November 2048, respectively, or (ii) the total capital ratio of HSBC Bank on a solo and consolidated basis falls below the regulatory minimum ratio required, or (iii) in view of the deteriorating financial condition of HSBC Bank, the Directors expect (ii) to occur in the near term, then the preferred securities will be substituted by preference shares of HSBC Bank having economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together.

Upper tier 2 capital securities

Upper tier 2 capital securities are perpetual subordinated securities on which there is an obligation to pay coupons. Such securities rank below lower tier 2 securities for coupon payments and in the event of a winding-up.

Qualifying upper tier 2 securities in issue

				At 31 December
		First call date		2013 US$m		2012 US$m
HSBC Bank plc
US$750m	Undated floating rate primary capital notes ..........................................	Jun 1990		751		750
US$500m	Undated floating rate primary capital notes ..........................................	Sep 1990		499		499
US$300m	Undated floating rate primary capital notes, series 3 .............................	Jun 1992		299		301
				1,549		1,550
The Hongkong and Shanghai Banking Corporation Ltd
US$400m	Primary capital undated floating rate notes ...........................................	Aug 1990		404		405
US$400m	Primary capital undated floating rate notes (second series) ....................	Dec 1990		402		402
US$400m	Primary capital undated floating rate notes (third series) .......................	Jul 1991		400		400
				1,206		1,207
Other HSBC subsidiaries
	Other perpetual subordinated loan capital less than US$100m ...............			22		21

Lower tier 2 capital securities

Lower tier 2 capital securities are dated securities on which there is an obligation to pay coupons. In accordance with the PRA's GENPRU, the capital contribution of lower tier 2 securities is amortised for regulatory purposes on a straight-line basis in their final five years before maturity.

Qualifying lower tier 2 securities in issue

						At 31 December
		First call date		Maturity date		2013 US$m		2012 US$m
HSBC Bank plc
£500m	4.75% callable subordinated notes1 ..................................	Sep 2015		Sep 2020		866		844
£350m	5.00% callable subordinated notes2 ..................................	Mar 2018		Mar 2023		635		630
£300m	6.50% subordinated notes ................................................	-		Jul 2023		494		483
£350m	5.375% callable subordinated step-up notes3 ....................	Nov 2025		Nov 2030		602		630
£500m	5.375% subordinated notes ..............................................	-		Aug 2033		884		925
£225m	6.25% subordinated notes ................................................	-		Jan 2041		370		362
£600m	4.75% subordinated notes ................................................	-		Mar 2046		980		958
€500m	Callable subordinated floating rate notes4 .........................	Sep 2015		Sep 2020		655		606
US$300m	7.65% subordinated notes ................................................	-		May 2025		380		394
						5,866		5,832
HSBC Bank Australia Limited
AUD200m	Callable subordinated floating rate notes ..........................	Nov 2015		Nov 2020		179		207
AUD42m	Callable subordinated floating rate notes5 .........................	Mar 2013		Mar 2018		-		44
						179		251
HSBC Bank Malaysia Berhad
MYR500m	4.35% subordinated bonds ................................................	Jun 2017		Jun 2022		152		164
MYR500m	5.05% subordinated bonds ................................................	Nov 2022		Nov 2027		154		168
						306		332
HSBC USA Inc.
US$200m	7.808% capital securities .................................................	Dec 2006		Dec 2026		200		200
US$200m	8.38% capital securities ...................................................	May 2007		May 2027		200		200
US$150m	9.50% subordinated debt ..................................................	-		Apr 2014		151		152
US$150m	7.75% Capital Trust pass through securities .....................	Nov 2006		Nov 2026		150		150
US$750m	5.00% subordinated notes ................................................	-		Sep 2020		746		745
US$250m	7.20% subordinated debentures ........................................	-		Jul 2097		215		214
	Other subordinated liabilities each less than US$150m .....					299		302
						1,961		1,963
HSBC Bank USA, N.A.
US$1,000m	4.625% subordinated notes ..............................................	-		Apr 2014		1,000		1,002
US$500m	6.00% subordinated notes  ...............................................	-		Aug 2017		513		516
US$1,250m	4.875% subordinated notes ..............................................	-		Aug 2020		1,262		1,263
US$1,000m	5.875% subordinated notes  .............................................	-		Nov 2034		1,081		1,151
US$750m	5.625% subordinated notes  .............................................	-		Aug 2035		811		864
US$700m	7.00% subordinated notes  ...............................................	-		Jan 2039		696		694
						5,363		5,490
HSBC Finance Corporation
US$1,000m	5.911% trust preferred securities6 ....................................	Nov 2015		Nov 2035		996		995
US$2,939m	6.676% senior subordinated notes7 ..................................	-		Jan 2021		2,182		2,180
						3,178		3,175
HSBC Bank Brazil S.A.
BRL383m	Subordinated certificates of deposit ..................................	-		Feb 2015		162		289
BRL500m	Subordinated floating rate certificates of deposit ..............	-		Dec 2016		212		464
	Other subordinated liabilities each less than US$150m8 ....					224		491
						598		1,244
HSBC Mexico, S.A.
MXN1,818m	Non-convertible subordinated obligations9 .......................	Sep 2013		Sep 2018		138		139
MXN2,273m	Non-convertible subordinated obligations9 .......................	Dec 2013		Dec 2018		173		173
US$300m	Non-convertible subordinated obligations9,10 ....................	Jun 2014		Jun 2019		240		240
						551		552
HSBC Bank Canada
CAD400m	4.80% subordinated debentures ........................................	Apr 2017		Apr 2022		403		438
CAD200m	4.94% subordinated debentures ........................................	Mar 2016		Mar 2021		188		201
CAD39m	Floating rate debentures ...................................................	Oct 1996		Nov 2083		37		39
						628		678

						At 31 December
		First call date		Maturity date		2013 US$m		2012 US$m
Other HSBC subsidiaries
	Other subordinated liabilities each less than US$200m9 ....					618		650
Total of subordinated liabilities issued by HSBC subsidiaries ...............................................................						28,583		30,469
Amounts owed to third parties by HSBC Holdings .............................................................................						22,308		20,569
						50,891		51,038

  1 The interest rate payable after September 2015 is the sum of the three-month sterling Libor plus 0.82%.

  2 The interest rate payable after March 2018 is the sum of the gross redemption yield of the then prevailing five-year UK gilt plus 1.80%.

  3 The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50%.

  4 The interest margin increases by 0.5% from September 2015.

  5 In March 2013, HSBC called its callable subordinated floating rate notes at par.

  6 The distributions change in November 2015 to three-month dollar Libor plus 1.926%.

  7 Approximately 25% of the senior subordinated notes are held by HSBC Holdings.

  8 Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with guidance in PRA's GENPRU.

  9 These securities are ineligible for inclusion in the capital base of HSBC in accordance with guidance in PRA's GENPRU.

10 Approximately US$60m of the subordinated obligations are held by HSBC Holdings.

HSBC Holdings

	At 31 December
	2013		2012
	US$m		US$m
Subordinated liabilities:
-. at amortised cost .......................................................................................................................	14,167		11,907
-. designated at fair value (Note 27) ..............................................................................................	12,921		14,618
	27,088		26,525

HSBC Holdings' subordinated liabilities

						At 31 December
		First call date		Maturity date		2013 US$m		2012 US$m
Amounts owed to third parties1
US$488m	7.625% subordinated notes ..............................................	-		May 2032		554		579
US$222m	7.35% subordinated notes ................................................	-		Nov 2032		278		258
US$2,000m	6.5% subordinated notes ..................................................	-		May 2036		2,029		2,034
US$2,500m	6.5% subordinated notes ..................................................	-		Sep 2037		3,039		3,202
US$1,500m	6.8% subordinated notes ..................................................	-		Jun 2038		1,487		1,486
£250m	9.875% subordinated bonds2 ............................................	Apr 2013		Apr 2018		-		442
£900m	6.375% callable subordinated notes3 ................................	Oct 2017		Oct 2022		1,672		1,648
£650m	5.75% subordinated notes ................................................	-		Dec 2027		1,158		1,210
£650m	6.75% subordinated notes ................................................	-		Sep 2028		1,066		1,041
£750m	7.0% subordinated notes ..................................................	-		Apr 2038		1,288		1,264
£900m	6.0% subordinated notes ..................................................	-		Mar 2040		1,464		1,431
€1,600m	6.25% subordinated notes ................................................	-		Mar 2018		2,210		2,118
€1,750m	6.0% subordinated notes ..................................................	-		Jun 2019		2,884		2,882
€700m	3.625% callable subordinated notes4 ................................	Jun 2015		Jun 2020		1,007		974
€1,500m	3.375% callable subordinated notes5 ................................	Jun 2019		Jun 2024		2,075		-
						22,211		20,569
Amounts owed to HSBC undertakings
US$1,250m	4.61% fixed/floating subordinated notes6 .........................	Jun 2013		Jun 2043		-		1,264
€1,400m	5.3687% fixed/floating subordinated notes7 .....................	Mar 2014		Dec 2043		2,024		1,952
£500m	8.208% subordinated step-up cumulative notes ................	Jun 2015		Jun 2040		825		806
€750m	5.13% fixed/floating subordinated notes ..........................	Mar 2016		Dec 2044		1,137		1,043
US$900m	10.176% subordinated step-up cumulative notes ..............	Jun 2030		Jun 2040		891		891
						4,877		5,956
						27,088		26,525

1  Amounts owed to third parties represent securities included in the capital base of HSBC as lower tier 2 securities in accordance with guidance in the PRA's GENPRU.

2 In April 2013, HSBC Holdings called its £250m 9.875% subordinated bonds at par.

3  The interest rate payable after October 2017 is the sum of the three-month sterling Libor plus 1.3%.

 

END

 

 

ACSUVONRSRAOUAR