Annual Financial Report - Part 8

RNS Number : 4608C
HSBC Holdings PLC
22 February 2022
 

 Financial statements

The financial statements provide detailed information and notes on our income, balance sheet, cash flows and changes in equity, alongside a report from our independent auditors.

 

 

298 Report of Independent Registered Public Accounting Firm to the Board of Directors and Shareholders of HSBC Holdings plc

308 Financial statements

318 Notes on the financial statements

 

Making our cards more sustainable and accessible

 

We are ending single-use plastic in our payment cards. By the end of 2026, the approximately 23 million cards we issue each year will be made from recycled PVC plastic. This action is expected to reduce CO2 emissions by 161 tonnes and save 73 tonnes of plastic waste per year as part of our net zero strategy. We rolled out recycled PVC cards for 13 markets in 2021, issuing them for customers needing new or replacement cards.

Our UK cards also feature a range of accessibility features as standard for all customers. Working with charities such as Alzheimer's Society, the new features include considerations for people with dementia, visual impairments, learning difficulties, dyslexia and colour blindness. These include tactile raised dots to differentiate credit cards from debit cards, and retail cards from commercial ones.

 

Independent auditors' report to the members of HSBC Holdings plc

Report on the audit of the financial statements

 Opinion

In our opinion, HSBC Holdings plc's group financial statements1 and company financial statements (the 'financial statements'):

• give a true and fair view of the state of the group's and of the company's affairs as at 31 December 2021 and of the group's and company's profit and the group's and company's cash flows for the year then ended;

• have been properly prepared in accordance with UK-adopted international accounting standards; and

• have been prepared in accordance with the requirements of the Companies Act 2006.

Our opinion is consistent with our reporting to the Group Audit Committee ('GAC').

Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union

As explained in note 1.1(a) to the financial statements, the group and company, in addition to applying UK-adopted international accounting standards, have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

In our opinion, the group and company financial statements have been properly prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

Separate opinion in relation to IFRSs as issued by the IASB

As explained in note 1.1(a) to the financial statements, the group and company, in addition to applying UK-adopted international accounting standards, have also applied international financial reporting standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB').

In our opinion, the group and company financial statements have been properly prepared in accordance with IFRSs as issued by the IASB.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs (UK)'), International Standards on Auditing issued by the International Auditing and Assurance Standards Board ('ISAs') and applicable law. Our responsibilities under ISAs (UK) and ISAs are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

During the period, we identified that PricewaterhouseCoopers provided an impermissible training service via a publicly available seminar in respect of the implementation of a new Indonesian IT security regulation. The attendees at this seminar included six members of staff from HSBC Indonesia. The HSBC staff who attended the course were not from the Finance function and were not in roles relevant to our audit. In addition, HSBC Indonesia is not within the scope of the group audit. We confirm that based on our assessment of the breach, nature and scope of the service and our communication with the GAC, that the provision of this service has not compromised  our professional judgement or integrity and as such believe that an objective, reasonable and informed third party in possession of these facts would conclude that our integrity and objectivity has not been impaired and accordingly we remain independent for the purposes of the audit.

Other than the matter referred to above, to the best of our knowledge, we declare that no other non-audit services prohibited by the FRC's Ethical Standard were provided to the company or its controlled undertakings in the period under audit.

Other than those disclosed in Note 6, we have provided no non-audit services to the company or its controlled undertakings in the period under audit.

Our audit approach

Overview

Audit scope

• This was the third year that it has been my responsibility to form this opinion on behalf of PricewaterhouseCoopers LLP ('PwC'), who you first appointed on 31 March 2015 in relation to that year's audit. In addition to forming this opinion, in this report we have also provided information on how we approached the audit, how it changed from the previous year and details of the significant discussions that we had with the GAC. 

1  We have audited the financial statements, included within the Annual Report and Accounts 2021 (the 'Annual Report'), which comprise: the consolidated and company balance sheets as at 31 December 2021, the consolidated and company income statements and the consolidated and company statements of comprehensive income for the year then ended, the consolidated and company statements of cash flows for the year then ended, the consolidated and company statements of changes in equity for the year then ended, and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain notes to the financial statements have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as '(Audited)'. The relevant disclosures are included in the Risk review section on pages 127 to 216 and the Directors' remuneration report disclosures on pages 268 to 276.

Key audit matters

• Expected credit losses - Impairment of loans and advances (group)

• Investment in associate - Bank of Communications Co., Ltd ('BoCom') (group)

• Impairment of investments in subsidiaries (parent)

• Valuation of defined benefit pensions obligations (group)

Materiality

• Overall group materiality: US$970m (2020: US$900m) based on 5% of adjusted profit before tax.

• Overall company materiality: US$920m (2020: US$855m) based on 0.75% of total assets. This would result in an overall materiality of US$2bn and was therefore reduced below the group materiality.

• Performance materiality: US$725m (2020: US$675m) (group) and US$690m (2020: US$641m) (company).

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.

Key audit matters

Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

Compared to last year the number of key audit matters has reduced from eight to four. The following are no longer considered to be key audit matters.

• Impact of Covid-19 (group and company) - Given the impact of Covid-19 on working practices and international travel, the majority of our interactions continued to be undertaken virtually, including those with the partners and teams for Significant Subsidiaries and operations centres, and with HSBC Board members and management. Similarly, a substantial part of our audit testing was performed remotely. We used established practices throughout 2021 for interacting and undertaking our audit testing virtually, consistent with the hybrid working models at both PwC network teams and HSBC.

• IT access management (group) - Management has remediated a number of the control deficiencies in relation to IT access management.

• Valuation of financial instruments (group) - The financial instruments where significant pricing inputs are unobservable, the most material of which are the private equity investments held by Global Banking and Markets and the Insurance business, experienced reduced market volatility during the year that impacted the determination of the fair value.

• Impairment of goodwill and intangible assets (group) - The risk of impairment at the period end is reduced due to the significant surplus between the recoverable amounts and the carrying value for the goodwill and intangible asset balances at the year end, after the full impairment recognised for the WPB LatAm goodwill in 2021.

The remaining four key audit matters are consistent with last year.

Expected credit losses - Impairment of loans and advances (group)

 

Determining expected credit losses ('ECL') involves management judgement and is subject to a high degree of estimation uncertainty.

Management makes various assumptions when estimating ECL. The significant assumptions that we focused on in our audit included those with greater levels of management judgement and for which variations had the most significant impact on ECL. These included assumptions made in determining forward looking economic scenarios and their probability weightings and estimating material management judgemental adjustments.

The impact of Covid-19, including the nature and extent of government support, supply chain constraints and increasing energy prices, and more recent factors, including developments in China's commercial real estate sector, have resulted in unprecedented economic conditions that vary between territories and industries, leading to uncertainty around judgements made in determining the severity and probability weighting of macroeconomic variable ('MEV') forecasts across the different economic scenarios used in ECL models.

The modelling methodologies used to estimate ECL are developed using historical experience. The impact of the unprecedented economic conditions has also resulted in certain limitations in the reliability of these methodologies to forecast the extent and timing of future customer defaults and therefore estimate ECL. In addition, modelling methodologies do not incorporate all factors that are relevant to estimating ECL, such as differentiating the impact on industry sectors of economic conditions. These limitations are addressed with management judgemental adjustments, the measurement of which is inherently judgemental and subject to a high level of estimation uncertainty.

Management makes other assumptions which are less judgemental or for which variations have a less significant impact on ECL. These assumptions include:

• The methodologies used in quantitative scorecards for determining customer risk ratings ('CRRs');

• Estimating expected cash flows and collateral valuations for credit impaired wholesale exposures;

• Model methodologies themselves; and

• Quantitative and qualitative criteria used to assess significant increases in credit risk.

 

We held discussions with the GAC covering governance and controls over ECL, with a significant focus on the  continuing impact of Covid-19 and other economic conditions, including recent developments in China's commercial real estate sector. We discussed a number of areas, including:

• The severity of MEV forecasts in economic scenarios, and their related probability weightings, across territories;

• Management judgemental adjustments and the nature and extent of analysis used to support those adjustments;

• The criteria and conditions used to assess to what extent management judgemental adjustments continue to be needed;

• Management's policies, governance and controls over model validation and monitoring; and

• The disclosures made in relation to ECL, in particular the impact of adjustments on determining ECL and the resulting estimation uncertainty.

 

We assessed the design and effectiveness of governance and controls over the estimation of ECL. We observed management's review and challenge in governance forums for (1) the determination of MEV forecasts and their probability weightings for different economic scenarios, and (2) the assessment of ECL for Retail and Wholesale portfolios, including the assessment of model limitations and any resulting management judgemental adjustments.

We also tested controls over:

• Model validation and monitoring;

• Credit reviews that determine customer risk ratings for wholesale customers;

• The identification of credit impaired events;

• The input of critical data into source systems and the flow and transformation of critical data from source systems to impairment models and management judgemental adjustments; and

• The calculation and approval of management judgemental adjustments to modelled outcomes.

We involved our economic experts in assessing the significant assumptions made in determining the severity and probability weighting of MEV forecasts. These assessments considered the sensitivity of ECL to variations in the severity and probability weighting of MEVs for different economic scenarios. We involved our modelling experts in assessing the appropriateness of the significant assumptions and methodologies used for models and management judgemental adjustments. We independently reperformed the calculations for a sample of those models and management judgemental adjustments. We further considered whether the judgements made in selecting the significant assumptions would give rise to indicators of possible management bias.

In addition, we performed substantive testing over:

• The compliance of ECL methodologies and assumptions with the requirements of IFRS 9;

• The appropriateness and application of the quantitative and qualitative criteria used to assess significant increases in credit risk;

• A sample of critical data used in ECL models and to estimate management judgemental adjustments as at 31 December 2021;

• Assumptions and critical data for a sample of credit impaired wholesale exposures; and

• A sample of CRRs applied to wholesale exposures.

We evaluated and tested the Credit Risk disclosures made in the Annual Report.

 

• Credit risk disclosures, page 137.

• GAC Report, page 245.

• Note 1.2(d): Financial instruments measured at amortised cost, page 321.

• Note 1.2(i): Impairment of amortised cost and FVOCI financial assets, page 323.

 Impairment of investment in associate - Bank of Communications Co., Ltd ('BoCom') (group)

 

At 31 December 2021, the fair value of the investment in BoCom, based on the share price, was US$15.1bn lower than the carrying value ('CV') of US$23.6bn.

This is an indicator of potential impairment. An impairment test was performed by management, with supporting sensitivity analysis, using the higher of fair value and value in use ('VIU'). The VIU was US$1.2bn in excess of the CV. On this basis, management concluded no impairment was required.

The methodology in the VIU model is dependent on various assumptions, both short term and long term in nature. These assumptions, which are subject to estimation uncertainty, are derived from a combination of management's judgement, analysts' forecasts and market data. The significant assumptions that we focused our audit on were those with greater levels of management judgement and for which variations had the most significant impact on the VIU. Specifically, these included:

• The discount rate;

• Short term assumptions for operating income growth rate, cost-income ratio, expected credit losses and effective tax rates;

• Long term assumptions for profit and asset growth rates, expected credit losses, and effective tax rates; and

• Capital related assumptions (risk-weighted assets, capital adequacy ratio and tier 1 capital adequacy ratio).

 

We discussed the appropriateness of the VIU methodology and significant assumptions with the GAC, giving consideration to the macroeconomic environment, the outlook for the Chinese banking market and the fair value, which has been lower than the carrying value for approximately 10 years. We also discussed the disclosures made in relation to BoCom, including reasonably possible alternatives for the significant assumptions, the use of sensitivity analysis to explain estimation uncertainty and the changes in certain assumptions that would result in the VIU being equal to the CV.

 

We tested controls in place over significant assumptions and the model used to determine the VIU. We assessed the appropriateness of the methodology used, and the mathematical accuracy of the calculations, to estimate the VIU. In respect of the significant assumptions, our testing included the following:

• Challenging the appropriateness of the significant assumptions and, where relevant, their interrelationships;

• Obtaining evidence for data supporting significant assumptions including historic experience, external market information, third-party sources including analyst reports, information from BoCom management and historical publicly available BoCom financial information;

• Assessing the sensitivity of the VIU to reasonable variations in certain significant assumptions, both individually and in aggregate; 

• Determining a reasonable range for the discount rate used within the model, with the assistance of our valuation experts, and comparing it to the discount rate used by management; and

• Assessing whether the judgements made in deriving the significant assumptions give rise to indicators of possible management bias.

We observed the quarterly meetings in March, May, September, and November 2021 between management and BoCom management, held specifically to identify facts and circumstances impacting assumptions relevant to the determination of the VIU.

Representations were obtained from management that assumptions used were consistent with information currently available to the group.  .

We evaluated and tested the disclosures made in the Annual Report in relation to BoCom.

 

• GAC Report, page 245.

• Note 1.2(a): Critical accounting estimates and judgements, page 320.

• Note 18 Interests in associates and joint ventures, page 359.

 

Impairment of investments in subsidiaries (company)

 

The macroeconomic and geopolitical environment continues to be challenging, impacting both 2021 and the outlook into 2022 and beyond. These external factors, as well as HSBC's strategy, impact the financial position and performance of subsidiaries within the group. These factors were considered by management in determining if there were potential indicators of impairment that required an impairment assessment for investment in subsidiaries.

Management compared the net assets to the carrying value of each direct subsidiary of HSBC Holdings plc. Where the net assets did not support the carrying value or the subsidiary made a loss during the period, management estimated the recoverable amount using the higher of value in use ('VIU') or fair value less cost to sell. Management predominantly used VIU in its impairment tests, unless it believed that fair value would result in a higher recoverable amount for any subsidiary. The impairment test resulted in a partial reversal of an impairment charge of US$3.1bn in relation to the investment in HSBC Overseas Holdings (UK) Limited ('HOHU'). This resulted in investment in subsidiaries of US$163bn at 31 December 2021.

The methodology used to estimate the recoverable amount is dependent on various assumptions, both short term and long term in nature. These assumptions, which are subject to estimation uncertainty, are derived from a combination of management's judgement, experts engaged by management and market data. The significant assumptions that we focused our audit on were those with greater levels of management judgement and for which variations had the most significant impact on the recoverable amount. Specifically, these included HSBC's strategic planning cycle for 2022 to 2026 including revenue forecasts and cost reduction targets, regulatory capital requirements, long term growth rates and discount rates.

 

We discussed the partial reversal of the impairment charge for HOHU, the appropriateness of methodologies used and significant assumptions with the GAC, giving consideration to the macroeconomic outlook and HSBC's strategy. We considered reasonably possible alternatives for significant assumptions.

 

We tested controls in place over significant assumptions and the model used to determine the recoverable amounts. We assessed the appropriateness of the methodology used, and tested the mathematical accuracy of the calculations, to estimate the recoverable amounts. In respect of the significant assumptions, our testing included the following:

• Challenging the achievability of management's strategic planning cycle  and the prospects for HSBC's businesses, as well as considering the achievement of historic forecasts;

• Obtaining and evaluating evidence where available for critical data relating to significant assumptions, from a combination of historic experience and external market and other financial information;

• Assessing whether the cash flows included in the model were in accordance with the relevant accounting standard;

• Assessing the sensitivity of the VIU to reasonable variations in significant assumptions, both individually and in aggregate; and

• Determining a reasonable range for the discount rate used within the model, with the assistance of our valuation experts, and comparing it to the discount rate used by management.

We evaluated and tested the disclosures made in the Annual Report in relation to investment in subsidiaries.

 

• Note 19: Investments in subsidiaries, page 362.

 

 

Valuation of defined benefit pensions obligations (group)

 

 

The group has a defined benefit obligation of US$42.8bn, of which US$32.3bn relates to HSBC Bank (UK) pension scheme.

The valuation of the defined benefit obligation for HSBC Bank (UK) pension scheme is dependent on a number of actuarial assumptions. Management uses an actuarial expert to determine the valuation of the defined benefit obligation. The valuation methodology uses a number of market based inputs and other financial and demographic assumptions. The significant assumptions that we focused our audit on were those with greater levels of management judgement and for which variations had the most significant impact on the liability. Specifically, these included the discount rate, inflation rate and mortality rate.

 

We discussed with the GAC the methodologies and significant assumptions used by management to determine the value of the defined benefit obligation.

 

We tested governance and controls in place over the methodologies and the significant assumptions, including those in relation to the use of management's experts. We also evaluated the objectivity and competence of management's expert involved in the valuation of the defined benefit obligation.

We assessed the appropriateness of the methodology used, and the mathematical accuracy of the calculations, to estimate the liability. In respect of the significant assumptions, we used our actuarial experts to understand the judgements made by management and their actuarial expert in determining the significant assumptions and compared these assumptions to our independently compiled expected ranges based on market observable indices and the knowledge and opinions of our actuarial experts.

We evaluated and tested the disclosures made in the Annual Report in relation to the defined benefit pension obligation.

 

• GAC Report, page 246.

• Note 1.2(k): Critical accounting estimates and judgements, page 327.

• Note 5: Employee compensation and benefits, page 331.

 

 

 

How we tailored the audit scope

We performed a risk assessment, giving consideration to relevant external and internal factors, including Covid-19, climate change, geopolitical and economic risks, relevant accounting and regulatory developments, HSBC's strategy and the changes taking place across the group. We also considered our knowledge and experience obtained in prior year audits. As part of considering the impact of climate change in our risk assessment, we evaluated management's assessment of the impact of climate risk, which is set out on page 45, including their conclusion that there is no material impact on the financial statements. In particular, we considered management's assessment of the impact on ECL on loans and advances to customers, the financial statement line item we determined to be most likely to be impacted by climate risk. Management's assessment gave consideration to a number of matters, including the climate stress testing performed in 2021.

Using our risk assessment, we tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. We continually assessed risks and changed the scope of our audit where necessary.

Our risk assessment and scoping identified certain entities (collectively the Significant Subsidiaries) for which we obtained audit opinions. We obtained full scope audit opinions for the consolidated financial position and performance of Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, and HSBC North America Holdings Limited. We also obtained full scope audit opinions for the company financial position and performance of HSBC UK Bank plc, HSBC Bank Canada and HSBC Mexico S.A. We obtained audit opinions over specific balances for HSBC Bank Middle East Limited - UAE Operations. The audits for HSBC Bank plc and HSBC UK Bank plc were performed by other PwC teams in the UK. All other audits were performed by other PwC network firms.

We continued with our approach for rotating certain smaller locations in and out of scope over a number of reporting periods. These locations, which are subject to local external audits, are individually relatively small compared to the group. Notwithstanding their size, the rotational approach is designed to ensure that over time these locations are subject to audit work as part of the group audit. HSBC Bank Malaysia was removed from the scope of The Hongkong and Shanghai Banking Corporation Limited audit for 2021 and India was included.

Group-wide audit approach

HSBC has entity level controls that have a pervasive influence across the group, as well as other global and regional governance and controls over aspects of financial reporting, such as those operated by the Global Risk function for expected credit losses. A significant amount of IT and operational processes and controls relevant to financial reporting are undertaken in operations centres run by Digital Business Services ('DBS') across different locations. Financial reporting processes and controls are performed centrally in HSBC's Group Finance function and the four Finance operations centres, including the impairment assessment of goodwill and intangible assets, the consolidation of the group's results, the preparation of the financial statements, and management's oversight controls relevant to the group's financial reporting.

For these areas, we either performed audit work ourselves, or directed and provided oversight of the audit work performed by PwC teams in the UK, Poland, China, Sri Lanka, Malaysia, India and the Philippines. A substantial part of our audit testing in these locations was performed remotely. Some of this work was relied upon by the PwC teams auditing the Significant Subsidiaries. This audit work, together with analytical review procedures and assessing the outcome of local external audits, also mitigated the risk of material misstatement for balances in entities that were not part of a Significant Subsidiary.

Significant Subsidiaries audit approach

We asked the partners and teams reporting to us on the Significant Subsidiaries to work to assigned materiality levels reflecting the size of the operations they audited. The performance materiality levels ranged from US$48m to US$690m. Certain Significant Subsidiaries were audited to a local statutory audit materiality that was less than our overall group materiality. 

We designed global audit approaches for the products and services that substantially make up HSBC's global businesses, such as lending, deposits and derivatives. These approaches were provided to the partners and teams performing audit testing for the Significant Subsidiaries.

We were in active dialogue throughout the year with the partners and teams responsible for the audits of the Significant Subsidiaries, including consideration of how they planned and performed their work. We attended Audit Committee meetings for some of the Significant Subsidiaries. We also attended meetings with management in each of these Significant Subsidiaries at the year-end. Given the impact of Covid-19 on working practices and international travel, the majority of our interactions continued to be undertaken virtually.

The audit of The Hongkong and Shanghai Banking Corporation Limited in Hong Kong relied upon work performed by other teams in Hong Kong and the PwC network firms in India, mainland China and Singapore. Similarly, the audit of HSBC Bank plc in the UK relied upon work performed by other teams in the UK and the PwC network firms in France and Germany. We considered how the audit partners and teams for the Significant Subsidiaries instructed and provided oversight to the work performed in these locations. Collectively, Significant Subsidiaries covered 85% of total assets and 75% of total operating income.

Using the work of others

We continued to make use of evidence provided by others. This included testing of controls performed by Global Internal Audit and management themselves in some low risk areas. We used the work of PwC experts, for example, economic experts for our work around the severity and probability weighting of macroeconomic variables used as part of the expected credit loss allowance and actuaries on the estimates used in determining pension liabilities. An increasing number of controls are operated on behalf of HSBC by third parties. We obtained audit evidence from work that is scoped and provided by other auditors that are engaged by those third parties. For example, we obtained a report evidencing the testing of external systems and controls supporting HSBC's payroll and HR processes.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

 

 

 

Overall materiality

US$970m (2020: US$900m).

US$920m (2020: US$855m).

How we determined it

5% of adjusted profit before tax

0.75% of total assets. This would result in an overall materiality of US$2bn and was therefore reduced below the group materiality level.

Rationale for benchmark applied

We believe a standard benchmark of 5% of adjusted profit before tax is an appropriate quantitative indicator of materiality, although certain items could also be material for qualitative reasons. This benchmark is standard for listed entities and consistent with the wider industry. We selected adjusted profit because, as discussed on page 28, management believes it best reflects the performance of HSBC and how the group is run. We excluded the adjustments made by management on page 28 for certain customer redress programmes and fair value movements of financial instruments, as in our opinion they are recurring items that form part of ongoing business performance.

A benchmark of total assets has been used, as the company's primary purpose is to act as a holding company with investments in the group's subsidiaries, not to generate operating profits and therefore a profit based measure is not relevant.

 

We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% of overall materiality, amounting to US$725m for the group financial statements and US$690m for the company financial statements.

In determining the performance materiality, we considered a number of factors, including the history of misstatements, our risk assessment and aggregation risk, and the effectiveness of controls. We concluded that an amount at the upper end of our normal range was appropriate.

We agreed with the GAC that we would report to them misstatements identified during our audit above US$48m (group audit) (2020: US$45m) and US$48m (company audit) (2020: US$45m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.

 Conclusions relating to going concern

Our evaluation of the directors' assessment of the group's and the company's ability to continue to adopt the going concern basis of accounting included:

• Performing a risk assessment to identify factors that could impact the going concern basis of accounting, including the impact of external risks including geopolitical, Covid-19 and climate change risks.

• Understanding and evaluating the group's financial forecasts and the group's stress testing of liquidity and regulatory capital, including the severity of the stress scenarios that were used.

• Understanding and evaluating credit rating agency ratings and actions.

• Reading and evaluating the adequacy of the disclosures made in the financial statements in relation to going concern.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group's and the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group's and the company's ability to continue as a going concern.

In relation to the directors' reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors' statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

Reporting on other information

The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information, which includes reporting based on the Task Force on Climate-related Financial Disclosures ('TCFD') recommendations. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information, including the TCFD reporting and other information related to climate change, is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

With respect to the Strategic report and Report of the Directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.

Strategic Report and Report of the Directors'

In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Report of the Directors' for the year ended 31 December 2021 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.

In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Report of the Directors'.

Directors' Remuneration

In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

 Corporate governance statement

The Listing Rules require us to review the directors' statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to:

• The directors' confirmation that they have carried out an assessment of the emerging and principal risks;

• The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated;

• The directors' statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the group's and company's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;

• The directors' explanation as to their assessment of the group's and company's prospects, the period this assessment covers and why the period is appropriate; and

• The directors' statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Our review of the directors' statement regarding the longer-term viability of the group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and understanding of the group and company and their environment obtained in the course of the audit.

In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:

• The directors' statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the group's and company's position, performance, business model and strategy;

• The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and

• The section of the Annual Report describing the work of the GAC.

We have nothing to report in respect of our responsibility to report when the directors' statement relating to the company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.

Responsibilities for the financial statements and the audit

Responsibilities of the directors for the financial statements

As explained more fully in the Directors' responsibility statement, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group's and the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.

Auditors' responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.

Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of financial crime laws and regulations and regulatory compliance, including regulatory reporting requirements and conduct of business, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue or reduce costs, creating fictitious trades to hide losses or to improve financial performance, and management bias in accounting estimates. The group engagement team shared this risk assessment with the Significant Subsidiaries auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included:

• Review of correspondence with and reports from the regulators, including the Prudential Regulation Authority ('PRA') and Financial Conduct Authority ('FCA');

• Reviewed reporting to the GAC and GRC in respect of compliance and legal matters;

• Review a sample of legal correspondence with legal advisors;

• Enquiries of management and review of internal audit reports, insofar as they related to the financial statements;

• Obtain legal confirmations from legal advisors relating to material litigation and compliance matters;

• Assessment of matters reported on the group's whistleblowing programmes and the results of management's investigation of such matters; insofar as they related to the financial statements.

• Challenging assumptions and judgements made by management in its significant accounting estimates, in particular in relation to the determination of expected credit losses, the impairment assessments of the investment in BoCom, valuation of defined benefit pensions obligations and investment in subsidiaries (see related key audit matters);

• Obtaining confirmations from third parties to confirm the existence of a sample of transactions and balances; and

• Identifying and testing journal entries, including those posted with certain descriptions, posted and approved by the same individual, backdated journals or posted by infrequent and unexpected users.

There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.

Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected.

A further description of our responsibilities for the audit of the financial statements in accordance with ISAs (UK) is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors' report.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's and company's internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's and company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group and company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group and company audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Use of this report

This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other required reporting

 Companies Act 2006 exception reporting

Under the Companies Act 2006 we are required to report to you if, in our opinion:

• we have not obtained all the information and explanations we require for our audit; or

• adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or

• certain disclosures of directors' remuneration specified by law are not made; or

• the company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

 Appointment

Following the recommendation of the GAC, we were appointed by the members on 31 March 2015 to audit the financial statements for the year ended 31 December 2015 and subsequent financial periods. The period of total uninterrupted engagement is seven years, covering the years ended 31 December 2015 to 31 December 2021.

 Other matter

As required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial statements form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in accordance with the ESEF Regulatory Technical Standard ('ESEF RTS'). This auditors' report provides no assurance over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS.

 

 

Scott Berryman   (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

London

22 February 2022

Financial statements

 

Page

Consolidated income statement

308

Consolidated statement of comprehensive income

308

Consolidated balance sheet

310

Consolidated statement of cash flows

311

Consolidated statement of changes in equity

312

HSBC Holdings income statement

314

HSBC Holdings statement of comprehensive income

314

HSBC Holdings balance sheet

315

HSBC Holdings statement of cash flows

316

HSBC Holdings statement of changes in equity

317

 

 

Consolidated income statement

for the year ended 31 December

 

 

2021

2020

2019

 

Notes*

$m

$m

$m

Net interest income

 

  26,489 

  27,578 

  30,462 

-  interest income1,2

 

  36,188 

  41,756 

  54,695 

-  interest expense3

 

  (9,699)

  (14,178)

  (24,233)

Net fee income

2

  13,097 

  11,874 

  12,023 

-  fee income

 

  16,788 

  15,051 

  15,439 

-  fee expense

 

  (3,691)

  (3,177)

  (3,416)

Net income from financial instruments held for trading or managed on a fair value basis

3

  7,744 

  9,582 

  10,231 

Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss

3

  4,053 

  2,081 

  3,478 

Changes in fair value of designated debt and related derivatives4

3

  (182)

  231

  90

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

3

  798 

  455

  812

Gains less losses from financial investments

 

  569 

  653

  335

Net insurance premium income

4

  10,870 

  10,093 

  10,636 

Other operating income

 

  502 

  527

  2,957 

Total operating income

 

  63,940 

  63,074 

  71,024 

Net insurance claims and benefits paid and movement in liabilities to policyholders

4

  (14,388)

  (12,645)

  (14,926)

Net operating income before change in expected credit losses and other credit impairment charges

 

  49,552 

  50,429 

  56,098 

Change in expected credit losses and other credit impairment charges

 

  928 

  (8,817)

  (2,756)

Net operating income

 

  50,480 

  41,612 

  53,342 

Employee compensation and benefits

5

  (18,742)

  (18,076)

  (18,002)

General and administrative expenses

 

  (11,592)

  (11,115)

  (13,828)

Depreciation and impairment of property, plant and equipment and right-of-use assets5

 

  (2,261)

  (2,681)

  (2,100)

Amortisation and impairment of intangible assets

 

  (1,438)

  (2,519)

  (1,070)

Goodwill impairment

21

  (587)

  (41)

  (7,349)

Total operating expenses

 

  (34,620)

  (34,432)

  (42,349)

Operating profit

 

  15,860 

  7,180 

  10,993 

Share of profit in associates and joint ventures

19

  3,046 

  1,597 

  2,354 

Profit before tax

 

  18,906 

  8,777 

  13,347 

Tax expense

7

  (4,213)

  (2,678)

  (4,639)

Profit for the year

 

  14,693 

  6,099 

  8,708 

Attributable to:

 

 

 

 

-  ordinary shareholders of the parent company

 

  12,607 

  3,898 

  5,969 

-  preference shareholders of the parent company

 

  7 

  90

  90

-  other equity holders

 

  1,303 

  1,241 

  1,324 

-  non-controlling interests

 

  776 

  870

  1,325 

Profit for the year

 

  14,693 

  6,099 

  8,708 

 

 

$

$

$

Basic earnings per ordinary share

9

  0.62 

  0.19 

  0.30 

Diluted earnings per ordinary share

9

  0.62 

  0.19 

  0.30 

*  For Notes on the financial statements, see page 318.

1  Interest income includes $30,916m (2020: $35,293m) of interest recognised on financial assets measured at amortised cost and $4,337m (2020: $5,614m) of interest recognised on financial assets measured at fair value through other comprehensive income.

2  Interest revenue calculated using the effective interest method comprises interest recognised on financial assets measured at either amortised cost or fair value through other comprehensive income.

3  Interest expense includes $8,227m (2020: $12,426m) of interest on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise mandatorily measured at fair value.

4  The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

5  Includes depreciation of the right-of-use assets of $878m (2020: $1,029m).

 

Consolidated statement of comprehensive income

for the year ended 31 December

 

2021

2020

2019

 

$m

$m

$m

Profit for the year

  14,693 

  6,099 

  8,708 

Other comprehensive income/(expense)

 

 

 

Items that will be reclassified subsequently to profit or loss when specific conditions are met:

 

 

 

Debt instruments at fair value through other comprehensive income

  (2,139)

  1,750 

  1,152 

-  fair value gains/(losses)

  (2,270)

  2,947 

  1,793 

-  fair value gains transferred to the income statement on disposal

  (464)

  (668)

  (365)

-  expected credit (recoveries)/losses recognised in the income statement

  (49)

  48

  109

-  income taxes

  644 

  (577)

  (385)

Cash flow hedges

  (664)

  471

  206

-  fair value gains/(losses)

  595 

  (157)

  551

-  fair value (gains)/losses reclassified to the income statement

-  fair value (gains)/losses reclassified to the income statement

  (1,514)

  769

  (286)

-  income taxes

  255 

  (141)

  (59)

Share of other comprehensive income/(expense) of associates and joint ventures

  103 

  (73)

  21

-  share for the year

  103 

  (73)

  21

Exchange differences

  (2,393)

  4,855 

  1,044 

Items that will not be reclassified subsequently to profit or loss:

 

 

 

Remeasurement of defined benefit asset/liability

  (274)

  834

  13

-  before income taxes

  (107)

  1,223 

  (17)

-  income taxes

  (167)

  (389)

  30

Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk

 

  531 

  167

  (2,002)

-  before income taxes

-  before income taxes

  512 

  190

  (2,639)

-  income taxes

-  income taxes

  19 

  (23)

  637

Equity instruments designated at fair value through other comprehensive income

  (446)

  212

  366

-  fair value gains/(losses)

  (443)

  212

  364

-  income taxes

  (3)

  - 

  2

Effects of hyperinflation

  315 

  193

  217

Other comprehensive income/(expense) for the period, net of tax

  (4,967)

  8,409 

  1,017 

Total comprehensive income for the year

  9,726 

  14,508 

  9,725 

Attributable to:

 

 

 

-  ordinary shareholders of the parent company

  7,765 

  12,146 

  6,838 

-  preference shareholders of the parent company

  7 

  90

  90

-  other equity holders

  1,303 

  1,241 

  1,324 

-  non-controlling interests

  651 

  1,031 

  1,473 

Total comprehensive income for the year

  9,726 

  14,508 

  9,725 

 

 

Consolidated balance sheet

 

 

At

 

 

31 Dec

31 Dec

 

 

2021

2020

 

Notes*

$m

$m

Assets

 

 

 

Cash and balances at central banks

 

  403,018 

  304,481 

Items in the course of collection from other banks

 

  4,136 

  4,094 

Hong Kong Government certificates of indebtedness

 

  42,578 

  40,420 

Trading assets

11

  248,842 

  231,990 

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

14

  49,804 

  45,553 

Derivatives

15

  196,882 

  307,726 

Loans and advances to banks

 

  83,136 

  81,616 

Loans and advances to customers

 

  1,045,814 

  1,037,987 

Reverse repurchase agreements - non-trading

 

  241,648 

  230,628 

Financial investments

16

  446,274 

  490,693 

Prepayments, accrued income and other assets

22

  139,982 

  156,412 

Current tax assets

 

  970 

  954

Interests in associates and joint ventures

18

  29,609 

  26,684 

Goodwill and intangible assets

21

  20,622 

  20,443 

Deferred tax assets

7

  4,624 

  4,483 

Total assets

 

  2,957,939 

  2,984,164 

Liabilities and equity

 

 

 

Liabilities

 

 

 

Hong Kong currency notes in circulation

 

  42,578 

  40,420 

Deposits by banks

 

  101,152 

  82,080 

Customer accounts

 

  1,710,574 

  1,642,780 

Repurchase agreements - non-trading

 

  126,670 

  111,901 

Items in the course of transmission to other banks

 

  5,214 

  4,343 

Trading liabilities

23

  84,904 

  75,266 

Financial liabilities designated at fair value

24

  145,502 

  157,439 

Derivatives

15

  191,064 

  303,001 

Debt securities in issue

25

  78,557 

  95,492 

Accruals, deferred income and other liabilities

26

  123,778 

  128,624 

Current tax liabilities

 

  698 

  690

Liabilities under insurance contracts

4

  112,745 

  107,191 

Provisions

27

  2,566 

  3,678 

Deferred tax liabilities

7

  4,673 

  4,313 

Subordinated liabilities

28

  20,487 

  21,951 

Total liabilities

 

  2,751,162 

  2,779,169 

Equity

 

 

 

Called up share capital

31

  10,316 

  10,347 

Share premium account

31

  14,602 

  14,277 

Other equity instruments

 

  22,414 

  22,414 

Other reserves

 

  6,460 

  8,833 

Retained earnings

 

  144,458 

  140,572 

Total shareholders' equity

 

  198,250 

  196,443 

Non-controlling interests

19

  8,527 

  8,552 

Total equity

 

  206,777 

  204,995 

Total liabilities and equity

 

  2,957,939 

  2,984,164 

*  For Notes on the financial statements, see page 318.

The accompanying notes on pages 318 to 396 and the audited sections in 'Risk' on pages 120 to 216 (including 'Measurement uncertainty and sensitivity analysis of ECL estimates' on pages 144 to 152), and 'Directors' remuneration report' on pages 254 to 287 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 22 February 2022 and signed on its behalf by:

 

 

 

Mark E Tucker

 

Ewen Stevenson

Group Chairman

 

Group Chief Financial Officer

 

Consolidated statement of cash flows

for the year ended 31 December

 

2021

2020

2019

 

$m

$m

$m

Profit before tax

  18,906 

  8,777 

  13,347 

Adjustments for non-cash items:

 

 

 

Depreciation, amortisation and impairment

  4,286 

  5,241 

  10,519 

Net gain from investing activities

  (647)

  (541)

  (399)

Share of profits in associates and joint ventures

  (3,046)

  (1,597)

  (2,354)

Gain on disposal of subsidiaries, businesses, associates and joint ventures

  - 

  - 

  (929)

Change in expected credit losses gross of recoveries and other credit impairment charges

  (519)

  9,096 

  3,012 

Provisions including pensions

  1,063 

  1,164 

  2,423 

Share-based payment expense

  467 

  433

  478

Other non-cash items included in profit before tax

  510 

  (906)

  (2,297)

Elimination of exchange differences1

  18,937 

  (25,749)

  (3,742)

Changes in operating assets and liabilities

 

 

 

Change in net trading securities and derivatives

  (9,226)

  13,150 

  (18,910)

Change in loans and advances to banks and customers

  (11,014)

  (14,131)

  (53,760)

Change in reverse repurchase agreements - non-trading

  552 

  9,950 

  (7,390)

Change in financial assets designated and otherwise mandatorily measured at fair value

  (4,254)

  (1,962)

  (2,308)

Change in other assets

  19,899 

  (19,610)

  (21,863)

Change in deposits by banks and customer accounts

  95,703 

  226,723 

  79,163 

Change in repurchase agreements - non-trading

  14,769 

  (28,443)

  (25,540)

Change in debt securities in issue

  (16,936)

  (9,075)

  19,268 

Change in financial liabilities designated at fair value

  (11,425)

  (6,630)

  20,068 

Change in other liabilities

  (10,935)

  20,323 

  23,124 

Dividends received from associates

  808 

  761

  633

Contributions paid to defined benefit plans

  (509)

  (495)

  (533)

Tax paid

  (3,077)

  (4,259)

  (2,267)

Net cash from operating activities

  104,312 

  182,220 

  29,743 

Purchase of financial investments

  (493,042)

  (496,669)

  (445,907)

Proceeds from the sale and maturity of financial investments

  521,190 

  476,990 

  413,186 

Net cash flows from the purchase and sale of property, plant and equipment

  (1,086)

  (1,446)

  (1,343)

Net cash flows from purchase/(disposal) of customer and loan portfolios

  3,059 

  1,362 

  1,118 

Net investment in intangible assets

  (2,479)

  (2,064)

  (2,289)

Net cash flow from acquisition and disposal of subsidiaries, businesses, associates and joint ventures

  (106)

  (603)

  (83)

Net cash from investing activities

  27,536 

  (22,430)

  (35,318)

Issue of ordinary share capital and other equity instruments

  1,996 

  1,497 

  - 

Cancellation of shares

  (707)

  - 

  (1,000)

Net sales/(purchases) of own shares for market-making and investment purposes

  (1,386)

  (181)

  141

Redemption of preference shares and other equity instruments

  (3,450)

  (398)

  - 

Subordinated loan capital repaid2

  (864)

  (3,538)

  (4,210)

Dividends paid to shareholders of the parent company and non-controlling interests

  (6,383)

  (2,023)

  (9,773)

Net cash from financing activities

  (10,794)

  (4,643)

  (14,842)

Net increase/(decrease) in cash and cash equivalents

  121,054 

  155,147 

  (20,417)

Cash and cash equivalents at 1 Jan

  468,323 

  293,742 

  312,911 

Exchange differences in respect of cash and cash equivalents

  (15,345)

  19,434 

  1,248 

Cash and cash equivalents at 31 Dec3

  574,032 

  468,323 

  293,742 

Cash and cash equivalents comprise:

 

 

 

-  cash and balances at central banks

  403,018 

  304,481 

  154,099 

-  items in the course of collection from other banks

  4,136 

  4,094 

  4,956 

-  loans and advances to banks of one month or less

  55,705 

  51,788 

  41,626 

-  reverse repurchase agreements with banks of one month or less

  76,658 

  65,086 

  65,370 

-  treasury bills, other bills and certificates of deposit less than three months

  28,488 

  30,023 

  20,132 

-  cash collateral and net settlement accounts

  11,241 

  17,194 

  12,376 

-  less: items in the course of transmission to other banks

  (5,214)

  (4,343)

  (4,817)

Cash and cash equivalents at 31 Dec3

  574,032 

  468,323 

  293,742 

 

Interest received was $40,175m (2020: $45,578m; 2019: $58,627m), interest paid was $12,695m (2020: $17,740m; 2019: $27,384m) and dividends received (excluding dividends received from associates, which are presented separately above) were $1,898m (2020: $1,158m; 2019: $2,369m).

1  Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.

2   Subordinated liabilities changes during the year are attributable to repayments of $(0.9)bn (2020: $(3.5)bn; 2019: $(4.2)bn) of securities. Non-cash changes during the year included foreign exchange gains/(losses) of $(0.3)bn (2020: $0.5bn; 2019: $0.6bn) and fair value gains/(losses) of $(1.0)bn (2020: $1.1bn; 2019: $1.4bn).

3   At 31 December 2021 $33,634m (2020: $41,912m; 2019: $35,735m) was not available for use by HSBC, of which $15,357m (2020: $16,935m; 2019: $19,353m) related to mandatory deposits at central banks.

 

 

Consolidated statement of changes in equity

for the year ended 31 December

 

 

 

 

Other reserves

 

 

 

 

Called up

share

capital

and

share

premium

Other

equity

instru-ments

Retained

earnings3,4

Financial

assets

at

FVOCI

reserve

Cash

flow

hedging

reserve

Foreign

exchange

reserve

Merger

and other

reserves4,5

Total

share-

holders'

equity

Non-

controlling

interests

Total

equity

 

$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2021

  24,624 

  22,414 

  140,572 

  1,816 

  457 

  (20,375)

  26,935 

  196,443 

  8,552 

  204,995 

Profit for the year

  - 

  - 

  13,917 

  - 

  - 

  - 

  - 

  13,917 

  776 

  14,693 

Other comprehensive income (net of tax)

  - 

  - 

  661 

  (2,455)

  (654)

  (2,394)

  - 

  (4,842)

  (125)

  (4,967)

-  debt instruments at fair value through other comprehensive income

  - 

  - 

  - 

  (2,105)

  - 

  - 

  - 

  (2,105)

  (34)

  (2,139)

-  equity instruments designated at fair value through other comprehensive income

  - 

  - 

  - 

  (350)

  - 

  - 

  - 

  (350)

  (96)

  (446)

-  cash flow hedges

  - 

  - 

  - 

  - 

  (654)

  - 

  - 

  (654)

  (10)

  (664)

-  changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk

  - 

  - 

  531 

  - 

  - 

  - 

  - 

  531 

  - 

  531 

-  remeasurement of defined benefit asset/liability

  - 

  - 

  (288)

  - 

  - 

  - 

  - 

  (288)

  14 

  (274)

-  share of other comprehensive income of associates and joint ventures

  - 

  - 

  103 

  - 

  - 

  - 

  - 

  103 

  - 

  103 

-  effects of hyperinflation

  - 

  - 

  315 

  - 

  - 

  - 

  - 

  315 

  - 

  315 

-  exchange differences

  - 

  - 

  - 

  - 

  - 

  (2,394)

  - 

  (2,394)

  1 

  (2,393)

Total comprehensive income for the year

  - 

  - 

  14,578 

  (2,455)

  (654)

  (2,394)

  - 

  9,075 

  651 

  9,726 

Shares issued under employee remuneration and share plans

  354 

  - 

  (336)

  - 

  - 

  - 

  - 

  18 

  - 

  18 

Capital securities issued1

  - 

  2,000 

  (4)

  - 

  - 

  - 

  - 

  1,996 

  - 

  1,996 

Dividends to shareholders

  - 

  - 

  (5,790)

  - 

  - 

  - 

  - 

  (5,790)

  (593)

  (6,383)

Redemption of securities2

  - 

  (2,000)

  - 

  - 

  - 

  - 

  - 

  (2,000)

  - 

  (2,000)

Transfers6

  - 

  - 

  (3,065)

  - 

  - 

  - 

  3,065 

  - 

  - 

  - 

Cost of share-based payment arrangements

  - 

  - 

  467 

  - 

  - 

  - 

  - 

  467 

  - 

  467 

Cancellation of shares7

  (60)

  - 

  (2,004)

  - 

  - 

  - 

  60 

  (2,004)

  - 

  (2,004)

Other movements

  - 

  - 

  40 

  5 

  - 

  - 

  - 

  45 

  (83)

  (38)

At 31 Dec 2021

  24,918 

  22,414 

  144,458 

  (634)

  (197)

  (22,769)

  30,060 

  198,250 

  8,527 

  206,777 

 

 

 

 

 

 

 

 

 

 

 

At 1 Jan 2020

  24,278 

  20,871 

  136,679 

  (108) 

  (2) 

  (25,133)

  27,370 

  183,955 

  8,713 

  192,668 

Profit for the year

  - 

  - 

  5,229 

  - 

  - 

  - 

  - 

  5,229 

  870

  6,099 

Other comprehensive income (net of tax)

  - 

  - 

  1,118 

  1,913 

  459

  4,758 

  - 

  8,248 

  161

  8,409 

-  debt instruments at fair value through other comprehensive income

  - 

  - 

  - 

  1,746 

  - 

  - 

  - 

  1,746 

  4

  1,750 

-  equity instruments designated at fair value through other comprehensive income

  - 

  - 

  - 

  167

 

  - 

  - 

  167

  45

  212

-  cash flow hedges

  - 

  - 

  - 

  - 

  459

  - 

  - 

  459

  12

  471

-  changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk

  - 

  - 

  167

  - 

  - 

  - 

  - 

  167

  - 

  167

-  remeasurement of defined benefit asset/liability

  - 

  - 

  831

  - 

  - 

  - 

  - 

  831

  3

  834

-  share of other comprehensive income of associates and joint ventures

  - 

  - 

  (73) 

  - 

  - 

  - 

  - 

  (73) 

  - 

  (73) 

-  effects of hyperinflation

  - 

  - 

  193

  - 

  - 

  - 

  - 

  193

  - 

  193

-  exchange differences

  - 

  - 

  - 

  - 

  - 

  4,758 

  - 

  4,758 

  97

  4,855 

Total comprehensive income for the year

  - 

  - 

  6,347 

  1,913 

  459

  4,758 

  - 

  13,477 

  1,031 

  14,508 

Shares issued under employee remuneration and share plans

  346

  - 

  (339) 

  - 

  - 

  - 

  - 

  7

  - 

  7

Capital securities issued1

  - 

  1,500 

  (3) 

  - 

  - 

  - 

  - 

  1,497 

  - 

  1,497 

Dividends to shareholders

  - 

  - 

  (1,331) 

  - 

  - 

  - 

  - 

  (1,331) 

  (692) 

  (2,023) 

Redemption of securities2

  - 

  - 

  (1,450) 

  - 

  - 

  - 

  - 

  (1,450) 

  - 

  (1,450) 

Transfers6

  - 

  - 

  435

  - 

  - 

  - 

  (435) 

  - 

  - 

  - 

Cost of share-based payment arrangements

  - 

  - 

  434

  - 

  - 

  - 

  - 

  434

  - 

  434

Other movements

  - 

  43

  (200) 

  11

  - 

  - 

  - 

  (146) 

  (500) 

  (646) 

At 31 Dec 2020

  24,624 

  22,414 

  140,572 

  1,816 

  457

  (20,375)

  26,935 

  196,443 

  8,552 

  204,995 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of changes in equity (continued)

for the year ended 31 December

 

 

 

 

Other reserves

 

 

 

 

Called up

share

capital and

share

premium

Other

equity

instru-ments

Retained

earnings3,4

Financial

assets at

FVOCI

reserve

Cash

flow

hedging

reserve

Foreign

exchange

reserve

Merger

and other

reserves4,5

Total

share-

holders'

equity

Non-

controlling

interests

Total

equity

 

$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2019

  23,789 

  22,367 

  138,191 

  (1,532) 

  (206) 

  (26,133)

  29,777 

  186,253 

  7,996 

  194,249 

Profit for the year

  - 

  - 

  7,383 

  - 

  - 

  - 

  - 

  7,383 

  1,325 

  8,708 

Other comprehensive income (net of tax)

  - 

  - 

  (1,759) 

  1,424 

  204

  1,000 

  - 

  869

  148

  1,017 

-  debt instruments at fair value through other comprehensive income

  - 

  - 

  - 

  1,146 

  - 

  - 

  - 

  1,146 

  6

  1,152 

-  equity instruments designated at fair value through other comprehensive income

  - 

  - 

  - 

  278

  - 

  - 

  - 

  278

  88

  366

-  cash flow hedges

  - 

  - 

  - 

  - 

  204

  - 

  - 

  204

  2

  206

-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

  - 

  - 

  (2,002) 

  - 

  - 

  - 

  - 

  (2,002) 

  - 

  (2,002) 

-  remeasurement of defined benefit asset/liability

  - 

  - 

  5

  - 

  - 

  - 

  - 

  5

  8

  13

-  share of other comprehensive income of associates and joint ventures

  - 

  - 

  21

  - 

  - 

  - 

  - 

  21

  - 

  21

-  effects of hyperinflation

  - 

  - 

  217

  - 

  - 

  - 

  - 

  217

  - 

  217

-  exchange differences

  - 

  - 

  - 

  - 

  - 

  1,000 

  - 

  1,000 

  44

  1,044 

Total comprehensive income for the year

  - 

  - 

  5,624 

  1,424 

  204

  1,000 

  - 

  8,252 

  1,473 

  9,725 

Shares issued under employee remuneration and share plans

  557

  - 

  (495) 

  - 

  - 

  - 

  - 

  62

  - 

  62

Shares issued in lieu of dividends and amounts arising thereon

  - 

  - 

  2,687 

  - 

  - 

  - 

  - 

  2,687 

  - 

  2,687 

Dividends to shareholders

  - 

  - 

  (11,683) 

  - 

  - 

  - 

  - 

  (11,683) 

  (777) 

  (12,460) 

Redemption of securities2

  - 

  (1,496) 

  (12) 

  - 

  - 

  - 

  - 

  (1,508) 

  - 

  (1,508) 

Transfers6

  - 

  - 

  2,475 

  - 

  - 

  - 

  (2,475) 

  - 

  - 

  - 

Cost of share-based payment arrangements

  - 

  - 

  478

  - 

  - 

  - 

  - 

  478

  - 

  478

Cancellation of shares7

  (68) 

  - 

  (1,000) 

  - 

  - 

  - 

  68

  (1,000) 

  - 

  (1,000) 

Other movements

  - 

  - 

  414

  - 

  - 

  - 

  - 

  414

  21

  435

At 31 Dec 2019

  24,278 

  20,871 

  136,679 

  (108) 

  (2) 

  (25,133)

  27,370 

  183,955 

  8,713 

  192,668 

1  During 2021, HSBC Holdings issued $2,000m of additional tier 1 instruments on which there were $4m of external issue costs. In 2020, HSBC Holdings issued $1,500m of perpetual subordinated contingent convertible capital securities.

2  During 2021, HSBC Holdings redeemed $2,000m 6.875% perpetual subordinated contingent convertible capital securities. For further details, see Note 31 in the Annual Report and Accounts 2021. In 2020, HSBC Holdings called and later redeemed $1,450m 6.20% non-cumulative US dollar preference shares. In 2019, HSBC Holdings redeemed $1,500m 5.625% perpetual subordinated capital securities on which there were $12m of external issuance costs. Under IFRSs external issuance costs are classified as equity.

3  At 31 December 2021, retained earnings included 558,397,704 treasury shares (2020: 509,825,249; 2019: 432,108,782). In addition, treasury shares are also held within HSBC's Insurance business retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Markets and Security Services.

4  Cumulative goodwill amounting to $5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including $3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of $1,669m has been charged against retained earnings.

5  Statutory share premium relief under section 131 of the Companies Act 1985 (the 'Act') was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC Continental Europe in 2000 and HSBC Finance Corporation in 2003, and the shares issued were recorded at their nominal value only. In HSBC's consolidated financial statements, the fair value differences of $8,290m in respect of HSBC Continental Europe and $12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited ('HOHU'), following a number of intra-Group reorganisations. During 2009, pursuant to section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and $15,796m was recognised in the merger reserve. 

6  Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. In the comparative periods, impairments (2020: $435m; 2019: $2,475m) were recognised and a permitted transfer of these amounts was made from the merger reserve to retained earnings. During 2021, a part reversal of these impairments resulted in a transfer from retained earnings back to the merger reserve of $3,065m.

7  For further details, see Note 31 in the Annual Report and Accounts 2021. In October 2021, HSBC announced a share buy-back of up to $2.0bn, which will be completed no later than April 2022. At 31 December 2021, 120,366,714 ordinary shares had been purchased and cancelled representing a nominal value of $60m, which has been transferred from share capital to capital redemption reserve within merger and other reserves. In August 2019, HSBC announced a share buy-back of up to $1.0bn, which was completed in September 2019.

 

 

HSBC Holdings income statement

for the year ended 31 December

 

 

2021

2020

2019

 

Notes*

$m

$m

$m

Net interest expense

 

  (2,367)

  (2,632)

  (2,554)

-  interest income

 

  380 

  473

  1,249 

-  interest expense

 

  (2,747)

  (3,105)

  (3,803)

Fee (expense)/income

 

  (5)

  (12)

  (2)

Net income from financial instruments held for trading or managed on a fair value basis

3

  110 

  801

  1,477 

Changes in fair value of designated debt and related derivatives1

3

  349 

  (326)

  (360)

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

3

  (420)

  1,141 

  1,659 

Dividend income from subsidiaries

 

  11,404 

  8,156 

  15,117 

Other operating income

 

  230 

  1,889 

  1,293 

Total operating income

 

  9,301 

  9,017 

  16,630 

Employee compensation and benefits

5

  (30)

  (56)

  (37)

General and administrative expenses

 

  (1,845)

  (4,276)

  (4,772)

Impairment of subsidiaries

 

  3,065 

  (435)

  (2,562)

Total operating expenses

 

  1,190 

  (4,767)

  (7,371)

Profit before tax

 

  10,491 

  4,250 

  9,259 

Tax (charge)/credit

 

  343 

  (165)

  (218)

Profit for the year

 

  10,834 

  4,085 

  9,041 

*  For Notes on the financial statements, see page 318.

1  The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

HSBC Holdings statement of comprehensive income

for the year ended 31 December

 

2021

2020

2019

 

$m

$m

$m

Profit for the year

  10,834 

  4,085 

  9,041 

Other comprehensive income/(expense)

 

 

 

Items that will not be reclassified subsequently to profit or loss:

 

 

 

Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk

  267 

  176

  (396)

-  before income taxes

  259 

  176

  (573)

-  income taxes

  8 

  - 

  177

Other comprehensive income/(expense) for the year, net of tax

  267 

  176

  (396)

Total comprehensive income for the year

  11,101 

  4,261 

  8,645 

 

HSBC Holdings balance sheet

 

 

31 Dec 2021

31 Dec 2020

 

Notes*

$m

$m

Assets

 

 

 

Cash and balances with HSBC undertakings

 

  2,590 

  2,913 

Financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value

 

  51,408 

  65,253 

Derivatives

15

  2,811 

  4,698 

Loans and advances to HSBC undertakings

 

  25,108 

  10,443 

Financial investments

 

  26,194 

  17,485 

Prepayments, accrued income and other assets

 

  1,513 

  1,445 

Current tax assets

 

  122 

  - 

Investments in subsidiaries

 

  163,211 

  160,660 

Intangible assets

 

  215 

  276

Total assets at 31 Dec

 

  273,172 

  263,173 

Liabilities and equity

 

 

 

Liabilities

 

 

 

Amounts owed to HSBC undertakings

 

  111 

  330

Financial liabilities designated at fair value

24

  32,418 

  25,664 

Derivatives

15

  1,220 

  3,060 

Debt securities in issue

25

  67,483 

  64,029 

Accruals, deferred income and other liabilities

 

  4,240 

  4,865 

Subordinated liabilities

28

  17,059 

  17,916 

Current tax liabilities

 

  - 

  71

Deferred tax liabilities

 

  311 

  438

Total liabilities

 

  122,842 

  116,373 

Equity

 

 

 

Called up share capital

31

  10,316 

  10,347 

Share premium account

 

  14,602 

  14,277 

Other equity instruments

 

  22,414 

  22,414 

Merger and other reserves

 

  37,882 

  34,757 

Retained earnings

 

  65,116 

  65,005 

Total equity

 

  150,330 

  146,800 

Total liabilities and equity at 31 Dec

 

  273,172 

  263,173 

*  For Notes on the financial statements, see page 318.  

The accompanying notes on pages 318 to 396 and the audited sections in 'Risk' on pages 120 to 216 (including 'Measurement uncertainty and sensitivity analysis of ECL estimates' on pages 144 to 152), and 'Directors' remuneration report' on pages 254 to 287 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 22 February 2022 and signed on its behalf by:

 

 

 

 

Mark E Tucker

 

Ewen Stevenson

Group Chairman

 

Group Chief Financial Officer

 

HSBC Holdings statement of cash flows

for the year ended 31 December

 

2021

2020

2019

 

$m

$m

$m

Profit before tax

  10,491 

  4,250 

  9,259 

Adjustments for non-cash items

  (2,954)

  442

  2,657 

-  depreciation, amortisation and impairment/expected credit losses

  (2,976)

  87

  72

-  share-based payment expense

  2 

  1

  1

-  other non-cash items included in profit before tax

  20 

  354

  2,584 

Changes in operating assets and liabilities

 

 

 

Change in loans to HSBC undertakings

  3,364 

  (327)

  41,471 

Change in financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value

  (4,409)

  (3,289)

  (38,451)

Change in net trading securities and net derivatives

  47 

  (1,657)

  (1,433)

Change in other assets

  (226)

  (633)

  (437)

Change in financial investments

  20 

  449

  (70)

Change in debt securities in issue

  (2,833)

  3,063 

  1,899 

Change in financial liabilities designated at fair value

  (1,396)

  1,258 

  1,227 

Change in other liabilities

  (691)

  1,366 

  437

Tax received

  32 

  270

  459

Net cash from operating activities

  1,445 

  5,192 

  17,018 

Purchase of financial investments

  (16,966)

  (11,652)

  (19,293)

Proceeds from the sale and maturity of financial investments

  16,074 

  9,342 

  6,755 

Net cash outflow from acquisition of or increase in stake of subsidiaries

  (1,337)

  (2,558)

  (3,721)

Repayment of capital from subsidiaries

  2,000 

  1,516 

  - 

Net investment in intangible assets

  (26)

  (33)

  (44)

Net cash from investing activities

  (255)

  (3,385)

  (16,303)

Issue of ordinary share capital and other equity instruments

  2,334 

  1,846 

  500

Redemption of preference shares and other equity instruments

  (3,450)

  - 

  - 

Purchase of treasury shares

  (28)

  - 

  - 

Cancellation of shares

  (707)

  - 

  (1,006)

Subordinated loan capital repaid

  - 

  (1,500)

  (4,107)

Debt securities issued

  19,379 

  15,951 

  10,817 

Debt securities repaid

  (5,569)

  (16,577)

  - 

Dividends paid on ordinary shares

  (4,480)

  - 

  (7,582)

Dividends paid to holders of other equity instruments

  (1,310)

  (1,331)

  (1,414)

Net cash from financing activities

  6,169 

  (1,611)

  (2,792)

Net increase/(decrease) in cash and cash equivalents

  7,359 

  196

  (2,077)

Cash and cash equivalents at 1 January

  6,176 

  5,980 

  8,057 

Cash and cash equivalents at 31 Dec

  13,535 

  6,176 

  5,980 

Cash and cash equivalents comprise:

 

 

 

-  cash at bank with HSBC undertakings

  2,590 

  2,913 

  2,382 

-  loans and advances to banks of one month or less

  93 

  249

  102

-  treasury and other eligible bills

  10,852 

  3,014 

  3,496 

 

Interest received was $1,636m (2020: $1,952m; 2019: $2,216m), interest paid was $2,724m (2020: $3,166m; 2019: $3,819m) and dividends received were $11,404m (2020: $8,156m; 2019: $15,117m).

 

HSBC Holdings statement of changes in equity

for the year ended 31 December

 

Called up

share

capital

Share

premium

Other

equity

instruments

Retained

earnings1

Merger and other

reserves

Total

shareholders'

equity

 

$m

$m

$m

$m

$m

$m

At 1 Jan 2021

  10,347 

  14,277 

  22,414 

  65,005 

  34,757 

  146,800 

Profit for the year

  - 

  - 

  - 

  10,834 

  - 

  10,834 

Other comprehensive income (net of tax)

  - 

  - 

  - 

  267 

  - 

  267 

-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

  - 

  - 

  - 

  267 

  - 

  267 

Total comprehensive income for the year

  - 

  - 

  - 

  11,101 

  - 

  11,101 

Shares issued under employee share plans

  29 

  325 

  - 

  (103)

  - 

  251 

Capital securities issued

  - 

  - 

  2,000 

  (20)

  - 

  1,980 

Cancellation of shares2

  (60)

  - 

  - 

  (2,004)

  60 

  (2,004)

Dividends to shareholders

  - 

  - 

  - 

  (5,790)

  - 

  (5,790)

Redemption of capital securities

  - 

  - 

  (2,000)

  - 

  - 

  (2,000)

Transfers3

  - 

  - 

  - 

  (3,065)

  3,065 

  - 

Other movements

  - 

  - 

  - 

  (8)

  - 

  (8)

At 31 Dec 2021

  10,316 

  14,602 

  22,414 

  65,116 

  37,882 

  150,330 

 

 

 

 

 

 

 

At 1 Jan 2020

  10,319 

  13,959 

  20,743 

  62,484 

  37,539 

  145,044 

Profit for the year

  - 

  - 

  - 

  4,085 

  - 

  4,085 

Other comprehensive income (net of tax)

  - 

  - 

  - 

  176

  - 

  176

-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

  - 

  - 

  - 

  176

  - 

  176

Total comprehensive income for the year

  - 

  - 

  - 

  4,261 

  - 

  4,261 

Shares issued under employee share plans

  28

  318

  - 

  2,540 

  (2,347) 

  539

Capital securities issued

  - 

  - 

  1,500 

  (15) 

  - 

  1,485 

Dividends to shareholders

  - 

  - 

  - 

  (1,331) 

  - 

  (1,331) 

Redemption of capital securities

  - 

  - 

  - 

  (1,450) 

  - 

  (1,450) 

Transfers3

  - 

  - 

  - 

  435

  (435) 

  - 

Other movements4

  - 

  - 

  171

  (1,919) 

  - 

  (1,748) 

At 31 Dec 2020

  10,347 

  14,277 

  22,414 

  65,005 

  34,757 

  146,800 

 

 

 

 

 

 

 

At 1 Jan 2019

  10,180 

  13,609 

  22,231 

  61,434 

  39,899 

  147,353 

Profit for the year

  - 

  - 

  - 

  9,041 

  - 

  9,041 

Other comprehensive income (net of tax)

  - 

  - 

  - 

  (396) 

  - 

  (396) 

-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk

  - 

  - 

  - 

  (396) 

  - 

  (396) 

Total comprehensive income for the year

  - 

  - 

  - 

  8,645 

  - 

  8,645 

Shares issued under employee share plans

  36

  521

  - 

  (56) 

  - 

  501

Shares issued in lieu of dividends and amounts arising thereon

  171

  (171) 

  - 

  2,687 

  - 

  2,687 

Cancellation of shares

  (68) 

  - 

  - 

  (1,000) 

  68

  (1,000) 

Capital securities issued

  - 

  - 

  - 

  - 

  - 

  - 

Dividends to shareholders

  - 

  - 

  - 

  (11,683) 

  - 

  (11,683) 

Redemption of capital securities

  - 

  - 

  (1,488) 

  (20) 

  - 

  (1,508) 

Transfers3

  - 

  - 

  - 

  2,475 

  (2,475) 

  - 

Other movements

  - 

  - 

  - 

  2

  47

  49

At 31 Dec 2019

  10,319 

  13,959 

  20,743 

  62,484 

  37,539 

  145,044 

 

Dividends per ordinary share at 31 December 2021 were $0.22 (2020: nil; 2019: $0.51).

1  At 31 December 2021, retained earnings includ ed 329,871,829 ($2,542m) treasury shares (2020: 326,766,253 ($2,521m); 2019: 326,191,804 ($2,543m)).

2  On 26 October 2021, HSBC announced a share buy-back of up to $2.0bn, which is to be completed no later than 20 April 2022.

3  Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. In 2021, a part reversal of this impairment resulted in a transfer from retained earnings back to the merger reserve of $3,065m. At 31 December 2020, an additional impairment of $435m (2019: $2,475m) was recognised and a permitted transfer of this amount was made from the merger reserve to retained earnings.

4  Includes an adjustment to retained earnings for a repayment of capital by a subsidiary of $1,650m, which had been recognised as dividend income in 2019.

 

Notes on the financial statements

 

 

Page

 

 

 

Page

1

Basis of preparation and significant accounting policies

318

 

21

Goodwill and intangible assets

 

365

2

Net fee income

329

 

22

Prepayments, accrued income and other assets

368

3

Net income from financial instruments measured at fair value through profit or loss

329

 

23

Trading liabilities

368

 

24

Financial liabilities designated at fair value

368

4

Insurance business

330

 

25

Debt securities in issue

369

5

Employee compensation and benefits

331

 

26

Accruals, deferred income and other liabilities

369

6

Auditors' remuneration

337

 

27

Provisions

369

7

Tax

338

 

28

Subordinated liabilities

370

8

Dividends

340

 

29

Maturity analysis of assets, liabilities and off-balance sheet commitments

373

9

Earnings per share

340

 

10

Segmental analysis

341

 

30

Offsetting of financial assets and financial liabilities

378

11

Trading assets

344

 

31

Called up share capital and other equity instruments

379

12

Fair values of financial instruments carried at fair value

344

 

32

Contingent liabilities, contractual commitments and guarantees

381

13

Fair values of financial instruments not carried at fair value

350

 

33

Finance lease receivables

382

14

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

351

 

34

Legal proceedings and regulatory matters

382

 

35

Related party transactions

385

15

Derivatives

352

 

36

Business disposals

387

16

Financial investments

356

 

37

Events after the balance sheet date

388

17

Assets pledged, collateral received and assets transferred

358

 

38

HSBC Holdings' subsidiaries, joint ventures and associates

388

18

Interests in associates and joint ventures

359

 

 

 

 

19

Investments in subsidiaries

362

 

 

 

 

20

Structured entities

363

 

 

 

 

 

1

Basis of preparation and significant accounting policies

 

1.1  Basis of preparation

(a)  Compliance with International Financial Reporting Standards

The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings comply with UK-adopted international accounting standards and with the requirements of the Companies Act 2006, and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. These financial statements are also prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB'), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRSs as issued by the IASB for the periods presented. There were no unendorsed standards effective for the year ended
31 December 2021 affecting these consolidated and separate financial statements.

Standards adopted during the year ended 31 December 2021

There were no new accounting standards or interpretations that had a significant effect on HSBC in 2021. Accounting policies have been consistently applied.

(b)  Differences between IFRSs and Hong Kong Financial Reporting Standards

 

There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms of their application to HSBC, and consequently there would be no significant differences had the financial statements been prepared in accordance with Hong Kong Financial Reporting Standards. The 'Notes on the financial statements', taken together with the 'Report of the Directors', include the aggregate of all disclosures necessary to satisfy IFRSs and Hong Kong reporting requirements.

(c)  Future accounting developments

Minor amendments to IFRSs

The IASB has not published any minor amendments effective from 1 January 2021 that are applicable to HSBC. However, the IASB has published a number of minor amendments to IFRSs that are effective from 1 January 2022 and 1 January 2023. HSBC expects they will have an insignificant effect, when adopted, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.

New IFRSs

IFRS 17 'Insurance Contracts'

IFRS 17 'Insurance Contracts' was issued in May 2017, with amendments to the standard issued in June 2020. The standard sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. Following the amendments, IFRS 17 is effective from 1 January 2023. The standard has been endorsed for use in the EU but has not yet been endorsed for use in the UK. The Group is in the process of implementing IFRS 17. Industry practice and interpretation of the standard are still developing. Therefore, the likely financial impact of its implementation remains uncertain. However, we have the following expectations as to the impact compared with our current accounting policy for insurance contracts, which is set out in policy 1.2(j) below:

• Under IFRS 17, there will be no present value of in-force business ('PVIF') asset recognised. Instead the estimated future profit will be included in the measurement of the insurance contract liability as the contractual service margin ('CSM'), representing  unearned profit, and this will be gradually recognised in revenue as services are provided over the duration of the insurance contract. While the profit over the life of an individual contract will be unchanged, its emergence will be later under IFRS 17. The removal  of the PVIF asset and the recognition of  CSM, which is a liability, will reduce  equity. The PVIF asset will be eliminated to equity on transition, together with other adjustments to assets and liabilities to reflect IFRS 17 measurement requirements and any consequential amendments to financial assets in the scope of IFRS 9.

• IFRS 17 requires increased use of current market values in the measurement of insurance liabilities. Changes in market conditions for certain products measured under the general measurement approach are immediately recognised in profit or loss, while changes in market conditions for other products measured under the variable fee approach are included in the measurement of CSM.

• In accordance with IFRS 17, directly attributable costs will be incorporated in the CSM and recognised in the results of insurance services as a reduction in reported revenue, as profit is recognised over the duration of insurance contracts.  Costs that are not directly attributable will remain in operating expenses. This will result in a reduction in reported operating expenses compared with the current accounting policy.

• We intend to provide an update on the likely financial impacts at or around our 2022 interim results announcement, when we expect that this will be reasonably estimable.

(d)  Foreign currencies

HSBC's consolidated financial statements are presented in US dollars because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business. The US dollar is also HSBC Holdings' functional currency because the US dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events and conditions of its subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.

Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date, except non-monetary assets and liabilities measured at historical cost, which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is recognised. In the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars are translated into the Group's presentation currency at the rate of exchange at the balance sheet date, while their results are translated into US dollars at the average rates of exchange for the reporting period. Exchange differences arising are recognised in other comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement.

(e)  Presentation of information

Certain disclosures required by IFRSs have been included in the sections marked as ('Audited') in the Annual Report and Accounts 2021 as follows:

• Disclosures concerning the nature and extent of risks relating to insurance contracts and financial instruments are included in the 'Risk review' on pages 120 to 216.

• The 'Own funds disclosure' is included in the 'Risk review' on page 193.

• Disclosures relating to HSBC's securitisation activities and structured products are included in the 'Risk review' on pages 120 to 216.

HSBC follows the UK Finance Disclosure Code. The UK Finance Disclosure Code aims to increase the quality and comparability of UK banks' disclosures and sets out five disclosure principles together with supporting guidance agreed in 2010. In line with the principles of the UK Finance Disclosure Code, HSBC assesses good practice recommendations issued from time to time by relevant regulators and standard setters, and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.

(f)  Critical accounting estimates and judgements

The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items, highlighted as the 'critical accounting estimates and judgements' in section 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management's estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of these financial statements. Management's selection of HSBC's accounting policies that contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved.

(g)  Segmental analysis

HSBC's Chief Operating Decision Maker is the Group Chief Executive, who is supported by the rest of the Group Executive Committee ('GEC'), which operates as a general management committee under the direct authority of the Board. Operating segments are reported in a manner consistent with the internal reporting provided to the Group Chief Executive and the GEC.

Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group's accounting policies. Segmental income and expenses include transfers between segments, and these transfers are conducted at arm's length. Shared costs are included in segments on the basis of the actual recharges made.

(h)  Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the uncertainty that the global Covid-19 pandemic has had on HSBC's operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity.

 

1.2  Summary of significant accounting policies

(a)  Consolidation and related policies

Investments in subsidiaries

Where an entity is governed by voting rights, HSBC consolidates when it holds - directly or indirectly - the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities, and whether power is held as agent or principal.

Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. This election is made for each business combination.

HSBC Holdings' investments in subsidiaries are stated at cost less impairment losses.

Goodwill

Goodwill is allocated to cash-generating units ('CGUs') for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. HSBC's CGUs are based on geographical regions subdivided by global business, except for Global Banking and Markets, for which goodwill is monitored on a global basis.

Impairment testing is performed at least once a year, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.

Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained.

Critical accounting estimates and judgements

The review of goodwill and non-financial assets (see Note 1.2(n)) for impairment reflects management's best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:

 

 

• The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests goodwill for impairment more frequently than once a year when indicators of impairment exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management's best estimate of future business prospects.

• The future cash flows of the CGUs are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management's view of future business prospects at the time of the assessment.

• The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of equity assigned to individual CGUs. The cost of equity percentage is generally derived from a capital asset pricing model and market implied cost of equity, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management's control.

• Key assumptions used in estimating goodwill and non-financial asset impairment are described in Note 21.

 

HSBC sponsored structured entities

HSBC is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing that entity or in bringing together relevant counterparties so the transaction that is the purpose of the entity could occur. HSBC is generally not considered a sponsor if the only involvement with the entity is merely administrative.

Interests in associates and joint arrangements

Joint arrangements are investments in which HSBC, together with one or more parties, has joint control. Depending on HSBC's rights and obligations, the joint arrangement is classified as either a joint operation or a joint venture. HSBC classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint arrangements, as associates.

HSBC recognises its share of the assets, liabilities and results in a joint operation. Investments in associates and interests in joint ventures are recognised using the equity method. The attributable share of the results and reserves of joint ventures and associates is included in the consolidated financial statements of HSBC based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and 31 December.

Investments in associates and joint ventures are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisitions of interests in joint ventures and associates is not tested separately for impairment, but is assessed as part of the carrying amount of the investment.

Critical accounting estimates and judgements

The most significant critical accounting estimates relate to the assessment of impairment of our investment in Bank of Communications Co. Limited ('BoCom'), which involves estimations of value in use:

 

 

 

• Management's best estimate of BoCom's earnings are based on management's explicit forecasts over the short to medium term and the capital maintenance charge, which is management's forecast of the earnings that need to be withheld in order for BoCom to meet capital requirements over the forecast period, both of which are subject to uncertain factors.

• Key assumptions used in estimating BoCom's value in use, the sensitivity of the value in use calculations to different assumptions and a sensitivity analysis that shows the changes in key assumptions that would reduce the excess of value in use over the carrying amount (the 'headroom') to nil are described in Note 18.

 

(b)  Income and expense

Operating income

Interest income and expense

Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value, are recognised in 'Interest income' and 'Interest expense' in the income statement using the effective interest method. However, as an exception to this, interest on debt instruments issued by HSBC for funding purposes that are designated under the fair value option to reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.

Interest on credit-impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Non-interest income and expense

HSBC generates fee income from services provided at a fixed price over time, such as account service and card fees, or when HSBC delivers a specific transaction at a point in time, such as broking services and import/export services. With the exception of certain fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and HSBC's performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee income is generally earned from short-term contracts with payment terms that do not include a significant financing component.

HSBC acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades, HSBC acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement.

HSBC recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement.

Where HSBC offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.

Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities.

Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:

• 'Net income from financial instruments held for trading or managed on a fair value basis': This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss.

• 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss': This includes interest income, interest expense and dividend income in respect of financial assets and liabilities measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately identifiable from other trading derivatives.

• 'Changes in fair value of designated debt instruments and related derivatives': Interest paid on debt instruments and interest cash flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch.

• 'Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss': This includes interest on instruments that fail the solely payments of principal and interest test, see (d) below.

The accounting policies for insurance premium income are disclosed in Note 1.2(j).

(c)  Valuation of financial instruments

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, HSBC recognises the difference as a trading gain or loss at inception (a 'day 1 gain or loss'). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or HSBC enters into an offsetting transaction. The fair value of financial instruments is generally measured on an individual basis. However, in cases where HSBC manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the financial statements, unless they satisfy the IFRS offsetting criteria.

Critical accounting estimates and judgements

The majority of valuation techniques employ only observable market data. However, certain financial instruments are classified on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the measurement of fair value is more judgemental:

 

 

• An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument's inception profit or greater than 5% of the instrument's valuation is driven by unobservable inputs.

• 'Unobservable' in this context means that there is little or no current market data available from which to determine the price at which an arm's length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).

• Details on the Group's level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonable possible alternative assumptions in determining their fair value are set out in Note 12.

 

(d)  Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. HSBC accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs.

HSBC may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. When HSBC intends to hold the loan, the loan commitment is included in the impairment calculations set out below.

Non-trading reverse repurchase, repurchase and similar agreements

When debt securities are sold subject to a commitment to repurchase them at a predetermined price ('repos'), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell ('reverse repos') are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement.

Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo agreements.

(e)  Financial assets measured at fair value through other comprehensive income

Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair value through other comprehensive income ('FVOCI'). These comprise primarily debt securities. They are recognised on the trade date when HSBC enters into contractual arrangements to purchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income statement as 'Gains less losses from financial instruments'. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in profit or loss.

(f)  Equity securities measured at fair value with fair value movements presented in other comprehensive income

The equity securities for which fair value movements are shown in other comprehensive income are business facilitation and other similar investments where HSBC holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are not transferred to profit or loss. Otherwise, equity securities are measured at fair value through profit or loss (except for dividend income, which is recognised in profit or loss).

(g)  Financial instruments designated at fair value through profit or loss

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below and are so designated irrevocably at inception:

• The use of the designation removes or significantly reduces an accounting mismatch.

• A group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

• The financial liability contains one or more non-closely related embedded derivatives.

Designated financial assets are recognised when HSBC enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when the rights to the cash flows expire or are transferred. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in 'Net income from financial instruments held for trading or managed on a fair value basis' or 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss' except for the effect of changes in the liabilities' credit risk, which is presented in 'Other comprehensive income', unless that treatment would create or enlarge an accounting mismatch in profit or loss.

Under the above criterion, the main classes of financial instruments designated by HSBC are:

• Debt instruments for funding purposes that are designated to reduce an accounting mismatch: The interest and/or foreign exchange exposure on certain fixed-rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy.

• Financial assets and financial liabilities under unit-linked and non-linked investment contracts: A contract under which HSBC does not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with discretionary participation features ('DPF'), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise be measured at either fair value through other comprehensive income or amortised cost. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in the same line.

• Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance evaluated on a fair value basis.

(h)  Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.

Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.

Hedge accounting

When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. HSBC uses these derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged.

Fair value hedge

Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.

Cash flow hedge

The effective portion of gains and losses on hedging instruments is recognised in other comprehensive income and the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income statement within 'Net income from financial instruments held for trading or managed on a fair value basis'. The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.

Net investment hedge

Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. The effective portion of gains and losses on the hedging instrument is recognised in other comprehensive income and other gains and losses are recognised immediately in the income statement. Gains and losses previously recognised in other comprehensive income are reclassified to the income statement on the disposal, or part disposal, of the foreign operation.

Derivatives that do not qualify for hedge accounting

Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.

(i)  Impairment of amortised cost and FVOCI financial assets

Expected credit losses ('ECL') are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months, or less, where the remaining life is less than 12 months ('12-month ECL'). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where
12-month ECL is recognised are considered to be 'stage 1'; financial assets that are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in 'stage 3'. Purchased or originated credit-impaired financial assets ('POCI') are treated differently, as set out below.

Credit impaired (stage 3)

HSBC determines 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.

Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL allowance.

Write-off

Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

Renegotiation

Loans are identified as renegotiated and classified as credit impaired when we modify the contractual payment terms due to significant credit distress of the borrower. Renegotiated loans remain classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity or derecognition.

A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms, or if the terms of an existing agreement are modified such that the renegotiated loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances are considered to be POCI and will continue to be disclosed as renegotiated loans.

Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any evidence of being credit impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows over the minimum observation period, and there are no other indicators of impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.

Loan modifications other than renegotiated loans

Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that HSBC's rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates and no payment-related concession has been provided. Mandatory and general offer loan modifications that are not borrower-specific, for example market-wide customer relief programmes, have not been classified as renegotiated loans and generally have not resulted in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy. Changes made to these financial instruments 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, but instead require the effective interest rate to be updated to reflect the change of the interest rate benchmark.  

Significant increase in credit risk (stage 2)

An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk, and these criteria will differ for different types of lending, particularly between retail and wholesale. However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and included on a watch or worry list, are included in stage 2.

For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default ('PD'), which encompasses a wide range of information including the obligor's customer risk rating ('CRR'), macroeconomic condition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure of significance varies depending on the credit quality at origination as follows:

 

 

0.1-1.2

15bps

2.1-3.3

30bps

 

For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates.

For loans originated prior to the implementation of IFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle PDs and through-the-cycle migration probabilities, consistent with the instrument's underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration-based thresholds, as set out in the table below:

 

 

0.1

5 notches

1.1-4.2

4 notches

4.3-5.1

3 notches

5.2-7.1

2 notches

7.2-8.2

1 notch

8.3

0 notch

 

Further information about the 23-grade scale used for CRR can be found on page 138.

For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meet its contractual cash flow obligations in the near term, and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.

For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporates all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than
12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies loans with a PD higher than would be expected from loans that are performing as originally expected, and higher than what would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.

Unimpaired and without significant increase in credit risk (stage 1)

ECL resulting from default events that are possible within the next 12 months ('12-month ECL') are recognised for financial instruments that remain in stage 1.

 

Purchased or originated credit impaired

Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes the recognition of a new financial instrument following a renegotiation where concessions have been granted for economic or contractual reasons relating to the borrower's financial difficulty that otherwise would not have been considered. The amount of change-in-lifetime ECL is recognised in profit or loss until the POCI is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.

Movement between stages

Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are not POCI will continue to be in stage 3 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. For loans that are assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.

Measurement of ECL

The assessment of credit risk and the estimation of ECL are unbiased and probability-weighted, and incorporate all available information that is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.

In general, HSBC calculates ECL using three main components: a probability of default, a loss given default ('LGD') and the exposure at default ('EAD').

The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively.

The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money.

HSBC makes use of the Basel II IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the following table:

 

 

 

PD

• Through the cycle (represents long-run average PD throughout a full economic cycle)

• The definition of default includes a backstop of 90+ days past due, although this has been modified to 180+ days past due for some portfolios, particularly UK and US mortgages

• Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD)

• Default backstop of 90+ days past due for all portfolios

EAD

• Cannot be lower than current balance

• Amortisation captured for term products

LGD

• Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn)

• Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data

• Discounted using cost of capital

• All collection costs included

• Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral)

• No floors

• Discounted using the original effective interest rate of the loan

• Only costs associated with obtaining/selling collateral included

Other

 

• Discounted back from point of default to balance sheet date

 

While 12-month PDs are recalibrated from Basel II models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life.

The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on the credit risk officer's estimates as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on the estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by the Group and the judgement of the credit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to the most likely outcome.

Period over which ECL is measured

Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which HSBC is exposed to credit risk. For wholesale overdrafts, credit risk management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of the next substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility. However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit HSBC's exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period HSBC remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, 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.

Forward-looking economic inputs

HSBC applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of its view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 144.

Critical accounting estimates and judgements

The calculation of the Group's ECL under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below:

 

 

• Defining what is considered to be a significant increase in credit risk

• Determining the lifetime and point of initial recognition of overdrafts and credit cards

• Selecting and calibrating the PD, LGD and EAD models, which support the calculations, including making reasonable and supportable judgements about how models react to current and future economic conditions

• Selecting model inputs and economic forecasts, including determining whether sufficient and appropriately weighted economic forecasts are incorporated to calculate unbiased expected loss

• Making management adjustments to account for late breaking events, model and data limitations and deficiencies, and expert credit judgements

• The section 'Measurement uncertainty and sensitivity analysis of ECL estimates', marked as audited from page 144, sets out the assumptions used in determining ECL, and provides an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions

 

 

(j)  Insurance contracts

A contract is classified as an insurance contract where HSBC accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. In addition, HSBC issues investment contracts with discretionary participation features ('DPF'), which are also accounted for as insurance contracts as required by IFRS 4 'Insurance Contracts'.

Net insurance premium income

Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are established. Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they relate.

Net insurance claims and benefits paid and movements in liabilities to policyholders

Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.

Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when notified.

Reinsurance recoveries are accounted for in the same period as the related claim.

Liabilities under insurance contracts

Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by reference to the value of the relevant underlying funds or indices.

Future profit participation on insurance contracts with DPF

Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and management's expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by the contractual terms, regulation, or past distribution policy.

Investment contracts with DPF

While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by IFRS 4. The Group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability.

In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.

Present value of in-force long-term insurance business

HSBC recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term and in-force at the balance sheet date, as an asset. The asset represents the present value of the equity holders' interest in the issuing insurance companies' profits expected to emerge from these contracts written at the balance sheet date. The present value of in-force business ('PVIF') is determined by discounting those expected future profits using appropriate assumptions in assessing factors such as future mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in 'Other operating income' on a gross of tax basis. 

(k)  Employee compensation and benefits

Share-based payments

HSBC enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for the provision of their services.

The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement. Expenses are recognised when the employee starts to render service to which the award relates.

Cancellations result from the failure to meet a non-vesting condition during the vesting period, and are treated as an acceleration of vesting recognised immediately in the income statement. Failure to meet a vesting condition by the employee is not treated as a cancellation, and the amount of expense recognised for the award is adjusted to reflect the number of awards expected to vest.

Post-employment benefit plans

HSBC operates a number of pension schemes including defined benefit, defined contribution and post-employment benefit schemes.

Payments to defined contribution schemes are charged as an expense as the employees render service.

Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses. Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets excluding interest and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets (see policy (c)), after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.

The cost of obligations arising from other post-employment plans are accounted for on the same basis as defined benefit pension plans.

Critical accounting estimates and judgements

The most significant critical accounting estimates relate to the determination of key assumptions applied in calculating the defined benefit pension obligation for the principal plan.

 

 

 

• A range of assumptions could be applied, and different assumptions could significantly alter the defined benefit obligation and the amounts recognised in profit or loss or OCI.

• The calculation of the defined benefit pension obligation includes assumptions with regard to the discount rate, inflation rate, pension payments and deferred pensions, pay and mortality. Management determines these assumptions in consultation with the plan's actuaries.

• Key assumptions used in calculating the defined benefit pension obligation for the principal plan and the sensitivity of the calculation to different assumptions are described in Note 5.

 

(l)  Tax

Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same statement as the related item appears.

Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. HSBC provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled.

Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.

Critical accounting estimates and judgements

The recognition of deferred tax assets depends on judgements and estimates.

 

 

• In assessing the probability and sufficiency of future taxable profit, we consider the availability of evidence to support the recognition of deferred tax assets. taking into account the inherent risk in long-term forecasting and drivers of recent history of tax losses where applicable, taking into account the future reversal of existing taxable temporary differences and tax planning strategies including corporate reorganisations. Specific judgements supporting deferred tax assets are described in Note 7.

The recognition of deferred tax assets is sensitive to estimates of future cash flows projected for periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of cash flows thereafter, on which forecasts of future taxable profit are based, and which affect the expected recovery periods and the pattern of utilisation of tax losses and tax credits. In particular there is estimation uncertainty relating to the recognition of deferred tax on the post-1 April 2017 tax losses of HSBC Holdings plc. See Note 7 for further detail.

 

 

(m)  Provisions, contingent liabilities and guarantees

Provisions

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.

Critical accounting estimates and judgements

The recognition and measurement of provisions requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below:

 

 

• Determining whether a present obligation exists. Professional advice is taken on the assessment of litigation and similar obligations.

• Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous estimates as appropriate. At more advanced stages, it is typically easier to make estimates around a better defined set of possible outcomes.

• Provisions for legal proceedings and regulatory matters remain very sensitive to the assumptions used in the estimate. There could be a wider range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions because of the diverse nature and circumstances of such matters and the wide range of uncertainties involved.

 

Contingent liabilities, contractual commitments and guarantees 

Contingent liabilities

Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to legal proceedings or regulatory matters, are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.

Financial guarantee contracts

Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable.

HSBC Holdings has issued financial guarantees and similar contracts to other Group entities. HSBC elects to account for certain guarantees as insurance contracts in HSBC Holdings' financial statements, in which case they are measured and recognised as insurance liabilities. This election is made on a contract-by-contract basis, and is irrevocable.

(n)  Impairment of non-financial assets

Software under development is tested for impairment at least annually. Other non-financial assets are property, plant and equipment, intangible assets (excluding goodwill) and right-of-use assets. They are tested for impairment at the individual asset level when there is indication of impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition, impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be the principal operating legal entities divided by global business.

Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying value of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs (see Note 21).

When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU.

Impairment loss recognised in prior periods for non-financial assets is reversed when there has been a change in the estimate used to determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior periods.

Critical accounting estimates and judgements

The review of goodwill and other non-financial assets for impairment reflects management's best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as described in the Critical accounting estimates and judgements in Note 1.2(a).

 

 

2

Net fee income

 

Net fee income by global business

 

2021

 

Wealth and

Personal

Banking

Commercial

Banking

Global

Banking and

Markets

Corporate

Centre

Total

 

$m

$m

$m

$m

$m

Funds under management

  1,984 

  126 

  546 

  - 

  2,656 

Cards

  1,949 

  240 

  23 

  1 

  2,213 

Credit facilities

  103 

  833 

  690 

  1 

  1,627 

Broking income

  863 

  69 

  669 

  - 

  1,601 

Account services

  429 

  677 

  340 

  6 

  1,452 

Unit trusts

  1,065 

  23 

  - 

  - 

  1,088 

Underwriting

  4 

  6 

  1,009 

  (2)

  1,017 

Global custody

  167 

  24 

  787 

  - 

  978 

Remittances

  75 

  357 

  343 

  - 

  775 

Imports/exports

  1 

  474 

  145 

  - 

  620 

Insurance agency commission

  324 

  17 

  - 

  - 

  341 

Other

  1,305 

  1,077 

  2,503 

  (2,465)

  2,420 

Fee income

  8,269 

  3,923 

  7,055 

  (2,459)

  16,788 

Less: fee expense

  (2,375)

  (284)

  (3,452)

  2,420 

  (3,691)

Net fee income

  5,894 

  3,639 

  3,603 

  (39)

  13,097 

 

 

 

 

 

 

 

 

 

2020

2019

 

Wealth and

Personal Banking

Commercial

Banking

Global

Banking and

Markets

Corporate

Centre

Total

Total

 

$m

$m

$m

$m

$m

$m

Funds under management

  1,686 

  126

  477

  - 

  2,289 

  2,177 

Cards

  1,564 

  360

  25

  - 

  1,949 

  1,975 

Credit facilities

  93

  740

  626

  - 

  1,459 

  1,618 

Broking income

  862

  61

  616

  - 

  1,539 

  1,057 

Account services

  431

  598

  264

  - 

  1,293 

  2,003 

Unit trusts

  881

  18

  - 

  - 

  899

  1,035 

Underwriting

  5

  9

  1,002 

  (1)

  1,015 

  829

Global custody

  189

  22

  723

  - 

  934

  717

Remittances

  77

  313

  288

  (1)

  677

  747

Imports/exports

  - 

  417

  160

  - 

  577

  662

Insurance agency commission

  307

  17

  1

  - 

  325

  377

Other

  1,123 

  893

  2,369 

  (2,290)

  2,095 

  2,242 

Fee income

  7,218 

  3,574 

  6,551 

  (2,292)

  15,051 

  15,439 

Less: fee expense

  (1,810)

  (349)

  (3,284)

  2,266 

  (3,177)

  (3,416)

Net fee income

  5,408 

  3,225 

  3,267 

  (26)

  11,874 

  12,023 

 

Net fee income included $6,742m of fees earned on financial assets that were not at fair value through profit or loss, other than amounts included in determining the effective interest rate (2020: $5,858m; 2019: $6,647m), $1,520m of fees payable on financial liabilities that were not at fair value through profit or loss, other than amounts included in determining the effective interest rate (2020: $1,260m; 2019: $1,450m), $3,849m of fees earned on trust and other fiduciary activities (2020: $3,426m; 2019: $3,110m) and $305m of fees payable relating to trust and other fiduciary activities (2020: $267m; 2019: $237m).

 

3

Net income from financial instruments measured at fair value through profit or loss

 

 

2021

2020

2019

 

$m

$m

$m

Net income/(expense) arising on:

 

 

 

Net trading activities

  6,668 

  11,074 

  16,121 

Other instruments managed on a fair value basis

  1,076 

  (1,492)

  (5,890)

Net income from financial instruments held for trading or managed on a fair value basis

  7,744 

  9,582 

  10,231 

Financial assets held to meet liabilities under insurance and investment contracts

  4,134 

  2,481 

  3,830 

Liabilities to customers under investment contracts

  (81)

  (400)

  (352)

Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss

  4,053 

  2,081 

  3,478 

Derivatives managed in conjunction with HSBC's issued debt securities

  (2,811)

  2,619 

  2,561 

Other changes in fair value

  2,629 

  (2,388)

  (2,471)

Changes in fair value of designated debt and related derivatives1

  (182)

  231

  90

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

  798 

  455

  812

Year ended 31 Dec

  12,413 

  12,349 

  14,611 

1  The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

 

 

HSBC Holdings

 

2021

2020

2019

 

$m

$m

$m

Net income/(expense) arising on:

 

 

 

-  trading activities

  87 

  (336)

  (559)

-  other instruments managed on a fair value basis

  23 

  1,137 

  2,036 

Net income from financial instruments held for trading or managed on a fair value basis

  110 

  801

  1,477 

Derivatives managed in conjunction with HSBC Holdings-issued debt securities

  (625)

  694

  764

Other changes in fair value

  974 

  (1,020)

  (1,124)

Changes in fair value of designated debt and related derivatives

  349 

  (326)

  (360)

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

  (420)

  1,141 

  1,659 

Year ended 31 Dec

  39 

  1,616 

  2,776 

 

 

4

Insurance business

 

Net insurance premium income

 

Non-linked

insurance

 Linked life

insurance

Investment

contracts with

DPF1

Total

 

$m

$m

$m

$m

Gross insurance premium income

  8,529 

  1,027 

  1,873 

  11,429 

Reinsurers' share of gross insurance premium income

  (555)

  (4)

  - 

  (559)

Year ended 31 Dec 2021

  7,974 

  1,023 

  1,873 

  10,870 

 

 

 

 

 

Gross insurance premium income

  8,321 

  579

  1,563 

  10,463 

Reinsurers' share of gross insurance premium income

  (362) 

  (8) 

  - 

  (370) 

Year ended 31 Dec 2020

  7,959 

  571

  1,563 

  10,093 

 

 

 

 

 

Gross insurance premium income

  9,353 

  489

  2,266 

  12,108 

Reinsurers' share of gross insurance premium income

  (1,465) 

  (7) 

  - 

  (1,472) 

Year ended 31 Dec 2019

  7,888 

  482

  2,266 

  10,636 

1  Discretionary participation features.

 

Net insurance claims and benefits paid and movement in liabilities to policyholders

 

Non-linked

insurance

Linked life

insurance

Investment

contracts with

DPF1

Total

 

$m

$m

$m

$m

Gross claims and benefits paid and movement in liabilities

  10,474 

  1,134 

  3,332 

  14,940 

-  claims, benefits and surrenders paid

  2,929 

  1,023 

  2,142 

  6,094 

-  movement in liabilities

  7,545 

  111 

  1,190 

  8,846 

Reinsurers' share of claims and benefits paid and movement in liabilities

  (543)

  (9)

  - 

  (552)

-  claims, benefits and surrenders paid

  (343)

  (7)

  - 

  (350)

-  movement in liabilities

  (200)

  (2)

  - 

  (202)

Year ended 31 Dec 2021

  9,931 

  1,125 

  3,332 

  14,388 

 

 

 

 

 

Gross claims and benefits paid and movement in liabilities

  10,050 

  1,112 

  1,853 

  13,015 

-  claims, benefits and surrenders paid

  3,695 

  900

  2,083 

  6,678 

-  movement in liabilities

  6,355 

  212

  (230) 

  6,337 

Reinsurers' share of claims and benefits paid and movement in liabilities

  (366) 

  (4) 

  - 

  (370) 

-  claims, benefits and surrenders paid

  (430) 

  (10) 

  - 

  (440) 

-  movement in liabilities

  64

  6

  - 

  70

Year ended 31 Dec 2020

  9,684 

  1,108 

  1,853 

  12,645 

 

 

 

 

 

Gross claims and benefits paid and movement in liabilities

  11,305 

  1,217 

  3,810 

  16,332 

-  claims, benefits and surrenders paid

  3,783 

  900

  1,921 

  6,604 

-  movement in liabilities

  7,522 

  317

  1,889 

  9,728 

Reinsurers' share of claims and benefits paid and movement in liabilities

  (1,402) 

  (4) 

  - 

  (1,406) 

-  claims, benefits and surrenders paid

  (411) 

  (17) 

  - 

  (428) 

-  movement in liabilities

  (991) 

  13

  - 

  (978) 

Year ended 31 Dec 2019

  9,903 

  1,213 

  3,810 

  14,926 

1  Discretionary participation features.

1 

 

Liabilities under insurance contracts

 

 Non-linked

insurance

 Linked life

insurance

Investment

contracts with

DPF1

Total

 

$m

$m

$m

$m

Gross liabilities under insurance contracts at 1 Jan 2021

  72,464 

  6,449 

  28,278 

  107,191 

Claims and benefits paid

  (2,929)

  (1,023)

  (2,142)

  (6,094)

Increase in liabilities to policyholders

  10,474 

  1,134 

  3,332 

  14,940 

Exchange differences and other movements2

  (534)

  (47)

  (2,711)

  (3,292)

Gross liabilities under insurance contracts at 31 Dec 2021

  79,475 

  6,513 

  26,757 

  112,745 

Reinsurers' share of liabilities under insurance contracts

  (3,638)

  (30)

  - 

  (3,668)

Net liabilities under insurance contracts at 31 Dec 2021

  75,837 

  6,483 

  26,757 

  109,077 

 

 

 

 

 

Gross liabilities under insurance contracts at 1 Jan 2020

  65,324 

  6,151 

  25,964 

  97,439 

Claims and benefits paid

  (3,695) 

  (900) 

  (2,083) 

  (6,678) 

Increase in liabilities to policyholders

  10,050 

  1,112 

  1,853 

  13,015 

Exchange differences and other movements2

  785

  86

  2,544 

  3,415 

Gross liabilities under insurance contracts at 31 Dec 2020

  72,464 

  6,449 

  28,278 

  107,191 

Reinsurers' share of liabilities under insurance contracts

  (3,434) 

  (14) 

  - 

  (3,448) 

Net liabilities under insurance contracts at 31 Dec 2020

  69,030 

  6,435 

  28,278 

  103,743 

1  Discretionary participation features.

2  'Exchange differences and other movements' includes movements in liabilities arising from net unrealised investment gains recognised in other comprehensive income.

The key factors contributing to the movement in liabilities to policyholders included movements in the market value of assets supporting policyholder liabilities, death claims, surrenders, lapses, new business, the declaration of bonuses and other amounts attributable to policyholders.

 

5

Employee compensation and benefits

 

 

 

 

 

 

2021

2020

2019

 

$m

$m

$m

Employee compensation and benefits

  18,742 

  18,076 

  18,002 

Capitalised wages and salaries

  870 

  1,320 

  1,475 

Gross employee compensation and benefits for the year ended 31 Dec

  19,612 

  19,396 

  19,477 

 

 

 

 

Consists of:

 

 

 

Wages and salaries

  17,072 

  17,072 

  17,056 

Social security costs

  1,503 

  1,378 

  1,472 

Post-employment benefits

  1,037 

  946

  949

Year ended 31 Dec

  19,612 

  19,396 

  19,477 

 

 

 

 

Employee compensation and benefits are presented net of software capitalisation costs in the income statement. During 2021, the allocation methodology for internally capitalised software costs between 'employee compensation and benefits' and 'general administrative expenses' has been updated to better reflect the underlying costs being capitalised.

 

Average number of persons employed by HSBC during the year by global business

 

2021

2020

2019

Wealth and Personal Banking

  138,026 

  144,615 

  148,680 

Commercial Banking

  44,992 

  45,631 

  46,584 

Global Banking and Markets

  48,179 

  49,055 

  51,313 

Corporate Centre

  359 

  411

  478

Year ended 31 Dec

  231,556 

  239,712 

  247,055 

 

 

 

 

 

Average number of persons employed by HSBC during the year by geographical region

 

2021

2020

2019

Europe

  60,919 

  64,886 

  66,392 

Asia

  127,673 

  129,923 

  133,624 

Middle East and North Africa

  9,329 

  9,550 

  9,798 

North America

  13,845 

  15,430 

  16,615 

Latin America

  19,790 

  19,923 

  20,626 

Year ended 31 Dec

  231,556 

  239,712 

  247,055 

 

 

 

 

 

 

Reconciliation of total incentive awards granted to income statement charge

 

2021

2020

2019

 

$m

$m

$m

Total incentive awards approved for the current year

  3,495 

  2,659 

  3,341 

Less: deferred bonuses awarded, expected to be recognised in future periods

  (379)

  (239)

  (337)

Total incentives awarded and recognised in the current year

  3,116 

  2,420 

  3,004 

Add: current year charges for deferred bonuses from previous years

  270 

  286

  327

Other

  4 

  2

  (55)

Income statement charge for incentive awards

  3,390 

  2,708 

  3,276 

 

 

Share-based payments

'Wages and salaries' includes the effect of share-based payments arrangements, of which $467m was equity settled (2020: $434m; 2019: $478m), as follows:

 

2021

2020

2019

 

$m

$m

$m

Conditional share awards

479

411

521

Savings-related and other share award option plans

27

51

30

Year ended 31 Dec

506

462

551

 

 

HSBC share awards

 

 

Deferred share awards (including annual incentive awards, LTI awards delivered in shares) and Group Performance Share Plans ('GPSP')

An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted.

• Deferred awards generally require employees to remain in employment over the vesting period and are generally not subject to performance conditions after the grant date. An exception to these are the LTI awards, which are subject to performance conditions.

• Deferred share awards generally vest over a period of three, five or seven years.

• Vested shares may be subject to a retention requirement post-vesting.

• Awards are subject to malus and clawback provisions.

International Employee Share Purchase Plan ('ShareMatch')

The plan was first introduced in Hong Kong in 2013 and now includes employees based in 28 jurisdictions.

• Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency.

• Matching awards are added at a ratio of one free share for every three purchased (in mainland China matching awards are settled in cash).

• Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months.

 

 

Movement on HSBC share awards

 

2021

2020

 

Number

Number

 

(000s)

(000s)

Conditional share awards outstanding at 1 Jan

  103,473 

  97,055 

Additions during the year

  75,549 

  72,443 

Released in the year

  (63,635)

  (60,673)

Forfeited in the year

  (6,023)

  (5,352)

Conditional share awards outstanding at 31 Dec

  109,364 

  103,473 

Weighted average fair value of awards granted ($)

  6.49 

  7.28 

 

 

 

 

 

HSBC share option plans

 

 

Savings-related share option plans ('Sharesave')

• From 2014, employees eligible for the UK plan could save up to £500 per month with the option to use the savings to acquire shares.

• These are generally exercisable within six months following either the third or fifth anniversary of the commencement of a three-year or five-year contract, respectively.

• The exercise price is set at a 20% (2020: 20%) discount to the market value immediately preceding the date of invitation.

 

Calculation of fair values

The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant.

 

Movement on HSBC share option plans

 

Savings-related

share option plans

 

Number

WAEP1

 

(000s)

£

Outstanding at 1 Jan 2021

  130,953 

  2.97 

Granted during the year2

  15,410 

  3.15 

Exercised during the year3

  (3,878) 

  3.80 

Expired during the year

  (11,502) 

  3.53 

Forfeited during the year

  (7,786) 

  3.97 

Outstanding at 31 Dec 2021

  123,197 

  2.85 

- of which exercisable

  4,949 

  4.05 

Weighted average remaining contractual life (years)

3.02

 

 

 

 

Outstanding at 1 Jan 2020

  65,060 

  4.81 

Granted during the year2

  111,469 

  2.63 

Exercised during the year3

  (1,387) 

  4.48 

Expired during the year

  (43,032) 

  4.81 

Forfeited during the year

  (1,158) 

  4.88 

Outstanding at 31 Dec 2020

  130,953 

  2.97 

- of which exercisable

  8,170 

  4.50 

Weighted average remaining contractual life (years)

3.68

 

1  Weighted average exercise price.

2  The weighted average fair value of options granted during the year was $0.85 (2020: $0.47).

3  The weighted average share price at the date the options were exercised was $5.87 (2020: $7.08).

 

Post-employment benefit plans

The Group operates pension plans throughout the world for its employees. 'Pension risk management processes' on page 192 contains details of the policies and practices associated with these pension plans, some of which are defined benefit plans. The largest defined benefit plan is the HBUK section of the HSBC Bank (UK) Pension Scheme ('the principal plan'), created as a result of the HSBC Bank (UK) Pension Scheme being fully sectionalised in 2018 to meet the requirements of the Banking Reform Act.

HSBC holds on its balance sheet the net surplus or deficit, which is the difference between the fair value of plan assets and the discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, HSBC has considered its current right to obtain a future refund or a reduction in future contributions together with the rights of third parties such as trustees.

The principal plan

The principal plan has a defined benefit section and a defined contribution section. The defined benefit section was closed to future benefit accrual in 2015, with defined benefits earned by employees at that date continuing to be linked to their salary while they remain employed by HSBC. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the operation of the plan. Its assets are held separately from the assets of the Group.

The investment strategy of the plan is to hold the majority of assets in bonds, with the remainder in a diverse range of investments. It also includes some interest rate swaps to reduce interest rate risk, inflation swaps to reduce inflation risk and longevity swaps to reduce the impact of longer life expectancy.

The latest funding valuation of the plan at 31 December 2019 was carried out by Colin G Singer of Willis Towers Watson Limited, who is a Fellow of the UK Institute and Faculty of Actuaries, using the projected unit credit method. At that date, the market value of the plan's assets was £31.1bn ($41.1bn) and this exceeded the value placed on its liabilities on an ongoing basis by £2.5bn ($3.3bn), giving a funding level of 109%. These figures include defined contribution assets amounting to £2.4bn ($3.2bn). The main differences between the assumptions used for assessing the defined benefit liabilities for this funding valuation and those used for IAS 19 are more prudent assumptions for discount rate, inflation rate and life expectancy. The next funding valuation will have an effective date of 31 December 2022.

Although the plan was in surplus at the valuation date, HSBC continued to make separately committed lump sum contributions and the final such contribution of £160m ($218m) was paid in 2021. The main employer of the principal plan is HSBC UK Bank plc, with additional support from HSBC Holdings plc. The HSBC Bank (UK) Pension Scheme is fully sectionalised and no entities outside the ring fence participate in the HBUK section.

 

The actuary also assessed the value of the liabilities if the plan were to have been stopped and an insurance company asked to secure all future pension payments. This is generally larger than the amount needed on the ongoing basis described above because an insurance company would use more prudent assumptions and include an explicit allowance for the future administrative expenses of the plan. Under this approach, the amount of assets needed was estimated to be £33bn ($44bn) at 31 December 2019.

 

Guaranteed minimum pension equalisation

Following a judgment issued by the High Court of Justice of England and Wales in 2018, we estimated the financial effect of equalising benefits in respect of guaranteed minimum pension ('GMP') equalisation, and any potential conversion of GMPs into non-GMP benefits, to be an approximate 0.9% increase in the principal plan's liabilities, or £187m ($239m). This was recognised in the income statement in 2018. A further judgment by the High Court on 20 November 2020 ruled that GMPs should also be equalised for those who had previously transferred benefits from the principal plan to another arrangement, with £13m ($17m) consequently being recognised in 2020. We continue to assess the impact of GMP equalisation.

 

Income statement charge

 

2021

2020

2019

 

$m

$m

$m

Defined benefit pension plans

  243 

  146

  176

Defined contribution pension plans

  767 

  775

  758

Pension plans

  1,010 

  921

  934

Defined benefit and contribution healthcare plans

  27 

  25

  15

Year ended 31 Dec

  1,037 

  946

  949

 

 

Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans

 

Fair value of

plan assets

Present value of

defined benefit

obligations

Effect of

limit on plan

surpluses

Total

 

$m

$m

$m

$m

Defined benefit pension plans

  51,431 

  (42,277)

  (23)

  9,131 

Defined benefit healthcare plans

  103 

  (572)

  - 

  (469)

At 31 Dec 2021

  51,534 

  (42,849)

  (23)

  8,662 

Total employee benefit liabilities (within Note 26 'Accruals, deferred income and other liabilities')

 

 

 

  (1,607)

Total employee benefit assets (within Note 22 'Prepayments, accrued income and other assets')

 

 

 

  10,269 

 

 

 

 

 

Defined benefit pension plans

  52,990 

  (43,995) 

  (44) 

  8,951 

Defined benefit healthcare plans

  114

  (639) 

  - 

  (525) 

At 31 Dec 2020

  53,104 

  (44,634) 

  (44) 

  8,426 

Total employee benefit liabilities (within Note 26 'Accruals, deferred income and other liabilities')

 

 

 

  (2,025) 

Total employee benefit assets (within Note 22 'Prepayments, accrued income and other assets')

 

 

 

  10,450 

 

 

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2021 amounted to $30m (2020: $56m). The average number of persons employed during 2021 was 54 (2020: 59). A small number of employees  are members of defined benefit pension plans. These employees are members of the HSBC Bank (UK) Pension Scheme. HSBC Holdings pays contributions to such plan for its own employees in accordance with the schedules of contributions determined by the trustees of the plan and recognises these contributions as an expense as they fall due.

 

 

Defined benefit pension plans

 

Net asset/(liability) under defined benefit pension plans

 

Fair value of plan assets

Present value of defined benefit obligations

Effect of the asset ceiling

Net defined benefit asset/(liability)

 

Principal1

plan

Other
plans

Principal1

plan

Other
plans

Principal1

plan

Other
plans

Principal1

plan

Other
plans

 

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2021

  42,505 

  10,485 

  (33,005)

  (10,990)

  - 

  (44)

  9,500 

  (549)

Service cost

  - 

  - 

  (55)

  (276)

  - 

  - 

  (55)

  (276)

-  current service cost

  - 

  - 

  (14)

  (206)

  - 

  - 

  (14)

  (206)

-  past service cost and gains/(losses) from settlements

  - 

  - 

  (41)

  (70)

  - 

  - 

  (41)

  (70)

Net interest income/(cost) on the net defined benefit asset/(liability)

  613 

  172 

  (473)

  (174)

  - 

  (1)

  140 

  (3)

Remeasurement effects recognised in other comprehensive income

  (377)

  7 

  (271)

  471 

  - 

  22 

  (648)

  500 

-  return on plan assets (excluding interest income)

  (377)

  7 

  - 

  - 

  - 

  - 

  (377)

  7 

-  actuarial gains/(losses) financial assumptions

  - 

  - 

  611 

  315 

  - 

  - 

  611 

  315 

-  actuarial gains/(losses) demographic assumptions

  - 

  - 

  (447)

  64 

  - 

  - 

  (447)

  64 

-  actuarial gains/(losses) experience adjustments

  - 

  - 

  (435)

  92 

  - 

  - 

  (435)

  92 

-  other changes

  - 

  - 

  - 

  - 

  - 

  22 

  - 

  22 

Exchange differences

  (361)

  (94)

  283 

  138 

  - 

  - 

  (78)

  44 

Benefits paid

  (1,396)

  (645)

  1,396 

  712 

  - 

  - 

  - 

  67 

Other movements2

  400 

  122 

  (130)

  97 

  - 

  - 

  270 

  219 

At 31 Dec 2021

  41,384 

  10,047 

  (32,255)

  (10,022)

  - 

  (23)

  9,129 

  2 

 

 

 

 

 

 

 

 

 

At 1 Jan 2020

  37,874 

  9,693 

  (30,158) 

  (10,424) 

  - 

  (16) 

  7,716 

  (747) 

Service cost

  - 

  - 

  (68) 

  (172) 

  - 

  - 

  (68) 

  (172) 

-  current service cost

  - 

  - 

  (28) 

  (184) 

  - 

  - 

  (28) 

  (184) 

-  past service cost and losses from settlements

  - 

  - 

  (40) 

  12

  - 

  - 

  (40) 

  12

Net interest income/(cost) on the net defined benefit asset/(liability)

  726

  233

  (575) 

  (245) 

  - 

  - 

  151

  (12) 

Remeasurement effects recognised in other comprehensive income

  3,173 

  879

  (2,118) 

  (547) 

  - 

  (26) 

  1,055 

  306

-  return on plan assets (excluding interest income)

  3,173 

  692

  - 

  - 

  - 

  - 

  3,173 

  692

-  actuarial gains/(losses) financial assumptions

  - 

  - 

  (3,179) 

  (564) 

  - 

  - 

  (3,179) 

  (564) 

-  actuarial gains/(losses) demographic assumptions

  - 

  - 

  86

  49

  - 

  - 

  86

  49

-  actuarial gains/(losses) experience adjustments

  - 

  - 

  975

  87

  - 

  - 

  975

  87

-  other changes

  - 

  187

  - 

  (119) 

  - 

  (26) 

  - 

  42

Exchange differences

  1,446 

  249

  (1,100) 

  (387) 

  - 

  (2) 

  346

  (140) 

Benefits paid

  (1,148) 

  (652) 

  1,148 

  727

  - 

  - 

  - 

  75

Other movements2

  434

  83

  (134) 

  58

  - 

  - 

  300

  141

At 31 Dec 2020

  42,505 

  10,485 

  (33,005) 

  (10,990) 

  - 

  (44) 

  9,500 

  (549) 

1  For further details of the principal plan, see page 333.

2  Other movements include contributions by HSBC, contributions by employees, administrative costs and taxes paid by plan.

 

HSBC expects to make $145m of contributions to defined benefit pension plans during 2022. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

Benefits expected to be paid from plans

 

2022

2023

2024

2025

2026

2027-2031

 

$m

$m

$m

$m

$m

$m

The principal plan1,2

  1,444 

  1,491 

  1,542 

  1,592 

  1,644 

  9,070 

Other plans1

  474

  473

  460

  459

  453

  2,325 

1  The duration of the defined benefit obligation is 17.3 years for the principal plan under the disclosure assumptions adopted (2020: 17.4 years) and 12.7 years for all other plans combined (2020: 13.5 years).

2  For further details of the principal plan, see page 333.

 

Fair value of plan assets by asset classes

 

 

 

31 Dec 2021

31 Dec 2020

 

 

 

Value

Quoted

market price

in active

market

No quoted

market price

in active

market

Thereof
HSBC1

Value

Quoted

market price

in active

market

No quoted

market price

in active

market

Thereof
HSBC1

 

 

 

$m

$m

$m

$m

$m

$m

$m

$m

 

 

The principal plan2

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets

  41,384 

  36,270 

  5,114 

  1,037 

  42,505 

  37,689 

  4,816 

  973

 

 

-  equities3

  197 

  5 

  192 

  - 

  268

  7

  261

  - 

 

 

-  bonds4

  36,295 

  35,612 

  683 

  - 

  36,198 

  35,479 

  719

  - 

 

 

-  derivatives

  1,864 

  - 

  1,864 

  1,037 

  1,973 

  - 

  1,973 

  973

 

 

-  property

  1,094 

  - 

  1,094 

  - 

  1,106 

  - 

  1,106 

  - 

 

 

-  other5

  1,934 

  653 

  1,281 

  - 

  2,960 

  2,203 

  757

  - 

 

 

Other plans

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets

  10,047 

  8,248 

  1,799 

  52 

  10,485 

  9,512 

  973

  54

 

 

-  equities

  892 

  668 

  224 

  5 

  1,484 

  1,069 

  415

  3

 

 

-  bonds

  7,080 

  6,490 

  590 

  5 

  7,624 

  7,143 

  481

  10

 

 

-  derivatives

  7 

  (13)

  20 

  - 

  (57)

  - 

  (57)

  - 

 

 

-  property

  123 

  119 

  4 

  - 

  192

  157

  35

  - 

 

 

-  other

  1,945 

  984 

  961 

  42 

  1,242 

  1,143 

  99

  41

 

 

1  The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 35.

2  For further details on the principal plan, see page 333.

3  Includes $192m (2020: $261m) in relation to private equities.

4  Principal plan bonds includes fixed income bonds of $18,315m (2020: $17,730m) and index-linked bonds of $18,160m (2020: $18,468m).

5  Other includes $0m (2020: $696m) of pooled investment vehicles with quoted underlying assets and $1,281m (2020: $757m) of pooled investment vehicles with unquoted underlying assets.

 

Post-employment defined benefit plans' principal actuarial financial assumptions

HSBC determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high-quality (AA-rated or equivalent) debt instruments with maturities consistent with those of the defined benefit obligations.

 

Key actuarial assumptions for the principal plan1

 

Discount rate

Inflation rate (RPI)2

Inflation rate (CPI)2

Rate of increase for pensions

Rate of pay increase

 

%

%

%

%

%

UK

 

 

 

 

 

At 31 Dec 2021

  1.90 

  3.45 

  3.20 

  3.30 

  3.45 

At 31 Dec 2020

  1.45 

  3.05 

  2.50 

  3.00 

  2.75 

1  For further details on the principal plan, see page 333.

2  Due to the significant difference between short-term and long-term inflation expectations that has developed over 2021, HSBC UK has changed the methodology of setting inflation-related assumptions to fully and separately reflect how benefits are linked to RPI inflation and CPI inflation respectively. For example, the revaluation of deferred pensions is driven by CPI inflation expectations in the short to medium term, whereas increases to pensions in payment are driven by RPI inflation expectations over the long term.

 

Mortality tables and average life expectancy at age 60  for the principal plan1

 

Mortality

table

Life expectancy at age 60 for

a male member currently:

Life expectancy at age 60 for

a female member currently:

 

 

Aged 60

Aged 40

Aged 60

Aged 40

UK

 

 

 

 

 

At 31 Dec 2021

SAPS S32

27.3

28.8

28.5

30.1

At 31 Dec 2020

SAPS S32

27.0

28.5

28.1

29.7

1  For further details of the principal plan, see page 333.

2  Self-administered pension scheme ('SAPS') S3 table, with different tables and multipliers adopted based on gender, pension amount and member status, reflecting the Scheme's actual mortality experience.  Improvements are projected in accordance with the Continuous Mortality Investigation's CMI 2020 core projection model with an initial addition  to  improvement of 0.25% per annum and a long-term rate of improvement of 1.25% per annum.

 

The effect of changes in key assumptions on the principal plan1

 

Impact on HBUK section of the

HSBC Bank (UK) Pension Scheme obligation2

 

Financial impact of increase

Financial impact of decrease

 

2021

2020

2021

2020

 

$m

$m

$m

$m

Discount rate - increase/decrease of 0.25%

  (1,337)

  (1,383)

  1,425 

  1,475 

Inflation rate (RPI and CPI) - increase/decrease of 0.25%

  1,211 

  871

  (980)

  (830)

Pension payments and deferred pensions - increase/decrease of 0.25%

  1,267 

  1,307 

  (1,177)

  (1,222)

Pay - increase/decrease of 0.25%

  20 

  60

  (20)

  (59)

Change in mortality - increase of 1 year

  1,387 

  1,453 

N/A

N/A

1  For further details of the principal plan, see page 333.

2  Sensitivities allow for HSBC UK's convention of rounding pension assumptions to the nearest 0.05%.

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this in unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit asset recognised in the balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared with the prior period.

 

Directors' emoluments

Details of Directors' emoluments, pensions and their interests are disclosed in the Directors' remuneration report on page 254.

 

6

Auditor's remuneration

 

 

2021

2020

2019

 

$m

$m

$m

Audit fees payable to PwC1

88.1

92.9

85.2

Other audit fees payable

2.0

1.0

0.9

Year ended 31 Dec

90.1

93.9

86.1

 

 

Fees payable by HSBC to PwC

 

2021

2020

2019

 

$m

$m

$m

Fees for HSBC Holdings' statutory audit2

  19.5

  21.9 

  15.7 

Fees for other services provided to HSBC

  109.9

  108.3 

  95.0 

-  audit of HSBC's subsidiaries

  68.6

  71.0 

  69.5 

-  audit-related assurance services3

  18.7

  17.2 

  10.0 

-  other assurance services4,5

  22.6

  20.1 

  12.2 

-  taxation compliance services

  -

  - 

  1.6 

-  other non-audit services4

  -

  - 

  1.7 

Year ended 31 Dec

  129.4

  130.2 

  110.7 

1  Audit fees payable to PwC in the current year include adjustments made to the prior year audit fee after finalisation of the 2020 financial statements.

2  Fees payable to PwC for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They include amounts payable for services relating to the consolidation returns of HSBC Holdings' subsidiaries, which are clearly identifiable as being in support of the Group audit opinion.

3  Including services for assurance and other services that relate to statutory and regulatory filings, including interim reviews.

4  Including permitted services relating to attestation reports on internal controls of a service organisation primarily prepared for and used by third-party end user, including comfort letters.

5  Includes reviews of PRA regulatory reporting returns. 

No fees were payable by HSBC to PwC as principal auditor for the following types of services: internal audit services and services related to litigation, recruitment and remuneration.

 

Fees payable by HSBC's associated pension schemes to PwC

 

 

2021

2020

2019

 

 

$000

$000

$000

Audit of HSBC's associated pension schemes

 

  382 

  316

  250

Year ended 31 Dec

 

  382 

  316

  250

 

No fees were payable by HSBC's associated pension schemes to PwC as principal auditor for the following types of services: internal audit services, other assurance services, services related to corporate finance transactions, valuation and actuarial services, litigation, recruitment and remuneration, and information technology.

In addition to the above, the estimated fees paid to PwC by third parties associated with HSBC amounted to $6.3m (2020: $12.3m; 2019: $17.2m). In these cases, HSBC was connected with the contracting party and may therefore have been involved in appointing PwC. These fees arose from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns that borrow from HSBC.

Fees payable for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for the Group.

 

7

Tax

 

 

Tax expense

 

2021

2020

2019

 

$m

$m

$m

Current tax1

  3,250 

  2,700 

  3,768 

-  for this year

  3,182 

  2,883 

  3,689 

-  adjustments in respect of prior years

  68 

  (183)

  79

Deferred tax

  963 

  (22)

  871

-  origination and reversal of temporary differences

  874 

  (341)

  684

-  effect of changes in tax rates

  132 

  58

  (11)

-  adjustments in respect of prior years

  (43)

  261

  198

Year ended 31 Dec2

  4,213 

  2,678 

  4,639 

1  Current tax included Hong Kong profits tax of $813m (2020: $888m; 2019: $1,413m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2020: 16.5%; 2019: 16.5%).

2  In addition to amounts recorded in the income statement, a tax charge of $7m (2020: charge of $7m) was recorded directly to equity.

 

Tax reconciliation

The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:

 

2021

2020

2019

 

 

 

$m

%

$m

%

$m

%

 

 

Profit before tax

  18,906 

 

  8,777 

 

  13,347 

 

 

 

Tax expense

 

 

 

 

 

 

 

 

Taxation at UK corporation tax rate of 19.00%

  3,592 

  19.0 

  1,668 

  19.0 

  2,536 

  19.0 

 

 

Impact of differently taxed overseas profits in overseas locations

  280 

  1.5 

  178

  2.0 

  253

  1.9 

 

 

 UK banking surcharge

  332 

  1.8 

  (113)

  (1.3)

  29

  0.2 

 

 

Items increasing tax charge in 2021:

 

 

 

 

 

 

 

 

-  impact of differences between French tax basis and IFRSs

  434 

  2.3 

  - 

  - 

  - 

  - 

 

 

-  local taxes and overseas withholding taxes

  360 

  1.9 

  228

  2.6 

  484

  3.6 

 

 

-  UK tax losses not recognised

  294 

  1.6 

  444

  5.1 

  364

  2.7 

 

 

-  other permanent disallowables

  254 

  1.3 

  322

  3.6 

  481

  3.6 

 

 

-  non-deductible goodwill write-down

  178 

  0.9 

  - 

  - 

  1,421 

  10.7 

 

 

-  impact of changes in tax rates

  132 

  0.7 

  58

  0.6 

  (11)

  (0.1)

 

 

-  bank levy

  93 

  0.5 

  202

  2.3 

  184

  1.4 

 

 

-  impacts of hyperinflation

  68 

  0.4 

  65

  0.7 

  29

  0.2 

 

 

-  adjustments in respect of prior period liabilities

  25 

  0.1 

  78

  0.9 

  277

  2.1 

 

 

-  non-deductible regulatory settlements

  2 

  - 

  33

  0.4 

  5

  - 

 

 

Items reducing tax charge in 2021:

 

 

 

 

 

 

 

 

-  non-taxable income and gains

  (641)

  (3.4)

  (515)

  (5.8)

  (844)

  (6.3)

 

 

-  tax impact of planned sale of French retail banking business

  (434)

  (2.3)

  - 

  - 

  - 

  - 

 

 

-  effect of profits in associates and joint ventures

  (414)

  (2.2)

  (250)

  (2.8)

  (467)

  (3.5)

 

 

-  deductions for AT1 coupon payments

  (270)

  (1.4)

  (310)

  (3.5)

  (263)

  (2.0)

 

 

-  non-UK movements in unrecognised deferred tax

  (67)

  (0.4)

  608

  6.9 

  12

  0.1 

 

 

-  non-deductible UK customer compensation

  (5)

  - 

  (18)

  (0.2)

  382

  2.9 

 

 

-  non-taxable gain on dilution of shareholding in SABB

  - 

  - 

  - 

  - 

  (181)

  (1.3)

 

 

-  other items

  - 

  - 

  - 

  - 

  (52)

  (0.4)

 

 

Year ended 31 Dec

  4,213 

  22.3 

  2,678 

  30.5 

  4,639 

  34.8 

 

 

 

 

The Group's profits are taxed at different rates depending on the country or territory in which the profits arise. The key applicable tax rates for 2021 include Hong Kong (16.5%), the US (21%) and the UK (19%). If the Group's profits were taxed at the statutory rates of the countries in which the profits arose, then the tax rate for the year would have been 22.3% (2020: 19.7%). The effective tax rate for the year of 22.3% was lower than in the previous year (2020: 30.5%). The impact of non-recognition of deferred tax was smaller in 2021 than in 2020, which decreased the effective tax rate by 10.8%. This was partly offset by changes in the geographical composition of profits, which resulted in tax at applicable local statutory rates being 2.5% greater for 2020 than for 2021.

The signing of a framework agreement for the planned sale of the French retail banking business resulted in a tax deduction (tax value of $434m) for a provision for loss on disposal, which was recorded in the French tax return. A deferred tax liability of the same amount arises as a consequence of the temporary difference between the French tax basis and IFRSs in respect of this provision.

During 2021, legislation to increase the main rate of UK corporation tax from 19% to 25% from 1 April 2023 was enacted, increasing the Group's 2021 tax charge by $132m due to the remeasurement of deferred tax balances. 

Accounting for taxes involves some estimation because tax law is uncertain and its application requires a degree of judgement, which authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account external advice where appropriate. We do not expect significant liabilities to arise in excess of the amounts provided. HSBC only recognises current and deferred tax assets where recovery is probable.

 

Movement of deferred tax assets and liabilities

 

Loan

impairment

provisions

Unused tax

losses and

tax credits

Derivatives, FVOD1

and other

investments

Insurance

business

Expense

provisions

Fixed assets

Retirement obligations

Other

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

$m

Assets

  1,242 

  1,821 

  548 

  - 

  565 

  901 

  - 

  960 

6,037 

Liabilities

  - 

  - 

  (705)

  (1,622)

  - 

  - 

  (2,306)

  (1,234)

  (5,867)

At 1 Jan 2021

  1,242 

  1,821 

  (157)

  (1,622)

  565 

  901 

  (2,306)

  (274)

  170 

Income statement

  (89)

  161 

  22 

  (43)

  (333)

  (26)

  (336)

  (319)

  (963)

Other comprehensive income

  (5)

  33 

  149 

  - 

  74 

  25 

  (205)

  713 

  784 

Foreign exchange and other adjustments

  14 

  (14)

  (5)

  25 

  (10)

  3 

  28 

  (81)

  (40)

At 31 Dec 2021

  1,162 

  2,001 

  9 

  (1,640)

  296 

  903 

  (2,819)

  39 

  (49)

Assets2

  1,162 

  2,001 

  9 

  - 

  296 

  903 

  109 

  742 

5,222 

Liabilities2

  - 

  - 

  - 

  (1,640)

  - 

  - 

  (2,928)

  (703)

  (5,271)

 

 

 

 

 

 

 

 

 

 

Assets

  983

  1,414 

  979

  - 

  650

  1,002 

  - 

  422

  5,450 

Liabilities

  - 

  - 

  (558) 

  (1,621) 

  - 

  - 

  (1,613) 

  (401) 

  (4,193) 

At 1 Jan 2020

  983

  1,414 

  421

  (1,621) 

  650

  1,002 

  (1,613) 

  21

  1,257 

Income statement

  295

  355

  (274) 

  (32) 

  (81) 

  (112) 

  (190) 

  61

  22

Other comprehensive income

  - 

  - 

  (23) 

  - 

  - 

  - 

  (387) 

  (660) 

  (1,070) 

Foreign exchange and other adjustments

  (36) 

  52

  (281) 

  31

  (4) 

  11

  (116) 

  304

  (39) 

At 31 Dec 2020

  1,242 

  1,821 

  (157) 

  (1,622) 

  565

  901

  (2,306) 

  (274) 

  170

Assets2

  1,242 

  1,821 

  548

  - 

  565

  901

  - 

  960

  6,037 

Liabilities2

  - 

  - 

  (705) 

  (1,622) 

  - 

  - 

  (2,306) 

  (1,234) 

  (5,867) 

1  Fair value of own debt.

2  After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets $4,624m (2020: $4,483m) and deferred tax liabilities $4,673m (2020: $4,313m).

 

In applying judgement in recognising deferred tax assets, management has critically assessed all available information, including future business profit projections and the track record of meeting forecasts. Management's assessment of the likely availability of future taxable profits against which to recover deferred tax assets is based on the most recent financial forecasts approved by management, which cover a five-year period and are extrapolated where necessary, and takes into consideration the reversal of existing taxable temporary differences and past business performance.

The Group's net deferred tax asset of $4.6bn (2020: $4.5bn) included $2.6bn (2020: $2.4bn) of deferred tax assets relating to the US and a net deferred asset of $0.0bn (2020: $0.00) in France.

The net US deferred tax asset of $2.6bn included $1.1bn related to US tax losses that expire in 13 to 17 years. Management expects the US deferred tax asset to be substantially recovered in seven to eight years, with the majority recovered in the first five years.

The net deferred tax asset in France of $0.0bn included $0.4bn related to tax losses which are expected to be substantially recovered within 10 years. 

Following the signing of a framework agreement in 2021 for the planned sale of the French retail banking business, that business is now excluded from our deferred tax analysis as its sale is considered probable. Although the French consolidated tax group recorded a tax loss in both 2020 and 2021, this would have been taxable profit if the effects of the retail banking business and other non-recurring items, mainly related to the restructuring of the European business, were excluded. The French net deferred tax asset is supported by forecasts of taxable profit, also taking into consideration the history of profitability in the remaining businesses. No net deferred tax asset was recognised as at 31 December 2020 as management did not consider there to be convincing evidence of sufficient future taxable profits within the French consolidated tax group to support recognition.

The Group's net deferred tax liability of $4.7bn (2020: $4.3bn) included a net UK deferred tax asset of $0.8bn (2020: $0.6bn), of which $0.2bn related to UK banking tax losses which are expected to be substantially recovered within one year. The net UK deferred tax asset of $0.8bn excludes a $3.0bn deferred tax liability arising on the UK pension scheme surplus, the reversal of which is not taken into account when estimating future taxable profits. The UK deferred tax assets are supported by forecasts of taxable profit, also taking into consideration the history of profitability in the relevant businesses. 

Unrecognised deferred tax

The amount of gross temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was $16.9bn (2020: $15.6bn). This amount included unused UK tax losses of $10.5bn (2020: $9.3bn), of which $5.8bn (2020: $4.3bn) arose after 1 April 2017 and can be recovered against the future taxable profits of any of the Group's UK tax resident subsidiaries. The remaining balance can only be recovered against future taxable profits of HSBC Holdings plc. No deferred tax was recognised on any of these losses due to the absence of convincing evidence regarding the availability of sufficient future taxable profits against which to recover them, taking into account the recent history of taxable losses within the UK group. Deferred tax asset recognition is reassessed at each balance sheet date based on the available evidence. Of the total amounts unrecognised, $10.9bn (2020: $11.5bn) had no expiry date, $0.7bn (2020: $0.7bn) was scheduled to expire within 10 years and the remaining balance is expected to expire after 10 years.

Deferred tax is not recognised in respect of the Group's investments in subsidiaries and branches where HSBC is able to control the timing of remittance or other realisation and where remittance or realisation is not probable in the foreseeable future. The aggregate temporary differences relating to unrecognised deferred tax liabilities arising on investments in subsidiaries and branches is $12.7bn (2020: $12.1bn) and the corresponding unrecognised deferred tax liability was $0.8bn (2020: $0.7bn).

 

8

Dividends

 

 

Dividends to shareholders of the parent company

 

2021

2020

2019

 

Per

share

Total

Settled

in scrip

Per

share

Total

Settled

in scrip

Per

share

Total

Settled

in scrip

 

$

$m

$m

$

$m

$m

$

$m

$m

Dividends paid on ordinary shares

 

 

 

 

 

 

 

 

 

In respect of previous year:

 

 

 

 

 

 

 

 

 

-  fourth interim dividend / interim dividend

  0.15 

  3,059 

  - 

  - 

  - 

  - 

  0.21 

  4,206 

  1,160 

In respect of current year:

 

 

 

 

 

 

 

 

 

-  first interim dividend

  0.07 

  1,421 

  - 

  - 

  - 

  - 

  0.10 

  2,013 

  375

-  second interim dividend

  - 

  - 

  - 

  - 

  - 

  - 

  0.10 

  2,021 

  795

-  third interim dividend

  - 

  - 

  - 

  - 

  - 

  - 

  0.10 

  2,029 

  357

Total

  0.22 

  4,480 

  - 

  - 

  - 

  - 

  0.51 

  10,269 

  2,687 

Total dividends on preference shares classified as equity (paid quarterly)1

  4.99 

  7 

 

  62.00 

  90

 

  62.00 

  90

 

Total coupons on capital securities classified as equity

 

  1,303 

 

 

  1,241 

 

 

  1,324 

 

Dividends to shareholders

 

  5,790 

 

 

  1,331 

 

 

  11,683 

 

1  HSBC Holdings called $1,450m 6.20% non-cumulative US dollar preference shares on 10 December 2020. The security was redeemed and cancelled on 13 January 2021.

 

Total coupons on capital securities classified as equity

 

 

2021

2020

2019

 

 

 

Total

Total

Total

 

First call date

Per security

$m

$m

$m

Perpetual subordinated contingent convertible securities,1,2

 

 

 

 

 

$1,500m issued at 5.625%2

Nov 2019

  $56.250

  - 

  - 

  84

$2,000m issued at 6.875%3

Jun 2021

  $68.750

  69 

  138

  138

$2,250m issued at 6.375%

Sep 2024

  $63.750

  143 

  143

  143

$2,450m issued at 6.375%

Mar 2025

  $63.750

  156 

  156

  156

$3,000m issued at 6.000%

May 2027

  $60.000

  180 

  180

  180

$2,350m issued at 6.250%

Mar 2023

  $62.500

  147 

  147

  147

$1,800m issued at 6.500%

Mar 2028

  $65.000

  117 

  117

  117

$1,500m issued at 4.600%4

Jun 2031

  $46.000

  69 

  - 

  - 

$1,000m issued at 4.000%5

Mar 2026

  $40.000

  20 

  - 

  - 

$1,000m issued at 4.700%6

Mar 2031

  $47.000

  24 

  - 

  - 

€1,500m issued at 5.250%

Sep 2022

  €52.500

  93 

  90

  88

€1,000m issued at 6.000%

Sep 2023

  €60.000

  70 

  67

  66

€1,250m issued at 4.750%

July 2029

  €47.500

  72 

  67

  68

£1,000m issued at 5.875%

Sep 2026

  £58.750

  80 

  74

  75

SGD1,000m issued at 4.700%

Jun 2022

  SGD47.000

  35 

  35

  34

SGD750m issued at 5.000%

Sep 2023

  SGD50.000

  28 

  27

  28

Total

 

 

  1,303 

  1,241 

  1,324 

1  Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities, in denominations of each security's issuance currency 1,000 per security.

2  This security was called by HSBC Holdings on 22 November 2019 and was redeemed and cancelled on 17 January 2020. Between the date of exercise of the call option and the redemption, this security was considered to be a subordinated liability. For further details on additional tier 1 securities, see Note 31.

3  This security was called by HSBC Holdings on 15 April 2021 and was redeemed and cancelled on 1 June 2021.

4  This security was issued by HSBC Holdings on 17 December 2020. The first call date commences six calendar months prior to the reset date of
17 June 2031.

5  This security was issued by HSBC Holdings on 9 March 2021. The first call date commences six calendar months prior to the reset date of 9 September 2026.

6  This security was issued by HSBC Holdings on 9 March 2021. The first call date commences six calendar months prior to the reset date of 9 September 2031.

6 

 

After the end of the year, the Directors approved a second interim dividend in respect of the financial year ended 31 December 2021 of $0.18 per ordinary share, a distribution of approximately $3,649m. The second interim dividend for 2021 will be payable on 28 April 2022 to holders on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on
11 March 2022. No liability was recorded in the financial statements in respect of the second interim dividend for 2021.

On 4 January 2022, HSBC paid a coupon on its €1,250m subordinated capital securities, representing a total distribution of €30m ($34m). No liability was recorded in the balance sheet at 31 December 2021 in respect of this coupon payment.

 

9

Earnings per share

 

Basic earnings per ordinary share is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share is calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.

 

Profit attributable to the ordinary shareholders of the parent company

 

2021

2020

2019

 

$m

$m

$m

Profit attributable to shareholders of the parent company

  13,917 

  5,229 

  7,383 

Dividend payable on preference shares classified as equity

  (7)

  (90)

  (90)

Coupon payable on capital securities classified as equity

  (1,303)

  (1,241)

  (1,324)

Year ended 31 Dec

  12,607 

  3,898 

  5,969 

 

 

Basic and diluted earnings per share

 

2021

2020

2019

 

Profit

Number

of shares

Per

 share

Profit

Number

of shares

Per

share

Profit

Number

of shares

Per

share

 

$m

(millions)

$

$m

(millions)

$

$m

(millions)

$

Basic1

  12,607 

  20,197 

  0.62 

  3,898 

  20,169 

  0.19 

  5,969 

  20,158 

  0.30 

Effect of dilutive potential ordinary shares

 

  105 

 

 

  73

 

 

  75

 

Diluted1

  12,607 

  20,302 

  0.62 

  3,898 

  20,242 

  0.19 

  5,969 

  20,233 

  0.30 

1  Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).

The number of anti-dilutive employee share options excluded from the weighted average number of dilutive potential ordinary shares is 8.6 million (2020: 14.6 million; 2019: 1.1 million).

 

10

Segmental analysis

 

The Group Chief Executive, supported by the rest of the Group Executive Committee ('GEC'), is considered the Chief Operating Decision Maker ('CODM') for the purposes of identifying the Group's reportable segments. Global business results are assessed by the CODM on the basis of adjusted performance that removes the effects of significant items and currency translation from reported results. Therefore, we present these results on an adjusted basis as required by IFRSs. The 2020 and 2019 adjusted performance information is presented on a constant currency basis. The 2020 and 2019 income statements are converted at the average rates of exchange for 2021, and the balance sheets at 31 December 2020 and 31 December 2019 at the prevailing rates of exchange on 31 December 2021.

Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to global businesses. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to global businesses are included in Corporate Centre.

Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-Group elimination items for the global businesses are presented in Corporate Centre.

Our global businesses

We provide a comprehensive range of banking and related financial services to our customers in our three global businesses. The products and services offered to customers are organised by these global businesses.

• Wealth and Personal Banking ('WPB') provides a full range of retail banking and wealth products to our customers from personal banking to ultra high net worth individuals. Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services. We also provide wealth management services, including insurance and investment products, global asset management services, investment management and private wealth solutions for customers with more sophisticated and international requirements.

• Commercial Banking ('CMB') offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers customers access to products and services offered by other global businesses, such as Global Banking and Markets, which include foreign exchange products, raising capital on debt and equity markets and advisory services.

• Global Banking and Markets ('GBM') provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.

HSBC adjusted profit before tax and balance sheet data

 

2021

 

Wealth and Personal Banking

Commercial

Banking

Global

Banking and

Markets

Corporate Centre

Total

 

$m

$m

$m

$m

$m

Net operating income/(expense) before change in expected credit losses and other credit impairment charges1

  22,110 

  13,415 

  15,002 

  (437) 

  50,090 

-  external

  21,753 

  13,294 

  16,558 

  (1,515) 

  50,090 

-  inter-segment

  357 

  121 

  (1,556) 

  1,078 

  - 

of which: net interest income/(expense)

  14,198 

  8,898 

  4,122 

  (739)

  26,479 

Change in expected credit losses and other credit impairment recoveries

  288 

  300 

  337 

  3 

  928 

Net operating income/(expense)

  22,398 

  13,715 

  15,339 

  (434) 

  51,018 

Total operating expenses

  (15,384) 

  (6,973) 

  (10,006) 

  215 

  (32,148) 

Operating profit/(loss)

  7,014 

  6,742 

  5,333 

  (219) 

  18,870 

Share of profit in associates and joint ventures

  34 

  1 

  - 

  3,011 

  3,046 

Adjusted profit before tax

  7,048 

  6,743 

  5,333 

  2,792 

  21,916 

 

%

%

%

%

%

Share of HSBC's adjusted profit before tax

  32.2 

  30.8 

  24.3 

  12.7 

  100.0 

Adjusted cost efficiency ratio

  69.6 

  52.0 

  66.7 

  49.2 

  64.2 

Adjusted balance sheet data

$m

$m

$m

$m

$m

Loans and advances to customers (net)

  488,786 

  349,126 

  207,162 

  740 

  1,045,814 

Interests in associates and joint ventures

  499 

  13 

  126 

  28,971 

  29,609 

Total external assets

  932,582 

  622,925 

  1,229,820 

  172,612 

  2,957,939 

Customer accounts

  859,029 

  506,688 

  344,205 

  652 

  1,710,574 

 

 

 

 

 

 

 

 

2020

Net operating income/(expense) before change in expected credit losses and other credit impairment charges1

  22,571 

  13,718 

  15,768 

  (287) 

  51,770 

-  external

  20,474 

  14,114 

  18,651 

  (1,469) 

  51,770 

-  inter-segment

  2,097 

  (396) 

  (2,883) 

  1,182 

  - 

-  of which: net interest income/(expense)

  15,470 

  9,560 

  4,580 

  (1,337)

  28,273 

Change in expected credit losses and other credit impairment (charges)/recoveries

  (3,005) 

  (4,989) 

  (1,289) 

  1

  (9,282) 

Net operating income/(expense)

  19,566 

  8,729 

  14,479 

  (286) 

  42,488 

Total operating expenses

  (15,443) 

  (6,897) 

  (9,640) 

  (429) 

  (32,409) 

Operating profit/(loss)

  4,123 

  1,832 

  4,839 

  (715) 

  10,079 

Share of profit in associates and joint ventures

  7

  (1) 

  - 

  2,186 

  2,192 

Adjusted profit before tax

  4,130 

  1,831 

  4,839 

  1,471 

  12,271 

 

%

%

%

%

%

Share of HSBC's adjusted profit before tax

  33.7 

  14.9 

  39.4 

  12.0 

  100.0 

Adjusted cost efficiency ratio

  68.4 

  50.3 

  61.1 

  (149.5) 

  62.6 

Adjusted balance sheet data

$m

$m

$m

$m

$m

Loans and advances to customers (net)

  462,286 

  338,193 

  220,692 

  1,231 

  1,022,402 

Interests in associates and joint ventures

  444

  13

  141

  26,472 

  27,070 

Total external assets

  869,924 

  562,125 

  1,319,389 

  187,189 

  2,938,627 

Customer accounts

  823,991 

  464,380 

  331,164 

  593

  1,620,128 

 

 

 

2019

Net operating income/(expense) before change in expected credit losses and other credit impairment charges1

  26,140 

  15,594 

  15,282 

  (581) 

  56,435 

-  external

  21,777 

  16,522 

  20,782 

  (2,646) 

  56,435 

-  inter-segment

  4,363 

  (928) 

  (5,500) 

  2,065 

  - 

-  of which: net interest income/(expense)

  17,820 

  11,242 

  5,309 

  (3,338)

  31,033 

Change in expected credit losses and other credit impairment (charges)/recoveries

  (1,376) 

  (1,194) 

  (155) 

  38

  (2,687) 

Net operating income/(expense)

  24,764 

  14,400 

  15,127 

  (543) 

  53,748 

Total operating expenses

  (15,823) 

  (7,028) 

  (9,891) 

  (821) 

  (33,563) 

Operating profit/(loss)

  8,941 

  7,372 

  5,236 

  (1,364) 

  20,185 

Share of profit in associates and joint ventures

  54

  1

  1

  2,440 

  2,496 

Adjusted profit before tax

  8,995 

  7,373 

  5,237 

  1,076 

  22,681 

 

%

%

%

%

%

Share of HSBC's adjusted profit before tax

  39.7 

  32.5 

  23.1 

  4.7 

  100.0 

Adjusted cost efficiency ratio

  60.5 

  45.1 

  64.7 

  (141.3) 

  59.5 

Adjusted balance sheet data

$m

$m

$m

$m

$m

Loans and advances to customers (net)

  448,880 

  348,716 

  248,062 

  1,141 

  1,046,799 

Interests in associates and joint ventures

  445

  14

  16

  25,305 

  25,780 

Total external assets

  780,456 

  515,962 

  1,283,597 

  161,055 

  2,741,070 

Customer accounts

  758,414 

  392,133 

  298,618 

  760

  1,449,925 

 

 

 

 

 

 

1  Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

Reported external net operating income is attributed to countries and territories on the basis of the location of the branch responsible for reporting the results or advancing the funds:

 

2021

2020

2019

 

$m

$m

$m

Reported external net operating income by country/territory1

  49,552 

  50,429 

  56,098 

-  UK

  10,909 

  9,163 

  9,011 

-  Hong Kong

  14,245 

  15,783 

  18,449 

-  US

  3,795 

  4,474 

  4,471 

-  France

  2,179 

  1,753 

  1,942 

-  other countries

  18,424 

  19,256 

  22,225 

1  Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

Adjusted results reconciliation

 

2021

2020

2019

 

Adjusted

Significant

items

Reported

Adjusted

Currency

translation

Significant

 items

Reported

Adjusted

Currency

translation

Significant

items

Reported

 

$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Revenue1

  50,090 

  (538)

  49,552 

  51,770 

  (1,393)

  52

  50,429 

  56,435 

  (1,010)

  673

  56,098 

ECL

  928 

  - 

  928 

  (9,282)

  465

  - 

  (8,817)

  (2,687)

  (69)

  - 

  (2,756)

Operating expenses

  (32,148)

  (2,472)

  (34,620)

  (32,409)

  1,072 

  (3,095)

  (34,432)

  (33,563)

  981

  (9,767)

  (42,349)

Share of profit in associates and joint ventures

  3,046 

  - 

  3,046 

  2,192 

  (133)

  (462)

  1,597 

  2,496 

  (142)

  - 

  2,354 

Profit/(loss) before tax

  21,916 

  (3,010)

  18,906 

  12,271 

  11

  (3,505)

  8,777 

  22,681 

  (240)

  (9,094)

  13,347 

1  Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

Adjusted balance sheet reconciliation

 

2021

2020

2019

 

Reported and

adjusted

Adjusted

Currency translation

Reported

Adjusted

Currency translation

Reported

 

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

  1,045,814 

  1,022,402 

  15,585 

  1,037,987 

  1,046,799 

  (10,056)

  1,036,743 

Interests in associates and joint ventures

  29,609 

  27,070 

  (386)

  26,684 

  25,780 

  (1,306)

  24,474 

Total external assets

  2,957,939 

  2,938,627 

  45,537 

  2,984,164 

  2,741,070 

  (25,918)

  2,715,152 

Customer accounts

  1,710,574 

  1,620,128 

  22,652 

  1,642,780 

  1,449,925 

  (10,810)

  1,439,115 

 

Adjusted profit reconciliation

 

2021

2020

2019

 

$m

$m

$m

Year ended 31 Dec

 

 

 

Adjusted profit before tax

  21,916 

  12,271 

  22,681 

Significant items

  (3,010)

  (3,505)

  (9,094)

-  customer redress programmes (revenue)

  11 

  (21)

  (163)

-  disposals, acquisitions and investment in new businesses (revenue)

  - 

  (10)

  768

-  fair value movements on financial instruments1

  (242)

  264

  84

-  restructuring and other related costs (revenue)2

  (307)

  (170)

  - 

-  costs of structural reform3

  - 

  - 

  (158)

-  customer redress programmes (operating expenses)

  (49)

  54

  (1,281)

-  impairment of goodwill and other intangible assets

  (587)

  (1,090)

  (7,349)

-  past service costs of guaranteed minimum pension benefits equalisation

  - 

  (17)

  - 

-  restructuring and other related costs (operating expenses)4

  (1,836)

  (1,908)

  (827)

-  settlements and provisions in connection with legal and other regulatory matters

  - 

  (12)

  61

-  impairment of goodwill (share of profit in associates and joint ventures)5

  - 

  (462)

  - 

-  currency translation on significant items

 

  (133)

  (229)

Currency translation

 

  11

  (240)

Reported profit before tax

  18,906 

  8,777 

  13,347 

1  Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.

2  Comprises losses associated with the RWA reduction commitments and gains relating to the business update in February 2020.

3  Comprises costs associated with preparations for the UK's exit from the European Union.

4  Includes impairment of software intangible assets of $189m (of the total software intangible asset impairment of $1,347m) and impairment of tangible assets of $197m in 2020.

5  During 2020, The Saudi British Bank ('SABB'), an associate of HSBC, impaired the goodwill that arose following the merger with Alawwal bank in 2019. HSBC's post-tax share of the goodwill impairment was $462m.

11

Trading assets

 

 

2021

2020

 

$m

$m

Treasury and other eligible bills

  23,110 

  24,035 

Debt securities

  89,944 

  102,846 

Equity securities

  109,614 

  77,643 

Trading securities

  222,668 

  204,524 

Loans and advances to banks1

  7,767 

  8,242 

Loans and advances to customers1

  18,407 

  19,224 

Year ended 31 Dec

  248,842 

  231,990 

1  Loans and advances to banks and customers include reverse repos, stock borrowing and other accounts.

 

12

Fair values of financial instruments carried at fair value

 

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk taker.

Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is used. For inactive markets, HSBC sources alternative market information, with greater weight given to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument comparability, consistency of data sources, underlying data accuracy and timing of prices.

For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.

The majority of financial instruments measured at fair value are in GBM. GBM's fair value governance structure comprises its Finance function, Valuation Committees and a Valuation Committee Review Group. Finance is responsible for establishing procedures governing valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the Valuation Committees, which consist of independent support functions. These committees are overseen by the Valuation Committee Review Group, which considers all material subjective valuations.

Financial liabilities measured at fair value

In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread that is appropriate to HSBC's liabilities. The change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using an appropriate market discount curve. The difference in the valuations is attributable to the Group's own credit spread. This methodology is applied consistently across all securities.

Structured notes issued and certain other hybrid instruments are included within trading liabilities and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes.

Gains and losses arising from changes in the credit spread of liabilities issued by HSBC, recorded in other comprehensive income, reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.

Fair value hierarchy

Fair values of financial assets and liabilities are determined according to the following hierarchy:

• Level 1 - valuation technique using quoted market price. These are financial instruments with quoted prices for identical instruments in active markets that HSBC can access at the measurement date.

• Level 2 - valuation technique using observable inputs. These are financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

• Level 3 - valuation technique with significant unobservable inputs. These are financial instruments valued using valuation techniques where one or more significant inputs are unobservable.

•

Financial instruments carried at fair value and bases of valuation

 

2021

2020

 

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Recurring fair value measurements at 31 Dec

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Trading assets

  180,423 

  65,757 

  2,662 

  248,842 

  167,980 

  61,511 

  2,499 

  231,990 

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

  17,937 

  17,629 

  14,238 

  49,804 

  19,711 

  14,365 

  11,477 

  45,553 

Derivatives

  2,783 

  191,621 

  2,478 

  196,882 

  2,602 

  302,454 

  2,670 

  307,726 

Financial investments

  247,745 

  97,838 

  3,389 

  348,972 

  303,654 

  94,746 

  3,654 

  402,054 

Liabilities

 

 

 

 

 

 

 

 

Trading liabilities

  63,437 

  20,682 

  785 

  84,904 

  53,290 

  21,814 

  162

  75,266 

Financial liabilities designated at fair value

  1,379 

  136,243 

  7,880 

  145,502 

  1,267 

  150,866 

  5,306 

  157,439 

Derivatives

  1,686 

  186,290 

  3,088 

  191,064 

  1,788 

  297,025 

  4,188 

  303,001 

 

 

Transfers between Level 1 and Level 2 fair values

 

Assets

Liabilities

 

Financial

investments

Trading

assets

Designated and otherwise

mandatorily measured at fair value

Derivatives

Trading

liabilities

Designated

at fair value

Derivatives

 

$m

$m

$m

$m

$m

$m

$m

At 31 Dec 2021

 

 

 

 

 

 

 

Transfers from Level 1 to Level 2

  8,477 

  6,553 

  1,277 

  103 

  181 

  - 

  212 

Transfers from Level 2 to Level 1

  6,007 

  4,132 

  768 

  - 

  638 

  - 

  - 

At 31 Dec 2020

 

 

 

 

 

 

 

Transfers from Level 1 to Level 2

  4,514 

  3,891 

  245

  - 

  155

  7,414 

  - 

Transfers from Level 2 to Level 1

  7,764 

  5,517 

  328

  1

  433

  - 

  - 

 

 

 

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.

Fair value adjustments

We adopt the use of fair value adjustments when we take into consideration additional factors not incorporated within the valuation model that would otherwise be considered by a market participant. We classify fair value adjustments as either 'risk-related' or 'model-related'. The majority of these adjustments relate to GBM. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.

 

Global Banking and Markets fair value adjustments

 

 

 

 

 

2021

2020

 

GBM

Corporate

Centre

GBM

Corporate

Centre

 

$m

$m

$m

$m

Type of adjustment

 

 

 

 

Risk-related

  868 

  42 

  1,170 

  28

-  bid-offer

  412 

  - 

  514

  - 

-  uncertainty

  66 

  1 

  106

  1

-  credit valuation adjustment

  228 

  35 

  445

  27

-  debt valuation adjustment

  (92)

  - 

  (120)

  - 

-  funding fair value adjustment

  254 

  6 

  204

  - 

-  other

  - 

  - 

  21

  - 

Model-related

  57 

  - 

  74

  - 

-  model limitation

  57 

  - 

  70

  - 

-  other

  - 

  - 

  4

  - 

Inception profit (Day 1 P&L reserves)

  106 

  - 

  104

  - 

At 31 Dec

  1,031 

  42 

  1,348 

  28

 

We continue to observe losses on the disposals of certain uncollateralised over-the-counter ('OTC') derivatives as part of our commitments to reduce RWAs in GBM, as set out in our business update in February 2020. Based on our analysis, these losses are not considered to give rise to an adjustment within the IFRS 13 'Fair Value Measurement' framework.

The reduction in fair value adjustments was driven by increased liquidity, lower volatility and an improved credit environment. Movement in funding fair value adjustment included a change in measurement from Libor to a Libor replacement risk-free rate.

 

Bid-offer

IFRS 13 'Fair Value Measurement' requires the use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position.

Uncertainty

Certain model inputs may be less readily determinable from market data and/or the choice of model itself may be more subjective. In these circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in HSBC's valuation model.

Credit and debt valuation adjustments

The credit valuation adjustment ('CVA') is an adjustment to the valuation of over-the-counter ('OTC') derivative contracts to reflect the possibility that the counterparty may default and that HSBC may not receive the full market value of the transactions.

The debt valuation adjustment ('DVA') is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that HSBC may default, and that it may not pay the full market value of the transactions.

HSBC calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not netted across Group entities.

HSBC calculates the CVA by applying the probability of default ('PD') of the counterparty, conditional on the non-default of HSBC, to HSBC's expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure.

For most products HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty.

The methodologies do not, in general, account for 'wrong-way risk'. Wrong-way risk is an adverse correlation between the counterparty's probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the currency of the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation.

Funding fair value adjustment

The funding fair value adjustment ('FFVA') is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HSBC or the counterparty. The FFVA and DVA are calculated independently.

Model limitation

Models used for portfolio valuation purposes may be based upon a simplified set of assumptions that do not capture all current and future material market characteristics. In these circumstances, model limitation adjustments are adopted.

Inception profit (Day 1 P&L reserves)

Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed in Note 1.

 

Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3

 

Assets

Liabilities

 

Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Total

Trading liabilities

Designated at fair value

Derivatives

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

$m

Private equity including strategic investments

  544 

  2 

  13,732 

  - 

  14,278 

  9 

  - 

  - 

  9 

Asset-backed securities

  1,008 

  132 

  1 

  - 

  1,141 

  - 

  - 

  - 

  - 

Structured notes

  - 

  - 

  - 

  - 

  - 

  - 

  7,879 

  - 

  7,879 

Derivatives with monolines

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

Other derivatives

  - 

  - 

  - 

  2,478 

  2,478 

  - 

  - 

  3,088 

  3,088 

Other portfolios

  1,837 

  2,528 

  505 

  - 

  4,870 

  776 

  1 

  - 

  777 

At 31 Dec 2021

  3,389 

  2,662 

  14,238 

  2,478 

  22,767 

  785 

  7,880 

  3,088 

  11,753 

 

 

 

 

 

 

 

 

 

 

Private equity including strategic investments

  930

  4

  10,971 

  - 

  11,905 

  4

  - 

  - 

  4

Asset-backed securities

  1,286 

  523

  25

  - 

  1,834 

  - 

  - 

  - 

  - 

Structured notes

  - 

  - 

  - 

  - 

  - 

  29

  5,301 

  - 

  5,330 

Derivatives with monolines

  - 

  - 

  - 

  68

  68

  - 

  - 

  - 

  - 

Other derivatives

  - 

  - 

  - 

  2,602 

  2,602 

  - 

  - 

  4,187 

  4,187 

Other portfolios

  1,438 

  1,972 

  481

  - 

  3,891 

  129

  5

  1

  135

At 31 Dec 2020

  3,654 

  2,499 

  11,477 

  2,670 

  20,300 

  162

  5,306 

  4,188 

  9,656 

 

 

 Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, derivatives with monolines, certain 'other derivatives' and predominantly all Level 3 asset-backed securities are legacy positions. HSBC has the capability to hold these positions.

Private equity including strategic investments

The fair value of a private equity investment (including strategic investments) is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; the price at which similar companies have changed ownership; or from published net asset values ('NAV') received. If necessary, adjustments are made to the NAV of funds to obtain the best estimate of fair value.

Asset-backed securities

While quoted market prices are generally used to determine the fair value of the asset-backed securities ('ABSs'), valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For certain ABSs, such as residential mortgage-backed securities, the valuation uses an industry standard model with assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature.

Structured notes

The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.

Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates.

Derivatives

OTC derivative valuation models calculate the present value of expected future cash flows, based upon 'no arbitrage' principles. For many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources.

 

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy

Movement in Level 3 financial instruments

 

Assets

Liabilities

 

Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2021

  3,654 

  2,499 

  11,477 

  2,670 

  162 

  5,306 

  4,188 

Total gains/(losses) recognised in profit or loss

  (10)

  (378)

  1,753 

  2,237 

  16 

  (836)

  2,583 

-  net income/(losses) from financial instruments held for trading or managed on a fair value basis

  - 

  (378)

  - 

  2,237 

  16 

  - 

  2,583 

-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

  - 

  - 

  1,753 

  - 

  - 

  (836)

  - 

-  gains less losses from financial investments at fair value through other comprehensive income

  (10)

  - 

  - 

  - 

  - 

  - 

  - 

Total gains/(losses) recognised in other comprehensive income ('OCI')1

  (521)

  (18)

  (285)

  (27)

  (8)

  (61)

  (26)

-  financial investments: fair value gains

  (428)

  - 

  - 

  - 

  - 

  - 

  - 

-  exchange differences

  (93)

  (18)

  (285)

  (27)

  (8)

  (61)

  (26)

Purchases

  1,025 

  1,988 

  3,692 

  - 

  1,014 

  1 

  - 

New issuances

  - 

  - 

  - 

  - 

  35 

  5,969 

  - 

Sales

  (580)

  (473)

  (1,216)

  - 

  (4)

  (27)

  - 

Settlements

  (336)

  (747)

  (1,049)

  (2,347)

  (681)

  (2,922)

  (3,962)

Transfers out

  (383)

  (1,027)

  (184)

  (418)

  (7)

  (704)

  (734)

Transfers in

  540 

  818 

  50 

  363 

  258 

  1,154 

  1,039 

At 31 Dec 2021

  3,389 

  2,662 

  14,238 

  2,478 

  785 

  7,880 

  3,088 

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2020

  - 

  (309)

  1,509 

  1,298 

  - 

  166 

  (969)

-  net income/(losses) from financial instruments held for trading or managed on a fair value basis

  - 

  (309)

  - 

  1,298 

  - 

  - 

  (969)

-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

  - 

  - 

  1,509 

  - 

  - 

  166 

  - 

 

Movement in Level 3 financial instruments (continued)

 

Assets

Liabilities

 

Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2020

  3,218 

  4,979 

  9,476 

  2,136 

  53

  5,016 

  2,302 

Total gains/(losses) recognised in profit or loss

  17

  (6)

  504

  2,281 

  307

  (59)

  3,398 

-  net income/(losses) from financial instruments held for trading or managed on a fair value basis

  - 

  (6)

  - 

  2,281 

  307

  - 

  3,398 

-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

  - 

  - 

  504

  - 

  - 

  (59)

  - 

-  gains less losses from financial investments at fair value through other comprehensive income

  17

  - 

  - 

  - 

  - 

  - 

  - 

Total gains/(losses) recognised in other comprehensive income ('OCI')1

  394

  115

  286

  143

  17

  204

  169

-  financial investments: fair value gains

  270

  - 

  - 

  - 

  - 

  - 

  - 

-  exchange differences

  124

  115

  286

  143

  17

  204

  169

Purchases

  671

  687

  3,701 

  - 

  66

  - 

  - 

New issuances

  - 

  - 

  1

  - 

  6

  1,876 

  - 

Sales

  (674)

  (1,579)

  (2,042)

  - 

  (260)

  - 

  - 

Settlements

  (530)

  (1,122)

  (435)

  (1,542)

  (26)

  (1,531)

  (1,462)

Transfers out

  (101)

  (1,790)

  (140)

  (565)

  (9)

  (777)

  (528)

Transfers in

  659

  1,215 

  126

  217

  8

  577

  309

At 31 Dec 2020

  3,654 

  2,499 

  11,477 

  2,670 

  162

  5,306 

  4,188 

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2020

  - 

  (32)

  412

  707

  1

  (91)

  (1,621)

-  net income/(losses) from financial instruments held for trading or managed on a fair value basis

  - 

  (32)

  - 

  707

  1

  - 

  (1,621)

-  changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

  - 

  - 

  412

  - 

  - 

  (91)

  - 

1  Included in 'financial investments: fair value gains/(losses)' in the current year and 'exchange differences' in the consolidated statement of comprehensive income.

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.  

 

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

Sensitivity of fair values to reasonably possible alternative assumptions

 

2021

2020

 

Reflected in profit or loss

Reflected in OCI

Reflected in profit or loss

Reflected in OCI

 

Favourable

changes

Un-

favourable

changes

Favourable

changes

Un-

favourable

changes

Favourable

changes

Un-

favourable

changes

Favourable

changes

Un-

favourable

changes

 

$m

$m

$m

$m

$m

$m

$m

$m

Derivatives, trading assets and trading liabilities1

  143 

  (146)

  - 

  - 

  229

  (244)

  - 

  - 

Financial assets and liabilities designated and otherwise mandatorily measured at fair value through profit or loss

  849 

  (868)

  - 

  - 

  644

  (643)

  - 

  - 

Financial investments

  20 

  (20)

  113 

  (112)

  35

  (35)

  110

  (110)

At 31 Dec

  1,012 

  (1,034)

  113 

  (112)

  908

  (922)

  110

  (110)

1  'Derivatives, trading assets and trading liabilities' are presented as one category to reflect the manner in which these instruments are risk-managed.

 

The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.

 

Key unobservable inputs to Level 3 financial instruments

The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31 December 2021.

Quantitative information about significant unobservable inputs in Level 3 valuations

 

Fair value

 

 

2021

2020

 

Assets

Liabilities

Valuation

techniques

Key unobservable

inputs

Full range

of inputs

Full range

of inputs

 

$m

$m

Lower

Higher

Lower

Higher

Private equity including strategic investments

  14,278 

  9 

See below

See below

 

 

 

 

Asset-backed securities

  1,141 

  - 

 

 

 

 

 

 

-  collateralised loan/debt obligation

20

  - 

Market proxy

Prepayment rate 

-

-

0%

9%

Market proxy

Bid quotes

0

100

0

100

-  other ABSs

  1,121 

  - 

Market proxy

Bid quotes

0

100

0

101

Structured notes

  - 

  7,879 

 

 

 

 

 

 

-  equity-linked notes

  - 

  6,565 

Model - Option model

Equity volatility

6%

124%

6%

115%

Model - Option model

Equity correlation

22%

99%

(4)%

88%

-  FX-linked notes

  - 

  629 

Model - Option model

FX volatility

1%

99%

0%

36%

-  other

  - 

  685 

 

 

 

 

 

 

Derivatives with monolines

  - 

  - 

Model - Discounted cash flow

Credit spread

-

-

2%

2%

Other derivatives

  2,478 

  3,088 

 

 

 

 

 

 

-  interest rate derivatives

  797 

  990 

 

 

 

 

 

 

  securitisation swaps

  284 

  595 

Model - Discounted cash flow

Prepayment rate

5%

10%

6%

6%

  long-dated swaptions

  36 

  73 

Model - Option model

IR volatility

15%

35%

6%

28%

  other

  477 

  322 

 

 

 

 

 

 

-  FX derivatives

  379 

  403 

 

 

 

 

 

 

  FX options

  212 

  270 

Model - Option model

FX volatility

1%

99%

0%

43%

  other

  167 

  133 

 

 

 

 

 

 

-  equity derivatives

  1,143 

  1,513 

 

 

 

 

 

 

  long-dated single stock options

  590 

  895 

Model - Option model

Equity volatility

4%

138%

0%

120%

  other

  553 

  618 

 

 

 

 

 

 

-  credit derivatives

  159 

  182 

 

 

 

 

 

 

  other

  159 

  182 

 

 

 

 

 

 

Other portfolios

  4,870 

  777 

 

 

 

 

 

 

-  repurchase agreements

  778 

  - 

Model - Discounted cash flow

IR curve

1%

5%

0%

5%

-  other1

  4,092 

  777 

 

 

 

 

 

 

At 31 Dec 2021

  22,767 

  11,753 

 

 

 

 

 

 

1  'Other' includes a range of smaller asset holdings.

 

Private equity including strategic investments

Given the bespoke nature of the analysis in respect of each private equity holding, it is not practical to quote a range of key unobservable inputs. The key unobservable inputs would be price and correlation. The valuation approach includes using a range of inputs that include company specific financials, traded comparable companies multiples, published net asset values and qualitative assumptions, which are not directly comparable or quantifiable.

Prepayment rates

Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the due date. They vary according to the nature of the loan portfolio and expectations of future market conditions, and may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and macroeconomic modelling.

Market proxy

Market proxy pricing may be used for an instrument when specific market pricing is not available but there is evidence from instruments with common characteristics. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence.

Volatility

Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio.

Correlation

Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one. It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market price pair.

Credit spread

Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit spreads may be implied from market prices and may not be observable in more illiquid markets.

Inter-relationships between key unobservable inputs

Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC's net risk position in respect of each variable.

 

HSBC Holdings

Basis of valuing HSBC Holdings' financial assets and liabilities measured at fair value

 

2021

2020

 

$m

$m

Valuation technique using observable inputs: Level 2

 

 

Assets at 31 Dec

 

 

-  derivatives

  2,811 

  4,698 

-  designated and otherwise mandatorily measured at fair value through profit or loss

  51,408 

  65,253 

Liabilities at 31 Dec

 

 

-  designated at fair value

  32,418 

  25,664 

-  derivatives

  1,220 

  3,060 

 

 

13

Fair values of financial instruments not carried at fair value

 

 

Fair values of financial instruments not carried at fair value and bases of valuation

 

 

Fair value

 

Carrying

amount

Quoted market

price Level 1

Observable

inputs Level 2

Significant

unobservable

inputs Level 3

Total

 

$m

$m

$m

$m

$m

At 31 Dec 2021

 

 

 

 

 

Assets

 

 

 

 

 

Loans and advances to banks

  83,136 

  - 

  82,220 

  1,073 

  83,293 

Loans and advances to customers

  1,045,814 

  - 

  10,287 

  1,034,288 

  1,044,575 

Reverse repurchase agreements - non-trading

  241,648 

  - 

  241,531 

  121 

  241,652 

Financial investments - at amortised cost

  97,302 

  38,722 

  63,022 

  523 

  102,267 

Liabilities

 

 

 

 

 

Deposits by banks

  101,152 

  - 

  101,149 

  - 

  101,149 

Customer accounts

  1,710,574 

  - 

  1,710,733 

  - 

  1,710,733 

Repurchase agreements - non-trading

  126,670 

  - 

  126,670 

  - 

  126,670 

Debt securities in issue

  78,557 

  - 

  78,754 

  489 

  79,243 

Subordinated liabilities

  20,487 

  - 

  26,206 

  - 

  26,206 

 

 

 

 

 

 

At 31 Dec 2020

 

 

 

 

 

Assets

 

 

 

 

 

Loans and advances to banks

  81,616 

  - 

  80,457 

  1,339 

  81,796 

Loans and advances to customers

  1,037,987 

  - 

  9,888 

  1,025,573 

  1,035,461 

Reverse repurchase agreements - non-trading

  230,628 

  - 

  230,330 

  272

  230,602 

Financial investments - at amortised cost

  88,639 

  28,722 

  67,572 

  507

  96,801 

Liabilities

 

 

 

 

 

Deposits by banks

  82,080 

  - 

  81,996 

  - 

  81,996 

Customer accounts

  1,642,780 

  - 

  1,642,988 

  143

  1,643,131 

Repurchase agreements - non-trading

  111,901 

  3

  111,898 

  - 

  111,901 

Debt securities in issue

  95,492 

  - 

  96,371 

  657

  97,028 

Subordinated liabilities

  21,951 

  - 

  28,552 

  - 

  28,552 

 

Other financial instruments not carried at fair value are typically short term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost.

 

Valuation

Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It does not reflect the economic benefits and costs that HSBC expects to flow from an instrument's cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies.

Loans and advances to banks and customers

To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans.

The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit-impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.

Deposits by banks and customer accounts

The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

Fair values in debt securities in issue and subordinated liabilities are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.

Repurchase and reverse repurchase agreements - non-trading

Fair values of repurchase and reverse repurchase agreements that are held on a non-trading basis provide approximate carrying amounts. This is due to the fact that balances are generally short dated.

 

HSBC Holdings

The methods used by HSBC Holdings to determine fair values of financial instruments for the purposes of measurement and disclosure are described above.

Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet

 

2021

2020

 

Carrying amount

Fair value1

Carrying amount

Fair value1

 

$m

$m

$m

$m

Assets at 31 Dec

 

 

 

 

Loans and advances to HSBC undertakings

  25,108 

  25,671 

  10,443 

  10,702 

Financial investments - at amortised cost

  26,194 

  26,176 

  17,485 

  17,521 

Liabilities at 31 Dec

 

 

 

 

Amounts owed to HSBC undertakings

  111 

  111 

  330

  330

Debt securities in issue

  67,483 

  69,719 

  64,029 

  67,706 

Subordinated liabilities

  17,059 

  21,066 

  17,916 

  22,431 

1  Fair values (other than Level 1 financial investments) were determined using valuation techniques with observable inputs (Level 2).

 

14

Financial assets designated and otherwise mandatorily measured at fair value through profit

or loss

 

 

2021

 

2020

 

 

Designated at fair value

Mandatorily measured at fair value

Total

Designated at fair value

Mandatorily measured at fair value

Total

 

$m

$m

$m

$m

$m

$m

Securities

  2,251 

  42,062 

  44,313 

  2,492 

  39,088 

  41,580 

-  treasury and other eligible bills

  599 

  31 

  630 

  635

  26

  661

-  debt securities

  1,652 

  5,177 

  6,829 

  1,857 

  5,250 

  7,107 

-  equity securities

  - 

  36,854 

  36,854 

  - 

  33,812 

  33,812 

Loans and advances to banks and customers

  - 

  4,307 

  4,307 

  - 

  2,988 

  2,988 

Other

  - 

  1,184 

  1,184 

  - 

  985

  985

At 31 Dec

  2,251 

  47,553 

  49,804 

  2,492 

  43,061 

  45,553 

 

 

15

Derivatives

 

Notional contract amounts and fair values of derivatives by product contract type held by HSBC

 

Notional contract amount

Fair value - Assets

Fair value - Liabilities

 

Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Foreign exchange

  7,723,034 

  43,839 

  79,801 

  1,062 

  80,863 

  77,670 

  207 

  77,877 

Interest rate

  14,470,539 

  162,921 

  151,631 

  1,749 

  153,380 

  146,808 

  966 

  147,774 

Equities

  659,142 

  - 

  12,637 

  - 

  12,637 

  14,379 

  - 

  14,379 

Credit

  190,724 

  - 

  2,175 

  - 

  2,175 

  3,151 

  - 

  3,151 

Commodity and other

  74,159 

  - 

  1,205 

  - 

  1,205 

  1,261 

  - 

  1,261 

Gross total fair values

  23,117,598 

  206,760 

  247,449 

  2,811 

  250,260 

  243,269 

  1,173 

  244,442 

Offset (Note 30)

 

 

 

 

  (53,378)

 

 

  (53,378)

At 31 Dec 2021

  23,117,598 

  206,760 

  247,449 

  2,811 

  196,882 

  243,269 

  1,173 

  191,064 

 

 

 

 

 

 

 

 

 

Foreign exchange

  7,606,446 

  35,021 

  106,696 

  309

  107,005 

  108,903 

  1,182 

  110,085 

Interest rate

  15,240,867 

  157,436 

  249,204 

  1,914 

  251,118 

  236,594 

  2,887 

  239,481 

Equities

  652,288 

  - 

  14,043 

  - 

  14,043 

  15,766 

  - 

  15,766 

Credit

  269,401 

  - 

  2,590 

  - 

  2,590 

  3,682 

  - 

  3,682 

Commodity and other

  120,259 

  - 

  2,073 

  - 

  2,073 

  3,090 

  - 

  3,090 

Gross total fair values

  23,889,261 

  192,457 

  374,606 

  2,223 

  376,829 

  368,035 

  4,069 

  372,104 

Offset (Note 30)

 

 

 

 

  (69,103) 

 

 

  (69,103) 

At 31 Dec 2020

  23,889,261 

  192,457 

  374,606 

  2,223 

  307,726 

  368,035 

  4,069 

  303,001 

 

The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

Derivative assets and liabilities decreased during 2021, driven by yield curve movements and changes in foreign exchange rates.

Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries

 

Notional contract amount

Assets

Liabilities

 

Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Foreign exchange

  36,703 

  - 

  384 

  - 

  384 

  377 

  - 

  377 

Interest rate

  35,970 

  45,358 

  712 

  1,715 

  2,427 

  769 

  74 

  843 

At 31 Dec 2021

  72,673 

  45,358 

  1,096 

  1,715 

  2,811 

  1,146 

  74 

  1,220 

 

 

 

 

 

 

 

 

 

Foreign exchange

  23,413 

  - 

  506

  - 

  506

  870

  - 

  870

Interest rate

  47,569 

  34,006 

  966

  3,221 

  4,187 

  2,176 

  8

  2,184 

At 31 Dec 2020

  70,982 

  34,006 

  1,472 

  3,221 

  4,693 

  3,046 

  8

  3,054 

 

Use of derivatives

For details regarding the use of derivatives, see page 207 under 'Market risk'.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenue based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Substantially all of HSBC Holdings' derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as shown in the following table:

 

Unamortised balance of derivatives valued using models with significant unobservable inputs

 

2021

2020

 

$m

$m

Unamortised balance at 1 Jan

  104 

  73

Deferral on new transactions

  311 

  232

Recognised in the income statement during the year:

  (308)

  (205)

-  amortisation

  (177)

  (116)

-  subsequent to unobservable inputs becoming observable

  (4)

  (4)

-  maturity, termination or offsetting derivative

  (127)

  (85)

Exchange differences

  (1)

  4

Other

  - 

  - 

Unamortised balance at 31 Dec1

  106 

  104

1  This amount is yet to be recognised in the consolidated income statement.

1 

 

Hedge accounting derivatives

HSBC applies hedge accounting to manage the following risks: interest rate and foreign exchange risks. Further details on how these risks arise and how they are managed by the Group can be found in the 'Risk review'.

Fair value hedges

HSBC enters into fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value caused by movements in market interest rates on certain fixed-rate financial instruments that are not measured at fair value through profit or loss, including debt securities held and issued.

HSBC hedging instrument by hedged risk

 

Hedging instrument

 

 

Carrying amount

 

 

 

Notional amount1

Assets

Liabilities

Balance sheet presentation

Change in fair value2

Hedged risk

$m

$m

$m

$m

Interest rate3

  90,556 

  1,637 

  1,410 

Derivatives

  1,330 

At 31 Dec 2021

  90,556 

  1,637 

  1,410 

 

  1,330 

 

 

 

 

 

 

 

Interest rate3

  121,573 

  1,675 

  3,761 

Derivatives

  (1,894)

At 31 Dec 2020

  121,573 

  1,675 

  3,761 

 

  (1,894)

1  The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

2  Used in effectiveness testing, which uses the full fair value change of the hedging instrument not excluding any component.

3  The hedged risk 'interest rate' includes inflation risk.

HSBC hedged item by hedged risk

 

Hedged item

Ineffectiveness

 

Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

Change in fair value1

Recognised in profit and loss

 

 

Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

  68,059 

 

  1,199 

 

Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income

  (1,932)

  (36)

Net income from financial instruments held for trading or managed on a fair value basis

  2 

 

  (3)

 

Loans and advances to banks

  (3)

  3,066 

 

  9 

 

Loans and advances to customers

  (41)

 

  14,428 

 

  992 

Debt securities in issue

  609 

 

  86 

 

  1 

Deposits by banks

  1 

At 31 Dec 2021

  71,127 

  14,514 

  1,205 

  993 

 

  (1,366)

  (36)

 

 

Interest rate3

  102,260 

 

  3,392 

 

Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income

  2,456 

  (11)

Net income from financial instruments held for trading or managed on a fair value basis

  6

 

  3

 

Loans and advances to banks

  1

  2,280 

 

  56

 

Loans and advances to customers

  21

 

  12,148 

 

  1,620 

Debt securities in issue

  (613)

 

  89

 

  3

Deposits by banks

  18

 

At 31 Dec 2020

  104,546 

  12,237 

  3,451 

  1,623 

 

  1,883 

  (11)

 

1  Used in effectiveness testing, which comprise an amount attributable to the designated hedged risk that can be a risk component.

2  The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were assets of $1,061m for FVOCI assets and assets of $15m for debt issued.

3  The hedged risk 'interest rate' includes inflation risk.

 

 

HSBC Holdings hedging instrument by hedged risk

 

Hedging instrument

 

 

Carrying amount

 

 

 

Notional amount1,4

Assets

Liabilities

Balance sheet presentation

Change in fair value2

Hedged risk

$m

$m

$m

$m

Interest rate3

  45,358 

  1,715 

  74 

Derivatives

  (1,515)

At 31 Dec 2021

  45,358 

  1,715 

  74 

 

  (1,515)

 

 

 

 

 

 

Interest rate3

  34,006 

  3,221 

  8

Derivatives

  1,927 

At 31 Dec 2020

  34,006 

  3,221 

  8

  1,927 

1  The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

2  Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3  The hedged risk 'interest rate' includes foreign exchange risk.

4  The notional amount of non-dynamic fair value hedges is equal to $45,358m, of which the weighted-average maturity date is January 2028 and the weighted-average swap rate is 1.30%. The majority of these hedges are internal to the Group.

HSBC Holdings hedged item by hedged risk

 

Hedged item

Ineffectiveness

 

Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

 

Change in fair value1

Recognised in

profit and loss

 

 

Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss

presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

 

  39,154 

 

  1,408 

Debt securities

in issue

  1,599 

  (21)

Net income from financial instruments held for trading or managed on a fair value basis

  7,863 

 

  (104)

 

Loans and Advances to banks

  (104)

 

At 31 Dec 2021

  7,863 

  39,154 

  (104)

  1,408 

 

  1,495 

  (21)

 

 

 

 

 

 

 

 

 

 

Interest rate3

 

  37,338 

 

  3,027 

Debt securities
in issue

  (1,910) 

  17

Net income from financial instruments held for trading or managed on a fair value basis

 

 

 

 

Loans and Advances to banks

 

 

At 31 Dec 2020

  - 

  37,338 

  - 

  3,027 

 

  (1,910) 

  17

 

1  Used in effectiveness testing; comprising amount attributable to the designated hedged risk that can be a risk component.

2  The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were liabilities of $54.4m for debt issued.

3  The hedged risk 'interest rate' includes foreign exchange risk.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to the discount rates used for calculating the fair value of derivatives, hedges using instruments with a non-zero fair value, and notional and timing differences between the hedged items and hedging instruments.

For some debt securities held, HSBC manages interest rate risk in a dynamic risk management strategy. The assets in scope of this strategy are high-quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements.

The interest rate risk of the HSBC fixed-rate debt securities issued is managed in a non-dynamic risk management strategy.

 

Cash flow hedges

HSBC's cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign-currency basis.

HSBC applies macro cash flow hedging for interest rate risk exposures on portfolios of replenishing current and forecasted issuances of non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.

HSBC also hedges the variability in future cash flows on foreign-denominated financial assets and liabilities arising due to changes in foreign exchange market rates with cross-currency swaps, which are considered dynamic hedges.

Hedging instrument by hedged risk

 

 

 

 

Hedging instrument

Hedged item

Ineffectiveness

 

 

Carrying amount

 

Change in fair value2

Change in fair value3

Recognised in profit and loss

Profit and loss presentation

 

Notional amount1

Assets

Liabilities

Balance sheet presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Foreign currency

  17,930 

  827 

  207 

Derivatives

  987 

  987 

  - 

Net income from
financial instruments
held for trading or
managed on a fair
value basis

Interest rate

  72,365 

  112 

  217 

Derivatives

  (519)

  (500)

  (19)

At 31 Dec 2021

  90,295 

  939 

  424 

 

  468 

  487 

  (19)

 

 

Foreign currency

  24,506 

  309

  448

Derivatives

  (630)

  (630)

  - 

Net income from financial instruments held for trading or managed on a fair value basis

Interest rate

  35,863 

  239

  2

Derivatives

  519

  514

  5

At 31 Dec 2020

  60,369 

  548

  450

 

  (111)

  (116)

  5

 

1  The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

2  Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3  Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to timing differences between the hedged items and hedging instruments and hedges using instruments with a non-zero fair value.

Reconciliation of equity and analysis of other comprehensive income by risk type

 

Interest rate

Foreign currency

 

$m

$m

Cash flow hedging reserve at 1 Jan 2021

  495 

  (37)

Fair value gains/(losses)

  (500)

  987 

Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:

 

 

Hedged items that have affected profit or loss

  (217)

  (1,177)

Income taxes

  185 

  25 

Others

  45 

  (3)

Cash flow hedging reserve at 31 Dec 2021

  8 

  (205)

 

 

 

 

Cash flow hedging reserve at 1 Jan 2020

  204

  (205)

Fair value gains/(losses)

  514

  (630)

Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:

 

 

Hedged items that have affected profit or loss

  (107)

  822

Income taxes

  (79)

  (23)

Others

  (37)

  (1)

Cash flow hedging reserve at 31 Dec 2020

  495

  (37)

 

Net investment hedges

The Group applies hedge accounting in respect of certain net investments in non-US dollar functional currency foreign operations for changes in spot exchange rates only. Hedging could be undertaken for Group structural exposure to changes in the US dollar to foreign currency exchange rates using forward foreign exchange contracts or by financing with foreign currency borrowings. The aggregate positions at the reporting date and the performance indicators of both live and de-designated hedges are summarised below. There were no amounts reclassified to the profit and loss account during the accounting periods presented.

Hedges of net investment in foreign operations

 

Carrying value

Nominal

 amount

Amounts recognised in OCI

Hedge ineffectiveness recognised in income statement

 

Derivative

 assets

Derivative liabilities

Description of hedged risk

$m

$m

$m

$m

$m

2021

 

 

 

 

 

Pound sterling-denominated structural foreign exchange

  229 

  - 

  15,717 

  (126)

  - 

Swiss franc-denominated structural foreign exchange

  - 

  (8)

  809 

  101 

  - 

Hong Kong dollar-denominated structural foreign exchange

  7 

  - 

  4,992 

  5 

  - 

Other structural foreign exchange1

  7 

  - 

  4,387 

  6 

  - 

Total

  243 

  (8)

  25,905 

  (14)

  - 

 

 

 

 

 

 

2020

 

 

 

 

 

Pound sterling-denominated structural foreign exchange

  - 

  733

  10,500 

  (167) 

  - 

Swiss franc-denominated structural foreign exchange

  - 

  - 

  - 

  111

  - 

Hong Kong dollar-denominated structural foreign exchange

  - 

  - 

  - 

  - 

  - 

Other structural foreign exchange1

  - 

  - 

  - 

  - 

  - 

Total

  - 

  733

  10,500 

  (56) 

  - 

 1  Other currencies include New Taiwan dollar, Singapore dollar, Canadian dollar, Omani rial, South Korean won and United Arab Emirates dirham.

Interest rate benchmark reform: Amendments to IFRS 9 and IAS 39 'Financial Instruments'

HSBC has applied both the first set of amendments ('Phase 1') and the second set of amendments ('Phase 2') to IFRS 9 and IAS 39 applicable to hedge accounting. The hedge accounting relationships that are affected by Phase 1 and Phase 2 amendments are presented in the balance sheet as 'Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income', 'Loans and advances to customers', 'Debt securities in issue' and 'Deposits by banks'. The notional value of the derivatives impacted by the Ibor reform, including those designated in hedge accounting relationships, is disclosed on page 127 in the section 'Financial instruments impacted by the Ibor reform'. For further details on Ibor transition, see 'Top and emerging risks' on page 126.

During 2021, the Group transitioned all of its hedging instruments referencing sterling Libor, European Overnight Index Average rate ('Eonia') and Japanese yen Libor. The Group also transitioned some of the hedging instruments referencing US dollar Libor. There is no significant judgement applied for these benchmarks to determine whether and when the transition uncertainty has been resolved.

The most significant Ibor benchmark in which the Group continues to have hedging instruments is US dollar Libor. It is expected that the transition out of US dollar Libor hedging derivatives will be largely completed by the end of 2022. These transitions do not necessitate new approaches compared with any of the mechanisms used so far for transition and it will not be necessary to change the transition risk management strategy.

For some of the Ibors included under the 'Other' header in the table below, judgement has been needed to establish whether a transition is required, since there are Ibor benchmarks that are subject to computation methodology improvements and insertion of fallback provisions without full clarity being provided by their administrators on whether these Ibor benchmarks will be demised.

The notional amounts of interest rate derivatives designated in hedge accounting relationships do not represent the extent of the risk exposure managed by the Group but they are expected to be directly affected by market-wide Ibor reform and in scope of Phase 1 amendments and are shown in the table below. The cross-currency swaps designated in hedge accounting relationships and affected by Ibor reform are not significant and have not been presented below.

Hedging instrument impacted by Ibor reform

 

Hedging instrument

 

Impacted by Ibor reform

Not impacted by Ibor reform

Notional

amount1

 

€2

£

$

Other3

Total

 

$m

$m

$m

$m

$m

$m

$m

Fair value hedges

  6,178 

  - 

  18,525 

  6,615 

  31,318 

  59,238 

  90,556 

Cash flow hedges

  7,954 

  - 

  100 

  8,632 

  16,686 

  55,679 

  72,365 

At 31 Dec 2021

  14,132 

  - 

  18,625 

  15,247 

  48,004 

  114,917 

  162,921 

 

 

 

 

 

 

 

 

Fair value hedges

  17,792 

  3,706 

  32,789 

  10,128 

  64,415 

  57,157 

  121,572 

Cash flow hedges

  8,344 

  2,522 

  8,705 

  6,797 

  26,368 

  9,495 

  35,863 

At 31 Dec 2020

  26,136 

  6,228 

  41,494 

  16,925 

  90,783 

  66,652 

  157,435 

1  The notional contract amounts of interest rate derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date and they do not represent amounts at risk.

2  The notional contract amounts of euro interest rate derivatives impacted by Ibor reform mainly comprise hedges with a Euribor benchmark, which are 'Fair value hedges' of $6,178m (31 December 2020: $6,000m) and 'Cash flow hedges' of $7,954m (31 December 2020: $8,344m).

3  Other benchmarks impacted by Ibor reform comprise mainly of Canadian dollar offered rate ('CDOR'), Hong Kong interbank offered rate ('HIBOR') and Mexican interbank equilibrium interest rate ('TIIE') related derivatives.

3 

 

Hedging instrument impacted by Ibor reform held by HSBC Holdings

 

Hedging instrument

 

Impacted by Ibor reform

Not impacted by Ibor reform

Notional amount

 

€

£

$

Other

Total

 

$m

$m

$m

$m

$m

$m

$m

Fair value hedges

  9,944 

  - 

  20,035 

  1,458 

  31,437 

  13,921 

  45,358 

At 31 Dec 2021

  9,944 

  - 

  20,035 

  1,458 

  31,437 

  13,921 

  45,358 

 

 

 

 

 

 

 

 

Fair value hedges

  4,290 

  5,393 

  21,081 

  3,242 

  34,006 

  - 

  34,006 

At 31 Dec 2020

  4,290 

  5,393 

  21,081 

  3,242 

  34,006 

  - 

  34,006 

 

 

16

Financial investments

 

Carrying amount of financial investments

 

2021

2020

 

$m

$m

Financial investments measured at fair value through other comprehensive income

  348,972 

  402,054 

-  treasury and other eligible bills

  100,158 

  118,163 

-  debt securities

  246,998 

  281,467 

-  equity securities

  1,770 

  2,337 

-  other instruments

  46 

  87

Debt instruments measured at amortised cost

  97,302 

  88,639 

-  treasury and other eligible bills

  21,634 

  11,757 

-  debt securities

  75,668 

  76,882 

At 31 Dec

  446,274 

  490,693 

 

Equity instruments measured at fair value through other comprehensive income

 

Fair value

Dividends recognised

Type of equity instruments

$m

$m

Investments required by central institutions

  766 

  17 

Business facilitation

  954 

  24 

Others

  50 

  3 

At 31 Dec 2021

  1,770 

  44 

 

 

 

Investments required by central institutions

  904

  22

Business facilitation

  1,387 

  22

Others

  46

  3

At 31 Dec 2020

  2,337 

  47

 

Weighted average yields of investment debt securities

 

Up to 1

 year

1 to 5

years

5 to 10 years

Over 10 years

 

Yield

Yield

Yield

Yield

 

%

%

%

%

Debt securities measured at fair value through other comprehensive income

 

 

 

 

US Treasury

  1.2 

  1.5 

  1.3 

  2.1 

US Government agencies

  0.2 

  1.2 

  2.8 

  1.9 

US Government-sponsored agencies

  1.0 

  1.6 

  2.3 

  1.6 

UK Government

  2.5 

  0.5 

  0.7 

  2.6 

Hong Kong Government

  0.4 

  0.9 

  2.2 

  - 

Other governments

  2.0 

  2.5 

  2.2 

  3.7 

Asset-backed securities

  9.3 

  0.7 

  1.1 

  0.5 

Corporate debt and other securities

  2.3 

  1.3 

  2.4 

  3.1 

 

 

 

 

 

Debt securities measured at amortised cost

 

 

 

 

US Treasury

  0.7 

  1.3 

  5.9 

  2.9 

US Government agencies

  3.8 

  8.2 

  5.4 

  2.5 

US Government-sponsored agencies

  2.7 

  2.8 

  2.3 

  3.3 

Hong Kong Government

  2.0 

  3.8 

  2.1 

  4.8 

Other governments

  3.0 

  3.9 

  3.3 

  3.9 

Asset-backed securities

  - 

  - 

  - 

  7.5 

Corporate debt and other securities

  3.4 

  3.3 

  3.7 

  3.3 

 

The maturity distributions of ABSs are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2021 by the book amount of debt securities at that date. The yields do not include the effect of related derivatives.

 

HSBC Holdings

HSBC Holdings carrying amount of financial investments

 

2021

2020

 

$m

$m

Debt instruments measured at amortised cost

 

 

-  treasury and other eligible bills

  19,508 

  10,941 

-  debt securities

  6,686 

  6,544 

At 31 Dec

  26,194 

  17,485 

 

Weighted average yields of investment debt securities

 

Up to 1

 year

1 to 5

years

5 to 10 years

Over 10 years

 

Yield

Yield

Yield

Yield

 

%

%

%

%

Debt securities measured at amortised cost

 

 

 

 

US Treasury

  0.3 

  0.3 

  - 

  - 

 

The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2021 by the book amount of debt securities at that date. The yields do not include the effect of related derivatives.

 

 

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