Half-year Report - 2022 Interim Report - Part 3

RNS Number : 5083U

HSBC Holdings PLC

01 August 2022

 

Risk
	Page
Key developments in the first half of 2022	64
Areas of special interest	64
Credit risk	68
Treasury risk	95
Market risk	106
Insurance manufacturing operations risk	110

We recognise that the primary role of risk management is to protect our customers, business, colleagues, shareholders and the communities that we serve, while ensuring we are able to support our strategy and provide sustainable growth.

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

We aim to use a comprehensive risk management approach across the organisation and across all risk types, underpinned by our culture and values. This is outlined in our risk management framework, including the key principles and practices that we employ in managing material risks, both financial and non-financial. The framework fosters continual monitoring, promotes risk awareness and encourages sound operational and strategic decision making. It also supports a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities. We continue to actively review and develop our risk management framework and enhance our approach to managing risk.

All our people are responsible for the management of risk, with the ultimate accountability residing with the Board. Our Group Risk and Compliance function, led by the Group Chief Risk and Compliance Officer, plays an important role in reinforcing our culture and values. We are focused on creating an environment that encourages our people to speak up and do the right thing.

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

A summary of our current policies and practices regarding the management of risk is set out in the 'Risk management' section on pages 121 to 124 of the Annual Report and Accounts 2021.

Key developments in the first half of 2022

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

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

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

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

• We have further strengthened our third-party risk policy and processes to improve control and oversight of our material third parties that are key to maintaining our operational resilience, and to meet new and evolving regulatory requirements.

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

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

• Our climate risk programme continues to shape our approach to climate risk across four key pillars: governance and risk appetite; risk management; stress testing; and disclosures.

• We continued to improve the effectiveness of our financial crime controls, deploying advanced analytics capabilities into new markets. We are refreshing our financial crime policies, ensuring they remain up-to-date and address changing and emerging risks. We continue to monitor regulatory changes.

Areas of special interest

During the first half of 2022, a number of areas were considered as part of our top and emerging risks because of the effect they have on the Group. In this section we have focused on risks related to geopolitical and macroeconomic risk, Covid-19, climate risk and the interbank offered rate ('Ibor') transition.

Geopolitical and macroeconomic risk

The Russia-Ukraine war has had far-reaching geopolitical and economic implications. HSBC is monitoring the direct and indirect impacts of the war, and continues to respond to the extensive sanctions and trade restrictions that have been imposed, noting the challenges that arise in implementing the complex, novel and ambiguous aspects of certain of these sanctions. Numerous sanctions have been imposed against the Russian government and its officials, alongside individuals with close ties to the Russian government and a number of Russian financial institutions and companies. Russia has implemented certain countermeasures in response.

Our business in Russia principally serves multinational corporate clients headquartered in other countries and is not accepting new business or customers, and is consequently on a declining trend. Following a strategic review, HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) has entered into an agreement to sell its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company), subject to regulatory approvals.

Global commodity markets have been significantly impacted by the Russia-Ukraine war and the Covid-19 pandemic, leading to sustained supply chain disruptions. This has resulted in product shortages appearing across several regions, and increased prices for both energy and non-energy commodities, such as food. We do not expect these to ease significantly at least until the end of 2022. In turn, this has had a significant impact on global inflation.

Rising global inflation is also prompting central banks to tighten monetary policy. The US Federal Reserve Board ('FRB') delivered a 75bps increase in the Federal Funds rate in June 2022, and a further 75bps increase in July, with several more rate rises expected in the second half of 2022 and into 2023. Financial markets currently expect the FRB to raise the Federal Funds rate above 3% by the end of 2022, although the pace of rate increases could decline if there is a sustained economic slowdown. The European Central Bank lagged the FRB but has started raising its benchmark rates, with a 0.5% increase in July 2022. Further incremental increases are now anticipated in light of inflation forecasts. Uncertainty over the economic outlook could nevertheless slow the pace of tightening, and keep fiscal policies broadly accommodative for some time. We continue to monitor our risk profile closely in the context of uncertainty over monetary policy.

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

The US-China relationship remains complex, with tensions over a number of critical issues. The US has recently articulated its approach to perceived strategic competition with China based on an intent to 'invest, align and compete'. The US, the UK, the EU, Canada and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies. These include the freezing of assets of government officials, and the implementation of investment and import/export restrictions targeting certain Chinese companies.

There is a continued risk of additional sanctions being imposed by the US and other governments in relation to human rights and other issues with China, and this could create a more complex operating environment for the Group and its customers.

China has in turn announced a number of its own sanctions and trade restrictions that target, or provide authority to target, foreign individuals and companies. It has also promulgated laws that provide a legal framework for imposing further sanctions and export restrictions.

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

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

The impact of the Covid-19 pandemic and second order impacts from other geopolitical events remain uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. To help mitigate this risk, model outputs and management adjustments are closely monitored and independently reviewed at the Group and country level for reliability and appropriateness. For further details on model risk, see page 209 of the Annual Report and Accounts 2021.

Political disagreements between the UK and the EU, notably over the future operation of the Northern Ireland Protocol, has stalled the creation of a framework for voluntary regulatory cooperation in financial services following the UK's withdrawal from the EU. While negotiations are continuing, it is unclear whether or when an agreement over the Northern Ireland Protocol will be reached, particularly as the UK government is currently in a period of political uncertainty amid a leadership election to replace Boris Johnson as prime minister.

In June 2022, the UK government published proposed legislation that seeks to amend the Protocol in a number of respects. The terms of such proposal may be subject to legal challenge by the EU, and any such dispute, together with any action that the EU may take in response, could further complicate the terms of trade between the UK and the EU and potentially prevent progress in other areas such as financial services. We are monitoring the situation closely, including the potential impacts on our customers. 

Our global presence and diversified customer base should help mitigate the direct impacts on our financial position of the absence of a comprehensive EU-UK agreement on financial services. Our wholesale and markets footprint in the EU provides a strong foundation for us to build upon. Over the medium to long term, the UK's withdrawal from the EU may impact markets and increase economic risk, particularly in the UK, which could adversely impact our profitability and prospects for growth in this market.

Expanding data privacy, national security and cybersecurity laws in a number of markets could pose potential challenges to intra-group data sharing. These developments could increase financial institutions' compliance burdens in respect of cross-border transfers of personal information, and degrade our enterprise-wide financial crime risk management capabilities.

Risks related to Covid-19

Despite the successful roll-out of vaccines around the world, the Covid-19 pandemic and its effect on the global economy have continued to impact our customers and organisation. The emergence of new variants and sub-variants pose a continuing risk. The global vaccination roll-out has helped reduce the social and economic impact of the Covid-19 pandemic, although there continues to be divergence in the speed at which vaccines have been deployed. Countries continue to differ in their approach to restrictions on activity and travel, and if these differences persist, this could prolong or worsen supply chain and international travel disruptions. Most notably, China's government-imposed lockdown restrictions in major cities, which were only eased recently, have impacted China's economy, Asian tourism and global supply chains.

Central banks in major markets - with the exception of mainland China - are raising interest rates, with the speed of such tightening varying across jurisdictions based on specific macroeconomic conditions. Policy tightening in several major emerging markets is also underway in order to counteract rising inflation and the risk of capital outflows. Governments are also expected to make fiscal support more targeted as the appetite for broad lockdowns and public health restrictions decreases. Government debt has risen in most advanced economies, and is expected to remain high into the medium term. High government debt burdens have raised fiscal vulnerabilities, increasing the sensitivity of debt service costs to interest rate increases, and potentially reducing the fiscal space available to address future economic downturns.

Our Central scenario used to calculate credit impairment assumes that economic growth continues in the second half of 2022, with GDP in our key markets surpassing pre-pandemic levels. It is assumed that private sector growth accelerates as pandemic-related fiscal support is withdrawn. However, there is a high degree of uncertainty associated with economic forecasts in the current environment and there are significant risks to our Central scenario. The degree of uncertainty varies by market, depending on exposure to commodity price increases, supply chain constraints, the monetary policy response to inflation and the public health policy response to the Covid-19 pandemic. As a result, our Central scenario for impairment has not been assigned an equal likelihood of occurrence across our key markets.

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

For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 67.

Climate risk

The pace of regulatory developments focusing on climate risk management, disclosures, and stress testing and scenario analysis continued to increase in 2022. The Russia-Ukraine war has impacted global commodity markets, with short-term supply concerns driving changes in energy policy in Europe. While these policy changes may affect the near-term climate transition path for HSBC and our customers, we remain committed to our climate ambition to align our own operations and supply chain to net zero by 2030, and the financed emissions from our portfolio of customers to net zero by 2050. As announced in March 2022, we intend to publish a climate transition plan in 2023, and have committed to a science-aligned phase-down of fossil fuel finance, and a review of our wider financing and investment policies critical to achieving net zero by 2050.

Our most material risks in terms of managing climate risk relate to corporate and retail client financing within our banking portfolio, but there are also significant responsibilities in relation to asset ownership by our insurance business and employee pension plans, as well as from the activities of our asset management business. We continue to monitor the impacts of climate risk, and further embed our approach across our key risk areas, priority regions and businesses.

We have refreshed our credit risk policy to further embed climate risk considerations into our corporate credit decisions for new money requests. We also delivered training to select colleagues in the Risk function to raise awareness of the likely impacts that climate risk could have on certain high transition risk sectors, as well as associated credit risk considerations. We continue to develop guidance for our other higher transition risk sectors. To help with risk assessment, our developing client transition and physical risk questionnaire is currently live for select customers in 10 sectors and 31 countries and territories to improve our understanding of transition risk and physical risk exposure.

We are also focused on embedding climate considerations into retail credit risk management processes and are implementing metrics to support monitoring of exposure to properties with heightened physical risk exposure within our mortgage portfolios.

We are considering transition risk by assessing the potential risk to the UK, which is our largest mortgage market, using current and potential energy efficiency ratings for individual properties, sourced from property energy performance certificate ('EPC') data. The UK government has set out policies and proposals that aim to deliver increased economic growth and decreased emissions in its 'Clean growth strategy', including a stated ambition to improve the EPC ratings of housing stock. In line with this, we are working towards improving the proportion of properties within our UK residential mortgage portfolio with an EPC rating of C or above, and on improving the EPC data coverage. We have approximately 54% of properties in our UK portfolio with a valid EPC certificate dated within the last 10 years, as at May 2022.

In addition to financial risks arising in our corporate and retail banking portfolio, we could also face increased reputational, legal and regulatory risks as we make progress towards our net zero ambition, as stakeholders are likely to place a greater focus on our actions, investment decisions and disclosures related to this ambition. We will also face these same risks if we are perceived to mislead stakeholders regarding our climate strategy, the climate impact of a product or service, or regarding the commitments of our customers. We have published internal guidance and established an advisory group to raise awareness and provide advice on these risks to existing governance forums.

We continued to develop our climate stress testing and scenario capabilities, including model development, and delivered regulatory climate stress tests. These are being used to further improve our understanding of our risk exposures for use in risk management and business decision making.

While climate risk reporting - and in particular reporting on financed emissions - has improved over time, we continue to focus on data quality and consistency with the development of our risk appetite and metrics.

Methodologies we have used may develop over time in line with market practice and regulations, as well as owing to developments in climate science. Any developments in data and methodologies could result in revisions to reported data going forward, including on financed emissions, meaning that reported figures may not be reconcilable or comparable year-on-year. We may also have to reevaluate our progress towards our climate-related targets in future and this could result in reputational, legal and regulatory risks.

Ibor transition

The publication of sterling, Swiss franc, euro and Japanese yen Libor interest rate benchmarks, as well as Euro Overnight Index Average ('Eonia'), ceased from the end of 2021. Our interbank offered rate ('Ibor') transition programme - which is tasked with the development of new near risk-free rate ('RFR') products and the transition of legacy Ibor products - has continued to support the transition of a limited number of remaining contracts in these benchmarks to RFRs, or alternative reference rates.

During the first half of 2022, we continued to develop processes, technology and RFR product capabilities throughout our Group, particularly in entities that have US dollar Libor contracts that require transition. We also implemented controls and associated monitoring to help ensure we do not undertake any new US dollar Libor contracts, outside of agreed upon exemptions, to control the related risks. We have begun to engage with our clients to support them through the transition of their US dollar Libor and other demising Ibor contracts, with progress being made on the transition of trade, hedging and uncommitted lending facilities. We continue to actively engage in market and industry discussions around the transition of the remaining demising Ibors, including ceasing the use of 'synthetic' sterling and Japanese yen Libor.

While we have fewer than 50 lending and derivatives contracts remaining in Ibors that demised from the end of 2021, we continue to engage with our clients and industry bodies to help ensure that contracts can be transitioned with fair client outcomes.

For the Group's own debt securities issuances, in 2021 HSBC launched a consent solicitation to remediate Ibor references in five of its English law-governed regulatory capital and MREL sterling and Singapore dollar instruments. The proposed amendments were successfully adopted on all of the sterling instruments, but were not adopted with respect to the Singapore dollar instruments, as the minimum quorum requirements were not met. One of these instruments has since been redeemed. The terms of the remaining instrument provide for an Ibor benchmark being used to reset the coupon rate if HSBC chooses not to redeem it on the call date. We remain mindful of the various factors that impact on the Ibor remediation strategy for our regulatory capital and MREL instruments, including - but not limited to - timescales for cessation of relevant Ibor rates, constraints relating to the governing law of outstanding instruments, the potential relevance of legislative solutions and industry best practice guidance. We remain committed in seeking to remediate or mitigate relevant risks relating to Ibor benchmark demise, as appropriate, on our outstanding regulatory capital and MREL instruments before the relevant calculation dates, which may occur post-cessation of the relevant Ibor rate or rates.

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

• Regulatory compliance and conduct risks: The transition of legacy contracts to RFRs or alternative rates, or sales of products referencing RFRs, may not deliver fair client outcomes.

• Resilience and operational risks: Changes to manual and automated processes, made in support of new RFR methodologies, and the transition of large volumes of Ibor contracts may lead to operational issues.

• Legal risk: Issues arising from the use of legislative solutions and from legacy contracts that the Group is unable to transition may result in unintended or unfavourable outcomes for clients and market participants. This could potentially increase the risk of disputes.

• Model risk: As a result of changes to our models, to replace Ibor-related data, there is a risk that the accuracy of model output is adversely affected.

• Market risk: As a result of differences in Libor and RFR interest rates, we are exposed to basis risk resulting from the asymmetric adoption of rates across assets, liabilities and products.

Based on our experience in transitioning contracts referencing Ibors that demised from the end of 2021, and an assessment of the risks that relate to the transition of US dollar Libor contracts, we do not believe that our risk position has materially changed during the first half of 2022. Increased market and industry use of alternative rates, including the Secured Overnight Funding Rate ('SOFR'), have further reduced potential risks related to the transition away from US dollar Libor. We will continue to monitor market initiatives, and have developed controls and plans to help mitigate these risks. We will monitor these risks through the development of our product capabilities and the transition of legacy contracts, with a focus on fair client outcomes.

Throughout the remainder of 2022, and into 2023, we are committed to engaging with our clients and investors to complete an orderly transition of contracts that reference the remaining demising Ibors.

Additionally, following the recent announcement relating to the cessation of the Canadian dollar offered rate ('CDOR') after June 2024, we are assessing the impacts and will take appropriate actions to effect the transition.

Financial instruments impacted by Ibor reform

	Financial instruments yet to transition to alternative benchmarks, by main benchmark
	USD Libor	GBP Libor	JPY Libor	Others1
At 30 Jun 2022	$m	$m	$m	$m
Non-derivative financial assets
Loans and advances to customers	61,768	208	7	6,780
Other financial assets	4,131	201	-	1,012
Total non-derivative financial assets2	65,899	409	7	7,792
Non-derivative financial liabilities
Financial liabilities designated at fair value	18,272	1,957	1,165	-
Debt securities in issue	5,254	-	-	185
Other financial liabilities	3,001	-	-	-
Total non-derivative financial liabilities	26,527	1,957	1,165	185
Derivative notional contract amount
Foreign exchange	145,857	1,488	48	7,707
Interest rate	2,336,091	2,736	233	171,082
Others	-	-	-	-
Total derivative notional contract amount	2,481,948	4,224	281	178,789

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

1  Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (euro Libor, Swiss franc Libor, Eonia, SOR, THBFIX and Sibor). In May 2022, Refinitiv Benchmark Services Limited announced the cessation of the Canadian dollar offered rate ('CDOR'), with the eventual transition to Canadian Overnight Repo Rate Average ('CORRA'). Therefore, CDOR is also included in Others during the current period.

2  Gross carrying amount excluding allowances for expected credit losses.

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

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

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

• are recognised on HSBC's consolidated balance sheet.

•

Credit risk

	Page
Overview	63
Credit risk in the first half of 2022	63
Summary of credit risk	63
Stage 2 decomposition at 30 June 2022	66
Measurement uncertainty and sensitivity analysis of ECL estimates	67
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers	75
Credit quality of financial instruments	77
Personal lending	79
Wholesale lending	81
Supplementary information	85

Overview

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

Credit risk in the first half of 2022

There were no material changes to credit risk policy in the first half of 2022.

During 1H22, we adopted the EBA 'Guidelines on the application of definition of default' for our retail portfolios. This did not have a material impact on our retail portfolios. This was undertaken for our wholesale lending portfolios during 2021.

A summary of our current policies and practices for the management of credit risk is set out in 'Credit risk management' on page 137 of the Annual Report and Accounts 2021.

At 30 June 2022, gross loans and advances to customers and banks of $1,136bn decreased by $4.8bn, compared with 31 December 2021. This included adverse foreign exchange movements of $54.7bn.

Excluding foreign exchange movements, the growth was driven by a $22.3bn increase in wholesale loans and advances to customers, a $16.8bn increase in loans and advances to banks and a $10.8bn increase in personal loans and advances to customers.

The increase in wholesale loans and advances to customers was driven mainly in the US (up $4.4bn), the UK (up $3.6bn), Canada (up $3.5bn), India (up $2.3bn), Japan (up $1.8bn), mainland China (up $1.4bn) and UAE (up $1.1bn).

The increase in personal loans and advances to customers was driven largely by mortgage growth of $9.9bn, mainly in the UK (up $5.5bn), Australia (up $2.1bn) and Hong Kong (up $1.5bn).

In addition, other personal lending increased by $0.9bn, compared with 31 December 2021. The increase was largely driven by secured personal lending of $1.5bn, mainly in Hong Kong, and guaranteed loans in respect of residential property of $0.3bn, mainly in France. This was partly offset by a $0.8bn decline in unsecured personal lending, mainly in Hong Kong.

At 30 June 2022, the allowance for ECL of $11.6bn decreased by $0.6bn, compared with 31 December 2021, including favourable foreign exchange movements of $0.6bn. The $11.6bn allowance comprised $11.1bn in respect of assets held at amortised cost, $0.4bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').

Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers decreased by $0.1bn from 31 December 2021. This was attributable to:

• a $0.1bn decrease in wholesale loans and advances to customers, which included a $0.4bn decrease driven by stages 1 and 2, offset by a $0.3bn increase driven by stage 3 net of write-offs and purchased or originated credit impaired ('POCI'); and

• broadly unchanged allowances for ECL in personal loans and advances to customer, where a $0.2bn decrease driven by stage 3 was offset by a $0.2bn increase in stages 1 and 2.

The ECL charge for the first six months of 2022 was $1.1bn, inclusive of recoveries. This was driven by higher stage 3 charges, heightened economic uncertainty and inflationary pressures, partly offset by a release in Covid-19-related allowances.

The ECL charge comprised: $0.6bn in respect of personal lending, of which the stage 3 charge was $0.3bn; and $0.5bn in respect of wholesale lending, of which the stage 3 and POCI charge was $0.5bn.

At 30 June 2022, net credit exposures mostly related to wholesale loans booked in Russia of $1.2bn ($1.3bn gross carrying amounts and $0.1bn allowance for ECL) were reclassified to assets held for sale as we have entered into an agreement to sell HSBC Bank (RR) (Limited Liability Company), subject to regulatory approvals.

Summary of credit risk

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

The following tables analyse loans by industry sector and represent the concentration of exposures on which credit risk is managed. The allowance for ECL decreased from $12.2bn at 31 December 2021 to $11.6bn at 30 June 2022.

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
	At 30 Jun 2022		At 31 Dec 2021
	Gross carrying/ nominal amount	Allowance for ECL1	Gross carrying/ nominal amount	Allowance for ECL1
	$m	$m	$m	$m
Loans and advances to customers at amortised cost	1,039,130	(10,774)	1,057,231	(11,417)
-  personal	463,621	(2,918)	478,337	(3,103)
-  corporate and commercial	509,566	(7,684)	513,539	(8,204)
-  non-bank financial institutions	65,943	(172)	65,355	(110)
Loans and advances to banks at amortised cost	96,481	(52)	83,153	(17)
Other financial assets measured at amortised cost	950,007	(281)	880,351	(193)
-  cash and balances at central banks	363,613	(5)	403,022	(4)
-  items in the course of collection from other banks	8,073	-	4,136	-
-  Hong Kong Government certificates of indebtedness	43,866	-	42,578	-
-  reverse repurchase agreements - non-trading	244,451	-	241,648	-
-  financial investments	154,294	(75)	97,364	(62)
-  prepayments, accrued income and other assets2	135,710	(201)	91,603	(127)
Total gross carrying amount on-balance sheet	2,085,618	(11,107)	2,020,735	(11,627)
Loans and other credit-related commitments	633,091	(337)	627,637	(379)
-  personal	237,077	(30)	239,685	(39)
-  corporate and commercial	263,452	(291)	283,625	(325)
-  financial	132,562	(16)	104,327	(15)
Financial guarantees	17,586	(42)	27,795	(62)
-  personal	1,120	-	1,130	-
-  corporate and commercial	12,393	(41)	22,355	(58)
-  financial	4,073	(1)	4,310	(4)
Total nominal amount off-balance sheet3	650,677	(379)	655,432	(441)
	2,736,295	(11,486)	2,676,167	(12,068)
	Fair value	Memorandum allowance for ECL4	Fair  value	Memorandum allowance for ECL4
	$m	$m	$m	$m
Debt instruments measured at fair value through other comprehensive income ('FVOCI')	274,765	(120)	347,203	(96)

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

2  Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets', as presented within the consolidated balance sheet on page 106, includes both financial and non-financial assets. The 30 June 2022 balances include $1,918m gross carrying amounts (31 December 2021: $2,424m) and $133m allowances for ECL (31 December 2021: $39m) related to assets held for sale under business disposals as disclosed in Note 15 'Business acquisitions and disposals' on page 129. 

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

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

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

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

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

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

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

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 30 June 2022
	Gross carrying/nominal amount1					Allowance for ECL					ECL coverage %
	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total	Stage 1	Stage 2	Stage 3	POCI2	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%	%
Loans and advances to customers at amortised cost	891,822	128,105	19,086	117	1,039,130	(1,116)	(2,998)	(6,617)	(43)	(10,774)	0.1	2.3	34.7	36.8	1.0
-  personal	431,517	28,086	4,018	-	463,621	(554)	(1,434)	(930)	-	(2,918)	0.1	5.1	23.1	-	0.6
-  corporate and commercial	399,152	95,590	14,707	117	509,566	(523)	(1,525)	(5,593)	(43)	(7,684)	0.1	1.6	38.0	36.8	1.5
-  non-bank financial institutions	61,153	4,429	361	-	65,943	(39)	(39)	(94)	-	(172)	0.1	0.9	26.0	-	0.3
Loans and advances to banks at amortised cost	95,091	1,311	79	-	96,481	(8)	(25)	(19)	-	(52)	-	1.9	24.1	-	0.1
Other financial assets measured at amortised cost	944,983	4,715	264	45	950,007	(71)	(119)	(85)	(6)	(281)	-	2.5	32.2	13.3	-
Loans and other credit-related commitments	608,589	23,487	1,015	-	633,091	(124)	(159)	(54)	-	(337)	-	0.7	5.3	-	0.1
-  personal	235,413	1,504	160	-	237,077	(29)	(1)	-	-	(30)	-	0.1	-	-	-
-  corporate and commercial	242,263	20,337	852	-	263,452	(90)	(147)	(54)	-	(291)	-	0.7	6.3	-	0.1
-  financial	130,913	1,646	3	-	132,562	(5)	(11)	-	-	(16)	-	0.7	-	-	-
Financial guarantees	15,198	2,208	180	-	17,586	(6)	(19)	(17)	-	(42)	-	0.9	9.4	-	0.2
-  personal	1,108	11	1	-	1,120	-	-	-	-	-	-	-	-	-	-
-  corporate and commercial	10,521	1,696	176	-	12,393	(6)	(18)	(17)	-	(41)	0.1	1.1	9.7	-	0.3
-  financial	3,569	501	3	-	4,073	-	(1)	-	-	(1)	-	0.2	-	-	-
At 30 Jun 2022	2,555,683	159,826	20,624	162	2,736,295	(1,325)	(3,320)	(6,792)	(49)	(11,486)	0.1	2.1	32.9	30.2	0.4

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

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

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

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

Stage 2 days past due analysis at 30 June 2022
	Gross carrying/nominal amount				Allowance for ECL				ECL coverage %
	Stage 2	Up-to-date	1 to 29  DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29  DPD1,2	30 and > DPD1,2	Stage 2	Up-to-date	1 to 29  DPD1,2	30 and > DPD1,2
	$m	$m	$m	$m	$m	$m	$m	$m	%	%	%	%
Loans and advances to customers at amortised cost	128,105	123,235	2,644	2,226	(2,998)	(2,587)	(214)	(197)	2.3	2.1	8.1	8.8
-  personal	28,086	25,756	1,548	782	(1,434)	(1,093)	(174)	(167)	5.1	4.2	11.2	21.4
-  corporate and commercial	95,590	93,503	1,075	1,012	(1,525)	(1,456)	(40)	(29)	1.6	1.6	3.7	2.9
-  non-bank financial institutions	4,429	3,976	21	432	(39)	(38)	-	(1)	0.9	1.0	-	0.2
Loans and advances to banks at amortised cost	1,311	1,303	-	8	(25)	(25)	-	-	1.9	1.9	-	-
Other financial assets measured at amortised cost	4,715	4,699	9	7	(119)	(117)	-	(2)	2.5	2.5	-	28.6

1  Days past due ('DPD').

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

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

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

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

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

1  Days past due ('DPD').

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

Stage 2 decomposition at 30 June 2022

The following table presents the stage 2 decomposition of gross carrying amount and allowances for ECL for loans and advances to customers. It also sets out the reasons why an exposure is classified as stage 2 as at 30 June 2022.

The quantitative classification shows gross carrying values and allowances for ECL for which the applicable reporting date probability of default ('PD') measure exceeds defined quantitative thresholds for retail and wholesale exposures, as set out in Note 1.2 'Summary of significant accounting policies', on page 324 of the Annual Report and Accounts 2021.

The qualitative classification primarily accounts for customer risk rating ('CRR') deterioration, watch-and-worry and retail management judgemental adjustments.

A summary of our current policies and practices for the significant increase in credit risk is set out in 'Summary of significant accounting policies' on page 324 of the Annual Report and Accounts 2021.

Loans and advances to customers at 30 June 20221
	Gross carrying amount				Allowance for ECL				ECL coverage
	Personal	Corporate and commercial	Non-bank financial institutions	Total	Personal	Corporate and commercial	Non-bank financial institutions	Total	Total
	$m	$m	$m	$m	$m	$m	$m	$m	%
Quantitative	12,084	70,586	3,126	85,796	(1,199)	(1,152)	(25)	(2,376)	2.8
Qualitative	15,872	24,312	1,085	41,269	(231)	(368)	(13)	(612)	1.5
30 DPD backstop2	130	692	218	1,040	(4)	(5)	(1)	(10)	1.0
Total stage 2	28,086	95,590	4,429	128,105	(1,434)	(1,525)	(39)	(2,998)	2.3

Loans and advances to customers at 31 December 20211
	Gross carrying amount				Allowance for ECL				ECL coverage
	Personal	Corporate and commercial	Non-bank financial institutions	Total	Personal	Corporate and commercial	Non-bank financial institutions	Total	Total
	$m	$m	$m	$m	$m	$m	$m	$m	%
Quantitative	9,907	68,000	3,041	80,948	(1,076)	(1,347)	(19)	(2,442)	3.0
Qualitative	6,329	30,326	818	37,473	(134)	(520)	(7)	(661)	1.8
30 DPD backstop2	203	585	15	803	(9)	(7)	-	(16)	2.0
Total stage 2	16,439	98,911	3,874	119,224	(1,219)	(1,874)	(26)	(3,119)	2.6

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

2  Days past due ('DPD').

Measurement uncertainty and sensitivity analysis of ECL estimates

There continues to be a high degree of uncertainty in relation to economic scenarios. The increased risks of lower economic growth with higher inflation and unemployment have been exacerbated by the geopolitical environment and the effects of global supply chain disruption. In addition, there are ongoing risks relating to Covid-19 in certain markets. The level and speed of recovery from the global pandemic remains volatile. As a result of this uncertainty, management judgements and estimates continue to reflect a degree of caution both in the selection of economic scenarios and their weightings, and in the use of management judgemental adjustments, described in more detail below. Additional stage 1 and 2 allowances were recorded in respect of the heightened levels of uncertainty. 

The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions to credit risk models to estimate future credit losses, and probability-weight the results to determine an unbiased ECL estimate.

Methodology

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

Of the four standard scenarios, three are drawn from consensus forecasts and distributional estimates. The fourth scenario, Downside 2, represents management's view of severe downside risks. In 2Q22, management chose to use an additional fifth scenario, known as Downside 1, to ensure that current supply-side risks are sufficiently reflected in forward economic guidance. The scenario is designed to capture the implications of a sustained global supply shock that keeps inflation elevated for a long period, raises unemployment and depresses GDP growth.

The use of an additional scenario is in line with HSBC's forward economic guidance methodology. Management may include additional scenarios when consensus scenarios are determined to inadequately capture the economic risks faced by the Group. Unlike the consensus scenarios, these additional scenarios are driven by narrative assumptions aligned to an identified risk, and may incorporate shocks that drive economic activity permanently away from its long-term trend.

Description of economic scenarios

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

Economic forecasts are subject to a high degree of uncertainty in the current environment. Risks to the outlook are dominated by the actions of central banks as they raise interest rates to bring inflation back to target and curtail a rise in inflation expectations. The implications of the Russia-Ukraine war and the progression and management of the Covid-19 pandemic in Asia also remain key sources of uncertainty. Other geopolitical risks, such as the evolution of the UK's relationship with the EU and differences between the US and China over a range of strategic issues, also present downside risks.

The five global scenarios used for the purpose of calculating ECL at 30 June 2022 are the consensus Central scenario, the consensus Upside scenario, the consensus Downside scenario, the Downside 1 scenario and the Downside 2 scenario.

The scenarios used to calculate ECL in the Interim Report 2022 are described below.

The consensus Central scenario

HSBC's Central scenario features a gradual slowdown in GDP growth through 2022 and 2023, following a strong recovery in 2021. Unemployment is expected to remain low through this period.

GDP forecasts have been lowered in recent quarters. In Asia, the downward revisions follow from the stringent public health policy responses to the Covid-19 pandemic in some markets. Elsewhere, the sharp rise in inflation, related to supply shortages and rising commodity prices, has started to weigh on growth as costs rise and real income growth stalls.

The Central scenario assumes that inflation peaks in 2022 and, supported by tighter monetary policy, reverts back towards central bank targets by the end of 2023.

Global GDP is expected to grow by 3.3% in 2022 in the Central scenario. The average rate of global GDP growth is expected to be 2.8% over the forecast period, which is in line with the average growth rate over the five-year period prior to the onset of the pandemic.

Across the key markets, the Central scenario assumes the following:

• Economic growth is expected to slow in the near term as supply chain disruptions and price inflation diminish purchasing power. Growth is expected to return to the long-term expected trend in later years as supply chain issues are assumed to ease and inflation returns towards their target.

• Unemployment is expected to remain close to pre-pandemic levels and labour market conditions remain tight across our key markets.

• Inflation is expected to remain elevated in 2022 as commodity, food and goods prices remain high. Inflation is subsequently expected to converge back to central bank targets over the next two years of the forecast.

• Policy interest rates in key markets are expected to rise over the first 18 months of the projection period as central banks tighten policy to bring inflation back towards their targets. Thereafter, they settle at higher levels than they were pre-pandemic.

• The West Texas Intermediate oil price is expected to average above $100 in the first two years of the forecast, before dropping back as supply constraints ease. Over the entire projection the oil price is expected to average $81 per barrel.

The Central scenario was created from consensus forecasts available in May, and subsequently updated in June. Dispersion between the constituent forecasts of the consensus remains unusually high, suggesting an elevated level of uncertainty. As a consequence, probability weights assigned to the Central scenario vary from 40% to 65% to reflect the uncertainty inherent in economic forecasts across markets.

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

Central scenario 3Q22-2Q27
	UK	US	Hong Kong	Mainland China	Canada	France	UAE	Mexico
	%	%	%	%	%	%	%	%
GDP growth rate
2022: Annual average growth rate	3.7	2.8	1.1	4.5	4.0	2.9	5.3	1.8
2023: Annual average growth rate	1.4	2.0	3.8	5.1	2.6	1.8	4.3	2.1
2024: Annual average growth rate	1.6	1.9	2.5	5.0	1.8	1.6	3.2	2.2
5-year average	1.6	1.9	2.9	4.9	2.2	1.5	3.3	2.2
Unemployment rate
2022: Annual average rate	4.0	3.6	4.4	3.8	5.5	7.5	3.0	3.8
2023: Annual average rate	4.2	3.6	3.6	3.7	5.4	7.4	2.7	3.8
2024: Annual average rate	4.1	3.6	3.5	3.7	5.6	7.3	2.6	3.8
5-year average	4.1	3.6	3.5	3.7	5.5	7.3	2.6	3.7
House price growth
2022: Annual average growth rate	9.2	14.7	(1.2)	(0.5)	18.9	5.8	9.4	7.2
2023: Annual average growth rate	2.9	6.4	1.2	1.3	(2.2)	4.5	3.4	5.3
2024: Annual average growth rate	2.9	4.5	2.5	3.5	(0.5)	4.1	2.5	4.8
5-year average	3.3	5.3	1.9	3.2	2.6	3.9	3.5	4.8
Inflation rate
2022: Annual average rate	8.3	7.0	2.3	2.2	5.4	4.5	3.2	6.8
2023: Annual average rate	4.7	3.2	2.2	2.3	2.8	2.4	2.3	4.5
2024: Annual average rate	2.1	2.2	2.2	2.3	2.3	2.0	2.2	4.0
5-year average	3.2	2.8	2.2	2.4	2.5	2.3	2.2	4.0
Probability	50	60	55	55	60	40	65	60

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

GDP growth: Comparison of Central scenarios

UK

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

Hong Kong

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

US

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

Mainland China

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

The consensus Upside scenario

Compared with the consensus Central scenario, the consensus Upside scenario features a faster rate of GDP growth during the first two years, before converging to long-run expected trends. The scenario is demand-driven and is consistent with a number of key upside risk themes. These include the faster resolution of supply chain issues; a rapid and peaceful conclusion to the Russia-Ukraine war; de-escalation of tensions between the US and China; and improved relations between the UK and the EU.

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

Consensus Upside scenario 'best outcome'
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	4.3	(2Q24)	4.7	(1Q23)	12.4	(1Q23)	10.2	(2Q23)	5.9	(2Q23)	3.4	(2Q23)	13.4	(2Q23)	5.8	(2Q23)
Unemployment rate	3.2	(2Q24)	3.1	(3Q22)	2.8	(4Q23)	3.5	(1Q23)	4.4	(1Q23)	6.4	(2Q24)	1.9	(4Q23)	3.2	(3Q23)
House price growth	9.8	(3Q22)	13.2	(3Q22)	7.7	(2Q23)	6.2	(2Q23)	18.2	(3Q22)	6.1	(3Q23)	15.4	(2Q23)	9.3	(3Q23)
Inflation rate	10.2	(3Q22)	7.8	(3Q22)	4.1	(3Q23)	5.8	(1Q23)	6.8	(4Q22)	6.7	(4Q22)	4.0	(4Q23)	7.6	(3Q23)
Probability	10		5		5		5		5		10		5		5

Note: Extreme point in the consensus Upside is 'best outcome' in the scenario, for example the highest GDP growth and the lowest unemployment rate, in the first two years of the scenario. Inflation is positively correlated with GDP in the Upside scenario, and the 'best outcome' also refers to the cyclical high point.

Downside scenarios

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

Inflation and the monetary policy response to it have become key concerns for global growth. Supply chain disruptions, caused by the Covid-19 pandemic and the Russia-Ukraine war, have led to sharp rises in commodity prices and headline price inflation across many markets. A key concern is that inflation expectations become unanchored from central bank targets, particularly as labour markets and labour supply shortages across some sectors are putting upward pressure on wages. The de-anchoring of inflation expectations would raise the risk that inflation remains elevated for longer, exacerbating cost pressures and the squeeze on household real incomes and corporate margins. In turn, it raises the risk of a more forceful policy response from central banks, a steeper trajectory for interest rates and ultimately, economic recession.

Covid-19-related risks also remain significant. Despite the easing of Covid-19-related restrictions across Europe and North America, the emergence of a new Covid-19 variant with greater vaccine-resistance that necessitates a stringent public health policy

response remains a key risk to the global outlook. In Asia, stringent public health policy responses to the circulation of highly virulent Covid-19 strains present ongoing risks to growth and global supply chains.

The geopolitical environment also present risks, including:

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

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

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

The consensus Downside scenario

In the consensus Downside scenario, economic activity is considerably weaker compared with the Central scenario. In this scenario, GDP growth weakens, unemployment rates rise and asset prices fall. The scenario is structured as a demand shock where inflation and commodity prices fall, before gradually recovering towards their long-run expected trends.

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

Consensus Downside scenario 'worst outcome'
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	(0.7)	(2Q23)	(1.7)	(2Q23)	(2.9)	(4Q23)	1.3	(1Q23)	(0.8)	(2Q23)	0.1	(2Q23)	(0.6)	(2Q23)	(1.0)	(2Q23)
Unemployment rate	5.5	(2Q23)	5.1	(1Q23)	5.4	(4Q22)	4.2	(1Q23)	6.6	(2Q24)	8.5	(1Q23)	4.0	(1Q23)	4.7	(1Q23)
House price growth	(4.1)	(3Q23)	2.9	(1Q24)	(8.3)	(3Q23)	(4.3)	(2Q23)	(9.0)	(2Q23)	2.4	(2Q23)	(4.8)	(4Q23)	2.2	(3Q23)
Inflation rate	0.7	(2Q24)	0.7	(2Q23)	(0.5)	(3Q23)	(0.7)	(3Q23)	0.0	(2Q23)	(0.6)	(2Q23)	0.4	(4Q23)	2.3	(3Q23)
Probability	0		15		20		30		15		0		20		10

Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. Inflation is positively correlated with GDP in the Downside scenario, and the 'worst outcome' refers to the cyclical low point.

Downside 1 scenario

An additional Downside scenario has been created to explore the implications of a prolonged period of high price inflation, a more aggressive upward path for policy interest rates, higher unemployment and a global recession.

In this scenario, the Russia-Ukraine war leads to a sustained supply shock that keeps inflation elevated above the baseline for a longer period than in the other scenarios.

The scenario assumes that major central banks are slow to respond, but as inflation expectations start to de-anchor from the inflation target, they resort to taking stronger action. The rise in interest rates is expected to cause a severe tightening of financial conditions that ultimately results in a global economic contraction later in the projection period.

The following table describes key macroeconomic variables and the probabilities assigned in the Downside 1 scenario.

Downside 1 scenario 'worst outcome'
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	(3.7)	(1Q25)	(4.1)	(4Q24)	(3.0)	(4Q23)	(1.2)	(1Q25)	(0.6)	(4Q23)	(3.1)	(1Q25)	(2.5)	(1Q25)	(5.3)	(1Q25)
Unemployment rate	6.6	(1Q24)	8.8	(4Q24)	6.5	(4Q24)	4.8	(1Q25)	9.9	(2Q25)	9.1	(3Q25)	3.0	(3Q22)	5.2	(2Q25)
House price growth	(11.9)	(1Q24)	(4.2)	(1Q25)	(7.6)	(2Q25)	(9.8)	(3Q23)	(8.2)	(4Q23)	(2.0)	(4Q24)	(4.4)	(2Q25)	2.8	(4Q25)
Inflation rate	9.5	(3Q22)	6.9	(3Q22)	4.2	(1Q23)	4.2	(1Q23)	6.3	(4Q22)	5.0	(4Q22)	3.7	(3Q22)	6.8	(3Q22)
Probability	30		10		15		5		10		35		5		15

Note: Extreme point in the Downside 1 is the 'worst outcome' in the scenario, for example the lowest GDP growth and the highest inflation and unemployment rate.

Downside 2 scenario

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

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

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

Downside 2 scenario 'worst outcome'
	UK		US		Hong Kong		Mainland China		Canada		France		UAE		Mexico
	%		%		%		%		%		%		%		%
GDP growth rate	(6.3)	(2Q23)	(4.9)	(2Q23)	(9.3)	(2Q23)	(5.0)	(2Q23)	(3.4)	(3Q23)	(5.5)	(2Q23)	(6.5)	(4Q23)	(7.2)	(2Q23)
Unemployment rate	8.5	(3Q23)	9.1	(1Q24)	5.9	(2Q23)	5.4	(2Q24)	11.1	(4Q23)	10.2	(2Q24)	4.6	(3Q22)	5.7	(4Q23)
House price growth	(15.2)	(3Q23)	(10.8)	(2Q23)	(10.8)	(3Q23)	(18.7)	(2Q23)	(30.1)	(3Q23)	(4.5)	(2Q24)	(11.3)	(1Q24)	1.1	(4Q23)
Inflation rate	(2.2)	(4Q23)	1.5	(2Q24)	(0.5)	(1Q24)	1.4	(2Q24)	0.9	(2Q24)	(2.7)	(4Q23)	1.7	(2Q24)	3.4	(2Q24)
Probability	10		10		5		5		10		15		5		10

Note: Extreme point in the Downside 2 is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. After a temporary increase, inflation remains positively correlated with GDP in the Downside 2 scenario, and the 'worst outcome' refers to the scenario low point.

Scenario weightings

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

A key consideration in 2Q22 has been the high level of uncertainty attached to the Central scenario projections. These concerns focused on:

• the risks of higher inflation given the risks attached to gas supply security in Europe and global oil supply, which raises the possibility of a more significant impact on real incomes and GDP growth;

• market interest rate expectations that imply a rapid and significant change to the interest rate environment; and

• the progression of the Covid-19 pandemic in Asian countries and the impact of stringent public policy responses on growth in the region and global supply chains.

In mainland China, increased weights have been assigned to Downside scenarios in light of the stringent public health responses to the Covid-19 pandemic, the virulence of current strains, and the observed impact on economic activity of the recent restrictions. In Hong Kong, the recent reopening has increased confidence in the Central scenario since the first quarter. In each market, the combined weighting of the consensus Upside and Central scenarios was 60%.

In the UK and US, the surge in price inflation and a squeeze on household real incomes have led to strong monetary policy responses from central banks. Economic and financial volatility remains elevated due to uncertainty around the implications of higher interest rates. For Canada and Mexico, similar risk themes dominate, and the connectivity to the US has also been a key consideration. For the UK, the consensus Upside and Central scenarios had a combined weighting of 60%. In the other three markets, the combined weighting of the consensus Upside and Central scenarios was 65%.

France faces the greatest economic uncertainties of our key markets. Uncertainties around the outlook remain elevated due to Europe's exposure to the Russia-Ukraine war through the economic costs incurred from the imposition of sanctions, trade disruption and energy dependence on Russia. Additional risks stem from the ECB's exit from a long period of negative interest rate policy. The consensus Upside and Central scenarios had a combined weighting of 50%.

In the UAE, the positive impact from elevated oil prices remains significant and management concluded that the outlook for the UAE was the least uncertain of all our key markets. The consensus Upside and Central scenarios had a combined weighting of 70%.

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

US

UK

Hong Kong

Mainland China

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

Critical accounting estimates and judgements

The calculation of ECL under IFRS 9 involves significant judgements, assumptions and estimates, as set out in the Annual Report and Accounts 2021 under 'Critical accounting estimates and judgements'. The level of estimation uncertainty and judgement has remained high since 31 December 2021, including judgements relating to:

•
the selection and weighting of economic scenarios, given rapidly changing economic conditions and a wide distribution of economic forecasts. There is judgement in making assumptions about the effects of inflation, supply chain disruption and length of time and severity of the continuing economic effects of the Covid-19 pandemic and health policy responses; and

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

How economic scenarios are reflected in ECL calculations

The methodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail loans and portfolios are set out on page 148 of the Annual Report and Accounts 2021. Models are used to reflect economic scenarios on ECL estimates. These models are based largely on historical observations and correlations with default.

Economic forecasts and ECL model responses to these forecasts are subject to a high degree of uncertainty in the current environment, and models continue to be supplemented by management judgemental adjustments where required.

Management judgemental adjustments

In the context of IFRS 9, management judgemental adjustments are typically increases or decreases to the ECL at either a customer, segment or portfolio level to account for late-breaking events, model deficiencies and other assessments applied during management review and challenge.

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

The wholesale and retail management judgemental adjustments are presented as part of the global business impairment committees with independent review from Model Risk Management. This is in line with the governance process for IFRS 9 as set out on page 137 of the Annual Report and Accounts 2021.

The drivers of the management judgemental adjustments continue to evolve with the economic environment.

At 30 June 2022, management judgemental adjustments reduced by $0.5bn compared with 31 December 2021. Adjustments related to Covid-19 were reduced, while adjustments for sector-specific risks, and sanction and geopolitical risks were maintained. They were also maintained to account for elevated uncertainty under the high inflation scenarios.

We have internal governance in place to monitor management judgement al adjustments regularly and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate. Given the level of economic uncertainty and idiosyncratic events, we believe that management judgemental adjustments will continue to be a key component of ECL for the foreseeable future.

Management judgemental adjustments made in estimating the reported ECL at 30 June 2022 are set out in the following table.

Management judgemental adjustments to ECL at 30 June 20221
	Retail	Wholesale	Total
	$bn	$bn	$bn
Banks, sovereigns and government entities		-	-
Corporate lending adjustments		0.8	0.8
Inflation-related adjustments	0.1		0.1
Other macroeconomic-related adjustments	0.1		0.1
Pandemic-related economic recovery adjustments	0.1		0.1
Other retail lending adjustments	0.2		0.2
Total	0.4	0.8	1.2

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

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

In the wholesale portfolio, management judgemental adjustments were an ECL increase of $0.8bn (31 December 2021: $1.2bn increase).

• Adjustments to corporate exposures increased ECL by $0.8bn at 30 June 2022 (31 December 2021: $1.3bn increase). These principally reflected management judgements for high-risk and vulnerable sectors in some of our key markets, supported by credit experts' input, portfolio risk metrics and quantitative analyses. The highest increase was observed on the real estate sector, including a $0.2bn ECL increase to reflect the uncertainty of the higher risk Chinese commercial real estate exposures, booked in Hong Kong. Adjustments also reflected the risk of exposures to the Russia-Ukraine war and a high degree of macroeconomic uncertainty, sanction risk and geopolitical risk in Europe.

In the retail portfolio, management judgemental adjustments were an ECL increase of $0.4bn at 30 June 2022 (31 December 2021: $0.5bn increase).

• Inflation-related adjustments increased ECL by $0.1bn (31 December 2021: $0.0bn). These adjustments addressed where country-specific inflation risks were not fully captured by the modelled output.

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

• Pandemic-related economic recovery adjustments increased ECL by $0.1bn (31 December 2021: $0.2bn). Compared with 31 December 2021, while the rationale for applying the adjustment remained the same, the amount of adjustment decreased as this was made only for markets in Asia where there remain concerns regarding Covid-19.

• Other retail lending adjustments increased ECL by $0.2bn (31 December: $0.3bn increase), reflecting those customers who remain in or have recently exited customer support programmes, and all other data and model adjustments.

Economic scenarios sensitivity analysis of ECL estimates

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

The ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating ECL for loans in stages 1 and 2 at the balance sheet date. The population of stage 3 loans (in default) at the balance sheet date is unchanged in these sensitivity calculations. Stage 3 ECL would only be sensitive to changes in forecasts of future economic conditions if the loss-given default of a particular portfolio was sensitive to these changes.

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

For wholesale credit risk exposures, the sensitivity analysis excludes ECL for financial instruments related to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios. Therefore, it is impracticable to separate the effect of macroeconomic factors in individual assessments.

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

Wholesale and retail sensitivity

The wholesale and retail sensitivity analysis is stated inclusive of management judgemental adjustments, as appropriate to each scenario. The results tables exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared with personal and wholesale lending presented in other credit risk tables. Additionally, in both the wholesale and retail analysis, the Downside 1 scenario was introduced during 1H22 and therefore was not present at 31 December 2021.

Wholesale analysis

IFRS 9 ECL sensitivity to future economic conditions1,2
	Gross carrying amount	Reported ECL	Consensus Central scenario ECL	Consensus Upside scenario ECL	Consensus Downside scenario ECL	Downside 1 scenario ECL	Downside 2 scenario ECL
By geography at 30 Jun 2022	$m	$m	$m	$m	$m	$m	$m
UK	432,013	730	509	433	613	923	1,851
US	216,976	247	219	198	245	266	371
Hong Kong	433,612	534	415	286	703	640	1,313
Mainland China	131,552	216	144	62	298	379	729
Canada	83,132	116	28	18	52	86	717
Mexico	24,919	79	62	48	90	151	223
UAE	44,323	84	71	41	105	115	155
France	177,515	142	122	109	146	158	182

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

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

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

At 30 June 2022, the highest level of 100% scenario-weighted ECL was observed in the UK and Hong Kong. This higher ECL impact was largely driven by significant exposure in these regions and downside risks of specific sectors.

Compared with 31 December 2021, the Downside 2 ECL impact was lower across all key markets, mostly driven by a reduction of

adjustments for uncertainty due to the Covid-19 pandemic, and changes to exposure and macroeconomic forecasts. A reduction of ECL was observed in MENA, the US and Canada under the Downside 2 scenario, as some of the sectors in these portfolios benefited from increased oil prices. This was partly offset by the ECL increase in Europe related to sector-specific inflation risk.

Retail analysis

IFRS 9 ECL sensitivity to future economic conditions1
	Gross carrying amount	Reported ECL	Consensus Central scenario ECL	Consensus Upside scenario ECL	Consensus Downside  scenario ECL	Downside 1 scenario ECL	Downside 2 scenario ECL
By geography at 30 Jun 2022	$m	$m	$m	$m	$m	$m	$m
UK
Mortgages	144,630	169	156	150	170	186	200
Credit cards	7,147	433	336	293	434	495	836
Other	7,253	374	305	258	325	471	595
Mexico
Mortgages	5,560	118	107	96	124	115	160
Credit cards	1,303	167	157	143	180	182	216
Other	3,119	395	387	371	411	400	471
Hong Kong
Mortgages	98,070	-	-	-	-	-	-
Credit cards	7,180	236	208	182	269	310	336
Other	5,848	99	91	83	105	111	140
UAE
Mortgages	2,081	37	37	35	37	39	40
Credit cards	427	41	34	20	67	36	70
Other	656	17	15	12	16	17	21
France
Mortgages	21,384	59	59	59	59	59	60
Other	1,438	48	48	47	48	49	50
US
Mortgages	13,300	11	9	9	11	11	21
Credit cards	224	51	47	39	52	60	70
Canada
Mortgages	26,311	27	25	24	27	27	43
Credit cards	282	10	10	10	10	11	12
Other	1,520	14	12	11	14	16	24

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

1  ECL sensitivities exclude portfolios utilising less complex modelling approaches.

At 30 June 2022, the highest level of level of 100% scenario-weighted ECL was observed in the UK, Mexico and Hong Kong. Mortgages reflected the lowest level of ECL across most markets as collateral values remain resilient. Hong Kong mortgages had low levels of reported ECL due to the credit quality of the portfolio, and so ECL under the remaining scenarios were also negligible.

Credit cards and other unsecured lending are more sensitive to economic forecasts, which have reflected improvements during the first half of 2022. Compared with 31 December 2021, the Downside 2 ECL impact was lower in most markets, due to the improvements in the macroeconomic forecast.

Group ECL sensitivity results

The ECL impact of the scenarios and management judgemental adjustments are highly sensitive to movements in economic forecasts. Based upon the sensitivity tables presented above, if the Group ECL balance (excluding wholesale stage 3, which is assessed individually) was estimated solely on the basis of the Central scenario, Upside scenario, Downside 1 scenario or the Downside 2 scenario at 30 June 2022, it would increase/(decrease) as presented in the below table.

	Retail1	Wholesale1
Total Group ECL at 30 Jun 2022	$bn	$bn
Reported ECL	2.8	2.6
Scenarios
100% consensus Central scenario	(0.3)	(0.7)
100% consensus Upside scenario	(0.5)	(1.1)
100% consensus Downside scenario	0.1	0.2
100% Downside 1 scenario	0.3	0.6
100% Downside 2 scenario	1.4	4.2

Total Group ECL at 31 Dec 2021
Reported ECL	3.0	3.1
Scenarios
100% consensus Central scenario	(0.2)	(0.6)
100% consensus Upside scenario	(0.5)	(1.2)
100% consensus Downside scenario	0.2	0.6
100% Downside 1 scenario
100%  Downside 2 scenario	2.0	5.5

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

At 30 June 2022, the Group reported a lower ECL compared with 31 December 2021. The decrease in reported ECL was primarily driven by the release of residual Covid-19-related adjustments, write-offs and foreign exchange movements, partly offset by the increase in ECL for China commercial real estate exposures and other sectors considered as high risk to inflation, mainly in Europe. The Downside 2 ECL impact was lower in some markets due to residual Covid-19-related adjustments in Asia, and wholesale portfolios benefited from increased oil prices in MENA, the US and Canada. This was partly offset by the ECL increase in Europe related to sector-specific inflation risk.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers

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

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

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

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

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2022	1,577,582	(1,557)	155,742	(3,326)	19,797	(6,928)	274	(64)	1,753,395	(11,875)
Transfers of financial instruments:	(31,551)	(362)	26,697	809	4,854	(447)	-	-	-	-
-  transfers from stage 1 to stage 2	(85,624)	192	85,624	(192)	-	-	-	-	-	-
-  transfers from stage 2 to stage 1	54,842	(531)	(54,842)	531	-	-	-	-	-	-
-  transfers to stage 3	(1,131)	6	(5,059)	590	6,190	(596)	-	-	-	-
-  transfers from stage 3	362	(29)	974	(120)	(1,336)	149	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	304	-	(379)	-	(61)	-	-	-	(136)
New financial assets originated or purchased	208,663	(223)	-	-	-	-	1	(1)	208,664	(224)
Assets derecognised (including final repayments)	(123,163)	72	(18,234)	166	(1,391)	192	(98)	-	(142,886)	430
Changes to risk parameters - further lending/repayments	(23,360)	185	(582)	53	(14)	227	(47)	3	(24,003)	468
Changes to risk parameters - credit quality	-	255	-	(700)	-	(1,292)	-	19	-	(1,718)
Changes to models used for ECL calculation	-	(9)	-	(34)	-	(2)	-	-	-	(45)
Assets written off	-	-	-	-	(1,270)	1,271	(10)	9	(1,280)	1,280
Credit-related modifications that resulted in derecognition	-	-	-	-	(2)	1	-	-	(2)	1
Foreign exchange	(74,283)	70	(7,897)	154	(1,157)	307	(3)	1	(83,340)	532
Other1, 2	7,228	11	(615)	56	(457)	25	-	(10)	6,156	82
At 30 Jun 2022	1,541,116	(1,254)	155,111	(3,201)	20,360	(6,707)	117	(43)	1,716,704	(11,205)
ECL income statement change for the period		584		(894)		(936)		21		(1,225)
Recoveries										158
Other										5
Total ECL income statement change for the period										(1,062)

	At 30 Jun 2022		6 months ended 30 Jun 2022
	Gross carrying/nominal amount	Allowance for ECL	ECL release/(charge)
	$m	$m	$m
As above	1,716,704	(11,205)	(1,062)
Other financial assets measured at amortised cost	950,007	(281)	(20)
Non-trading reverse purchase agreement commitments	69,584	-	-
Performance and other guarantees not considered for IFRS 9	-	-	14
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement	2,736,295	(11,486)	(1,068)
Debt instruments measured at FVOCI	274,765	(120)	(22)
Total allowance for ECL/total income statement ECL change for the period	n/a	(11,606)	(1,090)

1  Total includes $2.8bn of gross carrying loans and advances, which were classified to assets held for sale and a corresponding allowance for ECL of $147m, reflecting business disposals as disclosed in Note 15 'Business acquisitions and disposals' on page 129.

2  Includes $8.9bn of gross carrying amounts of stage 1 loans and advances to banks, representing the balance maintained with the Bank of England to support Bacs along with Faster Payments and the cheque-processing Image Clearing System in the UK. This balance was previously reported under 'Cash and balances at central banks'. Comparatives have not been restated.

As shown in the previous table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees decreased by $670m during the period, from $11,875m at 31 December 2021 to $11,205m at 30 June 2022.

This decrease was primarily driven by:

• $1,280m of assets written off;

• $674m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further pending repayment; and

• foreign exchange and other movements of $614m.

This decrease was offset by:

• $1,718m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;

• $136m relating to the net remeasurement impact of stage transfers; and

• $45m relating to changes to models used for ECL calculation.

The ECL charge for the period of $1,225m presented in the previous table consisted of $1,718m relating to underlying credit quality changes, including the credit quality impact of financial

instruments transferring between stages, $136m relating to the net remeasurement impact of stage transfers and $45m relating to

changes to models used for ECL calculation. These were offset by $674m relating to underlying net book volume.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees (continued)
	Non-credit impaired				Credit impaired
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
At 1 Jan 2021	1,506,451	(2,331)	223,432	(5,403)	20,424	(7,544)	279	(113)	1,750,586	(15,391)
Transfers of financial instruments:	21,107	(1,792)	(27,863)	2,601	6,756	(809)	-	-	-	-
-  transfers from stage 1 to stage 2	(159,633)	527	159,633	(527)	-	-	-	-	-	-
-  transfers from stage 2 to stage 1	182,432	(2,279)	(182,432)	2,279	-	-	-	-	-	-
-  transfers to stage 3	(2,345)	24	(6,478)	1,010	8,823	(1,034)	-	-	-	-
-  transfers from stage 3	653	(64)	1,414	(161)	(2,067)	225	-	-	-	-
Net remeasurement of ECL arising from transfer of stage	-	1,225	-	(596)	-	(34)	-	-	-	595
New financial assets originated or purchased	444,070	(553)	-	-	-	-	124	-	444,194	(553)
Assets derecognised (including final repayments)	(304,158)	174	(31,393)	489	(2,750)	458	(10)	6	(338,311)	1,127
Changes to risk parameters - further lending/repayment	(61,742)	547	(3,634)	498	(1,268)	576	(108)	12	(66,752)	1,633
Changes to risk parameters - credit quality	-	1,111	-	(1,012)	-	(2,354)	-	28	-	(2,227)
Changes to models used for ECL calculation	-	(17)	-	(33)	-	1	-	-	-	(49)
Assets written off	-	-	-	-	(2,610)	2,605	(7)	7	(2,617)	2,612
Credit-related modifications that resulted in derecognition	-	-	-	-	(125)	-	-	-	(125)	-
Foreign exchange	(25,231)	26	(2,918)	45	(479)	157	(4)	1	(28,632)	229
Other1	(2,915)	53	(1,882)	85	(151)	16	-	(5)	(4,948)	149
At 31 Dec 2021	1,577,582	(1,557)	155,742	(3,326)	19,797	(6,928)	274	(64)	1,753,395	(11,875)
ECL income statement change for the period		2,487		(654)		(1,353)		46		526
Recoveries										409
Other										(111)
Total ECL income statement change for the period2										824

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

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

2  The 31 December 2021 total ECL income statement change of $824m is attributable to $706m for the six months ended 30 June 2021 and $118m to the six months ended 31 December 2021.

Credit quality of financial instruments

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

The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and personal lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the following table. Personal lending credit quality is disclosed based on a 12-month point-in-time PD adjusted for multiple economic scenarios. The credit quality classifications for wholesale lending are based on internal credit risk ratings.

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

1  Customer risk rating ('CRR').

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

Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation
	Gross carrying/nominal amount						Allowance for ECL	Net
	Strong	Good	Satisfactory	Sub-standard	Credit impaired	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	524,443	239,180	227,371	28,934	19,202	1,039,130	(10,774)	1,028,356
-  stage 1	511,234	208,847	166,552	5,189	-	891,822	(1,116)	890,706
-  stage 2	13,209	30,333	60,819	23,744	-	128,105	(2,998)	125,107
-  stage 3	-	-	-	-	19,086	19,086	(6,617)	12,469
-  POCI	-	-	-	1	116	117	(43)	74
Loans and advances to banks at amortised cost	87,017	4,169	4,121	1,095	79	96,481	(52)	96,429
-  stage 1	86,906	4,088	4,096	1	-	95,091	(8)	95,083
-  stage 2	111	81	25	1,094	-	1,311	(25)	1,286
-  stage 3	-	-	-	-	79	79	(19)	60
-  POCI	-	-	-	-	-	-	-	-
Other financial assets measured at amortised cost	832,310	72,077	44,274	1,037	309	950,007	(281)	949,726
-  stage 1	831,582	70,175	43,167	59	-	944,983	(71)	944,912
-  stage 2	728	1,902	1,107	978	-	4,715	(119)	4,596
-  stage 3	-	-	-	-	264	264	(85)	179
-  POCI	-	-	-	-	45	45	(6)	39
Loan and other credit-related commitments	399,238	136,087	89,993	6,758	1,015	633,091	(337)	632,754
-  stage 1	397,945	129,260	79,384	2,000	-	608,589	(124)	608,465
-  stage 2	1,293	6,827	10,609	4,758	-	23,487	(159)	23,328
-  stage 3	-	-	-	-	1,015	1,015	(54)	961
-  POCI	-	-	-	-	-	-	-	-
Financial guarantees	7,065	4,504	4,787	1,050	180	17,586	(42)	17,544
-  stage 1	7,008	4,227	3,807	156	-	15,198	(6)	15,192
-  stage 2	57	277	980	894	-	2,208	(19)	2,189
-  stage 3	-	-	-	-	180	180	(17)	163
-  POCI	-	-	-	-	-	-	-	-
At 30 Jun 2022	1,850,073	456,017	370,546	38,874	20,785	2,736,295	(11,486)	2,724,809
Debt instruments at FVOCI1
-  stage 1	262,420	10,762	8,824	-	-	282,006	(63)	281,943
-  stage 2	86	28	111	2,083	-	2,308	(46)	2,262
-  stage 3	-	-	-	-	5	5	(3)	2
-  POCI	-	-	-	-	33	33	(8)	25
At 30 Jun 2022	262,506	10,790	8,935	2,083	38	284,352	(120)	284,232

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

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

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

Personal lending

This section provides further details on the regions, countries and products driving the increase in personal loans and advances to customers. Additionally, Hong Kong and UK mortgage book
loan-to-value ('LTV') data are provided.

Further product granularity is also provided by stage, with geographical data presented for loans and advances to customers, loans and other credit-related commitments, and financial guarantees and similar contracts.

At 30 June 2022, total personal lending for loans and advances to customers of $464bn decreased by $14.7bn compared with 31 December 2021. This decrease included adverse foreign exchange movements of $25.5bn. Excluding foreign exchange movements, there was a growth of $10.8bn, mainly driven by $4.9bn in Europe, $3.9bn in Asia and $1.0bn in Latin America.

The allowance for ECL attributable to personal lending, excluding off-balance sheet loan commitments and guarantees, decreased by $0.2bn to $2.9bn at 30 June 2022.

Excluding foreign exchange movements, mortgage lending balances increased by $9.9bn to $360.7bn at 30 June 2022. Mortgages grew $5.5bn in the UK; $3.7bn in Asia, notably $2.1bn in Australia and $1.5bn in Hong Kong; and $0.8bn in Canada.

The allowance for ECL attributable to mortgages, excluding foreign exchange, decreased by $0.1bn to $0.6bn when compared with 31 December 2021.

At 30 June 2022, the increase in stage 2 mortgage lending balances, primarily in the UK, is largely explained by a management adjustment designed to reflect inflation risk in certain segments of our customer base that may be more susceptible to inflationary pressure. While no increase in stress has emerged among this customer group, these have been classified as stage 2 as a recognition of the higher perceived risk to inflationary pressure that may occur. This does not have a material impact on ECL given the low LTV profile of these customers. We will continue to monitor the impact of inflation and update the management judgemental adjustments as the inflationary impacts abate or translate into changes in customer behaviour and performance.

The quality of both our Hong Kong and UK mortgage books remained high, with low levels of impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 59%, compared with an estimated 50% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 67%, compared with an estimated 49% for the overall mortgage portfolio.

Excluding foreign exchange movements, other personal lending balances increased by $0.9bn compared with 31 December 2021. The increase was largely driven by secured personal lending of $1.5bn, mainly in Hong Kong, and guaranteed loans in respect of residential property of $0.3bn, mainly in France. This was partly offset by a $0.8bn decline in unsecured personal lending, driven mainly in Hong Kong.

At 30 June 2022, the allowance for ECL attributable to other personal lending remained broadly stable at $2.3bn.

Total personal lending for loans and advances to customers by stage distribution
	Gross carrying amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
By portfolio
First lien residential mortgages	341,328	16,958	2,418	360,704	(89)	(172)	(312)	(573)
-  of which: interest only (including offset)	24,434	2,774	192	27,400	(4)	(30)	(69)	(103)
affordability (including US adjustable rate mortgages)	14,070	507	300	14,877	(2)	(3)	(3)	(8)
Other personal lending	90,189	11,128	1,600	102,917	(465)	(1,262)	(618)	(2,345)
-  second lien residential mortgages	316	31	18	365	(1)	(3)	(6)	(10)
-  guaranteed loans in respect of residential property	18,660	1,264	284	20,208	(10)	(7)	(35)	(52)
-  other personal lending which is secured	37,477	964	257	38,698	(14)	(20)	(48)	(82)
-  credit cards	16,455	4,626	277	21,358	(214)	(754)	(158)	(1,126)
-  other personal lending which is unsecured	15,725	4,058	757	20,540	(211)	(468)	(366)	(1,045)
-  motor vehicle finance	1,556	185	7	1,748	(15)	(10)	(5)	(30)
At 30 Jun 2022	431,517	28,086	4,018	463,621	(554)	(1,434)	(930)	(2,918)
By geography
Europe	187,287	15,285	1,550	204,122	(141)	(659)	(380)	(1,180)
-  of which: UK	155,423	13,631	1,068	170,122	(121)	(632)	(263)	(1,016)
Asia	185,481	9,543	1,324	196,348	(143)	(354)	(215)	(712)
-  of which: Hong Kong	126,385	5,226	225	131,836	(58)	(243)	(43)	(344)
MENA	5,347	284	149	5,780	(28)	(43)	(79)	(150)
North America	43,910	2,068	667	46,645	(32)	(86)	(90)	(208)
Latin America	9,492	906	328	10,726	(210)	(292)	(166)	(668)
At 30 Jun 2022	431,517	28,086	4,018	463,621	(554)	(1,434)	(930)	(2,918)

Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution
	Nominal amount				Allowance for ECL
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	51,245	405	93	51,743	(10)	-	-	(10)
-  of which: UK	49,102	332	87	49,521	(9)	-	-	(9)
Asia	164,874	864	23	165,761	-	-	-	-
-  of which: Hong Kong	126,512	161	14	126,687	-	-	-	-
MENA	2,562	32	1	2,595	(1)	-	-	(1)
North America	13,973	187	43	14,203	(11)	(1)	-	(12)
Latin America	3,867	27	1	3,895	(7)	-	-	(7)
At 30 Jun 2022	236,521	1,515	161	238,197	(29)	(1)	-	(30)

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

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

Wholesale lending

This section provides further details on the regions, countries and industries driving the increase in wholesale loans and advances to customers and banks, with the impact of foreign exchange separately identified. Industry granularity is also provided by stage, with geographical data presented for loans and advances to customers, banks, other credit commitments, financial guarantees and similar contracts.

At 30 June 2022, wholesale lending for loans and advances to banks and customers of $672bn increased by $9.9bn since 31 December 2021. This included adverse foreign exchange movements of $29.1bn.

Excluding foreign exchange movements, the total wholesale lending growth was driven by a $19.1bn increase in corporate and commercial balances. This can be attributed to an $8.1bn increase in Asia, notably $2.4bn in mainland China; a $6.1bn increase in North America including $3.2bn in Canada, and $3.0bn in the US; and a $2.3bn increase in Europe.

Further growth in wholesale lending was driven by a $16.8bn increase in loans and advances to banks, including a $9.4bn increase in Asia, notably $3.7bn in Hong Kong, and a $7.6bn increase in Europe.

Loans and advances to non-bank financial institutions grew by $3.2bn, including $2.0bn in Europe and $1.6bn in North America, partly offset by a decline of $0.4bn in Asia.

Loan commitments and financial guarantees declined by $2.1bn since 31 December 2021 to $412bn at 30 June 2022, including a $28bn increase related to unsettled reverse repurchase agreements. Excluding adverse foreign exchange movements of $22bn, loans commitments and financial guarantees increased by $19.9bn.

The allowance for ECL attributable to loans and advances to banks and customers of $7.9bn at 30 June 2022 decreased from $8.3bn at 31 December 2021. This included favourable foreign exchange movements of $0.4bn.

Excluding foreign exchange movements, the total decrease in the wholesale ECL allowance for loans and advances to customers and banks was driven by a $0.1bn fall in corporate and commercial balances. This was mainly attributable to a $0.1bn decline in each of the following sectors: wholesale and retail trade, accommodation and food, and other services, partly offset by an increase of $0.3bn in real estate.

The decline in ECL allowance for loans to corporate and commercial was largely offset by an increase in ECL allowance of $0.1bn for loans to non-bank financial institutions.

Total wholesale lending for loans and advances to banks and customers by stage distribution
	Gross carrying amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	399,152	95,590	14,707	117	509,566	(523)	(1,525)	(5,593)	(43)	(7,684)
-  agriculture, forestry and fishing	6,455	884	366	-	7,705	(13)	(25)	(102)	-	(140)
-  mining and quarrying	7,732	1,956	336	3	10,027	(7)	(28)	(151)	(1)	(187)
-  manufacturing	74,788	17,584	1,922	52	94,346	(77)	(176)	(892)	(30)	(1,175)
-  electricity, gas, steam and air-conditioning supply	14,199	1,749	242	-	16,190	(9)	(16)	(54)	-	(79)
-  water supply, sewerage, waste management and remediation	3,141	358	43	-	3,542	(3)	(4)	(17)	-	(24)
-  construction	9,914	3,458	803	1	14,176	(26)	(62)	(367)	(1)	(456)
-  wholesale and retail trade, repair of motor vehicles and motorcycles	80,879	13,641	2,813	2	97,335	(76)	(162)	(1,706)	(1)	(1,945)
-  transportation and storage	20,620	6,959	520	8	28,107	(56)	(98)	(150)	-	(304)
-  accommodation and food	10,997	8,225	1,217	1	20,440	(26)	(161)	(118)	(1)	(306)
-  publishing, audiovisual and broadcasting	19,953	1,925	237	26	22,141	(22)	(29)	(82)	(8)	(141)
-  real estate	86,978	25,456	3,745	-	116,179	(105)	(557)	(1,237)	-	(1,899)
-  professional, scientific and technical activities	15,740	2,181	499	-	18,420	(23)	(47)	(141)	-	(211)
-  administrative and support services	19,520	7,411	838	24	27,793	(32)	(85)	(280)	(1)	(398)
-  public administration and defence, compulsory social security	1,204	207	34	-	1,445	(1)	(2)	-	-	(3)
-  education	1,320	218	60	-	1,598	(4)	(8)	(13)	-	(25)
-  health and care	3,540	689	140	-	4,369	(7)	(12)	(23)	-	(42)
-  arts, entertainment and recreation	1,135	761	135	-	2,031	(5)	(15)	(30)	-	(50)
-  other services	10,383	1,486	556	-	12,425	(29)	(28)	(225)	-	(282)
-  activities of households	827	30	-	-	857	-	-	-	-	-
-  extra-territorial organisations and bodies activities	-	-	-	-	-	-	-	-	-	-
-  government	9,808	399	201	-	10,408	(2)	-	(5)	-	(7)
-  asset-backed securities	19	13	-	-	32	-	(10)	-	-	(10)
Non-bank financial institutions	61,153	4,429	361	-	65,943	(39)	(39)	(94)	-	(172)
Loans and advances to banks	95,091	1,311	79	-	96,481	(8)	(25)	(19)	-	(52)
At 30 Jun 2022	555,396	101,330	15,147	117	671,990	(570)	(1,589)	(5,706)	(43)	(7,908)
By geography
Europe	151,487	29,194	6,577	27	187,285	(276)	(581)	(1,567)	(11)	(2,435)
-  of which: UK	109,746	16,645	5,048	26	131,465	(226)	(404)	(937)	(8)	(1,575)
Asia	305,524	52,054	5,784	73	363,435	(165)	(641)	(2,795)	(22)	(3,623)
-  of which: Hong Kong	171,301	24,612	3,845	48	199,806	(66)	(439)	(1,355)	(22)	(1,882)
MENA	27,567	4,432	1,545	17	33,561	(22)	(75)	(873)	(10)	(980)
North America	58,350	12,821	495	-	71,666	(41)	(244)	(115)	-	(400)
Latin America	12,468	2,829	746	-	16,043	(66)	(48)	(356)	-	(470)
At 30 Jun 2022	555,396	101,330	15,147	117	671,990	(570)	(1,589)	(5,706)	(43)	(7,908)

Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1
	Nominal amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Corporate and commercial	252,784	22,033	1,028	-	275,845	(96)	(165)	(71)	-	(332)
Financial	134,482	2,147	6	-	136,635	(5)	(12)	-	-	(17)
At 30 Jun 2022	387,266	24,180	1,034	-	412,480	(101)	(177)	(71)	-	(349)
By geography
Europe	185,084	10,421	519	-	196,024	(40)	(78)	(44)	-	(162)
-  of which: UK	69,386	6,407	301	-	76,094	(34)	(50)	(33)	-	(117)
Asia	74,588	4,721	326	-	79,635	(40)	(36)	(6)	-	(82)
-  of which: Hong Kong	27,975	1,201	309	-	29,485	(11)	(11)	(2)	-	(24)
MENA	7,424	707	35	-	8,166	(3)	(12)	(17)	-	(32)
North America	117,603	8,231	145	-	125,979	(17)	(50)	(1)	-	(68)
Latin America	2,567	100	9	-	2,676	(1)	(1)	(3)	-	(5)
At 30 Jun 2022	387,266	24,180	1,034	-	412,480	(101)	(177)	(71)	-	(349)

1  Included in loans and other credit-related commitments and financial guarantees is $70bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.

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

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

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

The following table presents the Group's total exposure to mainland China commercial real estate at 30 June 2022, by country/territory and credit quality. Mainland China reported real estate exposures comprise exposures booked in mainland China

and offshore where the ultimate parent and beneficial owner is based in mainland China, and all exposures booked on mainland China balance sheets.

Mainland China commercial real estate
	Hong Kong	Mainland China	Rest of the Group	Total
	$m	$m	$m	$m
Loans and advances to customers1	9,773	6,488	441	16,702
Guarantees issued and others2	1,961	1,026	94	3,081
Total mainland China commercial real estate exposure at 30 Jun 2022	11,734	7,514	535	19,783
Distribution of mainland China commercial real estate exposure by credit quality
- Strong	2,095	2,117	145	4,357
- Good	2,429	2,898	58	5,385
- Satisfactory	3,104	2,272	175	5,551
- Sub-standard	1,946	95	157	2,198
- Credit impaired	2,160	132	-	2,292
At 30 Jun 2022	11,734	7,514	535	19,783
Allowance for ECL	(884)	(103)	(3)	(990)

Loans and advances to customers1	9,903	6,811	410	17,124
Guarantees issued and others2	1,747	2,376	79	4,202
Total mainland China commercial real estate exposure at 31 Dec 2021	11,650	9,187	489	21,326
Distribution of mainland China commercial real estate exposure by credit quality
- Strong	3,543	3,864	155	7,562
- Good	2,652	2,354	73	5,079
- Satisfactory	3,383	2,855	106	6,344
- Sub-standard	1,570	12	155	1,737
- Credit impaired	502	102	-	604
At 31 Dec 2021	11,650	9,187	489	21,326
Allowance for ECL	(560)	(49)	(2)	(611)

1  Amounts represent gross carrying amount.

2  Amounts represent nominal amount.

At 30 June 2022, the Group had no direct credit exposure to developers in the 'red' category of the Chinese government's 'three red lines' framework. The Group's exposures related to companies whose primary activities are focused on residential, commercial and mixed-use real estate activities. Lending is generally focused on tier 1 and 2 cities.

The Group's exposures related to mainland China commercial real estate that are booked in Hong Kong are generally higher risk exposures to a combination of state and privately owned enterprises.

This portfolio had 77% of exposure booked with a credit quality of 'satisfactory' or above, but had a higher degree of uncertainty due to tightening liquidity and increased refinancing risks. In addition, offshore exposures are typically higher risk than onshore exposures. At 30 June 2022, the Group had allowances for ECL of $884m (31 December 2021: $560m) held against mainland China commercial real estate exposures booked in Hong Kong. We will continue to monitor the situation closely.

Supplementary information

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

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business
	Gross carrying/nominal amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	891,822	128,105	19,086	117	1,039,130	(1,116)	(2,998)	(6,617)	(43)	(10,774)
-  WPB	446,321	27,960	4,176	-	478,457	(564)	(1,446)	(981)	-	(2,991)
-  CMB	269,446	73,681	11,440	95	354,662	(463)	(1,297)	(4,607)	(43)	(6,410)
-  GBM	175,541	26,421	3,470	22	205,454	(89)	(239)	(1,029)	-	(1,357)
-  Corporate Centre	514	43	-	-	557	-	(16)	-	-	(16)
Loans and advances to banks at amortised cost	95,091	1,311	79	-	96,481	(8)	(25)	(19)	-	(52)
-  WPB	22,033	392	-	-	22,425	(1)	(1)	-	-	(2)
-  CMB	22,322	197	-	-	22,519	(1)	-	-	-	(1)
-  GBM	44,067	696	79	-	44,842	(5)	(24)	(19)	-	(48)
-  Corporate Centre	6,669	26	-	-	6,695	(1)	-	-	-	(1)
Other financial assets measured at amortised cost	944,983	4,715	264	45	950,007	(71)	(119)	(85)	(6)	(281)
-  WPB	204,810	1,717	126	45	206,698	(32)	(34)	(47)	(6)	(119)
-  CMB	167,534	1,823	89	-	169,446	(14)	(18)	(32)	-	(64)
-  GBM	481,926	1,166	43	-	483,135	(25)	(67)	(6)	-	(98)
-  Corporate Centre	90,713	9	6	-	90,728	-	-	-	-	-
Total gross carrying amount on-balance sheet at 30 Jun 2022	1,931,896	134,131	19,429	162	2,085,618	(1,195)	(3,142)	(6,721)	(49)	(11,107)
Loans and other credit-related commitments	608,589	23,487	1,015	-	633,091	(124)	(159)	(54)	-	(337)
-  WPB	233,329	1,941	138	-	235,408	(28)	(3)	-	-	(31)
-  CMB	126,429	11,547	530	-	138,506	(62)	(97)	(44)	-	(203)
-  GBM	248,675	9,998	347	-	259,020	(34)	(59)	(10)	-	(103)
-  Corporate Centre	156	1	-	-	157	-	-	-	-	-
Financial guarantees	15,198	2,208	180	-	17,586	(6)	(19)	(17)	-	(42)
-  WPB	1,268	11	1	-	1,280	-	(1)	-	-	(1)
-  CMB	6,438	1,265	117	-	7,820	(4)	(7)	(13)	-	(24)
-  GBM	7,492	932	62	-	8,486	(2)	(11)	(4)	-	(17)
-  Corporate Centre	-	-	-	-	-	-	-	-	-	-
Total nominal amount off-balance sheet at 30 Jun 2022	623,787	25,695	1,195	-	650,677	(130)	(178)	(71)	-	(379)
WPB	106,858	971	1	24	107,854	(17)	(17)	(1)	(7)	(42)
CMB	72,335	678	1	8	73,022	(9)	(10)	(1)	(1)	(21)
GBM	90,086	308	-	1	90,395	(11)	(3)	-	-	(14)
Corporate Centre	3,195	299	-	-	3,494	(27)	(16)	-	-	(43)
Debt instruments measured at FVOCI at 30 Jun 2022	272,474	2,256	2	33	274,765	(64)	(46)	(2)	(8)	(120)

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business (continued)
	Gross carrying/nominal amount					Allowance for ECL
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m	$m
Loans and advances to customers at amortised cost	918,936	119,224	18,797	274	1,057,231	(1,367)	(3,119)	(6,867)	(64)	(11,417)
-  WPB	469,477	17,285	5,211	-	491,973	(664)	(1,247)	(1,276)	-	(3,187)
-  CMB	267,517	76,798	11,462	245	356,022	(571)	(1,369)	(4,904)	(53)	(6,897)
-  GBM	181,247	25,085	2,124	29	208,485	(132)	(493)	(687)	(11)	(1,323)
-  Corporate Centre	695	56	-	-	751	-	(10)	-	-	(10)
Loans and advances to banks at amortised cost	81,636	1,517	-	-	83,153	(14)	(3)	-	-	(17)
-  WPB	20,464	481	-	-	20,945	(1)	(1)	-	-	(2)
-  CMB	15,269	352	-	-	15,621	(1)	-	-	-	(1)
-  GBM	36,875	654	-	-	37,529	(10)	(2)	-	-	(12)
-  Corporate Centre	9,028	30	-	-	9,058	(2)	-	-	-	(2)
Other financial assets measured at amortised cost	875,016	4,988	304	43	880,351	(91)	(54)	(42)	(6)	(193)
-  WPB	207,335	1,407	175	43	208,960	(51)	(44)	(14)	(6)	(115)
-  CMB	163,457	2,370	61	-	165,888	(12)	(8)	(20)	-	(40)
-  GBM	409,808	1,204	62	-	411,074	(28)	(2)	(8)	-	(38)
-  Corporate Centre	94,416	7	6	-	94,429	-	-	-	-	-
Total gross carrying amount on-balance sheet at 31 Dec 2021	1,875,588	125,729	19,101	317	2,020,735	(1,472)	(3,176)	(6,909)	(70)	(11,627)
Loans and other credit-related commitments	594,473	32,389	775	-	627,637	(165)	(174)	(40)	-	(379)
-  WPB	235,722	2,111	153	-	237,986	(37)	(3)	-	-	(40)
-  CMB	126,728	17,490	555	-	144,773	(80)	(118)	(37)	-	(235)
-  GBM	231,890	12,788	67	-	244,745	(48)	(53)	(3)	-	(104)
-  Corporate Centre	133	-	-	-	133	-	-	-	-	-
Financial guarantees	24,932	2,638	225	-	27,795	(11)	(30)	(21)	-	(62)
-  WPB	1,295	15	1	-	1,311	-	(1)	-	-	(1)
-  CMB	6,105	1,606	126	-	7,837	(7)	(16)	(17)	-	(40)
-  GBM	17,531	1,017	98	-	18,646	(4)	(13)	(4)	-	(21)
-  Corporate Centre	1	-	-	-	1	-	-	-	-	-
Total nominal amount off-balance sheet at 31 Dec 2021	619,405	35,027	1,000	-	655,432	(176)	(204)	(61)	-	(441)
WPB	143,373	718	-	35	144,126	(20)	(7)	-	(5)	(32)
CMB	86,247	471	-	10	86,728	(11)	(1)	-	(1)	(13)
GBM	111,473	526	-	1	112,000	(13)	(2)	-	-	(15)
Corporate Centre	4,038	311	-	-	4,349	(25)	(11)	-	-	(36)
Debt instruments measured at FVOCI at 31 Dec 2021	345,131	2,026	-	46	347,203	(69)	(21)	-	(6)	(96)

Wholesale lending - loans and advances to customers at amortised cost by country/territory
	Gross carrying amount				Allowance for ECL
	Corporate and commercial	of which: real estate1	Non-bank financial institutions	Total	Corporate and commercial	of which: real estate1	Non-bank financial institutions	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	150,203	20,458	18,172	168,375	(2,297)	(432)	(96)	(2,393)
-  UK	105,057	14,452	12,470	117,527	(1,450)	(391)	(85)	(1,535)
-  France	32,009	4,743	3,737	35,746	(591)	(42)	(5)	(596)
-  Germany	6,728	257	1,025	7,753	(100)	-	(2)	(102)
-  Switzerland	1,194	716	441	1,635	(53)	-	-	(53)
-  other	5,215	290	499	5,714	(103)	1	(4)	(107)
Asia	265,508	78,749	35,014	300,522	(3,563)	(1,096)	(49)	(3,612)
-  Hong Kong	161,966	60,728	19,204	181,170	(1,871)	(971)	(13)	(1,884)
-  Australia	9,516	2,534	1,022	10,538	(99)	(1)	-	(99)
-  India	8,958	1,761	4,877	13,835	(78)	(26)	(3)	(81)
-  Indonesia	3,546	87	207	3,753	(231)	(1)	-	(231)
-  mainland China	34,239	6,488	7,959	42,198	(264)	(72)	(30)	(294)
-  Malaysia	6,405	1,575	187	6,592	(130)	(12)	-	(130)
-  Singapore	16,870	4,112	542	17,412	(781)	(6)	-	(781)
-  Taiwan	6,129	-	118	6,247	-	-	-	-
-  other	17,879	1,464	898	18,777	(109)	(7)	(3)	(112)
Middle East and North Africa (excluding Saudi Arabia)	23,347	1,531	354	23,701	(977)	(139)	(4)	(981)
-  Egypt	1,794	81	126	1,920	(173)	(9)	(1)	(174)
-  UAE	13,985	1,334	214	14,199	(625)	(128)	-	(625)
-  other	7,568	116	14	7,582	(179)	(2)	(3)	(182)
North America	58,239	14,057	11,801	70,040	(380)	(114)	(22)	(402)
-  US	30,050	5,985	9,854	39,904	(221)	(78)	(9)	(230)
-  Canada	27,784	7,981	1,767	29,551	(140)	(28)	(3)	(143)
-  other	405	91	180	585	(19)	(8)	(10)	(29)
Latin America	12,269	1,384	602	12,871	(467)	(118)	(1)	(468)
-  Mexico	9,742	1,381	571	10,313	(425)	(118)	(1)	(426)
-  other	2,527	3	31	2,558	(42)	-	-	(42)
At 30 Jun 2022	509,566	116,179	65,943	575,509	(7,684)	(1,899)	(172)	(7,856)

Europe	163,341	23,137	17,818	181,159	(2,770)	(546)	(41)	(2,811)
-  UK	115,386	16,233	11,306	126,692	(1,855)	(489)	(32)	(1,887)
-  France	34,488	5,520	4,391	38,879	(654)	(47)	(2)	(656)
-  Germany	6,746	306	987	7,733	(120)	-	(3)	(123)
-  Switzerland	1,188	731	688	1,876	(8)	-	-	(8)
-  other	5,533	347	446	5,979	(133)	(10)	(4)	(137)
Asia	263,821	81,453	36,321	300,142	(3,297)	(731)	(44)	(3,341)
-  Hong Kong	162,684	62,792	20,182	182,866	(1,585)	(624)	(7)	(1,592)
-  Australia	9,937	2,596	717	10,654	(108)	(3)	-	(108)
-  India	8,221	1,786	4,003	12,224	(84)	(29)	(8)	(92)
-  Indonesia	3,436	86	226	3,662	(246)	(2)	(1)	(247)
-  mainland China	33,555	6,811	9,359	42,914	(198)	(41)	(28)	(226)
-  Malaysia	7,229	1,741	197	7,426	(172)	(21)	-	(172)
-  Singapore	16,401	4,158	782	17,183	(792)	(5)	-	(792)
-  Taiwan	6,291	31	47	6,338	-	-	-	-
-  other	16,067	1,452	808	16,875	(112)	(6)	-	(112)
Middle East and North Africa (excluding Saudi Arabia)	21,963	1,555	376	22,339	(1,207)	(158)	(3)	(1,210)
-  Egypt	1,788	69	152	1,940	(161)	(7)	-	(161)
-  UAE	12,942	1,370	190	13,132	(811)	(149)	-	(811)
-  other	7,233	116	34	7,267	(235)	(2)	(3)	(238)
North America	52,577	13,639	10,197	62,774	(427)	(87)	(18)	(445)
-  US	27,002	5,895	8,511	35,513	(207)	(64)	(1)	(208)
-  Canada	25,048	7,650	1,546	26,594	(198)	(15)	(6)	(204)
-  other	527	94	140	667	(22)	(8)	(11)	(33)
Latin America	11,837	1,476	643	12,480	(503)	(122)	(4)	(507)
-  Mexico	9,561	1,475	618	10,179	(452)	(122)	(4)	(456)
-  other	2,276	1	25	2,301	(51)	-	-	(51)
At 31 Dec 2021	513,539	121,260	65,355	578,894	(8,204)	(1,644)	(110)	(8,314)

1  Real estate lending within this disclosure corresponds solely to the industry of the borrower.

Personal lending - loans and advances to customers at amortised cost by country/territory
	Gross carrying amount				Allowance for ECL
	First lien residential mortgages	Other personal	of which: credit cards	Total	First lien residential mortgages	Other personal	of which: credit cards	Total
	$m	$m	$m	$m	$m	$m	$m	$m
Europe	158,799	45,323	7,897	204,122	(251)	(929)	(431)	(1,180)
-  UK	152,508	17,614	7,546	170,122	(196)	(820)	(428)	(1,016)
-  France1	2,710	21,286	318	23,996	(34)	(79)	(2)	(113)
-  Germany	-	269	-	269	-	-	-	-
-  Switzerland	1,208	5,309	-	6,517	-	(21)	-	(21)
-  other	2,373	845	33	3,218	(21)	(9)	(1)	(30)
Asia	150,221	46,127	10,421	196,348	(55)	(657)	(407)	(712)
-  Hong Kong	98,877	32,959	7,392	131,836	(1)	(343)	(234)	(344)
-  Australia	22,143	466	397	22,609	(5)	(25)	(23)	(30)
-  India	1,049	595	174	1,644	(6)	(24)	(16)	(30)
-  Indonesia	77	266	138	343	(1)	(13)	(9)	(14)
-  mainland China	10,055	1,037	459	11,092	(4)	(70)	(60)	(74)
-  Malaysia	2,327	2,442	767	4,769	(34)	(106)	(27)	(140)
-  Singapore	7,542	6,372	362	13,914	-	(38)	(13)	(38)
-  Taiwan	5,463	1,133	234	6,596	-	(17)	(4)	(17)
-  other	2,688	857	498	3,545	(4)	(21)	(21)	(25)
Middle East and North Africa (excluding Saudi Arabia)	2,430	3,350	736	5,780	(23)	(127)	(53)	(150)
-  Egypt	-	357	91	357	-	(3)	(1)	(3)
-  UAE	2,079	1,350	419	3,429	(15)	(82)	(41)	(97)
-  other	351	1,643	226	1,994	(8)	(42)	(11)	(50)
North America	43,666	2,979	556	46,645	(128)	(80)	(51)	(208)
-  US	16,488	714	214	17,202	(7)	(48)	(36)	(55)
-  Canada	26,098	2,102	301	28,200	(32)	(27)	(10)	(59)
-  other	1,080	163	41	1,243	(89)	(5)	(5)	(94)
Latin America	5,588	5,138	1,748	10,726	(116)	(552)	(184)	(668)
-  Mexico	5,387	4,352	1,364	9,739	(116)	(516)	(168)	(632)
-  other	201	786	384	987	-	(36)	(16)	(36)
At 30 Jun 2022	360,704	102,917	21,358	463,621	(573)	(2,345)	(1,126)	(2,918)

Europe	170,818	49,253	8,624	220,071	(329)	(1,006)	(437)	(1,335)
-  UK	163,549	19,154	8,213	182,703	(223)	(823)	(434)	(1,046)
-  France1	3,124	22,908	366	26,032	(38)	(91)	(3)	(129)
-  Germany	-	282	-	282	-	-	-	-
-  Switzerland	1,367	6,615	-	7,982	-	(75)	-	(75)
-  other	2,778	294	45	3,072	(68)	(17)	-	(85)
Asia	149,709	46,781	11,413	196,490	(59)	(706)	(428)	(765)
-  Hong Kong	98,019	32,996	8,154	131,015	(1)	(338)	(217)	(339)
-  Australia	21,149	504	427	21,653	(5)	(33)	(32)	(38)
-  India	981	543	181	1,524	(10)	(30)	(20)	(40)
-  Indonesia	76	272	147	348	(1)	(20)	(14)	(21)
-  mainland China	10,525	1,103	563	11,628	(4)	(72)	(66)	(76)
-  Malaysia	2,532	2,657	791	5,189	(33)	(122)	(34)	(155)
-  Singapore	7,811	6,649	367	14,460	-	(40)	(13)	(40)
-  Taiwan	5,672	1,188	271	6,860	-	(17)	(5)	(17)
-  other	2,944	869	512	3,813	(5)	(34)	(27)	(39)
Middle East and North Africa (excluding Saudi Arabia)	2,262	3,157	761	5,419	(26)	(146)	(60)	(172)
-  Egypt	-	368	98	368	-	(3)	(1)	(3)
-  UAE	1,924	1,232	417	3,156	(18)	(88)	(39)	(106)
-  other	338	1,557	246	1,895	(8)	(55)	(20)	(63)
North America	43,529	3,091	555	46,620	(141)	(87)	(47)	(228)
-  US	16,642	799	232	17,441	(12)	(53)	(36)	(65)
-  Canada	25,773	2,123	284	27,896	(33)	(27)	(8)	(60)
-  other	1,114	169	39	1,283	(96)	(7)	(3)	(103)
Latin America	5,050	4,687	1,505	9,737	(120)	(483)	(163)	(603)
-  Mexico	4,882	4,006	1,172	8,888	(119)	(450)	(148)	(569)
-  other	168	681	333	849	(1)	(33)	(15)	(34)
At 31 Dec 2021	371,368	106,969	22,858	478,337	(675)	(2,428)	(1,135)	(3,103)

1  Included in other personal lending as at 30 June 2022 is $18,726m (31 December 2021: $19,972m) guaranteed by Crédit Logement.

Treasury risk
	Page
Overview	89
Treasury risk management	89
Capital risk in the first half of 2022	91
Liquidity and funding risk in the first half of 2022	94
Sources of funding	95
Interest rate risk in the banking book in the first half of 2022	96

Overview

Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, together with the financial risks arising from the provision of pensions and other post-employment benefits to staff and their dependants. Treasury risk also includes the risk to our earnings or capital due to non-trading book foreign exchange exposures and changes in market interest rates.

Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment.

Approach and policy

Our objective in the management of treasury risk is to maintain appropriate levels of capital, liquidity, funding, foreign exchange and market risk to support our business strategy, and meet our regulatory and stress testing-related requirements.

Our approach to treasury management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital and liquidity base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory requirements at all times.

Our policy is underpinned by our risk management framework, our internal capital adequacy assessment process ('ICAAP') and our internal liquidity adequacy assessment process ('ILAAP'). The risk framework incorporates a number of measures aligned to our assessment of risks for both internal and regulatory purposes. These risks include credit, market, operational, pensions, non-trading book foreign exchange risk, and interest rate risk in the banking book.

A summary of our current policies and practices regarding the management of treasury risk is set out on pages 189 to 191 of the Annual Report and Accounts 2021.

Treasury risk management

Key developments in the first half of 2022

• Our CET1 position fell from 15.8% at 31 December 2021 to 13.6% at 30 June 2022, as a result of a $16.8bn reduction in CET1 capital and a $13.4bn increase in risk-weighted assets ('RWAs').

• During the periods of high market volatility in the first half of 2022, we enhanced the monitoring and forecasting of our capital positions.

• The mark-to-market movement in financial instruments that impacted our capital ratio arose from the portfolio of high-quality liquid assets ('HQLA') held by our Markets Treasury business as economic hedges of net interest income. This portfolio is largely accounted for at fair value through other comprehensive income ('FVOCI'), together with any derivative hedges held to offset the duration risk of the assets. During 1H22, we took steps to reduce the duration risk of this portfolio to reduce the capital impact from higher interest rates. The impact of this risk reduction reduced the hold-to-collect-and-sell stressed value at risk ('VaR') exposure from $3.63bn at the end of 2021 to $2.34bn at the end of 1H22. For further details of the calculation of this exposure and the use of this metric in our interest rate risk management framework, see page 91.

• Our portfolio of hold-to-collect-and-sell assets forms a material part of our liquid asset buffer, and the duration risk of the portfolio acts as a hedge to our structural interest rate risk. We have recently approved a new hold-to-collect business model, which is currently being implemented at legal entity level, and certain new purchases of securities will be booked under this model. In future, this portfolio of assets will also form a more material part of our structural interest rate hedging. This will allow more flexibility in managing the market risk of the current hold-to-collect-and-sell portfolio to optimise returns from market movements while still safeguarding the Group's capital and future earnings.

• All of the Group's material operating entities were above regulatory minimum levels of capital, liquidity and funding at 30 June 2022. The Group and all entities had significant surplus liquidity, and maintained heightened liquidity coverage ratios ('LCR') throughout the first half of 2022.

• There have been no material capital or liquidity direct impacts from the inflationary pressures and increased uncertainty on the forward economic outlook exacerbated by the Russia-Ukraine war, although we continue to monitor developments closely.

• We continued to improve global consistency and control standards across a number of our processes. We are keeping the Prudential Regulation Authority ('PRA') and other relevant regulators informed of adverse findings from external and internal reviews.

• We continued to build our recovery and resolution capabilities in line with the Group's preferred resolution strategy to meet requirements from the Bank of England ('BoE') under its Resolvability Assessment Framework ('RAF'). We met our compliance deadline of 1 January 2022 to develop RAF capabilities. We publicly disclosed a summary of our preparedness for resolution on 10 June 2022, thereby completing the first RAF cycle. We will continue to enhance our capabilities during the second half of 2022 in discussion with the BoE.

For quantitative disclosures on capital ratios, own funds and RWAs, see pages 91 to 93. For quantitative disclosures on liquidity and funding metrics, see pages 94 to 95. For quantitative disclosures on interest rate risk in the banking book, see pages 96 to 97.

Capital, liquidity and funding risk management processes

Assessment and risk appetite

Our capital management policy is underpinned by a global capital management framework and our ICAAP. The framework incorporates key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities ('MREL'), leverage ratio and double leverage. The ICAAP is an assessment of the Group's capital position, outlining both regulatory and internal capital resources and requirements resulting from HSBC's business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, interest rate risk in the banking book and Group risk driven by credit concentration risk in HSBC UK. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach. The Group's ICAAP supports the determination of the consolidated capital risk appetite and target ratios, as well as enables the assessment and determination of capital requirements by regulators. Subsidiaries prepare ICAAPs in line with global guidance, while considering their local regulatory regimes to determine their own risk appetites and ratios.

HSBC Holdings is the provider of equity capital and MREL-eligible debt to its subsidiaries, and also provides them with non-equity capital where necessary. These investments are funded by HSBC Holdings' own regulatory capital and MREL-eligible debt.

HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investments in subsidiaries.

As a matter of long-standing policy, the holding company retains a substantial holdings capital buffer comprising HQLA, which at 30 June 2022 was in excess of $18bn.

We aim to ensure that management has oversight of our liquidity and funding risks at Group and entity level through robust governance, in line with our risk management framework. We manage liquidity and funding risk at an operating entity level, in accordance with globally consistent policies, procedures and reporting standards. This ensures that obligations can be met in a timely manner, in the jurisdiction where they fall due.

Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through the ILAAP, which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively in each major entity. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the Group's policies and controls.

Planning and performance

Capital and RWA plans form part of the annual financial resource plan that is approved by the Board. Capital and RWA forecasts are submitted to the Group Executive Committee on a monthly basis, and capital and RWAs are monitored and managed against the plan. The responsibility for global capital allocation principles rests with the Group Chief Financial Officer, supported by the Group Capital Management Meeting. This is a specialist forum addressing capital management, reporting into the HSBC Holdings Asset and Liability Management Committee ('ALCO').

Through our internal governance processes, we seek to strengthen discipline over our investment and capital allocation decisions, and to ensure that returns on investment meet management's objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified, and in order to meet their regulatory and economic capital needs. We evaluate and manage business returns by using a return on average tangible equity measure.

Funding and liquidity plans form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the LCR together with an internal liquidity metric. In addition, we use a wider set of measures to manage an appropriate funding and liquidity profile, including net stable funding ratio ('NSFR'), legal entity depositor concentration limits, intra-day liquidity, forward-looking funding assessments and other key measures.

Risks to capital and liquidity

Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs, capital and/or liquidity position. Downside and Upside scenarios are assessed against our management objectives, and mitigating actions are assigned as necessary. We closely monitor future regulatory changes, and continue to evaluate the impact of these upon our capital and liquidity requirements, particularly those related to the UK's implementation of the outstanding measures to be implemented from the Basel III reforms ('Basel 3.1').

Regulatory developments

Our capital adequacy ratios have been affected by regulatory developments in 2022, including changes to internal-ratings based ('IRB') modelling requirements and the UK's implementation of the revisions to the Capital Requirements Regulation and Directive ('CRR II').

Future changes to our ratios will occur with the implementation of Basel 3.1, with the PRA expected to consult on the UK's implementation in the last quarter of 2022, with an effective date of 1 January 2025. We currently do not foresee a material net impact on our ratios from the initial implementation. The RWA output floor under Basel 3.1 will be subject to a five-year transitional provision. Any impact from the output floor would be towards the end of the transition period.

Disposal of retail banking business in France

In relation to the sale of our retail banking business in France, we expect a reduction in the Group's CET1 ratio of approximately 30 basis points ('bps') in the second half of 2022 when classified as held for sale. This impact will be partly offset by the reduction in RWAs upon the estimated completion in 2023.

Regulatory reporting processes and controls

The quality of regulatory reporting remains a key priority for management and regulators. We are progressing with a comprehensive programme to strengthen our processes, improve consistency, and enhance controls on various aspects of regulatory reporting. We have commissioned a number of independent external reviews, some at the request of our regulators, including one on our credit risk RWA reporting process, which is currently ongoing. These reviews have so far resulted in higher RWAs and changes to LCR through improvements in reporting accuracy. There may be further impacts on some of our regulatory ratios, such as the CET1 and LCR.

Stress testing and recovery and resolution planning

The Group uses stress testing to evaluate the robustness of plans and risk portfolios, and to meet the stress testing requirements set by supervisors. Stress testing also informs the ICAAP and ILAAP, and supports recovery planning in many jurisdictions. It is an important output used to evaluate how much capital and liquidity the Group requires in setting risk appetite for capital and liquidity risk. It is also used to re-evaluate business plans where analysis shows capital, liquidity and/or returns do not meet their target.

In addition to a range of internal stress tests, we are subject to supervisory stress testing in many jurisdictions. These include the programmes of the Bank of England, the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority, as well as stress tests undertaken in other jurisdictions. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital requirements through the ICAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators feed into the setting of regulatory minimum ratios and buffers.

The Group and subsidiaries have established recovery plans, which set out potential options management could take in a range of stress scenarios that could result in a breach of our capital or liquidity buffers. All entities monitor internal and external triggers that could threaten their capital, liquidity or funding positions. Entities have established recovery plans providing detailed actions that management would consider taking in a stress scenario should their positions deteriorate and threaten to breach risk appetite and regulatory minimum levels. This is to help ensure that our capital and liquidity position can be recovered even in an extreme stress event.

Recovery and resolution plans form part of the integral framework safeguarding the Group's financial stability. The Group is committed to developing its recovery and resolution capabilities further, including in relation to the BoE's Resolvability Assessment Framework.

Measurement of interest rate risk in the banking book processes

Assessment and risk appetite

Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities, specifically loans, deposits and financial instruments that are not held for trading intent or in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to the Markets Treasury business. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Markets Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate.

The Global Treasury function uses a number of measures to monitor and control interest rate risk in the banking book, including:

• net interest income sensitivity;

• economic value of equity sensitivity; and

• hold-to-collect-and-sell stressed value at risk.

Net interest income sensitivity

A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income ('NII') under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level, where entities calculate both one-year and five-year NII sensitivities across a range of interest rate scenarios.

NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure. The exception to this is where the size of the balances or repricing is deemed interest rate sensitive, for example, early prepayment of mortgages. These sensitivity calculations do not incorporate actions that would be taken by Markets Treasury or in the business that originates the risk to mitigate the effect of interest rate movements.

The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable.

Economic value of equity sensitivity

Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity holders under a managed run-off scenario. This equates to the current book value of equity plus the present value of future NII in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources.

Hold-to-collect-and-sell stressed value at risk

Hold-to-collect-and-sell stressed value at risk ('VaR') is a quantification of the potential losses to a 99% confidence level of the portfolio of high-quality liquid assets held under a hold-to-collect-and-and-sell business model in the Markets Treasury business. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in

designated hedging relationships with these securities. The mark-to-market of this portfolio therefore has an impact on CET1.

Stressed VaR is quantified based on the worst losses over a one-year period, using a historical time series stretching back to the beginning of 2007, and the assumed holding period is 60 days. At the end of June 2022, the stressed VaR of the portfolio is $2.34bn (December 2021: $3.63bn). The decrease is primarily due to actions taken to reduce the overall duration risk of the portfolio in order to reduce the potential capital impact from further increases in interest rates.

Capital risk in the first half of 2022

Capital overview

Capital adequacy metrics
	At
	30 Jun	31 Dec
	2022	2021
Risk-weighted assets ('RWAs') ($bn)
Credit risk	697.1	680.6
Counterparty credit risk	42.8	35.9
Market risk	27.4	32.9
Operational risk	84.4	88.9
Total RWAs	851.7	838.3
Capital on a transitional basis ($bn)
Common equity tier 1 capital	115.8	132.6
Tier 1 capital	137.5	156.3
Total capital	158.5	177.8
Capital ratios on a transitional basis (%)
Common equity tier 1 ratio	13.6	15.8
Tier 1 ratio	16.1	18.6
Total capital ratio	18.6	21.2
Capital on an end point basis ($bn)
Common equity tier 1 capital	115.8	132.6
Tier 1 capital	137.5	155.0
Total capital	150.6	167.5
Capital ratios on an end point basis (%)
Common equity tier 1 ratio	13.6	15.8
Tier 1 ratio	16.1	18.5
Total capital ratio	17.7	20.0
Liquidity coverage ratio ('LCR')
Total high-quality liquid assets ($bn)	656.6	717.0
Total net cash outflow ($bn)	491.7	518.0
LCR ratio (%)	134	138

Capital figures and ratios in the table above are calculated in accordance with the revisions to the Capital Requirements Regulation and Directive, as implemented ('CRR II'). The table presents them under the transitional arrangements in CRR II for capital instruments and after their expiry, known as the end point. The end point figures in the table above include the benefit of the regulatory transitional arrangements in CRR II for IFRS 9, which are more fully described in 'Regulatory transitional arrangements for IFRS 9 'Financial Instruments'' on page 94.

Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those subsequently submitted in regulatory filings. Where differences are significant, we will restate comparatives.

Own funds

Own funds disclosure
		At
		30 Jun	31 Dec
		2022	2021
Ref*		$m	$m
6	Common equity tier 1 capital before regulatory adjustments	154,654	162,918
28	Total regulatory adjustments to common equity tier 1	(38,874)	(30,353)
29	Common equity tier 1 capital	115,780	132,565
36	Additional tier 1 capital before regulatory adjustments	21,794	23,787
43	Total regulatory adjustments to additional tier 1 capital	(60)	(60)
44	Additional tier 1 capital	21,734	23,727
45	Tier 1 capital	137,514	156,292
51	Tier 2 capital before regulatory adjustments	22,278	23,018
57	Total regulatory adjustments to tier 2 capital	(1,273)	(1,524)
58	Tier 2 capital	21,005	21,494
59	Total capital	158,519	177,786
60	Total risk-weighted assets	851,743	838,263
	Capital ratios	%	%
61	Common equity tier 1 ratio	13.6	15.8
62	Tier 1 ratio	16.1	18.6
63	Total capital ratio	18.6	21.2

*  These are references to lines prescribed in the Pillar 3 'Own funds disclosure' template.

At 30 June 2022, our common equity tier 1 ('CET1') capital ratio decreased to 13.6% from 15.8% at 31 December 2021, reflecting a decrease in CET1 capital of $16.8bn and an increase in RWAs of $13.4bn. The key drivers of the overall fall in our CET1 ratio were:

• a 0.8 percentage point impact from the UK's implementation of new regulatory requirements, which decreased CET1 capital by $3.5bn and increased RWAs by $27.1bn. The changes included new internal ratings-based ('IRB') modelling requirements, the deduction of intangible software assets from CET1 capital, and the new standardised approach to counterparty credit risk exposure;

• a 0.6 percentage point impact from the $4.8bn post-tax fall in the fair value of securities classified as held to collect and sell;

• a 0.3 percentage point impact from other underlying RWA movements (apart from foreign exchange). These are described in the following section; and

• a 0.1 percentage point impact from foreign exchange translation movements, which reduced CET1 capital by $5.7bn and RWAs by $34bn.

These movements were accompanied by a 0.5 percentage point fall in the CET1 ratio due to a $3.6bn increase in threshold deductions from CET1 capital, mainly as a result of these changes and increased deductions for significant investments in financial sector entities (including the acquisition of AXA Singapore).

Profits less an associated increase in deductions for deferred tax, dividends accrued and paid, the share buy-back announced in February 2022, and other movements, added $0.8bn to CET1 capital and 0.1 percentage point to the CET1 ratio.

At 30 June 2022, our Pillar 2A requirement, in accordance with the PRA's Individual Capital Requirement based on a point-in-time assessment, was equivalent to 2.6% of RWAs, of which 1.5% was met by CET1 capital. Throughout the first half of 2022, we complied with the PRA's regulatory capital adequacy requirements.

Risk-weighted assets

RWAs by global business
	WPB	CMB	GBM	Corporate Centre	Total
	$bn	$bn	$bn	$bn	$bn
Credit risk	152.6	315.7	153.3	75.5	697.1
Counterparty credit risk	1.0	1.0	39.5	1.3	42.8
Market risk	1.3	0.6	19.4	6.1	27.4
Operational risk	31.2	24.6	28.9	(0.3)	84.4
At 30 Jun 2022	186.1	341.9	241.1	82.6	851.7
At 31 Dec 2021	178.3	332.9	236.2	90.9	838.3

RWAs by geographical region
	Europe	Asia	MENA	North America	Latin America	Total
	$bn	$bn	$bn	$bn	$bn	$bn
Credit risk	192.7	330.9	51.1	92.4	30.0	697.1
Counterparty credit risk	22.2	12.2	1.8	4.8	1.8	42.8
Market risk1	22.1	25.9	2.2	3.6	1.0	27.4
Operational risk	20.6	41.7	5.8	11.2	5.1	84.4
At 30 Jun 2022	257.6	410.7	60.9	112.0	37.9	851.7
At 31 Dec 2021	261.1	396.3	60.2	110.4	35.9	838.3

1  Market risk RWAs are non-additive across geographical regions due to diversification effects within the Group.

RWA movement by global businesses by key driver
	Credit risk, counterparty credit risk and operational risk
	WPB	CMB	GBM	Corporate Centre	Market risk	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn
RWAs at 1 Jan 2022	176.6	332.0	215.9	80.9	32.9	838.3
Asset size	5.4	15.6	7.3	(2.9)	(5.5)	19.9
Asset quality	0.3	(0.9)	0.8	0.4	-	0.6
Model updates	0.1	1.3	(1.2)	(0.1)	-	0.1
Methodology and policy	12.3	10.1	6.8	(0.9)	-	28.3
Acquisitions and disposals	(1.5)	-	-	-	-	(1.5)
Foreign exchange movements	(8.4)	(16.8)	(7.9)	(0.9)	-	(34.0)
Total RWA movement	8.2	9.3	5.8	(4.4)	(5.5)	13.4
RWAs at 30 Jun 2022	184.8	341.3	221.7	76.5	27.4	851.7

RWA movement by geographical region by key driver
	Credit risk, counterparty credit risk and operational risk
	Europe	Asia	MENA	North America	Latin America	Market risk	Total RWAs
	$bn	$bn	$bn	$bn	$bn	$bn	$bn
RWAs at 1 Jan 2022	236.5	371.0	57.9	105.1	34.9	32.9	838.3
Asset size	6.6	8.6	1.6	5.6	3.0	(5.5)	19.9
Asset quality	(1.8)	4.5	(0.2)	(1.6)	(0.3)	-	0.6
Model updates	(1.5)	1.8	-	(0.2)	-	-	0.1
Methodology and policy	15.5	9.5	1.4	1.6	0.3	-	28.3
Acquisitions and disposals	-	-	-	(1.5)	-	-	(1.5)
Foreign exchange movements	(19.8)	(10.6)	(2.0)	(0.6)	(1.0)	-	(34.0)
Total RWA movement	(1.0)	13.8	0.8	3.3	2.0	(5.5)	13.4
RWAs at 30 Jun 2022	235.5	384.8	58.7	108.4	36.9	27.4	851.7

  RWAs rose by $13.4bn during the first half of the year, net of a decrease of $34.0bn due to foreign currency translation differences. This increase was mainly due to regulatory change and lending growth.

Asset size

CMB and GBM RWAs increased by $22.9bn as a result of corporate loan growth across all our major regions.

Retail term lending and mortgage growth in Asia and the UK led to most of the $5.4bn increase in WPB RWAs.

The $5.5bn fall in market risk RWAs reflected lower structural foreign exchange risk following additional hedging, and reduced value at risk and stressed value at risk.

The $2.9bn fall in Corporate Centre RWAs was mainly due to a decrease in the value of recognised significant investments in financial sector entities.

Asset quality

A $4.5bn RWA increase in Asia was mostly due to credit migration, primarily in CMB and WPB. A further $1.4bn increase, largely in GBM, was due to downgrades on exposures in Russia. This was partly offset by reductions related to improved ratings in Europe and favourable portfolio mix changes in North America, primarily in CMB.

Model updates

A revised commercial property loan model was the main cause of a $1.8bn increase of RWAs in Asia. This was mostly offset by reductions from the introduction of a GBM counterparty credit risk equity model, primarily in Europe.

Acquisitions and disposals

Our exit from mass market retail banking in the US through the sale of retail branches reduced our RWAs by $1.5bn.

Methodology and policy

Regulatory changes caused an RWA increase of $27.1bn. These included revised IRB modelling requirements and the UK's implementation of the CRR II rules.

These increases were partly offset by reductions due to risk parameter refinements in GBM, mostly in Europe and Asia, and the reversal of the beneficial changes to the treatment of software assets in Corporate Centre.

Reporting process improvements and RWA saves

Reporting process improvements and our RWA reduction programme contributed to the movements above.

Reporting process improvements led to an RWA increase of around $12bn during 2022 (2021: $6bn increase). This included an $8bn rise in RWAs from data enhancements related to small and medium-sized enterprises.

At 30 June 2022, our cumulative RWA saves as part of our reduction programme were $114bn. This included accelerated reductions of $9.6bn in 4Q19.

Leverage ratio¹

	At
	30 Jun	31 Dec
	2022	2021
	$bn	$bn
Tier 1 capital	137.5	155.0
Total leverage ratio exposure	2,484.2	2,962.7
	%	%
Leverage ratio	5.5	5.2

1  The CRR II regulatory transitional arrangements for IFRS 9 are applied in the leverage ratio calculation. This calculation is in line with the UK leverage rules that were implemented on 1 January 2022, and excludes central bank claims. Comparatives for 2021 are reported based on the disclosure rules in force at that time, and include claims on central banks.

Our leverage ratio was 5.5% at 30 June 2022, up from 5.2% at 31 December 2021. The improvement was primarily due to the exclusion of central bank claims following the implementation of the UK leverage ratio framework of 1 January 2022. This was partly offset by a decline in tier 1 capital.

At 30 June 2022, our UK minimum leverage ratio requirement of 3.25% was supplemented by a leverage ratio buffer of 0.8%, made up of an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.1%.

These additional buffers translated into capital values of $17.4bn and $2.5bn respectively. We exceeded these leverage requirements.

Regulatory transitional arrangements for IFRS 9 'Financial Instruments'

We have adopted the regulatory transitional arrangements in CRR II for IFRS 9, including paragraph four of article 473a. Our capital and ratios are presented under these arrangements throughout the 'Capital adequacy metrics' table on page 91, including in the end point figures. Without their application, our CET1 ratio would be 13.6%.

The IFRS 9 regulatory transitional arrangements allow banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use.

The impact is defined as:

• the increase in loan loss allowances on day one of IFRS 9 adoption; and

• any subsequent increase in ECL in the non-credit-impaired book thereafter.

Any add-back must be tax affected and accompanied by a recalculation of deferred tax, exposure and RWAs. The impact is calculated separately for portfolios using the standardised ('STD') and internal ratings-based ('IRB') approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.

The EU's CRR 'Quick Fix' relief package increased the 2022 scalar from 25% to 75% the relief that banks may take for loan loss allowances recognised since 1 January 2020 on the non-credit-impaired book.

In the current period, the add-back to CET1 capital amounted to $0.5bn under the STD approach with a tax impact of $0.1bn. At 31 December 2021, the add-back to the capital base under the STD approach was $1.0bn with a tax impact of $0.2bn.

Regulatory disclosures

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 30 June 2022 is expected to be published on or around 9 August 2022 at www.hsbc.com/investors.

Liquidity and funding risk in the first half of 2022

Liquidity metrics

At 30 June 2022, all of the Group's material operating entities were above regulatory minimum levels.

Each entity maintains sufficient unencumbered liquid assets to comply with local and regulatory requirements. The liquidity value of these liquid assets for each entity is shown in the following table along with the individual LCR levels on a PRA basis. This basis may differ from local LCR measures due to differences in the way different regulators have implemented the Basel III standards.

Each entity maintains a sufficient stable funding profile and it is assessed by using the net stable funding ratio ('NSFR') or other appropriate metrics.

In addition to regulatory metrics, HSBC uses a wide set of measures to manage its liquidity and funding profile.

The Group liquidity and funding position at 30 June 2022 is analysed in the following sections.

Operating entities' liquidity
	At 30 Jun 2022
	LCR	HQLA	Net outflows	NSFR5
	%	$bn	$bn	%
HSBC UK Bank plc (ring-fenced bank)1	228	138	61	165
HSBC Bank plc (non-ring-fenced bank)2	157	138	88	120
The Hongkong and Shanghai Banking Corporation - Hong Kong branch3	160	138	86	132
The Hongkong and Shanghai Banking Corporation - Singapore branch3	168	12	7	133
Hang Seng Bank	207	48	23	155
HSBC Bank China	153	20	13	133
HSBC Bank USA	104	85	81	132
HSBC Continental Europe4	145	50	35	126
HSBC Middle East - UAE branch	248	11	4	156
HSBC Canada4	121	19	16	121
HSBC Mexico	132	7	5	127

	At 31 Dec 2021
HSBC UK Bank plc (ring-fenced bank)1	241	163	68	178
HSBC Bank plc (non-ring-fenced bank)2	150	135	90	107
The Hongkong and Shanghai Banking Corporation - Hong Kong branch3	154	145	94	135
The Hongkong and Shanghai Banking Corporation - Singapore branch3	179	18	10	145
Hang Seng Bank	169	43	25	144
HSBC Bank China	141	17	12	130
HSBC Bank USA	119	98	83	140
HSBC Continental Europe4,	145	54	37	128
HSBC Middle East - UAE branch	210	12	6	146
HSBC Canada4	119	22	18	123
HSBC Mexico	200	9	5	141

1  HSBC UK Bank plc refers to the HSBC UK liquidity group, which comprises four legal entities: HSBC UK Bank plc, Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA.

2  HSBC Bank plc includes overseas branches and special purpose entities consolidated by HSBC for financial statements purposes.

3  The Hongkong and Shanghai Banking Corporation - Hong Kong branch and The Hongkong and Shanghai Banking Corporation - Singapore branch represent the material activities of The Hongkong and Shanghai Banking Corporation. Each branch is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.

4  HSBC Continental Europe and HSBC Canada represent the consolidated banking operations of the Group in France and Canada, respectively. HSBC Continental Europe and HSBC Canada are each managed as single distinct operating entities for liquidity purposes.

5  The calculation of NSFR on 30 June 2022 is based on the PRA rulebook, and the NSFR ratio at 31 December 2021 was following the Capital Requirements Regulation (CRR) regulation (EU) No 575/2013 requirement.

At 30 June 2022, all of the Group's principal operating entities were well above regulatory minimum levels.

The most significant movements in 2022 are explained below:

• HSBC UK Bank plc retained a strong liquidity position, although its liquidity ratio reduced to 228%, mainly due to growth in retail mortgages, commercial lending and the impact of foreign exchange movements.

• HSBC Bank plc's liquidity ratio increased to 157%, mainly due to growth in customer deposits.

• The Hongkong and Shanghai Banking Corporation - Hong Kong branch's liquidity ratio increased to 160%, mainly due to a decline in non-HQLA trading assets, offset by growth in customer loans.

• Hang Seng Bank's liquidity ratio increased to 207%, mainly reflecting growth in its commercial surplus.

• The Hongkong and Shanghai Banking Corporation - Singapore branch retained a strong liquidity position, although its liquidity ratio decreased to 168%, mainly due to a lower commercial surplus.

• HSBC Bank China's liquidity ratio increased to 153%, mainly due to growth in customer deposits and loans.

• HSBC Bank USA's liquidity ratio decreased to 104%, mainly due to a decrease in deposits as a result of the exit of domestic mass market retail.

• HSBC Continental Europe maintained a strong liquidity position, with the liquidity ratio remaining largely unchanged.

• HSBC Bank Middle East - UAE branch retained a strong liquidity position, with a liquidity ratio of 248%.

• HSBC Canada maintained a strong liquidity position, with its liquidity ratio increasing to 121%.

Consolidated liquidity metrics

Liquidity coverage ratio

At 30 June 2022, the total HQLA held at entity level amounted to $802bn (31 December 2021: $880bn), a decrease of $78bn. The reduction is mainly due to foreign exchange movements. Since 2021, HSBC has maintained a revised approach to the application of the requirements under the EC Delegated Act and the PRA rulebook. This approach was used to assess the limitations in the fungibility of entity liquidity around the Group and resulted in an adjustment of $145bn to LCR HQLA and $8bn to LCR inflows. The change in methodology was designed to better incorporate local regulatory restrictions on the transferability of liquidity.

As a consequence, the Group LCR was 134% at 30 June 2022 (31 December 2021:138%). The $145bn of HQLA and $8bn of inflows remain available to cover liquidity risk in relevant entities.

	At
	30 Jun	30 Jun	31 Dec
	2022	2021	2021
	$bn	$bn	$bn
High-quality liquid assets (in entities)	802	844	880
EC Delegated Act/PRA rulebook adjustment 1	(153)	(189)	(172)
Group LCR HQLA	657	659	717
Net outflows	492	494	518
Liquidity coverage ratio	134%	134%	138%

1  This includes adjustments made to high-quality liquidity assets and inflows in entities to reflect liquidity transfer restrictions.

Liquid assets

After the $145bn adjustment, the Group LCR HQLA of $657bn (31 December 2021: $717bn) was held in a range of asset classes and currencies. Of these, 95% were eligible as level 1 (31 December 2021: 97%).

The following tables reflect the composition of the liquidity pool by asset type and currency at 30 June 2022:

Liquidity pool by asset type
	Liquidity pool	Cash	Level 11	Level 21
	$bn	$bn	$bn	$bn
Cash and balance at central bank	350	350	-	-
Central and local government bonds	289	-	263	26
Regional government and public sector entities	2	-	2	-
International organisation and multilateral development banks	10	-	10	-
Covered bonds	4	-	1	3
Other	2	-	1	1
Total at 30 Jun 2022	657	350	277	30
Total at 31 Dec 2021	717	390	302	25

1  As defined in EU and PRA regulation, level 1 assets means 'assets of extremely high liquidity and credit quality', and level 2 assets means 'assets of high liquidity and credit quality'.

Liquidity pool by currency
	$	£	€	HK$	Other	Total
	$bn	$bn	$bn	$bn	$bn	$bn
Liquidity pool at 30 Jun 2022	156	196	102	54	149	657
Liquidity pool at 31 Dec 2021	189	211	104	56	157	717

Sources of funding

Our primary sources of funding are customer current accounts and savings deposits payable on demand or at short notice. We issue secured and unsecured wholesale securities to supplement customer deposits, meet regulatory obligations and to change the currency mix, maturity profile or location of our liabilities.

The following 'Funding sources' and 'Funding uses' tables provide a view of how our consolidated balance sheet is funded. In practice, all the principal operating entities are required to manage liquidity and funding risk on a stand-alone basis.

The tables analyse our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented as a net balancing source or deployment of funds.

In 1H22, the level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets.

Funding sources
	At
	30 Jun	31 Dec
	2022	2021
	$m	$m
Customer accounts	1,651,301	1,710,574
Deposits by banks	105,275	101,152
Repurchase agreements - non-trading	129,707	126,670
Debt securities in issue	87,944	78,557
Cash collateral, margin and settlement accounts	112,180	65,452
Liabilities of disposal groups held for sale	3,907	9,005
Subordinated liabilities	20,711	20,487
Financial liabilities designated at fair value	126,006	145,502
Liabilities under insurance contracts	113,130	112,745
Trading liabilities	80,569	84,904
-  repos	8,257	11,004
-  stock lending	2,658	2,332
-  other trading liabilities	69,654	71,568
Total equity	196,690	206,777
Other balance sheet liabilities	358,000	296,114
	2,985,420	2,957,939

Funding uses
	At
	30 Jun	31 Dec
	2022	2021
	$m	$m
Loans and advances to customers	1,028,356	1,045,814
Loans and advances to banks	96,429	83,136
Reverse repurchase agreements - non-trading	244,451	241,648
Cash collateral, margin and settlement accounts	102,500	59,884
Assets held for sale	3,989	3,411
Trading assets	217,350	248,842
-  reverse repos	15,884	14,994
-  stock borrowing	11,664	8,082
-  other trading assets	189,802	225,766
Financial investments	430,796	446,274
Cash and balances with central banks	363,608	403,018
Other balance sheet assets	497,941	425,912
	2,985,420	2,957,939

Interest rate risk in the banking book in the first half of 2022

Net interest income sensitivity

The following tables set out the assessed impact to a hypothetical base case projection of our net interest income ('NII'), excluding pensions, insurance and investment in subsidiaries, under the following scenarios:

• an immediate shock of 25 basis points ('bps') to the current market-implied path of interest rates across all currencies on 1 July 2022 (effects over one year and five years); and

• an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 July 2022 (effects over one year and five years).

Calculations of the NII base case are based on certain assumptions: a static balance sheet, no management actions from the Markets Treasury business and a simplified 50% pass-through assumption applied for material entities as described below.

The calculations also incorporate the effects of interest rate behaviouralisation, hypothetical managed rate product pricing assumptions and customer behaviour, including prepayment of mortgages under the specific interest rate scenarios. The scenarios represent interest rate shocks to the current market implied path of rates.

The NII sensitivity analysis performed in the case of a down-shock does not include floors to market rates. It only includes floors on wholesale customer assets and liabilities when those are embedded in the terms of the contract. Floors have been maintained for retail deposits and loans to customers where this is contractual or where negative rates would not be applied.

As market and policy rates move, the degree to which these changes are passed on to customers will vary based on a number of factors, including the absolute level of market rates, regulatory and contractual frameworks, and competitive dynamics in particular markets. To aid comparability between markets, we have simplified the basis of preparation for our disclosure, and have used a 50% pass-through assumption for major entities on certain interest bearing deposits. The pass-through rates on our key deposit products to date are low and assumed to increase over time. Our pass-through asset assumptions are largely in line with our contractual agreements or established market practice, which typically results in a significant portion of interest rate changes being passed on.

Immediate interest rate rises of 25bps and 100bps would increase projected NII for the 12 months to 30 June 2023 by $1,158m and $4,697m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 30 June 2023 by $1,214m and $5,954m, respectively.

The sensitivity of NII for 12 months decreased by $717m in the plus 100bps parallel shock and increased by $192m in the minus 100bps parallel shock, comparing 30 June 2022 with 31 December 2021.

The decrease in the sensitivity of NII for 12 months and five years in the up-shock scenarios is attributed to multiple drivers, including a change in balance sheet composition, currency depreciation (mainly in pound sterling and euros) and pricing caps on Hong Kong lending products. Given that implied forward rates have reached contractual pricing caps, the whole Hong Kong dollar mortgage portfolio is expected to change its benchmark from HIBOR to HSBC's Hong Kong Dollar Best Lending Rate over the projection horizon.

As implied forward rates have increased, the impact from pricing floors has reduced on assets, and the sensitivity of NII for 12 months has increased in the minus 100bps parallel shock in US dollars and Hong Kong dollars. In pound sterling and euros, the sensitivity has decreased in the minus 100bps parallel shock, driven primarily by lower balance sheet size due to currency depreciation.

The NII sensitivities for 12 months in the minus 25bps parallel shock and for five years in both down-shock scenarios decreased at 30 June 2022 when compared with 31 December 2021. This was driven by the changes in the forecasted yield curves and changes in balance sheet composition and pricing.

NII sensitivity to an instantaneous change in yield curves (12 months) - 1 year NII sensitivity by currency
			Currency
	US dollar	HK dollar	Sterling	Euro	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jul 2022 to Jun 2023 (based on balance sheet at 30 Jun 2022)
+25bps	109	183	356	111	399	1,158
-25bps	(120)	(188)	(393)	(104)	(409)	(1,214)
+100bps	433	720	1,513	460	1,571	4,697
-100bps	(881)	(1,254)	(1,677)	(419)	(1,723)	(5,954)
Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 Dec 2021)
+25bps	125	265	420	106	393	1,309
-25bps	(257)	(536)	(594)	(170)	(395)	(1,952)
+100bps	458	1,054	1,739	632	1,531	5,414
-100bps	(466)	(1,020)	(2,070)	(595)	(1,610)	(5,761)

NII sensitivity to an instantaneous change in yield curves (5 years) - cumulative 5 years NII sensitivity by currency
			Currency
	US dollar	HK dollar	Sterling	Euro	Other	Total
	$m	$m	$m	$m	$m	$m
Change in Jul 2022 to Jun 2023 (based on balance sheet at 30 Jun 2022)
+25bps	850	1,011	3,002	622	2,519	8,004
-25bps	(896)	(1,017)	(3,081)	(606)	(2,585)	(8,185)
+100bps	3,354	4,028	12,128	2,561	9,952	32,023
-100bps	(5,623)	(6,617)	(12,483)	(2,556)	(10,776)	(38,055)
Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 Dec 2021)
+25bps	1,026	1,410	3,333	827	2,510	9,106
-25bps	(1,701)	(2,887)	(4,216)	(997)	(2,600)	(12,401)
+100bps	3,922	4,870	13,389	3,919	9,841	35,941
-100bps	(5,060)	(7,052)	(14,893)	(3,571)	(10,481)	(41,057)

NII sensitivity to an instantaneous change in yield curves (5 years) - NII sensitivity by years
	Year 1	Year 2	Year 3	Year 4	Year 5	Total
	$m	$m	$m	$m	$m	$m
Change in Jul 2022 to Jun 2027 (based on balance sheet at 30 Jun 2022)
+25bps	1,158	1,491	1,675	1,799	1,881	8,004
-25bps	(1,214)	(1,516)	(1,708)	(1,830)	(1,917)	(8,185)
+100bps	4,697	5,943	6,690	7,171	7,522	32,023
-100bps	(5,954)	(7,128)	(7,875)	(8,371)	(8,727)	(38,055)
Change in Jan 2022 to Dec 2026 (based on balance sheet at 31 Dec 2021)
+25bps	1,309	1,758	1,896	2,002	2,141	9,106
-25bps	(1,952)	(2,324)	(2,593)	(2,687)	(2,845)	(12,401)
+100bps	5,414	6,738	7,492	7,937	8,360	35,941
-100bps	(5,761)	(7,664)	(8,675)	(9,354)	(9,603)	(41,057)

Market risk

Overview

Market risk is the risk of adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads. Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios.

Market risk in the first half of 2022

There were no material changes to the policies and practices for the management of market risk in the first half of 2022.

A summary of our current policies and practices for the management of market risk is set out in 'Market risk management' on page 203 of the Annual Report and Accounts 2021.

Concerns over high inflation and recession risks increased during 1H22, against the backdrop of the Russia-Ukraine war and continued Covid-19 pandemic restrictions in Asia. High energy, commodity and food prices led to major central banks tightening their monetary policies at a much faster pace than anticipated at the start of the year, in order to counter rising inflation. Bond markets sold off sharply, although the rapid rise in bond yields to multi-year highs was moderated by the prospect that the cycle of rising global interest rates could prove to be short lived. In the second quarter, recession risks and tightening liquidity conditions led to losses in most global equity market sectors. Foreign exchange markets were dominated by a strengthening of the US dollar due to global geopolitical instability and the relatively fast

pace of monetary tightening by the US Federal Reserve Board. Negative investor sentiment in credit markets led to credit spreads in investment-grade and high-yield debt benchmarks reaching their widest levels since the start of the Covid-19 pandemic.

We continued to manage market risk prudently in the first half of 2022. Sensitivity exposures and VaR remained within appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits, including stress and scenario analysis.

Trading portfolios

Value at risk of the trading portfolios

Trading VaR was predominantly generated by Markets and Securities Services. Market-making activities in the Global Debt Markets and Foreign Exchange businesses continued to be the key drivers of trading VaR at the end of 1H22. Trading VaR peaked in May 2022 but at 30 June 2022 was lower than at 31 December 2021. The moderate reduction in trading VaR during the first half of the year was due mainly to lower loss contributions from the Foreign Exchange business and greater offsetting gains from the Equity business. These were partly offset by larger losses from dividend risks and interest rates volatility that were captured within the risk not in VaR ('RNIV') framework. The RNIV framework covers risks from exposures in our trading book that are not fully captured by the VaR model. The VaR-based RNIVs are included within the metrics for each asset class.

The Group trading VaR for the half-year is shown in the table below.

Trading VaR, 99% 1 day
	Foreign exchange and commodity	Interest rate	Equity	Credit spread	Portfolio diversification1	Total
	$m	$m	$m	$m	$m	$m
Half-year to 30 Jun 2022	11.3	26.8	14.6	16.1	(32.5)	36.3
Average	14.2	26.3	14.5	19.1	(35.1)	39.1
Maximum	29.2	33.9	19.2	27.9		55.6
Minimum	5.7	20.3	11.5	12.0		29.1
Half-year to 30 Jun 2021	13.6	33.5	15.8	18.3	(42.5)	38.7
Average	15.0	33.4	16.5	18.1	(46.2)	36.8
Maximum	31.8	50.4	24.3	29.4		48.2
Minimum	6.9	18.5	12.1	12.2		31.1
Half-year to 31 Dec 2021	9.1	25.9	15.4	24.8	(36.5)	38.8
Average	10.9	34.2	16.8	20.2	(44.8)	37.3
Maximum	20.0	51.7	22.7	26.9		53.8
Minimum	6.7	25.2	13.3	15.6		27.7

1  When VaR is calculated at a portfolio level, natural offsets in risk can occur when compared with aggregating VaR at the asset class level. This difference is called portfolio diversification. The asset class VaR maxima and minima reported in the table occurred on different dates within the reporting period. For this reason, we do not report an implied portfolio diversification measure between the maximum (minimum) asset class VaR measures and the maximum (minimum) total VaR measures in this table.

The table below shows trading VaR at a 99% confidence level compared with trading VaR at a 95% confidence level at 30 June 2022.

This comparison facilitates the benchmarking of the trading VaR, which can be stated at different confidence levels, with financial institution peers. The 95% VaR is unaudited.

Comparison of trading VaR, 99% 1 day vs trading VaR, 95% 1 day
	Trading VaR, 99% 1 day	Trading VaR, 95% 1 day
	$m	$m
Half-year to 30 Jun 2022	36.3	21.1
Average	39.1	22.1
Maximum	55.6	28.4
Minimum	29.1	17.5
Half-year to 30 Jun 2021	38.7	26.4
Average	36.8	24.4
Maximum	48.2	30.0
Minimum	31.1	19.6
Half-year to 31 Dec 2021	38.8	21.6
Average	37.3	23.7
Maximum	53.8	28.6
Minimum	27.7	18.9

Back-testing

In 1H22, the Group experienced three loss exceptions against hypothetical profit and loss and no exceptions against actual profit and loss.

The hypothetical profit and loss reflects the profit and loss that would be realised if positions were held constant from the end of one trading day to the end of the next. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore necessarily indicative of the actual performance of the business.

The loss back-testing exception against hypothetical profit and loss comprised:

• a loss back-testing exception in February, mainly attributable to the effect of tightening credit spreads in benchmark credit indices, sovereigns and corporates on long credit risk protection positions;

• a loss exception in March, which was driven primarily by the impact of tightening credit spreads in benchmark credit indices on long credit risk protection, as well as losses from the effect of the US dollar weakening on foreign exchange positions; and

• a loss back-testing exception in June, driven mainly by the impact of tightening credit spreads in benchmark credit indices

on long credit risk protection, movements in interest rates, as well as the effect of a temporary one-day US dollar weakening on foreign exchange positions.  

There is an elevated probability of experiencing further VaR back-testing exceptions in the second half of the year, under the current volatile market environment and the shift in interest rate regime.

Non-trading portfolios

Value at risk of the non-trading portfolios

Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments measured at fair value through other comprehensive income, debt instruments measured at amortised cost, and exposures arising from our insurance operations.

The VaR for non-trading activity at 30 June 2022 decreased materially compared with 31 December 2021 to $120.8m from $220.4m. This was primarily due to a reduction in interest rate risk as market interest rates increased, as well as the removal of Covid-19-related scenarios from the two-year VaR calculation window.

Non-trading VaR includes non-trading financial instruments held in portfolios managed by Markets Treasury. The management of interest rate risk in the banking book is described further in 'Net interest income sensitivity' on page 91.

The Group non-trading VaR for the half-year is shown in the following table.

Non-trading VaR, 99% 1 day
	Interest rate	Credit spread	Portfolio diversification1	Total
	$m	$m	$m	$m
Half-year to 30 Jun 2022	113.3	53.3	(45.7)	120.8
Average	148.4	61.9	(36.7)	173.7
Maximum	225.5	84.7		265.3
Minimum	109.2	50.3		119.1
Half-year to 30 Jun 2021	193.7	73.8	(18.0)	249.5
Average	201.1	80.5	(31.2)	250.5
Maximum	248.7	99.3		298.8
Minimum	163.3	64.7		193.5
Half-year to 31 Dec 2021	216.4	70.3	(66.3)	220.4
Average	200.3	73.4	(49.1)	224.6
Maximum	235.7	79.9		268.4
Minimum	179.3	68.7		194.6

1  When VaR is calculated at a portfolio level, natural offsets in risk can occur when compared with aggregating VaR at the asset class level. This difference is called portfolio diversification. The asset class VaR maxima and minima reported in the table occurred on different dates within the reporting period. For this reason, we do not report an implied portfolio diversification measure between the maximum (minimum) asset class VaR measures and the maximum (minimum) total VaR measures in this table.

Non-trading VaR excludes equity risk on securities held at fair value, non-trading book foreign exchange risk and the risks managed in HSBC Holdings arising from long-term capital issuance.

HSBC's management of market risk in the non-trading book is described in the Treasury risk section on page 89.

For disclosure of the stressed value at risk of the Markets Treasury hold-to-collect-and-sell portfolio, see page 91. This portfolio of financial instruments is measured at fair value through other comprehensive income and is included in the non-trading VaR above. The stressed VaR quantitative disclosure provides the discrete potential capital impact from this portfolio.

Insurance manufacturing operations risk

Overview

The key risks for our insurance manufacturing operations are market risks, in particular interest rate, growth asset and credit risks, as well as insurance underwriting and operational risks. Liquidity risk, while significant for other parts of the Group, is relatively minor for our insurance operations.

Insurance manufacturing operations risk in the first half of 2022

There have been no material changes to the policies and practices for the management of risks arising in our insurance operations described in the Annual Report and Accounts 2021.

A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture is provided on page 210 of the Annual Report and Accounts 2021.
The risk profile of our insurance manufacturing operations are assessed in the Group's ICAAP based on their financial capacity to support the risks to which they are exposed.

Capital adequacy is assessed on both the Group's economic capital basis, and the relevant local insurance regulatory basis. The Group's economic capital basis is largely aligned to European Solvency II regulations, other than in Hong Kong where it is based on the emerging Hong Kong risk-based capital regulations. Risk appetite buffers are set to ensure that the operations are able to remain solvent on both bases, allowing for business-as-usual volatility and extreme but plausible stress events. In addition, the insurance manufacturing operations manage their market, liquidity, credit, underwriting and non-financial risk exposures to Board-approved risk appetite limits.

Equity values, which are a key risk driver for the financial strength of the insurance operations, in general fell during the first half of the year. This was partly offset by the impact of rising interest rates. Overall, at 30 June 2022, the majority of the capital and financial risk positions of our insurance operations were within risk appetite. However, the impact of changes in market factors, relative to the economic assumptions in place at the start of the year, had a negative impact on reported profit before tax of $680m (1H21: $413m positive). We continue to monitor these risks closely in the current volatile economic climate.

The following table shows the composition of assets and liabilities by contract type.

Balance sheet of insurance manufacturing subsidiaries by type of contract
	With DPF	Unit- linked	Other contracts1	Shareholder assets and liabilities	Total
	$m	$m	$m	$m	$m
Financial assets	89,110	8,294	20,912	8,435	126,751
-  trading assets	-	-	-	-	-
-  financial assets designated and otherwise mandatorily measured at fair value through profit or loss	29,688	8,073	3,752	1,395	42,908
-  derivatives	210	-	21	5	236
-  financial investments - at amortised cost	44,257	57	15,683	4,410	64,407
-  financial investments - at fair value through other comprehensive income	8,992	-	432	1,750	11,174
-  other financial assets2	5,963	164	1,024	875	8,026
Reinsurance assets	2,270	67	1,841	3	4,181
PVIF3	-	-	-	10,437	10,437
Other assets and investment properties	2,498	4	224	964	3,690
Total assets at June 2022	93,878	8,365	22,977	19,839	145,059
Liabilities under investment contracts designated at fair value	-	2,177	3,407	-	5,584
Liabilities under insurance contracts	90,169	5,558	17,468	-	113,195
Deferred tax4	223	5	17	1,616	1,861
Other liabilities	-	-	-	7,113	7,113
Total liabilities	90,392	7,740	20,892	8,729	127,753
Total equity	-	-	-	17,306	17,306
Total liabilities and equity at June 2022	90,392	7,740	20,892	26,035	145,059
Financial assets	88,969	8,881	19,856	9,951	127,657
-  trading assets	-	-	-	-	-
-  financial assets designated at fair value	30,669	8,605	3,581	1,827	44,682
-  derivatives	129	1	15	2	147
-  financial investments at amortised cost	42,001	61	14,622	4,909	61,593
-  financial investments at fair value through other comprehensive income	10,858	-	459	1,951	13,268
-  other financial assets2	5,312	214	1,179	1,262	7,967
Reinsurance assets	2,180	72	1,666	3	3,921
PVIF3	-	-	-	9,453	9,453
Other assets and investment properties	2,558	1	206	820	3,585
Total assets at December 2021	93,707	8,954	21,728	20,227	144,616
Liabilities under investment contracts designated at fair value	-	2,297	3,641	-	5,938
Liabilities under insurance contracts	89,492	6,558	16,757	-	112,807
Deferred tax4	179	9	24	1,418	1,630
Other liabilities	-	-	-	7,269	7,269
Total liabilities	89,671	8,864	20,422	8,687	127,644
Total equity	-	-	-	16,972	16,972
Total liabilities and equity at December 2021	89,671	8,864	20,422	25,659	144,616

1  Other contracts includes term assurance, credit life insurance, universal life insurance and certain investment contracts not included in the 'Unit-linked' or 'With DPF' columns.

2  Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.

3  Present value of in-force long-term insurance business.

4  Deferred tax includes the deferred tax liabilities arising on recognition of PVIF.

Market risk

Description and exposure

Market risk is the risk of changes in market factors affecting HSBC's capital or profit. Market factors include interest rates, equity and growth assets, and foreign exchange rates.

Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with discretionary participating features ('DPF'). These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns.

DPF products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance.

In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by HSBC. Amounts are held against the cost of such guarantees, calculated by stochastic modelling.

The cost of such guarantees is accounted for as a deduction from the present value of in-force ('PVIF') asset, unless the cost of guarantees is already explicitly allowed for within the insurance contract liabilities.

For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets.

Sensitivities

The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the period and the total equity of our insurance manufacturing subsidiaries.

Where appropriate, the effects of the sensitivity tests on profit after tax and equity incorporate the impact of the stress on the PVIF.

Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the profit and total equity and the risk factors is non-linear, particularly in a low interest-rate environment.

Therefore, the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not necessarily symmetrical on the upside and downside. The sensitivities are stated before allowance for management actions, which may mitigate the effect of changes in the market environment.

The sensitivities presented allow for adverse changes in policyholder behaviour that may arise in response to changes in market rates. The differences between the impacts on profit after

tax and equity are driven by the changes in value of the bonds measured at fair value through other comprehensive income, which are only accounted for in equity.

Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk factors
	At 30 Jun 2022		At 31 Dec 2021
	Effect on profit after tax	Effect on total equity	Effect on profit after tax	Effect on total equity
	$m	$m	$m	$m
+100 basis point parallel shift in yield curves	(136)	(270)	(2)	(142)
-100 basis point parallel shift in yield curves	(47)	92	(154)	(9)
10% increase in equity prices	373	373	369	369
10% decrease in equity prices	(388)	(388)	(377)	(377)
10% increase in US dollar exchange rate compared with all currencies	126	126	80	80
10% decrease in US dollar exchange rate compared with all currencies	(127)	(127)	(80)	(80)

Directors' responsibility statement

The Directors¹ are required to prepare the condensed consolidated financial statements on a going concern basis unless it is not appropriate. They are satisfied that the Group has the resources to continue in business for the foreseeable future and that the financial statements continue to be prepared on a going concern basis.

The Directors confirm that to the best of their knowledge:

• the financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the UK, IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board ('IASB') and IAS 34 'Interim Financial Reporting' as adopted by the European Union, and the Disclosure Guidance and Transparency Rules ('DTR') sourcebook of the UK's Financial Conduct Authority;

• this Interim Report 2022 gives a true, fair, balanced and understandable view of the assets, liabilities, financial position and profit or loss of the Company; and

• this Interim Report 2022 includes a fair review of the information required by:

-  DTR 4.2.7R, being an indication of: important events that have occurred during the first six months of the financial year ending 31 December 2022 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

-  DTR 4.2.8R, being: related party transactions that have taken place in the first six months of the financial year ending 31 December 2022, which have materially affected the financial position or performance of HSBC during that period; and any changes in the related parties transactions described in the Annual Report and Accounts 2021 that could materially affect the financial position or performance of HSBC during the first six months of the financial year ending 31 December 2022.

On behalf of the Board

Mark E Tucker

Group Chairman

1 August 2022

 1   Mark Tucker*, Geraldine Buckingham^†, Rachel Duan^†, Carolyn Julie Fairbairn^†, James Anthony Forese^†, Steven Guggenheimer^†,
José Antonio Meade Kuribreña^†, Eileen K Murray^†, David Nish^†, Noel Quinn, Ewen Stevenson and Jackson Tai^† .

*Non-executive Group Chairman ^† Independent non-executive Director 

 

END

 

 

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