Standard Chartered PLC - Additional Financial information
The following pages provide additional information related to the announcement results for the year ended 31 December 2017.
TABLE OF CONTENTS
Risk review and Capital review |
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Principal uncertainties |
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Enterprise Risk Management Framework |
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Principal risks |
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Risk profile |
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Capital review |
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Statement of directors' responsibilities |
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Financial statements |
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Consolidated income statement |
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Consolidated statement of comprehensive income |
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Consolidated balance sheet |
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Consolidated statement of changes in equity |
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Cash flow statement |
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Notes to the financial statements |
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Shareholder information |
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Standard Chartered PLC - Risk review and Capital review
PRINCIPAL UNCERTAINTIES
In 2017 we undertook a thorough review of our principal uncertainties, using the approach described in the Enterprise Risk Management Framework section. The key results of the review are detailed below
Key changes to our principal uncertainties
The following items have been removed as principal uncertainties:
• 'Evolving financial crime and fraud' and 'cyber crime'. These form part of our Principal Risk Types which we control and mitigate through distinct risk type frameworks, policies and Board-approved Risk Appetite
• 'Operational performance eroding confidence in the Group' as the Group has a clear Strategic Plan on which it has now started to deliver
The following items have been added as new principal uncertainties:
• 'Climate-related physical risks and transition risks'. There is growing stakeholder interest in these risks, including investors, regulators and civil society, and it is anticipated that climate change will inform future regulatory approaches
• 'New technologies and digitisation. The rapid development of new technologies and digitisation, accompanied by changes in consumer behaviour, could disrupt many elements of banking
Our list of principal uncertainties, based on our current knowledge and assumptions, is set out below:
Geopolitical considerations (Risk ranked according to severity)
Principal |
Risk trend since 2016 |
Context |
How these are mitigated/next steps |
Increase 1 Potential impact: Likelihood: Velocity of change: Steady |
ó |
• Protectionist policies driven by nationalist agendas could disrupt established supply chains and invoke retaliatory actions. Countries could introduce tariffs on goods and services available domestically or from other economies. Such actions would impact global trade • Several authorities in our footprint continue to adopt stringent standards on outsourcing or offshoring activities and there is an increased focus on priority sector lending requirements • The Group has a significant revenue stream from supporting cross-border trade and material off-shore support operations |
• We assessed the impact of a severe world trade downturn triggered by rising protectionism as part of our 2017 stress tests. The insights gained as part of these were reviewed through internal governance and we continue to build measures to link stress test outcomes to business objectives in order to mitigate potential downside risk from trade disruption |
Korean peninsula geopolitical tensions 2 Potential impact: Likelihood: Velocity of change: Fast |
ñ |
• Tensions could exacerbate weak investment spending and low growth in the developed world • The Group has a material presence in South Korea and nearby countries |
• Country level crisis management and contingency plans are in place for South Korea focused on the business activities, credit risk, liquidity and capital risk, operations and employee safety. We have enhanced the process for daily monitoring of key indicators and actively review geopolitical risk levels • A North Korea stress scenario is run weekly as part of the global stress test of market and traded risk • We are also assessing contagion risks arising from Korean geopolitical risk levels and associated contingency plans • Regular stress testing on exposures to South Korea and Japan are conducted to support any required action plans |
Middle East political situation 3 Potential impact: Likelihood: Velocity of change: Steady |
ó |
• In June 2017, the governments of Kingdom of Saudi Arabia, Bahrain, United Arab Emirates and Egypt announced that they were severing diplomatic ties with Qatar escalating tensions in the Middle East region • A number of prominent Saudi Arabian princes, government ministers, and business people were arrested in Saudi Arabia in November 2017 • A decision by the US president to recognise Jerusalem as the capital of Israel, and start preparations for the US to move its embassy from Tel Aviv, has the potential to further increase tensions across the Middle East • The Group has a material presence across the region |
• The impact of the diplomatic crisis on our portfolio has been limited so far, however we are closely monitoring a small number of clients which have been affected. • Tightened controls over transactions and general governance have been put in place • Potential for further event risks is constantly monitored at country and regional level |
Post-Brexit implications 4 Potential impact: Likelihood: Velocity of change: Moderate |
ó |
• The outcome of the UK referendum to leave the European Union (Brexit) could have implications on economic conditions globally because of changes in policy direction, which might in turn influence the economic outlook for the eurozone. The uncertainties linked to the Brexit negotiations process could delay corporate investment decisions until there is more clarity • Both the EU and UK have indicated their support for a transition period following the UK's formal departure from the EU in March 2019, although it is not clear how long this period will be for • The full implications of Brexit will only be known over the next 12-18 months as negotiations progress. • The first order impact of Brexit on the Group is limited given the nature of the Group's activity |
• We continue to assess and manage post-Brexit risk and the practical implications through the Brexit Executive Committee chaired by a Management Team Member • We are setting up a new European Union (EU) subsidiary and optimising our EU structure to mitigate any potential impact to our clients, our staff and the Group as a result of Brexit, including loss of EU passporting rights |
Macroeconomic considerations
Principal |
Risk trend since 2016 |
Context |
How these are mititgated/next steps |
Moderation 5 Potential impact: Likelihood: Velocity of change: Steady |
ó |
• Asia remains the main driver of global growth supported by internal drivers, led by China • Debt levels in China and the pace of transition to more consumption-led growth remain a concern • Highly trade oriented economies such as Hong Kong and Singapore with close ties to China would weaken in the event of an economic slowdown in China. Regional supply chain economies such as Korea, Taiwan and Malaysia would be impacted from a fall in economic activity • Greater China and South East Asian economies remain key strategic regions for the Group |
• As part of our stress tests, severe stress in the global economy associated with a sharp slowdown in China was assessed in 2017 and a refreshed scenario will be run in 2018 • Exposures that result in material loan impairment charges and risk-weighted assets inflation under stress tests are regularly reviewed and actively managed • A global downturn with shocks concentrated on China and countries with close trade links with China is one of the regular market and traded risk stress tests |
Sharp interest rate rises and asset price corrections 6 Potential impact: Likelihood: Velocity of change: Moderate |
ñ |
• Significant increases in interest rates from the historically low levels currently prevailing in many markets could have an impact on the highly leveraged corporate sector, as well as countries with high current account deficits or high foreign currency share of domestic debt. Property, commodities and asset prices would also come under pressure • Such sharp increases in interest rates could adversely impact the credit quality of the Group's exposures, and our ability to reprice these exposures in response to changes in the interest rate environment |
• We monitor on a centralised basis the contractual and behavioural interest rate risk exposures, and manage these within a clearly defined risk management framework and Risk Appetite • In many of our markets we have implemented loan-to-value and debt-to-income restrictions in response to rising property prices • The Group has been actively managing its commodities portfolio, including energy, metals and mining exposures over the last few years. For new business, we are focused on deals that are resilient to further price volatility • Relevant scenarios will be run as part of our stress test programme in 2018 |
Environmental and social considerations
Principal |
Risk trend since 2016 |
Context |
How these are mitigated/next steps |
Climate- 7 Potential impact: Likelihood: Velocity of change: Steady |
NEW |
• National governments have, through the UN Framework Convention on Climate Change (UNFCCC) process and Paris Agreement, made commitments to enact policies which support the transition to a lower-carbon economy, limiting global warming to less than 2ºC and therefore mitigating the most severe physical effects of climate change. • Such policies may however have significant impacts, for example, on energy infrastructure developed in our markets, and thus present 'transition' risks for our clients • Conversely, if governments fail to enact policies which limit global warming, the Group's markets are particularly susceptible to 'physical' risks of climate change such as droughts, floods, sea level change and average temperature change • There is growing stakeholder interest in these risks, including investors, regulators and civil society |
• We are developing an approach for assessing energy utilities clients' power generation assets against a range of physical and transition risks, under multiple climate scenarios and a range of time horizons. We are considering how we extend this to other sectors in 2018 • We have, over time, reduced our Risk Appetite to carbon-intensive sectors by introducing technical standards for coal-fired power plants, and restrictions on new coal mining clients and projects. These standards are reviewed on a regular basis • We have made a public commitment to fund and facilitate $4 billion toward clean technology between 2016 and 2020 |
Legal considerations
Principal |
Risk trend since 2016 |
Context |
How these are mitigated/next steps |
Regulatory reviews and investigations, legal proceedings 8 Potential impact: Likelihood: Velocity of change: Moderate |
ó |
• The Group has been, and may continue to be, subject to regulatory actions, reviews, requests for information (including subpoenas and requests for documents) and investigations across our markets, the outcomes of which are generally difficult to predict and could be material to the Group • The Group is also party to legal proceedings from time to time, which may give rise to financial losses or adversely impact our reputation in the eyes of our customers, investors and other stakeholders • In recent years, authorities have exercised their discretion to impose increasingly severe penalties on financial institutions that have been accused of violated laws and regulations, and there can be no assurance that future penalties will not be of increased severity |
• We have invested in improving compliance controls, including increasing the capacity and capabilities of compliance resources, enhancing systems and controls, and implementing remediation programmes (where relevant) • We are cooperating with all relevant ongoing reviews, requests for information and investigations |
1 Physical risk refers to the risk of increased extreme weather events while transition risk refers to the risk of changes to market dynamics due to governments' responses to climate change
Principal |
Risk trend since 2016 |
Context |
How these are mitigated/next steps |
Regulatory changes and tax reforms 9 Potential impact: Likelihood: Velocity of change: Fast |
ó |
• Revised rules have been defined in many key areas of regulation that could impact our business model and how we manage our capital and liquidity. In particular, the upcoming Basel III proposed changes to capital calculation methodology for credit and operational risk, revised framework for Securitisation and Credit Valuation Adjustment (CVA) risk, Fundamental Review of the Trading Book, Large Exposures and implementation of Margin Reforms, and Bank Recovery and Resolution Directive for Total Loss Absorbing Capacity (TLAC) • Increased global efforts in detecting tax evasion through the use of offshore bank accounts and facilitating cross-border tax compliance require the Group to comply with five extraterritorial client tax information regimes. These tax regimes impact the jurisdictions in which the Group operates, as well as all client segments and products • There may be implications on cross-border tax compliance for our clients following the recent US tax reform • There is increasing regulatory scrutiny and emphasis on local responsibilities of remotely booked business. The degree of reliance on global controls is reducing, and the focus is on local controls and governance |
• We actively monitor regulatory initiatives across our footprint to identify any potential impact and change to our business model • With respect to Basel III: - We are closely monitoring developments, and conducting sensitivity analyses on the potential headwinds and opportunities - We continuously review a menu of prospective capital accretive actions, along with impact to the Group Strategy and financial performance • We have established specific programmes to ensure effective and efficient implementation of changes required by new or existing tax regulations and reforms • Relevant product areas have implemented project management or programme oversight to review and improve the end-to-end process, including oversight and accountability, policies and standards, transparency and management information, permission and controls, legal-entity level limits and training |
Technological considerations
Principal |
Risk trend since 2016 |
Context |
How these are mitigated/next steps |
New technologies and digitisation 10 Potential impact: Likelihood: Velocity of change: Moderate |
NEW |
• New technologies, accompanied by changes in consumer behaviour and digitisation, are likely to significantly disrupt both, the basis of competition and the economics of many elements of banking • The banking landscape for retail banking, for example, is witnessing a significant change where start-ups, Fintechs and existing payment players are able to offer traditional retail banking products and services in real-time with competitive pricing. In addition, regulators are also encouraging Fintechs and start-ups. The impact to the banking sector arises by way of migration of clients and balances to competition or Fintechs due to a more user-friendly client experience • There is a risk of business model disruption arising from inability or failure of the bank to adapt to changing client and regulatory requirements or expectations due to rapidly evolving product and technology innovation |
• We continuously monitor developments in the technology space which affect the banking sector, to keep abreast of the latest trends and announced partnerships. The Management Team has increased its focus on business innovation, given that a large driver of uncertainty is the possible disruption to banking from new entrants and the blurring of barriers between sectors • The Group continuously scans the market for innovative companies that can bring value to the bank through collaborations. Our Exellerator (the Group's innovation lab) in Singapore and Hong Kong engages with start-ups and established companies that can bring specific capabilities to support the Bank with our digitisation agenda. Our SC Studios in San Francisco identifies companies that we believe can bring significant advancements to our business • We also participate in industry-wide initiatives, such as the Ripple Consortium, to allow us to build our own capabilities and be able to capitalise on opportunities, should such technologies 'take-off' |
ENTERPRISE RISK MANAGEMENT FRAMEWORK
Risk management is essential to consistent and sustainable performance for all of our stakeholders and is therefore a central part of the financial and operational management of the Group. The Group adds value to clients and therefore the communities in which they operate and generates returns for shareholders by taking and managing risk
Key changes
• Refreshing our risk culture and Risk Appetite Statements for our Principal Risk Types
• Changing our Principal Risk Types including:
- Elevating Conduct, Compliance, Financial crime and Information and cyber security to Principal Risk Types
- Broadening the scope of Country cross border risk to cover Country risk
- Pension risk is now a risk sub-type of Market risk
- Integrating Strategy risk as part of the overall Framework. See section on Strategic Risk Management on the right which explains how the Group approaches Strategic risk
- Consolidating Capital and Liquidity risk types into one Principal Risk Type
• Strengthening risk assessment by introducing a dynamic risk identification process
• Further clarity on accountability and responsibility by strengthening of the three lines of defence and alignment with the objectives of the Senior Managers' Regime
Through our Enterprise Risk Management Framework we manage enterprise-wide risks, with the objective of maximising risk-adjusted returns while remaining within our risk appetite.
In 2017 we completed a thorough review of our Enterprise Risk Management Framework and the following key changes were approved by the Board:
The new revised Enterprise Risk Management Framework is effective from 22 January 2018 and will be further embedded in 2018.
Risk culture
The Group's risk culture provides guiding principles for the behaviours expected from our people when managing risk. The Board has approved a risk culture statement that encourages the following behaviours and outcomes:
• An enterprise level ability to identify and assess current and future risks, openly discuss these and take prompt actions
• The highest level of integrity by being transparent and proactive in disclosing and managing all types of risks
• A constructive and collaborative approach in providing oversight and challenge, and taking decisions in a timely manner
• Everyone to be accountable for their decisions and feel safe using their judgement to make these considered decisions
We acknowledge that banking inherently involves risk-taking and undesired outcomes will occur from time to time; however, we shall take the opportunity to learn from our experience and formalise what we can do to improve. We expect managers to demonstrate a high awareness of risk and control by self-identifying issues and managing them in a manner that will deliver lasting change.
Strategic risk management
The Group approaches strategic risk management by:
• Including in the strategy review process an impact analysis on the risk profile from the growth plans, strategic initiatives and business model vulnerabilities with the aim of proactively identifying and managing new risks or existing risks that need to be reprioritised
• Including in the strategy review process a confirmation that growth plans and strategic initiatives can be delivered within the approved Risk Appetite and/or proposing additional Risk Appetite for Board consideration
• Validating the Corporate Plan against the approved or proposed Risk Appetite Statement to the Board. The Board approves the strategy review and the five year Corporate Plan with a confirmation from the Group Chief Risk Officer that it is aligned with the Enterprise Risk Management Framework and the Group Risk Appetite Statement where projections allow
Roles and responsibilities
Three Lines of Defence model
Roles and responsibilities for risk management are defined under a Three Lines of Defence model. Each line of defence has a specific set of responsibilities for risk management and control as shown in the following table.
Senior Managers' Regime
Roles and responsibilities under the revised Enterprise Risk Management Framework are aligned to the objectives of the Senior Managers' Regime. The Group Chief Risk Officer is responsible for the overall development and maintenance of the Group's Enterprise Risk Management Framework and for identifying material risk types to which the Group may be potentially exposed. The Group Chief Risk Officer delegates effective implementation of the Principal Risk Type frameworks to risk framework owners who provide Second Line of Defence oversight for the Principal Risk Types.
Lines of Defence |
Definition |
Key responsibilities include |
1st |
The businesses and functions engaged in or supporting revenue generating activities that own and manage risks |
• Identify, monitor and escalate risks and issues to the Second Line and senior management1 and promote a healthy risk culture and good conduct • Manage risks within Risk Appetite and ensure laws and regulations are being complied with • Ensure systems meet risk data aggregation, risk reporting and data quality requirements set by the Second Line |
2nd |
The control functions independent of the First Line that provide oversight and challenge of risk management to provide confidence to the Group Chief Risk Officer, the management team and the Board |
• Identify, monitor and escalate risks and issues to the Group Chief Risk Officer, senior management1 and the Board and promote a healthy risk culture and good conduct • Oversee and challenge First Line risk taking activities and review First Line risk proposals • Propose Risk Appetite to the Board, monitor and report adherence to Risk Appetite and intervene to curtail business if it is not in line with existing or adjusted Risk Appetite • Set risk data aggregation, risk reporting and data quality requirements |
3rd |
The independent assurance provided by the Group Internal Audit Function, of the effectiveness of controls that support First Line's risk management of business activities, and the processes maintained by the Second Line. Its role is defined and overseen by the Audit Committee of the Board |
• Independently assess whether management has identified the key risks in the business and whether these are reported and governed in line with the established risk management processes • Independently assess the adequacy of the design of controls and their operating effectiveness |
1 Senior management in this table refers to individuals designated as Senior Management Functions (SMF) under the FCA and PRA Senior Managers' Regime (SMR)
The Risk and Compliance function
The Group Chief Risk Officer directly manages the Risk and Compliance function that is separate and independent from the origination, trading and sales functions of the businesses. The role of the function is:
• To maintain the Enterprise Risk Management Framework, ensuring it remains appropriate to the Group's activities, is effectively communicated and implemented across the Group, and to administer related governance and reporting processes
• To uphold the overall integrity of the Group's risk/return decisions, and in particular to ensure that risks are properly assessed, that risk/return decisions are made transparently on the basis of this proper assessment, and that risks are controlled in accordance with the Group's standards and Risk Appetite
• To oversee and challenge the management of credit, country, market, operational, reputational, compliance, conduct, information and cyber security and financial crime risk types
The independence of the Risk and Compliance function is to ensure that the necessary balance in risk/return decisions is not compromised by short-term pressures to generate revenues.
In addition, the Risk and Compliance function is a centre of excellence that provides specialist capabilities of relevance to risk management processes in the broader organisation.
Risk Appetite and profile
We recognise the following constraints which determine the risks that we are willing to take in pursuit of our strategy and the development of a sustainable business:
• Risk capacity is the maximum level of risk the Group can assume, given its current capabilities and resources, before breaching constraints determined by capital and liquidity requirements and internal operational capability (including but not limited to technical infrastructure, risk management capabilities, expertise), or otherwise failing to meet the expectations of regulators and law enforcement agencies
• Risk Appetite is defined by the Group and approved by the Board. It is the maximum amount and type of risk the Group is willing to assume in pursuit of its strategy. Risk Appetite cannot exceed risk capacity
The Board has approved a Risk Appetite Statement, which is underpinned by a set of financial and operational control parameters known as Risk Appetite metrics and associated thresholds. These directly constrain the aggregate risk exposures that can be taken across the Group. The Risk Appetite Statement is supplemented by an overarching statement outlining the Group's Risk Appetite Principles.
Risk Appetite Principles
The Group Risk Appetite is in accordance with our overall approach to risk management and our risk culture. We follow the highest ethical standards required by our stakeholders and ensure a fair outcome for our clients, the effective operation of financial markets, while at the same time meeting expectations of regulators and law enforcement agencies. We set our Risk Appetite to enable us to grow sustainably and to avoid shocks to earnings or our general financial health and to manage our reputational risk in a way that does not materially undermine the confidence of our investors and all internal and external stakeholders.
Risk Appetite Statement
The Group will not compromise adherence to its Risk Appetite in order to pursue revenue growth or higher returns.
Risk control tools such as exposure limits, underwriting standards, scorecard cut-offs and policies and other operational control parameters are used to keep the Group's risk profile within risk appetite (and therefore also risk capacity). The Group's risk profile is its overall exposure to risk at a given point in time, covering all applicable risk types. Status against Risk Appetite is reported to the Board Risk Committee and the Group Risk Committee, including the status of breaches and remediation plans where applicable.
The Group Risk Committee, the Group Financial Crime Risk Committee, the Group Operational Risk Committee and the Group Asset and Liability Committee are responsible for ensuring that our risk profile is managed in compliance with the Risk Appetite set by the Board. The Board Risk Committee and the Board Financial Crime Risk Committee (for Financial Crime Compliance) advise the Board on the Risk Appetite Statement and monitor the Group's compliance with it.
Risk identification and assessment
Identification and assessment of potential adverse risk events is an essential first step in managing the risks of any business or activity. To ensure consistency in communication we use Principal Risk Types to classify our risk exposures. Nevertheless, we also recognise the need to maintain an overall perspective since a single transaction or activity may give rise to multiple types of risk exposure, risk concentrations may arise from multiple exposures that are closely correlated, and a given risk exposure may change its form from one risk type to another.
To facilitate the above, the Group maintains a dynamic risk scanning process with inputs on the internal and external risk environment, as well as potential threats and opportunities from the business and client perspectives.
Stress testing
The objective of stress testing is to support the Group in assessing that it:
• Does not have a portfolio with excessive concentrations of risk that could produce unacceptably high losses under severe but plausible scenarios
• Has sufficient financial resources to withstand severe but plausible scenarios
• Has the financial flexibility to respond to extreme but plausible scenarios
• Understands the Group's key business model risks, considers what kind of event might crystallise those risks - even if extreme with a low likelihood of occurring - and identifies, as required, actions to mitigate the likelihood or the impact
Enterprise stress tests include Capital and Liquidity Adequacy Stress Tests including in the context of recovery and resolution, and stress tests that assess scenarios where our business model becomes unviable, such as reverse stress tests.
Stress tests are performed at Group, country, business and portfolio level. Bespoke scenarios are applied to our market and liquidity positions as described in the sections Market risk and Liquidity and funding risk. In addition to these, our stress tests also focus on the potential impact of macroeconomic, geopolitical and physical events on relevant regions, client segments and risk types.
The Board delegates approval of stress tests to the Board Risk Committee, who reviews the recommendations from the Stress Testing Committee. The Stress Testing Committee is appointed by the Group Risk Committee to review and challenge the stress test scenarios, assumptions and results.
Based on the stress test results, the Group Chief Risk Officer and Group Chief Financial Officer can recommend strategic actions to ensure that the Group Strategy remains within the Board-approved Risk Appetite.
The individual Principal Risk Types' Risk Appetite Statements along with the key associated Risk Appetite metrics approved by the Board are set out in the Principal Risks section
Principal Risk Types
Principal risks are those risks that are inherent in our strategy and our business model. These risks are managed through distinct Risk Type Frameworks (RTF). The RTFs are approved by the Group Chief Risk Officer. The principal risks and associated Risk Appetite Statements are approved by the Board.
As part of the overall risk management framework review in 2017 we also reviewed our Principal Risk Types. The table below shows the current Group's principal risks.
Principal Risks Types |
Definition |
Credit risk |
• Potential for loss due to the failure of a counterparty to meet its agreed obligations to pay the Group |
Country risk |
• Potential for default or losses due to political or economic events in a country |
Market risk |
• Potential for loss of economic value due to adverse changes in financial market rates or prices |
Capital & liquidity risk |
• Capital: potential for insufficient level or composition of capital to support our normal activities • Liquidity: potential for failure where we may not have sufficient stable or diverse sources of funding or financial resources to meet our obligations as they fall due |
Operational risk |
• Potential for loss resulting from inadequate or failed internal processes and systems, human error, or from the impact of external events |
Reputational risk |
• Potential for loss of earnings or market capitalisation as a result of stakeholders taking a negative view of the organisation or its actions |
Compliance |
• Potential for regulatory sanctions or loss from a failure on our part to comply with laws or regulations |
Conduct |
• Potential regulatory sanctions or loss from a failure on our part to abide by the Group's Conduct Risk Management Framework |
Information and cyber security |
• Potential for loss from a breach of confidentiality, integrity and availability of the Group's information systems and assets through cyber attack, insider activity, error or control failure |
Financial crime |
• Potential for legal or regulatory penalties, material financial loss or reputational damage resulting from the failure to comply with applicable laws and regulations relating to International Sanctions, Anti-Money Laundering and Anti-Bribery and Corruption |
Further details of our principal risks and how these are being managed are set out in the Principal Risks section
Executive and Board risk oversight
Overview
The Board has ultimate responsibility for risk management and is supported by the six Board-level committees. The Board approves the Enterprise Risk Management Framework based on the recommendation from the Board Risk Committee, which also recommends the Group Risk Appetite Statement other than financial crime risk. Financial crime risk related Risk Appetite is reviewed and recommended to the Board by the Board Financial Crime Risk Committee.
The Board appoints the Standard Chartered Bank Court to maintain a sound system of internal control and risk management. The Group Risk Committee, through its authority received from the Court, oversees effective implementation of the Enterprise Risk Management Framework. The Group Chief Risk Officer, as Chair of the Group Risk Committee, approves the use of sub-committees to support the Group Risk Committee overseeing risk at Business, Regional, Country, or Principal Risk Type level.
The Board Risk Committee receives regular reports on risk management, including the Group's portfolio trends, policies and standards, stress testing, liquidity and capital adequacy, and is authorised to investigate or seek any information relating to an activity within its terms of reference. The Board Risk Committee also conducts deep dive reviews on a rolling basis of different sections of the consolidated risk information report that is provided at each scheduled committee meeting.
Group Risk Committee
The Group Risk Committee is responsible for ensuring the effective management of risk throughout the Group in support of the Group's strategy. The Group Chief Risk Officer chairs the Group Risk Committee, whose members are drawn from the management team. The Committee determines the overall Enterprise Risk Management Framework for the Group, including the delegation of any part of its authorities to appropriate individuals or properly constituted sub-committees.
The Committee requests and receives information to fulfil its governance mandates relating to the risks to which the Group is exposed. As with the Board Risk Committee, the Group Risk Committee and Group Asset and Liability Committee receive reports that include information on risk measures, Risk Appetite metrics and thresholds, risk concentrations, forward-looking assessments, updates on specific risk situations and actions agreed by these committees to reduce or manage risk.
Group Risk Committee sub-committees
The Corporate & Institutional Banking Risk Committee (CIBRC) covers risks arising from activities in Corporate & Institutional Banking globally and in the Europe & Americas region as well as Group-wide Market and Traded Credit Risk. The CIBRC is chaired by the Chief Risk Officer, Corporate & Institutional Banking.
The Private Banking Risk Committee covers risks arising in Private Banking globally including wealth management. It is chaired by the Chief Risk Officer, Commercial Banking and Private Banking.
The three regional risk committees, chaired by the Chief Risk Officer for each respective region, cover risks arising from their respective region including Commercial and Retail Banking.
The Group Reputational Risk Committee oversees the implementation of the reputational risk framework and takes decisions on material and thematic reputational risk issues.
The Group Operational Risk Committee, chaired by the Group Head, Operational Risk, ensures effective management of operational risk throughout the Group.
The Group Financial Crime Risk Committee, chaired by the Group Chief Risk Officer, provides oversight of the effectiveness of the Group's policies, procedures, systems, controls and assurance arrangements designed to identify, assess, manage, monitor, prevent and/or detect money laundering, non-compliance with sanctions, bribery, corruption and tax crime by third parties.
The Stress Testing Committee, chaired by the Global Head, Enterprise Risk Management, ensures the effective management of capital and liquidity related enterprise-wide stress testing in line with the Group's enterprise-wide stress testing policy and applicable regulatory requirements. The Committee also enforces model governance for Credit risk, Traded Credit risk and Market risk throughout the Group in line with Risk Appetite and in support of Group strategy. In addition, the Committee approves and provides oversight over stress testing models pertaining to Credit risk, Traded Credit and Market risk, Liquidity risk and valuation models.
The Group Information Management Governance Committee, chaired by the Group Chief Information Officer, ensures that an effective Group strategy and approach to data quality management framework, data quality management strategy, priorities, standards and metrics are in place and maintained taking into account the information-related requirements of internal and external stakeholders.
The IFRS 9 Impairment Committee, chaired by the Global Head, Enterprise Risk Management, ensures the effective management of expected credit loss computation as well as stage allocation of financial assets for quarterly financial reporting within the authorities set by the Group Risk Committee.
Group Asset and Liability Committee
Members of the Group Asset and Liability Committee are drawn principally from the Court. The Group Asset and Liability Committee is chaired by the Group Chief Financial Officer. The Group Asset and Liability Committee is responsible for determining the Group's approach to balance sheet management and ensuring that, in executing the Group's strategy, the Group operates within internally approved Risk Appetite and external requirements relating to capital, liquidity and leverage risk. It is also responsible for policies relating to balance sheet management, including management of our liquidity, capital adequacy and structural foreign exchange, and interest rate exposure and tax exposure.
Combined United States Operations Risk Committee
The Combined United States Operations Risk Committee was established in 2016 to comply with the Dodd-Frank Act section 165 Enhanced Prudential Standards (EPS Rules). The EPS Rules legislated a number of enhanced obligations on the US operations commensurate with its structure, risk profile, complexity, activities and size. The Committee receives its authority from the Court of Standard Chartered Bank and is chaired by the Group Chief Risk Officer with membership drawn from the Court of Standard Chartered Bank and one iNED of Standard Chartered PLC. Its responsibilities are drawn from the EPS Rules and pertain to liquidity, risk governance and oversight.
PRINCIPAL RISKS
We manage and control our Principal Risk Types through distinct risk type frameworks, policies and Board-approved Risk Appetite
Credit risk
The Group defines Credit risk as the potential for loss due to the failure of a counterparty to meet its agreed obligations to pay the Group
Risk Appetite Statement
The Group manages its credit exposures following the principle of diversification across products, geographies, client segments and industry sectors
Roles and responsibilities
The Credit Risk Framework for the Group is set by the Chief Risk Officers for the Corporate & Institutional Banking, Commercial Banking and Private Banking, and Retail Banking segments. The Credit Risk function is the second line control function that performs independent challenge, monitoring and oversight of the credit risk management practices of the business and functions engaged in or supporting revenue generating activities which constitute the first line of defence. The first and second lines of defence are supported by the organisation structure, job descriptions and delegated authorities. Additionally, to ensure that credit risks are properly assessed and are transparent, credit decisions are controlled in accordance with the Group's Risk Appetite and credit policies and procedures. All segment Credit Officers in Group, regional and country roles are accountable to the segment Chief Risk Officers for credit risk management strategy, policy and performance.
Mitigation
Group-wide credit policies and standards are established and approved by the Group Risk Committee or individuals with authority delegated by the Risk Authorities policy. The Group Risk Committee oversees the delegation of credit approval and loan impairment provisioning authorities. The principles for the delegation, review and maintenance of credit approval authorities are defined in the Risk Authorities policy. In addition, there are other Group-wide policies integral to credit risk management such as those relating to stress testing, risk measurement and impairment provisioning.
Policies and procedures specific to each customer segment are established by individuals authorised via the Risk Authorities policy. These are consistent with our Group-wide credit policies, but are more detailed and adapted to reflect the different risk characteristics across customer segments. Policies are regularly reviewed and monitored to ensure they remain effective and consistent with the risk environment and Risk Appetite.
The Group credit policies set out the key considerations for eligibility, enforceability and effectiveness of credit risk mitigation arrangements. Potential credit losses from any given account, client or portfolio are mitigated using a range of tools such as collateral, netting agreements, credit insurance, credit derivatives and guarantees. The reliance that can be placed on risk mitigants is carefully assessed in light of issues such as legal certainty and enforceability, market valuation, correlation and counterparty risk of the protection provider. The requirement for risk mitigation is, however, not a substitute for the ability to pay, which is the primary consideration for any lending decisions.
Collateral types that are eligible as risk mitigants include: cash; account receivables; residential, commercial and industrial property; fixed assets such as motor vehicles, aircraft, plant and machinery; marketable securities; commodities; risk participations; guarantees; derivatives; credit insurance; and standby letters of credit. Physical collateral, such as property, fixed assets and commodities, and financial collateral must be independently valued and an active secondary resale market must exist. The collateral must be valued prior to drawdown and regularly thereafter as required. The valuation frequency is at minimum annual, and more frequent valuations are driven by the level of price volatility of each type of collateral and the nature of the underlying product or risk exposure. For financial collateral to be eligible for recognition, the collateral must be sufficiently liquid, and its value over time sufficiently stable, to provide appropriate certainty as to the credit protection achieved. Risk mitigation benefits may be reduced or removed where the collateral value is not supported by a recent independent valuation.
Documentation must be held to enable the Group to realise the collateral without the cooperation of the obligor in the event that this is necessary. For certain types of lending, typically mortgages or asset financing where a first charge over the risk mitigant must be attained, the right to take charge over physical assets is significant in terms of determining appropriate pricing and recoverability in the event of default. Physical collateral is required to be insured at all times against risk of physical loss or damage.
Collateral values are, where appropriate, adjusted to reflect current market conditions, the probability of recovery and the period of time to realise the collateral in the event of liquidation. Stress tests are performed on changes in collateral values for key portfolios to assist senior management in managing the risks in those portfolios. The Group also seeks to diversify its collateral holdings across asset classes and markets.
Where guarantees, credit insurance, standby letter of credit or credit derivatives are used as credit risk mitigation, the creditworthiness of the protection provider is assessed and monitored using the same credit approval process applied to the obligor. The main types of guarantors include banks, insurance companies, parent companies, governments and export credit agencies.
Governance Committee Oversight
At a Board level, the Board Risk Committee oversees the effective management of Credit risk and the Board Audit Committee approves the Group Impairment provisioning policy and reviews judgements made by Management on key accounting issues and significant accounting estimates.
At the executive level, the Group Risk Committee delegates the authority for the management of credit risk to several committees - the Corporate & Institutional Banking Risk Committee, Private Banking Risk Committee as well as the regional risk committees for Greater China and North Asia, ASEAN and South Asia and Africa and Middle East. These committees are responsible for overseeing the credit risk profile of the Group within the respective business areas and regions. Meetings are held regularly and the committees monitor all material credit risk exposures, key internal developments and external trends, and ensure that appropriate action is taken.
In addition, there is a Credit Approval Committee and an Underwriting Committee.The Credit Approval Committee, appointed by the Group Risk Committee, reviews and approves major credit exposures to individual counterparties, groups of connected counterparties and portfolios of retail exposures. The Underwriting Committee, appointed by the Corporate & Institutional Banking Risk Committee, approves limits for the underwriting of securities to be held for sale, and ensures effective risk management of underwritten debt securities and syndicated loans.
Decision making authorities and delegation
Major credit exposures to individual counterparties, groups of connected counterparties and portfolios of retail exposures are reviewed and approved by the Credit Approval Committee.
All other credit approval authorities are delegated by the Group Risk Committee to individuals based both on their judgement and experience. These individuals further delegate credit authorities to individual credit officers by applying Group Risk Committee approved delegated Credit Authorities matrices by customer type or portfolio. These matrices establish the maximum limits that the delegated credit officers are authorised to approve, based on risk-adjusted scales which take account of the estimated maximum expected loss from a given customer or portfolio. In Corporate & Institutional Banking, Commercial & Private Banking, the individuals delegating the credit authorities perform oversight by reviewing on a monthly basis a sample of the limit applications approved by the delegated credit officers. In Retail Banking, credit decisions are subject to periodic quality control assessment and assurance checks.
All credit proposals are subject to a robust credit risk assessment. It includes a comprehensive evaluation of the client's credit quality, including willingness, ability and capacity to repay. The primary lending consideration is based on the client's credit quality and the repayment capacity from operating cashflows for counterparties; and personal income or wealth for individual borrowers. The risk assessment gives due consideration to the client's liquidity and leverage position. Where applicable, the assessment includes a detailed analysis of the credit risk mitigation arrangements to determine the level of reliance on such arrangements as the secondary source of repayment in the event of a significant deterioration in a client's credit quality leading to default. Lending activities that are considered as higher risk or non-standard are subjected to stricter minimum requirements and require escalation to a senior credit officer or authorised body.
Monitoring
We regularly monitor credit exposures, portfolio performance, and external trends that may impact risk management outcomes.
Internal risk management reports that are presented to risk committees contain information on key political and economic trends across major portfolios and countries; portfolio delinquency and loan impairment performance.
Credit risk committees meet regularly to assess the impact of external events and trends on the Group's credit risk portfolios and to define and implement our response in terms of the appropriate changes to portfolio shape, portfolio and underwriting standards, risk policy and procedures.
Clients or portfolios are subjected to additional review when they display signs of actual or potential weakness; for example, where there is a decline in the client's position within the industry, financial deterioration, a breach of covenants, non-performance of an obligation within the stipulated period, or there are concerns relating to ownership or management.
Such accounts and portfolios are subjected to a dedicated process overseen by the Credit Issues Committees in the relevant countries where client account strategies and credit grades are re-evaluated. In addition, remedial actions are agreed and monitored. Remedial actions include, but are not limited to, exposure reduction, security enhancement, exiting the account or immediate movement of the account into the control of Group Special Assets Management, our specialist recovery unit for Corporate & Institutional Banking, Commercial Banking & Private Banking.
For Retail Banking exposures, portfolio delinquency trends are monitored continuously at a detailed level. Individual customer behaviour is also tracked and considered for lending decisions. Accounts that are past due or charged-off are subject to a collections or recovery process respectively, and managed independently by the Risk function. In some countries, aspects of collections and recovery activities are outsourced.
Credit rating and measurement
Risk measurement plays a central role, along with judgement and experience, in informing risk-taking and portfolio management decisions.
Since 1 January 2008, we have used the advanced internal ratings-based approach under the Basel II regulatory framework to calculate credit risk capital requirements.
A standard alphanumeric credit risk grade system for Corporate & Institutional Banking and Commercial Banking is used. The numeric grades run from 1 to 14 and some of the grades are further sub-classified. Lower numeric credit grades are indicative of a lower likelihood of default. Credit grades 1 to 12 are assigned to performing customers, while credit grade 13 and 14 are assigned to non-performing or defaulted customers. An analysis by credit quality of those loans that are neither past due nor impaired is set out in the Risk Profile section.
Retail Banking internal ratings-based portfolios use application and behaviour credit scores that are calibrated to generate a probability of default and then mapped to the standard alphanumeric credit risk grade system. We refer to external ratings from credit bureaus (where these are available); however, we do not rely solely on these to determine Retail Banking credit grades.
Advanced internal ratings-based models cover a substantial majority of our exposures and are used in assessing risks at a customer and portfolio level, setting strategy and optimising our risk return decisions. Material internal ratings-based risk measurement models are approved by the Stress Testing Committee on the recommendation of the Credit Model Assessment Committee. The Credit Model Assessment Committee approves all other internal ratings-based risk measurement models, with key decisions noted to the Stress Testing Committee. Prior to review by the Credit Model Assessment Committee, all internal ratings-based models are validated in detail by a model validation team which is separate from the teams that develop and maintain the models. Models undergo annual validation by the model validation team. Reviews are also triggered if the performance of a model deteriorates materially against predetermined thresholds during the ongoing model performance monitoring process which takes place between the annual validations.
Credit concentration risk
Credit concentration risk may arise from a single large exposure to a counterparty or a group of connected counterparties, or from multiple exposures across the portfolio that are closely correlated. Large exposure concentration risk is managed through concentration limits set by a counterparty or a group of connected counterparties based on control and economic dependence criteria. Risk Appetite metrics are set at portfolio level and monitored to control concentrations, where appropriate, by industry, specific products, tenor, collateralisation level, top 20 concentration and exposure to holding companies. Single name credit concentration thresholds are set by a Client Group depending on credit grade, and by customer segment. For concentrations that are material at a Group level, breaches and potential breaches are monitored by the respective governance committees and reported to the Group Risk and Board Risk Committees.
Traded products
Credit risk from traded products derives from the positive mark-to‑market value of the underlying instruments, and an additional component to cater for potential future market movements. This counterparty credit risk is managed within the Group's overall credit Risk Appetite for corporate and financial institutions. In addition to analysing potential future movements, the Group uses various single and multi-risk factor stress test scenarios to identify and manage counterparty credit risk across derivatives and securities financing transactions.
The Group uses bilateral and multilateral netting to reduce pre-settlement and settlement counterparty credit risk. Pre-settlement risk exposures are normally netted using bilateral netting documentation in legally approved jurisdictions. Settlement exposures are generally netted using Delivery versus Payments or Payment versus Payments systems. Master netting agreements are generally enforced only in the event of default. In line with International Accounting Standards (IAS) 32, derivative exposures are presented on a net basis in the financial statements only if there is a legal right to offset and there is intent to settle on a net basis or realise the assets and liabilities simultaneously.
In addition, the Group enters into credit support annexes (CSAs) with counterparties where collateral is deemed a necessary or desirable mitigant to the exposure. Further details on CSAs are set out in the Risk Profile section. The netting and collateral enforceability status of previously approved jurisdictions is periodically reviewed. This is undertaken as and when industry opinions are updated or where a change in the law or significant event in a relevant jurisdiction requires a re-assessment of the conclusions previously drawn under the existing opinion.
Wrong-way risk occurs when an exposure increase is coupled with a decrease in the credit quality of the obligor. Specifically, as the mark-to-market on a derivative contract or a repurchase agreement contract increases in favour of the Group, the driver of this mark-to-market change also reduces the ability of the counterparty to meet its payment, margin call or collateral posting requirements. The Group employs various policies and procedures to ensure that wrong-way risk exposures are identified, measured and managed.
Securities
The limits for the underwriting of securities to be held for sale are approved by the Underwriting Committee, under the authority of the Corporate & Institutional Banking Risk Committee. The limits contain the overall size of the securities inventory, the maximum holding period, the daily value at risk, the sensitivity to interest rate and credit spread moves. The Underwriting Committee approves individual proposals to underwrite new security issues for our clients.
Day-to-day credit risk management activities for traded securities are carried out by a specialist team within the Risk function whose activities include oversight and approval within the levels delegated by the Underwriting Committee. Issuer credit risk, including settlement and pre-settlement risk, and price risks are controlled by the Risk function. Where an underwritten security is held for a period longer than the target sell-down period, the final decision on whether to sell the position rests with the Risk function.
Loan impairment
A loan is impaired when we assess that we will not recover a portion of the contractual cashflows. Impaired loans are classified as follows:
• In Corporate & Institutional Banking, Commercial Banking & Private Banking, a loan is considered impaired where analysis and review indicate that full payment of either interest or principal, including the timeliness of such payment, is questionable, or as soon as payment of interest or principal is 90 days overdue. Impaired accounts are managed by our Group Special Assets Management recovery unit, GSAM, which is independent from our main businesses
• In Retail Banking, a loan is considered impaired when it meets certain defined threshold conditions in terms of overdue payments (contractual impairment) or meets other objective conditions such as bankruptcy, debt restructuring, fraud or death. A loan is considered delinquent (or past due), when the customer has failed to make a principal or interest payment in accordance with the loan contract. These threshold conditions are defined in policy and are set at the point where empirical evidence suggests that the client is unlikely to meet their contractual obligations or a loss of principal is expected
The Group's loan loss provisions are established to recognise incurred impairment losses either on specific loan assets or within a portfolio of loans and advances. Individually impaired loans are those loans against which individual impairment provisions (IIP) have been raised.
Provisions are taken in the form of:
• Individually impaired provisions (IIP)
• Portfolio impairment provisions (PIP) held to cover the inherent risk of losses which, although not identified, are known through experience to be present in any loan portfolio
More information on the components of these calculations for Corporate & Institutional Banking, Commercial Banking & Private Banking, as well as Retail Banking, can be found in note 8 of the financial statements.
Estimating the amount and timing of future recoveries involves significant judgement, and considers the assessment of matters such as future economic conditions and the value of collateral, for which there may not be a readily accessible market.
Loan losses that have been incurred but have not been separately identified at the balance sheet date are determined by taking into account past loss experience as a result of uncertainties arising from the economic environment, and defaults based on portfolio trends. Actual losses identified could differ significantly from the impairment provisions reported, for example, as a result of uncertainties arising from the economic environment.
The total amount of the Group's impairment provision is inherently uncertain, being sensitive to changes in economic and credit conditions across the regions in which the Group operates. Economic and credit conditions are interdependent within each geography and as a result there is no single factor to which the Group's loan impairment provisions as a whole are sensitive. It is possible that actual events over the next year will differ from the assumptions built into our model, resulting in material adjustments to the carrying amount of loans and advances.
Effective from 1 January 2018, the impairment requirements of IFRS 9 Financial Instruments are being adopted. More information can be found in note 41 of the financial statements.
Country risk
Risk Appetite Statement
The Group manages its country cross-border exposures following the principle of diversification across geographies and controls the business activities in line with the level of jurisdiction risk
The Group defines Country risk as the potential for default or losses due to political or economic events in a country
Roles and responsibilities
The Global Head, Enterprise Risk Management is responsible for the management and control of Country Risk across the Group with the day-to-day management and control activities delegated to the Global Head, Country Risk. They are supported by the Regional Chief Risk Officers and Country Chief Risk Officers who provide second line oversight and challenge to the first line country risk management activities. The first line ownership of country risk resides with the country CEOs who are responsible for the implementation of policy and allocation of approved country risk limits across relevant businesses and product lines, as well as the identification and measurement of country risks and communication of these and any non-compliance to policy to the second line.
Mitigation
Policies and procedures are developed and deployed to put in place standards and controls that all countries must follow to ensure effective management of country risk. The policies include standards for the acceptance and effective management of country risk in particular around identification, measurement, reporting and setting, and the calibration and allocation of country risk limits. The procedures outline the process for country risk limit setting, monitoring and reporting exposures.
Governance Committee Oversight
At a Board level, the Board Risk Committee oversees the effective management of Country risk. At the executive level, the Group Risk Committee is responsible for approving policies and control risk parameters, monitoring material risk exposures and directing appropriate action in response to material risk issues or themes that come to the Committee's attention that relate to Country risk. The Group Risk Committee delegates the management of Country risk to the Group Country Risk function. At a country level, the Country Risk Committee (or Executive Risk Committee for subsidiaries) is responsible for monitoring all risk issues for their given country, including Country risk.
Decision making authorities and delegation
Decision making and approval authorities are guided by reference levels for countries. Reference levels are guidelines to set country limits in respect of Country risk. The reference levels are assessed by the Group Country Risk function and are functionally derived from factors including: Group Tier 1 capital, sovereign risk grade, with adjustment for transfer risk; Group strategy, through Country tiering; portfolio composition (short and medium-term) and Country's total foreign currency earnings.
Monitoring
Monitoring and reporting is included in the policy and procedures and covers the monitoring of exposures relative to Risk Appetite thresholds and limits, and the reporting of material exposures to internal committees and externally. The Group Risk Committee monitors Risk Appetite thresholds on a traffic-light indicator basis which provide an early warning indicator of stress and concentration risk. An escalation process to the Board Risk Committee is in place based on the traffic-light indicators monitoring system. In addition, the Group Risk Committee and the Board Risk Committee receive regular reports on exposures in excess of 1 per cent of total Group assets.
Market risk
The Group defines Market risk as the potential for loss of economic value due to adverse changes in financial market rates or prices
Risk Appetite Statement
The Group should control its trading portfolio and activities to ensure that market risk losses (financial or reputational) do not cause material damage to the Group's franchise
Roles and responsibilities
The Market Risk Framework, which sets the roles and responsibilities in respect of Market risk for the Group, is owned by the Global Head, Market and Traded Credit Risk (MTCR). The front office acting as first line of defence is responsible for the effective management of market risks. The Market Risk Function is the second line control function that performs independent challenge, monitoring and oversight of the market risk management practices of the first line of defence. The first and second lines of defence are supported by the organisation structure, job descriptions and authorities delegated by market risk control owners.
Mitigation
The Group controls its trading portfolio and activities to ensure that market risk losses (financial or reputational) do not cause material damage to the Group's franchise by assessing the various market risk factors. These are captured and analysed using proprietary and custom built analytical tools, in addition to risk managers' specialist market and product knowledge.
MTCR has market risk policies and procedures in place ensuring that appropriate market risk limits are implemented. The Group's market risk exposure is aligned with its appetite for market risk and assessing potential losses that might be incurred by the Group as a consequence of extreme but plausible events.
Market risk limits are applied as required by the Market Risk Limits Policy and related procedures. All businesses incurring market risk must do so in compliance with the Market Risk Limits Policy. The Policy requires that market risk limits are defined at a level appropriate to ensure that the Group remains within market Risk Appetite. The market Risk Appetite metrics are defined in terms of VaR and stress loss, therefore all material market risks must be captured by these metrics. All exposures throughout the Group that the MTCR function is responsible for aggregate up to MTCR's Group-level reporting. This aggregation approach ensures that the limits structure across the Group is consistent with the Group's Risk Appetite.
The Market Risk Stress Testing Policy is designed to ensure that adherence to Group market risk stress appetite is achieved. Stress testing aims at supplementing other risk metrics used within the bank by providing a forward-looking view of positions and an assessment of their resilience to stressed market conditions. Stress testing is performed on all Group businesses with market risk exposures, either where the risk is actively traded or where material risk remains. This additional information is used to inform the management of the market risks taken within the Group. The outcome of stress tests is discussed across the various business lines and management levels so that existing and potential risks can be reviewed and related management actions can be decided upon where appropriate.
Policies are reviewed and approved by the Global Head, MTCR annually to ensure their ongoing effectiveness and sustainability.
Stress testing
Losses beyond the 97.5 per cent confidence interval are not captured by a VaR calculation, which therefore gives no indication of the size of losses in tail event situations.
The VaR measurement is complemented by weekly stress testing of market risk exposures to highlight the potential risk that may arise from extreme market events that are deemed rare but plausible.
Stress testing is an integral part of the market risk management framework and considers both historical market events and forward-looking scenarios. A consistent stress testing methodology is applied to trading and non-trading books. The stress testing methodology assumes that scope for management action would be limited during a stress event, reflecting the decrease in market liquidity that often occurs.
Stress scenarios are regularly updated to reflect changes in risk profile and economic events. The MTCR function reviews stress testing results and, where necessary, enforces reductions in overall market risk exposure. The Group Risk Committee considers the results of stress tests as part of its supervision of Risk Appetite.
Regular stress test scenarios are applied to interest rates, credit spreads, exchange rates, commodity prices and equity prices. This covers all asset classes in the Financial Markets banking and trading books.
Ad hoc scenarios are also prepared, reflecting specific market conditions and for particular concentrations of risk that arise within the business.
Governance Committee Oversight
At a Board level, the Board Risk Committee oversees the effective management of Market risk. At the executive level, the Group Risk Committee delegates responsibilities to the Corporate & Institutional Banking Risk Committee (CIBRC) to act as the primary risk governance body for market risk and to the Stress Testing Committee for stress testing and model risk. The Group Risk Committee also delegates limit authority to the Global Head, MTCR who is responsible for the market risk.
Decision making authorities and delegation
The Group's Risk Appetite Statement, along with the key associated Risk Appetite metrics, is approved by the Board, and responsibility for market risk limits is then tiered accordingly.
Subject to the Group's Risk Appetite for market risk, the Group Risk Committee sets Group-level market risk limits and delegates authority for the supervision of all other market risk limits to the CIBRC and Market & Traded Credit Risk.
Major business limits are reviewed and approved by the CIBRC. The committee is responsible for determining which major business limits meet the criteria for categorisation. The CIBRC is appointed by the Group Risk Committee.
All other market risk limit approval authorities are delegated by the Global Head, MTCR to individual market risk managers. Additional limits are placed on specific instruments and position concentrations where appropriate. Sensitivity measures are used in addition to VaR as risk management tools. Authorities are reviewed at least annually to ensure they remain appropriate and to assess the quality of decisions taken by the authorised individual. Key risk-taking decisions are made only by certain individuals or committees with the skills, judgement and perspective to ensure that the Group's control standards and risk-return objectives are met.
Authority delegators are responsible for monitoring the quality of the risk decisions taken by their delegates and the ongoing suitability of their authorities.
VaR
The Group applies VaR as a measure of the risk of losses arising from future potential adverse movements in market rates, prices and volatilities. VaR, in general, is a quantitative measure of market risk that applies recent historical market conditions to estimate the potential future loss in market value that will not be exceeded in a set time period at a set statistical confidence level. VaR provides a consistent measure that can be applied across trading businesses and products over time and can be set against actual daily trading profit and loss outcome.
VaR is calculated for expected movements over a minimum of one business day and to a confidence level of 97.5 per cent. This confidence level suggests that potential daily losses in excess of the VaR measure are likely to be experienced six times per year.
The Group applies two VaR methodologies:
• Historical simulation: involves the revaluation of all existing positions to reflect the effect of historically observed changes in market risk factors on the valuation of the current portfolio. This approach is applied for general market risk factors and the majority of specific (credit spread) risk VaR;
• Monte Carlo simulation: this methodology is similar to historical simulation but with considerably more input risk factor observations. These are generated by random sampling techniques, but the results retain the essential variability and correlations of historically observed risk factor changes. This approach is applied for some of the specific (credit spread) risk VaR in relation to idiosyncratic exposures in credit markets
In both methods a historical observation period of one year is chosen and applied.
VaR is calculated on our exposure as at the close of business, generally UK time. Intra-day risk levels may vary from those reported at the end of the day.
A small proportion of market risk generated by trading positions is not included in VaR or cannot be appropriately captured by VaR. This is recognised through a Risks-not-in-VaR framework, which estimates these risks and applies capital add-ons.
To assess their ongoing performance, VaR models are backtested against actual results.
See an analysis of VaR and backtesting results in 2017 in the Risk Profile section.
Monitoring
MTCR monitors the overall portfolio risk and ensures that it is within specified limits and therefore Risk Appetite. The annual and mid-year limit review processes provide opportunities for the business and MTCR to review risk in light of performance.
Market risk exposures are monitored daily against approved limits. Intra-day risk exposures may vary from those reported at the end of the day. Limit excess approval decisions are informed by factors such as an assessment of the returns that will result from an incremental increase to the business risk exposure. Limits and excesses can only be approved by a market risk manager with the appropriate delegated authority.
Stress testing is the basis for internal economic capital and economic profit reporting for market risk. Incremental Risk Charge is also used to reflect credit default and migration risk. Financial Markets traders may adjust their market risk exposures within approved limits and assess risk/reward trade-offs according to market conditions.
In addition, stress scenario analysis is performed on all market risk exposures in Financial Markets and in portfolios outside Financial Markets such as Syndicated Loans and Principal Finance. MTCR reports and monitors limits applied to stressed exposures. Stress loss excesses are discussed with the business and approved where appropriate based on delegated authority levels. Stress loss excesses are reported to CIBRC. Where required by local statute or regulation, MTCR's Group and business-wide stress and scenario testing will be supplemented by entity stress testing at a country level. This stress testing is coordinated at the country level and subject to the relevant local governance.
Capital and liquidity risk
Risk Appetite Statement
The Group maintains a strong capital position, including the maintenance of management buffers sufficient to support its strategic aims, and holds an adequate buffer of high quality liquid assets to survive extreme but plausible liquidity stress scenarios for at least 60 days without recourse to extraordinary central bank support
The Group defines capital risk as the potential for insufficient level or composition of capital to support our normal activities, and liquidity risk as the potential for failure where we may not have sufficient stable or diverse sources of funding or financial resources to meet our obligations as they fall due
Roles and responsibilities
The Treasurer is responsible for developing a risk framework for capital and liquidity risk and for complying with regulatory requirements at a Group level. The Treasury and Finance functions provide independent challenge and oversight of the first line risk management activities relating to capital and liquidity risk. In country, the Treasurer is supported by Treasury and Finance in implementing the capital and liquidity framework.
Mitigation
The Group develops policies to address material capital and liquidity risks and aims to constrain its risk profile within Risk Appetite. Risk Appetite is set for the Group and cascaded down to the countries as limits. The Group also maintains a Recovery Plan which is a live document to be used by management in a liquidity or solvency crisis. The Recovery Plan includes a set of Recovery Indicators, an escalation framework and a set of management actions that could be effectively implemented in a liquidity stress. A Recovery Plan is also maintained within each major country.
The approach to mitigation is detailed further below:
Capital Planning
On an annual basis, strategic business and capital plans are drawn up covering a five-year horizon and are approved by the Board. The capital plan ensures that adequate levels of capital and an efficient mix of the different components of capital are maintained to support our strategy and business plans. Treasury is responsible for the ongoing assessment of the demand for capital and the updating of the Group's capital plan.
Capital planning takes the following into account:
• Current regulatory capital requirements and our assessment of future standards
• Demand for capital due to the business and loan impairment outlook and potential market shocks or stresses
• Available supply of capital and capital raising options
The Funding Plan is also developed to ensure we have a credible plan to manage the future demand and supply of funds in a prudent yet commercially effective manner.
Structural FX Risk
The Group's structural position results from the Group's non-USD investment in the share capital and reserves of subsidiaries and branches. The FX translation gains or losses are recorded in the Group's 'Translation Reserves' with a direct impact on the Group's CET1 ratio.
The Group contracts hedges to manage its structural FX position in accordance with a Board-approved Risk Appetite, and as a result the Group has taken net investment hedges (using a combination of derivative and non-derivative financial investments) to partly cover its exposure to the Korean won, Chinese renminbi and Taiwanese dollar to mitigate the FX impact of such positions on its capital ratios.
Liquidity and Funding Risk
At Group and country level we implement various business-as-usual and stress risk metrics and monitor these against limits. This ensures that the Group maintains an adequate and well-diversified liquidity buffer and stable funding base. The approach to managing the risks and the Board-approved Risk Appetite metrics are assessed annually through the Internal Liquidity Adequacy Assessment Process.
Earnings Risk
Interest rate re-pricing risk is managed centrally by Treasury Markets within market risk limits. The governance of Earnings Risk will develop through 2018 in line with regulatory guidelines for interest rate risk in the banking book. This will focus on implementing this risk type within the Group's Enterprise Risk Management Framework supported by formal delegations of authority, additional policies and methodologies, data and model governance, a broader suite of Risk Appetite metrics, limits, and ongoing reporting and monitoring of exposures against these.
Stress testing
Stress testing and scenario analysis are an integral part of the capital and liquidity framework, and are used to ensure that the Group's internal assessment of capital and liquidity consider the impact of extreme but plausible scenarios on its risk profile. They provide an insight into the potential impact of significant adverse events on the Group's capital and liquidity position and how these could be mitigated through appropriate management actions to ensure the Group remains within the approved Risk Appetite and regulatory limits.
Governance Committee Oversight
At a Board level, the Board Risk Committee oversees the effective management of Capital and Liquidity risk. At the executive level, the Group Asset and Liability Committee informs the Group's strategy on balance sheet matters and ensures that the Group operates within internally approved Risk Appetite and regulatory requirements. This relates to capital, loss absorbing capacity, liquidity, leverage, earnings risk and structural foreign exchange risk. The Group Asset and Liability Committee also ensures that the Group meets internal and external recovery and resolution planning requirements. The Group Asset and Liability Committee delegates responsibilities to the Operational Balance Sheet Committee to ensure that, in executing the Group's strategy, the Group operates within internal and regulatory requirements, with a focus on ensuring alignment with business objectives.
Country oversight under the capital and liquidity framework resides with country Asset and Liability Committees. Countries must ensure they remain in compliance with Group capital and liquidity policies and practices, as well as local regulatory requirements.
The Stress Testing Committee ensures the effective management of capital and liquidity related enterprise-wide stress testing in line with the Group's enterprise-wide stress testing policy and applicable regulatory requirements. The Stress Testing Committee reviews, challenges and approves stress scenarios, results and management actions as part of the Internal Capital Adequacy Assessment Process, as well as assumptions and results as part of the Internal Liquidity Adequacy Assessment Process.
Decision making authorities and delegation
The Group Chief Financial Officer has overall responsibility for determining the Group's approach to capital and liquidity risk management and delegates this authority to the Treasurer. The Treasurer has the authority to delegate second line responsibilities to the Treasury and Finance functions to relevant and suitably qualified individuals. This includes the delegation of policy and metric development, implementation and limit setting, as well as oversight and challenge of first line processes and controls and is delegated to the most appropriate individuals.
Monitoring
On a day-to-day basis the management of capital and liquidity is performed by the country Chief Executive Officer and Treasury Markets respectively. The Group regularly reports and monitors capital and liquidity risks inherent in its business activities and those that arise from internal and external events. The management of capital and liquidity is monitored by Treasury for the Group with appropriate escalation processes in place for any breach of limits.
Internal risk management reports covering the balance sheet and the capital and liquidity position of the Group are presented to the Operational Balance Sheet Committee and the Group Asset and Liability Committee. The reports contain key information on balance sheet trends, exposures against Risk Appetite and supporting risk measures which enable members to make informed decisions around the overall management of the Group's balance sheet. Oversight at a country level is provided by the country Asset and Liability Committee, with a focus on the local capital and liquidity risks, local prudential requirements and risks that arise from local internal and external events.
Operational risk
The Group defines Operational Risk as the potential for loss resulting from inadequate or failed internal processes and systems, human error, or from the impact of external events
Risk Appetite Statement
The Group aims to control operational risks to ensure that operational losses (financial or reputational), including any related to conduct of business matters, do not cause material damage to the Group's franchise
Roles and responsibilities
The Operational Risk Framework (ORF) is set by the Group Head, Operational Risk and approved by the Group Operational Risk Committee. Group Operational Risk, in its role as the second line of defence, develops the Operational Risk Framework and monitors its application across the Group. The Operational Risk function challenges process owners in ensuring the Group's operational risk profile is within Risk Appetite.
Mitigation
The ORF sets out the Group's overall approach to the management of operational risk in line with the Group's Risk Appetite. The approach reinforces the three lines of defence and serves to continually improve the Group's ability to anticipate and control material risks. It also requires the need for clear ownership and accountability for all processes across the Group. Risk assessment is used to determine the design strength and reliability of each process to prevent risks.
The operational risk management approach requires:
• All processes and risks to be identified, owned, and recorded in the Process Universe
• Control tolerance standards to be set for each control for quantity, materiality and timeliness of detection and rectification of defects
• Monitoring of control performance against tolerance standards
• Residual risks to be assessed by process owners and approved by risk framework owners
• Prompt execution of treatment actions
The Group fulfills the requirements of the approach by defining and maintaining a process universe for all client segments, products, and functions. The Process Universe is the complete set of processes that collectively describe the activities of the Group and is the common reference for the approach to operational risk management. Each process is owned by a named individual who is responsible for the outcomes of the process and the design, monitoring and effectiveness of the control environment.
Potential failures in processes are identified by process owners and risk framework owners using their expert judgment. These potential failures are risk assessed against a pre-defined operational risk assessment matrix which must be approved by individuals delegated within the Risk Authorities policy. Risks that fall above the Group's Risk Appetite levels require a time-bound treatment plan to address the potential failures, and are monitored until the risk is reduced to within acceptable levels.
Stress testing
As part of the operational risk management approach, the Group conducts stress testing using scenario analysis. Fifteen scenarios are identified that test the robustness of the Group's processes, and assess the potential impact to the Group. These scenarios include anti-money laundering, sanctions, information and cyber security and external fraud.
In 2017, we also participated in the Bank of England stress test exercise and the annual Internal Capital Adequacy Assessment Process.
Governance Committee Oversight
At a Board level, the Board Risk Committee oversees the effective management of Operational risk. At the executive level, the Group Operational Risk Committee (GORC) oversees the operational risk profile of the Group within the boundaries of the Group's Risk Appetite and any limits and policies set by authorised bodies of the Group. The GORC has the authority to challenge, constrain and, if required, stop business activities where risks are not aligned with the Group's Risk Appetite.
The GORC is supported by Business Process Governance Committees (PGCs) and Function Operational Risk Committees (FORCs) which provide global oversight of all operational risks arising from processes within the Business and Function at the Group level. In addition, the Country Operational Risk Committees (CORCs) oversee the management of operational risks at the country (or entity) level.
The GORC monitors the effectiveness of the PGCs, FORCs and CORCs and challenges the risk decisions made within these committees to remain within the Group's Risk Appetite.
Decision making authorities and delegation
Authority to make risk-related decisions is delegated to individuals or committees with the requisite skills, judgement, and perspective to ensure that the Group's control standards and risk/return objectives are met. The Group has prescribed policies defining the scope and responsibility of the authorised individuals. The authorities are reviewed at least annually to ensure they remain appropriate to assess the quality of decisions taken by the authorised individual.
To ensure the appropriate infrastructure, people, processes, and controls are in place to support change and product management, including mitigation of all operational risks within Risk Appetite, minimum governance standards are set at the Group and Country levels. Significant changes to internal and external environments may give rise to operational risks. Such changes with impact to client segments, products and functions are subject to process governance at a PGC or FORC. Standards for business products are owned by Business Heads and Business PGCs. All products must be approved to the standards set out in the policy, including completion of an operational risk assessment.
Monitoring
Operational Risk Appetite metrics are set against each top risk. These are included as part of the operational risk profile which comprises the following elements:
• Top Risk performance against Risk Appetite
• Losses, near misses and related insights
• Changes to the internal or external environment
• Results of audit and regulatory reviews, or other independent findings
The operational risk profile is aggregated and reported at relevant committees defined at Group, business, regional, country and function level. This provides senior management with the relevant information to inform their risk decisions. The completeness of the operational risk profile ensures appropriate prioritisation and promptness of risk decisions, including risk acceptances with treatment plans for risks that are beyond the acceptable threshold.
Reputational risk
The Group defines reputational risk as the potential for loss of earnings or market capitalisation as a result of stakeholders taking a negative view of the organisation or its actions
Risk Appetite Statement
The Group aims to protect the franchise from material damage to its reputation by ensuring that any business activity is satisfactorily assessed and managed by the appropriate level of management and governance oversight
Roles and responsibilities
In February 2017, second line ownership of reputational risk was transferred from the Group Head, Corporate Affairs to the Group Chief Risk Officer, with responsibility delegated to the Global Head, Enterprise Risk Management. At country level, the responsibility of reputational risk management is delegated to Country Chief Risk Officers. Both the Global Head, Enterprise Risk Management and Country Chief Risk Officers constitute the second line of defence, overseeing and challenging the first line which resides with the CEOs, Business Heads and Product Heads in respect of risk management activities of reputational-related risks.
Mitigation
The Group's reputational risk policy sets out the principal sources of reputational risk and the responsibilities and procedures for identifying, assessing and escalating reputational risks. The policy also defines the control and oversight standards to effectively manage reputational risk.
The Group takes a structured approach to the assessment of risks associated with how individual client, transaction, product and strategic coverage decisions may affect perceptions of the organisation and its activities. Wherever a potential for stakeholder concerns is identified, issues are subject to prior approval by a management authority commensurate with the materiality of matters being considered. Such authorities may accept, decline the risk or impose conditions upon proposals, to protect the Group's reputation. The Group recognises that there is also the potential for consequential reputational risk should it fail to control other Principal Risk Types. Such secondary reputational risks are managed by the owners of each Principal Risk Type.
Stress testing
Reputational risk is incorporated into the Group's stress testing scenarios. For example, the Group may consider what impact a hypothetical event leading to loss of confidence among liquidity providers in a particular market might have, or what the implications might be for supporting part of the organisation in order to protect the brand.
Governance Committee Oversight
The Brand, Values and Conduct Committee retains Board level oversight responsibility for reputational risk. Oversight from an operational perspective falls under the remit of the Group Risk Committee and the Board Risk Committee. The Group Reputational Risk Committee appointed by the Group Risk Committee in May 2017 ensures the effective management of Reputational Risk across the Group. The Group Reputational Risk Committee's remit is to:
• Challenge, constrain and if required, to stop business activities where risks are not aligned with the Group's Risk Appetite
• Make decisions on reputational risk matters assessed as high or very high based on the Group's reputational risk materiality assessment matrix, and matters escalated from the Regions or Client Businesses
• Provide oversight of material reputational risk and/or thematic issues arising from the potential failure of other risk types
Decision making authorities and delegation
The Group Risk Committee provides Group-wide oversight on reputational risk, approves policy and monitors material risks. The Group Reputational Risk Committee is authorised to approve or decline reputational risk aspects of any business transaction, counterparty, client, product, line of business and market within the boundaries of the Group's Risk Appetite, and any limits and policies set by authorised bodies of the Group.
Monitoring
Reputational risk policies and procedures are applicable to all Group entities. However local regulators in some markets may impose additional requirements on how banks manage and track reputational risk. In such cases, these are complied with in addition to Group policies and procedures. Exposure to reputational risk is monitored through:
• A requirement that process owners establish triggers to prompt consideration of reputational risk and escalation where necessary
• The tracking of risk acceptance decisions
• The tracking of thematic trends in secondary risk arising from other Principal Risk Types
• The analysis of prevailing stakeholder concerns
Compliance risk
The Group defines compliance risk as the potential for regulatory sanctions or loss from a failure on our part to comply with laws or regulations
Risk Appetite Statement
The Group has no appetite for breaches in laws and regulations; whilst recognising that regulatory non-compliance cannot be always entirely avoided, the Group strives to reduce this to an absolute minimum
Roles and responsibilities
The Group Head, Compliance sets standards for compliance, establishes and maintains risk-based compliance frameworks and a programme for monitoring compliance; provides support to senior management on regulatory and compliance matters; and is the Risk Framework Owner for Compliance Risk.
The Compliance Risk Framework sets out the roles and responsibilities in respect of compliance risk for the Group. Businesses and functions acting as the first line of defence are responsible for ensuring that their processes operate in a way that ensures continued compliance with all applicable laws and regulations. The compliance function is the second line that provides oversight and challenge of the first line risk management activities that relate to compliance risk.
The Compliance Risk Framework defines risk sub-types and delegates these to the most appropriate control function to ensure that the Compliance function as second line, can effectively provide oversight and challenge of the first line risk management activities.
Mitigation
The Compliance function develops and deploys relevant policies and procedures setting out standards and controls for adherence by the Group to ensure continued compliance with applicable laws and regulations. Through a combination of control monitoring and attestation, the Compliance Risk Framework Owner seeks to ensure that all policies are operating as expected to mitigate the risk that they cover.
Governance Committee Oversight
Compliance risk and the risk of non-compliance with laws and regulations resulting from failed processes and controls are overseen by Process Governance Committees and Functional Operational Risk Committees, and Country Operational Risk Committees that are in place for each business, function and country. The Compliance and Regulatory Risk Committee has a consolidated view of these risks and ensures that appropriate governance is in place for these. In addition, the Committee ensures that elevated levels of Compliance Risk are reported to the Group Operational Risk Committee, Group Risk Committee and Board Audit Committee.
Decision making authorities and delegation
Decision making and approval authorities follow the Enterprise Risk Management Framework approach and risk thresholds. The Group Head, Compliance has the authority to delegate second line responsibilities within the Compliance function to relevant and suitably qualified individuals. In addition, second line responsibilities including policy development, implementation and validation as well as oversight and challenge of first line processes and controls are delegated based on the most appropriate control function for certain compliance risk sub-types.
Monitoring
The monitoring of controls designed to mitigate the risk of regulatory non-compliance in processes is carried out in line with the Operational Risk Framework. The Group has a monitoring and reporting process in place for compliance Risk Appetite metrics, which includes escalation and reporting to Compliance and Regulatory Risk Committee, Group Risk Committee and Board Risk Committee as appropriate. In addition, there is a Group Regulatory Reform team set up to monitor regulatory reforms in key markets and establish a protocol for horizon scanning.
Conduct risk
The Group defines Conduct Risk as the potential regulatory sanctions or loss from a failure on our part to abide by the Group's Conduct Risk Management Framework
Risk Appetite Statement
The Group strives to maintain the standards in our Code of Conduct and outcomes of our Conduct Framework, by continuously demonstrating that we "Do The Right Thing" in the way we conduct business
Roles and responsibilities
Conduct risk management and abiding by the Group Code of Conduct is the responsibility of all employees in the Group. The first line businesses and functions are responsible for reviewing their processes and identifying conduct-related outcomes and ensuring controls are in place to mitigate these risks. The compliance function as second line for conduct risk is responsible for providing oversight and challenge to the first line to ensure the adequacy of the conduct risk management and that we remain within Risk Appetite.
Mitigation
The Group Conduct Risk Management Framework is designed to enable dynamic risk control implementation and risk-based decision making in line with the Group's Enterprise Risk Management Framework. The framework is supported by policies including the Group conduct management policy and the Group code of conduct as well as a range of other policies and procedures which address conduct related aspects in further granular detail. The management of conduct risk includes the monitoring of Risk Appetite metrics and limits that are reported to relevant governance committees.
Conduct risk identification and mitigation are embedded in businesses and functions through an end-to-end review of the Bank's critical processes. Controls are put in place for conduct related risks that have been identified within these processes. In-country workshops are conducted to assist CEOs and management teams to identify conduct related risks in their businesses and country strategies while leader-led training on conduct issues and dilemmas are rolled out across businesses and functions as we seek to ensure conduct is seen in the broader context, as opposed to behavioural conduct.
Governance Committee Oversight
The Board Risk Committee, Brand Values and Conduct Committee, Group Risk Committee, Group Operational Risk Committee and the Compliance Regulatory Risk Committee are responsible for ensuring that the Group remains within conduct Risk Appetite. As Risk Framework Owner for conduct risk, compliance sets reporting thresholds for escalation of conduct risks to the Group Operational Risk Committee and Group Risk Committee. The Board Risk Committee and the Brand Values and Conduct Committee receive periodic reports on conduct risk assurance against businesses and functions.
Decision making authorities and delegation
Conduct risk authority is delegated through the Group ensuring appropriate spans of control and suitable persons holding roles. Responsibilities are clearly articulated and ensure the split between 'doing' and 'oversight'.
Monitoring
The Group regularly monitors the effectiveness of mitigating controls and performance against Risk Appetite. Risk Appetite metrics are defined at granular levels and take into consideration measures such as the outcome of speaking up cases in individual countries and collectively as a group. To further support managers with their responsibilities in respect of conduct risk, a conduct dashboard is in development which will provide managers with a snapshot of each respective business and function.
Information and cyber security risk
The Group defines Information and cyber security risk as the potential for loss from a breach of confidentiality, integrity or availability of the Group's information systems and assets through cyber attack, insider activity, error or control failure
Risk Appetite Statement
The Group seeks to avoid risk and uncertainty for our critical information assets and systems and has a low appetite for material incidents affecting these or the wider operations and reputation of the Group
Roles and responsibilities
In 2017 we introduced the Chief Information Security Officer function in Risk & Compliance and announced a revised operating model to address information and cyber security as a business risk, incorporating this into our overall risk management strategy. The Chief Information Security Officer (CISO) has overall responsibility for strategy, governance and oversight of information and cyber security across the Group and operates as the second line of defence.
The CISO defines policy for information and cyber security overseeing and challenging the operational implementation of controls at the first line, which includes both technical and business responsibilities. The Technology Information Security Office (TISO) operate within the ITO function at the first line, ensuring security of the Group's technology applications and infrastructure.
Mitigation
Information and cyber security risk is managed through a structured framework comprised of a risk assessment methodology and supporting policies, procedures and standards which are aligned to industry best practice models.
The Chief Information Security Officer function is responsible for the information and cyber security risk framework and associated policy documents. The framework model and policy documents must be reviewed and updated at least biennially and / or following material change to a control environment.
Stress testing
Stress testing of technical controls relating to information and cyber security risk are performed annually by an external independent party. Results of these stress tests are reported to the Chief Information Security Officer function for consideration and action. Identified actions are overseen to appropriate conclusion by the Chief Information Security Officer function with progress reports provided to the Group Operational Risk Committee.
Governance Committee Oversight
The information and cyber security risk within the bank is currently governed via the Board Risk Committee who has responsibility for approving the definition of information and cyber risk and the Group appetite. Close and continuous oversight of information and cyber security risk in the Bank is performed by the Technology Operations Risk Committee (TORC) and the Group Operational Risk Committee (GORC), with the GORC being appointed by the Group Risk Committee. Escalation of risks which fall outside the defined appetite for the Group are overseen by these committees to ensure effective mitigation.
Decision making authorities and delegation
Measurement and decision making relating to the approval and or sign off of information and cyber security risk follows the below principles:
• All first line and second line process owner roles in Information and cyber security must be covered, leaving no gaps in risk management and regulatory compliance
• Delegation authority must be consistent with the Group Enterprise Risk Management Framework, apply to IT and non-IT processes impacting in-country information and cyber security risk, cover local and Group processes impacting in-country cyber risk
• Must consider the cost to the Group and take into account any regulatory requirements
• Geographic resource span of control must be consistent with Group models
Monitoring
Following the introduction of the Chief Information Security Officer function in 2017, we are extending monitoring capability for information and cyber security risk with further enhancements planned to take place during 2018.
We have a range of roles and activities in both the Chief Information Security Officer function and the TISO that look at monitoring information and cyber security risks.
CISO activities include:
• The Business Information Security Officers who support business activities relating to information and cyber security at a country or operation level
• Control testing (e.g. phishing simulation exercises)
• Strategic assurance activities (e.g. enterprise-wide security risk assessment)
• Dispensation assessment and approval
• Deployment of the Third Party Security Assessment model
TISO activities include:
• Operation of technical controls (e.g. email monitoring)
• Security Incident response, etc.
Financial crime risk
The Group defines Financial crime risk as the potential for legal or regulatory penalties, material financial loss or reputational damage resulting from the failure to comply with applicable laws and regulations relating to International Sanctions, Anti-Money Laundering and Anti-Bribery and Corruption
Risk Appetite Statement
The Group has no appetite for breaches in laws and regulations related to Financial Crime, recognising that whilst incidents are unwanted, they cannot be entirely avoided
Roles and responsibilities
The Global Head, Financial Crime Compliance has overall responsibility for financial crime risk and is responsible for the establishment and maintenance of effective systems and controls to meet legal and regulatory obligations in respect of Financial Crime. The Global Head, Financial Crime Compliance is the Group's Money Laundering Reporting Officer and performs the Financial Conduct Authority controlled function and senior management function in accordance with the requirements set out by the Financial Conduct Authority1, including those set out in their 'Systems and Controls' Handbook.
As the first line, the business unit process owners have responsibility for the application of policy controls and the identification and measurement of risks relating to financial crime. Business units must communicate risks and any policy non-compliance to the second line for review and approval following the model for delegation of authority.
Mitigation
There are three Group policies in support of the Financial crime compliance Risk Type Framework:
• Anti-bribery and corruption as set out in the Group Anti-Bribery and Corruption Policy
• Anti-money laundering as set out in the Group Anti-Money Laundering and Terrorist Financing Policy
• Sanctions as set out in the Group Sanctions Policy.
These policies are approved by the Global Head, Financial Crime Compliance.
The Group operates risk-based controls in support of its Financial Crime programme, including (but not limited to):
• Client Due Diligence, to meet "Know Your Customer" requirements
• Surveillance, including Transaction Screening, Name Screening and Transaction Monitoring
• Global Risk Assessment; to understand and quantify the Inherent and Residual Financial Crime risk across the organisation
The strength of these controls are tested and assessed through the Group's Operational Risk Framework, in addition to oversight by the Financial Crime Compliance Assurance and Group Internal Audit functions.
Governance Committee Oversight
Financial crime risk within the Group is governed by the Group Financial Crime Risk Committee which is appointed by and reports into the Group Risk Committee. The Group Financial Crime Risk Committee is responsible for ensuring the effective management of operational risk relating to Financial crime compliance throughout the Group in support of the Group's strategy and in line with the Group's Risk Appetite, Enterprise Risk Management Framework and Group Operational Risk Procedures.
The Board Financial Crime Risk Committee is appointed by the Board, to provide oversight of the effectiveness of the Group's policies, procedures, systems, controls and assurance mechanism designed to identify, assess, manage, monitor, detect or prevent money laundering, non-compliance with sanctions, bribery, corruption, and tax crime by third parties.
Decision making authorities and delegation
The Global Head, Financial Crime Compliance is the Risk Framework Owner for financial crime under the Group's Enterprise Risk Management Framework, and has been allocated overall responsibility within the Group for the establishment and maintenance of effective systems and controls to meet legal and regulatory obligations in relation to Financial crime. Certain aspects of Financial crime compliance second line oversight and challenge are delegated within the Financial Crime Compliance function.
Approval frameworks are in place to allow for risk-based decisions on client on-boarding, for potential breaches of Sanctions regulation or Policy, and for situations of potential Money Laundering and Anti-Bribery and Corruption concerns.
Monitoring
The Group monitors Financial crime compliance risk against a set of Risk Appetite metrics that are approved by the Board. These metrics are reviewed periodically and reported regularly to both the Group Financial Crime Risk Committee and Board Financial Crime Risk Committee.
1 MLRO is a controlled/Senior Management function (SMF 17 - Money Laundering Reporting Function) under Section 59 of the Financial Services and Markets Act 2000 ("FSMA")
RISK PROFILE
Our risk profile in 2017
Through our well-established risk governance structure and risk management framework, we closely manage our risks with the objective of maximising risk-adjusted returns while remaining in compliance with the Risk Appetite Statement. We manage uncertainties through a framework that provides a forward-looking 12 to 18 month view of the economic, business and credit conditions across the Group's key markets, enabling us to proactively manage our portfolio.
We continue to take action to reposition the Group's corporate portfolio, exiting weaker credit or lower-returning clients and adding new clients selectively. The Group's portfolio is well diversified across dimensions such as industries, geographies and products.
The table below highlights the Group's overall risk profile associated with our business strategy.
Our risk profile in 2017
Revised Enterprise Risk Management Framework and experienced senior team
• In 2017 we reviewed and significantly enhanced our Enterprise Risk Management Framework, in particular around risk culture, the control framework, strategic risk management and Principal Risk Types
• We also embarked on a key initiative to build out the Enterprise Risk Management function, allowing the Group to identify and manage risks holistically, with appropriate governance, oversight and information in place to run a safe, secure and well-controlled organisation
• We have a clear Risk Appetite Statement which is aligned to the Group's strategy; it is approved by the Board and informs the more granular risk parameters within which our businesses operate, with a particular focus on reducing concentrations
• We have an experienced senior risk team and our risk committees are staffed by the Group's most senior leaders
• We continuously monitor our risk profile to ensure it remains within our risk appetite, conduct regular stress tests, and adjust our exposures, underwriting standards and limits
Increasingly diversified short tenor portfolio with reducing concentrations
• Our balance sheet remains resilient and well diversified across a wide range of geographies, industries and products which serves to mitigate risk
• Within the Corporate & Institutional and Commercial Banking portfolios:
- Loans and advances to the financing, insurance and non-banking industry are 27 per cent of the total customer portfolio, and are mostly to investment grade institutions. All other industry concentrations are at or below 13 per cent of the total customer portfolio
- The loan portfolio remains predominantly short-dated, with 70 per cent of loans and advances to customers maturing in under one year
- Our top 20 corporate exposures have reduced to 50 per cent of Tier 1 capital in 2017 (2016: 55 per cent)
- Exposure to investment grade clients has increased to 57 per cent of the total corporate book in 2017 (2016: 56 per cent).
• We hold a diverse mix of collateral and 55 per cent of long-term sub-investment grade exposures within the corporate portfolio are collateralised
• More than 40 per cent of customer loans and advances are in Retail Products. 68 per cent of the Retail Products are mortgages where the overall loan-to-value ratio is less than 47 per cent
• Within the Retail Banking portfolio, we maintain minimal exposure outside of our core markets.
Strong capital and liquidity position
• We remain well capitalised and our balance sheet remains highly liquid
• We have a strong advances-to-deposits ratio, and remain a net provider of liquidity to interbank markets
• Our customer deposit base is diversified by type and maturity
• We have a substantial portfolio of liquid assets which can be realised if a liquidity stress occurs
Further details on the Enterprise Risk Management Framework can be found in the Risk Management Approach
Basis of preparation
Unless otherwise stated the balance sheet and income statement information presented within this section is based on the Group's management view. This is principally the location from which a client relationship is managed, which may differ from where it is financially booked and may be shared between businesses and/or regions. This view reflects how the client segments and regions are managed internally.
Credit risk
This section details the Group's credit risk exposure, split as follows:
• Overall exposure to credit risk, for on-balance sheet and off-balance sheet financial instruments, before and after taking into account credit risk mitigation
• Credit quality, which provides an analysis of the loan portfolio by client segment categorised by Strong, Satisfactory and Higher risk, forborne loans, and credit quality by region, and credit quality by industry
• Problem credit management and provisioning, which provides an analysis of non-performing loans and impaired loans
• Credit risk mitigation, which provides analysis of collateral held by client segment and collateral type, and details of loan-to-value ratios and other forms of credit risk mitigation
• Other portfolio analysis, which provides maturity analysis by client segment, and industry and retail products analysis by region
• Selected portfolios, which provide further detail on debt securities and treasury bills and asset backed securities
Credit risk is the potential for loss due to the failure of a counterparty to meet its obligations to pay the Group in accordance with agreed terms. Credit exposures arise from both the banking and trading books.
A summary of our current policies and practices regarding credit risk management is provided in the risk management approach.
Maximum exposure to credit risk
The table below presents the Group's maximum exposure to credit risk for its on-balance sheet and off-balance sheet financial instruments as at 31 December 2017, before and after taking into account any collateral held or other credit risk mitigation.
For on-balance sheet instruments, the maximum exposure to credit risk is the carrying amount reported on the balance sheet. For off-balance sheet instruments, the maximum exposure to credit risk generally represents the contractual notional amounts.
The Group's maximum exposure to credit risk is spread across its markets and is affected by the general economic conditions in the regions in which it operates. The Group sets limits on the exposure to any counterparty, and credit risk is spread over a variety of different personal, commercial and institutional customers.
The Group's gross maximum exposure to credit risk has increased by $29 billion when compared to 2016, driven by the increase in both on-balance sheet and off-balance sheet exposure. Cash and balances at central banks have decreased by $11.8 billion reflecting lower fluctuating liquidity. Loans and advances to customers and banks have increased by $36.3 billion, mainly driven by customer loan growth and expansion of the reverse repo business in response to client demand and improving the quality of our funding base. Off-balance sheet exposures, mainly arising from trade finance, increased by $13.2 billion, reflecting the business growth.
Investment securities increased by $14.6 billion due to increased holdings benefitting from the higher government yields in the UK and the treasury and liquidity management activities. The Group's credit risk exposure before risk mitigation arising from derivatives decreased by $18.5 billion.
Maximum exposure to credit risk
|
2017 |
|
2016 |
||||||
Maximum exposure |
Credit risk management |
Net exposure |
Maximum exposure |
Credit risk management |
Net |
||||
Collateral |
Master netting agreements |
Collateral |
Master |
||||||
On balance sheet |
|
|
|
|
|
|
|
|
|
Cash and balances at central banks |
58,864 |
- |
- |
58,864 |
|
70,706 |
- |
- |
70,706 |
Loans and advances to customers held at:1 |
|
|
|
|
|
|
|
|
|
Fair value through profit or loss |
3,265 |
|
|
|
|
3,177 |
|
|
|
Amortised cost |
282,288 |
|
|
|
|
252,719 |
|
|
|
|
285,553 |
|
|
|
|
255,896 |
|
|
|
Loans and advances to banks held at:1 |
|
|
|
|
|
|
|
|
|
Fair value through profit or loss |
3,137 |
|
|
|
|
2,060 |
|
|
|
Amortised cost |
78,188 |
|
|
|
|
72,609 |
|
|
|
|
81,325 |
|
|
|
|
74,669 |
|
|
|
Total loans and advances to banks and customers2 |
366,878 |
168,247 |
- |
198,631 |
|
330,565 |
151,310 |
- |
179,255 |
Investment securities3 |
|
|
|
|
|
|
|
|
|
As per balance sheet |
117,025 |
- |
- |
117,025 |
|
108,972 |
- |
- |
108,972 |
Held at fair value through profit or loss |
21,162 |
- |
- |
21,162 |
|
14,840 |
- |
- |
14,840 |
Less: equity securities |
(2,345) |
- |
- |
(2,345) |
|
(2,564) |
- |
- |
(2,564) |
|
135,842 |
- |
- |
135,842 |
|
121,248 |
- |
- |
121,248 |
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments4 |
47,031 |
9,825 |
29,135 |
8,071 |
|
65,509 |
9,624 |
40,391 |
15,494 |
Accrued income |
1,947 |
|
|
1,947 |
|
1,639 |
|
|
1,639 |
Assets held for sale |
2 |
|
|
2 |
|
1,102 |
|
|
1,102 |
Other assets5 |
29,922 |
|
|
29,922 |
|
33,942 |
|
|
33,942 |
Total balance sheet |
640,486 |
178,072 |
29,135 |
433,279 |
|
624,711 |
160,934 |
40,391 |
423,386 |
|
|
|
|
|
|
|
|
|
|
Off-balance sheet |
|
|
|
|
|
|
|
|
|
Contingent liabilities |
43,521 |
- |
- |
43,521 |
|
38,3027 |
- |
- |
38,302 |
Undrawn irrevocable standby facilities, credit lines and other commitments to lend6 |
63,890 |
- |
- |
63,890 |
|
55,655 |
- |
- |
55,655 |
Documentary credits and short-term trade-related transactions |
3,880 |
- |
- |
3,880 |
|
4,120 |
- |
- |
4,120 |
Forward asset purchases and forward deposits |
- |
- |
- |
- |
|
6 |
- |
- |
6 |
Total off- balance sheet |
111,291 |
- |
- |
111,291 |
|
98,083 |
- |
- |
98,083 |
Total |
751,777 |
178,072 |
29,135 |
544,570 |
|
722,794 |
160,934 |
40,391 |
521,469 |
1 An analysis of credit quality is set out in the credit quality analysis section. Further details of collateral held by client segment and held for past due and individually impaired loans are set out in the collateral analysis section
2 Loans and advances include reverse repurchase agreements and other similar secured lending of $55,187 million for 2017 and $44,916 million for 2016
3 Equity shares are excluded as they are not subject to credit risk
4 The Group enters into master netting agreements, which in the event of default result in a single amount owed by or to the counterparty through netting the sum of the positive and negative mark-to-market values of applicable derivative transactions.
5 Other assets include Hong Kong certificates of indebtedness, cash collateral, and acceptances, in addition to unsettled trades and other financial assets
6 Excludes unconditionally cancellable facilities
7 Total contingent liabilities of the Group in 2016 were $37.4 billion and have been restated to $38.3 billion
Credit quality analysis
An overall breakdown of the loan portfolio by client segment is provided in the client segment analysis section differentiating between the performing and non-performing book.
Within the performing book, there is an analysis:
• By credit quality, which plays a central role in the quality assessment and monitoring of risk
• Of loans and advances past due but not impaired: a loan is considered past due if payment of principal or interest has not been made on its contractual due date
• Of loans and advances where an impairment provision has been raised: these represent certain forborne Retail accounts that have complied with their revised contractual terms for more than 180 days and on which no further loss of principal is expected
Credit grade migration
Performing loans constitute 99 per cent of customer loans, which is consistent with the prior period.
A breakdown of the performing loans by credit quality is provided in the credit quality analysis section.
Risk measurement plays a central role in risk-quantification and portfolio management decisions. The Group uses the advanced internal ratings-based (IRB) approach under the Basel regulatory framework to calculate credit risk capital for the majority of its portfolios.
A standard credit risk grade (CG) scale is used for Corporate & Institutional Banking and Commercial Banking. The numeric grades run from 1 to 14 and some of the grades are further sub-classified. Lower numbered credit grades are indicative of a lower likelihood of default. CG 1 to 12 are assigned to performing clients, while CG 13 and 14 are assigned to non-performing or defaulted clients. Further details can be found in the Risk Management Approach.
The Group uses an internal risk mapping to determine the credit quality for loans, as shown in the table below.
Year-on-year, the overall portfolio credit quality of the Group has improved as a result of active portfolio management and steps taken to improve the quality of origination over the last two years. The new originations are in line with our granular risk appetite and diversified across industries, geographies and products. The proportion of Group loans and advances classified as strong has increased from 67 per cent to 70 per cent in 2017, with an increase in strong credit quality exposures observed across all business segments.
In Corporate & Institutional Banking, the strong credit quality category has increased by $12 billion due to increased lending to corporate clients across multiple industries. The largest increases were from financing, insurance & non-banking ($3.0 billion), commercial real estate ($1.8 billion), manufacturing ($1.8 billion) and transportation ($1.7 billion). The satisfactory credit quality category has decreased by $2.6 billion due to actions taken to reduce single name concentration and commodities exposure.
For the rest of the portfolio, the credit quality composition across most sectors and countries is broadly consistent with the prior year, although there has been some deterioration in India and Africa.
In Commercial Banking, the strong credit quality category has increased by $1.2 billion and satisfactory credit quality category has increased by $2.9 billion. This growth was well diversified across multiple countries and industries with an average of $0.1 billion increase per country or per industry.
Retail Banking credit quality remained stable over the past year with overall performing loans growing by 10 per cent ($9.5 billion), predominantly in the strong credit quality category. The implementation of the Risk Decision Framework has continued to show improvements through 2016 and 2017, shaping the portfolio towards preferred segments such as priority and employee banking, and better credit quality customers with optimum risk-return profiles.
The credit quality composition for loans to banks is also consistent with prior periods, with the majority of the growth in this period observed in the strong and satisfactory category.
Performing loans and advances that are past due but not impaired decreased by $0.7 billion in 2017. The past due balances arise substantially in the 'up to 30 days past due' category. In the Corporate & Institutional Banking and Commercial Banking segments, across all past due categories, approximately 70 per cent (2016: 73 per cent) of the amounts past due were regularised by 31 January 2018.
Mapping of credit quality
The Group uses the following internal risk mapping to determine the credit quality for loans.
Credit quality description |
Corporate & Institutional Banking and Commercial Banking |
|
Private Banking |
|
Retail Banking |
||
Default Grade mapping |
S&P external ratings equivalent |
PD range |
Internal ratings |
Number of days past due |
|||
Strong |
Grades 1-5 |
AAA/AA+ to BB+/BBB- |
0.000-0.425 |
|
Class I and Class IV |
|
Current loans (no past dues nor impaired) |
Satisfactory |
Grades 6-8 |
BB+ to BB-/B+ |
0.426-2.350 |
|
Class II and Class III |
|
Loans past due till 29 days |
Grades 9-11 |
B+/B to B-/CCC |
2.351-15.750 |
|||||
Higher Risk |
Grade 12 |
B-/CCC |
15.751-50.000 |
|
GSAM managed |
|
Past due loans 30 days and over till 90 days |
Non-performing loans (NPLs)
An NPL is any loan that is more than 90 days past due or is otherwise individually impaired. This excludes Retail Banking loans renegotiated at or after 90 days past due, but on which there has been no default in interest or principal payments for more than 180 days since renegotiation, and against which no loss of principal is expected.
NPLs are analysed, net of individual impairment provisions, between what is past due but not impaired and what is impaired.
NPLs (net of individual impairment provisions) have reduced to $3.5 billion compared to 2016 ($3.9 billion). This is driven primarily by the liquidation portfolio in the Corporate & Institutional Banking segment.
NPLs (net of individual impairment provisions) for the ongoing business have increased to $2.8 billion from $2.5 billion due to the deterioration of a small number of exposures booked in the UAE and UK in the Corporate & Institutional Banking book.
Liquidation portfolio NPLs (net of individual impairment provisions) have decreased from $1,386 million to $653 million in 2017 primarily due to sales and writedowns.
Total Corporate & Institutional Banking NPLs (net of individual impairment provisions) remained stable at $2.5 billion (2016: $2.5 billion).
Retail Banking NPL (net of individual impairment provisions) decreased by 19 per cent compared to 2016 (2017: $274 million; 2016: $339 million) particularly in Korea, India and China.
By client segment
|
2017 |
||||||
Loans to banks1 |
Loans to customers |
||||||
Corporate & Institutional Banking |
Retail Banking |
Commercial Banking |
Private Banking |
Central & other items |
Total1 |
||
Performing loans |
|
|
|
|
|
|
|
- Strong |
68,958 |
75,672 |
100,687 |
6,072 |
9,220 |
9,253 |
200,904 |
- Satisfactory |
12,309 |
52,610 |
1,586 |
21,216 |
3,951 |
90 |
79,453 |
- Higher risk |
54 |
1,128 |
405 |
323 |
42 |
- |
1,898 |
|
81,321 |
129,410 |
102,678 |
27,611 |
13,213 |
9,343 |
282,255 |
|
|
|
|
|
|
|
|
Impaired forborne loans, net of provisions |
- |
- |
269 |
- |
- |
- |
269 |
Non-performing loans, net of provisions |
5 |
2,484 |
274 |
596 |
140 |
- |
3,494 |
Total loans |
81,326 |
131,894 |
103,221 |
28,207 |
13,353 |
9,343 |
286,018 |
Portfolio impairment provision |
(1) |
(156) |
(208) |
(99) |
(2) |
- |
(465) |
Total net loans |
81,325 |
131,738 |
103,013 |
28,108 |
13,351 |
9,343 |
285,553 |
The following table further analyses total loans included within the table above:
Included in performing loans |
|
|
|
|
|
|
|
Neither past due nor impaired |
|
|
|
|
|
|
|
- Strong |
68,740 |
75,482 |
100,687 |
6,058 |
9,220 |
9,251 |
200,698 |
- Satisfactory |
12,255 |
51,846 |
- |
20,831 |
3,866 |
90 |
76,633 |
- Higher risk |
54 |
899 |
- |
239 |
42 |
- |
1,180 |
|
81,049 |
128,227 |
100,687 |
27,128 |
13,128 |
9,341 |
278,511 |
Past due but not impaired |
|
|
|
|
|
|
|
- Up to 30 days past due |
247 |
951 |
1,586 |
360 |
69 |
- |
2,966 |
- 31 - 60 days past due |
25 |
32 |
278 |
49 |
16 |
- |
375 |
- 61 - 90 days past due |
- |
200 |
127 |
74 |
- |
2 |
403 |
|
272 |
1,183 |
1,991 |
483 |
85 |
2 |
3,744 |
Total performing loans |
81,321 |
129,410 |
102,678 |
27,611 |
13,213 |
9,343 |
282,255 |
of which, forborne loans amounting to |
2 |
480 |
84 |
31 |
- |
- |
595 |
|
|
|
|
|
|
|
|
Included in non-performing loans |
|
|
|
|
|
|
|
Past due but not impaired |
|
|
|
|
|
|
|
- 91 - 120 days past due |
- |
- |
67 |
- |
- |
- |
67 |
-121 - 150 days past due |
- |
- |
56 |
- |
- |
- |
56 |
|
- |
- |
123 |
- |
- |
- |
123 |
Individually impaired loans, net of provisions |
5 |
2,484 |
151 |
596 |
140 |
- |
3,371 |
|
|
|
|
|
|
|
|
Total non-performing loans |
5 |
2,484 |
274 |
596 |
140 |
- |
3,494 |
of the above, forborne loans |
4 |
861 |
268 |
186 |
- |
- |
1,315 |
The following table sets out loans held at fair value through profit and loss which are included within the table above:
|
2017 |
||||||
Loans to banks1 |
Loans to customers |
||||||
Corporate & Institutional Banking |
Retail Banking |
Commercial Banking |
Private Banking |
Central & other items |
Total1 |
||
Neither past due nor impaired |
|
|
|
|
|
|
|
- Strong |
2,081 |
1,451 |
- |
30 |
- |
- |
1,481 |
- Satisfactory |
1,056 |
1,572 |
- |
186 |
- |
- |
1,758 |
- Higher risk |
- |
7 |
- |
- |
- |
- |
7 |
|
3,137 |
3,030 |
- |
216 |
- |
- |
3,246 |
Individually impaired loans |
- |
19 |
- |
- |
- |
- |
19 |
|
|
|
|
|
|
|
|
Total loans held at fair value through profit and loss |
3,137 |
3,049 |
- |
216 |
- |
- |
3,265 |
1 Loans and advances include reverse repurchase agreements and other similar secured lending of $55,187 million.
|
2016 |
||||||
Loans to banks1 |
Loans to customers |
||||||
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private Banking |
Central & other items |
Total1 |
||
Performing loans |
|
|
|
|
|
|
|
- Strong |
66,954 |
63,547 |
91,186 |
4,851 |
7,816 |
4,023 |
171,423 |
- Satisfactory |
7,682 |
55,207 |
1,560 |
18,296 |
3,767 |
233 |
79,063 |
- Higher risk |
34 |
1,223 |
410 |
264 |
38 |
- |
1,935 |
|
74,670 |
119,977 |
93,156 |
23,411 |
11,621 |
4,256 |
252,421 |
|
|
|
|
|
|
|
|
Impaired forborne loans, net of provisions |
- |
- |
251 |
- |
- |
- |
251 |
Non-performing loans, net of provisions |
- |
2,515 |
339 |
768 |
289 |
- |
3,911 |
Total loans |
74,670 |
122,492 |
93,746 |
24,179 |
11,910 |
4,256 |
256,583 |
Portfolio impairment provision |
(1) |
(261) |
(258) |
(166) |
(2) |
- |
(687) |
Total net loans |
74,669 |
122,231 |
93,488 |
24,013 |
11,908 |
4,256 |
255,896 |
The following table further analyses total loans included within the table above:
Included in performing loans |
|
|
|
|
|
|
|
Neither past due nor impaired |
|
|
|
|
|
|
|
- Strong |
66,600 |
63,416 |
91,186 |
4,812 |
7,816 |
4,023 |
171,253 |
- Satisfactory |
7,580 |
53,791 |
- |
17,728 |
3,690 |
233 |
75,442 |
- Higher risk |
34 |
1,121 |
- |
188 |
18 |
- |
1,327 |
|
74,214 |
118,328 |
91,186 |
22,728 |
11,524 |
4,256 |
248,022 |
Past due but not impaired |
|
|
|
|
|
|
|
- Up to 30 days past due |
456 |
1,402 |
1,560 |
539 |
91 |
- |
3,592 |
- 31 - 60 days past due |
- |
100 |
282 |
111 |
- |
- |
493 |
- 61 - 90 days past due |
- |
147 |
128 |
33 |
6 |
- |
314 |
|
456 |
1,649 |
1,970 |
683 |
97 |
- |
4,399 |
Total performing loans |
74,670 |
119,977 |
93,156 |
23,411 |
11,621 |
4,256 |
252,421 |
of which, forborne loans amounting to2 |
1 |
760 |
224 |
104 |
- |
- |
1,088 |
|
|
|
|
|
|
|
|
Included in non-performing loans |
|
|
|
|
|
|
|
Past due but not impaired |
|
|
|
|
|
|
|
- 91 - 120 days past due |
- |
- |
72 |
5 |
- |
- |
77 |
-121 - 150 days past due |
- |
- |
60 |
12 |
- |
- |
72 |
|
- |
- |
132 |
17 |
- |
- |
149 |
Individually impaired loans, net of provisions |
- |
2,515 |
207 |
751 |
289 |
- |
3,762 |
|
|
|
|
|
|
|
|
Total non-performing loans |
- |
2,515 |
339 |
768 |
289 |
- |
3,911 |
of the above, forborne loans2 |
- |
858 |
135 |
182 |
- |
- |
1,175 |
The following table sets out loans held at fair value through profit and loss which are included within the table above:
|
2016 |
||||||
Loans to banks1 |
Loans to customers |
||||||
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private Banking |
Central & other items |
Total1 |
||
Neither past due nor impaired |
|
|
|
|
|
|
|
- Strong |
1,659 |
1,769 |
- |
- |
- |
- |
1,769 |
- Satisfactory |
401 |
1,346 |
- |
47 |
- |
- |
1,393 |
- Higher risk |
- |
- |
- |
- |
- |
- |
- |
|
2,060 |
3,115 |
- |
47 |
- |
- |
3,162 |
Individually impaired loans |
- |
15 |
- |
- |
- |
- |
15 |
|
|
|
|
|
|
|
|
Total loans held at fair value through profit and loss |
2,060 |
3,130 |
- |
47 |
- |
- |
3,177 |
1 Loans and advances include reverse repurchase agreements and other similar secured lending of $44,916 million
2 The 2016 comparatives have been represented to reflect the forbearance policy change
Forborne loans
A forborne loan arises when a concession has been made to the contractual terms of a loan in response to a customer's financial difficulties. The table below presents performing and non-performing loans with forbearance measures by segment. In 2017, the Group changed its policy to allow for curing of forborne loans, which has been applied retrospectively. Refer to note 8 of the financial statements on impairment losses on loans and advances and other credit risk provisions.
The performing forborne loans have decreased by $474 million to $866 million in 2017 (2016: $1,340 million). The Corporate & Institutional Banking segment decreased by $280 million to $480 million in 2017 (2016: $760 million) primarily due to repayments from clients in the Africa & Middle East region. The Retail Banking segment decreased by $122 million to $353 million in 2017 (2016: $475 million).
The net non-performing forborne loans have increased by $144 million to $1,319 million in 2017 (2016: $1,175 million); this increase was in the Retail Banking segment on account of a change in accounting policy on forborne loans.
Forborne loans
|
2017 |
||||||
Loans to banks |
Corporate & Institutional Banking |
Retail Banking |
Commercial Banking |
Private Banking |
Central & other items |
Total |
|
All loans with forbearance measures |
6 |
2,143 |
797 |
647 |
- |
- |
3,593 |
Accumulated impairment |
- |
(802) |
(176) |
(430) |
- |
- |
(1,408) |
Net balance |
6 |
1,341 |
621 |
217 |
- |
- |
2,185 |
Included within the above table
Performing loans with forbearance measures:
|
2017 |
||||||
Loans to banks |
Corporate & Institutional Banking |
Retail Banking |
Commercial Banking |
Private Banking |
Central & other items |
Total |
|
All performing forborne loans |
2 |
480 |
353 |
31 |
- |
- |
866 |
of which: modification of terms and conditions1 |
2 |
480 |
353 |
28 |
- |
- |
863 |
Refinancing2 |
- |
- |
- |
3 |
- |
- |
3 |
Collateral held on performing forborne loans |
- |
4 |
2 |
- |
- |
- |
6 |
Non-performing loans with forbearance measures:
|
2017 |
||||||
Loans to banks |
Corporate & Institutional Banking |
Retail Banking |
Commercial Banking |
Private Banking |
Central & other items |
Total |
|
All non-performing forborne loans |
4 |
1,663 |
384 |
616 |
- |
- |
2,667 |
of which: modification of terms and conditions1 |
4 |
1,314 |
384 |
559 |
- |
- |
2,261 |
Refinancing2 |
- |
349 |
- |
57 |
- |
- |
406 |
Accumulated impairment |
- |
(802) |
(116) |
(430) |
- |
- |
(1,348) |
of which: modification of terms and conditions1 |
- |
(554) |
(116) |
(400) |
- |
- |
(1,070) |
Refinancing2 |
- |
(248) |
- |
(30) |
- |
- |
(278) |
Net non-performing forborne loans |
4 |
861 |
268 |
186 |
- |
- |
1,319 |
Collateral held on non-performing forborne loans |
- |
52 |
20 |
34 |
- |
- |
106 |
1 Modification of terms is any contractual change apart from refinancing, as a result of credit stress of the counterparty, i.e. interest reductions, loan covenant waivers
2 Refinancing is a new contract to a lender in credit stress, such that they are refinanced and can pay other debt contracts that they were unable to honour
Forborne loans
|
2016 |
||||||
Loans to banks |
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private Banking |
Central & other items |
Total |
|
All loans with forbearance measures |
1 |
2,528 |
725 |
598 |
- |
- |
3,852 |
Accumulated impairment |
- |
(910) |
(115) |
(312) |
- |
- |
(1,337) |
Net balance |
1 |
1,618 |
610 |
286 |
- |
- |
2,515 |
Included within the above table
Performing loans with forbearance measures:
|
2016 |
||||||
Loans to banks |
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private Banking |
Central & other items |
Total |
|
All performing forborne loans |
1 |
760 |
475 |
104 |
- |
- |
1,340 |
of which: modification of terms and conditions1 |
1 |
760 |
475 |
65 |
- |
- |
1,301 |
Refinancing2 |
- |
- |
- |
39 |
- |
- |
39 |
Collateral held on performing forborne loans |
- |
54 |
- |
36 |
- |
- |
90 |
Non-performing loans with forbearance measures:
|
2016 |
||||||
Loans to banks |
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private Banking |
Central & other items |
Total |
|
All non-performing forborne loans |
- |
1,768 |
195 |
494 |
- |
- |
2,457 |
of which: modification of terms and conditions1 |
- |
1,609 |
195 |
398 |
- |
- |
2,202 |
Refinancing2 |
- |
159 |
- |
96 |
- |
- |
255 |
Accumulated impairment |
- |
(910) |
(60) |
(312) |
- |
- |
(1,282) |
of which: modification of terms and conditions1 |
- |
(813) |
(60) |
(264) |
- |
- |
(1,137) |
Refinancing2 |
- |
(97) |
- |
(48) |
- |
- |
(145) |
Net non-performing forborne loans |
- |
858 |
135 |
182 |
- |
- |
1,175 |
Collateral held on non-performing forborne loans |
- |
215 |
- |
42 |
- |
- |
257 |
1. Modification of terms is any contractual change apart from refinancing, as a result of credit stress of the counterparty, i.e. interest reductions, loan covenant waivers
2. Refinancing is a new contract to a lender in credit stress, such that they are refinanced and can pay other debt contracts that they were unable to honour
The table below shows an analysis of forborne loans by region. Refer to note 8 of the financial statements for the accounting policy on forborne loans.
|
2017 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & Americas |
Total |
|
Not impaired |
56 |
40 |
395 |
106 |
597 |
Impaired |
353 |
778 |
202 |
255 |
1,588 |
Total forborne loans |
409 |
818 |
597 |
361 |
2,185 |
|
2016 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & |
Total |
|
Not impaired |
159 |
237 |
584 |
109 |
1,089 |
Impaired |
327 |
718 |
243 |
138 |
1,426 |
Total forborne loans1 |
486 |
955 |
827 |
247 |
2,515 |
1 The 2016 comparatives have been represented to reflect the forbearance policy change
Credit quality by geographic region
The following tables set out an analysis of the loans to customers and banks, split between those loans that are neither past due nor impaired, those that are past due but not impaired, those that are impaired, the impairment provision and net impairment charge by geographic region.
Loans and advances to customers
|
2017 |
|||||||||
Balance sheet1 |
|
Profit and loss1 |
||||||||
Neither |
Past due |
Individually impaired |
Individual impairment provision |
Portfolio impairment provision |
Total |
Net individual impairment provision |
Portfolio impairment provision/ (release) |
Net loan impairment charge |
||
Greater China & North Asia |
125,565 |
809 |
806 |
(312) |
(129) |
126,739 |
|
169 |
(79) |
90 |
ASEAN & South Asia |
79,175 |
1,711 |
4,233 |
(2,361) |
(179) |
82,579 |
|
871 |
(66) |
805 |
Africa & Middle East |
27,774 |
1,153 |
2,654 |
(1,858) |
(121) |
29,602 |
|
308 |
(5) |
303 |
Europe & Americas |
45,997 |
194 |
1,184 |
(706) |
(36) |
46,633 |
|
233 |
(90) |
143 |
|
278,511 |
3,867 |
8,877 |
(5,237) |
(465) |
285,553 |
|
1,581 |
(240) |
1,341 |
|
2016 |
|||||||||
Balance sheet1 |
|
Profit and loss1 |
||||||||
Neither |
Past due |
Individually impaired |
Individual impairment provision |
Portfolio impairment provision |
Total |
Net |
Portfolio impairment provision/ (release) |
Net loan impairment charge |
||
Greater China & North Asia |
109,250 |
901 |
1,115 |
(535) |
(198) |
110,533 |
|
484 |
(53) |
431 |
ASEAN & South Asia |
69,652 |
1,648 |
4,665 |
(2,568) |
(236) |
73,161 |
|
984 |
6 |
990 |
Africa & Middle East |
25,846 |
1,720 |
2,682 |
(1,981) |
(127) |
28,140 |
|
594 |
7 |
601 |
Europe & Americas |
43,274 |
279 |
1,218 |
(583) |
(126) |
44,062 |
|
491 |
92 |
583 |
|
248,022 |
4,548 |
9,680 |
(5,667) |
(687) |
255,896 |
|
2,553 |
52 |
2,605 |
1 Excludes impairment charges relating to debt securities classified as loans and receivables, refer to note 8 of the financial statements for details
Loans and advances to banks
|
2017 |
|||||||||
Balance sheet1 |
|
Profit and loss1 |
||||||||
Neither |
Past due |
Individually impaired |
Individual impairment provision |
Portfolio impairment provision |
Total |
Net individual impairment provision |
Portfolio impairment provision/ (release) |
Net loan impairment charge |
||
Greater China & North Asia |
33,096 |
130 |
- |
- |
- |
33,226 |
|
- |
- |
- |
ASEAN & South Asia |
16,482 |
41 |
- |
- |
- |
16,523 |
|
- |
- |
- |
Africa & Middle East |
7,328 |
101 |
- |
- |
(1) |
7,428 |
|
- |
- |
- |
Europe & Americas |
24,143 |
- |
9 |
(4) |
- |
24,148 |
|
- |
- |
- |
|
81,049 |
272 |
9 |
(4) |
(1) |
81,325 |
|
- |
- |
- |
|
2016 |
|||||||||
Balance sheet1 |
|
Profit and loss1 |
||||||||
Neither |
Past due |
Individually impaired |
Individual impairment provision |
Portfolio impairment provision |
Total |
Net |
Portfolio impairment provision/ (release) |
Net loan impairment charge |
||
Greater China & North Asia |
31,930 |
309 |
- |
- |
- |
32,239 |
|
- |
- |
- |
ASEAN & South Asia |
14,722 |
17 |
163 |
(163) |
(1) |
14,738 |
|
- |
- |
- |
Africa & Middle East |
7,492 |
61 |
- |
- |
- |
7,553 |
|
- |
- |
- |
Europe & Americas |
20,070 |
69 |
- |
- |
- |
20,139 |
|
- |
- |
- |
|
74,214 |
456 |
163 |
(163) |
(1) |
74,669 |
|
- |
- |
- |
1 Excludes impairment charges relating to debt securities classified as loans and receivables, refer to note 8 of the financial statements for details
Credit quality analysis by industry
|
2017 |
||||||||
Neither |
Past due |
Individually impaired |
Individual impairment provision |
Total |
Movements in impairment |
||||
Individual impairment provision |
Net impairment charge/ |
Amounts written |
Individual impairment provision |
||||||
Industry: |
|
|
|
|
|
|
|
|
|
Energy |
18,090 |
116 |
1,217 |
(879) |
18,544 |
814 |
208 |
(143) |
879 |
Manufacturing |
22,085 |
397 |
860 |
(611) |
22,731 |
644 |
250 |
(283) |
611 |
Financing, insurance and non-banking |
44,439 |
314 |
444 |
(213) |
44,984 |
409 |
79 |
(275) |
213 |
Transport, telecom and utilities |
15,640 |
123 |
777 |
(376) |
16,164 |
218 |
230 |
(72) |
376 |
Food and household products |
9,543 |
179 |
756 |
(422) |
10,056 |
561 |
75 |
(214) |
422 |
Commercial real estate |
14,574 |
199 |
400 |
(34) |
15,139 |
33 |
9 |
(8) |
34 |
Mining and quarrying |
6,063 |
64 |
1,297 |
(783) |
6,641 |
1,140 |
26 |
(383) |
783 |
Consumer durables |
8,792 |
132 |
725 |
(583) |
9,066 |
523 |
124 |
(64) |
583 |
Construction |
3,346 |
60 |
781 |
(484) |
3,703 |
553 |
59 |
(128) |
484 |
Trading companies & distributors |
2,155 |
43 |
458 |
(331) |
2,325 |
310 |
46 |
(25) |
331 |
Government |
14,390 |
25 |
6 |
(1) |
14,420 |
- |
(1) |
2 |
1 |
Other |
5,579 |
16 |
252 |
(176) |
5,671 |
195 |
37 |
(54) |
178 |
Retail Products: |
|
|
|
|
|
|
|
|
|
Mortgage |
77,279 |
1,340 |
276 |
(117) |
78,778 |
104 |
34 |
(21) |
117 |
CCPL and other unsecured lending |
16,700 |
610 |
360 |
(135) |
17,535 |
140 |
398 |
(405) |
133 |
Auto |
588 |
45 |
- |
- |
633 |
- |
1 |
(1) |
- |
Secured Wealth products |
13,969 |
57 |
198 |
(70) |
14,154 |
4 |
28 |
38 |
70 |
Other |
5,279 |
147 |
70 |
(22) |
5,474 |
19 |
19 |
(16) |
22 |
Loans and advances to customers |
278,511 |
3,867 |
8,877 |
(5,237) |
286,018 |
|
|
|
|
Individual impairment provision |
|
|
|
|
|
5,667 |
1,622 |
(2,052) |
5,237 |
Portfolio impairment provision |
|
|
|
|
(465) |
687 |
(239) |
17 |
465 |
Total |
|
|
|
|
285,553 |
6,354 |
1,383 |
(2,035) |
5,702 |
|
|
|
|
|
|
|
|
|
|
Loans and advances to banks |
81,049 |
272 |
9 |
(4) |
81,326 |
- |
- |
- |
- |
Individual impairment provision |
|
|
|
|
|
163 |
- |
(159) |
4 |
Portfolio impairment provision |
|
|
|
|
(1) |
1 |
- |
- |
1 |
Total |
|
|
|
|
81,325 |
164 |
- |
(159) |
5 |
Credit quality analysis by industry continued
|
2016 |
||||||||
Neither |
Past due |
Individually impaired |
Individual impairment provision |
Total |
Movements in impairment |
||||
Individual impairment provision |
Net impairment charge/ |
Amounts written |
Individual impairment provision |
||||||
Industry: |
|
|
|
|
|
|
|
|
|
Energy |
18,110 |
287 |
1,194 |
(814) |
18,777 |
1,679 |
288 |
(1,153) |
814 |
Manufacturing |
18,840 |
477 |
1,069 |
(644) |
19,742 |
563 |
259 |
(178) |
644 |
Financing, insurance and non-banking |
40,425 |
314 |
903 |
(409) |
41,233 |
423 |
63 |
(77) |
409 |
Transport, telecom and utilities |
15,032 |
176 |
509 |
(218) |
15,499 |
519 |
113 |
(414) |
218 |
Food and household products |
9,562 |
253 |
798 |
(561) |
10,052 |
373 |
215 |
(27) |
561 |
Commercial real estate |
10,920 |
323 |
74 |
(33) |
11,284 |
20 |
14 |
(1) |
33 |
Mining and quarrying |
7,326 |
149 |
1,489 |
(1,140) |
7,824 |
854 |
230 |
56 |
1,140 |
Consumer durables |
8,854 |
122 |
917 |
(523) |
9,370 |
426 |
394 |
(297) |
523 |
Construction |
3,348 |
69 |
952 |
(553) |
3,816 |
332 |
258 |
(37) |
553 |
Trading companies & distributors |
2,098 |
94 |
507 |
(310) |
2,389 |
320 |
67 |
(77) |
310 |
Government |
6,313 |
- |
2 |
- |
6,315 |
- |
- |
- |
- |
Other |
4,484 |
85 |
252 |
(195) |
4,626 |
174 |
59 |
(38) |
195 |
Retail Products: |
|
|
|
|
|
|
|
|
|
Mortgage |
72,071 |
1,296 |
244 |
(104) |
73,507 |
125 |
26 |
(47) |
104 |
CCPL and other unsecured lending |
15,262 |
669 |
415 |
(140) |
16,206 |
195 |
458 |
(513) |
140 |
Auto |
600 |
38 |
- |
- |
638 |
- |
1 |
(1) |
- |
Secured wealth products |
10,757 |
46 |
281 |
(4) |
11,080 |
4 |
64 |
(64) |
4 |
Other |
4,020 |
150 |
74 |
(19) |
4,225 |
16 |
45 |
(42) |
19 |
Loans and advances to customers |
248,022 |
4,548 |
9,680 |
(5,667) |
256,583 |
|
|
|
|
Individual impairment provision |
|
|
|
|
|
6,023 |
2,554 |
(2,910) |
5,667 |
Portfolio impairment provision |
|
|
|
|
(687) |
657 |
53 |
(23) |
687 |
Total |
|
|
|
|
255,896 |
6,680 |
2,607 |
(2,933) |
6,354 |
|
|
|
|
|
|
|
|
|
|
Loans and advances to banks |
74,214 |
456 |
163 |
(163) |
74,670 |
- |
- |
- |
- |
Individual impairment provision |
|
|
|
|
|
163 |
- |
- |
163 |
Portfolio impairment provision |
|
|
|
|
(1) |
1 |
- |
- |
1 |
Total |
|
|
|
|
74,669 |
164 |
- |
- |
164 |
Problem credit management and provisioning
Impairments
At a Group level, total loan impairment including the liquidation portfolio was $1,362 million, representing 50 basis points (bps) of average customer loans and advances, down from $2,791 million (107 bps) in 2016.
Loan impairment in the Group's ongoing business improved from the elevated levels seen in 2015 and 2016. The ongoing business loan impairment of $1,200 million in 2017 is significantly lower than in previous years (2016: $2,382 million, 2015: $2,381 million).
The ongoing business loan impairment in Corporate & Institutional Banking decreased to $657 million in 2017 (2016: $1,401 million). This was due to lower loan impairment in the commodities and diamond and jewellery sectors. Loan impairment in 2017 was primarily driven by a small number of India related exposures, with ASEAN & South Asia contributing to 60 per cent of the total Corporate & Institutional Banking impairment charge.
Commercial Banking ongoing business loan impairment fell by 66 per cent to $168 million in 2017 (2016: $491 million). This was driven by lower losses across all regions, reflecting improvements in credit and account management, but the Group remains vigilant of emerging risks.
By industry, loan impairment related to the commodities sector has decreased significantly. Total commodities (excluding oil and gas related exposures) loan impairment for Corporate & Institutional Banking and Commercial Banking fell to $18 million (2016: $536 million).
In India, ongoing business loan impairment in Corporate & Institutional Banking was down 32 per cent to $193 million (2016: $284 million) mainly due to reductions in the commodities sector. Commercial Banking ongoing business loan impairment in India decreased by 64 per cent to $37 million (2016: $103 million).
Retail Banking loan impairment reduced by 24 per cent to $374 million in 2017, (2016: $489 million), driven by improved portfolio performance and the implementation of the Risk Decision Framework, although in the fourth quarter of 2017 we took a one-off provision of $40 million due to a change in Personal Debt Rehabilitation Scheme regulation in Korea. The framework targets higher quality sustainable growth and lower volatility in the unsecured asset portfolio. Improvements have been observed, particularly in key markets such as Korea, Hong Kong, Singapore and Malaysia.
During the last quarter of 2017, a net impairment charge of $57 million was taken on the liquidation portfolio bringing the yearly total to $120 million (2016: $409 million). This resulted from the resolution of some cases and other reassessments of realisable value. Further restructuring impairment also includes a $30 million impairment relating to the non-strategic Principal Finance business in Corporate & Institutional Banking.
The following table provides details of the impairment charge for the period.
|
2017 |
2016 |
Ongoing business portfolio loan impairment |
|
|
Corporate & Institutional Banking |
657 |
1,401 |
Retail Banking |
374 |
489 |
Commercial Banking |
168 |
491 |
Private Banking |
1 |
1 |
Impairment on loans and advances and other credit risk provisions |
1,200 |
2,382 |
|
|
|
Restructuring |
|
|
Liquidation portfolio |
120 |
409 |
Others |
42 |
- |
Impairment on loans and advances and other credit risk provisions |
162 |
409 |
Total Loan Impairment |
1,362 |
2,791 |
Non-performing loans by client segment
Gross NPLs decreased by $1,008 million, or 10 per cent, compared to 2016, as increases in the ongoing business were more than offset by planned reductions in the liquidation portfolio. NPLs in the Corporate & Institutional Banking liquidation portfolio decreased by $1,388 million in 2017 to $1,945 million (2016: $3,333 million) on account of loan disposals, write-offs and repayments.
Corporate & Institutional Banking ongoing business NPLs increased by $869 million in 2017 primarily due to the deterioration of a few accounts in the oil & gas support services and India. New NPLs were mainly accounts that had been closely monitored over a period of time and include a large exposure that was repaid in full, and some others that are highly collateralised.
For sectors with previously high NPL exposures, specifically commodities and diamond & jewellery, NPL inflows were muted in 2017 relative to 2016.
NPLs in Commercial Banking reduced by $343 million (14 per cent) relative to 2016. This was largely due to write-offs and recoveries in India, Hong Kong and the United Arab Emirates (UAE). Commercial Banking NPL inflows were down 28 per cent in 2017 at $460 million (2016: $642 million).
Gross NPLs in Retail Banking reduced by 11 per cent compared to 2016, benefiting from the risk decision framework implemented in 2015.
The movement of gross NPLs to banks and customers, together with the provisions held and the respective cover ratios for all segments, is presented in the next table.
Provisions
The Group's loan loss provisions are established to recognise incurred impairment losses either on specific loan assets or within a portfolio of loans and advances.
Provisions are taken in the form of:
• Individually impaired provisions (IIP);
• Portfolio impairment provisions (PIP), which cover the inherent losses in the portfolio that exist at the balance sheet date but have not yet been individually identified.
Individual impairment provisions
Corporate & Institutional and Commercial Banking individual impairment provisions decreased by $493 million and $171 million respectively in 2017. These were primarily driven by a reduction of provision charges in the commodities and diamond and jewellery sectors, as well as writedowns.
Retail Banking individual impairment provision as a percentage of loans and advances remained broadly stable at 0.2 per cent.
Portfolio impairment provisions
Portfolio impairment provision balances for the Group have decreased by $222 million from 2016 due to reductions in Corporate & Institutional Banking of $105 million, Commercial Banking of $67 million and Retail Banking of $50 million. These decreases were on account of judgemental risk adjustments to the modelled number which has now reduced due to improvement in portfolio credit quality and receipt of expected repayments in certain stress portfolios.
Cover ratio
The cover ratio measures the proportion of total impairment provisions to gross NPLs, and is a metric commonly used in considering impairment trends. This metric does not allow for variations in the composition of NPLs and should be used in conjunction with other credit risk information provided, including the level of collateral cover.
The cover ratio for the Group currently stands at 65 per cent (2016: 67 per cent). With collateral, the cover ratio has improved to 81 per cent (2016: 76 per cent).
The cover ratio for the Group's ongoing portfolio has reduced from 69 per cent in 2016 to 63 per cent in 2017 and with collateral, the cover ratio improved to 79 per cent from 74 per cent.
By client segment, the cover ratio for Corporate & Institutional Banking reduced from 65 per cent to 61 per cent. The cover ratio including collateral improved from 72 per cent to 77 per cent.
The cover ratio for Commercial Banking remained relatively flat at 75 per cent and 84 per cent including collateral. The cover ratio for Retail Banking improved from 85 per cent to 87 per cent, and including collateral increased from 85 per cent to 89 per cent.
The balance of NPLs not covered by individual impairment provisions represents the adjusted value of collateral held and the Group's estimate of the net outcome of any workout or recovery strategy.
Collateral provides risk mitigation to some degree in all client segments and supports the credit quality and cover ratio assessments post impairment provisions. Further information on collateral is provided in the Credit risk mitigation section.
|
2017 |
||||
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private |
Total |
|
Gross non-performing loans at 1 January |
6,477 |
547 |
2,370 |
294 |
9,688 |
Exchange translation differences |
86 |
28 |
45 |
4 |
163 |
Classified as non-performing during the year |
2,316 |
572 |
460 |
20 |
3,368 |
Recoveries on loans and advances previously written off |
83 |
16 |
64 |
1 |
164 |
Additions |
2,399 |
588 |
524 |
21 |
3,532 |
Transferred to assets held for sale |
- |
- |
- |
- |
- |
Transferred to performing during the year |
- |
(47) |
(21) |
(3) |
(71) |
Net repayments |
(1,145) |
(130) |
(362) |
(104) |
(1,741) |
Amounts written off |
(888) |
(481) |
(400) |
- |
(1,769) |
Disposals of loans |
(807) |
(16) |
(130) |
(5) |
(958) |
Other movement |
(165) |
- |
- |
- |
(165) |
Reductions |
(3,005) |
(674) |
(913) |
(112) |
(4,704) |
|
|
|
|
|
|
Gross non-performing loans at 31 December |
5,957 |
489 |
2,026 |
207 |
8,679 |
Individual impairment provisions1 |
(3,468) |
(215) |
(1,430) |
(67) |
(5,180) |
Net non-performing loans |
2,489 |
274 |
596 |
140 |
3,499 |
Portfolio impairment provision |
(157) |
(208) |
(99) |
(2) |
(466) |
Total |
2,332 |
66 |
497 |
138 |
3,033 |
Cover ratio |
61% |
87% |
75% |
33% |
65% |
Collateral ($ million) |
1,111 |
218 |
277 |
203 |
1,809 |
Cover ratio (after collateral) |
77% |
89% |
84% |
100% |
81% |
|
|
|
|
|
|
Of the above, included in liquidation portfolio: |
|
|
|
|
|
Gross non-performing loans at 31 December |
1,945 |
- |
125 |
156 |
2,226 |
Individual impairment provisions |
(1,388) |
- |
(123) |
(62) |
(1,573) |
Net non-performing loans |
557 |
- |
2 |
94 |
653 |
Cover ratio |
71% |
- |
98% |
40% |
71% |
Collateral ($ million) |
237 |
- |
- |
96 |
333 |
Cover ratio (after collateral) |
84% |
- |
98% |
100% |
86% |
1 The difference to total individual impairment provision reflects provisions against forborne loans that are not included within non-performing loans as they have been performing for 180 days
|
2016 |
||||
Corporate & Institutional |
Retail |
Commercial Banking |
Private |
Total |
|
Gross non-performing loans at 1 January |
9,128 |
747 |
2,559 |
325 |
12,759 |
Exchange translation differences |
(68) |
(12) |
(59) |
(2) |
(141) |
Classified as non-performing during the year |
1,800 |
864 |
642 |
103 |
3,409 |
Recoveries on loans and advances previously written off |
13 |
63 |
51 |
- |
127 |
Additions |
1,813 |
927 |
693 |
103 |
3,536 |
Transferred to assets held for sale |
- |
(47) |
- |
- |
(47) |
Transferred to performing during the year |
(39) |
(147) |
(5) |
- |
(191) |
Net repayments |
(2,416) |
(180) |
(300) |
- |
(2,896) |
Amounts written off |
(1,390) |
(722) |
(480) |
(63) |
(2,655) |
Disposals of loans |
(552) |
(18) |
(39) |
(69) |
(678) |
Reductions |
(4,397) |
(1,114) |
(824) |
(132) |
(6,467) |
|
|
|
|
|
|
Gross non-performing loans at 31 December |
6,476 |
548 |
2,369 |
294 |
9,687 |
Individual impairment provisions1 |
(3,961) |
(209) |
(1,601) |
(5) |
(5,776) |
Net non-performing loans |
2,515 |
339 |
768 |
289 |
3,911 |
Portfolio impairment provision |
(262) |
(258) |
(166) |
(2) |
(688) |
Total |
2,253 |
81 |
602 |
287 |
3,223 |
Cover ratio |
65% |
85% |
75% |
2% |
67% |
Collateral ($ million) |
702 |
255 |
358 |
290 |
1,605 |
Cover ratio (after collateral) |
72% |
85% |
83% |
100% |
76% |
|
|
|
|
|
|
Of the above, included in liquidation portfolio: |
|
|
|
|
|
Gross non-performing loans at 31 December |
3,333 |
- |
213 |
261 |
3,807 |
Individual impairment provisions |
(2,267) |
- |
(154) |
- |
(2,421) |
Net non-performing loans |
1,066 |
- |
59 |
261 |
1,386 |
Cover ratio |
68% |
- |
72% |
- |
64% |
Collateral ($ million) |
356 |
- |
- |
261 |
617 |
Cover ratio (after collateral, excluding PIP) |
79% |
- |
72% |
100% |
80% |
1 The difference to total individual impairment provision reflects provisions against forborne loans that are not included within non-performing loans as they have been performing for 180 days
Non-performing loans by geographic region
Gross non-performing loans decreased by $1,008 million compared to 2016. The largest reductions were observed in the ASEAN & South Asia ($763 million) and Greater China & North Asia ($275 million) regions, primarily driven by planned reductions in the liquidation portfolio.
The following tables present a breakdown of total non-performing loans to banks and customers by geographic regions:
|
2017 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & Americas |
Total |
|
Loans and advances |
|
|
|
|
|
Gross non-performing |
895 |
3,948 |
2,692 |
1,144 |
8,679 |
Individual impairment provisions1 |
(396) |
(2,389) |
(1,675) |
(720) |
(5,180) |
Non-performing loans net of individual impairment provision |
499 |
1,559 |
1,017 |
424 |
3,499 |
Portfolio impairment provision |
(129) |
(180) |
(121) |
(36) |
(466) |
Net non-performing loans and advances |
370 |
1,379 |
896 |
388 |
3,033 |
Cover ratio |
59% |
65% |
67% |
66% |
65% |
1 The difference to total individual impairment provision reflects provisions against forborne loans that are not included within non-performing loans as they have been performing for 180 days
|
2016 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & |
Total |
|
Loans and advances |
|
|
|
|
|
Gross non-performing |
1,170 |
4,711 |
2,739 |
1,067 |
9,687 |
Individual impairment provision1 |
(600) |
(2,659) |
(1,847) |
(670) |
(5,776) |
Non-performing loans net of individual impairment provision |
570 |
2,052 |
892 |
397 |
3,911 |
Portfolio impairment provision |
(198) |
(236) |
(128) |
(126) |
(688) |
Net non-performing loans and advances |
372 |
1,816 |
764 |
271 |
3,223 |
Cover ratio |
68% |
61% |
72% |
75% |
67% |
1 The difference to total individual impairment provision reflects provisions against forborne loans that are not included within non-performing loans as they have been performing for 180 days
Individual and portfolio impairment provision
The present value of estimated future cashflows, discounted at the asset's original effective interest rate, is used to determine the amount of any impairment. In the case of the liquidation portfolio, the effect and timing of the disposal strategy is included in the estimate of future cashflows.
The reduction in individual impairment provisions is predominantly due to write offs from the liquidation portfolio.
The portfolio impairment provisions reduced primarily due to an improvement in overall portfolio credit quality and receipt of expected repayments in certain stress portfolios.
Amounts written off are significantly lower although this is due to 2016 seeing elevated levels in the liquidation portfolio and ongoing business, mainly in India.
|
2017 |
|
2016 |
||||
Individual impairment provisions |
Portfolio impairment provisions |
Total |
Individual impairment provisions |
Portfolio |
Total |
||
Provisions held at 1 January |
5,830 |
688 |
6,518 |
|
6,186 |
658 |
6,844 |
Exchange translation differences |
102 |
14 |
116 |
|
(68) |
(9) |
(77) |
Amounts written off |
(2,160) |
- |
(2,160) |
|
(2,745) |
- |
(2,745) |
Releases of acquisition fair values |
(1) |
- |
(1) |
|
- |
- |
- |
Recoveries of amounts previously written off |
234 |
- |
234 |
|
177 |
- |
177 |
Discount unwind |
(83) |
- |
(83) |
|
(287) |
- |
(287) |
Transferred to assets held for sale |
(6) |
3 |
(3) |
|
(16) |
(13) |
(29) |
Disposal of business units |
- |
- |
- |
|
- |
- |
- |
New provisions - restructuring |
162 |
- |
162 |
|
409 |
- |
409 |
New provisions - excluding restructuring |
2,094 |
57 |
2,151 |
|
2,582 |
205 |
2,787 |
New provisions |
2,256 |
57 |
2,313 |
|
2,991 |
205 |
3,196 |
Recoveries/provisions no longer required |
(652) |
(296) |
(948) |
|
(438) |
(153) |
(591) |
Net impairment charge/(releases) against profit |
1,604 |
(239) |
1,365 |
|
2,553 |
52 |
2,605 |
Other movements |
(279) |
- |
(279) |
|
30 |
- |
30 |
Provisions held at 31 December |
5,241 |
466 |
5,707 |
|
5,830 |
688 |
6,518 |
Individually impaired loans by client segment
Gross individually impaired loans decreased by 10 per cent in 2017, primarily driven by the Corporate & Institutional Banking segment which reduced by $519 million on account of loan disposals and settlements, mainly in the ASEAN & South Asia region.
Gross impaired loans in the Retail Banking book have shown modest improvement with a decrease of 3 per cent year-on-year.
The following table shows the movement of individually impaired loans and provisions for each client segment:
|
2017 |
||||
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private |
Total |
|
Gross impaired loans at 1 January |
6,476 |
720 |
2,353 |
294 |
9,843 |
Exchange translation differences |
87 |
48 |
45 |
4 |
184 |
Classified as individually impaired during the year |
2,293 |
421 |
380 |
20 |
3,114 |
Transferred to not impaired during the year |
- |
(31) |
(21) |
(3) |
(55) |
Other movements1 |
(2,899) |
(463) |
(730) |
(108) |
(4,200) |
Gross impaired loans at 31 December |
5,957 |
695 |
2,027 |
207 |
8,886 |
|
|
|
|
|
|
Provisions held at 1 January |
3,961 |
262 |
1,602 |
5 |
5,830 |
Exchange translation differences |
55 |
15 |
31 |
1 |
102 |
Amounts written off |
(1,139) |
(577) |
(444) |
- |
(2,160) |
Releases of acquisition fair values |
(1) |
- |
- |
- |
(1) |
Recoveries of amounts previously written off |
27 |
153 |
22 |
32 |
234 |
Discount unwind |
(41) |
(23) |
(19) |
- |
(83) |
Disposal of business units |
- |
(6) |
- |
- |
(6) |
New provisions |
1,197 |
669 |
327 |
63 |
2,256 |
Recoveries/provisions no longer required |
(314) |
(218) |
(86) |
(34) |
(652) |
Net individual impairment charge against profit |
883 |
451 |
241 |
29 |
1,604 |
Other movements2 |
(277) |
- |
(2) |
- |
(279) |
Individual impairment provisions held at 31 December |
3,468 |
275 |
1,431 |
67 |
5,241 |
Net individually impaired loans |
2,489 |
420 |
596 |
140 |
3,645 |
|
2016 |
||||
Corporate & Institutional |
Retail |
Commercial Banking |
Private |
Total |
|
Gross impaired loans at 1 January |
9,128 |
831 |
2,546 |
325 |
12,830 |
Exchange translation differences |
(75) |
(11) |
(59) |
(1) |
(146) |
Classified as individually impaired during the year |
1,801 |
769 |
573 |
103 |
3,246 |
Transferred to not impaired during the year |
(39) |
(87) |
(2) |
- |
(128) |
Other movements1 |
(4,339) |
(782) |
(705) |
(133) |
(5,959) |
Gross impaired loans at 31 December |
6,476 |
720 |
2,353 |
294 |
9,843 |
|
|
|
|
|
|
Provisions held at 1 January |
4,230 |
337 |
1,616 |
3 |
6,186 |
Exchange translation differences |
(77) |
(3) |
12 |
- |
(68) |
Amounts written off |
(1,439) |
(722) |
(520) |
(64) |
(2,745) |
Recoveries of amounts previously written off |
8 |
164 |
5 |
- |
177 |
Discount unwind |
(230) |
(26) |
(31) |
- |
(287) |
Transferred to assets held for sale |
- |
(16) |
- |
- |
(16) |
New provisions |
1,574 |
763 |
587 |
67 |
2,991 |
Recoveries/provisions no longer required |
(134) |
(235) |
(68) |
(1) |
(438) |
Net individual impairment charge against profit |
1,440 |
528 |
519 |
66 |
2,553 |
Other movements2 |
29 |
- |
1 |
- |
30 |
Individual impairment provisions held at 31 December |
3,961 |
262 |
1,602 |
5 |
5,830 |
Net individually impaired loans |
2,515 |
458 |
751 |
289 |
4,013 |
1 Other movements include repayments, amounts written off and disposals of loans
2 Other movements include provisions for liabilities and charges that have been drawn down and are now part of loan impairment
Credit risk mitigation
Potential credit losses from any given account, customer or portfolio are mitigated using a range of tools such as collateral, netting arrangements, credit insurance and credit derivatives, taking into account expected volatility and guarantees.
The reliance that can be placed on these mitigants is carefully assessed in light of issues such as legal certainty and enforceability, market valuation correlation and counterparty risk of the guarantor. Our overall approach to credit risk mitigation is further discussed in Risk Management Approach.
Collateral
The requirement for collateral is not a substitute for the ability to pay, which is the primary consideration for any lending decisions. As a result of reinforcing our collateralisation requirements, the fair value of collateral held as a percentage of amount outstanding has remained stable in 2017.
The unadjusted market value of collateral across all asset types, in respect of Corporate & Institutional Banking and Commercial Banking, without adjusting for over-collateralisation, was $247 billion (2016: $229 billion).
The collateral values in the table below are adjusted where appropriate in accordance with our risk mitigation policy and for the effect of over-collateralisation. 47 per cent of clients that have placed collateral with the Group are over-collateralised. The average amount of over-collateralisation is 41 per cent.
We have remained conservative in the way we assess the value of collateral, which is calibrated for a severe downturn and back-tested against our prior experience. On average, across all types of non-cash collateral, the value ascribed is approximately half of its current market value. Collateral held against Corporate & Institutional Banking and Commercial Banking exposures amounted to $77 billion (2016: $64 billion).
In the Retail Banking and Private Banking segments, a secured loan is one where the borrower pledges an asset as collateral of which the Group is able to take possession in the event that the borrower defaults. The collateral level for Retail Banking has increased by $3.2 billion in 2017.
For loans and advances to customers and banks (including those held at fair value through profit or loss), the table below sets out the fair value of collateral held by the Group, adjusted where appropriate in accordance with the risk mitigation policy as outlined in Risk Management Approach and for the effect of over-collateralisation.
|
Maximum exposure |
|
Collateral |
|
Net expsoure1,2 |
||||||
Total |
Past due |
Individually impaired loans |
Total |
Past due |
Individually impaired loans |
Total |
Past due |
Individually impaired loans |
|||
As at 31 December 2017 |
|
|
|
|
|
|
|
|
|
|
|
Corporate & Institutional Banking |
193,442 |
1,455 |
5,957 |
|
70,499 |
160 |
1,111 |
|
122,943 |
1,295 |
4,846 |
Retail Banking |
103,371 |
2,114 |
695 |
|
76,543 |
1,514 |
218 |
|
26,828 |
600 |
477 |
Commercial Banking |
29,602 |
483 |
2,027 |
|
6,570 |
247 |
277 |
|
23,032 |
236 |
1,750 |
Private Banking |
13,359 |
85 |
207 |
|
9,296 |
82 |
203 |
|
4,063 |
3 |
4 |
Central & other items |
27,570 |
2 |
- |
|
5,339 |
- |
- |
|
22,231 |
2 |
- |
Total |
367,344 |
4,139 |
8,886 |
|
168,247 |
2,003 |
1,809 |
|
199,097 |
2,136 |
7,077 |
As at 31 December 2016 |
|
|
|
|
|
|
|
|
|
|
|
Corporate & Institutional Banking |
174,877 |
2,105 |
6,476 |
|
57,378 |
93 |
702 |
|
117,499 |
2,012 |
5,774 |
Retail Banking |
93,846 |
2,102 |
720 |
|
73,352 |
1,527 |
255 |
|
20,494 |
575 |
465 |
Commercial Banking |
25,042 |
700 |
2,353 |
|
7,084 |
393 |
358 |
|
17,958 |
307 |
1,995 |
Private Banking |
11,926 |
97 |
294 |
|
7,584 |
94 |
290 |
|
4,342 |
3 |
4 |
Central & other items |
25,562 |
- |
- |
|
5,912 |
- |
- |
|
19,650 |
- |
- |
Total |
331,253 |
5,004 |
9,843 |
|
151,310 |
2,107 |
1,605 |
|
179,943 |
2,897 |
8,238 |
1 Includes loans held at fair value through profit or loss
2 Includes loans and advances
Collateral held against Corporate & Institutional Banking and Commercial Banking exposures amounted to $77 billion (2016: $64 billion). The increase of $13 billion was primarily in reverse repurchase (repo) collateral due to increased liquidity management activity by the Group. The proportion of investment grade securities in reverse repos collateral has increased from 85 per cent in 2016 to 96 per cent in 2017. The average residual maturity of the reverse repo collateral is 8.3 years.
Collateral taken for longer-term and sub-investment grade Corporate loans continues to be high at 55 per cent (2016: 55 per cent).
Our underwriting standards encourage taking specific charges on assets and we consistently seek high quality, investment grade collateral. 27 per cent of collateral held comprises physical assets or is property-based (2016: 29 per cent), with the remainder largely in cash and investment securities.
Non-tangible collateral such as guarantees and standby letters of credit may also be held against corporate exposures, although the financial effect of this type of collateral is less significant in terms of recoveries. However, this type of collateral is considered when determining probability of default and other credit-related factors. Collateral is also held against off-balance sheet exposures, including undrawn commitments and trade-related instruments.
The following table provides an analysis of the types of collateral held against Corporate & Institutional Banking and Commercial Banking loan exposures.
|
2017 |
2016 |
Maximum exposure |
193,442 |
174,877 |
|
|
|
Property |
7,014 |
5,920 |
Plant, machinery and other stock |
3,612 |
3,574 |
Cash |
5,742 |
7,778 |
Reverse repos |
49,736 |
35,930 |
AAA |
1,027 |
327 |
A- to AA+ |
40,421 |
27,660 |
BBB- to BBB+ |
6,448 |
2,657 |
Lower than BBB- |
915 |
854 |
Unrated |
925 |
4,432 |
Commodities |
162 |
772 |
Ships and aircraft |
4,233 |
3,404 |
Total value of collateral |
70,499 |
57,378 |
Net exposure |
122,943 |
117,499 |
|
2017 |
2016 |
Maximum exposure |
29,602 |
25,042 |
|
|
|
Property |
4,642 |
4,843 |
Plant, machinery and other stock |
767 |
935 |
Cash |
923 |
1,064 |
Reverse repos |
- |
- |
AAA |
- |
- |
A- to AA+ |
- |
- |
BBB- to BBB+ |
- |
- |
Lower than BBB- |
- |
- |
Unrated |
- |
- |
Commodities |
4 |
4 |
Ships and aircraft |
234 |
238 |
Total value of collateral |
6,570 |
7,084 |
Net exposure |
23,032 |
17,958 |
In Retail Banking and Private Banking, 84 per cent of the portfolio is fully secured. The proportion of unsecured loans remains unchanged at 15 per cent.
LTV ratios measure the ratio of the current mortgage outstanding to the current fair value of the properties on which they are secured.
In mortgages the value of property held as security significantly exceeds the value of mortgage loans. The average LTV of the overall mortgage portfolio is less than 47 per cent, a decrease from the end of 2016 (49 per cent). Hong Kong, which represents 37 per cent of the Retail Banking mortgage portfolio has an average LTV of 38.6 per cent. All of our other key markets continue to have low portfolio LTVs, with Korea, Singapore and Taiwan at 48.0 per cent, 59.5 per cent and 50.4 per cent respectively.
An analysis of LTV ratios by geography for the mortgage portfolio is presented in the mortgage LTV ratios by geography table below.
The following table presents an analysis of loans to individuals by product split between fully secured, partially secured and unsecured.
|
2017 |
|
2016 |
||||||
Fully secured |
Partially secured |
Unsecured |
Total1 |
Fully |
Partially secured |
Unsecured |
Total1 |
||
Maximum exposure |
97,523 |
1,301 |
17,750 |
116,574 |
|
88,450 |
1,632 |
15,574 |
105,656 |
Loans to individuals |
|
|
|
|
|
|
|
|
|
Mortgages |
78,755 |
23 |
- |
78,778 |
|
73,484 |
23 |
- |
73,507 |
CCPL |
240 |
86 |
17,209 |
17,535 |
|
360 |
690 |
15,156 |
16,206 |
Auto |
630 |
- |
3 |
633 |
|
635 |
- |
3 |
638 |
Secured wealth products |
13,903 |
156 |
95 |
14,154 |
|
11,036 |
44 |
- |
11,080 |
Other |
3,995 |
1,036 |
443 |
5,474 |
|
2,935 |
875 |
415 |
4,225 |
Total collateral |
|
|
|
85,839 |
|
|
|
|
80,936 |
Net exposure |
|
|
|
30,735 |
|
|
|
|
24,720 |
Percentage of total loans |
84% |
1% |
15% |
|
|
83% |
2% |
15% |
|
1 Amounts net of individual impairment provisions
The following table provides an analysis of LTV ratios by region for the mortgages portfolio:
|
2017 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & Americas |
Total |
|
Less than 50 per cent |
62.9 |
36.1 |
21.6 |
28.4 |
54.7 |
50 per cent to 59 per cent |
16.4 |
17.5 |
16.9 |
23.4 |
16.8 |
60 per cent to 69 per cent |
15.3 |
18.7 |
22.6 |
31.4 |
16.6 |
70 per cent to 79 per cent |
4.5 |
22.8 |
20.8 |
13.7 |
9.5 |
80 per cent to 89 per cent |
0.7 |
4.3 |
11.2 |
2.0 |
1.9 |
90 per cent to 99 per cent |
0.1 |
0.3 |
3.9 |
0.4 |
0.3 |
100 per cent and greater |
0.1 |
0.3 |
3.0 |
0.8 |
0.2 |
Average portfolio loan-to-value |
43.5 |
55.0 |
63.9 |
52.1 |
46.8 |
Loans to individuals - mortgages ($million) |
54,609 |
20,105 |
2,279 |
1,785 |
78,778 |
|
2016 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & |
Total |
|
Less than 50 per cent |
55.9 |
36.9 |
22.3 |
36.7 |
49.9 |
50 per cent to 59 per cent |
18.2 |
16.8 |
16.9 |
37.4 |
18.1 |
60 per cent to 69 per cent |
17.3 |
18.8 |
20.5 |
16.2 |
17.8 |
70 per cent to 79 per cent |
6.4 |
17.6 |
20.7 |
8.3 |
9.7 |
80 per cent to 89 per cent |
1.9 |
8.8 |
11.3 |
0.9 |
3.9 |
90 per cent to 99 per cent |
0.2 |
0.7 |
4.2 |
0.5 |
0.5 |
100 per cent and greater |
0.1 |
0.4 |
4.1 |
- |
0.3 |
Average portfolio loan-to-value |
46.6 |
54.7 |
64.9 |
44.4 |
49.0 |
Loans to individuals - mortgages ($million) |
51,219 |
18,903 |
2,245 |
1,140 |
73,507 |
The Group obtains assets by taking possession of collateral or calling upon other credit enhancements (such as guarantees). Repossessed properties are sold in an orderly fashion. Where the proceeds are in excess of the outstanding loan balance the excess is returned to the borrower. Certain equity securities acquired may be held by the Group for investment purposes and are classified as available-for-sale, and the related loan written off.
The carrying value of collateral possessed and held by the Group as at 31 December 2017 is $24.1 million (2016: $51.1 million). The decrease in collateral value is largely due to the reduction in cash collateral following utilisation to settle customer outstanding.
|
2017 |
2016 |
Property, plant and equipment |
14.9 |
13.0 |
Equity shares |
0.2 |
0.1 |
Guarantees |
4.0 |
11.5 |
Cash |
4.6 |
26.1 |
Other |
0.4 |
0.4 |
Total |
24.1 |
51.1 |
Other credit risk mitigation
Other forms of credit risk mitigation are set out below.
The Group has transferred to third-parties by way of securitisation, the rights to any collection of principal and interest on client loan assets with a face value of $11 million (2016: $21 million). The Group continues to recognise these assets in addition to the proceeds and related liability of $13 million (2016: $15 million) arising from the securitisations. The Group considers the above client loan assets to be encumbered. Further details of encumbered assets are provided in the Encumbered assets section.
The Group has entered into credit default swaps for portfolio management purposes, referencing loan assets with a notional value of $16 billion (2016: $17.5 billion). These credit default swaps are accounted for as guarantees as they meet the accounting requirements set out in International Accounting Standards (IAS) 39. The Group continues to hold the underlying assets referenced in the credit default swaps and it continues to be exposed to related credit and foreign exchange risk on these assets.
The Group enters into master netting agreements, which in the event of default result in a single amount owed by or to the counterparty through netting the sum of the positive and negative mark-to-market values of applicable derivative transactions. The value of exposure under master netting agreements is $29,135 million (2016: $40,391 million).
In addition, we enter into credit support annexes (CSAs) with counterparties where collateral is deemed a necessary or desirable mitigant to the exposure. Cash collateral includes collateral called under a variation margin process from counterparties if total uncollateralised mark-to-market exposure exceeds the threshold and minimum transfer amount specified in the CSA. With certain counterparties, the CSA is reciprocal and requires us to post collateral if the overall mark-to-market values of positions are in the counterparty's favour and exceed an agreed threshold. The Group holds $6,562 million (2016: $7,280 million) under CSAs.
For certain types of exposures, such as letters of credit and guarantees, the Group obtains collateral such as cash depending on internal credit risk assessments, as well as in the case of letters of credit holding legal title to the underlying assets should a default take place.
Other portfolio analysis
This section provides maturity analysis by business segment and industry and Retail Products analysis by region.
Maturity analysis by client segment
The loans and advances to the Corporate & Institutional Banking and Commercial Banking segments remain predominantly short-term, with 70 per cent of loans and advances to customers in the segments maturing in less than one year, a decrease compared to December 2016. 96 per cent of loans to banks mature in less than one year. Shorter maturity gives us the flexibility to respond promptly to events and rebalance or reduce our exposure to clients or sectors that are facing increased pressure or uncertainty.
The Private Banking loan book also demonstrates a short-term bias, typical for loans that are secured on wealth management assets.
The Retail Banking loan book continues to be longer-term in nature with 60 per cent of the loans maturing over five years as mortgages constitute the majority of the Retail Banking loan book.
|
2017 |
|||
One year or less |
One to five years |
Over five years |
Total |
|
Corporate & Institutional Banking |
90,613 |
31,827 |
9,454 |
131,894 |
Retail Banking |
24,200 |
17,341 |
61,680 |
103,221 |
Commercial Banking |
21,683 |
5,293 |
1,231 |
28,207 |
Private Banking |
12,407 |
270 |
676 |
13,353 |
Central & other items |
9,335 |
6 |
2 |
9,343 |
Loans and advances to customers net of individual impairment provision |
158,238 |
54,737 |
73,043 |
286,018 |
Portfolio impairment provision |
|
|
|
(465) |
Net loans and advances to customers |
|
|
|
285,553 |
Net loans and advances to banks |
77,739 |
2,974 |
612 |
81,325 |
|
2016 |
|||
One year or less |
One to five years |
Over five years |
Total |
|
Corporate & Institutional Banking |
84,199 |
29,919 |
8,374 |
122,492 |
Retail Banking |
15,510 |
16,725 |
61,511 |
93,746 |
Commercial Banking |
19,125 |
4,048 |
1,006 |
24,179 |
Private Banking |
10,802 |
249 |
859 |
11,910 |
Central & other items |
4,215 |
39 |
2 |
4,256 |
Loans and advances to customers net of individual impairment provision |
133,851 |
50,980 |
71,752 |
256,583 |
Portfolio impairment provision |
|
|
|
(687) |
Net loans and advances to customers |
|
|
|
255,896 |
Net loans and advances to banks |
71,867 |
2,644 |
158 |
74,669 |
Industry and Retail Products analysis by geographic region
This section provides analysis of the Group's loan portfolio by Industry and Region.
In the Corporate & Institutional Banking and Commercial Banking segments our largest industry exposure is financing, insurance and non-banking, which constitutes 27 per cent of Corporate & Institutional Banking and Commercial Banking loans and advances to customers (2016: 27 per cent). Lending to financing, insurance and non-banking clients is mostly to investment grade institutions and is part of the liquidity management of the Group.
The manufacturing sector makes up 13 per cent of the Corporate & Institutional Banking and Commercial Banking loans and advances (2016: 13 per cent). The manufacturing industry group is spread across a diverse range of industries, including automobiles and components, capital goods, pharmaceuticals, biotech and life sciences, technology hardware and equipment, chemicals, paper products and packaging, with lending spread over 3,900 clients.
Loans and advances to the energy sector have remained stable and constitute 11 per cent (2016: 12 per cent) of total loans and advances to Corporate & Institutional Banking and Commercial Banking. The energy sector lending is spread across five subsectors and over 350 clients.
The Group provides loans to commercial real estate (CRE) counterparties of $15.1 billion (2016: $11.3 billion), which represents 5 per cent of total customer loans and advances. In total, $8.0 billion of this lending is to counterparties where the source of repayment is substantially derived from rental or sale of real estate and is secured by real estate collateral. The remaining CRE loans comprise working capital loans to real estate corporates, loans with non-property collateral, unsecured loans and loans to real estate entities of diversified conglomerates. The average LTV ratio of the commercial real estate (CRE) portfolio has increased to 41 per cent, compared with 39 per cent in 2016. The proportion of loans with an LTV greater than 80 per cent has remained at 1 per cent during the same period.
Credit cards and personal loans (CCPL) and other unsecured lending of total Retail Products loans and advances remains broadly stable at 15 per cent.
|
2017 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & Americas |
Total |
|
Industry: |
|
|
|
|
|
Energy |
2,855 |
6,097 |
3,303 |
6,289 |
18,544 |
Manufacturing |
10,919 |
6,685 |
3,221 |
1,906 |
22,731 |
Financing, insurance and non-banking |
8,213 |
6,421 |
1,308 |
29,042 |
44,984 |
Transport, telecom and utilities |
6,456 |
3,965 |
4,707 |
1,036 |
16,164 |
Food and household products |
2,174 |
4,126 |
2,577 |
1,179 |
10,056 |
Commercial real estate |
8,429 |
5,169 |
1,479 |
62 |
15,139 |
Mining and quarrying |
2,079 |
2,903 |
1,089 |
570 |
6,641 |
Consumer durables |
4,432 |
2,544 |
1,300 |
790 |
9,066 |
Construction |
989 |
1,118 |
1,358 |
238 |
3,703 |
Trading companies and distributors |
1,192 |
573 |
432 |
128 |
2,325 |
Government |
4,864 |
6,728 |
1,430 |
1,398 |
14,420 |
Other |
1,839 |
2,174 |
1,075 |
583 |
5,671 |
Retail Products: |
|
|
|
|
|
Mortgages |
54,609 |
20,105 |
2,279 |
1,785 |
78,778 |
CCPL and other unsecured lending |
10,175 |
4,336 |
3,022 |
2 |
17,535 |
Auto |
- |
399 |
234 |
- |
633 |
Secured wealth products |
5,278 |
7,005 |
213 |
1,658 |
14,154 |
Other |
2,365 |
2,410 |
696 |
3 |
5,474 |
|
126,868 |
82,758 |
29,723 |
46,669 |
286,018 |
Portfolio impairment provision |
(129) |
(179) |
(121) |
(36) |
(465) |
Total loans and advances to customers |
126,739 |
82,579 |
29,602 |
46,633 |
285,553 |
Total loans and advances to banks |
33,226 |
16,523 |
7,428 |
24,148 |
81,325 |
|
2016 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & |
Total |
|
Industry: |
|
|
|
|
|
Energy |
2,781 |
5,334 |
4,076 |
6,586 |
18,777 |
Manufacturing |
8,807 |
5,944 |
3,161 |
1,830 |
19,742 |
Financing, insurance and non-banking |
7,959 |
5,007 |
1,451 |
26,816 |
41,233 |
Transport, telecom and utilities |
5,562 |
4,570 |
3,659 |
1,708 |
15,499 |
Food and household products |
1,932 |
4,624 |
2,408 |
1,088 |
10,052 |
Commercial real estate |
5,580 |
4,555 |
1,122 |
27 |
11,284 |
Mining and quarrying |
2,063 |
3,568 |
1,234 |
959 |
7,824 |
Consumer durables |
4,356 |
2,321 |
1,432 |
1,261 |
9,370 |
Construction |
1,027 |
1,313 |
1,392 |
84 |
3,816 |
Trading companies and distributors |
938 |
535 |
657 |
259 |
2,389 |
Government |
2,290 |
3,053 |
468 |
504 |
6,315 |
Other |
1,437 |
1,644 |
1,015 |
530 |
4,626 |
Retail Products: |
|
|
|
|
|
Mortgages |
51,219 |
18,903 |
2,245 |
1,140 |
73,507 |
CCPL and other unsecured lending |
9,265 |
3,838 |
3,012 |
91 |
16,206 |
Auto |
- |
315 |
323 |
- |
638 |
Secured wealth products |
3,725 |
5,965 |
90 |
1,300 |
11,080 |
Other |
1,790 |
1,908 |
522 |
5 |
4,225 |
|
110,731 |
73,397 |
28,267 |
44,188 |
256,583 |
Portfolio impairment provision |
(198) |
(236) |
(127) |
(126) |
(687) |
Total loans and advances to customers |
110,533 |
73,161 |
28,140 |
44,062 |
255,896 |
Total loans and advances to banks |
32,239 |
14,739 |
7,552 |
20,139 |
74,669 |
Selected portfolios
Debt securities and other eligible bills
This section provides further detail on debt securities and treasury bills and asset backed securities.
Debt securities and other eligible bills are analysed as follows:
|
2017 |
|
2016 |
Debt securities |
Debt securities |
||
Net impaired securities: |
|
|
|
Impaired securities |
421 |
|
406 |
Impairment |
(376) |
|
(400) |
|
45 |
|
6 |
|
|
|
|
Securities neither past due nor impaired: |
|
|
|
AAA |
35,937 |
|
44,815 |
AA- to AA+ |
51,914 |
|
34,112 |
A- to A+ |
13,305 |
|
15,316 |
BBB- to BBB+ |
17,498 |
|
12,598 |
Lower than BBB- |
5,333 |
|
5,361 |
Unrated |
11,810 |
|
9,040 |
|
135,797 |
|
121,242 |
Total |
135,842 |
|
121,248 |
Of which: |
|
|
|
Assets at fair value |
|
|
|
Trading |
19,318 |
|
13,310 |
Designated at fair value |
393 |
|
354 |
Available-for-sale |
109,161 |
|
104,308 |
|
128,872 |
|
117,972 |
Assets at amortised cost |
|
|
|
Loans and receivables |
2,630 |
|
3,106 |
Held-to-maturity |
4,340 |
|
170 |
|
6,970 |
|
3,276 |
Total |
135,842 |
|
121,248 |
The above table analyses debt securities and treasury bills that are neither past due nor impaired by external credit rating.
The standard credit ratings used by the Group are those used by Standard & Poor's or its equivalent. Debt securities held that have a short-term rating are reported against the long-term rating of the issuer. For securities that are unrated, the Group applies an internal credit rating, as described under the credit rating and measurement section.
Net impaired debt securities increased during the year, primarily due to a new impairment in Singapore.
Debt securities in the AAA rating category decreased during the year by $8.9 billion to $35.9 billion, mainly driven by a downgrade of UK-held Treasury Bills to the AA- to AA+ rating category. The resulting increase in the AA- to AA+ rating category was further enhanced by the purchase of government securities in Asia.
Unrated securities have primarily related to corporate issuers, but during 2017 the Group also purchased unrated government securities.
Using internal credit ratings, $9,109 million (2016: $7,013 million) of these securities are considered to be equivalent to investment grade.
Asset backed securities (unaudited)
|
2017 |
|
2016 |
||||||
Percentage |
Notional |
Carrying |
Fair value1 $million |
Percentage |
Notional |
Carrying |
Fair value1 $million |
||
Residential mortgage backed securities (RMBS)2 |
44% |
2,814 |
2,812 |
2,812 |
|
37% |
2,248 |
2,248 |
2,244 |
Collateralised debt obligations (CDOs) |
1% |
75 |
70 |
69 |
|
0% |
28 |
8 |
7 |
Commercial mortgage backed securities (CMBS) |
1% |
63 |
29 |
29 |
|
1% |
50 |
19 |
18 |
Other asset backed securities (other ABS)3 |
54% |
3,518 |
3,517 |
3,519 |
|
62% |
3,717 |
3,716 |
3,716 |
|
100% |
6,470 |
6,428 |
6,429 |
|
100% |
6,043 |
5,991 |
5,985 |
Of which included within: |
|
|
|
|
|
|
|
|
|
Financial assets held at fair value through profit or loss |
14% |
887 |
885 |
885 |
|
3% |
172 |
172 |
172 |
Investment securities - available-for-sale |
64% |
4,145 |
4,106 |
4,109 |
|
72% |
4,380 |
4,331 |
4,331 |
Investment securities - loans and receivables |
22% |
1,438 |
1,437 |
1,435 |
|
25% |
1,491 |
1,488 |
1,482 |
|
100% |
6,470 |
6,428 |
6,429 |
|
100% |
6,043 |
5,991 |
5,985 |
1 Fair value reflects the value of the entire portfolio, including assets redesignated to loans and receivables.
2 RMBS includes Other UK, Dutch, Australia and Korea RMBS
3 Other asset backed securities includes auto loans, credit cards, student loans, future flows and trade receivables
The carrying value of asset-backed securities (ABS) represents 1 per cent (2016: 1 per cent) of the Group's total assets.
The credit quality of the ABS portfolio remains strong, with over 99 per cent of the overall portfolio rated investment grade, and 68 per cent of the overall portfolio is rated as AAA. The portfolio is broadly diversified across asset classes and geographies, with an average credit grade of AA. Residential mortgage-backed securities (RMBS) make up 43 per cent of the overall portfolio and have a weighted averaged credit rating of AAA (AAA in 2016).
Other ABS includes Auto ABS, comprising 30 per cent of the overall portfolio, and credit card ABS (13 per cent); both maintain a weighted average credit rating of AAA. The balance of Other ABS mainly includes securities backed by diversified payment rights, and receivables ABS.
Country risk (unaudited)
Country risk is defined as the potential for default or losses due to political or economic events in a country. A key component of Country Risk is Country cross-border risk, which is the risk that the Group will be unable to obtain payment from counterparties on their contractual obligations as a result of actions taken by foreign governments, chiefly relating to convertibility and transferability of foreign currency.
The profile of the Group's country cross-border exposures as at 31 December 2017 remained consistent with its strategic focus on core franchise countries, and with the scale of the larger markets in which it operates.
Country cross-border exposure to China remains predominantly short-term; 87 per cent of exposure had a tenor of less than 12 months. During 2017, the Group's cross-border exposure to China from lending and trade finance increased, driven by robust economic growth in China and support to China's Belt and Road initiative. The significant increase in China cross-border exposure was predominantly short-term in tenor and related to trade and lending facilities as well as interbank placements with strategic clients.
Country cross-border risk exposure to Hong Kong declined during 2017 with a reduction in exposure from liquidity management activity, interbank placements, and corporate business loans.
The increase in cross border exposure to South Korea in 2017 reflects an expansion of export volumes and improved economic growth compared to the previous year.
The overall size of cross-border exposure to India reflects the size of the Group's franchise in the country, and the facilitation of overseas investment and trade flows supported by parent companies in India. The increase in India cross-border exposure relates to new or expanded arrangements with chosen counterparties and product categories that are accretive to the India franchise.
Cross-border exposure to developed countries in which the Group does not have a major presence predominantly relates to short-dated money market treasury and liquidity management activities, which can change significantly from period to period. Exposure also represents global corporate business for customers with interests in our footprint. This is a key factor explaining the significant cross-border exposure to the US, Japan and Germany.
The table below, which is based on the Group's internal country cross-border risk reporting requirements, shows cross-border exposures that exceed 1 per cent of total assets.
|
2017 |
|
20161 |
||||
Less than |
More than |
Total |
Less than |
More than |
Total |
||
China |
40,351 |
6,204 |
46,555 |
|
29,727 |
4,414 |
34,142 |
US |
10,068 |
9,524 |
19,592 |
|
9,675 |
10,255 |
19,930 |
Hong Kong |
11,685 |
7,867 |
19,553 |
|
15,517 |
7,738 |
23,255 |
Singapore |
13,555 |
5,955 |
19,510 |
|
15,101 |
5,086 |
20,187 |
South Korea |
14,513 |
4,331 |
18,844 |
|
11,436 |
5,124 |
16,559 |
India |
11,687 |
5,819 |
17,506 |
|
9,280 |
4,589 |
13,869 |
United Arab Emirates |
7,932 |
8,341 |
16,272 |
|
7,523 |
7,730 |
15,253 |
Germany |
3,022 |
4,505 |
7,527 |
|
2,600 |
3,536 |
6,136 |
Japan |
5,272 |
1,555 |
6,827 |
|
8,625 |
1,669 |
10,294 |
1 2016 cross-border exposure data has been restated as a result of a recalibration and enhancement to the internal methodology for reporting country cross-border risk. Methodology changes have been implemented in line with BCBS239 principles.
Market risk
Market risk is the potential for loss of economic value due to adverse changes in financial market rates or prices. The Group's exposure to market risk arises predominantly from the following sources:
• Trading book: The Group provides clients access to financial markets, the facilitation of which entails the Group taking moderate market risk positions. All trading teams support client activity; there are no proprietary trading teams. Hence, income earned from market risk-related activities is primarily driven by the volume of client activity rather than risk-taking
• Non-trading book:
- The Treasury Markets desk is required to hold a liquid assets buffer much of which is held in high-quality marketable debt securities
- The Group has capital invested and related income streams denominated in currencies other than US dollars. To the extent that these are not hedged, the Group is subject to structural foreign exchange risk which is reflected in reserves
A summary of our current policies and practices regarding market risk management is provided in the Principal Risks section.
The primary categories of market risk for the Group are:
• Interest rate risk: arising from changes in yield curves, credit spreads and implied volatilities on interest rate options
• Currency exchange rate risk: arising from changes in exchange rates and implied volatilities on foreign exchange options
• Commodity price risk: arising from changes in commodity prices and implied volatilities on commodity options; covering energy, precious metals, base metals and agriculture
• Credit spread risk: arising from changes in the credit spread of the Group's derivative counterparties through CVA accounting.
Market risk changes
The average level of total trading and non-trading VaR in 2017 was 19 per cent lower than in 2016 and the actual level of total VaR as at year end 2017 was 25 per cent lower than in 2016. These declines were driven by reduced market volatility in the historical time series. In 2016 the VaR had been elevated by events such as the devaluation of the Chinese renminbi in August 2015 and uncertainty about the timing of anticipated US interest rate rises.
Trading book interest rate VaR and trading book total VaR results are not comparable year-on-year as the 2017 figures include the XVA desk VaR but the 2016 figures do not. The average level of VaR for the XVA desk in 2017 was 44 per cent lower than in 2016 at $5.5 million (2016 $9.8 million).
Daily value at risk (VaR at 97.5%, one day)
Trading and non-trading |
2017 |
|
2016 |
||||||
Average |
High1 |
Low1 |
Actual2 |
Average |
High1 |
Low1 |
Actual2 |
||
Interest rate risk3,6 |
22.6 |
28.5 |
18.1 |
18.7 |
|
27.7 |
32.7 |
24.1 |
25.3 |
Foreign exchange risk |
5.5 |
12.3 |
3.0 |
6.0 |
|
6.3 |
12.2 |
3.7 |
9.4 |
Commodity risk |
1.2 |
2.0 |
0.6 |
1.0 |
|
1.9 |
3.1 |
1.0 |
1.4 |
Equity risk |
7.7 |
8.4 |
6.4 |
6.7 |
|
10.0 |
13.1 |
6.9 |
8.1 |
Total4,6 |
25.7 |
32.4 |
20.3 |
22.3 |
|
31.6 |
38.8 |
26.4 |
29.9 |
Trading5 |
2017 |
|
2016 |
||||||
Average |
High1 |
Low1 |
Actual2 |
Average |
High1 |
Low1 |
Actual2 |
||
Interest rate risk3,6 |
10.1 |
13.1 |
7.7 |
8.5 |
|
6.7 |
10.3 |
4.7 |
6.8 |
Foreign exchange risk |
5.5 |
12.3 |
3.0 |
6.0 |
|
6.3 |
12.2 |
3.7 |
9.4 |
Commodity risk |
1.2 |
2.0 |
0.6 |
1.0 |
|
1.9 |
3.1 |
1.0 |
1.4 |
Equity risk |
0.1 |
0.4 |
0.06 |
0.14 |
|
0.4 |
1.3 |
0.1 |
0.1 |
Total4,6 |
12.1 |
15.7 |
8.3 |
10.9 |
|
10.6 |
18.7 |
7.5 |
11.6 |
Non-trading |
2017 |
|
2016 |
||||||
Average |
High1 |
Low1 |
Actual2 |
Average |
High1 |
Low1 |
Actual2 |
||
Interest rate risk3 |
19.5 |
23.1 |
14.4 |
14.4 |
|
26.3 |
31.4 |
21.5 |
22.8 |
Equity risk |
7.6 |
8.1 |
6.2 |
6.6 |
|
9.8 |
12.5 |
6.9 |
8.1 |
Total4 |
21.7 |
27.6 |
16.3 |
16.3 |
|
30.7 |
35.1 |
24.6 |
27.3 |
1 Highest and lowest VaR for each risk factor are independent and usually occur on different days
2 Actual one day VaR at year end date
3 Interest rate risk VaR includes credit spread risk arising from securities held for trading or available-for-sale.
4 The total VaR shown in the tables above is not a sum of the component risks due to offsets between them
5 Trading book for market risk is defined in accordance with the EU Capital Requirements Regulation (CRDIV/CRR) Part 3 Title I Chapter 3 which restricts the positions permitted in the trading book. This regulatory definition is narrower than the accounting definition of the trading book within IAS39 'Financial Instruments: Recognition and Measurement
6 XVA (Credit and Funding Valuation Adjustment): In 2016 the XVA desk VaR was incompletely reflected in the related total VaR lines as follows:
• Total trading and non-trading VaR and total trading and non-trading interest rate VaR reflected XVA desk VaR but only from 1 August 2016 onwards
• Total trading VaR and trading interest rate VaR figures did not reflect XVA VaR at all in 2016
The following table sets out how trading and non-trading VaR is distributed across the Group's products:
|
2017 |
|
2016 |
||||||
Average |
High1 |
Low1 |
Actual2 |
Average |
High1 |
Low1 |
Actual2 |
||
Trading and non-trading |
25.7 |
32.4 |
20.3 |
22.3 |
|
31.6 |
38.8 |
26.4 |
29.9 |
Trading4 |
|
|
|
|
|
|
|
|
|
Rates |
5.9 |
8.6 |
4.4 |
5.1 |
|
5.2 |
8.6 |
3.3 |
5.8 |
Global foreign exchange |
5.5 |
12.3 |
3.0 |
6.0 |
|
6.3 |
12.2 |
3.7 |
9.4 |
Credit trading and capital markets |
4.6 |
6.9 |
2.6 |
4.9 |
|
3.0 |
5.3 |
2.2 |
3.2 |
Commodities |
1.2 |
2.0 |
0.6 |
1.0 |
|
1.9 |
3.1 |
1.0 |
1.4 |
Equities |
0.1 |
0.4 |
0.1 |
0.1 |
|
0.4 |
1.3 |
0.1 |
0.1 |
XVA5 |
5.5 |
8.3 |
3.0 |
3.0 |
|
9.8 |
12.0 |
6.6 |
6.6 |
Total3 |
12.1 |
15.7 |
8.3 |
10.9 |
|
10.6 |
18.7 |
7.5 |
11.6 |
Non-trading |
|
|
|
|
|
|
|
|
|
Asset & liability management |
19.5 |
23.1 |
14.4 |
14.4 |
|
26.3 |
31.4 |
21.5 |
22.8 |
Listed private equity |
7.6 |
8.1 |
6.2 |
6.6 |
|
9.8 |
12.5 |
6.9 |
8.1 |
Total3 |
21.7 |
27.6 |
16.3 |
16.3 |
|
30.7 |
35.1 |
24.6 |
27.3 |
1 Highest and lowest VaR for each risk factor are independent and usually occur on different days
2 Actual one day VaR at year end date
3 The total VaR shown in the tables above is not a sum of the component risks due to offsets between them
4 Trading book for market risk is defined in accordance with the EU Capital Requirements Regulation (CRDIV/CRR) Part 3 Title I Chapter 3 which restricts the positions permitted in the trading book. This regulatory definition is narrower than the accounting definition of the trading book within IAS39 'Financial Instruments: Recognition and Measurement'
5 XVA (Credit and Funding Valuation Adjustment): In 2016 the XVA desk VaR reflects a period from 1 August 2016 to 30 December 2016
Risks not in VaR (unaudited)
In 2017 the main market risk not reflected in VaR was currency risk where the exchange rate is currently pegged or managed. The historical one-year VaR observation period does not reflect the future possibility of a change in the currency regime such as sudden depegging. The other material market risk not reflected in VaR was associated with off-the-run bonds. Newly issued bonds are actively traded (on-the-run), however off-the-run bonds are less frequently traded, meaning that historical market price data for VaR is sometimes more limited. Additional capital is set aside to cover such 'risks not in VaR'. For further details on market risk capital see the Standard Chartered PLC Pillar 3 Disclosures 2017 section on market risk.
Backtesting (unaudited)
Regulatory backtesting is applied at both Group and Solo levels. In 2017 there has been one negative exception at both Group level and Solo level (in 2016 there was one exception at Group level and two at Solo level).
This exception occurred on 18 December due to yield curve moves in Nigeria. The Central Bank of Nigeria restarted their liquidity management open market operations unexpectedly, filling Nigerian treasury bill auctions below the lowest bid yields. This move caused the market to sell-off and Nigerian Naira yields to rise sharply. One exception in a year due to market events is within the 'green zone' applied internationally to internal models by bank supervisors
(Basel Committee on Banking Supervision: 'Supervisory framework for the use of backtesting in conjunction with the internal models approach to market risk capital requirements', January 1996).
The graph below illustrates the performance of the VaR model used in capital calculations. It compares the 99 percentile loss confidence level given by the VaR model with the Hypothetical P&L of each day given the actual market movement without taking into account any intra-day trading activity.
Financial Markets loss days
|
2017 |
2016 |
Number of loss days reported for Financial Markets trading book total product income1 |
15 |
30 |
1 Reflects total product income for Financial Markets:
• Including CVA and FVA risk.
• Excluding Treasury-Markets business (non-trading) and periodic valuation changes for Capital Markets, expected loss provisions and OIS discounting.
There were fewer Financial Markets loss days in 2017 as market volatility dropped following the events of 2016 which saw a collapse in oil prices, a Chinese equities sell-off, the UK referendum to leave the European Union (Brexit) and the US presidential election.
Average daily income earned from market risk related activities1
Trading |
2017 |
2016 |
Interest rate risk |
3.5 |
4.5 |
Foreign exchange risk |
3.7 |
4.6 |
Commodity risk |
0.6 |
0.7 |
Equity risk |
- |
- |
Total |
7.8 |
9.8 |
|
|
|
Non-trading |
|
|
Interest rate risk |
2.4 |
1.8 |
Equity risk |
0.3 |
(0.2) |
Total |
2.7 |
1.6 |
1 Reflects total product income which is the sum of Client Income and Own Account Income. Includes elements of Trading Income, Interest Income and Other Income which are generated from market risk related activities. XVA income is included under Interest rate risk
Mapping of market risk items to the balance sheet (unaudited)
Market risk contributes only 8.2 per cent of the Group's regulatory capital risk-weighted asset (RWA) requirement, as shown in the risk-weighted assets tables. As highlighted in the VaR disclosure, during 2017 the majority of market risk was managed within Treasury Markets and Financial Markets, which span both trading book and non-trading book. The non-trading equity market risk is generated by listed private equity holdings within Principal Finance. Treasury manages the market risk associated with debt and equity capital issuance.
|
Amounts as |
Exposure to trading risk |
Exposure to |
Market risk type |
Financial assets |
|
|
|
|
Derivative financial instruments |
47,031 |
46,855 |
176 |
Interest rate, foreign exchange, commodity and/or equity risk |
Loans and advances to banks |
81,325 |
19,305 |
62,020 |
Interest rate and/or foreign exchange risk |
Loans and advances to customers |
285,553 |
33,707 |
251,846 |
Interest rate and/or foreign exchange risk |
Debt securities and other eligible bills |
135,842 |
19,493 |
116,349 |
Interest rate mainly, but also foreign exchange and/or equity risk |
Equities |
2,345 |
718 |
1,627 |
Equities risk mainly, but also interest and/or foreign exchange risk |
Other assets |
33,490 |
6,266 |
27,224 |
Interest rate, foreign exchange, commodity and/or equity risk |
Total |
585,586 |
126,344 |
459,242 |
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
Deposits by banks |
35,486 |
- |
35,486 |
Interest rate and/or foreign exchange risk |
Customer accounts |
411,724 |
- |
411,724 |
Interest rate and/or foreign exchange risk |
Debt securities in issue |
53,402 |
- |
53,402 |
Interest rate mainly, but also foreign exchange and/or equity risk |
Derivatives financial instruments |
48,101 |
47,652 |
449 |
Interest rate, foreign exchange, commodity and/or equity risk |
Short positions |
3,637 |
3,608 |
29 |
Interest rate, foreign exchange, commodity and/or equity risk |
Total |
552,350 |
51,260 |
501,090 |
|
Structural foreign exchange exposures
The table below sets out the principal structural foreign exchange exposures (net of investment hedges) of the Group.
|
2017 |
2016 |
Hong Kong dollar |
7,119 |
6,452 |
Indian rupee |
4,806 |
4,450 |
Renminbi |
3,784 |
3,370 |
Singapore dollar |
2,972 |
2,505 |
Korean won |
2,361 |
2,460 |
Taiwanese dollar |
1,589 |
2,140 |
UAE dirham |
1,842 |
1,556 |
Malaysian ringgit |
1,512 |
1,330 |
Thai baht |
1,277 |
1,290 |
Indonesian rupiah |
1,090 |
1,090 |
Pakistani rupee |
543 |
573 |
Other |
4,000 |
3,595 |
|
32,895 |
30,811 |
As at 31 December 2017, the Group had taken net investment hedges (using a combination of derivative and non-derivative financial investments) of $2,003 million (2016: $1,313 million) to partly cover its exposure to the Korean won. An analysis has been performed on these exposures to assess the impact of a 1 per cent fall in the US dollar exchange rates, adjusted to incorporate the impacts of correlations of these currencies to the US dollar. The impact on the positions above would be a decrease of $357 million (2016: $225 million). Changes in the valuation of these positions are taken to reserves.
For analysis of the Group's capital position and requirements, refer to the Capital Review
Liquidity and funding risk
Liquidity and funding risk is the potential that the Group does not have sufficient financial resources or stable sources of funding in the medium or long term, to meet its obligations as they fall due, or can access these financial resources only at excessive cost.
The Group's liquidity and funding risk framework requires each country to ensure that it operates within predefined liquidity limits and remain in compliance with Group liquidity policies and practices, as well as local regulatory requirements.
The Group achieves this through a combination of setting risk appetite and associated limits, policy formation, risk measurement and monitoring, prudential and internal stress testing, governance and review.
For further information on the Group's liquidity and funding risk framework, refer to the Risk Management Approach.
In 2017, the Group issued approximately $1.5 billion of senior debt securities and $1 billion of Additional Tier 1 (AT1) securities from its holding company Standard Chartered PLC (2016: $4.4 billion of term senior debt, $1.25 billion of subordinated debt and $2 billion of AT1).
Since the beginning of the year, there were no significant changes in treasury policies as disclosed in the 2016 Annual Report and Accounts.
Primary sources of funding
The Group's funding strategy is largely driven by its policy to maintain adequate liquidity at all times, in all geographic locations and for all currencies, and hence to be in a position to meet all obligations as they fall due. The Group's funding profile is therefore well diversified across different sources, maturities and currencies.
A substantial portion of our assets are funded by customer deposits aligned with our policy to fund customer assets predominantly using customer deposits. Wholesale funding is diversified by type and maturity and represents a stable source of funds for the Group.
We maintain access to wholesale funding markets in all major financial centres in which we operate. This seeks to ensure that we have market intelligence, maintain stable funding lines and can obtain optimal pricing when performing our interest rate risk management activities.
Debt refinancing levels are low. In the next 12 months approximately $5.6 billion of the Group's holding company senior debt and subordinated debt are falling due for repayment either contractually or callable by the Group.
The information presented in the Liquidity Pool section is on a financial view. This is the location in which the transaction or balance was booked and provides a more accurate view of where liquidity risk is actually located.
The chart below shows the composition of liabilities in which customer deposits make up 62.1 per cent of total equity and liabilities as at 31 December 2017, the majority of which are current accounts, savings accounts and time deposits. Our largest customer deposit base by geography is Greater China & North Asia (in particular Hong Kong), which holds 45.2 per cent of Group customer accounts.
Liquidity and funding risk metrics
We monitor key liquidity metrics regularly, both on a country basis and in aggregate across the Group.
The following Liquidity and Funding Board Risk Appetite metrics define the maximum amount and type of risk that the Group is willing to assume in pursuit of its strategy: liquidity coverage ratio (LCR), liquidity stress survival horizons, external wholesale borrowing and advances to deposits ratio.
Liquidity coverage ratio (LCR) (unaudited)
The LCR is a regulatory requirement set to ensure that the Group has sufficient unencumbered high quality liquid assets to meet its liquidity needs in a 30-calendar-day liquidity stress scenario.
The Group monitors and reports its liquidity position under European Commission Delegated Regulation 2015/ 61 and has maintained its liquidity position above the prudential requirement.
At the reporting date, the Group LCR was 146 per cent (2016: 133 per cent) with a prudent surplus to both Board-approved Risk Appetite and regulatory requirements. The ratio increased 13 per cent year-on-year due to a reduction in net cash outflows as we focused on high quality liquidity across our businesses. We also held adequate liquidity across our footprint to meet all local prudential LCR requirements, where applicable.
For a more detailed Group LCR disclosure, refer to Section 6 of the Group's 2017 Pillar 3 Disclosures.
|
2017 |
2016 |
Liquidity buffer |
132,251 |
136,291 |
Total net cash outflows |
90,691 |
102,263 |
Liquidity coverage ratio |
146% |
133% |
Stressed coverage (unaudited)
The Group intends to maintain a prudent and sustainable funding and liquidity position, in all presence countries and currencies, such that it can withstand a severe but plausible liquidity stress.
Our approach to managing liquidity and funding risk is reflected in the following Risk Appetite statement.
"The Group should hold an adequate buffer of high quality liquid assets to survive extreme but plausible liquidity stress scenarios for at least 60 days without recourse to extraordinary central bank support."
The Group's internal liquidity stress testing framework covers the following stress scenarios:
• Standard Chartered-specific - this scenario captures the liquidity impact from an idiosyncratic event affecting Standard Chartered only, i.e. the rest of the market is assumed to operate normally
• Market-wide - this scenario captures the liquidity impact from a market-wide crisis affecting all participants in a country, region or globally
• Combined - this scenario assumes both Standard Chartered-specific and Market- Wide events affecting the Group simultaneously, and is hence the most severe scenario
All scenarios include, but are not limited to, modelled outflows for retail and wholesale funding, off-balance sheet funding risk, cross-currency funding risk, intraday risk, franchise risk and risks associated with a deterioration of a firm's credit rating.
Stress testing results show that a positive surplus was maintained under all scenarios at 31 December 2017, i.e. the respective countries included were able to survive for a period of time as defined under each scenario. The combined scenario at 31 December 2017 showed the Group maintaining liquidity resources to survive greater than 60 days, as per our Risk Appetite. The results take into account currency convertibility and portability constraints across all major presence countries.
Standard Chartered Bank's credit ratings as at 31 December 2017 were A+ with stable outlook (Fitch), A with stable outlook (S&P) and A1 with stable outlook (Moody's). A downgrade in the Group's long-term credit ratings would increase derivative collateral requirements and outflows due to rating-linked liabilities. At 31 December 2017, the estimated contractual outflow of a two-notch long term ratings downgrade is $1.3 billion (unaudited).
External wholesale borrowing
The Board sets a risk limit to prevent excessive reliance on wholesale borrowing. Limits are applied to all branches and operating subsidiaries in the Group and as at the reporting date the Group remained within the Board-approved Risk Appetite.
Advances-to-deposits ratio
This is defined as the ratio of total loans and advances to customers relative to total customer accounts. An advances-to-deposits ratio of below 100 per cent demonstrates that customer deposits exceed customer loans as a result of the emphasis placed on generating a high level of funding from customers.
The advances-to-deposits ratio (2017: 69.4 per cent) increased from the previous year (2016: 67.6 per cent).
Loans and advances to customers have increased 12 per cent since the end of 2016 to $286 billion. This growth was largely due to higher Corporate Finance balances in Hong Kong and increased retail mortgage lending in Singapore and Korea, benefiting in part from favourable foreign exchange movement. Our repo business also grew over the period as we benefitted from our deep client franchise and balance sheet strength.
Customer accounts have also increased 9 per cent from the end of 2016 to $412 billion as the Group focused on high-quality liquidity across its businesses with an emphasis on Retail, Transaction Banking and other deposits with high liquidity and regulatory value. Retail current and savings account balances increased significantly over the period along with growth in time deposits.
|
2017 |
2016 |
Loans and advances to customers1,2 |
285,553 |
255,896 |
Customer accounts3 |
411,724 |
378,302 |
Advances-to-deposits ratio |
69.4% |
67.6% |
1. See note 13 of the financial statements
2. Includes reverse repurchase agreements and other similar secured lending of $55,187 million
3. Includes repurchase agreements and other similar secured borrowing of $39,783 million
Net stable funding ratio (NSFR) (unaudited)
On 23 November 2016 the European Commission, as part of a package of risk-reducing measures, proposed a binding requirement for stable funding (Net Stable Funding Ratio (NSFR)) at European Union level. The proposal aims to implement the European Banking Authority's interpretation of the Basel standard on NSFR (BCBS295).
Pending implementation of the final rules, the Group continues to monitor NSFR in line with the BCBS' final recommendation (BCBS295), At the last reporting date, the Group NSFR remained above 100 per cent.
Liquidity pool (unaudited)
The liquidity value of the Group's LCR eligible liquidity pool at the reporting date was $132 billion. The figures in the below table account for haircuts, currency convertibility and portability constraints and therefore are not directly comparable with the consolidated balance sheet. The pool is held to offset stress outflows as defined in European Commission Delegated Regulation 2015/ 61.
The pool decreased $4 billion year-on-year, reflecting the improved quality of our funding base and redeployment of surplus liquidity, held primarily in Europe & Americas, into commercial assets. Our liquidity pool composition also changed over the period as we increased our holdings of Level 1 LCR eligible securities and reduced cash and central bank reserves.
|
2017 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & Americas |
Total |
|
Level 1 securities |
|
|
|
|
|
Cash and balances at central banks |
13,779 |
2,400 |
1,708 |
33,191 |
51,078 |
Central banks, governments/public sector entities |
28,187 |
12,265 |
1,064 |
24,464 |
65,980 |
Multilateral development banks and international organisations |
- |
563 |
159 |
8,568 |
9,290 |
Other |
- |
- |
- |
130 |
130 |
Total Level 1 securities |
41,966 |
15,228 |
2,931 |
66,353 |
126,478 |
Level 2A securities |
2,234 |
825 |
113 |
1,147 |
4,319 |
Level 2B securities |
- |
246 |
3 |
1,206 |
1,455 |
Total LCR eligible assets |
44,200 |
16,299 |
3,047 |
68,706 |
132,252 |
|
2016 |
||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & |
Total |
|
Level 1 securities |
|
|
|
|
|
Cash and balances at central banks |
14,206 |
2,878 |
1,452 |
45,054 |
63,590 |
Central banks, governments/public sector entities |
28,304 |
10,430 |
1,709 |
16,271 |
56,714 |
Multilateral development banks and international organisations |
178 |
1,362 |
169 |
9,178 |
10,887 |
Other |
- |
- |
- |
200 |
200 |
Total Level 1 securities |
42,688 |
14,670 |
3,330 |
70,703 |
131,391 |
Level 2A securities |
- |
1,848 |
152 |
1,597 |
3,597 |
Level 2B securities |
- |
59 |
- |
1,244 |
1,303 |
Total LCR eligible assets |
42,688 |
16,577 |
3,482 |
73,544 |
136,291 |
Encumbrance (unaudited)
Encumbered assets
Encumbered assets represent on-balance sheet assets pledged or subject to any form of arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn. Cash collateral pledged against derivatives and Hong Kong government certificates of indebtedness, which secure the equivalent amount of Hong Kong currency notes in circulation, are included within Other assets.
Unencumbered - readily available for encumbrance
Unencumbered assets that are considered by the Group to be readily available in the normal course of business to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes.
Unencumbered - other assets capable of being encumbered
Unencumbered assets that, in their current form, are not considered by the Group to be readily realisable in the normal course of business to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes. Included within this category are loans and advances which would be suitable for use in secured funding structures such as securitisations.
Unencumbered - cannot be encumbered
Unencumbered assets are assets that have not been pledged and we have assessed that cannot be used to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements.
Derivatives, reverse repurchase assets and stock lending
These assets are shown separately as these on-balance sheet amounts cannot be pledged. However, these assets can give rise to off-balance sheet collateral, which can be used to raise secured funding or meet additional funding requirements.
The following table provides a reconciliation of the Group's encumbered assets to total assets.
|
Assets |
2017 |
|||||||||
Assets encumbered as a result of transactions with counterparties other than central banks |
|
Other assets (comprising assets encumbered at the central bank |
|||||||||
As a result of securitisations |
Other |
Total |
Assets positioned at the central bank (ie pre-positioned plus encumbered) |
Assets not positioned at the central bank |
|
||||||
Readily available for encumbrance |
Other assets that are capable of being encumbered |
Derivatives and reverse repo/stock lending |
Cannot be encumbered |
Total |
|||||||
Cash and balances at central banks |
58,864 |
- |
- |
- |
|
9,761 |
49,103 |
- |
- |
- |
58,864 |
Derivative financial instruments |
47,031 |
- |
- |
- |
|
- |
- |
- |
47,031 |
- |
47,031 |
Loans and advances |
81,325 |
- |
- |
- |
|
- |
47,380 |
5,333 |
21,260 |
7,352 |
81,325 |
Loans and advances |
285,553 |
11 |
- |
11 |
|
- |
- |
232,328 |
33,928 |
19,286 |
285,542 |
Investment securities1 |
138,187 |
- |
8,213 |
8,213 |
|
178 |
91,928 |
29,967 |
- |
7,901 |
129,974 |
Other assets |
33,490 |
- |
14,930 |
14,930 |
|
- |
- |
11,604 |
- |
6,956 |
18,560 |
Current tax assets |
491 |
- |
- |
- |
|
- |
- |
- |
- |
491 |
491 |
Prepayments and accrued income |
2,307 |
- |
- |
- |
|
- |
- |
1,503 |
- |
804 |
2,307 |
Interests in associates and joint ventures |
2,307 |
- |
- |
- |
|
- |
- |
- |
- |
2,307 |
2,307 |
Goodwill and intangible assets |
5,013 |
- |
- |
- |
|
- |
- |
352 |
- |
4,661 |
5,013 |
Property, plant and equipment |
7,211 |
- |
- |
- |
|
- |
- |
1,148 |
- |
6,063 |
7,211 |
Deferred tax assets |
1,177 |
- |
- |
- |
|
- |
- |
- |
- |
1,177 |
1,177 |
Assets classified as |
545 |
- |
- |
- |
|
- |
- |
- |
- |
545 |
545 |
Total |
663,501 |
11 |
23,143 |
23,154 |
|
9,939 |
188,411 |
282,235 |
102,219 |
57,543 |
640,347 |
1 Includes assets held at fair value through profit or loss and reverse repurchase agreements and other similar secured lending
|
Assets |
2016 |
|||||||||
Assets encumbered as a result of transactions with counterparties |
|
Other assets (comprising assets encumbered at the central bank |
|||||||||
As a result of securitisations |
Other |
Total |
Assets not positioned at the central bank |
Total |
|||||||
Assets positioned at the central bank (ie pre- |
Readily available for encumbrance |
Other assets that are capable of being encumbered |
Derivatives and reverse repo/stock lending |
Cannot be encumbered |
|||||||
Cash and balances at central banks |
70,706 |
- |
- |
- |
|
8,648 |
62,058 |
- |
- |
- |
70,706 |
Derivative financial instruments |
65,509 |
- |
- |
- |
|
- |
- |
- |
65,509 |
- |
65,509 |
Loans and advances |
74,669 |
- |
- |
- |
|
- |
50,561 |
4,092 |
18,568 |
1,448 |
74,669 |
Loans and advances |
255,896 |
21 |
- |
21 |
|
- |
- |
214,354 |
26,348 |
15,173 |
255,875 |
Investment securities1 |
123,812 |
- |
5,868 |
5,868 |
|
35 |
78,535 |
33,083 |
- |
6,291 |
117,944 |
Other assets |
36,940 |
- |
19,674 |
19,674 |
|
- |
- |
10,637 |
- |
6,629 |
17,266 |
Current tax assets |
474 |
- |
- |
- |
|
- |
- |
- |
- |
474 |
474 |
Prepayments and accrued income |
2,238 |
- |
- |
- |
|
- |
- |
887 |
- |
1,351 |
2,238 |
Interests in associates and joint ventures |
1,929 |
- |
- |
- |
|
- |
- |
- |
- |
1,929 |
1,929 |
Goodwill and |
4,719 |
- |
- |
- |
|
- |
- |
109 |
- |
4,610 |
4,719 |
Property, plant |
7,252 |
- |
- |
- |
|
- |
- |
1,039 |
- |
6,213 |
7,252 |
Deferred tax assets |
1,294 |
- |
- |
- |
|
- |
- |
- |
- |
1,294 |
1,294 |
Assets classified as |
1,254 |
- |
- |
- |
|
- |
- |
- |
- |
1,254 |
1,254 |
Total2 |
646,692 |
21 |
25,542 |
25,563 |
|
8,683 |
191,154 |
264,201 |
110,425 |
46,666 |
621,129 |
1 Includes assets held at fair value through profit or loss and reverse repurchase agreements and other similar secured lending
2 The 2016 comparatives have been represented to split unencumbered assets to enhance disclosures
The Group received $72,982 million (2016: $54,473 million) as collateral under reverse repurchase agreements that was eligible for repledging; of this, the Group sold or repledged $34,018 million (2016: $33,053 million) under repurchase agreements.
Liquidity analysis of the Group's balance sheet
Contractual maturity of assets and liabilities
The following table presents assets and liabilities by maturity groupings based on the remaining period to the contractual maturity date as at the balance sheet date on a discounted basis. Contractual maturities do not necessarily reflect actual repayments or cashflow.
Within the tables below, cash and balances with central banks, interbank placements and investment securities that are available-for-sale are used by the Group principally for liquidity management purposes.
At the reporting date, assets remain predominantly short-dated, with 61 per cent maturing in under one year. Our less than three month cumulative net funding gap increased from the previous year, largely due to an increase in customer accounts as the Group focused on improving the quality of its deposit base. In practice, these deposits are recognised as stable and have behavioural profiles that extend beyond their contractual maturities.
|
2017 |
||||||||
One month |
Between |
Between three |
Between |
Between |
Between |
Between |
More than |
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and balances at central banks |
49,103 |
- |
- |
- |
- |
- |
- |
9,761 |
58,864 |
Derivative financial instruments |
6,284 |
7,706 |
5,930 |
3,537 |
2,601 |
5,427 |
7,111 |
8,435 |
47,031 |
Loans and advances to banks1,2 |
36,548 |
21,238 |
12,042 |
4,299 |
3,612 |
1,588 |
1,386 |
612 |
81,325 |
Loans and advances to customers1,2 |
87,794 |
32,618 |
17,459 |
11,357 |
8,545 |
17,500 |
37,237 |
73,043 |
285,553 |
Investment securities |
14,185 |
18,208 |
13,692 |
11,213 |
9,145 |
22,369 |
31,660 |
17,715 |
138,187 |
Other assets |
19,349 |
4,466 |
2,521 |
105 |
247 |
138 |
127 |
25,588 |
52,541 |
Total assets |
213,263 |
84,236 |
51,644 |
30,511 |
24,150 |
47,022 |
77,521 |
135,154 |
663,501 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Deposits by banks1,3 |
29,365 |
2,484 |
1,437 |
530 |
730 |
154 |
135 |
651 |
35,486 |
Customer accounts1,4 |
327,434 |
37,178 |
19,716 |
10,775 |
9,321 |
3,115 |
1,746 |
2,439 |
411,724 |
Derivative financial instruments |
8,018 |
8,035 |
6,068 |
3,544 |
2,685 |
5,057 |
7,794 |
6,900 |
48,101 |
Senior debt |
67 |
273 |
1,801 |
53 |
1,937 |
5,053 |
4,747 |
5,585 |
19,516 |
Other debt securities in issue1 |
4,139 |
10,616 |
9,954 |
2,005 |
779 |
1,091 |
794 |
4,508 |
33,886 |
Other liabilities |
20,428 |
5,988 |
3,672 |
671 |
303 |
696 |
897 |
13,150 |
45,805 |
Subordinated liabilities and |
- |
116 |
1,382 |
- |
- |
- |
3,887 |
11,791 |
17,176 |
Total liabilities |
389,451 |
64,690 |
44,030 |
17,578 |
15,755 |
15,166 |
20,000 |
45,024 |
611,694 |
Net liquidity gap |
(176,188) |
19,546 |
7,614 |
12,933 |
8,395 |
31,856 |
57,521 |
90,130 |
51,807 |
1 Loans and advances, investment securities, deposits by banks, customer accounts and debt securities in issue include financial instruments held at fair value through profit or loss, see note 13 of the financial statements
2 Loans and advances include reverse repurchase agreements and other similar secured lending borrowing of $55.2 billion
3 Deposits by banks include repurchase agreements and other similar secured borrowing of $3.8 billion
4 Customer accounts include repurchase agreements and other similar secured lending borrowing of $36 billion
|
2016 |
||||||||
One month |
Between |
Between |
Between |
Between |
Between |
Between |
More than |
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and balances at central banks |
62,058 |
- |
- |
- |
- |
- |
- |
8,648 |
70,706 |
Derivative financial instruments |
7,749 |
10,562 |
8,263 |
5,317 |
4,580 |
8,472 |
10,798 |
9,768 |
65,509 |
Loans and advances to banks1,2 |
32,231 |
23,388 |
10,667 |
3,041 |
2,540 |
1,240 |
1,404 |
158 |
74,669 |
Loans and advances to customers1,2 |
71,483 |
27,977 |
17,948 |
7,917 |
7,839 |
18,365 |
32,615 |
71,752 |
255,896 |
Investment securities1 |
8,600 |
16,894 |
11,796 |
10,496 |
11,764 |
19,272 |
32,626 |
12,364 |
123,812 |
Other assets |
23,357 |
5,379 |
2,857 |
195 |
1,007 |
60 |
113 |
23,132 |
56,100 |
Total assets |
205,478 |
84,200 |
51,531 |
26,966 |
27,730 |
47,409 |
77,556 |
125,822 |
646,692 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Deposits by banks1,3 |
31,340 |
2,912 |
1,115 |
665 |
573 |
629 |
146 |
232 |
37,612 |
Customer accounts1,4 |
280,329 |
46,060 |
25,258 |
11,135 |
8,942 |
2,577 |
2,119 |
1,882 |
378,302 |
Derivative financial instruments |
8,709 |
9,911 |
7,661 |
6,058 |
4,797 |
8,969 |
11,275 |
8,332 |
65,712 |
Senior debt |
96 |
173 |
1,212 |
1,500 |
981 |
3,347 |
8,849 |
3,433 |
19,591 |
Other debt securities in issue1 |
5,916 |
11,188 |
6,883 |
2,687 |
447 |
860 |
748 |
4,050 |
32,779 |
Other liabilities |
19,262 |
6,163 |
5,003 |
687 |
604 |
1,368 |
847 |
10,581 |
44,515 |
Subordinated liabilities and |
22 |
31 |
- |
1,710 |
- |
978 |
785 |
15,997 |
19,523 |
Total liabilities |
345,674 |
76,438 |
47,132 |
24,442 |
16,344 |
18,728 |
24,769 |
44,507 |
598,034 |
Net liquidity gap |
(140,196) |
7,762 |
4,399 |
2,524 |
11,386 |
28,681 |
52,787 |
81,315 |
48,658 |
1 Loans and advances, investment securities, deposits by banks, customer accounts and debt securities in issue include financial instruments held at fair value through profit or loss, see note 13 of the financial statements
2 Loans and advances include reverse repurchase agreements and other similar secured lending borrowing of $44.9 billion
3 Deposits by banks include repurchase agreements and other similar secured borrowing of $4 billion
4 Customer accounts include repurchase agreements and other similar secured lending borrowing of $33.7 billion
Behavioural maturity of financial assets and liabilities
The cashflows presented in the previous section reflect the cashflows that will be contractually payable over the residual maturity of the instruments. However, contractual maturities do not necessarily reflect the timing of actual repayments or cashflow. In practice, certain assets and liabilities behave differently from their contractual terms, especially for short-term customer accounts, credit card balances and overdrafts, which extend to a longer period than their contractual maturity. On the other hand, mortgage balances tend to have a shorter repayment period than their contractual maturity date. Expected customer behaviour is assessed and managed on a country basis using qualitative and quantitative techniques, including analysis of observed customer behaviour over time.
Maturity of financial liabilities on an undiscounted basis
The following table analyses the contractual cashflows payable for the Group's financial liabilities by remaining contractual maturities on an undiscounted basis. The financial liability balances in the table below will not agree to the balances reported in the consolidated balance sheet as the table incorporates all contractual cashflows, on an undiscounted basis, relating to both principal and interest payments. Derivatives not treated as hedging derivatives are included in the "On demand" time bucket and not by contractual maturity.
Within the 'More than five years and undated' maturity band are undated financial liabilities, all of which relate to subordinated debt, on which interest payments are not included as this information would not be meaningful given the instruments are undated. Interest payments on these instruments are included within the relevant maturities up to five year.
|
2017 |
||||||||
One month |
Between |
Between three months and six months |
Between |
Between |
Between |
Between |
More than |
Total |
|
Deposits by banks |
29,427 |
2,497 |
1,460 |
545 |
743 |
160 |
150 |
697 |
35,679 |
Customer accounts |
327,501 |
37,353 |
20,720 |
10,901 |
9,463 |
3,178 |
1,840 |
2,919 |
413,875 |
Derivative financial instruments1 |
47,267 |
- |
3 |
- |
153 |
166 |
246 |
266 |
48,101 |
Debt securities in issue |
4,287 |
10,888 |
11,878 |
2,141 |
2,876 |
6,550 |
6,163 |
11,769 |
56,552 |
Subordinated liabilities and |
126 |
207 |
1,490 |
210 |
166 |
657 |
3,726 |
19,356 |
25,938 |
Other liabilities |
20,800 |
6,052 |
3,676 |
681 |
324 |
720 |
929 |
11,241 |
44,423 |
Total liabilities |
429,408 |
56,997 |
39,227 |
14,478 |
13,725 |
11,431 |
13,054 |
46,248 |
624,568 |
|
2016 |
||||||||
One month |
Between |
Between |
Between |
Between |
Between |
Between |
More than |
Total |
|
Deposits by banks |
31,412 |
2,923 |
1,123 |
671 |
576 |
644 |
154 |
257 |
37,760 |
Customer accounts |
280,731 |
46,268 |
25,539 |
11,289 |
9,074 |
2,622 |
2,177 |
2,548 |
380,248 |
Derivative financial instruments1 |
62,917 |
10 |
- |
- |
876 |
11 |
472 |
1,426 |
65,712 |
Debt securities in issue |
6,159 |
11,361 |
8,228 |
4,240 |
1,606 |
4,574 |
10,271 |
9,362 |
55,801 |
Subordinated liabilities and |
173 |
86 |
163 |
1,949 |
77 |
1,691 |
2,724 |
23,228 |
30,091 |
Other liabilities |
21,139 |
6,905 |
5,059 |
769 |
612 |
1,391 |
915 |
11,459 |
48,249 |
Total liabilities |
402,531 |
67,553 |
40,112 |
18,918 |
12,821 |
10,933 |
16,713 |
48,280 |
617,861 |
1. Derivatives are on the discounted basis
Earnings sensitivity (unaudited)
The following table provides the estimated impact on the Group's earnings of a 50 basis point parallel shock (up and down) across all yield curves. The sensitivities shown represent the estimated change in base case projected net interest income (NII), plus the change in interest rate implied income and expense from FX swaps used to manage banking book currency positions, under the two interest rate shock scenarios.
The interest rate sensitivities are indicative and based on simplified scenarios, estimating the aggregate impact of an instantaneous 50 basis point parallel shock across all yield curves over a one-year horizon, including the time taken to implement changes to pricing before becoming effective. The assessment assumes that non-interest rate-sensitive aspects of the size and mix of the balance sheet remain constant and that there are no specific management actions in response to the change in rates. No assumptions are made in relation to the impact on credit spreads in a changing rate environment.
Significant modelling and behavioural assumptions are made regarding scenario simplification, market competition, pass-through rates, asset and liability re-pricing tenors, and price flooring. In particular, the assumption that interest rates of all currencies and maturities shift by the same amount concurrently, and that no actions are taken to mitigate the impacts arising from this are considered unlikely. Reported sensitivities will vary over time due to a number of factors including changes in balance sheet composition, market conditions, customer behaviour and risk management strategy and should therefore not be considered an income or profit forecast.
Estimated one-year impact to earnings from a parallel shift in yield curves |
2017 |
|||
USD bloc |
HKD, SGD & |
Other |
Total |
|
+ 50 basis points |
70 |
120 |
140 |
330 |
- 50 basis points |
(50) |
(100) |
(140) |
(290) |
As at 31 December 2017, the Group estimates the one-year impact of an instantaneous, parallel increase across all yield curves of 50 basis points would result in an earnings benefit of $330 million. The corresponding impact from a parallel decrease of 50 basis points would result in an earnings reduction of $290 million.
The benefit from rising interest rates is primarily from reinvesting at higher yields and from assets re-pricing faster and to a greater extent than deposits. The current estimate indicates that the majority of the earnings benefit would come from our GCNA region and from non-USD currencies.
The USD sensitivity is impacted by the dampening effect due to the asymmetry of funding Trading Book assets with Banking Book liabilities. The sensitivities include the cost of Banking Book liabilities used to fund the Trading Book, however the revenue associated with the Trading Book positions is recognised in net trading income. This asymmetry in both the up and down scenarios should be broadly offset within total operating income.
Operational risk (unaudited)
Operational risks arise from the broad scope of activities carried out across the Group. Risks associated with these activities are mapped into a Group Process Universe where a standardised operational risk management approach is applied to mitigate the risks. We benchmark practices against industry standards and regulatory requirements.
A summary of our operational risk management approach is provided in the Risk management approach.
Operational risk profile
The operational risk profile is the Group's overall exposure to operational risk, at a given point in time, covering all applicable operational risk sub-types. The operational risk profile comprises both operational risk events and losses that have already occurred and the current exposures to operational risks which, at an aggregate level, includes the consideration of top risks and emerging risks.
Operational risk events and losses
Operational losses are one indicator of the effectiveness and robustness of the operational risk control environment. In addition, lessons learnt reviews and root cause analyses from external and internal loss events, including near misses, are used to improve processes and controls.
As at 31 December 2017, recorded operational losses for 2017 are lower than 2016. Operational losses in 2017 comprise of unrelated non-systemic events which were not individually significant. The largest operational loss recognised as at 31 December 2017 relates to the Group's $17.2 million settlement arising from a US class action brought against a number of banks concerning foreign exchange benchmark rates.
Losses in 2016 include incremental events that were recognised in 2017 and reclassification of Basel event types and Basel business lines. As at 31 December 2017, the largest loss recorded for 2016 relates to a credit loan impairment of $24.5 million in the Commercial Banking Basel business line.
The Group's profile of operational loss events in 2017 and 2016 is summarised in the table below. It shows the percentage distribution of gross operational losses by Basel business line.
Distribution of operational losses by Basel business line |
% Loss |
|
2017 |
20161 |
|
Agency services |
3.2% |
2.5% |
Commercial Banking |
7.2% |
25.3% |
Corporate Finance |
4.6% |
0.0% |
Corporate items |
3.8% |
10.7% |
Payment and settlements |
1.6% |
7.0% |
Retail Banking |
39.6% |
30.6% |
Retail brokerage |
0.1% |
4.4% |
Trading and sales |
39.9% |
19.5% |
1 2016 losses are restated to reflect incremental losses recorded.
The Group's profile of operational loss events in 2017 and 2016 is also summarised by Basel event type in the table below. It shows the percentage distribution of gross operational losses by Basel event type:
Distribution of operational losses by Basel event type |
% Loss |
|
2017 |
20161 |
|
Business disruption and system failures |
0.6% |
2.1% |
Client products and business practices |
41.8% |
10.6% |
Damage to physical assets |
0.1% |
0.0% |
Employment practices and workplace safety |
0.0% |
0.4% |
Execution delivery and process management |
36.0% |
50.7% |
External fraud |
20.7% |
34.2% |
Internal fraud |
0.8% |
2.0% |
1 2016 losses are restated to reflect incremental losses recorded
Operational losses are one indicator of the effectiveness and robustness of the operational risk control environment. In addition, lessons learnt reviews and root cause analyses from external and internal loss events, including near misses, are used to improve processes and controls.
Top risks and emerging risks
A top risk is a risk exposure, or a group of highly correlated risk exposures, that has the highest potential to breach the Group's risk capacity. The objective is to identify those risks that can materially impact the Group's risk capacity, and to calibrate metrics as early warning indicators against undesirable outcomes and performance under stress. Top risk candidates are identified through a top-down assessment of concentration of exposures or aggregation of risks.
Emerging risks are also considered, both internally from the Group's internal operational risk profile and from external events. Given their significance, top risks attract closer scrutiny from management and governance committees. Top risks change over time based on the top-down assessments by management.
The Group's operational top risks as at 31 December 2017 are shown in the table below.
Top risks
Macro-prudential, regulatory, and external risks
• Regulatory non-compliance
• Anti-money laundering and terrorist financing
• International sanctions
• External fraud
• Market misconduct
• Information and cyber security
• Critical third-party vendors
• Additional conduct matters
• Anti-bribery and corruption
Internal processes, systems, and change risks
• Change management
• Data management
• Major systems failure
• Significant business interruption
• Rogue trading
• Internal fraud
• Mis-selling
• Product management
• Collateral and Document management
For further information on the Group's liquidity stress testing framework refer to the Risk Management Approach.
CAPITAL REVIEW
The Capital review provides an analysis of the Group's capital and leverage position and requirements
Capital summary
The Group's capital and leverage position is managed within the Board-approved Risk Appetite. The Group is well capitalised with low leverage and high levels of loss-absorbing capacity.
Capital, leverage and RWA |
2017 |
2016 |
CET1 capital % |
13.6 |
13.6 |
Tier 1 capital % |
16.0 |
15.7 |
Total capital % |
21.0 |
21.3 |
UK leverage % |
6.0 |
6.0 |
RWA ($ million) |
279,748 |
269,445 |
The Group's Common Equity Tier 1 (CET1) capital and leverage position was ahead of both the current requirements and the expected end-state requirements for 2019. For further detail see the Standard Chartered PLC Pillar 3 Disclosures 2017 section on Capital.
The Group was advised during the period that its Pillar 2A requirement, as reviewed regularly by the PRA for all banks, has increased. The Group's current Pillar 2A requirement is 3.1 per cent of RWA of which at least 1.7 per cent must be held in CET1. This requirement is expected to vary over time.
In January 2017, the Group issued $1 billion of Additional Tier 1 (AT1) capital and currently has 2.4 per cent of RWA in AT1. The Group continued its programme of senior issuance from the holding company, with around $1.5 billion issued during the year, including Standard Chartered PLC's inaugural issuance of callable senior notes.
The Bank of England (BoE) confirmed the Group's non-binding, indicative minimum requirement for own funds and eligible liabilities (MREL). As at 31 December 2017 the Group estimates that its MREL requirement is 16.0 per cent of RWA in 2019 rising to 19.1 per cent of RWA in 2020 and 22.2 per cent of RWA from 1 January 2022.
The Group's combined buffer (comprising the capital conservation, global systemically important institution (G-SII) and countercyclical buffers) sits above any MREL requirement, resulting in a total loss-absorbing capacity requirement of 26.0 per cent of RWA from 1 January 2022 based on the Group's CRD IV capital buffers that are known at this time.
The Group currently estimates that its MREL position was around 25.5 per cent of RWA and around 10.0 per cent of leverage exposure at 31 December 2017.
In November 2017, the Bank of England released the results of the 2017 stress test exercise. The 2017 annual cyclical scenario (ACS) incorporated a severe and synchronised global macroeconomic and financial market stress with growth in China, Hong Kong and Singapore particularly impacted. The results showed that, under the ACS, the Group exceeded all hurdle rates and systemic reference points after strategic management actions. The Group has a strong and liquid balance sheet and these results demonstrate the benefits of the actions recently undertaken by the Group
to improve its resilience to an extreme stress scenario.
Regulatory update
The Group has been in discussions with the Prudential Regulation Authority (PRA) about changes to the treatment of certain exposures where the country-specific default experience is not deemed sufficient for modelling purposes, including the application of various loss given default (LGD) floors based on the Foundation IRB approach.
Following an agreement reached in the third quarter with the PRA, as of September 2017 the Group has applied a LGD floor to certain financial institutions exposures, which resulted in a RWA increase equivalent to about a 35 basis points reduction in the Group's CET1 ratio. Similar model changes relating to certain corporate exposures will be introduced during the first half of 2018. These changes are expected to have a lower impact on the Group's CET1 ratio than the changes taken in 2017.
The European Commission is proposing amendments to the Capital Requirements Regulation, CRD IV, the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation. Any proposed reforms remain subject to change and until the proposals are in final form it is uncertain how they will affect the Group.
The Group remains a G-SII with a 1.0 per cent G-SII CET1 buffer which began to be phased in from 1 January 2016 and will be fully implemented by 1 January 2019. The buffer phases in at a rate of 0.25 per cent per year. The Standard Chartered PLC 2016 G-SII disclosure is published at: investors.sc.com/fullyearresults
IFRS 9
Under IFRS 9 it is estimated that on day 1 the Group's CET1 ratio would not be impacted after applying 95 per cent transitional relief. The day 1 end point impact (with no transitional relief) reduces CET1 by an estimated 15 basis points, which is attributed to the following factors:
• The increase in IFRS 9 expected credit loss (ECL) allowances for AIRB portfolios has been mostly offset by the existing regulatory excess expected loss (EL) deduction
• The increase in IFRS 9 ECL for standardised portfolios directly impacts CET1 as there is no existing regulatory deduction to absorb the increase
• The increase in deferred tax assets recognised from IFRS 9 re-measurements and the increase in asset fair values as a result of classification and measurement partially mitigates the impact of ECL.
CET1 ratio (phasing in of transition) |
|
13.6 |
IAS 39 at 31 December 2017 |
13.5 |
IFRS 9 at 1 January 2018 before transitional relief |
13.6 |
IFRS 9 at 1 January 2018 after transitional relief |
Transitional relief relates to the phasing in of the impact of the initial adoption of the ECL component of IFRS 9 into CET1, as permitted by Regulation (EU) 2017/2395 of the European Parliament and of the Council. Under this approach, the balance of ECL allowances in excess of the regulatory excess EL and standardised portfolios are phased into the CET1 capital base over 5 years.
The proportion phased in for the balance at each reporting period is: 2018 5 per cent; 2019 15 per cent; 2020 30 per cent; 2021 50 per cent; 2022 75 per cent. From 2023 onwards there is no transitional relief.
Capital ratios
|
2017 |
2016 |
CET1 |
13.6% |
13.6% |
Tier 1 capital |
16.0% |
15.7% |
Total capital |
21.0% |
21.3% |
CRD IV Capital base
|
2017 |
2016 |
CET1 instruments and reserves |
|
|
Capital instruments and the related share premium accounts |
5,603 |
5,597 |
Of which: share premium accounts |
3,957 |
3,957 |
Retained earnings1 |
25,316 |
26,000 |
Accumulated other comprehensive income (and other reserves) |
12,766 |
11,524 |
Non-controlling interests (amount allowed in consolidated CET1) |
850 |
809 |
Independently reviewed interim and year-end profits/(losses) |
1,227 |
(247) |
Foreseeable dividends net of scrip |
(399) |
(212) |
CET1 capital before regulatory adjustments |
45,363 |
43,471 |
CET1 regulatory adjustments |
|
|
Additional value adjustments (prudential valuation adjustments) |
(574) |
(660) |
Intangible assets (net of related tax liability) |
(5,112) |
(4,856) |
Deferred tax assets that rely on future profitability (excludes those arising from temporary differences) |
(125) |
(197) |
Fair value reserves related to net losses on cash flow hedges |
45 |
85 |
Deduction of amounts resulting from the calculation of excess expected loss |
(1,142) |
(740) |
Net gains on liabilities at fair value resulting from changes in own credit risk |
(53) |
(289) |
Defined-benefit pension fund assets |
(40) |
(18) |
Fair value gains arising from the institution's own credit risk related to derivative liabilities |
(59) |
(20) |
Exposure amounts which could qualify for risk weighting of 1,250% |
(141) |
(168) |
Total regulatory adjustments to CET1 |
(7,201) |
(6,863) |
CET1 capital |
38,162 |
36,608 |
Additional Tier 1 capital (AT1) instruments |
6,719 |
5,704 |
AT1 regulatory adjustments |
(20) |
(20) |
Tier 1 capital |
44,861 |
42,292 |
|
|
|
Tier 2 capital instruments |
13,927 |
15,176 |
Tier 2 regulatory adjustments |
(30) |
(30) |
Tier 2 capital |
13,897 |
15,146 |
Total capital |
58,758 |
57,438 |
Total risk-weighted assets (unaudited) |
279,748 |
269,445 |
1. CET1 capital before regulatory adjustments is prepared on the regulatory scope of consolidation
Movement in total capital
|
2017 |
2016 |
CET1 at 1 January |
36,608 |
38,182 |
Ordinary shares issued in the year and share premium |
6 |
1 |
Profit/(loss) for the year |
1,227 |
(247) |
Foreseeable dividends net of scrip deducted from CET1 |
(399) |
(212) |
Difference between dividends paid and foreseeable dividends |
(233) |
(116) |
Movement in goodwill and other intangible assets |
(256) |
(36) |
Foreign currency translation differences |
1,363 |
(779) |
Non-controlling interests |
41 |
227 |
Movement in eligible other comprehensive income |
119 |
(579) |
Deferred tax assets that rely on future profitability |
72 |
15 |
(Increase) / decrease in excess expected loss |
(402) |
(171) |
Additional value adjustments (Prudential Valuation Adjustment) |
86 |
(96) |
Own credit gains |
(39) |
342 |
Exposure amounts which could qualify for risk weighting |
27 |
31 |
Other |
(58) |
46 |
CET1 at 31 December |
38,162 |
36,608 |
|
|
|
AT1 at 1 January |
5,684 |
4,591 |
Issuances net of redemptions |
992 |
1,010 |
Foreign currency translation difference |
23 |
(47) |
Other |
- |
130 |
AT1 at 31 December |
6,699 |
5,684 |
|
|
|
Tier 2 capital at 1 January |
15,146 |
16,248 |
Regulatory amortisation |
779 |
(181) |
Issuances net of redemptions |
(2,907) |
(697) |
Foreign currency translation difference |
676 |
(577) |
Tier 2 ineligible minority interest |
233 |
374 |
Other |
(30) |
(21) |
Tier 2 capital at 31 December |
13,897 |
15,146 |
Total capital at 31 December |
58,758 |
57,438 |
The main movements in capital in 2017 were:
• The CET1 ratio remained flat at 13.6 per cent with a $10.3 billion increase in RWA offsetting a $1.6 billion increase in CET1 capital as described below
• CET1 capital increased by $1.6 billion as underlying profits and favourable foreign currency translation were offset in part by distributions and higher regulatory adjustments
• AT1 capital increased to $6.7 billion due to the issuance of $1 billion of AT1 securities in the period
• Tier 2 reduced by $1.2 billion to $13.9 billion as calls and maturities were not replaced by new issuance. This was in part offset by foreign currency translation and the net impact of regulatory amortisation and deductions.
Risk-weighted assets by business
|
2017 |
|||
Credit risk |
Operational risk |
Market risk |
Total risk |
|
Corporate & Institutional Banking |
109,368 |
14,740 |
22,994 |
147,102 |
Retail Banking |
36,345 |
7,761 |
- |
44,106 |
Commercial Banking |
29,712 |
3,356 |
- |
33,068 |
Private Banking |
5,134 |
809 |
- |
5,943 |
Central and other items |
45,671 |
3,812 |
46 |
49,529 |
Total risk-weighted assets |
226,230 |
30,478 |
23,040 |
279,748 |
|
2016 |
|||
Credit risk |
Operational risk |
Market risk |
Total risk |
|
Corporate & Institutional Banking |
106,834 |
16,703 |
19,228 |
142,765 |
Retail Banking |
33,210 |
8,953 |
- |
42,163 |
Commercial Banking |
27,553 |
4,385 |
- |
31,938 |
Private Banking |
5,129 |
959 |
- |
6,088 |
Central and other items |
41,149 |
2,693 |
2,649 |
46,491 |
Total risk-weighted assets |
213,875 |
33,693 |
21,877 |
269,445 |
Risk-weighted assets by geographic region1
|
2017 |
2016 |
Greater China & North Asia |
84,593 |
76,665 |
ASEAN & South Asia |
96,733 |
96,673 |
Africa & Middle East |
56,437 |
52,849 |
Europe & Americas |
44,735 |
43,487 |
Central & other items |
(2,750) |
(229) |
Total risk weighted assets |
279,748 |
269,445 |
1 Risk-weighted assets by geographic region is presented on a basis consistent with Note 2 Segmental information
Movement in risk weighted assets
|
Credit risk |
Operational risk |
Market risk |
Total risk |
|||||
Corporate & Institutional Banking |
Retail Banking |
Commercial Banking |
Private Banking |
Central & other items |
Total |
||||
At 1 January 2016 |
127,528 |
38,007 |
30,825 |
6,302 |
42,740 |
245,402 |
35,610 |
21,913 |
302,925 |
Assets (decline)/growth |
(15,860) |
(1,221) |
(3,221) |
(1,120) |
493 |
(20,929) |
|
|
(20,929) |
Net credit migration |
156 |
116 |
(61) |
- |
(179) |
32 |
- |
- |
32 |
Risk-weighted assets efficiencies |
(2,722) |
- |
- |
- |
- |
(2,722) |
- |
- |
(2,722) |
Model, methodology and policy changes |
(917) |
(2,708) |
437 |
- |
(1,316) |
(4,504) |
- |
5,500 |
996 |
Disposals |
- |
(471) |
- |
- |
- |
(471) |
- |
- |
(471) |
Foreign currency translation |
(1,351) |
(513) |
(427) |
(53) |
(589) |
(2,933) |
|
|
(2,933) |
Other non-credit risk movements |
- |
- |
- |
- |
- |
- |
(1,917) |
(5,536) |
(7,453) |
At 31 December 2016 |
106,834 |
33,210 |
27,553 |
5,129 |
41,149 |
213,875 |
33,693 |
21,877 |
269,445 |
Assets (decline)/growth |
(6,363) |
2,349 |
1,973 |
445 |
2,273 |
677 |
- |
- |
677 |
Net credit migration |
4,035 |
74 |
(465) |
- |
9 |
3,653 |
- |
- |
3,653 |
Risk-weighted assets efficiencies |
(2,295) |
- |
- |
- |
- |
(2,295) |
- |
- |
(2,295) |
Model, methodology and policy changes |
4,990 |
(368) |
- |
(575) |
2,372 |
6,419 |
- |
(2,178) |
4,241 |
Disposals |
- |
(710) |
- |
- |
(443) |
(1,153) |
- |
- |
(1,153) |
Foreign currency translation |
2,167 |
1,790 |
651 |
135 |
311 |
5,054 |
- |
- |
5,054 |
Other non-credit risk movements |
- |
- |
- |
- |
- |
- |
(3,215) |
3,341 |
126 |
At 31 December 2017 |
109,368 |
36,345 |
29,712 |
5,134 |
45,671 |
226,230 |
30,478 |
23,040 |
279,748 |
RWA increased by $10.3 billion, or 3.8 per cent from 31 December 2016 to $279.7 billion. This was due to a $12.4 billion increase in credit risk RWA and a $1.2 billion increase in market risk RWA partly offset by a $3.2 billion decrease in operational risk RWA.
Corporate & Institutional Banking
Credit risk RWA increased by $2.5 billion to $109.4 billion mainly due to:
• $4.0 billion increase due to credit migration in the AME and GCNA regions
• $5.0 billion increase in model, methodology and policy changes, of which $5.2 billion was due to PRA approved IRB model changes in financial institutions relating to LGD floors
• Financial markets and corporate finance asset decline of $6.4 billion driven by asset reduction and change in product mix
• $2.3 billion reduction from efficiencies in financial markets through optimisation and process enhancements, including CVA RWA saves
• $2.2 billion increase from foreign currency translation due to appreciation of currencies in Europe, India, and China
Retail Banking
Credit risk RWA increased by $3.1 billion to $36.3 billion, due to:
• $2.3 billion increase from mortgage and secured lending growth
• $0.4 billion RWA save due to model, methodology and policy changes
• $0.7 billion due to the disposal of our Thailand retail portfolio
• $1.8 billion increase from foreign currency translation due to appreciation of currencies in Korea, Singapore and India
Commercial Banking
Credit risk RWA increased by $2.2 billion to $29.7 billion mainly due to:
• $2.0 billion increase from new business, with growth in transaction banking and lending
• Credit migration reduction of $0.5 billion due to increased provisions in the ASA and GCNA regions
• $0.7 billion increase from foreign currency translation due to appreciation of currencies in Korea, India and Europe
Private Banking
Credit risk RWA is broadly flat at $5.1 billion year on year. Changes in asset balances and foreign currency translation in Europe and Singapore, were offset by RWA saves achieved through recognition of eligible collateral.
Central & other items
Credit risk RWA increased by $4.5 billion to $45.7 billion due to:
• An increase of $2.3 billion in credit RWA mainly due to treasury activities, offset in part by lower RWA balances for investments in Associates
• $2.4 billion increase due to PRA approved IRB model changes in financial institutions relating to LGD floors in treasury markets
• $0.4 billion saving from the disposal of an investment in the GCNA region
• $0.3 billion increase from foreign currency translation due to appreciation of currencies in India, Korea and China
Market risk
Total market risk RWA increased by $1.2 billion, or 5.3 per cent from 31 December 2016 to $23.0 billion. This was mainly due to increases in trading book debt security holdings partly offset by lower market volatility. Methodology and policy changes contributed RWA savings of $2.2 billion.
Operational risk
Operational risk RWA reduced by $3.2 billion to $30.5 billion, due to a decrease in the average income over a rolling three-year time horizon, as lower 2016 income replaced higher 2013 income. This represents a 9.5 per cent year-on-year reduction in operational risk RWA.
UK leverage ratio
The Group's UK leverage ratio, which excludes qualifying claims on central banks in accordance with a PRA waiver, was 6.0 per cent, which is above the current minimum requirement of 3.5 per cent.
The UK leverage ratio in the period remained flat as the increase in Tier 1 capital (end point) was offset by an increase in the UK leverage exposure measure.
UK leverage ratio (unaudited)
|
2017 |
2016 |
Tier 1 capital (transitional) |
44,861 |
42,292 |
Additional Tier 1 capital subject to phase out |
(1,758) |
(1,735) |
Tier 1 capital (end point) |
43,103 |
40,557 |
Derivative financial instruments |
47,031 |
65,509 |
Derivative cash collateral |
9,513 |
14,230 |
Securities financing transactions (SFTs) |
55,187 |
44,916 |
Loans and advances and other assets |
551,770 |
522,037 |
Total on-balance sheet assets |
663,501 |
646,692 |
Regulatory consolidation adjustments1 |
(31,712) |
(31,491) |
|
|
|
Derivatives adjustments |
|
|
Derivatives netting |
(29,830) |
(38,737) |
Adjustments to cash collateral |
(18,411) |
(23,449) |
Net written credit protection |
1,360 |
7,311 |
Potential future exposure on derivatives |
30,027 |
49,607 |
Total derivatives adjustments |
(16,854) |
(5,268) |
Counterparty risk leverage exposure measure for SFTs |
13,238 |
10,412 |
Off-balance sheet items |
96,260 |
60,535 |
Regulatory deductions from Tier 1 capital |
(7,089) |
(6,553) |
UK leverage exposure (end point) |
717,344 |
674,327 |
UK leverage ratio (end point) |
6.0% |
6.0% |
UK leverage exposure quarterly average |
723,508 |
N/A |
UK leverage ratio quarterly average |
6.0% |
N/A |
Countercyclical leverage ratio buffer |
0.1% |
0.0% |
G-SII additional leverage ratio buffer |
0.2% |
0.1% |
1 Includes adjustment for qualifying central bank claims
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare Group and Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing each of the Group and Company financial statements, the directors are required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgements and estimates that are reasonable, relevant and reliable;
• State whether they have been prepared in accordance with IFRSs as adopted by the EU;
• Assess the Group and the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• Use the going concern basis of accounting unless they either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the directors in respect of the annual financial report
We confirm that to the best of our knowledge:
• The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
• The Strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.
By order of the Board
Andy Halford
Group Chief Financial Officer
27 February 2018
FINANCIAL STATEMENTS
Consolidated income statement
For the year ended 31 December 2017
|
Notes |
2017 |
2016 |
Interest income |
|
14,435 |
13,010 |
Interest expense |
|
(6,254) |
(5,216) |
Net interest income |
3 |
8,181 |
7,794 |
Fees and commission income |
|
3,942 |
3,671 |
Fees and commission expense |
|
(430) |
(440) |
Net fee and commission income |
4 |
3,512 |
3,231 |
Net trading income |
5 |
1,527 |
1,886 |
Other operating income |
6 |
1,205 |
1,149 |
Operating income |
|
14,425 |
14,060 |
Staff costs |
|
(6,758) |
(6,303) |
Premises costs |
|
(823) |
(797) |
General administrative expenses |
|
(2,007) |
(2,372) |
Depreciation and amortisation |
|
(829) |
(739) |
Operating expenses |
7 |
(10,417) |
(10,211) |
Operating profit before impairment losses and taxation |
|
4,008 |
3,849 |
Impairment losses on loans and advances and other credit risk provisions |
8 |
(1,362) |
(2,791) |
Other impairment |
|
|
|
Goodwill |
9 |
(320) |
(166) |
Other |
9 |
(179) |
(446) |
Profit/(loss) from associates and joint ventures |
32 |
268 |
(37) |
Profit before taxation |
|
2,415 |
409 |
Taxation |
10 |
(1,147) |
(600) |
Profit/(loss) for the year |
|
1,268 |
(191) |
|
|
|
|
Profit/(loss) attributable to: |
|
|
|
Non-controlling interests |
29 |
49 |
56 |
Parent company shareholders |
|
1,219 |
(247) |
Profit/(loss) for the year |
|
1,268 |
(191) |
|
|
cents |
cents |
Earnings per share: |
|
|
|
Basic earnings/(loss) per ordinary share |
12 |
23.5 |
(14.5) |
Diluted earnings/(loss) per ordinary share |
12 |
23.3 |
(14.5) |
The notes form an integral part of these financial statements.
Consolidated statement of comprehensive income
For the year ended 31 December 2017
|
Notes |
2017 |
2016 |
Profit/(loss) for the year |
|
1,268 |
(191) |
Other comprehensive income/(loss) |
|
|
|
Items that will not be reclassified to income statement: |
|
(238) |
(445) |
Own credit losses on financial liabilities designated at fair value through profit or loss |
|
(249) |
(372) |
Actuarial gains/(losses) on retirement benefit obligations |
30 |
32 |
(105) |
Taxation relating to components of other comprehensive income |
10 |
(21) |
32 |
|
|
|
|
Items that may be reclassified subsequently to income statement: |
|
1,532 |
(968) |
Exchange differences on translation of foreign operations: |
|
|
|
Net gains/(losses) taken to equity |
|
1,637 |
(817) |
Net (losses)/gains on net investment hedges |
|
(288) |
30 |
Share of other comprehensive loss from associates and joint ventures |
|
(1) |
(11) |
Available-for-sale investments: |
|
|
|
Net valuation gains taken to equity |
|
369 |
48 |
Reclassified to income statement |
|
(233) |
(188) |
Cash flow hedges: |
|
|
|
Net gains/(losses) taken to equity |
|
35 |
(79) |
Reclassified to income statement |
14 |
11 |
57 |
Taxation relating to components of other comprehensive income |
10 |
2 |
(8) |
Other comprehensive income/(loss) for the year, net of taxation |
|
1,294 |
(1,413) |
Total comprehensive income/(loss) for the year |
|
2,562 |
(1,604) |
|
|
|
|
Total comprehensive income/(loss) attributable to: |
|
|
|
Non-controlling interests |
29 |
50 |
45 |
Parent company shareholders |
|
2,512 |
(1,649) |
|
|
2,562 |
(1,604) |
Consolidated balance sheet
As at 31 December 2017
|
Notes |
2017 |
2016 |
Assets |
|
|
|
Cash and balances at central banks |
13,35 |
58,864 |
70,706 |
Financial assets held at fair value through profit or loss |
13 |
27,564 |
20,077 |
Derivative financial instruments |
13,14 |
47,031 |
65,509 |
Loans and advances to banks |
13 |
57,494 |
54,538 |
Loans and advances to customers |
13 |
248,707 |
226,693 |
Reverse repurchase agreements and other similar secured lending |
13,17 |
54,275 |
44,097 |
Investment securities |
13,15 |
117,025 |
108,972 |
Other assets |
21 |
33,490 |
36,940 |
Current tax assets |
10 |
491 |
474 |
Prepayments and accrued income |
|
2,307 |
2,238 |
Interests in associates and joint ventures |
32 |
2,307 |
1,929 |
Goodwill and intangible assets |
18 |
5,013 |
4,719 |
Property, plant and equipment |
19 |
7,211 |
7,252 |
Deferred tax assets |
10 |
1,177 |
1,294 |
Assets classified as held for sale |
21 |
545 |
1,254 |
Total assets |
|
663,501 |
646,692 |
|
|
|
|
Liabilities |
|
|
|
Deposits by banks |
13 |
30,945 |
32,872 |
Customer accounts |
13 |
370,509 |
338,185 |
Repurchase agreements and other similar secured borrowing |
13,17 |
39,783 |
37,692 |
Financial liabilities held at fair value through profit or loss |
13 |
16,633 |
16,598 |
Derivative financial instruments |
13,14 |
48,101 |
65,712 |
Debt securities in issue |
13,22 |
46,379 |
46,700 |
Other liabilities |
23 |
35,257 |
33,146 |
Current tax liabilities |
10 |
376 |
327 |
Accruals and deferred income |
|
5,493 |
5,223 |
Subordinated liabilities and other borrowed funds |
13,27 |
17,176 |
19,523 |
Deferred tax liabilities |
10 |
404 |
353 |
Provisions for liabilities and charges |
24 |
183 |
213 |
Retirement benefit obligations |
30 |
455 |
525 |
Liabilities included in disposal groups held for sale |
23 |
- |
965 |
Total liabilities |
|
611,694 |
598,034 |
|
|
|
|
Equity |
|
|
|
Share capital and share premium account |
28 |
7,097 |
7,091 |
Other reserves |
|
12,767 |
11,524 |
Retained earnings |
|
26,641 |
25,753 |
Total parent company shareholders' equity |
|
46,505 |
44,368 |
Other equity instruments |
28 |
4,961 |
3,969 |
Total equity excluding non-controlling interests |
|
51,466 |
48,337 |
Non-controlling interests |
29 |
341 |
321 |
Total equity |
|
51,807 |
48,658 |
Total equity and liabilities |
|
663,501 |
646,692 |
The notes form an integral part of these financial statements.
These financial statements were approved by the Board of directors and authorised for issue on 27 February 2018 and signed on its behalf by:
José Viñals Bill Winters Andy Halford
Group Chairman Group Chief Executive Group Chief Financial Officer
Consolidated statement of changes in equity
For the year ended 31 December 2017
|
Share capital |
Capital and merger reserves1 |
Own credit adjustment reserve |
Available-for-sale reserve |
Cash flow hedge reserve |
Translation reserve |
Retained earnings |
Parent company shareholders' equity |
Other |
Non-controlling interests |
Total |
At 1 January 2016 |
7,088 |
17,122 |
- |
132 |
(46) |
(5,026) |
26,934 |
46,204 |
1,987 |
321 |
48,512 |
Transfer of own credit adjustment, net of taxation2 |
- |
- |
631 |
- |
- |
- |
(631) |
- |
- |
- |
- |
(Loss)/profit for the year |
- |
- |
- |
- |
- |
- |
(247) |
(247) |
- |
56 |
(191) |
Other comprehensive loss |
- |
- |
(342) |
(136) |
(39) |
(779) |
(106)3 |
(1,402) |
- |
(11) |
(1,413) |
Distributions |
- |
- |
- |
- |
- |
- |
- |
- |
- |
(37) |
(37) |
Shares issued, net of expenses |
3 |
7 |
- |
- |
- |
- |
- |
10 |
- |
- |
10 |
Other equity instruments issued, net of expenses |
- |
- |
- |
- |
- |
- |
- |
- |
1,982 |
- |
1,982 |
Net own shares adjustment |
- |
- |
- |
- |
- |
- |
(46) |
(46) |
- |
- |
(46) |
Share option expense, net of taxation |
- |
- |
- |
- |
- |
- |
80 |
80 |
- |
- |
80 |
Dividends4 |
- |
- |
- |
- |
- |
- |
(231) |
(231) |
- |
- |
(231) |
Other movements5 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
(8) |
(8) |
As at 31 December 2016 |
7,091 |
17,129 |
289 |
(4) |
(85) |
(5,805) |
25,753 |
44,368 |
3,969 |
321 |
48,658 |
Profit for the year |
- |
- |
- |
- |
- |
- |
1,219 |
1,219 |
- |
49 |
1,268 |
Other comprehensive (loss)/income |
- |
- |
(235) |
87 |
40 |
1,351 |
503 |
1,293 |
- |
1 |
1,294 |
Distributions |
- |
- |
- |
- |
- |
- |
- |
- |
- |
(51) |
(51) |
Shares issued, net of expenses |
6 |
- |
- |
- |
- |
- |
- |
6 |
- |
- |
6 |
Other equity instruments issued, net of expenses |
- |
- |
- |
- |
- |
- |
- |
- |
992 |
- |
992 |
Net own shares adjustment |
- |
- |
- |
- |
- |
- |
10 |
10 |
- |
- |
10 |
Share option expense, net of taxation |
- |
- |
- |
- |
- |
- |
125 |
125 |
- |
- |
125 |
Dividends4 |
- |
- |
- |
- |
- |
- |
(445) |
(445) |
- |
- |
(445) |
Other movements6 |
- |
- |
- |
- |
- |
- |
(71) |
(71) |
- |
21 |
(50) |
As at 31 December 2017 |
7,097 |
17,129 |
54 |
83 |
(45) |
(4,454) |
26,641 |
46,505 |
4,961 |
341 |
51,807 |
1 Includes capital reserve of $5 million, capital redemption reserve of $13 million and merger reserve of $17,111 million
2 The Group early adopted IFRS 9 Financial Instruments to present own credit adjustments within Other comprehensive income (rather than Net trading income)
3 Comprises actuarial gain/(loss), net of taxation and share from associates and joint ventures $50 million (2016: $(106) million)
4 Comprises of dividends on preferences shares classified as equity and Additional Tier 1 securities $445 million (2016: $231 million)
5 Mainly due to completion of sale of businesses with non-controlling interest in Pakistan and issuance of shares to non-controlling interest in Angola
6 Mainly due to additional share capital issued including the premium by Nepal to its non-controlling interests of $31 million, non-controlling interest with respect to an acquisition during 2017 of $9 million and offset by other equity adjustments of $90 million
The notes form an integral part of these financial statements.
Cash flow statement
For the year ended 31 December 2017
|
Notes |
Group |
|
Company |
||
2017 |
2016 |
2017 |
2016 |
|||
Cash flows from operating activities: |
|
|
|
|
|
|
Profit before taxation |
|
2,415 |
409 |
|
207 |
192 |
Adjustments for non-cash items and other adjustments included within income statement |
34 |
3,241 |
4,615 |
|
615 |
703 |
Change in operating assets |
34 |
(13,625) |
(8,286) |
|
459 |
110 |
Change in operating liabilities |
34 |
5,819 |
13,080 |
|
575 |
(619) |
Contributions to defined benefit schemes |
30 |
(143) |
(98) |
|
- |
- |
UK and overseas taxes paid |
10 |
(915) |
(1,287) |
|
(14) |
(12) |
Net cash (used in)/from operating activities |
|
(3,208) |
8,433 |
|
1,842 |
374 |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchase of property, plant and equipment |
19 |
(165) |
(195) |
|
- |
- |
Disposal of property, plant and equipment |
|
29 |
23 |
|
- |
- |
Acquisition of investment in subsidiaries, associates, and joint ventures, net of cash acquired |
32 |
(44) |
(238) |
|
(1,000) |
(5,500) |
Dividends received from subsidiaries, associates and joint ventures |
32 |
2 |
3 |
|
392 |
204 |
Disposal of subsidiaries |
|
- |
636 |
|
- |
- |
Purchase of investment securities |
15 |
(265,186) |
(207,274) |
|
- |
(4,000) |
Disposal and maturity of investment securities |
|
261,316 |
210,857 |
|
2,850 |
1,300 |
Net cash (used in)/from investing activities |
|
(4,048) |
3,812 |
|
2,242 |
(7,996) |
Cash flows from financing activities: |
|
|
|
|
|
|
Issue of ordinary and preference share capital, net of expenses |
28 |
6 |
10 |
|
6 |
10 |
Exercise of share options |
|
10 |
5 |
|
10 |
5 |
Purchase of own shares |
|
- |
(51) |
|
- |
(51) |
Issue of Additional Tier 1 capital, net of expenses |
28 |
992 |
1,982 |
|
992 |
1,982 |
Gross proceeds from issue of subordinated liabilities |
34 |
- |
1,250 |
|
- |
1,250 |
Interest paid on subordinated liabilities |
34 |
(743) |
(920) |
|
(353) |
(604) |
Repayment of subordinated liabilities |
34 |
(2,984) |
(2,666) |
|
(1,249) |
(105) |
Proceeds from issue of senior debts |
34 |
2,292 |
5,453 |
|
1,501 |
4,385 |
Repayment of senior debts |
34 |
(4,162) |
(6,470) |
|
(3,237) |
(3,941) |
Interest paid on senior debts |
34 |
(896) |
(454) |
|
(825) |
(365) |
Investment from/(repayment to) non-controlling interests |
|
21 |
(8) |
|
- |
- |
Dividends paid to non-controlling interests and preference shareholders |
|
(496) |
(268) |
|
(445) |
(231) |
Net cash (used in)/from financing activities |
|
(5,960) |
(2,137) |
|
(3,600) |
2,335 |
Net (decrease)/increase in cash and cash equivalents |
|
(13,216) |
10,108 |
|
484 |
(5,287) |
Cash and cash equivalents at beginning of the year |
|
96,977 |
88,428 |
|
15,230 |
20,517 |
Effect of exchange rate movements on cash and cash equivalents |
|
3,470 |
(1,559) |
|
- |
- |
Cash and cash equivalents at end of the year |
35 |
87,231 |
96,977 |
|
15,714 |
15,230 |
The notes form an integral part of these financial statements.
Notes to the financial statements
1. Accounting policies
Statement of compliance
The Group financial statements consolidate Standard Chartered PLC (the Company) and its subsidiaries (together referred to as the Group) and equity account the Group's interest in associates and jointly controlled entities.
The parent company financial statements present information about the Company as a separate entity.
Both the parent company financial statements and the Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee interpretations as endorsed by the European Union (EU). EU-endorsed IFRS may differ from IFRS published by the International Accounting Standards Board (IASB) if a standard has not been endorsed by the EU.
The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual statement of comprehensive income and related notes that form a part of these financial statements.
The following parts of the Risk review and Capital review form part of these financial statements:
a) From the start of Risk profile section to the end of Top risks and emerging risks in the same section excluding:
• Asset backed securities
• Country risk
• Market risk changes - risks not in value at risk
• Market risk changes - backtesting
• Mapping of market risk items to the balance sheet
• Stressed coverage and liquidity coverage ratio
• Net stable funding ratio
• Liquidity pool
• Encumbrance
• Earnings sensitivity
• Operational risk
b) From the start of Principal risks to the end of Capital and Liquidity risk, excluding Country risk
c) From the start of the CRD IV capital base section to the end of Movement in total capital section
Basis of preparation
The consolidated and Company financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of cash-settled share-based payments, available-for-sale assets, and financial assets and liabilities (including derivatives) at fair value through profit or loss.
Significant accounting estimates and judgements
In determining the carrying amounts of certain assets and liabilities, the Group makes assumptions of the effects of uncertain future events on those assets and liabilities at the balance sheet date. The Group's estimates and assumptions are based on historical experience and expectation of future events and are reviewed periodically. Further information about key assumptions concerning the future, and other key sources of estimation uncertainty and judgement, are set out in the relevant disclosure notes for the following areas:
• Impairment of loans and advances (note 8)
• Taxation (note 10)
• Valuation of financial instruments held at fair value (note 13)
• Goodwill impairment (note 18)
• Provisions for liabilities and charges (note 24)
• Retirement benefit obligations (note 30)
• Investments in associates and joint ventures (note 32)
IFRS and Hong Kong accounting requirements
As required by the Hong Kong Listing Rules, an explanation of the differences in accounting practices between EU-endorsed IFRS and Hong Kong Financial Reporting Standards is required to be disclosed. There would be no significant differences had these accounts been prepared in accordance with Hong Kong Financial Reporting Standards.
Comparatives
Certain comparatives have been changed to comply with current year disclosures.
Reverse repurchase and repurchase agreements including other similar secured lending and borrowing have been separated from loans and advances to banks and customers and deposits by banks and customer accounts on the balance sheet.
Details of these changes are set out in the relevant notes below:
• Liquidity and funding risk
• Note 13 Financial instruments
• Note 15 Investment securities
• Note 18 Goodwill and intangible assets
• Note 25 Contingent liabilities and commitments
• Note 27 Subordinated liabilities and other borrowed funds
• Note 33 Structured entities
These changes have not resulted in any amendments to the reported income statement or balance sheet of the Group.
New accounting standards adopted by the Group
There were no new standards applied during the year ended 31 December 2017.
The accounting policies used by the Group are detailed in the relevant note to the financial statements, except those set out below. All have been applied consistently across the Group and to all years presented in these financial statements.
Foreign currencies
Items included in the Group financial statements for each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency of that entity). Both the Group and Company financial statements are presented in millions of US dollars ($ million), which is the functional and presentation currency of the Company and the presentation currency of the Group.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction date. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. Non-monetary assets and liabilities are translated at historical exchange rates if held at historical cost, or year-end exchange rates if held at fair value, and the resulting foreign exchange gains and losses are recognised in either the income statement or shareholders' equity depending on the treatment of the gain or loss on the asset or liability.
Foreign currency translation
The results and financial position of all the entities included in the Group financial statements that have a functional currency different from the Group's presentation currency are accounted for as follows:
• Assets and liabilities for each balance sheet presented are translated at the closing rate at the balance sheet date
• Income and expenses for each income statement are translated at average exchange rates or at rates on the date of the transaction where exchange rates fluctuate significantly
• All resulting exchange differences arising since 1 January 2004 are recognised as a separate component of equity
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to other comprehensive income. When a foreign operation is sold or capital repatriated they are recognised in the income statement as part of the gain or loss on disposal. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
New accounting standards in issue but not yet effective
The following new standards are effective for periods beginning on or after 1 January 2018 and have not been applied in preparing these consolidated financial statements:
IFRS 9 Financial Instruments
IFRS 9 was issued in July 2014 and has an effective date of 1 January 2018. It was endorsed by the EU in November 2016.
In October 2017, the IASB published an amendment to IFRS 9, Prepayment Features with Negative Compensation, which is effective from 1 January 2019, with earlier application permitted.
This has not yet been endorsed by the EU. The amendment amends the existing requirements regarding termination rights in order to allow measurement at amortised cost (or fair value through OCI) even in the case of negative compensation payments. This is consistent with Management's treatment of these clauses.
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement, introducing new requirements for the classification and measurement of financial instruments, the recognition and measurement of credit impairment provisions, and providing for a simplified approach to hedge accounting. The Group has elected to continue hedge accounting in line with the IAS 39 requirements and has not therefore applied the IFRS 9 hedging requirements. The Group will, however, adopt these revised disclosures set out in IFRS 7, which includes those relating to hedge accounting. The changes in measurement arising on initial application of IFRS 9 will be incorporated through an adjustment to the opening reserves and retained earnings position as at 1 January 2018.
Although IFRS 9 will be retrospectively applied, the Group is only permitted to restate comparatives if, and only if, it is possible without the use of hindsight.
The Group does not consider it possible to restate comparatives for impairment without the use of hindsight. For further details on the effect and implementation of IFRS 9 refer to note 41.
IFRS 15 Revenue from Contracts with Customers
The effective date of IFRS 15 is 1 January 2018 and the standard has been endorsed by the EU in September 2016. The standard provides a more detailed principles-based approach for income recognition than the current standard IAS 18 Revenue, with revenue being recognised as or when promised services are transferred to customers. The standard applies to 'fees and commission income' but not to financial instruments or lease contracts. IFRS 15 will
not have a material impact on the Group's consolidated financial statements and there will not be an adjustment to retained earnings in respect of adoption.
IFRS 16 Leases
The effective date of IFRS 16 is 1 January 2019 and the standard was endorsed by the EU in November 2017. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17 Leases. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The work to assess the impact of the standard is ongoing and it is not yet practicable to quantify the effect of IFRS 16 on these consolidated financial statements. The Group will have a balance sheet increase in lease liabilities and right-of-use assets on adoption of IFRS 16.
2. Segmental information
The Group's segmental reporting is in accordance with IFRS 8 Operating Segments and is reported consistently with the internal performance framework and as presented to the Group's Management Team. The four client segments are Corporate & Institutional Banking, Retail Banking, Commercial Banking and Private Banking. The four geographic regions are Greater China & North Asia, ASEAN & South Asia, Africa & Middle East, and Europe & America. Activities not directly related to a client segment and/or geographic region are included in Central & other items. These mainly include Corporate Centre costs, Asset and Liability Management, treasury activities, certain strategic investments and the UK bank levy.
The following should also be noted:
• Transactions and funding between the segments are carried out on an arm's-length basis
• Corporate Centre costs represent stewardship and central management services roles and activities that are not directly attributable to business or country operations
• Asset and Liability Management, joint ventures and associate investments are managed in the regions and are included within the applicable region. However, they are not managed directly by a client segment and therefore included in the Central & other items segment
• In addition to treasury activities, Corporate Centre costs and other Group related functions, Central & other items for regions includes globally run businesses or activities that are managed by the client segments but not directly by geographic management. These include Principal Finance and Portfolio Management
• The Group allocated central costs (excluding Corporate Centre costs) relating to client segments and geographic regions using appropriate business drivers (such as in proportion to the direct cost base of each segment before allocation of indirect costs) and these are reported within operating expenses
An analysis of the Group's performance by client segment and region is set out in the Strategic report.
Basis of preparation
The analysis reflects how the client segments and geographic regions are managed internally. This is described as the Management View and is principally the location from which a client relationship is managed, which may differ from where it is financially booked and may be shared between businesses and/or regions. In certain instances this approach is not appropriate and a Financial View is disclosed, that is, the location in which the transaction or balance was booked. Typically the Financial View is used in areas such as the Market and Liquidity Risk reviews where actual booking location is more important for an assessment. Segmental information is therefore on a Management View unless otherwise stated.
Restructuring items excluded from underlying results
Income, costs and impairment relating to identifiable business units, products or portfolios from the date that have been approved for restructuring, disposal, wind down or redundancy as a consequence of the Strategy Review announced 3 November 2015 are presented as restructuring and excluded from the underlying results of the Group. This includes realised and unrealised gains and losses from management's decisions to dispose of assets as well as residual income, direct costs and impairment of related legacy assets of those identifiable business units, products or portfolios.
A reconciliation between underlying and statutory results is set out in the table below:
|
2017 |
||||
Underlying |
Restructuring |
Net gain on businesses disposed/ |
Goodwill impairment |
Statutory |
|
Operating income |
14,289 |
58 |
78 |
- |
14,425 |
Operating expenses |
(10,120) |
(297) |
- |
- |
(10,417) |
Operating profit/(loss) before impairment losses and taxation |
4,169 |
(239) |
78 |
- |
4,008 |
Impairment losses on loans and advances and other credit |
(1,200) |
(162) |
- |
- |
(1,362) |
Other impairment |
(169) |
(10) |
- |
(320) |
(499) |
Profit from associates and joint ventures |
210 |
58 |
- |
- |
268 |
Profit/(loss) before taxation |
3,010 |
(353) |
78 |
(320) |
2,415 |
|
2016 |
|||||
Underlying |
Restructuring |
Net gain on businesses disposed/ |
Goodwill impairment |
Gains arising on repurchase of subordinated liabilities |
Statutory |
|
Operating income |
13,808 |
(85) |
253 |
- |
84 |
14,060 |
Operating expenses |
(9,975) |
(236) |
- |
- |
- |
(10,211) |
Operating profit/(loss) before impairment losses and taxation |
3,833 |
(321) |
253 |
- |
84 |
3,849 |
Impairment losses on loans and advances and other credit risk provisions |
(2,382) |
(409) |
- |
- |
- |
(2,791) |
Other impairment |
(383) |
(63) |
- |
(166) |
- |
(612) |
Profit from associates and joint ventures |
25 |
(62) |
- |
- |
- |
(37) |
Profit/(loss) before taxation |
1,093 |
(855) |
253 |
(166) |
84 |
409 |
Underlying performance by client segment
|
2017 |
|||||
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private |
Central & |
Total |
|
Operating income |
6,496 |
4,834 |
1,333 |
500 |
1,126 |
14,289 |
Operating expenses |
(4,409) |
(3,585) |
(881) |
(500) |
(745) |
(10,120) |
Operating profit before impairment losses and taxation |
2,087 |
1,249 |
452 |
- |
381 |
4,169 |
Impairment (losses)/release on loans and advances and other credit risk provisions |
(658) |
(375) |
(167) |
(1) |
1 |
(1,200) |
Other impairment |
(168) |
(1) |
(3) |
- |
3 |
(169) |
Profit from associates and joint ventures |
- |
- |
- |
- |
210 |
210 |
Underlying profit/(loss) before taxation |
1,261 |
873 |
282 |
(1) |
595 |
3,010 |
Restructuring |
(275) |
(19) |
(13) |
(15) |
(31) |
(353) |
Net gains on businesses disposed/ |
- |
- |
- |
- |
78 |
78 |
Goodwill impairment |
- |
- |
- |
- |
(320) |
(320) |
Statutory profit/(loss) before taxation |
986 |
854 |
269 |
(16) |
322 |
2,415 |
Total assets |
293,334 |
105,178 |
31,650 |
13,469 |
219,870 |
663,501 |
Of which: loans and advances to customers |
131,738 |
103,013 |
28,108 |
13,351 |
9,343 |
285,553 |
Total liabilities |
353,582 |
132,819 |
36,385 |
22,203 |
66,705 |
611,694 |
Of which: customer accounts |
222,714 |
129,536 |
33,880 |
22,222 |
3,372 |
411,724 |
|
2016 |
|||||
Corporate & Institutional |
Retail |
Commercial Banking |
Private |
Central & |
Total |
|
Operating income |
6,472 |
4,669 |
1,295 |
496 |
876 |
13,808 |
Operating expenses |
(4,268) |
(3,413) |
(929) |
(463) |
(902) |
(9,975) |
Operating profit/(loss) before impairment losses and taxation |
2,204 |
1,256 |
366 |
33 |
(26) |
3,833 |
Impairment losses on loans and advances and other credit risk provisions |
(1,401) |
(489) |
(491) |
(1) |
- |
(2,382) |
Other impairment |
(368) |
(1) |
5 |
- |
(19) |
(383) |
Profit from associates and joint ventures |
- |
- |
- |
- |
25 |
25 |
Underlying profit/(loss) before taxation |
435 |
766 |
(120) |
32 |
(20) |
1,093 |
Restructuring |
(459) |
(47) |
(26) |
(73) |
(250) |
(855) |
Net gains on businesses disposed/ |
- |
- |
- |
- |
253 |
253 |
Goodwill impairment |
- |
- |
- |
- |
(166) |
(166) |
Gains arising on repurchase of subordinated liabilities |
- |
- |
- |
- |
84 |
84 |
Statutory (loss)/profit before taxation |
(24) |
719 |
(146) |
(41) |
(99) |
409 |
Total assets |
289,183 |
96,834 |
27,151 |
11,974 |
221,550 |
646,692 |
Of which: loans and advances to customers |
122,231 |
93,488 |
24,013 |
11,908 |
4,256 |
255,896 |
Total liabilities |
347,865 |
121,015 |
35,576 |
21,840 |
71,738 |
598,034 |
Of which: customer accounts |
204,279 |
117,355 |
32,570 |
21,767 |
2,331 |
378,302 |
Underlying performance by region
|
2017 |
|||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & Americas |
Central & |
Total |
|
Operating income |
5,616 |
3,833 |
2,764 |
1,601 |
475 |
14,289 |
Operating expenses |
(3,681) |
(2,654) |
(1,819) |
(1,407) |
(559) |
(10,120) |
Operating profit/(loss) before impairment losses and taxation |
1,935 |
1,179 |
945 |
194 |
(84) |
4,169 |
Impairment (losses)/release on loans |
(141) |
(653) |
(300) |
(107) |
1 |
(1,200) |
Other impairment |
(81) |
(12) |
(3) |
(16) |
(57) |
(169) |
Profit/(loss) from associates and joint ventures |
229 |
(22) |
- |
- |
3 |
210 |
Underlying profit/(loss) before taxation |
1,942 |
492 |
642 |
71 |
(137) |
3,010 |
Restructuring |
35 |
(161) |
(33) |
(25) |
(169) |
(353) |
Net gains on businesses disposed/ |
- |
19 |
- |
- |
59 |
78 |
Goodwill impairment |
- |
- |
- |
- |
(320) |
(320) |
Statutory profit/(loss) before taxation |
1,977 |
350 |
609 |
46 |
(567) |
2,415 |
Net interest margin |
1.4% |
1.9% |
3.3% |
0.5% |
|
1.6% |
Total assets |
257,692 |
148,467 |
59,166 |
185,345 |
12,831 |
663,501 |
Of which: loans and advances to customers |
126,739 |
82,579 |
29,602 |
46,633 |
- |
285,553 |
Total liabilities |
228,093 |
128,165 |
39,413 |
177,525 |
38,498 |
611,694 |
Of which: customer accounts |
186,517 |
95,310 |
31,797 |
98,100 |
- |
411,724 |
|
2016 |
|||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & |
Central & |
Total |
|
Operating income |
5,190 |
4,052 |
2,742 |
1,664 |
160 |
13,808 |
Operating expenses |
(3,546) |
(2,518) |
(1,730) |
(1,302) |
(879) |
(9,975) |
Operating profit/(loss) before impairment losses and taxation |
1,644 |
1,534 |
1,012 |
362 |
(719) |
3,833 |
Impairment losses on loans and advances and other credit risk provisions |
(424) |
(762) |
(563) |
(511) |
(122) |
(2,382) |
Other impairment |
(47) |
3 |
(18) |
1 |
(322) |
(383) |
Profit/(loss) from associates and joint ventures |
167 |
(146) |
- |
- |
4 |
25 |
Underlying profit/(loss) before taxation |
1,340 |
629 |
431 |
(148) |
(1,159) |
1,093 |
Restructuring |
(137) |
(443) |
(82) |
(113) |
(80) |
(855) |
Net gains on businesses disposed/held for sale |
253 |
- |
- |
- |
- |
253 |
Goodwill impairment |
- |
- |
- |
- |
(166) |
(166) |
Gains arising on repurchase of subordinated liabilities |
- |
- |
- |
- |
84 |
84 |
Statutory profit/(loss) before taxation |
1,456 |
186 |
349 |
(261) |
(1,321) |
409 |
Net interest margins |
1.3% |
2.0% |
3.2% |
0.5% |
|
1.5% |
Total assets |
239,740 |
143,704 |
56,980 |
195,937 |
10,331 |
646,692 |
Of which: loans and advances to customers |
110,533 |
73,161 |
28,140 |
44,062 |
- |
255,896 |
Total liabilities |
210,795 |
126,701 |
38,020 |
181,639 |
40,879 |
598,034 |
Of which: customer accounts |
169,957 |
88,141 |
29,931 |
90,273 |
- |
378,302 |
Additional segmental information (statutory)
|
2017 |
|||||
Corporate & Institutional Banking |
Retail |
Commercial Banking |
Private |
Central & |
Total |
|
Net interest income |
3,225 |
3,006 |
802 |
286 |
862 |
8,181 |
Other income |
3,298 |
1,897 |
527 |
214 |
308 |
6,244 |
Operating income |
6,523 |
4,903 |
1,329 |
500 |
1,170 |
14,425 |
|
2016 |
|||||
Corporate & Institutional |
Retail |
Commercial Banking |
Private |
Central & |
Total |
|
Net interest income |
3,051 |
2,977 |
782 |
287 |
697 |
7,794 |
Other income |
3,437 |
1,692 |
511 |
209 |
417 |
6,266 |
Operating income |
6,488 |
4,669 |
1,293 |
496 |
1,114 |
14,060 |
|
2017 |
|||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & Americas |
Central & |
Total |
|
Net interest income |
2,950 |
2,402 |
1,619 |
692 |
518 |
8,181 |
Other income |
2,663 |
1,468 |
1,145 |
904 |
64 |
6,244 |
Operating income |
5,613 |
3,870 |
2,764 |
1,596 |
582 |
14,425 |
|
2016 |
|||||
Greater China & North Asia |
ASEAN & |
Africa & |
Europe & |
Central & |
Total |
|
Net interest income |
2,684 |
2,485 |
1,566 |
744 |
315 |
7,794 |
Other income |
2,698 |
1,557 |
1,171 |
911 |
(71) |
6,266 |
Operating income |
5,382 |
4,042 |
2,737 |
1,655 |
244 |
14,060 |
|
2017 |
|||||||
Hong Kong |
Korea |
China |
Singapore |
India |
UAE |
UK |
US |
|
Net interest income |
1,564 |
625 |
540 |
965 |
577 |
394 |
428 |
158 |
Other income |
1,823 |
340 |
163 |
470 |
406 |
339 |
314 |
517 |
Operating income |
3,387 |
965 |
703 |
1,435 |
983 |
733 |
742 |
675 |
|
2016 |
|||||||
Hong Kong |
Korea |
China |
Singapore |
India |
UAE |
UK |
US |
|
Net interest income |
1,375 |
586 |
505 |
817 |
680 |
392 |
451 |
179 |
Other income |
1,959 |
295 |
187 |
683 |
275 |
357 |
331 |
482 |
Operating income |
3,334 |
881 |
692 |
1,500 |
955 |
749 |
782 |
661 |
3. Net interest income
Accounting policy
Interest income and expense on available-for-sale assets, held-to-maturity assets and financial assets and liabilities held at amortised cost, is recognised using the effective interest method.
Interest income and expense on financial instruments held at fair value through profit or loss is recognised within net interest income.
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Where the estimates of cash flows have been revised, the carrying amount of the financial asset or liability is adjusted to reflect the actual and revised cash flows, discounted at the instruments original effective interest rate. The adjustment is recognised as interest income or expense in the period in which the revision is made.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
|
2017 |
2016 |
Balances at central banks |
287 |
213 |
Loans and advances to banks |
1,955 |
1,282 |
Loans and advances to customers |
8,845 |
8,461 |
Listed debt securities |
928 |
604 |
Unlisted debt securities |
1,501 |
1,569 |
Other eligible bills |
836 |
593 |
Accrued on impaired assets (discount unwind) |
83 |
288 |
Interest income |
14,435 |
13,010 |
|
|
|
Deposits by banks |
891 |
494 |
Customer accounts |
3,859 |
3,187 |
Debt securities in issue |
756 |
700 |
Subordinated liabilities and other borrowed funds |
748 |
835 |
Interest expense |
6,254 |
5,216 |
Net interest income |
8,181 |
7,794 |
|
|
|
Of which from financial instruments held at: |
|
|
Amortised cost |
10,861 |
10,040 |
Available-for-sale |
2,657 |
2,291 |
Fair value through profit or loss |
847 |
663 |
Held-to-maturity |
70 |
16 |
Interest income |
14,435 |
13,010 |
|
|
|
Of which from financial instruments held at: |
|
|
Amortised cost |
6,128 |
5,107 |
Fair value through profit or loss |
126 |
109 |
Interest expense |
6,254 |
5,216 |
Net interest income |
8,181 |
7,794 |
4. Net fees and commission
Accounting policy
Fees and commissions charged for services provided or received by the Group are recognised on an accrual basis when the service has been provided or significant act performed.
Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retained no part of the loan package for itself, or retained a part at the same effective interest rate as for the other participants.
The Group can act as trustee or in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. The assets and income arising thereon are excluded from these financial statements, as they are not assets and income of the Group.
|
2017 |
2016 |
Fees and commissions income |
3,942 |
3,671 |
Fees and commissions expense |
(430) |
(440) |
Net fees and commission |
3,512 |
3,231 |
|
|
|
Transaction Banking |
1,277 |
1,194 |
Financial Markets |
193 |
(62) |
Corporate Finance |
226 |
521 |
Wealth Management |
1,355 |
1,089 |
Retail Products |
443 |
464 |
Lending and Portfolio Management |
51 |
50 |
Principal Finance |
17 |
3 |
Treasury1 |
(20) |
(30) |
Others1 |
(30) |
2 |
Net fees and commission |
3,512 |
3,231 |
1 Treasury net fees and commission comprises items previously reported under Asset and Liability Management ($(22) million) and Treasury-related aspects of Other income ($(8) million). This reflects the reorganisation of the Group's balance sheet, liquidity, and capital management activities such that they are now managed within one Treasury function.
2016 has been re-presented as a result
Total fee income arising from financial instruments that are not fair valued through profit or loss is $1,067 million (2016: $1,035 million) and arising from trust and other fiduciary activities of $130 million (2016: $115 million).
Total fee expense arising from financial instruments that are not fair valued through profit or loss is $74 million (2016: $56 million) and arising from trust and other fiduciary activities of $22 million (2016: $17 million).
5. Net trading income
Accounting policy
Gains and losses arising from changes in the fair value of financial instruments held at fair value through profit or loss are included in the income statement in the period in which they arise.
Income is recognised from the sale and purchase of trading positions, margins on market making and customer business and fair value changes.
|
2017 |
2016 |
Net trading income |
1,527 |
1,886 |
Significant items within net trading income include: |
|
|
Gains on instruments held for trading |
1,716 |
2,106 |
Gains/(losses) on financial assets designated at fair value through profit or loss |
167 |
(73) |
Losses on financial liabilities designated at fair value through profit or loss |
(202) |
(178) |
6. Other operating income
Accounting policy
Operating lease income is recognised on a straight line basis over the period of the lease unless another systematic basis is more appropriate.
Dividends on equity instruments are recognised when the Group's right to receive payment is established.
On disposal of available-for-sale financial instruments, the cumulative gain or loss recognised in other comprehensive income is recycled to the profit or loss in other operating income/expense.
When the Group loses control of the subsidiary or disposal group, the difference between the consideration received and the carrying amount of the subsidiary or disposal group is recognised as a gain or loss on sale of the business.
|
2017 |
2016 |
Other operating income includes: |
|
|
Rental income from operating lease assets |
670 |
561 |
Gains less losses on disposal of available-for-sale financial instruments |
235 |
192 |
Net gain on sale of businesses |
28 |
284 |
Net gain on derecognition of Investment in associate |
64 |
- |
Dividend income |
46 |
52 |
Other |
162 |
60 |
|
1,205 |
1,149 |
7. Operating expenses
Accounting policy
Short-term employee benefits: salaries and social security expenses are recognised over the period in which the employees provide the service. Variable compensation is included within share-based payments costs and wages and salaries. Further details are disclosed in the Annual report.
Pension costs: contributions to defined contribution pension schemes are recognised in profit or loss when payable. For defined benefit plans, net interest expense, service costs and expenses are recognised to the income statement. Further details are provided in note 30.
Share-based compensation: the group operates equity-settled and cash-settled share-based payment compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. Further details are provided in note 31.
|
2017 |
2016 |
Staff costs: |
|
|
Wages and salaries |
5,047 |
4,713 |
Social security costs |
159 |
145 |
Other pension costs (note 30) |
357 |
316 |
Share-based payment costs (note 31) |
152 |
100 |
Other staff costs |
1,043 |
1,029 |
|
6,758 |
6,303 |
Other staff costs include redundancy and other restructuring expenses of $85 million (2016: $236 million). Further costs in this category include training, travel costs and other staff-related costs.
The following table summarises the number of employees within the Group:
|
2017 |
|
2016 |
||||
Business |
Support services |
Total |
Business |
Support services |
Total |
||
At 31 December |
40,636 |
45,385 |
86,021 |
|
43,286 |
43,407 |
86,693 |
Average for the year |
41,806 |
44,988 |
86,794 |
|
42,605 |
42,311 |
84,916 |
The Company employed nil staff at 31 December 2017 (2016: nil) and it incurred costs of $5 million (2016: $3 million).
Details of directors' pay and benefits and interests in shares are disclosed in the Annual report.
Transactions with directors, officers and other related parties are disclosed in note 36.
|
2017 |
2016 |
Premises and equipment expenses: |
|
|
Rental of premises |
379 |
400 |
Other premises and equipment costs |
427 |
379 |
Rental of computers and equipment |
17 |
18 |
|
823 |
797 |
|
|
|
General administrative expenses: |
|
|
UK bank levy |
220 |
383 |
Other general administrative expenses |
1,787 |
1,989 |
|
2,007 |
2,372 |
|
|
|
Depreciation and amortisation: |
|
|
Property, plant and equipment (note 19): |
|
|
Premises |
85 |
98 |
Equipment |
85 |
84 |
Operating lease assets |
328 |
271 |
|
498 |
453 |
Intangibles (note 18): |
|
|
Software |
320 |
272 |
Acquired on business combinations |
11 |
14 |
|
829 |
739 |
The UK bank levy is applied on the chargeable equities and liabilities on the Group's consolidated balance sheet. Key exclusions from chargeable equities and liabilities include Tier 1 capital, insured or guaranteed retail deposits, repos secured on certain sovereign debt and liabilities subject to netting. The 2017 charge was lower than expected after updating estimates made in previous years. The rate of the levy for 2017 is the blended rate of 0.17 per cent for chargeable short-term liabilities, with a lower rate of 0.085 per cent generally applied to chargeable equity and long-term liabilities (i.e. liabilities with a remaining maturity greater than one year). The rates will be gradually reduced over the next five years, from 1 January 2021 they will be 0.10 per cent for short-term liabilities and 0.05 per cent for long-term liabilities. In addition, the scope of the bank levy will be restricted to the balance sheet of UK operations only from that date.
8. Impairment losses on loans and advances and other credit risk provisions
Accounting policy
Significant accounting estimates and judgements
The calculation of impairment involves key judgements to be made by the Group:
• Loan loss provisions are management's best estimate of incurred loss in the loan portfolio at the balance sheet date. Management has to exercise judgement in making assumptions and estimates of the loan portfolio on both individually and collectively assessed loan and advances
• For individually significant financial assets, the Group will consider judgements that have an impact on the expected future cash flows of the asset. These include: the business prospects, industry and geopolitical climate of the customer, quality of realisable value of collateral, the Group's legal position relative to other claimants and any renegotiation/forbearance options. Many of the key judgement factors have a degree of interdependency, therefore a higher level of judgement is required for loans to borrowers showing signs of financial difficulty/failure to pay in market sectors experiencing economic stress, particularly where the likelihood of repayment is affected by the ability of the client to refinance or sell a specified asset
• The difference between the loan carrying amount and the discounted expected future cash flows will result in the impairment amount. The future cash flow calculation involves significant judgements and estimates. As new information becomes available and further negotiations/forbearance measures are taken, the estimates of the future cash flows will be revised, and will have an impact on the future cash flow analysis
• For financial assets which are not individually significant, such as the Retail Banking portfolio or small business loans, which comprise a large number of homogenous loans that share similar characteristics, statistical estimates and techniques are used, as well as credit scoring analysis. These techniques use models which analyse historical repayment and default rates over a time horizon. Where various models are used, management's judgement is required to analyse the available information provided and to select the appropriate model or combination of models to use. Further judgement is required to determine whether the current economic climate, behavioural and credit conditions are such that the actual level of incurred losses, and losses inherent in the collective portfolio is likely to be greater or less than historical experience, and is not fully reflective in the allowance estimated through the use of statistical models and historical data. Factors are applied in different geographical regions and countries to reflect local economic conditions, geopolitical risk, laws and regulations (e.g. new industry debt relief programme), credit bureau data, analysis of credit grade migration and delinquency trends. Further judgement is required to determine overlays on the models (described below in Retail Banking)
Objective evidence of impairment
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events occurring after the initial recognition of the asset (a loss event), and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The Group considers the following factors in assessing objective evidence of impairment:
• Whether the counterparty is in default of principal or interest payments
- the disappearance of an active market for that financial asset because of financial difficulties
- significant financial difficulty of the issuer or obligor
• When a counterparty files for bankruptcy protection (or the local equivalent) and this would avoid or delay discharge of its obligation
• Where the Group files to have the counterparty declared bankrupt or files a similar order in respect of a credit obligation
• Where the Group consents to a restructuring of the obligation, resulting in a diminished financial obligation, demonstrated by a material forgiveness of debt or postponement of scheduled payments
• Where the Group sells a credit obligation at a material credit-related economic loss; or where there is observable data indicating that there is a measurable decrease in the estimated future cash flows of a group of financial assets, although the decrease cannot yet be identified with specific individual financial assets
Assets at amortised cost
The assessment of the credit risk of corporate and commercial loans is done by the Credit Risk department, based upon counterparty information they receive from various sources including relationship managers and on external market information, or as soon as payment of interest or principal is 90 days overdue.
Once a loan starts to exhibit credit deterioration, it will move along the credit grading scale in the performing book and when it is classified as Credit Grade (CG) 12 as defined in the Risk review and Capital review, the credit assessment and oversight of the loan will be performed by Group Special Asset Management (GSAM).
Where GSAM's assessment indicates that a loan is impaired, GSAM will calculate an Individual Impairment Provision (IIP) based on estimated cash flows revised to reflect anticipated recoveries. GSAM's assessment and calculation of impairment involves a significant level of judgement.
If there is objective evidence that an impairment loss on a loan and receivable or a held-to-maturity asset has occurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred), discounted at the asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan and receivable or held-to-maturity asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price.
The individual circumstances of each client are taken into account when GSAM estimates future cash flows. All available sources, such as cash flow arising from operations, selling assets or subsidiaries, realising collateral or payments under guarantees are considered. In any decision relating to the raising of provisions, the Group attempts to balance economic conditions, local knowledge and experience, and the results of independent asset reviews.
The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure, less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
Further details on collateral held by the Group is discussed in the Risk review and Capital review.
In cases where the impairment assessment indicates that there will be a loss of principal, the loan is graded CG 14 while other impaired loans will be graded CG 13. Loans graded CG 13-CG 14 are classified as non-performing loans.
The performing loan portfolio is subject to a Portfolio Impairment Provision (PIP) to cover latent losses i.e. those that are not specifically identified but are known, by experience, to be present in any performing portfolio. The PIP is based on models using risk sizing (including probability of default and loss given default), environmental parameters and exceptional adjustment overlays. The calculation of the PIP uses regulatory expected credit loss (ECL) models. ECL is subject to an emergence risk factor that is generally understood as the hypothetical amount of time between a loss event occurrence and the bank recognition of impairment. The emergence risk factor is the principal means of translating a risk position to an impairment estimate, and the main scaling factor to adjust the conservative regulatory Expected Loss to
an effective PIP level, as the regulatory ECL models are more punitive than the incurred loss model under IAS 39. On a portfolio basis, the emergence risk factor ranges between 2 and 3 months based on structural economic drivers that might influence the accurate and timely discovery of credit issues in each country.
An IIP is recognised for Retail Banking when an account meets a defined threshold condition in terms of overdue payments ('contractual default') or meets other objective conditions (such as bankruptcy, debt restructuring, fraud or death) as further described above in the assessment factors. The threshold conditions are set at the point where empirical evidence suggests that the client is unlikely to meet their contractual obligations or a loss of principal is expected.
A credit obligation in Retail Banking clients portfolio that is more than 150 Days Past Due (DPD) or, a credit obligation secured by Wealth Management products that is 90 DPD, is recognised as 'impaired' and IIP is provided for accordingly. There are, however, exceptions to this rule for portfolios where empirical evidence suggests that they should be set more conservatively. In addition, the credit account is recognised as 'impaired' immediately if the borrower files for bankruptcy or other equivalent forbearance programme, or the borrower is deceased, or the business is closed in the case of small business clients, or the borrower's other credit accounts with the Group are impaired. The core components of the IIP calculation are the value of gross charge-off and recoveries. Gross charge-off and/or provisions are recognised when it is established that the account is unlikely to pay. Recovery of unsecured debt post-impairment is recognised based on actual cash collected, either directly from clients or through the sale of defaulted loans to third-party institutions. Provision release of secured loans post-impairment is recognised if the loan outstanding is paid in full (release of full provision), or the provision is higher than the loan outstanding (release of the excess provision), or the loan is paid to current and remains in current for more than 180 days (release of full provision).
Retail Banking PIP, covering the inherent losses in the portfolio that exist at the balance sheet date but have not been individually identified,
is computed on performing loans (no IIP), using EL rates, to determine latent losses in the portfolio. The EL utilises probability of default and loss given default inherent within the portfolio of impaired loans or receivables and the historical loss experience for assets with credit risk characteristics similar to those in the Group. For defaulted yet non-impaired accounts (greater than 90 days past due) full EL is used, while for non-defaulted accounts, a three month emergence period is applied. An adjustment is added to the PIP calculation to take into the account instances where the EL-based PIP is deemed imprecise due to under-prediction or over-prediction of EL by underlying models. An overlay in the form of Special Risk Adjustment (SRA) is added to the EL-based PIP calculation to take into account instances where EL-based PIP is deemed insufficient to incorporate the impact of a specific credit event. An overlay in the form of Business Cycle Adjustment (BCA) is taken to account for the impact of cyclical volatility in the operating environment, which is not adequately covered in the underlying models.
The assessment and calculation of the Retail Banking IIP and PIP involve a significant level of judgement.
Write-off and reversal of impairment
To the extent a loan is irrecoverable, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed, it is decided that there is no realistic probability of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to
an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement during
the period.
Forborne loans
A forborne loan arises when a concession has been made to the contractual terms of a loan in response to a customer's financial difficulties.
In certain circumstances, the Group may renegotiate client loans. Loans that are renegotiated for commercial reasons, such as when a client had a credit rating upgrade, are not included as part of forborne loans because they are not indicative of any credit stress or event.
Forbearance strategies assist clients who are temporarily in financial distress and are unable to meet their original contractual repayment terms. Forbearance can be initiated by the client, the Bank or a third party (including government-sponsored programmes or a conglomerate of credit institutions) and includes debt restructuring such as a new repayment schedule, payment deferrals, tenor extensions and interest-only payments.
Loans that are renegotiated on terms that are not consistent with those readily available in the market and/or where we have granted a concession compared with the original terms of the loans, are considered for impairment. If the terms of the renegotiation are such that, where the present value of the new cash flows is lower than the present value of the original cash flows, the loan would be considered to be impaired and, at a minimum, a discount provision would be raised and are disclosed as 'Loans subject to forbearance - impaired', which
is a subset of impaired loans. All other loans that have been subject to a forbearance contract amendment, but which are not considered impaired (not classified as CG 13 or 14) are classified as 'Forborne - not impaired' (previously disclosed as 'other renegotiated loans').
If a loan enters the forbearance process and the terms are substantially modified, the original loan will be derecognised, and a new loan will be recognised.
For Retail Banking clients, all forborne loans are managed within a separate portfolio. If such loans subsequently become past due, charge-off and IIP is accelerated to 90 days past due for unsecured loans and automobile finance or 120 days past due for secured loans. The accelerated loss rates applied to this portfolio are derived from experience with other forborne loans, rather than the Retail Banking clients portfolio as a whole, to recognise the greater degree of inherent risk.
For Corporate & Institutional Banking, Commercial Banking and Private Banking clients, forbearance is applied on a case-by-case basis and is not subject to business-wide programmes. In some cases, the asset is derecognised and a new loan is granted as part of the restructure. In others, the contractual terms and repayment of the existing loans are changed or extended (for example, interest only for a period). Loans classified as subject to forbearance are managed by GSAM and are kept under close review to assess the client's ability to adhere to the restructured repayment strategy and to identify any events that could result in a deterioration in the client's ability to repay.
Curing of forborne loans
During the year the Group changed its methodology, to allow curing of forborne loans. Comparatives have been re-presented.
A forborne loan can only be removed from the disclosure (cured) if the loan is performing and a further two year probation period is met.
In order for a forborne loan to become performing, the following criteria have to be satisfied:
• At least a year has passed with no default based upon the forborne contract terms
• The customer is likely to repay its obligations in full without realising security
• The customer has no accumulated impairment against amount outstanding
Subsequent to the criteria above, a further two year probation period has to be fulfilled, whereby regular payments are made by the customer and none of the exposures to the customer are more than 30 days past due.
Forborne loans are disclosed by client segments.
Further details on the application of these policies are set out in the Risk review and Capital review.
The following table reconciles the charge for impairment provisions on loans and advances to the total impairment charge and other credit risk provision:
|
2017 |
2016 |
Net charge against profit on loans and advances: |
|
|
Individual impairment charge |
1,604 |
2,553 |
Portfolio impairment (release)/charge |
(239) |
52 |
|
1,365 |
2,605 |
Impairment (release)/charges related to credit commitments |
(23) |
45 |
Impairment charges relating to debt securities classified as loans and receivables |
20 |
97 |
Impairment charges relating to credit risk mitigation instruments |
- |
44 |
Total impairment losses and other credit risk provisions on loans and advances |
1,362 |
2,791 |
Impairment charges relating to credit risk mitigation instruments
The Group executed funded credit mitigation transactions related to the Liquidation Portfolio, which did not achieve derecognition and are recorded as liabilities on an amortised cost basis. The liability balances are adjusted for revisions to the impairment estimates for the loans referenced in the transactions. Both impairment losses on the referenced loans and the related impairment on these credit mitigation transactions are recorded in total impairment losses and other credit risk provisions on loans and advances.
An analysis of impairment provisions on loans and advances by geography and client segment is set out within the Risk review and Capital review.
9. Other impairment
Accounting policy
Available-for-sale assets
Where objective evidence of impairment exists for available-for-sale financial assets, the cumulative loss (measured as the difference between the amortised cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement) is reclassified from equity and recognised in the income statement.
Available-for-sale debt securities are assessed for impairment in the same way as assets carried at amortised cost (see note 8 - Objective evidence of impairment, for impairment 'trigger' events).
Further, the extent, observability and depth of market price decreases and collateral rights are considered when assessing objective evidence of listed impairment for available-for-sale instruments.
If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the income statement.
For equity securities, a significant or prolonged decline in the fair value of an equity security below its cost is considered, among other factors, in assessing objective evidence of impairment. In assessing significance, the decline in fair value is evaluated against the original fair value of the asset upon recognition.
In assessing prolonged, the decline is evaluated against the continuous period in which the fair value of the asset has been below its initial recognition amount. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.
Refer to the below referenced notes for the relevant accounting policy.
|
2017 |
2016 |
Impairment of goodwill (note 18) |
320 |
166 |
Other impairment |
|
|
Impairment of fixed assets (note 19) |
137 |
131 |
Impairment losses on available-for-sale financial assets: |
|
|
Debt securities |
- |
54 |
Equity shares |
16 |
246 |
Impairment of other intangible assets (note 18) |
23 |
14 |
Other |
3 |
1 |
|
179 |
446 |
|
499 |
612 |
10. Taxation
Accounting policy
Income tax payable on profits is based on the applicable tax law in each jurisdiction and is recognised as an expense in the period in which profits arise.
Deferred tax is provided on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted as at the balance sheet date, and that are expected to apply when the related deferred tax asset is realised or the deferred income tax liability
is settled.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Where permitted deferred tax assets and liabilities are offset on an entity basis and not by component of deferred taxation.
Current and deferred tax relating to items which are charged or credited directly to equity, is credited or charged directly to equity and is subsequently recognised in the income statement together with the current or deferred gain or loss.
Significant accounting estimates and judgements
• Determining the Group's tax charge for the year involves estimation and judgement, which includes an interpretation of local tax laws and an assessment of whether the tax authorities will accept the position taken. These judgements take account of external advice where appropriate, and the Group's view on settling with tax authorities
• The Group provides for current tax liabilities at the best estimate of the amount that is expected to be paid to the tax authorities where an outflow is probable. In making its estimates the Group assumes that the tax authorities will examine all the amounts reported to them and have full knowledge of all relevant information
• The recoverability of the Group's deferred tax assets is based on management's judgement of the availability of future taxable profits against which the deferred tax assets will be utilised
The following table provides analysis of taxation charge in the year:
|
2017 |
2016 |
The charge for tax based upon the profit for the year comprises: |
|
|
Current tax: |
|
|
United Kingdom corporation tax at 19.25 per cent (2016: 20 per cent): |
|
|
Current tax charge on income for the year |
- |
10 |
Adjustments in respect of prior years (including double tax relief) |
1 |
(74) |
Foreign tax: |
|
|
Current tax charge on income for the year |
977 |
786 |
Adjustments in respect of prior years |
(13) |
84 |
|
965 |
806 |
Deferred tax: |
|
|
Origination/reversal of temporary differences |
156 |
(136) |
Adjustments in respect of prior years |
26 |
(70) |
|
182 |
(206) |
Tax on profits on ordinary activities |
1,147 |
600 |
Effective tax rate |
47.5% |
nm1 |
|
|
|
Tax on profits on ordinary activities excluding the impact of US Tax Reform |
927 |
600 |
Effective tax rate excluding the impact of US Tax Reform |
38.4% |
nm1 |
1 Not meaningful as the tax charge is greater than profit before tax
The US Tax Cuts and Jobs Act of 2017, effective from 1 January 2018, reduces the US corporate tax rate from 35 per cent to 21 per cent and introduces a Base Erosion and Anti Abuse Tax. The combined impact of these changes in tax rates reduced the US deferred tax asset, increasing the deferred taxation charge for the year by $220 million.
Foreign tax includes current tax on Hong Kong profits of $167 million (31 December 2016: $109 million) on the profits assessable in Hong Kong.
Deferred tax includes origination or reversal of temporary differences in Hong Kong profits of $5 million (2016: $(4) million) provided at a rate of 16.5 per cent (2016: 16.5 per cent) on the profits assessable to Hong Kong.
The tax charge for the year of $1,147 million (2016: $600 million) on a profit before tax of $2,415 million (2016: $409 million) reflects the impact of US Tax Reform, non-deductible expenses and the impact of countries with tax rates higher or lower than the UK, the most significant of which
is India.
Tax rate: The tax charge for the year is higher than the charge at the rate of corporation tax in the UK, 19.25 per cent. The differences are explained below:
|
2017 |
2016 |
Profit on ordinary activities before tax |
2,415 |
409 |
Tax at 19.25 per cent (2016: 20.00 per cent) |
465 |
82 |
Lower tax rates on overseas earnings |
(17) |
(5) |
Higher tax rates on overseas earnings |
351 |
269 |
Tax-free income |
(130) |
(117) |
Share of associates and joint ventures |
(45) |
13 |
Non-deductible expenses |
217 |
201 |
Bank levy |
42 |
77 |
Non-taxable losses on investments |
9 |
120 |
Non-taxable gains on disposals of businesses |
(12) |
(41) |
Goodwill impairment |
63 |
33 |
US Tax Reform |
220 |
- |
Deferred tax not recognised |
39 |
93 |
Adjustments to tax charge in respect of prior years |
14 |
(60) |
Other items |
(69) |
(65) |
Tax on profit on ordinary activities |
1,147 |
600 |
Factors affecting the tax charge in future years: The Group's tax charge, and effective tax rate in future years could be affected by several factors including acquisitions, disposals and restructuring of our businesses, the mix of profits across jurisdictions with different statutory tax rates, changes in tax legislation and tax rates and resolution of uncertain tax positions.
The evaluation of uncertain tax positions involves an interpretation of local tax laws which could be subject to challenge by a tax authority, and an assessment of whether the tax authorities will accept the position taken. The Group does not currently consider that the assumptions or judgements made in assessing tax liabilities have a significant risk of resulting in a material adjustment within the next financial year.
|
2017 |
|
2016 |
||||
Current tax |
Deferred tax |
Total |
Current tax |
Deferred tax |
Total |
||
Tax recognised in other comprehensive income |
|
|
|
|
|
|
|
Available-for-sale assets |
1 |
7 |
8 |
|
10 |
(1) |
9 |
Cash flow hedges |
- |
(6) |
(6) |
|
- |
(17) |
(17) |
Own credit adjustment |
- |
14 |
14 |
|
29 |
1 |
30 |
Retirement benefit obligations |
- |
(35) |
(35) |
|
- |
2 |
2 |
|
|
|
|
|
|
|
|
Total tax credit/(charge) recognised in equity |
1 |
(20) |
(19) |
|
39 |
(15) |
24 |
|
2017 |
2016 |
Current tax assets |
474 |
388 |
Current tax liabilities |
(327) |
(769) |
Net current tax balance as at 1 January |
147 |
(381) |
Movements in income statement |
(965) |
(806) |
Movements in other comprehensive income |
1 |
39 |
Taxes paid |
915 |
1,287 |
Other movements |
17 |
8 |
Net current tax balance as at 31 December |
115 |
147 |
Current tax assets |
491 |
474 |
Current tax liabilities |
(376) |
(327) |
Total |
115 |
147 |
Deferred tax: The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the year:
|
At 1 January 2017 |
Exchange & other adjustments |
(Charge)/credit to profit |
(Charge)/credit to equity |
At 31 December 2017 |
Deferred tax comprises: |
|
|
|
|
|
Accelerated tax depreciation |
(399) |
(12) |
(2) |
- |
(413) |
Impairment provisions on loans and advances |
934 |
36 |
101 |
- |
1,071 |
Tax losses carried forward |
396 |
8 |
(114) |
- |
290 |
Available-for-sale assets |
(27) |
(2) |
- |
7 |
(22) |
Cash flow hedges |
5 |
(1) |
- |
(6) |
(2) |
Own credit adjustment |
- |
(3) |
- |
14 |
11 |
Retirement benefit obligations |
76 |
3 |
(6) |
(35) |
38 |
Share-based payments |
16 |
- |
- |
- |
16 |
Other temporary differences |
(60) |
5 |
(161) |
- |
(216) |
Net deferred tax assets |
941 |
34 |
(182) |
(20) |
773 |
|
At 1 January 2016 |
Exchange & other adjustments |
(Charge)/credit |
(Charge)/credit |
At 31 December 2016 |
Deferred tax comprises: |
|
|
|
|
|
Accelerated tax depreciation |
(319) |
7 |
(87) |
- |
(399) |
Impairment provisions on loans and advances |
767 |
(22) |
189 |
- |
934 |
Tax losses carried forward |
396 |
1 |
(1) |
- |
396 |
Available-for-sale assets |
(29) |
1 |
2 |
(1) |
(27) |
Cash flow hedges |
2 |
1 |
19 |
(17) |
5 |
Retirement benefit obligations |
71 |
2 |
1 |
2 |
76 |
Share-based payments |
26 |
- |
(10) |
- |
16 |
Other temporary differences |
(148) |
(6) |
93 |
1 |
(60) |
Net deferred tax assets |
766 |
(16) |
206 |
(15) |
941 |
Deferred tax comprises assets and liabilities as follows:
|
2017 |
|
2016 |
||||
Total |
Asset |
Liability |
Total |
Asset |
Liability |
||
Deferred tax comprises: |
|
|
|
|
|
|
|
Accelerated tax depreciation |
(413) |
17 |
(430) |
|
(399) |
13 |
(412) |
Impairment provisions on loans |
1,071 |
1,037 |
34 |
|
934 |
914 |
20 |
Tax losses carried forward |
290 |
134 |
156 |
|
396 |
217 |
179 |
Available-for-sale assets |
(22) |
(8) |
(14) |
|
(27) |
(10) |
(17) |
Cash flow hedges |
(2) |
(7) |
5 |
|
5 |
- |
5 |
Own credit adjustment |
11 |
(2) |
13 |
|
- |
- |
- |
Retirement benefit obligations |
38 |
38 |
- |
|
76 |
76 |
- |
Share-based payments |
16 |
16 |
- |
|
16 |
16 |
- |
Other temporary differences |
(216) |
(48) |
(168) |
|
(60) |
68 |
(128) |
|
773 |
1,177 |
(404) |
|
941 |
1,294 |
(353) |
At 31 December 2017, the Group has net deferred tax assets of $773 million (2016: $941 million). The recoverability of the Group's deferred tax assets is based on management's judgement of the availability of future taxable profits against which the deferred tax assets will be utilised.
Of the Group's total deferred tax assets, $290 million relates to tax losses carried forward. These tax losses have arisen in individual legal entities and will be offset as future taxable profits arise in those entities.
• $151 million of the deferred tax assets relating to losses has arisen in Ireland, where there is no expiry date for unused tax losses. These losses relate to aircraft leasing and are expected to be fully utilised over the useful economical life of the assets being up to 18 years
• $33 million of the deferred tax assets relating to losses has arisen in Korea. These losses have no expiry date, and there is a defined profit stream against which they are forecast to be utilised
• $31 million of the deferred tax assets relating to losses has arisen in the US. Management forecasts show that the losses are expected to be fully utilised over a period of nine years. The tax losses have no expiry date
• $26 million of the deferred tax assets relating to losses has arisen in Taiwan. Management forecasts show that the losses are expected to be fully utilised over a period of three years. The tax losses expire after 10 years
• The remaining deferred tax assets of $49 million relating to losses has arisen in other jurisdictions and is expected to be recovered in less than 10 years
|
2017 |
2016 |
No account has been taken of the following potential deferred tax assets/(liabilities): |
|
|
Withholding tax on unremitted earnings from overseas subsidiaries |
(343) |
(333) |
Foreign exchange movements on investments in branches |
(339) |
(263) |
Tax losses1 |
1,311 |
1,197 |
Held over gains on incorporation of overseas branches |
(399) |
(417) |
Other temporary differences |
47 |
53 |
1 Primarily in the UK
11. Dividends
Accounting policy
Dividends on ordinary shares and preference shares classified as equity are recognised in equity in the year in which they are declared.
Dividends on ordinary equity shares are recorded in the year in which they are declared and, in respect of the final dividend, have been approved by the shareholders.
The Board considers a number of factors which include the rate of recovery in the Group's financial performance, the macroeconomic environment, and opportunities to further invest in our business and grow profitably in our markets.
There was no interim dividend declared in 2017 or during the comparative reporting periods.
Preference shares and Additional Tier 1 securities
Dividends on these preference shares and securities classified as equity are recorded in the period in which they are declared.
|
|
2017 |
2016 |
Non-cumulative redeemable preference shares: |
7.014 per cent preference shares of $5 each |
53 |
53 |
|
6.409 per cent preference shares of $5 each |
39 |
48 |
|
|
92 |
101 |
Additional Tier 1 securities: $5 billion fixed rate resetting perpetual subordinated contingent convertible securities |
353 |
130 |
|
|
|
445 |
231 |
Dividends on these preference shares are treated as interest expense and accrued accordingly. |
|
|
|
Non-cumulative irredeemable preference shares: |
7 3/8 per cent preference shares of £1 each |
10 |
10 |
|
8 1/4 per cent preference shares of £1 each |
11 |
11 |
|
|
21 |
21 |
The 2017 ordinary equity share dividend recommended by the Board is 11 cents per share. The financial statements for the year ended 31 December 2017 do not reflect this dividend as this will be accounted for in shareholders' equity as an appropriation of retained profits in the year ending 31 December 2018.
The dividend will be paid in either pounds sterling, Hong Kong dollars or US dollars on 17 May 2018 to shareholders on the UK register of members at the close of business in the UK on 9 March 2018. The dividend will be paid in Indian rupees on 17 May 2018 to Indian Depository Receipt holders on the Indian register at the close of business in India on 9 March 2018.
It is intended that shareholders on the UK register and Hong Kong branch register will be able to receive shares credited as fully paid instead of all or part of the final cash dividend. Details of the dividend arrangements will be sent to shareholders on or around 26 March 2018. Indian Depository Receipt holders will receive their dividend in Indian rupees only.
12. Earnings per ordinary share
Accounting policy
The Group measures earnings per share on an underlying basis. This differs from earnings defined in IAS 33 Earnings per share. Underlying earnings is profit/(loss) attributable to ordinary shareholders adjusted for profits or losses of a capital nature; amounts consequent to investment transactions driven by strategic intent; and other infrequent and/or exceptional transactions that are significant or material in the context of the Group's normal business earnings for the period.
The table below provides the basis of underlying earnings.
|
2017 |
2016 |
Profit/(loss) for the year attributable to equity holders |
1,268 |
(191) |
Non-controlling interest |
(49) |
(56) |
Dividend payable on preference shares and AT1 classified as equity |
(445) |
(231) |
Profit/(loss) for the year attributable to ordinary shareholders |
774 |
(478) |
|
|
|
Items normalised: |
|
|
Restructuring |
353 |
855 |
Gains arising on repurchase of subordinated liabilities |
- |
(84) |
Goodwill impairment (note 9) |
320 |
166 |
Net gain on business disposed and available-for-sale financial instruments (included within note 6) |
(78) |
(253) |
Impact of US Tax Reform (note 10) |
220 |
- |
Tax on normalised items1 |
(36) |
(95) |
Underlying profit |
1,553 |
111 |
|
|
|
Basic - Weighted average number of shares (millions) |
3,293 |
3,291 |
Diluted - Weighted average number of shares (millions) |
3,325 |
3,305 |
|
|
|
Basic earnings/(loss) per ordinary share (cents) |
23.5 |
(14.5) |
Diluted earnings/(loss) per ordinary share (cents) |
23.3 |
(14.5)2 |
Underlying basic earnings per ordinary share (cents) |
47.2 |
3.4 |
Underlying diluted earnings per ordinary share (cents) |
46.7 |
3.42 |
1 No tax is included in respect of the impairment of goodwill as no tax relief is available
2 The impact of any diluted options has been excluded from this amount as required by IAS 33 Earnings per share
13. Financial instruments
Classification and measurement
Accounting policy
The Group classifies its financial assets into the following measurement categories: financial assets held at fair value through profit or loss; loans and receivables; held-to-maturity; or available-for-sale.
Financial liabilities are classified as either held at fair value through profit or loss or at amortised cost.
Management determines the classification of its financial assets and liabilities at initial recognition.
The following details the approach for the categories:
a) Financial assets and liabilities held at fair value through profit or loss: This category has two sub-categories:
• Financial assets and liabilities held for trading: A financial asset or liability is classified as held for trading if acquired principally for the purpose of selling in the short term, or forms part of a portfolio of financial instruments which are managed together and for which there is evidence of short-term profit-taking or is a derivative (excluding qualifying hedging relationships)
• Designated at fair value through profit or loss: Financial assets and liabilities may be designated at fair value through profit or loss when:
- The designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities on a different basis (for example, the Group may designate certain fixed rate loans and receivables that are managed with derivative interest rate swaps)
- A group of financial assets and/or liabilities is managed and its performance evaluated on a fair value basis (for example, the Group may designate issued debt to fund a portfolio of trading assets and liabilities that are all managed on a fair value basis)
- The assets or liabilities include embedded derivatives and such derivatives are required to be recognised separately
b) Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and it is expected that apart from credit deterioration substantially all of the initial investment will be recovered.
c) Held-to-maturity assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the intention and ability to hold to maturity.
d) Available-for-sale assets are those non-derivative financial assets intended to be held for an indefinite period of time, which may be sold in response to liquidity requirements or changes in interest rates, exchange rates, commodity prices or equity prices.
e) Financial liabilities held at amortised cost: Financial liabilities, which include borrowings not classified as held at fair value through profit or loss, are classified as amortised cost instruments. Preference shares which carry a mandatory coupon that represents a market rate of interest at the issue date, or which are redeemable on a specific date or at the option of the shareholders, are classified as financial liabilities and are presented in other borrowed funds. The dividends on these preference shares are recognised in the income statement as interest expense on an amortised cost basis using the effective interest method.
A financial guarantee issued is a special case of financial liability. Under a financial guarantee contract, the Group, in return for a fee, undertakes to meet a customer's obligations under the terms of a debt instrument if the customer fails to do so. A financial guarantee is recognised as a liability; initially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initial value less cumulative amortisation and any provision under the contract measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Amortisation is calculated so as to recognise fees receivable in profit or loss over the period of the guarantee.
Initial recognition of financial instruments
All financial instruments are initially recognised at fair value, which is normally the transaction price plus, for those financial assets and liabilities not carried at fair value through profit or loss, directly attributable transaction costs.
In certain circumstances the initial fair value may be based on a valuation technique which may lead to the recognition of profits or losses at the time of initial recognition. However, these profits or losses can only be recognised when the valuation technique used is based primarily on observable market data. In those cases where the initially recognised fair value is based on a valuation model that uses inputs which are not observable in the market, the difference between the transaction price and the valuation model is not recognised immediately in the income statement. The difference is amortised to the income statement until the inputs become observable, or the transaction matures or
is terminated.
Regular way purchases and sales of financial assets and liabilities held at fair value through profit or loss, and financial assets classified as held-to-maturity and available-for-sale, are initially recognised on the trade date (the date on which the Group commits to purchase or sell the asset). Regular way loans are recognised on settlement date when cash is advanced to the borrowers.
Subsequent measurement
Financial assets and liabilities held at fair value through profit or loss are carried at fair value, with gains and losses arising from changes in fair value taken directly to the net trading income line in the income statement except for changes in fair value on financial liabilities designated at fair value attributable to the Group's own credit presented directly within other comprehensive income.
Available-for-sale financial assets are carried at fair value, with gains and losses arising from changes in fair value taken to the available-for-sale reserve within equity until the asset is sold, or is impaired, when the cumulative gain or loss is transferred to the income statement.
Loans and receivables are carried at amortised cost using the effective interest method.
Held-to-maturity financial assets are carried at amortised cost using the effective interest method.
Financial liabilities are stated at amortised cost, with any difference between proceeds net of directly attributable transaction costs and the redemption value recognised in the income statement over the period of the borrowings using the effective interest method.
In addition to these instruments, the carrying value of a financial instrument carried at amortised cost that is the hedged item in a qualifying fair value hedge relationship is adjusted by the fair value gain or loss attributable to the hedged risk.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. If substantially all the risks and rewards have been neither retained nor transferred and the Group has retained control, the assets continue to be recognised to the extent of the Group's continuing involvement.
Financial liabilities are derecognised when they are extinguished. A financial liability is extinguished when the obligation is discharged, cancelled or expires.
If the Group purchases its own debt, it is removed from the balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in other income.
Reclassification of financial instruments:
Reclassifications of financial assets or financial liabilities between measurement categories are not permitted following initial recognition, other than:
• Held for trading non-derivative financial assets can only be transferred out of the held at fair value through profit or loss category in the following circumstances: to the available-for-sale category, where, in rare circumstances, they are no longer held for the purpose of selling or repurchasing in the near term; or to the loan and receivables category, where they are no longer held for the purpose of selling or repurchasing in the near term and they would have met the definition of a loan and receivable at the date of reclassification and the Group has the intent and ability to hold the assets for the foreseeable future or until maturity
• Financial assets can only be transferred out of the available-for-sale category to the loan and receivables category where they would have met the definition of a loan and receivable at the date of reclassification and the Group has the intent and ability to hold the assets for the foreseeable future or until maturity
Change in comparatives
Reverse repurchase agreements and other similar secured lending have been reported separately from loans and advances to banks and customers. Similarly, repurchase agreements and other similar secured borrowing have been reported separately from deposits by banks and customer accounts. Prior year comparatives have been re-presented to reflect this change. The Group's classification of its financial assets and liabilities is summarised in the following tables.
Assets |
Notes |
Assets at fair value |
|
Assets at amortised cost |
Total |
|||||
Trading |
Derivatives held for hedging |
Designated at fair value through profit or loss |
Available- |
Total financial assets at |
Loans and receivables |
Held-to- maturity |
||||
Cash and balances at central banks |
|
- |
- |
- |
- |
- |
|
58,864 |
- |
58,864 |
Financial assets held at fair value through profit or loss |
|
|
|
|
|
|
|
|
|
|
Loans and advances to banks1 |
|
320 |
- |
2,252 |
- |
2,572 |
|
- |
- |
2,572 |
Loans and advances to customers1 |
|
1,689 |
- |
1,229 |
- |
2,918 |
|
- |
- |
2,918 |
Reverse repurchase agreements and other |
17 |
454 |
- |
458 |
- |
912 |
|
- |
- |
912 |
Debt securities and other eligible bills |
13 |
19,318 |
- |
393 |
- |
19,711 |
|
- |
- |
19,711 |
Equity shares |
13 |
718 |
- |
733 |
- |
1,451 |
|
- |
- |
1,451 |
|
|
22,499 |
- |
5,065 |
- |
27,564 |
|
- |
- |
27,564 |
Derivative financial instruments |
14 |
46,333 |
698 |
- |
- |
47,031 |
|
- |
- |
47,031 |
Loans and advances to banks1 |
16 |
- |
- |
- |
- |
- |
|
57,494 |
- |
57,494 |
Loans and advances to customers1 |
16 |
- |
- |
- |
- |
- |
|
248,707 |
- |
248,707 |
Reverse repurchase agreements and other similar secured lending |
17 |
- |
- |
- |
- |
- |
|
54,275 |
- |
54,275 |
Investment securities |
|
|
|
|
|
|
|
|
|
|
Debt securities and other eligible bills |
15 |
- |
- |
- |
109,161 |
109,161 |
|
2,630 |
4,340 |
116,131 |
Equity shares |
15 |
- |
- |
- |
894 |
894 |
|
- |
- |
894 |
|
|
- |
- |
- |
110,055 |
110,055 |
|
2,630 |
4,340 |
117,025 |
Other assets |
21 |
- |
- |
- |
- |
- |
|
29,922 |
- |
29,922 |
Assets held for sale |
21 |
- |
- |
466 |
- |
466 |
|
62 |
- |
528 |
Total at 31 December 2017 |
|
68,832 |
698 |
5,531 |
110,055 |
185,116 |
|
451,954 |
4,340 |
641,410 |
1 Further analysed in Risk review and Capital review
Assets |
Notes |
Assets at fair value |
|
Assets at amortised cost |
Total |
|||||
Trading |
Derivatives held for hedging |
Designated at fair value through profit or loss |
Available- |
Total financial assets at |
Loans and receivables |
Held-to- maturity |
||||
Cash and balances at central banks |
|
- |
- |
- |
- |
- |
|
70,706 |
- |
70,706 |
Financial assets held at fair value through profit or loss |
|
|
|
|
|
|
|
|
|
|
Loans and advances to banks1 |
|
267 |
- |
1,296 |
- |
1,563 |
|
- |
- |
1,563 |
Loans and advances to customers1 |
|
614 |
- |
2,241 |
- |
2,855 |
|
- |
- |
2,855 |
Reverse repurchase agreements and other |
17 |
322 |
- |
497 |
- |
819 |
|
- |
- |
819 |
Debt securities and other eligible bills |
13 |
13,310 |
- |
354 |
- |
13,664 |
|
- |
- |
13,664 |
Equity shares |
13 |
425 |
- |
751 |
- |
1,176 |
|
- |
- |
1,176 |
|
|
14,938 |
- |
5,139 |
- |
20,077 |
|
- |
- |
20,077 |
Derivative financial instruments |
14 |
64,433 |
1,076 |
- |
- |
65,509 |
|
- |
- |
65,509 |
Loans and advances to banks1 |
16 |
- |
- |
- |
- |
- |
|
54,538 |
- |
54,538 |
Loans and advances to customers1 |
16 |
- |
- |
- |
- |
- |
|
226,693 |
- |
226,693 |
Reverse repurchase agreements and other similar secured lending |
17 |
- |
- |
- |
- |
- |
|
44,097 |
- |
44,097 |
Investment securities |
|
|
|
|
|
|
|
|
|
|
Debt securities and other eligible bills |
15 |
- |
- |
- |
104,308 |
104,308 |
|
3,106 |
170 |
107,584 |
Equity shares |
15 |
- |
- |
- |
1,388 |
1,388 |
|
- |
- |
1,388 |
|
|
- |
- |
- |
105,696 |
105,696 |
|
3,106 |
170 |
108,972 |
Other assets |
21 |
- |
- |
- |
- |
- |
|
33,942 |
- |
33,942 |
Assets held for sale |
21 |
- |
- |
- |
- |
- |
|
1,102 |
- |
1,102 |
Total at 31 December 2016 |
|
79,371 |
1,076 |
5,139 |
105,696 |
191,282 |
|
434,184 |
170 |
625,636 |
1 Further analysed in Risk review and Capital review
Liabilities |
Notes |
Liabilities at fair value |
Amortised cost |
Total |
|||
Trading |
Derivatives held for hedging |
Designated at fair value through profit or loss |
Total financial liabilities at fair value |
||||
Financial liabilities held at fair value through profit or loss |
|
|
|
|
|
|
|
Deposits by banks |
|
- |
- |
737 |
737 |
- |
737 |
Customer accounts |
|
- |
- |
5,236 |
5,236 |
- |
5,236 |
Debt securities in issue |
22 |
- |
- |
7,023 |
7,023 |
- |
7,023 |
Short positions |
|
3,637 |
- |
- |
3,637 |
- |
3,637 |
|
|
3,637 |
- |
12,996 |
16,633 |
- |
16,633 |
Derivative financial instruments |
14 |
46,558 |
1,543 |
- |
48,101 |
- |
48,101 |
Deposits by banks |
|
- |
- |
- |
- |
30,945 |
30,945 |
Customer accounts |
|
- |
- |
- |
- |
370,509 |
370,509 |
Repurchase agreements and other similar secured borrowing |
17 |
- |
- |
- |
- |
39,783 |
39,783 |
Debt securities in issue |
22 |
- |
- |
- |
- |
46,379 |
46,379 |
Other liabilities |
23 |
- |
- |
- |
- |
34,982 |
34,982 |
Subordinated liabilities and other borrowed funds |
27 |
- |
- |
- |
- |
17,176 |
17,176 |
Liabilities included in disposal groups held for sale |
23 |
- |
- |
- |
- |
- |
- |
Total at 31 December 2017 |
|
50,195 |
1,543 |
12,996 |
64,734 |
539,774 |
604,508 |
Liabilities |
Notes |
Liabilities at fair value |
Amortised cost |
Total |
|||
Trading |
Derivatives held for hedging |
Designated at fair value through profit or loss |
Total financial liabilities at fair value |
||||
Financial liabilities held at fair value through profit or loss |
|
|
|
|
|
|
|
Deposits by banks |
|
- |
- |
718 |
718 |
- |
718 |
Customer accounts |
|
- |
- |
6,447 |
6,447 |
- |
6,447 |
Debt securities in issue |
22 |
- |
- |
5,670 |
5,670 |
- |
5,670 |
Short positions |
|
3,763 |
- |
- |
3,763 |
- |
3,763 |
|
|
3,763 |
- |
12,835 |
16,598 |
- |
16,598 |
Derivative financial instruments |
14 |
62,917 |
2,795 |
- |
65,712 |
- |
65,712 |
Deposits by banks |
|
- |
- |
- |
- |
32,872 |
32,872 |
Customer accounts |
|
- |
- |
- |
- |
338,185 |
338,185 |
Repurchase agreements and other similar secured borrowing |
17 |
- |
- |
- |
- |
37,692 |
37,692 |
Debt securities in issue |
22 |
- |
- |
- |
- |
46,700 |
46,700 |
Other liabilities |
23 |
- |
- |
- |
- |
32,958 |
32,958 |
Subordinated liabilities and other borrowed funds |
27 |
- |
- |
- |
- |
19,523 |
19,523 |
Liabilities included in disposal groups held for sale |
23 |
- |
- |
- |
- |
958 |
958 |
Total at 31 December 2016 |
|
66,680 |
2,795 |
12,835 |
82,310 |
508,888 |
591,198 |
Debt securities, other eligible bills and equity shares held at fair value through profit or loss
|
2017 |
||
Debt securities |
Equity shares |
Total |
|
Issued by public bodies: |
|
|
|
Government securities |
10,540 |
|
|
Other public sector securities |
68 |
|
|
|
10,608 |
|
|
Issued by banks: |
|
|
|
Certificates of deposit |
512 |
|
|
Other debt securities |
3,270 |
|
|
|
3,782 |
|
|
Issued by corporate entities and other issuers: |
|
|
|
Other debt securities |
5,321 |
|
|
Total debt securities and other eligible bills |
19,711 |
|
|
Of which: |
|
|
|
Listed on a recognised UK exchange |
238 |
92 |
330 |
Listed elsewhere |
13,430 |
575 |
14,005 |
Unlisted |
6,043 |
784 |
6,827 |
|
19,711 |
1,451 |
21,162 |
Market value of listed securities |
13,668 |
667 |
14,335 |
|
2016 |
||
Debt securities |
Equity shares |
Total |
|
Issued by public bodies: |
|
|
|
Government securities |
8,628 |
|
|
Other public sector securities |
77 |
|
|
|
8,705 |
|
|
Issued by banks: |
|
|
|
Certificates of deposit |
406 |
|
|
Other debt securities |
1,546 |
|
|
|
1,952 |
|
|
Issued by corporate entities and other issuers: |
|
|
|
Other debt securities |
3,007 |
|
|
Total debt securities and other eligible bills |
13,664 |
|
|
Of which: |
|
|
|
Listed on a recognised UK exchange |
164 |
- |
164 |
Listed elsewhere |
8,099 |
44 |
8,143 |
Unlisted |
5,401 |
1,132 |
6,533 |
|
13,664 |
1,176 |
14,840 |
Market value of listed securities |
8,263 |
44 |
8,307 |
Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.
In practice, for credit mitigation, the Group is able to offset assets and liabilities which do not meet the IAS 32 netting criteria set out above. Such arrangements include master netting arrangements for derivatives and global master repurchase agreements for repurchase and reverse repurchase transactions. These agreements generally allow that all outstanding transactions with a particular counterparty can be offset but only in the event of default or other predetermined events.
In addition the Group also receives and pledges readily realisable collateral for derivative transactions to cover net exposure in the event of a default. Under repurchase and reverse repurchase agreements the Group pledges (legally sells) and obtains (legally purchases) respectively, highly liquid assets which can be sold in the event of a default.
The following tables set out the impact of netting on the balance sheet. This comprises derivative transactions settled through an enforceable netting agreement where we have the intent and ability to settle net and which are offset on the balance sheet.
|
2017 |
||||||
Gross amounts |
Impact of |
Net amounts |
|
Related amount not offset |
Net amount |
||
Financial instruments |
Financial |
||||||
Assets |
|
|
|
|
|
|
|
Derivative financial instruments |
54,619 |
(7,588) |
47,031 |
|
(29,135) |
(9,825) |
8,071 |
Reverse repurchase agreements and other similar secured lending |
61,520 |
(6,333)1 |
55,187 |
|
- |
(55,187) |
- |
At 31 December 2017 |
116,139 |
(13,921) |
102,218 |
|
(29,135) |
(65,012) |
8,071 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Derivative financial instruments |
55,689 |
(7,588) |
48,101 |
|
(29,135) |
(9,513) |
9,453 |
Repurchase agreements and other similar secured borrowing |
46,116 |
(6,333)1 |
39,783 |
|
- |
(39,783) |
- |
At 31 December 2017 |
101,805 |
(13,921) |
87,884 |
|
(29,135) |
(49,296) |
9,453 |
1 Increase in offset has been achieved through confirmation of single settlement from each bilateral counterparty. As a result the repurchase and reverse repurchase balances have decreased at year end by $6.3 billion
|
2016 |
||||||
Gross amounts |
Impact of |
Net amounts |
|
Related amount not offset |
Net amount |
||
Financial instruments |
Financial |
||||||
Assets |
|
|
|
|
|
|
|
Derivative financial instruments |
73,822 |
(8,313) |
65,509 |
|
(40,391) |
(9,624) |
15,494 |
Reverse repurchase agreements and other similar secured lending |
44,916 |
- |
44,916 |
|
- |
(44,916) |
- |
At 31 December 2016 |
118,738 |
(8,313) |
110,425 |
|
(40,391) |
(54,540) |
15,494 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Derivative financial instruments |
74,025 |
(8,313) |
65,712 |
|
(40,391) |
(14,230) |
11,091 |
Repurchase agreements and other similar secured borrowing |
37,692 |
- |
37,692 |
|
- |
(37,692) |
- |
At 31 December 2016 |
111,717 |
(8,313) |
103,404 |
|
(40,391) |
(51,922) |
11,091 |
Related amounts not offset in the balance sheet comprises:
• Financial instruments not offset in the balance sheet, but covered by an enforceable netting arrangement. This comprises master netting arrangements held against derivative financial instruments and excludes the effect of over-collateralisation
• Financial collateral - This comprises cash collateral pledged and received for derivative financial instruments and collateral bought and sold for reverse repurchase and repurchase agreements respectively and excludes the effect of over-collateralisation
Loans and advances designated at fair value through profit or loss
The maximum exposure to credit risk for loans and advances to banks and customers and reverse repurchase and other similar secured lending designated at fair value through profit or loss was $3,939 million (2016: $4,034 million). The net fair value gain on loans and advances to banks and customers and reverse repurchase and other similar secured lending designated at fair value through profit or loss was $23 million (2016: $17 million). Of this, $1 million (2016: $1 million) relates to changes in credit risk. The cumulative fair value loss attributable to changes in credit risk was $1 million (2016: $2 million). Further details of the Group's valuation technique is described in this note.
Financial liabilities designated at fair value through profit or loss
|
2017 |
2016 |
Carrying balance aggregate fair value |
12,996 |
12,835 |
Amount contractually obliged to repay at maturity |
13,052 |
12,941 |
Difference between aggregate fair value and contractually obliged to repay at maturity |
(56) |
(106) |
Cumulative change in fair value accredited to credit risk difference |
82 |
331 |
The net fair value loss on financial liabilities designated at fair value through profit or loss was $202 million for the period (2016: net loss of $178 million). Further details of the Group's own credit adjustment (OCA) valuation technique is described later in this note.
Valuation of financial instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market or, in the absence of this, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects the Group's non-performance risk. The fair value of financial instruments is generally measured on the basis of the individual financial instrument. However, when a group of financial assets and financial liabilities is managed on the basis of its net exposure to either market risks or credit risk, the fair value of the group of financial instruments is measured on a net basis.
The fair values of quoted financial assets and liabilities in active markets are based on current prices. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments held by the Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been determined using valuation techniques which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Valuation techniques used include discounted cash flow analysis and pricing models and, where appropriate, comparison with instruments that have characteristics similar to those of the instruments held by the Group.
The Valuation Control function is responsible for independent price verification, oversight of fair value and prudent value adjustments and escalation of valuation issues. Independent price verification is the process of determining that the valuations incorporated into the financial statements are validated independent of the business area responsible for the product. The Valuation Control function has oversight of the fair value adjustments to ensure the financial instruments are priced to exit. These are key controls in ensuring the material accuracy of the valuations incorporated in the financial statements. The market data used for price verification may include data sourced from recent trade data involving external counterparties or third parties such as Bloomberg, Reuters, brokers and consensus pricing providers. Valuation Control performs a semi-annual review of the suitability of the market data used for price testing. Price verification uses independently sourced data that is deemed most representative of the market the instruments trade in. To determine the quality of the market data inputs, factors such as independence, relevance, reliability, availability of multiple data sources and methodology employed by the pricing provider are taken into consideration.
Formal committees for the business clusters, consisting of representatives from Group Market Risk, Product Control, Valuation Control and the business meet monthly to discuss and approve the valuations of the inventory. For Principal Finance, the Investment Committee meeting is held on a quarterly basis to review investments and valuations. The business cluster valuation committees fall under the Valuation Benchmarks Committee as part the of the valuation governance structure.
Significant accounting estimates and judgements
The Group evaluates the significance of financial instruments and material accuracy of the valuations incorporated in the financial statements as they involve a high degree of judgement and estimation uncertainty in determining the carrying values of financial assets and liabilities at the balance sheet date.
• Fair value of financial instruments are determined using valuation techniques (see below) which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Changes in the observability of significant valuation inputs can materially affect the fair values of financial instruments
• When establishing the exit price of a financial instrument using a valuation technique, the Group considers valuation adjustments in determining the fair value
• In determining the valuation of financial instruments, the Group makes judgements on the amounts reserved to cater for model and valuation risks, which cover both Level 2 and Level 3 assets, and the significant valuation judgements in respect of Level 3 instruments
• Where the measurement of fair value is more judgemental in respect of Level 3 assets, these are valued based on models that use a significant degree of non-market-based unobservable inputs
Valuation techniques
Refer to the fair value hierarchy explanation - Level 1, 2 and 3
• Financial instruments held at fair value
- Loans and advances: These include loans in the global syndications business which were not syndicated as of the balance sheet date and other financing transactions within Financial Markets. These loans are generally bilateral in nature and, where available, their valuation is based on market observable credit spreads. If observable credit spreads are not available, proxy spreads based on comparable loans with similar credit grade, sector, and region, are used. Where observable credit spreads and market standard proxy methods are available, these loans are classified as Level 2. Where there are no recent transactions or comparable loans, these loans are classified as Level 3
- Debt securities - asset backed securities: Asset backed securities are priced based on external prices obtained from consensus pricing providers, broker quotes, recent trades, arrangers' quotes, etc. Where an observable price is available for a given security, it is classified as Level 2. In instances where third-party prices are not available or reliable, the security is classified as Level 3. The fair value of Level 3 securities is estimated using market standard cash flow models with input parameter assumptions which include prepayment speeds, default rates, discount margins derived from comparable securities with similar vintage, collateral type, and credit ratings. Therefore, once external pricing has been verified, an assessment is made whether each security is traded with significant liquidity based on its credit rating and sector. If a security is of high credit rating and is traded in a liquid sector, it will be classified as Level 2, otherwise it will be classified as Level 3
- Other debt securities: These debt securities include convertible bonds, corporate bonds, credit and structured notes. Where quoted prices are available through pricing vendors, brokers or observable trading activities from liquid markets, these are classified as Level 2 and valued using such quotes. Where there are significant valuation inputs which are unobservable in the market, due to illiquid trading or the complexity of the product, these are classified as Level 3. The valuations of these debt securities are implied using input parameters such as bond spreads and credit spreads. These input parameters are determined with reference to the same issuer (if available) or proxied from comparable issuers or assets
- Equity shares - private equity: The majority of private equity unlisted investments are valued based on earning multiples - Price-to-Earnings (P/E) or enterprise value to earnings before income tax, depreciation and amortisation (EV/EBITDA) ratios - of comparable listed companies. The two primary inputs for the valuation of these investments are the actual or forecast earnings of the investee companies and earning multiples for the comparable listed companies. To ensure comparability between these unquoted investments and the comparable listed companies, appropriate adjustments are also applied (for example, liquidity and size) in the valuation. In circumstances where an investment does not have direct comparables or where the multiples for the comparable companies cannot be sourced from reliable external sources, alternate valuation techniques (for example, discounted cash flow models), which use predominantly unobservable inputs or Level 3 inputs, may be applied. Even though earning multiples for the comparable listed companies can be sourced from third-party sources (for example, Bloomberg), and those inputs can be deemed Level 2 inputs, all unlisted investments (excluding those where observable inputs are available, for example, over-the-counter (OTC) prices) are classified as Level 3 on the basis that the valuation methods involve judgments ranging from determining comparable companies to discount rates where the discounted cash flow method is applied
- Derivatives: Derivative products are classified as Level 2 if the valuation of the product is based upon input parameters which are observable from independent and reliable market data sources. Derivative products are classified as Level 3 if there are significant valuation input parameters which are unobservable in the market, such as products where the performance is linked to more than one underlying variable. Examples are foreign exchange basket options, equity options based on the performance of two or more underlying indices and interest rate products with quanto payouts. In most cases these unobservable correlation parameters cannot be implied from the market, and methods such as historical analysis and comparison with historical levels or other benchmark data must be employed
- Debt securities in issue: These debt securities relate to structured notes issued by the Group. Where independent market data is available through pricing vendors and broker sources these positions are classified as Level 2. Where such liquid external prices are not available, valuation of these debt securities are implied using input parameters such as bond spreads and credit spreads, and are classified as Level 3. These input parameters are determined with reference to the same issuer (if available) or proxies from comparable issuers or assets
• Financial instruments held at amortised cost
The following sets out the Group's basis of establishing fair values of amortised cost financial instruments and their classification between Levels 1, 2 and 3. As certain categories of financial instruments are not actively traded, there is a significant level of management judgement involved in calculating the fair values:
- Cash and balances at central banks: The fair value of cash and balances at central banks is their carrying amounts
- Loans and advances to banks and customers: For loans and advances to banks, the fair value of floating rate placements and overnight deposits is their carrying amounts. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using the prevailing money market rates for debts with a similar credit risk and remaining maturity. The Group's loans and advances to the customers' portfolio is well diversified by geography and industry. Approximately a quarter of the portfolio re-prices within one month, and approximately half re-prices within 12 months. Loans and advances are presented net of provisions for impairment. The fair value of loans and advances to customers with a residual maturity of less than one year generally approximates the carrying value. The estimated fair value of loans and advances with a residual maturity of more than one year represents the discounted amount of future cash flows expected to be received, including assumptions relating to prepayment rates and, credit risk/credit spreads. Expected cash flows are discounted at current market rates to determine fair value. The Group has a wide range of individual instruments within its loans and advances portfolio and as a result providing quantification of the key assumptions used to value such instruments is impractical
- Investment securities: For investment securities that do not have directly observable market values, the Group utilises a number of valuation techniques to determine fair value. Where available, securities are valued using inputs proxies from the same or closely related underlying (for example, bond spreads from the same or closely related issuer) or inputs proxies from a different underlying (for example, a similar bond but using spreads for a particular sector and rating). Certain instruments cannot be proxies as set out above, and in such cases the positions are valued using non-market observable inputs. This includes those instruments held at amortised cost and predominantly relates to asset backed securities. The fair value for such instruments is usually proxies from internal assessments of the underlying cash flows
- Deposits and borrowings: The estimated fair value of deposits with no stated maturity is the amount repayable on demand. The estimated fair value of fixed interest bearing deposits and other borrowings without quoted market prices is based on discounted cash flows using the prevailing market rates for debts with a similar credit risk and remaining maturity
- Debt securities in issue, subordinated liabilities and other borrowed funds: The aggregate fair values are calculated based on quoted market prices. For those notes where quoted market prices are not available, a discounted cash flow model is used based on a current market-related yield curve appropriate for the remaining term to maturity
- Other assets: Other assets comprise primarily of cash collateral and trades pending settlement. The carrying amount of these financial instruments is considered to be a reasonable approximation of fair value as they are either short term in nature or re-price to current market rates frequently
Fair value adjustments
When establishing the exit price of a financial instrument using a valuation technique, the Group considers adjustments to the modelled price which market participants would make when pricing that instrument. The main valuation adjustments (described further below) in determining fair value for financial assets and financial liabilities are as follows:
|
2017 |
2016 |
Bid-offer valuation adjustment |
82 |
106 |
CVA |
229 |
466 |
DVA |
(66) |
(23) |
Model valuation adjustment |
6 |
6 |
FVA |
79 |
248 |
Others (including day one) |
148 |
132 |
Total |
478 |
935 |
• Bid-offer valuation adjustment: Where market parameters are marked on a mid-market basis in the revaluation systems, a bid offer valuation adjustment is required to quantify the expected cost of neutralising the business' positions through dealing away in the market, thereby bringing long positions to bid and short positions to offer. The methodology to calculate the bid-offer adjustment for a derivative portfolio involves netting between long and short positions and the grouping of risk by strike and tenor based on the hedging strategy where long positions are marked to bid and short positions marked to offer in the systems
• Credit valuation adjustment (CVA): The Group makes CVA adjustment against the fair value of derivative products. CVA is an adjustment to the fair value of the transactions to reflect the possibility that our counterparties may default and we may not receive the full market value of the outstanding transactions. It represents an estimate of the adjustment a market participant would include when deriving a purchase price to acquire our exposures. CVA is calculated for each subsidiary, and within each entity for each counterparty to which the entity has exposure and takes account of any collateral we may hold. The Group calculates the CVA by applying the probability of default (PD) on the potential estimated future positive exposure of the counterparty using market-implied PD. Where market-implied data is not readily available, we use market-based proxies to estimate the PD. Wrong-way risk arises when the underlying value of the derivative prior to any CVA is positively correlated to the probability of default by the counterparty and the Group has implemented a model to capture this impact for certain key wrong way exposures. The Group continues to include 'wrong-way risk' in its Prudential Valuation Adjustments
• Debit valuation adjustment (DVA): The Group calculates DVA adjustments on its derivative liabilities to reflect changes in its own credit standing. The Group's DVA adjustments will increase if its credit standing worsens and, conversely, decrease if its credit standing improves. The Group's DVA adjustments will reverse over time as its derivatives mature. For derivative liabilities, a DVA adjustment is determined by applying the Group's probability of default to the Group's negative expected exposure against the counterparty. The Group's probability of default and loss expected in the event of default is derived based on internally assessed credit ratings and market standard recovery levels. The expected exposure is modelled based on simulation methodology and is generated through simulation of underlying risk factors over the life of the deal booked against the particular counterparty. This simulation methodology incorporates the collateral posted by the Group and the effects of master netting agreements. In December 2017, the Group refined its methodology used to calculate DVA to better align with current industry practice. This change in calculation methodology is treated as a change in estimate and resulted in an increase in the DVA balance of $66 million
• Model valuation adjustment: Valuation models may have pricing deficiencies or limitations that require a valuation adjustment. These pricing deficiencies or limitations arise due to the choice, implementation and calibration of the pricing model
• Funding valuation adjustment (FVA): The Group makes FVA adjustments against derivative products. FVA reflects an estimate of the adjustment to its fair value that a market participant would make to incorporate funding costs that could arise in relation to the exposure. FVA is calculated by determining the net expected exposure at a counterparty level and then applying a funding rate to those exposures that reflect the market cost of funding. The FVA for collateralised derivatives is based on discounting the expected future cash flows at the relevant overnight indexed swap (OIS) rate after taking into consideration the terms of the underlying collateral agreement with the counterparty. The FVA for uncollateralised (including partially collateralised) derivatives incorporates the estimated present value of the market funding cost or benefit associated with funding these transactions
• Day one profit and loss: In certain circumstances the initial fair value may be based on a valuation technique which may lead to the recognition of profits or losses at the time of initial recognition. However, these profits or losses can only be recognised when the valuation technique used is based primarily on observable market data. In those cases where the initially recognised fair value is based on a valuation model that uses inputs which are not observable in the market, the difference between the transaction price and the valuation model is not recognised immediately in the income statement. The difference is amortised to the income statement until the inputs become observable, or the transaction matures or is terminated
In addition, the Group calculates own credit adjustment (OCA) on its issued debt designated at fair value, including structured notes, in order to reflect changes in its own credit standing. The Group's OCA adjustments will increase if its credit standing worsens and, conversely, decrease if its credit standing improves. The Group's OCA adjustments will reverse over time as its liabilities mature. For issued debt and structured notes designated at fair value, an OCA adjustment is determined by discounting the contractual cash flows using a yield curve adjusted for market observed secondary senior debt issuance spreads above average interbank rates. The OCA is $82 million (2016: $331 million).
Fair value hierarchy - Financial instruments held at fair value
Assets and liabilities carried at fair value or for which fair values are disclosed have been classified into three levels according to the observability of the significant inputs used to determine the fair values. Changes in the observability of significant valuation inputs during the reporting period may result in a transfer of assets and liabilities within the fair value hierarchy. The Group recognises transfers between levels of the fair value hierarchy when there is a significant change in either its principal market or the level of observability of the inputs to the valuation techniques as at the end of the reporting period.
• Level 1: Fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities
• Level 2: Fair value measurements are those with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable
• Level 3: Fair value measurements are those where at least one input which could have a significant effect on the instrument's valuation is not based on observable market data
The following tables show the classification of financial instruments held at fair value into the valuation hierarchy:
Assets |
Level 1 |
Level 2 |
Level 3 |
Total |
Financial instruments held at fair value through profit or loss |
|
|
|
|
Loans and advances to banks |
- |
2,501 |
71 |
2,572 |
Loans and advances to customers |
- |
2,792 |
126 |
2,918 |
Reverse repurchase agreements and other similar secured lending |
- |
912 |
- |
912 |
Debt securities and other eligible bills |
5,860 |
13,800 |
51 |
19,711 |
Of which: |
|
|
|
|
Government bonds and treasury bills |
4,988 |
5,531 |
- |
10,519 |
Issued by corporates other than financial institutions |
171 |
4,017 |
48 |
4,236 |
Issued by financial institutions |
701 |
4,252 |
3 |
4,956 |
|
|
|
|
|
Equity shares |
725 |
- |
726 |
1,451 |
|
|
|
|
|
Derivative financial instruments |
402 |
46,589 |
40 |
47,031 |
Of which: |
|
|
|
|
Foreign exchange |
97 |
35,641 |
17 |
35,755 |
Interest rate |
2 |
10,065 |
7 |
10,074 |
Commodity |
303 |
609 |
2 |
914 |
Credit |
- |
249 |
- |
249 |
Equity and stock index |
- |
25 |
14 |
39 |
|
|
|
|
|
Investment securities |
|
|
|
|
Debt securities and other eligible bills |
61,246 |
47,511 |
404 |
109,161 |
Of which: |
|
|
|
|
Government bonds and treasury bills |
51,257 |
21,364 |
318 |
72,939 |
Issued by corporates other than financial institutions |
5,648 |
7,590 |
86 |
13,324 |
Issued by financial institutions |
4,341 |
18,557 |
- |
22,898 |
|
|
|
|
|
Equity shares |
369 |
5 |
520 |
894 |
Total financial instruments at 31 December 2017 |
68,602 |
114,110 |
1,938 |
184,650 |
|
|
|
|
|
Liabilities |
|
|
|
|
Financial instruments held at fair value through profit or loss |
|
|
|
|
Deposits by banks |
- |
668 |
69 |
737 |
Customer accounts |
- |
5,236 |
- |
5,236 |
Debt securities in issue |
- |
6,581 |
442 |
7,023 |
Short positions |
1,495 |
2,142 |
- |
3,637 |
|
|
|
|
|
Derivative financial instruments |
470 |
47,606 |
25 |
48,101 |
Of which: |
|
|
|
|
Foreign exchange |
90 |
36,149 |
- |
36,239 |
Interest rate |
9 |
9,851 |
18 |
9,878 |
Commodity |
371 |
590 |
- |
961 |
Credit |
- |
871 |
2 |
873 |
Equity and stock index |
- |
145 |
5 |
150 |
Total financial instruments at 31 December 2017 |
1,965 |
62,233 |
536 |
64,734 |
There have been no significant changes to valuation or levelling approaches in 2017.
There are no significant transfers of financial assets and liabilities measured at fair value between Level 1 and Level 2 during the year.
Assets |
Level 1 |
Level 2 |
Level 3 |
Total |
Financial instruments held at fair value through profit or loss |
|
|
|
|
Loans and advances to banks |
- |
1,563 |
- |
1,563 |
Loans and advances to customers |
- |
2,676 |
179 |
2,855 |
Reverse repurchase agreements and other similar secured lending |
- |
819 |
- |
819 |
Debt securities and other eligible bills |
4,249 |
9,411 |
4 |
13,664 |
Of which: |
|
|
|
|
Government bonds and treasury bills |
4,044 |
4,242 |
- |
8,286 |
Issued by corporates other than financial institutions |
77 |
2,467 |
3 |
2,547 |
Issued by financial institutions |
128 |
2,702 |
1 |
2,831 |
|
|
|
|
|
Equity shares |
181 |
- |
995 |
1,176 |
|
|
|
|
|
Derivative financial instruments |
513 |
64,636 |
360 |
65,509 |
Of which: |
|
|
|
|
Foreign exchange |
52 |
53,706 |
324 |
54,082 |
Interest rate |
14 |
9,858 |
6 |
9,878 |
Commodity |
447 |
879 |
- |
1,326 |
Credit |
- |
171 |
- |
171 |
Equity and stock index |
- |
22 |
30 |
52 |
|
|
|
|
|
Investment securities |
|
|
|
|
Debt securities and other eligible bills |
58,547 |
45,562 |
199 |
104,308 |
Of which: |
|
|
|
|
Government bonds and treasury bills |
47,002 |
14,491 |
173 |
61,666 |
Issued by corporates other than financial institutions |
6,928 |
7,741 |
24 |
14,693 |
Issued by financial institutions |
4,617 |
23,330 |
2 |
27,949 |
|
|
|
|
|
Equity shares |
798 |
41 |
549 |
1,388 |
Total financial instruments at 31 December 2016 |
64,288 |
124,708 |
2,286 |
191,282 |
|
|
|
|
|
Liabilities |
|
|
|
|
Financial instruments held at fair value through profit or loss |
|
|
|
|
Deposits by banks |
- |
718 |
- |
718 |
Customer accounts |
- |
6,447 |
- |
6,447 |
Debt securities in issue |
- |
5,140 |
530 |
5,670 |
Short positions |
1,845 |
1,918 |
- |
3,763 |
|
|
|
|
|
Derivative financial instruments |
547 |
64,849 |
316 |
65,712 |
Of which: |
|
|
|
|
Foreign exchange |
52 |
53,838 |
233 |
54,123 |
Interest rate |
25 |
9,911 |
25 |
9,961 |
Commodity |
470 |
628 |
- |
1,098 |
Credit |
- |
442 |
30 |
472 |
Equity and stock index |
- |
30 |
28 |
58 |
Total financial instruments at 31 December 2016 |
2,392 |
79,072 |
846 |
82,310 |
There are no significant transfers of financial assets and liabilities measured at fair value between Level 1 and Level 2 during 2016.
Fair value hierarchy - financial instruments measured at amortised cost
The following table shows the carrying amounts and incorporates the Group's estimate of fair values of those financial assets and liabilities not presented on the Group's balance sheet at fair value. These fair values may be different from the actual amount that will be received or paid on the settlement or maturity of the financial instrument. For certain instruments, the fair value may be determined using assumptions for which no observable prices are available.
|
Carrying value |
Fair value |
|||
Level 1 |
Level 2 |
Level 3 |
Total |
||
Assets |
|
|
|
|
|
Cash and balances at central banks1 |
58,864 |
- |
58,864 |
- |
58,864 |
Loans and advances to banks |
57,494 |
- |
57,388 |
4 |
57,392 |
Loans and advances to customers |
248,707 |
- |
14,644 |
234,812 |
249,456 |
Reverse repurchase agreements and other similar secured lending |
54,275 |
- |
23,068 |
31,218 |
54,286 |
Investment securities |
6,970 |
- |
6,955 |
36 |
6,991 |
Other assets1 |
29,922 |
- |
29,922 |
- |
29,922 |
Assets held for sale |
62 |
- |
62 |
- |
62 |
At 31 December 2017 |
456,294 |
- |
190,903 |
266,070 |
456,973 |
Liabilities |
|
|
|
|
|
Deposits by banks |
30,945 |
- |
30,939 |
- |
30,939 |
Customer accounts |
370,509 |
- |
370,489 |
- |
370,489 |
Repurchase agreements and other similar secured borrowing |
39,783 |
- |
39,783 |
- |
39,783 |
Debt securities in issue |
46,379 |
15,264 |
30,158 |
- |
45,422 |
Subordinated liabilities and other borrowed funds |
17,176 |
17,456 |
161 |
- |
17,617 |
Other liabilities1 |
34,982 |
- |
34,982 |
- |
34,982 |
At 31 December 2017 |
539,774 |
32,720 |
506,512 |
- |
539,232 |
|
Carrying value |
Fair value |
|||
Level 1 |
Level 2 |
Level 3 |
Total |
||
Assets |
|
|
|
|
|
Cash and balances at central banks1 |
70,706 |
- |
70,706 |
- |
70,706 |
Loans and advances to banks |
54,538 |
- |
54,473 |
- |
54,473 |
Loans and advances to customers |
226,693 |
- |
7,401 |
218,998 |
226,399 |
Reverse repurchase agreements and other similar secured lending |
44,097 |
- |
18,433 |
25,664 |
44,097 |
Investment securities |
3,276 |
- |
3,252 |
6 |
3,258 |
Other assets1 |
33,942 |
- |
33,942 |
- |
33,942 |
Assets held for sale |
1,102 |
- |
- |
1,102 |
1,102 |
At 31 December 2016 |
434,354 |
- |
188,207 |
245,770 |
433,977 |
Liabilities |
|
|
|
|
|
Deposits by banks |
32,872 |
- |
32,740 |
- |
32,740 |
Customer accounts |
338,185 |
- |
338,153 |
- |
338,153 |
Repurchase agreements and other similar secured borrowing |
37,692 |
- |
37,692 |
- |
37,692 |
Debt securities in issue |
46,700 |
17,132 |
29,568 |
- |
46,700 |
Subordinated liabilities and other borrowed funds |
19,523 |
18,655 |
177 |
- |
18,832 |
Other liabilities1 |
32,958 |
- |
32,958 |
- |
32,958 |
Liabilities included in disposal groups held for sale |
958 |
- |
958 |
- |
958 |
At 31 December 2016 |
508,888 |
35,787 |
472,246 |
- |
508,033 |
1 The carrying amount of these financial instruments is considered to be a reasonable approximation of fair value as they are short term in nature or reprice to current market rates frequently
Loans and advances to customers by client segment1
|
2017 |
||||||
Carrying value |
|
Fair value |
|||||
Impaired |
Not impaired |
Total |
Impaired |
Not impaired |
Total |
||
Corporate & Institutional Banking |
2,465 |
126,224 |
128,689 |
|
2,491 |
126,695 |
129,186 |
Retail Banking |
420 |
102,593 |
103,013 |
|
422 |
102,828 |
103,250 |
Commercial Banking |
596 |
27,296 |
27,892 |
|
646 |
27,269 |
27,915 |
Private Banking |
140 |
13,211 |
13,351 |
|
140 |
13,202 |
13,342 |
Central & other items |
- |
9,343 |
9,343 |
|
- |
9,349 |
9,349 |
At 31 December 2017 |
3,621 |
278,667 |
282,288 |
|
3,699 |
279,343 |
283,042 |
|
2016 |
||||||
Carrying value |
|
Fair value |
|||||
Impaired |
Not impaired |
Total |
Impaired |
Not impaired |
Total |
||
Corporate & Institutional Banking |
2,500 |
116,601 |
119,101 |
|
2,481 |
116,501 |
118,982 |
Retail Banking |
458 |
93,030 |
93,488 |
|
460 |
92,786 |
93,246 |
Commercial Banking |
751 |
23,215 |
23,966 |
|
736 |
23,306 |
24,042 |
Private Banking |
289 |
11,619 |
11,908 |
|
289 |
11,609 |
11,898 |
Central & other items |
- |
4,256 |
4,256 |
|
- |
4,256 |
4,256 |
At 31 December 2016 |
3,998 |
248,721 |
252,719 |
|
3,966 |
248,458 |
252,424 |
1 Loans and advances includes reverse repurchase agreements and other similar secured lending: carrying value $33,581 million and fair value $33,586 million (2016: $26,026 million and $26,026 million respectively)
Level 3 Summary and significant unobservable inputs
The following table presents the Group's primary Level 3 financial instruments which are held at fair value. The table also presents the valuation techniques used to measure the fair value of those financial instruments, the significant unobservable inputs, the range of values for those inputs and the weighted average of those inputs.
Instrument |
Value at 31 December 2017 |
|
Principal valuation technique |
Significant unobservable inputs |
Range1 |
Weighted |
|
Assets |
Liabilities |
||||||
Loans and advances to banks |
71 |
- |
|
Comparable pricing/yield |
Price/yield |
2.3% |
2.3% |
Loans and advances to customers |
126 |
- |
|
Comparable pricing/yield |
Price/yield |
3.6% |
3.6% |
|
|
|
|
Comparable pricing/yield |
Recovery rates |
27.8% to 48.3% |
43.5% |
Debt securities |
98 |
- |
|
Comparable pricing/yield |
Price/yield |
8% |
8% |
Asset backed securities |
39 |
- |
|
Discounted cash flows |
Price/yield |
1.6% to 5% |
1.7% |
Deposits by banks |
- |
69 |
|
Discounted cash flows |
Credit spreads |
1% |
1% |
Debt securities in issue |
- |
442 |
|
Discounted cash flows |
Credit spreads |
0.4% to 4% |
1.7% |
Government bonds and treasury bills |
318 |
- |
|
Discounted cash flows |
Price/yield |
2.4% to 11% |
8.1% |
Derivative financial instruments of which: |
|
|
|
|
|
|
|
Foreign exchange |
17 |
- |
|
Option pricing model |
Foreign exchange option implied volatility |
5.4% to 7.1% |
5.9% |
|
|
|
|
Discounted cash flows |
Foreign exchange curves |
4.1% to 5.1% |
4.6% |
Interest rate |
7 |
18 |
|
Discounted cash flows |
Interest rate curves |
1.5% to 16.4% |
7.2% |
Credit |
- |
2 |
|
Discounted cash flows |
Credit spreads |
0.8% to 3% |
1.3% |
Commodities |
2 |
- |
|
Internal pricing model |
Commodities correlation |
81.4% to 99.4% |
92.1% |
Equity |
14 |
5 |
|
Internal pricing model |
Equity correlation |
5% to 85% |
N/A |
|
|
|
|
|
Equity-FX correlation |
-85% to 85% |
N/A |
Equity shares (includes private equity investments)3 |
1,246 |
- |
|
Comparable pricing/yield |
EV/EBITDA multiples |
7.6x to 18.6x |
10.8x |
|
|
|
|
|
P/E multiples |
8.6x to 17.7x |
16.3x |
|
|
|
|
|
P/B multiples |
1.2x |
1.2x |
|
|
|
|
|
P/S multiples |
2x |
2x |
|
|
|
|
|
Liquidity discount |
10% to 20% |
15.5% |
|
|
|
|
Discounted cash flows |
Discount rates |
8.6% to 14% |
10.7% |
Total |
1,938 |
536 |
|
|
|
|
|
1 The ranges of values shown in the above table represent the highest and lowest levels used in the valuation of the Group's Level 3 financial instruments as at 31 December 2017. The ranges of values used are reflective of the underlying characteristics of these Level 3 financial instruments based on the market conditions at the balance sheet date. However, these ranges of values may not represent the uncertainty in fair value measurements of the Group's Level 3 financial instruments
2 Weighted average for non-derivative financial instruments have been calculated by weighting inputs by the relative fair value. Weighted average for derivatives has been provided by weighting inputs by the risk relevant to that variable. N/A has been entered for the cases where weighted average is not a meaningful indicator
3 The Group has an equity investment in the Series B preferred shares of Ripple Labs, Inc., which owns a digital currency (XRP) and is being carried at a fair value based on the shares' initial offering price. The shares will continue to be valued at the initial offering price until such time as a reliable means of valuing the cash flows and underlying assets is possible or additional sales are observable
The following section describes the significant unobservable inputs identified in the valuation technique table:
• Commodities correlation: This refers to the correlation between two commodity underlyings over a specified time
• Comparable price/yield is a valuation methodology in which a price of a comparable instrument is used to estimate the fair value where there are no direct observable prices. Yield is the interest rate that is used to discount the future cash-flows in a discounted cash-flow model. Valuation using comparable instruments can be done by calculating an implied yield (or spread over a liquid benchmark) from the price of a comparable instrument, then adjusting that yield (or spread) to derive a value for the instrument. The adjustment should account for relevant differences in the financial instruments such as maturity and/or credit quality. Alternatively, a price-to-price basis can be assumed between the comparable instrument and the instrument being valued in order to establish the value of the instrument (for example, deriving a fair value for a junior unsecured bond from the price of a senior secured bond). An increase in price, in isolation, would result in a favourable movement in the fair value of the asset. An increase in yield, in isolation, would result in an unfavourable movement in the fair value of the asset
• Correlation is the measure of how movement in one variable influences the movement in another variable. An equity correlation is the correlation between two equity instruments while an interest rate correlation refers to the correlation between two swap rates
• Credit spread represents the additional yield that a market participant would demand for taking exposure to the credit risk of an instrument
• Discount rate refers to the rate of return used to convert expected cash flows into present value
• EV/EBITDA ratio multiples: This is the ratio of Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). EV is the aggregate market capitalisation and debt minus the cash and cash equivalents. An increase in EV/EBITDA multiples in isolation, will result in a favourable movement in the fair value of the unlisted firm
• Interest rate curves is the term structure of interest rates and measure of future interest rates at a particular point in time
• Liquidity discounts in the valuation of unlisted investments: A liquidity discount is primarily applied to the valuation of unlisted firms' investments to reflect the fact that these stocks are not actively traded. An increase in liquidity discount will result in unfavourable movement in the fair value of the unlisted firm
• Price-Book (P/B) multiple: This is the ratio of the market value of equity to the book value of equity. An increase in P/B multiple will result in a favourable movement in the fair value of the unlisted firm
• Price-Earnings (P/E) multiples: This is the ratio of the Market Capitalisation to the Net Income after tax. The multiples are determined from multiples of listed comparables, which are observable. An increase in P/E multiple will result in a favourable movement in the fair value of the unlisted firm
• Price-Sales (P/S) multiple: This is the ratio of the market value of equity to sales. An increase in P/S multiple will result in a favourable movement in the fair value of the unlisted firm
• Recovery rates are the expectation of the rate of return resulting from the liquidation of a particular loan. As the probability of default increases for a given instrument, the valuation of that instrument will increasingly reflect its expected recovery level assuming default. An increase in the recovery rate, in isolation, would result in a favourable movement in the fair value of the loan
• Volatility represents an estimate of how much a particular instrument, parameter or index will change in value over time. Generally, the higher the volatility, the more expensive the option will be
Level 3 movement tables - financial assets
The table below analyses movements in level 3 financial assets carried at fair value.
Assets |
Held at fair value through profit or loss |
Derivative financial instruments |
Investment securities |
Total |
||||
Loans and advances to banks |
Loans and advances to customers |
Debt securities |
Equity |
Debt securities |
Equity |
|||
At 1 January 2017 |
- |
179 |
4 |
995 |
360 |
199 |
549 |
2,286 |
Total (losses)/gains recognised in |
|
|
|
|
|
|
|
|
income statement |
(1) |
(11) |
(2) |
121 |
(4) |
(15) |
(9) |
79 |
Net interest income |
- |
- |
- |
- |
- |
(15) |
- |
(15) |
Net trading income |
(1) |
(11) |
(2) |
121 |
(4) |
- |
(1) |
102 |
Other operating income |
- |
- |
- |
- |
- |
- |
9 |
9 |
Impairment charge |
- |
- |
- |
- |
- |
- |
(17) |
(17) |
Total gains recognised in other comprehensive income |
- |
- |
- |
- |
- |
7 |
54 |
61 |
Available-for-sale reserve |
- |
- |
- |
- |
- |
- |
41 |
41 |
Exchange difference |
- |
- |
- |
- |
- |
7 |
13 |
20 |
Purchases |
- |
- |
94 |
1113 |
6 |
399 |
22 |
632 |
Sales |
- |
- |
(20) |
(254) |
(13) |
(1) |
(91) |
(379) |
Settlements |
- |
- |
- |
- |
(250) |
(169) |
- |
(419) |
Transfers out1 |
- |
(72) |
(25) |
(247)3 |
(61) |
(16) |
(5) |
(426) |
Transfers in2 |
72 |
30 |
- |
- |
2 |
- |
- |
104 |
At 31 December 2017 |
71 |
126 |
51 |
726 |
40 |
404 |
520 |
1,938 |
Total unrealised losses recognised in the income statement, within net interest income, relating to change in fair value of assets held at 31 December 2017 |
- |
- |
- |
- |
- |
(15) |
- |
(15) |
Total unrealised (losses)/gains recognised in the income statement, within net trading income, relating to change in fair value of assets held at 31 December 2017 |
(1) |
(5) |
(2) |
65 |
(7) |
- |
(1) |
49 |
Total unrealised losses recognised in the income statement, within impairment charges at 31 December 2017 |
- |
- |
- |
- |
- |
- |
(17) |
(17) |
1 Transfers out include debt securities, equity shares and derivative financial instruments where the valuation parameters became observable during the year, and were transferred to Level 1 and Level 2. Transfers out further relate to equity shares and debt securities held at fair value through profit or loss which are now presented under held for sale
2 Transfers in during the year primarily relate to loans and advances and derivative financial instruments where the valuation parameters become unobservable during the year
3 When an entity is consolidated through a step up in ownership, the additional equity shares acquired are disclosed in the Purchases line. Subsequently these shares are eliminated
on consolidation and disclosed in the Transfer out line. Any underlying Level 3 financial instruments which are recognised as a result of the consolidation are disclosed in the Transfers in line
Assets |
Held at fair value through profit or loss |
Derivative financial instruments |
Investment securities |
Total |
||||
Loans and advances to banks |
Loans and advances to customers |
Debt securities |
Equity |
Debt securities |
Equity |
|||
At 1 January 2016 |
- |
232 |
256 |
813 |
478 |
339 |
841 |
2,959 |
Total (losses)/gains recognised in income statement |
- |
(87) |
4 |
(268) |
44 |
(64) |
(198) |
(569) |
Net trading income |
- |
(87) |
4 |
(268) |
44 |
- |
- |
(307) |
Other operating income |
- |
- |
- |
- |
- |
- |
(7) |
(7) |
Impairment charge |
- |
- |
- |
- |
- |
(64) |
(191) |
(255) |
Total (losses)/gains recognised in other comprehensive income |
- |
- |
- |
- |
- |
(4) |
1 |
(3) |
Available-for-sale reserve |
- |
- |
- |
- |
- |
- |
5 |
5 |
Exchange difference |
- |
- |
- |
- |
- |
(4) |
(4) |
(8) |
Purchases |
- |
- |
73 |
300 |
32 |
104 |
121 |
630 |
Sales |
- |
(6) |
(197) |
(60) |
(13) |
(50) |
(36) |
(362) |
Settlements |
- |
(67) |
(10) |
- |
(54) |
(23) |
- |
(154) |
Transfers out1 |
- |
(100) |
(122) |
- |
(127) |
(120) |
(180) |
(649) |
Transfers in2 |
- |
207 |
- |
210 |
- |
17 |
- |
434 |
At 31 December 2016 |
- |
179 |
4 |
995 |
360 |
199 |
549 |
2,286 |
Total unrealised (losses)/gains recognised in the income statement, within net trading income, relating to change in fair value of assets held at 31 December 2016 |
- |
(87) |
5 |
(258) |
24 |
- |
- |
(316) |
Total unrealised losses recognised in the income statement, within impairment charges at 31 December 2016 |
- |
- |
- |
- |
- |
(64) |
(191) |
(255) |
1 Transfers out during the year primarily relate to loans and advances, debt securities and other eligible bills, derivative financial instruments and equity shares where the valuation parameters became observable during the year and were transferred to Level 1 and Level 2 financial assets
2 Transfers in during the year primarily relate to loans and advances, equity shares and debt securities and other eligible bills where the valuation parameters become unobservable during the year
Level 3 movement tables - financial liabilities
|
2017 |
||||
Deposits |
Customer accounts |
Debt securities |
Derivative |
Total |
|
At 1 January 2017 |
- |
- |
530 |
316 |
846 |
Total gains recognised in income statement - net trading income |
- |
- |
(9) |
(24) |
(33) |
Issues |
79 |
- |
274 |
1 |
354 |
Settlements |
(10) |
- |
(353) |
(266) |
(629) |
Transfers out1 |
- |
- |
- |
(2) |
(2) |
At 31 December 2017 |
69 |
- |
442 |
25 |
536 |
Total unrealised gains recognised in the income statement, within net trading income, relating to change in fair value of liabilities held at 31 December 2017 |
- |
- |
- |
(17) |
(17) |
1 Transfers out during the year primarily relate to derivative financial instruments where the valuation parameters became observable during the year and were transferred to Level 2 financial liabilities
|
2016 |
||||
Deposits |
Customer |
Debt securities |
Derivative |
Total |
|
At 1 January 2016 |
- |
1 |
495 |
319 |
815 |
Total losses recognised in income statement - net trading income |
- |
- |
1 |
31 |
32 |
Issues |
- |
- |
268 |
78 |
346 |
Settlements |
- |
- |
(237) |
(74) |
(311) |
Transfers out1 |
- |
(1) |
- |
(38) |
(39) |
Transfers in2 |
- |
- |
3 |
- |
3 |
At 31 December 2016 |
- |
- |
530 |
316 |
846 |
Total unrealised losses recognised in the income statement, within net trading income, relating to change in fair value of liabilities held at 31 December 2016 |
- |
- |
5 |
39 |
44 |
1 Transfers out during the year primarily relate to customer accounts and derivative financial instruments where the valuation parameters became observable during the year and were transferred to Level 2 financial liabilities
2 Transfers in during the year primarily relate to debt securities in issue for which parameters became unobservable during the year
Sensitivities in respect of the fair values of Level 3 assets and liabilities
Sensitivity analysis is performed on products with significant unobservable inputs. The Group applies a 10 per cent increase or decrease on the values of these unobservable inputs, to generate a range of reasonably possible alternative valuations. The percentage shift is determined by statistical analyses performed on a set of reference prices based on the composition of our Level 3 assets. Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable parameters. This Level 3 sensitivity analysis assumes a one-way market move and does not consider offsets for hedges.
|
Held at fair value through profit or loss |
|
Available-for-sale |
||||
Net exposure |
Favourable |
Unfavourable |
Net exposure |
Favourable |
Unfavourable |
||
Financial instruments held at fair value |
|
|
|
|
|
|
|
Debt securities and other eligible bills |
51 |
56 |
46 |
|
404 |
415 |
393 |
Equity shares |
726 |
799 |
653 |
|
520 |
572 |
468 |
Loan and advances |
197 |
201 |
194 |
|
- |
- |
- |
Derivative financial instruments |
15 |
17 |
12 |
|
- |
- |
- |
Deposits by banks |
(69) |
(68) |
(70) |
|
- |
- |
- |
Debt securities in issue |
(442) |
(434) |
(450) |
|
- |
- |
- |
At 31 December 2017 |
478 |
571 |
385 |
|
924 |
987 |
861 |
|
|
|
|
|
|
|
|
Financial instruments held at fair value |
|
|
|
|
|
|
|
Debt securities and other eligible bills |
4 |
4 |
4 |
|
199 |
200 |
198 |
Equity shares |
995 |
1,095 |
896 |
|
549 |
604 |
494 |
Loan and advances |
179 |
187 |
171 |
|
- |
- |
- |
Derivative financial instruments |
44 |
158 |
25 |
|
- |
- |
- |
Debt securities in issue |
(530) |
(521) |
(539) |
|
- |
- |
- |
At 31 December 2016 |
692 |
923 |
557 |
|
748 |
804 |
692 |
The reasonably possible alternatives could have increased or decreased the fair values of financial instruments held at fair value through profit or loss and those classified as available-for-sale by the amounts disclosed below.
Financial instruments |
Fair value changes |
2017 |
2016 |
Held at fair value through profit or loss |
Possible increase |
93 |
231 |
|
Possible decrease |
(93) |
(135) |
Available-for-sale |
Possible increase |
63 |
56 |
|
Possible decrease |
(63) |
(56) |
14. Derivative financial instruments
Accounting policy
Accounting for derivatives: Derivatives are financial instruments that derive their value in response to changes in interest rates, financial instrument prices, commodity prices, foreign exchange rates, credit risk and indices. Derivatives are categorised as trading unless they are designated as hedging instruments.
Derivatives are initially recognised and subsequently measured at fair value, with revaluation gains recognised in profit and loss (except where cash flow or net investment hedging has been achieved, in which case the effective portion of changes in fair value is recognised within other comprehensive income).
Fair values may be obtained from quoted market prices in active markets, recent market transactions, and valuation techniques, including discounted cash flow models and option pricing models, as appropriate. Where the initially recognised fair value of a derivative contract is based on a valuation model that uses inputs which are not observable in the market, it follows the same initial recognition accounting policy as for other financial assets and liabilities. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond held, are valued as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Embedded derivatives continue to be presented with the host contract and are not separately disclosed or included within derivatives.
Hedge accounting: The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either:
a) Hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge)
b) Hedges of highly probable future cash flows attributable to a recognised asset or liability, or a forecasted transaction (cash flow hedge)
c) Hedges of the net investment of a foreign operation (net investment hedges)
Hedge accounting is used for derivatives designated in this way, provided certain criteria are met.
The Group documents at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
The Group may enter into economic hedges that do not qualify for IAS 39 hedge accounting treatment. Where these economic hedges use derivatives to offset risk, the derivatives are fair valued, with fair value changes recognised through profit or loss.
Fair value hedge: Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the period to maturity or derecognition.
Cash flow hedge: The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedging instruments is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
Net investment hedge: Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in the translation reserve; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are reclassified to the income statement when the foreign operation is disposed of.
The tables below analyse the notional principal amounts and the positive and negative fair values of derivative financial instruments. Notional principal amounts are the amount of principal underlying the contract at the reporting date.
Derivatives |
2017 |
|
2016 |
||||
Notional |
Assets |
Liabilities |
Notional |
Assets |
Liabilities |
||
Foreign exchange derivative contracts: |
|
|
|
|
|
|
|
Forward foreign exchange contracts |
1,825,488 |
18,905 |
19,702 |
|
1,896,056 |
24,872 |
24,475 |
Currency swaps and options |
1,211,332 |
16,850 |
16,537 |
|
1,288,908 |
29,210 |
29,648 |
Exchange traded futures and options |
100 |
- |
- |
|
225 |
- |
- |
|
3,036,920 |
35,755 |
36,239 |
|
3,185,189 |
54,082 |
54,123 |
Interest rate derivative contracts: |
|
|
|
|
|
|
|
Swaps |
2,831,025 |
8,603 |
8,414 |
|
2,191,851 |
8,425 |
8,409 |
Forward rate agreements and options |
153,697 |
1,351 |
1,364 |
|
114,988 |
1,305 |
1,404 |
Exchange traded futures and options |
637,883 |
120 |
100 |
|
789,901 |
148 |
148 |
|
3,622,605 |
10,074 |
9,878 |
|
3,096,740 |
9,878 |
9,961 |
Credit derivative contracts |
34,772 |
249 |
873 |
|
25,101 |
171 |
472 |
Equity and stock index options |
2,520 |
39 |
150 |
|
2,535 |
52 |
58 |
Commodity derivative contracts |
74,133 |
914 |
961 |
|
80,921 |
1,326 |
1,098 |
Total derivatives |
6,770,950 |
47,031 |
48,101 |
|
6,390,486 |
65,509 |
65,712 |
The Group limits exposure to credit losses in the event of default by entering into master netting agreements with certain market counterparties. As required by IAS 32, exposures are only presented net in these accounts where they are subject to legal right of offset and intended to be settled net in the ordinary course of business. Details of the amounts available for offset are set out in note 13.
The Derivatives and Hedging sections of the Risk review and Capital review explain the Group's risk management of derivative contracts and application of hedging.
Derivatives held for hedging
Included in the table above are derivatives held for hedging purposes as follows:
|
2017 |
|
2016 |
||||
Notional |
Assets |
Liabilities |
Notional |
Assets |
Liabilities |
||
Derivatives designated as fair value hedges: |
|
|
|
|
|
|
|
Interest rate swaps |
45,420 |
456 |
272 |
|
48,565 |
972 |
303 |
Forward foreign exchange contracts |
- |
- |
- |
|
419 |
12 |
15 |
Currency swaps |
19,973 |
174 |
899 |
|
21,495 |
37 |
2,377 |
|
65,393 |
630 |
1,171 |
|
70,479 |
1,021 |
2,695 |
Derivatives designated as cash flow hedges: |
|
|
|
|
|
|
|
Interest rate swaps |
13,348 |
43 |
48 |
|
10,236 |
3 |
84 |
Forward foreign exchange contracts |
356 |
2 |
29 |
|
883 |
- |
13 |
Currency swaps |
2,987 |
23 |
107 |
|
1,258 |
1 |
3 |
|
16,691 |
68 |
184 |
|
12,377 |
4 |
100 |
Derivatives designated as net investment hedges: |
|
|
|
|
|
|
|
Forward foreign exchange contracts |
3,470 |
- |
188 |
|
1,313 |
51 |
- |
Total derivatives held for hedging |
85,554 |
698 |
1,543 |
|
84,169 |
1,076 |
2,795 |
Fair value hedges
The Group uses interest rate swaps to exchange fixed rates for floating rates on funding to match floating rates received on assets, or exchange fixed rates on assets to match floating rates paid on funding.
For qualifying hedges, the fair value changes of the derivative are substantially matched by corresponding fair value changes of the hedged item, both of which are recognised in profit or loss. All qualifying hedges were effective. Included in net losses and net gains below is an adjustment in respect of hedge ineffectiveness.
|
2017 |
2016 |
Net losses on hedging instruments |
(154) |
(77) |
Net gains on hedged items1 |
81 |
57 |
1 Includes amortisation of fair value adjustments in respect of hedges no longer qualifying for hedge accounting
Cash flow hedges
The Group uses interest rate swaps to manage the variability in future cash flows on assets and liabilities that have floating rates of interest by exchanging the floating rates for fixed rates. It also uses foreign exchange contracts and currency swaps to manage the variability in future exchange rates on its assets and liabilities and costs in foreign currencies.
Gains and losses arising on the effective portion of the hedges are deferred in equity until the variability on the cash flow affects profit or loss, at which time the gains or losses are transferred to profit or loss.
|
2017 |
2016 |
Losses reclassified from reserves to income statement |
(11) |
(57) |
Losses recognised in operating costs |
(4) |
(67) |
Gains/(losses) recognised in other comprehensive income |
35 |
10 |
The Group has hedged the following cash flows which are expected to impact the income statement in the following years:
|
2017 |
||||||
Less than |
One to |
Two to |
Three to |
Four to |
Over |
Total |
|
Forecast receivable cash flows |
122 |
40 |
30 |
22 |
8 |
- |
222 |
Forecast payable cash flows |
(97) |
(83) |
(51) |
(49) |
(48) |
(134) |
(462) |
|
25 |
(43) |
(21) |
(27) |
(40) |
(134) |
(240) |
|
2016 |
||||||
Less than |
One to |
Two to |
Three to |
Four to |
Over |
Total |
|
Forecast receivable cash flows |
68 |
48 |
50 |
35 |
23 |
8 |
232 |
Forecast payable cash flows |
(20) |
(9) |
(28) |
(1) |
- |
- |
(58) |
|
48 |
39 |
22 |
34 |
23 |
8 |
174 |
Net investment hedges
The Group uses a combination of foreign exchange contracts and non-derivative financial assets to manage the variability in future exchange rates on its net investments in foreign currencies. Gains and losses arising on the effective portion of the hedges are deferred in equity until the net investment is disposed of.
|
2017 |
2016 |
(Losses)/gains recognised in other comprehensive income |
(288) |
30 |
15. Investment securities
Accounting policy
Investment securities are debt securities, other eligible bills and equity shares intended to be held on a continuing basis. The securities are predominantly classified as available for sale. Refer to note 13 Financial instruments for the accounting policy.
Change in comparatives
Treasury bills are now included within other debt securities, prior year comparatives have been updated to reflect this change.
|
2017 |
||||
Debt securities and other eligible bills |
Equity |
Total |
|||
Held-to-maturity |
Available- |
Loans and receivables |
|||
Issued by public bodies: |
|
|
|
|
|
Government securities |
4,340 |
72,843 |
- |
|
|
Other public sector securities |
- |
2,720 |
274 |
|
|
|
4,340 |
75,563 |
274 |
|
|
Issued by banks: |
|
|
|
|
|
Certificates of deposit |
- |
4,236 |
- |
|
|
Other debt securities |
- |
18,734 |
63 |
|
|
|
- |
22,970 |
63 |
|
|
Issued by corporate entities and other issuers: |
|
|
|
|
|
Other debt securities |
- |
10,628 |
2,293 |
|
|
Total debt securities and other eligible bills |
4,340 |
109,161 |
2,630 |
|
|
Of which: |
|
|
|
|
|
Listed on a recognised UK exchange |
- |
6,849 |
232 |
4 |
6,876 |
Listed elsewhere |
4,271 |
49,276 |
5492 |
383 |
54,479 |
Unlisted |
69 |
53,036 |
2,058 |
507 |
55,670 |
|
4,340 |
109,161 |
2,630 |
894 |
117,025 |
Market value of listed securities |
4,271 |
56,125 |
572 |
387 |
61,355 |
|
2016 |
||||
Debt securities and other eligible bills |
Equity |
Total |
|||
Held-to-maturity |
Available- |
Loans and receivables |
|||
Issued by public bodies: |
|
|
|
|
|
Government securities |
163 |
65,416 |
10 |
|
|
Other public sector securities |
- |
1,705 |
222 |
|
|
|
163 |
67,121 |
232 |
|
|
Issued by banks: |
|
|
|
|
|
Certificates of deposit |
- |
5,764 |
- |
|
|
Other debt securities |
- |
21,748 |
79 |
|
|
|
- |
27,512 |
79 |
|
|
Issued by corporate entities and other issuers: |
|
|
|
|
|
Other debt securities |
7 |
9,675 |
2,795 |
|
|
Total debt securities and other eligible bills |
170 |
104,308 |
3,106 |
|
|
Of which: |
|
|
|
|
|
Listed on a recognised UK exchange |
- |
9,475 |
1082 |
3 |
9,586 |
Listed elsewhere |
7 |
48,350 |
5962 |
741 |
49,694 |
Unlisted |
163 |
46,483 |
2,402 |
644 |
49,692 |
|
170 |
104,308 |
3,106 |
1,388 |
108,972 |
Market value of listed securities |
7 |
57,825 |
704 |
744 |
59,280 |
1 Equity shares largely comprise investments in corporates
2 These debt securities listed or registered on a recognised UK exchange or elsewhere are thinly traded or the markets for these securities are illiquid
The change in the carrying amount of investment securities comprised:
|
2017 |
|
2016 |
||||
Debt securities |
Equity |
Total |
Debt securities |
Equity |
Total |
||
At 1 January |
107,584 |
1,388 |
108,972 |
|
113,047 |
1,720 |
114,767 |
Exchange translation differences |
3,463 |
17 |
3,480 |
|
(2,261) |
(30) |
(2,291) |
Additions |
265,126 |
60 |
265,186 |
|
207,081 |
193 |
207,274 |
Maturities and disposals |
(260,271) |
(814) |
(261,085) |
|
(210,540) |
(284) |
(210,824) |
Transfers to assets held for sale |
(60) |
- |
(60) |
|
- |
- |
- |
Impairment, net of recoveries on disposal |
(20) |
(16) |
(36) |
|
(151) |
(246) |
(397) |
Changes in fair value (including the effect of fair value hedging) |
17 |
259 |
276 |
|
143 |
35 |
178 |
Amortisation of discounts and premiums |
292 |
- |
292 |
|
265 |
- |
265 |
At 31 December |
116,131 |
894 |
117,025 |
|
107,584 |
1,388 |
108,972 |
The analysis of unamortised premiums and unamortised discounts on debt securities and income on equity shares held for investment purposes is provided below:
|
2017 |
2016 |
Debt securities: |
|
|
Unamortised premiums |
765 |
462 |
Unamortised discounts |
104 |
139 |
Income from listed equity shares |
36 |
38 |
Income from unlisted equity shares |
10 |
14 |
The following table sets out the movement in the allowance of impairment provisions for investment securities classified as loans and receivables:
|
2017 |
2016 |
At 1 January |
144 |
57 |
Exchange translation differences |
(3) |
(3) |
Amounts written off |
(47) |
(7) |
Impairment charge |
20 |
97 |
At 31 December |
114 |
144 |
16. Loans and advances to banks and customers
Accounting policy
Refer to note 13 Financial instruments for the relevant accounting policy.
|
2017 |
2016 |
Loans and advances to banks |
78,193 |
72,773 |
Individual impairment provision |
(4) |
(163) |
Portfolio impairment provision |
(1) |
(1) |
|
78,188 |
72,609 |
|
|
|
Loans and advances to customers |
287,990 |
259,073 |
Individual impairment provision |
(5,237) |
(5,667) |
Portfolio impairment provision |
(465) |
(687) |
|
282,2881 |
252,719 |
Total loans and advances to banks and customers |
360,476 |
325,328 |
1 Loans and advances to customers (net of provision) totalling $2 million (2016: $1,101 million) have been classified and disclosed as held for sale in note 21
The Group has outstanding residential mortgage loans to Korea residents of $18.5 billion (2016: $15.3 billion) and Hong Kong residents of $28.3 billion (2016: $28.7 billion).
Analysis of loans and advances to customers by geographic region and client segments and related impairment provisions as set out within the Risk review and Capital review.
17. Reverse repurchase and repurchase agreements including other similar secured lending and borrowing
Accounting policy
The Group purchases securities (a reverse repurchase agreement - 'reverse repo') typically with financial institutions subject to a commitment to resell or return the securities at a predetermined price. These securities are not included in the balance sheet as the Group does not acquire the risks and rewards of ownership, however are recorded off balance sheet as collateral received. Consideration paid (or cash collateral provided) is accounted for as a loan asset at amortised cost, unless it is designated at fair value through profit or loss.
The Group also sells securities (a repurchase agreement - 'repo') subject to a commitment to repurchase or redeem the securities at a predetermined price. The securities are retained on the balance sheet as the Group retains substantially all the risks and rewards of ownership and these securities are disclosed as pledged collateral. Consideration received (or cash collateral received) is accounted for as a financial liability at amortised cost, unless it is designated at fair value through profit or loss.
Repo and reverse repo transactions typically entitle the Group and its counterparties to have recourse to assets similar to those provided as collateral in the event of a default. Securities sold subject to repos, either by way of a Global Master Repurchase Agreement (GMRA), or through a securities sale and Total Return Swap (TRS) continue to be recognised on the balance sheet as the Group retains substantially the associated risks and rewards of the securities (the TRS is not recognised). The counterparty liability is included in deposits by banks or customer accounts, as appropriate. Assets sold under repurchase agreements are considered encumbered as the group cannot pledge these to obtain funding.
Reverse repurchase agreements and other similar secured lending1
|
2017 |
2016 |
Banks |
21,259 |
18,569 |
Customers |
33,928 |
26,347 |
|
55,187 |
44,916 |
Of which: |
|
|
Fair value through profit or loss |
912 |
819 |
Banks |
565 |
497 |
Customers |
347 |
322 |
Held at amortised cost |
54,275 |
44,097 |
Banks |
20,694 |
18,071 |
Customers |
33,581 |
26,026 |
1 Includes other similar secured lending
Under reverse repurchase and securities borrowing arrangements, the Group obtains securities on terms which permit it to repledge or resell the securities to others. Amounts on such terms are:
|
2017 |
2016 |
Securities and collateral received (at fair value) |
75,088 |
55,394 |
Securities and collateral which can be repledged or sold (at fair value) |
72,982 |
54,473 |
Amounts repledged/transferred to others for financing activities, to satisfy liabilities under sale and repurchase agreements (at fair value) |
34,018 |
33,053 |
Repurchase agreements and other similar secured borrowing held at amortised cost
|
2017 |
2016 |
Banks |
3,804 |
4,022 |
Customers |
35,979 |
33,670 |
|
39,783 |
37,692 |
The tables below set out the financial assets provided as collateral for repurchase and other secured borrowing transactions:
Collateral pledged against repurchase agreements |
2017 |
|||
Fair value through |
Available |
Loans and receivables |
Total |
|
On balance sheet |
|
|
|
|
Debt securities and other eligible bills |
2,178 |
3,618 |
- |
5,796 |
Off balance sheet |
|
|
|
|
Repledged collateral received |
- |
- |
34,018 |
34,018 |
At 31 December 2017 |
2,178 |
3,618 |
34,018 |
39,814 |
Collateral pledged against repurchase agreements |
2016 |
|||
Fair value |
Available |
Loans and receivables |
Total |
|
On balance sheet |
|
|
|
|
Debt securities and other eligible bills |
1,094 |
3,686 |
- |
4,780 |
Off balance sheet |
|
|
|
|
Repledged collateral received |
- |
- |
33,053 |
33,053 |
At 31 December 2016 |
1,094 |
3,686 |
33,053 |
37,833 |
18. Goodwill and intangible assets
Accounting policy
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the identifiable net assets and contingent liabilities of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill included in intangible assets is assessed at each balance sheet date for impairment and carried at cost less any accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Detailed calculations are performed based on discounting expected pre-tax cash flows of the relevant cash generating units (CGUs) and discounting these at an appropriate discount rate, the determination of which requires the exercise of judgement. Goodwill is allocated to CGUs for the purpose of impairment testing. CGUs represent the lowest level within the Group which generate separate cash inflows and at which the goodwill is monitored for internal management purposes. These are equal to or smaller than the Group's reportable segments (as set out in note 2) as the Group views its reportable segments on a global basis. The major CGUs to which goodwill has been allocated are set out in the CGU table.
Significant accounting estimates and judgements
The carrying amount of goodwill is based on the extent of judgements including the basis of assumptions and forecasts used for determining cash flows for CGUs, headroom availability, and sensitivities of the forecasts to reasonably possible changes in assumptions. The Group undertakes an annual assessment to evaluate whether the carrying value of goodwill on balance sheet is impaired. The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement and subject to potential change over time.
Acquired intangibles
At the date of acquisition of a subsidiary or associate, intangible assets which are deemed separable and which arise from contractual or other legal rights are capitalised and included within the net identifiable assets acquired. These intangible assets are initially measured at fair value, which reflects market expectations of the probability that the future economic benefits embodied in the asset will flow to the entity, and are amortised on the basis of their expected useful lives (4 to 16 years). At each balance sheet date, these assets are assessed for indicators of impairment. In the event that an asset's carrying amount is determined to be greater than its recoverable amount, the asset is written down immediately.
Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Direct costs of the development of separately identifiable internally generated software are capitalised where it is probable that future economic benefits attributable to the asset will flow from its use (internally generated software). These costs include salaries and wages, materials, service providers and contractors, and directly attributable overheads. Costs incurred in the ongoing maintenance of software are expensed immediately when incurred. Internally generated software is amortised over a three-year time period.
|
2017 |
|
2016 |
||||||
Goodwill |
Acquired intangibles |
Computer software |
Total |
Goodwill |
Acquired intangibles |
Computer software |
Total |
||
Cost |
|
|
|
|
|
|
|
|
|
At 1 January |
3,456 |
505 |
1,881 |
5,842 |
|
3,616 |
494 |
1,551 |
5,661 |
Exchange translation differences |
85 |
38 |
152 |
275 |
|
6 |
(1) |
(55) |
(50) |
Additions |
31 |
44 |
704 |
779 |
|
- |
24 |
567 |
591 |
Disposals |
- |
- |
(2) |
(2) |
|
- |
- |
(1) |
(1) |
Impairment |
(320) |
- |
- |
(320) |
|
(166) |
- |
- |
(166) |
Amounts written off |
- |
(9) |
(206) |
(215) |
|
- |
(12) |
(181) |
(193) |
At 31 December |
3,252 |
578 |
2,529 |
6,359 |
|
3,456 |
505 |
1,881 |
5,842 |
Provision for amortisation |
|
|
|
|
|
|
|
|
|
At 1 January |
- |
431 |
692 |
1,123 |
|
- |
430 |
589 |
1,019 |
Exchange translation differences |
- |
35 |
42 |
77 |
|
- |
(1) |
(15) |
(16) |
Amortisation |
- |
11 |
320 |
331 |
|
- |
14 |
272 |
286 |
Impairment charge |
- |
2 |
21 |
23 |
|
- |
- |
14 |
14 |
Disposals |
- |
- |
(2) |
(2) |
|
- |
- |
(1) |
(1) |
Amounts written off |
- |
(9) |
(197) |
(206) |
|
- |
(12) |
(167) |
(179) |
At 31 December |
- |
470 |
876 |
1,346 |
|
- |
431 |
692 |
1,123 |
Net book value |
3,252 |
108 |
1,653 |
5,013 |
|
3,456 |
74 |
1,189 |
4,719 |
At 31 December 2017, accumulated goodwill impairment losses incurred from 1 January 2005 amounted to $2,801 million (2016: $2,481 million), of which $320 million was recognised in 2017 (2016: $166 million).
Goodwill
CGU structure
In 2017, the Group realigned its CGUs in line with its management structure and goodwill has been reallocated accordingly. When considering the generation of independent cash inflows and appropriate level of management, Corporate Finance, Private Banking and Transaction Banking are managed on a global basis, while Retail Banking and Commercial Banking activities are managed on a country basis. Comparatives have been amended to reflect the new structure of the CGUs.
Testing of goodwill for impairment
An annual assessment is made as to whether the current carrying value of goodwill is impaired. For the purposes of impairment testing, goodwill is allocated at the date of acquisition to a CGU. Goodwill is considered to be impaired if the carrying amount of the relevant CGU exceeds its recoverable amount. Indicators of impairment include changes in the economic performance and outlook of the region including geopolitical changes, changes in market value of regional investments, large credit defaults and strategic decisions to exit certain regions. The recoverable amounts for all the CGUs were measured based on value-in-use (ViU). The calculation of ViU for each CGU is calculated using five-year cash flow projections and an estimated terminal value based on a perpetuity value after year five. The cash flow projections are based on forecasts approved by management up to 2022. The perpetuity terminal value amount is calculated using year five cash flows using long-term GDP growth rates. All cash flows are discounted using pre-tax discount rates which reflect market rates appropriate to the CGU.
At 31 December 2017, all CGUs had recoverable amounts that exceed the carrying amounts, with the exception of the Taiwan CGU, where, primarily as a result of a one per cent increase in the discount rate, the carrying amount exceeded the recoverable value and therefore an impairment charge of $320 million has been recognised. The goodwill allocated to each CGU and key assumptions used in determining the recoverable amounts are set out below and are solely estimates for the purposes of assessing impairment of acquired goodwill.
Cash Generating Unit |
2017 |
|
20161 |
||||
Goodwill |
Pre-tax |
Long-term |
Goodwill |
Pre-tax |
Long-term |
||
Regional CGUs |
|
|
|
|
|
|
|
Greater China & North Asia |
913 |
|
|
|
1,165 |
|
|
Hong Kong |
357 |
14.9 |
3.0 |
|
357 |
12.1 |
2.8 |
Taiwan |
556 |
13.9 |
2.1 |
|
808 |
12.8 |
2.2 |
Africa & Middle East |
569 |
|
|
|
583 |
|
|
Pakistan |
242 |
21.3 |
5.8 |
|
256 |
23.8 |
5.3 |
UAE |
204 |
10.8 |
3.2 |
|
204 |
10.9 |
3.2 |
Others (5)2 |
123 |
11.5-19.6 |
2.0-6.1 |
|
123 |
11.7-20.5 |
1.9-5.9 |
ASEAN & South Asia |
790 |
|
|
|
728 |
|
|
India |
289 |
18.9 |
7.9 |
|
270 |
17.0 |
7.8 |
Singapore |
343 |
11.8 |
2.6 |
|
327 |
10.1 |
2.6 |
Others (6)3 |
158 |
15.2-19.0 |
4.0-7.0 |
|
131 |
15.0-20.1 |
3.9-8.2 |
Global CGUs |
980 |
|
|
|
980 |
|
|
Global Private Banking |
84 |
10.2 |
3.7 |
|
84 |
13.5 |
2.9 |
Global Corporate Finance |
219 |
10.3 |
3.7 |
|
219 |
13.4 |
2.9 |
Global Transaction Banking |
677 |
10.3 |
3.7 |
|
677 |
13.4 |
2.9 |
|
|
|
|
|
|
|
|
|
3,252 |
|
|
|
3,456 |
|
|
1 CGUs reported in 2016 have been re-presented to align with the Group's management structure
2 Bahrain, Ghana, Jordan, Oman and Qatar
3 Bangladesh, Brunei, Indonesia, Nepal, Sri Lanka and Vietnam
The Group has performed sensitivity analysis on the key assumptions for each CGU's recoverable amount. The key CGUs at risk of future impairment as a result of potentially adverse movements are:
|
2017 |
||
Decrease in |
Increase |
Decrease in |
|
Taiwan |
138 |
135 |
92 |
India |
77 |
162 |
96 |
The headroom of $150 million relating to the India CGU would be eliminated if there was either a 6.5 per cent decrease in cash flows, a 0.5 per cent increase in the discount rate or a 0.6 per cent decrease in GDP.
Acquired intangibles
These primarily comprise those items recognised as part of the acquisitions of Union Bank (now amalgamated into Standard Chartered Bank (Pakistan) Limited), Hsinchu (now amalgamated into Standard Chartered Bank (Taiwan) Limited), Pembroke, American Express Bank and ABSA's custody business in Africa. Maintenance intangible assets represent the value in the difference between the contractual right under acquired leases to receive aircraft in a specified maintenance condition at the end of the lease and the actual physical condition of the aircraft at the date of acquisition.
The acquired intangibles are amortised over periods from four years to a maximum of 16 years. The constituents are as follows:
|
2017 |
2016 |
Acquired intangibles comprise: |
|
|
Aircraft maintenance |
24 |
24 |
Brand names |
31 |
- |
Core deposits |
2 |
3 |
Customer relationships |
32 |
39 |
Licences |
19 |
8 |
Net book value |
108 |
74 |
19. Property, plant and equipment
Accounting policy
All property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the assets. Subsequent costs are included in the asset's carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.
At each balance sheet date the assets' residual values and useful lives are reviewed, and adjusted if appropriate, including assessing for indicators of impairment. In the event that an asset's carrying amount is determined to be greater than its recoverable amount, the asset is written down to the recoverable amount. Gains and losses on disposals are included in the income statement.
Repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Land and buildings comprise mainly branches and offices. Freehold land is not depreciated although it is subject to impairment testing.
Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
• Buildings up to 50 years
• Leasehold improvements life of lease up to 50 years
• Equipment and motor vehicles three to 15 years
• Aircraft up to 18 years
• Ships up to 15 years
Where the Group is a lessee under finance leases, the leased assets are capitalised and included in Property, plant and equipment with a corresponding liability to the lessor recognised in Other liabilities. Finance charges payable are recognised over the period of the lease based on the interest rate implicit in the lease to give a constant periodic rate of return.
All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
|
2017 |
|
2016 |
||||||
Premises |
Equipment |
Operating lease assets |
Total |
Premises |
Equipment |
Operating lease assets |
Total |
||
Cost or valuation |
|
|
|
|
|
|
|
|
|
At 1 January |
2,117 |
699 |
6,982 |
9,798 |
|
2,156 |
735 |
6,527 |
9,418 |
Exchange translation differences |
119 |
31 |
2 |
152 |
|
(62) |
(28) |
- |
(90) |
Additions |
61 |
104 |
1,603 |
1,768 |
|
79 |
116 |
1,016 |
1,211 |
Disposals and fully depreciated assets written off |
(75) |
(66) |
(1,587) |
(1,728) |
|
(38) |
(123) |
(561) |
(722) |
Transfers to assets held for sale |
(6) |
(1) |
- |
(7) |
|
(18) |
(1) |
- |
(19) |
As at 31 December |
2,216 |
767 |
7,000 |
9,983 |
|
2,117 |
699 |
6,982 |
9,798 |
Depreciation |
|
|
|
|
|
|
|
|
|
Accumulated at 1 January |
713 |
474 |
1,359 |
2,546 |
|
668 |
528 |
1,013 |
2,209 |
Exchange translation differences |
27 |
21 |
1 |
49 |
|
(19) |
(17) |
- |
(36) |
Charge for the year |
85 |
85 |
328 |
498 |
|
98 |
84 |
271 |
453 |
Impairment (release)/charge |
(8) |
- |
145 |
137 |
|
- |
- |
131 |
131 |
Attributable to assets sold, transferred |
(58) |
(65) |
(327) |
(450) |
|
(28) |
(120) |
(56) |
(204) |
Transfers to assets held for sale |
(6) |
(2) |
- |
(8) |
|
(6) |
(1) |
- |
(7) |
Accumulated at 31 December |
753 |
513 |
1,506 |
2,772 |
|
713 |
474 |
1,359 |
2,546 |
Net book amount at 31 December |
1,463 |
254 |
5,494 |
7,211 |
|
1,404 |
225 |
5,623 |
7,252 |
During the year, an impairment charge of $145 million (2016: $131 million) was recognised in respect of aircraft and ships held as operating lease assets, as the ViU or current market value (CMV) of the assets was lower than the net book value.
Operating lease assets
Assets leased to customers under operating leases consist of commercial aircraft and ships which are included within property, plant and equipment. At 31 December 2017, these assets had a net book value of $5,494 million (2016: $5,623 million).
|
2017 |
2016 |
Within one year |
564 |
611 |
Later than one year and not later than five years |
1,881 |
2,186 |
After five years |
1,228 |
1,182 |
|
3,673 |
3,979 |
20. Operating lease commitments
Accounting policy
The leases entered into by the Group are primarily operating leases. An operating lease is a lease where substantially all of the risks and rewards of the leased assets remain with the lessor. The Group leases various premises under non-cancellable lease arrangements. The total payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which the termination takes place.
If an operating lease contains a reinstatement clause, a provision will be raised for the best estimate of the expenses to be incurred at the end of the lease to reinstate the property to its original condition. This cost is amortised over the life of the lease.
|
2017 |
|
2016 |
||
Premises |
Equipment |
Premises |
Equipment |
||
Commitments under non-cancellable operating leases expiring: |
|
|
|
|
|
Within one year |
255 |
2 |
|
258 |
1 |
Later than one year and not later than five years |
603 |
3 |
|
623 |
1 |
After five years |
189 |
- |
|
245 |
- |
|
1,047 |
5 |
|
1,126 |
2 |
During the year $340 million (2016: $400 million) was recognised as an expense in the income statement in respect of operating leases. The Group leases various premises and equipment under non-cancellable operating lease agreements. The leases have various terms, escalation clauses and renewal rights. The total future minimum sublease payments expected to be received under non-cancellable subleases at 31 December 2017 is $9 million (2016: $96 million).
21. Other assets
Accounting policy
Financial instruments can be reclassified as held for sale if they are non-current assets or if they are part of a disposal group; however, the measurement provisions for the financial instruments remain governed by the requirements of IAS 39 Financial Instruments: Recognition and Measurement. Refer to note 13 Financial instruments for the relevant accounting policy.
Commodities represent physical holdings where the Group has title and exposure to the market risk associated with the holding. Commodities are fair valued with the fair value derived from observable spot or short-term futures prices from relevant exchanges.
|
2017 |
2016 |
Financial assets held at amortised cost (note 13): |
|
|
Hong Kong SAR Government certificates of indebtedness (note 23)1 |
5,417 |
5,444 |
Cash collateral |
9,513 |
14,230 |
Acceptances and endorsements |
5,096 |
4,479 |
Unsettled trades and other financial assets |
9,896 |
9,789 |
|
29,922 |
33,942 |
Non-financial assets: |
|
|
Commodities2 |
3,263 |
2,719 |
Other assets |
305 |
279 |
|
33,490 |
36,940 |
1 The Hong Kong SAR Government certificates of indebtedness are subordinated to the claims of other parties in respect of bank notes issued
2 Commodities are carried at fair value and classified as Level 2
Assets held for sale
Non-current assets (such as property) and disposal groups (including both the assets and liabilities of the disposal groups) are classified as held for sale and measured at the lower of their carrying amount and fair value less cost to sell when:
a) their carrying amounts will be recovered principally through sale
b) they are available-for-sale in their present condition
c) their sale is highly probable
Immediately before the initial classification as held for sale, the carrying amounts of the assets (or assets and liabilities in the disposal group) are measured in accordance with the applicable accounting policies related to the asset or liability before reclassification as held for sale.
The assets below have been presented as held for sale following the approval of Group management and the transactions are expected to complete in 2018.
Assets held for sale |
2017 |
2016 |
Non-current assets |
|
|
Loans and advances to customers |
2 |
- |
Financial assets held at fair value through profit or loss |
466 |
- |
Debt securities held at amortised cost |
60 |
- |
Interests in associates |
- |
131 |
Others |
17 |
12 |
|
545 |
143 |
Disposal group |
|
|
Cash and balances at central banks |
- |
1 |
Loans and advances to customers |
- |
1,101 |
Prepayments and accrued income |
- |
9 |
|
545 |
1,254 |
Assets held for sale include disposal groups and non-current assets as follows:
• Principal Finance assets of $280 million, classified in Financial assets held at fair value through profit or loss ($216 million), Debt securities ($60 million) and Others ($4 million), expected to be completed in 2018
• Asia Commercial Bank assets of $250 million classified as Financial assets held at fair value through profit or loss (sale completed in 2018, classified as an interest in associate in 2016, and reclassified after loss of significant influence in 2017)
• The disposal group disclosed in 2016 consisted of the Retail Banking Business of Standard Chartered Bank (Thai) Public Company Limited, the sale of which was completed in 2017
The assets reported above are in Level 3 except for Debt securities held at amortised cost and loans and advances to customers which are classified as Level 2.
22. Debt securities in issue
Accounting policy
Refer to note 13 Financial instruments for the relevant accounting policy.
|
2017 |
|
2016 |
||||
Certificates |
Other debt securities |
Total |
Certificates |
Other debt securities |
Total |
||
Debt securities in issue |
20,460 |
25,919 |
46,379 |
|
15,020 |
31,680 |
46,700 |
Debt securities in issue included within: |
|
|
|
|
|
|
|
Financial liabilities held at fair value through profit or loss (note 13) |
117 |
6,906 |
7,023 |
|
35 |
5,635 |
5,670 |
Total debt securities in issue |
20,577 |
32,825 |
53,402 |
|
15,055 |
37,315 |
52,370 |
In 2017, the Company issued a total of $1.5 billion senior notes for general business purposes of the Group as shown below:
Securities |
$million |
€750 million callable fixed rate senior notes due 2023 |
901 |
€500 million callable fixed rate senior notes due 2027 |
600 |
23. Other liabilities
Accounting policy
Refer to note 13 Financial instruments for the relevant accounting policy.
|
2017 |
2016 |
Financial liabilities held at amortised cost (note 13) |
|
|
Notes in circulation1 |
5,417 |
5,444 |
Acceptances and endorsements |
5,096 |
4,479 |
Cash collateral |
9,825 |
9,624 |
Unsettled trades and other financial liabilities |
14,644 |
13,411 |
|
34,982 |
32,958 |
Non-financial liabilities |
|
|
Cash-settled share-based payments |
39 |
26 |
Other liabilities |
236 |
162 |
|
35,257 |
33,146 |
1 Hong Kong currency notes in circulation of $5,417 million (2016: $5,444 million) that are secured by the government of Hong Kong SAR certificates of indebtedness of the same amount included in other assets (note 21)
Liabilities included in disposal group held for sale1 |
2017 |
2016 |
Customer accounts |
- |
958 |
Other liabilities |
- |
1 |
Accruals and deferred income |
- |
6 |
|
- |
965 |
1 Liabilities included in disposal group held for sale are classified within Level 2 of the fair value hierarchy. The disposal group disclosed in 2016 consisted of the Retail Banking Business of Standard Chartered Bank (Thai) Public Company Limited, the sale of which was completed in 2017
24. Provisions for liabilities and charges
Accounting policy
The Group recognises a provision for a present legal or constructive obligation resulting from a past event when it is more likely than not that it will be required to transfer economic benefits to settle the obligation and the amount of the obligation can be estimated reliably. Where a liability arises based on participation in a market at a specified date, the obligation is recognised in the financial statements on that date and is not accrued over the period.
Significant accounting estimates and judgements
The recognition and measurement of provisions for liabilities and charges requires significant judgement and the use of estimates about uncertain future conditions or events. Determining the best estimate of the probability of outflow of economic resources, cost of settling a provision and timing of settlement, requires significant judgement by management. These areas are inherently uncertain such as legal decisions, outcome of regulator reviews and anticipated cost of redress.
|
2017 |
|
2016 |
||||
Provision |
Other |
Total |
Provision |
Other |
Total |
||
At 1 January |
109 |
104 |
213 |
|
100 |
115 |
215 |
Exchange translation differences |
(2) |
1 |
(1) |
|
(2) |
(2) |
(4) |
(Release)/charge against profit |
(23) |
83 |
60 |
|
45 |
37 |
82 |
Provisions utilised |
(1) |
(88) |
(89) |
|
(34) |
(46) |
(80) |
At 31 December |
83 |
100 |
183 |
|
109 |
104 |
213 |
Provision for credit commitment comprises those undrawn contractually committed facilities where there is doubt as to the borrowers' ability to meet their repayment obligations.
Other provisions consists mainly of provisions for regulatory settlements and legal claims, the nature of which are described in note 26.
25. Contingent liabilities and commitments
Accounting policy
Contingent liabilities are possible obligations arising from past events, whose existence will be confirmed only by uncertain future events or present obligations arising from past events that are not recognised because either an outflow of economic benefits is not probable or the amount of the obligation cannot be reliably measured. Contingent liabilities are not recognised but information about them is disclosed unless the possibility of any outflow of economic benefits in settlement is remote.
Where the Group undertakes to make a payment on behalf of its customers for guarantees issued such as for performance bonds or as irrevocable letters of credit as part of the Group's Transaction Banking business for which an obligation to make a payment has not arisen at the reporting date those are included in these financial statements as contingent liabilities.
Other contingent liabilities primarily include revocable letters of credit and bonds issued on behalf of customers to customs officials, for bids or offers and as shipping guarantees.
Commitments are where the Group has confirmed its intention to provide funds to a customer or on behalf of a customer in the form of loans, overdrafts, future guarantees whether cancellable or not or letters of credit and the Group has not made payments at the balance sheet date, those instruments are included in these financial statement as commitments.
Capital commitments are contractual commitments the Group has entered into to purchase non-financial assets.
The table below shows the contract or underlying principal amounts and risk-weighted amounts of unmatured off-balance sheet transactions at the balance sheet date. The contract or underlying principal amounts indicate the volume of business outstanding and do not represent amounts at risk.
|
2017 |
2016 |
Contingent liabilities |
|
|
Guarantees and irrevocable letters of credit |
37,311 |
32,2861 |
Other contingent liabilities |
6,210 |
6,0161 |
|
43,521 |
38,3021 |
Commitments |
|
|
Documentary credits and short-term trade-related transactions |
3,880 |
4,120 |
Forward asset purchases and forward deposits placed |
- |
6 |
Undrawn formal standby facilities, credit lines and other commitments to lend |
|
|
One year and over |
43,730 |
38,108 |
Less than one year |
20,160 |
17,547 |
Unconditionally cancellable |
113,584 |
118,330 |
|
181,354 |
178,111 |
Capital commitments |
|
|
1 Total contingent liabilities of the Group have been restated from $37.4 billion to $38.3 billion (increase of $0.9 billion). Guarantees and irrevocable letters of credit have been restated from $33.6 billion to $32.3 billion (reduction of $1.3 billion), and other contingent liabilities have been restated from $3.8 billion to $6.0 billion (offsetting increase of $2.2 billion)
The Group's share of contingent liabilities and commitments relating to joint ventures is $0.2 billion (31 December 2016: $0.2 billion).
The Group has committed to purchase 10 aircraft for delivery in 2018. The total purchase commitment for these orders is $458 million. Pre-delivery payments of $88.5 million have been made to date in respect of these aircraft.
As set out in note 26, the Group has contingent liabilities in respect of certain legal and regulatory matters for which it is not practicable to estimate the financial impact as there are many factors that may affect the range of possible outcomes.
26. Legal and regulatory matters
Accounting policy
Where appropriate, the Group recognises a provision for liabilities when it is probable that an outflow of economic resources embodying economic benefits will be required and for which a reliable estimate can be made of the obligation. The uncertainties inherent in legal and regulatory matters affect the amount and timing of any potential outflows with respect to which provisions have been established.
Claims and other proceedings
The Group receives legal claims against it in a number of jurisdictions and is a party to regulatory proceedings arising in the normal course of business.
Apart from the matters described below, the Group currently considers none of these claims or proceedings to be material.
2012 Settlements with certain US authorities
In 2012, the Group reached settlements with certain US authorities regarding US sanctions compliance in the period 2001 to 2007, involving a Consent Order by the New York Department of Financial Services (NYDFS), a Cease and Desist Order by the Board of Governors of the Federal Reserve System (Fed), Deferred Prosecution Agreements (DPAs) with each of the Department of Justice (DOJ) and the New York County District Attorney's Office (DANY) and a Settlement Agreement with the Office of Foreign Assets Control (together, the 'Settlements' and together the foregoing authorities, the 'US authorities'). In addition to the civil penalties totalling $667 million, the terms of these Settlements include a number of conditions and ongoing obligations with regard to improving sanctions, Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) controls such as remediation programmes, reporting requirements, compliance reviews and programmes, banking transparency requirements, training measures, audit programmes, disclosure obligations and, in connection with the NYDFS Consent Order, the appointment of an independent monitor (Monitor). These obligations are managed under a programme of work referred to as the US Supervisory Remediation Program (SRP). The SRP comprises work streams designed to ensure compliance with the remediation requirements contained in all of the Settlements and the Group is engaged with all relevant authorities to implement these programmes and meet the Group's obligations under
the Settlements.
On 9 December 2014, the Group announced that the DOJ, DANY and the Group had agreed to a three-year extension of the DPAs until 10 December 2017, resulting in the subsequent retention of the Monitor to evaluate and make recommendations regarding the Group's sanctions compliance programme. On 9 November 2017, the Group announced the further extension of the DPAs until 28 July 2018.
The November 2017 DPA extension agreement noted that the Group had taken a number of steps and made significant progress to comply with the requirements of the DPA and enhance its sanctions compliance programme, but that the programme had not at the time reached
the standard required by the DPA. The Group is committed to ongoing cooperation with the authorities and to continuing to implement a comprehensive programme of improvements to its financial crime controls.
2014 Settlement with NYDFS
On 19 August 2014, the Group announced that it had reached a final settlement with the NYDFS regarding deficiencies in the AML transaction surveillance system in its New York branch (the 'Branch'). The system, which is separate from the sanctions screening process, is one part of the Group's overall financial crime controls and is designed to alert the Branch to unusual transaction patterns that require further investigation on a post-transaction basis.
The settlement provisions are summarised as follows:
(i) A civil monetary penalty of $300 million
(ii) Enhancements to the transaction surveillance system at the Branch
(iii) A two-year extension to the term of the Monitor (which, on 21 April 2017, was further extended to operate until 31 December 2018)
(iv) A set of temporary remediation measures, which will remain in place until the transaction surveillance system's detection scenarios are operating to a standard approved by the Monitor. These temporary remediation measures include a restriction on opening, without prior approval of the NYDFS, a US dollar demand deposit account for any client that does not already have such an account with the Branch, a restriction on US dollar-clearing services for certain clients in Hong Kong and enhanced monitoring of certain high-risk clients in the UAE.
The remit of the SRP covers the management of these obligations.
Other ongoing investigations and reviews
The Group continues to cooperate with an investigation by the US authorities relating to historical violations of US sanctions laws and regulations. In contrast to the 2012 settlements, which focused on the period before the Group's 2007 decision to stop doing new business with known Iranian parties, the ongoing investigation is focused on examining the extent to which conduct and control failures permitted clients with Iranian interests to conduct transactions through Standard Chartered Bank after 2007 and the extent to which any such failures were shared with relevant US authorities in 2012.
The Group is engaged in ongoing discussions with the relevant US authorities regarding the resolution of this investigation, and such resolution may involve a range of civil and criminal penalties for sanctions compliance violations including substantial monetary penalties combined with other compliance measures such as remediation requirements and/or business restrictions.
Standard Chartered Bank is also engaged in ongoing discussions with the Financial Conduct Authority (FCA) regarding an investigation concerning its financial crime controls. The investigation is looking at the effectiveness and governance of those controls within the correspondent banking business carried out by Standard Chartered Bank's London branch, particularly in relation to the business carried on with respondent banks from outside the European Economic Area and the effectiveness and governance of those controls in one of Standard Chartered Bank's overseas branches and the oversight exercised at Group level over those controls. Any resolution of the investigation could involve a substantial monetary penalty and other civil measures available to the FCA.
As part of their remit to oversee market conduct, regulators and other agencies in certain markets are conducting investigations or requesting reviews into a number of areas of regulatory compliance and market conduct, including sales and trading, involving a range of financial products, and submissions made to set various market interest rates and other financial benchmarks, such as foreign exchange. At relevant times, certain of the Group's branches and/or subsidiaries were (and are) participants in some of those markets, in some cases submitting data to bodies that set such rates and other financial benchmarks and responding to inquiries and investigations by relevant authorities, and the Group is facing regulatory investigations and proceedings in various jurisdictions related to foreign exchange trading. There may be penalties or other financial consequences to the Group as a result. The Group is contributing to industry proposals to strengthen financial benchmarks processes in certain markets and continues to review its practices and processes in the light of the investigations, reviews and the industry proposals.
It is not practicable to estimate the financial impact of these matters as there are many factors that may affect the range of possible outcomes; however, the resulting financial impact could be substantial.
The Securities and Futures Commission (SFC) in Hong Kong has been investigating Standard Chartered Securities (Hong Kong) Limited's (SCSHK) role as a joint sponsor of an initial public offering of China Forestry Holdings Limited, which was listed on the Hong Kong Stock Exchange in 2009. The SFC is pursuing disciplinary action against SCSHK, and there may be financial consequences for SCSHK in connection with this action.
27. Subordinated liabilities and other borrowed funds
Accounting policy
Subordinated liabilities and other borrowed funds are classified as financial instruments. Refer to note 13 Financial instruments for the accounting policy.
All subordinated liabilities are unsecured, unguaranteed and subordinated to the claims of other creditors including without limitation, customer deposits and deposits by banks. The Group has the right to settle these debt instruments in certain circumstances as set out in the contractual agreements.
|
2017 |
2016 |
Subordinated loan capital - issued by subsidiary undertakings |
|
|
£700 million 7.75 per cent subordinated notes 2018 |
956 |
898 |
£675 million 5.375 per cent undated step up subordinated notes (callable 2020) |
327 |
307 |
£200 million 7.75 per cent subordinated notes (callable 2022) |
221 |
215 |
$750 million 5.875 per cent subordinated notes 2020 |
768 |
785 |
$700 million 8.0 per cent subordinated notes 2031 |
426 |
432 |
BWP 127.26 million 8.2 per cent subordinated notes 2022 (callable) |
13 |
12 |
BWP 70 million floating rate subordinated notes 2021 (callable) |
7 |
7 |
BWP 50 million floating rate notes 2022 (callable) |
5 |
5 |
JPY 10 billion 3.35 per cent subordinated notes 2023 (callable 2018) |
89 |
88 |
KRW 90 billion 6.05 per cent subordinated debt 2018 |
85 |
79 |
SGD 450 million 5.25 per cent subordinated notes 2023 (callable 2018) |
339 |
318 |
€700 million 5.875 per cent subordinated notes 2017 |
- |
766 |
€400 million 5.875 per cent subordinated notes 2017 |
- |
431 |
$1 billion 6.4 per cent notes subordinated notes 2017 |
- |
512 |
PKR 2.5 billion floating rate notes 2022 (callable) |
- |
24 |
|
3,236 |
4,879 |
Subordinated loan capital - issued by the Company |
|
|
Primary capital floating rate notes: |
|
|
$400 million |
16 |
16 |
$300 million (Series 2) |
69 |
69 |
$400 million (Series 3) |
50 |
50 |
$200 million (Series 4) |
26 |
26 |
£150 million |
16 |
15 |
£900 million 5.125 per cent subordinated debt 2034 |
1,498 |
1,307 |
$2 billion 5.7 per cent subordinated debt 2044 |
2,395 |
2,372 |
$2 billion 3.95 per cent subordinated debt 2023 |
1,959 |
1,971 |
$1 billion 5.7 per cent subordinated notes 2022 |
1,004 |
996 |
$1 billion 5.2 per cent subordinated debt 2024 |
1,014 |
1,027 |
$750 million 5.3 per cent subordinated debt 2043 |
787 |
788 |
$1.25 billion 4.3 per cent subordinated debt 2027 |
1,144 |
1,220 |
€1.25 billion 4 per cent subordinated debt 2025 (callable 2020) |
1,565 |
1,387 |
€750 million 3.625 per cent subordinated notes 2022 |
958 |
852 |
€500 million 3.125 per cent subordinated debt 2024 |
613 |
543 |
SGD 700 million 4.4 per cent subordinated notes 2026 (callable 2021) |
531 |
473 |
Other subordinated borrowings - issued by company1 |
295 |
283 |
$1.25 billion 4 per cent subordinated notes 2022 (callable) |
- |
1,249 |
|
13,940 |
14,644 |
Total for Group |
17,176 |
19,523 |
1 Other borrowings comprise irredeemable sterling preference shares (note 28). In the balance sheet of the Company the amount recognised is $58 million (2016: $221 million), with the difference being the effect of hedge accounting achieved on a Group basis
|
2017 |
||||
USD |
GBP |
EUR |
Others |
Total |
|
Fixed rate subordinated debt |
9,497 |
3,297 |
3,136 |
1,057 |
16,987 |
Floating rate subordinated debt |
161 |
16 |
- |
12 |
189 |
Total |
9,658 |
3,313 |
3,136 |
1,069 |
17,176 |
|
2016 |
||||
USD1 |
GBP |
EUR |
Others |
Total |
|
Fixed rate subordinated debt |
11,352 |
3,010 |
3,979 |
970 |
19,311 |
Floating rate subordinated debt |
161 |
15 |
- |
36 |
212 |
Total |
11,513 |
3,025 |
3,979 |
1,006 |
19,523 |
1 2016 numbers have been restated moving $1.2 billion from floating rate to fixed rate subordinated debt
Redemptions during the year
On 12 July 2017, Standard Chartered PLC exercised its right to redeem its $1.25 billion 4.0 per cent callable subordinated notes in full on the first call date.
On 26 September 2017, Standard Chartered Bank redeemed:
• The remaining $512 million of its $1 billion 6.4 per cent subordinated notes on the date of maturity
• €700 million 5.875 per cent subordinated notes in full on its maturity
• €400 million 5.875 per cent subordinated notes in full on its maturity
On 28 December 2017, Standard Chartered Bank Pakistan exercised its right to redeem PKR 2.5 billion floating rate notes 2022 in full on the first call date.
Issuances during the year
There were no new issuances during the year ended 31 December 2017.
28. Share capital, other equity instruments and reserves
Accounting policy
Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash, other financial assets or issue available number of own equity instruments. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Securities which carry a discretionary coupon and have no fixed maturity or redemption date are classified as other equity instruments. Interest payments on these securities are recognised, net of tax, as distributions from equity in the period in which they are paid.
Where the Company or other members of the consolidated Group purchase the Company's equity share capital, the consideration paid is deducted from the total shareholders' equity of the Group and/or of the Company as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders' equity of the Group and/or the Company.
Group and Company |
Number of ordinary shares |
Ordinary |
Share |
Total share capital & share premium |
Other equity instruments |
At 1 January 2016 |
3,278 |
1,639 |
5,449 |
7,088 |
1,987 |
Shares issued |
6 |
3 |
- |
3 |
- |
Additional Tier 1 equity issuance |
- |
- |
- |
- |
1,982 |
At 31 December 2016 |
3,284 |
1,642 |
5,449 |
7,091 |
3,969 |
Shares issued |
12 |
6 |
- |
6 |
- |
Additional Tier 1 equity issuance |
- |
- |
- |
- |
992 |
At 31 December 2017 |
3,296 |
1,648 |
5,449 |
7,097 |
4,961 |
1 Issued and fully paid ordinary shares of 50 cents each
2 Includes $1,494 million of share premium relating to preference capital
Ordinary share capital
In accordance with the Companies Act 2006 the Company does not have authorised share capital. The nominal value of each ordinary share is 50 cents.
During the year 12,272,991 shares were issued under employee share plans at prices between nil and 557.76 pence.
Preference share capital
At 31 December 2016 and 2017, the company has 15,000 $5 non-cumulative redeemable preference shares in issue, with a premium of $99,995 making a paid up amount per preference share of $100,000. The preference shares are redeemable at the option of the company and are classified in equity.
The available profits of the company are distributed to the holders of the issued preference shares in priority to payments made to holders of the ordinary shares and in priority to, or pari passu with, any payments to the holders of any other class of shares in issue. On a winding up, the assets of the Company are applied to the holders of the preference shares in priority to any payment to the ordinary shareholders and in priority to, or pari passu with, the holders of any other shares in issue, for an amount equal to any dividends accrued and/or payable and the nominal value of the shares together with any premium as determined by the board. The redeemable preference shares are redeemable at the paid up amount (which includes premium) at the option of the Company in accordance with the terms of the shares. The holders of the preference shares are not entitled to attend or vote at any general meeting except where any relevant dividend due is not paid in full or where a resolution is proposed varying the rights of the preference shares.
Other equity instruments
On 2 April 2015 Standard Chartered PLC issued $2,000 million Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities as Additional Tier 1 (AT1) securities, raising $1,987 million after issue costs. On 18 August 2016, Standard Chartered PLC issued a further $2,000 million Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities as AT1 securities, raising $1,982 million after issue costs. On 18 January 2017, Standard Chartered PLC issued a further $1,000 million Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities as AT1 securities, raising $992 million after issue costs. All the issuances were made for general business purposes and to increase the regulatory capital base of the Group.
The principal terms of the AT1 securities are described below:
• The securities are perpetual and redeemable, at the option of Standard Chartered PLC in whole but not in part, on the first interest reset date and each date falling five years after the first reset date
• The securities are also redeemable for certain regulatory or tax reasons on any date at 100 per cent of their principal amount together with any accrued but unpaid interest upto (but excluding) the date fixed for redemption. Any redemption is subject to Standard Chartered PLC giving notice to the relevant regulator and the regulator granting permission to redeem
• The interest rate in respect of the securities issued on 2 April 2015 for the period from (and including) the issue date to (but excluding) 2 April 2020 is a fixed rate of 6.50 per cent per annum. The first reset date for the interest rate is 2 April 2020 and each date falling five, or an integral multiple of five years after the first reset date
• The interest rate in respect of the securities issued on 18 August 2016 for the period from (and including) the issue date to (but excluding) 2 April 2022 is a fixed rate of 7.50 per cent per annum. The first reset date for the interest rate is 2 April 2022 and each date falling five years, or an integral multiple of five years, after the first reset date
• The interest rate in respect of the securities issued on 18 January 2017 for the period from (and including) the issue date to (but excluding) 2 April 2023 is a fixed rate of 7.75 per cent per annum. The first reset date for the interest rate is 2 April 2023 and each date falling five years, or an integral multiple of five years, after the first reset date
• The interest on each of the securities will be payable semi-annually in arrears on 2 April and 2 October in each year, accounted for as a dividend
• Interest on the securities is due and payable only at the sole and absolute discretion of Standard Chartered PLC, subject to certain additional restrictions set out in the terms and conditions. Accordingly, Standard Chartered PLC may at any time elect to cancel any interest payment (or part thereof) which would otherwise be payable on any interest payment date
• The securities convert into ordinary shares of Standard Chartered PLC, at a pre-determined price, should the fully loaded Common Equity Tier 1 ratio of the Group fall below 7.0 per cent. Approximately 572 million ordinary shares would be required to satisfy the conversion of all the securities mentioned above
The securities rank behind the claims against Standard Chartered PLC of: (a) unsubordinated creditors; (b) which are expressed to be subordinated to the claims of unsubordinated creditors of Standard Chartered PLC but not further or otherwise; or (c) which are, or are expressed to be, junior to the claims of other creditors of Standard Chartered PLC, whether subordinated or unsubordinated, other than claims which rank, or are expressed to rank, pari passu with, or junior to, the claims of holders of the AT1 securities in a winding-up occurring prior to the conversion trigger.
Reserves
The constituents of the reserves are summarised as follows:
• The capital reserve represents the exchange difference on redenomination of share capital and share premium from sterling to US dollars in 2001. The capital redemption reserve represents the nominal value of preference shares redeemed
• Merger reserve represents the premium arising on shares issued using a cash box financing structure, which required the Company to create a merger reserve under section 612 of the Companies Act 2006. Shares were issued using this structure in 2005 and 2006 to assist in the funding of certain acquisitions, in 2008, 2010 and 2015 for the shares issued by way of a rights issue, and for the shares issued in 2009 in the placing. The funding raised by the 2008 and 2010 rights issues and 2009 share issue was fully retained within the Company
• Own credit adjustment reserve represents the cumulative gains and losses on financial liabilities designated at fair value through profit or loss relating to own credit. Following the Group's decision to early apply this IFRS 9 requirement the cumulative OCA component of financial liabilities designated at fair value through profit or loss has been transferred from opening retained earnings to the OCA reserve. Gains and losses on financial liabilities designated at fair value through profit or loss relating to own credit in the year have been taken through other comprehensive income into this reserve. On derecognition of applicable instruments, the balance of any OCA will not be recycled to the income statement, but will be transferred within equity to retained earnings
• Available-for-sale reserve represents the unrealised fair value gains and losses in respect of financial assets classified as available-for-sale, net of taxation. Gains and losses are deferred in this reserve and are reclassified to the income statement when the underlying asset is sold, matures or becomes impaired
• Cash flow hedge reserve represents the effective portion of the gains and losses on derivatives that meet the criteria for these types of hedges. Gains and losses are deferred in this reserve and are reclassified to the income statement when the underlying hedged item affects profit and loss or when a forecast transaction is no longer expected to occur
• Translation reserve represents the cumulative foreign exchange gains and losses on translation of the net investment of the Group in foreign operations. Since 1 January 2004, gains and losses are deferred to this reserve and are reclassified to the income statement when the underlying foreign operation is disposed. Gains and losses arising from derivatives used as hedges of net investments are netted against the foreign exchange gains and losses on translation of the net investment of the foreign operations
• Retained earnings represents profits and other comprehensive income earned by the Group and Company in the current and prior periods, together with the after tax increase relating to equity-settled share options, less dividend distributions and own shares held (treasury shares)
A substantial part of the Group's reserves are held in overseas subsidiary undertakings and branches, principally to support local operations or to comply with local regulations. The maintenance of local regulatory capital ratios could potentially restrict the amount of reserves which can be remitted. In addition, if these overseas reserves were to be remitted, further unprovided taxation liabilities might arise
As at 31 December 2017, the distributable reserves of Standard Chartered PLC (the Company) were $15.1 billion (2016: $15.2 billion). These comprised retained earnings and $12.5 billion of the merger reserve account. Distribution of reserves is subject to maintaining minimum capital requirements.
Own shares
Computershare Trustees (Jersey) Limited is the trustee of the 2004 Employee Benefit Trust (2004 Trust) and Ocorian Trustees (Jersey) Limited (formerly known as Bedell Trustees Limited) is the trustee of the 1995 Employees' Share Ownership Plan Trust (1995 Trust). The 2004 Trust is used in conjunction with the Group's employee share schemes and the 1995 Trust is used for the delivery of other employee share-based payments (such as upfront shares and fixed pay allowances). Group companies fund these trusts from time to time to enable the trustees to acquire shares to satisfy these arrangements.
Except as disclosed, neither the Company nor any of its subsidiaries has bought, sold or redeemed any securities of the company listed on The Stock Exchange of Hong Kong Limited during the period. Details of the shares purchased and held by the trusts are set out below.
Number of shares |
1995 Trust |
|
2004 Trust |
|
Total |
|||
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
|||
Shares purchased during the year |
- |
6,160,185 |
|
- |
- |
|
- |
6,160,185 |
Market price of shares purchased ($million) |
- |
51 |
|
- |
- |
|
- |
51 |
Shares held at the end of the year |
3,769,011 |
6,104,154 |
|
18,004 |
78,313 |
|
3,787,015 |
6,182,467 |
Maximum number of shares held during the year |
|
|
|
|
|
|
6,182,467 |
6,183,210 |
29. Non-controlling interests
Accounting policy
Non-controlling interests are measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets.
|
$million |
At 1 January 2016 |
321 |
Loss in equity attributable to non-controlling interests |
(11) |
Other profits attributable to non-controlling interests |
56 |
Comprehensive income for the year |
45 |
Distributions |
(37) |
Other decreases1 |
(8) |
At 31 December 2016 |
321 |
Income in equity attributable to non-controlling interests |
1 |
Other profits attributable to non-controlling interests |
49 |
Comprehensive income for the year |
50 |
Distributions |
(51) |
Other increases2 |
21 |
At 31 December 2017 |
341 |
1 Mainly due to completion of sale of businesses with non-controlling interest in Pakistan and issuance of shares to non-controlling interest in Angola
2 Mainly due to additional shares issued including the premium by Nepal $12 million and $9 million with respect to an acquisition during 2017
30. Retirement benefit obligations
Accounting policy
The Group operates pension and other post-retirement benefit plans around the world, which can be categorised into defined contribution plans and defined benefit plans.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans on a statutory or contractual basis, and such amounts are charged to operating expenses. The Group has no further payment obligations once the contributions have been paid. For funded defined benefit plans, the liability recognised in the balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets.
For unfunded defined benefit plans the liability recognised at the balance sheet date is the present value of the defined benefit obligation. The defined benefit obligation is calculated annually by independent actuaries using the projected unit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using an interest rate equal to the yield on high-quality corporate bonds of the same currency and term as the benefit payments.
Actuarial gains and losses that arise are recognised in shareholders' equity and presented in the statement of other comprehensive income in the period they arise. The Group determines the net interest expense on the net defined benefit liability for the year by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit liability, taking into account any changes in the net defined benefit liability during the year as a result of contributions and benefit payments. Net interest expense, the cost of the accrual of new benefits, benefit enhancements (or reductions) and administration expenses met directly from plan assets are recognised in the income statement.
Significant accounting estimates and judgements
There are many factors that affect the measurement of retirement benefit obligations of the UK Fund and overseas plans. This measurement requires the use of assumptions, such as inflation, salary increases, pension increases and discount rates which are inherently uncertain; the sensitivity of the liabilities to changes in these assumptions is shown in the note below.
Retirement benefit obligations comprise:
|
2017 |
2016 |
Defined benefit plans obligation |
443 |
495 |
Defined contribution plans obligation |
12 |
30 |
Net obligation |
455 |
525 |
Retirement benefit charge comprises:
|
2017 |
2016 |
Defined benefit plans |
98 |
85 |
Defined contribution plans |
259 |
231 |
Charge against profit (note 7) |
357 |
316 |
The Group operates over 50 defined benefit plans across its geographies, many of which are closed to new entrants who now join defined contribution arrangements. The aim of all these plans is to give employees the opportunity to save appropriately for retirement in a way that is consistent with local regulations, taxation requirements and market conditions. The defined benefit plans expose the Group to currency risk, interest rate risk, investment risk and actuarial risks such as longevity risk.
The material holdings of government and corporate bonds shown in the asset table below partially hedge movements in the liabilities resulting from interest rate changes. Setting aside movements from other drivers such as currency fluctuation, the falls in discount rates in most geographies over 2017 have led to higher liabilities. These have been somewhat offset by rises in the value of bonds held, higher stock markets generally and changes to demographic assumptions reflecting an assumed lower future pace of mortality improvements in the UK. These movements are shown as actuarial losses versus gains respectively in the tables below. Higher contributions into a number of plans have also helped the net deficit reduce over the year.
The disclosures required under IAS 19 have been calculated by independent qualified actuaries based on the most recent full actuarial valuations updated, where necessary, to 31 December 2017.
UK Fund
The Standard Chartered Pension Fund (the 'UK Fund') is the Group's largest pension plan, representing 60 per cent of total pension liabilities, and provides pensions based on 1/60th of final salary per year of service, normally payable from age 60. The UK Fund is set up under a trust that is legally separate from the Bank (its formal sponsor) and, as required by UK legislation, at least one-third of the trustee directors are nominated by members; the remainder are appointed by the Bank. The trustee directors have a fiduciary duty to members and are responsible for governing the UK Fund in accordance with its Trust Deed and Rules.
The financial position of the UK Fund is regularly assessed by an independent qualified actuary. The funding valuation as at 31 December 2017 is currently underway with results expected to be finalised over the course of 2018, as permitted by UK pension regulations. The most recent completed funding valuation was performed as at 31 December 2014 by A Zegleman, Fellow of the Institute and Faculty of Actuaries, of Willis Towers Watson, using the projected unit method and assumptions different from those below. To repair the $97 million (£72 million) past service deficit identified as at 31 December 2014, four annual cash payments of $17.0 million (£12.6 million) were agreed, starting in January 2016. The agreement allows that if the funding position improves more quickly than expected, the three payments from January 2017 could be reduced or eliminated. The actuarial assessment that applied to the January 2017 and 2018 payments did not allow for a reduction in either case, so the full £12.6 million payments were paid into the Fund on 16 January 2017 and 11 January 2018. In addition, an escrow account of $149 million (£110 million) exists to provide security for future contributions. Following the 31 December 2014 valuation, regular contributions to the UK Fund were set at 32 per cent of pensionable salary for all members.
With effect from 1 July 1998, the UK Fund was closed to new entrants and new employees are offered membership of a defined contribution plan. Over 90 per cent of the Fund's liabilities now relate to pensioners or ex-employees who have left the Group but have not yet retired. The discretionary pension increase awarded April 2017 was half what was assumed in the accounting liabilities, and this is reflected in the gain in the pension cost table below. As at 31 December 2017, the weighted-average duration of the UK Fund was 15 years (2016: 16 years).
The Group is not required to recognise any additional liability under IFRIC 14 or the 2015 exposure draft of proposed amendments to it, as the Bank has control of any pension surplus under the Trust Deed and Rules.
Overseas plans
The principal overseas defined benefit arrangements operated by the Group are in Germany, Hong Kong, India, Jersey, Korea, Taiwan and the United States of America (US).
Key assumptions
The principal financial assumptions used at 31 December 2017 were:
|
Funded plans |
||||
UK Fund1 |
|
Overseas Plans2 |
|||
2017 |
2016 |
2017 |
2016 |
||
Price inflation |
2.1 |
2.1 |
|
1.0-5.0 |
1.0-5.0 |
Salary increases |
2.1 |
2.1 |
|
2.1-7.0 |
2.1-6.5 |
Pension increases |
2.1 |
2.1 |
|
1.6-3.2 |
1.5-3.2 |
Discount rate |
2.5 |
2.7 |
|
1.0-7.2 |
1.3-6.9 |
1 The assumptions for life expectancy for the UK Fund are that a male member currently aged 60 will live for 28 years (2016: 28 years) and a female member for 29 years (2016: 29 years) and a male member currently aged 40 will live for 30 years (2016: 30 years) and a female member for 30 years (2016: 31 years) after their 60th birthdays
2 The range of assumptions shown is for the main funded defined benefit overseas plans in Germany, Hong Kong, India, Jersey, Korea, Taiwan and the US. These comprise over 85 per cent of the total liabilities of funded overseas plans
These assumptions are likely to change in the future and this will affect the value placed on the liabilities. For example, changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below:
• If the discount rate increased by 25 basis points the liability would reduce by approximately $65 million for the UK Fund and $30 million for the other plans
• If the rate of inflation and pension increases increased by 25 basis points the liability would increase by approximately $45 million for the UK Fund and $20 million for the other plans
• If the rate salaries increase compared with inflation increased by 25 basis points the liability would increase by $2 million for the UK Fund and approximately $15 million for the other plans
• If longevity expectations increased by one year the liability would increase by approximately $55 million for the UK Fund and $15 million for the other plans
Although this analysis does not take account of the full distribution of cash flows expected under the UK Fund, it does provide an approximation of the sensitivity to the main assumptions. While changes in other assumptions would also have an impact, the effect would not be as significant.
|
Unfunded plans |
||||
US post-retirement medical1 |
|
Other2 |
|||
2017 |
2016 |
2017 |
2016 |
||
Price inflation |
2.5 |
2.5 |
|
1.9-5.0 |
2.0-5.0 |
Salary increases |
N/A |
4 |
|
2.1-7.0 |
2.1-6.5 |
Pension increases |
N/A |
N/A |
|
0.0-2.1 |
0.0-2.1 |
Discount rate |
3.8 |
4.4 |
|
2.3-7.2 |
2.7-8.4 |
Post-retirement medical rate |
8% in 2017 reducing by 1% per annum to 5% in 2020 |
9% in 2016 reducing by 1% per annum to 5% in 2020 |
|
N/A |
N/A |
1 The US post-retirement medical plan is closed to new entrants and eligibility for benefits tightened. This is reflected in the pension cost table below
2 The range of assumptions shown is for the main unfunded plans in India, Korea, Thailand, UAE and the UK. They comprise around 85 per cent of the total liabilities of unfunded plans
Fund values:
The fair value of assets and present value of liabilities of the plans attributable to defined benefit members were:
At 31 December |
2017 |
|
2016 |
||||||||
Funded plans |
|
Unfunded plans |
Funded plans |
|
Unfunded plans |
||||||
UK Fund |
Overseas plans |
Post-retirement medical |
Other |
UK Fund |
Overseas plans |
Post-retirement medical |
Other |
||||
Equities |
180 |
354 |
|
N/A |
N/A |
|
191 |
291 |
|
N/A |
N/A |
Government bonds |
752 |
191 |
|
N/A |
N/A |
|
642 |
153 |
|
N/A |
N/A |
Corporate bonds |
140 |
87 |
|
N/A |
N/A |
|
169 |
81 |
|
N/A |
N/A |
Absolute Return Fund |
177 |
- |
|
N/A |
N/A |
|
148 |
- |
|
N/A |
N/A |
Hedge funds1 |
190 |
2 |
|
N/A |
N/A |
|
187 |
- |
|
N/A |
N/A |
Insurance linked funds1 |
38 |
- |
|
N/A |
N/A |
|
29 |
- |
|
N/A |
N/A |
Opportunistic credit1 |
60 |
- |
|
N/A |
N/A |
|
61 |
- |
|
N/A |
N/A |
Property |
64 |
13 |
|
N/A |
N/A |
|
70 |
4 |
|
N/A |
N/A |
Derivatives |
5 |
4 |
|
N/A |
N/A |
|
(16) |
- |
|
N/A |
N/A |
Cash and equivalents |
91 |
195 |
|
N/A |
N/A |
|
52 |
160 |
|
N/A |
N/A |
Others1 |
10 |
39 |
|
N/A |
N/A |
|
8 |
30 |
|
N/A |
N/A |
Total fair value of assets2 |
1,707 |
885 |
|
N/A |
N/A |
|
1,541 |
719 |
|
N/A |
N/A |
Present value of liabilities |
(1,827) |
(996) |
|
(18) |
(194) |
|
(1,657) |
(878) |
|
(22) |
(198) |
Net pension (liability)/asset |
(120) |
(111) |
|
(18) |
(194) |
|
(116) |
(159) |
|
(22) |
(198) |
1 Unquoted assets
2 Self investment is monitored closely and is less than $2 million of Standard Chartered equities and bonds for 2017 (2016: $2 million). Self investment is only allowed where it is not practical to exclude it - for example through investment in index-tracking funds where the Group is a constituent of the relevant index
The pension cost for defined benefit plans was:
2017 |
Funded plans |
|
Unfunded plans |
Total |
||
UK Fund |
Overseas |
Post- |
Other |
|||
Current service cost |
4 |
53 |
|
- |
16 |
73 |
Past service cost and curtailments1 |
(6) |
7 |
|
(4) |
- |
(3) |
Settlement cost2 |
- |
(1) |
|
- |
8 |
7 |
Interest income on pension plan assets |
(43) |
(23) |
|
- |
- |
(66) |
Interest on pension plan liabilities |
46 |
28 |
|
1 |
12 |
87 |
Total charge/(credit) to profit before deduction of tax |
1 |
64 |
|
(3) |
36 |
98 |
Return on plan assets excluding interest income3 |
(30) |
(83) |
|
- |
- |
(113) |
Losses/(gains) on liabilities |
41 |
51 |
|
- |
(11) |
81 |
Total losses/(gains) recognised directly in statement |
11 |
(32) |
|
- |
(11) |
(32) |
Deferred taxation |
28 |
7 |
|
- |
- |
35 |
Total losses/(gains) after tax |
39 |
(25) |
|
- |
(11) |
3 |
1 The gain in the UK Fund is due to the lower 2017 discretionary pension increased awarded. Costs arising in funded overseas schemes arise primarily in India from the expected statutory increase in the gratuity payment ceiling, an early retirement severance plan and a discretionary increase to minimum pensions. The gain in the post-retirement medical plan arises due to the reduction in eligibility criteria in the US plan
2 The costs arise primarily from the settlement of benefits in Thailand
3 The actual return on the UK fund assets was $73 million and on overseas plan assets was $106 million
The pension cost for defined benefit plans was:
2016 |
Funded plans |
|
Unfunded plans |
Total |
||
UK Fund |
Overseas |
Post- |
Other |
|||
Current service cost |
5 |
52 |
|
1 |
17 |
75 |
Past service cost and curtailments |
- |
(7) |
|
- |
3 |
(4) |
Gain on settlements1 |
- |
(1) |
|
- |
- |
(1) |
Interest income on pension plan assets |
(56) |
(22) |
|
- |
- |
(78) |
Interest on pension plan liabilities |
57 |
27 |
|
1 |
8 |
93 |
Total charge to profit before deduction of tax |
6 |
49 |
|
2 |
28 |
85 |
Return on plan assets excluding interest income2 |
(139) |
(18) |
|
- |
- |
(157) |
Losses/(gains) on liabilities |
239 |
12 |
|
(4) |
15 |
262 |
Total losses/(gains) recognised directly in statement |
100 |
(6) |
|
(4) |
15 |
105 |
Deferred taxation |
- |
(2) |
|
- |
- |
(2) |
Total losses/(gains) after tax |
100 |
(8) |
|
(4) |
15 |
103 |
1 These movements reflect a reduction in workforce in a number of geographies as result of the restructuring actions of the Group
2 The actual return on the UK Fund assets was $195 million and on overseas plan assets was $40 million
Movement in the defined benefit pension plans and post-retirement medical deficit during the year comprises:
|
Funded plans |
|
Unfunded plans |
Total |
||
UK Fund |
Overseas |
Post- |
Other |
|||
Deficit at 1 January 2017 |
(116) |
(159) |
|
(22) |
(198) |
(495) |
Contributions |
19 |
92 |
|
1 |
31 |
143 |
Current service cost |
(4) |
(53) |
|
- |
(16) |
(73) |
Past service cost and curtailments |
6 |
(7) |
|
4 |
- |
3 |
Settlement costs and transfers impact |
- |
1 |
|
- |
(8) |
(7) |
Net interest on the net defined benefit asset/liability |
(3) |
(5) |
|
(1) |
(12) |
(21) |
Actuarial (losses)/gains |
(11) |
32 |
|
- |
11 |
32 |
Adjustment for Indonesia scheme1 |
- |
(4) |
|
- |
4 |
- |
Exchange rate adjustment |
(11) |
(8) |
|
- |
(6) |
(25) |
Deficit at 31 December 20172 |
(120) |
(111) |
|
(18) |
(194) |
(443) |
1 During 2017 the Indonesian plan (with liabilities of $8 million) was partially funded with a Company contribution of $4 million. The scheme has moved from the unfunded to funded category in the tables
2 The deficit total of $443 million is made up of plans in deficit of $483 million (2016: $513 million) net of plans in surplus with assets totalling $40 million (2016: $18 million)
|
Funded plans |
|
Unfunded plans |
Total |
||
UK Fund |
Overseas |
Post- |
Other |
|||
Deficit at 1 January 2016 |
(36) |
(175) |
|
(24) |
(187) |
(422) |
Contributions |
20 |
60 |
|
- |
18 |
98 |
Current service cost |
(5) |
(52) |
|
(1) |
(17) |
(75) |
Past service cost and curtailments |
- |
7 |
|
- |
(3) |
4 |
Settlement costs and transfers impact |
- |
1 |
|
- |
- |
1 |
Net interest on the net defined benefit asset/liability |
(1) |
(5) |
|
(1) |
(8) |
(15) |
Actuarial (losses)/gains |
(100) |
6 |
|
4 |
(15) |
(105) |
Exchange rate adjustment |
6 |
(1) |
|
- |
14 |
19 |
Deficit at 31 December 2016 |
(116) |
(159) |
|
(22) |
(198) |
(495) |
The Group's expected contribution to its defined benefit pension plans in 2018 is $91 million.
|
2017 |
|
2016 |
||||
Assets |
Obligations |
Total |
Assets |
Obligations |
Total |
||
At 1 January |
2,260 |
(2,755) |
(495) |
|
2,409 |
(2,831) |
(422) |
Contributions1 |
144 |
(1) |
143 |
|
99 |
(1) |
98 |
Current service cost2 |
- |
(73) |
(73) |
|
- |
(75) |
(75) |
Past service cost and curtailments |
- |
3 |
3 |
|
- |
4 |
4 |
Settlement costs |
(14) |
7 |
(7) |
|
(13) |
14 |
1 |
Interest cost on pension plan liabilities |
- |
(87) |
(87) |
|
- |
(93) |
(93) |
Interest income on pension plan assets |
66 |
- |
66 |
|
78 |
- |
78 |
Benefits paid out2 |
(152) |
152 |
- |
|
(175) |
175 |
- |
Actuarial (losses)/gains3 |
113 |
(81) |
32 |
|
157 |
(262) |
(105) |
Exchange rate adjustment |
175 |
(200) |
(25) |
|
(295) |
314 |
19 |
At 31 December |
2,592 |
(3,035) |
(443) |
|
2,260 |
(2,755) |
(495) |
1 Includes employee contributions of $1 million (2016: $1 million)
2 Includes administrative expenses paid out of plan assets of $1 million (2016: $1 million)
3 Actuarial loss on obligation comprises $81 million loss (2016: $284 million loss) from financial assumption changes, $30 million gain (2016: $8 million gain) from demographic assumption changes and $30 million loss (2016: $14 million gain) from experience
31. Share-based payments
Accounting policy
The Group operates equity-settled and cash-settled share-based compensation plans. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. For deferred share awards granted as part of an annual performance award, the expense is recognised over the period from the start of the performance period to the vesting date. For example, the expense
for awards granted in 2017 in respect of 2016 performance, which vest in 2018-2020, is recognised as an expense over the period from 1 January 2016 to the vesting dates in 2018-2020. For all other awards, the expense is recognised over the period from the date of grant to the vesting date.
For equity-settled awards, the total amount to be expensed over the vesting period is determined by reference to the fair value of the options at the date of grant, which excludes the impact of any non-market vesting conditions (for example, profitability and growth targets). The fair value of equity instruments granted is based on market prices, if available, at the date of grant. In the absence of market prices, the fair value of the instruments is estimated using an appropriate valuation technique, such as a binomial option pricing model. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest.
At each balance sheet date, the Group revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. Forfeitures prior to vesting attributable to factors other than the failure to satisfy a non-market vesting condition are treated as a cancellation and the remaining unamortised charge is debited to the income statement at the time of cancellation. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.
Cash-settled awards are revalued at each balance sheet date and a liability recognised on the balance sheet for all unpaid amounts, with any changes in fair value charged or credited to staff costs in the income statement until the awards are exercised. Where forfeitures occur prior to vesting that are attributable to factors other than a failure to satisfy market-based performance conditions, the cumulative charge incurred up to the date of forfeiture is credited to the income statement. The Company records the value of the equity-settled awards as a deemed investment in subsidiaries. Any revaluation related to cash-settled awards is recorded as an amount due from subsidiary undertakings.
The Group operates a number of share-based arrangements for its executive directors and employees. Details of the share-based payment charge are set out below.
|
20171 |
|
20161 |
||||
Cash |
Equity |
Total |
Cash |
Equity |
Total |
||
Deferred share awards |
14 |
71 |
85 |
|
8 |
26 |
34 |
Other share awards |
9 |
58 |
67 |
|
5 |
61 |
66 |
Total share-based payments |
23 |
129 |
152 |
|
13 |
87 |
100 |
1 No forfeiture assumed
2011 Standard Chartered Share Plan (the '2011 Plan')
The 2011 Plan was approved by shareholders in May 2011 and is the Group's main share plan. Since approval, it has been used to deliver various types of share awards:
• Long Term Incentive Plan (LTIP) awards: granted with vesting subject to performance measures. Performance measures attached to awards granted previously include: total shareholder return (TSR); return on equity (RoE) with a common equity tier 1 (CET1) underpin; strategic measures; earnings per share (EPS) growth; and return on risk-weighted assets (RoRWA). Each measure is assessed independently over a three-year period. Awards granted from 2016 have an individual conduct gateway that results in the award lapsing if not met
• Deferred awards are used to deliver the deferred portion of variable remuneration, in line with both market practice and regulatory requirements. These awards vest in instalments on anniversaries of the award date specified at the time of grant. Deferred awards are not subject to any plan limit. This enables the Group to meet regulatory requirements relating to deferral levels, and is in line with market practice
• Restricted share awards, made outside of the annual performance process as replacement buy-out awards to new joiners who forfeit awards on leaving their previous employers, vest in instalments on the anniversaries of the award date specified at the time of grant. This enables the Group to meet regulatory requirements relating to buy-outs, and is in line with market practice. In line with similar plans operated by our competitors, restricted share awards are not subject to an annual limit and do not have any performance measures
• Underpin shares are subject to a combination of two performance measures: EPS growth and RoRWA. The weighting between the two elements is split equally, one-half of the award depending on each measure, assessed independently. These awards vest after three or five years. Underpin shares formed part of the variable remuneration awarded to executive directors and senior management in respect of 2014 performance
Under the 2011 Plan, no grant price is payable to receive an award. The remaining life of the 2011 Plan during which new awards can be made is four years.
Valuation - LTIP awards
The vesting of awards granted in both 2016 and 2017 is subject to the satisfaction of RoE (subject to a capital underpin) and relative TSR performance measures and achievement of a strategic scorecard. The fair value of the TSR component is calculated using the probability of meeting the measures over a three-year performance period, using a Monte Carlo simulation model. The number of shares expected to vest is evaluated at each reporting date, based on the expected performance against the RoE and strategic measures in the scorecard, to determine the accounting charge.
Dividend equivalents accrue on these awards during the vesting period, so no discount is applied.
Grant date |
2017 |
|
2016 |
||
13 March |
15 June |
4 May |
11 March |
||
Share price at grant date (£) |
7.43 |
|
5.05 |
5.08 |
4.68 |
Vesting period (years) |
3-7 |
|
3 |
3, 3-7 |
3 |
Expected dividend yield (%) |
N/A |
|
N/A |
N/A |
N/A |
Fair value (RoE) (£) |
2.48, 2.48 |
|
1.68 |
1.69, 1.69 |
1.56 |
Fair value (TSR) (£) |
1.81, 1.38 |
|
1.24 |
1.25, 1.12 |
1.15 |
Fair value (Strategic) (£) |
2.48, 2.48 |
|
1.68 |
1.69, 1.69 |
1.56 |
Valuation - deferred shares and restricted shares
The fair value for all employees is based on 100 per cent of the face value of the shares at the date of grant as the share price will reflect expectations of all future dividends.
Deferred shares and underpin shares accrue dividend equivalent payments during the vesting period. The expected dividend yield assumption is based on a historical average over a period commensurate with this 'average' period until vesting, or over one year if the average period until vesting is less than one year.
Details of deferred, underpin and LTIP awards for executive directors can be found in the Annual report.
Deferred share awards
Grant date |
2017 |
|
2016 |
||||||
3 October |
15 June |
13 March |
30 November |
4 October |
15 June |
4 May |
11 March |
||
Share price at grant date (£) |
7.56 |
7.69 |
7.43 |
|
6.41 |
6.50 |
5.05 |
5.08 |
4.68 |
Vesting period |
Fair value (£) |
Fair value (£) |
Fair value (£) |
|
Fair value (£) |
Fair value (£) |
Fair value (£) |
Fair value (£) |
Fair value (£) |
1-3 years |
7.56 |
7.69 |
7.43 |
|
6.41 |
6.50 |
5.05 |
5.08 |
4.68 |
1-5 years |
- |
- |
7.43 |
|
- |
- |
- |
- |
- |
3-7 years |
- |
- |
7.43 |
|
- |
- |
- |
- |
- |
Other restricted share awards
Grant date |
2017 |
||||||
29 November |
|
3 October |
|
15 June |
|
13 March |
|
Share price at grant date (£) |
7.43 |
7.56 |
7.69 |
7.43 |
Vesting Period |
Expected dividend yield |
Fair value |
|
Expected dividend yield |
Fair value |
|
Expected dividend yield |
Fair value |
|
Expected dividend yield |
Fair value |
6 months |
- |
- |
|
- |
- |
|
- |
- |
|
- |
7.43 |
1 year |
- |
7.43 |
|
- |
7.56 |
|
- |
7.69 |
|
- |
7.43 |
2 year |
- |
7.43 |
|
- |
7.56 |
|
0.5 |
7.61 |
|
0.5 |
7.35 |
2-3 years |
- |
- |
|
- |
- |
|
- |
- |
|
1.9 |
7.08 |
3 year |
1.6 |
7.08 |
|
1.6 |
7.21 |
|
2.1 |
7.23 |
|
2.1 |
6.99 |
4 year |
2.2 |
6.80 |
|
2.2 |
6.92 |
|
2.5 |
6.96 |
|
2.5 |
6.72 |
5 year |
2.4 |
6.58 |
|
2.4 |
6.70 |
|
- |
- |
|
- |
- |
6 year |
2.6 |
6.36 |
|
2.6 |
6.47 |
|
- |
- |
|
- |
- |
Grant date |
2016 |
||||||||
30 November |
|
4 October |
|
15 June |
|
4 May |
|
11 March |
|
Share price at grant date (£) |
6.41 |
6.50 |
5.05 |
5.08 |
4.68 |
Vesting Period |
Expected dividend |
Fair value |
|
Expected dividend |
Fair value |
|
Expected dividend |
Fair value |
|
Expected dividend |
Fair value |
|
Expected dividend |
Fair value |
1 year |
- |
6.41 |
|
- |
6.50 |
|
- |
- |
|
- |
- |
|
- |
- |
2 year |
2.4 |
6.11 |
|
2.4 |
6.20 |
|
- |
- |
|
- |
- |
|
- |
- |
2-3 years |
2.5 |
6.03 |
|
2.5 |
6.11 |
|
3.6 |
4.62 |
|
3.6 |
4.65 |
|
3.5 |
4.30 |
3 year |
3.0 |
5.87 |
|
3.0 |
5.95 |
|
- |
- |
|
3.4 |
4.60 |
|
- |
- |
2-4 years |
- |
- |
|
- |
- |
|
- |
- |
|
3.8 |
4.65 |
|
- |
- |
1-4 years |
- |
- |
|
- |
- |
|
- |
- |
|
- |
- |
|
3.5 |
4.30 |
4 year |
- |
- |
|
3.1 |
5.76 |
|
- |
- |
|
3.4 |
4.44 |
|
- |
- |
2001 Performance Share Plan (2001 PSP) - now closed to new grants:
The Group's previous plan for delivering performance shares was the 2001 PSP and there remain outstanding vested awards. Under the 2001 PSP half the award was dependent upon TSR performance and the balance was subject to a target of defined EPS growth. Both measures used the same three-year period and were assessed independently.
2006 Restricted Share Scheme (2006 RSS)/2007 Supplementary Restricted Share Scheme (2007 SRSS):
The Group's previous plans for delivering restricted shares were the 2006 RSS and 2007 SRSS, both now replaced by the 2011 Plan. There remain outstanding vested awards under these plans. Awards were generally in the form of nil cost options and did not have any performance measures. Generally deferred restricted share awards vested equally over three years and for non-deferred awards half-vested two years after the date of grant and the balance after three years. No further awards will be granted under the 2006 RSS and 2007 SRSS.
All Employee Sharesave Plans (comprised of the 2004 International Sharesave Plan, the 2004 UK Sharesave Plan and the 2013 Sharesave Plan):
Under the All Employee Sharesave Plans, employees may open a savings contract. Within a period of six months after the third or fifth anniversary, as appropriate, employees may purchase ordinary shares in the Company at a discount of up to 20 per cent on the share price at the date of invitation (this is known as the 'option exercise price'). There are no performance measures attached to options granted under the All Employee Sharesave Plans and no grant price is payable to receive an option. In some countries in which the Group operates, it is not possible to operate Sharesave plans, typically due to securities law and regulatory restrictions. In these countries the Group offers an equivalent cash-based plan to its employees. The 2004 International Sharesave and the 2004 UK Sharesave plans are now closed and no further awards will be granted under these plans.
The 2013 Sharesave Plan was approved by Shareholders in May 2013 and all future Sharesave invitations are made under this plan. The remaining life of the 2013 Sharesave Plan is five years.
Valuation - Sharesave:
Options under the Sharesave plans are valued using a binomial option-pricing model. The same fair value is applied to all employees including executive directors. The fair value per option granted and the assumptions used in the calculation are as follows:
All Employee Sharesave Plan (Sharesave)
Grant date |
2017 |
|
2016 |
3 October |
4 October |
||
Share price at grant date (£) |
7.71 |
|
6.50 |
Exercise price (£) |
6.20 |
|
5.30 |
Vesting period (years) |
3 |
|
3 |
Expected volatility (%) |
34.9 |
|
34.2 |
Expected option life (years) |
3.33 |
|
3.33 |
Risk-free rate (%) |
0.47 |
|
0.13 |
Expected dividend yield (%) |
1.87 |
|
3.04 |
Fair value (£) |
2.32 |
|
1.71 |
The expected volatility is based on historical volatility over the last three years, or three years prior to grant. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed option life. The expected dividend yield is based on historical dividend for three years prior to grant.
Reconciliation of option movements for the year to 31 December 2017
|
2011 Plan1 |
PSP1 |
RSS1 |
SRSS1 |
Sharesave |
Weighted average exercise price |
|
Performance shares |
Deferred/restricted shares |
||||||
Outstanding as at 1 January |
28,740,614 |
24,208,988 |
76,977 |
701,603 |
80,299 |
13,291,261 |
6.72 |
Granted2,3 |
2,347,184 |
12,066,323 |
- |
- |
- |
3,097,250 |
6.20 |
Lapsed |
(5,550,569) |
(1,233,517) |
(14,821) |
(118,531) |
(18,741) |
(3,529,783) |
8.67 |
Exercised |
(59,861) |
(11,730,573) |
(44,934) |
(397,129) |
(60,309) |
(40,494) |
5.55 |
Outstanding as at 31 December |
25,477,368 |
23,311,221 |
17,222 |
185,943 |
1,249 |
12,818,234 |
6.06 |
Exercisable as at 31 December |
65,429 |
4,526,848 |
17,222 |
185,943 |
1,249 |
1,364,426 |
9.38 |
Range of exercise prices (£)2 |
- |
- |
- |
- |
- |
5.30-9.38 |
- |
Intrinsic value of vested but not exercised options |
0.1 |
3.6 |
0.0 |
0.2 |
0.0 |
0.0 |
- |
Weighted average contractual remaining life (years) |
8.29 |
8.09 |
1.13 |
0.19 |
0.19 |
2.05 |
- |
Weighted average share price for options exercised during the period (£) |
7.44 |
7.43 |
7.73 |
7.43 |
7.35 |
7.62 |
- |
1 Employees do not contribute towards the cost of these awards
2 For Sharesave granted in 2017 the exercise price is £6.20 per share, which was the average of the closing prices over the five days to the invitation date of 4 September. The closing share price on 1 September 2017 was £7.7390
3 Performance shares comprise 2,347,184 (LTIP) granted on 13 March 2017. Deferred/restricted shares comprise 10,055,740 (RSA/DRSA) granted on 13 March 2017, 366,830 (RSA/DRSA) granted on 15 June 2017, 871,760 (RSA) granted on 03 October 2017 and 771,993 (RSA) granted on 29 November 2017
Reconciliation of option movements for the year to 31 December 2016
|
2011 Plan1 |
PSP1 |
RSS1 |
SRSS1 |
Sharesave |
Weighted average exercise price (£) |
|
Performance shares |
Deferred/restricted shares |
||||||
Outstanding as at 1 January |
9,658,733 |
23,108,554 |
103,768 |
1,150,866 |
140,110 |
15,341,808 |
7.87 |
Granted2 |
25,319,8333 |
8,457,5594 |
- |
- |
- |
3,801,733 |
5.30 |
Lapsed |
(6,074,460) |
(1,585,856) |
(14,007) |
(121,803) |
(348) |
(5,851,915) |
8.83 |
Exercised |
(163,492) |
(5,771,269) |
(12,784) |
(327,460) |
(59,463) |
(365) |
5.67 |
Outstanding as at 31 December |
28,740,614 |
24,208,988 |
76,977 |
701,603 |
80,299 |
13,291,261 |
6.72 |
Exercisable as at 31 December |
145,928 |
5,745,431 |
76,977 |
701,603 |
80,299 |
1,484,146 |
10.98 |
Range of exercise prices (£)2 |
- |
- |
- |
- |
- |
5.30-11.21 |
- |
Intrinsic value of vested but not exercised options |
0.1 |
3.6 |
0.1 |
0.4 |
0.1 |
0.0 |
- |
Weighted average contractual remaining life (years) |
8.88 |
8.15 |
2.02 |
0.90 |
0.45 |
2.31 |
- |
Weighted average share price for options exercised during the period (£) |
4.89 |
5.21 |
6.23 |
5.49 |
6.02 |
5.85 |
- |
1 Employees do not contribute towards the cost of these awards
2 For Sharesave granted in 2016 the exercise price is £5.30 per share, which was the average of the closing prices over the five days to the invitation date of 5 September. The closing share price on 2 September 2016 was £6.614
3 23,437,968 granted on 11 March 2016, 922 (notional dividend) granted on 19 March 2016, 1,810,435 granted on 4 May 2016, 70,508 granted on 15 June 2016
4 7,134,374 granted on 11 March 2016, 34,643 (notional dividend) granted on 11 March 2016, 52,514 (notional dividend) granted on 13 March 2016, 94,242 (notional dividend) granted on 19 March 2016, 600,413 granted on 4 May 2016, 21,991 granted on 15 June 2016, 187 (notional dividend) granted on 17 June 2016, 35 (notional dividend) granted on 18 June 2016, 14 (notional dividend) granted on 19 June 2016, 434,555 granted on 4 October 2016, and 84,591 granted on 30 November 2016
32. Investments in subsidiary undertakings, joint ventures and associates
Accounting policy
Subsidiaries
Subsidiaries are all entities, including structured entities, which the Group controls. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the investee. The assessment of power is based on the Group's practical ability to direct the relevant activities of the entity unilaterally for the Group's own benefit and is subject to reassessment if and when one or more of the elements of control change. Subsidiaries are fully consolidated from the date on which the Group effectively obtains control. They are deconsolidated from the date that control ceases, and where any interest in the subsidiary remains, this is remeasured to its fair value and the change in carrying amount is recognised in the income statement.
Associates and joint arrangements
Joint arrangements are where two or more parties either have rights to the assets, and obligations of the joint arrangement (joint operations), or have rights to the net assets of the joint arrangement (joint venture). The Group evaluates the contractual terms of joint arrangements to determine whether a joint arrangement is a joint operation or a joint venture. As at 31 December 2017, the Group did not have any contractual interest in joint operations.
An associate is an entity over which the Group has significant influence.
Investments in associates and joint ventures are accounted for by the equity method of accounting and are initially recognised at cost. The Group's investment in associates and joint ventures includes goodwill identified on acquisition (net of any accumulated impairment loss).
The Group's share of its associates' and joint ventures' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in other comprehensive income is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate or a joint venture equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture.
Unrealised gains and losses on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest in the associates and joint ventures. At each balance sheet date the Group assesses whether there is any objective evidence of impairment in the investment in associates and joint ventures. Such evidence includes a significant or prolonged decline in the fair value of the Group's investment in an associate or joint venture below its cost, among other factors.
Significant accounting estimates and judgements
The Group applies judgement in determining if it has control, joint control or significant influence over subsidiaries, joint ventures and associates respectively. These judgements are based upon identifying the relevant activities of counterparties, being those activities that significantly affect the entities' returns, and further making a decision on whether the Group has control over those entities, joint control, or has significant influence (being the power to participate in the financial and operating policy decisions but not control them.).
These judgements are at times determined by equity holdings, and the voting rights associated with those holdings. However, further considerations, including but not limited to board seats, advisory committee members and specialist knowledge of some decision-makers are also taken into account.
Impairment testing of investments in associates and joint arrangements is based on judgements, including the basis of assumptions and forecasts used for estimating the expected cash flows from the investments and in the calculations of the present values of those cash flows. The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement.
Business combinations
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, together with the fair value of any contingent consideration payable. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets and contingent liabilities acquired is recorded as goodwill (see note 18 for details on goodwill recognised by the Group). If the cost of acquisition is less than the fair value of the net assets and contingent liabilities of the subsidiary acquired, the difference is recognised directly in the income statement.
Where the fair values of the identifiable net assets and contingent liabilities acquired have been determined provisionally, or where contingent or deferred consideration is payable, adjustments arising from their subsequent finalisation are not reflected in the income statement if; (i) they arise within 12 months of the acquisition date (or relate to acquisitions completed before 1 January 2014); and (ii) the adjustments arise from better information about conditions existing at the acquisition date (measurement period adjustments). Such adjustments are applied as at the date of acquisition and, if applicable, prior year amounts are restated. All changes that are not measurement period adjustments are reported in income other than changes in contingent consideration not classified as financial instruments, which are accounted for in accordance with the appropriate accounting policy, and changes in contingent consideration classified as equity, which is not remeasured.
Changes in ownership interest in a subsidiary, which do not result in a loss of control, are treated as transactions between equity holders and are reported in equity. Where a business combination is achieved in stages, the previously held equity interest is remeasured at the acquisition date fair value with the resulting gain or loss recognised in the income statement.
In the Company's financial statements, investment in subsidiaries, associates and joint ventures are held at cost less impairment and dividends from pre-acquisition profits received prior to 1 January 2009, if any. Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated in the Group accounts.
Investments in subsidiary undertakings |
2017 |
2016 |
As at 1 January |
33,853 |
28,381 |
Additions |
1,000 |
5,500 |
Disposal |
- |
(28) |
As at 31 December |
34,853 |
33,853 |
At 31 December 2017, the principal subsidiary undertakings, all indirectly held and principally engaged in the business of banking and provision of other financial services, were as follows:
Country and place of incorporation or registration |
Main areas of operation |
Group interest |
Standard Chartered Bank, England and Wales |
United Kingdom, Middle East, South Asia, Asia Pacific, Americas and, through Group companies, Africa |
100 |
Standard Chartered Bank (China) Limited, China |
China |
100 |
Standard Chartered Bank (Hong Kong) Limited, Hong Kong |
Hong Kong |
100 |
Standard Chartered Bank Korea Limited, Korea |
Korea |
100 |
Standard Chartered Bank Malaysia Berhad, Malaysia |
Malaysia |
100 |
Standard Chartered Private Equity Limited, Hong Kong |
Hong Kong |
100 |
Standard Chartered Bank Nigeria Limited, Nigeria |
Nigeria |
100 |
Standard Chartered Bank (Singapore) Limited, Singapore |
Singapore |
100 |
Standard Chartered Bank (Taiwan) Limited, Taiwan |
Taiwan |
100 |
Standard Chartered Bank (Pakistan) Limited, Pakistan |
Pakistan |
98.99 |
Standard Chartered Bank (Thai) Public Company Limited, Thailand |
Thailand |
99.87 |
Standard Chartered Bank Kenya Limited, Kenya |
Kenya |
74.30 |
A complete list of subsidiary undertaking is included in note 40.
The Group does not have any material non-controlling interests in any of its subsidiaries except the 25.7 per cent non-controlling interests amounting to $105 million (2016: $103 million) in Standard Chartered Bank Kenya Limited. This contributes 3.4 per cent of the Group's Operating Profit and 0.4 per cent of the Group's assets.
While the Group's subsidiaries are subject to local statutory capital and liquidity requirements in relation to foreign exchange remittance, these restrictions arise in the normal course of business and do not significantly restrict the Group's ability to access or use assets and settle liabilities of the Group.
The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the regulatory framework within which the banking subsidiaries operate. These frameworks require banking operations to keep certain levels of regulatory capital, liquid assets, exposure limits and comply with other required ratios. These restrictions are summarised below:
Regulatory and liquidity requirements
The Group's subsidiaries are required to maintain minimum capital, leverage ratios, liquidity and exposure ratios, which therefore restrict the ability of these subsidiaries to distribute cash or other assets to the parent company.
The subsidiaries are also required to maintain balances with central banks and other regulatory authorities in the countries in which they operate. At 31 December 2017, the total cash and balances with central bank was $59 billion (2016: $71 billion), of which $10 billion (2016: $9 billion) is restricted.
Statutory requirements
The Group's subsidiaries are subject to statutory requirements not to make distributions of capital and unrealised profits to the parent company, generally to maintain solvency. These requirements restrict the ability of subsidiaries to remit dividends to the Group. Certain subsidiaries are also subject to local exchange control regulations which provide for restrictions on exporting capital from the country other than through normal dividends.
Contractual requirements
The encumbered assets in the balance sheet of the Group's subsidiaries are not available for transfer around the Group. Encumbered assets are disclosed in Risk review and Capital review.
Share of profit/(loss) from investment in associates and joint ventures comprises:
|
2017 |
2016 |
Profit/(loss) from investment in joint ventures |
29 |
(215) |
Profit from investment in associates |
239 |
178 |
Total |
268 |
(37) |
Interests in joint ventures
|
PT Bank Permata Tbk & others |
|
2017 |
2016 |
|
As at 1 January |
713 |
679 |
Exchange translation difference |
(1) |
13 |
Additions |
44 |
238 |
Share of profit/(loss) |
29 |
(215) |
Share of available-for-sale and other reserves |
(2) |
(2) |
As at 31 December |
783 |
713 |
The Group's principal joint venture is PT Bank Permata Tbk (Permata). The Group has a 44.56 per cent (2016: 44.56 per cent) equity investment in Permata. The Group has determined that it has joint control of Permata through its shareholding, which is held alongside a third party that holds the same percentage. The Group has made the judgement that through these equity holdings, and in making decisions pertaining to Permata that both parties require each other's unanimous consent when making decisions over the relevant activities of Permata. Permata is based in Indonesia and provides financial services to the consumer and commercial banking clients. The Group's share of profit/(loss) of Permata amounts to $29 million (2016: $(215) million) and the Group's share of net assets was $775 million (2016: $705 million). On 16 February 2017, Permata announced plans for an IDR3 trillion (approximately $225 million) rights issue to drive growth. The Group invested an additional $44 million during 2017 as part of the rights issue. Permata is listed on the Indonesia Stock Exchange with a share price of IDR 625 as at 31 December 2017 resulting in a share capitalisation value of the Group's investment of $576 million.
The following table sets out the summarised financial statements of PT Bank Permata Tbk prior to the Group's share of joint ventures being applied:
|
2017 |
2016 |
Current assets |
5,626 |
6,484 |
Non-current assets |
5,193 |
5,697 |
Current liabilities |
(8,415) |
(9,896) |
Non-current liabilities |
(924) |
(963) |
Net assets |
1,480 |
1,322 |
Operating income |
641 |
608 |
Of which: |
|
|
Interest income |
837 |
1,083 |
Interest expense |
(447) |
(641) |
Expenses |
(334) |
(329) |
Impairment |
(224) |
(923) |
Operating profit/(loss) |
83 |
(644) |
Taxation |
(18) |
161 |
Profit/(loss) after tax |
65 |
(483) |
The above amounts of assets and liabilities include the following: |
|
|
Cash and cash equivalents |
1,207 |
1,964 |
Other comprehensive loss for the year |
(5) |
(4) |
Total comprehensive income/(loss) for the year |
60 |
(487) |
In December 2016, Permata established a portfolio of non-performing loans that were beyond its risk appetite which were to be liquidated. This resulted in an incremental impairment of $140 million, representing the difference between the carrying amount of the liquidation portfolio on a 'hold to collect' basis and the amount expected to be realised upon liquidation. This is consistent with the Group's restructuring actions. Accordingly, in 2016 the Group has recorded its $62 million share of this incremental impairment as restructuring and this was normalised from the underlying results of the Group. In 2017, a gain of $59 million has been recognised in restructuring as a result of recoveries on these non-performing loans.
Current assets primarily represent cash and short-term receivable balances. Non-current assets are primarily loans to customers. Current liabilities are primarily customer deposits based on contractual maturities, while non-current liabilities are longer-term payables such as subordinated debt.
Reconciliation of the net assets above to the carrying amount of the investments in PT Bank Permata Tbk recognised in the consolidated financial statements:
|
2017 |
2016 |
Net assets of PT Bank Permata Tbk |
1,480 |
1,322 |
Proportion of the Group's ownership interest in joint ventures |
659 |
589 |
Notional goodwill |
116 |
116 |
Carrying amount of the Group's interest in PT Bank Permata Tbk |
775 |
705 |
The Group's interest in Permata was tested for impairment. The recoverable amount of the interest is measured based on its ViU, which is calculated using five-year cash flow projections and an estimated terminal value based on a perpetuity value after year five. The cash flow projections are based on forecasts approved by Permata's management up to 2020. The perpetuity terminal value amount is calculated using year five cash flows using long-term GDP growth rates. All cash flows are discounted using pre-tax discount rates which reflect market rates appropriate to the interest. At 31 December 2017, the recoverable amount of the interest in Permata exceeded its carrying amount, and no impairment provision was required.
Interests in associates
|
China Bohai Bank |
|
Other |
|
Total |
|||
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
|||
As at 1 January |
1,182 |
1,099 |
|
34 |
159 |
|
1,216 |
1,258 |
Exchange translation differences |
96 |
(75) |
|
- |
(1) |
|
96 |
(76) |
Share of profits |
229 |
167 |
|
10 |
11 |
|
239 |
178 |
Disposals |
- |
- |
|
37 |
- |
|
37 |
- |
Dividends received |
- |
- |
|
(2) |
(3) |
|
(2) |
(3) |
Share of AFS and Other reserves |
(18) |
(9) |
|
(39) |
- |
|
(57) |
(9) |
Others |
- |
- |
|
(5) |
(132) |
|
(5) |
(132) |
As at 31 December |
1,489 |
1,182 |
|
35 |
34 |
|
1,524 |
1,216 |
A complete list of the Group's interest in associates is included in note 40. The Group's principal associate is:
Associate |
Nature of activities |
Main areas of operation |
Group interest |
China Bohai Bank |
Banking operations |
China |
19.99 |
The Group's investment in China Bohai Bank is less than 20 per cent but it is considered to be an associate because of the significant influence the Group is able to exercise over the management and financial and operating policies. The Group applies the equity method of accounting for investments in associates. The reported financials up to November 2017 of this associate are within three months of the Group's reporting date.
The following table sets out the summarised financial statements of China Bohai Bank prior to the Group's share of the associates being applied:
|
China Bohai Bank |
|
30 Nov 2017 |
30 Nov 2016 |
|
Current assets |
52,056 |
39,799 |
Non-current assets |
104,479 |
86,568 |
Current liabilities |
(82,293) |
(71,453) |
Non-current liabilities |
(66,794) |
(49,001) |
Net assets |
7,448 |
5,913 |
Operating income |
3,854 |
3,221 |
Of which: |
|
|
Interest income |
6,014 |
5,763 |
Interest expense |
(3,452) |
(3,432) |
Expenses |
(1,388) |
(1,208) |
Impairment |
(1,056) |
(994) |
Operating profit |
1,410 |
1,019 |
Taxation |
(263) |
(182) |
Profit after tax |
1,147 |
837 |
The above amounts of assets and liabilities include the following: |
|
|
Other comprehensive loss for the year |
(91) |
(43) |
Total comprehensive income for the year |
1,056 |
794 |
Non-current assets are primarily loans to customers and current liabilities are primarily customer deposits based on contractual maturities.
During the year, there were no indicators of impairment for the Group's investment in China Bohai Bank.
33. Structured entities
Accounting policy
A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Contractual arrangements determine the rights and therefore relevant activities of the structured entity. Structured entities are generally created to achieve a narrow and well-defined objective with restrictions around their activities. Structured entities are consolidated when the substance of the relationship between the Group and the structured entity indicates the Group has power over the contractual relevant activities of the structured entity, is exposed to variable returns, and can use that power to affect the variable return exposure.
In determining whether to consolidate a structured entity to which assets have been transferred, the Group takes into account its ability to direct the relevant activities of the structured entity. These relevant activities are generally evidenced through a unilateral right to liquidate the structured entity, investment in a substantial proportion of the securities issued by the structured entity or where the Group holds specific subordinate securities that embody certain controlling rights. The Group may further consider relevant activities embedded within contractual arrangements such as call options which give the practical ability to direct entity, special relationships between the structured entity and investors, and if a single investor has a large exposure to variable returns of the structured entity.
Significant accounting judgement
Significant judgement is required in determining control over structured entities. The purpose and design of the entity is considered, along with a determination of what the relevant activities are of the entity and who directs these. Further judgements are made around which investor is exposed to, and absorbs the variable returns of the structured entity. The Group will have to weigh up all of these facts to consider whether the Group, or another involved party, is acting as a principal in its own right or as an agent on behalf of others. Judgement is further required in the ongoing assessment of control over structured entities, specifically if market conditions have an effect on the variable return exposure of different investors.
The Group has involvement with both consolidated and unconsolidated structured entities, which may be established by the Group as a sponsor or by a third party.
Interests in consolidated structured entities: A structured entity is consolidated into the Group's financial statements where the Group controls the structured entity, as per the determination in the accounting policy above.
The following table presents the Group's interests in consolidated structured entities:
|
2017 |
2016 |
Aircraft and ship leasing |
5,494 |
5,623 |
Structured and Principal finance |
2,534 |
2,809 |
Total |
8,028 |
8,4321 |
1 The Group's disclosure of its interests in consolidated structured entities as at 31 December 2016 has increased by $1.3 billion (previously disclosed as $7.2 billion) following a review of the population. These interests have historically been included within the Group's results but not separately disclosed as relating to structured entities
Interests in unconsolidated structured entities: Unconsolidated structured entities are all structured entities that are not controlled by the Group. The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities. An interest in a structured entity is contractual or non-contractual involvement which creates variability of the returns of the Group arising from the performance of the structured entity.
The table below presents the carrying amount of the assets and liabilities recognised in the financial statements relating to variable interests held in unconsolidated structured entities, the maximum exposure to loss relating to those interests and the total assets of the structured entities. Maximum exposure to loss is primarily limited to the carrying amount of the Group's on-balance sheet exposure to the structured entity. For derivatives, the maximum exposure to loss represents the on-balance sheet valuation and not the notional amount. For commitments and guarantees, the maximum exposure to loss is the notional amount of potential future losses.
|
2017 |
|
2016 |
||||||
Principal finance funds |
Structured finance |
Asset-backed securities |
Total |
Principal finance |
Structured finance |
Asset- |
Total |
||
Group's interest - assets |
|
|
|
|
|
|
|
|
|
Financial assets held at fair value through profit or loss |
389 |
- |
983 |
1,372 |
|
515 |
- |
526 |
1,041 |
Loans and advances to customers |
- |
1,527 |
- |
1,527 |
|
- |
1,202 |
- |
1,202 |
Investment securities (available-for-sale) |
56 |
- |
4,105 |
4,161 |
|
54 |
- |
4,906 |
4,960 |
Investment securities (loans and receivables) |
439 |
- |
1,437 |
1,876 |
|
624 |
- |
1,489 |
2,113 |
Other assets |
19 |
- |
- |
19 |
|
12 |
- |
- |
12 |
Total assets |
903 |
1,527 |
6,525 |
8,955 |
|
1,205 |
1,202 |
6,921 |
9,328 |
Off balance sheet |
262 |
501 |
86 |
849 |
|
422 |
327 |
107 |
856 |
Group's maximum exposure to loss |
1,165 |
2,028 |
6,611 |
9,804 |
|
1,627 |
1,529 |
7,028 |
10,1841 |
Total assets of structured entities |
5,052 |
3,747 |
295,574 |
304,373 |
|
4,967 |
5,185 |
316,177 |
326,329 |
1 The Group's disclosed interests in unconsolidated structured entities as at 31 December 2016 has increased by $2.1 billion (previously disclosed as $8.1 billion). These interests have historically been included within the Group's results, but not separately disclosed as relating to structured entities
The main types of activities for which the Group utilises unconsolidated structured entities cover synthetic credit default swaps for managed investment funds (including specialised Principal finance funds), portfolio management purposes, structured finance and asset backed securities. These are detailed as follows:
• Principal finance fund: The Group's exposure to Principal finance funds represents committed or invested capital in unleveraged investment funds, primarily investing in pan-Asian infrastructure, real estate and private equity
• Structured finance: Structured finance comprises interests in transactions that the Group or, more usually, a customer has structured, using one or more structured entities, which provide beneficial arrangements for customers. The Group's exposure primarily represents the provision of funding to these structures as a financial intermediary, for which it receives a lender's return. The transactions largely relate to the provision of aircraft leasing and ship finance
• Asset backed securities (ABS): The Group also has investments in asset backed securities issued by third-party structured entities as set out in Risk Review and Capital review. For the purpose of market marking and at the discretion of ABS trading desk, the Group may hold an immaterial amount of debt securities ($1 million at year end) from structured entities originated by credit portfolio management. This is disclosed in the ABS column above
- Portfolio management (Group-sponsored entities): For the purposes of portfolio management, the Group purchased credit protection via synthetic credit default swaps from note-issuing structured entities. The referenced assets remain on the Group's balance sheet as they are not assigned to these structured entities. The Group continues to own or hold all of the risks and returns relating to these assets. The credit protection obtained from the regulatory-compliant securitisation only serves to protect the Group against losses upon the occurrence of eligible credit events and the underlying assets are not de-recognised from the Group balance sheet. The Group does not hold any equity interests in the structured entities, but may hold an insignificant amount of the issued notes for market marking purposes. This is disclosed in the ABS section above. The proceeds of the notes' issuance are typically held as cash collateral in issuer's account operated by a trustee or invested in AAA-rated government-backed securities to collateralise the structured entities swap obligations to the Group, and to repay the principal to investors at maturity. The structured entities reimburse the Group on actual losses incurred, through the use of the cash collateral or realisation of the collateral security. Correspondingly, the structured entities write down the notes issued by an equal amount of the losses incurred, in reverse order of seniority. All funding is committed for the life of these vehicles and the Group has no indirect exposure in respect of the vehicles' liquidity position. The Group has reputational risk in respect of certain portfolio management vehicles and investment funds either because the Group is the arranger and lead manager or because the structured entities have Standard Chartered branding
During the year, the Group transferred assets of $24 million to a Group-sponsored structured entity.
34. Cash flow statement
Adjustment for non-cash items and other adjustments included within income statement
|
Group |
|
Company |
||
2017 |
2016 |
2017 |
2016 |
||
Amortisation of discounts and premiums of investment securities |
(292) |
(265) |
|
- |
- |
Interest expense on subordinated liabilities |
748 |
835 |
|
563 |
604 |
Interest expense on senior debt securities in issue |
465 |
367 |
|
381 |
238 |
Other non-cash items |
541 |
9 |
|
63 |
65 |
Pension costs for defined benefit schemes |
98 |
85 |
|
- |
- |
Share-based payment costs |
152 |
100 |
|
- |
- |
Impairment losses on loans and advances and other credit risk provisions |
1,362 |
2,791 |
|
- |
- |
Dividend income from subsidiaries |
- |
- |
|
(392) |
(204) |
Other impairment |
499 |
612 |
|
- |
- |
Loss on business classified as held for sale |
- |
44 |
|
- |
- |
Net gain on derecognition of investment in associate |
(64) |
- |
|
- |
- |
(Profit)/loss from associates and joint ventures |
(268) |
37 |
|
- |
- |
Total |
3,241 |
4,615 |
|
615 |
703 |
Change in operating assets
|
Group |
|
Company |
||
2017 |
2016 |
2017 |
2016 |
||
Decrease/(increase) in derivative financial instruments |
19,246 |
(2,692) |
|
459 |
110 |
(Increase)/decrease in debt securities, treasury bills and equity shares held |
(5,373) |
718 |
|
- |
- |
Increase in loans and advances to banks and customers |
(26,085) |
(3,626) |
|
- |
- |
Net increase in pre-payments and accrued income |
(19) |
(98) |
|
- |
- |
Net increase in other assets |
(1,394) |
(2,588) |
|
- |
- |
Total |
(13,625) |
(8,286) |
|
459 |
110 |
Change in operating liabilities
|
Group |
|
Company |
||
2017 |
2016 |
2017 |
2016 |
||
(Decrease)/increase in derivative financial instruments |
(18,405) |
4,110 |
|
(1,049) |
103 |
Net increase/(decrease) in deposits from banks, customer accounts, debt securities in issue, Hong Kong notes in circulation and short positions |
23,877 |
9,219 |
|
1,599 |
(240) |
Increase/(decrease) in accruals and deferred income |
68 |
(139) |
|
(7) |
18 |
Net increase/(decrease) in other liabilities |
279 |
(110) |
|
32 |
(500) |
Total |
5,819 |
13,080 |
|
575 |
(619) |
Disclosures
|
Group |
|
Company |
||
2017 |
2016 |
2017 |
2016 |
||
Subordinated debt (including accrued interest): |
|
|
|
|
|
Opening balance |
19,913 |
22,295 |
|
14,821 |
13,951 |
Proceeds from the issue |
- |
1,250 |
|
- |
1,250 |
Interest paid |
(743) |
(920) |
|
(353) |
(604) |
Repayment |
(2,984) |
(2,666) |
|
(1,249) |
(105) |
Foreign exchange movements |
701 |
(861) |
|
536 |
(350) |
Fair value changes |
11 |
(42) |
|
93 |
56 |
Other |
652 |
857 |
|
261 |
623 |
Closing balance |
17,550 |
19,913 |
|
14,109 |
14,821 |
|
|
|
|
|
|
Senior debt (including accrued interest): |
|
|
|
|
|
Opening balance |
19,800 |
21,445 |
|
17,265 |
17,432 |
Proceeds from the issue |
2,292 |
5,453 |
|
1,501 |
4,385 |
Interest paid |
(896) |
(454) |
|
(825) |
(365) |
Repayment |
(4,162) |
(6,470) |
|
(3,237) |
(3,941) |
Foreign exchange movements |
882 |
(614) |
|
659 |
(543) |
Fair value changes |
26 |
(14) |
|
21 |
(61) |
Other |
1,796 |
454 |
|
923 |
358 |
Closing balance |
19,738 |
19,800 |
|
16,307 |
17,265 |
35. Cash and cash equivalents
Accounting policy
For the purposes of the cash flow statement, cash and cash equivalents comprise cash, on demand and overnight balances with central banks (unless restricted) and balances with less than three months' maturity from the date of acquisition, including treasury bills and other eligible bills, loans and advances to banks, and short-term government securities.
The following balances with less than three months' maturity from the date of acquisition have been identified by the Group as being cash and cash equivalents.
|
Group |
|
Company |
||
2017 |
2016 |
2017 |
2016 |
||
Cash and balances at central banks |
58,864 |
70,706 |
|
- |
- |
Less: restricted balances |
(9,761) |
(8,648) |
|
- |
- |
Treasury bills and other eligible bills |
9,384 |
9,163 |
|
- |
- |
Loans and advances to banks |
25,729 |
23,109 |
|
- |
- |
Trading securities |
3,015 |
2,647 |
|
- |
- |
Amounts owed by and due to subsidiary undertakings |
- |
- |
|
15,714 |
15,230 |
Total |
87,231 |
96,977 |
|
15,714 |
15,230 |
Restricted balances comprise minimum balances required to be held at central banks.
36. Related party transactions
Directors and officers
Details of directors' remuneration and interests in shares are disclosed in the Directors' remuneration report. IAS 24 Related party disclosures requires the following additional information for key management compensation. Key management comprises non-executive directors, executive directors of Standard Chartered PLC, the court directors of Standard Chartered Bank and the persons discharging managerial responsibilities (PDMR) of Standard Chartered PLC.
|
2017 |
2016 |
Salaries, allowances and benefits in kind |
35 |
37 |
Share-based payments |
29 |
34 |
Bonuses paid or receivable |
11 |
5 |
|
75 |
76 |
Transactions with directors and others
At 31 December 2017, the total amounts to be disclosed under the Companies Act 2006 (the Act) and the Listing Rules of the Hong Kong Stock Exchange Limited (HK Listing Rules) about loans to directors were as follows:
|
2017 |
|
2016 |
||
Number |
$million |
Number |
$million |
||
Directors |
1 |
- |
|
2 |
- |
The loan transaction provided to the directors of Standard Chartered PLC was a connected transaction under Chapter 14A of the HK Listing Rules. It was fully exempt as financial assistance under Rule 14A.87(1), as it was provided in our ordinary and usual course of business and on normal commercial terms.
As at 31 December 2017, Standard Chartered Bank had created a charge over $75 million (2016: $68 million) of cash assets in favour of the independent trustee of its employer-financed retirement benefit scheme.
Other than as disclosed in the Annual Report and Accounts, there were no other transactions, arrangements or agreements outstanding for any director, connected person or officer of the Company which have to be disclosed under the Act, the rules of the UK Listing Authority or the HK Listing Rules.
Company
The Company has received $848 million (2016: $751 million) of interest income from Standard Chartered Bank. The Company issues debt externally and lends proceeds to Group companies. At 31 December 2017, it had amounts due from Standard Chartered Bank of $12,580 million (2016: $11,625 million), derivative financial assets of $70 million (2016: $529 million) and of $492 million derivative financial liabilities (2016: $1,541 million) with Standard Chartered Bank, amounts due from Standard Chartered Holdings Limited of $80 million (2016: $80 million). At 31 December 2017, it had amounts due from Standard Chartered I H Limited of $298 million (2016: $1,054 million).
The Company has an agreement with Standard Chartered Bank that, in the event of Standard Chartered Bank defaulting on its debt coupon interest payments, where the terms of such debt requires it, the Company shall issue shares as settlement for non-payment of the coupon interest.
Associate and joint ventures
|
2017 |
|
2016 |
||||
China Bohai Bank |
Clifford Capital |
PT Bank Permata |
China Bohai Bank |
Clifford Capital |
PT Bank Permata |
||
Assets |
|
|
|
|
|
|
|
Loans and advances |
- |
50 |
95 |
|
- |
40 |
90 |
Debt securities |
- |
27 |
- |
|
- |
27 |
- |
Derivative assets |
1 |
- |
- |
|
- |
- |
- |
Total assets |
1 |
77 |
95 |
|
- |
67 |
90 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Deposits |
219 |
- |
29 |
|
7 |
- |
29 |
Debt securities issued |
15 |
- |
- |
|
14 |
- |
- |
Total liabilities |
234 |
- |
29 |
|
21 |
- |
29 |
Loan commitments and other guarantees |
- |
- |
- |
|
- |
10 |
- |
|
|
|
|
|
|
|
|
Total net income |
5 |
- |
6 |
|
2 |
- |
- |
37. Post balance sheet events
A final dividend for 2017 of 11 cents per ordinary share was declared by the directors after 31 December 2017.
38. Auditor's remuneration
Auditor's remuneration is included within other general administration expenses. The amounts paid by the Group to their principal auditor, KPMG LLP and its associates (together KPMG), are set out below. All services are approved by the Group Audit Committee and are subject to controls to ensure the external auditor's independence is unaffected by the provision of other services.
|
2017 |
2016 |
Audit fees for the Group statutory audit: |
|
|
Fees relating to the current year |
9.4 |
5.6 |
Fees payable to KPMG for other services provided to the Group: |
|
|
Audit of Standard Chartered PLC subsidiaries, pursuant to legislation |
|
|
Fees relating to the current year |
7.7 |
8.5 |
Total audit and audit-related fees |
17.1 |
14.1 |
Audit-related |
5.4 |
5.4 |
Other services pursuant to legislation |
0.2 |
0.2 |
Tax services |
0.4 |
0.4 |
Services relating to corporate finance transactions |
0.4 |
0.7 |
All other services |
0.4 |
0.6 |
Total fees payable |
23.9 |
21.4 |
The following is a description of the type of services included within the categories listed above:
• Audit fees are in respect of fees payable to KPMG LLP for the statutory audit of the consolidated financial statements of the Group and the separate financial statements of Standard Chartered PLC. They exclude amounts payable for the audit of Standard Chartered PLC's subsidiaries and amounts payable to KPMG LLP's associates. These amounts have been included in fees payable to KPMG for other services provided to the Group
• Audit-related fees consist of fees such as those for services required by law or regulation to be provided by the auditor, reviews of interim financial information, reporting on regulatory returns, reporting to a regulator on client assets and extended work performed over financial information and controls
• Other services pursuant to legislation include services for assurance and other services that are in relation to statutory and regulatory filings
• Tax services include services which are not prohibited by the European Directive on Statutory Audits of Annual and Consolidated Accounts and the Regulation on Statutory Audits of Public Interest Entities
• Services related to corporate finance transactions include fees payable to KPMG for issuing comfort letters
• All other services include other assurance and advisory services such as ad hoc accounting advice and extended work over controls
Expenses incurred during the provision of services and which have been reimbursed by the Group are included within auditor's remuneration.
39. Standard Chartered PLC (Company)
Classification and measurement of financial instruments
Financial assets |
2017 |
|
2016 |
||||
Derivatives held for hedging |
Amortised cost |
Total |
Derivatives held |
Amortised cost |
Total |
||
Derivatives |
70 |
- |
70 |
|
529 |
- |
529 |
Debt securities |
- |
12,159 |
12,159 |
|
- |
15,009 |
15,009 |
Amounts owed by subsidiary undertakings |
- |
15,714 |
15,714 |
|
- |
15,230 |
15,230 |
Total |
70 |
27,873 |
27,943 |
|
529 |
30,239 |
30,768 |
Derivatives held for hedging are held at fair value and are classified as Level 2 while the counterparty is Standard Chartered Bank.
Debt securities comprise corporate securities issued by Standard Chartered Bank and have a fair value equal to carrying value of $12,159 million (2016: $15,009 million).
In 2017 and 2016, amounts owed by subsidiary undertakings have a fair value equal to carrying value.
Financial liabilities |
2017 |
|
2016 |
||||
Derivatives held |
Amortised cost |
Total |
Derivatives held |
Amortised cost |
Total |
||
Derivatives |
492 |
- |
492 |
|
1,541 |
- |
1,541 |
Debt securities in issue |
- |
16,169 |
16,169 |
|
- |
17,132 |
17,132 |
Subordinated liabilities and other |
- |
13,882 |
13,882 |
|
- |
14,582 |
14,582 |
Total |
492 |
30,051 |
30,543 |
|
1,541 |
31,714 |
33,255 |
Derivatives held for hedging are held at fair value and are classified as Level 2 while the counterparty is Standard Chartered Bank.
The fair value of debt securities in issue is $16,169 million (2016: $17,132 million) and they have fair value equal to carrying value. The fair value of subordinated liabilities and other borrowed funds is $14,314 million (2016: $13,970 million).
Derivative financial instruments
Derivatives |
2017 |
|
2016 |
||||
Notional |
Assets |
Liabilities |
Notional |
Assets |
Liabilities |
||
Foreign exchange derivative contracts: |
|
|
|
|
|
|
|
Currency swaps |
8,038 |
59 |
300 |
|
7,998 |
- |
1,333 |
Interest rate derivative contracts: |
|
|
|
|
|
|
|
Swaps |
11,980 |
11 |
192 |
|
17,918 |
529 |
208 |
Total |
20,018 |
70 |
492 |
|
25,916 |
529 |
1,541 |
Credit risk
Maximum exposure to credit risk
|
2017 |
2016 |
Derivative financial instruments |
70 |
529 |
Debt securities |
12,159 |
15,009 |
Amounts owed by subsidiary undertakings |
15,714 |
15,230 |
Total |
27,943 |
30,768 |
In 2017 and 2016, amounts owed by subsidiary undertakings were neither past due nor impaired; the Company had no individually impaired loans.
In 2017 and 2016, the Company had no impaired debt securities. The debt securities held by the Group are issued by Standard Chartered Bank, a wholly owned subsidiary undertaking with credit ratings of A+/A/A1.
Liquidity risk
The following table analyses the residual contractual maturity of the assets and liabilities of the Company on a discounted basis:
|
2017 |
||||||||
One month |
Between |
Between three months and six months |
Between |
Between |
Between |
Between |
More than |
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
- |
- |
- |
- |
- |
2 |
5 |
63 |
70 |
Investment securities |
- |
- |
- |
- |
- |
- |
3,658 |
8,501 |
12,159 |
Amount owed by subsidiary undertakings |
271 |
23 |
1,577 |
- |
1,613 |
3,901 |
5,275 |
3,054 |
15,714 |
Investments in subsidiary undertakings |
- |
- |
- |
- |
- |
- |
- |
34,853 |
34,853 |
Other assets |
- |
- |
- |
- |
- |
- |
- |
3 |
3 |
Total assets |
271 |
23 |
1,577 |
- |
1,613 |
3,903 |
8,938 |
46,474 |
62,799 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
- |
- |
2 |
- |
- |
19 |
283 |
188 |
492 |
Senior debt |
- |
- |
1,326 |
- |
1,499 |
3,826 |
4,671 |
4,847 |
16,169 |
Other liabilities |
194 |
72 |
76 |
- |
24 |
- |
36 |
3 |
405 |
Subordinated liabilities and other borrowed funds |
- |
- |
- |
- |
- |
- |
3,094 |
10,788 |
13,882 |
Total liabilities |
194 |
72 |
1,404 |
- |
1,523 |
3,845 |
8,084 |
15,826 |
30,948 |
Net liquidity gap |
77 |
(49) |
173 |
- |
90 |
58 |
854 |
30,648 |
31,851 |
|
2016 |
||||||||
One month |
Between |
Between |
Between |
Between |
Between |
Between |
More than |
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
- |
- |
- |
16 |
- |
1 |
17 |
495 |
529 |
Investment securities |
- |
- |
- |
1,250 |
1,600 |
- |
1,698 |
10,461 |
15,009 |
Amount owed by subsidiary undertakings |
249 |
98 |
992 |
1,500 |
20 |
2,873 |
8,725 |
773 |
15,230 |
Investments in subsidiary undertakings |
- |
- |
- |
- |
- |
- |
- |
33,853 |
33,853 |
Total assets |
249 |
98 |
992 |
2,766 |
1,620 |
2,874 |
10,440 |
45,582 |
64,621 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
- |
- |
- |
- |
240 |
1 |
323 |
977 |
1,541 |
Senior debt |
- |
- |
842 |
1,500 |
795 |
2,899 |
7,858 |
3,238 |
17,132 |
Other liabilities |
207 |
73 |
72 |
- |
20 |
- |
37 |
4 |
413 |
Subordinated liabilities and |
- |
- |
- |
1,250 |
- |
- |
2,250 |
11,082 |
14,582 |
Total liabilities |
207 |
73 |
914 |
2,750 |
1,055 |
2,900 |
10,468 |
15,301 |
33,668 |
Net liquidity gap |
42 |
25 |
78 |
16 |
565 |
(26) |
(28) |
30,281 |
30,953 |
Financial liabilities on an undiscounted basis
|
2017 |
||||||||
One month |
Between |
Between three months and six months |
Between |
Between |
Between |
Between |
More than |
Total |
|
Derivative financial instruments |
- |
- |
2 |
- |
- |
18 |
284 |
188 |
492 |
Debt securities in issue |
6 |
10 |
51 |
66 |
1,592 |
4,151 |
5,192 |
5,854 |
16,922 |
Subordinated liabilities and |
12 |
30 |
33 |
210 |
106 |
617 |
4,774 |
15,982 |
21,764 |
Other liabilities |
192 |
72 |
76 |
- |
24 |
- |
36 |
- |
400 |
Total liabilities |
210 |
112 |
162 |
276 |
1,722 |
4,786 |
10,286 |
22,024 |
39,578 |
|
2016 |
||||||||
One month |
Between |
Between |
Between |
Between |
Between |
Between |
More than |
Total |
|
Derivative financial instruments |
- |
- |
- |
- |
185 |
2 |
773 |
581 |
1,541 |
Debt securities in issue |
9 |
14 |
912 |
1,546 |
1,022 |
2,930 |
8,479 |
4,596 |
19,508 |
Subordinated liabilities and |
25 |
28 |
19 |
207 |
24 |
575 |
1,726 |
21,136 |
23,740 |
Other liabilities |
207 |
73 |
72 |
- |
20 |
- |
37 |
- |
409 |
Total liabilities |
241 |
115 |
1,003 |
1,753 |
1,251 |
3,507 |
11,015 |
26,313 |
45,198 |
40. Related undertakings of the Group
As at 31 December 2017 the Group's interests in related undertakings is disclosed below. Unless otherwise stated, the share capital disclosed comprises ordinary or common shares which are held by subsidiaries of the Group. Note 32 details undertakings that have a significant contribution to the Group's net profit or net assets.
Subsidiary undertakings
Name and registered address |
Country of |
Description of shares |
Proportion of shares held (%) |
|
The following companies have the address of 1 Basinghall Avenue, London, EC2V 5DD, United Kingdom |
|
|
|
|
BWA Dependents Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
FinVentures UK Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Pembroke Aircraft Leasing (UK) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
SC (Secretaries) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
SC Leaseco Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
SC Overseas Investments Limited |
United Kingdom |
AUD1.00 Ordinary shares |
100 |
|
$1.00 Ordinary shares |
100 |
|
||
SC Transport Leasing 1 LTD |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
SC Transport Leasing 2 Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
SCMB Overseas Limited |
United Kingdom |
£0.10 Ordinary shares |
100 |
|
St. Helens Nominees Limited1 |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Stanchart Nominees Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Standard Chartered (GCT) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Standard Chartered Africa Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Standard Chartered APR Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Bank |
United Kingdom |
$0.01 Non-Cumulative Irredeemable Preference shares |
100 |
|
$5.00 Non-Cumulative Redeemable Preference shares |
100 |
|
||
$1.00 Ordinary shares |
100 |
|
||
Standard Chartered Debt Trading Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Standard Chartered Health Trustee (UK) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Standard Chartered Holdings Limited1 |
United Kingdom |
$2.00 Ordinary shares |
100 |
|
Standard Chartered I H Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Leasing (UK) 2 Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Leasing (UK) 3 Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Leasing (UK) Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Masterbrand Licensing Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered NEA Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Nominees Limited1 |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Standard Chartered Nominees (Private Clients UK) Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Overseas Holdings Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Standard Chartered Securities (Africa) Holdings Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Trustees (UK) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
|
Standard Chartered UK Holdings Limited |
United Kingdom |
£10.00 Ordinary shares |
100 |
|
The SC Transport Leasing Partnership 12 |
United Kingdom |
Limited Partnership interest |
100 |
|
The SC Transport Leasing Partnership 22 |
United Kingdom |
Limited Partnership interest |
100 |
|
The SC Transport Leasing Partnership 32 |
United Kingdom |
Limited Partnership interest |
100 |
|
The SC Transport Leasing Partnership 42 |
United Kingdom |
Limited Partnership interest |
100 |
|
The BW Leasing Partnership 1 LP2 |
United Kingdom |
Limited Partnership interest |
99.9 |
|
The BW Leasing Partnership 2 LP2 |
United Kingdom |
Limited Partnership interest |
99.9 |
|
The BW Leasing Partnership 3 LP2 |
United Kingdom |
Limited Partnership interest |
99.9 |
|
The BW Leasing Partnership 4 LP2 |
United Kingdom |
Limited Partnership interest |
99.9 |
|
The BW Leasing Partnership 5 LP2 |
United Kingdom |
Limited Partnership interest |
99.9 |
|
The following company has the address of Rua Gamal Abdel Nasser, Edificio Tres Torres, Eixo Viario, Distrito Urbano da Ingombota, Municipio de Luanda, Provincia de Luanda, Angola |
|
|
|
|
Standard Chartered Bank Angola S.A. |
Angola |
AOK6,475.62 Ordinary shares |
60 |
|
The following company has the address of Level 5, 345 George St, Sydney NSW 2000, Australia |
|
|
|
|
Standard Chartered Grindlays Pty Limited |
Australia |
AUD Ordinary shares |
100 |
|
The following companies have the address of 5th Floor Standard House Bldg, The Mall, Queens Road, PO Box 496, Gaborone, Botswana |
|
|
|
|
Standard Chartered Bank Botswana Insurance Agency (Proprietary) Limited |
Botswana |
BWP1.00 Ordinary shares |
100 |
|
Standard Chartered Bank Botswana Investment Services (Pty) Limited |
Botswana |
BWP1.00 Ordinary shares |
100 |
|
Standard Chartered Bank Botswana Limited |
Botswana |
BWP1.00 Ordinary shares |
75.8 |
|
Standard Chartered Botswana Education Trust3 |
Botswana |
Interest in trust |
100 |
|
Standard Chartered Botswana Nominees (Proprietary) Limited |
Botswana |
BWP Ordinary shares |
100 |
|
The following companies have the address of Avenida Brigadeiro Faria Lima, 3600 - 7th floor, Sao Paulo, Sao Paulo, 04538-132, Brazil |
|
|
|
|
Standard Chartered Bank (Brasil) S.A. - Banco de Investimento |
Brazil |
BRL Ordinary shares |
100 |
|
Standard Chartered Participacoes E Assessoria Economica Ltda |
Brazil |
BRL0.51 Common shares |
100 |
|
The following company has the address of 51-55 Jalan Sultan, Complex Jalan sultan, Bandar Seri Begawan, BS8811, Brunei Darussalam |
|
|
|
|
Standard Chartered Finance (Brunei) Bhd |
Brunei Darussalam |
BND1.00 Ordinary shares |
100 |
|
The following company has the address of G01-02, Wisma Haji Mohd Taha Building, Jalan Gadong, BE4119, Brunei Darussalam |
|
|
|
|
Standard Chartered Securities (B) Sdn Bhd |
Brunei Darussalam |
BND1.00 Ordinary shares |
100 |
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The following company has the address of 1155, Boulevard de la Liberté, Douala, B.P. 1784, Cameroon |
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Standard Chartered Bank Cameroon S.A |
Cameroon |
XAF10,000.00 shares |
100 |
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The following company has the address of 20 Adelaide Street, Suite 1105 , Toronto ON M5C 2T6 Canada |
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Standard Chartered (Canada) Limited |
Canada |
CAD1.00 Ordinary shares |
100 |
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The following company has the address of Maples Finance Limited, PO Box 1093 GT, Queensgate House, Georgetown, Grand Cayman, Cayman Islands |
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SCB Investment Holding Company Limited |
Cayman Islands |
$1,000.00 A Ordinary shares |
100 |
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The following company has the address of Cayman Corporate Centre, 27 Hospital Road, George Town, Grand Cayman KY1-9008, Cayman Islands |
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Ocean Horizon Holdings South Ltd |
Cayman Islands |
$1.00 Ordinary shares |
100 |
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The following companies have the address of Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road George Town, Grand Cayman KY1-9008, Cayman Islands |
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Sirat Holdings Limited |
Cayman Islands |
$0.01 Ordinary shares |
91 |
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$0.01 Preference shares |
66.7 |
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Standard Chartered Corporate Private Equity (Cayman) Limited |
Cayman Islands |
$1.00 Ordinary shares |
100 |
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Standard Chartered International Partners |
Cayman Islands |
$1.00 Ordinary shares |
100 |
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Standard Chartered Principal Finance (Cayman) Limited |
Cayman Islands |
$1.00 Ordinary shares |
100 |
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Standard Chartered Private Equity (Cayman) Limited |
Cayman Islands |
$1.00 Ordinary shares |
100 |
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The following company has the address of Mourant Ozannes Corporate Services (Cayman) Limited, Harbour Centre, 42 North Church Street, PO Box 1348, Grand Cayman KY1-1108, Cayman Islands |
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Sunflower Cayman SPC2 |
Cayman Islands |
$1.00 Management shares |
100 |
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The following companies have the address of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands |
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Cerulean Investments LP |
Cayman Islands |
Limited Partnership interest |
100 |
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Standard Chartered Saadiq Mudarib Company Limited |
Cayman Islands |
$1.00 Ordinary shares |
100 |
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The following companies have the address of Unit 2 - 101, Building 3, Haifeng Logistics Park, No. 600 Luoyang Road, Tianjin, Dongjiang Free Trade Port Zone, China |
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Pembroke Aircraft Leasing (Tianjin) Limited |
China |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing Tianjin 1 Limited |
China |
CNY1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing Tianjin 2 Limited |
China |
CNY1.00 Ordinary shares |
100 |
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The following company has the address of Standard Chartered Tower, 201 Century Avenue, Pudong, Shanghai, 200120, China |
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Standard Chartered Bank (China) Limited |
China |
CNY Ordinary shares |
100 |
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The following company has the address of Unit 5, 12th Floor, Standard Chartered Tower, World Finance, No 1 East Third Ring Middle Road, Chaoyang District, Beijing, 100020, China |
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Standard Chartered Corporate Advisory Co. Ltd |
China |
$1.00 Ordinary shares |
100 |
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The following company has the address of No. 188 Yeshen Rd, 11F, A-1161 RM, Pudong New District, Shanghai, 31201308, China |
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Standard Chartered Trading (Shanghai) Limited |
China |
$15,000,000.00 Ordinary shares |
100 |
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The following company has the address of No. 35, Xinhuanbei Road, TEDA, Tianjin, 300457, China |
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Standard Chartered Global Business Services Co. Limited |
China |
$ Ordinary shares |
100 |
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The following company has the address of Standard Chartered Bank |
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Standard Chartered Bank Cote d' Ivoire SA |
Cote d'Ivoire |
XOF100,000.00 Ordinary shares |
100 |
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The following company has the address of Standard Chartered Bank France, 32 Rue de Monceau,75008, Paris, France |
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Pembroke Lease France SAS |
France |
€1.00 Ordinary shares |
100 |
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The following company has the address of 8 Ecowas Avenue, PMB 259 Banjul, The Gambia |
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Standard Chartered Bank Gambia Limited |
Gambia |
GMD1.00 Ordinary shares |
74.9 |
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The following company has the address of Standard Chartered Bank Germany Branch, Franklinstraße 46-48, 60486, Frankfurt am Main, Germany |
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Standard Chartered AG |
Germany |
€ Ordinary shares |
100 |
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The following companies have the address of Standard Chartered Bank Building, 6 John Evans Atta Mills High Street,P.O. Box 768, Accra,Ghana |
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Standard Chartered Bank Ghana Limited |
Ghana |
GHS Ordinary shares |
69.4 |
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GHS0.52 Preference shares |
87.0 |
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Standard Chartered Ghana Nominees Limited |
Ghana |
GHS Ordinary shares |
100 |
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The following companies have the address of Bordeaux Court |
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Birdsong Limited |
Guernsey |
£1.00 Ordinary shares |
100 |
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Nominees One Limited |
Guernsey |
£1.00 Ordinary shares |
100 |
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Nominees Two Limited |
Guernsey |
£1.00 Ordinary shares |
100 |
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Songbird Limited |
Guernsey |
£1.00 Ordinary shares |
100 |
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Standard Chartered Secretaries (Guernsey) Limited |
Guernsey |
£1.00 Ordinary shares |
100 |
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Standard Chartered Trust (Guernsey) Limited |
Guernsey |
£1.00 Ordinary shares |
100 |
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The following companies have the address of 1401 Hutchison House, |
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Double Wings Limited |
Hong Kong |
HKD1.00 Ordinary shares |
100 |
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Kozagi Limited |
Hong Kong |
HKD10.00 Ordinary shares |
100 |
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Majestic Legend Limited |
Hong Kong |
HKD1.00 Ordinary shares |
100 |
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Ori Private Limited |
Hong Kong |
$1.00 Ordinary shares |
100 |
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$1.00 A Ordinary shares |
90.8 |
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Rivendell Private Limited |
Hong Kong |
$1.00 A Ordinary shares |
84.8 |
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Standard Chartered PF Real Estate (Hong Kong) Limited |
Hong Kong |
HKD10.00 Ordinary shares |
100 |
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The following company has the address of 15th Floor, Standard Chartered Tower, 388 Kwun Tong Road, Kwun Tong, Hong Kong |
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Horsford Nominees Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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The following companies have the address of 25/F, Standard Chartered Bank Building, 4-4A Des Voeux Road Central, Hong Kong |
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Marina Acacia Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Amaryllis Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Amethyst Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Ametrine Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Angelite Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Apollo Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Beryl Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Carnelian Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Emerald Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Flax Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Gloxinia Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Hazel Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Honor Shipping Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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$ Ordinary shares |
100 |
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Marina Ilex Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Iridot Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Kunzite Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Leasing Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Mimosa Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Moonstone Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Peridot Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Sapphire Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Marina Splendor Shipping Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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$ Ordinary shares |
100 |
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Marina Tourmaline Shipping Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Standard Chartered Leasing Group Limited |
Hong Kong |
$ Ordinary shares |
100 |
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Standard Chartered Trade Support (HK) Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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The following company has the address of 13/F, Standard Chartered Tower, 388 Kwun Tong Road, Kwun Tong, Kowloon, Hong Kong |
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S C Learning Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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The following company has the address of 21/F, Standard Chartered Tower, 388 Kwun Tong Road, Kwun Tong, Kowloon, Hong Kong |
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Standard Chartered Asia Limited |
Hong Kong |
HKD Deferred shares |
100 |
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HKD Ordinary shares |
100 |
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The following companies have the address of 32nd Floor, 4-4A Des Voeux Road, Central, Hong Kong |
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Standard Chartered Sherwood (HK) Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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Standard Chartered Bank (Hong Kong) Limited |
Hong Kong |
HKD A Ordinary shares |
100 |
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HKD B Ordinary shares |
100 |
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$ Preference shares |
100 |
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The following company has the address of L5 The Forum, Exchange Square, 8 Connaught Place, Central, Hong Kong |
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Standard Chartered Global Trading Investments Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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The following companies have the address of 20/F, Standard Chartered Bank Building, 4-4A Des Voeux Road, Central, Hong Kong |
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Standard Chartered Private Equity Limited |
Hong Kong |
HKD1.00 Ordinary shares |
100 |
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Standard Chartered Private Equity Managers (Hong Kong) Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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The following company has the address of 15/F, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong |
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Standard Chartered Securities (Hong Kong) Limited |
Hong Kong |
HKD Ordinary shares |
100 |
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The following company has the address of 17/F, Standard Chartered Bank Building, 4-4A Des Voeux Road, Central, Hong Kong |
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Standard Chartered Trust (Hong Kong) Limited |
Hong Kong |
HKD10.00 Ordinary shares |
100 |
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The following company has the address of Room 1305, 13/F, Shun Tak Center West Tower, 200 Connaught Road, Hong Kong |
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Union Town Limited |
Hong Kong |
HKD1.00 Ordinary shares |
100 |
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The following company has the address of 1st Floor, Europe Building, No.1, Haddows Road, Nungambakkam, Chennai, 600 006, India |
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Standard Chartered Global Business Services Private Limited |
India |
INR10.00 Equity shares |
100 |
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The following company has the address of 1st Floor, Crescenzo, Plot no. C-38 & 39, G-Block, Bandra (East), Mumbai, Maharashtra, 400 051, India |
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St Helen's Nominees India Private Limited |
India |
INR10.00 Equity shares |
100 |
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The following company has the address of 90 M.G.Road, II Floor, FORT, Mumbai, MAHARASHTRA, 400 001, India |
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Standard Chartered Finance Private Limited |
India |
INR10.00 Ordinary shares |
98.7 |
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The following company has the address of 6th Floor, Crescenzo, Plot No 38-39, G-Block, Bandra Kurla Complex, Bandra East, Mumbai, Maharashtra, 400051, India |
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Standard Chartered Investments and Loans (India) Limited |
India |
INR10.00 Ordinary shares |
100 |
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The following company has the address of Floor no.7, Crescenzo Building, C-38-39, G"-Block, Bandra Kurla Complex, Bandra East, Mumbai, Maharashtra, 400051, India |
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Standard Chartered Private Equity Advisory (India) Private Limited |
India |
INR1,000.00 Ordinary shares |
100 |
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The following company has the address of 2nd Floor, 23-25 M.G. Road, Fort, Mumbai, 400 001, India |
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Standard Chartered Securities (India) Limited |
India |
INR10.00 Ordinary shares |
100 |
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The following company has the address of 6th Floor, Crescenzo, Plot No.C-38-39, G-Block, Bandra Kurla Complex, Bandra (East), , Mumbai, Maharashtra, 400051, India |
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Standard Chartered (India) Modeling and Analytics Centre Private Limited |
India |
INR10.00 Ordinary shares |
100 |
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The following company has the address of Menara Standard Chartered, |
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PT Standard Chartered Sekuritas Indonesia |
Indonesia |
IDR100,000,000.00 Ordinary shares |
99 |
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The following company has the address of Menara Standard Chartered, |
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PT. Price Solutions Indonesia |
Indonesia |
$100.00 Ordinary shares |
100 |
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The following companies have the address of 33-41 Lower Mount Street, Dublin 2, Ireland |
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Inishbrophy Leasing Limited |
Ireland |
€1.00 Ordinary shares |
100 |
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Inishcannon Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Inishcorky Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Inishcrean Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Inishdawson Leasing Limited |
Ireland |
€1.00 Ordinary shares |
100 |
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Inisherkin Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Inishgort Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Inishlynch Leasing Limited |
Ireland |
€1.00 Ordinary shares |
100 |
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Inishoo Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Inishquirk Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Inishtubrid Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Nightjar Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke 7006 Leasing Limited |
Ireland |
€1.25 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 1 Limited |
Ireland |
€1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 2 Limited |
Ireland |
€1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 3 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 4 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 5 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 6 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 7 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 8 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 9 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 10 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 11 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing 12 Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Aircraft Leasing Holdings Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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Pembroke Alpha Limited |
Ireland |
€1.00 Ordinary shares |
100 |
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Pembroke Capital Limited |
Ireland |
€1.25 Ordinary shares |
100 |
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$1.00 Ordinary shares |
100 |
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Pembroke Capital Shannon Limited |
Ireland |
€1.25 Ordinary shares |
100 |
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Skua Limited |
Ireland |
$1.00 Ordinary shares |
100 |
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The following company has the address of First Names House, |
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Pembroke Group Limited |
Isle of Man |
$0.01 Ordinary shares |
100 |
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The following companies have the address of 1st Floor, Rose House, |
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Standard Chartered Assurance Limited |
Isle of Man |
$1.00 Ordinary shares |
100 |
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$1.00 Redeemable Preference shares |
100 |
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Standard Chartered Insurance Limited |
Isle of Man |
$1.00 Ordinary shares |
100 |
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The following company has the address of 21/F, Sanno Park Tower, |
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Standard Chartered Securities (Japan) Limited |
Japan |
JPY50,000 Ordinary shares |
100 |
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The following company has the address of Lime Grove House, Green Street, St Helier, JE1 2ST, Jersey |
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Ocean Horizon Holdings East Limited |
Jersey |
$1.00 Ordinary shares |
100 |
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The following company has the address of 4/F St Pauls Gate, |
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Ocean Horizon Holdings West Limited |
Jersey |
$1.00 Ordinary shares |
100 |
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The following company has the address of 15 Castle Street, St Helier, |
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SCB Nominees (CI) Limited |
Jersey |
$1.00 Ordinary shares |
100 |
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The following company has the address of 13 Castle Street, St Helier, |
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Standard Chartered Funding (Jersey) Limited1 |
Jersey |
£1.00 Ordinary shares |
100 |
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The following companies have the address of Standard Chartered Chiromo, Number 48, Westlands Road, P. O. Box 30003 - 00100, |
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Standard Chartered Investment Services Limited |
Kenya |
KES1.00 Ordinary shares |
100 |
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Standard Chartered Bank Kenya Limited |
Kenya |
KES5.00 Ordinary shares |
74.3 |
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KES5.00 Preference shares |
100 |
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Standard Chartered Securities (Kenya) Limited |
Kenya |
KES10.00 Ordinary shares |
100 |
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Standard Chartered Financial Services Limited |
Kenya |
KES20.00 Ordinary shares |
100 |
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Standard Chartered Insurance Agency Limited |
Kenya |
KES100.00 Ordinary shares |
100 |
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Standard Chartered Kenya Nominees Limited |
Kenya |
KES20.00 Ordinary shares |
100 |
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The following company has the address of M6-2701, West 27Fl, Suha-dong, 26, Eulji-ro 5-gil, Jung-gu, Seoul, Korea, Republic of |
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Resolution Alliance Korea Ltd |
Korea, Republic of |
KRW5,000.00 Ordinary shares |
100 |
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The following company has the address of 47 Jongno, Jongno-gu, Seoul, 110-702, Korea, Republic of |
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Standard Chartered Bank Korea Limited |
Korea, Republic of |
KRW5,000.00 Ordinary shares |
100 |
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The following companies have the address of 17th Floor, 100, Gongpyeong-dong, Jongno-gu, Seoul, Korea, Republic of |
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Standard Chartered Private Equity Korea II |
Korea, Republic of |
KRW1,000,000.00 Ordinary shares |
100 |
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Standard Chartered Private Equity Managers Korea Limited |
Korea, Republic of |
KRW5,000.00 Ordinary shares |
100 |
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The following company has the address of 2F, 47 Jongno, Jongno-gu, Seoul, 110-702, Korea, Republic of |
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Standard Chartered Securities Korea Limited |
Korea, Republic of |
KRW5,000.00 Ordinary shares |
100 |
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The following company has the address of Atrium Building, Maarad Street, 3rd Floor, P.O.Box: 11-4081 Riad El Solh, Beirut, Beirut Central District, Lebanon |
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Standard Chartered Metropolitan Holdings SAL |
Lebanon |
$10.00 Ordinary A shares |
100 |
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The following companies have the address of Level 16, Menara Standard Chartered, 30, Jalan Sultan Ismail, 50250, Kuala Lumpur, Malaysia |
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Amphissa Corporation Sdn Bhd |
Malaysia |
RM1.00 Ordinary shares |
100 |
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Cartaban (Malaya) Nominees Sdn Berhad |
Malaysia |
RM10.00 Ordinary shares |
100 |
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Cartaban Nominees (Asing) Sdn Bhd |
Malaysia |
RM1.00 Ordinary shares |
100 |
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Cartaban Nominees (Tempatan) Sdn Bhd |
Malaysia |
RM1.00 Ordinary shares |
100 |
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Golden Maestro Sdn Bhd |
Malaysia |
RM1.00 Ordinary shares |
100 |
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Popular Ambience Sdn Bhd |
Malaysia |
RM1.00 Ordinary shares |
100 |
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Price Solutions Sdn Bhd |
Malaysia |
RM1.00 Ordinary shares |
100 |
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SCBMB Trustee Berhad |
Malaysia |
RM10.00 Ordinary shares |
100 |
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Standard Chartered Bank Malaysia Berhad |
Malaysia |
RM0.10 Irredeemable Cumulative Preference shares |
100 |
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RM1.00 Ordinary shares |
100 |
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Standard Chartered Saadiq Berhad |
Malaysia |
RM1.00 Ordinary shares |
100 |
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The following companies have the address of Brumby Centre, Lot 42, |
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Marina Morganite Shipping Limited |
Malaysia |
$ Ordinary shares |
100 |
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Marina Moss Shipping Limited |
Malaysia |
$1.00 Ordinary shares |
100 |
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Marina Tanzanite Shipping Limited |
Malaysia |
$ Ordinary shares |
100 |
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Pembroke Leasing (Labuan) 2 Berhad |
Malaysia |
$1.00 Ordinary shares |
100 |
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Pembroke Leasing (Labuan) 3 Berhad |
Malaysia |
$1.00 Ordinary shares |
100 |
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Pembroke Leasing (Labuan) Pte Limited |
Malaysia |
$1.00 Ordinary shares |
100 |
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The following company has the address of 12th Floor, Menara KH, Jalan Sultan Ismail, 50250 Kuala Lumpur, Wilayah Persekutuan, Malaysia |
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Resolution Alliance Sdn Bhd2 |
Malaysia |
RM1.00 Ordinary shares |
91 |
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The following company has the address of Level 7, Wisma Standard Chartered, Jalan Teknologi 8, Taman Teknologi Malaysia, 57000, Bukit Jalil, Kuala Lumpur, Wilayah Persekutuan, Malaysia |
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Standard Chartered Global Business Services Sdn Bhd |
Malaysia |
RM1.00 Ordinary shares |
100 |
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The following companies have the address of Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, MH96960, Marshall Islands |
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Marina Alysse Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
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Marina Amandier Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
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Marina Ambroisee Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
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Marina Angelica Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
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Marina Aquamarine Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Aventurine Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Buxus Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Celsie Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Citrine Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Dahlia Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Dittany Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Dorado Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Lilac Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Lolite Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Obsidian Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Pissenlet Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Poseidon Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Protea Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Quartz Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Remora Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Turquoise Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Zeus Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
Marina Zircon Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
|
The following company has the address of 6th Floor, Standard Chartered Tower, 19, Bank Street, Cybercity, Ebene, 72201, Mauritius |
|
|
|
|
Standard Chartered Bank (Mauritius) Limited |
Mauritius |
$10.00 Ordinary shares |
100 |
|
The following companies have the address of c/o Abax Corporate Services Ltd, 6th Floor, Tower A, 1 CYBERCITY, Ebene, Mauritius |
|
|
|
|
Standard Chartered Financial Holdings |
Mauritius |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Private Equity (Mauritius) II Limited |
Mauritius |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Private Equity (Mauritius) Limited |
Mauritius |
$1.00 Ordinary shares |
100 |
|
$ Redeemable Preference shares |
100 |
|
||
Standard Chartered Private Equity (Mauritius) lll Limited |
Mauritius |
$1.00 Ordinary shares |
100 |
|
The following company has the address of 5th Floor, Ebene Esplanade, 24 Bank Street, Cybercity, Ebene, Mauritius |
|
|
|
|
Subcontinental Equities Limited |
Mauritius |
$1.00 Ordinary shares |
100 |
|
The following company has the address of Standard Chartered Bank Nepal Limited, Madan Bhandari Marg, Ward No.34, Kathmandu Metropolitan City, Kathmandu District, Bagmati Zone, Kathmandu, Nepal |
|
|
|
|
Standard Chartered Bank Nepal Limited |
Nepal |
NPR100.00 Ordinary shares |
70.2 |
|
The following companies have the address of Hoogoorddreef 15, 1101 BA, Amsterdam, Netherlands |
|
|
|
|
Pembroke B717 Holdings B.V. |
Netherlands |
€1.00 Ordinary shares |
100 |
|
Pembroke Holland B.V. |
Netherlands |
€450.00 Ordinary shares |
100 |
|
The following companies have the address of 1 Basinghall Avenue, London, EC2V 5DD, United Kingdom |
|
|
|
|
Smart Application Investment B.V. |
Netherlands |
€45.00 Ordinary shares |
100 |
|
Standard Chartered Holdings (Africa) B.V. |
Netherlands |
€4.50 Ordinary shares |
100 |
|
Standard Chartered Holdings (Asia Pacific) B.V. |
Netherlands |
€4.50 Ordinary shares |
100 |
|
Standard Chartered Holdings (International) B.V. |
Netherlands |
€4.50 Ordinary A shares |
100 |
|
€4.50 Ordinary B shares |
100 |
|
||
€4.50 Ordinary C shares |
100 |
|
||
€4.50 Ordinary D shares |
100 |
|
||
€4.50 Ordinary E shares |
100 |
|
||
€4.50 Ordinary F shares |
100 |
|
||
€4.50 Ordinary G shares |
100 |
|
||
Standard Chartered MB Holdings B.V. |
Netherlands |
€4.50 Ordinary shares |
100 |
|
The following companies have the address of 142 Ahmadu Bello Way, Victoria Island, Lagos, Nigeria |
|
|
|
|
Cherroots Nigeria Limited |
Nigeria |
NGN1.00 Ordinary shares |
100 |
|
Standard Chartered Bank Nigeria Limited |
Nigeria |
NGN1.00 Irredeemable Non Cumulative Preference shares |
100 |
|
NGN1.00 Ordinary shares |
100 |
|
||
NGN1.00 Redeemable |
100 |
|
||
Standard Chartered Capital & Advisory Nigeria Limited |
Nigeria |
NGN1.00 Ordinary shares |
100 |
|
Standard Chartered Nominees (Nigeria) Limited |
Nigeria |
NGN1.00 Ordinary shares |
100 |
|
The following company has the address of 3rd Floor Main SCB Building, |
|
|
|
|
Price Solution Pakistan (Private) Limited1 |
Pakistan |
PKR10.00 Ordinary shares |
100 |
|
The following company has the address of P.O. Box No. 5556I.I. |
|
|
|
|
Standard Chartered Bank (Pakistan) Limited |
Pakistan |
PKR10.00 Ordinary shares |
99 |
|
The following company has the address of Offshore Chambers, |
|
|
|
|
Standard Chartered Nominees (Western Samoa) Limited |
Samoa |
$1.00 Ordinary shares |
100 |
|
The following company has the address of Al Faisaliah Office Tower Floor No 7 (T07D), King Fahad Highway, Olaya District, Riyadh P.O box 295522, Riyadh, 11351, Saudi Arabia |
|
|
|
|
Standard Chartered Capital (Saudi Arabia) |
Saudi Arabia |
SAR10.00 Ordinary shares |
100 |
|
The following company has the address of 9 & 11, Lightfoot Boston Street, Freetown, Sierra Leone |
|
|
|
|
Standard Chartered Bank Sierra Leone Limited |
Sierra Leone |
SLL1.00 Ordinary shares |
80.7 |
|
The following company has the address of 8 Marina Boulevard, #23-01 Marina Bay Financial Centre, 018981, Singapore |
|
|
|
|
Greenman Pte. Ltd. |
Singapore |
SGD1.00 Class A Preferred shares |
100 |
|
SGD1.00 Class B Preferred shares |
100 |
|
||
SGD1.00 Ordinary shares |
100 |
|
||
The following companies have the address of 8 Marina Boulevard, Level 26, Marina Bay Financial Centre, Tower 1, 018981, Singapore |
|
|
|
|
Marina Aquata Shipping Pte. Ltd. |
Singapore |
$ Ordinary shares |
100 |
|
Marina Aruana Shipping Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
$ Ordinary shares |
100 |
|
||
Marina Aster Shipping Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
Marina Cobia Shipping Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
$ Ordinary shares |
100 |
|
||
Marina Daffodil Shipping Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
Marina Fatmarini Shipping Pte. Ltd. |
Singapore |
$ Ordinary shares |
100 |
|
Marina Frabandari Shipping Pte. Ltd. |
Singapore |
$ Ordinary shares |
100 |
|
Marina Freesia Shipping Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
Marina Gerbera Shipping Pte. Ltd. |
Singapore |
$ Ordinary shares |
100 |
|
Marina Mars Shipping Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
Marina Mercury Shipping Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
Marina Opah Shipping Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
$ Ordinary shares |
100 |
|
||
Marina Partawati Shipping Pte. Ltd. |
Singapore |
$ Ordinary shares |
100 |
|
Marina Poise Shipping Pte. Ltd. |
Singapore |
$ Ordinary shares |
100 |
|
The following companies have the address of 231A Pandan Loop, 128419, Singapore |
|
|
|
|
Phoon Huat Pte. Ltd. |
Singapore |
SGD1.00 Ordinary shares |
70 |
|
Redman Pte. Ltd. |
Singapore |
SGD1.00 Ordinary shares |
70 |
|
The following company has the address of 7 Changi Business Park Crescent, #03-00 Standard Chartered @ Changi, 486028, Singapore |
|
|
|
|
Raffles Nominees (Pte.) Limited |
Singapore |
SGD Ordinary shares |
100 |
|
The following company has the address of 8 Marina Boulevard, Marina Bay Financial Centre Tower 1, Level 23, 018981, Singapore |
|
|
|
|
SCM Real Estate (Singapore) Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
The following companies have the address of 8 Marina Boulevard, #27-01 Marina Bay Financial Centre Tower 1, 018981, Singapore |
|
|
|
|
SCTS Capital Pte. Ltd |
Singapore |
SGD Ordinary shares |
100 |
|
SCTS Management Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
|
Standard Chartered (2000) Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Bank (Singapore) Limited |
Singapore |
SGD Ordinary shares |
100 |
|
SGD Preference shares |
100 |
|
||
Standard Chartered Trust (Singapore) Limited |
Singapore |
SGD Ordinary shares |
100 |
|
Standard Chartered Holdings (Singapore) Private Limited |
Singapore |
SGD Ordinary shares |
100 |
|
The following company has the address of Abogado Pte Ltd, No. 8 Marina Boulevard, #05-02 MBFC Tower 1, 018981, Singapore |
|
|
|
|
Standard Chartered IL&FS Management (Singapore) Pte. Limited |
Singapore |
$1.00 Ordinary shares |
50 |
|
The following company has the address of 9 Battery Road, #15-01 Straits Trading Building, 049910, Singapore |
|
|
|
|
Standard Chartered Nominees (Singapore) Pte Ltd |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
The following company has the address of Marina Bay Financial Centre (Tower 1), 8 Marina Boulevard, #05-02, 018981, Singapore |
|
|
|
|
Standard Chartered PF Managers Pte. Limited |
Singapore |
$1.00 Ordinary shares |
100 |
|
The following companies have the address of Marina Bay Financial Centre (Tower 1), 8 Marina Boulevard, Level 23, 018981, Singapore |
|
|
|
|
Standard Chartered Private Equity (Singapore) Pte. Ltd |
Singapore |
$ Ordinary shares |
100 |
|
$ Redeemable Preference shares |
100 |
|
||
Standard Chartered Private Equity Managers (Singapore) Pte. Ltd |
Singapore |
$ Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment (Singapore) I Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment (Singapore) II Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment (Singapore) III Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment (Singapore) IV Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment (Singapore) V Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment (Singapore) VI Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment (Singapore) VII Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment (Singapore) VIII Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
Standard Chartered Real Estate Investment Holdings (Singapore) Private Limited |
Singapore |
SGD1.00 Ordinary shares |
100 |
|
The following companies have the address of 5th Floor, 4 Sandown Valley Crescent, Sandton, Gauteng, 2196, South Africa |
|
|
|
|
CMB Nominees Proprietary Limited |
South Africa |
ZAR1.00 Ordinary shares |
100 |
|
Standard Chartered Nominees South Africa Proprietary Limited (RF) |
South Africa |
ZAR Ordinary shares |
100 |
|
The following company has the address of 1, 2, 4, 7, 9, 10F, No. 168/170 &, 8F, 12F, no.168, Tun Hwa N. Rd., Songshan Dist., Taipei, 105, Taiwan |
|
|
|
|
Standard Chartered Bank (Taiwan) Limited |
Taiwan |
TWD10.00 Ordinary shares |
100 |
|
The following companies have the address of 1st Floor, International House, Shaaban Robert Street / Garden Avenue, PO Box 9011, Dar Es Salaam, Tanzania, United Republic of |
|
|
|
|
Standard Chartered Bank Tanzania Limited |
Tanzania, United Republic of |
TZS1,000.00 Ordinary shares |
100 |
|
TZS1,000.00 Preference shares |
100 |
|
||
Standard Chartered Tanzania Nominees Limited |
Tanzania, United Republic of |
TZS1,000.00 Ordinary shares |
100 |
|
The following company has the address of 90 North Sathorn Road, Silom, Bangrak Bangkok , 10500, Thailand |
|
|
|
|
Standard Chartered Bank (Thai) Public Company Limited |
Thailand |
THB10.00 Ordinary shares |
99.9 |
|
The following company has the address of Buyukdere Cad. Yapi Kredi |
|
|
|
|
Standard Chartered Yatirim Bankasi Turk Anonim Sirketi |
Turkey |
TRL0.10 Ordinary shares |
100 |
|
The following company has the address of Standard Chartered Bank, |
|
|
|
|
Standard Chartered Bank Uganda Limited |
Uganda |
UGS1,000.00 Ordinary shares |
100 |
|
The following company has the address of 625 2nd Street, #102, San Francisco CA 94107, United States |
|
|
|
|
SC Studios, LLC |
United States |
Membership Interest |
100 |
|
The following company has the address of Standard Chartered Bank, 37F, 1095 Avenue of the Americas, New York, 10036, United States |
|
|
|
|
Standard Chartered Bank International (Americas) Limited |
United States |
$1.00 Ordinary shares |
100 |
|
The following companies have the address of Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States |
|
|
|
|
Standard Chartered Holdings Inc. |
United States |
$100.00 Common shares |
100 |
|
StanChart Securities International LLC |
United States |
Membership Interest |
100 |
|
Standard Chartered Capital Management (Jersey), LLC |
United States |
Membership Interest |
100 |
|
Standard Chartered Securities (North America) LLC |
United States |
Membership Interest |
100 |
|
Standard Chartered International (USA) LLC |
United States |
Membership Interest |
100 |
|
The following company has the address of 50 Fremont Street, |
|
|
|
|
Standard Chartered Overseas Investment, Inc. |
United States |
$10.00 Ordinary shares |
100 |
|
The following company has the address of 1013 Centre Road, Wilmington, Delaware, USA |
|
|
|
|
Standard Chartered Trade Services Corporation |
United States |
$0.01 Common shares |
100 |
|
The following company has the address of Room 1810-1815, Level 18, Building 72, Keangnam Hanoi Landmark Tower, Pham Hung Road, Cau Giay New Urban Area, Me Tri Ward, Nam Tu Liem District, Hanoi10000, Vietnam |
|
|
|
|
Standard Chartered Bank (Vietnam) Limited |
Vietnam |
VND Charter Capital shares |
100 |
|
The following companies have the address of P.O.Box 438, Palm Grove House, Road Town, Tortola, Virgin Islands, British |
|
|
|
|
California Rose Limited |
Virgin Islands, British |
$1.00 Ordinary shares |
90.5 |
|
Earnest Range Limited |
Virgin Islands, British |
$1.00 Ordinary shares |
90.5 |
|
The following companies have the address of Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, Virgin Islands, British |
|
|
|
|
Sky Favour Investments Limited |
Virgin Islands, British |
$1.00 Ordinary shares |
100 |
|
Sky Harmony Holdings Limited |
Virgin Islands, British |
$1.00 Ordinary shares |
100 |
|
The following companies have the address of Standard Chartered House, Cairo Road, Lusaka, PO BOX 32238, Zambia |
|
|
|
|
Standard Chartered Bank Zambia Plc |
Zambia |
ZMW0.25 Ordinary shares |
90 |
|
Standard Chartered Zambia Securities Services Nominees Limited |
Zambia |
ZMK1.00 Ordinary shares |
100 |
|
The following companies have the address of Africa Unitry Square Building, 68 Nelson Mandela Avenue, Harare, Zimbabwe |
|
|
|
|
Standard Chartered Asset Management Limited |
Zimbabwe |
$0.001 Ordinary shares |
100 |
|
Standard Chartered Bank Zimbabwe Limited |
Zimbabwe |
$1.00 Ordinary shares |
100 |
|
Standard Chartered Nominees Zimbabwe (Private) Limited |
Zimbabwe |
$2.00 Ordinary shares |
100 |
|
1 Directly held by parent company of the Group
2. The Group has determined that these undertakings are excluded from being consolidated into the Group's accounts, and do not meet the definition of a Subsidiary under IFRS. See notes 32 and 33 for the consolidation policy and disclosure of the undertaking
3. No share capital by virtue of being a trust
Associates
Name |
Country of |
Description of shares |
Proportion of shares held (%) |
The following company has the address of Bohai Bank Building, No.218 Hai He Dong Lu, Hedong District, Tianjin, China, 300012, China |
|
|
|
China Bohai Bank Co. Ltd |
China |
CNY Ordinary shares |
19.9 |
The following company has the address of C/o CIM Corporate Services Ltd, Les Cascades, Edith Cavell Street, Port Louis, Mauritius |
|
|
|
FAI Limited |
Mauritius |
$1.00 Ordinary shares |
25 |
The following company has the address of Victoria House, State House Avenue, Victoria, MAHE, Seychelles |
|
|
|
Seychelles International Mercantile Banking Corporation Limited |
Seychelles |
SCR1,000.00 Ordinary shares |
22 |
The following company has the address of Marina Bay Financial Centre, 17-03, MBFC Tower 3, 12 Marina Boulevard, 018981, Singapore |
|
|
|
Clifford Capital Pte. Ltd |
Singapore |
$1.00 Ordinary shares |
9.9 |
Joint ventures
Name |
Country of |
Description of shares |
Proportion of shares held (%) |
The following company has the address of WTC II Building, Jalan Jenderal Sudirman Kav29-31, Jakarta, 12920' Indonesia |
|
|
|
PT Bank Permata Tbk |
Indonesia |
IDR125.00 B shares |
44.6 |
The following companies have the address of 33-41 Lower Mount Street, Dublin 2, Ireland |
|
|
|
Canas Leasing Limited |
Ireland |
$1 Ordinary shares |
50 |
Elviria Leasing Limited |
Ireland |
$1 Ordinary shares |
33.3 |
The following company has the address of 100/36 Sathorn Nakorn Tower, |
|
|
|
Resolution Alliance Limited |
Thailand |
THB10.00 Ordinary shares |
49 |
Significant investment holdings and other related undertakings
Name |
Country of |
Description of shares |
Proportion of shares held (%) |
The following company has the address of 65A Basinghall Street, London, EC2V 5DZ, United Kingdom |
|
|
|
Cyber Defence Alliance Limited |
United Kingdom |
Membership interest |
25 |
The following company has the address of Walker House, 87 Mary Street, George Town, KY1-9005, Cayman Islands |
|
|
|
Asia Trading Holdings Limited |
Cayman Islands |
$0.01 Ordinary shares |
50 |
The following company has the address of Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman, KY1-9005, Cayman Islands |
|
|
|
ATSC Cayman Holdco Limited |
Cayman Islands |
$0.01 A Ordinary shares |
5.3 |
$0.01 B Ordinary shares |
100 |
||
The following companies have the address of Harbour Centre #42 North Church Street, PO Box 1348, Grand Cayman, KY1-1108 Cayman Islands |
|
|
|
Standard Chartered IL&FS Asia Infrastructure (Cayman) Limited |
Cayman Islands |
$0.01 Ordinary shares |
50 |
Standard Chartered IL&FS Asia Infrastructure Growth Fund |
Cayman Islands |
$1.00 Ordinary shares |
50 |
Standard Chartered IL&FS Asia Infrastructure Growth Fund, L.P. |
Cayman Islands |
Partnership interest |
38.6 |
The following companies have the address of 190 Elgin Avenue, George Town, Grand Cayman, KY1-9005, Cayman Islands |
|
|
|
Greathorse Chemical Limited |
Cayman Islands |
$1.00 Ordinary shares |
33.0 |
Hygienic Group |
Cayman Islands |
$0.01 Redeemable Exchangeable Preferred shares |
29.3 |
The following company has the address of PO Box 31493, George Town, Grand Cayman, KY1-1206, Cayman Islands |
|
|
|
Chayora Holdings Limited |
Cayman Islands |
$0.01 Series B Preferred Shares |
100 |
The following company has the address of Unit 4, 14F Ke Chuang Building, No. 16 Buzheng Lane, Haishu District, Ningbo, China |
|
|
|
Ningbo Xingxin Real Estate Development Co.,Ltd |
China |
CNY1.00 Registered Capital |
60 |
The following company has the address of 3, Floor 1, No.1, Shiner Wuxingcaiyuan, West Er Huan Rd, Xi Shan District, Kunming, Yunnan Province, PRC, China |
|
|
|
Yunnan Golden Shiner Property Development Co., Ltd. |
China |
CNY1.00 Ordinary shares |
50 |
The following company has the address of Room 1A-1, No.88 Xianxia Road, Changning District, Shanghai, China |
|
|
|
Shanghai Siyanli Industrial Co., Ltd. |
China |
CNY1.00 Ordinary shares |
39 |
The following company has the address of Nerine House, St George's Place, St Peter Port, GY1 3ZG, Guernsey |
|
|
|
Stonehage Fleming Family and Partners Ltd |
Guernsey |
£1.00 Class B shares |
9.8 |
£1.00 Class DC shares |
20.2 |
||
The following company has the address of 15/F, 1 Duddell Street, |
|
|
|
Fast Great Investment Limited |
Hong Kong |
HKD1.00 Ordinary shares |
28 |
The following company has the address of Suite 1401, 14 Floor, World Commerce Centre, Harbour City, 7-11 Canton Road, Tsim Sha Tsui, |
|
|
|
Standard Latitude Consultancy (HK) Limited |
Hong Kong |
$5,000 Ordinary shares |
20 |
The following company has the address of 3i Infotech Limited, Tower 5, 3rd to 6th Floors, International Infotech Park, Vashi, Navi Mumbai, 400 703, India |
|
|
|
3i Infotech Limited |
India |
INR5.00 Cumulative Redeemable Preference shares |
27.3 |
INR10.00 Ordinary shares |
11.1 |
||
The following company has the address of 70, Nagindas Master Road, Fort, Mumbai, 400023, India |
|
|
|
Joyville Shapoorji Housing Private Limited |
India |
INR10.00 Common Equity shares |
25.8 |
The following company has the address of 5th Floor, Mahindra Towers, Worli, Mumbai, 400018, India |
|
|
|
Mahindra Homes Private Limited |
India |
INR100.00 Compulsorily Convertible Debentures Series A shares |
100 |
INR10.00 Compulsorily Convertible Preference Shares |
100 |
||
INR10.00 Ordinary-A shares |
25 |
||
INR10.00 Ordinary-B shares |
100 |
||
The following company has the address of 1221 A, Devika Tower, 12th Floor, 6 Nehru Place, New Delhi 110019, New Delhi, 110019, India. |
|
|
|
Mikado Realtors Private Limited |
India |
INR10.00 Ordinary shares |
26 |
The following company has the address of Elphinstone Building, 2nd Floor,10 Veer Nariman Road, Fort, Mumbai -400001, Maharashtra, India |
|
|
|
TRIL IT4 Private Limited |
India |
INR10.00 Ordinary shares |
26 |
The following company has the address of 4thFloor, 274, Chitalia House, Dr. Cawasji Hormusji Road, Dhobi Talao, Mumbai City, Maharashtra, India 400 002, Mumbai, 400 002, India |
|
|
|
Industrial Minerals and Chemical Co. Pvt. Ltd |
India |
INR100.00 Ordinary shares |
26 |
The following company has the address of No. 1, Kanagam Village, 10th Floor IITM Research Park, , Taramani, Chennai - 600113, Tamil Nadu, India |
|
|
|
IFMR Capital Finance Private Limited (IFMRC) |
India |
INR20.00 Compulsorily Convertible Preference shares |
40.7 |
INR10.00 Equity shares |
4.6 |
||
The following company has the address of Graha Paramita, 3rd Floor, Jalan Denpasar, Raya Block D-2, Kav. 8, Kuningan, Jakarta, 12940, Indonesia |
|
|
|
PT Travira Air |
Indonesia |
IDR1,000,000.00 Ordinary shares |
30 |
The following company has the address of Trio Building, 8th Floor, Jl, Kebon Sirih Raya Kav, 63, Jakarta 10340, Indonesia |
|
|
|
PT Trikomsel Oke Tbk |
Indonesia |
IDR50.00 Series B shares |
29.2 |
The following companies have the address of 4th Floor, St Pauls Gate, 22-24 New Street, St Helier, Jersey JE1 4TR, Jersey |
|
|
|
Standard Jazeera Limited |
Jersey |
$100.00 Ordinary shares |
20 |
Standard Topaz Limited |
Jersey |
$1,000.00 Ordinary shares |
20.1 |
The following company has the address of 146-8 Chusa-ro Sinam-myeon, Yesan-gun Chungnam, Korea, Republic of |
|
|
|
Daiyang Metal Company Ltd |
Korea, Republic of |
KRW 500 Common shares |
23.1 |
KRW 500 Convertible |
100 |
||
The following company has the address of 6th Floor D Tower, 17, |
|
|
|
Fountain Valley PFV Limited |
Korea, Republic of |
KRW5,000.00 Ordinary shares |
47.3 |
The following company has the address of 17th Floor, 100, Gongpyeong-dong, Jongno-gu, Seoul, Korea, Republic of |
|
|
|
SCPEK IV |
Korea, Republic of |
Limited Partnership Interest |
41.4 |
The following company has the address of 17F (Gongpyung-dong), 47, Jongno, Jongno-gu, Seoul, Korea, Republic of |
|
|
|
Standard Chartered Private Equity Korea III |
Korea, Republic of |
KRW1,000,000.00 Ordinary shares |
31 |
The following company has the address of 14th Fl Sewoo Bldg, 115 Yeouigongwon-ro, Yeongdeungpo-gu, Seoul 07241, 07241, Korea, Republic of |
|
|
|
Lotus PFV Co. Ltd |
Korea, Republic of |
KRW5,000.00 Ordinary shares |
50 |
The following company has the address of Lot 6.05, Level 6, KPMG Tower, 8 First Avenue, Bandar Utama, 47800 Petaling Jaya, Selangor, Malaysia |
|
|
|
House Network SDN BHD |
Malaysia |
RM1.00 Ordinary shares |
25 |
The following company has the address of Area 5, Iperin Gate, Optic Industrial Estate, Agbara, Ogun State, Nigeria |
|
|
|
GZ Industries Limited |
Nigeria |
NGN1.00 Ordinary shares |
11.2 |
$1.00 Redeemable Preference shares |
75.1 |
||
The following company has the address of 168 Robinson Road, #33-01 Capital Tower, 068912, Singapore |
|
|
|
Standard Chartered IL&FS Asia Infrastructure Growth Fund Company Pte. Limited |
Singapore |
$1.00 Ordinary shares |
100 |
$0.01 Redeemable Preference shares |
83.6 |
||
The following company has the address of 1 Venture Avenue, |
|
|
|
Omni Centre Pte. Ltd. |
Singapore |
$ Redeemable Convertible |
100 |
The following company has the address of 180B Bencoolen Street, #11-00 The Bencoolen, 189648, Singapore |
|
|
|
Crystal Jade Group Holdings Pte Ltd |
Singapore |
$1.00 Ordinary shares |
42.6 |
The following company has the address of Blk 10, Kaki Bukit Avenue 1, #07-05 Kaki Bukitr Industrial Estate, 417492, Singapore |
|
|
|
MMI Technoventures Pte Ltd |
Singapore |
SGD Ordinary shares |
50 |
SGD 0.01 Redeemable |
50 |
||
The following company has the address of 80 Raffles Place, #32-01, |
|
|
|
THSC Investments Pte. Ltd. |
Singapore |
SGD0.50 Ordinary Shares |
33.3 |
The following company has the address of 80 Robinson Road, #02-00, 068898, Singapore |
|
|
|
Maxpower Group Pte Ltd |
Singapore |
Redeemable Preference shares |
100 |
The following company has the address of 81 Ubi Avenue 4, |
|
|
|
Polaris Limited |
Singapore |
SGD Ordinary shares |
25.8 |
The following company has the address of EADB Building, Plot 4 Nile Avenue, PO Box 7128, Kampala, Uganda |
|
|
|
East African Development Bank |
Uganda |
$13,500.00 Class B shares |
24.5 |
The following company has the address of 251 Little Falls Drive, Wilmington, New Castle DE 19808, United States |
|
|
|
Paxata, Inc. |
United States |
$0.0001 Series C2 Preferred Stock |
40.7 |
The following company has the address of Floor 7, Samco Building, |
|
|
|
New Lifestyle Service Corporation |
Vietnam |
VND Dividend Preference shares |
100 |
VND Redeemable Preference shares |
100 |
||
The following company has the address of Floor M, Petroland Building, |
|
|
|
Online Mobile Services Joint Stock Company |
Vietnam |
Class A1 Redeemable |
100 |
Class A1 Dividend Preference shares |
100 |
||
The following company has the address of PO Box 957, Offshore Incorporations Centre, Road Town, Tortola, BVI, Virgin Islands, British |
|
|
|
Ecoplast Technologies Inc |
Virgin Islands, British |
$0.0001 Class C Preferred shares |
100 |
In liquidation
Subsidiary undertakings
Name |
Country of |
Description of shares |
Proportion of shares held (%) |
The following companies have the address of Deloitte LLP, Hill House, |
|
|
|
Chartered Financial Holdings Limited |
United Kingdom |
£5.00 Ordinary shares |
100 |
£1.00 Preference shares |
100 |
||
Standard Chartered Capital Markets Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
$1.00 Ordinary shares |
100 |
||
Standard Chartered (CT) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
Standard Chartered Corporate Finance (Canada) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
Standard Chartered Corporate Finance (Eurasia) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
Standard Chartered Equitor Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
Standard Chartered Financial Investments Limited |
United Kingdom |
£1.00 Ordinary A Shares |
100 |
Standard Chartered Portfolio Trading (UK) Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
Standard Chartered Receivables (UK) Limited |
United Kingdom |
$1.00 Ordinary shares |
100 |
Compass Estates Limited |
United Kingdom |
£1.00 Ordinary shares |
100 |
The following company has the address of 648-07 room, Building 2, Shanghai Zhangjiang High-tech Park, 351 Guo shoujing road, Shanghai, 201203, China |
|
|
|
SCL Consulting (Shanghai) Co. Ltd |
China |
$ Ordinary shares |
100 |
The following company has the address of Cra 7 Nro 71-52 TA if 702, Bogata, Colombia |
|
|
|
Sociedad Fiduciaria Extebandes S.A. |
Colombia |
COP1.00 Ordinary shares |
100 |
The following companies have the address of Schottegatweg Oost, 44, Curacao, Netherlands Antilles |
|
|
|
American Express International Finance Corp.N.V. |
Curaçao |
$1,000.00 Ordinary shares |
100 |
Ricanex Participations N.V. |
Curaçao |
$1,000.00 Ordinary shares |
100 |
The following company has the address of 8/F Eurotrade Centre, |
|
|
|
GE Capital (Hong Kong) Limited |
Hong Kong |
HKD10.00 Ordinary shares |
100 |
The following company has the address of 8th Floor, Gloucester Tower, |
|
|
|
Leopard Hong Kong Limited |
Hong Kong |
$ Ordinary shares |
100 |
The following company has the address of Standard Chartered@Chiromo, Number 48, Westlands Road, P. O. Box 30003 - 00100, Nairobi, Kenya |
|
|
|
Standard Chartered Management Services Limited |
Kenya |
KES20.00 Ordinary shares |
100 |
The following company has the address of 26 Boulevard royal, 2449, Luxembourg |
|
|
|
Standard Chartered Financial Services (Luxembourg) S.A. |
Luxembourg |
€25.00 Ordinary shares |
100 |
The following company has the address of A Martins & Associados Advogados - Sociedade Unipessoal Lda, Av. Vladimir Lenine, 174, 4º andar, Edifício Millennium Park, Caixa Postal 796, Maputo, Mozambique |
|
|
|
Standard Chartered Bank Mozambique, S.A. |
Mozambique |
$1.00 Ordinary shares |
100 |
The following company has the address of 380 Canaval y Moreyra, |
|
|
|
Banco Standard Chartered en Liquidacion |
Peru |
$75.133 Ordinary shares |
100 |
The following companies have the address of 8 Marina Boulevard, #27-01 Marina Bay Financial Centre Tower 1, 018981, Singapore |
|
|
|
Standard Chartered Investments (Singapore) Private Limited |
Singapore |
$ Ordinary shares |
100 |
Prime Financial Holdings Limited |
Singapore |
SGD Ordinary shares |
100 |
$ Ordinary shares |
100 |
||
The following company has the address of 10 Collyer Quay, #10-01, |
|
|
|
Standard Chartered Securities (Singapore) Pte. Limited |
Singapore |
SGD Ordinary shares |
100 |
The following company has the address of Quai du General Guisan 38, 8022, Zurich, Switzerland |
|
|
|
Standard Chartered Bank (Switzerland) S.A. |
Switzerland |
CHF1,000.00 Ordinary shares |
100 |
CHF100.00 Participation |
100 |
||
The following company has the address of 6th Floor, Hewlett Packard Building, 337 Fu Hsing North Road, Taipei, Taiwan |
|
|
|
Kwang Hua Mocatta Ltd. (Taiwan) |
Taiwan |
TWD1,000.00 Ordinary shares |
100 |
The following company has the address of 100/3, Sathorn Nakorn Tower, 3rd Floor, North Sathorn Road, Silom, Bangrak, Bangkok, 10500, Thailand |
|
|
|
Thai Exclusive Leasing Company Limited |
Thailand |
THB10.00 Ordinary shares |
100 |
Standard Chartered (Thailand) Company Limited |
Thailand |
THB10.00 Ordinary shares |
100 |
The following company has the address of Luis Alberto de Herrera 1248, Torre II, Piso 11, Esc. 1111, Uruguay |
|
|
|
Standard Chartered Uruguay Representacion S.A. |
Uruguay |
UYU1.00 Ordinary shares |
100 |
Associates
Name |
Country of |
Description of shares |
Proportion of shares held (%) |
The following company has the address of Quadrant House, 4 Thomas More Square, London, E1W 1YW, United Kingdom |
|
|
|
MCashback Limited |
United Kingdom |
£0.01 Ordinary shares |
31.7 |
Liquidated/dissolved/sold
Subsidiary undertakings
Name |
Country of |
Description of shares |
Proportion of shares held (%) |
Marina Jessamine Shipping Limited |
Marshall Islands |
$1.00 Ordinary shares |
100 |
Inishmullen Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
Inishroe Leasing Limited |
Ireland |
$1.00 Ordinary shares |
100 |
Pembroke Funding BV |
Netherlands |
€100.00 Ordinary shares |
100 |
Pembroke Thai Aircraft ll B.V. |
Netherlands |
€100.00 Ordinary shares |
100 |
SC2 Investments (Singapore) Private Limited |
Singapore |
SGD Ordinary shares |
100 |
Standard Chartered (1996) Limited |
Singapore |
SGD Ordinary shares |
100 |
Price Solutions Singapore Pte. Ltd. |
Singapore |
SGD Ordinary shares |
100 |
New Group Investments Limited |
Virgin Islands, British |
$1.00 Ordinary shares |
100 |
Significant investment holdings and other related undertakings
Name |
Country of |
Description of shares |
Proportion of shares held (%) |
Kamoso Distribution (Proprietary) Limited (previously named Spark Capital (Proprietary) Limited) |
Botswana |
BWP Ordinary shares |
49.9 |
Abacus Eight Limited |
Cayman Islands |
A Shares |
24.5 |
Abacus Nine Limited |
Cayman Islands |
A Shares |
24.5 |
Abacus Seven Limited |
Cayman Islands |
A Shares |
24.5 |
Abacus Ten Limited |
Cayman Islands |
A Shares |
31.2 |
Etonkids Educational Group Limited |
Cayman Islands |
$0.001 Series A Preferred Shares |
100 |
$0.001 Series A-1 Preferred Shares |
100 |
||
BCC Launchpad, L.P. |
Cayman Islands |
Partnership Interest |
49 |
Shui Li Realty (Shanghai) Limited |
China |
Registered Capital |
45 |
Inox India Limited |
India |
Compulsorily Convertible |
100 |
Equity Shares |
4.6 |
||
Guangdong Aiyingdao Children Departmental Store Co. Ltd |
China |
CNY1.00 Common shares |
20.2 |
Jin Li Realty (Shanghai) Co., Ltd. |
China |
Registered Capital |
48.6 |
Smoothie King Holdings, Inc. |
Korea, Republic of |
KRW5,000.00 Ordinary shares |
20.3 |
KRW5,000.00 Redeemable Convertible Preference shares |
58 |
41. IFRS 9 Financial Instruments
We estimate that the changes in measurement arising on the initial adoption of IFRS 9 results in a decrease in shareholders' equity of approximately $1.1 billion, net of tax, at 1 January 2018 (Company: approximately $7 million). This will result in an increase in the Group's loan impairment provisions from $5.7 billion under IAS 39 to approximately $6.7 billion ($0.2 billion of which is held in other liabilities against undrawn commitments and financial guarantees) and an estimated gain of $35 million from changes in the classification and measurement of assets and liabilities under IFRS 9. The impact on regulatory capital is set out in the Risk review and Capital review.
The Group continues to refine its expected credit loss models and embed its operational processes which may change the actual impact on adoption.
The estimated impact of the remeasurement and reclassifications and the impact of the changes to the recognition and measurement of credit impairment loss allowances, net of the related tax impacts, is set out by category of reserve in the table below.
|
Share capital |
Capital |
Own credit adjustment reserve |
Available-for-sale reserve |
Fair value through OCI |
Cash flow hedge reserve |
Translation reserve |
Retained earnings |
Parent company shareholders' equity |
Other equity instruments |
Non-controlling interests |
Total |
As at 31 December 2017 |
7,097 |
17,129 |
54 |
83 |
- |
(45) |
(4,454) |
26,641 |
46,505 |
4,961 |
341 |
51,807 |
Net impact of: |
- |
- |
- |
(83) |
(82) |
- |
- |
200 |
35 |
- |
- |
35 |
IFRS 9 reclassifications |
- |
- |
- |
(83) |
(86) |
- |
- |
169 |
- |
- |
- |
- |
IFRS 9 re-measurements |
- |
- |
- |
- |
4 |
- |
- |
31 |
35 |
- |
- |
35 |
Expected credit loss, net |
- |
- |
- |
- |
65 |
- |
- |
(1,296) |
(1,231) |
- |
(8) |
(1,239) |
Tax impact |
- |
- |
- |
- |
(6) |
- |
- |
182 |
176 |
- |
- |
176 |
Impact of IFRS 9 on share of joint ventures and associates, net |
- |
- |
- |
- |
(1) |
- |
- |
(51) |
(52) |
- |
- |
(52) |
Estimated IFRS 9 transition adjustments |
- |
- |
- |
(83) |
(24) |
- |
- |
(965) |
(1,072) |
- |
(8) |
(1,080) |
As at 1 January 2018 |
7,097 |
17,129 |
54 |
- |
(24) |
(45) |
(4,454) |
25,676 |
45,433 |
4,961 |
333 |
50,727 |
The Group will publish an IFRS 9 transition report prior to the issuance of the first quarter 2018 Interim Management Statement. This transition report will be unaudited and provide more extensive disclosures to explain the opening IFRS 9 adjustments and to provide a bridge from IAS 39 to IFRS 9. In particular it will include further details in respect of:
• Quantitative information to reconcile impairment provisions, key risk metrics and the classification and measurement of financial instruments under IAS 39 to those under IFRS 9
• The effect of IFRS 9 on significant accounting policies, credit risk policies and practices and related governance processes
• Explanation of the inputs, assumptions and estimation techniques used in determining expected credit losses and the key judgements made in applying IFRS 9
• Qualitative information regarding volatility and areas of measurement uncertainty
• Supplementary quantitative information on credit risk and classification and measurement of financial instruments in IFRS 9 terms, including stage distribution and an analysis of credit quality and expected credit loss allowances coverage by stage and segment for the loan portfolio
Classification and measurement of financial instruments
IAS 39
There are four asset classifications under IAS 39: fair value through profit or loss (FVTPL), incorporating trading and instruments designated at FVTPL; loans and receivables; held to maturity; and available-for-sale. The classification of assets into these categories was determined based on a mix of management intent and product characteristics. Only the available-for-sale category has no restrictions on classification.
In respect of hybrid financial assets, the embedded derivative component may be separated and measured at fair value, unless closely related to the host contract. If this is not possible, the entire instrument must be designated at FVTPL.
Other instruments may be designated at FVTPL if they are managed on a fair value basis, or where the designation would eliminate or significantly reduce an accounting mismatch.
IFRS 9
There are three measurement classifications under IFRS 9: amortised cost, fair value through profit or loss (FVTPL) and, for financial assets, fair value through other comprehensive income (FVOCI). The existing IAS 39 financial asset categories are removed.
Financial assets are classified into these categories based on the business model within which they are held, and their contractual cash flow characteristics.
The business model reflects how groups of financial assets are managed to achieve a particular business objective. Financial assets can only be held at amortised cost if the instruments are held in order to collect the contractual cash flows ('hold to collect'), and where those contractual cash flows are solely payments of principal and interest (SPPI). Principal represents the fair value of the instrument at the time of initial recognition.
Interest in this context represents compensation for the time value of money and associated credit risks together with compensation for other risks and costs consistent with a basic lending arrangement and a profit margin. This requires an assessment at initial recognition of the contractual terms to determine whether it contains a term that could change the timing or amount of cash flows in a way that is inconsistent with the SPPI criteria.
Assets may be sold out of 'hold to collect' portfolios where there is an increase in credit risk. Disposals for other reasons are permitted but such sales should be insignificant in value or infrequent in nature.
Financial asset debt instruments where the business model objectives are achieved by collecting the contractual cash flows and by selling the assets ('hold to collect and sell') and that have SPPI cash flows are held at FVOCI, with unrealised gains or losses deferred in reserves until the asset is derecognised. In certain circumstances, non-trading equity instruments can be irrevocably designated as FVOCI but both unrealised and realised gains or losses are recognised in reserves and no amounts other than dividends received are recognised in the income statement.
All other financial assets will mandatorily be held at FVTPL.
Financial assets may be designated at FVTPL only if doing so eliminates or reduces an accounting mismatch.
There has been no change to the requirements in respect of the classification and measurement of financial liabilities. The Group adopted the changes related to the presentation of fair value changes on own credit in its 2016 financial statements.
The derecognition requirements have also been carried forward unchanged from IAS 39.
Where the contractual terms of financial assets are modified, and that modification does not result in derecognition, a modification gain or loss is recognised in the income statement and the gross carrying amount of the asset adjusted accordingly.
Transition impact
The Group has assessed the business models that it operates across the Group. In its assessment, the Group considered the objectives of the business model, how performance is measured and how staff are remunerated amongst other factors.
Where the objective of a business is to manage financial assets on a fair value basis, the instruments within that business model are measured at FVTPL. This includes the Group's trading portfolios.
Most of the Group's loans to banks and customers are held within a 'hold to collect' business model.
Investment debt securities held with Treasury Markets are held within a 'hold to collect and sell' portfolio. The majority of the remaining investment debt securities are held within a 'hold to collect' business model.
For 'hold to collect' portfolios, the level of sales and the reason for those sales is also monitored to ensure they are consistent with the characteristics of a 'hold to collect' business model.
Instruments that do not meet the SPPI criteria are measured at FVTPL regardless of the business model in which they are held. Other than hybrid financial assets, this primarily arises from prepayment clauses. While prepayment clauses are common across the Group's loan portfolio, prepayment penalties are not considered to meet the SPPI criteria if the prepayment penalty received by the bank is not considered to be reasonable compensation from an IFRS 9 perspective for early termination of the contract. This has impacted a small number of products in Retail Banking and a small number of contracts within the Corporate Finance/Corporate Lending portfolios.
Non-trading equity investments are measured at FVTPL except for a small portfolio of strategic equity investments which are irrevocably designated at FVOCI.
Assets designated at FVTPL under IAS 39 that are not as a result of an accounting mismatch have been de-designated and mandatorily classified as FVTPL either because they are managed on a fair value basis or cash flows are maximised through sale or part of a broader trading business or are hybrid financial assets. There is no impact on the measurement of these instruments. The Group has also elected on initial implementation of IFRS 9 to designate certain financial assets and financial liabilities at FVTPL in order to reduce or eliminate accounting mismatches:
• Loans and advances to customers, to reduce the impact of associated credit derivatives; and
• Sales and repurchase liabilities, where the related financial assets are now required to be accounted for at FVTPL
Impact
The estimated impact on retained earnings and reserves as a result of reclassification and re-measurement of financial assets and liabilities is approximately $35 million.
The amounts previously reported as part of the available-for-sale reserve have been reclassified either to the fair value through OCI reserve or to retained earnings.
Impairment of financial assets not held at FVTPL
IAS 39
For debt instruments held at amortised cost or available-for-sale, specific loss allowances are only recognised where there is objective evidence of impairment as a result of one or more loss events occurring after the initial recognition of the instrument. This includes losses arising from credit related modifications to the contractual terms (such as forbearance).
For debt instruments held at amortised cost, where losses are known, by experience, to have been incurred but have not been separately identified, a portfolio impairment provision (PIP) is recognised. The calculation of PIP is based on regulatory expected loss models, after adjustments made to align the calculation with IFRS, together with adjustments to take into account factors not adequately covered in the underlying models.
A PIP is not, however, recognised for available-for-sale instruments. Impairment loss allowances are also not recognised for loan commitments and financial guarantees.
Where there is objective evidence of impairment for available-for-sale debt instruments, the entire unrealised loss held in reserves is transferred to the income statement and recognised as impairment.
For equity shares classified as available-for-sale, a significant or prolonged decline in the fair value below its cost is considered, among other factors, in assessing objective evidence of impairment. On impairment, the entire unrealised loss held in reserves is transferred to the income statement and recognised as impairment.
See note 8 for further details on the IAS 39 accounting policy.
IFRS 9
A summary of the Group's approach to determining ECL is set out within note 40 to the 2016 Annual Report and Accounts. The Group primarily uses sophisticated models that utilise the probability of default (PD), loss given default (LGD) and exposure at default (EAD) metrics, discounted using the effective interest rate. For lower value, less complex portfolios in Retail Banking, the Group uses roll rate or loss rate models.
Expected credit losses are recognised for all financial debt instruments, loan commitments and financial guarantees that are classified as 'hold to collect'/'hold to collect and sell' and have cash flows that are solely payments of principal and interest. Expected credit losses are not recognised for equity instruments designated at FVOCI.
An ECL allowance is recognised at the time of initial recognition for all financial instruments that are in the scope of ECL in respect of default events that may occur over the next 12 months (so-called 'stage 1 assets' with allowances equivalent to 12-months expected credit losses). ECL continues to be determined on this basis until there is either a significant increase in credit risk (SICR) or the asset becomes credit impaired.
If a financial asset (or portfolio of financial assets) experiences an SICR since initial recognition, an ECL allowance is recognised for default events that may occur over the lifetime of the asset (so-called 'stage 2 assets' with loss allowances equivalent to lifetime expected credit losses). SICR is assessed in the context of an increase in the risk of a default occurring over the remaining life of the financial instrument when compared with that expected at the time of initial recognition for the same period. It is not assessed in the context of an increase in the expected credit loss.
The Group uses a number of qualitative and quantitative measures in assessing SICR. Quantitative measures relate to the relative and absolute changes in the lifetime PD compared with those expected at initial recognition. Qualitative factors include placement of loans on non-purely precautionary early alert, classification as higher risk (CG 12) or where principal and/or interest payments are 30 days or more past due.
An asset is only considered credit impaired, and lifetime expected credit losses recognised, if there is observed objective evidence of impairment. These factors are similar to the indicators of objective evidence of impairment under IAS 39. This includes, amongst other factors, assets in default, experiencing significant financial difficulty or subject to forbearance actions credit-impaired (so-called 'stage 3 assets').
The definition of default is aligned to the regulatory definition within CRR Article 178 and considered to occur when an asset is 90 days or more past due on contractual payments of principal and/or interest or is considered unlikely to pay without realisation of any collateral held.
To the extent that assets are credit-impaired at the point of initial recognition, they are classified as purchased or originated credit-impaired. An expected credit loss allowance is not recognised at initial recognition. Any changes in lifetime expected losses after initial recognition are charged or credited to the income statement through 'Impairment'.
The measurement of expected credit losses across all stages is required to reflect an unbiased and probability weighted amount that is determined by evaluating a range of reasonably possible outcomes using reasonable and supportable information about past events, current conditions and forecasts of future economic conditions.
To account for the potential non-linearity in credit losses, multiple forward-looking scenarios are incorporated into the range of reasonably possible outcomes for all material portfolios. The Group uses a Monte Carlo approach to simulate a set of 50 scenarios around the Group's central forecast to incorporate the potential non-linearity.
The period considered when measuring expected credit loss is the shorter of the expected life and the contractual term of the financial asset.
The expected life may be impacted by prepayments and the maximum contractual term by extension options. For certain revolving portfolios, including credit cards, the expected life is assessed over the period that the Group is exposed to credit risk (which is based on the length of time it takes for credit facilities to be withdrawn) rather than the contractual term.
For stage 3 financial assets, the determination of lifetime expected credit losses will be similar to the IAS 39 approach; for example, loan loss allowances within Corporate & Institutional Banking will be based on the present value of estimated future cash flows for individual clients. The estimated cash flows will, however, be based on a probability range of scenarios. Where the cash flows include realisable collateral, the values used will incorporate forward-looking information.
Where the contractual terms of a financial asset have been modified due to financial difficulties (forbearance, for example) and the asset has not been derecognised, a modification loss is recognised as part of 'Impairment' in the income statement. The loss represents the difference between the present value of the cash flows before and after the modification, discounted at the original effective interest rate. Unlike IAS 39, however, no loss allowance is recorded in the balance sheet, as the modification loss is offset against the gross carrying amount of the asset. Modifications for other reasons are accounted for in a similar way, except the modification gain or loss will be reported as part of income.
For assets measured at amortised cost, the balance sheet amount reflects the gross asset less the allowance for ECL.
For debt instruments held at FVOCI, the balance sheet amount reflects the instrument's fair value, with the expected credit loss allowance held as a separate reserve within other comprehensive income.
ECL allowances on off-balance sheet instruments are held as liability provisions to the extent that the drawn and undrawn components of loan exposures can be separately identified. Otherwise they will be reported against the drawn component.
Impact
The estimated initial adoption of the ECL approach would reduce retained earnings and reserves by approximately $1.2 billion.
Approximately $1 billion of this estimate related to loans and advances to banks and customers and approximately $0.2 billion to undrawn commitments and financial guarantees (which have been recognised in other liabilities) and $65 million has been recognised in respect of debt securities, which has been offset through a credit to the FVOCI reserve.
The portfolios and products most impacted by the increase in loan loss allowances are Corporate Finance and Lending portfolios, due to the relatively longer maturity profile, and unsecured products in Retail Banking.
Tax
Tax of $176 million has been credited to reserves as a result of transition to IFRS 9. Of this, deferred tax of $142 million has been credited to retained earnings, and is provided on additional deductible temporary differences that have arisen from loss provisions due to initial adoption of the ECL approach.
42. Dealings in Standard Chartered PLC listed securities
This is also disclosed as part of Note 28 Share capital, other equity and reserves
Except as disclosed, neither the Company nor any of its subsidiaries has bought, sold or redeemed any securities of the company listed on The Stock Exchange of Hong Kong Limited during the period. Details of the shares purchased and held by the trusts are set out below.
Number of shares |
1995 Trust |
|
2004 Trust |
|
Total |
|||
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
|||
Shares purchased during the year |
- |
6,160,185 |
|
- |
- |
|
- |
6,160,185 |
Market price of shares purchased ($million) |
- |
51 |
|
- |
- |
|
- |
51 |
Shares held at the end of the year |
3,769,011 |
6,104,154 |
|
18,004 |
78,313 |
|
3,787,015 |
6,182,467 |
Maximum number of shares held during the year |
|
|
|
|
|
|
6,182,467 |
6,183,210 |
43. Corporate governance
The directors confirm that Standard Chartered PLC (the Company) has complied with all of the provisions set out in the UK Corporate Governance Code 2014 during the year ended 31 December 2017. The directors also confirm that, throughout the year, the Company has complied with the code provisions set out in the Hong Kong Corporate Governance Code contained in Appendix 14 of the Hong Kong Listing Rules. The Group confirms that it has adopted a code of conduct regarding directors' securities transactions on terms no less exacting than required by Appendix 10 of the Hong Kong Listing Rules and that the directors of the Company have complied with the required standards of the adopted code of conduct. The directors also confirm that the announcement of these results has been reviewed by the Company's Audit Committee.
SHAREHOLDER INFORMATION
Forward-looking statements
This document may contain 'forward-looking statements' that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as 'may', 'could', 'will', 'expect', 'intend', 'estimate', 'anticipate', 'believe', 'plan', 'seek', 'continue' or other words of similar meaning. By their very nature, such statements are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and the Group's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Recipients should not place reliance on, and are cautioned about relying on, any forward-looking statements. There are several factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. The factors that could cause actual results to differ materially from those described in the forward-looking statements include (but are not limited to) changes in global, political, economic, business, competitive, market and regulatory forces or conditions, future exchange and interest rates, changes in tax rates, future business combinations or dispositions and other factors specific to the Group. Any forward-looking statement contained in this document is based on past or current trends and/or activities of the Group and should not be taken as a representation that such trends or activities will continue in the future.
No statement in this document is intended to be a profit forecast or to imply that the earnings of the Group for the current year or future years will necessarily match or exceed the historical or published earnings of the Group. Each forward-looking statement speaks only as of the date of the particular statement. Except as required by any applicable laws or regulations, the Group expressly disclaims any obligation to revise or update any forward looking statement contained within this document, regardless of whether those statements are affected as a result of new information, future events or otherwise.
Nothing in this document shall constitute, in any jurisdiction, an offer or solicitation to sell or purchase any securities or other financial instruments, nor shall it constitute a recommendation or advice in respect of any securities or other financial instruments or any other matter.