Annual Financial Report - Part 5

RNS Number : 5843Q

HSBC Holdings PLC

21 February 2023

 

Risk review

Our risk review outlines our approach to risk management, how we identify and monitor top and emerging risks, and the actions we take to mitigate them. In addition, it explains our material banking risks, including how we manage capital.
Contents
132	Our approach to risk
132	Our risk appetite
132	Risk management
135	Key developments in 2022
135	Top and emerging risks
135	Externally driven
140	Internally driven
142	Areas of special interest
142	Risks related to Covid-19
142	Our material banking risks
145	Credit risk
202	Treasury risk
218	Market risk
221	Climate risk
230	Resilience risk
231	Regulatory compliance risk
231	Financial crime risk
232	Model risk
233	Insurance manufacturing operations risk

Identifying suspicious activities through our award-winning AI tool

We are using the latest artificial intelligence technology to help identify suspicious activities to help prevent financial crime.

Our dynamic risk assessment solution brings data together on the Cloud, and uses machine learning to analyse and identify criminal activity by making use of relevant data, with the ability to identify patterns that humans are unlikely to spot.

The tool, which we first developed in November 2021 and is active in several markets including the UK, enables suspicious activity to be identified twice as fast than the previous process and reduces case volumes by 60%. 

The solution was recognised at the 2022 Banking Tech Awards, winning 'Best Use of Cloud' and 'Best Use of AI'. We plan to roll it out to other markets throughout 2023.

Our approach to risk

Our risk appetite

We recognise the importance of a strong culture, which refers to our shared attitudes, beliefs, values and standards that shape behaviours including those related to risk awareness, risk taking and risk management. All our people are responsible for the management of risk, with the ultimate accountability residing with the Board.

We seek to build our business for the long term by balancing social, environmental and economic considerations in the decisions we make. Our strategic priorities are underpinned by our endeavour to operate in a sustainable way. This helps us to carry out our social responsibility and manage the risk profile of the business. We are committed to managing and mitigating climate-related risks, both physical and transition risks, and continue to incorporate consideration of these into how we manage and oversee risks internally and with our customers.

The following principles guide the Group's overarching appetite for risk and determine how our businesses and risks are managed.

Financial position

• We aim to maintain a strong capital position, defined by regulatory and internal capital ratios.

• We carry out liquidity and funding management for each operating entity, on a stand-alone basis.

Operating model

• We seek to generate returns in line with our risk appetite and strong risk management capability.

• We aim to deliver sustainable and diversified earnings and consistent returns for shareholders.

Business practice

• We have no appetite for deliberately or knowingly causing detriment to consumers, or incurring a breach of the letter or spirit of regulatory requirements.

• We have no appetite for inappropriate market conduct by any member of staff or by any Group business.

• We are committed to managing the climate risks that have an impact on our financial position, and delivering on our net zero ambition.

• We consider and, where appropriate, mitigate reputational risk that may arise from our business activities and decisions.

• We monitor non-financial risk exposure against risk appetite, including exposure related to inadequate or failed internal processes, people and systems, or events that impact our customers or can lead to sub-optimal returns to shareholders, censure, or reputational damage.

Enterprise-wide application

Our risk appetite encapsulates the consideration of financial and non-financial risks. We define financial risk as the risk of a financial loss as a result of business activities. We actively take these types of risks to maximise shareholder value and profits. Non-financial risk is the risk to achieving our strategy or objectives as the result of failed internal processes, people and systems, or from external events.

Our risk appetite is expressed in both quantitative and qualitative terms and applied at the global business level, at the regional level and to material operating entities. Every three years, the Group Risk and Compliance function commissions an external independent firm to review the Group's approach to risk appetite and to help ensure that it remains in line with market best practice and regulatory expectations. This review was last carried out in 2021 and confirmed the Group's risk appetite statement ('RAS') remains aligned to best practices, regulatory expectations and strategic goals. Our risk appetite continues to evolve and expand its scope as part of our regular review process.

The Board reviews and approves the Group's risk appetite regularly to make sure it remains fit for purpose. The Group's risk appetite is considered, developed and enhanced through:

• an alignment with our strategy, purpose, values and customer needs;

• trends highlighted in other Group risk reports;

• communication with risk stewards on the developing risk landscape;

• strength of our capital, liquidity and balance sheet;

• compliance with applicable laws and regulations;

• effectiveness of the applicable control environment to mitigate risk, informed by risk ratings from risk control assessments;

• functionality, capacity and resilience of available systems to manage risk; and

• the level of available staff with the required competencies to manage risks.

We formally articulate our risk appetite through our RAS. Setting out our risk appetite ensures that we agree a suitable level of risk for our strategy. In this way, risk appetite informs our financial planning process and helps senior management to allocate capital to business activities, services and products.

The RAS is applied to the development of business line strategies, strategic and business planning and remuneration. At a Group level, performance against the RAS is reported to the Group Risk Management Meeting alongside key risk indicators to support targeted insight and discussion on breaches of risk appetite and any associated mitigating actions. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture.

Each global business, region and material operating entity is required to have its own RAS, which is monitored to help ensure it remains aligned with the Group's RAS. Each RAS and business activity is guided and underpinned by qualitative principles and/or quantitative metrics.

Risk management

We recognise that the primary role of risk management is to protect our customers, business, colleagues, shareholders and the communities that we serve, while ensuring we are able to support our strategy and provide sustainable growth. This is supported through our three lines of defence model described on page 134.

The implementation of our business strategy remains a key focus. As we implement change initiatives, we actively manage the execution risks. We also perform periodic risk assessments, including against strategies, to help ensure retention of key personnel for our continued safe operation.

We aim to use a comprehensive risk management approach across the organisation and across all risk types, underpinned by our culture and values. This is outlined in our risk management framework, including the key principles and practices that we employ in managing material risks, both financial and non-financial. The framework fosters continual monitoring, promotes risk awareness and encourages a sound operational and strategic decision-making and escalation process. It also supports a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities, with clear accountabilities. We actively review and enhance our risk management framework and our approach to managing risk, through our activities with regard to: people and capabilities; governance; reporting and management information; credit risk management models; and data.

Group Risk and Compliance is independent from the global businesses, including our sales and trading functions, to provide challenge, oversight and appropriate balance in risk/return decisions.

Our risk management framework

The following diagram and descriptions summarise key aspects of the risk management framework, including governance, structure, risk management tools and our culture, which together help align employee behaviour with risk appetite.

Key components of our risk management framework
Risk governance		Non-executive risk governance								The Board approves the Group's risk appetite, plans and performance targets. It sets the 'tone from the top' and is advised by the Group Risk Committee (see page 255).
		Executive risk governance								Our executive risk governance structure is responsible for the enterprise-wide management of all risks, including key policies and frameworks for the management of risk within the Group (see pages 134 and 142).
Roles and responsibilities		Three lines of defence model								Our 'three lines of defence' model defines roles and responsibilities for risk management. An independent Group Risk and Compliance function helps ensure the necessary balance in risk/return decisions (see page 134).
Processes and tools		Risk appetite								The Group has processes in place to identify/assess, monitor, manage and report risks to help ensure we remain within our risk appetite.
		Enterprise-wide risk management tools
		Active risk management: identification/assessment, monitoring, management and reporting
Internal controls		Policies and procedures								Policies and procedures define the minimum requirements for the controls required to manage our risks.
		Control activities								Operational and resilience risk management defines minimum standards and processes for managing operational risks and internal controls.
		Systems and infrastructure								The Group has systems and/or processes that support the identification, capture and exchange of information to support risk management activities.

Risk governance

The Board has ultimate responsibility for the effective management of risk and approves our risk appetite.

The Group Chief Risk and Compliance Officer, supported by the Group Risk Management Meeting, holds executive accountability for the ongoing monitoring, assessment and management of the risk environment and the effectiveness of the risk management framework.

The Group Chief Risk and Compliance Officer is also responsible for the oversight of reputational risk, with the support of the Group Reputational Risk Committee. The Group Reputational Risk Committee considers matters arising from customers, transactions and third parties that either present a serious potential reputational

risk to the Group or merit a Group-led decision to ensure a consistent risk management approach across the regions, global businesses and global functions. Further details can be found under the 'Reputational risk' section of www.hsbc.com/our-approach/risk-and-responsibility.

Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. All our people have a role to play in risk management. These roles are defined using the three lines of defence model, which takes into account our business and functional structures as described in the following commentary, 'Our responsibilities'.

We use a defined executive risk governance structure to help ensure there is appropriate oversight and accountability of risk, which facilitates reporting and escalation to the Group Risk Management Meeting. This structure is summarised in the following table.

Governance structure for the management of risk and compliance
Group Risk Management Meeting	Group Chief Risk and Compliance Officer Group Chief Legal Officer Group Chief Executive Group Chief Financial Officer Group Head of Financial Crime and Group Money Laundering Reporting Officer Group Head of Compliance All other Group Executive Committee members	• Supporting the Group Chief Risk and Compliance Officer in exercising Board-delegated risk management authority • Overseeing the implementation of risk appetite and the risk management framework • Forward-looking assessment of the risk environment, analysing possible risk impacts and taking appropriate action • Monitoring all categories of risk and determining appropriate mitigating action • Promoting a supportive Group culture in relation to risk management and conduct
Group Risk and Compliance Executive Committee	Group Chief Risk and Compliance Officer Chief risk officers of HSBC's global businesses and regions Heads of Global Risk and Compliance sub-functions	• Supporting the Group Chief Risk and Compliance Officer in providing strategic direction for the Group Risk and Compliance function, setting priorities and providing oversight • Overseeing a consistent approach to accountability for, and mitigation of, risk and compliance across the Group
Global business/regional risk management meetings	Global business/regional chief risk officer Global business/regional chief executive officer Global business/regional chief financial officer Global business/regional heads of global functions	• Supporting the Group Chief Risk and Compliance Officer in exercising Board-delegated risk management authority • Forward-looking assessment of the risk environment • Implementation of risk appetite and the risk management framework • Monitoring all categories of risk and overseeing appropriate mitigating actions • Embedding a supportive culture in relation to risk management and controls

The Board committees with responsibility for oversight of risk-related matters are set out on page 258.

Treasury risks are the responsibility of the Group Executive Committee and the Group Risk Committee. Global Treasury actively manages these risks, supported by the Holdings Asset and Liability Management Committee ('ALCO') and local ALCOs, overseen by Treasury Risk Management and the Group Risk Management Meeting. Further details on treasury risk management are set out on page 202.

Our responsibilities

All our people are responsible for identifying and managing risk within the scope of their roles. Roles are defined using the three lines of defence model, which takes into account our business and functional structures as described below.

Three lines of defence

To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment.

The model underpins our approach to risk management by clarifying responsibility and encouraging collaboration, as well as enabling efficient coordination of risk and control activities. The three lines of defence are summarised below:

• The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing them in line with risk appetite, and ensuring that the right controls and assessments are in place to mitigate them.

• The second line of defence challenges the first line of defence on effective risk management, and provides advice and guidance in relation to the risk.

• The third line of defence is our Global Internal Audit function, which provides independent assurance as to whether our risk management approach and processes are designed and operating effectively.

Group Risk and Compliance function

Our Group Risk and Compliance function is responsible for the Group's risk management framework. This responsibility includes establishing global policy, monitoring risk profiles, and identifying and managing forward-looking risk. Group Risk and Compliance is made up of sub-functions covering all risks to our business. Forming part of the second line of defence, the Group Risk and Compliance function is independent from the global businesses, including sales and trading functions, to provide challenge, appropriate oversight and balance in risk/return decisions.

Responsibility for minimising both financial and non-financial risk lies with our people. They are required to manage the risks of the business and operational activities for which they are responsible. We maintain adequate oversight of our risks through our various specialist risk stewards and the collective accountability held by our chief risk officers.

We have continued to strengthen the control environment and our approach to the management of non-financial risk, as set out in our risk management framework. The management of non-financial risk focuses on governance and risk appetite, and provides a single view of the non-financial risks that matter the most as well as the associated controls. It incorporates a risk management system designed to enable the active management of non-financial risk. Our ongoing focus is on simplifying our approach to non-financial risk management, while driving more effective oversight and better end-to-end identification and management of non-financial risks. This is overseen by the Operational and Resilience Risk function, headed by the Group Head of Operational and Resilience Risk.

Stress testing and recovery planning

We operate a wide-ranging stress testing programme that is a key part of our risk management and capital and liquidity planning. Stress testing provides management with key insights into the impact of severely adverse events on the Group, and provides confidence to regulators on the Group's financial stability. 

Our stress testing programme assesses our capital and liquidity strength through a rigorous examination of our resilience to external shocks. As well as undertaking regulatory-driven stress tests, we conduct our own internal stress tests in order to understand the nature and level of all material risks, quantify the impact of such risks and develop plausible business-as-usual mitigating actions.

Internal stress tests

Our internal capital assessment uses a range of stress scenarios that explore risks identified by management. They include potential adverse macroeconomic, geopolitical and operational risk events, as well as other potential events that are specific to HSBC.

The selection of stress scenarios is based upon the output of our identified top and emerging risks and our risk appetite. Stress testing analysis helps management understand the nature and extent of vulnerabilities to which the Group is exposed. Using this information, management decides whether risks can or should be mitigated through management actions or, if they were to crystallise, be absorbed through capital and liquidity. This in turn informs decisions about preferred capital and liquidity levels and allocations.

In addition to the Group-wide stress testing scenarios, each major subsidiary conducts regular macroeconomic and event-driven scenario analysis specific to its region. They also participate, as required, in the regulatory stress testing programmes of the jurisdictions in which they operate, such as stress tests required by the Bank of England ('BoE') in the UK, the Federal Reserve Board ('FRB') in the US, and the Hong Kong Monetary Authority ('HKMA') in Hong Kong. Global functions and businesses also perform bespoke stress testing to inform their assessment of risks to potential scenarios.

We also conduct reverse stress tests each year at Group level and, where required, at subsidiary entity level to understand potential extreme conditions that would make our business model non-viable. Reverse stress testing identifies potential stresses and vulnerabilities we might face, and helps inform early warning triggers, management actions and contingency plans designed to mitigate risks.

Recovery and resolution plans

Recovery and resolution plans form part of the integral framework safeguarding the Group's financial stability. The Group recovery plan, together with stress testing, help us understand the likely outcomes of adverse business or economic conditions and in the identification of appropriate risk mitigating actions. The Group is committed to further developing its recovery and resolution capabilities in line with the BoE's Resolvability Assessment Framework requirements.

Key developments in 2022

We actively managed the risks related to macroeconomic uncertainties including inflation, fiscal and monetary policy, the Russia-Ukraine war, broader geopolitical uncertainties and continued risks resulting from the Covid-19 pandemic, as well as other key risks described in this section. In addition, we sought to enhance our risk management in the following areas:

•
We continued to improve our risk governance decision making, particularly with regard to the governance of treasury risk, to help ensure senior executives have appropriate oversight and visibility of macroeconomic trends around inflation and interest rates.

• We adapted our interest rate risk management strategy as market and official interest rates increased in reaction to inflationary pressures. This included the Board approving in September a new interest rate risk in the banking book strategy, a managed reduction in the duration risk of our hold-to-collect-and-sell asset portfolio and an increase in net interest income stabilisation.

• We began a process of enhancement of our country credit risk management framework to strengthen our control of risk tolerance and appetite at a country level.

• We continued to develop our approach to emerging risk identification and management, including the use of forward-looking indicators to support our analysis.

• We enhanced our enterprise risk reporting processes to place a greater focus on our emerging risks, including by capturing the materiality, oversight and individual monitoring of these risks.

• We sought to further strengthen our third-party risk policy and processes to improve control and oversight of our material third parties to maintain our operational resilience, and to meet new and evolving regulatory requirements.

• We made progress with our comprehensive regulatory reporting programme to strengthen our global processes, improve consistency and enhance controls.

• We continued to embed the governance and oversight around model adjustments and related processes for IFRS 9 models and Sarbanes-Oxley controls.

• We commenced a programme to enhance our framework for managing the risks associated with machine learning and artificial intelligence ('AI').

• Through our climate risk programme, we continued to embed climate considerations throughout the organisation, including updating the scope of our programme to cover all risk types, expanding the scope of climate-related training, developing new climate risk metrics to monitor and manage exposures, and developing our internal climate scenario exercise.

• We sought to improve the effectiveness of our financial crime controls, deploying advanced analytics capabilities into new markets. We refreshed our financial crime policies to help ensure they remain up to date and address changing and emerging risks. We continue to monitor regulatory changes.

Top and emerging risks

We use a top and emerging risks process to provide a forward-looking view of issues with the potential to threaten the execution of our strategy or operations over the medium to long term.

We proactively assess the internal and external risk environment, as well as review the themes identified across our regions and global businesses, for any risks that may require global escalation. We update our top and emerging risks as necessary.

Our current top and emerging risks are as follows.

Externally driven

Geopolitical and macroeconomic risks

The Russia-Ukraine war has had far-reaching geopolitical and economic implications. HSBC is monitoring the impacts of the war and continues to respond to the further economic sanctions and trade restrictions that have been imposed on Russia in response. In particular, significant sanctions and trade restrictions imposed against Russia have been put in place by the UK, the US and the EU, as well as other countries. Such sanctions and restrictions have specifically targeted certain Russian government officials, politically exposed persons, business people, Russian oil imports, energy products, financial institutions and other major Russian companies. In addition, there have been put in place more generally applicable investment, export, and import bans and restrictions. In response to such sanctions and trade restrictions, as well as asset flight, Russia has implemented certain countermeasures.

Further sanctions, trade restrictions and Russian countermeasures may adversely impact the Group, its customers and the markets in which the Group operates by creating regulatory, reputational and market risks. Our business in Russia principally serves multinational corporate clients headquartered in other countries, is not accepting new business or customers and is consequently on a declining trend. Following a strategic review, HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) has entered into an agreement to sell its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company), subject to regulatory and governmental approvals.

Global commodity markets have been significantly impacted by the Russia-Ukraine war and localised Covid-19 outbreaks, leading to continued supply chain disruptions. This has resulted in product shortages appearing across several regions, and increased prices for both energy and non-energy commodities, such as food. We do not expect these to ease significantly in the near term. In turn, this has had a significant impact on global inflation. Relatively mild weather, until recently, and diversification of fuel sources have nevertheless helped regions most dependent on Russian supply to substantially reduce risks of rationing over the winter months.

China's policy measures issued at the end of 2022 have increased liquidity and the supply of credit to the mainland China commercial real estate sector. Recovery in the underlying domestic residential demand and improved customer sentiment will be necessary to support the ongoing health of the sector. We will continue to monitor the sector closely, notably the risk of further idiosyncratic real estate defaults and the potential associated impact on wider market, investor and consumer sentiment. Given that parts of the global economy are in, or close to, recession, the demand for Chinese exports may also diminish.

Rising global inflation has prompted central banks to tighten monetary policy. Since the beginning of 2022, the US Federal Reserve Board ('FRB') has delivered a cumulative 450 basis point ('bps') increase in the Federal Funds rate. The European Central Bank lagged the FRB initially, but its benchmark rate has subsequently been increased by 300bps since July 2022. As of mid-February 2023, interest-rate futures suggested market uncertainty as to whether the FRB would begin to ease monetary policy over the 12-month horizon. Should monetary policy rates move materially higher than current expectations, a realignment of market expectations could cause turbulence in financial asset prices.

Financial markets have also shown reduced appetite for expansionary fiscal policies in the context of high debt ratios. Following the fiscal statement of 23 September 2022 by the UK government, there was a fall in the value of sterling and a sharp rise in the yields of UK government securities, known as gilts. Following this, the Bank of England reversed its plan to begin selling its gilt holdings from September 2022, and the UK government reversed most of the previously announced fiscal measures. We continue to monitor our risk profile closely in the context of uncertainty over global macroeconomic policies.

Higher inflation and interest rate expectations around the world - and the resulting economic uncertainty - have had an impact on expected credit losses and other credit impairment charges ('ECL'). The combined pressure of higher inflation and interest rates may impact the ability of our customers to repay debt. Our Central scenario, which has the highest probability weighting in our IFRS 9 'Financial Instruments' calculations of ECL, assumes low growth and a higher inflation environment across many of our key markets. However, due to the rapidly changing economic conditions, the potential for forecast dispersion and volatility remain high, impacting the degree of accuracy and certainty of our Central scenario forecast. The level of volatility varies by market, depending on exposure to commodity price increases, supply chain constraints, the monetary policy response to inflation and the public health policy response to the Covid-19 pandemic. As a result, our Central scenario for impairment has not been assigned the same likelihood of occurrence across our key markets. There is also uncertainty with respect to the relationship between the economic drivers and the historical loss experience, which has required adjustments to modelled ECL in cases where we determined that the model was unable to capture the material underlying risks.

For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 153.

Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.

The US-China relationship remains complex. To date, the UK, the US, the EU and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies. Although sanctions and trade restrictions are difficult to predict, increases in diplomatic tensions between China and the US and other countries could result in sanctions that could negatively impact the Group, its customers and the markets in which the Group operates. There is a continued risk of additional sanctions and trade restrictions being imposed by the US and other governments in relation to human rights, technology, and other issues with China, and this could create a more complex operating environment for the Group and its customers.

China has in turn announced a number of its own sanctions and trade restrictions that target, or provide authority to target, foreign individuals and companies.

These and any future measures and countermeasures that may be taken by the US, China and other countries may affect the Group, its customers and the markets in which the Group operates.

Negotiations between the UK and the EU over the operation of the Northern Ireland Protocol are continuing. While there are signs that differences may be diminishing, failure to reach agreement could have implications for the future operation of the EU-UK Trade and Cooperation Agreement.

In June 2022, the UK government published proposed legislation that seeks to amend the Protocol in a number of respects. In response, the EU launched infringement procedures against the UK, and is evaluating the UK response, received in September 2022. If the proposed legislation were to pass, and infringement procedures progressed, it could further complicate the terms of trade between the UK and the EU and potentially prevent progress in other areas such as financial services. Over the medium to long term, the UK's withdrawal from the EU may impact markets and increase economic risk, particularly in the UK, which could adversely impact our profitability and prospects for growth in this market. We are monitoring the situation closely, including the potential impacts on our customers. 

In August 2022, the US Inflation Reduction Act introduced a minimum tax of 15% with effect from 1 January 2023. It is possible that the minimum tax could result in an additional US tax liability over our regular US federal corporate tax liability in a given year, based on the differences between US book and taxable income (including as a result of temporary differences). Given its recent pronouncement, it is unclear at this time what, if any, impact the US Inflation Reduction Act will have on HSBC's US tax rate and US financial results. HSBC will continue to evaluate its impact as further information becomes available. In addition, potential changes to tax legislation and tax rates in the countries and territories in which we operate could increase our effective tax rate in the future.

As the geopolitical landscape evolves, compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional compliance, reputational and political risks for the Group. We maintain dialogue with our regulators in various jurisdictions on the impact of legal and regulatory obligations on our business and customers.

The financial impact on the Group of geopolitical risks in Asia is heightened due to the region's relatively high contribution to the Group's profitability, particularly in Hong Kong.

While it is the Group's policy to comply with all applicable laws and regulations of all jurisdictions in which it operates, geopolitical risks and tensions, and potential ambiguities in the Group's compliance obligations, will continue to present challenges and risks for the Group and could have a material adverse impact on the Group's business, financial condition, results of operations, prospects and strategy, as well as on the Group's customers.

Expanding data privacy, national security and cybersecurity laws in a number of markets could pose potential challenges to intra-group data sharing. These developments could increase financial institutions' compliance obligations in respect of cross-border transfers of personal information, which may affect our ability to manage financial crime risks across markets.

Mitigating actions

• We closely monitor geopolitical and economic developments in key markets and sectors and undertake scenario analysis where appropriate. This helps us to take portfolio actions where necessary, including through enhanced monitoring, amending our risk appetite and/or reducing limits and exposures.

• We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions being taken to rebalance exposures and manage risk appetite where necessary.

• We regularly review key portfolios to help ensure that individual customer or portfolio risks are understood and that our ability to manage the level of facilities offered through any downturn is appropriate.

• We continue to manage sanctions and trade restrictions through the use of, and enhancements to, our existing controls.

• We continue to monitor the UK's relationship with the EU, and assess the potential impact on our people, operations and portfolios.

• We have taken steps, where necessary, to enhance physical security in geographical areas deemed to be at high risk from terrorism and military conflicts.

Technology and cybersecurity risk

Together with other organisations, we operate in an extensive and complex technology landscape, which needs to remain resilient in order to support customers, our organisation and financial markets globally. Risks arise where technology is not understood, maintained, or developed appropriately. We also continue to operate in an increasingly hostile cyber threat environment globally. These threats include potential unauthorised access to customer accounts, attacks on our systems or those of our third-party suppliers, and require ongoing investment in business and technical controls to defend against.

Mitigating actions

• We continue to invest in transforming how software solutions are developed, delivered and maintained to improve system resilience. We continue to build security into our software development lifecycle and improve our testing processes and tools.

• We continue to upgrade many of our IT systems, simplify our service provision and replace older IT infrastructure and applications. These enhancements supported global improvements in service availability during 2022 for both our customers and colleagues.

• We continually evaluate threat levels for the most prevalent cyber-attack types and their potential outcomes. To further protect HSBC and our customers and help ensure the safe expansion of our global businesses, we continue to strengthen our controls to reduce the likelihood and impact of advanced malware, data leakage, exposure through third parties and security vulnerabilities.

• We continue to enhance our cybersecurity capabilities, including Cloud security, identity and access management, metrics and data analytics, and third-party security reviews. An important part of our defence strategy is ensuring our colleagues remain aware of cybersecurity issues and know how to report incidents.

• We report and review cyber risk and control effectiveness at executive and non-executive Board level. We also report it across our global businesses, functions and regions to help ensure there is appropriate visibility and governance of the risk and its mitigating actions.

• We participate globally in industry bodies and working groups to collaborate on tactics employed by cyber-crime groups and to work together preventing, detecting and defending against cyber-attacks on financial organisations globally.

Evolving regulatory environment risk

We aim to keep abreast of the emerging regulatory compliance and conduct agenda, which currently includes, but is not limited to: ESG matters; ensuring good customer outcomes; addressing customer vulnerabilities due to cost of living pressures; regulatory compliance; regulatory reporting; employee compliance, including the use of e-communication channels; and the proposed reforms to the UK financial services sector, known as the Edinburgh Reforms. We monitor regulatory developments closely and engage with regulators, as appropriate, to help ensure new regulatory requirements are implemented effectively and in a timely way. The competitive landscape in which the Group operates may be impacted by future regulatory changes and government intervention.

Mitigating actions

• We monitor for regulatory developments to understand the evolving regulatory landscape and seek to respond with changes in a timely manner.

• We engage with governments and regulators, responding to consultations with a view to help shaping regulations that can be implemented effectively. We hold regular meetings with relevant authorities to discuss strategic contingency plans, including those arising from geopolitical issues. 

• Our simplified conduct approach aligns to our purpose and values, in particular the value 'we take responsibility'.

Financial crime risk

Financial institutions remain under considerable regulatory scrutiny regarding their ability to detect and prevent financial crime. These evolving challenges include managing conflicting laws and approaches to legal and regulatory regimes, and implementing an unprecedented volume and diverse set of sanctions, notably as a result of the Russia-Ukraine war.

Amid rising inflation and increasing cost of living pressures, we face increasing regulatory expectations with respect to managing internal and external fraud, and protecting vulnerable customers.

The digitisation of financial services continues to have an impact on the payments ecosystem, with an increasing number of new market entrants and payment mechanisms, not all of which are subject to the same level of regulatory scrutiny or regulations as banks. Developments around digital assets and currencies have continued at pace, with an increasing regulatory and enforcement focus on the financial crimes linked to these types of assets.

Expectations with respect to the intersection of ESG issues and financial crime, as our organisation, customers and suppliers transition to net zero, continue to increase. These are particularly focused on potential 'greenwashing', human rights issues and environmental crimes. In addition, climate change itself could heighten risks linked to vulnerable migrant populations in countries where financial crime is already more prevalent.

We also continue to face increasing challenges presented by national data privacy requirements, which may affect our ability to manage financial crime risks across markets.

Mitigating actions  

• We continue to manage sanctions and trade restrictions through the use of, and enhancements to, our existing controls.

• We continue to develop our fraud controls and invest in capabilities to fight financial crime through the application of advanced analytics and artificial intelligence.

• We are looking at the impact of a rapidly changing payments ecosystem, as well as risks associated with direct and indirect exposure to digital assets and currencies, in an effort to maintain appropriate financial crime controls.

• We are assessing our existing policies and control framework so that developments relating to ESG are considered and the risks mitigated.

• We engage with regulators, policymakers and relevant international bodies, seeking to address data privacy challenges through international standards, guidance and legislation.

Ibor transition risk

Interbank offered rates ('Ibors') have previously been used extensively to set interest rates on different types of financial transactions and for valuation purposes, risk measurement and performance benchmarking.

Following the UK's Financial Conduct Authority ('FCA') announcement in July 2017 that it would no longer continue to persuade or require panel banks to submit rates for the London interbank offered rate ('Libor') after 2021, we have been actively working to transition legacy contracts from Ibors to products linked to near risk-free replacement rates ('RFRs') or alternative reference rates.

The publication of sterling, Swiss franc, euro and Japanese yen Libor interest rate benchmarks, as well as Euro Overnight Index Average ('Eonia'), ceased from the end of 2021. Our Ibor transition programme - which is tasked with the development of RFR products and the transition of legacy Ibor products - has continued to support the transition of a limited number of remaining contracts in sterling and Japanese yen Libor, which were published using a 'synthetic' interest rate methodology during 2022. The remaining 'tough legacy' sterling contracts have required protracted client discussions where contracts are complex or restructuring of facilities is required. The publication of 'synthetic' Japanese yen Libor ceased after 31 December 2022. In addition the FCA announced, in September and November 2022, that one month and six-month 'synthetic' sterling Libor rates will cease to be published from 31 March 2023, and three-month 'synthetic' sterling Libor will cease to be published after 31 March 2024. We have or are prepared to transition or remediate the remaining few contracts relying on 'synthetic' sterling settings, outstanding as at 31 December 2022, in advance of those cessation dates.

For the cessation of the publication of US dollar Libor from 30 June 2023, we have implemented the majority of required processes, technology and RFR product capabilities throughout the Group in preparation for upcoming market events. We will continue to transition outstanding legacy contracts through the first half of 2023. We have completed the transition of the majority of our uncommitted lending facilities, and continue to make steady progress with the transition of the outstanding legacy committed lending facilities. Transition of our derivatives portfolio is progressing well with most clients reliant on industry mechanisms to transition to RFRs. For the limited number of bilateral derivatives trades where an alternative transition path is required, client engagement is continuing. For certain products and contracts, including bonds and syndicated loans, we remain reliant on the continued support of agents and third parties, but we continue to progress those contracts requiring transition. We continue to monitor contracts that may be potentially more challenging to transition, and may need to rely upon legislative solutions. Additionally, following the FCA's consultation in November 2022 proposing that US dollar Libor is to be published using a 'synthetic' methodology for a defined period, we will continue to work with our clients to support them through the transition of their products if transition is not completed by 30 June 2023.

For the Group's own debt securities issuances, we continue to have instruments in US dollars, sterling, Japanese yen and Singapore dollars where the terms provide for an Ibor benchmark to be used to reset the coupon rate if HSBC chooses not to redeem them on their call dates. We remain mindful of the various factors that have an impact on the Ibor remediation strategy for our regulatory capital and MREL instruments, including - but not limited to - timescales for cessation of relevant Ibor rates, constraints relating to the governing law of outstanding instruments, the potential relevance of legislative solutions and industry best practice guidance. We remain committed to seeking to remediate or mitigate relevant risks relating to Ibor-demise, as appropriate, on our outstanding regulatory capital and MREL instruments before the relevant calculation dates, which may occur post-cessation of the relevant Ibor rate or rates.

For US dollar Libor and other demising Ibors, we continue to be exposed to, and actively monitor, risks including:

• regulatory compliance and conduct risks, as the transition of legacy contracts to RFRs or alternative rates, or sales of products referencing RFRs, may not deliver fair client outcomes;

• resilience and operational risks, as changes to manual and automated processes, made in support of new RFR methodologies, and the transition of large volumes of Ibor contracts may lead to operational issues;

• legal risk, as issues arising from the use of legislative solutions and from legacy contracts that the Group is unable to transition may result in unintended or unfavourable outcomes for clients and market participants, which could potentially increase the risk of disputes;

• model risk, as there is a risk that changes to our models to replace Ibor-related data adversely affect the accuracy of model outputs; and

• market risk, because as a result of differences in Libor and RFR interest rates, we are exposed to basis risk resulting from the asymmetric adoption of rates across assets, liabilities and products. Additionally the current stage of the Term Secured Overnight Financing Rate ('SOFR') market presents challenges for certain hedge accounting strategies.

While the level of risk is diminishing in line with our process implementation and continued transition of contracts, we will monitor these risks through the remainder of the transition of legacy contracts. Throughout 2023, we plan to continue to engage with our clients and investors to complete an orderly transition of contracts that reference the remaining demising Ibors.

Mitigating actions

• Our global Ibor transition programme, which is overseen by the Group Chief Risk and Compliance Officer, will continue to deliver IT and operational processes to meet its objectives.

• We carry out extensive training, communication and client engagement to facilitate appropriate selection of new rates and products.

• We have dedicated teams in place to support the transition.

• We have actively transitioned legacy contracts and ceased entering into new contracts based on demised or demising Ibors, other than those allowed under regulatory exemptions, and implemented associated monitoring and controls.

• We assess, monitor and dynamically manage risks arising from Ibor transition, and implement specific mitigating controls when required.

• We continue to actively engage with regulatory and industry bodies to mitigate risks relating to 'tough legacy' contracts.

Financial instruments impacted by Ibor reform

(Audited)

Interest Rate Benchmark Reform Phase 2, the amendments to IFRSs issued in August 2020, represents the second phase of the IASB's project on the effects of interest rate benchmark reform. The amendments address issues affecting financial statements when changes are made to contractual cash flows and hedging relationships.

Under these amendments, changes made to a financial instrument measured at other than fair value through profit or loss that are economically equivalent and required by interest rate benchmark reform, do not result in the derecognition or a change in the carrying amount of the financial instrument. Instead they require the effective interest rate to be updated to reflect the change in the interest rate benchmark. In addition, hedge accounting will not be discontinued solely because of the replacement of the interest rate benchmark if the hedge meets other hedge accounting criteria.

	Financial instruments yet to transition to alternative benchmarks, by main benchmark
	USD Libor	GBP Libor	JPY Libor	Others1
At 31 Dec 2022	$m	$m	$m	$m
Non-derivative financial assets
Loans and advances to customers	49,632	262	-	7,912
Other financial assets	4,716	42	-	1,562
Total non-derivative financial assets2	54,348	304	-	9,474
Non-derivative financial liabilities
Financial liabilities designated at fair value	17,224	1,804	1,179	-
Debt securities in issue	5,352	-	-	-
Other financial liabilities	2,988	-	-	176
Total non-derivative financial liabilities	25,564	1,804	1,179	176
Derivative notional contract amount
Foreign exchange	140,223	-	-	7,337
Interest rate	2,208,189	68	-	186,952
Total derivative notional contract amount	2,348,412	68	-	194,289

	Financial instruments yet to transition to alternative benchmarks, by main benchmark
	USD Libor	GBP Libor	JPY Libor	Others1
At 31 Dec 2021	$m	$m	$m	$m
Non-derivative financial assets
Loans and advances to customers	70,932	18,307	370	8,259
Other financial assets	5,131	1,098	-	2
Total non-derivative financial assets2	76,063	19,405	370	8,261
Non-derivative financial liabilities
Financial liabilities designated at fair value	20,219	4,019	1,399	1
Debt securities in issue	5,255	-	-	-
Other financial liabilities	2,998	78	-	-
Total non-derivative financial liabilities	28,472	4,097	1,399	1
Derivative notional contract amount
Foreign exchange	137,188	5,157	31,470	9,652
Interest rate	2,318,613	284,898	72,229	133,667
Total derivative notional contract amount	2,455,801	290,055	103,699	143,319

1  Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (euro Libor, Swiss franc Libor, Eonia, SOR, THBFIX, MIFOR and Sibor). Announcements were made by regulators during 2022 on the cessation of the Canadian dollar offered rate ('CDOR') and Mexican Interbank equilibrium interest rate ('TIIE'), which will eventually transition to the Canadian overnight repo rate average ('CORRA') and a new Mexican overnight fall-back rate, respectively. Therefore, CDOR and TIIE are also included in Others during the current period.

2  Gross carrying amount excluding allowances for expected credit losses.

The amounts in the above table relate to HSBC's main operating entities where HSBC has material exposures impacted by Ibor reform, including in the UK, Hong Kong, France, the US, Mexico, Canada, Singapore, the UAE, Bermuda, Australia, Qatar, Germany, Thailand, India and Japan. The amounts provide an indication of the extent of the Group's exposure to the Ibor benchmarks that are due to be replaced. Amounts are in respect of financial instruments that:

• contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark;

• have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and

• are recognised on HSBC's consolidated balance sheet.

Environmental, social and governance ('ESG') risk

We are subject to financial and non-financial risks associated with ESG-related matters. Our current areas of focus include climate risk, nature-related risks and human rights risks. These can impact us both directly and indirectly through our business activities and relationships. For details of how we govern ESG, see page 86.

Our assessment of climate risks covers three distinct time periods, comprising: short term, which is up to 2025; medium term, which is between 2026 and 2035; and long term, which is between 2036 and 2050. Focus on climate-related risk continued to increase over 2022, owing to the pace and volume of policy and regulatory changes globally, particularly on climate risk management, stress testing and scenario analysis and disclosures. If we fail to meet evolving regulatory expectations or requirements on climate risk management, this could have regulatory compliance and reputational impacts.

We could face direct impacts, owing to the increase in frequency and severity of weather events and chronic shifts in weather patterns, which could affect our ability to conduct our day-to-day operations.

Our customers may find that their business models fail to align to a net zero economy or face disruption to their operations or deterioration to their assets as a result of extreme weather.

We face increased reputational, legal and regulatory risk as we make progress towards our net zero ambition, with stakeholders likely to place greater focus on our actions such as the development of climate-related policies, our disclosures and financing and investment decisions relating to our ambition.

We will face additional risks if we are perceived to mislead stakeholders in respect of our climate strategy, the climate impact of a product or service, or the commitments of our customers. Climate risk may also impact on model risk, as the uncertain impacts of climate change and data and methodology limitations present challenges to creating reliable and accurate model outputs.

We also face reporting risk in relation to our climate disclosures, as any data, methodologies and standards we have used may evolve over time in line with market practice, regulation or owing to developments in climate science. While emissions reporting has improved over time, data remains of limited quality and consistency. The use of inconsistent or incomplete data and models could result in sub-optimal decision making. Any changes could result in revisions to our internal frameworks and reported data, and could mean that reported figures are not reconcilable or comparable year on year. We may also have to re-evaluate our progress towards our climate-related targets in future and this could result in reputational, legal and regulatory risks.

There is increasing evidence that a number of nature-related risks beyond climate change, which include risks that can be represented more broadly by impact and dependence on nature, can and will have significant economic impact. These risks arise when the provision of natural services - such as water availability, air quality and soil quality - is compromised by overpopulation, urban development, natural habitat and ecosystem loss, ecosystem degradation arising from economic activity and other environmental stresses beyond climate change. They can show themselves in various ways, including through macroeconomic, market, credit, reputational, legal and regulatory risks, for both HSBC and our customers. We continue to engage with investors, regulators and customers on nature-related risks to evolve our approach and understand best practice risk mitigation.

Regulation and disclosure requirements in relation to human rights, and to modern slavery in particular, are increasing. Businesses are expected to be transparent about their efforts to identify and respond to the risk of negative human rights impacts arising from their business activities and relationships.

Mitigating actions

• We aim to deepen our understanding of the drivers of climate risk. A dedicated Climate Risk Oversight Forum is responsible for shaping and overseeing our approach and providing support in managing climate risk. For further details of the Group's ESG governance structure, see page 86.

• Our climate risk programme continues to support the development of our climate risk management capabilities across four key pillars: governance and risk appetite, risk management, stress testing and scenario analysis, and disclosures. We also aim to enhance our approach to greenwashing risk management.

• In December 2022, we published our updated policy covering the broader energy system including upstream oil and gas, oil and gas power generation, coal, hydrogen, renewables and hydropower, nuclear, biomass and energy from waste. We also expanded our thermal coal phase-out policy, in which we committed to not provide new finance or advisory services for the specific purposes of the conversion of existing coal-to-gas fired power plants, or new metallurgical coal mines (see page 65).

• Climate stress tests and scenarios are being used to further improve our understanding of our risk exposures for use in risk management and business decision making.

• In 2022, we reviewed our salient human rights issues following the methodology set out in the UNGPs. These are the human rights at risk of the most severe potential negative impact through our business activities and relationships. This review built on an earlier review that had identified modern slavery and discrimination as priority human rights issues. For further details, see page 87 of the ESG review.

• In 2021, we joined several industry working groups dedicated to helping us assess and manage nature-related risks, such as the Taskforce on Nature-related Financial Disclosures ('TNFD'). In 2022 our asset management business published its biodiversity policy to publicly explain how our analysts address nature-related issues.

• We continue to engage with our customers, investors and regulators proactively on the management of ESG risks. We also engage with initiatives, including the Climate Financial Risk Forum, Equator Principles, Task Force on Climate-related Financial Disclosures and CDP (formerly the Carbon Disclosure Project) to help drive best practice for climate risk management.

For further details of our approach to climate risk management, see 'Climate risk' on page 221.

For further details of ESG risk management, see 'Financial crime risk' on page 231 and 'Regulatory compliance risk environment including conduct' on page 225.

Our ESG review can be found on page 44.

Digitalisation and technological advances risk

Developments in technology and changes to regulations are enabling new entrants to the industry, particularly with respect to payments. This challenges us to continue innovating and taking advantage of new digital capabilities so that we improve how we serve our customers, drive efficiency and adapt our products to attract and retain customers. As a result, we may need to increase our investment in our business to adapt or develop products and services to respond to our customers' evolving needs. We also need to ensure that new digital capabilities do not weaken our resilience or wider risk management capabilities.

New technologies such as blockchain and quantum computing offer both business opportunities and potential risks for HSBC. As with all use of technologies, we aim to maximise their potential while seeking to ensure a robust control environment is in place to help manage the inherent risks, such as the impact on encryption algorithms.

Mitigating actions:

• We continue to monitor this emerging risk, as well as the advances in technology, and changes in customer behaviours to understand how these may impact our business.

• We assess new technologies to help develop appropriate controls and maintain resilience.

• We closely monitor and assess financial crime risk and the impact on payment transparency and architecture.

Internally driven

Risks associated with workforce capability, capacity and environmental factors with potential impact on growth

Our global businesses and functions in all of our markets are exposed to risks associated with workforce capacity challenges, including challenges to retain, develop and attract high-performing employees in key labour markets, and compliance with employment laws and regulations. Changed working arrangements, and the residual impact of local Covid-19-related restrictions and health concerns during the pandemic, have also affected employee mental health and well-being.

Mitigating actions

• We seek to promote a diverse and inclusive workforce and provide health and well-being support. We continue to build our speak-up culture through active campaigns.

• We monitor hiring activities and levels of employee attrition, with each business and function putting in place plans to help ensure they have effective workforce forecasting to meet business demands.

• We monitor people risks that could arise due to organisational restructuring, helping to ensure we manage redundancies sensitively and support impacted employees. We encourage our people leaders to focus on talent retention at all levels, with an empathetic mindset and approach, while ensuring the whole proposition of working at HSBC is well understood.

• Our Future Skills curriculum helps provides skills that will help to enable employees and HSBC to be successful in the future.

• We develop succession plans for key management roles, with oversight from the Group Executive Committee.

•

Risks arising from the receipt of services from third parties

We use third parties to provide a range of goods and services. Risks arising from the use of third-party providers and their supply chain may be harder to identify. It is critical that we ensure we have appropriate risk management policies, processes and practices over the selection, governance and oversight of third parties and their supply chain, particularly for key activities that could affect our operational resilience. Any deficiency in the management of risks associated with our third parties could affect our ability to support our customers and meet regulatory expectations.

Mitigating actions

• We continue to monitor the effectiveness of the controls operated by our third-party providers and request third-party control reports, where required. We have made further enhancements to our framework to help ensure risks associated with these arrangements are understood and managed effectively by our global businesses, global functions and regions. 

• We continue to enhance the effective management of our intra-Group arrangements using the same control standards as we have for external third-party arrangements.

• We are implementing the changes required by new regulations as set by our regulators.

Model risk

Model risk arises whenever business decision making includes reliance on models. We use models in both financial and non-financial contexts, as well as in a range of business applications such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Assessing model performance is a continuous undertaking. Models can need redevelopment as market conditions change. Significant increases in global inflation and interest rates have impacted the reliability and accuracy of both credit and market risk models.

We continued to prioritise the redevelopment of internal ratings-based ('IRB') and internal model methods ('IMM') models, in relation to counterparty credit, as part of the IRB repair and Basel III programmes with a key focus on enhancing the quality of data used as model inputs. A number of these models have been submitted to the UK's Prudential Regulation Authority ('PRA') and other key regulators for feedback, and approval is in progress. Some IMM and internal model approach ('IMA') models have been approved for use, and feedback has been received for some IRB models. Climate risk modelling is a key focus for the Group as HSBC's commitment to ESG has become a key part of the Group's strategy.

Model risk remains a key area of focus given the regulatory scrutiny in this area, with local regulatory exams taking place in many jurisdictions and further developments in policy expected from many regulators, including the PRA.

Mitigating actions

• We have continued to embed the enhanced monitoring, review and challenge of expected credit loss model performance through our Model Risk Management function as part of a broader quarterly process to determine loss levels. The Model Risk Management team aims to provide effective review and challenge of any future redevelopment of these models.

• Model Risk Governance committees at the Group, business and functional levels continue to provide oversight of model risk.

•
Model Risk Management works closely with businesses to ensure that IRB/IMM/IMA models in development meet risk management, pricing and capital management needs. Global Internal Audit provides assurance over the risk management framework for models.

• Additional assurance work is performed by the model risk governance teams, which act as second lines of defence. The teams test whether controls implemented by model users comply with model risk policy and if model risk standards are adequate.

• Models using advanced machine learning techniques are validated and monitored to help ensure that risks that are determined by the algorithms have adequate oversight and review. A framework to manage the range of risks that are generated by these advanced techniques, and to recognise the multidisciplinary nature of these risks, is being developed.

Data risk

We use multiple systems and growing quantities of data to support our customers. Risk arises if data is incorrect, unavailable, misused, or unprotected. Along with other banks and financial institutions, we need to meet external regulatory obligations and laws that cover data, such as the Basel Committee on Banking Supervision's 239 guidelines and the General Data Protection Regulation ('GDPR').

Mitigating actions

• Through our global data management framework, we monitor the quality, availability and security of data that supports our customers and internal processes. We work towards resolving any identified data issues in a timely manner.

• We have made improvements to our data policies. We are implementing an updated control framework (which includes trusted sources, data flows and data quality) in order to enhance the end-to-end management of data risk.

• We have established a global data management utility, and continue to simplify and unify data management activities across the Group.

• We seek to protect customer data through our data privacy framework, which establishes practices, design principles and guidelines that enable us to demonstrate compliance with data privacy laws and regulations.

• We continue to modernise our data and analytics infrastructure through investments in Cloud technology, data visualisation, machine learning and artificial intelligence.

• We continue to educate our employees on data risk and data management. We have delivered regular mandatory training globally on how to protect and manage data appropriately.

Change execution risk

We have continued investment in strategic change to support the delivery of our strategic priorities and regulatory commitments. This requires change to be executed safely and efficiently.

Mitigating actions

• In 2022, we added change execution risk to our risk taxonomy and control library, so that it could be defined, assessed, managed, reported and overseen in the same way as our other material risks.

• The Transformation Oversight Executive Committee oversees the prioritisation, strategic alignment and management of execution risk for all change portfolios and initiatives.

•

Areas of special interest

During 2022, a number of areas were identified and considered as part of our top and emerging risks because of the effect they may have on the Group. While considered under the themes captured under top and emerging risks, in this section we have placed a particular focus on the Covid-19 pandemic.

Risks related to Covid-19

The impact from the Covid-19 pandemic remains a continuing risk to our customers and organisation. However, the appetite for public health restrictions has reduced following the successful roll-out of vaccine programmes, and as societies have adapted. Countries continue to differ in their approach, although China has recently reversed restrictions on activity and mobility. 

In most countries, high vaccination rates and acquired population immunity have minimised the public health risks and the need for restrictions. However, in mainland China and Hong Kong, adherence

to public health restrictions had adverse economic implications throughout much of 2022. Government-imposed restrictions on

activity in major Chinese cities, and restrictions on travel, adversely affected global tourism and supply chains.

While the recovery in China resulting from the relaxation of Covid-19 related restrictions on movement, international travel and tourism in China that commenced in December 2022, raises the prospect of global growth, it could also lead to renewed inflationary pressures as demand for commodities and other goods rises. However, there are still short-term risks, as any surge in Covid-19 infections in China may dampen confidence and activity, and lead to the emergence of new vaccine-resistant variants of the virus.

We continue to monitor the situation closely, and given the continuing uncertainties related to the post-pandemic landscape, additional mitigating actions may be required.

Our material banking risks

The material risk types associated with our banking and insurance manufacturing operations are described in the following tables:

Description of risks - banking operations
Credit risk (see page 145)
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract.	Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and derivatives.	Credit risk is: • measured as the amount that could be lost if a customer or counterparty fails to make repayments; • monitored using various internal risk management measures and within limits approved by individuals within a framework of delegated authorities; and • managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance for risk managers.
Treasury risk (see page 202)
Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural and transactional foreign exchange exposures and changes in market interest rates, together with pension and insurance risk.	Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment.	Treasury risk is: • measured through risk appetite and more granular limits, set to provide an early warning of increasing risk, minimum ratios of relevant regulatory metrics, and metrics to monitor the key risk drivers impacting treasury resources; • monitored and projected against appetites and by using operating plans based on strategic objectives together with stress and scenario testing; and • managed through control of resources in conjunction with risk profiles, strategic objectives and cash flows.
Market risk (see page 218)
Market risk is the risk of an adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads.	Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios. Market risk for non-trading portfolios is discussed in the Treasury risk section on page 214. Market risk exposures arising from our insurance operations are discussed on page 237.	Market risk is: • measured using sensitivities, value at risk and stress testing, giving a detailed picture of potential gains and losses for a range of market movements and scenarios, as well as tail risks over specified time horizons; • monitored using value at risk, stress testing and other measures; and • managed using risk limits approved by the Group Risk Management Meeting and the risk management meetings in various global businesses.
Climate risk (see page 221)
Climate risk relates to the financial and non-financial impacts that may arise as a result of climate change and the move to a greener economy.	Climate risk can materialise through: • physical risk, which arises from the increased frequency and severity of weather events; • transition risk, which arises from the process of moving to a low-carbon economy; and • greenwashing risk, which arises from the act of knowingly or unknowingly misleading stakeholders regarding our strategy relating to climate, the climate impact/benefits of a product or service, or the climate commitments or performance of our customers.	Climate risk is: • measured using a variety of risk appetite metrics and key management indicators, which assess the impact of climate risk across the risk taxonomy; • monitored using stress testing; and • managed through adherence to risk appetite thresholds and via specific policies.
Resilience risk (see page 230)
Resilience risk is the risk of sustained and significant business disruption from  execution, delivery, physical security or safety events, causing the inability to provide critical services to our customers, affiliates, and counterparties.	Resilience risk arises from failures or inadequacies in processes, people, systems or external events.	Resilience risk is: • measured using a range of metrics with defined maximum acceptable impact tolerances, and against our agreed risk appetite; • monitored through oversight of enterprise processes, risks, controls and strategic change programmes; and • managed by continual monitoring and thematic reviews.
Regulatory compliance risk (see page 231)
Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct and breaching related financial services regulatory standards.	Regulatory compliance risk arises from the failure to observe relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business.	Regulatory compliance risk is: • measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our regulatory compliance teams; • monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and • managed by establishing and communicating appropriate policies and procedures, training employees in them and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.
Financial crime risk (see page 231)
Financial crime risk is the risk that HSBC's products and services will be exploited for criminal activity. This includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing.	Financial crime risk arises from day-to-day banking operations involving customers, third parties and employees.	Financial crime risk is: • measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement of, and assessment by, our compliance teams; • monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and • managed by establishing and communicating appropriate policies and procedures, training employees in them and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.
Model risk (see page 232)
Model risk is the risk of inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions.	Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models.	Model risk is: • measured by reference to model performance tracking and the output of detailed technical reviews, with key metrics including model review statuses and findings;  • monitored against model risk appetite statements, insight from the independent review function, feedback from internal and external audits, and regulatory reviews; and • managed by creating and communicating appropriate policies, procedures and guidance, training colleagues in their application, and supervising their adoption to ensure operational effectiveness.

Our insurance manufacturing subsidiaries are regulated separately from our banking operations. Risks in our insurance entities are managed using methodologies and processes that are subject to Group oversight. Our insurance operations are also subject to many of

the same risks as our banking operations, and these are covered by the Group's risk management processes. However, there are specific risks inherent to the insurance operations as noted below.

Financial risk (see page 237)
For insurance entities, financial risk includes the risk of not being able  to effectively match liabilities arising under insurance contracts with appropriate investments and that the expected sharing of financial performance with policyholders under certain contracts is not possible.	Exposure to financial risk arises from: • market risk affecting the fair values of financial assets or their future cash flows; • credit risk; and • liquidity risk of entities being unable to make payments to policyholders as they fall due.	Financial risk is: • measured for credit risk, in terms of economic capital and the amount that could be lost if a counterparty fails to make repayments; for market risk, in terms of economic capital, internal metrics and fluctuations in key financial variables; and for liquidity risk, in terms of internal metrics including stressed operational cash flow projections; • monitored through a framework of approved limits and delegated authorities; and • managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance. This includes using product design, asset liability matching and bonus rates.
Insurance risk (see page 238)
Insurance risk is the risk that, over time, the cost of insurance policies written, including claims and benefits, may exceed the total amount of premiums and investment income received.	The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, as well as lapse and surrender rates.	Insurance risk is: • measured in terms of life insurance liabilities and economic capital allocated to insurance underwriting risk; • monitored through a framework of approved limits and delegated authorities; and • managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance. This includes using product design, underwriting, reinsurance and claims-handling procedures.

Credit risk

Contents

145	Overview
145	Credit risk management
147	Credit risk in 2022
148	Summary of credit risk
151	Stage 2 decomposition as at December 2022
152	Credit exposure
154	Measurement uncertainty and sensitivity analysis of ECL
166	Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
169	Credit quality
174	Wholesale lending
192	Personal lending
202	Supplementary information
208	HSBC Holdings

Overview

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and derivatives.

Credit risk management

Key developments in 2022

There were no material changes to the policies and practices for the management of credit risk in 2022. We continued to apply the requirements of IFRS 9 'Financial Instruments' within the Credit Risk sub-function. For certain retail portfolios, we enhanced the significant increase in credit risk ('SICR') approach in relation to capturing relative movements in probability of default ('PD') since origination.

For our retail portfolios, we adopted the EBA 'Guidelines on the application of definition of default' during 2022 and, for our wholesale portfolios, these guidelines were adopted during 2021. Adoption of these guidelines did not have a material impact on our portfolios and comparative disclosures have not been restated.

We actively managed the risks related to macroeconomic uncertainties, including inflation, fiscal and monetary policy, the Russia-Ukraine war, broader geopolitical uncertainties, and the continued risks resulting from the Covid-19 pandemic.

For further details, see 'Top and emerging risks' on page 135.

Governance and structure

We have established Group-wide credit risk management and related IFRS 9 processes. We continue to assess the impact of economic developments in key markets on specific customers, customer segments or portfolios. As credit conditions change, we take mitigating actions, including the revision of risk appetites or limits and tenors, as appropriate. In addition, we continue to evaluate the terms under which we provide credit facilities within the context of individual customer requirements, the quality of the relationship, local regulatory requirements, market practices and our local market position.

Credit Risk sub-function

(Audited)

Credit approval authorities are delegated by the Board to the Group Chief Executive together with the authority to sub-delegate them. The Credit Risk sub-function in Group Risk and Compliance is responsible for the key policies and processes for managing credit risk, which include formulating Group credit policies and risk rating frameworks, guiding the Group's appetite for credit risk exposures, undertaking independent reviews and objective assessment of credit risk, and monitoring performance and management of portfolios.

The principal objectives of our credit risk management are:

• to maintain across HSBC a strong culture of responsible lending, and robust risk policies and control frameworks;

• to both partner and challenge our businesses in defining, implementing and continually re-evaluating our risk appetite under actual and scenario conditions; and

• to ensure there is independent, expert scrutiny of credit risks, their costs and their mitigation.

Key risk management processes

IFRS 9 'Financial Instruments' process

The IFRS 9 process comprises three main areas: modelling and data; implementation; and governance.

Modelling, data and forward economic guidance

We have established IFRS 9 modelling and data processes in various geographies, which are subject to internal model risk governance including independent review of significant model developments.

We have a centralised process for generating unbiased and independent global economic scenarios. Scenarios are subject to a process of review and challenge by a dedicated team, as well as regional groupings. Each quarter, the scenarios and probability weights are reviewed and checked for consistency with the economic conjuncture and current economic and financial risks. These are subject to final review and approval by senior management in a Forward Economic Guidance Global Business Impairment Committee.

Implementation

A centralised impairment engine performs the expected credit losses calculation using data, which is subject to a number of validation checks and enhancements, from a variety of client, finance and risk systems. Where possible, these checks and processes are performed in a globally consistent and centralised manner.

Governance

Regional management review forums are established in key sites and regions in order to review and approve the impairment results. Regional management review forums have representatives from Credit Risk and Finance. The key site and regional approvals are reported up to the relevant global business impairment committee for final approval of the Group's ECL for the period. Required members of the committee are the Wholesale Global Chief Corporate Credit Officer and Chief Risk Officer for Wealth and Personal Banking Risk, as well as the relevant global business Chief Financial Officer and the Global Financial Controller.

Concentration of exposure

(Audited)

Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or such counterparties are engaged in similar activities or operate in the same geographical areas or industry sectors so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. We use a number of controls and measures to minimise undue concentration of exposure in our portfolios across industries, countries and global businesses. These include portfolio and counterparty limits, approval and review controls, and stress testing.

Credit quality of financial instruments

(Audited)

Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support the calculation of our minimum credit regulatory capital requirement. The five credit quality classifications encompass a range of granular internal credit rating grades assigned to wholesale and retail customers, and the external ratings attributed by external agencies to debt securities.

For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related customer risk rating ('CRR') to external credit rating.

Wholesale lending

The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default ('PD'). All corporate customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the Basel approach adopted for the exposure.

Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and may vary over time.

Retail lending

Retail lending credit quality is based on a 12-month point-in-time probability-weighted PD.

Credit quality classification
	Sovereign debt securities and bills	Other debt securities and bills	Wholesale lending and derivatives		Retail lending
	External credit rating	External credit rating	Internal credit rating	12-month Basel probability of default %	Internal credit rating	12 month probability- weighted PD %
Quality classification1,2
Strong	BBB and above	A- and above	CRR 1 to CRR 2	0-0.169	Band 1 and 2	0.000-0.500
Good	BBB- to BB	BBB+ to BBB-	CRR 3	0.170-0.740	Band 3	0.501-1.500
Satisfactory	BB- to B and unrated	BB+ to B and unrated	CRR 4 to CRR 5	0.741-4.914	Band 4 and 5	1.501-20.000
Sub-standard	B- to C	B- to C	CRR 6 to CRR 8	4.915-99.999	Band 6	20.001-99.999
Credit impaired	Default	Default	CRR 9 to CRR 10	100	Band 7	100

1  Customer risk rating ('CRR').

2  12-month point-in-time probability-weighted probability of default ('PD').

Quality classification definitions • 'Strong' exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. • 'Good' exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. • 'Satisfactory' exposures require closer monitoring and demonstrate an average-to-fair capacity to meet financial commitments, with moderate default risk. • 'Sub-standard' exposures require varying degrees of special attention and default risk is of greater concern. • 'Credit-impaired' exposures have been assessed as described on Note 1.2(i) on the financial statements.

Forborne loans and advances

(Audited)

Forbearance measures consist of concessions towards an obligor that is experiencing or about to experience difficulties in meeting its financial commitments.

We continue to class loans as forborne when we modify the contractual payment terms due to having significant concerns about the borrowers' ability to meet contractual payments when they were due.

In 2022, we expanded our definition of forborne to capture non-payment-related concessions, such as covenant waivers. For our wholesale portfolio, we began identifying non-payment-related concessions in 2021 when our internal policies were changed. For our retail portfolios, we began identifying them during 2022.

The comparative disclosures have been presented under the prior definition of forborne for the wholesale and retail portfolios.

For details of our policy on forbearance, see Note 1.2(i) in the financial statements.

Credit quality of forborne loans

For wholesale lending, where payment-related forbearance measures result in a diminished financial obligation, or if there are other indicators of impairment, the loan will be classified as credit impaired if it is not already so classified. All facilities with a customer, including loans that have not been modified, are considered credit impaired following the identification of a payment-related forborne loan. For

retail lending, where a material payment-related concession has been granted, the loan will be classified as credit impaired. In isolation, non-payment forbearance measures may not result in the loan being classified as credit impaired unless combined with other indicators of credit impairment. These are classed as performing forborne loans for both wholesale and retail lending.

Wholesale and retail lending forborne loans are classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period, and there are no other indicators of impairment. Any forborne loans not considered credit impaired will remain forborne for a minimum of two years from the date that credit impairment no longer applies. For wholesale and retail lending, any forbearance measures granted on a loan already classed as forborne results in the customer being classed as credit impaired.

Forborne loans and recognition of expected credit losses

(Audited)

Forborne loans expected credit loss assessments reflect the higher rates of losses typically experienced with these types of loans such that they are in stage 2 and stage 3. The higher rates are more pronounced in unsecured retail lending requiring further segmentation. For wholesale lending, forborne loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessments. The individual impairment assessment takes into account the higher risk of the future non-payment inherent in forborne loans.

Impairment assessment

(Audited)

For details of our impairment policies on loans and advances and financial investments, see Note 1.2(i) on the financial statements.

Write-off of loans and advances

(Audited)

For details of our policy on the write-off of loans and advances, see Note 1.2(i) on the financial statements.

Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due. The standard period runs until the end of the month in which the account becomes 180 days contractually delinquent. However, in exceptional circumstances to achieve a fair customer outcome, and in line with regulatory expectations, they may be extended further.

For secured facilities, write-off should occur upon repossession of collateral, receipt of proceeds via settlement, or determination that recovery of the collateral will not be pursued.

Any secured assets maintained on the balance sheet beyond 60 months of consecutive delinquency-driven default require additional monitoring and review to assess the prospect of recovery.

There are exceptions in a few countries and territories where local regulation or legislation constrains earlier write-off, or where the realisation of collateral for secured real estate lending takes more time. Write-off, either partially or in full, may be earlier when there is no reasonable expectation of further recovery, for example, in the event of a bankruptcy or equivalent legal proceedings. Collection procedures may continue after write-off.

Credit risk in 2022

At 31 December 2022, gross loans and advances to customers and banks of $1,041bn decreased by $99.1bn, compared with 31 December 2021. This included adverse foreign exchange movements of $59.2bn and an $81.2bn decrease due to a reclassification of businesses to assets held for sale, including our banking business in Canada and our retail banking operations in France.

Excluding foreign exchange movements, the underlying decrease of $39.9bn was driven by a $36.1bn decrease in personal loans and advances to customers and by a $29.9bn decrease in wholesale loans and advances to customers. These were partly offset by a $25.9bn increase in loans and advances to banks.

The underlying decrease in personal loans and advances to customers was driven by the $50.1bn reclassification of businesses to assets held for sale, and by a decrease in other personal lending, mainly in Hong Kong (down $1.5bn). This was offset by mortgage growth of $15.4bn, mainly in the UK (up $8.9bn), Hong Kong (up $3.4bn) and Australia (up $1.6bn).

The underlying increase in loans and advances to banks was driven by growth in the UK (up $10.6bn), Hong Kong (up $7.9bn) and Egypt (up $1.9bn), driven mainly by higher central bank placements.

At 31 December 2022, the allowance for ECL of $12.6bn increased by $0.5bn compared with 31 December 2021, including favourable foreign exchange movements of $0.6bn and the effect of reclassifications to assets held for sale of $0.4bn. The $12.6bn allowance comprised $12.1bn in respect of assets held at amortised cost, $0.4bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').

Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers increased by $0.6bn from 31 December 2021. This was attributable to:

• a $0.7bn increase in wholesale loans and advances to customers, of which $0.7bn was driven by stage 3; and

• a $0.1bn decrease in personal loans and advances to customers, of which $0.4bn was driven by stage 3, partly offset by an increase of $0.3bn in stages 1 and 2.

Stage 3 balances at 31 December 2022 increased by $1.9bn from 31 December 2021. This was driven by a $3.2bn increase in wholesale loans and advances to customers, mainly in corporate real estate portfolios in Hong Kong. This was partly offset by a decrease of $1.3bn in personal loans and advances to customers.

At 31 December 2022, for certain retail lending portfolios, we introduced enhancements in the significant increase in credit risk ('SICR') approach in relation to capturing relative movements in probability of default ('PD'). The enhanced approach captured relative movements in PD since origination, which resulted in a significant migration to stage 2 from loans to customers gross carrying amounts in stage 1.

The volume of stage 1 customer accounts with lower absolute levels of credit risk who have exhibited some amount of relative increase in PD since origination have migrated into stage 2, and accounts originated with higher absolute levels of credit risk with no or insignificant increases in PD since origination have been transferred to stage 1, with no material overall change in risk.

The impact on ECL is immaterial due to the offsetting ECL impacts of stage migrations and due to the low loan-to-value ('LTV') profiles. This is particularly applicable to UK customers.

The enhancement of the SICR approach constitutes an improvement towards more responsive models that better reflect the SICR since origination. This includes consideration of the current cost of living pressures, as markets adjust to the higher interest-rate environment.

In wholesale lending, China's commercial real estate sector continued to deteriorate in 2022, resulting in further stage 2 allowances on downgrades and new and additional stage 3 charges.

The ECL charge for 2022 was $3.6bn, inclusive of recoveries. This was driven by higher ECL charges relating to increasing inflationary pressures, rising interest rates, China commercial real estate exposures and economic uncertainty, partly offset by a release in Covid-19-related allowances at the beginning of the year.

The ECL charge comprised: $2.4bn in respect of wholesale lending, of which $1.7bn were in stage 3 and purchased or originated credit impaired ('POCI'); $1.1bn in respect of personal lending, of which $0.5bn were in stage 3; and $0.1bn in respect of debt instruments measured at FVOCI.

Income statement movements are analysed further on page 101.

While credit risk arises across most of our balance sheet, ECL have typically been recognised on loans and advances to customers and banks, in addition to securitisation exposures and other structured products. As a result, our disclosures focus primarily on these two areas. For further details of:

• maximum exposure to credit risk, see page 153;

• measurement uncertainty and sensitivity analysis of ECL estimates, see page 153;

• reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees, see page 162;

• credit quality, see page 165;

• total wholesale lending for loans and advances to banks and customers by stage distribution, see page 171;

• wholesale lending collateral, see page 180;

• total personal lending for loans and advances to customers at amortised cost by stage distribution, see page 188; and

• personal lending collateral, see page 193.

•

Summary of credit risk

The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL.

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
(Audited)
	31 Dec 2022		At 31 Dec 2021
	Gross carrying/nominal amount	Allowance for ECL1	Gross carrying/nominal amount	Allowance for ECL1
	$m	$m	$m	$m
Loans and advances to customers at amortised cost	936,307	(11,453)	1,057,231	(11,417)
-  personal	415,012	(2,872)	478,337	(3,103)
-  corporate and commercial	454,356	(8,324)	513,539	(8,204)
-  non-bank financial institutions	66,939	(257)	65,355	(110)
Loans and advances to banks at amortised cost	104,951	(69)	83,153	(17)
Other financial assets measured at amortised cost	1,014,498	(553)	880,351	(193)
-  cash and balances at central banks	327,005	(3)	403,022	(4)
-  items in the course of collection from other banks	7,297	-	4,136	-
-  Hong Kong Government certificates of indebtedness	43,787	-	42,578	-
-  reverse repurchase agreements - non-trading	253,754	-	241,648	-
-  financial investments	168,827	(80)	97,364	(62)
-  assets held for sale2	102,556	(415)	2,859	(43)
-  prepayments, accrued income and other assets3	111,272	(55)	88,744	(84)
Total gross carrying amount on-balance sheet	2,055,756	(12,075)	2,020,735	(11,627)
Loans and other credit-related commitments	618,788	(386)	627,637	(379)
-  personal	244,006	(27)	239,685	(39)
-  corporate and commercial	269,187	(340)	283,625	(325)
-  financial	105,595	(19)	104,327	(15)
Financial guarantees	18,783	(52)	27,795	(62)
-  personal	1,135	-	1,130	-
-  corporate and commercial	13,587	(50)	22,355	(58)
-  financial	4,061	(2)	4,310	(4)
Total nominal amount off-balance sheet4	637,571	(438)	655,432	(441)
	2,693,327	(12,513)	2,676,167	(12,068)
	Fair value	Memorandum allowance for ECL5	Fair value	Memorandum allowance for ECL5
	$m	$m	$m	$m
Debt instruments measured at fair value through other comprehensive income ('FVOCI')	266,303	(145)	347,203	(96)

1  The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

2  For further details on gross carrying amounts and allowances for ECL related to assets held for sale, see 'Assets held for sale' on page 151.

3  Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 326 comprises both financial and non-financial assets, including cash collateral and settlement accounts.

4  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

5  Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the income statement.

The following table provides an overview of the Group's credit risk by stage and industry, and the associated ECL coverage. The financial assets recorded in each stage have the following characteristics:

• Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised.

• Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime ECL is recognised.

•
Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised.

• POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime ECL is recognised.

•

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2022
(Audited)
	Gross carrying/nominal amount1					Allowance for ECL					ECL coverage %
	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%	%
Loans and advances to customers at amortised cost	777,543	139,130	19,505	129	936,307	(1,095)	(3,491)	(6,829)	(38)	(11,453)	0.1	2.5	35.0	29.5	1.2
-  personal	362,781	48,891	3,340	-	415,012	(562)	(1,505)	(805)	-	(2,872)	0.2	3.1	24.1	-	0.7
-  corporate and commercial	353,010	85,521	15,696	129	454,356	(490)	(1,909)	(5,887)	(38)	(8,324)	0.1	2.2	37.5	29.5	1.8
-  non-bank financial institutions	61,752	4,718	469	-	66,939	(43)	(77)	(137)	-	(257)	0.1	1.6	29.2	-	0.4
Loans and advances to banks at amortised cost	103,042	1,827	82	-	104,951	(18)	(29)	(22)	-	(69)	-	1.6	26.8	-	0.1
Other financial assets measured at amortised cost	996,489	17,166	797	46	1,014,498	(124)	(188)	(234)	(7)	(553)	-	1.1	29.4	15.2	0.1
Loan and other credit-related commitments	583,383	34,033	1,372	-	618,788	(141)	(180)	(65)	-	(386)	-	0.5	4.7	-	0.1
-  personal	239,521	3,686	799	-	244,006	(26)	(1)	-	-	(27)	-	-	-	-	-
-  corporate and commercial	241,313	27,323	551	-	269,187	(111)	(166)	(63)	-	(340)	-	0.6	11.4	-	0.1
-  financial	102,549	3,024	22	-	105,595	(4)	(13)	(2)	-	(19)	-	0.4	9.1	-	-
Financial guarantees	16,071	2,463	249	-	18,783	(6)	(13)	(33)	-	(52)	-	0.5	13.3	-	0.3
-  personal	1,123	11	1	-	1,135	-	-	-	-	-	-	-	-	-	-
-  corporate and commercial	11,547	1,793	247	-	13,587	(5)	(12)	(33)	-	(50)	-	0.7	13.4	-	0.4
-  financial	3,401	659	1	-	4,061	(1)	(1)	-	-	(2)	-	0.2	-	-	-
At 31 Dec 2022	2,476,528	194,619	22,005	175	2,693,327	(1,384)	(3,901)	(7,183)	(45)	(12,513)	0.1	2.0	32.6	25.7	0.5

1  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

2  Purchased or originated credit-impaired ('POCI').

Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2

financial assets by those less than 30 days and greater than 30 DPD and therefore presents those financial assets classified as stage 2 due to ageing (30 DPD) and those identified at an earlier stage (less than 30 DPD).

Stage 2 days past due analysis at 31 December 2022
(Audited)
	Gross carrying amount				Allowance for ECL				ECL coverage %
	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2
	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%
Loans and advances to customers at amortised cost	139,130	134,733	2,411	1,986	(3,491)	(3,019)	(234)	(238)	2.5	2.2	9.7	12.0
-  personal	48,891	46,402	1,683	806	(1,505)	(1,080)	(214)	(211)	3.1	2.3	12.7	26.2
-  corporate and commercial	85,521	84,005	712	804	(1,909)	(1,862)	(20)	(27)	2.2	2.2	2.8	3.4
-  non-bank financial institutions	4,718	4,326	16	376	(77)	(77)	-	-	1.6	1.8	-	-
Loans and advances to banks at amortised cost	1,827	1,817	-	10	(29)	(29)	-	-	1.6	1.6	-	-
Other financial assets measured at amortised cost	17,166	16,930	140	96	(188)	(164)	(8)	(16)	1.1	1.0	5.7	16.7

1  Days past due ('DPD').

2  The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2021 (continued)
(Audited)
	Gross carrying/nominal amount1					Allowance for ECL					ECL coverage %
	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%	%
Loans and advances to customers at amortised cost	918,936	119,224	18,797	274	1,057,231	(1,367)	(3,119)	(6,867)	(64)	(11,417)	0.1	2.6	36.5	23.4	1.1
-  personal	456,956	16,439	4,942	-	478,337	(658)	(1,219)	(1,226)	-	(3,103)	0.1	7.4	24.8	-	0.6
-  corporate and commercial	400,894	98,911	13,460	274	513,539	(665)	(1,874)	(5,601)	(64)	(8,204)	0.2	1.9	41.6	23.4	1.6
-  non-bank financial institutions	61,086	3,874	395	-	65,355	(44)	(26)	(40)	-	(110)	0.1	0.7	10.1	-	0.2
Loans and advances to banks at amortised cost	81,636	1,517	-	-	83,153	(14)	(3)	-	-	(17)	-	0.2	-	-	-
Other financial assets measured at amortised cost	875,016	4,988	304	43	880,351	(91)	(54)	(42)	(6)	(193)	-	1.1	13.8	14.0	-
Loan and other credit-related commitments	594,473	32,389	775	-	627,637	(165)	(174)	(40)	-	(379)	-	0.5	5.2	-	0.1
-  personal	237,770	1,747	168	-	239,685	(37)	(2)	-	-	(39)	-	0.1	-	-	-
-  corporate and commercial	254,750	28,269	606	-	283,625	(120)	(165)	(40)	-	(325)	-	0.6	6.6	-	0.1
-  financial	101,953	2,373	1	-	104,327	(8)	(7)	-	-	(15)	-	0.3	-	-	-
Financial guarantees	24,932	2,638	225	-	27,795	(11)	(30)	(21)	-	(62)	-	1.1	9.3	-	0.2
-  personal	1,114	15	1	-	1,130	-	-	-	-	-	-	-	-	-	-
-  corporate and commercial	20,025	2,107	223	-	22,355	(10)	(28)	(20)	-	(58)	-	1.3	9.0	-	0.3
-  financial	3,793	516	1	-	4,310	(1)	(2)	(1)	-	(4)	-	0.4	100.0	-	0.1
At 31 Dec 2021	2,494,993	160,756	20,101	317	2,676,167	(1,648)	(3,380)	(6,970)	(70)	(12,068)	0.1	2.1	34.7	22.1	0.5

1  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

2  Purchased or originated credit-impaired ('POCI').

Stage 2 days past due analysis at 31 December 2021 (continued)
(Audited)
	Gross carrying amount				Allowance for ECL				ECL coverage %
	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29 DPD1,2	30 and > DPD1,2
	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%
Loans and advances to customers at amortised cost	119,224	115,350	2,193	1,681	(3,119)	(2,732)	(194)	(193)	2.6	2.4	8.8	11.5
-  personal	16,439	14,124	1,387	928	(1,219)	(884)	(160)	(175)	7.4	6.3	11.5	18.9
-  corporate and commercial	98,911	97,388	806	717	(1,874)	(1,822)	(34)	(18)	1.9	1.9	4.2	2.5
-  non-bank financial institutions	3,874	3,838	-	36	(26)	(26)	-	-	0.7	0.7	-	-
Loans and advances to banks at amortised cost	1,517	1,517	-	-	(3)	(3)	-	-	0.2	0.2	-	-
Other financial assets measured at amortised cost	4,988	4,935	22	31	(54)	(47)	(4)	(3)	1.1	1.0	18.2	9.7

1  Days past due ('DPD').

2  The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.  

Stage 2 decomposition

The following table presents the stage 2 decomposition of gross carrying amount and allowances for ECL for loans and advances to customers. It also sets out the reasons why an exposure is classified as stage 2 and therefore presented as a significant increase in credit risk at 31 December 2022.

The quantitative classification shows gross carrying values and allowances for ECL for which the applicable reporting date probability of default ('PD') measure exceeds defined quantitative thresholds for retail and wholesale exposures, as set out in Note 1.2 'Summary of significant accounting policies', on page 342.

The qualitative classification primarily accounts for CRR deterioration, watch-and-worry and retail management judgemental adjustments.

A summary of our current policies and practices for the significant increase in credit risk is set out in 'Summary of significant accounting policies' on page 342.

Loans and advances to customers1
	At 31 Dec 2022
	Gross carrying amount				Allowance for ECL				ECL coverage
	Personal	Corporate and commercial	Non-bank financial institutions	Total	Personal	Corporate and commercial	Non-bank financial institutions	Total	Total
	$m	$m	$m	$m	$m	$m	$m	$m	%
Quantitative	41,611	66,450	3,679	111,740	(1,301)	(1,644)	(66)	(3,011)	2.7
Qualitative	7,233	18,555	878	26,666	(201)	(262)	(11)	(474)	1.8
30 DPD backstop2	47	516	161	724	(3)	(3)	-	(6)	0.8
Total stage 2	48,891	85,521	4,718	139,130	(1,505)	(1,909)	(77)	(3,491)	2.5
	At 31 Dec 2021
Quantitative	9,907	68,000	3,041	80,948	(1,076)	(1,347)	(19)	(2,442)	3.0
Qualitative	6,329	30,326	818	37,473	(134)	(520)	(7)	(661)	1.8
30 DPD backstop2	203	585	15	803	(9)	(7)	-	(16)	2.0
Total stage 2	16,439	98,911	3,874	119,224	(1,219)	(1,874)	(26)	(3,119)	2.6

1  Where balances satisfy more than one of the above three criteria for determining a significant increase in credit risk, the corresponding gross exposure and ECL have been assigned in order of categories presented.

2  Days past due ('DPD').

Assets held for sale

(Audited)

During 2022, gross loans and advances and related impairment allowances were reclassified from 'loans and advances to customers' and 'loans and advances to banks' to 'assets held for sale' in the balance sheet.

At 31 December 2022, the most material balances held for sale came from our banking business in Canada and from our retail banking operations in France.

Disclosures relating to assets held for sale are provided in the following credit risk tables, primarily where the disclosure is relevant to the measurement of these financial assets:

•
'Maximum exposure to credit risk' (page 153);

• 'Distribution of financial instruments by credit quality at 31 December' (page 165);

Although there was a reclassification on the balance sheet, there was no separate income statement reclassification. As a result, charges for changes in expected credit losses and other credit impairment charges shown in the credit risk disclosures include charges relating to financial assets classified as 'assets held for sale'.

'Loans and other credit-related commitments' and 'financial guarantees', as reported in credit disclosures, also include exposures and allowances relating to financial assets classified as 'assets held for sale'.

Loans and advances to customers and banks measured at amortised cost
(Audited)
	2022		2021
	Total gross loans and advances	Allowance for ECL	Total gross loans and advances	Allowance for ECL
	$m	$m	$m	$m
As reported	1,041,258	(11,522)	1,140,384	(11,434)
Reported in 'Assets held for sale'	81,221	(392)	2,424	(39)
At 31 December	1,122,479	(11,914)	1,142,808	(11,473)

At 31 December 2022, gross loans and advances of our banking business in Canada were $55.5bn, and the related allowance for ECL were $0.2bn. Gross loans of our retail banking operations in France were $25.1bn, and the related allowance for ECL were $0.1bn.

Lending balances held for sale continue to be measured at amortised cost less allowances for impairment and, therefore, such carrying amounts may differ from fair value.

These lending balances are part of associated disposal groups that are measured in their entirety at the lower of carrying amount and fair value less costs to sell. Any difference between the carrying amount of these assets and their sales price is part of the overall gain or loss on the associated disposal group as a whole.

For further details of the carrying amount and the fair value at 31 December 2022 of loans and advances to banks and customers classified as held for sale, see Note 23 on the financial statements.

Gross loans and allowance for ECL on loans and advances to customers and banks reported in 'Assets held for sale'
(Audited)
	Banking business in Canada		Retail banking operations in France		Other1		Total
	Gross carrying value	Allowance for ECL	Gross carrying value	Allowance for ECL	Gross carrying value	Allowance for ECL	Gross carrying value	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	55,431	(234)	25,121	(92)	412	(62)	80,964	(388)
-  personal	26,637	(75)	22,691	(88)	305	(47)	49,633	(210)
-  corporate and commercial	27,128	(154)	2,379	(4)	107	(15)	29,614	(173)
-  non-bank financial institutions	1,666	(5)	51	-	-	-	1,717	(5)
Loans and advances to banks at amortised cost	100	-	-	-	157	(4)	257	(4)
At 31 December 2022	55,531	(234)	25,121	(92)	569	(66)	81,221	(392)
	Banking business in Canada		Retail banking operations in France		Other2		Total
	Gross carrying value	Allowance for ECL	Gross carrying value	Allowance for ECL	Gross carrying value	Allowance for ECL	Gross carrying value	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	-	-	-	-	2,424	(39)	2,424	(39)
-  personal	-	-	-	-	2,424	(39)	2,424	(39)
-  corporate and commercial	-	-	-	-	-	-	-	-
-  non-bank financial institutions	-	-	-	-	-	-	-	-
Loans and advances to banks at amortised cost	-	-	-	-	-	-	-	-
At 31 December 2021	-	-	-	-	2,424	(39)	2,424	(39)

1  Comprising assets held for sale relating to the planned sale of our branch operations in Greece and of our business in Russia.

2  Comprising assets held for sale relating to our mass market retail banking business in the US.

The table below analyses the amount of ECL (charges)/releases arising from assets held for sale. The charges during the period primarily relate to our retail banking operations in France.

Changes in expected credit losses and other credit impairment
(Audited)
	2022	2021
	$m	$m
ECL (charges)/releases arising from:
-  assets held for sale	(5)	-
-  assets not held for sale	(3,587)	928
Year ended 31 December	(3,592)	928

Credit exposure

Maximum exposure to credit risk

(Audited)

This section provides information on balance sheet items and their offsets as well as loan and other credit-related commitments.

Commentary on consolidated balance sheet movements in 2022 is provided on page 106.

The offset on derivatives remains in line with the movements in maximum exposure amounts.

'Maximum exposure to credit risk' table The following table presents our maximum exposure before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net exposure to credit risk, and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount and is net of the allowance for ECL. For financial guarantees and other guarantees granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of the committed facilities. The offset in the table relates to amounts where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. No offset has been applied to off-balance sheet collateral. In the case of derivatives, the offset column also includes collateral received in cash and other financial assets.

Other credit risk mitigants

While not disclosed as an offset in the following 'Maximum exposure to credit risk' table, other arrangements are in place that reduce our maximum exposure to credit risk. These include a charge over collateral on borrowers' specific assets, such as residential properties, collateral held in the form of financial instruments that are not held on the balance sheet and short positions in securities. In addition, for financial assets held as part of linked insurance/investment contracts the credit risk is predominantly borne by the policyholder. See page 341 and Note 31 on the financial statements for further details of collateral in respect of certain loans and advances and derivatives.

Collateral available to mitigate credit risk is disclosed in the 'Collateral' section on page 180.

Maximum exposure to credit risk
(Audited)
	2022			2021
	Maximum exposure	Offset	Net	Maximum exposure	Offset	Net
	$m	$m	$m	$m	$m	$m
Loans and advances to customers held at amortised cost	924,854	(20,315)	904,539	1,045,814	(22,838)	1,022,976
-  personal	412,140	(2,575)	409,565	475,234	(4,461)	470,773
-  corporate and commercial	446,032	(16,262)	429,770	505,335	(16,824)	488,511
-  non-bank financial institutions	66,682	(1,478)	65,204	65,245	(1,553)	63,692
Loans and advances to banks at amortised cost	104,882	-	104,882	83,136	-	83,136
Other financial assets held at amortised cost	1,029,618	(8,969)	1,020,649	882,708	(12,231)	870,477
-  cash and balances at central banks	327,002	-	327,002	403,018	-	403,018
-  items in the course of collection from other banks	7,297	-	7,297	4,136	-	4,136
-  Hong Kong Government certificates of indebtedness	43,787	-	43,787	42,578	-	42,578
-  reverse repurchase agreements - non-trading	253,754	(8,969)	244,785	241,648	(12,231)	229,417
-  financial investments	168,747	-	168,747	97,302	-	97,302
-  assets held for sale	115,919	-	115,919	3,411	-	3,411
-  prepayments, accrued income and other assets	113,112	-	113,112	90,615	-	90,615
Derivatives	284,146	(273,497)	10,649	196,882	(188,284)	8,598
Total on-balance sheet exposure to credit risk	2,343,500	(302,781)	2,040,719	2,208,540	(223,353)	1,985,187
Total off-balance sheet	934,326	-	934,326	928,183	-	928,183
-  financial and other guarantees	106,861	-	106,861	113,088	-	113,088
-  loan and other credit-related commitments	827,465	-	827,465	815,095	-	815,095
At 31 Dec	3,277,826	(302,781)	2,975,045	3,136,723	(223,353)	2,913,370

Concentration of exposure

We have a number of global businesses with a broad range of products. We operate in a number of geographical markets with the majority of our exposures in Asia and Europe.

For an analysis of:

• financial investments, see Note 16 on the financial statements;

• trading assets, see Note 11 on the financial statements;

• derivatives, see page 187 and Note 15 on the financial statements; and

• loans and advances by industry sector and by the location of the principal operations of the lending subsidiary (or, in the case of the operations of The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, HSBC Bank Middle East Limited and HSBC Bank USA, by the location of the lending branch), see page 170 for wholesale lending and page 187 for personal lending.

Credit deterioration of financial instruments

(Audited)

A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2, stage 3 (credit impaired) and POCI financial instruments can be found in Note 1.2 on the financial statements.

Measurement uncertainty and sensitivity analysis of ECL estimates

 (Audited)

The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions to credit risk models to estimate future credit losses, and probability weight the results to determine an unbiased ECL estimate. Management judgemental adjustments are used to address late-breaking events, data and model limitations, model deficiencies and expert credit judgements.

Amid a deterioration in the economic and geopolitical environment, management judgements and estimates continued to be subject to a high degree of uncertainty in relation to assessing economic scenarios for impairment allowances in 2022.

Inflation, economic contraction and high interest rates, combined with an unstable geopolitical environment and the effects of global supply chain disruption, contributed to elevated levels of uncertainty during the year.

At 31 December 2022, as a result of this uncertainty, additional stage 1 and 2 impairment allowances were recognised. Management continued to reflect a degree of caution both in the selection of economic scenarios and their weightings, and in the use of management judgemental adjustments, described in more detail below.

At 31 December 2022, there was a reduction in management judgemental adjustments compared with 31 December 2021. Adjustments related to Covid-19 and for sector-specific risks were reduced as scenarios and modelled outcomes better reflected the key risks at 31 December 2022.

Methodology

Four global economic scenarios are used to capture the current economic environment and to articulate management's view of the range of potential outcomes. Scenarios produced to calculate ECL are aligned to HSBC's top and emerging risks.

Three of the scenarios are drawn from consensus forecasts and distributional estimates. The Central scenario is deemed the 'most likely' scenario, and usually attracts the largest probability weighting, while the outer scenarios represent the tails of the distribution, which are less likely to occur. The Central scenario is created using the average of a panel of external forecasters. Consensus Upside and Downside scenarios are created with reference to distributions for select markets that capture forecasters' views of the entire range of outcomes. In the later years of the scenarios, projections revert to long-term consensus trend expectations. In the consensus outer scenarios, reversion to trend expectations is done mechanically with reference to historically observed quarterly changes in the values of macroeconomic variables.

The fourth scenario, Downside 2, is designed to represent management's view of severe downside risks. It is a globally consistent narrative-driven scenario that explores more extreme economic outcomes than those captured by the consensus scenarios. In this scenario, variables do not, by design, revert to long-term trend expectations. They may instead explore alternative states of equilibrium, where economic activity moves permanently away from past trends. The consensus Downside and the consensus Upside scenarios are each constructed to be consistent with a 10% probability. The Downside 2 is constructed with a 5% probability. The Central scenario is assigned the remaining 75%. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances. However, management may depart from this probability-based scenario weighting approach when the economic outlook is determined to be particularly uncertain and risks are elevated.

In light of ongoing risks, management deviated from this probability weighting in the fourth quarter of 2022, and assigned additional weight to outer scenarios.

Description of economic scenarios

The economic assumptions presented in this section have been formed by HSBC with reference to external forecasts and estimates, specifically for the purpose of calculating ECL.

Economic forecasts in the Central scenario remain subject to a high degree of uncertainty. Upside and Downside scenarios are constructed so that they encompass the potential crystallisation of a number of key macro-financial risks.

At the end of 2022, risks to the economic outlook included the persistence of high inflation and its consequences on monetary policy. Rapid changes to public policy also increased forecast uncertainty.

In Asia, the removal of Chinese Covid-19-related public health restrictions presents a key source of potential upside risk, but with significant near-term uncertainty relating to a subsequent surge of infections. This policy change could also have global implications.

In Europe, risks relating to energy pricing and supply security remain significant. Geopolitical risks also remain significant and include the possibility of a prolonged and escalating Russia-Ukraine war, continued differences between the US and other countries with China over a range of economic and strategic issues, and the evolution of the UK's relationship with the EU.

Economic forecasts for our main markets deteriorated in the fourth quarter as GDP growth slowed. In North America and Europe, high inflation and rising interest rates have reduced real household incomes and raised business costs, dampening consumption and investment and lowering growth expectations. The effects of higher interest rate expectations and lower growth are evident in asset price expectations, with house prices forecasts, in particular, significantly lower.

In Asia, forecasts for Hong Kong and mainland China were cut following weaker than expected third-quarter GDP growth, and due to China's adherence to a stringent pandemic-related public health policy response for the majority of the year. While China made an abrupt reversal of the policy in December and GDP is expected to recover in 2023, there remains a very high degree of uncertainty to both the upside and downside, and consensus forecasts have been slow to adjust. The increased uncertainty over China's lifting of the restrictions has been reflected in management's assessment of scenario probabilities.

The scenarios used to calculate ECL in the Annual Report and Accounts 2022 are described below.

The consensus Central scenario

HSBC's Central scenario reflects a low-growth and higher-inflation environment across many of our key markets. The scenario features an initial period of below-trend GDP growth in most of our main markets as higher inflation and tighter monetary policy causes a squeeze on business margins and households' real disposable income. Growth returns to its long-term expected trend in later years as central banks bring inflation back to target.

However, three of our markets are forecast to experience increased GDP growth. In Hong Kong and mainland China, GDP growth is expected to be stronger in 2023 relative to 2022, following several quarters of negative GDP growth and the suspension of Covid-19-related restrictions. In the UAE, high oil prices and the continued recovery of international travel and tourism are expected to ensure growth remains above trend in the short term. 

Our Central scenario assumes that inflation peaked in most of our key markets at the end of 2022, but remains high through 2023, before moderating as energy prices stabilise and supply chain disruptions abate. Central banks are expected to keep raising interest rates until the middle of 2023. Inflation is forecast to revert to target in most markets by early 2024.

Global GDP is expected to grow by 1.6% in 2023 in the Central scenario, and the average rate of global GDP growth is forecast to be 2.5% over the five-year forecast period. This is below the average growth rate over the five-year period prior to the onset of the pandemic.

The key features of our Central scenario are:

• Economic activity in European and North American markets continues to weaken. Most major economies are forecast to grow in 2023, but at very low rates. Hong Kong and mainland China are expected to see a recovery in activity from 2023 as Covid-19-related restrictions are lifted.

• In most markets, unemployment rises moderately from historical lows as economic activity slows. Labour markets remain fairly tight across our key markets.

• Inflation is expected to remain elevated across many of our key markets, driven by energy and food prices. Inflation is subsequently expected to converge back towards central banks' target rates over the next two years of the forecast.

• Policy interest rates in key markets will continue to rise in the near term but at a slower pace. Interest rates will stay elevated but start to ease as inflation in each of the markets return to target.

• The West Texas Intermediate oil price is forecast to average $72 per barrel over the projection period.

The Central scenario was first created with forecasts available in November, and reviewed continually until late December. Probability weights assigned to the Central scenario vary from 55% to 70% and reflect relative differences in risk and uncertainty across markets.

The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario.

Central scenario 2023-2027
	UK	US	Hong Kong	Mainland China	Canada	France	UAE	Mexico
	%	%	%	%	%	%	%	%
GDP growth rate
2023: Annual average growth rate	(0.8)	0.2	2.7	4.6	0.6	0.2	3.7	1.2
2024: Annual average growth rate	1.3	1.5	3.0	4.8	1.9	1.6	3.7	2.0
2025: Annual average growth rate	1.7	2.0	2.7	4.7	2.0	1.5	3.1	2.3
5-year average	1.1	1.5	2.7	4.6	1.6	1.2	3.2	1.9
Unemployment rate
2023: Annual average rate	4.4	4.3	3.7	5.2	6.1	7.6	2.9	3.7
2024: Annual average rate	4.6	4.5	3.5	5.1	5.9	7.5	2.8	3.7
2025: Annual average rate	4.3	4.2	3.4	5.0	6.0	7.3	2.8	3.5
5-year average	4.3	4.2	3.4	5.0	5.9	7.3	2.8	3.6
House price growth
2023: Annual average growth rate	0.2	(2.5)	(10.0)	(0.1)	(15.6)	1.8	5.9	7.9
2024: Annual average growth rate	(3.8)	(3.2)	(3.0)	2.9	(1.2)	2.0	5.2	5.2
2025: Annual average growth rate	0.7	(1.0)	1.7	3.5	4.0	3.1	4.5	4.2
5-year average	0.4	(0.7)	(1.0)	2.9	(1.1)	2.8	4.4	5.1
Inflation rate
2023: Annual average rate	6.9	4.1	2.1	2.4	3.5	4.6	3.2	5.7
2024: Annual average rate	2.5	2.5	2.1	2.2	2.2	2.0	2.2	4.1
2025: Annual average rate	2.1	2.2	2.0	2.2	2.1	1.8	2.1	3.7
5-year average	3.1	2.7	2.1	2.2	2.4	2.4	2.3	4.2
Probability	60	70	55	55	70	60	70	70

The graphs compare the respective Central scenario at the year end 2021 with economic expectations at the end of 2022.

GDP growth: Comparison of Central scenarios

UK

Note: Real GDP shown as year-on-year percentage change.

Hong Kong

Note: Real GDP shown as year-on-year percentage change.

US

Note: Real GDP shown as year-on-year percentage change.

Mainland China

Note: Real GDP shown as year-on-year percentage change.

The consensus Upside scenario

Compared with the Central scenario, the consensus Upside scenario features stronger economic activity in the near term, before converging to long-run trend expectations. It also incorporates a faster fall in the rate of inflation than incorporated in the Central scenario.

The scenario is consistent with a number of key upside risk themes. These include faster resolution of supply chain issues; a rapid

conclusion to the Russia-Ukraine war; de-escalation of tensions between the US and China; relaxation of Covid-19 policies in Asia; and improved relations between the UK and the EU.

The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario.

Consensus Upside scenario 'best outcome'
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	4.4	(4Q24)	3.6	(4Q24)	9.0	(3Q23)	10.3	(2Q23)	4.3	(3Q24)	3.1	(1Q24)	7.8	(4Q23)	4.7	(4Q23)
Unemployment rate	3.5	(4Q23)	3.1	(3Q23)	3.0	(4Q23)	4.7	(3Q24)	5.2	(3Q24)	6.5	(4Q24)	2.2	(3Q24)	3.1	(3Q23)
House price growth	4.2	(1Q23)	3.6	(1Q23)	1.4	(4Q24)	6.9	(4Q24)	4.9	(2Q24)	3.7	(1Q23)	9.5	(2Q24)	10.3	(4Q23)
Inflation rate	0.7	(1Q24)	1.6	(1Q24)	(0.1)	(4Q23)	0.8	(4Q23)	1.0	(1Q24)	0.8	(4Q23)	1.5	(3Q24)	3.2	(1Q24)
Probability	5		5		20		20		5		5		5		5

Note: Extreme point in the consensus Upside is 'best outcome' in the scenario, for example the highest GDP growth and the lowest unemployment rate, in the first two years of the scenario. The date on which the extreme is reached is indicated in parenthesis. For inflation, lower inflation is interpreted as the 'best' outcome.

Downside scenarios

Downside scenarios explore the intensification and crystallisation of a number of key economic and financial risks.

High inflation and a stronger monetary policy response have become key concerns for global growth. In the Downside scenarios, supply chain disruptions intensify, exacerbated by an escalation in the spread of Covid-19, and rising geopolitical tensions drive inflation higher.

There also remains a risk that energy and food prices rise further due to the Russia-Ukraine war, increasing pressure on household budgets and firms' costs.

The possibility of inflation expectations becoming detached from central bank targets also remains a risk. A wage-price spiral triggered by higher inflation and pandemic-related labour supply shortages could put sustained upward pressure on wages, aggravating cost pressures and increasing the squeeze on household real incomes and corporate margins. In turn, it raises the risk of a more forceful policy response from central banks, a steeper trajectory for interest rates and, ultimately, a deep economic recession.

The risks relating to Covid-19 are centred on the emergence of a new variant with greater vaccine resistance that necessitates the imposition of stringent public health policies. In Asia, with the reopening of China in December, management of Covid-19 remains a

key source of uncertainty, with the rapid spread of the virus posing a heightened risk of new vaccine-resistant variants emerging.

The geopolitical environment also present risks, including:

• a prolonged Russia-Ukraine war with escalation beyond Ukraine's borders;

• the deterioration of the trading relationship between the UK and the EU over the Northern Ireland Protocol; and

• continued differences between the US and other countries with China, which could affect sentiment and restrict global economic activity.

The consensus Downside scenario

In the consensus Downside scenario, economic activity is considerably weaker compared with the Central scenario. In this scenario, GDP growth weakens below the Central scenario, unemployment rates rise and asset prices fall. The scenario features a temporary supply side shock that keeps inflation higher than the baseline, before the effects of weaker demand begin to dominate, leading to a fall in commodity prices and to lower inflation.

The following table describes key macroeconomic variables and the probabilities assigned in the consensus Downside scenario.

Consensus Downside scenario 'worst outcome'
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	(3.5)	(3Q23)	(3.7)	(4Q23)	(2.2)	(4Q23)	(1.2)	(4Q23)	(3.9)	(4Q23)	(1.4)	(3Q23)	1.0	(4Q23)	(2.7)	(4Q23)
Unemployment rate	5.8	(2Q24)	5.9	(1Q24)	5.2	(3Q24)	5.9	(4Q23)	7.6	(3Q23)	8.8	(4Q23)	4.1	(3Q23)	4.4	(1Q23)
House price growth	(10.1)	(2Q24)	(7.8)	(4Q23)	(14.9)	(2Q23)	(1.9)	(1Q23)	(23.8)	(2Q23)	(0.6)	(4Q23)	(3.0)	(4Q23)	2.2	(3Q24)
Inflation rate (min)	(0.4)	(4Q24)	0.6	(4Q24)	0.3	(4Q24)	0.7	(4Q24)	0.4	(4Q24)	0.3	(4Q24)	1.8	(2Q23)	2.2	(4Q24)
Inflation rate (max)	10.8	(1Q23)	6.2	(1Q23)	3.7	(4Q23)	4.0	(4Q23)	6.0	(1Q23)	7.2	(1Q23)	4.5	(1Q23)	7.9	(1Q23)
Probability	25		20		20		20		15		25		20		20

Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, for example lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. The date on which the extreme is reached is indicated in parenthesis. Due to the nature of the shock to inflation in the Downside scenarios, both the lowest and the highest point is shown in the tables.

Downside 2 scenario

The Downside 2 scenario features a deep global recession and reflects management's view of the tail of the economic distribution. It incorporates the crystallisation of a number of risks simultaneously, including further escalation of the Russia-Ukraine war, worsening of supply chain disruptions and the emergence of a vaccine-resistant Covid-19 variant that necessitates a stringent public health policy response globally.

This scenario features an initial supply-side shock that pushes up inflation and interest rates higher. This impulse is expected to prove short lived as a large downside demand pressure causes commodity prices to correct sharply and global price inflation to fall as a severe and prolonged recession takes hold.

The following table describes key macroeconomic variables and the probabilities assigned in the Downside 2 scenario.

Downside 2 scenario 'worst outcome'
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	(6.9)	(3Q23)	(5.0)	(4Q23)	(9.2)	(4Q23)	(6.9)	(4Q23)	(5.9)	(4Q23)	(6.8)	(4Q23)	(3.7)	(2Q24)	(7.4)	(4Q23)
Unemployment rate	8.7	(2Q24)	9.5	(4Q24)	5.8	(1Q24)	6.8	(4Q24)	11.6	(2Q24)	10.3	(4Q24)	4.6	(2Q24)	5.6	(2Q24)
House price growth	(22.9)	(2Q24)	(21.5)	(4Q23)	(18.2)	(1Q24)	(18.5)	(4Q23)	(36.3)	(4Q23)	(6.4)	(2Q24)	(3.6)	(4Q23)	0.9	(3Q24)
Inflation rate (min)	(2.3)	(2Q24)	0.3	(4Q24)	0.6	(4Q24)	1.0	(4Q24)	1.1	(4Q24)	(2.5)	(2Q24)	1.7	(4Q24)	2.0	(4Q24)
Inflation rate (max)	13.5	(2Q23)	6.3	(1Q23)	4.3	(4Q23)	4.6	(4Q23)	6.5	(1Q23)	10.4	(2Q23)	4.8	(1Q23)	7.9	(1Q23)
Probability	10		5		5		5		10		10		5		5

Note: Extreme point in the Downside 2 is 'worst outcome' in the scenario, for example lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. The date on which the extreme is reached is indicated in parenthesis. Due to the nature of the shock to inflation in the Downside scenarios, both the lowest and the highest point is shown in the tables.

Scenario weighting

In reviewing the economic conjuncture, the level of risk and uncertainty, management has considered both global and country-specific factors. This has led management to assign scenario probabilities that are tailored to its view of uncertainty in individual markets.

Key consideration around uncertainty attached to the Central scenario projections focused on:

• the progression of the Covid-19 pandemic in Asian countries, and the announcement of the removal of Covid-19-related measures and travel restrictions in mainland China and Hong Kong;

• further tightening of monetary policy, and the impact on borrowing costs in interest-rate sensitive sectors, such as housing;

• the risks to gas supply security in Europe, and the subsequent impact on inflation and commodity prices and growth; and

• the ongoing risks to global supply chains.

In mainland China and Hong Kong, the announcement of the relaxation of Covid-19-related measures and travel restrictions has led to increased uncertainty around the Central scenario projection. It was management's view that the easing of the policy could increase risks to the upside in the form of increased spending and travel. However, the continuing risks to the downside were also acknowledged, given the surge in Covid-19 infections and the potential for a new vaccine-resistant variant. This led management to assign a combined weighting of 75% to the consensus Upside and Central scenarios in both markets.

In the UK and US, the surge in price inflation and a squeeze on household real incomes have led to strong monetary policy responses from both central banks. Higher interest rates have increased recession risks and the prospects for outright decline in house prices. The UK faces additional challenges from the rise in energy prices and accompanying deterioration in the terms of trade. For Canada and Mexico, similar risk themes dominate, and the connectivity to the US has also been a key consideration. For the UK, the consensus Upside and Central scenarios had a combined weighting of 65%. In each of the other three markets, the combined weightings of the consensus Upside and Central scenarios were 75%.

In France, uncertainties around the outlook remain elevated due to high inflation and Europe's exposure to the Russia-Ukraine war through the economic costs incurred from the imposition of sanctions, trade disruption and energy dependence on Russia. The consensus Upside and Central scenarios had a combined weighting of 65%.

Management concluded that the outlook for the UAE was the least uncertain of all our key markets. It is benefiting from higher commodity prices and the revival in tourism and travel. The consensus Upside and Central scenarios had a combined weighting of 75%.

The following graphs show the historical and forecasted GDP growth rate for the various economic scenarios in our four largest markets.

US

UK

Hong Kong

Mainland China

Critical estimates and judgements

The calculation of ECL under IFRS 9 involves significant judgements, assumptions and estimates. The level of estimation uncertainty and judgement has remained elevated since 31 December 2021, including judgements relating to:

• the selection and weighting of economic scenarios, given rapidly changing economic conditions and a wide dispersion of economic forecasts. There is judgement in making assumptions about the effects of inflation and interest rates, global growth, supply chain disruption; and

• estimating the economic effects of those scenarios on ECL, particularly as the historical relationship between macroeconomic variables and defaults might not reflect the dynamics of current macroeconomic conditions.

How economic scenarios are reflected in ECL calculations

Models are used to reflect economic scenarios on ECL estimates. As described above, modelled assumptions and linkages based on historical information could not alone produce relevant information under the conditions experienced in 2022, and management judgemental adjustments were still required to support modelled outcomes. 

We have developed globally consistent methodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail credit risk. These standard approaches are described below, followed by the management judgemental adjustments made, including those to reflect the circumstances experienced in 2022.

For our wholesale portfolios, a global methodology is used for the estimation of the term structure of probability of default ('PD') and loss given default ('LGD'). For PDs, we consider the correlation of forward economic guidance to default rates for a particular industry in a country. For LGD calculations, we consider the correlation of forward economic guidance to collateral values and realisation rates for a particular country and industry. PDs and LGDs are estimated for the entire term structure of each instrument.

For impaired loans, LGD estimates take into account independent recovery valuations provided by external consultants where available or internal forecasts corresponding to anticipated economic conditions and individual company conditions. In estimating the ECL on impaired loans that are individually considered not to be significant, we incorporate the forward economic guidance proportionate to the probability-weighted outcome and the Central scenario outcome of the performing population.

For our retail portfolios, the impact of economic scenarios on PD is modelled at a portfolio level. Historical relationships between observed default rates and macroeconomic variables are integrated into IFRS 9 ECL estimates by using economic response models.

The impact of these scenarios on PD is modelled over a period equal to the remaining maturity of the underlying asset or assets. The impact on LGD is modelled for mortgage portfolios by forecasting future loan-to-value profiles for the remaining maturity of the asset by using national level forecasts of the house price index and applying the corresponding LGD expectation.

These models are based largely on historical observations and correlations with default rates. Management judgemental adjustments are described below.

Management judgemental adjustments

In the context of IFRS 9, management judgemental adjustments are typically short-term increases or decreases to the ECL at either a customer, segment or portfolio level to account for late-breaking events, model and data limitations and deficiencies, and expert credit judgement applied following management review and challenge.

This includes refining model inputs and outputs and using adjustments to ECL based on management judgement and higher-level quantitative analysis for impacts that are difficult to model.

The effects of management judgemental adjustments are considered for both balances and ECL when determining whether or not a significant increase in credit risk has occurred and is allocated to a stage where appropriate. This is in accordance with the internal adjustments framework.

Management judgemental adjustments are reviewed under the governance process for IFRS 9 (as detailed in the section 'Credit risk management' on page 145). Review and challenge focuses on the rationale and quantum of the adjustments with a further review carried out by the second line of defence where significant. For some management judgemental adjustments, internal frameworks establish the conditions under which these adjustments should no longer be required and as such are considered as part of the governance process. This internal governance process allows management judgemental adjustments to be reviewed regularly and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate.

The drivers of management judgemental adjustments continue to evolve with the economic environment and as new risks emerge.

At 31 December 2022, there was a $0.9bn reduction in management judgemental adjustments compared with 31 December 2021. Adjustments related to Covid-19 and for sector-specific risks were reduced as scenarios and modelled outcomes better reflected the key risks at 31 December 2022.

Management judgemental adjustments made in estimating the scenario-weighted reported ECL at 31 December 2022 are set out in the following table.

Management judgemental adjustments to ECL at 31 December 20221
	Retail	Wholesale	Total
	$bn	$bn	$bn
Banks, sovereigns, government entities and low-risk counterparties	-	-	-
Corporate lending adjustments		0.5	0.5
Retail lending inflation-related adjustments	0.1		0.1
Other macroeconomic-related adjustments	0.1		0.1
Pandemic-related economic recovery adjustments	-		-
Other retail lending adjustments	0.2		0.2
Total	0.3	0.5	0.8

.

Management judgemental adjustments to ECL at 31 December 20211
	Retail	Wholesale	Total
	$bn	$bn	$bn
Banks, sovereigns, government entities and low-risk counterparties		(0.1)	(0.1)
Corporate lending adjustments		1.3	1.3
Retail lending inflation-related adjustments			-
Other macroeconomic-related adjustments			-
Pandemic-related economic recovery adjustments	0.2		0.2
Other retail lending adjustments	0.3		0.3
Total	0.5	1.2	1.7

1  Management judgemental adjustments presented in the table reflect increases or (decreases) to ECL, respectively.

Management judgemental adjustments at 31 December 2022 were an increase to ECL of $0.5bn for the wholesale portfolio and an increase to ECL of $0.3bn for the retail portfolio.

At 31 December 2022, wholesale management judgemental adjustments were an ECL increase of $0.5bn (31 December 2021: $1.2bn increase).

• Adjustments to corporate exposures increased ECL by $0.5bn at 31 December 2022 (31 December 2021: $1.3bn increase). These principally reflected the outcome of management judgements for high-risk and vulnerable sectors in some of our key markets. This was supported by credit experts' input, portfolio risk metrics, short- to medium-term risks under each scenario, model performance, quantitative analyses and benchmarks. Considerations include risk of individual exposures under different macroeconomic scenarios and sub-sector analyses.
The largest increase in ECL was observed in the real estate sector, including material adjustments to reflect the uncertainty of the higher-risk Chinese commercial real estate exposures, booked in Hong Kong.

At 31 December 2022, retail management judgemental adjustments were an ECL increase of $0.3bn (31 December 2021: $0.5bn increase).

• Retail lending inflation-related adjustments increased ECL by $0.1bn (31 December 2021: $0.0bn). These adjustments addressed where increasing inflation and interest rates result in affordability risks that were not fully captured by the modelled output.

• Other macroeconomic-related adjustments increased ECL by $0.1bn (31 December 2021: $0.0bn). These adjustments were primarily in relation to country-specific risks related to future macroeconomic conditions.

• Other retail lending adjustments increased ECL by $0.2bn (31 December 2021: $0.3bn increase), reflecting all other data, model and management judgemental adjustments.

• Pandemic-related economic recovery adjustments were removed during 2022 as scenarios stabilised.

Economic scenarios sensitivity analysis of ECL estimates

Management considered the sensitivity of the ECL outcome against the economic forecasts as part of the ECL governance process by recalculating the ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of a significant increase in credit risk and the measurement of the resulting ECL.

The ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating ECL for loans at the balance sheet date.

There is a particularly high degree of estimation uncertainty in numbers representing more severe risk scenarios when assigned a 100% weighting.

For wholesale credit risk exposures, the sensitivity analysis excludes ECL and financial instruments related to defaulted (stage 3) obligors. It is generally impracticable to separate the effect of macroeconomic factors in individual assessments of obligors in default. The measurement of stage 3 ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios, and loans to defaulted obligors are a small portion of the overall wholesale lending exposure, even if representing the majority of the allowance for ECL. Therefore, the sensitivity analysis to macroeconomic scenarios does not capture the residual estimation risk arising from wholesale stage 3 exposures. Due to the range and specificity of the credit factors to which the ECL is sensitive, it is not possible to provide a meaningful alternative sensitivity analysis for a consistent set of risks across all defaulted obligors.

For retail credit risk exposures, the sensitivity analysis includes ECL for loans and advances to customers related to defaulted obligors. This is because the retail ECL for secured mortgage portfolios including loans in all stages is sensitive to macroeconomic variables.

Wholesale and retail sensitivity

The wholesale and retail sensitivity tables present the 100% weighted results. These exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared with personal and wholesale lending presented in other credit risk tables. In both the wholesale and retail analysis, the comparative period results for Downside 2 scenarios are also not directly comparable with the current period, because they reflect different risks relative to the consensus scenarios for the period end.

The wholesale and retail sensitivity analysis is stated inclusive of management judgemental adjustments, as appropriate to each scenario.

Wholesale analysis

IFRS 9 ECL sensitivity to future economic conditions1,2,3
	Gross carrying amount2	Reported ECL	Consensus Central scenario ECL	Consensus Upside scenario ECL	Consensus Downside scenario ECL	Downside 2 scenario ECL
By geography at 31 Dec 2022	$m	$m	$m	$m	$m	$m
UK	421,685	769	624	484	833	2,240
US	190,858	277	241	227	337	801
Hong Kong	415,875	925	819	592	1,315	2,161
Mainland China	125,466	295	242	144	415	1,227
Canada4	83,274	126	80	60	148	579
Mexico	26,096	88	80	67	116	313
UAE	45,064	45	41	30	55	93
France	173,146	110	102	90	121	145

By geography at 31 Dec 2021
UK	483,273	920	727	590	944	1,985
US	227,817	227	204	155	317	391
Hong Kong	434,608	767	652	476	984	1,869
Mainland China	120,627	149	113	36	216	806
Canada4	85,117	151	98	61	150	1,121
Mexico	23,054	118	80	61	123	358
UAE	44,767	158	122	73	214	711
France	163,845	133	121	106	162	187

1  ECL sensitivity includes off-balance sheet financial instruments. These are subject to significant measurement uncertainty.

2  Includes low credit-risk financial instruments such as debt instruments at FVOCI, which have high carrying amounts but low ECL under all the above scenarios.

3  Excludes defaulted obligors. For a detailed breakdown of performing and non-performing wholesale portfolio exposures, see page 170.

4  Classified as held for sale at 31 December 2022.

At 31 December 2021, the most significant level of ECL sensitivity was observed in the UK, Hong Kong and mainland China.

Real estate was the sector with higher sensitivity to a severe Downside scenario, namely in Hong Kong and mainland China due to higher risk of some material exposures.

In the UK, the real estate and services sectors accounted for the majority of ECL sensitivity due to higher exposure to these sectors in this market.

Retail analysis

IFRS 9 ECL sensitivity to future economic conditions1
	Gross carrying amount	Reported ECL	Consensus Central scenario ECL	Consensus Upside scenario ECL	Consensus Downside scenario ECL	Downside 2 scenario ECL
By geography at 31 December 2022	$m	$m	$m	$m	$m	$m
UK
Mortgages	147,306	204	188	183	189	399
Credit cards	6,518	455	434	396	442	719
Other	7,486	368	333	274	383	605
Mexico
Mortgages	6,319	152	127	102	183	270
Credit cards	1,616	198	162	97	233	289
Other	3,447	438	400	318	503	618
Hong Kong
Mortgages	100,107	1	1	-	1	1
Credit cards	8,003	261	227	180	417	648
Other	5,899	85	81	74	100	123
UAE
Mortgages	2,170	37	37	36	38	38
Credit cards	441	41	37	21	68	86
Other	718	17	17	15	19	22
France3
Mortgages	21,440	51	50	50	51	52
Other	1,433	54	53	52	55	59
US
Mortgages	13,489	7	6	6	8	15
Credit cards	219	26	25	23	27	36
Canada2
Mortgages	25,163	45	44	43	46	58
Credit cards	299	10	9	8	11	11
Other	1,399	16	14	13	17	36

IFRS 9 ECL sensitivity to future economic conditions1
	Gross carrying amount	Reported ECL	Consensus Central scenario  ECL	Consensus Upside scenario  ECL	Consensus Downside scenario ECL	Downside 2 scenario ECL
By geography at 31 December 2021	$m	$m	$m	$m	$m	$m
UK
Mortgages	155,084	191	182	175	197	231
Credit cards	8,084	439	381	330	456	987
Other	7,902	369	298	254	388	830
Mexico
Mortgages	4,972	123	116	106	130	164
Credit cards	1,167	141	134	122	150	176
Other	2,935	366	360	350	374	401
Hong Kong
Mortgages	96,697	-	-	-	-	-
Credit cards	7,644	218	206	154	231	359
Other	5,628	109	101	88	128	180
UAE
Mortgages	1,982	45	44	42	46	57
Credit cards	429	43	41	29	54	82
Other	615	19	18	13	21	25
France
Mortgages	23,159	63	62	62	63	64
Other	1,602	61	61	60	61	63
US
Mortgages	15,379	28	27	26	29	41
Credit cards	446	80	76	70	83	118
Canada
Mortgages	26,097	28	27	26	29	48
Credit cards	279	9	9	9	10	13
Other	1,598	19	18	17	19	27

1  ECL sensitivities exclude portfolios utilising less complex modelling approaches.

2  Classified as 'assets held for sale' at 31 December 2022.

3  Includes balances and ECL, which have been reclassified from 'loans and advances to customers' to 'assets held for sale' in the balance sheet. This also includes any balances and ECL which continue to be reported as personal lending in 'loans and advances to customers' that are in accordance with the basis of inclusion for retail sensitivity analysis.

At 31 December 2022, the most significant level of ECL sensitivity was observed in the UK, Mexico and Hong Kong. Mortgages reflected the lowest level of ECL sensitivity across most markets as collateral values remained resilient. Hong Kong mortgages had low levels of reported ECL due to the credit quality of the portfolio. Credit cards and other unsecured lending are more sensitive to economic forecasts, and therefore reflected the highest level of ECL sensitivity during 2022.

Group ECL sensitivity results

The ECL impact of the scenarios and management judgemental adjustments are highly sensitive to movements in economic forecasts. Based upon the sensitivity tables presented above, if the Group ECL balance was estimated solely on the basis of the Central scenario, Downside scenario or the Downside 2 scenario at 31 December 2022, it would increase/(decrease) as presented in the below table.

	Retail1	Wholesale1
Total Group ECL at 31 December 2022	$bn	$bn
Reported ECL	3.0	3.1
Scenarios
100% Consensus Central scenario	(0.2)	(0.5)
100% Consensus Upside scenario	(0.6)	(1.1)
100% Consensus Downside scenario	0.4	0.8
100% Downside 2 scenario	1.8	5.5

	Retail1	Wholesale
Total Group ECL at 31 December 2021	$bn	$bn
Reported ECL	3.0	3.1
Scenarios
100% Consensus Central scenario	(0.2)	(0.6)
100% Consensus Upside scenario	(0.5)	(1.2)
100% Consensus Downside scenario	0.2	0.6
100% Downside 2 scenario	2.0	5.5

1  On the same basis as retail and wholesale sensitivity analysis.

At Group level for both the retail and wholesale portfolios, the reported ECL in scope of this analysis remained stable since 31 December 2021. The Group total Downside 2 scenario ECL continues to present the highest level of sensitivity.

The ECL sensitivity for the Central scenario remained flat for the wholesale and retail portfolios from the previous year. For the remaining scenarios, the changes in ECL sensitivity from the previous year were reflective of geographical and sector risks, which increased or reduced accordingly with macroeconomic conditions.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees

The following disclosure provides a reconciliation by stage of the Group's gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees. Movements are calculated on a quarterly basis and therefore fully capture stage movements between quarters. If movements were calculated on a year-to-date basis they would only reflect the opening and closing position of the financial instrument.

The transfers of financial instruments represents the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL.

The net remeasurement of ECL arising from stage transfers represents the increase or decrease due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying customer risk rating ('CRR')/probability of default ('PD') movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the 'changes in risk parameters - credit quality' line item.

Changes in 'New financial assets originated or purchased', 'assets derecognised (including final repayments)' and 'changes to risk parameters - further lending/repayment' represent the impact from volume movements within the Group's lending portfolio.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2022	1,577,582	(1,557)	155,742	(3,326)	19,797	(6,928)	274	(64)	1,753,395	(11,875)
Transfers of financial instruments:	(99,022)	(798)	89,052	1,620	9,970	(822)	-	-	-	-
-  transfers from stage 1 to stage 2	(225,616)	470	225,616	(470)	-	-	-	-	-	-
-  transfers from stage 2 to stage 1	128,246	(1,216)	(128,246)	1,216	-	-	-	-	-	-
-  transfers to stage 3	(2,392)	9	(10,087)	1,132	12,479	(1,141)	-	-	-	-
-  transfers from stage 3	740	(61)	1,769	(258)	(2,509)	319	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	739	-	(953)	-	(152)	-	-	-	(366)
New financial assets originated or purchased	483,617	(548)	-	-	-	-	26	(2)	483,643	(550)
Assets derecognised (including final repayments)	(318,659)	148	(37,941)	343	(2,806)	416	(97)	-	(359,503)	907
Changes to risk parameters - further lending/repayment	(65,778)	226	(6,963)	93	(594)	259	(61)	5	(73,396)	583
Changes to risk parameters - credit quality	-	403	-	(1,670)	-	(3,019)	-	32	-	(4,254)
Changes to models used for ECL calculation	-	4	-	(151)	-	13	-	-	-	(134)
Assets written off	-	-	-	-	(2,794)	2,794	(10)	10	(2,804)	2,804
Credit-related modifications that resulted in derecognition	-	-	-	-	(32)	9	-	-	(32)	9
Foreign exchange	(81,975)	59	(8,811)	170	(1,395)	323	(3)	1	(92,184)	553
Others1	(60,557)	64	(13,716)	161	(938)	158	-	(20)	(75,211)	363
At 31 Dec 2022	1,435,208	(1,260)	177,363	(3,713)	21,208	(6,949)	129	(38)	1,633,908	(11,960)
ECL income statement change for the period		972		(2,338)		(2,483)		35		(3,814)
Recoveries										316
Others										(26)
Total ECL income statement change for the period										(3,524)

1  Total includes $82.7bn of gross carrying loans and advances to customers and banks, which were classified to assets held for sale, and a corresponding allowance for ECL of $426m, reflecting business disposals as disclosed in Note 23 'Assets held for sale and liabilities of disposal groups held for sale' on page 389.

	At 31 Dec 2022		12 months ended 31 Dec 2022
	Gross carrying/nominal amount	Allowance for ECL	ECL charge
	$m	$m	$m
As above	1,633,908	(11,960)	(3,524)
Other financial assets measured at amortised cost	1,014,498	(553)	(41)
Non-trading reverse purchase agreement commitments	44,921	-	-
Performance and other guarantees not considered for IFRS 9	-	-	41
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement	2,693,327	(12,513)	(3,524)
Debt instruments measured at FVOCI	266,303	(145)	(68)
Total allowance for ECL/total income statement ECL change for the period	n/a	(12,658)	(3,592)

As shown in the previous table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees increased $85m during the period from $11,875m at 31 December 2021 to $11,960m at 31 December 2022.

This increase was primarily driven by:

• $4,254m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;

• $366m relating to the net remeasurement impact of stage transfers; and

• $134m of changes to models used for ECL calculation.

These were partly offset by:

• $2,804m of assets written off;

• $940m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayment; and

• foreign exchange and other movements of $916m.

The ECL charge for the period of $3,814m presented in the previous table consisted of $4,254m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages, $366m relating to the net remeasurement impact of stage transfers, and $134m in changes to models used for ECL calculation. This was partly offset by $940m relating to underlying net book volume movement.

Summary views of the movement in wholesale and personal lending are presented on pages 173 and 191.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross exposure	Allowance/ provision for ECL	Gross exposure	Allowance/ provision for ECL	Gross exposure	Allowance/ provision for ECL	Gross exposure	Allowance/ provision for ECL	Gross exposure	Allowance/ provision for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2021	1,506,451	(2,331)	223,432	(5,403)	20,424	(7,544)	279	(113)	1,750,586	(15,391)
Transfers of financial instruments:	21,107	(1,792)	(27,863)	2,601	6,756	(809)	-	-	-	-
-  transfers from stage 1 to stage 2	(159,633)	527	159,633	(527)	-	-	-	-	-	-
-  transfers from stage 2 to stage 1	182,432	(2,279)	(182,432)	2,279	-	-	-	-	-	-
-  transfers to stage 3	(2,345)	24	(6,478)	1,010	8,823	(1,034)	-	-	-	-
-  transfers from stage 3	653	(64)	1,414	(161)	(2,067)	225	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	1,225	-	(596)	-	(34)	-	-	-	595
New financial assets originated or purchased	444,070	(553)	-	-	-	-	124	-	444,194	(553)
Assets derecognised (including final repayments)	(304,158)	174	(31,393)	489	(2,750)	458	(10)	6	(338,311)	1,127
Changes to risk parameters - further lending/repayment	(61,742)	547	(3,634)	498	(1,268)	576	(108)	12	(66,752)	1,633
Changes to risk parameters - credit quality	-	1,111	-	(1,012)	-	(2,354)	-	28	-	(2,227)
Changes to models used for ECL calculation	-	(17)	-	(33)	-	1	-	-	-	(49)
Assets written off	-	-	-	-	(2,610)	2,605	(7)	7	(2,617)	2,612
Credit-related modifications that resulted in derecognition	-	-	-	-	(125)	-	-	-	(125)	-
Foreign exchange	(25,231)	26	(2,918)	45	(479)	157	(4)	1	(28,632)	229
Others1	(2,915)	53	(1,882)	85	(151)	16	-	(5)	(4,948)	149
At 31 Dec 2021	1,577,582	(1,557)	155,742	(3,326)	19,797	(6,928)	274	(64)	1,753,395	(11,875)
ECL income statement change for the period		2,487		(654)		(1,353)		46		526
Recoveries										409
Others										(111)
Total ECL income statement change for the period										824

1  Total includes $3.0bn of gross carrying loans and advances to customers, which were classified to assets held for sale, and a corresponding allowance for ECL of $123m, reflecting our exit of the domestic mass market retail banking in the US.

	At 31 Dec 2021		12 months ended 31 Dec 2021
	Gross carrying/nominal amount	Allowance for ECL	ECL charge
	$m	$m	$m
As above	1,753,395	(11,875)	824
Other financial assets measured at amortised cost	880,351	(193)	(19)
Non-trading reverse purchase agreement commitments	42,421	-	-
Performance and other guarantees not considered for IFRS 9	-	-	75
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement	2,676,167	(12,068)	880
Debt instruments measured at FVOCI	347,203	(96)	48
Total allowance for ECL/total income statement ECL change for the period	n/a	(12,164)	928

Credit quality

Credit quality of financial instruments

(Audited)

We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a point-in-time assessment of PD, whereas stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition for the majority of portfolios. Accordingly, for non-credit-impaired financial instruments, there is no direct relationship

between the credit quality assessment and stages 1 and 2, although typically the lower credit quality bands exhibit a higher proportion in stage 2.

The five credit quality classifications provided below each encompass a range of granular internal credit rating grades assigned to wholesale and personal lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the table on page 146.

Distribution of financial instruments by credit quality at 31 December 2022
(Audited)
	Gross carrying/notional amount						Allowance for ECL/other credit provisions	Net
	Strong	Good	Satisfactory	Sub-standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
In-scope for IFRS 9 ECL
Loans and advances to customers held at amortised cost	492,848	197,560	196,819	29,446	19,634	936,307	(11,453)	924,854
-  personal	333,838	45,696	28,942	3,196	3,340	415,012	(2,872)	412,140
-  corporate and commercial	126,659	132,847	154,135	24,890	15,825	454,356	(8,324)	446,032
-  non-bank financial institutions	32,351	19,017	13,742	1,360	469	66,939	(257)	66,682
Loans and advances to banks held at amortised cost	93,025	4,890	5,643	1,311	82	104,951	(69)	104,882
Cash and balances at central banks	325,119	1,296	590	-	-	327,005	(3)	327,002
Items in the course of collection from other banks	7,280	12	5	-	-	7,297	-	7,297
Hong Kong Government certificates of indebtedness	43,787	-	-	-	-	43,787	-	43,787
Reverse repurchase agreements - non-trading	170,386	41,659	41,686	20	3	253,754	-	253,754
Financial investments	151,385	14,113	3,121	161	47	168,827	(80)	168,747
Assets held for sale	67,617	17,993	13,972	2,333	641	102,556	(415)	102,141
Other assets	91,114	10,911	8,821	274	152	111,272	(55)	111,217
-  endorsements and acceptances	2,350	3,059	2,815	175	25	8,424	(17)	8,407
-  accrued income and other	88,764	7,852	6,006	99	127	102,848	(38)	102,810
Debt instruments measured at fair value through other comprehensive income1	261,247	10,132	5,981	1,949	42	279,351	(145)	279,206
Out-of-scope for IFRS 9
Trading assets	91,330	14,371	23,415	820	133	130,069	-	130,069
Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss	6,281	809	1,785	110	-	8,985	-	8,985
Derivatives	241,905	34,181	7,843	181	36	284,146	-	284,146
Assets held for sale	15,254	-	-	-	-	15,254	-	15,254
Total gross carrying amount on balance sheet	2,058,578	347,927	309,681	36,605	20,770	2,773,561	(12,220)	2,761,341
Percentage of total credit quality	74.2%	12.5%	11.2%	1.3%	0.8%	100%
Loan and other credit-related commitments	402,972	132,402	74,410	7,632	1,372	618,788	(386)	618,402
Financial guarantees	8,281	4,669	4,571	1,013	249	18,783	(52)	18,731
In-scope: Irrevocable loan commitments and financial guarantees	411,253	137,071	78,981	8,645	1,621	637,571	(438)	637,133
Loan and other credit-related commitments	76,095	69,667	59,452	3,360	489	209,063	-	209,063
Performance and other guarantees	37,943	30,029	17,732	2,137	399	88,240	(110)	88,130
Out-of-scope: Revocable loan commitments and non-financial guarantees	114,038	99,696	77,184	5,497	888	297,303	(110)	297,193

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

Distribution of financial instruments by credit quality at 31 December 2021 (continued)
(Audited)
	Gross carrying/notional amount						Allowance for ECL/other credit provisions	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
In-scope for IFRS 9 ECL
Loans and advances to customers held at amortised cost	544,695	230,326	233,739	29,404	19,067	1,057,231	(11,417)	1,045,814
-  personal	388,903	52,080	30,492	1,920	4,942	478,337	(3,103)	475,234
-  corporate and commercial	124,819	158,938	188,858	27,194	13,730	513,539	(8,204)	505,335
-  non-bank financial institutions	30,973	19,308	14,389	290	395	65,355	(110)	65,245
Loans and advances to banks held at amortised cost	72,978	4,037	5,020	1,118	-	83,153	(17)	83,136
Cash and balances at central banks	400,176	1,675	1,171	-	-	403,022	(4)	403,018
Items in the course of collection from other banks	4,122	10	4	-	-	4,136	-	4,136
Hong Kong Government certificates of indebtedness	42,578	-	-	-	-	42,578	-	42,578
Reverse repurchase agreements -  non-trading	175,576	46,412	18,881	779	-	241,648	-	241,648
Financial investments	84,477	11,442	1,401	1	43	97,364	(62)	97,302
Assets held for sale	560	1,112	936	110	141	2,859	(43)	2,816
Other assets	66,537	10,997	10,749	298	163	88,744	(84)	88,660
-  endorsements and acceptances	1,742	5,240	4,038	199	26	11,245	(17)	11,228
-  accrued income and other	64,795	5,757	6,711	99	137	77,499	(67)	77,432
Debt instruments measured at fair value through other comprehensive income1	320,161	12,298	11,677	1,087	46	345,269	(96)	345,173
Out-of-scope for IFRS 9
Trading assets	101,879	16,254	20,283	678	134	139,228	-	139,228
Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss	6,438	723	4,455	150	-	11,766	-	11,766
Derivatives	146,748	42,717	6,691	719	7	196,882	-	196,882
Total gross carrying amount on balance sheet	1,966,925	378,003	315,007	34,344	19,601	2,713,880	(11,723)	2,702,157
Percentage of total credit quality	72.5%	13.9%	11.6%	1.3%	0.7%	100%
Loan and other credit-related commitments	389,865	136,297	92,558	8,142	775	627,637	(379)	627,258
Financial guarantees	16,511	4,902	5,166	991	225	27,795	(62)	27,733
In-scope: Irrevocable loan commitments and financial guarantees	406,376	141,199	97,724	9,133	1,000	655,432	(441)	654,991
Loan and other credit-related commitments	62,701	65,031	56,446	3,327	332	187,837	-	187,837
Performance and other guarantees	31,510	32,193	19,265	2,027	539	85,534	(179)	85,355
Out-of-scope: Revocable loan commitments and non-financial guarantees	94,211	97,224	75,711	5,354	871	273,371	(179)	273,192

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation
(Audited)
	Gross carrying/notional amount						Allowance  for ECL	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	492,848	197,560	196,819	29,446	19,634	936,307	(11,453)	924,854
-  stage 1	458,843	170,875	142,695	5,130	-	777,543	(1,095)	776,448
-  stage 2	34,005	26,685	54,124	24,316	-	139,130	(3,491)	135,639
-  stage 3	-	-	-	-	19,505	19,505	(6,829)	12,676
-  POCI	-	-	-	-	129	129	(38)	91
Loans and advances to banks at amortised cost	93,025	4,890	5,643	1,311	82	104,951	(69)	104,882
-  stage 1	92,696	4,465	5,466	415	-	103,042	(18)	103,024
-  stage 2	329	425	177	896	-	1,827	(29)	1,798
-  stage 3	-	-	-	-	82	82	(22)	60
-  POCI	-	-	-	-	-	-	-	-
Other financial assets measured at amortised cost	856,688	85,984	68,195	2,788	843	1,014,498	(553)	1,013,945
-  stage 1	855,523	80,175	60,583	208	-	996,489	(124)	996,365
-  stage 2	1,165	5,809	7,612	2,580	-	17,166	(188)	16,978
-  stage 3	-	-	-	-	797	797	(234)	563
-  POCI	-	-	-	-	46	46	(7)	39
Loan and other credit-related commitments	402,972	132,402	74,410	7,632	1,372	618,788	(386)	618,402
-  stage 1	398,120	121,581	60,990	2,692	-	583,383	(141)	583,242
-  stage 2	4,852	10,821	13,420	4,940	-	34,033	(180)	33,853
-  stage 3	-	-	-	-	1,372	1,372	(65)	1,307
-  POCI	-	-	-	-	-	-	-	-
Financial guarantees	8,281	4,669	4,571	1,013	249	18,783	(52)	18,731
-  stage 1	8,189	4,245	3,488	149	-	16,071	(6)	16,065
-  stage 2	92	424	1,083	864	-	2,463	(13)	2,450
-  stage 3	-	-	-	-	249	249	(33)	216
-  POCI	-	-	-	-	-	-	-	-
At 31 Dec 2022	1,853,814	425,505	349,638	42,190	22,180	2,693,327	(12,513)	2,680,814
Debt instruments at FVOCI1
-  stage 1	260,941	10,000	5,690	-	-	276,631	(68)	276,563
-  stage 2	306	132	291	1,949	-	2,678	(69)	2,609
-  stage 3	-	-	-	-	5	5	(1)	4
-  POCI	-	-	-	-	37	37	(7)	30
At 31 Dec 2022	261,247	10,132	5,981	1,949	42	279,351	(145)	279,206

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation (continued)
(Audited)
	Gross carrying/notional amount
	Strong	Good	Satisfactory	Sub-standard	Credit impaired	Total	Allowance for ECL	Net
	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	544,695	230,326	233,739	29,404	19,067	1,057,231	(11,417)	1,045,814
-  stage 1	537,642	206,645	169,809	4,840	-	918,936	(1,367)	917,569
-  stage 2	7,053	23,681	63,930	24,560	-	119,224	(3,119)	116,105
-  stage 3	-	-	-	-	18,797	18,797	(6,867)	11,930
-  POCI	-	-	-	4	270	274	(64)	210
Loans and advances to banks at amortised cost	72,978	4,037	5,020	1,118	-	83,153	(17)	83,136
-  stage 1	72,903	3,935	4,788	10	-	81,636	(14)	81,622
-  stage 2	75	102	232	1,108	-	1,517	(3)	1,514
-  stage 3	-	-	-	-	-	-	-	-
-  POCI	-	-	-	-	-	-	-	-
Other financial assets measured at amortised cost	774,026	71,648	33,142	1,188	347	880,351	(193)	880,158
-  stage 1	773,427	70,508	30,997	84	-	875,016	(91)	874,925
-  stage 2	599	1,140	2,145	1,104	-	4,988	(54)	4,934
-  stage 3	-	-	-	-	304	304	(42)	262
-  POCI	-	-	-	-	43	43	(6)	37
Loan and other credit-related commitments	389,865	136,297	92,558	8,142	775	627,637	(379)	627,258
-  stage 1	387,434	129,455	76,043	1,541	-	594,473	(165)	594,308
-  stage 2	2,431	6,842	16,515	6,601	-	32,389	(174)	32,215
-  stage 3	-	-	-	-	775	775	(40)	735
-  POCI	-	-	-	-	-	-	-	-
Financial guarantees	16,511	4,902	5,166	991	225	27,795	(62)	27,733
-  stage 1	16,351	4,469	3,929	183	-	24,932	(11)	24,921
-  stage 2	160	433	1,237	808	-	2,638	(30)	2,608
-  stage 3	-	-	-	-	225	225	(21)	204
-  POCI	-	-	-	-	-	-	-	-
At 31 Dec 2021	1,798,075	447,210	369,625	40,843	20,414	2,676,167	(12,068)	2,664,099
Debt instruments at FVOCI1
-  stage 1	319,557	12,196	11,354	-	-	343,107	(67)	343,040
-  stage 2	604	102	323	1,087	-	2,116	(22)	2,094
-  stage 3	-	-	-	-	-	-	-	-
-  POCI	-	-	-	-	46	46	(7)	39
At 31 Dec 2021	320,161	12,298	11,677	1,087	46	345,269	(96)	345,173

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses.

Credit-impaired loans

(Audited)

We determine that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether:

• contractual payments of either principal or interest are past due for more than 90 days;

• there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and

•
the loan is otherwise considered to be in default. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired.

•

Forbearance

The following table shows the gross carrying amounts and allowances for ECL of the Group's holdings of forborne loans and advances to customers by industry sector and by stages.

A summary of our current policies and practices for forbearance is set out in 'Credit risk management' on page 145.

Forborne loans and advances to customers at amortised cost by stage allocation
	Performing - forborne		Non-performing - forborne		Total - forborne
	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m
Gross carrying amount
Personal	-	651	1,171	-	1,822
-  first lien residential mortgages	-	369	738	-	1,107
- second lien residential mortgages	-	-	7	-	7
- guaranteed loans in respect of residential property	-	-	4	-	4
-  other personal lending which is secured	-	5	13	-	18
- credit cards	-	93	75	-	168
-  other personal lending which is unsecured	-	179	334	-	513
-  motor vehicle finance	-	5	-	-	5
Wholesale	-	4,873	4,576	107	9,556
-  corporate and commercial	-	4,859	4,562	107	9,528
-  non-bank financial institutions	-	14	14	-	28
At 31 Dec 2022	-	5,524	5,747	107	11,378
Allowance for ECL
Personal	-	(124)	(302)	-	(426)
-  first lien residential mortgages	-	(49)	(118)	-	(167)
- second lien residential mortgages	-	-	(3)	-	(3)
- guaranteed loans in respect of residential property	-	-	(3)	-	(3)
-  other personal lending which is secured	-	-	(2)	-	(2)
- credit cards	-	(19)	(44)	-	(63)
-  other personal lending which is unsecured	-	(54)	(132)	-	(186)
-  motor vehicle finance	-	(2)	-	-	(2)
Wholesale	-	(152)	(1,497)	(25)	(1,674)
-  corporate and commercial	-	(151)	(1,490)	(25)	(1,666)
-  non-bank financial institutions	-	(1)	(7)	-	(8)
At 31 Dec 2022	-	(276)	(1,799)	(25)	(2,100)

Gross carrying amount
Personal	-	-	2,256	-	2,256
-  first lien residential mortgages	-	-	1,547	-	1,547
- second lien residential mortgages	-	-	22	-	22
- guaranteed loans in respect of residential property	-	-	23	-	23
-  other personal lending which is secured	-	-	39	-	39
- credit cards	-	-	168	-	168
-  other personal lending which is unsecured	-	-	456	-	456
-  motor vehicle finance	-	-	1	-	1
Wholesale	366	559	4,505	253	5,683
-  corporate and commercial	355	550	4,491	253	5,649
-  non-bank financial institutions	11	9	14	-	34
At 31 Dec 20211	366	559	6,761	253	7,939
Allowance for ECL
Personal	-	-	(400)	-	(400)
-  first lien residential mortgages	-	-	(178)	-	(178)
- second lien residential mortgages	-	-	(6)	-	(6)
- guaranteed loans in respect of residential property	-	-	(7)	-	(7)
-  other personal lending which is secured	-	-	(5)	-	(5)
- credit cards	-	-	(53)	-	(53)
-  other personal lending which is unsecured	-	-	(151)	-	(151)
-  motor vehicle finance	-	-	-	-	-
Wholesale	(7)	(24)	(1,282)	(52)	(1,365)
-  corporate and commercial	(7)	(24)	(1,274)	(52)	(1,357)
-  non-bank financial institutions	-	-	(8)	-	(8)
At 31 Dec 20211	(7)	(24)	(1,682)	(52)	(1,765)

1  Forborne exposures and allowances for ECL at 31 December 2021 have not been restated and agreed with the policies and disclosures presented in the Annual Report and Accounts 2021.

Following the adoption of the EBA 'Guidelines on the application of definition of default', retail and wholesale loans are identified as forborne and classified as either performing or non-performing when we modify the contractual terms due to financial difficulty of the borrower. At 31 December 2022, we reported $5,524m (31 December 2021: $925m) of performing forborne loans. The increase of $4,599m was mainly driven by the inclusion of non-payment-related concessions in the forbearance assessment since 1 January 2022.

Forborne loans and advances to customers by geographical region
							of which:
	Europe	Asia	MENA	North America	Latin America	Total	UK	Hong Kong
	$m	$m	$m	$m	$m	$m	$m	$m
Gross carrying amount
Performing forborne	3,121	276	482	1,100	545	5,524	1,028	134
Non-performing forborne	2,636	1,562	1,076	368	212	5,854	2,126	879
At 31 Dec 2022	5,757	1,838	1,558	1,468	757	11,378	3,154	1,013
Allowances for ECL
Performing forborne	(95)	(21)	(19)	(62)	(79)	(276)	(64)	(17)
Non-performing forborne	(566)	(525)	(536)	(83)	(114)	(1,824)	(441)	(355)
At 31 Dec 2022	(661)	(546)	(555)	(145)	(193)	(2,100)	(505)	(372)
Gross carrying amount
Performing forborne	698	5	105	89	28	925	640	-
Non-performing forborne	3,421	1,317	849	975	452	7,014	2,829	528
At 31 Dec 20211	4,119	1,322	954	1,064	480	7,939	3,469	528
Allowances for ECL
Performing forborne	(13)	-	(9)	(8)	(1)	(31)	(10)	-
Non-performing forborne	(615)	(306)	(475)	(138)	(200)	(1,734)	(459)	(89)
At 31 Dec 20211	(628)	(306)	(484)	(146)	(201)	(1,765)	(469)	(89)

1  Forborne exposures and allowances for ECL at 31 December 2021 have not been restated and agreed with the policies and disclosures presented in the Annual Report and Accounts 2021.

Wholesale lending

This section provides further details on the regions, countries, territories and products comprising wholesale loans and advances to customers and banks. Product granularity is also provided by stage with geographical data presented for loans and advances to customers, banks, other credit commitments, financial guarantees and similar contracts. Additionally, this section provides a reconciliation of the opening 1 January 2022 to 31 December 2022 closing gross carrying/nominal amounts and the associated allowance for ECL.

At 31 December 2022, wholesale lending for loans and advances to banks and customers of $626.2bn decreased by $35.8bn since 31 December 2021. This included adverse foreign exchange movements of $31.9bn. Excluding foreign exchange movements, the total wholesale lending decrease of $3.9bn was driven by a $34.3bn decline in corporate and commercial balances. This was partly offset by a $25.9bn increase in loans and advances to banks and a $4.5bn increase in balances from non-bank financial institutions.

The primary driver of the decline in corporate and commercial balances was the $23.4bn reclassification of our banking business in Canada to held for sale, and a decline of $11.3bn in Asia. In Asia, the decline was driven from a $17.3bn decrease in Hong Kong, partly offset by growth of $2.4bn in Australia, $1.9b in Japan and $1.7bn in India.

Growth in loans and advances to banks was mainly driven by a $13.0bn increase in Asia, a $10.1bn increase in Europe, and a $2.6bn increase in MENA. In Asia, the increase can be largely attributed to $7.9bn in Hong Kong and $1.5bn in Malaysia. In Europe, the growth was mainly from the UK with an increase of $10.6bn.

The increase in balances from non-bank financial institutions was driven from an increase of $3.7bn in Asia and $2.0bn in Europe. This growth was partly offset by a decline of $1.3bn in North America, of which $1.4bn was due to the reclassification of our banking business in Canada to held for sale, and a $0.1bn increase in the US.

Loan commitments and financial guarantees decreased by $22.2bn since 31 December 2021 to $392.4bn at 31 December 2022, including a $3.0bn increase related to unsettled reverse repurchase agreements. This also included adverse foreign exchange movements of $21.8bn.

The allowance for ECL attributable to wholesale loans and advances to banks and customers increased by $0.3bn to $8.7bn at 31 December 2022. This included favourable foreign exchange movements of $0.4bn.

Excluding foreign exchange movements, the total increase in the wholesale ECL allowance for loans and advances to customers and banks was driven by a $0.5bn growth in corporate and commercial allowances. The primary driver of this increase in corporate and commercial allowance for ECL was $1.1bn in Asia, notably $1.4bn in Hong Kong, which was partly offset by a decline of $0.4bn in Singapore. Allowances for ECL decreased by $0.2bn in North America, and by $0.1bn in both Europe and Latin America.

The allowance for ECL attributable to loan commitments and financial guarantees at 31 December 2022 remained at $0.4bn from 31 December 2021.

Total wholesale lending for loans and advances to banks and customers by stage distribution
	Gross carrying amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	353,010	85,521	15,696	129	454,356	(490)	(1,909)	(5,887)	(38)	(8,324)
-  agriculture, forestry and fishing	4,805	1,505	261	-	6,571	(10)	(44)	(68)	-	(122)
-  mining and quarrying	6,498	1,463	232	1	8,194	(5)	(21)	(145)	(1)	(172)
-  manufacturing	70,187	15,251	2,016	49	87,503	(93)	(164)	(867)	(29)	(1,153)
-  electricity, gas, steam and air-conditioning supply	15,006	1,799	277	-	17,082	(11)	(31)	(67)	-	(109)
-  water supply, sewerage, waste management and remediation	2,690	277	26	-	2,993	(3)	(5)	(13)	-	(21)
-  construction	9,692	2,742	791	7	13,232	(21)	(51)	(368)	(3)	(443)
-  wholesale and retail trade, repair of motor vehicles and motorcycles	63,755	15,872	2,805	5	82,437	(96)	(226)	(1,341)	(3)	(1,666)
-  transportation and storage	19,227	5,062	556	-	24,845	(31)	(65)	(153)	-	(249)
-  accommodation and food	9,873	6,523	787	2	17,185	(23)	(139)	(81)	(1)	(244)
-  publishing, audiovisual and broadcasting	16,609	1,537	249	28	18,423	(22)	(36)	(58)	(1)	(117)
-  real estate	72,195	24,386	4,834	19	101,434	(86)	(904)	(1,861)	-	(2,851)
-  professional, scientific and technical activities	15,164	2,229	542	-	17,935	(21)	(51)	(200)	-	(272)
-  administrative and support services	20,592	3,505	962	18	25,077	(25)	(90)	(293)	-	(408)
-  public administration and defence, compulsory social security	1,166	14	-	-	1,180	-	(1)	-	-	(1)
-  education	1,346	181	87	-	1,614	(4)	(5)	(22)	-	(31)
-  health and care	3,055	643	266	-	3,964	(6)	(17)	(67)	-	(90)
-  arts, entertainment and recreation	1,264	452	146	-	1,862	(4)	(16)	(57)	-	(77)
-  other services	10,391	1,547	589	-	12,527	(26)	(30)	(219)	-	(275)
-  activities of households	730	14	-	-	744	-	-	-	-	-
-  extra-territorial organisations and bodies activities	47	-	-	-	47	-	-	-	-	-
-  government	8,699	506	270	-	9,475	(3)	-	(7)	-	(10)
-  asset-backed securities	19	13	-	-	32	-	(13)	-	-	(13)
Non-bank financial institutions	61,752	4,718	469	-	66,939	(43)	(77)	(137)	-	(257)
Loans and advances to banks	103,042	1,827	82	-	104,951	(18)	(29)	(22)	-	(69)
At 31 Dec 2022	517,804	92,066	16,247	129	626,246	(551)	(2,015)	(6,046)	(38)	(8,650)
By geography
Europe	150,592	28,060	7,070	31	185,753	(223)	(628)	(1,718)	(1)	(2,570)
-  of which: UK	104,595	21,489	5,432	28	131,544	(186)	(501)	(1,015)	(1)	(1,703)
Asia	293,503	50,826	6,938	81	351,348	(220)	(1,077)	(3,125)	(25)	(4,447)
-  of which: Hong Kong	155,513	28,275	5,338	57	189,183	(104)	(775)	(2,136)	(22)	(3,037)
MENA	29,512	3,254	1,530	17	34,313	(22)	(49)	(909)	(12)	(992)
North America	31,372	6,950	245	-	38,567	(25)	(197)	(44)	-	(266)
Latin America	12,825	2,976	464	-	16,265	(61)	(64)	(250)	-	(375)
At 31 Dec 2022	517,804	92,066	16,247	129	626,246	(551)	(2,015)	(6,046)	(38)	(8,650)

Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1
	Nominal amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	252,860	29,116	798	-	282,774	(116)	(178)	(96)	-	(390)
Financial	105,950	3,683	23	-	109,656	(5)	(14)	(2)	-	(21)
At 31 Dec 2022	358,810	32,799	821	-	392,430	(121)	(192)	(98)	-	(411)
By geography
Europe	168,179	17,235	498	-	185,912	(41)	(87)	(85)	-	(213)
-  of which: UK	60,532	9,941	278	-	70,751	(34)	(64)	(46)	-	(144)
Asia	67,473	6,081	114	-	73,668	(54)	(53)	(9)	-	(116)
-  of which: Hong Kong	27,102	2,448	46	-	29,596	(14)	(27)	(2)	-	(43)
MENA	7,500	565	21	-	8,086	(4)	(5)	(2)	-	(11)
North America	112,695	8,642	185	-	121,522	(21)	(47)	(2)	-	(70)
Latin America	2,963	276	3	-	3,242	(1)	-	-	-	(1)
At 31 Dec 2022	358,810	32,799	821	-	392,430	(121)	(192)	(98)	-	(411)

1  Included in loans and other credit-related commitments and financial guarantees is $45bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.

Total wholesale lending for loans and advances to banks and customers by stage distribution
	Gross carrying amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	400,894	98,911	13,460	274	513,539	(665)	(1,874)	(5,601)	(64)	(8,204)
-  agriculture, forestry and fishing	6,510	1,026	362	1	7,899	(10)	(23)	(104)	(1)	(138)
-  mining and quarrying	7,167	2,055	447	16	9,685	(17)	(39)	(159)	(12)	(227)
-  manufacturing	75,193	16,443	2,019	88	93,743	(110)	(176)	(931)	(31)	(1,248)
-  electricity, gas, steam and air-conditioning supply	15,255	1,285	78	-	16,618	(16)	(21)	(31)	-	(68)
-  water supply, sewerage, waste management and remediation	3,376	468	51	-	3,895	(5)	(4)	(20)	-	(29)
-  construction	9,506	3,605	842	1	13,954	(24)	(44)	(439)	(1)	(508)
-  wholesale and retail trade, repair of motor vehicles and motorcycles	79,137	12,802	3,003	2	94,944	(71)	(99)	(1,936)	(1)	(2,107)
-  transportation and storage	21,199	7,726	658	9	29,592	(56)	(116)	(191)	-	(363)
-  accommodation and food	8,080	14,096	1,199	1	23,376	(67)	(245)	(110)	(1)	(423)
-  publishing, audiovisual and broadcasting	16,417	1,804	222	28	18,471	(37)	(47)	(94)	(6)	(184)
-  real estate	93,633	25,154	2,375	98	121,260	(132)	(737)	(775)	-	(1,644)
-  professional, scientific and technical activities	16,160	2,888	637	-	19,685	(26)	(40)	(172)	-	(238)
-  administrative and support services	23,186	4,740	719	30	28,675	(40)	(84)	(296)	(11)	(431)
-  public administration and defence, compulsory social security	938	333	-	-	1,271	(5)	(3)	-	-	(8)
-  education	1,455	273	65	-	1,793	(4)	(15)	(18)	-	(37)
-  health and care	3,743	928	183	-	4,854	(11)	(24)	(37)	-	(72)
-  arts, entertainment and recreation	1,620	826	152	-	2,598	(6)	(44)	(42)	-	(92)
-  other services	10,123	1,726	448	-	12,297	(26)	(101)	(246)	-	(373)
-  activities of households	860	117	-	-	977	-	-	-	-	-
-  extra-territorial organisations and bodies activities	2	-	-	-	2	-	-	-	-	-
-  government	7,010	602	-	-	7,612	(2)	(2)	-	-	(4)
-  asset-backed securities	324	14	-	-	338	-	(10)	-	-	(10)
Non-bank financial institutions	61,086	3,874	395	-	65,355	(44)	(26)	(40)	-	(110)
Loans and advances to banks	81,636	1,517	-	-	83,153	(14)	(3)	-	-	(17)
At 31 Dec 2021	543,616	104,302	13,855	274	662,047	(723)	(1,903)	(5,641)	(64)	(8,331)
By geography
Europe	154,575	31,871	6,741	30	193,217	(356)	(654)	(1,806)	(9)	(2,825)
-  of which: UK	101,029	24,461	5,126	28	130,644	(306)	(518)	(1,060)	(6)	(1,890)
Asia	297,423	53,993	3,997	199	355,612	(182)	(830)	(2,299)	(43)	(3,354)
-  of which: Hong Kong	165,437	30,305	1,990	159	197,891	(85)	(650)	(836)	(21)	(1,592)
MENA	26,135	5,295	1,682	22	33,134	(62)	(108)	(1,028)	(11)	(1,209)
North America	53,513	10,397	652	-	64,562	(57)	(215)	(169)	-	(441)
Latin America	11,970	2,746	783	23	15,522	(66)	(96)	(339)	(1)	(502)
At 31 Dec 2021	543,616	104,302	13,855	274	662,047	(723)	(1,903)	(5,641)	(64)	(8,331)

Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1
	Nominal amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	274,775	30,376	829	-	305,980	(130)	(193)	(60)	-	(383)
Financial	105,746	2,889	2	-	108,637	(9)	(9)	(1)	-	(19)
At 31 Dec 2021	380,521	33,265	831	-	414,617	(139)	(202)	(61)	-	(402)
By geography
Europe	189,770	15,585	673	-	206,028	(67)	(76)	(47)	-	(190)
-  of which: UK	68,136	8,430	389	-	76,955	(55)	(49)	(28)	-	(132)
Asia	72,179	5,229	20	-	77,428	(35)	(40)	(5)	-	(80)
-  of which: Hong Kong	31,314	1,517	10	-	32,841	(11)	(17)	(2)	-	(30)
MENA	6,335	1,017	19	-	7,371	(10)	(18)	(3)	-	(31)
North America	109,851	11,350	91	-	121,292	(24)	(66)	(1)	-	(91)
Latin America	2,386	84	28	-	2,498	(3)	(2)	(5)	-	(10)
At 31 Dec 2021	380,521	33,265	831	-	414,617	(139)	(202)	(61)	-	(402)

1  Included in loans and other credit-related commitments and financial guarantees is $42bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.

Wholesale lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2022	881,742	(862)	137,541	(2,105)	14,686	(5,702)	274	(64)	1,034,243	(8,733)
Transfers of financial instruments	(58,188)	(299)	49,569	943	8,619	(644)	-	-	-	-
-  transfers from stage 1 to stage 2	(157,553)	201	157,553	(201)	-	-	-	-	-	-
-  transfers from stage 2 to stage 1	100,839	(482)	(100,839)	482	-	-	-	-	-	-
-  transfers to stage 3	(1,831)	7	(8,100)	771	9,931	(778)			-	-
-  transfers from stage 3	357	(25)	955	(109)	(1,312)	134	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	241	-	(370)	-	(64)	-	-	-	(193)
New financial assets originated or purchased	352,985	(277)	-	-	-	-	26	(2)	353,011	(279)
Assets derecognised (including final repayments)	(250,014)	54	(33,850)	73	(1,763)	292	(97)	-	(285,724)	419
Changes to risk parameters - further lending/repayments	(34,321)	64	(11,501)	128	(1,491)	292	(61)	5	(47,374)	489
Change in risk parameters - credit quality	-	321	-	(994)	-	(2,197)	-	32	-	(2,838)
Changes to models used for ECL calculation	-	6	-	(57)	-	-	-	-	-	(51)
Assets written off	-	-	-	-	(1,579)	1,579	(10)	10	(1,589)	1,589
Credit-related modifications that resulted in derecognition	-	-	-	-	(32)	9	-	-	(32)	9
Foreign exchange and other1	(60,421)	80	(16,984)	175	(1,372)	291	(3)	(19)	(78,780)	527
At 31 Dec 2022	831,783	(672)	124,775	(2,207)	17,068	(6,144)	129	(38)	973,755	(9,061)
ECL income statement change for the period		409		(1,220)		(1,677)		35		(2,453)
Recoveries										33
Others										(23)
Total ECL income statement change for the period										(2,443)

1  Total includes $33.1bn of gross carrying loans and advances to customers and banks, which were classified to assets held for sale, and a corresponding allowance for ECL of $204m, reflecting business disposals as disclosed in Note 23 'Assets held for sale and liabilities of disposal groups held for sale' on page 389.

As shown in the above table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees increased by $328m during the period from $8,733m at 31 December 2021 to $9,061m at 31 December 2022.

This increase was primarily driven by:

• $2,838m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;

• $193m relating to the net remeasurement impact of stage transfers; and

• $51m of changes to models used for ECL calculation.

These were partly offset by:

• $1,589m of assets written off;

• $629m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayments; and

• foreign exchange and other movements of $527m.

The ECL charge for the period of $2,453m presented in the previous table consisted of $2,838m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages, $193m relating to the net remeasurement impact of stage transfers and $51m in changes to models used for ECL calculation. This was partly offset by $629m relating to underlying net book volume movement.

During the period, there was a net transfer to stage 2 of $56,714m gross carrying/nominal amounts. The movement reflected the increased level of uncertainty around the macroeconomic outlook during the period. It was primarily driven by $29,049m in Asia, due to deterioration in the macroeconomic outlook affecting real estate portfolios booked in Hong Kong, and $20,860m in Europe, mainly driven by deterioration in the macroeconomic outlook affecting corporate and commercial portfolios in France.

Wholesale lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2021	841,105	(1,465)	196,662	(2,998)	14,662	(6,041)	279	(113)	1,052,708	(10,617)
Transfers of financial instruments	19,285	(638)	(23,361)	888	4,076	(250)	-	-	-	-
-  transfers from stage 1 to stage 2	(135,932)	238	135,932	(238)	-	-	-	-	-	-
-  transfers from stage 2 to stage 1	156,346	(875)	(156,346)	875	-	-	-	-	-	-
-  transfers to stage 3	(1,363)	17	(3,410)	276	4,773	(293)	-	-	-	-
-  transfers from stage 3	234	(18)	463	(25)	(697)	43	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	400	-	(233)	-	(27)	-	-	-	140
New financial assets originated or purchased	307,150	(342)	-	-	-	-	124	-	307,274	(342)
Assets derecognised (including final repayments)	(221,160)	55	(26,136)	70	(1,514)	239	(10)	6	(248,820)	370
Changes to risk parameters - further lending/repayments	(47,766)	307	(6,014)	384	(987)	525	(108)	12	(54,875)	1,228
Changes to risk parameters - credit quality	-	793	-	(234)	-	(1,347)	-	28	-	(760)
Changes to models used for ECL calculation	-	(15)	-	(33)	-	-	-	-	-	(48)
Assets written off	-	-	-	-	(1,085)	1,085	(7)	7	(1,092)	1,092
Credit-related modifications that resulted in derecognition	-	-	-	-	(125)	-	-	-	(125)	-
Foreign exchange	(16,157)	9	(2,560)	26	(341)	112	(4)	1	(19,062)	148
Others	(715)	34	(1,050)	25	-	2	-	(5)	(1,765)	56
At 31 Dec 2021	881,742	(862)	137,541	(2,105)	14,686	(5,702)	274	(64)	1,034,243	(8,733)
ECL income statement change for the period		1,198		(46)		(610)		46		588
Recoveries										54
Others										(102)
Total ECL income statement change for the period										540

Wholesale lending - distribution of financial instruments to which the impairment requirements of IFRS 9 are applied by credit quality
	Gross carrying/nominal amount						Allowance for ECL	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By geography
Europe	60,016	49,831	58,580	10,224	7,102	185,753	(2,570)	183,183
-  of which: UK	44,515	38,521	36,934	6,115	5,459	131,544	(1,703)	129,841
Asia	167,720	81,907	84,973	9,735	7,013	351,348	(4,447)	346,901
-  of which: Hong Kong	77,227	44,479	54,500	7,581	5,396	189,183	(3,037)	186,146
MENA	15,132	5,349	11,170	1,113	1,549	34,313	(992)	33,321
North America	7,445	13,390	12,856	4,630	246	38,567	(266)	38,301
Latin America	1,722	6,277	5,941	1,859	466	16,265	(375)	15,890
At 31 Dec 2022	252,035	156,754	173,520	27,561	16,376	626,246	(8,650)	617,596
Percentage of total credit quality	40.3  %	25.0  %	27.7  %	4.4  %	2.6  %	100.0  %

By geography
Europe	48,758	49,254	74,240	14,196	6,769	193,217	(2,825)	190,392
-  of which: UK	30,390	37,212	48,694	9,192	5,156	130,644	(1,890)	128,754
Asia	155,072	95,626	96,046	4,670	4,198	355,612	(3,354)	352,258
-  of which: Hong Kong	74,440	54,703	63,301	3,297	2,150	197,891	(1,592)	196,299
MENA	12,264	7,004	10,321	1,844	1,701	33,134	(1,209)	31,925
North America	11,683	24,663	22,022	5,543	651	64,562	(441)	64,121
Latin America	993	5,736	5,638	2,349	806	15,522	(502)	15,020
At 31 Dec 2021	228,770	182,283	208,267	28,602	14,125	662,047	(8,331)	653,716
Percentage of total credit quality	34.6  %	27.5  %	31.5  %	4.3  %	2.1  %	100.0  %

Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support calculation of our minimum credit regulatory capital requirement. The credit quality classifications can be found on page 146.

Wholesale lending - credit risk profile by obligor grade for loans and advances at amortised cost
		Gross carrying amount					Allowance for ECL
	Basel one-year PD range	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total	ECL coverage	Mapped external rating
	%	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	%
Corporate and commercial		353,010	85,521	15,696	129	454,356	(490)	(1,909)	(5,887)	(38)	(8,324)	1.8
-  CRR 1	0.000 to 0.053	35,630	330	-	-	35,960	(6)	(1)	-	-	(7)	-	AA- and above
-  CRR 2	0.054 to 0.169	87,465	3,234	-	-	90,699	(28)	(15)	-	-	(43)	-	A+ to A-
-  CRR 3	0.170 to 0.740	115,116	17,731	-	-	132,847	(129)	(122)	-	-	(251)	0.2	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	74,229	21,550	-	-	95,779	(155)	(210)	-	-	(365)	0.4	BB+ to BB-
-  CRR 5	1.928 to 4.914	36,707	21,649	-	-	58,356	(146)	(361)	-	-	(507)	0.9	BB- to B
-  CRR 6	4.915 to 8.860	2,513	9,171	-	-	11,684	(16)	(237)	-	-	(253)	2.2	B-
-  CRR 7	8.861 to 15.000	1,164	5,476	-	-	6,640	(8)	(337)	-	-	(345)	5.2	CCC+
-  CRR 8	15.001 to 99.999	186	6,380	-	-	6,566	(2)	(626)	-	-	(628)	9.6	CCC to C
-  CRR 9/10	100.000	-	-	15,696	129	15,825	-	-	(5,887)	(38)	(5,925)	37.4	D
Non-bank financial institutions		61,752	4,718	469	-	66,939	(43)	(77)	(137)	-	(257)	0.4
-  CRR 1	0.000 to 0.053	15,082	421	-	-	15,503	(2)	(1)	-	-	(3)	-	AA- and above
-  CRR 2	0.054 to 0.169	16,350	498	-	-	16,848	(3)	(1)	-	-	(4)	-	A+ to A-
-  CRR 3	0.170 to 0.740	17,254	1,763	-	-	19,017	(9)	(13)	-	-	(22)	0.1	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	7,074	717	-	-	7,791	(19)	(4)	-	-	(23)	0.3	BB+ to BB-
-  CRR 5	1.928 to 4.914	5,215	736	-	-	5,951	(10)	(10)	-	-	(20)	0.3	BB- to B
-  CRR 6	4.915 to 8.860	716	90	-	-	806	-	(4)	-	-	(4)	0.5	B-
-  CRR 7	8.861 to 15.000	46	32	-	-	78	-	(3)	-	-	(3)	3.8	CCC+
-  CRR 8	15.001 to 99.999	15	461	-	-	476	-	(41)	-	-	(41)	8.6	CCC to C
-  CRR 9/10	100.000	-	-	469	-	469	-	-	(137)	-	(137)	29.2	D
Banks		103,042	1,827	82	-	104,951	(18)	(29)	(22)	-	(69)	0.1
-  CRR 1	0.000 to 0.053	79,188	120	-	-	79,308	(8)	-	-	-	(8)	-	AA- and above
-  CRR 2	0.054 to 0.169	13,508	209	-	-	13,717	(2)	-	-	-	(2)	-	A+ to A-
-  CRR 3	0.170 to 0.740	4,465	425	-	-	4,890	(3)	-	-	-	(3)	0.1	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	2,154	5	-	-	2,159	(1)	-	-	-	(1)	-	BB+ to BB-
-  CRR 5	1.928 to 4.914	3,312	172	-	-	3,484	(4)	(1)	-	-	(5)	0.1	BB- to B
-  CRR 6	4.915 to 8.860	-	5	-	-	5	-	-	-	-	-	-	B-
-  CRR 7	8.861 to 15.000	1	862	-	-	863	-	(27)	-	-	(27)	3.1	CCC+
-  CRR 8	15.001 to 99.999	414	29	-	-	443	-	(1)	-	-	(1)	0.2	CCC to C
-  CRR 9/10	100.000	-	-	82	-	82	-	-	(22)	-	(22)	26.8	D
At 31 Dec 2022		517,804	92,066	16,247	129	626,246	(551)	(2,015)	(6,046)	(38)	(8,650)	1.4

Wholesale lending - credit risk profile by obligor grade for loans and advances at amortised cost (continued)
	Basel one-year PD range	Gross carrying amount					Allowance for ECL					ECL coverage	Mapped external rating
		Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	%	$m	$m	$m	$m	$m $m	$m	$m	$m	$m	$m	%
Corporate and commercial		400,894	98,911	13,460	274	513,539	(665)	(1,874)	(5,601)	(64)	(8,204)	1.6
-  CRR 1	0.000 to 0.053	40,583	599	-	-	41,182	(7)	(1)	-	-	(8)	-	AA- and above
-  CRR 2	0.054 to 0.169	78,794	4,843	-	-	83,637	(26)	(43)	-	-	(69)	0.1	A+ to A-
-  CRR 3	0.170 to 0.740	139,739	19,199	-	-	158,938	(165)	(145)	-	-	(310)	0.2	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	91,268	23,365	-	-	114,633	(218)	(258)	-	-	(476)	0.4	BB+ to BB-
-  CRR 5	1.928 to 4.914	45,850	28,375	-	-	74,225	(185)	(424)	-	-	(609)	0.8	BB- to B
-  CRR 6	4.915 to 8.860	3,280	11,197	-	-	14,477	(22)	(242)	-	-	(264)	1.8	B-
-  CRR 7	8.861 to 15.000	1,101	4,406	-	-	5,507	(24)	(167)	-	-	(191)	3.5	CCC+
-  CRR 8	15.001 to 99.999	279	6,927	-	4	7,210	(18)	(594)	-	-	(612)	8.5	CCC to C
-  CRR 9/10	100.000	-	-	13,460	270	13,730	-	-	(5,601)	(64)	(5,665)	41.3	D
Non-bank financial institutions		61,086	3,874	395	-	65,355	(44)	(26)	(40)	-	(110)	0.2
-  CRR 1	0.000 to 0.053	14,370	122	-	-	14,492	(2)	(1)	-	-	(3)	-	AA- and above
-  CRR 2	0.054 to 0.169	16,438	43	-	-	16,481	(5)	-	-	-	(5)	-	A+ to A-
-  CRR 3	0.170 to 0.740	18,282	1,026	-	-	19,308	(11)	(4)	-	-	(15)	0.1	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	6,835	1,204	-	-	8,039	(15)	(11)	-	-	(26)	0.3	BB+ to BB-
-  CRR 5	1.928 to 4.914	5,053	1,297	-	-	6,350	(11)	(4)	-	-	(15)	0.2	BB- to B
-  CRR 6	4.915 to 8.860	102	98	-	-	200	-	(5)	-	-	(5)	2.5	B-
-  CRR 7	8.861 to 15.000	5	25	-	-	30	-	(1)	-	-	(1)	3.3	CCC+
-  CRR 8	15.001 to 99.999	1	59	-	-	60	-	-	-	-	-	-	CCC to C
-  CRR 9/10	100.000	-	-	395	-	395	-	-	(40)	-	(40)	10.1	D
Banks		81,636	1,517	-	-	83,153	(14)	(3)	-	-	(17)	-
-  CRR 1	0.000 to 0.053	61,275	10	-	-	61,285	(4)	-	-	-	(4)	-	AA- and above
-  CRR 2	0.054 to 0.169	11,628	65	-	-	11,693	(3)	-	-	-	(3)	-	A+ to A-
-  CRR 3	0.170 to 0.740	3,935	102	-	-	4,037	(2)	-	-	-	(2)	-	BBB+ to BBB-
-  CRR 4	0.741 to 1.927	4,232	180	-	-	4,412	(5)	-	-	-	(5)	0.1	BB+ to BB-
-  CRR 5	1.928 to 4.914	556	52	-	-	608	-	(1)	-	-	(1)	0.2	BB- to B
-  CRR 6	4.915 to 8.860	9	541	-	-	550	-	-	-	-	-	-	B-
-  CRR 7	8.861 to 15.000	1	564	-	-	565	-	-	-	-	-	-	CCC+
-  CRR 8	15.001 to 99.999	-	3	-	-	3	-	(2)	-	-	(2)	66.7	CCC to C
-  CRR 9/10	100.000	-	-	-	-	-	-	-	-	-	-	-	D
At 31 Dec 2021		543,616	104,302	13,855	274	662,047	(723)	(1,903)	(5,641)	(64)	(8,331)	1.3

Commercial real estate

Commercial real estate lending includes the financing of corporate, institutional and high net worth customers who are investing primarily in income-producing assets and, to a lesser extent, in their construction and development. The portfolio is globally diversified with larger concentrations in Hong Kong, the UK, mainland China and the US.

Our global exposure is centred largely on cities with economic, political or cultural significance. In more developed markets, our exposure mainly comprises the financing of investment assets, the redevelopment of existing stock and the augmentation of both commercial and residential markets to support economic and population growth. In less developed commercial real estate markets, our exposures comprise lending for development assets on relatively short tenors with a particular focus on supporting larger, better capitalised developers involved in residential construction or assets supporting economic expansion.

Excluding adverse foreign exchange movements of $3.8bn, commercial real estate lending decreased by $14.9bn, mainly due to the reclassification of assets held for sale of our banking operations in Canada of $7.1bn, compounded by loan repayments in Hong Kong of $6.7bn and France of $0.7bn.

Commercial real estate lending to customers
							of which:
	Europe	Asia	MENA	North  America	Latin America	Total	UK	Hong Kong
	$m	$m	$m	$m	$m	$m	$m	$m
Gross loans and advances
Stage 1	17,318	46,757	1,115	1,534	880	67,604	12,209	35,963
Stage 2	3,590	16,337	364	798	44	21,133	3,008	11,092
Stage 3	980	3,320	286	8	54	4,648	827	3,029
POCI	-	19	-	-	-	19	-	19
At 31 Dec 2022	21,888	66,433	1,765	2,340	978	93,404	16,044	50,103
-  of which: forborne loans	359	763	472	173	47	1,814	336	654
Allowance for ECL	(369)	(2,095)	(159)	(12)	(31)	(2,666)	(323)	(1,879)

Gross loans and advances
Stage 1	20,317	56,734	781	8,328	1,073	87,233	14,235	42,951
Stage 2	3,505	17,103	569	1,265	218	22,660	2,781	13,300
Stage 3	1,062	543	206	9	249	2,069	905	435
POCI	-	98	-	-	-	98	-	98
At 31 Dec 2021	24,884	74,478	1,556	9,602	1,540	112,060	17,921	56,784
-  of which: forborne loans1	440	251	145	-	-	836	436	170
Allowance for ECL	(450)	(693)	(158)	(26)	(130)	(1,457)	(366)	(604)

1  Forborne gross loans and advances at 31 December 2021 have not been restated, and agreed with the policies and disclosures presented in the Annual Report and Accounts 2021.

Refinance risk in commercial real estate

Commercial real estate lending tends to require the repayment of a significant proportion of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a customer, being

unable to repay the debt on maturity, fails to refinance it at commercial terms. We monitor our commercial real estate portfolio closely, assessing indicators for signs of potential issues with refinancing.

Commercial real estate gross loans and advances to customers maturity analysis
							of which:
	Europe	Asia	MENA	North America	Latin America	Total	UK	Hong Kong
	$m	$m	$m	$m	$m	$m	$m	$m
On demand, overdrafts or revolving
< 1 year	10,996	23,492	434	196	299	35,417	9,211	18,698
1-2 years	5,197	18,052	255	280	117	23,901	3,678	13,917
2-5 years	4,031	21,818	694	1,832	462	28,837	2,472	14,978
> 5 years	1,664	3,071	382	32	100	5,249	683	2,510
At 31 Dec 2022	21,888	66,433	1,765	2,340	978	93,404	16,044	50,103

On demand, overdrafts or revolving
< 1 year	12,980	26,736	478	5,961	336	46,491	10,546	20,466
1-2 years	4,794	18,192	159	1,098	280	24,523	3,921	14,399
2-5 years	5,352	26,668	631	2,297	559	35,507	2,805	19,562
> 5 years	1,758	2,882	288	246	365	5,539	649	2,357
At 31 Dec 2021	24,884	74,478	1,556	9,602	1,540	112,060	17,921	56,784

The following table presents the Group's exposure to borrowers classified in the commercial real estate sector where the ultimate parent is based in mainland China, as well as all commercial real estate exposures booked on mainland China balance sheets. The exposures at 31 December 2022 are split by country/territory and credit quality including allowances for ECL by stage.

Mainland China commercial real estate
	Hong Kong	Mainland China	Rest of the Group	Total
	(audited)1	(audited)1	(unaudited)1	(unaudited)1
	$m	$m	$m	$m
Loans and advances to customers2	9,129	5,752	860	15,741
Guarantees issued and others3	249	755	18	1,022
Total mainland China commercial real estate exposure at 31 Dec 2022	9,378	6,507	878	16,763
Distribution of mainland China commercial real estate exposure by credit quality
-  Strong	1,425	2,118	220	3,763
-  Good	697	1,087	370	2,154
-  Satisfactory	1,269	2,248	77	3,594
-  Sub-standard	2,887	779	193	3,859
-  Credit impaired	3,100	275	18	3,393
At 31 Dec 2022	9,378	6,507	878	16,763
Allowance for ECL by credit quality
-  Strong	-	(5)	-	(5)
-  Good	-	(8)	(1)	(9)
-  Satisfactory	(20)	(81)	-	(101)
-  Sub-standard	(458)	(42)	(3)	(503)
-  Credit impaired	(1,268)	(105)	-	(1,373)
At 31 Dec 2022	(1,746)	(241)	(4)	(1,991)
Allowance for ECL by stage distribution
- Stage 1	(1)	(9)	(1)	(11)
- Stage 2	(477)	(127)	(3)	(607)
- Stage 3	(1,268)	(105)	-	(1,373)
- POCI	-	-	-	-
At 31 Dec 2022	(1,746)	(241)	(4)	(1,991)
ECL coverage %	18.6	3.7	0.5	11.9

1  Disclosures in respect of mainland China commercial real estate exposures in Hong Kong and mainland China form part of the scope of the audit of the Group's Annual Report and Accounts 2022. Amounts disclosed for mainland China commercial real estate exposures elsewhere in the Group have not been audited but are provided for completeness.

2  Amounts represent gross carrying amount.

3  Amounts represent nominal amount for guarantees and other contingent liabilities.

Mainland China commercial real estate
	Hong Kong1	Mainland China	Rest of the Group	Total
	(audited)2	(audited)2	(unaudited)2	(unaudited)2
	$m	$m	$m	$m
Loans and advances to customers3	11,484	6,811	410	18,705
Guarantees issued and others4	166	2,376	79	2,621
Total mainland China commercial real estate exposure at 31 Dec 2021	11,650	9,187	489	21,326
Distribution of mainland China commercial real estate exposure by credit quality
-  Strong	3,543	3,864	155	7,562
-  Good	2,652	2,354	73	5,079
-  Satisfactory	3,383	2,855	106	6,344
-  Sub-standard	1,570	12	155	1,737
-  Credit impaired	502	102	-	604
At 31 Dec 2021	11,650	9,187	489	21,326
Allowance for ECL by credit quality
-  Strong	(15)	(7)	-	(22)
-  Good	(37)	(10)	-	(47)
-  Satisfactory	(382)	(20)	(2)	(404)
-  Sub-standard	(24)	(1)	-	(25)
-  Credit impaired	(102)	(11)	-	(113)
At 31 Dec 2021	(560)	(49)	(2)	(611)
Allowance for ECL by stage distribution
-  Stage 1	(2)	(11)	(1)	(14)
-  Stage 2	(456)	(27)	(1)	(484)
-  Stage 3	(102)	(11)	-	(113)
-  POCI	-	-	-	-
At 31 Dec 2021	(560)	(49)	(2)	(611)
ECL coverage %	4.8	0.5	0.4	2.9

1  Comparatives have been restated to reflect an exposure reclassification from ' guarantees and others ' to ' loans and advances to customers ' , which better reflects the nature of product.

2  Disclosures in respect of mainland China commercial real estate exposures in Hong Kong and mainland China form part of the scope of the audit of the Group's Annual Report and Accounts 2022. Amounts disclosed for mainland China commercial real estate exposures elsewhere in the Group have not been audited but are provided for completeness.

3  Amounts represent gross carrying amount.

4  Amounts represent nominal amount for guarantees and other contingent liabilities.

Commercial real estate financing refers to lending that focuses on commercial development and investment in real estate and covers commercial, residential and industrial assets. Commercial real estate financing can also be provided to a corporate or financial entity for the purchase or financing of a property which supports the overall operations of the business.

The exposures in the table are related to companies whose primary activities are focused on residential, commercial and mixed-use real estate activities. Lending is generally focused on tier 1 and 2 cities.

The exposures in the table above had 57% (31 December 2021: 89%) of exposure booked with a credit quality of 'satisfactory' or above. This deterioration reflects increased funding risks and weaker sales performance for a number of our customers over the period.

Facilities booked in Hong Kong are exposures which represent relatively higher risk within the mainland China commercial real estate portfolio. This portfolio had 36% (31 December 2021: 82%) of exposure booked with a credit quality of 'satisfactory' or above, reflecting sustained credit deterioration in this book over the course of the year. At 31 December 2022, the Group had allowances for ECL of $1.7bn (31 December 2021: $0.6bn) held against mainland China commercial real estate exposures booked in Hong Kong .

Over one third of the unimpaired exposure in the Hong Kong portfolio reflects lending to state owned enterprises, and much of the remaining is to relatively strong privately owned enterprises. This is reflected in the relatively low ECL allowance in this part of the portfolio.

Regulatory and policy developments in the latter part of 2022 appear to have stabilised the sector. Sustained liquidity support and improved domestic residential demand will be necessary to support a recovery.

The Group has additional exposures to mainland China commercial real estate as a result of lending to multinational corporates, which is not incorporated in the table above.

Collateral and other credit enhancements

(Audited)

Although collateral can be an important mitigant of credit risk, it is the Group's practice to lend on the basis of the customer's ability to meet their obligations out of cash flow resources rather than placing primary reliance on collateral and other credit risk enhancements. Depending on the customer's standing and the type of product, facilities may be provided without any collateral or other credit enhancements. For other lending, a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of default, the Group may utilise the collateral as a source of repayment.

Depending on its form, collateral can have a significant financial effect in mitigating our exposure to credit risk. Where there is sufficient collateral, an expected credit loss is not recognised. This is the case for reverse repurchase agreements and for certain loans and advances to customers where the loan to value ('LTV') is very low.

Mitigants may include a charge on borrowers' specific assets, such as real estate or financial instruments. Other credit risk mitigants include short positions in securities and financial assets held as part of linked insurance/investment contracts where the risk is predominantly borne by the policyholder. Additionally, risk may be managed by employing other types of collateral and credit risk enhancements, such as second charges, other liens and unsupported guarantees. Guarantees are normally taken from corporates and export credit agencies. Corporates would normally provide guarantees as part of a parent/subsidiary relationship and span a number of credit grades. The export credit agencies will normally be investment grade.

Certain credit mitigants are used strategically in portfolio management activities. While single name concentrations arise in portfolios managed by Global Banking and Corporate Banking, it is only in Global Banking that their size requires the use of portfolio level credit mitigants. Across Global Banking, risk limits and utilisations, maturity profiles and risk quality are monitored and managed proactively. This process is key to the setting of risk appetite for these larger, more complex, geographically distributed customer groups. While the principal form of risk management continues to be at the point of exposure origination, through the lending decision-making process, Global Banking also utilises loan sales and credit default swap ('CDS') hedges to manage concentrations and reduce risk.

These transactions are the responsibility of a dedicated Global Banking portfolio management team. Hedging activity is carried out within agreed credit parameters, and is subject to market risk limits and a robust governance structure. Where applicable, CDSs are entered into directly with a central clearing house counterparty. Otherwise, the Group's exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings.

CDS mitigants are held at portfolio level and are not included in the expected credit loss calculations. CDS mitigants are not reported in the following tables.

Collateral on loans and advances

Collateral held is analysed separately for commercial real estate and for other corporate, commercial and financial (non-bank) lending. The following tables include off-balance sheet loan commitments, primarily undrawn credit lines.

The collateral measured in the following tables consists of fixed first charges on real estate, and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis. No adjustment has been made to the collateral for any expected costs of recovery. Marketable securities are measured at their fair value.

Other types of collateral such as unsupported guarantees and floating charges over the assets of a customer's business are not measured in the following tables. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes.

The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. When collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is pro-rated across the loans and advances protected by the collateral.

For credit-impaired loans, the collateral values cannot be directly compared with impairment allowances recognised. The LTV figures use open market values with no adjustments. Impairment allowances are calculated on a different basis, by considering other cash flows and adjusting collateral values for costs of realising collateral as explained further on page 342.

Commercial real estate loans and advances

The value of commercial real estate collateral is determined by using a combination of external and internal valuations

and physical inspections. For commercial real estate, where the facility exceeds regulatory threshold requirements, Group policy requires an independent review of the valuation at least every three years, or more frequently as the need arises.

In Hong Kong, market practice is typically for lending to major property companies to be either secured by guarantees or unsecured. In Europe, facilities of a working capital nature are generally not secured by a first fixed charge, and are therefore disclosed as not collateralised.

Wholesale lending - commercial real estate loans and advances to customers including loan commitments by level of collateral for key countries/territories (by stage)
(Audited)
			of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Stage 1
Not collateralised	44,052	0.1	5,960	0.3	20,286	-
Fully collateralised	53,475	0.1	10,293	0.1	27,926	-
LTV ratio:
-  less than 50%	29,486	0.1	2,900	0.2	21,185	-
-  51% to 75%	18,530	0.1	6,361	0.1	5,365	0.1
-  76% to 90%	2,941	0.1	556	0.2	995	-
-  91% to 100%	2,518	0.2	476	0.2	381	-
Partially collateralised (A):	4,923	0.1	1,920	0.2	804	-
-  collateral value on A	2,800		1,113		584
Total	102,450	0.1	18,173	0.2	49,016	-
Stage 2
Not collateralised	9,804	5.7	2,511	1.5	4,673	10.5
Fully collateralised	15,423	1.6	2,025	0.9	7,457	1.1
LTV ratio:
-  less than 50%	5,945	1.6	664	0.9	3,539	1.4
-  51% to 75%	6,821	1.1	1,197	0.9	3,536	1.0
-  76% to 90%	908	2.1	140	1.4	134	0.1
-  91% to 100%	1,749	3.6	24	0.4	248	0.2
Partially collateralised (B):	1,624	1.6	179	1.1	390	2.8
-  collateral value on B	997		144		249
Total	26,851	3.1	4,715	1.3	12,520	4.7
Stage 3
Not collateralised	2,612	53.7	295	35.3	2,123	56.9
Fully collateralised	1,617	10.8	372	6.5	864	5.2
LTV ratio:
-  less than 50%	544	16.5	53	3.8	318	2.2
-  51% to 75%	594	4.4	291	2.1	205	3.4
-  76% to 90%	315	4.1	11	18.2	264	1.9
-  91% to 100%	164	28.7	17	76.5	77	32.5
Partially collateralised (C):	513	54.2	176	68.8	73	61.6
-  collateral value on C	293		72		39
Total	4,742	39.1	843	29.5	3,060	42.5
POCI
Not collateralised	-	-	-	-	-	-
Fully collateralised	-	-	-	-	-	-
LTV ratio:
-  less than 50%	-	-	-	-	-	-
-  51% to 75%	-	-	-	-	-	-
-  76% to 90%	-	-	-	-	-	-
-  91% to 100%	-	-	-	-	-	-
Partially collateralised (D):	19	-	-	-	19	-
-  collateral value on D	8		-		8
Total	19	-	-	-	19	-
At 31 Dec 2022	134,062	2.1	23,731	1.4	64,615	2.9

Wholesale lending - commercial real estate loans and advances to customers including loan commitments by level of collateral for key countries/territories (by stage) (continued)
(Audited)
			Of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Stage 1
Not collateralised	50,603	0.1	7,623	0.4	23,864	-
Fully collateralised	71,769	0.1	13,139	0.2	32,951	-
LTV ratio:
-  less than 50%	35,984	0.1	4,142	0.2	22,645	-
-  51% to 75%	26,390	0.1	6,460	0.2	8,082	-
-  76% to 90%	5,284	0.2	1,859	0.2	1,181	-
-  91% to 100%	4,111	0.1	678	-	1,043	0.1
Partially collateralised (A):	5,429	0.1	2,018	0.1	714	-
-  collateral value on A	2,942		874		447
Total	127,801	0.1	22,780	0.3	57,529	-
Stage 2
Not collateralised	11,729	4.3	1,970	0.9	7,758	5.9
Fully collateralised	12,741	1.1	1,131	2.3	6,385	0.4
LTV ratio:
-  less than 50%	5,759	1.0	605	3.1	3,633	0.3
-  51% to 75%	4,804	1.1	471	1.3	2,389	0.5
-  76% to 90%	757	1.5	43	-	269	0.4
-  91% to 100%	1,421	1.5	12	-	94	-
Partially collateralised (B):	1,783	2.7	366	0.3	172	2.9
-  collateral value on B	930		223		70
Total	26,253	2.7	3,467	1.3	14,315	3.4
Stage 3
Not collateralised	828	40.9	407	42.0	198	35.9
Fully collateralised	1,176	22.0	346	5.2	290	11.0
LTV ratio:
-  less than 50%	645	19.8	36	2.8	284	10.9
-  51% to 75%	286	9.1	250	5.2	-	-
-  76% to 90%	62	14.5	11	-	2	-
-  91% to 100%	183	52.5	49	8.2	4	25.0
Partially collateralised (C):	265	47.9	204	49.0	-	-
-  collateral value on C	149		97		-
Total	2,269	32.0	957	30.2	488	21.1
POCI
Not collateralised	-	-	-	-	-	-
Fully collateralised	98	-	-	-	98	-
LTV ratio:
-  less than 50%	98	-	-	-	98	-
-  51% to 75%	-	-	-	-	-	-
-  76% to 90%	-	-	-	-	-	-
-  91% to 100%	-	-	-	-	-	-
Partially collateralised (D):	-	-	-	-	-	-
-  collateral value on D	-		-		-
Total	98	-	-	-	98	-
At 31 Dec 2021	156,421	1.0	27,204	1.5	72,430	0.8

Wholesale lending - commercial real estate loans and advances including loan commitments by level of collateral for key countries/territories
(Audited)
			of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Rated CRR/PD1 to 7
Not collateralised	52,373	0.6	8,457	0.7	23,861	0.9
Fully collateralised	68,020	0.3	12,309	0.3	34,779	0.1
Partially collateralised (A):	6,479	0.4	2,098	0.2	1,194	0.9
-  collateral value on A	3,754		1,257		833
Total	126,872	0.4	22,864	0.4	59,834	0.5
Rated CRR/PD8
Not collateralised	1,483	19.8	14	3.6	1,098	26.0
Fully collateralised	878	9.2	9	11.1	604	7.1
LTV ratio:
-  less than 50%	236	21.6	4	7.5	167	15.0
-  51% to 75%	594	5.1	3	13.3	393	4.6
-  76% to 90%	45	0.4	-	-	44	0.2
-  91% to 100%	3	3.3	2	3.5	-	-
Partially collateralised (B):	68	2.9	1	8.0	-	-
-  collateral value on B	43		-		-
Total	2,429	15.5	24	6.6	1,702	19.3
Rated CRR/PD9 to 10
Not collateralised	2,612	53.7	295	35.3	2,123	56.9
Fully collateralised	1,617	10.8	372	6.5	864	5.2
LTV ratio:
-  less than 50%	544	16.5	53	3.8	318	2.2
-  51% to 75%	594	4.4	291	2.1	205	3.4
-  76% to 90%	315	4.1	11	18.2	264	1.9
-  91% to 100%	164	28.7	17	76.5	77	32.5
Partially collateralised (C):	532	52.3	176	68.8	92	48.9
-  collateral value on C	301		72		47
Total	4,761	39.0	843	29.5	3,079	42.2
At 31 Dec 2022	134,062	2.1	23,731	1.4	64,615	2.9

Rated CRR/PD1 to 7
Not collateralised	61,279	0.5	9,586	0.5	30,917	0.6
Fully collateralised	83,456	0.2	14,218	0.2	38,817	0.1
Partially collateralised (A):	7,059	0.5	2,379	0.2	886	0.6
-  collateral value on A	3,729		1,092		517
Total	151,794	0.3	26,183	0.3	70,620	0.3
Rated CRR/PD8
Not collateralised	1,053	26.5	7	42.9	705	38.6
Fully collateralised	1,054	3.8	52	38.5	519	2.1
LTV ratio:
-  less than 50%	503	4.8	41	41.5	378	0.8
-  51% to 75%	447	3.1	8	25.0	137	5.8
-  76% to 90%	60	1.7	1	-	4	-
-  91% to 100%	44	2.3	2	-	-	-
Partially collateralised (B):	153	15.0	5	20.0	-	-
-  collateral value on B	143		5		-
Total	2,260	15.1	64	37.5	1,224	23.1
Rated CRR/PD9 to 10
Not collateralised	828	40.9	407	42.0	198	35.9
Fully collateralised	1,274	20.3	346	5.2	388	8.2
LTV ratio:
-  less than 50%	743	17.2	36	2.8	382	8.1
-  51% to 75%	286	9.1	250	5.2	-	-
-  76% to 90%	62	14.5	11	-	2	-
-  91% to 100%	183	52.5	49	8.2	4	25.0
Partially collateralised (C):	265	47.9	204	49.0	-	-
-  collateral value on C	149		97		-
Total	2,367	30.6	957	30.2	586	17.6
At 31 Dec 2021	156,421	1.0	27,204	1.5	72,430	0.8

Other corporate, commercial and financial (non-bank) loans and advances

Other corporate, commercial and financial (non-bank) loans are analysed separately in the following table, which focuses on the countries/territories containing the majority of our loans and advances balances. For financing activities in other corporate and commercial lending, collateral value is not strongly correlated to principal repayment performance.

Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them.

Accordingly, the following table reports values only for customers with CRR 8-10, recognising that these loans and advances generally have valuations that are comparatively recent.

Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories (by stage)
(Audited)
			of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Stage 1
Not collateralised	632,847	0.1	105,126	0.1	109,919	-
Fully collateralised	96,434	0.1	21,192	0.1	39,165	0.1
LTV ratio:
-  less than 50%	36,896	0.1	6,928	0.1	15,695	0.1
-  51% to 75%	29,242	0.1	7,611	0.1	13,893	0.1
-  76% to 90%	9,922	0.1	1,889	0.1	4,964	0.1
-  91% to 100%	20,374	0.1	4,764	-	4,613	0.1
Partially collateralised (A):	54,836	0.1	6,480	0.1	17,704	0.1
-  collateral value on A	27,779		3,470		7,737
Total	784,117	0.1	132,798	0.1	166,788	0.1
Stage 2
Not collateralised	79,013	1.0	16,886	2.2	9,906	0.7
Fully collateralised	29,618	1.2	6,511	1.3	12,693	1.0
LTV ratio:
-  less than 50%	11,221	1.3	2,872	1.0	4,577	0.9
-  51% to 75%	11,948	1.4	2,656	1.5	5,413	1.2
-  76% to 90%	2,990	1.0	578	1.9	1,479	0.7
-  91% to 100%	3,459	0.8	405	1.2	1,224	0.3
Partially collateralised (B):	13,130	1.0	2,288	1.2	3,379	0.6
-  collateral value on B	6,484		1,197		1,524
Total	121,761	1.1	25,685	1.9	25,978	0.8
Stage 3
Not collateralised	8,278	38.4	3,783	17.8	939	56.0
Fully collateralised	1,948	13.7	699	4.6	665	3.8
LTV ratio:
-  less than 50%	678	18.7	175	3.4	175	1.7
-  51% to 75%	503	11.3	336	6.5	115	7.8
-  76% to 90%	402	4.7	102	1.0	268	0.4
-  91% to 100%	365	17.5	86	3.5	107	10.3
Partially collateralised (C):	2,120	37.3	308	25.6	777	30.9
-  collateral value on C	1,133		158		397
Total	12,346	34.3	4,790	16.4	2,381	33.2
POCI
Not collateralised	64	18.8	28	3.6	-	-
Fully collateralised	24	91.7	-	-	24	91.7
LTV ratio:
-  less than 50%	-	-	-	-	-	-
-  51% to 75%	1	-	-	-	1	-
-  76% to 90%	23	95.7	-	-	23	95.7
-  91% to 100%	-	-	-	-	-	-
Partially collateralised (D):	22	18.2	-	-	14	-
-  collateral value on D	16		-		13
Total	110	34.5	28	3.6	38	57.9
At 31 Dec 2022	918,334	0.7	163,301	0.9	195,185	0.6

Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories (by stage) (continued)
(Audited)
			of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Stage 1
Not collateralised	624,935	0.1	112,188	0.2	111,948	-
Fully collateralised	112,905	0.1	22,971	0.2	45,479	0.1
LTV ratio:
-  less than 50%	40,636	0.1	6,512	0.2	16,915	-
-  51% to 75%	38,709	0.1	9,431	0.2	16,533	0.1
-  76% to 90%	13,284	0.1	2,556	0.1	4,920	0.1
-  91% to 100%	20,276	0.1	4,472	-	7,111	0.1
Partially collateralised (A):	64,058	0.1	8,665	0.1	20,358	-
-  collateral value on A	30,890		4,826		9,322
Total	801,898	0.1	143,824	0.2	177,785	-
Stage 2
Not collateralised	85,394	1.1	18,562	2.0	8,310	1.1
Fully collateralised	32,019	1.1	8,231	1.3	11,503	0.7
LTV ratio:
-  less than 50%	10,892	1.2	3,148	1.5	3,378	0.5
-  51% to 75%	14,281	1.1	4,161	1.2	5,202	0.9
-  76% to 90%	2,752	1.2	687	1.5	1,148	0.9
-  91% to 100%	4,094	0.9	235	1.7	1,775	0.2
Partially collateralised (B):	12,484	1.0	1,824	1.9	1,788	0.4
-  collateral value on B	6,675		937		785
Total	129,897	1.1	28,617	1.8	21,601	0.8
Stage 3
Not collateralised	8,122	47.3	2,979	21.6	732	74.7
Fully collateralised	2,278	12.7	1,212	3.4	240	2.1
LTV ratio:
-  less than 50%	603	20.9	249	4.8	76	-
-  51% to 75%	1,110	5.0	786	1.4	110	3.6
-  76% to 90%	295	11.5	115	9.6	26	-
-  91% to 100%	270	27.4	62	9.7	28	3.6
Partially collateralised (C):	2,134	38.7	318	35.5	616	28.9
-  collateral value on C	1,200		186		358
Total	12,534	39.6	4,509	17.7	1,588	46.0
POCI
Not collateralised	114	36.0	28	21.4	4	-
Fully collateralised	61	34.4	-	-	57	36.8
LTV ratio:
-  less than 50%	-	-	-	-	-	-
-  51% to 75%	57	36.8	-	-	57	36.8
-  76% to 90%	-	-	-	-	-	-
-  91% to 100%	4	-	-	-	-	-
Partially collateralised (D):	2	100.0	-	-	-	-
-  collateral value on D	2		-		-
Total	177	36.2	28	21.4	61	34.4
At 31 Dec 2021	944,506	0.8	176,978	0.9	201,035	0.5

Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories
(Audited)
			of which:
	Total		UK		Hong Kong
	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage	Gross carrying/nominal amount	ECL coverage
	$m	%	$m	%	$m	%
Rated CRR/PD8
Not collateralised	4,209	3.5	1,071	1.6	62	38.7
Fully collateralised	2,208	3.8	303	3.3	171	12.3
LTV ratio:
-  less than 50%	1,104	4.3	184	0.5	84	14.3
-  51% to 75%	933	3.5	95	5.3	84	10.7
-  76% to 90%	44	6.8	22	13.6	-	-
-  91% to 100%	127	0.8	2	10.0	3	6.7
Partially collateralised (A):	1,298	2.9	24	4.2	9	11.1
-  collateral value on A	1,212		4		5
Total	7,715	3.5	1,398	2.0	242	19.0
Rated CRR/PD9 to 10
Not collateralised	8,342	38.2	3,810	17.7	939	56.0
Fully collateralised	1,971	14.6	699	4.6	688	6.7
LTV ratio:
-  less than 50%	677	18.8	175	3.4	175	1.7
-  51% to 75%	504	11.3	336	6.5	116	7.8
-  76% to 90%	425	9.6	102	1.0	290	7.9
-  91% to 100%	365	17.5	86	3.5	107	10.3
Partially collateralised (B):	2,143	37.1	309	25.6	792	30.3
-  collateral value on B	1,149		158		410
Total	12,456	34.3	4,818	16.3	2,419	33.6
At 31 Dec 2022	20,171	22.5	6,216	13.1	2,661	32.2

Rated CRR/PD8
Not collateralised	4,790	3.9	1,587	3.1	79	30.4
Fully collateralised	1,653	3.9	259	6.6	32	-
LTV ratio:
-  less than 50%	803	3.5	113	6.2	2	-
-  51% to 75%	583	3.8	110	8.2	1	-
-  76% to 90%	116	5.2	23	4.3	29	-
-  91% to 100%	151	5.3	13	-	-	-
Partially collateralised (A):	1,253	3.7	138	8.0	11	-
-  collateral value on A	921		40		6
Total	7,696	3.9	1,984	3.9	122	20.5
Rated CRR/PD9 to 10
Not collateralised	8,239	47.1	3,007	21.5	736	74.3
Fully collateralised	2,335	13.3	1,212	3.4	297	9.1
LTV ratio:
-  less than 50%	604	20.9	249	4.8	75	-
-  51% to 75%	1,166	6.7	786	1.4	168	14.9
-  76% to 90%	295	11.5	115	9.6	26	-
-  91% to 100%	270	27.4	62	9.7	28	3.6
Partially collateralised (B):	2,137	38.7	318	35.5	616	28.9
-  collateral value on B	1,203		186		358
Total	12,711	39.5	4,537	17.7	1,649	45.6
At 31 Dec 2021	20,407	26.1	6,521	13.5	1,771	43.8

Other credit risk exposures

In addition to collateralised lending, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are summarised below:

• Some securities issued by governments, banks and other financial institutions benefit from additional credit enhancements provided by government guarantees that cover the assets.

• Debt securities issued by banks and financial institutions include asset-backed securities ('ABSs') and similar instruments, which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of credit default swap ('CDS') protection.

• Trading loans and advances mainly pledged against cash collateral are posted to satisfy margin requirements. There is limited credit risk on cash collateral posted since in the event of default of the counterparty this would be set off against the related liability. Reverse repos and stock borrowing are by their nature collateralised.

Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described on page 378 of the financial statements.

• The Group's maximum exposure to credit risk includes financial guarantees and similar contracts granted, as well as loan and other credit-related commitments. Depending on the terms of the arrangement, we may use additional credit mitigation if a guarantee is called upon or a loan commitment is drawn and subsequently defaults.

For further information on these arrangements, see Note 33 on the financial statements.

Derivatives

We participate in transactions exposing us to counterparty credit risk. Counterparty credit risk is the risk of financial loss if the counterparty to a transaction defaults before satisfactorily settling it. It arises principally from over-the-counter ('OTC') derivatives and securities financing transactions and is calculated in both the trading and non-trading books. Transactions vary in value by reference to a market factor such as an interest rate, exchange rate or asset price.

The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit valuation adjustment ('CVA').

For an analysis of CVAs, see Note 12 on the financial statements.

The following table reflects by risk type the fair values and gross notional contract amounts of derivatives cleared through an exchange, central counterparty or non-central counterparty.

Notional contract amounts and fair values of derivatives
	2022			2021
	Notional	Fair value		Notional	Fair value
	amount	Assets	Liabilities	amount	Assets	Liabilities
	$m	$m	$m	$m	$m	$m
Total OTC derivatives	23,649,591	421,309	423,911	21,964,665	246,108	241,136
-  total OTC derivatives cleared by central counterparties	11,360,729	149,190	154,167	10,086,344	59,147	60,686
-  total OTC derivatives not cleared by central counterparties	12,288,862	272,119	269,744	11,878,321	186,961	180,450
Total exchange traded derivatives	1,146,426	3,824	2,840	1,359,692	4,152	3,306
Gross	24,796,017	425,133	426,751	23,324,357	250,260	244,442
Offset		(140,987)	(140,987)		(53,378)	(53,378)
At 31 Dec		284,146	285,764		196,882	191,064

The purposes for which HSBC uses derivatives are described in Note 15 on the financial statements.

The International Swaps and Derivatives Association ('ISDA') master agreement is our preferred agreement for documenting derivatives activity. It is common, and our preferred practice, for the parties involved in a derivative transaction to execute a credit support annex ('CSA') in conjunction with the ISDA master agreement. Under a CSA, collateral is passed between the parties to mitigate the counterparty risk inherent in outstanding positions. The majority of our CSAs are with financial institutional clients.

We manage the counterparty exposure on our OTC derivative contracts by using collateral agreements with counterparties and netting agreements. Currently, we do not actively manage our general OTC derivative counterparty exposure in the credit markets, although we may manage individual exposures in certain circumstances.

We place strict policy restrictions on collateral types and as a consequence the types of collateral received and pledged are, by value, highly liquid and of a strong quality, being predominantly cash.

Where a collateral type is required to be approved outside the collateral policy, approval is required from a committee of senior representatives from Markets, Legal and Risk.

See Note 31 on the financial statements for details regarding legally enforceable right of offset in the event of counterparty default and collateral received in respect of derivatives.

Personal lending

This section presents further disclosures related to personal lending. It provides details of the regions, countries and products that are driving the change observed in personal loans and advances to customers, with the impact of foreign exchange separately identified. Additionally, Hong Kong and UK mortgage book LTV data is provided.

This section also provides a reconciliation of the opening 1 January 2022 to 31 December 2022 closing gross carrying/nominal amounts and associated allowance for ECL. Further product granularity is also provided by stage, with geographical data presented for loans and advances to customers, loan and other credit-related commitments and financial guarantees.

At 31 December 2022, total personal lending for loans and advances to customers of $415bn decreased by $63.3bn compared with 31 December 2021. This decrease included adverse foreign exchange movements of $27.3bn. Excluding foreign exchange movements, there was a decrease of $36bn. This decrease was due to the reclassification to assets held for sale of our banking business in Canada of $26.1bn and our retail banking operations in France of $23.7bn.

The reduction was partly mitigated by growth of $8.7bn in the UK, $2.8bn in Asia and $2.0bn in Latin America.

The allowance for ECL attributable to personal lending, excluding off-balance sheet loan commitments and guarantees, decreased by $0.2bn to $2.9bn at 31 December 2022. This included favourable foreign exchange movements of $0.1bn.

Excluding foreign exchange movements and reclassifications to held for sale, mortgage lending balances increased by $15.4bn to $336.8bn at 31 December 2022. The majority of the growth was in the UK by $ 8.9bn; Asia by $4.4bn, notably $3.4bn in Hong Kong and $1.6bn in Australia; and in Latin America by $1.0bn. The allowance for ECL, excluding foreign exchange, attributable to mortgages of $0.6bn decreased by $0.1bn compared with 31 December 2021.

At 31 December 2022, for certain retail lending portfolios, we introduced enhancements in the significant increase in credit risk ('SICR') approach in relation to capturing relative movements in probability of default ('PD'). The enhanced approach captured relative movements in PD since origination, which resulted in a significant migration to stage 2 from loans to customers gross carrying amounts in stage 1.

The volume of stage 1 customer accounts with lower absolute levels of credit risk who have exhibited some amount of relative increase in PD since origination have migrated into stage 2, and accounts originated with higher absolute levels of credit risk with no or insignificant increases in PD since origination have been transferred to stage 1, with no material overall change in risk.

The impact on ECL is immaterial due to the offsetting ECL impacts of stage migrations and due to the LTV profiles. This is particularly applicable to UK customers.

The enhancement of the SICR approach constitutes an improvement towards more responsive models that better reflect the SICR since origination. This includes consideration of the current cost of living pressures, as markets adjust to the higher interest-rate environment.

The quality of both our Hong Kong and UK mortgage books remained strong, with low levels of impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 59%, compared with an estimated 57% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 67%, compared with an estimated 50% for the overall mortgage portfolio.

Excluding foreign exchange movements and reclassifications to held for sale, other personal lending balances at 31 December 2022 decreased by $1.4bn compared with 31 December 2021. This was mainly from a decline of $2.0bn from Hong Kong in secured personal lending, partly offset by an increase of $0.5bn from Latin America in credit cards.

The allowance for ECL, excluding foreign exchange, attributable to other personal lending of $2.3bn remained unchanged from 31 December 2021. Excluding foreign exchange, the allowance for

ECL attributable to credit cards increased by $ 0.1bn, offset by a decrease of $0.1bn in unsecured personal lending.

Total personal lending for loans and advances to customers at amortised cost by stage distribution
	Gross carrying amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By portfolio
First lien residential mortgages	294,918	39,860	2,043	336,821	(74)	(230)	(270)	(574)
-  of which: interest only (including offset)	19,636	4,485	169	24,290	(3)	(46)	(41)	(90)
-  affordability (including US adjustable rate mortgages)	14,773	369	240	15,382	(5)	(3)	(4)	(12)
Other personal lending	67,863	9,031	1,297	78,191	(488)	(1,275)	(535)	(2,298)
-  second lien residential mortgages	353	20	6	379	(1)	(2)	(3)	(6)
-  guaranteed loans in respect of residential property	1,121	121	125	1,367	(1)	(3)	(30)	(34)
-  other personal lending which is secured	31,306	594	206	32,106	(15)	(10)	(30)	(55)
-  credit cards	16,705	4,423	260	21,388	(225)	(777)	(160)	(1,162)
-  other personal lending which is unsecured	16,617	3,706	687	21,010	(235)	(470)	(305)	(1,010)
-  motor vehicle finance	1,761	167	13	1,941	(11)	(13)	(7)	(31)
At 31 Dec 2022	362,781	48,891	3,340	415,012	(562)	(1,505)	(805)	(2,872)
By geography
Europe	143,438	38,186	1,269	182,893	(151)	(706)	(282)	(1,139)
-  of which: UK	132,312	37,974	1,027	171,313	(137)	(696)	(230)	(1,063)
Asia	185,828	8,723	1,117	195,668	(139)	(363)	(188)	(690)
-  of which: Hong Kong	128,218	4,563	236	133,017	(59)	(255)	(39)	(353)
MENA	5,347	237	132	5,716	(33)	(42)	(70)	(145)
North America	17,772	562	439	18,773	(15)	(44)	(67)	(126)
Latin America	10,396	1,183	383	11,962	(224)	(350)	(198)	(772)
At 31 Dec 2022	362,781	48,891	3,340	415,012	(562)	(1,505)	(805)	(2,872)

At 31 December 2022, the stage 2 personal lending balances in the UK of $38.0bn increased by $33.3bn compared with 31 December 2021. This increase was largely due to the enhancement in the SICR approach in relation to capturing relative movements in PD since

origination, and also, to a lesser extent, it considered cost of living pressures. The impact on ECL was immaterial due to the offsetting ECL impacts of stage migrations due to the low LTV profiles applicable to these UK customers.

Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution
	Nominal amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	53,299	592	114	54,005	(11)	(1)	-	(12)
-  of which: UK	51,589	454	107	52,150	(11)	(1)	-	(12)
Asia	170,103	2,914	633	173,650	(2)	-	-	(2)
-  of which: Hong Kong	128,990	2,176	624	131,790	(2)	-	-	(2)
MENA	2,328	20	2	2,350	(1)	-	-	(1)
North America	10,418	140	48	10,606	(1)	-	-	(1)
Latin America	4,496	31	3	4,530	(11)	-	-	(11)
At 31 Dec 2022	240,644	3,697	800	245,141	(26)	(1)	-	(27)

Total personal lending for loans and advances to customers at amortised cost by stage distribution (continued)
	Gross carrying amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By portfolio
First lien residential mortgages	360,686	7,637	3,045	371,368	(128)	(131)	(416)	(675)
-  of which: interest only (including offset)	28,506	1,795	255	30,556	(5)	(24)	(81)	(110)
-  affordability (including US adjustable rate mortgages)	13,621	712	452	14,785	(6)	(6)	(5)	(17)
Other personal lending	96,270	8,802	1,897	106,969	(530)	(1,088)	(810)	(2,428)
-  second lien residential mortgages	314	44	37	395	(1)	(4)	(9)	(14)
-  guaranteed loans in respect of residential property	20,643	731	236	21,610	(9)	(7)	(42)	(58)
-  other personal lending which is secured	36,533	1,096	366	37,995	(21)	(15)	(120)	(156)
-  credit cards	18,623	3,897	338	22,858	(246)	(675)	(214)	(1,135)
-  other personal lending which is unsecured	18,743	2,820	915	22,478	(240)	(378)	(421)	(1,039)
-  motor vehicle finance	1,414	214	5	1,633	(13)	(9)	(4)	(26)
At 31 Dec 2021	456,956	16,439	4,942	478,337	(658)	(1,219)	(1,226)	(3,103)
By geography
Europe	212,284	5,639	2,148	220,071	(199)	(499)	(637)	(1,335)
-  of which: UK	176,547	4,668	1,488	182,703	(167)	(480)	(399)	(1,046)
Asia	187,391	7,796	1,303	196,490	(158)	(381)	(226)	(765)
-  of which: Hong Kong	125,854	4,959	202	131,015	(65)	(231)	(43)	(339)
MENA	4,965	252	202	5,419	(38)	(40)	(94)	(172)
North America	43,489	2,126	1,005	46,620	(43)	(67)	(118)	(228)
Latin America	8,827	626	284	9,737	(220)	(232)	(151)	(603)
At 31 Dec 2021	456,956	16,439	4,942	478,337	(658)	(1,219)	(1,226)	(3,103)

Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution (continued)
	Nominal amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	57,109	558	107	57,774	(11)	(1)	-	(12)
-  of which: UK	54,704	407	104	55,215	(10)	(1)	-	(11)
Asia	160,248	894	21	161,163	-	-	-	-
-  of which: Hong Kong	121,597	292	19	121,908	-	-	-	-
MENA	2,568	30	16	2,614	(5)	-	-	(5)
North America	15,039	251	23	15,313	(15)	(1)	-	(16)
Latin America	3,920	29	2	3,951	(6)	-	-	(6)
At 31 Dec 2021	238,884	1,762	169	240,815	(37)	(2)	-	(39)

Exposure to UK interest-only mortgage loans

The following information is presented for HSBC branded interest-only mortgage loans. This excludes offset mortgages in first direct and private banking mortgages.

At the end of 2022, the average LTV ratio of the interest-only mortgage loans was 41% (2021: 40%) and 99% (2021: 99%) had a LTV ratio of 75% or less.

Of the interest-only mortgage loans that expired in 2020, 83% were repaid within 12 months of expiry with a total of 96% being repaid within 24 months of expiry. For those expiring during 2021, 95% were repaid within 12 months of expiry. The increase of the amount fully repaid within the 12 months is explained by the extensions granted as part of the FCA guidance on helping borrowers with maturing interest-only mortgages during the pandemic, which reduced the repayment rates within 12 months for cases maturing in 2022. Following the end of these extension in October 2021, repayment rates have now returned to levels similar to 2019.

At 31 December 2022, interest-only mortgage loans exposures were $14.4bn and the maturity profile is as follows:

UK interest-only mortgage loans
	$m
Expired interest-only mortgage loans	134
Interest-only mortgage loans by maturity
-  2023	219
-  2024	215
-  2025	300
-  2026	383
-  2027-2031	2,951
-  post-2031	10,248
At 31 Dec 2022	14,450

Expired interest-only mortgage loans	167
Interest-only mortgage loans by maturity
-  2022	267
-  2023	401
-  2024	330
-  2025	420
-  2026-2030	3,288
-  post-2030	10,333
At 31 Dec 2021	15,206

Exposure to offset mortgage in first direct

The offset mortgage in first direct is a flexible way for our customers to take control of their finances. It works by grouping together the customer's mortgage, savings and current accounts to offset their credit and debit balances against their mortgage exposure.

At 31 December 2022, exposures were worth a total $5.5bn with an average LTV ratio of 32% (2021: $7.0bn exposure and 35% LTV ratio).

Personal lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2022	695,840	(695)	18,201	(1,221)	5,111	(1,226)	719,152	(3,142)
Transfers of financial instruments	(40,834)	(499)	39,483	677	1,351	(178)	-	-
-  transfers from stage 1 to stage 2	(68,063)	269	68,063	(269)	-	-	-	-
-  transfers from stage 2 to stage 1	27,407	(734)	(27,407)	734	-	-	-	-
-  transfers to stage 3	(561)	2	(1,987)	361	2,548	(363)	-	-
-  transfers from stage 3	383	(36)	814	(149)	(1,197)	185	-	-
Net remeasurement of ECL arising from transfer of stage	-	498	-	(583)	-	(88)	-	(173)
New financial assets originated or purchased	130,632	(271)	-	-	-	-	130,632	(271)
Assets derecognised (including final repayments)	(68,645)	94	(4,091)	270	(1,043)	124	(73,779)	488
Changes to risk parameters - further lending/repayments	(31,457)	162	4,538	(35)	897	(33)	(26,022)	94
Change in risk parameters - credit quality	-	82	-	(676)	-	(822)	-	(1,416)
Changes to models used for ECL calculation	-	(2)	-	(94)	-	13	-	(83)
Assets written off	-	-	-	-	(1,215)	1,215	(1,215)	1,215
Foreign exchange and other1	(82,111)	43	(5,543)	156	(961)	190	(88,615)	389
At 31 Dec 2022	603,425	(588)	52,588	(1,506)	4,140	(805)	660,153	(2,899)
ECL income statement change for the period		563		(1,118)		(806)		(1,361)
Recoveries								283
Other								(3)
Total ECL income statement change for the period								(1,081)

1  Total includes $49.6bn of gross carrying loans and advances to customers, which were classified to assets held for sale, and a corresponding allowance for ECL of $221m, reflecting business disposals as disclosed in Note 23 'Assets held for sale and liabilities of disposal groups held for sale' on page 389.

As shown in the above table, the allowance for ECL for loans and advances to customers and relevant loan commitments and financial guarantees decreased by $243m during the period from $3,142m at 31 December 2021 to $2,899m at 31 December 2022.

This decrease was primarily driven by:

• $1,215m of assets written off;

• foreign exchange and other movements of $389m; and

• $311m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further lending/repayment.

These were partly offset by:

• $1,416m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;

• $173m relating to the net remeasurement impact of stage transfers; and

•
$83m of changes to models used for ECL calculation.

The ECL charge for the period of $1,361m presented in the above table consisted of $1,416m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages, $83m in changes to models used for ECL calculation and $173m relating to the net remeasurement impact of stage transfers. This was partly offset by $311m relating to underlying net book volume movements.

During the period, there was a net transfer to stage 2 of $40,656m gross carrying/nominal amounts. This increase was primarily driven by $36,816m in Europe, of which $34,278m was from the UK, largely due to enhancements in the SICR approach in relation to capturing relative movements in PD since origination and taking into consideration cost of living pressures. Further details are presented on page 187.

Personal lending - reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers including loan commitments and financial guarantees
(Audited)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2021	665,346	(866)	26,770	(2,405)	5,762	(1,503)	697,878	(4,774)
Transfers of financial instruments	1,822	(1,154)	(4,502)	1,713	2,680	(559)	-	-
-  transfers from stage 1 to stage 2	(23,701)	289	23,701	(289)	-	-	-	-
-  transfers from stage 2 to stage 1	26,086	(1,404)	(26,086)	1,404	-	-	-	-
-  transfers to stage 3	(982)	7	(3,068)	734	4,050	(741)	-	-
-  transfers from stage 3	419	(46)	951	(136)	(1,370)	182	-	-
Net remeasurement of ECL arising from transfer of stage	-	825	-	(363)	-	(7)	-	455
New financial assets originated or purchased	136,920	(211)	-	-	-	-	136,920	(211)
Assets derecognised (including final repayments)	(82,998)	119	(5,257)	419	(1,236)	219	(89,491)	757
Changes to risk parameters - further lending/repayments	(13,976)	240	2,380	114	(281)	51	(11,877)	405
Change in risk parameters - credit quality	-	318	-	(778)	-	(1,007)	-	(1,467)
Changes to models used for ECL calculation	-	(2)	-	-	-	1	-	(1)
Assets written off	-	-	-	-	(1,525)	1,520	(1,525)	1,520
Foreign exchange	(9,074)	17	(358)	19	(138)	45	(9,570)	81
Others1	(2,200)	19	(832)	60	(151)	14	(3,183)	93
At 31 Dec 2021	695,840	(695)	18,201	(1,221)	5,111	(1,226)	719,152	(3,142)
ECL income statement change for the period		1,289		(608)		(743)		(62)
Recoveries								355
Other								(9)
Total ECL income statement change for the period								284

1 Total includes $3.0bn of gross carrying loans and advances to customers, which were classified to assets held for sale, and a corresponding allowance for ECL of $123m, reflecting our exit of the domestic mass market retail banking in the US.

Personal lending - credit risk profile by internal PD band for loans and advances to customers at amortised cost
		Gross carrying amount				Allowance for ECL
	PD range1	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total	ECL coverage
	%	$m	$m	$m	$m	$m	$m	$m	$m	%
First lien residential mortgages		294,918	39,860	2,043	336,821	(74)	(230)	(270)	(574)	0.2
-  Band 1	0.000 to 0.250	247,330	21,220	-	268,550	(13)	(4)	-	(17)	-
-  Band 2	0.251 to 0.500	19,614	7,900	-	27,514	(4)	(3)	-	(7)	-
-  Band 3	0.501 to 1.500	21,323	5,691	-	27,014	(18)	(7)	-	(25)	0.1
-  Band 4	1.501 to 5.000	6,594	2,694	-	9,288	(39)	(24)	-	(63)	0.7
-  Band 5	5.001 to 20.000	34	1,024	-	1,058	-	(40)	-	(40)	3.8
-  Band 6	20.001 to 99.999	23	1,331	-	1,354	-	(152)	-	(152)	11.2
-  Band 7	100.000	-	-	2,043	2,043	-	-	(270)	(270)	13.2
Other personal lending		67,863	9,031	1,297	78,191	(488)	(1,275)	(535)	(2,298)	2.9
-  Band 1	0.000 to 0.250	30,151	153	-	30,304	(54)	(13)	-	(67)	0.2
-  Band 2	0.251 to 0.500	7,219	251	-	7,470	(26)	(1)	-	(27)	0.4
-  Band 3	0.501 to 1.500	17,183	1,499	-	18,682	(82)	(44)	-	(126)	0.7
-  Band 4	1.501 to 5.000	10,342	2,061	-	12,403	(171)	(104)	-	(275)	2.2
-  Band 5	5.001 to 20.000	2,501	3,692	-	6,193	(154)	(520)	-	(674)	10.9
-  Band 6	20.001 to 99.999	467	1,375	-	1,842	(1)	(593)	-	(594)	32.2
-  Band 7	100.000	-	-	1,297	1,297	-	-	(535)	(535)	41.2
At 31 Dec 2022		362,781	48,891	3,340	415,012	(562)	(1,505)	(805)	(2,872)	0.7

1  12-month point in time adjusted for multiple economic scenarios.

Personal lending - credit risk profile by internal PD band for loans and advances to customers at amortised cost (continued)
		Gross carrying amount				Allowance for ECL
	PD range1	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total	ECL coverage
	%	$m	$m	$m	$m	$m	$m	$m	$m	%
First lien residential mortgages		360,686	7,637	3,045	371,368	(128)	(131)	(416)	(675)	0.2
-  Band 1	0.000 to 0.250	310,042	451	-	310,493	(30)	(5)	-	(35)	-
-  Band 2	0.251 to 0.500	19,741	203	-	19,944	(7)	(2)	-	(9)	-
-  Band 3	0.501 to 1.500	25,835	1,936	-	27,771	(79)	(8)	-	(87)	0.3
-  Band 4	1.501 to 5.000	4,976	2,657	-	7,633	(12)	(30)	-	(42)	0.6
-  Band 5	5.001 to 20.000	88	1,416	-	1,504	-	(35)	-	(35)	2.3
-  Band 6	20.001 to 99.999	4	974	-	978	-	(51)	-	(51)	5.2
-  Band 7	100.000	-	-	3,045	3,045	-	-	(416)	(416)	13.7
Other personal lending		96,270	8,802	1,897	106,969	(530)	(1,088)	(810)	(2,428)	2.3
-  Band 1	0.000 to 0.250	45,049	187	-	45,236	(50)	(13)	-	(63)	0.1
-  Band 2	0.251 to 0.500	12,625	605	-	13,230	(27)	(6)	-	(33)	0.2
-  Band 3	0.501 to 1.500	22,791	1,518	-	24,309	(102)	(30)	-	(132)	0.5
-  Band 4	1.501 to 5.000	13,006	2,360	-	15,366	(213)	(108)	-	(321)	2.1
-  Band 5	5.001 to 20.000	2,732	3,257	-	5,989	(138)	(554)	-	(692)	11.6
-  Band 6	20.001 to 99.999	67	875	-	942	-	(377)	-	(377)	40.0
-  Band 7	100.000	-	-	1,897	1,897	-	-	(810)	(810)	42.7
At 31 Dec 2021		456,956	16,439	4,942	478,337	(658)	(1,219)	(1,226)	(3,103)	0.6

1  12-month point in time adjusted for multiple economic scenarios.

Collateral on loans and advances

(Audited)

The following table provides a quantification of the value of fixed charges we hold over specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual

obligations, and where the collateral is cash or can be realised by sale in an established market. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit from other forms of credit mitigants.

 

END

 

 

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