Annual Financial Report - Part 9

RNS Number : 5857Q
HSBC Holdings PLC
21 February 2023
 

 

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.

 

Contents

313

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

324

Financial statements

335

Notes on the financial statements

 

 

 

Building on our international connections

We aim to collaborate internationally to make a difference for our customers. In May 2022, we supported a Hong Kong-based client with its investment in one of London's tallest skyscrapers. We helped C C Land Holdings Limited with a £605m refinancing of The Leadenhall Building in the City of London financial district. The international property development and investment company bought the 225-metre tall tower in 2017 for £1.15bn, in what was the second biggest sale of a UK building at the time. The refinancing was co-ordinated by colleagues from our UK and Hong Kong teams, and incorporated support from three other banks.

 


 


 


 

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 statements 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 2022 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.

We have audited the financial statements, included within the Annual Report and Accounts 2022 (the "Annual Report"), which comprise: the consolidated and company balance sheets as at 31 December 2022; 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 description of the 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 131 to 238 and the Directors remuneration report disclosures on pages 276 to 301.

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

We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC's Ethical Standard, as applicable to listed public interest entities, and the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by either the FRC's Ethical Standard or Article 5(1) of Regulation (EU) No 537/2014 were not provided to the company or its controlled undertakings.

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 fourth year that it has been my responsibility to form this opinion on behalf of PricewaterhouseCoopers LLP, 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.

Key audit matters

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

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

• Investments in subsidiaries (company)

• Valuation of defined benefit pension obligations (group)

• Held for sale accounting (group)

Materiality

• Overall group materiality: US$1bn (2021: US$970m) based on 5% of adjusted profit before tax.

• Overall company materiality: US$950m (2021: US$920) 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$750m (2021: US$725m) (group) and US$712m (2021: US$690m) (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.

Held for sale accounting (group) is a new key audit matter this year. Otherwise, the key audit matters below 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 (specifically the central and downside scenarios given these have the most material impact on ECL) and estimating management judgemental adjustments and significant discounted cash flows for material credit impaired exposures in relation to the China offshore unsecured commercial real estate portfolio.

The level of estimation uncertainty and judgement has remained high during 2022 as a result of the uncertain macroeconomic and geopolitical environment, high levels of inflation and a rising global interest rate environment, as well as developments in China's commercial real estate sector. Macroeconomic conditions vary between territories and industries, leading to uncertainty around judgements made in determining the severity and probability weighting of macroeconomic variable 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 prevailing macroeconomic 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 and 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, in particular in relation to the China commercial real estate offshore portfolio.

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 corporate exposures, other than in relation to the China commercial real estate offshore portfolio;

• 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 uncertain prevailing macroeconomic conditions and developments in China's commercial real estate sector. We discussed a number of areas, including:

• the severity of macroeconomic scenarios, and their related probability weightings, across territories;

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

• significant assumptions used to estimate the discounted cash inflow projections for defaulted exposures in relation to unsecured offshore China commercial real estate;

• 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.

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 macroeconomic scenarios and their probability weightings, 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 triggers;

• 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;

• the calculation and approval of management judgemental adjustments to modelled outcomes; and

• approval of significant individual impairments.

We involved our economic experts in assessing the significant assumptions made in determining the severity and probability weighting of macroeconomic variables ("MEV") forecasts. These assessments considered the sensitivity of ECL to variations in the severity and probability weighting of MEV forecasts. We involved our modelling experts in assessing the appropriateness of the significant assumptions and methodologies used for models and certain management judgemental adjustments. We independently re-performed the calculations for a sample of those models and certain management judgemental adjustments. In respect of unsecured offshore China commercial real estate, we involved our business recovery experts in assessing certain significant management judgemental adjustments and discounted cash flows for a sample of credit impaired exposures. 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;

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

• a sample of CRRs applied to the wholesale exposures.

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

• Credit risk disclosures, page 145.

• Group Audit Committee Report, page 262.

• Note 1.2(d):Financial instruments measured at amortised cost, page 340.

• Note 1.2(i): Impairment of amortised cost and FVOCI financial assets, page 341.

 

 

At 31 December 2022, the fair value of the investment in BoCom, based on the share price, was US$15.2bn lower than the carrying value ('CV') of US$23.3bn.

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 $0.2bn 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, and expected credit losses;

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

• capital related assumptions (risk-weighted assets as a percentage of total 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 11 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 the 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 analysts reports, information from BoCom management and historically available BoCom public information;

• assessing the impact on the VIU of 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 meetings 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.

• Group Audit Committee Report, page 262.

• Note 1.2(a): Critical accounting estimates and judgements, page 338.

• Note 18: Interests in associates and joint ventures, page 379.

 

Investments in subsidiaries (company)

Management reviewed investments in subsidiaries for indicators of impairment and indicators that impairment charges recognised in prior periods may no longer exist or may have decreased in accordance with IAS 36 as at 31 December 2022. Where indicators have been identified management estimated the recoverable amount using the higher of value in use ('VIU) or fair value less cost to sell. Management's assessment resulted in a partial reversal of an impairment charge of US$2.5bn in relation to the investment in HSBC Overseas Holdings (UK) Limited ('HOHU'), which is an immediate holding company of certain businesses in North America. This resulted in investment in subsidiaries of $US167.5bn at 31 December 2022.

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 business plan for 2023 to 2027 focusing on revenue, cost and ECL forecasts including the impact of climate change risk;

• 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 reasonable 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 business plan and the prospects for HSBC's businesses, as well as considering the achievement of historic forecasts;

• obtaining and evaluating evidence relating to significant assumptions, from a combination of historical 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 382.

 

Valuation of defined benefit pensions obligations (group)

The group has a defined benefit obligation of US$25.7bn, of which US$18.8bn 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 obligations. 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 tested the accuracy of the calculation, 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.

• Group Audit Committee Report, page 262.

• Note 1.2(k): Critical accounting estimates and judgements, page 345.

• Note 5: Employee compensation and benefits, page 351.

 

 

 

 

 

Held for sale accounting (group)

The group has agreements to sell a number of businesses as part of executing its strategy. This has resulted in US$115.9bn of assets and US$114.6bn of liabilities being classified as held for sale as at 31 December 2022, in relation to businesses in France, Canada, Russia and Greece. In addition to the assets and liabilities classified as held for sale, a loss of US$2.4bn has also been recognised in 2022 in relation to the sale of the business in France. For the assets and liabilities to be classified as held for sale, the sale needs to be considered highly probable and expected to complete within 12 months of the date of classification. We focused our audit on the areas with greater levels of management judgement relating to the highly probable threshold being met including the expected timing of completion, the appropriateness of disclosures relating to the highly probable assessment and the loss recognised in relation to the sale of the business in France.

We discussed with the GAC the judgements made by management in determining if the highly probable thresholds were met as at 31 December 2022. We also discussed the appropriateness of the disclosure made in the Annual Report which explained how management had concluded that transactions met the highly probable threshold as at 31 December 2022.

We tested governance and controls in place over the management process to determine if the highly probable threshold had been met on assets and liabilities classified as held for sale.

We assessed the key judgments made by management to determine whether the highly probable thresholds were met as at 31 December 2022, including their assessment of remaining actions to complete the transactions, any regulatory requirements that need to be met, and the likelihood and expected timing of the transactions being approved by relevant regulators and shareholders.

We also tested the completeness and accuracy of the assets and liabilities that were classified as held for sale and the loss on sale recognised in relation to the French business. We evaluated and tested the disclosures made in the Annual Report in relation to assets and liabilities classified as held for sale.

• Group Audit Committee Report, page 262.

• Note 1.2(o): Critical accounting estimates and judgements, page 347.

• Note 23: Assets held for sale and liabilities of disposal groups held for sale, page 389.

 

How we tailored the audit scope

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.

The risks that HSBC faces are diverse, with the interdependencies between them being numerous and complex. In performing our risk assessment we engaged with a number of stakeholders to ensure we appropriately understood and considered these risks and their interrelationships. This includes stakeholders within HSBC and our own experts within PwC. This engagement covered external factors across the geopolitical, macroeconomic and regulatory and accounting landscape, the impact of climate change risk as well as the internal environment at HSBC, driven by strategy and transformation.

We evaluated and challenged management's assessment of the impact of climate change risk, which is set out on page 46, including their conclusion that there is no material impact on the financial statements. In making this evaluation we considered management's use of stress testing and scenario analysis to arrive at the conclusion that there is no material impact on the financial statements. We considered management's assessment on the areas in the financial statements most likely to be impacted by climate risk, including:

• the impact on ECL on loans and advances to customers, for both physical and transition risk;

• the forecast cashflows from management's five year business plan and long term growth rates used in estimating recoverable amounts as part of impairment assessments of investments in subsidiaries, goodwill and intangible assets;

• the impact of climate related terms on the solely payments of principal and interest test for classification and measurement of loans and advances to customers; and

• climate risks relating to contingent liabilities as HSBC faces increased reputational, legal and regulatory risk as it progresses towards its climate ambition.

HSBC's progress on their ESG targets is not included within the scope of this audit. We were engaged separately to provide independent limited assurance to the Directors over the following ESG data:

 

• the 2019 and 2020 on-balance sheet financed emissions for 6 sectors in total (page 50);

• the cumulative progress made by HSBC on providing and facilitating sustainable financing and investments (page  57); and

• HSBC's own operations' scope 1, 2 and 3 (limited to business travel) greenhouse gas emissions data for 2022 (page 62); and supply chain greenhouse gas emissions for purchased goods and services, and capital goods for 2021 and 2022 (page 64).

The independent limited assurance reports, which explain the scope of our work and the procedures undertaken can be found on: www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre. The work performed for a limited assurance report is substantially less than the work performed for our financial audit, which provides reasonable assurance.

Through our risk assessment, we tailored our determination as to which entities and balances we needed to perform testing over to support our Group opinion, taking into consideration the complex and disaggregated group structure, the accounting processes and controls as well as the industry in which they operate. The risks of material misstatement can be reduced to an acceptable level by testing the most financially significant entities within the Group and those that drive particular significant risks identified as part of our risk assessment. This ensures that sufficient coverage has been obtained for each financial statement line item (FSLI). 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 The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc, and HSBC North America Holdings Inc. 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. Banco. 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 to incorporate elements of unpredictability into our audit scoping, extending the scope of work performed for both

The Hongkong and Shanghai Banking Corporation India Branch, and HSBC Bank (China) Limited. These entities are also in scope for The Hongkong and Shanghai Banking Corporation Limited. This was undertaken with consideration of both the relative profitability of these entities in the region and the Group's strategy.

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'). Whilst these operations centres are not separate components,  the IT and operational processes and controls are relevant to the financial information of the Significant Subsidiaries. Financial reporting processes and controls are also performed centrally in HSBC's Group Finance function and finance operation centres ('Finance Operations'), including the impairment assessment of goodwill and intangible assets, the consolidation of the group's results, the preparation of financial statements, and management's oversight controls relevant to the group's financial reporting.

Group-wide processes or processes in DBS and Finance Operations are subject to specified audit procedures or an audit over specific FSLIs. These procedures primarily relate to testing of IT general controls, forward looking economic scenarios for ECL, operating expenses, intangible assets, valuation of financial instruments, intercompany eliminations, reconciliations and consolidation as well as payroll. 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, Mexico and the Philippines. 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

In March 2022, we held a meeting in Dubai with the partners and senior staff from the Group audit team and the PwC teams who undertake audits of the Significant Subsidiaries and the Operations Centres. The meeting focused primarily on reconnecting as a team after virtual interactions throughout the Covid-19 pandemic, reassessing our approach to auditing HSBC's businesses, changes at HSBC and in our PwC teams, and how we continue to innovate and improve the quality of the audit. We also discussed our significant audit risks.

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$712m to US$50m. Certain Significant Subsidiaries were audited to a local statutory audit materiality that was a lower level than our allocated 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. Senior members of our team undertook at least one in-person site visit prior to the year end where a full scope audit was requested. We attended Audit Committee meetings for some of the Significant Subsidiaries. We also attended meetings with management for each of these Significant Subsidiaries at the year-end.

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 84% of total assets and 69% of total operating income.

Using the work of others

We have increased our use of evidence provided by others through our reliance on management assurance testing of controls across the group. This included testing of controls performed by management themselves in certain low risk areas including reconciliations, footnote disclosure controls and certain automated controls. We re-performed a portion of the testing to ensure appropriate quality of testing, as well as assessing the competence and objectivity of those performing the testing.

We also used the work of PwC experts, for example economic experts for our work around the severity and probability weighting of macroeconomics variables 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$1bn (2021: US$970m).

US$950m (2021: US$920).

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.

Rationale for benchmark applied

We believe a standard benchmark of 5% of adjusted profit before tax is an appropriate qualitative 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 29, management believes it best reflects the performance of HSBC and how the group is run. We excluded the adjustments made by management on page 29 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% (2021: 75%) of overall materiality, amounting to US$750m (2021: US$725m) for the group financial statements and US$712m (2021: US$690m) for the company financial statements.

In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and 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$50m (group audit) (2021: US$48m) and US$50m (company audit) (2021: US$48m) 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 both internal risks (i.e. strategy execution) and external risks (i.e. macroeconomic conditions);

• 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; and

• 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.

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 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 2022 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 appropriate 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 and company 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 in relation to cost targets, and management bias in accounting estimates. The group engagement team shared this risk assessment with the component 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 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;

• 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 assessment of the investment in BoCom, valuation of defined benefit pensions obligations, investment in subsidiaries and valuation of financial instruments;

• 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 controls 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 controls;

• 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; and

• 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 Group Audit Committee ('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 eight years, covering the years ended 31 December 2015 to 31 December 2022.

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

21 February 2023


 

Financial statements

 


 

Contents

324

Consolidated income statement

325

Consolidated statement of comprehensive income

326

Consolidated balance sheet

327

Consolidated statement of cash flows

328

Consolidated statement of changes in equity

331

HSBC Holdings income statement

331

HSBC Holdings statement of comprehensive income

332

HSBC Holdings balance sheet

333

HSBC Holdings statement of cash flows

334

HSBC Holdings statement of changes in equity

 


Consolidated income statement

for the year ended 31 December



2022

2021

2020


Notes*

$m

$m

$m

Net interest income


  32,610 

  26,489 

  27,578 

-  interest income1,2


  55,059 

  36,188 

  41,756 

-  interest expense3


  (22,449)

  (9,699)

  (14,178)

Net fee income

2

  11,451 

  13,097 

  11,874 

-  fee income


  15,213 

  16,788 

  15,051 

-  fee expense


  (3,762)

  (3,691)

  (3,177)

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

3

  10,469 

  7,744 

  9,582 

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

3

  (3,394)

  4,053 

  2,081 

Changes in fair value of designated debt and related derivatives4

3

  (77)

  (182)

  231 

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

3

  226 

  798 

  455 

Gains less losses from financial investments


  (3)

  569 

  653 

Net insurance premium income

4

  12,825 

  10,870 

  10,093 

Impairment loss relating to the planned sale of our retail banking operations in France5


  (2,378)

  - 

  - 

Other operating income/(loss)6


  (133)

  502 

  527 

Total operating income


  61,596 

  63,940 

  63,074 

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

4

  (9,869)

  (14,388)

  (12,645)

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


  51,727 

  49,552 

  50,429 

Change in expected credit losses and other credit impairment charges


  (3,592)

  928 

  (8,817)

Net operating income


  48,135 

  50,480 

  41,612 

Employee compensation and benefits

5

  (18,366)

  (18,742)

  (18,076)

General and administrative expenses


  (11,091)

  (11,592)

  (11,115)

Depreciation and impairment of property, plant and equipment and right-of-use assets7


  (2,157)

  (2,261)

  (2,681)

Amortisation and impairment of intangible assets


  (1,716)

  (1,438)

  (2,519)

Goodwill impairment

21

  - 

  (587)

  (41)

Total operating expenses


  (33,330)

  (34,620)

  (34,432)

Operating profit


  14,805 

  15,860 

  7,180 

Share of profit in associates and joint ventures

18

  2,723 

  3,046 

  1,597 

Profit before tax


  17,528 

  18,906 

  8,777 

Tax expense

7

  (858)

  (4,213)

  (2,678)

Profit for the year


  16,670 

  14,693 

  6,099 

Attributable to:





-  ordinary shareholders of the parent company


  14,822 

  12,607 

  3,898 

-  preference shareholders of the parent company


  - 

  7

  90

-  other equity holders


  1,213 

  1,303 

  1,241 

-  non-controlling interests


  635 

  776 

  870 

Profit for the year


  16,670 

  14,693 

  6,099 



$

$

$

Basic earnings per ordinary share

9

  0.75 

  0.62 

  0.19 

Diluted earnings per ordinary share

9

  0.74 

  0.62 

  0.19 

*  For Notes on the financial statements, see page 335.

1  Interest income includes $48,134m (2021: $30,916m; 2020: $35,293m) of interest recognised on financial assets measured at amortised cost and $6,386m (2021: $4,337m; 2020: $5,614m) of interest recognised on financial assets measured at fair value through other comprehensive income.

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

3  Interest expense includes $20,798m (2021: $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 impairment of goodwill of $425m.

6  Other operating income includes a loss on net monetary positions of $678m (2021: $224m, 2020: $128m) as a result of applying IAS 29 'Financial Reporting in Hyperinflationary Economies'.

7  Includes depreciation of the right-of-use assets of $723m (2021: $878m; 2020: $1,029m).


Consolidated statement of comprehensive income

for the year ended 31 December


2022

2021

2020


$m

$m

$m

Profit for the year

  16,670 

  14,693 

  6,099 

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

  (5,468)

  (2,139)

  1,750 

-  fair value gains/(losses)

  (7,261)

  (2,270)

  2,947 

-  fair value gains transferred to the income statement on disposal

  (20)

  (464)

  (668)

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

  67 

  (49)

  48

-  income taxes

  1,746 

  644 

  (577)

Cash flow hedges

  (3,655)

  (664)

  471 

-  fair value gains/(losses)

  (4,207)

  595 

  (157)

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

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

  (758)

  (1,514)

  769 

-  income taxes

  1,310 

  255 

  (141)

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

  (367)

  103 

  (73)

-  share for the year

  (367)

  103 

  (73)

Exchange differences

  (9,931)

  (2,393)

  4,855 

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




Fair value gains on property revaluation

  280 

  - 

  - 

Remeasurement of defined benefit asset/liability

  (1,031)

  (274)

  834 

-  before income taxes

  (1,723)

  (107)

  1,223 

-  income taxes

  692 

  (167)

  (389)

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

 

  1,922 

  531 

  167 

-  before income taxes

-  before income taxes

  2,573 

  512 

  190 

-  income taxes

-  income taxes

  (651)

  19

  (23)

Equity instruments designated at fair value through other comprehensive income

  107 

  (446)

  212 

-  fair value gains/(losses)

  107 

  (443)

  212 

-  income taxes

  - 

  (3)

  - 

Effects of hyperinflation

  842 

  315 

  193 

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

  (17,301)

  (4,967)

  8,409 

Total comprehensive income/(expense) for the year

  (631)

  9,726 

  14,508 

Attributable to:




-  ordinary shareholders of the parent company

  (2,393)

  7,765 

  12,146 

-  preference shareholders of the parent company

  - 

  7

  90

-  other equity holders

  1,213 

  1,303 

  1,241 

-  non-controlling interests

  549 

  651 

  1,031 

Total comprehensive income/(expense) for the year

  (631)

  9,726 

  14,508 

 


Consolidated balance sheet



At



31 Dec

31 Dec



2022

2021


Notes*

$m

$m

Assets




Cash and balances at central banks


  327,002 

  403,018 

Items in the course of collection from other banks


  7,297 

  4,136 

Hong Kong Government certificates of indebtedness


  43,787 

  42,578 

Trading assets

11

  218,093 

  248,842 

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

14

  45,063 

  49,804 

Derivatives

15

  284,146 

  196,882 

Loans and advances to banks


  104,882 

  83,136 

Loans and advances to customers


  924,854 

  1,045,814 

Reverse repurchase agreements - non-trading


  253,754 

  241,648 

Financial investments

16

  425,564 

  446,274 

Assets held for sale1

23

  115,919 

  3,411 

Prepayments, accrued income and other assets

22

  156,866 

  136,571 

Current tax assets


  1,230 

  970 

Interests in associates and joint ventures

18

  29,254 

  29,609 

Goodwill and intangible assets

21

  21,321 

  20,622 

Deferred tax assets

7

  7,498 

  4,624 

Total assets


  2,966,530 

  2,957,939 

Liabilities and equity




Liabilities




Hong Kong currency notes in circulation


  43,787 

  42,578 

Deposits by banks


  66,722 

  101,152 

Customer accounts


  1,570,303 

  1,710,574 

Repurchase agreements - non-trading


  127,747 

  126,670 

Items in the course of transmission to other banks


  7,864 

  5,214 

Trading liabilities

24

  72,353 

  84,904 

Financial liabilities designated at fair value

25

  127,327 

  145,502 

Derivatives

15

  285,764 

  191,064 

Debt securities in issue

26

  78,149 

  78,557 

Liabilities of disposal groups held for sale1

23

  114,597 

  9,005 

Accruals, deferred income and other liabilities

27

  133,240 

  114,773 

Current tax liabilities


  1,135 

  698 

Liabilities under insurance contracts

4

  114,844 

  112,745 

Provisions

28

  1,958 

  2,566 

Deferred tax liabilities

7

  2,422 

  4,673 

Subordinated liabilities

29

  22,290 

  20,487 

Total liabilities


  2,770,502 

  2,751,162 

Equity




Called up share capital

32

  10,147 

  10,316 

Share premium account

32

  14,664 

  14,602 

Other equity instruments


  19,746 

  22,414 

Other reserves


  (9,141)

  6,460 

Retained earnings


  152,068 

  144,458 

Total shareholders' equity


  187,484 

  198,250 

Non-controlling interests

19

  8,544 

  8,527 

Total equity


  196,028 

  206,777 

Total liabilities and equity


  2,966,530 

  2,957,939 

1  'Assets held for sale' in 2021, including $2.4bn of loans and advances to customers in relation to our exit of mass market retail banking business in the US, were reported within 'Prepayments, accrued income and other assets' in the Annual Report and Accounts 2021. Similarly, $8.8bn of customer accounts classified as 'Liabilities of disposal groups' were previously presented within 'Accruals, deferred income and other liabilities'.

*  For Notes on the financial statements, see page 335.

The accompanying notes on pages 335 to 417 and the audited sections in the Risk review on pages 131 to 238 (including 'Measurement uncertainty and sensitivity analysis of ECL estimates' on pages 153 to 162, and 'Directors' remuneration report' on pages 276 to 301 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 21 February 2023 and signed on its behalf by:




Mark E Tucker


Georges Elhedery

Group Chairman


Group Chief Financial Officer

 


Consolidated statement of cash flows

for the year ended 31 December


2022

2021

2020


$m

$m

$m

Profit before tax

  17,528 

  18,906 

  8,777 

Adjustments for non-cash items:




Depreciation, amortisation and impairment

  3,873 

  4,286 

  5,241 

Net loss/(gain) from investing activities

  11 

  (647)

  (541)

Share of profits in associates and joint ventures

  (2,723)

  (3,046)

  (1,597)

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

  2,639 

  - 

  - 

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

  3,907 

  (519)

  9,096 

Provisions including pensions

  635 

  1,063 

  1,164 

Share-based payment expense

  400 

  467 

  433 

Other non-cash items included in profit before tax

  (1,084)

  510 

  (906)

Elimination of exchange differences1

  49,127 

  18,937 

  (25,749)

Changes in operating assets and liabilities




Change in net trading securities and derivatives

  20,181 

  (9,226)

  13,150 

Change in loans and advances to banks and customers

  31,799 

  (11,014)

  (14,131)

Change in reverse repurchase agreements - non-trading

  (23,405)

  552 

  9,950 

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

  8,344 

  (4,254)

  (1,962)

Change in other assets

  (10,771)

  19,899 

  (19,610)

Change in deposits by banks and customer accounts

  (91,194)

  95,703 

  226,723 

Change in repurchase agreements - non-trading

  4,344 

  14,769 

  (28,443)

Change in debt securities in issue

  12,518 

  (16,936)

  (9,075)

Change in financial liabilities designated at fair value

  (13,647)

  (11,425)

  (6,630)

Change in other liabilities

  15,978 

  (10,935)

  20,323 

Dividends received from associates

  944 

  808 

  761 

Contributions paid to defined benefit plans

  (194)

  (509)

  (495)

Tax paid

  (2,776)

  (3,077)

  (4,259)

Net cash from operating activities

  26,434 

  104,312 

  182,220 

Purchase of financial investments

  (520,600)

  (493,042)

  (496,669)

Proceeds from the sale and maturity of financial investments

  495,049 

  521,190 

  476,990 

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

  (1,285)

  (1,086)

  (1,446)

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

  (3,530)

  3,059 

  1,362 

Net investment in intangible assets

  (3,125)

  (2,479)

  (2,064)

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

  (989)

  (106)

  (603)

Net cash from investing activities

  (34,480)

  27,536 

  (22,430)

Issue of ordinary share capital and other equity instruments

  - 

  1,996 

  1,497 

Cancellation of shares

  (2,285)

  (707)

  - 

Net purchases of own shares for market-making and investment purposes

  (91)

  (1,386)

  (181)

Net cash flow from change in stake of subsidiaries

  (197)

  - 

  - 

Redemption of preference shares and other equity instruments

  (2,266)

  (3,450)

  (398)

Subordinated loan capital issued

  7,300 

  - 

  - 

Subordinated loan capital repaid2

  (1,777)

  (864)

  (3,538)

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

  (6,970)

  (6,383)

  (2,023)

Net cash from financing activities

  (6,286)

  (10,794)

  (4,643)

Net increase/(decrease) in cash and cash equivalents

  (14,332)

  121,054 

  155,147 

Cash and cash equivalents at 1 Jan

  574,032 

  468,323 

  293,742 

Exchange differences in respect of cash and cash equivalents

  (38,029)

  (15,345)

  19,434 

Cash and cash equivalents at 31 Dec3

  521,671 

  574,032 

  468,323 

Cash and cash equivalents comprise:




-  cash and balances at central banks

  327,002 

  403,018 

  304,481 

-  items in the course of collection from other banks

  7,297 

  4,136 

  4,094 

-  loans and advances to banks of one month or less

  72,295 

  55,705 

  51,788 

-  reverse repurchase agreements with banks of one month or less

  68,682 

  76,658 

  65,086 

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

  26,727 

  28,488 

  30,023 

-  cash collateral and net settlement accounts

  19,445 

  11,241 

  17,194 

-  cash and cash equivalents held for sale4

  8,087 

  - 

  - 

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

  (7,864)

  (5,214)

  (4,343)

Cash and cash equivalents at 31 Dec3

  521,671 

  574,032 

  468,323 

Interest received was $55,664m (2021: $40,175m; 2020: $45,578m), interest paid was $22,856m (2021: $12,695m; 2020: $17,440m) and dividends received (excluding dividends received from associates, which are presented separately above) were $1,638m (2021: $1,898m; 2020: $1,158m).

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 $(1.8)bn (2021: $(0.9)bn; 2020: $(3.5)bn) of securities. Non-cash changes during the year included foreign exchange gains/(losses) of $(1.1)bn (2021: $(0.3)bn; 2020: $0.5bn) and fair value gains/(losses) of $(3.1)bn (2021: $(1.0)bn; 2020: $1.1bn).

3   At 31 December 2022, $59.3bn (2021: $33.6bn; 2020: $41.9bn) was not available for use by HSBC, due to a range of restrictions, including currency exchange and other restrictions, of which $22.1bn (2021: $15.4bn; 2020: $16.9bn) related to mandatory deposits at central banks.

4  Includes $6.5bn of cash and balances at central banks (excluding the expected cash contribution as part of the planned sale of our retail banking operations in France. For further details, see Note 23); $1.3bn of reverse repurchase agreements with banks of one month or less and $0.2bn of loans and advances to banks of one month or less.


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 2022

  24,918 

  22,414 

  144,458 

  (634)

  (197)

  (22,769)

  30,060 

  198,250 

  8,527 

  206,777 

Profit for the year

  - 

  - 

  16,035 

  - 

  - 

  - 

  - 

  16,035 

  635 

  16,670 

Other comprehensive income (net of tax)

  - 

  - 

  1,368 

  (5,325)

  (3,613)

  (9,819)

  174 

  (17,215)

  (86)

  (17,301)

-  debt instruments at fair value through other comprehensive income

  - 

  - 

  - 

  (5,417)

  - 

  - 

  - 

  (5,417)

  (51)

  (5,468)

-  equity instruments designated at fair value through other comprehensive income

  - 

  - 

  - 

  92 

  - 

  - 

  - 

  92 

  15 

  107 

-  cash flow hedges

  - 

  - 

  - 

  - 

  (3,613)

  - 

  - 

  (3,613)

  (42)

  (3,655)

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

  - 

  - 

  1,922 

  - 

  - 

  - 

  - 

  1,922 

  - 

  1,922 

-  property revaluation

  - 

  - 

  - 

  - 

  - 

  - 

  174 

  174 

  106 

  280 

-  remeasurement of defined benefit asset/liability

  - 

  - 

  (1,029)

  - 

  - 

  - 

  - 

  (1,029)

  (2)

  (1,031)

-  share of other comprehensive income of associates and joint ventures

  - 

  - 

  (367)

  - 

  - 

  - 

  - 

  (367)

  - 

  (367)

-  effects of hyperinflation

  - 

  - 

  842 

  - 

  - 

  - 

  - 

  842 

  - 

  842 

-  exchange differences

  - 

  - 

  - 

  - 

  - 

  (9,819)

  - 

  (9,819)

  (112)

  (9,931)

Total comprehensive income for the year

  - 

  - 

  17,403 

  (5,325)

  (3,613)

  (9,819)

  174 

  (1,180)

  549 

  (631)

Shares issued under employee remuneration and share plans

  67 

  - 

  (67)

  - 

  - 

  - 

  - 

  - 

  - 

  - 

Dividends to shareholders

  - 

  - 

  (6,544)

  - 

  - 

  - 

  - 

  (6,544)

  (426)

  (6,970)

Redemption of securities2

  - 

  (2,668)

  402 

  - 

  - 

  - 

  - 

  (2,266)

  - 

  (2,266)

Transfers6

  - 

  - 

  (2,499)

  - 

  - 

  - 

  2,499 

  - 

  - 

  - 

Cost of share-based payment arrangements

  - 

  - 

  400 

  - 

  - 

  - 

  - 

  400 

  - 

  400 

Cancellation of shares7

  (174)

  - 

  (1,000)

  - 

  - 

  - 

  174 

  (1,000)

  - 

  (1,000)

Other movements

  - 

  - 

  (485)

  3 

  2 

  - 

  304 

  (176)

  (106)

  (282)

At 31 Dec 2022

  24,811 

  19,746 

  152,068 

  (5,956)

  (3,808)

  (32,588)

  33,211 

  187,484 

  8,544 

  196,028 


































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 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 



































































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 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 due to movement 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 

1  In 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 additional tier 1 instruments.

2  During 2022, HSBC Holdings redeemed €1,500m 5.250% perpetual subordinated contingent convertible capital securities and SGD1,000m 5.875% perpetual subordinated contingent convertible capital securities. For further details, see Note 32. In 2021, HSBC Holdings redeemed $2,000m 6.875% perpetual subordinated contingent convertible capital securities. In 2020, HSBC Holdings called and later redeemed $1,450m 6.20% non-cumulative US dollar preference shares.

3  At 31 December 2022, retained earnings included 554,452,437 treasury shares (2021: 558,397,704; 2020: 509,825,249). These include treasury shares held within HSBC's insurance business's 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 Securities 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 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, 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 2020, an impairment of $435m was recognised and a permitted transfer of this amount was made from the merger reserve to retained earnings. During 2022 and 2021, part-reversals of these impairments resulted in transfers from retained earnings back to the merger reserve of $2,499m and $3,065m respectively.

7  For further details, see Note 32 . In October 2021, HSBC announced a share buy-back of up to $2.0bn, which was completed in April 2022. Additionally, HSBC announced a share buy-back of up to $1.0bn in February 2022, which concluded on 28 July 2022.


HSBC Holdings income statement

for the year ended 31 December



2022

2021

2020


Notes*

$m

$m

$m

Net interest expense


  (3,074)

  (2,367)

  (2,632)

-  interest income


  937 

  380 

  473 

-  interest expense


  (4,011)

  (2,747)

  (3,105)

Fee (expense)/income


  (3)

  (5)

  (12)

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

3

  2,129 

  110 

  801 

Changes in fair value of designated debt and related derivatives1

3

  2,144 

  349 

  (326)

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

3

  (2,409)

  (420)

  1,141 

Gains less losses from financial investments


  58 

  - 

  - 

Dividend income from subsidiaries


  9,478 

  11,404 

  8,156 

Other operating income


  91 

  230 

  1,889 

Total operating income


  8,414 

  9,301 

  9,017 

Employee compensation and benefits

5

  (41)

  (30)

  (56)

General and administrative expenses


  (1,586)

  (1,845)

  (4,276)

Reversal of impairment/(impairment) of subsidiaries


  2,493 

  3,065 

  (435)

Total operating expenses


  866 

  1,190 

  (4,767)

Profit before tax


  9,280 

  10,491 

  4,250 

Tax (charge)/credit2


  3,077 

  343 

  (165)

Profit for the year


  12,357 

  10,834 

  4,085 

*  For Notes on the financial statements, see page 335.

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

2  The tax credit includes $2.2bn arising from the recognition of a deferred tax asset from historical tax losses in HSBC Holdings. This was a result of improved profit forecasts for the UK tax group, which accelerated the expected utilisation of these losses and reduced uncertainty regarding their recoverability. The amounts recorded within profit before tax with respect to dividend income from subsidiaries and reversal of impairment of subsidiaries are not subject to tax.


HSBC Holdings statement of comprehensive income

for the year ended 31 December


2022

2021

2020


$m

$m

$m

Profit for the year

  12,357 

  10,834 

  4,085 

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

  326 

  267 

  176 

-  before income taxes

  435 

  259 

  176 

-  income taxes

  (109)

  8

  - 

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

  326 

  267 

  176 

Total comprehensive income for the year

  12,683 

  11,101 

  4,261 

 


HSBC Holdings balance sheet



31 Dec 2022

31 Dec 2021


Notes*

$m

$m

Assets




Cash and balances with HSBC undertakings


  3,210 

  2,590 

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


  52,322 

  51,408 

Derivatives

15

  3,801 

  2,811 

Loans and advances to HSBC undertakings


  26,765 

  25,108 

Financial investments


  19,466 

  26,194 

Prepayments, accrued income and other assets


  5,242 

  1,513 

Current tax assets


  464 

  122 

Investments in subsidiaries


  167,542 

  163,211 

Intangible assets


  189 

  215 

Deferred tax assets


  2,100 

  - 

Total assets at 31 Dec


  281,101 

  273,172 

Liabilities and equity




Liabilities




Amounts owed to HSBC undertakings


  314 

  111 

Financial liabilities designated at fair value

25

  32,123 

  32,418 

Derivatives

15

  6,922 

  1,220 

Debt securities in issue

26

  66,938 

  67,483 

Accruals, deferred income and other liabilities


  1,969 

  4,240 

Subordinated liabilities

29

  19,727 

  17,059 

Deferred tax liabilities


  - 

  311 

Total liabilities


  127,993 

  122,842 

Equity




Called up share capital

32

  10,147 

  10,316 

Share premium account


  14,664 

  14,602 

Other equity instruments


  19,746 

  22,414 

Merger and other reserves


  40,555 

  37,882 

Retained earnings


  67,996 

  65,116 

Total equity


  153,108 

  150,330 

Total liabilities and equity at 31 Dec


  281,101 

  273,172 

*  For Notes on the financial statements, see page 335.

The accompanying notes on pages 335 to 417 and the audited sections in the Risk review on pages 131 to 238 (including 'Measurement uncertainty and sensitivity analysis of ECL estimates' on pages 153 to 162), and 'Directors' remuneration report' on pages 276 to 301 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 21 February 2023 and signed on its behalf by:

 




Mark E Tucker


Georges Elhedery

Group Chairman


Group Chief Financial Officer

 


HSBC Holdings statement of cash flows

for the year ended 31 December


2022

2021

2020


$m

$m

$m

Profit before tax

  9,280 

  10,491 

  4,250 

Adjustments for non-cash items

  (2,500)

  (2,954)

  442 

-  depreciation, amortisation and impairment/expected credit losses

  (2,428)

  (2,976)

  87

-  share-based payment expense

  1 

  2

  1

-  other non-cash items included in profit before tax

  (73)

  20

  354 

Changes in operating assets and liabilities




Change in loans to HSBC undertakings

  (1,657)

  3,364 

  (327)

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

  (914)

  (4,409)

  (3,289)

Change in net trading securities and net derivatives

  4,712 

  47

  (1,657)

Change in other assets

  51 

  (226)

  (633)

Change in financial investments

  196 

  20

  449 

Change in debt securities in issue

  (5,625)

  (2,833)

  3,063 

Change in financial liabilities designated at fair value

  (4,755)

  (1,396)

  1,258 

Change in other liabilities

  (3,394)

  (691)

  1,366 

Tax received

  215 

  32

  270 

Net cash from operating activities

  (4,391)

  1,445 

  5,192 

Purchase of financial investments

  (21,481)

  (16,966)

  (11,652)

Proceeds from the sale and maturity of financial investments

  17,165 

  16,074 

  9,342 

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

  (5,696)

  (1,337)

  (2,558)

Repayment of capital from subsidiaries

  3,860 

  2,000 

  1,516 

Net investment in intangible assets

  (39)

  (26)

  (33)

Net cash from investing activities

  (6,191)

  (255)

  (3,385)

Issue of ordinary share capital and other equity instruments

  67 

  2,334 

  1,846 

Redemption of preference shares and other equity instruments

  (2,266)

  (3,450)

  - 

Purchase of treasury shares

  (438)

  (28)

  - 

Cancellation of shares

  (2,298)

  (707)

  - 

Subordinated loan capital issued

  7,300 

  - 

  - 

Subordinated loan capital repaid

  - 

  - 

  (1,500)

Debt securities issued

  18,076 

  19,379 

  15,951 

Debt securities repaid

  (10,094)

  (5,569)

  (16,577)

Dividends paid on ordinary shares

  (5,330)

  (4,480)

  - 

Dividends paid to holders of other equity instruments

  (1,214)

  (1,310)

  (1,331)

Net cash from financing activities

  3,803 

  6,169 

  (1,611)

Net increase/(decrease) in cash and cash equivalents

  (6,779)

  7,359 

  196 

Cash and cash equivalents at 1 January

  13,535 

  6,176 

  5,980 

Cash and cash equivalents at 31 Dec

  6,756 

  13,535 

  6,176 

Cash and cash equivalents comprise:




-  cash at bank with HSBC undertakings

  3,210 

  2,590 

  2,913 

-  cash collateral and net settlement accounts

  3,544 

  93

  249 

-  treasury and other eligible bills

  2 

  10,852 

  3,014 

 

Interest received was $2,410m (2021: $1,636m; 2020: $1,952m), interest paid was $3,813m (2021: $2,724m; 2020: $3,166m) and dividends received were $9,478m (2021: $11,404m; 2020: $8,156m).

 


HSBC Holdings statement of changes in equity

for the year ended 31 December






Other reserves



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 2022

  10,316 

  14,602 

  22,414 

  65,116 

  37,882 

  150,330 

Profit for the year

  - 

  - 

  - 

  12,357 

  - 

  12,357 

Other comprehensive income (net of tax)

  - 

  - 

  - 

  326 

  - 

  326 

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

  - 

  - 

  - 

  326 

  - 

  326 

Total comprehensive income for the year

  - 

  - 

  - 

  12,683 

  - 

  12,683 

Shares issued under employee share plans

  5 

  62 

  - 

  (161)

  - 

  (94)

Capital securities issued

  - 

  - 

  - 

  - 

  - 

  - 

Cancellation of shares2,3

  (174)

  - 

  - 

  (1,001)

  174 

  (1,001)

Dividends to shareholders

  - 

  - 

  - 

  (6,544)

  - 

  (6,544)

Redemption of capital securities

  - 

  - 

  (2,668)

  402 

  - 

  (2,266)

Transfers4

  - 

  - 

  - 

  (2,499)

  2,499 

  - 

Other movements

  - 

  - 

  - 

  - 

  - 

  - 

At 31 Dec 2022

  10,147 

  14,664 

  19,746 

  67,996 

  40,555 

  153,108 








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) 

Transfers4

  - 

  - 

  - 

  (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) 

Transfers4

  - 

  - 

  - 

  435 

  (435) 

  - 

Other movements5

  - 

  - 

  171 

  (1,919)

  - 

  (1,748) 

At 31 Dec 2020

  10,347 

  14,277 

  22,414 

  65,005 

  34,757 

  146,800 

 

Dividends per ordinary share at 31 December 2022 were $0.27 (2021: $0.22; 2020: nil).

1  At 31 December 2022, retained earnings includ ed 331,874,221 ($2,615m) treasury shares (2021: 329,871,829 ($2,542m); 2020: 326,766,253 ($2,521m)).

2  On 26 October 2021, HSBC announced a share buy-back of up to $2.0bn, which was completed on 20 April 2022.

3  On 3 May 2022, HSBC announced a share buy-back of up to $1.0bn, which was completed on 28 July 2022.

4  Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. In 2022, a part-reversal of this impairment resulted in a transfer from retained earnings back to the merger reserve of $2,499m (2021: $3,065m). At 31 December 2020, an additional impairment of $435m was recognised and a permitted transfer of this amount was made from the merger reserve to retained earnings.

5  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

 


 

Contents

337

  1 

Basis of preparation and significant accounting

 policies


396

  21 

Goodwill and intangible assets

Goodwill and intangible assets



399

  22 

Prepayments, accrued income and other assets

350

  2 

Net fee income


399

  23 

Assets held for sale and liabilities of disposal groups held for sale

352

  3 

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


401

  24 

Trading liabilities


401

25

Financial liabilities designated at fair value

352

  4 

Insurance business


402

26

Debt securities in issue

354

  5 

Employee compensation and benefits


402

27

Accruals, deferred income and other liabilities

361

  6 

Auditors' remuneration


402

28

Provisions

362

  7 

Tax


403

29

Subordinated liabilities

364

  8 

Dividends


407

30

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

365

  9 

Earnings per share


365

  10 

Segmental analysis


413

31

Offsetting of financial assets and financial liabilities

369

  11 

Trading assets


414

32

Called up share capital and other equity instruments

369

  12 

Fair values of financial instruments carried at fair value


417

33

Contingent liabilities, contractual commitments and guarantees

376

  13 

Fair values of financial instruments not carried at fair value


418

34

Finance lease receivables

377

  14 

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


418

35

Legal proceedings and regulatory matters


421

36

Related party transactions

378

  15 

Derivatives


423

37

Events after the balance sheet date

383

  16 

Financial investments


423

38

HSBC Holdings' subsidiaries, joint ventures and associates

386

  17 

Assets pledged, collateral received and assets

transferred





388

  18 

Interests in associates and joint ventures





391

  19 

Investments in subsidiaries





393

20

Structured entities





 


 

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 2022 affecting these consolidated and separate financial statements.

Standards adopted during the year ended 31 December 2022

There were no new accounting standards or interpretations that had a significant effect on HSBC in 2022. 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 2022 that are applicable to HSBC. However, the IASB has published a number of minor amendments to IFRSs that are effective from 1 January 2023 and 1 January 2024. 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 and December 2021. Following the amendments, IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023 and is applied retrospectively, with comparatives restated from 1 January 2022. IFRS 17 has been adopted in its entirety for use in the UK while it has been adopted by the EU subject to certain optional exemptions. 

IFRS 17 sets out the requirements that the Group will apply in accounting for insurance contracts it issues, reinsurance contracts it holds, and investment contracts with discretionary participation features.

The Group is at an advanced stage in the implementation of IFRS 17, having put in place accounting policies, data and models, and made progress with preparing 2022 comparative data. We set out below our expectations of the impact of IFRS 17 compared with our current accounting policy for insurance contracts, which is set out in Note 1.2(j) on page 344.

Under IFRS 17, no present value of in-force business ('PVIF') asset is recognised. Instead, the measurement of the insurance contracts liability is based on groups of insurance contracts and will include fulfilment cash flows, as well as the contractual service margin ('CSM'), which represents the unearned profit.

To identify groups of insurance contracts, individual contracts subject to similar dominant risk and managed together are identified as a portfolio of insurance contracts. Each portfolio is further separated by profitability group and issue date into periodic cohorts.

The fulfilment cash flows comprise:

• the best estimates of future cash flows, including amounts expected to be collected from premiums and payouts for claims, benefits and expenses, which are projected using assumptions based on demographic and operating experience;

• an adjustment for the time value of money and financial risks associated with the future cash flows; and

• an adjustment for non-financial risk that reflects the uncertainty about the amount and timing of future cash flows.

In contrast to the Group's IFRS 4 accounting where profits are recognised upfront, the CSM will be systematically recognised in revenue, as services are provided over the expected coverage period of the group of contracts without any change to the overall profit of the contracts. Losses resulting from the recognition of onerous contracts are recognised in the income statement immediately.

The CSM is adjusted depending on the measurement model of the group of insurance contracts. While the general measurement model ('GMM') is the default measurement model under IFRS 17, the Group expects that the majority of its contracts will be accounted for under the variable fee approach ('VFA'), which is mandatory to apply for insurance contracts with direct participation features upon meeting the eligibility criteria.

IFRS 17 requires entities to apply the standard retrospectively as if it had always applied, using the full retrospective approach ('FRA') unless it is impracticable. When the FRA is impracticable such as when there is a lack of sufficient and reliable data, an entity has an accounting policy choice to use either the modified retrospective approach ('MRA') or the fair value approach ('FVA'). HSBC will apply the FRA for new business from 2018 at the earliest, subject to practicability, and the FVA for the majority of contracts for which the FRA is impracticable. Where the FVA is used, the measurement takes into account the cost of capital that a market participant within the jurisdiction would be expected to hold based on the asset and liability positions on the transition date.

The Group will make use of the option to re-designate eligible financial assets held to support insurance liabilities, currently measured at amortised cost, as financial assets measured at fair value through profit or loss. Following re-designation, interest income earned on these financial assets will no longer be shown in 'net interest income', and will instead form part of 'net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss' in accordance with HSBC's income and expense policy set out in Note 1.2(b) on page 339.

The Group will also make use of the risk mitigation option for a number of economic offsets between the VFA contracts and reinsurance contracts held that meet the requirements, and the other comprehensive income ('OCI') option to a limited extent for some contracts.

Impact of IFRS 17

Changes to equity on transition are driven by the elimination of the PVIF asset, the re-designation of certain eligible financial assets in the scope of IFRS 9, the remeasurement of insurance liabilities and assets under IFRS 17, and the recognition of the CSM.

IFRS 17 requires the use of current market values for the measurement of insurance liabilities. The shareholder's share of the investment experience and assumption changes will be absorbed by the CSM and released over time to profit or loss under the VFA. For contracts measured under GMM, the shareholder's share of the investment volatility is recorded in profit or loss as it arises. Under IFRS 17, operating expenses will be lower as directly attributable costs will be incorporated in the CSM and recognised in the insurance service result.

While the profit over the life of an individual contract will be unchanged, its emergence will be later under IFRS 17.

All of these impacts will be subject to deferred tax.

Estimates of the opening balance sheet as at 1 January 2022 have been calculated and are presented below, showing separately the impact on the total assets, liabilities and equity of our insurance manufacturing operations and Group equity. These estimates are based on accounting policies, assumptions, judgements and estimation techniques that remain subject to change.

 

Impact of transition to IFRS 17, at 1 January 2022

Insurance manufacturing operations

Group


Assets

Liabilities

Equity

Equity


$bn

$bn

$bn

$bn

Balance sheet values at 1 January 2022 under IFRS 4

144.6

127.6

  17.0 

  206.8 

Removal of PVIF

  (9.5)

  - 

  (9.5)

  (9.5)

Replacement of IFRS 4 liabilities with IFRS 17

  (0.4)

7.3

  (7.7)

  (8.1)

Removal of IFRS 4 liabilities and recording of IFRS 17 fulfilment cash

  (0.3)

  (2.2)

1.9

  1.9 

IFRS 17 contractual service margin

  (0.1)

9.5

  (9.6)

  (10.0)

Remeasurement effect of IFRS 9 re-designations

4.9

  - 

4.9

  4.9 

Tax effect

0.6

  (1.6)

2.2

  2.2 

Estimated balance sheet values at 1 January 2022 under IFRS 17

140.2

133.3

6.9

  196.3 

 

PVIF of $9.5bn less deferred tax of $1.7bn constitute the overall estimated reduction in intangible assets, after tax, of $7.8bn on transition to IFRS 17.

The Group's accounting for insurance contracts considers a broader set of cash flows than those arising within the insurance manufacturing entities. This includes the effect of eliminating intra-Group fees associated with distribution of policies through the Group's banking channels and directly attributable costs incurred by other Group entities. These factors lead to an increase to the Group CSM after inclusion of distribution activities of approximately $0.4bn, with a consequential reduction to Group's equity of approximately $0.4bn after the inclusion of deferred tax.

(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. Except for subsidiaries operating in hyperinflationary economies (see Note 1.2(p)), 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 2022 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 131 to 238.

• The 'Own funds disclosure' is included in the 'Risk review' on page 206.

• Disclosures relating to HSBC's securitisation activities and structured products are included in the 'Risk review' on pages 131 to238.

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.

Management has considered the impact of climate-related risks on HSBC's financial position and performance. While the effects of climate change are a source of uncertainty, as at 31 December 2022 management do not consider there to be a material impact on our critical judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular management has considered the known and observable potential impact of climate-related risks of associated judgements and estimates in our value in use calculations.

(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 in structural changes from the Covid-19 pandemic, the Russia-Ukraine war, disrupted supply chains globally, slower Chinese economic activity, climate change and other top and emerging risks, as well as from the related impacts 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.

Impairment testing is performed where there is an indication of impairment, by comparing the recoverable amount of the relevant investment to its carrying amount.

 

Critical accounting estimates and judgements

Investments in subsidiaries are tested for impairment when there is an indication that the investment may be impaired, which involves estimations of value in use reflecting management's best estimate of the future cash flows of the investment 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 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 each investment 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 the investment. The cost of equity percentage is generally derived from a capital asset pricing model and the 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 impairment in subsidiaries are described in Note 19.

 

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 is 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, 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 reasonably 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 sold shortly after origination, 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. Dividends from such investments are recognised in profit or loss. 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.

(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' or 'Changes in fair value of designated debt and related derivatives' 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 criteria, 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 where doing so reduces an accounting mismatch, 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 fair value through other comprehensive income ('FVOCI'), and certain loan commitments and financial guarantee contracts. At initial recognition, an 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, an 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 which 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 that a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition, or 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.

Forbearance

Loans are identified as forborne and classified as either performing or non-performing when HSBC modifies the contractual terms due to financial difficulty of the borrower. Non-performing forborne loans are stage 3 and classified as non-performing until they meet the cure criteria, as specified by applicable credit risk policy (for example, when the loan is no longer in default and no other indicators of default have been present for at least 12 months). Any amount written off as a result of any modification of contractual terms upon entering forbearance would not be reversed.

In 2022, the Group adopted the EBA Guidelines on the application of definition of default for our retail portfolios, which affect credit risk policies and our reporting in respect of the status of loans as credit impaired principally due to forbearance (or curing thereof). Further details are provided under 'Forborne loans and advances' on page 146.

Performing forborne loans are initially stage 2 and remain classified as forborne until they meet applicable cure criteria (for example, they continue to not be in default and no other indicators of default are present for a period of at least 24 months). At this point, the loan is either stage 1 or stage 2 as determined 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).

A forborne loan 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 forborne loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances would generally be classified as POCI and will continue to be disclosed as forborne.

Loan modifications other than forborne loans

Loan modifications that are not identified as forborne are considered to be commercial restructurings. 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. Modifications of certain higher credit risk wholesale loans are assessed for derecognition, having regard to changes in contractual terms that either individually or in combination are judged to result in a substantially different financial instrument. Mandatory and general offer loan modifications that are not borrower specific, for example market-wide customer relief programmes generally do not result 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 146.

For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporate 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 homogenous 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 therefore identifies loans with a PD higher than would be expected from loans that are performing as originally expected and higher than that which would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.

As additional data becomes available, the retail transfer criteria approach continues to be refined to utilise a more relative approach for certain portfolios. These enhancements take advantage of the increase in origination-related data in the assessment of significant increases in credit risk by comparing remaining lifetime PD to the comparable remaining term lifetime PD at origination based on portfolio-specific origination segments. These enhancements resulted in significant migrations of loans to customers gross carrying amounts from stage 1 to stage 2, but did not have a significant impact on the overall ECL for these portfolios in 2022 due to low loan-to-value ratios.

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 new financial instruments recognised in most cases following the derecognition of forborne loans. The amount of change in lifetime ECL for a POCI loan is recognised in profit or loss until the POCI loan 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. In the case of non-performing forborne loans, such financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment and meet the curing criteria as described above.

Measurement of ECL

The assessment of credit risk and the estimation of ECL are unbiased and probability-weighted, and incorporate all available information which 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 and considers other factors such as climate-related risks.

In general, HSBC calculates ECL using three main components: a probability of default ('PD'), 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 of 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 its 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 work-out 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. 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. For wholesale overdraft facilities, credit risk management actions are taken no less frequently than on an annual basis.

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 credit losses 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 153.

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

• Selecting applicable recovery strategies for certain wholesale credit-impaired loans

• The section 'Measurement uncertainty and sensitivity analysis of ECL estimates', marked as audited from page 153, 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 Note 1.2 (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 costs 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.

In assessing the probability and sufficiency of future taxable profit, management considers the availability of evidence to support the recognition of deferred tax assets, taking into account the inherent risks in long-term forecasting, including climate change-related, and drivers of recent history of tax losses where applicable. Management also considers the future reversal of existing taxable temporary differences and tax planning strategies, including corporate reorganisations.

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.

• 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. See Note 7 for further detail.

The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of deferred tax assets in the next financial year but does consider this to be an area that is inherently judgemental.

(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 losses 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).

 

(o)  Non-current assets and disposal groups held for sale

HSBC classifies non-current assets or disposal groups (including assets and liabilities) as held for sale when their carrying amounts will be recovered principally through sale rather than through continuing use. To be classified as held for sale, the non-current asset or disposal group must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups), and the sale must be highly probable. For a sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group) and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify as a completed sale within one year from the date of classification and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. 

Held for sale assets and disposal groups are measured at the lower of their carrying amount and fair value less costs to sell except for those assets and liabilities that are not within the scope of the measurement requirements of IFRS 5. If the carrying amount of the non-current asset (or disposal group) is greater than the fair value less costs to sell, an impairment loss for any initial or subsequent write down of the asset or disposal group to fair value less costs to sell is recognised. Any such impairment loss is first allocated against the non-current assets that are in scope of IFRS 5 for measurement. This first reduces the carrying amount of any goodwill allocated to the disposal group, and then to the other non-current assets of the disposal group pro rata on the basis of the carrying amount of each asset in the disposal group. Thereafter, any impairment loss in excess of the carrying value of the non-current assets in scope of IFRS 5 for measurement is recognised against the total assets of the disposal group.

Critical accounting judgements

The classification as held for sale depends on certain judgements:

Management judgement is required in determining whether the IFRS 5 held for sale criteria are met, including whether a sale is highly probable and expected to complete within one year of classification. The exercise of judgement will normally consider the likelihood of successfully securing any necessary regulatory or political approvals which are almost always required for sales of banking businesses. For large and complex plans judgement will also include an assessment of the enforceability of any binding sale agreement, the nature and magnitude of any disincentives for non-performance, and the ability of the counterparty to undertake necessary pre-completion preparatory work, comply with conditions precedent, and otherwise be able to comply with contractual undertakings to achieve completion within the expected timescale. Once classified as held for sale, judgement is required to be applied on a continuous basis to ensure that classification remains appropriate in future accounting periods.

 

(p)  Hyperinflationary accounting

Hyperinflationary accounting is applied to those subsidiary operations in countries where the three-year cumulative inflation rate is approaching or exceeding 100%. In 2022, this affected the Group's operations in Argentina and Türkiye. The Group applies IAS 29 to the underlying financial information of relevant subsidiaries to restate their local currency results and financial position so as to be stated in terms of the measuring unit current at the end of the reporting period. Those restated results are translated into the Group's presentation currency of US dollars for consolidation at the closing rate at the balance sheet date. Group comparatives are not restated for inflation and consequential adjustments to the opening balance sheet in relation to hyperinflationary subsidiaries are presented in other comprehensive income. The hyperinflationary gain or loss in respect of the net monetary position of the relevant subsidiary is included in profit or loss.

When applying hyperinflation accounting for the first time, the underlying financial information is restated in terms of the measuring unit current at the end of the reporting period as if the relevant economy had always been hyperinflationary. Group comparatives are not restated for such historic adjustments.


 

2

Net fee income

 

Net fee income by global business


2022


Wealth and

Personal

Banking

Commercial Banking

Global Banking and Markets

Corporate Centre

Total


$m

$m

$m

$m

$m

Funds under management

  1,769 

  105 

  503 

  - 

  2,377 

Cards

  2,146 

  313 

  32 

  - 

  2,491 

Credit facilities

  100 

  776 

  598 

  - 

  1,474 

Broking income

  575 

  40 

  634 

  - 

  1,249 

Account services

  337 

  718 

  356 

  1 

  1,412 

Unit trusts

  682 

  14 

  - 

  - 

  696 

Underwriting

  1 

  2 

  443 

  (5)

  441 

Global custody

  140 

  14 

  767 

  - 

  921 

Remittances

  72 

  378 

  348 

  1 

  799 

Imports/exports

  - 

  475 

  159 

  - 

  634 

Insurance agency commission

  283 

  16 

  1 

  - 

  300 

Other

  1,423 

  1,082 

  2,382 

  (2,468)

  2,419 

Fee income

  7,528 

  3,933 

  6,223 

  (2,471)

  15,213 

Less: fee expense

  (2,497)

  (240)

  (3,464)

  2,439 

  (3,762)

Net fee income

  5,031 

  3,693 

  2,759 

  (32)

  11,451 

 








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


Wealth and

Personal Banking

Commercial

Banking

Global

Banking and

Markets

Corporate

Centre

Total


$m

$m

$m

$m

$m

Funds under management

  1,686 

  126 

  477 

  - 

  2,289 

Cards

  1,564 

  360 

  25

  - 

  1,949 

Credit facilities

  93

  740 

  626 

  - 

  1,459 

Broking income

  862 

  61

  616 

  - 

  1,539 

Account services

  431 

  598 

  264 

  - 

  1,293 

Unit trusts

  881 

  18

  - 

  - 

  899 

Underwriting

  5

  9

  1,002 

  (1)

  1,015 

Global custody

  189 

  22

  723 

  - 

  934 

Remittances

  77

  313 

  288 

  (1)

  677 

Imports/exports

  - 

  417 

  160 

  - 

  577 

Insurance agency commission

  307 

  17

  1

  - 

  325 

Other

  1,123 

  893 

  2,369 

  (2,290)

  2,095 

Fee income

  7,218 

  3,574 

  6,551 

  (2,292)

  15,051 

Less: fee expense

  (1,810)

  (349)

  (3,284)

  2,266 

  (3,177)

Net fee income

  5,408 

  3,225 

  3,267 

  (26)

  11,874 

 

 

Net fee income included $6,410m 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 (2021: $6,742m; 2020: $5,858m), $1,613m 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 (2021: $1,520m; 2020: $1,260m), $3,506m of fees earned on trust and other fiduciary activities (2021: $3,849m; 2020: $3,426m) and $422m of fees payable relating to trust and other fiduciary activities (2021: $305m; 2020: $267m).


 

3

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

 


2022

2021

2020


$m

$m

$m

Net income/(expense) arising on:




Net trading activities

  2,576 

  6,668 

  11,074 

Other instruments managed on a fair value basis

  7,893 

  1,076 

  (1,492)

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

  10,469 

  7,744 

  9,582 

Financial assets held to meet liabilities under insurance and investment contracts

  (3,720)

  4,134 

  2,481 

Liabilities to customers under investment contracts

  326 

  (81)

  (400)

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

  (3,394)

  4,053 

  2,081 

Derivatives managed in conjunction with HSBC's issued debt securities

  (7,086)

  (2,811)

  2,619 

Other changes in fair value

  7,009 

  2,629 

  (2,388)

Changes in fair value of designated debt and related derivatives1

  (77)

  (182)

  231 

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

  226 

  798 

  455 

Year ended 31 Dec

  7,224 

  12,413 

  12,349 

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


HSBC Holdings


2022

2021

2020


$m

$m

$m

Net income/(expense) arising on:




-  trading activities

  2,094 

  87

  (336)

-  other instruments managed on a fair value basis

  35 

  23

  1,137 

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

  2,129 

  110 

  801 

Derivatives managed in conjunction with HSBC Holdings-issued debt securities

  (1,529)

  (625)

  694 

Other changes in fair value

  3,673 

  974 

  (1,020)

Changes in fair value of designated debt and related derivatives

  2,144 

  349 

  (326)

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

  (2,409)

  (420)

  1,141 

Year ended 31 Dec

  1,864 

  39

  1,616 

 


 

4

Insurance business

 

Net insurance premium income1


Non-linked

insurance

 Linked life

insurance

Investment

contracts with DPF2

Total


$m

$m

$m

$m

Gross insurance premium income

  11,685 

  824 

  1,547 

  14,056 

Reinsurers' share of gross insurance premium income

  (1,226)

  (5)

  - 

  (1,231)

Year ended 31 Dec 2022

  10,459 

  819 

  1,547 

  12,825 






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 

1  This table is presented after elimination of inter-company transactions between our insurance manufacturing operations and other Group entities.

2  Discretionary participation features.


 

Net insurance claims and benefits paid and movement in liabilities to policyholders1


Non-linked

insurance

Linked life

insurance

Investment

contracts with DPF2

Total


$m

$m

$m

$m

Gross claims and benefits paid and movement in liabilities

  11,008 

  (124)

  183 

  11,067 

-  claims, benefits and surrenders paid

  4,032 

  680 

  1,845 

  6,557 

-  movement in liabilities

  6,976 

  (804)

  (1,662)

  4,510 

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

  (1,206)

  8 

  - 

  (1,198)

-  claims, benefits and surrenders paid

  (1,005)

  (7)

  - 

  (1,012)

-  movement in liabilities

  (201)

  15 

  - 

  (186)

Year ended 31 Dec 2022

  9,802 

  (116)

  183 

  9,869 






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 

1  This table is presented after elimination of inter-company transactions between our insurance manufacturing operations and other Group entities.

2  Discretionary participation features.

2 


 

Liabilities under insurance contracts1


 Non-linked

insurance

 Linked life

insurance

Investment

contracts with DPF2

Total


$m

$m

$m

$m

Gross liabilities under insurance contracts at 1 Jan 2022

  79,475 

  6,513 

  26,757 

  112,745 

Claims and benefits paid

  (4,032)

  (680)

  (1,845)

  (6,557)

Increase in liabilities to policyholders

  11,008 

  (124)

  183 

  11,067 

Exchange differences and other movements2

  2,004 

  (313)

  (4,102)

  (2,411)

Gross liabilities under insurance contracts at 31 Dec 2022

  88,455 

  5,396 

  20,993 

  114,844 

Reinsurers' share of liabilities under insurance contracts

  (4,247)

  (10)

  - 

  (4,257)

Net liabilities under insurance contracts at 31 Dec 2022

  84,208 

  5,386 

  20,993 

  110,587 






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 movements3

  (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 

1  This table is presented after elimination of inter-company transactions between our insurance manufacturing operations and other Group entities.

2  Discretionary participation features.

3  '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

 


2022

2021

2020


$m

$m

$m

Employee compensation and benefits1

  18,366 

  18,742 

  18,076 

Capitalised wages and salaries

  922 

  870 

  1,320 

Gross employee compensation and benefits for the year ended 31 Dec

  19,288 

  19,612 

  19,396 





Consists of:




Wages and salaries

  16,954 

  17,072 

  17,072 

Social security costs

  1,413 

  1,503 

  1,378 

Post-employment benefits

  921 

  1,037 

  946 

Year ended 31 Dec

  19,288 

  19,612 

  19,396 

1  Employee compensation and benefits are presented net of software capitalisation costs in the income statement.


 

Average number of persons employed by HSBC during the year by global business1


2022

2021

2020

Wealth and Personal Banking

  135,676 

  138,026 

  144,615 

Commercial Banking

  48,004 

  44,992 

  45,631 

Global Banking and Markets

  48,597 

  48,179 

  49,055 

Corporate Centre

  365 

  359 

  411 

Year ended 31 Dec

  232,642 

  231,556 

  239,712 

1  Average number of persons employed represents the number of persons with contracts of service with the Group.

Average number of persons employed by HSBC during the year by geographical region1


2022

2021

2020

Europe

  58,145 

  60,919 

  64,886 

Asia

  132,257 

  127,673 

  129,923 

Middle East and North Africa

  9,541 

  9,329 

  9,550 

North America

  12,242 

  13,845 

  15,430 

Latin America

  20,457 

  19,790 

  19,923 

Year ended 31 Dec

  232,642 

  231,556 

  239,712 

1  Average number of persons employed represents the number of persons with contracts of service with the Group.


 

Reconciliation of total incentive awards granted to income statement charge


2022

2021

2020


$m

$m

$m

Total incentive awards approved for the current year

  3,359 

  3,495 

  2,659 

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

  (343)

  (379)

  (239)

Total incentives awarded and recognised in the current year

  3,016 

  3,116 

  2,420 

Add: current year charges for deferred bonuses from previous years

  239 

  270 

  286 

Other

  (22)

  4

  2

Income statement charge for incentive awards

  3,233 

  3,390 

  2,708 

 


Share-based payments

'Wages and salaries' includes the effect of share-based payments arrangements, of which $400m was equity settled (2021: $467m; 2020: $434m), as follows:


2022

2021

2020


$m

$m

$m

Conditional share awards

402

479

411

Savings-related and other share award option plans

22

27

51

Year ended 31 Dec

424

506

462

 


 

HSBC share awards

Deferred share awards (including annual incentive awards, long-term incentive ('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 LTI awards, which are subject to performance conditions.

• Deferred share awards generally vest over a period of three, four, 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 31 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


2022

2021


Number

Number


(000s)

(000s)

Conditional share awards outstanding at 1 Jan

  109,364 

  103,473 

Additions during the year

  90,190 

  75,549 

Released in the year

  (67,718)

  (63,635)

Forfeited in the year

  (5,590)

  (6,023)

Conditional share awards outstanding at 31 Dec

  126,246 

  109,364 

Weighted average fair value of awards granted ($)

  5.60 

  6.49 




 


 

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% (2021: 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 2022

  123,197 

  2.85 

Granted during the year2

  8,928 

  4.24 

Exercised during the year3

  (3,483)

  3.49 

Expired during the year

  (9,047)

  3.55 

Forfeited during the year

  (3,944)

  2.79 

Outstanding at 31 Dec 2022

  115,651 

  2.89 

-  of which exercisable

  4,029 

  4.11 

Weighted average remaining contractual life (years)

2.26





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


1  Weighted average exercise price.

2  The weighted average fair value of options granted during the year was $1.45 (2021: $0.85).

3  The weighted average share price at the date the options were exercised was $6.22 (2021: $5.87).


Post-employment benefit plans

The Group operates pension plans throughout the world for its employees. 'Pension risk management processes' on page 205 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. For further details of how the trustee of the HSBC Bank (UK) Pension Scheme manages climate risk, see 'Managing risk for our stakeholders' on page 64.

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 principal plan is subject to the statutory funding objective requirements of the UK Pensions Act 2004, which requires that it be funded to at least the level of technical provisions (an actuarial estimate of the assets needed to provide for the benefits already built up under the plan). Where a funding valuation is carried out and identifies a deficit, the employer and trustee are required to agree to a deficit recovery plan.

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 that an element of prudence is contained in the funding valuation assumptions for discount rate, inflation rate and life expectancy. The funding valuation is used to judge the amount of cash contributions the Group needs to put into the pension scheme. It will always be different to the IAS 19 accounting surplus, which is an accounting rule concerning employee benefits and shown on the balance sheet of our financial statements. The next funding valuation will be performed in 2023, with an effective date of 31 December 2022. The plan is estimated to remain in a comfortable surplus relative to the funding liabilities as at the end of 2022, based on assumptions consistent with those used to determine the funding liabilities for the 2019 valuation.


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 assumption which allow for reserves 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.

The trust deed gives the ability for HSBC UK to take a refund of surplus assets after the plan has been run down such that no further

beneficiaries remain. In assessing whether a surplus is recoverable, HSBC UK has considered its right to obtain a future refund together

with the rights of third parties such as trustees. On this basis, any net surplus in the HBUK section of the plan is recognised in HSBC UK's

financial statements and the Group's financial statements,

 


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. In 2022, the trustee and HSBC UK agreed to adopt a simplified approach for all members to implement GMP equalisation. This resulted in an increase to the liabilities of £5m ($6m) and has been recognised as a past service cost through profit and loss.


 

Income statement charge


2022

2021

2020


$m

$m

$m

Defined benefit pension plans

  42 

  243 

  146 

Defined contribution pension plans

  852 

  767 

  775 

Pension plans

  894 

  1,010 

  921 

Defined benefit and contribution healthcare plans

  27 

  27

  25

Year ended 31 Dec

  921 

  1,037 

  946 

 

 


 

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

  32,171 

  (25,693)

  - 

  6,478 

Defined benefit healthcare plans

  96 

  (388)

  - 

  (292)

At 31 Dec 2022

  32,267 

  (26,081)

  - 

  6,186 

Total employee benefit liabilities (within Note 27 'Accruals, deferred income and other liabilities')




  (1,096)

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




  7,282 






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 27 'Accruals, deferred income and other liabilities')




  (1,607) 

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




  10,269 

 


HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2022 amounted to $41m (2021: $30m). The average number of persons employed during 2022 was 42 (2021: 54). 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 2022

  41,384 

  10,047 

  (32,255)

  (10,022)

  - 

  (23)

  9,129 

  2 

Service cost

  - 

  - 

  (30)

  (170)

  - 

  - 

  (30)

  (170)

-  current service cost

  - 

  - 

  (12)

  (161)

  - 

  - 

  (12)

  (161)

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

  - 

  - 

  (18)

  (9)

  - 

  - 

  (18)

  (9)

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

  703 

  198 

  (546)

  (202)

  - 

  (1)

  157 

  (5)

Remeasurement effects recognised in other comprehensive income

  (11,505)

  (2,181)

  9,532 

  2,360 

  - 

  (3)

  (1,973)

  176 

-  return on plan assets (excluding interest income)

  (11,505)

  (2,181)

  - 

  - 

  - 

  - 

  (11,505)

  (2,181)

-  actuarial gains/(losses) financial assumptions

  - 

  - 

  10,543 

  2,383 

  - 

  - 

  10,543 

  2,383 

-  actuarial gains/(losses) demographic assumptions

  - 

  - 

  (123)

  24 

  - 

  - 

  (123)

  24 

-  actuarial gains/(losses) experience adjustments

  - 

  - 

  (888)

  (47)

  - 

  - 

  (888)

  (47)

-  other changes

  - 

  - 

  - 

  - 

  - 

  (3)

  - 

  (3)

Exchange differences

  (4,288)

  (180)

  3,325 

  35 

  - 

  2 

  (963)

  (143)

Benefits paid

  (1,222)

  (616)

  1,222 

  686 

  - 

  - 

  - 

  70 

Other movements2

  49 

  (218)

  (35)

  407 

  - 

  25 

  14 

  214 

At 31 Dec 2022

  25,121 

  7,050 

  (18,787)

  (6,906)

  - 

  - 

  6,334 

  144 










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 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 

1  For further details of the principal plan, see page 352.

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


HSBC expects to make $129m of contributions to defined benefit pension plans during 2023, consisting of $13m for the principal plan and $116m for other plans. 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


2023

2024

2025

2026

2027

2028-2032


$m

$m

$m

$m

$m

$m

The principal plan1,2

  1,234 

  1,275 

  1,317 

  1,359 

  1,403 

  7,737 

Other plans1

  433 

  439 

  445 

  428 

  452 

  2,231 

1  The duration of the defined benefit obligation is 13.2 years for the principal plan under the disclosure assumptions adopted (2021: 17.3 years) and 10.2 years for all other plans combined (2021: 12.7 years).

2  For further details of the principal plan, see page 352.


 

Fair value of plan assets by asset classes




31 Dec 2022

31 Dec 2021




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

  25,121 

  13,915 

  11,206 

  510 

  41,384 

  36,270 

  5,114 

  1,037 



-  equities3

  112 

  - 

  112 

  - 

  197 

  5

  192 

  - 



-  bonds4

  14,764 

  14,301 

  463 

  - 

  36,295 

  35,612 

  683 

  - 



-  derivatives

  1,203 

  - 

  1,203 

  510 

  1,864 

  - 

  1,864 

  1,037 



-  property

  842 

  - 

  842 

  - 

  1,094 

  - 

  1,094 

  - 



-  other5

  8,200 

  (386)

  8,586 

  - 

  1,934 

  653 

  1,281 

  - 



Other plans











Fair value of plan assets

  7,050 

  5,848 

  1,202 

  37 

  10,047 

  8,248 

  1,799 

  52



-  equities

  639 

  486 

  153 

  2 

  892 

  668 

  224 

  5



-  bonds

  4,986 

  4,537 

  449 

  4 

  7,080 

  6,490 

  590 

  5



-  derivatives

  4 

  (1)

  5 

  - 

  7

  (13)

  20

  - 



-  property

  109 

  104 

  5 

  - 

  123 

  119 

  4

  - 



-  other

  1,312 

  722 

  590 

  31 

  1,945 

  984 

  961 

  42



1  The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 36.

2  For further details on the principal plan, see page 352.

3  Includes $112m (2021: $192m) in relation to private equities.

4  Principal plan bonds includes fixed income bonds of $5,285m (2021: $18,315m) and index-linked bonds of $9,479m (2021: $18,160m).

5  Other assets within the principal plan includes $8,586m (2021: $1,281m) of unquoted pooled investment vehicles, of which the majority of the underlying assets are invested in bonds.


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)

Inflation rate (CPI)

Rate of increase for pensions

Rate of pay increase


%

%

%

%

%

UK






At 31 Dec 2022

  4.93 

  3.39 

  2.84 

  3.27 

  3.34 

At 31 Dec 2021

  1.90 

  3.45 

  3.20 

  3.30 

  3.45 

1  For further details on the principal plan, see page 352.


 

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 2022

SAPS S32

27.1

28.6

28.4

29.9

At 31 Dec 2021

SAPS S3

27.3

28.8

28.5

30.1

1  For further details of the principal plan, see page 352.

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 2021 core projection model with an initial addition to improvement of 0.25% per annum, a long-term rate of improvement of 1.25% per annum, and a 5% weighting to 2020 and 2021 mortality experience reflecting updated long-term view on mortality improvements post-pandemic.


 

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


2022

2021

2022

2021


$m

$m

$m

$m

Discount rate - increase/decrease of 0.25%

  (582)

  (1,337)

  612 

  1,425 

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

  466 

  1,211 

  (446)

  (980)

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

  551 

  1,267 

  (519)

  (1,177)

Pay - increase/decrease of 0.25%

  10 

  20

  (10)

  (20)

Change in mortality - increase of 1 year

  470 

  1,387 

N/A

N/A

1  For further details of the principal plan, see page 352.

2  Sensitivities allow for HSBC UK's convention of rounding pension assumptions during 2022 to the nearest 0.01% (2021: 0.05%). The degree of rounding has been increased to align with market practice.

 

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is 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 276.

 


 

6

Auditor's remuneration

 


2022

2021

2020


$m

$m

$m

Audit fees payable to PwC1

97.6

88.1

92.9

Other audit fees payable

1.6

2.0

1.0

Year ended 31 Dec

99.2

90.1

93.9

 


 

Fees payable by HSBC to PwC


2022

2021

2020


$m

$m

$m

Fees for HSBC Holdings' statutory audit2

  21.9 

  19.5 

  21.9 

Fees for other services provided to HSBC

  126.2 

  109.9 

  108.3 

-  audit of HSBC's subsidiaries

  75.7 

  68.6 

  71.0 

-  audit-related assurance services3

  26.4 

  18.7 

  17.2 

-  other assurance services4,5

  24.1 

  22.6 

  20.1 

Year ended 31 Dec

  148.1 

  129.4 

  130.2 

1  Audit fees payable to PwC in 2022 included adjustments made to the prior year audit fee after finalisation of the 2021 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



2022

2021

2020



$000

$000

$000

Audit of HSBC's associated pension schemes


  480 

  382 

  316 

Year ended 31 Dec


  480 

  382 

  316 

 

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 $13.1m (2021: $6.3m; 2020: $12.3m). 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


2022

2021

2020


$m

$m

$m

Current tax1

  2,991 

  3,250 

  2,700 

-  for this year

  3,271 

  3,182 

  2,883 

-  adjustments in respect of prior years

  (280)

  68

  (183)

Deferred tax

  (2,133)

  963 

  (22)

-  origination and reversal of temporary differences

  (2,236)

  874 

  (341)

-  effect of changes in tax rates

  (293)

  132 

  58

-  adjustments in respect of prior years

  396 

  (43)

  261 

Year ended 31 Dec2

  858 

  4,213 

  2,678 

1  Current tax included Hong Kong profits tax of $604m (2021: $813m; 2020: $888m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2021: 16.5%; 2020: 16.5%).

2  In addition to amounts recorded in the income statement, a tax credit of $145m (2021: 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:


2022

2021

2020


$m

%

$m

%

$m

%

Profit before tax

  17,528 


  18,906 


  8,777 


Tax expense







Taxation at UK corporation tax rate of 19.00%

  3,329 

  19.0 

  3,592 

  19.0 

  1,668 

  19.0 

Impact of differently taxed overseas profits in overseas locations

  374 

  2.1 

  280 

  1.5 

  178 

  2.0 

UK banking surcharge

  283 

  1.6 

  332 

  1.8 

  (113)

  (1.3)

Items increasing tax charge in 2022:







-  local taxes and overseas withholding taxes

  550 

  3.1 

  360 

  1.9 

  228 

  2.6 

-  other permanent disallowables

  202 

  1.2 

  236 

  1.2 

  333 

  3.8 

-  impacts of hyperinflation

  171 

  1.0 

  68

  0.4 

  65

  0.7 

-  adjustments in respect of prior period liabilities

  116 

  0.7 

  25

  0.1 

  78

  0.9 

-  tax impact of planned sale of French retail banking business

  115 

  0.7 

  (434)

  (2.3)

  - 

  - 

-  bank levy

  59 

  0.3 

  93

  0.5 

  202 

  2.3 

-  movements in provisions for uncertain tax positions

  27 

  0.2 

  15

  0.1 

  4

  - 

-  non-deductible goodwill write-down

  3 

  - 

  178 

  0.9 

  - 

  - 

-  impact of differences between French tax basis and IFRSs

  - 

  - 

  434 

  2.3 

  - 

  - 

Items reducing tax charge in 2022:







-  movements in unrecognised UK deferred tax

  (2,191)

  (12.5)

  294 

  1.6 

  444 

  5.1 

-  non-taxable income and gains

  (825)

  (4.7)

  (641)

  (3.4)

  (515)

  (5.8)

-  effect of profits in associates and joint ventures

  (504)

  (2.9)

  (414)

  (2.2)

  (250)

  (2.8)

-  non-UK movements in unrecognised deferred tax

  (312)

  (1.8)

  (67)

  (0.4)

  608 

  6.9 

-  impact of changes in tax rates

  (293)

  (1.7)

  132 

  0.7 

  58

  0.6 

-  deductions for AT1 coupon payments

  (246)

  (1.4)

  (270)

  (1.4)

  (310)

  (3.5)

Year ended 31 December 2022

  858 

  4.9 

  4,213 

  22.3 

  2,678 

  30.5 

 


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 2022 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 22.7% (2021: 22.3%).

The effective tax rate for the year of 4.9% was lower than in the previous year (2021: 22.3%). The effective tax rate for the year reduced by 14.3% as a result of the recognition of previously unrecognised losses in the UK of $2.2bn and France of $0.3bn, in light of improved forecast profitability.

During 2022, legislation was enacted to reduce the rate of the UK banking surcharge from 8% to 3% from 1 April 2023, decreasing the Group's 2022 tax charge by $173m due to the remeasurement of deferred tax balances. The main rate of UK corporation tax will increase from 19% to 25% from 1 April 2023. 

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. Exposures relating to legacy tax cases were reassessed during 2022, resulting in a charge of $27m to the income statement. 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

Financial assets at FVOCI

Insurance

business

Cash flow hedges

Retirement obligations

Other

Total


$m

$m

$m

$m

$m

$m

$m

$m

Assets

  1,162 

  2,001 

  84 

  - 

  176 

  109 

  1,690 

  5,222 

Liabilities

  - 

  - 

  (254)

  (1,640)

  (22)

  (2,928)

  (427)

  (5,271)

At 1 Jan 2022

  1,162 

  2,001 

  (170)

  (1,640)

  154 

  (2,819)

  1,263 

  (49)

Income statement

  6 

  2,425 

  - 

  170 

  - 

  217 

  (685)

  2,133 

Other comprehensive income

  - 

  - 

  1,679 

  - 

  1,159 

  692 

  (642)

  2,888 

Foreign exchange and other adjustments

  7 

  (36)

  (79)

  35 

  (42)

  237 

  (18)

  104 

At 31 Dec 2022

  1,175 

  4,390 

  1,430 

  (1,435)

  1,271 

  (1,673)

  (82)

  5,076 

Assets1

  1,175 

  4,390 

  1,430 

  - 

  1,271 

  - 

  1,571 

  9,837 

Liabilities1

  - 

  - 

  - 

  (1,435)

  - 

  (1,673)

  (1,653)

  (4,761)










Assets

  1,242 

  1,821 

  99 

  - 

  25 

  - 

  2,850 

  6,037 

Liabilities

  - 

  - 

  (896) 

  (1,622) 

  (70) 

  (2,306) 

  (973) 

  (5,867) 

At 1 Jan 2021

  1,242 

  1,821 

  (797) 

  (1,622) 

  (45) 

  (2,306) 

  1,877 

  170 

Income statement

  (89) 

  161 

  - 

  (43) 

  - 

  (336) 

  (656) 

  (963) 

Other comprehensive income

  (5) 

  33 

  634 

  - 

  212 

  (205) 

  115 

  784 

Foreign exchange and other adjustments

  14 

  (14) 

  (7) 

  25 

  (13) 

  28 

  (73) 

  (40) 

At 31 Dec 2021

  1,162 

  2,001 

  (170) 

  (1,640) 

  154 

  (2,819) 

  1,263 

  (49) 

Assets1

  1,162 

  2,001 

  84 

  - 

  176 

  109 

  1,690 

  5,222 

Liabilities1

  - 

  - 

  (254) 

  (1,640) 

  (22) 

  (2,928) 

  (427) 

  (5,271) 

1  After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets of $7,498m (2021: $4,624m) and deferred tax liabilities of $2,422m (2021: $4,673m).


In applying judgement in recognising deferred tax assets, management has 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. When forecasts are extrapolated beyond five years, a number of different scenarios are considered, reflecting difference downward risk adjustments, in order to assess the sensitivity of our recognition and measurement conclusions in the context of such longer-term forecasts.

The Group's deferred tax asset of $7.5bn (2021: $4.6bn) included $3.9bn (2021: $0.8bn) of deferred tax assets relating to the UK, $3.3bn (2021: $2.6bn) of deferred tax assets relating to the US and a net deferred asset of $0.7bn (2021: $0.0bn) in France.

The net UK deferred tax asset of $3.9bn excluded a $1.8bn 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. The majority of the deferred tax asset relates to tax attributes which do not expire and are forecast to be recovered within five years and as such are less sensitive to changes in long-term profit forecasts. The net UK deferred tax asset includes $2.2bn of previously unrecognised losses that were recognised in the UK in the period in light of improved forecast profitability in the UK group. Sensitivity regarding the recognition and measurement of that deferred tax asset relates to ongoing experience outcome of UK profitability versus forecast, taking into account the non-expiring nature of the underlying attributes.

The net US deferred tax asset of $3.3bn included $1.3bn related to US tax losses, of which $1.1bn expire in 10 to 15 years. Management expects the US deferred tax asset to be substantially recovered within 14 years, with the majority recovered in the first eight years.

The net deferred tax asset in France of $0.7bn included $0.7bn related to tax losses, which are expected to be substantially recovered within nine to 18 years. Following recognition of $0.3bn of previously unrecognised deferred tax asset on losses, deferred tax is now recognised in full in respect of France.

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 $9.2bn (2021: $16.9bn). This amount included unused UK tax losses of $3.5bn (2021: $10.5bn), which arose prior to 1 April 2017 and can only be recovered against future taxable profits of HSBC Holdings. No deferred tax was recognised on these losses due to the absence of convincing evidence regarding the availability of sufficient future taxable profits against which to recover them. Deferred tax asset recognition is reassessed at each balance sheet date based on the available evidence. Of the total amounts unrecognised, $3.6bn (2021: $10.9bn) had no expiry date, $1.2bn (2021: $0.7bn) was scheduled to expire within 10 years and the remaining balance is expected to expire after ten 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 $11.7bn (2021: $12.7bn) and the corresponding unrecognised deferred tax liability was $0.7bn (2021: $0.8bn).


 

8

Dividends

 


 

Dividends to shareholders of the parent company


2022

2021

2020


Per

share

Total

Per

share

Total

Per

share

Total


$

$m

$

$m

$

$m

Dividends paid on ordinary shares







In respect of previous year:







-  second interim dividend

  0.18 

  3,576 

  0.15 

  3,059 

  - 

  - 

In respect of current year:







-  first interim dividend

  0.09 

  1,754 

  0.07 

  1,421 

  - 

  - 

Total

  0.27 

  5,330 

  0.22 

  4,480 

  - 

  - 

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

  - 

  - 

  4.99 

  7

  62.00 

  90

Total coupons on capital securities classified as equity


  1,214 


  1,303 


  1,241 

Dividends to shareholders


  6,544 


  5,790 


  1,331 

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



2022

2021

2020




Total

Total


First call date

Per security

$m

$m

$m

Perpetual subordinated contingent convertible securities1






$2,000 m issued at 6.875%2

Jun 2021

  $68.750

  - 

  69

  138 

$2,250 m issued at 6.375%

Sep 2024

  $63.750

  143 

  143 

  143 

$2,450 m 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%3

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 

  69

  - 

$1,000m issued at 4.000%5

Mar 2026

  $40.000

  40 

  20

  - 

$1,000m issued at 4.700%6

Mar 2031

  $47.000

  47 

  24

  - 

€1,500m issued at 5.250%7

Sep 2022

  €52.500

  76 

  93

  90

€1,000m issued at 6.000%

Sep 2023

  €60.000

  63 

  70

  67

€1,250m issued at 4.750%

Jul 2029

  €47.500

  65 

  72

  67

£1,000m issued at 5.875%

Sep 2026

  £58.750

  70 

  80

  74

SGD1,000m issued at 4.700%8

Jun 2022

  SGD47.000

  14 

  35

  35

SGD750m issued at 5.000%

Sep 2023

  SGD50.000

  27 

  28

  27

Total



  1,214 

  1,303 

  1,241 

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 15 April 2021 and was redeemed and cancelled on 1 June 2021.

3  This security was called by HSBC Holdings on 30 January 2023 and is expected to be redeemed and cancelled on 23 March 2023.

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.

7  This security was called by HSBC Holdings on 9 August 2022 and was redeemed and cancelled on 16 September 2022.

8  This security was called by HSBC Holdings on 4 May 2022 and was redeemed and cancelled on 8 June 2022.

8 


After the end of the year, the Directors approved a second interim dividend in respect of the financial year ended 31 December 2022 of $0.23 per ordinary share, a distribution of approximately $4,593m. The second interim dividend for 2022 will be payable on 27 April 2023 to holders on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 3 March 2023. No liability was recorded in the financial statements in respect of the second interim dividend for 2022.

On 4 January 2023, HSBC paid a coupon on its €1,250m subordinated capital securities, representing a total distribution of €30m ($31m). No liability was recorded in the balance sheet at 31 December 2022 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


2022

2021

2020


$m

$m

$m

Profit attributable to shareholders of the parent company

  16,035 

  13,917 

  5,229 

Dividend payable on preference shares classified as equity

  - 

  (7)

  (90)

Coupon payable on capital securities classified as equity

  (1,213)

  (1,303)

  (1,241)

Year ended 31 Dec

  14,822 

  12,607 

  3,898 

 


 

Basic and diluted earnings per share


2022

2021

2020


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

  14,822 

  19,849 

  0.75 

  12,607 

  20,197 

  0.62 

  3,898 

  20,169 

  0.19 

Effect of dilutive potential ordinary shares


  137 



  105 



  73


Diluted1

  14,822 

  19,986 

  0.74 

  12,607 

  20,302 

  0.62 

  3,898 

  20,242 

  0.19 

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 9.4 million (2021: 8.6 million; 2020: 14.6 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 2021 and 2020 adjusted performance information is presented on a constant currency basis. The 2021 and 2020 income statements are converted at the average rates of exchange for 2022, and the balance sheets at 31 December 2021 and 31 December 2020 at the prevailing rates of exchange on 31 December 2022.

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


2022


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

  24,367 

  16,215 

  15,359 

  (596)

  55,345 

-  external

  21,753 

  16,715 

  19,598 

  (2,721)

  55,345 

-  inter-segment

  2,614 

  (500)

  (4,239)

  2,125 

  - 

-  of which: net interest income/(expense)

  18,137 

  11,867 

  5,303 

  (2,706)

  32,601 

Change in expected credit losses and other credit impairment recoveries

  (1,137)

  (1,858)

  (587)

  (10)

  (3,592)

Net operating income/(expense)

  23,230 

  14,357 

  14,772 

  (606)

  51,753 

Total operating expenses

  (14,726)

  (6,642)

  (9,325)

  227 

  (30,466)

Operating profit/(loss)

  8,504 

  7,715 

  5,447 

  (379)

  21,287 

Share of profit in associates and joint ventures

  29 

  1 

  (2)

  2,695 

  2,723 

Adjusted profit before tax

  8,533 

  7,716 

  5,445 

  2,316 

  24,010 


%

%

%

%

%

Share of HSBC's adjusted profit before tax

  35.5 

  32.1 

  22.7 

  9.7 

  100.0 

Adjusted cost efficiency ratio

  60.4 

  41.0 

  60.7 

  38.1 

  55.0 

Adjusted balance sheet data

$m

$m

$m

$m

$m

Loans and advances to customers (net)

  423,553 

  308,094 

  192,852 

  355 

  924,854 

Interests in associates and joint ventures

  508 

  15 

  108 

  28,623 

  29,254 

Total external assets

  889,450 

  606,698 

  1,321,076 

  149,306 

  2,966,530 

Customer accounts

  779,310 

  458,714 

  331,844 

  435 

  1,570,303 

 


2021

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

  20,963 

  12,538 

  13,982 

  (463)

  47,020 

-  external

  20,725 

  12,423 

  15,590 

  (1,718)

  47,020 

-  inter-segment

  238 

  115 

  (1,608)

  1,255 

  - 

-  of which: net interest income/(expense)

  13,458 

  8,308 

  3,844 

  (716)

  24,894 

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

  213 

  225 

  313 

  3

  754 

Net operating income/(expense)

  21,176 

  12,763 

  14,295 

  (460)

  47,774 

Total operating expenses

  (14,489)

  (6,554)

  (9,250)

  189 

  (30,104)

Operating profit/(loss)

  6,687 

  6,209 

  5,045 

  (271)

  17,670 

Share of profit in associates and joint ventures

  34

  1

  - 

  2,898 

  2,933 

Adjusted profit before tax

  6,721 

  6,210 

  5,045 

  2,627 

  20,603 


%

%

%

%

%

Share of HSBC's adjusted profit before tax

  32.6 

  30.1 

  24.5 

  12.8 

  100.0 

Adjusted cost efficiency ratio

  69.1 

  52.3 

  66.2 

  40.8 

  64.0 

Adjusted balance sheet data

$m

$m

$m

$m

$m

Loans and advances to customers (net)

  461,047 

  330,683 

  198,779 

  688 

  991,197 

Interests in associates and joint ventures

  489 

  12

  116 

  27,469 

  28,086 

Total external assets

  888,028 

  586,392 

  1,157,327 

  174,073 

  2,805,820 

Customer accounts

  819,319 

  480,201 

  322,435 

  592 

  1,622,547 

 



2020

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

  21,481 

  12,889 

  14,696 

  (218)

  48,848 

-  external

  19,521 

  13,278 

  17,635 

  (1,586)

  48,848 

-  inter-segment

  1,960 

  (389)

  (2,939)

  1,368 

  - 

-  of which: net interest income/(expense)

  14,752 

  8,997 

  4,314 

  (1,324)

  26,739 

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

  (2,878)

  (4,710)

  (1,227)

  - 

  (8,815)

Net operating income/(expense)

  18,603 

  8,179 

  13,469 

  (218)

  40,033 

Total operating expenses

  (14,536)

  (6,475)

  (8,895)

  (539)

  (30,445)

Operating profit/(loss)

  4,067 

  1,704 

  4,574 

  (757)

  9,588 

Share of profit in associates and joint ventures

  6

  (1)

  - 

  2,102 

  2,107 

Adjusted profit before tax

  4,073 

  1,703 

  4,574 

  1,345 

  11,695 


%

%

%

%

%

Share of HSBC's adjusted profit before tax

  34.8 

  14.6 

  39.1 

  11.5 

  100.0 

Adjusted cost efficiency ratio

  67.7 

  50.2 

  60.5 

  (247.2)

  62.3 

Adjusted balance sheet data

$m

$m

$m

$m

$m

Loans and advances to customers (net)

  436,105 

  320,084 

  211,510 

  1,151 

  968,850 

Interests in associates and joint ventures

  437 

  15

  128 

  25,142 

  25,722 

Total external assets

  828,309 

  530,203 

  1,238,781 

  184,030 

  2,781,323 

Customer accounts

  788,043 

  439,889 

  310,757 

  540 

  1,539,229 

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:


2022

2021

2020


$m

$m

$m

Reported external net operating income by country/territory1

  51,727 

  49,552 

  50,429 

-  UK

  11,767 

  10,909 

  9,163 

-  Hong Kong

  15,894 

  14,245 

  15,783 

-  US

  3,893 

  3,795 

  4,474 

-  France

  136 

  2,179 

  1,753 

-  other countries

  20,037 

  18,424 

  19,256 

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

Adjusted results reconciliation


2022

2021

2020


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

  55,345 

  (3,618)

  51,727 

  47,020 

  3,074 

  (542)

  49,552 

  48,848 

  1,523 

  58

  50,429 

ECL

  (3,592)

  - 

  (3,592)

  754 

  174 

  - 

  928 

  (8,815)

  (2)

  - 

  (8,817)

Operating expenses

  (30,466)

  (2,864)

  (33,330)

  (30,104)

  (2,181)

  (2,335)

  (34,620)

  (30,445)

  (1,170)

  (2,817)

  (34,432)

Share of profit in associates and joint ventures

  2,723 

  - 

  2,723 

  2,933 

  113 

  - 

  3,046 

  2,107 

  (48)

  (462)

  1,597 

Profit/(loss) before tax

  24,010 

  (6,482)

  17,528 

  20,603 

  1,180 

  (2,877)

  18,906 

  11,695 

  303 

  (3,221)

  8,777 

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

Adjusted balance sheet reconciliation


2022

2021

2020


Reported and

adjusted

Adjusted

Currency translation

Reported

Adjusted

Currency translation

Reported


$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

  924,854 

  991,197 

  54,617 

  1,045,814 

  968,850 

  69,137 

  1,037,987 

Interests in associates and joint ventures

  29,254 

  28,086 

  1,523 

  29,609 

  25,722 

  962 

  26,684 

Total external assets

  2,966,530 

  2,805,820 

  152,119 

  2,957,939 

  2,781,323 

  202,841 

  2,984,164 

Customer accounts

  1,570,303 

  1,622,547 

  88,027 

  1,710,574 

  1,539,229 

  103,551 

  1,642,780 

 

Adjusted profit reconciliation


2022

2021

2020


$m

$m

$m

Year ended 31 Dec




Adjusted profit before tax

  24,010 

  20,603 

  11,695 

Significant items

  (6,482)

  (2,877)

  (3,221)

-  customer redress programmes (revenue)

  8 

  11

  (21)

-  disposals, acquisitions and investment in new businesses (revenue)1

  (2,799)

  - 

  (10)

-  fair value movements on financial instruments2

  (579)

  (242)

  264 

-  restructuring and other related costs (revenue)3

  (248)

  (307)

  (170)

-  customer redress programmes (operating expenses)

  31 

  (49)

  54

-  disposals, acquisitions and investment in new businesses (operating expenses)

  (18)

  - 

  - 

-  impairment of goodwill and other intangible assets

  4 

  (587)

  (1,090)

-  past service costs of guaranteed minimum pension benefits equalisation

  - 

  - 

  (17)

-  restructuring and other related costs (operating expenses)4

  (2,881)

  (1,836)

  (1,908)

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

  - 

  - 

  (12)

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

  - 

  - 

  (462)

-  currency translation on significant items


  133 

  151 

Currency translation


  1,180 

  303 

Reported profit before tax

  17,528 

  18,906 

  8,777 

1  Includes losses from classifying businesses as held for sale as part of the broader restructuring of our European business, of which $2.4bn relates

  to the planned sale of the retail banking operations in France in 2022.

2  Includes fair value movements on non-qualifying hedges and debit valuation adjustments on derivatives. 

3  Comprises gains and losses relating to the business update in February 2020, including losses associated with the RWA reduction programme.

4  Includes impairment of software intangible assets of $128m (2021: $21m, 2020: $189m) of the total software intangible asset impairment of $147m (2021: $146m, 2020: $1,347m) and impairment of tangible assets of $332m (2021: $75m, 2020: $197m).

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


 

11

Trading assets

 


2022

2021


$m

$m

Treasury and other eligible bills

  22,897 

  23,110 

Debt securities

  78,126 

  89,944 

Equity securities

  88,026 

  109,614 

Trading securities

  189,049 

  222,668 

Loans and advances to banks1

  8,769 

  7,767 

Loans and advances to customers1

  20,275 

  18,407 

Year ended 31 Dec

  218,093 

  248,842 

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 reported as financial liabilities designated 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


2022

2021


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

  148,592 

  64,684 

  4,817 

  218,093 

  180,423 

  65,757 

  2,662 

  248,842 

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

  15,978 

  13,019 

  16,066 

  45,063 

  17,937 

  17,629 

  14,238 

  49,804 

Derivatives

  2,917 

  279,265 

  1,964 

  284,146 

  2,783 

  191,621 

  2,478 

  196,882 

Financial investments

  182,231 

  71,621 

  2,965 

  256,817 

  247,745 

  97,838 

  3,389 

  348,972 

Liabilities









Trading liabilities

  44,787 

  27,092 

  474 

  72,353 

  63,437 

  20,682 

  785 

  84,904 

Financial liabilities designated at fair value

  1,130 

  115,765 

  10,432 

  127,327 

  1,379 

  136,243 

  7,880 

  145,502 

Derivatives

  2,400 

  280,444 

  2,920 

  285,764 

  1,686 

  186,290 

  3,088 

  191,064 

 

The table below provides the fair value levelling of assets held for sale and liabilities of disposal groups that have been classified as held for sale in accordance with IFRS 5. For further details, see Note 23.

 

Financial instruments carried at fair value and bases of valuation - assets and liabilities held for sale


2022

2021


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

  2,932 

  244 

  - 

  3,176 

  - 

  - 

  - 

  - 

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

  - 

  14 

  47 

  61 

  - 

  - 

  - 

  - 

Derivatives

  - 

  866 

  - 

  866 

  - 

  - 

  - 

  - 

Financial investments

  11,184 

  - 

  - 

  11,184 

  - 

  - 

  - 

  - 

Liabilities









Trading liabilities

  2,572 

  182 

  - 

  2,754 

  - 

  - 

  - 

  - 

Financial liabilities designated at fair value

  - 

  3,523 

  - 

  3,523 

  - 

  - 

  - 

  - 

Derivatives

  - 

  813 

  - 

  813 

  - 

  - 

  - 

  - 

 


 

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 2022








Transfers from Level 1 to Level 2

  4,721 

  5,284 

  743 

  - 

  113 

  - 

  - 

Transfers from Level 2 to Level 1

  8,208 

  5,964 

  1,214 

  - 

  233 

  - 

  - 

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 

  - 

  - 

 


 

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






2022

2021


GBM

Corporate

Centre

GBM

Corporate

Centre


$m

$m

$m

$m

Type of adjustment





Risk-related

  650 

  40 

  868 

  42

-  bid-offer

  426 

  - 

  412 

  - 

-  uncertainty

  86 

  - 

  66

  1

-  credit valuation adjustment

  245 

  35 

  228 

  35

-  debit valuation adjustment

  (175)

  - 

  (92)

  - 

-  funding fair value adjustment

  68 

  5 

  254 

  6

Model-related

  61 

  - 

  57

  - 

-  model limitation

  61 

  - 

  57

  - 

Inception profit (Day 1 P&L reserves)

  97 

  - 

  106 

  - 

At 31 Dec

  808 

  40 

  1,031 

  42

 

The reduction in fair value adjustments was driven by changes to derivative exposures and the credit environment, including HSBC's own credit.


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 debit 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 debit 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

  647 

  19 

  15,652 

  - 

  16,318 

  92 

  - 

  - 

  92 

Asset-backed securities

  438 

  208 

  95 

  - 

  741 

  - 

  - 

  - 

  - 

Structured notes

  - 

  - 

  - 

  - 

  - 

  - 

  10,432 

  - 

  10,432 

Other derivatives

  - 

  - 

  - 

  1,964 

  1,964 

  - 

  - 

  2,920 

  2,920 

Other portfolios

  1,880 

  4,590 

  319 

  - 

  6,789 

  382 

  - 

  - 

  382 

At 31 Dec 2022

  2,965 

  4,817 

  16,066 

  1,964 

  25,812 

  474 

  10,432 

  2,920 

  13,826 











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 

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 

 


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 2022

  3,389 

  2,662 

  14,238 

  2,478 

  785 

  7,880 

  3,088 

Total gains/(losses) recognised in profit or loss

  (4)

  (245)

  159 

  390 

  (52)

  (1,334)

  1,014 

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

  - 

  (245)

  - 

  390 

  (52)

  - 

  1,014 

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

  - 

  - 

  159 

  - 

  - 

  (1,334)

  - 

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

  (4)

  - 

  - 

  - 

  - 

  - 

  - 

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

  (325)

  (137)

  (217)

  (219)

  (11)

  (345)

  (226)

-  financial investments: fair value gains/ (losses)

  (203)

  - 

  - 

  - 

  - 

  82 

  - 

-  exchange differences

  (122)

  (137)

  (217)

  (219)

  (11)

  (427)

  (226)

Purchases

  1,048 

  3,436 

  4,330 

  - 

  178 

  - 

  - 

New issuances

  1 

  - 

  - 

  - 

  8 

  4,183 

  - 

Sales

  (245)

  (1,102)

  (783)

  - 

  (152)

  (94)

  - 

Settlements

  (463)

  (1,273)

  (1,729)

  (918)

  (644)

  182 

  (993)

Transfers out

  (523)

  (442)

  (39)

  (409)

  (18)

  (1,296)

  (632)

Transfers in

  87 

  1,918 

  107 

  642 

  380 

  1,256 

  669 

At 31 Dec 2022

  2,965 

  4,817 

  16,066 

  1,964 

  474 

  10,432 

  2,920 

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2021

  - 

  (100)

  (148)

  707 

  2 

  100 

  2,779 

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

  - 

  (100)

  - 

  707 

  2 

  - 

  2,779 

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

  - 

  - 

  (148)

  - 

  100 

  - 

 

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/ (losses)

  (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 

  - 

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


2022

2021


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

  264 

  (291)

  - 

  - 

  143 

  (146)

  - 

  - 

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

  914 

  (911)

  - 

  - 

  849 

  (868)

  - 

  - 

Financial investments

  11 

  (11)

  65 

  (55)

  20

  (20)

  113 

  (112)

At 31 Dec

  1,189 

  (1,213)

  65 

  (55)

  1,012 

  (1,034)

  113 

  (112)

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 2022.

Quantitative information about significant unobservable inputs in Level 3 valuations


Fair value



2022

2021


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

  16,318 

  92 

See below

See below





Asset-backed securities

  741 

  - 







-  collateralised loan/debt obligation

188

  - 

Market proxy

Bid quotes

  - 

92

  - 

100

-  other ABSs

  553 

  - 

Market proxy

Bid quotes

  - 

99

  - 

100

Structured notes

  - 

  10,432 







-  equity-linked notes

  - 

  6,833 

Model - Option model

Equity volatility

6%

142%

6%

124%

Model - Option model

Equity correlation

32%

99%

22%

99%

-  Foreign exchange-linked notes

  - 

  2,694 

Model - Option model

Foreign exchange volatility

3%

37%

1%

99%

-  other

  - 

  905 







Derivatives

  1,964 

  2,920 

 

 





-  interest rate derivatives

  560 

  710 

 

 





  securitisation swaps

  259 

  209 

Model - Discounted cash flow

Prepayment rate

5%

10%

5%

10%

  long-dated swaptions

  53 

  67 

Model - Option model

Interest rate volatility

8%

53%

15%

35%

  other

  248 

  434 







-  Foreign exchange derivatives

  445 

  304 







  Foreign exchange options

  404 

  274 

Model - Option model

Foreign exchange volatility

1%

46%

1%

99%

  other

  41 

  30 







-  equity derivatives

  850 

  1,658 







  long-dated single stock options

  415 

  502 

Model - Option model

Equity volatility

7%

153%

4%

138%

  other

  435 

  1,156 







-  credit derivatives

  109 

  248 







Other portfolios

  6,789 

  382 







-  repurchase agreements

  750 

  328 

Model - Discounted cash flow

Interest rate curve

1%

9%

1%

5%

-  other1

  6,039 

  54 







At 31 Dec 2022

  25,812 

  13,826 







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


2022

2021


$m

$m

Valuation technique using observable inputs: Level 2



Assets at 31 Dec



-  derivatives

  3,801 

  2,811 

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

  52,322 

  51,408 

Liabilities at 31 Dec



-  designated at fair value

  32,123 

  32,418 

-  derivatives

  6,922 

  1,220 

 


 

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 2022






Assets






Loans and advances to banks

  104,882 

  - 

  104,074 

  814 

  104,888 

Loans and advances to customers

  924,854 

  - 

  8,768 

  904,288 

  913,056 

Reverse repurchase agreements - non-trading

  253,754 

  - 

  253,668 

  - 

  253,668 

Financial investments - at amortised cost

  168,746 

  90,629 

  67,419 

  626 

  158,674 

Liabilities






Deposits by banks

  66,722 

  - 

  66,831 

  - 

  66,831 

Customer accounts

  1,570,303 

  - 

  1,570,209 

  - 

  1,570,209 

Repurchase agreements - non-trading

  127,747 

  - 

  127,500 

  - 

  127,500 

Debt securities in issue

  78,149 

  - 

  76,640 

  381 

  77,021 

Subordinated liabilities

  22,290 

  - 

  22,723 

  - 

  22,723 







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 

 

Fair values of financial instruments not carried at fair value and bases of valuation - assets and disposal groups held for sale



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 2022






Assets






Loans and advances to banks

  253 

  - 

  257 

  - 

  257 

Loans and advances to customers

  80,687 

  - 

  111 

  78,048 

  78,159 

Reverse repurchase agreements - non-trading

  4,646 

  - 

  4,646 

  - 

  4,646 

Financial investments - at amortised cost

  6,165 

  6,042 

  - 

  - 

  6,042 

Liabilities






Deposits by banks

  64 

  - 

  64 

  - 

  64 

Customer accounts

  85,274 

  - 

  85,303 

  - 

  85,303 

Repurchase agreements - non-trading

  3,266 

  - 

  3,266 

  - 

  3,266 

Debt securities in issue

  12,928 

  - 

  12,575 

  - 

  12,575 

Subordinated liabilities

  8 

  - 

  7 

  - 

  7 







At 31 Dec 2021






Assets






Loans and advances to banks

  3 

  - 

  3 

  - 

  3 

Loans and advances to customers

  3,056 

  - 

  363 

  2,808 

  3,171 

Liabilities






Deposits by banks

  87 

  - 

  87 

  - 

  87 

Customer accounts

  8,750 

  - 

  8,750 

  - 

  8,750 

 

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


2022

2021


Carrying amount

Fair value1

Carrying amount

Fair value1


$m

$m

$m

$m

Assets at 31 Dec





Loans and advances to HSBC undertakings

  26,765 

  26,962 

  25,108 

  25,671 

Financial investments - at amortised cost

  19,466 

  19,314 

  26,194 

  26,176 

Liabilities at 31 Dec





Debt securities in issue

  66,938 

  65,364 

  67,483 

  69,719 

Subordinated liabilities

  19,727 

  20,644 

  17,059 

  21,066 

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

 


2022


2021



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

  3,079 

  38,529 

  41,608 

  2,251 

  42,062 

  44,313 

-  treasury and other eligible bills

  649 

  95 

  744 

  599 

  31

  630 

-  debt securities

  2,430 

  3,969 

  6,399 

  1,652 

  5,177 

  6,829 

-  equity securities

  - 

  34,465 

  34,465 

  - 

  36,854 

  36,854 

Loans and advances to banks and customers

  - 

  1,841 

  1,841 

  - 

  4,307 

  4,307 

Other

  - 

  1,614 

  1,614 

  - 

  1,184 

  1,184 

At 31 Dec

  3,079 

  41,984 

  45,063 

  2,251 

  47,553 

  49,804 

 


 

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