Annual Report and Accounts 2023 4 of 5

HSBC Bank plc

21 February 2024

Independent auditors' report to the members of HSBC Bank plc

Report on the audit of the financial statements

Opinion

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

- give a true and fair view of the state of the group's and of the company's affairs as at 31 December 2023 and of the group's profit and the group's and company's cash flows for the year then ended;

- have been properly prepared in accordance with UK-adopted international accounting standards as applied in accordance with the provisions of the Companies Act 2006; and

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

We have audited the financial statements, included within the Annual Report and Accounts 2023 (the 'Annual Report'), which comprise the:

- consolidated balance sheet as at 31 December 2023;

- consolidated income statement and consolidated statement of comprehensive income for the year then ended;

- consolidated statement of changes in equity for the year then ended;

- consolidated statement of cash flows for the year then ended;

- HSBC Bank plc balance sheet as at 31 December 2023;

- HSBC Bank plc statement of changes in equity for the year then ended;

- HSBC Bank plc statement of cash flows for the year then ended; and

- notes on the financial statements, comprising material accounting policies and other explanatory information.

Certain notes to the financial statements have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as '(Audited)'. The relevant disclosures are included in the Risk review section on pages 22 to 86.

Our opinion is consistent with our reporting to the Audit Committee.

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

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

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

Separate opinion in relation to IFRSs as issued by the IASB

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

In our opinion, the group and company financial statements have been properly prepared in accordance with IFRS Accounting Standards

Basis for opinion

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

Independence

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

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

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

Our audit approach

Overview

Audit scope

- We performed audits of the complete financial information of two Components, namely the UK non-ring-fenced bank ('UK NRFB') and HSBC Continental Europe ('HBCE'). For five further Components, specific audit procedures were performed over selected significant account balances and financial statement note disclosures.

Key audit matter

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

Materiality

- Overall group materiality: £231 million (2022: £230 million) based on 1% of Tier 1 capital.

- Overall company materiality: £129 million (2022: £133 million) based on 1% of Tier 1 capital.

- Performance materiality: £174 million (2022: £172 million) (group) and £97 million (2022: £99 million) (company).

The scope of our audit

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

Key audit matters

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

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

Held for sale accounting (group), recognition of deferred tax assets (group) and impairment of investment in subsidiaries (company), which were key audit matters last year, are no longer included. The judgement in relation to held for sale accounting (group) has reduced following the completion of the disposal of the HBCE retail banking business on 1 January 2024. The judgement associated with the recognition of deferred tax assets has also reduced as the forecast cash flows of HBCE have improved and there is less uncertainty on the underlying assumptions.

The risk of impairment of investment in subsidiaries (company) has reduced due to a significantly improved Value in Use assessment resulting in a lower risk of material misstatement.

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

Determining expected credit losses ('ECL') involves management judgement and is subject to a high degree of estimation uncertainty. Management makes various assumptions when estimating ECL. The significant assumptions that we focused on in our audit included those with greater levels of management judgement and for which variations had the most significant impact on ECL. These included assumptions made in determining forward looking economic scenarios and their probability weightings (specifically the central and downside scenarios given these have the most material impact on ECL) and estimating expected cash flows and collateral valuations to assess the ECL of credit impaired wholesale exposures.

The level of estimation uncertainty and judgement has remained high during 2023 as a result of the uncertain macroeconomic and geopolitical environment, high levels of inflation and the rising global interest rate environment.

This leads to uncertainty around judgements made in determining the severity and probability weighting of macroeconomic variable forecasts across the different economic scenarios used in ECL models, and in the estimation of expected cash flows and collateral valuations on credit impaired stage 3 exposures.

We held discussions with the Audit Committee covering governance and controls over ECL. We discussed a number of areas including:

- the severity of forward looking economic scenarios, and their related probability weightings;

- the valuation of credit impaired exposures, with focus on assumptions made in the recoverability of significant wholesale exposures; and

- the disclosures made in relation to ECL.

We assessed the design and effectiveness of governance and controls over the estimation of ECL. We observed management's review and challenge in governance forums for (1) the determination of forward looking economic scenarios and their probability weightings and (2) the assessment of ECL for Wholesale portfolios, including the assessment of ECL calculated on high value credit impaired stage 3 exposures.

We also tested controls over:

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

- the calculation and approval of management's judgemental adjustments to modelled outcomes;

- the identification of credit impairment triggers; and

- the calculation and approval of significant individual impairments relating to high value wholesale credit impaired exposures.

We involved our economic experts in assessing the significant assumptions made in determining the severity and probability weighting of forward looking economic scenarios, with particular focus on the downside and consensus central scenarios. These assessments considered the sensitivity of ECL to variations in the severity and probability weighting of macroeconomic variables for different economic scenarios.

We involved our modelling specialists in assessing the appropriateness of the significant assumptions and methodologies used for models and independently reperformed the calculations for a sample of those models. We further considered whether the judgements made in selecting the significant assumptions would give rise to indicators of possible management bias.

We tested a sample of Credit Risk Ratings ('CRRs') applied to wholesale exposures and for certain credit impaired wholesale exposures we tested calculations made in estimating expected cash flows and challenged assumptions used by management. Where necessary, we involved our valuation specialists to assist in testing the valuation of collateral for a sample of wholesale credit impaired exposures.

In addition, we performed substantive testing over:

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

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

- a sample of critical data elements used in the year end ECL calculation.

We evaluated and tested the Credit Risk disclosures made in the financial statements.

- Credit risk page 30 - 68

Audit Committee Report, page 90

Note 1.2(d) Financial instruments measured at amortised cost, page 122.

Note 1.2(i) Impairment of amortised cost and FVOCI financial assets, page 123.

How we tailored the audit scope

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

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

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

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

- the forecast cash flows from management's five year business plan and long term growth rates used in estimating recoverable amounts as part of impairment assessments of investments in subsidiaries;

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

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

HSBC Bank plc's progress on their group-wide ESG targets is not included within the scope of this audit.

Scoping

HSBC Bank plc operates as one integrated business with two main hubs in London and Paris. The London hub consists of the UK NRFB and the Paris hub comprises HBCE, its EU branches and its subsidiaries in Malta and Luxembourg.

Through our risk assessment, we tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. The risks of material misstatement can be reduced to an acceptable level by testing the most financially significant entities within the group and those that drive particular significant risks identified as part of our risk assessment (collectively 'Components'). This ensures that sufficient coverage has been obtained for each financial statement line item ('FSLI'). We continually assessed risks and changed the scope of our audit where necessary.

In establishing the overall approach to the group and company audit, we scoped using the balances relevant to each Component and determined the type of work that needed to be performed over the Components by us, as the group engagement team, or auditors within PwC UK and from other PwC network firms operating under our instruction ('Component auditors').

As a result of our scoping for the group we determined that audits of the complete financial information of the UK NRFB and HBCE were necessary, owing to their financial significance. We instructed Component auditors, PwC UK and PwC France to perform the audits of these

Components. We then considered the significance of other Components in relation to primary statement account balances and note disclosures. In doing this we also considered the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). For five Components, specific audit procedures were performed over selected significant account balances. For the remainder, the risk of material misstatement was mitigated through group audit procedures including testing of entity level controls and group and company level analytical review procedures.

In June 2023, we held a meeting in London with the partners and senior staff from the group audit team and the PwC teams who undertake audits of the financially significant Components. The meeting focused primarily on assessing our approach to auditing the group's businesses, changes at HSBC Bank plc and in our PwC teams, and how we continue to innovate and improve the quality of the audit. We also discussed our significant audit risks.

We were in active dialogue throughout the year with the partners and teams responsible for the UK NFRB and HBCE audits, including consideration of how they planned and performed their work. Senior members of our team undertook at least one in-person site visit prior to the year end where a full scope audit was requested. Our interactions with Component auditors included regular communication throughout the audit, including the issuance of instructions, a review of working papers relating to the key audit matters, in-person site visits to inspect their working papers throughout the different phases of the audit and formal clearance meetings. This enabled us to effectively oversee and monitor the quality of the audit carried out by the Component auditors. The group audit engagement partner was also the partner on the audit of the UK NRFB significant Component.

Certain balances were audited by the PwC HSBC Holdings plc Group engagement team where they related to Group level accounts. HSBC has entity level controls that have a pervasive influence across the Group, as well as other global and regional governance and controls over aspects of financial reporting, such as those operated by the Global Risk function for expected credit losses. A significant amount of IT and operational processes and controls relevant to financial reporting are undertaken in operations centres run by Digital Business Services ('DBS'). Whilst these operations centres are not separate Components, the IT and operational processes and controls are relevant to the financial information of HSBC Bank plc. Financial reporting processes and controls are also performed centrally in HSBC Bank plc's finance operations centres ('Finance Operations'), including the impairment assessment of investment in subsidiaries and intangible assets, the consolidation of HSBC Bank plc's results, the preparation of financial statements, and certain management oversight controls relevant to financial reporting.

HSBC Holdings plc Group-wide processes or processes in DBS and Finance Operations are subject to specified audit procedures or an audit over specific FSLIs. These procedures primarily relate to testing of IT general controls, forward looking economic scenarios for ECL, operating expenses, intangible assets, valuation of financial instruments, intercompany eliminations, reconciliations, consolidation and payroll. For these areas, we either performed audit work ourselves, or directed and provided oversight of the audit work performed by other PwC teams. This audit work, together with analytical review procedures and assessing the outcome of local external audits, also mitigated the risk of material misstatement for balances in entities that were not financially significant components.

Materiality

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

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:


Overall materiality	£231 million (2022: £230 million).	£129 million (2022: £133 million).
How we determined it	1% of Tier 1 capital	1% of Tier 1 capital
Rationale for benchmark applied	Tier 1 capital is used as a benchmark as it is considered to be a key driver of HSBC Bank plc's decision making process and has been a primary focus for regulators.	Tier 1 capital is used as a benchmark as it is considered to be a key driver of HSBC Bank plc's decision making process and has been a primary focus for regulators.

Tier 1 capital was also used as the benchmark in the prior year. The basis for determining materiality was re-evaluated and we considered other benchmarks, such as profit before tax. Tier 1 capital is a common benchmark for wholly owned banking subsidiaries, because of the focus on financial stability. Tier 1 capital was determined to be the most appropriate benchmark given the importance of this metric to the HSBC Bank plc decision making process and to principal users of the financial statements, including the ultimate holding company HSBC Holdings plc.

For each Component in the scope of our group audit, we allocated a materiality that was less than our overall group materiality. The range of materiality allocated across Components was £6 million to £117 million. Certain Components were audited to a local statutory audit materiality that was also less than our overall group materiality.

We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2022: 75%) of overall materiality, amounting to £174 million (2022: £172 million) for the group financial statements and £97 million (2022: £99 million) for the company financial statements.

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

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £12 million (group audit) (2022: £11 million) and £6 million (company audit) (2022: £6 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.

Conclusions relating to going concern

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

- Performing a risk assessment to identify factors that could impact the going concern basis of accounting, including both internal risks (i.e., strategy execution) and external risks (i.e., macroeconomic conditions);

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

- Inspecting credit rating agency ratings and actions; and

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

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

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

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

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

Reporting on other information

The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.

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

With respect to the Strategic report and Report of the Directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.

Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.

Strategic Report and Report of the Directors

In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Report of the Directors for the year ended 31 December 2023 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.

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

Responsibilities for the financial statements and the audit

Responsibilities of the directors for the financial statements

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

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

Auditors' responsibilities for the audit of the financial statements

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

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

Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to Financial Conduct Authority's ('FCA') regulations, the Prudential Regulation Authority's ('PRA') regulations, and equivalent local laws and regulations applicable to other countries in which the company operates, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006 and relevant tax legislation. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue or reduce costs, creation of fictitious transactions to hide losses or to improve financial

performance, and management bias in accounting estimates. The group engagement team shared this risk assessment with the Component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or Component auditors included:

- Review of correspondence with and reports to the regulators, including the PRA and FCA;

- Review of reporting to the Audit Committee and Risk Committee in respect of compliance and legal matters;

- Enquiries of management and review of internal audit reports in so far as they related to the financial statements;

- Obtaining legal confirmations from legal advisors relating to material litigation and compliance matters;

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

- Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to the determination of fair value for certain financial instruments, the determination of expected credit losses and recognition of deferred tax assets;

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

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

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

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

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

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

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

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

- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management;

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

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

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

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

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

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

Use of this report

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

Other required reporting

Companies Act 2006 exception reporting

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

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

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

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

- the company financial statements are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Appointment

Following the recommendation of the Audit Committee, we were appointed by the directors on 31 March 2015 to audit the financial statements for the year ended 31 December 2015 and subsequent financial periods. The period of total uninterrupted engagement is nine years, covering the years ended 31 December 2015 to 31 December 2023.

Other matter

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

Lawrence Wilkinson

(Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

London

20 February 2024

Financial statements

Contents

106	Consolidated income statement
108	Consolidated statement of comprehensive income
109	Consolidated balance sheet
110	Consolidated statement of changes in equity
114	Consolidated statement of cash flows
115	HSBC Bank plc balance sheet
116	HSBC Bank plc statement of changes in equity
118	HSBC Bank plc statement of cash flows
Consolidated income statement
for the year ended 31 December
			2023	2022¹	2021¹
		Notes*	£m	£m	£m
Net interest income			2,151	1,904	1,754
- interest income^2,3			17,782	6,535	3,149
- interest expense⁴			(15,631)	(4,631)	(1,395)
Net fee income		2	1,229	1,295	1,413
- fee income			2,594	2,593	2,706
- fee expense			(1,365)	(1,298)	(1,293)
Net income from financial instruments held for trading or managed on a fair value basis		3	3,395	2,875	1,733
Net income/ (expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss		3	1,168	(1,370)	1,214
Changes in fair value of long-term debt and related derivatives		3	(63)	102	(8)
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss		3	284	143	493
Net (losses)/ gains from financial investments			(84)	(60)	60
Net insurance premium income		4	-	-	1,906
Gains/ (losses) recognised on Assets held for sale^5,6			296	(1,947)	67
Insurance finance (expense)/income			(1,184)	1,106	-
Insurance service result			124	121	-
- Insurance revenue			379	361	-
- Insurance service expense			(255)	(240)	-
Other operating income⁶			190	135	527
Total operating income			7,506	4,304	9,159
Net insurance claims, benefits paid and movement in liabilities to policyholders		4	-	-	(3,039)
Net operating income before change in expected credit losses and other credit impairment charges⁷			7,506	4,304	6,120
Change in expected credit losses and other credit impairment charges			(169)	(222)	174
Net operating income			7,337	4,082	6,294
Total operating expenses			(5,142)	(5,251)	(5,462)
- employee compensation and benefits		5	(1,706)	(1,698)	(2,023)
- general and administrative expenses			(3,375)	(3,425)	(3,265)
- depreciation and impairment of property, plant and equipment and right of use assets			(45)	(103)	(110)
- amortisation and impairment of intangible assets			(16)	(25)	(64)
Operating profit/ (loss)			2,195	(1,169)	832
Share of (loss)/profit in associates and joint ventures		17	(43)	(30)	191
Profit/(loss) before tax			2,152	(1,199)	1,023
Tax (charge)/ credit		7	(427)	646	23
Profit/(loss) for the year			1,725	(553)	1,046
Profit/ (loss) attributable to the parent company			1,703	(563)	1,041
Profit attributable to non-controlling interests			22	10	5

* For Notes on the financial statements, see page 118.

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis.

2 Interest income includes £16,484m (2022: £5,512m; 2021: £1,986m) of interest recognised on financial assets measured at amortised cost; £42m (2022: £422m; 2021: £659m) of negative interest recognised on financial liabilities and £1,256m (2022: £601m; 2021: £504m) of interest recognised on financial assets measured at fair value through other comprehensive income. Include within this is £117m (2022: £59m; 2021: £61m) interest recognised on impaired financial assets.

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

4 Interest expense includes £14,226m (2022: £3,740m; 2021: £616m) of interest on financial liabilities, excluding interest on financial liabilities held for trading or designated or otherwise mandatorily measured at fair value.

5 In relation to the sale of our retail banking operations in France, we recognised a £1.7bn impairment loss in 3Q22 on initial classification of the business as held-for-sale. In 1Q23, we reversed the £1.7bn impairment loss as the sale became less certain. On subsequent re-classification of the business as held-for-sale in 4Q23, we recognised a £1.5bn impairment loss.

6 In 2022, a £0.2bn impairment loss on the planned sale of our business in Russia was recognised upon classification as held for sale in accordance with IFRS 5. As at 31 December 2023, the outcome of the planned sale become less certain. This resulted in the reversal of £0.2bn of the previously recognised loss, as the business was no longer classified as held for sale. However, owing to restrictions impacting the recoverability of assets in Russia, we recognised a charge of £0.2bn in other operating income.

7 Net operating income before change in expected credit losses and other credit impairment charges is also referred to as 'revenue'.

Consolidated statement of comprehensive income
for the year ended 31 December
	2023	2022¹	2021¹
	£m	£m	£m
Profit/(loss) for the year	1,725	(553)	1,046
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Debt instruments at fair value through other comprehensive income	439	(1,886)	(237)
- fair value gains/(losses)	495	(2,631)	(247)
- fair value (gains)/losses transferred to the income statement on disposal	93	59	(63)
- expected credit (recoveries)/losses recognised in the income statement	(2)	6	(5)
- income taxes	(147)	680	78
Cash flow hedges	663	(943)	(165)
- fair value gains/(losses)	614	(1,418)	(40)
- fair value losses/(gains) reclassified to the income statement	301	127	(202)
- income taxes	(252)	348	77
Finance (expenses)/income from insurance contracts	(298)	1,408	-
- before income taxes	(402)	1,898	-
- income taxes	104	(490)	-
Exchange differences	(302)	672	(603)
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit asset/liability	(2)	38	44
- before income taxes	(20)	56	61
- income taxes	18	(18)	(17)
Equity instruments designated at fair value through other comprehensive income	(1)	-	2
- fair value (losses)/gains	(1)	-	2
- income taxes	-	-	-
Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	(132)	329	2
- fair value (losses)/gains	(179)	462	3
- income taxes	47	(133)	(1)
Other comprehensive income/(expense) for the year, net of tax	367	(382)	(957)
Total comprehensive income/(expense) for the year	2,092	(935)	89
Attributable to:
- shareholders of the parent company	2,070	(947)	93
- non-controlling interests	22	12	(4)

Consolidated balance sheet
at 31 December
		At
		31 Dec	31 Dec	1 Jan
		2023	2022¹	2022
	Notes*	£m	£m	£m
Assets
Cash and balances at central banks		110,618	131,433	108,482
Items in the course of collection from other banks		2,114	2,285	346
Trading assets	10	100,696	79,878	83,706
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	13	19,068	15,881	18,649
Derivatives	14	174,116	225,238	141,221
Loans and advances to banks		14,371	17,109	10,784
Loans and advances to customers		75,491	72,614	91,177
Reverse repurchase agreements - non-trading		73,494	53,949	54,448
Financial investments	15	46,368	32,604	41,300
Assets held for sale²	35	20,368	21,214	9
Prepayments, accrued income and other assets	21	63,635	61,444	43,146
Current tax assets		485	595	1,135
Interests in associates and joint ventures	17	665	728	743
Goodwill and intangible assets	20	203	91	83
Deferred tax assets	7	1,278	1,583	798
Total assets		702,970	716,646	596,027
Liabilities and equity
Liabilities
Deposits by banks		22,943	20,836	32,188
Customer accounts		222,941	215,948	205,241
Repurchase agreements - non-trading		53,416	32,901	27,259
Items in the course of transmission to other banks		2,116	2,226	489
Trading liabilities	22	42,276	41,265	46,433
Financial liabilities designated at fair value	23	32,545	27,282	33,608
Derivatives	14	171,474	218,867	139,368
Debt securities in issue		13,443	7,268	9,428
Liabilities of disposal groups held for sale²	35	20,684	24,711	-
Accruals, deferred income and other liabilities	24	60,444	67,020	43,515
Current tax liabilities		272	130	97
Insurance contract liabilities	4	20,595	20,004	22,201
Provisions	25	390	424	562
Deferred tax liabilities	7	6	3	5
Subordinated liabilities	26	14,920	14,528	12,488
Total liabilities		678,465	693,413	572,882
Equity
Total shareholders' equity		24,359	23,102	23,014
- called up share capital	30	797	797	797
- share premium account		1,004	420	-
- other equity instruments	30	3,930	3,930	3,722
- other reserves		(6,096)	(6,413)	(5,662)
- retained earnings		24,724	24,368	24,157
Non-controlling interests		146	131	131
Total equity		24,505	23,233	23,145
Total liabilities and equity		702,970	716,646	596,027

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data and the IFRS 17 transition impact on the balance sheet at 1 January 2022.

2 Includes businesses classified as held-for-sale as part of a broader restructuring of our European business. Refer to Note 35 'Assets held for sale and liabilities of disposal groups held for sale' on page 184.

* For Notes on the financial statements, see page 118.

The accompanying notes on pages 118 to 192, and the audited sections of the 'Report of the Directors' on pages 22 to 96 form an integral part of these financial statements.

The financial statements were approved by the Board of Directors on 20 February 2024 and signed on its behalf by:

Kavita Mahtani

Director

Consolidated statement of changes in equity
for the year ended 31 December

				Other reserves
	Called up share capital & share premium	Other equity instru- ments	Retained earnings	Financial assets at FVOCI reserve	Cash flow hedging reserve	Foreign exchange reserve	Group reorgan-isation reserve ('GRR')⁷	Insur-ance finance reserve¹	Total share- holders' equity	Non-control-ling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 Jan 2023	1,217	3,930	24,368	(278)	(950)	1,613	(7,692)	894	23,102	131	23,233
Profit for the period	-	-	1,703	-	-	-	-	-	1,703	22	1,725
Other comprehensive income/(expense) (net of tax)	-	-	(134)	422	661	(294)	-	(288)	367	-	367
- debt instruments at fair value through other comprehensive income	-	-	-	437	-	-	-	-	437	2	439
- equity instruments designated at fair value through other comprehensive income	-	-	-	(1)	-	-	-	-	(1)	-	(1)
- cash flow hedges	-	-	-	-	663	-	-	-	663	-	663
- remeasurement of defined benefit asset/liability	-	-	(2)	-	-	-	-	-	(2)	-	(2)
- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk³	-	-	(132)	-	-	-	-	-	(132)	-	(132)
- insurance finance (expense)/income recongnised in other comprehensive income	-	-	-	-	-	-	-	(298)	(298)	-	(298)
- exchange differences	-	-	-	(14)	(2)	(294)	-	10	(300)	(2)	(302)
Total comprehensive income/(expense) for the year	-	-	1,569	422	661	(294)	-	(288)	2,070	22	2,092
Capital securities issued during the period	584	-	-	-	-	-	-	-	584	-	584
Dividends paid to the parent company⁴	-	-	(961)	-	-	-	-	-	(961)	(7)	(968)
Net impact of equity-settled share-based payments	-	-	(18)	-	-	-	-	-	(18)	-	(18)
Change in business combinations and other movements	-	-	(234)	(1,012)	(41)	859	-	10	(418)	-	(418)
At 31 Dec 2023	1,801	3,930	24,724	(868)	(330)	2,178	(7,692)	616	24,359	146	24,505

Consolidated statement of changes in equity (continued)
for the year ended 31 December
					Other reserves
	Called up share capital & share premium	Other equity instru-ments	Retained earnings	Financial assets at FVOCI reserve	Cash flow hedging reserve	Foreign exchange reserve	Group reorgani-sation reserve ('GRR')⁷	Insur-ance finance reserve¹	Total share- holders' equity	Non- control-ling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
As on 31 Dec 2021	797	3,722	24,735	1,081	(7)	948	(7,692)	-	23,584	131	23,715
IFRS 17 Transition	-	-	(578)	522	-	-	-	(514)	(570)	-	(570)
At 1 Jan 2022	797	3,722	24,157	1,603	(7)	948	(7,692)	(514)	23,014	131	23,145
Loss for the year	-	-	(563)	-	-	-	-	-	(563)	10	(553)
Other comprehensive (expense)/income (net of tax)	-	-	367	(1,881)	(943)	665	-	1,408	(384)	2	(382)
- debt instruments at fair value through other comprehensive income	-	-	-	(1,881)	-	-	-	-	(1,881)	(5)	(1,886)
- equity instruments designated at fair value through other comprehensive income	-	-	-	-	-	-	-	-	-	-	-
- cash flow hedges	-	-	-	-	(943)	-	-	-	(943)	-	(943)
- remeasurement of defined benefit asset/liability	-	-	38	-	-	-	-	-	38	-	38
- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk³	-	-	329	-	-	-	-	-	329	-	329
- insurance finance income/ (expense) recongnised in other comprehensive income	-	-	-	-	-	-	-	1,408	1,408	-	1,408
- exchange differences	-	-	-	-	-	665	-	-	665	7	672
Total comprehensive (expense)/income for the year	-	-	(196)	(1,881)	(943)	665	-	1,408	(947)	12	(935)
Capital securities issued during the period	420	208	-	-	-	-	-	-	628	-	628
Dividends paid to the parent company⁴	-	-	(1,052)	-	-	-	-	-	(1,052)	(2)	(1,054)
Net impact of equity-settled share-based payments	-	-	5	-	-	-	-	-	5	-	5
Capital contribution⁵	-	-	1,465	-	-	-	-	-	1,465	-	1,465
Change in business combinations and other movements	-	-	(11)	-	-	-	-	-	(11)	(10)	(21)
At 31 Dec 2022²	1,217	3,930	24,368	(278)	(950)	1,613	(7,692)	894	23,102	131	23,233

Consolidated statement of changes in equity (continued)
for the year ended 31 December
					Other reserves
	Called up share capital & share premium	Other equity instru-ments	Retained earnings	Financial assets at FVOCI reserve	Cash flow hedging reserve	Foreign exchange reserve	Group reorgani-sation reserve ('GRR')⁷	Total share- holders' equity	Non- control-ling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 Jan 2021	797	3,722	23,829	1,309	158	1,543	(7,692)	23,666	183	23,849
Profit for the year	-	-	1,041	-	-	-	-	1,041	5	1,046
Other comprehensive (expense)/income (net of tax)	-	-	46	(234)	(165)	(595)	-	(948)	(9)	(957)
- debt instruments at fair value through other comprehensive income	-	-	-	(236)	-	-	-	(236)	(1)	(237)
- equity instruments designated at fair value through other comprehensive income	-	-	-	2	-	-	-	2	-	2
- cash flow hedges	-	-	-	-	(165)	-	-	(165)	-	(165)
- remeasurement of defined benefit asset/liability	-	-	44	-	-	-	-	44	-	44
- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk³	-	-	2	-	-	-	-	2	-	2
- exchange differences	-	-	-	-	-	(595)	-	(595)	(8)	(603)
Total comprehensive income/(expense) for the year	-	-	1,087	(234)	(165)	(595)	-	93	(4)	89
Capital securities issued during the period	-	-	-	-	-	-	-	-	-	-
Dividends paid to the parent company⁴	-	-	(194)	-	-	-	-	(194)	(1)	(195)
Net impact of equity-settled share-based payments	-	-	(10)	-	-	-	-	(10)	-	(10)
Change in business combinations and other movements⁶	-	-	23	6	-	-	-	29	(47)	(18)
At 31 Dec 2021²	797	3,722	24,735	1,081	(7)	948	(7,692)	23,584	131	23,715

1 The insurance finance reserve reflects the impact of the adoption of the other comprehensive income option for our insurance business in France. Underlying assets supporting these contracts are measured at fair value through other comprehensive income. Under this option, only the amount that matches income or expenses recognised in profit or loss on underlying items is included in finance income or expenses, resulting in the elimination of income statement accounting mismatches. The remaining amount of finance income or expenses for these insurance contracts is recognised in other comprehensive income ('OCI').

2 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis.

3 The cumulative amount of change in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a gain of £151m (2022: gain of £292m and 2021: loss of £165m).

4 The dividends to the parent company includes dividend on ordinary share capital £750m (2022: £850m and 2021: nil) and coupon payments on additional tier 1 instrument £211m (2022: £202m and 2021: £194m).

5 HSBC Holdings plc injected £1.5bn of CET1 capital into HSBC Bank plc during November 2022 which in turn injected into HSBC Continental Europe for funding the acquisition of HSBC Bank Malta plc and HSBC Trinkaus & Burkhardt GmbH.

6 Additional shares were acquired in HSBC Trinkaus & Burkhardt GmbH and HSBC Bank Armenia CJSC, in 2021 increasing the group's interest to 100%.

7 The Group reorganisation reserve ('GRR') is an accounting reserve resulting from the ring-fencing implementation.

Consolidated statement of cash flows
for the year ended 31 December
	2023	2022¹	2021¹
	£m	£m	£m
Profit/(loss) before tax	2,152	(1,199)	1,023
Adjustments for non-cash items
Depreciation, amortisation and impairment	61	128	174
Net loss/(gain) from investing activities²	(66)	2,002	(62)
Share of loss/(profit) in associates and joint ventures	43	30	(191)
Change in expected credit losses gross of recoveries and other credit impairment charges	161	253	(171)
Provisions including pensions	132	192	104
Share-based payment expense	58	46	96
Other non-cash items included in loss/(profit) before tax	(165)	(16)	(198)
Elimination of exchange differences³	4,426	(6,761)	4,926
Changes in operating assets and liabilities	(3,172)	37,515	9,602
- change in net trading securities and derivatives	(15,528)	(6,213)	8,157
- change in loans and advances to banks and customers	4,245	(2,717)	11,149
- change in reverse repurchase agreements - non-trading	(13,531)	6,251	9,538
- change in financial assets designated and otherwise mandatorily measured at fair value	(3,296)	2,729	(2,429)
- change in other assets	(5,707)	(7,359)	10,924
- change in deposits by banks and customer accounts	7,548	19,835	7,940
- change in repurchase agreements - non-trading	20,516	5,641	(7,643)
- change in debt securities in issue	6,175	(1,060)	(7,943)
- change in financial liabilities designated at fair value	4,042	(1,827)	(7,191)
- change in other liabilities	(7,506)	21,393	(12,295)
- dividend received from associates	15	7	-
- contributions paid to defined benefit plans	(5)	(10)	(24)
- tax received/(paid)	(140)	845	(581)
Net cash from operating activities	3,630	32,190	15,303
- purchase of financial investments	(26,586)	(13,227)	(18,890)
- proceeds from the sale and maturity of financial investments	15,497	20,490	25,027
- net cash flows from the purchase and sale of property, plant and equipment	(31)	(20)	52
- net investment in intangible assets	(125)	(28)	(45)
- net cash outflow from investment in associates and acquisition of businesses and subsidiaries⁴	(1,161)	(29)	(85)
- net cash flow on disposal of subsidiaries, businesses, associates and joint ventures⁵	(394)	-	-
Net cash from investing activities	(12,800)	7,186	6,059
- issue of ordinary share capital and other equity instruments	584	628	-
- subordinated loan capital issued⁶	3,246	3,111	10,466
- subordinated loan capital repaid⁶	(2,693)	(2,248)	(10,902)
- dividends to the parent company	(961)	(1,052)	(194)
- funds received from the parent company	-	1,465	-
- dividends paid to non-controlling interests	(7)	(2)	(1)
Net cash from financing activities	169	1,902	(631)
Net increase in cash and cash equivalents	(9,001)	41,278	20,731
Cash and cash equivalents at 1 Jan	189,907	140,923	125,304
Exchange difference in respect of cash and cash equivalents	(3,869)	7,706	(5,112)
Cash and cash equivalents at 31 Dec⁷	177,037	189,907	140,923

Cash and cash equivalents comprise of
- cash and balances at central banks	110,618	131,433	108,482
- items in the course of collection from other banks	2,114	2,285	346
- loans and advances to banks of one month or less	12,970	13,801	7,516
- reverse repurchase agreement with banks of one month or less	28,704	23,182	17,430
- treasury bills, other bills and certificates of deposit less than three months	144	294	235
- cash collateral and net settlement accounts	16,325	19,213	7,403
- cash and cash equivalents held for sale⁸	8,278	1,925	-
- less: items in the course of transmission to other banks	(2,116)	(2,226)	(489)
Cash and cash equivalents at 31 Dec⁶	177,037	189,907	140,923

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year 31 December 2021 is prepared on an IFRS 4 basis.

2 2022 balances include losses on disposal of businesses classified as held-for-sale as part of a broader restructuring of our European business.

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

4 During 2023, HSBC Bank plc acquired HSBC Bank Bermuda Limited ('HBBM') from HSBC Overseas Holdings (UK) Limited ('HOHU') for £990m and HSBC Continental Europe ('HBCE') acquired HSBC Private Bank (Luxembourg) SA ('PBLU') for £170m.

5 2023 balances includes net cash outflow of £(667)m on sale of the assets of our HBCE Greece branch.

6 Subordinated liabilities changes during the year are attributable to cash flows from issuance £3,246m (2022: £3,111m; 2021: £10,466m) and repayment of £(2,693)m (2022: £(2,248)m; 2021: £(10,902)m) of securities as presented in the Consolidated statement of cash flows. Non-cash changes during the year included foreign exchanges gains/(losses) £(420)m (2022: £711m; 2021: £(512)m) and fair value gains/(losses) £62m (2022: £(427)m; 2021: £(82)m).

7 At 31 December 2023, £26,554m (2022: £23,395m; 2021: £9,410m) was not available for use by the group due to a range of restrictions including currency exchange and other restrictions.

8 Includes £177m (2022: £1,562m) of cash and balances at central banks; £8,103m (2022: £114m) of loans and advances to banks of one month or less, nil (2022: £208m) of reverse repurchase agreements with banks of one month or less and remaining £(2)m (2022: £41m) relates to other cash and cash equivalents.

Interest received was £19,288m (2022: £7,668m; 2021: £4,285m), interest paid was £17,267m (2022: £5,284m; 2021: £2,919m) and dividends received were £522m (2022: £431m; 2021: £704m).

HSBC Bank plc balance sheet
at 31 December
		2023	2022
	Notes*	£m	£m
Assets
Cash and balances at central banks		61,128	78,441
Items in the course of collection from other banks		1,877	1,863
Trading assets	10	85,766	67,623
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	13	3,181	1,618
Derivatives	14	153,765	196,714
Loans and advances to banks		11,670	14,486
Loans and advances to customers		32,443	36,992
Reverse repurchase agreements - non-trading		56,973	43,055
Financial investments	15	28,391	18,639
Assets held for sale¹	35	160	-
Prepayments, accrued income and other assets	21	47,400	43,907
Current tax assets		39	394
Investments in subsidiary undertakings	18	11,627	10,646
Goodwill and intangible assets	20	88	41
Deferred tax assets	7	391	608
Total assets		494,899	515,027
Liabilities and equity
Liabilities
Deposits by banks		18,775	13,594
Customer accounts		133,373	141,714
Repurchase agreements - non-trading		48,842	29,638
Items in the course of transmission to other banks		1,837	1,758
Trading liabilities	22	24,932	25,765
Financial liabilities designated at fair value	23	23,446	19,415
Derivatives	14	152,799	193,336
Debt securities in issue		7,353	4,656
Accruals, deferred income and other liabilities	24	44,922	47,982
Current tax liabilities		77	21
Provisions	25	176	167
Deferred tax liabilities	7	1	-
Subordinated liabilities	26	14,658	14,252
Total liabilities		471,191	492,298
Equity
Called up share capital	30	797	797
Share premium account		1,004	420
Other equity instruments	30	3,930	3,930
Other reserves		(5,522)	(6,073)
Retained earnings		23,499	23,655
Total equity		23,708	22,729
Total liabilities and equity		494,899	515,027

* For Notes on the financial statements, see page 118.

1 Includes planned transfer of hedge fund administration services.

Profit after tax for the year was £887m (2022: £2,743m).

The accompanying notes on pages 118 to 192, and the audited sections of the 'Report of the Directors' on pages 22 to 96 form an integral part of these financial statements.

The financial statements were approved by the Board of Directors on 20 February 2024 and signed on its behalf by:

Kavita Mahtani

Director

HSBC Bank plc statement of changes in equity
for the year ended 31 December
				Other reserves
	Called up share capital & share premium	Other equity instruments	Retained earnings	Financial assets at FVOCI reserve	Cash flow hedging reserve	Foreign exchange reserve	Group reorganisation reserve ('GRR')⁴	Total shareholders' equity
	£m	£m	£m	£m	£m	£m	£m	£m
At 1 Jan 2023	1,217	3,930	23,655	(122)	(796)	93	(5,248)	22,729
Profit for the year	-	-	887	-	-	-	-	887
Other comprehensive income/(expense) (net of tax)	-	-	(63)	65	516	(30)	-	488
- debt instruments at fair value through other comprehensive income	-	-	-	67	-	-	-	67
- equity instruments designated at fair value through other comprehensive income	-	-	-	-	-	-	-	-
- cash flow hedges	-	-	-	-	516	-	-	516
- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk¹	-	-	(80)	-	-	-	-	(80)
- remeasurement of defined benefit asset/liability	-	-	17	-	-	-	-	17
- exchange differences	-	-	-	(2)	-	(30)	-	(32)
Total comprehensive income/(expense) for the period	-	-	824	65	516	(30)	-	1,375
Capital securities issued during the period	584	-	-	-	-	-	-	584
Dividends to the parent company²	-	-	(961)	-	-	-	-	(961)
Net impact of equity-settled share-based payments	-	-	(18)	-	-	-	-	(18)
Change in business combinations and other movements	-	-	(1)	(29)	4	25	-	(1)
At 31 Dec 2023	1,801	3,930	23,499	(86)	(276)	88	(5,248)	23,708

HSBC Bank plc statement of changes in equity (continued)
for the year ended 31 December
				Other reserves
	Called up share capital & share premium	Other equity instruments	Retained earnings	Financial assets at FVOCI reserve	Cash flow hedging reserve	Foreign exchange reserve	Group reorganisation reserve ('GRR')⁵	Total shareholders' equity
	£m	£m	£m	£m	£m	£m	£m	£m
At 1 Jan 2022	797	3,722	20,353	135	(82)	22	(5,248)	19,699
Profit for the year	-	-	2,743	-	-	-	-	2,743
Other comprehensive income/(expense) (net of tax)	-	-	141	(257)	(714)	71	-	(759)
- debt instruments at fair value through other comprehensive income	-	-	-	(258)	-	-	-	(258)
- equity instruments designated at fair value through other comprehensive income	-	-	-	1	-	-	-	1
- cash flow hedges	-	-	-	-	(714)	-	-	(714)
- changes in fair value of financial liabilities designated at fair value due to movement in own credit risk¹	-	-	156	-	-	-	-	156
- remeasurement of defined benefit asset/liability	-	-	(15)	-	-	-	-	(15)
- exchange differences	-	-	-	-	-	71	-	71
Total comprehensive income/(expense) for the period	-	-	2,884	(257)	(714)	71	-	1,984
Capital securities issued during the period	420	208	-	-	-	-	-	628
Dividends to the parent company²	-	-	(1,052)	-	-	-	-	(1,052)
Net impact of equity-settled share-based payments	-	-	5	-	-	-	-	5
Capital contribution³	-	-	1,465	-	-	-	-	1,465
At 31 Dec 2022	1,217	3,930	23,655	(122)	(796)	93	(5,248)	22,729

1 The cumulative amount of change in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a gain of £42m (2022: gain of £139m).

2 The dividends to the parent company includes dividend on ordinary share capital £750m (2022: £850m) and coupon payments on additional tier 1 instrument £211m (2022: £222m) & dividend on preference share capital nil (2022: nil).

3 HSBC Holdings plc injected £1.5bn of CET1 capital into HSBC Bank plc during November 2022 which in turn injected into HSBC Continental Europe for funding the acquisition of HSBC Bank Malta plc and HSBC Trinkaus & Burkhardt GmbH.

4 The Group reorganisation reserve ('GRR') is an accounting reserve resulting from the ring-fencing implementation.

HSBC Bank plc statement of cash flows
for the year ended 31 December
	2023	2022
	£m	£m
Profit before tax	1,063	2,548
Adjustments for non-cash items
Depreciation, amortisation and impairment	4	17
Net (gain)/loss from investing activities¹	80	(1,669)
Change in expected credit losses gross of recoveries and other credit impairment charges	37	130
Provisions including pensions	110	91
Share-based payment expense	45	27
Other non-cash items included in loss/(profit) before tax	(127)	(21)
Elimination of exchange differences²	2,650	(2,109)
Changes in operating assets and liabilities	(5,098)	18,609
- change in net trading securities and derivatives	(16,033)	(9,551)
- change in loans and advances to banks and customers	(1,405)	(3,870)
- change in reverse repurchase agreements - non-trading	(8,040)	791
- change in financial assets designated and otherwise mandatorily measured at fair value	(1,632)	1,597
- change in other assets³	(6,509)	(10,912)
- change in deposits by banks and customer accounts	5,989	15,947
- change in repurchase agreements - non-trading	19,204	7,294
- change in debt securities in issue	2,697	(1,002)
- change in financial liabilities designated at fair value	3,946	(116)
- change in other liabilities	(3,554)	17,343
- contributions paid to defined benefit plans	(5)	(10)
- tax received	244	1,098
Net cash from operating activities	(1,236)	17,623
- purchase of financial investments	(19,798)	(8,535)
- proceeds from the sale and maturity of financial investments	11,115	17,022
- net cash flows from the purchase and sale of property, plant and equipment	(6)	(2)
- net investment in intangible assets	(76)	(176)
- net cash outflow from investment in associates and acquisition of businesses and subsidiaries⁴	(990)	-
- net cash flow on disposal of subsidiaries, businesses, associates and joint ventures	268	-
Net cash from investing activities	(9,487)	8,309
- issue of ordinary share capital and other equity instruments	584	628
- subordinated loan capital issued⁵	3,246	3,111
- subordinated loan capital repaid⁵	(2,685)	(2,240)
- funds received from the parent company	-	1,465
- dividends to the parent company	(961)	(1,052)
Net cash from financing activities	184	1,912
Net increase in cash and cash equivalents	(10,539)	27,844
Cash and cash equivalents at 1 Jan	115,310	83,814
Exchange difference in respect of cash and cash equivalents	(2,354)	3,652
Cash and cash equivalents at 31 Dec	102,417	115,310
Cash and cash equivalents comprise of:
- cash and balances at central banks	61,128	78,441
- items in the course of collection from other banks	1,877	1,863
- loans and advances to banks of one month or less	9,922	11,353
- reverse repurchase agreement with banks of one month or less	19,795	13,917
- treasury bills, other bills and certificates of deposit less than three months	-	150
- cash collateral and net settlement accounts	11,532	11,344
- less: items in the course of transmission to other banks	(1,837)	(1,758)
Cash and cash equivalents at 31 Dec	102,417	115,310

1 Included within 2022 is the impact of impairment reversal booked in Paris branch for investment in subsidiary.

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

3 Includes additional investment in subsidiaries nil (2022: £3,406m).

4 During 2023, HSBC Bank plc acquired HBBM from HOHU and invested £990m.

5 Subordinated liabilities changes during the year are attributable to cash flows from issuance £3,246m (2022: £3,111m) and repayment of £(2,685)m (2022: £(2,240)m) of securities as presented in the HSBC Bank plc statement of cash flows. Non-cash changes during the year included foreign exchange gains/(losses) £(415)m (2022: £696m) and fair value gains/(losses) £62m (2022: £(427)m).

Interest received was £13,005m (2022: £5,023m), interest paid was £12,934m (2022: £3,891m) and dividends received was £629m (2022: £936m).

Notes on the Financial Statements

Contents
119	1	Basis of preparation and material accounting policies	170	20	Goodwill and intangible assets
131	2	Net fee income	170	21	Prepayments, accrued income and other assets
132	3	Net income from financial instruments measured at fair value through profit or loss	171	22	Trading liabilities
132	3		171	23	Financial liabilities designated at fair value
132	4	Insurance business	172	24	Accruals, deferred income and other liabilities
139	5	Employee compensation and benefits	172	25	Provisions
144	6	Auditors' remuneration	173	26	Subordinated liabilities
144	7	Tax	176	27	Maturity analysis of assets, liabilities and off-balance sheet commitments
147	8	Dividends	176	27
147	9	Segmental analysis	179	28	Offsetting of financial assets and financial liabilities
149	10	Trading assets	180	29	Interest rate benchmark reform
149	11	Fair values of financial instruments carried at fair value	180	30	Called up share capital and other equity instruments
157	12	Fair values of financial instruments not carried at fair value	181	31	Contingent liabilities, contractual commitments, guarantees and contingent assets
159	13	Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	181	31
159	13		182	32	Finance lease receivables
159	14	Derivatives	182	33	Legal proceedings and regulatory matters
164	15	Financial investments	185	34	Related party transactions
165	16	Assets pledged, collateral received and assets transferred	187	35	Assets held for sale and liabilities of disposal groups held for sale
166	17	Interests in associates and joint ventures	189	36	Effects of adoption of IFRS 17
166	18	Investments in subsidiaries	192	37	Events after the balance sheet date
168	19	Structured entities	193	38	HSBC Bank plc's subsidiaries, joint ventures and associates

1	Basis of preparation and material accounting policies

1.1 Basis of preparation

(a) Compliance with International Financial Reporting Standards

The consolidated financial statements of the group and the separate financial statements of the bank comply with UK-adopted international accounting standards and with the requirements of the Companies Act 2006, and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. These financial statements are also prepared in accordance with International Financial Reporting Standards as issued by the IASB ('IFRS Accounting Standards'), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRS Accounting standards adopted by the UK, IFRS Accounting Standards as adopted by the EU and IFRS Accounting Standards as issued by the IASB in terms of their application to the group for the periods presented. There were no unendorsed standards effective for the year ended 31 December 2023 affecting these consolidated and separate financial statements.

Standards adopted during the year ended 31 December 2023

IFRS 17 'Insurance Contracts'

On 1 January 2023, the group adopted the requirements of IFRS 17 'Insurance Contracts' retrospectively with comparatives restated from the transition date, 1 January 2022. At transition, the group's total equity reduced by £570m.

On adoption of IFRS 17, balances based on IFRS 4, including the present value of in-force long-term insurance business ('PVIF') asset in relation to the upfront recognition of future profits of in-force insurance contracts, were derecognised. Insurance contract liabilities have been remeasured under IFRS 17 based on groups of insurance contracts, which include the fulfilment cash flows comprising the best estimate of the present value of the future cash flows (for example premiums and payouts for claims, benefits and expenses), together with a risk adjustment for non-financial risk, as well as the contractual service margin ('CSM'). The CSM represents the unearned profits that will be released and systematically recognised in insurance revenue as services are provided over the expected coverage period.

In addition, the group has made use of the option under the standard to re-designate certain eligible financial assets held to support insurance contract liabilities, which were predominantly measured at amortised cost, as financial assets measured at fair value through profit or loss, with comparatives restated from the transition date. The effects on adoption of IFRS 17 are set out in Note 36 with a description of the policy set out in Note 1.2(j).

The key differences between IFRS 4 and IFRS 17 are summarised in the following table:


Balance sheet	- Insurance contract liabilities for non-linked life insurance contracts are calculated by local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, by reference to the value of the relevant underlying funds or indices. Grouping requirements follow local regulations. - An intangible asset for the PVIF is recognised, representing the upfront recognition of future profits associated with in-force insurance contracts.	- Insurance contract liabilities are measured for groups of insurance contracts at current value, comprising the fulfilment cash flows and the CSM. - The fulfilment cash flows comprise the best estimate of the present value of the future cash flows, together with a risk adjustment for non-financial risk. - The CSM represents the unearned profit.
Profit emergence / recognition	- The value of new business is reported as revenue on Day 1 as an increase in PVIF. - The impact of the majority of assumption changes is recognised immediately in the income statement. - Variances between actual and expected cash flows are recognised in the period they arise.	- The CSM is systematically recognised in revenue as services are provided over the expected coverage period of the group of contracts (i.e. no Day 1 profit). - Contracts are measured using the GMM or VFA model for insurance contracts with direct participation features upon meeting the eligibility criteria. Under the VFA model, the group's share of the investment experience and assumption changes are absorbed by the CSM and released over time to profit or loss. For contracts measured under GMM, the group's share of the investment volatility is recorded in profit or loss as it arises. - Losses from onerous contracts are recognised in the income statement immediately.
Investment return assumptions (discount rate)	- PVIF is calculated based on long-term investment return assumptions based on assets held. It therefore includes investment margins expected to be earned in future.	- Under the market consistent approach, expected future investment spreads are not included in the investment return assumption. Instead, the discount rate includes an illiquidity premium that reflects the nature of the associated insurance contract liabilities.
Expenses	- Total expenses to acquire and maintain the contract over its lifetime are included in the PVIF calculation. - Expenses are recognised across operating expenses and fee expense as incurred and the allowances for those costs are released from the PVIF simultaneously.	- Projected lifetime expenses that are directly attributable costs are included in the insurance contract liabilities and recognised in the insurance service result. - Non-attributable costs are reported in operating expenses.

Transition

In applying IFRS 17 for insurance contracts retrospectively, the full retrospective approach ('FRA') has been used unless it was impracticable. When the FRA is impracticable such as when there is a lack of sufficient and reliable data, an entity has an accounting policy choice to use either the modified retrospective approach ('MRA') or the fair value approach ('FVA'). The group has applied the MRA in France prior to 2019, and the FVA for the UK insurance business prior to 2019. The FVA has been applied for all other businesses prior to 2020 when the FRA is impracticable to apply.

Under the FVA, the valuation of insurance liabilities on transition is based on the applicable requirements of IFRS 13 'Fair Value Measurement'. This requires consideration of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The CSM is calculated as the difference between what a market participant would demand for assuming the unexpired risk associated with insurance contracts, including required profit, and the fulfilment cash flows that are determined using IFRS 17 principles.

In determining the fair value, the group considered the estimated profit margin that a market participant would demand in return for assuming the insurance liabilities with the consideration of the level of capital that a market participant would be required to hold, and the discount rate with an allowance for an illiquidity premium that takes into account the level of 'matching' between the group's assets and related liabilities. These assumptions were set taking into account the assumptions that a hypothetical market participant operating in each local jurisdiction would consider.

Amendments to IAS 12 'International Tax Reform - Pillar Two Model Rules'

On 23 May 2023, the IASB issued amendments to IAS 12 'International Tax Reform - Pillar Two Model Rules', which became effective immediately and were approved for adoption by all members of the UK Endorsement Board on 19 July 2023 and by the European Financial Reporting Advisory Group on 8 November 2023. On 20 June 2023, legislation was substantively enacted in the UK to introduce the OECD's Pillar Two global minimum tax rules and a UK qualified domestic minimum top-up tax, with effect from 1 January 2024. The group has applied the IAS 12 exemption from recognising and disclosing information on associated deferred tax assets and liabilities.

There were no other new standards or amendments to standards that had an effect on these financial statements.

(b) Future accounting developments

Minor amendments to IFRS Accounting Standards

The IASB has published a number of minor amendments to IFRS Accounting Standards that are effective from 1 January 2024. The group expects they will have an insignificant effect, when adopted, on the consolidated financial statements of the group and the separate financial statements of HSBC Bank plc.

The functional currency of the bank is sterling, which is also the presentational currency of the consolidated financial statements of the group.

Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured at historical cost, which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is recognised.

In the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not sterling are translated into the group's presentation currency at the rate of exchange at the balance sheet date, while their results are translated into sterling at the average rates of exchange for the reporting period. Exchange differences arising are recognised in other comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement.

(d) Presentation of information

Certain disclosures required by IFRS Accounting standards have been included in the audited sections of this Annual Report and Accounts 2023 as follows:

- disclosures concerning the nature and extent of risks relating to financial instruments and insurance contracts are included in the 'Report of the Directors: Risk' on pages 22 to 86;

- the 'Own funds' disclosure is included in the 'Report of the Directors: Capital Risk in 2023' on page 73; and

- in publishing the parent company financial statements together with the group financial statements, the bank has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its individual income statement and related notes.

(e) Critical estimates and judgements

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

Management has considered the impact of climate-related risks on HSBC's financial position and performance. While the effects of climate change are a source of uncertainty, as at 31 December 2023 management did not consider there to be a material impact on our critical judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular management has considered the known and observable potential impacts of climate-related risks of associated judgements and estimates in our value in use calculations.

(f) Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the group and the company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the uncertainty in the macroeconomic environment following, rising inflation and disrupted supply chains as a result of the ongoing Russia-Ukraine and Israel-Hamas wars. They also considered other top and emerging risks, including climate change, as well as the related impacts on profitability, capital and liquidity.

1.2 Summary of material accounting policies

(a) Consolidation and related policies

Investments in subsidiaries

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

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

The bank's investments in subsidiaries are stated at cost less impairment losses.

Impairment testing is performed where there is an indication of impairment, by comparing the recoverable amount of a cash-generating unit with its carrying amount.

Critical estimates and judgements

Investments in subsidiaries are tested for impairment when there is an indication that the investment may be impaired, which involves estimations of value in use reflecting management's best estimate of the future cash flows of the investment and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:

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

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

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

- Key assumptions used in estimating impairment in subsidiaries are described in Note 18.

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

Group sponsored structured entities

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

Interests in associates and joint arrangements

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

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

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

(b) Income and expense

Operating income

Interest income and expense

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

Interest on credit-impaired financial assets is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amount of the asset less allowance for ECL).

Non-interest income and expense

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

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

The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement. Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.

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

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

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

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

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

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

The accounting policies for insurance service result and insurance finance income/(expense) are disclosed in Note 1.2(j).

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, the group recognises the difference as a trading gain or loss at inception (a 'day 1 gain or loss'). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction either until the transaction matures or is closed out or the valuation inputs become observable.

The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the financial statements, unless they satisfy the IFRS offsetting criteria. Financial instruments are classified into one of three fair value hierarchy levels, described in Note 11, 'Fair values of financial instruments carried at fair value'.

Critical estimates and judgements

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

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

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

- Details on the group's level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonably possible alternative assumptions in determining their fair value are set out in Note 11.

(d) Financial instruments measured at amortised cost

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

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

Non-trading reverse repurchase, repurchase and similar agreements

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

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

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

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

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

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

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

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

- the use of the designation removes or significantly reduces an accounting mismatch;

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

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

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

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

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

- Financial assets and financial liabilities under unit-linked and non-linked investment contracts: A contract under which HSBC does not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with discretionary participation features ('DPF'), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds or by a valuation model. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in the same line.

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

(h) Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss, with changes in fair value generally recorded in the income statement. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value where doing so reduces an accounting mismatch, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.

Hedge accounting

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

Fair value hedge

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

Cash flow hedge

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

Derivatives that do not qualify for hedge accounting

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

(i) Impairment of amortised cost and FVOCI financial assets

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

Credit-impaired (stage 3)

The group determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether contractual payments of either principal or interest are past due for more than 90 days, there are other indications that the borrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition, or the loan is otherwise considered to be in default.

If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired.

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

Write-off

Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security.

In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

Forbearance

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

The group applies the EBA Guidelines on the application of definition of default for our retail portfolios, which affects credit risk policies and our reporting in respect of the status of loans as credit impaired principally due to forbearance (or curing thereof). Further details are provided under 'Forborne loans and advances' on page 32.

Performing forborne loans are initially stage 2 and remain classified as forborne until they meet applicable cure criteria (for example, they continue to not be in default and no other indicators of default are present for a period of at least 24 months). At this point, the loan is either stage 1 or stage 2 as determined by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms).

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

Loan modifications other than forborne loans

Loan modifications that are not identified as forborne are considered to be commercial restructurings. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that HSBC's rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructuring is at market rates and no payment-related concession has been provided. Modifications of certain higher credit risk wholesale loans are assessed for derecognition having regard to changes in contractual terms that either individually or in combination are judged to result in a substantially different financial instrument. Mandatory and general offer loan modifications that are not borrower specific, for example market-wide customer relief programmes generally do not result in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy. Changes made to these financial instruments that are economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change of the interest rate benchmark.

Significant increase in credit risk (stage 2)

An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument.

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

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


0.1-1.2	15bps
2.1-3.3	30bps

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

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


0.1	5 notches
1.1-4.2	4 notches
4.3-5.1	3 notches
5.2-7.1	2 notches
7.2-8.2	1 notch
8.3	0 notch

Further information about the 23-grade scale used for CRR can be found on page 31.

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

We continue to refine the retail transfer criteria approach for certain portfolios, as additional data becomes available, in order to utilise a more relative approach for certain portfolios. These enhancements take advantage of the increase in origination related data in the assessment of significant increases in credit risk by comparing remaining lifetime PD to the comparable remaining term lifetime PD at origination based on portfolio-specific origination segments.

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

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

Purchased or originated credit impaired

Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes new financial instruments recognised in most cases following the derecognition of forborne loans. The amount of change in lifetime ECL for a POCI loan is recognised in profit or loss until the POCI loan is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.

Movement between stages

Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. In the case of non-performing forborne loans such financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment and meet the curing criteria as described above.

Measurement of ECL

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

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

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

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

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


PD	- Through the cycle (represents long-run average PD throughout a full economic cycle). - The definition of default includes a backstop of 90+ days past due.	- Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD). - Default backstop of 90+ days past due for all portfolios.
EAD	- Cannot be lower than current balance	- Amortisation captured for term products
LGD	- Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn). - Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data. - Discounted using cost of capital. - All collection costs included.	- Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral). - No floors. - Discounted using the original effective interest rate of the loan. - Only costs associated with obtaining/selling collateral included.
Other		- Discounted back from point of default to balance sheet date.

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

The ECL for Wholesale stage 3 is determined primarily on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on estimates as of the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest.

Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on its estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral.

The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under up to four different scenarios are probability-weighted by reference to the status of the borrower, economic scenarios applied more generally by HSBC Group and judgement of in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases where an individual assessment is undertaken, the effect of different economic scenarios and work-out strategies results in an ECL calculation based on a most likely outcome which is adjusted to capture losses resulting from less likely but possible outcomes. For certain less significant cases, the bank may use an LGD-based modelled approach to ECL assessment, which factors in a range of economic scenarios.

Period over which ECL is measured

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

Forward-looking economic inputs

HSBC applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of its view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected credit loss in most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 41.

Critical estimates and judgements

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

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

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

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

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

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

- The section 'Measurement uncertainty and sensitivity analysis of ECL estimates', marked as audited from page 41 sets out the assumptions used in determining ECL, and provides an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions.

(j) Insurance contracts

A contract is classified as an insurance contract where the group accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. In addition, the group issues investment contracts with discretionary participation features ('DPF') which are also accounted for as insurance contracts as required by IFRS 17 'Insurance Contracts'.

Aggregation of insurance contracts

Individual insurance contracts that are managed together and subject to similar risks are identified as a portfolio. Contracts that are managed together usually belong to the same product group, and have similar characteristics such as being subject to a similar pricing framework or similar product management, and are issued by the same legal entity. If a contract is exposed to more than one risk, the dominant risk of the contract is used to assess whether the contract features similar risks. Each portfolio is further separated by the contract's expected profitability. The portfolios are split by their profitability into: (i) contracts that are onerous at initial recognition; (ii) contracts that at initial recognition have no significant possibility of becoming onerous subsequently; and (iii) the remaining contracts. These profitability groups are then divided by issue date, with most contracts the group issues after the transition date being grouped into calendar quarter cohorts. For multi-currency groups of contracts, the group considers its groups of contracts as being denominated in a single currency.

The measurement of the insurance contract liability is based on groups of insurance contracts as established at initial recognition, and will include fulfilment cash flows as well as the CSM representing the unearned profit. The group has elected to update the estimates used in the measurement on a year-to-date basis.

Fulfilment cash flows

The fulfilment cash flows comprise the following:

Best estimates of future cash flows

These cash flows within the contract boundary of each contract in the group include amounts expected to be collected from premiums and payouts for claims, benefits and expenses, and are projected using a range of scenarios and assumptions in an unbiased way based on the group's demographic and operating experience along with external mortality data where the group's own experience data is not sufficiently large in size to be credible.

Adjustment for the time value of money (i.e. discounting) and financial risks associated with the future cash flows

The estimates of future cash flows are adjusted to reflect the time value of money and the financial risks to derive an expected present value. The group generally makes use of stochastic modelling techniques in the estimation for products with options and guarantees.

A bottom-up approach is used to determine the discount rate to be applied to a given set of expected future cash flows. This is derived as the sum of the risk-free yield and an illiquidity premium. The risk-free yield is determined based on observable market data, where such markets are considered to be deep, liquid and transparent. When information is not available, management judgement is applied to determine the appropriate risk-free yield. Illiquidity premiums reflect the liquidity characteristics of the associated insurance contracts.

Risk adjustment for non-financial risk

The risk adjustment reflects the compensation required for bearing the uncertainty about the amount and timing of future cash flows that arises from non-financial risk. It is calculated as a 75th percentile level of stress over a one-year period. The level of the stress is determined with reference to external regulatory stresses and internal economic capital stresses.

For the main insurance manufacturing entity in the group, the one-year 75th percentile level of stress corresponds to the 60th percentile (2022: 60th percentile) based on an ultimate view of risk over all future years.

The group does not disaggregate changes in the risk adjustment between insurance service result (comprising insurance revenue and insurance service expense) and insurance finance income or expenses. All changes are included in insurance service result.

Measurement models

The variable fee approach ('VFA') measurement model is used for most of the contracts issued by the group, which is mandatory upon meeting the following eligibility criteria at inception:

- the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;

- the group expects to pay to the policyholder a substantial share of the fair value returns on the underlying items. The group considers that a substantial share is a majority of returns; and

- the group expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items. The group considers that a substantial proportion is a majority proportion of change on a present value probability-weighted average of all scenarios.

For some contracts measured under VFA, the other comprehensive income ('OCI') option is used. The OCI option is applied where the underlying items held by the group are not accounted for at fair value through profit or loss. Under this option, only the amount that matches income or expenses recognised in profit or loss on underlying items is included in finance income or expenses for these insurance contracts, and hence results in the elimination of accounting mismatches. The remaining amount of finance income or expenses for these insurance contracts issued for the period is recognised in OCI. In addition, the risk mitigation option is used for a number of economic offsets against the instruments that meet specific requirements.

The remaining contracts issued and the reinsurance contracts held are accounted for under the general measurement model ('GMM').

CSM and coverage units

The CSM represents the unearned profit and results in no income or expense at initial recognition when the group of contracts is profitable. The CSM is adjusted at each subsequent reporting period for changes in fulfilment cash flows relating to future service (e.g. changes in non-economic assumptions, including mortality and morbidity rates). For initial recognition of onerous groups of contracts and when groups of contracts become onerous subsequently, losses are recognised in insurance service expense immediately.

For groups of contracts measured using the VFA, changes in the group's share of the underlying items, and economic experience and economic assumption changes adjust the CSM, whereas these changes do not adjust the CSM under the GMM, but are recognised in profit or loss as they arise. However, under the risk mitigation option for VFA contracts, the changes in the fulfilment cash flows and the changes in the group's share in the fair value return on underlying items that the instruments mitigate are not adjusted in CSM but recognised in profit or loss. The risk mitigating instruments are primarily reinsurance contracts held.

The CSM is systematically recognised in insurance revenue to reflect the insurance contract services provided, based on the coverage units of the group of contracts. Coverage units are determined by the quantity of benefits and the expected coverage period of the contracts.

The group identifies the quantity of the benefits provided as follows:

- Insurance coverage: This is based on the expected net policyholder insurance benefit at each period after allowance for decrements, where net policyholder insurance benefit refers to the amount of sum assured less the fund value or surrender value.

- Investment services (including both investment-return service and investment-related service): This is based on a constant measure basis which reflects the provision of access for the policyholder to the facility.

For contracts that provide both insurance coverage and investment services, coverage units are weighted according to the expected present value of the future cash outflows for each service.

Insurance service result

Insurance revenue reflects the consideration to which the group expects to be entitled in exchange for the provision of coverage and other insurance contract services (excluding any investment components). Insurance service expenses comprise the incurred claims and other incurred insurance service expenses (excluding any investment components), and losses on onerous groups of contracts and reversals of such losses.

Insurance finance income and expenses

Insurance finance income or expenses comprise the change in the carrying amount of the group of insurance contracts arising from the effects of the time value of money, financial risk and changes therein. For VFA contracts, changes in the fair value of underlying items (excluding additions and withdrawals) are recognised in insurance finance income or expenses.

(k) Employee compensation and benefits

Share-based payments

The group enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for the provision of their services. The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement. Expenses are recognised when the employee starts to render service to which the award relates.

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

Post-employment benefit plans

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

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

Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.

Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.

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

(l) Tax

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

Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. Payments associated with any incremental base erosion and anti-abuse tax are reflected in tax expense in the period incurred.

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

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

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

Critical estimates and judgements

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

- Specific judgements supporting deferred tax assets are described in Note 7.	The recognition of deferred tax assets is sensitive to estimates of future cash flows projected for periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of cash flows thereafter, on which forecasts of future taxable profit are based, and which affect the expected recovery periods and the pattern of utilisation of tax losses and tax credits.

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

(m) Provisions, contingent liabilities and guarantees

Provisions

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

Critical estimates and judgements

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

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

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

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

Contingent liabilities, contractual commitments and guarantees

Contingent liabilities

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

Financial guarantee contracts

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

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

(n) Impairment of non-financial assets

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

Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying amount of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs. When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU.

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

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

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

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

Critical estimates and judgements

The classification as held for sale depends on certain judgements:

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

2	Net fee income

Net fee income by product type
	2023	2022¹	2021¹
	£m	£m	£m
Net fee income by product
Account services	339	302	271
Funds under management	408	420	465
Cards	59	56	44
Credit facilities	278	235	246
Broking income	327	354	368
Underwriting	239	171	286
Imports/exports	35	44	40
Remittances	114	101	84
Global custody	190	203	200
Corporate finance	45	124	132
Securities others - (including stock lending)	95	81	76
Trust income	55	49	43
Other	410	453	451
Fee income	2,594	2,593	2,706
Less: fee expense	(1,365)	(1,298)	(1,293)
Net fee income	1,229	1,295	1,413

Net fee income by global business
	MSS	GB	GBM Other	CMB	WPB	Corporate Centre	Total
	£m	£m	£m	£m	£m	£m	£m
Year ended 31 Dec 2023
Fee income	1,275	847	131	427	556	(642)	2,594
Less: fee expense	(1,496)	(177)	(102)	(19)	(207)	636	(1,365)
Net fee income/ (expense)	(221)	670	29	408	349	(6)	1,229

Year ended 31 Dec 2022¹
Fee income	1,301	817	69	425	580	(599)	2,593
Less: fee expense	(1,439)	(173)	(55)	(25)	(199)	593	(1,298)
Net fee income/ (expense)	(138)	644	14	400	381	(6)	1,295

Year ended 31 Dec 2021¹
Fee income	1,251	861	89	415	633	(543)	2,706
Less: fee expense	(1,245)	(188)	(83)	(54)	(255)	532	(1,293)
Net fee income/ (expense)	6	673	6	361	378	(11)	1,413

Net fee income includes £842m of fees earned on financial assets that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate) (2022: £778m; 2021: £935m), £247m of fees payable on financial liabilities that are not at fair value through profit of loss (other than amounts included in determining the effective interest rate) (2022: £229m; 2021: £221m), £654m of fees earned on trust and other fiduciary activities (2022: £673m; 2021: £709m), and £83m of fees payable relating to trust and other fiduciary activities (2022: £69m; 2021: £61m).

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

	2023	2022	2021
	£m	£m	£m
Net income arising on:
Net Trading activities	4,569	(2,840)	3
Other instruments managed on a fair value basis	(1,174)	5,715	1,730
Net income from financial instruments held for trading or managed on a fair value basis	3,395	2,875	1,733
Financial assets held to meet liabilities under insurance and investment contracts	1,231	(1,429)	1,305
Liabilities to customers under investment contracts	(63)	59	(91)
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss	1,168	(1,370)	1,214
Derivatives managed in conjunction with the group's issued debt securities	189	(736)	(337)
Other changes in fair value	(252)	838	329
Changes in fair value of designated debt and related derivatives	(63)	102	(8)
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	284	143	493
Year ended 31 Dec	4,784	1,750	3,432

4	Insurance business

The table below represents an analysis of the total insurance revenue and expenses recognised in the period:

Insurance Service result
	Year ended 31 Dec 2023			Year ended 31 Dec 2022¹
	Life direct participating and Investment DPF contracts²	Life other contracts³	Total	Life direct participating and Investment DPF contracts²	Life other contracts³	Total
	£m	£m	£m	£m	£m	£m
Insurance revenue
Amounts relating to changes in liabilities for remaining coverage	183	188	371	165	193	358
- Contractual service margin recognised for services provided	77	43	120	78	36	114
- Change in risk adjustment for non-financial risk for risk expired	6	6	12	5	7	12
- Expected incurred claims and other insurance service expenses	100	139	239	82	150	232
Recovery of insurance acquisition cash flows	2	6	8	1	2	3
Total insurance revenue	185	194	379	166	195	361
Insurance service expenses
Incurred claims and other insurance service expenses	(88)	(120)	(208)	(88)	(132)	(220)
Losses and reversal of losses on onerous contracts	(8)	(7)	(15)	(2)	(6)	(8)
Amortisation of insurance acquisition cash flows	(2)	(6)	(8)	(1)	(2)	(3)
Adjustments to liabilities for incurred claims	-	(24)	(24)	1	(10)	(9)
Total insurance service expenses	(98)	(157)	(255)	(90)	(150)	(240)
Total insurance service results	87	37	124	76	45	121

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

2 'Life direct participating and investment DPF contracts' are substantially measured under the variable fee approach measurement model.

3 'Life other contracts' are measured under the general measurement model.

Net investment return
	Year ended 31 Dec 2023			Year ended 31 Dec 2022¹
	Life direct participating and Investment DPF contracts	Life other contracts	Total	Life direct participating and Investment DPF contracts	Life other contracts	Total
	£m	£m	£m	£m	£m	£m
Investment return
Amounts recognised in profit or loss²	1,246	17	1,263	(1,086)	(4)	(1,090)
Amounts recognised in OCI³	404	-	404	(1,899)	-	(1,899)
Total investment return (memorandum)	1,650	17	1,667	(2,985)	(4)	(2,989)
Net finance (expense)/income
Changes in fair value of underlying items of direct participating contracts	(1,585)	-	(1,585)	2,979	-	2,979
Interest accreted	-	2	2	-	7	7
Effect of changes in interest rates and other financial assumptions	-	1	1	-	19	19
Effect of measuring changes in estimates at current rates and adjusting the CSM at rates on initial recognition	-	(4)	(4)	-	(1)	(1)
Total net finance (expenses)/income from insurance contracts	(1,585)	(1)	(1,586)	2,979	25	3,004
Represented by:
Amounts recognised in profit or loss	(1,183)	(1)	(1,184)	1,081	25	1,106
Amounts recognised in OCI	(402)	-	(402)	1,898	-	1,898
Total net investment results	65	16	81	(6)	21	15
Represented by:
Amounts recognised in profit or loss	63	16	79	(5)	21	16
Amounts recognised in OCI	2	-	2	(1)	-	(1)

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

2 Total Bank 'Net income/(expense) from assets and liabilities of insurance business, including related derivatives, measured at fair value through profit or loss' gain of £1,168m (2022: £1,370m loss) includes returns on assets and liabilities supporting insurance policies of £1,082m (2022: £1,300m loss) and on shareholder assets of £86m (2022: £70m loss). Investment returns of £1,263m (2022: £1,090m loss) include gains of £1,082m (2022: £1,300m loss) on underlying assets supporting insurance liabilities reported in 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss', £187m gains (2022: £210m gain) reported in 'Net interest income' and £6m loss (2022: nil) reported in 'Other operating income'.

3 'Amounts recognised in OCI' for the year ended 31 December 2023 included fair value gains of £407m (2022: £1,902m losses) and impairment of £3m (2022: £3m impairment reversal).

Reconciliation of amounts included in other comprehensive income for financial assets measured at fair value through other comprehensive income - Contracts measured under the modified retrospective approach
	2023	2022
	£m	£m
Balance at 1 Jan	(808)	459
Net change in fair value	363	(1,665)
Net amount reclassified to profit or loss	(5)	(1)
Related income tax	(93)	430
Foreign exchange and other	17	(31)
Balance at 31 Dec	(526)	(808)

Movements in carrying amounts of insurance contracts - Analysis by remaining coverage and incurred claims
	Year ended 31 Dec 2023
	Life direct participating and Investment DPF contracts				Life other contracts
	Liabilities for remaining coverage:				Liabilities for remaining coverage:
	Excluding loss component	Loss component	Incurred claims	Total	Excluding loss component	Loss component	Incurred claims	Total	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening assets	-	-	-	-	(49)	-	6	(43)	(43)
Opening liabilities	19,712	5	2	19,719	146	10	129	285	20,004
Net opening balance at 1 Jan 2023	19,712	5	2	19,719	97	10	135	242	19,961
Changes in the statement of profit or loss and other comprehensive income
Insurance revenue
Contracts under the fair value approach	(11)	-	-	(11)	(78)	-	-	(78)	(89)
Contracts under the modified retrospective approach	(119)	-	-	(119)	(17)	-	-	(17)	(136)
Other contracts²	(55)	-	-	(55)	(99)	-	-	(99)	(154)
Total insurance revenue	(185)	-	-	(185)	(194)	-	-	(194)	(379)
Insurance service expenses
Incurred claims and other insurance service expenses	-	(1)	89	88	-	(1)	121	120	208
Amortisation of insurance acquisition cash flows	2	-	-	2	6	-	-	6	8
Losses and reversal of losses on onerous contracts	-	8	-	8	-	7	-	7	15
Adjustments to liabilities for incurred claims	-	-	-	-	-	-	24	24	24
Total insurance service expenses	2	7	89	98	6	6	145	157	255
Investment components	(1,879)	-	1,879	-	(3)	-	3	-	-
Insurance service result	(2,062)	7	1,968	(87)	(191)	6	148	(37)	(124)
Net finance (income)/expense from insurance contracts³	1,585	-	-	1,585	-	-	1	1	1,586
Effect of movements in exchange rates	(371)	-	-	(371)	(1)	-	-	(1)	(372)
Total changes in the statement of profit or loss and other comprehensive income	(848)	7	1,968	1,127	(192)	6	149	(37)	1,090
Cash flows
Premiums received	1,471	-	-	1,471	218	-	-	218	1,689
Claims and other insurance service expenses paid, including investment components	(51)	-	(1,968)	(2,019)	-	-	(116)	(116)	(2,135)
Insurance acquisition cash flows	(15)	-		(15)	(28)	-		(28)	(43)
Total cash flows	1,405	-	(1,968)	(563)	190	-	(116)	74	(489)
Other movements	5	1	-	6	3	-	(17)	(14)	(8)
Net closing balance at 31 Dec 2023	20,274	13	2	20,289	98	16	151	265	20,554
Closing assets	-	-	-	-	(54)	4	9	(41)	(41)
Closing liabilities	20,274	13	2	20,289	152	12	142	306	20,595
Net closing balance at 31 Dec 2023	20,274	13	2	20,289	98	16	151	265	20,554

Movements in carrying amounts of insurance contracts - Analysis by remaining coverage and incurred claims (continued)
	Year ended 31 Dec 2022¹
	Life direct participating and Investment DPF contracts				Life other contracts
	Liabilities for:				Liabilities for:
	Excluding loss component	Loss component	Incurred claims	Total	Excluding loss component	Loss component	Incurred claims	Total	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening assets	-	-	-	-	(53)	1	5	(47)	(47)
Opening liabilities	21,916	4	2	21,922	170	4	105	279	22,201
Net opening balance at 1 Jan 2022	21,916	4	2	21,922	117	5	110	232	22,154
Changes in the statement of profit or loss and other comprehensive income
Insurance revenue
Contracts under the fair value approach	(10)	-	-	(10)	(83)	-	-	(83)	(93)
Contracts under the modified retrospective approach	(120)	-	-	(120)	(20)	-	-	(20)	(140)
Other contracts²	(36)	-	-	(36)	(92)	-	-	(92)	(128)
Total insurance revenue	(166)	-	-	(166)	(195)	-	-	(195)	(361)
Insurance service expenses
Incurred claims and other insurance service expenses	-	(1)	89	88	-	-	132	132	220
Amortisation of insurance acquisition cash flows	1	-	-	1	2	-	-	2	3
Losses and reversal of losses on onerous contracts	-	2	-	2	-	6	-	6	8
Adjustments to liabilities for incurred claims	-	-	(1)	(1)	-	-	10	10	9
Total insurance service expenses	1	1	88	90	2	6	142	150	240
Investment components	(1,687)	-	1,687	-	(3)	-	3	-	-
Insurance service result	(1,852)	1	1,775	(76)	(196)	6	145	(45)	(121)
Net finance income from insurance contracts³	(2,979)	-	-	(2,979)	(19)	-	(6)	(25)	(3,004)
Effect of movements in exchange rates	946	-	-	946	-	-	3	3	949
Total changes in the statement of profit or loss and other comprehensive income	(3,885)	1	1,775	(2,109)	(215)	6	142	(67)	(2,176)
Cash flows
Premiums received	1,721	-	-	1,721	215	-	-	215	1,936
Claims and other insurance service expenses paid, including investment components	(41)	-	(1,775)	(1,816)	-	-	(124)	(124)	(1,940)
Insurance acquisition cash flows	(14)	-	-	(14)	(26)	-	-	(26)	(40)
Total cash flows	1,666	-	(1,775)	(109)	189	-	(124)	65	(44)
Other movements	15	-	-	15	6	(1)	7	12	27
Net closing balance at 31 Dec 2022	19,712	5	2	19,719	97	10	135	242	19,961
Closing assets	-	-	-	-	(49)	-	6	(43)	(43)
Closing liabilities	19,712	5	2	19,719	146	10	129	285	20,004
Net closing balance at 31 Dec 2022	19,712	5	2	19,719	97	10	135	242	19,961

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

2 'Other contracts' are those contracts measured by applying IFRS 17 from inception of the contracts. This includes contracts measured under the full retrospective approach at Transition and contracts incepted after Transition.

3 'Net finance (income)/expense from insurance contracts' expense of £1,586m (2022: £3,004m income) comprises expense of £1,184m (2022: £1,106m income) recognised in the statement of profit or loss and expense of £402m (2022: £1,898m income) recognised in the statement of other comprehensive income.

Movements in carrying amounts of insurance contracts - Analysis by measurement component
	Year ended 31 Dec 2023
	Life direct participating and investment discretionary participating contracts					Life other contracts
		Contractual service margin					Contractual service margin
	Estimates of present value of future cash flows and risk adjustment	Contracts under the fair value approach	Contracts under the modified retros- pective approach	Other contracts²	Total	Estimates of present value of future cash flows and risk adjustment	Contracts under the fair value approach	Contracts under the modified retros- pective approach	Other contracts²	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening assets	-	-	-	-	-	(76)	6	-	27	(43)
Opening liabilities	18,771	29	657	262	19,719	134	114	15	22	285
Net opening balance at 1 Jan 2023	18,771	29	657	262	19,719	58	120	15	49	242
Changes in the statement of profit or loss and other comprehensive income
Changes that relate to current services
Contractual service margin recognised for services provided	-	(3)	(57)	(17)	(77)	-	(19)	(5)	(19)	(43)
Change in risk adjustment for non-financial risk expired	(6)	-	-	-	(6)	(6)	-	-	-	(6)
Experience adjustments	(12)	-	-	-	(12)	(19)	-	-	-	(19)
Changes that relate to future services
Contracts initially recognised in the year	(48)	-	-	48	-	(24)	-	-	25	1
Changes in estimates that adjust contractual service margin	133	(16)	(26)	(91)	-	(1)	9	5	(13)	-
Changes in estimates that result in losses and reversal of losses on onerous contracts	8	-	-	-	8	6	-	-	-	6
Changes that relate to past services
Adjustments to liabilities for incurred claims	-	-	-	-	-	24	-	-	-	24
Insurance service result	75	(19)	(83)	(60)	(87)	(20)	(10)	-	(7)	(37)
Net finance (income)/expense from insurance contracts³	1,585	-	-	-	1,585	(1)	1	-	1	1
Effect of movements in exchange rates	(352)	-	(14)	(5)	(371)	-	(1)	-	-	(1)
Total changes in the statement of profit or loss and other comprehensive income	1,308	(19)	(97)	(65)	1,127	(21)	(10)	-	(6)	(37)
Cash flows
Premiums received	1,471	-	-	-	1,471	218	-	-	-	218
Claims, other insurance service expenses paid (including investment components) and other cash flows	(2,019)	-	-	-	(2,019)	(116)	-	-	-	(116)
Insurance acquisition cash flows	(15)	-	-	-	(15)	(28)	-	-	-	(28)
Total cash flows	(563)	-	-	-	(563)	74	-	-	-	74
Other movements	1	-	1	4	6	(21)	-	-	7	(14)
Net closing balance at 31 Dec 2023	19,517	10	561	201	20,289	90	110	15	50	265
Closing assets	-	-	-	-	-	(63)	4	-	18	(41)
Closing liabilities	19,517	10	561	201	20,289	153	106	15	32	306
Net closing balance at 31 Dec 2023	19,517	10	561	201	20,289	90	110	15	50	265

Movements in carrying amounts of insurance contracts - Analysis by measurement component (continued)
	Year ended 31 Dec 2022
	Life direct participating and investment discretionary participating contracts					Life other contracts
		Contractual service margin					Contractual service margin
	Estimates of present value of future cash flows and risk adjustment	Contracts under the fair value approach	Contracts under the modified retros- pective approach	Other contracts²	Total	Estimates of present value of future cash flows and risk adjustment	Contracts under the fair value approach	Contracts under the modified retros- pective approach	Other contracts²	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening assets	-	-	-	-	-	(79)	17	-	15	(47)
Opening liabilities	21,172	34	520	196	21,922	139	94	19	27	279
Net opening balance at 1 Jan 2022	21,172	34	520	196	21,922	60	111	19	42	232
Changes in the statement of profit or loss and other comprehensive income
Changes that relate to current services
Contractual service margin recognised for services provided	-	(3)	(57)	(18)	(78)	-	(21)	(5)	(10)	(36)
Change in risk adjustment for non-financial risk expired	(5)	-	-	-	(5)	(7)	-	-	-	(7)
Experience adjustments	6	-	-	-	6	(20)	-	-	-	(20)
Changes that relate to future services
Contracts initially recognised in the year	(54)	-	-	54	-	(23)	-	-	25	2
Changes in estimates that adjust contractual service margin	(178)	1	161	16	-	(8)	11	-	(3)	-
Changes in estimates that result in losses and reversal of losses on onerous contracts	2	-	-	-	2	6	-	-	-	6
Changes that relate to past services
Adjustments to liabilities for incurred claims	(1)	-	-	-	(1)	10	-	-	-	10
Insurance service result	(230)	(2)	104	52	(76)	(42)	(10)	(5)	12	(45)
Net finance income from insurance contracts³	(2,979)	-	-	-	(2,979)	(26)	1	-	-	(25)
Effect of movements in exchange rates	901	1	33	11	946	(2)	3	1	1	3
Total changes in the statement of profit or loss and other comprehensive income	(2,308)	(1)	137	63	(2,109)	(70)	(6)	(4)	13	(67)
Cash flows
Premiums received	1,721	-	-	-	1,721	215	-	-	-	215
Claims, other insurance service expenses paid (including investment components) and other cash flows	(1,816)	-	-	-	(1,816)	(124)	-	-	-	(124)
Insurance acquisition cash flows	(14)	-	-	-	(14)	(26)	-	-	-	(26)
Total cash flows	(109)	-	-	-	(109)	65	-	-	-	65
Other movements	16	(4)	-	3	15	3	15	-	(6)	12
Net closing balance at 31 Dec 2022	18,771	29	657	262	19,719	58	120	15	49	242
Closing assets	-	-	-	-	-	(76)	6	-	27	(43)
Closing liabilities	18,771	29	657	262	19,719	134	114	15	22	285
Net closing balance at 31 Dec 2022	18,771	29	657	262	19,719	58	120	15	49	242

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

2 'Other contracts' are those contracts measured by applying IFRS 17 from inception of the contracts. These include contracts measured under the full retrospective approach at Transition and contracts incepted after Transition.

Effect of contracts initially recognised in the year
	Year ended 31 Dec 2023			Year ended 31 Dec 2022¹
	Profitable contracts issued	Onerous contracts issued	Total	Profitable contracts issued	Onerous contracts issued	Total
	£m	£m	£m	£m	£m	£m
Life direct participating and investment DPF contracts
Estimates of present value of cash outflows	1,169	15	1,184	1,377	12	1,389
- Insurance acquisition cash flows	10	-	10	-	-	-
- Claims and other insurance service expenses payable	1,159	15	1,174	1,377	12	1,389
Estimates of present value of cash inflows	(1,222)	(15)	(1,237)	(1,437)	(12)	(1,449)
Risk adjustment for non-financial risk	5	-	5	4	-	4
Contractual service margin	48	-	48	56	-	56
Losses recognised on initial recognition	-	-	-	-	-	-
Life other contracts
Estimates of present value of cash outflows	129	9	138	150	22	172
- Insurance acquisition cash flows	1	-	1	-	-	-
- Claims and other insurance service expenses payable	128	9	137	150	22	172
Estimates of present value of cash inflows	(161)	(8)	(169)	(183)	(20)	(203)
Risk adjustment for non-financial risk	7	-	7	7	1	8
Contractual service margin	25	-	25	25	-	25
Losses recognised on initial recognition	-	(1)	(1)	-	(2)	(2)

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

Present value of expected future cash flows of insurance contract liabilities and contractual service margin
	Less than 1 year	1-2 years	2-3 years	3-4 years	4-5 years	5-10 years	10-20 years	Over 20 years	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Insurance liability future cash flows
Life direct participating and investment DPF contracts	614	660	648	612	555	1,809	(15)	14,536	19,419
Life other contracts	33	-	(4)	(5)	(4)	13	28	59	120
Insurance liability future cash flows at 31 Dec 2023	647	660	644	607	551	1,822	13	14,595	19,539
Remaining contractual service margin
Life direct participating and investment DPF contracts	66	62	59	55	51	204	208	67	772
Life other contracts	28	24	19	16	14	42	29	3	175
Remaining contractual service margin at 31 Dec 2023	94	86	78	71	65	246	237	70	947
Insurance liability future cash flows
Life direct participating and investment DPF contracts	196	327	343	336	316	1,004	7	16,148	18,677
Life other contracts	46	(7)	(8)	(8)	(7)	(9)	33	59	99
Insurance liability future cash flows at 31 Dec 2022¹	242	320	335	328	309	995	40	16,207	18,776
Remaining contractual service margin
Life direct participating and investment DPF contracts	78	74	70	66	61	248	261	90	948
Life other contracts	28	23	19	16	14	44	31	8	183
Remaining contractual service margin at 31 Dec 2022¹	106	97	89	82	75	292	292	98	1,131

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

Discount rates

The discount rates applied to expected future cash flows are determined through a bottom-up approach as set out in Note 1.2(j) 'Summary of material accounting policies - Insurance contracts' on page 127. The blended average of discount rates used within our most material manufacturing entities are as follows:

	HSBC Life (UK) Ltd	HSBC Assurances Vie (France)
	£	€
At 31 Dec 2023
10 year discount rate (%)	3.28	2.96
20 year discount rate (%)	3.43	2.97
At 31 Dec 2022
10 year discount rate (%)	3.71	3.66
20 year discount rate (%)	3.54	3.33

5	Employee compensation and benefits

	2023	2022	2021
	£m	£m	£m
Wages and salaries	1,344	1,365	1,609
Social security costs	294	278	341
Post-employment benefits¹	68	55	73
Year ended 31 Dec	1,706	1,698	2,023

1 Includes £52m (2022: £42m; 2021: £37m) in employer contributions to the defined contribution pension plans.

Average number of persons employed by the group during the year by global business¹
	2023	2022	2021
MSS	3,954	3,722	4,322
GB	2,125	2,155	2,458
GBM Other	27	81	140
CMB	2,536	2,748	3,023
WPB	6,119	6,484	6,709
Corporate Centre	48	215	171
Year ended 31 Dec	14,809	15,405	16,823

1 Average numbers of headcount in corporate centre are allocated in respective businesses on the basis of amounts charged to the respective global businesses.

Share-based payments

'Wages and salaries' includes the effect of share-based payments arrangements, of which £58m were equity settled (2022: £45m; 2021: £96m), as follows:

	2023	2022	2021
	£m	£m	£m
Restricted share awards	58	45	96
Savings-related and other share award option plans	1	1	1
Year ended 31 Dec	59	46	97

HSBC share awards

Deferred share awards (including annual incentive awards, long-term incentive ('LTI') awards delivered in shares) and Group Performance Share Plan ('GPSP')	- An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted. - Deferred awards generally require employees to remain in employment over the vesting period and are generally not subject to performance conditions after the grant date. An exception to these are the LTI awards, which are subject to performance conditions. - Deferred share awards generally vest over a period of three, four, five or seven years. - Vested shares may be subject to a retention requirement post-vesting. - Awards are subject to malus and clawback.
International Employee Share Purchase Plan ('ShareMatch')	- The plan was first introduced in Hong Kong in 2013 and now includes employees based in 31 jurisdictions. - Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency. - Matching awards are added at a ratio of one free share for every three purchased. - Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months.

Movement on HSBC share awards
	2023	2022
	Number	Number
	(000s)	(000s)
Restricted share awards outstanding at 1 Jan	20,454	21,828
Additions during the year¹	10,998	11,651
Released in the year¹	(11,864)	(12,279)
Forfeited in the year	(383)	(746)
Restricted share awards outstanding at 31 Dec	19,205	20,454
Weighted average fair value of awards granted (£)	4.74	4.96

1 Includes a number of share option plans transferred from or to other subsidiaries of HSBC Holdings plc.

HSBC share option plans

Savings-related share option plans ('Sharesave')

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

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

- The exercise price is set at a 20% (2022: 20%) discount to the market value immediately preceding the date of invitation.

Calculation of fair values

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

Movement on HSBC share option plans
	Savings-related share option plans
	Number	WAEP¹
	(000s)	£
Outstanding at 1 Jan 2023	5,782	2.91
Granted during the year²	1,348	4.57
Exercised during the year	(2,428)	2.72
Expired during the year	(38)	4.73
Forfeited during the year	(325)	2.94
Outstanding at 31 Dec 2023	4,339	3.51
Weighted average remaining contractual life (years)	2.37

Outstanding at 1 Jan 2022	6,936	2.87
Granted during the year²	(179)	3.96
Exercised during the year	(173)	3.36
Expired during the year	(177)	4.72
Forfeited during the year	(625)	2.98
Outstanding at 31 Dec 2022	5,782	2.91
Weighted average remaining contractual life (years)	2.18

1 Weighted average exercise price.

2 Includes a number of share option plans transferred from or to other subsidiaries of HSBC Holdings plc.

Post-employment benefit plans

We operate a number of pension plans throughout Europe for our employees. Some are defined benefit plans, of which HSBC Germany Pension Plan is the most prominent within the group.

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

HSBC Germany Pension Plan (HSBC Trinkaus & Burkhardt Pension Plan)

HSBC Germany Pension Plan is a final salary scheme and is calculated based on the employee length of service multiplied by a predefined benefit accrual and earnings. The pension is paid when the benefit falls due and is a specified pension payment, lumpsum or combination thereof. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the operation of the plan. Its assets are held separately from the assets of the group.

The strategic aim of the investment is to achieve, as continuously as possible, an increase in value over time. For this purpose, the fund invests mainly in government bonds, corporate bonds, investment funds and equities. It invests predominantly in developed regions. Overall, emphasis is placed on having a high degree of diversification.

Plan assets were created to fund the pension obligations and separated through what is known as a contractual trust agreement (CTA). HSBC Trinkaus Vermögenstreuhänder e.V. and HSBC Trinkaus Mitarbeitertreuhänder e.V. assume the role of trustee. Active members of the trustee are Bank employees.

The Bank regularly aims to comprehensively finance the committed benefits externally. There is no obligation to allocate contributions to the CTA. The Bank is entitled to assets that are not needed to fund the committed benefits. No further additions to the plan assets are envisaged at the present time.

In accordance with the Memorandum and Articles of Association, the revenues may only be used, for example, for pension payments or for reinvestment. Similarly, withdrawals may only be made in accordance with the Memorandum and Articles of Association.

The latest measurement of the defined benefit obligation of the plan at 31 December 2023 was carried out by Hans-Peter Kieselmann (Fellow of the German Association of Actuaries ('DAV')) and Helga Bader, at Willis Towers Watson GmbH, using the projected unit credit method. The next measurement will have an effective date of 31 December 2024.

Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans
	Fair value of plan assets	Present value of defined benefit obligations	Total
	£m	£m	£m
Defined benefit pension plans	459	(479)	(20)
Defined benefit healthcare plans	-	(46)	(46)
At 31 Dec 2023	459	(525)	(66)
Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities')			(117)
Total employee benefit assets (within 'Prepayments, accrued income and other assets')			51

Defined benefit pension plans	534	(531)	3
Defined benefit healthcare plans	-	(51)	(51)
At 31 Dec 2022	534	(582)	(48)
Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities')			(121)
Total employee benefit assets (within 'Prepayments, accrued income and other assets')			73

Defined benefit pension plans

Net asset/(liability) under defined benefit pension plans
	Fair value of plan assets		Present value of defined benefit obligations		Net defined benefit asset/(liability)
	HSBC Germany Pension Plan²	Other plans	HSBC Germany Pension Plan²	Other plans	HSBC Germany Pension Plan²	Other plans
	£m	£m	£m	£m	£m	£m
At 1 Jan 2023	405	129	(357)	(174)	48	(45)
Service cost	-	-	(7)	(5)	(7)	(5)
- current service cost	-	-	(8)	(6)	(8)	(6)
- past service gains	-	-	1	1	1	1
Net interest income/(cost) on the net defined benefit asset/(liability)	11	6	(9)	(9)	2	(3)
Remeasurement effects recognised in other comprehensive income	6	(6)	(29)	1	(23)	(5)
- return on plan assets (excluding interest income)	6	(6)	-	-	6	(6)
- actuarial losses financial assumptions	-	-	(29)	(8)	(29)	(8)
- actuarial gains demographic assumptions	-	-	-	2	-	2
- actuarial gains experience assumptions	-	-	-	7	-	7
- other changes	-	-	-	-	-	-
Exchange differences	(8)	-	7	1	(1)	1
Benefits paid	-	(7)	12	15	12	8
Other movements^1,3	(77)	-	79	(4)	2	(4)
At 31 Dec 2023	337	122	(304)	(175)	33	(53)

Net asset/(liability) under defined benefit pension plans (continued)
	Fair value of plan assets		Present value of defined benefit obligations		Net defined benefit asset/(liability)
	HSBC Germany Pension Plan²	Other plans	HSBC Germany Pension Plan²	Other plans	HSBC Germany Pension Plan²	Other plans
	£m	£m	£m	£m	£m	£m
At 1 Jan 2022	434	234	(438)	(304)	(4)	(70)
Service cost	-	-	4	(8)	4	(8)
- current service cost	-	-	3	(9)	3	(9)
- past service gains	-	-	1	1	1	1
Net interest income/(cost) on the net defined benefit asset/(liability)	(3)	5	(4)	(5)	(7)	-
Remeasurement effects recognised in other comprehensive income	(51)	(99)	94	98	43	(1)
- return on plan assets (excluding interest income)	(51)	(99)	-	-	(51)	(99)
- actuarial gains financial assumptions	-	-	94	106	94	106
- actuarial losses demographic assumptions	-	-	-	(2)	-	(2)
- actuarial losses experience assumptions	-	-	-	(6)	-	(6)
- other changes	-	-	-	-	-	-
Exchange differences	22	1	(20)	(3)	2	(2)
Benefits paid	-	(7)	10	13	10	6
Other movements¹	3	(5)	(3)	35	-	30
At 31 Dec 2022	405	129	(357)	(174)	48	(45)

1 Other movements include contributions by the group, contributions by employees, administrative costs and tax paid by plan.

2 The HSBC Germany Pension Plan and its comparatives have been disclosed as it is considered to be a prominent plan within the group. Figures disclosed comprise this prominent plan and other plans in Germany.

3 Other movements for HSBC Germany Pension Plan include reclassification of Lebensarbeitszeitkonto (LAZK) plan to long term employee benefits.

HSBC Germany does not expect to make contributions to the HSBC Germany Pension Plan during 2024. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

Benefits expected to be paid from plans
	2024	2025	2026	2027	2028	2029-2033
	£m	£m	£m	£m	£m	£m
HSBC Germany Pension Plan¹	12	12	11	12	12	69

1 The duration of the defined benefit obligation is 14.2 years for the HSBC Germany Pension Plan under the disclosure assumptions adopted (2022: 13.7 years).

Fair value of plan assets by asset classes
	31 Dec 2023				31 Dec 2022
	Value	Quoted market price in active market	No quoted market price in active market	Thereof HSBC	Value	Quoted market price in active market	No quoted market price in active market	Thereof HSBC
	£m	£m	£m	£m	£m	£m	£m	£m
HSBC Germany Pension Plan
Fair value of plan assets	337	312	25	-	405	352	53	-
- equities	3	3	-	-	8	8	-	-
- bonds fixed income	196	196	-	-	173	173	-	-
- bonds index linked	6	6	-	-	26	26	-	-
- bonds other	-	-	-	-	-	-	-	-
- property	3	-	3	-	-	-	-	-
- pooled investment vehicle	-	-	-	-	-	-	-	-
- other	129	107	22	-	198	145	53	-

Post-employment defined benefit plans' principal actuarial financial assumptions

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

Key actuarial assumptions
	Discount rate	Inflation rate	Rate of increase for pensions	Rate of pay increase
	%	%	%	%
HSBC Germany Pension Plan
At 31 Dec 2023	3.17	2.25	2.25	2.25
At 31 Dec 2022	3.71	2.25	2.25	2.25

Mortality tables and average life expectancy at age 60
	Mortality table	Life expectancy at age 60 for a male member currently:		Life expectancy at age 60 for a female member currently:
		Aged 60	Aged 40	Aged 60	Aged 40
HSBC Germany Pension Plan
At 31 Dec 2023	RT 2018G1¹	25.4	28.3	29.1	31.3
At 31 Dec 2022	RT 2018G1¹	25.2	28.2	28.9	31.2

1 Heubeck tables: RT 2018G. These are generally accepted and used mortality tables for occupational pension plans in Germany, taking into account future mortality improvements and lighter mortality for higher-paid pensioners.

The effect of changes in key assumptions
	HSBC Germany Pension Plan Obligation
	Financial impact of increase			Financial impact of decrease
	2023	2022	2021	2023	2022	2021
	£m	£m	£m	£m	£m	£m
Discount rate - increase/decrease of 0.25%	(9)	(7)	(13)	9	8	13
Inflation rate - increase/decrease of 0.25%	7	7	11	(6)	(5)	(9)
Pension payments and deferred pensions - increase/decrease of 0.25%	6	5	9	(6)	(5)	(8)
Pay - increase/decrease of 0.25%	1	1	2	(1)	(1)	(2)
Change in mortality - increase of 1 Year	9	10	16	N/A	N/A	N/A

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

Directors' emoluments

The aggregate emoluments of the Directors of the bank, computed in accordance with the Companies Act 2006 as amended by statutory instrument 2008 No.410, were:

	2023	2022	2021
	£000	£000	£000
Fees¹	1,427	1,410	1,525
Salaries and other emoluments²	2,792	2,294	3,569
Annual incentives³	1,163	979	694
Long-term incentives⁴	1,193	779	511
Year ended 31 Dec	6,575	5,462	6,299

1 Fees paid to non-executive Directors.

2 Salaries and other emoluments include Fixed Pay Allowances.

3 Discretionary annual incentives for executive Directors are based on a combination of individual and corporate performance, and are determined by the Remuneration Committee of the bank's parent company, HSBC Holdings plc. Incentive awards made to executive directors are delivered in the form of cash and HSBC Holdings plc shares. The total amount shown is comprised of £581,561 (2022: £489,285) in cash and £581,561 (2022: £489,285) in Restricted Shares, which is the upfront portion of the annual incentive granted in respect of performance year 2023.

4 The amount shown is comprised of £493,868 (2022: £380,893) in deferred cash, £699,552 (2022: £398,162) in deferred Restricted Shares. These amounts relate to the portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2023. The total vesting period of deferred cash and share awards is no less than three years, with 33% of the award vesting on each of the first and second anniversaries of the date of the award, and the balance vesting on the third anniversary of the date of the award. The deferred share awards are subject to at least a six-month retention period upon vesting. Details of the Plans are contained within the Directors' Remuneration Report of HSBC Holdings plc. The cost of any awards subject to service conditions under the HSBC Share Plan 2011 are recognised through an annual charge based on the fair value of the awards, apportioned over the period of service to which the award relates.

5 In addition to the amounts set out above, a payment was also made to a Director relating to compensation for loss of employment. As the payment related to a longer period of employment with the Group (and not specifically to the Directorship) it is not included in the tables. However, the amount paid that related (on a time apportioned basis) to the period of Directorship is £169,358.

No Director exercised share options over HSBC Holdings plc ordinary shares during the year.

No Director is accruing retirement benefits under a money purchase scheme in respect of Directors' qualifying services (2022: None).

In addition, there were payments during 2023 under unfunded retirement benefit agreements to former Directors of £410,403 (2022: £394,334). The provision at 31 December 2023 in respect of unfunded pension obligations to former Directors amounted to £3,811,422 (2022: £4,286,951).

Of these aggregate figures, the following amounts are attributable to the highest paid Director:

	2023	2022	2021
	£000	£000	£000
Salaries and other emoluments	1,641	1,641	1,399
Annual incentives¹	1,074	859	558
Long-term incentives²	990	677	390
Year ended 31 Dec	3,705	3,177	2,347

1 Awards made to the highest paid Director are delivered in the form of cash and HSBC Holdings plc shares. The amount shown comprises £537,040 (2022: £429,285) in cash and £537,040 (2022: £429,285) in Restricted Shares.

2 The amount shown comprises £408,439 (2022: £330,687) in deferred cash, £581,165 (2022: £345,818) in deferred Restricted Shares. These amounts relate to a portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2023. The total vesting period of deferred cash and share awards is no less than three years, with 33% of the award vesting on each of the first and second anniversaries of the date of the award, and the balance vesting on the third anniversary of the date of the award. The share awards are subject to a six-month retention period upon vesting.

No pension contributions were made by the bank in respect of services by the highest paid Director during the year (2022: £0).

6	Auditors' remuneration

	2023	2022	2021
	£m	£m	£m
Audit fees payable to PwC	13.1	11.3	10.4
Other audit fees payable	0.6	0.7	0.4
Year ended 31 Dec	13.7	12.0	10.8

Fees payable by the group to PwC
	2023	2022	2021
	£m	£m	£m
Fees for HSBC Bank plc's statutory audit^1,5	5.3	5.5	4.8
Fees for other services provided to the group	17.5	15.6	14.3
- audit of the group's subsidiaries²	7.8	5.8	5.6
- audit-related assurance services³	5.2	5.3	5.7
- other assurance services⁴	4.5	4.5	3.0
Year ended 31 Dec	22.8	21.1	19.1

1 Fees payable to PwC for the statutory audit of the consolidated financial statements of the group and the separate financial statements of HSBC Bank plc. They exclude amounts payable for the statutory audit of the bank's subsidiaries which have been included in 'Fees for other services provided to the group'.

2 Including fees payable to PwC for the statutory audit of the bank's subsidiaries.

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

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

5 2023 Audit fees payable to PwC includes prior year adjustments after finalisation of the 2022 financial statements.

In addition to the above, the estimated fees paid to PwC by third parties associated with HSBC Bank plc amount to £0.6m. In these cases, HSBC Bank plc was connected with the contracting party and may therefore have been involved in appointing PwC. These fees arose from services such as reviewing the financial position of corporate concerns that borrow from HSBC Bank plc.

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

Tax

Tax expense
	2023	2022¹	2021¹
	£m	£m	£m
Current tax	386	(283)	(187)
- for this year	359	(243)	(245)
- adjustments in respect of prior years	27	(40)	58
Deferred tax	41	(363)	164
- origination and reversal of temporary differences	25	(529)	248
- effect of changes in tax rates	-	33	(56)
- adjustments in respect of prior years	16	133	(28)
Year ended 31 Dec²	427	(646)	(23)

2 In addition to amounts recorded in the income statement, a tax charge of £334m (2022: credit of £393m; 2021 credit of £135m) was recorded directly to equity.

The group's profits are taxed at different rates depending on the country in which they arise. The key applicable corporate tax rates in 2023 included the UK and France. The UK tax rate applying to HSBC Bank plc and its banking subsidiaries in 2023 was a blended rate of 27.75% (2022: 27.00%), comprising 23.50% corporation tax plus 4.25% surcharge on UK banking profits, following an increase in the main rate of UK corporation tax from 19% to 25% and a reduction in the UK banking surcharge rate from 8% to 3% from 1 April 2023. The applicable tax rate in France was 26% (2022: 26%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

On 20 June 2023, legislation was substantively enacted in the UK, the jurisdiction of the entity's ultimate parent entity, HSBC Holdings plc, to introduce the 'Pillar Two' global minimum tax model rules of the OECD's Inclusive Framework on Base Erosion and Profit Shifting (BEPS), as well as a qualified domestic minimum tax, with effect from 1 January 2024. Under these rules, a top-up tax liability arises where the effective tax rate of the HSBC Holdings plc operations in a jurisdiction, calculated based on principles set out in the OECD's Pillar Two model rules, is below 15%.

Based on the group's forecasts, top-up tax liabilities are expected to arise in four jurisdictions, in particular Jersey, due to low statutory tax rates. During 2023, the government of Bermuda announced the introduction of a corporation tax system to apply to Bermudian entities of large multinational groups, with a statutory rate of 15%, with effect from 1 January 2025. This is expected to apply to the HSBC Group's operations in Bermuda.

Tax reconciliation

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

	2023		2022¹		2021¹
	£m	%	£m	%	£m	%
Profit/(loss) before tax	2,152		(1,199)		1,023
Tax expense
Taxation at UK corporation tax rate	506	23.5	(228)	19.0	194	19.0
Impact of taxing overseas profits at different rates	(20)	(0.9)	(75)	6.3	7	0.7
UK banking surcharge	5	0.2	(47)	3.9	(2)	(0.2)
Items increasing the tax charge in 2023:
- UK and European bank levies	78	3.6	50	(4.2)	72	7.0
- adjustments in respect of prior periods	58	2.7	93	(7.8)	30	2.9
- provisions for fines and penalties	23	1.1	3	(0.3)	(2)	(0.2)
- local taxes and overseas withholding taxes	19	0.9	4	(0.3)	(4)	(0.4)
- effect of losses (profits) in associates and joint ventures	5	0.2	5	(0.4)	(43)	(4.2)
- other	25	1.2	(5)	0.4	(32)	3.0
- impact of changes in tax rates	-	-	33	(2.8)	(56)	(5.5)
- impact of temporary differences between French tax and IFRS	-	-	-	-	324	31.7
Items reducing the tax charge in 2023:
- movements in unrecognised deferred tax	(81)	(3.8)	(268)	22.4	(47)	(4.6)
- non-taxable gain on transfer of Guernsey branch	(74)	(3.4)	-	-	-	-
- deductions for AT1 coupon payments	(60)	(2.8)	(55)	4.6	(53)	(5.2)
- impact of held for sale adjustments	(25)	(1.2)	47	(3.9)	-	-
- non-taxable income and gains	(21)	(1.0)	(93)	7.8	(92)	(9.0)
- movements in provisions for uncertain tax positions	(11)	(0.5)	(110)	9.2	5	0.5
- tax impact of sale of French retail banking business	-	-	-	-	(324)	(31.7)
Year ended 31 Dec	427	19.8	(646)	53.9	(23)	(2.2)

The effective tax rate for the year was 19.8% (2022: 53.9%; 2021: (2.2)%). The 2023 effective tax rate of 19.8% reflects the mix of profits and losses in different jurisdictions and is decreased by the release of provisions for uncertain tax positions, recognition of a deferred tax asset for prior period excess expenses in HSBC Life (UK) and the non-taxable gain arising on the transfer of the Guernsey branch to PBRS and increased by non-deductible UK and European bank levy expenses and charges in respect of prior periods.

The effective tax rate for 2022 of 53.9% represented a tax credit on a loss before tax and was increased by non-recurring items, including recognition of previously unrecognised deferred tax assets in France and a tax credit of £110m from the release of provisions for uncertain tax positions and reduced by charges in respect of prior periods and non-deductible UK and European bank levy expenses.

In 2021, the signing of a framework agreement for the sale of the French retail banking business resulted in a tax deduction (tax value of £324m) for a provision for loss on disposal which was recorded in the French tax return. A deferred tax liability of the same amount arose as a consequence of the temporary difference between the French tax basis and IFRS in respect of this provision. This temporary difference reversed in 2022 upon application of held for sale accounting for IFRS, resulting in the reversal of this deferred tax liability to the income statement.

Accounting for taxes involves some estimation because tax law is uncertain and its application requires a degree of judgement, which authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account external advice where appropriate. We do not expect significant liabilities to arise in excess of the amounts provided. The current tax asset includes an estimate of tax recoverable from HMRC with regards to past dividends received from EU resident companies. The ultimate resolution of this matter involves litigation for which the outcome is uncertain.

Movement of deferred tax assets and liabilities
	Cash flow hedges	Loan impairment provisions	Property, plant and equipment	FVOCI investments	Relief for tax losses³	Other²	Total
	£m	£m	£m	£m	£m	£m	£m
Assets	391	60	227	474	628	151	1,931
Liabilities	-	-	-	(351)	-	-	(351)
At 1 Jan 2023	391	60	227	123	628	151	1,580
Income statement	-	(4)	(36)	44	(17)	(28)	(41)
Other comprehensive income	(252)	-	-	(43)	-	65	(230)
Foreign exchange and other adjustments	(1)	3	-	8	(10)	(37)	(37)
At 31 Dec 2023	138	59	191	132	601	151	1,272
Assets⁴	138	59	191	329	601	204	1,522
Liabilities⁴	-	-	-	(197)	-	(53)	(250)

Assets	40	60	206	40	382	65	793
Liabilities	-	-	-	-	-	-	-
At 1 Jan 2022¹	40	60	206	40	382	65	793
Income statement	-	(2)	22	(124)	221	246	363
Other comprehensive income	348	-	-	190	-	(151)	387
Foreign exchange and other adjustments	3	2	(1)	17	25	(9)	37
At 31 Dec 2022¹	391	60	227	123	628	151	1,580
Assets⁴	391	60	227	474	628	151	1,931
Liabilities⁴	-	-	-	(351)	-	-	(351)

2 Other deferred tax assets and liabilities relate to share-based payments, expense provisions and other temporary differences.

3 The deferred tax asset recognised in respect of tax losses mainly relates to France (£566m) and US State tax losses of the New York branch of HSBC Bank plc (£28m), both of which are supported by future profit forecasts.

4 After netting off balances within countries, the balances as disclosed in the financial statements are as follows: deferred tax assets £1,278m (2022: £1,583m); and deferred tax liabilities £6m (2022: £3m).

Management has assessed the likely availability of future taxable profits against which to recover the deferred tax assets of the Company and the group, taking into consideration the reversal of existing taxable temporary differences, past business performance and forecasts of future business performance.

The group's net deferred tax asset of £1,272m (2022: £1,580m) included a net UK deferred tax asset of £441m (2022: £597m) and a net deferred asset of £693m (2022: £797m) in France, of which £566m (2022: £588m) related to tax losses which are expected to be substantially recovered within 12 years.

Management is satisfied that although the Company recorded a UK tax loss in the year, the aforementioned evidence is sufficient to support recognition of all UK deferred tax assets. These deferred tax assets are supported by future profit forecasts for the whole of HSBC's UK tax group. This includes a number of companies which are not part of the HSBC Bank plc group, in particular HSBC UK Bank plc and its subsidiaries.

Movement of deferred tax assets and liabilities
	Retirement benefits	Property, plant and equipment	FVOCI	Goodwill and intangibles	Relief for tax losses²	Other¹	Total
The bank	£m	£m	£m	£m	£m	£m	£m
Assets²	14	231	75	-	28	260	608
Lliabilities²	-	-	-	-	-	-	-
At 1 Jan 2023	14	231	75	-	28	260	608
Income statement	(15)	(40)	-	-	-	38	(17)
Other comprehensive income	10	-	(32)	-	-	(179)	(201)
Foreign exchange and other adjustments	-	-	-	-	-	-	-
At 31 Dec 2023	9	191	43	-	28	119	390
Assets³	9	191	43	-	28	120	391
Liabilities³	-	-	-	-	-	(1)	(1)

Assets	17	207	-	191	69	48	532
Liabilities	-	-	(23)	-	-	-	(23)
At 1 Jan 2022	17	207	(23)	191	69	48	509
Income statement	(4)	24	-	(191)	(41)	(6)	(218)
Other comprehensive income	1	-	98	-	-	210	309
Foreign exchange and other adjustments	-	-	-	-	-	8	8
At 31 Dec 2022	14	231	75	-	28	260	608
Assets³	14	231	75	-	28	260	608
Liabilities³	-	-	-	-	-	-	-

1 Other deferred tax assets and liabilities relate to fair value of own debt, loan impairment allowances, share-based payments and cash flow hedges.

2 The deferred tax asset recognised in respect of losses mainly relates to US State tax losses of the New York branch of HSBC Bank plc, which are supported by future profit forecasts.

3 After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets £391m (2022: £608m) and deferred tax liabilities £1m (2022: nil).

Unrecognised deferred tax

The group

The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was £673m (2022: £1,017m). These amounts include unused tax losses, tax credits and temporary differences of £668m (2022: £912m) arising in the New York branch of HSBC Bank plc. The unrecognised losses expire after 10 years or do not expire.

The bank

The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was £668m (2022: £912m). These amounts include unused tax losses, tax credits and temporary differences arising in the New York branch of HSBC Bank plc of £668m (2022: £912m). The unrecognised losses expire after 10 years or do not expire.

Deferred tax is not recognised in respect of the group's investments in subsidiaries and branches where HSBC Bank plc is able to control the timing of remittance or other realisation and where remittance or realisation is not probable in the foreseeable future. The aggregate temporary differences relating to unrecognised deferred tax liabilities arising on investments in subsidiaries and branches is £3.7bn (2022: £3.3bn) and the corresponding unrecognised deferred tax liability was £27m (2022: £26m).

8	Dividends

Dividends to the parent company
	2023		2022		2021
	£ per share	£m	£ per share	£m	£ per share	£m
Dividends paid on ordinary shares
Current year:
- first special dividend¹	0.941	750	1.067	850	-	-
- second special dividend	-	-	-	-	-	-
Total	0.941	750	1.067	850	-	-
Dividends on preference shares classified as equity
Dividend on HSBC Bank plc non-cumulative third dollar preference shares	0.001	-	0.001	-	0.001	-
Total	0.001	-	0.001	-	0.001	-
Total coupons on capital securities classified as equity	-	211	-	202	-	194
Dividends to parent	-	961	-	1,052	-	194

1 Special dividend declared/paid on CET1 capital in 2023.

Total coupons on capital securities classified as equity
		2023	2022	2021
	First call date	£m	£m	£m
Undated Subordinated additional Tier 1 instruments
Undated Subordinated Resettable Additional Tier 1 instrument 2015	Dec 2020	85	87	84
Undated Subordinated Resettable Additional Tier 1 instrument 2016	Jan 2022	12	11	12
Undated Subordinated Resettable Additional Tier 1 instrument 2018	Mar 2023	28	28	10
Undated Subordinated Resettable Additional Tier 1 instrument 2018	Mar 2023	10	10	28
Undated Subordinated Resettable Additional Tier 1 instrument 2019	Nov 2024	24	24	24
Undated Subordinated Resettable Additional Tier 1 instrument 2019	Nov 2024	15	8	7
Undated Subordinated Resettable Additional Tier 1 instrument 2019	Dec 2024	19	20	20
Undated Subordinated Resettable Additional Tier 1 instrument 2019	Jan 2025	9	8	9
Undated Subordinated Resettable Additional Tier 1 instrument 2022	Mar 2027	9	6	-
Total		211	202	194

9	Segmental analysis

The Chief Executive, supported by the rest of the Executive Committee, is considered the Chief Operating Decision Maker ('CODM') for the purposes of identifying the group's reportable segments.

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

Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. Measurement of segmental assets, liabilities, income and expenses is in accordance with the group's accounting policies. Shared costs are included in segments on the basis of actual recharges. The intra-group elimination items for the global businesses are presented in Corporate Centre.

The types of products and services from which each reportable segment derives its revenue are discussed in the 'Strategic Report - Our global businesses' on page 7.

By operating segment:

Profit/(loss) before tax
	2023
	MSS	GB	GBM Other	CMB	WPB	Corporate Centre	Total
	£m	£m	£m	£m	£m	£m	£m
Net operating income before change in ECL and other credit impairment charges¹	1,996	2,092	13	1,746	1,339	320	7,506
- of which: net interest income/(expense)	212	1,430	(13)	1,331	946	(1,755)	2,151
Change in ECL and other credit impairment charges	(9)	(91)	3	(83)	12	(1)	(169)
Net operating income/(expense)	1,987	2,001	16	1,663	1,351	319	7,337
Total operating expenses	(2,131)	(1,013)	(282)	(663)	(894)	(159)	(5,142)
Operating profit/(loss)	(144)	988	(266)	1,000	457	160	2,195
Share of loss in associates and joint ventures	-	-	-	-	-	(43)	(43)
Profit/(loss) before tax	(144)	988	(266)	1,000	457	117	2,152
	%	%	%	%	%		%
Cost efficiency ratio	106.8	48.4	n/a	38.0	66.8		68.5

	2022²
Net operating income/(expense) before change in ECL and other credit impairment charges¹	2,446	1,571	(108)	1,433	(432)	(606)	4,304
- of which: net interest income/(expense)	(54)	903	(16)	925	710	(564)	1,904
Change in ECL and other credit impairment charges	(1)	(153)	(1)	(54)	(7)	(6)	(222)
Net operating income/(expense)	2,445	1,418	(109)	1,379	(439)	(612)	4,082
Total operating expenses	(1,936)	(932)	(406)	(663)	(834)	(480)	(5,251)
Operating profit/(loss)	509	486	(515)	716	(1,273)	(1,092)	(1,169)
Share of loss in associates and joint ventures	-	-	(2)	-	-	(28)	(30)
Profit/(loss) before tax	509	486	(517)	716	(1,273)	(1,120)	(1,199)
	%	%	%	%	%		%
Cost efficiency ratio	79.1	59.3	n/a	46.3	n/a		122.0

	2021²
Net operating income before change in ECL other credit impairment charges¹	2,042	1,367	311	1,096	1,277	27	6,120
- of which: net interest income/(expense)	(232)	568	224	649	567	(22)	1,754
Change in ECL and other credit impairment charges	1	140	5	7	23	(2)	174
Net operating income/(expense)	2,043	1,507	316	1,103	1,300	25	6,294
Total operating expenses	(2,055)	(918)	(597)	(611)	(981)	(300)	(5,462)
Operating profit/(loss)	(12)	589	(281)	492	319	(275)	832
Share of profit in associates and joint ventures	-	-	-	-	-	191	191
Profit/(loss) before tax	(12)	589	(281)	492	319	(84)	1,023
	%	%	%	%	%		%
Cost efficiency ratio	100.6	67.2	192.0	55.7	76.8		89.2

1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. It includes inter-segment revenue which is eliminated in Corporate centre, amounting to £62m (2022: £108m; 2021: £127m).

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

	2023	2022¹	2021
	£m	£m	£m
External net operating income by country	7,506	4,304	6,120
- United Kingdom	3,609	3,068	2,937
- France	1,819	(70)	1,677
- Germany	836	732	887
- Other countries	1,242	574	619

Balance sheet by business
	MSS	GB	GBM Other	CMB	WPB	Corporate Centre	Total
	£m	£m	£m	£m	£m	£m	£m
31 Dec 2023
Loans and advances to customers	2,718	34,723	67	24,226	13,666	91	75,491
Customer accounts	41,102	85,303	9,434	58,620	28,337	145	222,941

31 Dec 2022
Loans and advances to customers	2,785	37,523	115	25,219	6,826	146	72,614
Customer accounts	45,320	79,606	5,903	55,749	29,211	159	215,948

10	Trading assets

	The group		The bank
	2023	2022	2023	2022
	£m	£m	£m	£m
Treasury and other eligible bills	4,808	3,712	4,353	3,061
Debt securities	27,724	21,873	16,071	13,960
Equity securities	50,020	38,330	47,498	35,407
Trading securities	82,552	63,915	67,922	52,428
Loans and advances to banks¹	5,094	3,987	5,060	3,872
Loans and advances to customers¹	13,050	11,976	12,784	11,323
At 31 Dec	100,696	79,878	85,766	67,623

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

11	Fair values of financial instruments carried at fair value

Control framework

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

For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. In inactive markets, the group will source alternative market information to validate the financial instrument's fair value, with greater weight given to information that is considered to be more relevant and reliable. The factors that are considered in this regard are, inter alia:

- the extent to which prices may be expected to represent genuine traded or tradable prices;

- the degree of similarity between financial instruments;

- the degree of consistency between different sources;

- the process followed by the pricing provider to derive the data;

- the elapsed time between the date to which the market data relates and the balance sheet date; and

- the manner in which the data was sourced.

For fair values determined using valuation models, the control framework may include, as applicable, development or validation by independent support functions of: (i) the logic within valuation models; (ii) the inputs to these models; (iii) any adjustments required outside the valuation models; and (iv) where possible, model outputs. Valuation models are subject to a process of due diligence and calibration before becoming operational and are calibrated against external market data on an ongoing basis.

Financial liabilities measured at fair value

In certain circumstances, the group records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are based either on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread that is appropriate to the group's liabilities.

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

Fair value hierarchy

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

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

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

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

Financial instruments carried at fair value and bases of valuation
	2023				2022¹
	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
The group	£m	£m	£m	£m	£m	£m	£m	£m
Recurring fair value measurements at 31 Dec
Assets
Trading assets	72,164	26,482	2,050	100,696	52,493	24,647	2,738	79,878
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	7,008	9,178	2,882	19,068	6,183	6,380	3,318	15,881
Derivatives	428	171,865	1,823	174,116	2,296	221,205	1,737	225,238
Financial investments	25,857	10,743	907	37,507	19,007	8,902	1,447	29,356
Liabilities
Trading liabilities	29,791	12,233	252	42,276	26,258	14,592	415	41,265
Financial liabilities designated at fair value	992	27,595	3,958	32,545	933	23,888	2,461	27,282
Derivatives	994	168,145	2,335	171,474	1,744	214,645	2,478	218,867

The bank
Recurring fair value measurements at 31 Dec
Assets
Trading assets	58,152	25,772	1,842	85,766	41,524	23,940	2,159	67,623
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	206	2,910	65	3,181	252	1,094	272	1,618
Derivatives	152	151,661	1,952	153,765	2,037	192,778	1,899	196,714
Financial investments	15,074	1,233	55	16,362	11,214	976	71	12,261
Liabilities
Trading liabilities	13,177	11,503	252	24,932	11,771	13,591	403	25,765
Financial liabilities designated at fair value	-	20,811	2,635	23,446	-	17,565	1,850	19,415
Derivatives	601	149,850	2,348	152,799	1,691	189,908	1,737	193,336

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly.

Transfers between Level 1 and Level 2 fair values
	Assets				Liabilities
	Financial investments	Trading assets	Designated and otherwise mandatorily measured at fair value through profit or loss	Derivatives	Trading liabilities	Designated at fair value	Derivatives
	£m	£m	£m	£m	£m	£m	£m
At 31 Dec 2023
Transfers from Level 1 to Level 2	26	252	-	-	4	-	-
Transfers from Level 2 to Level 1	121	408	-	-	41	-	-

At 31 Dec 2022
Transfers from Level 1 to Level 2	126	1,194	-	39	-	-	-
Transfers from Level 2 to Level 1	189	682	-	32	-	-	-

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

Fair value adjustments

Fair value adjustments are adopted when the group determines there are additional factors considered by market participants that are not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement, such as when models are enhanced and fair value adjustments may no longer be required.

Fair value adjustments
	2023		2022
	MSS	Corporate Centre	MSS	Corporate Centre
	£m	£m	£m	£m
Type of adjustment
Risk-related	327	32	359	33
- bid-offer	155	-	188	-
- uncertainty	42	2	50	-
- credit valuation adjustment	61	27	98	29
- debt valuation adjustment	(20)	-	(64)	-
- funding fair value adjustment	89	3	87	4
- other	-	-	-	-
Model-related	41	-	31	-
- model limitation	41	-	31	-
- other	-	-	-	-
Inception profit (Day 1 P&L reserves)	54	-	64	-
At 31 Dec	422	32	454	33

Bid-offer

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

Uncertainty

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

Credit and debit valuation adjustments

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

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

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

HSBC calculates the CVA by applying the probability of default ('PD') of the counterparty, conditional on the non-default of HSBC, to HSBC's expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default.

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

For most products, HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty. The methodologies do not, in general, account for 'wrong-way risk', which arises when the underlying value of the derivative prior to any CVA is positively correlated to the PD of the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation.

Funding fair value adjustment

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

Model limitation

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

Inception profit (Day 1 P&L reserves)

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

Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3
	Assets					Liabilities
	Financial Investments	Held for trading	Designated and otherwise mandatorily measured at fair value through profit or loss	Derivatives	Total	Held for trading	Designated at fair value	Derivatives	Total
The group	£m	£m	£m	£m	£m	£m	£m	£m	£m
Private equity including strategic investments	66	1	2,656	-	2,723	8	1	-	9
Asset-backed securities	160	97	6	-	263	-	-	-	-
Structured notes	-	-	-	-	-	-	3,490	-	3,490
Derivatives	-	-	-	1,823	1,823	-	-	2,335	2,335
Other portfolios	681	1,952	220	-	2,853	244	467	-	711
At 31 Dec 2023	907	2,050	2,882	1,823	7,662	252	3,958	2,335	6,545

Private equity including strategic investments	85	59	3,058	-	3,202	104	-	-	104
Asset-backed securities	275	170	78	-	523	-	-	-	-
Structured notes	-	-	-	-	-	-	2,461	-	2,461
Derivatives	-	-	-	1,737	1,737	-	-	2,478	2,478
Other portfolios	1,087	2,509	182	-	3,778	311	-	-	311
At 31 Dec 2022	1,447	2,738	3,318	1,737	9,240	415	2,461	2,478	5,354

The bank
Private equity including strategic investments	55	-	65	-	120	8	-	-	8
Asset-backed securities	-	97	-	-	97	-	-	-	-
Structured notes	-	-	-	-	-	-	2,635	-	2,635
Derivatives	-	-	-	1,952	1,952	-	-	2,343	2,343
Other portfolios	-	1,745	-	-	1,745	244	-	5	249
At 31 Dec 2023	55	1,842	65	1,952	3,914	252	2,635	2,348	5,235

Private equity including strategic investments	54	58	272	-	384	103	-	-	103
Asset-backed securities	17	170	-	-	187	-	-	-	-
Structured notes	-	-	-	-	-	-	1,850	-	1,850
Derivatives	-	-	-	1,899	1,899	-	-	1,728	1,728
Other portfolios	-	1,931	-	-	1,931	300	-	9	309
At 31 Dec 2022	71	2,159	272	1,899	4,401	403	1,850	1,737	3,990

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

Private equity including strategic investments

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

Asset-backed securities

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

Structured notes

The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes, issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios. Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates.

Derivatives

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

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

Movement in Level 3 financial instruments
	Assets				Liabilities
	Financial Investments	Trading assets	Designated and otherwise mandatorily measured at fair value through profit or loss	Derivatives	Trading liabilities	Designated at fair value	Derivatives
The group	£m	£m	£m	£m	£m	£m	£m
At 1 Jan 2023	1,447	2,738	3,318	1,737	415	2,461	2,478
Total gains or losses) on assets and total gains or losses on liabilities recognised in profit or loss	(1)	189	8	851	(268)	60	1,008
- net income from financial instruments held for trading or managed on a fair value basis	-	189	-	851	(268)	-	1,008
- changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	-	-	8	-	-	60	-
- gains less losses from financial investments at fair value through other comprehensive income	(1)	-	-	-	-	-	-
Total total gains or losses recognised in other comprehensive income ('OCI')¹	(1)	(28)	(92)	(2)	-	(8)	(5)
- financial investments: fair value total gains or losses	29	-	-	-	-	-	-
- exchange differences	(30)	(28)	(92)	(2)	-	(8)	(5)
Purchases	51	1,004	305	-	233	-	-
New issuances	-	1	-	-	2	3,005	-
Sales	(213)	(1,675)	(484)	-	(253)	(2)	-
Settlements	(38)	(79)	(72)	(1,009)	138	(1,169)	(1,295)
Transfers out	(451)	(561)	(120)	(233)	(30)	(660)	(339)
Transfers in	113	461	19	479	15	271	488
At 31 Dec 2023	907	2,050	2,882	1,823	252	3,958	2,335
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2023	-	-	(75)	520	-	(217)	(823)
- trading income/(expense) excluding net interest income	-	-	-	520	-	-	(823)
- net income/(expense) from other financial instruments designated at fair value	-	-	(75)	-	-	(217)	-

At 1 Jan 2022	1,387	1,344	3,171	1,816	580	2,121	2,454
Total gains/(losses) on assets and total (gains)/losses on liabilities recognised in profit or loss	(6)	(415)	(84)	564	(223)	(638)	723
- net income from financial instruments held for trading or managed on a fair value basis	-	(415)	-	564	(223)	-	723
- changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	-	-	(84)	-	-	(638)	-
- gains less losses from financial investments at fair value through other comprehensive income	(6)	-	-	-	-	-	-
Total gains/(losses) recognised in other comprehensive income ('OCI')¹	(145)	12	238	3	1	29	17
- financial investments: fair value gains/(losses)	(232)	-	-	-	-	-	-
- exchange differences	87	12	238	3	1	29	17
Purchases	601	2,067	562	-	151	-	-
New issuances	-	-	-	-	7	1,705	-
Sales	(142)	(716)	(594)	-	(120)	(78)	-
Settlements	(90)	(323)	(51)	(731)	(407)	(575)	(701)
Transfers out	(199)	(283)	(2)	(473)	(15)	(564)	(582)
Transfers in	41	1,052	78	558	441	461	567
At 31 Dec 2022	1,447	2,738	3,318	1,737	415	2,461	2,478
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2022	-	(5)	49	565	2	30	2,339
- trading income/(expense) excluding net interest income	-	(5)	-	565	2	-	2,339
- net income from other financial instruments designated at fair value	-	-	49	-	-	30	-

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

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

Movement in Level 3 financial instruments (continued)
	Assets				Liabilities
	Financial Investments	Trading Assets	Designated and otherwise mandatorily measured at fair value through profit or loss	Derivatives	Trading Liabilities	Designated at fair value	Derivatives
The bank	£m	£m	£m	£m	£m	£m	£m
At 1 Jan 2023	71	2,159	272	1,899	403	1,850	1,737
Total gains/(losses) on assets and total (gains)/losses on liabilities recognised in profit or loss	-	192	22	1,025	(271)	13	1,222
- net income from financial instruments held for trading or managed on a fair value basis	-	192	-	1,025	(271)	-	1,222
- changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	-	-	22	-	-	13	-
- gains less losses from financial investments at fair value through other comprehensive income	-	-	-	-	-	-	-
Total gains/(losses) recognised in other comprehensive income ('OCI')¹	-	(18)	(7)	-	-	-	-
- financial investments: fair value gains/(losses)	-	-	-	-	-	-	-
- exchange differences	-	(18)	(7)	-	-	-	-
Purchases	-	930	-	-	233	-	-
New issuances	-	-	-	-	-	2,548	-
Sales	-	(1,280)	(154)	-	(252)	-	-
Settlements	(1)	(72)	(69)	(1,192)	154	(1,580)	(746)
Transfers out	(15)	(490)	-	(287)	(30)	(449)	(400)
Transfers in	-	421	1	507	15	253	535
At 31 Dec 2023	55	1,842	65	1,952	252	2,635	2,348
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2023	-	-	(1)	511	-	(180)	(818)
- trading income/(expense) excluding net interest income	-	-	-	511	-	-	(818)
- net income/(expense) from other financial instruments designated at fair value	-	-	(1)	-	-	(180)	-

At 1 Jan 2022	53	1,334	361	1,952	554	1,563	2,722
Total gains/(losses) on assets and total (gains)/losses on liabilities recognised in profit or loss	2	(419)	(91)	665	(216)	(569)	45
- net income from financial instruments held for trading or managed on a fair value basis	-	(419)	-	665	(216)	-	45
- changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	-	-	(91)	-	-	(569)	-
- gains less losses from financial investments at fair value through other comprehensive income	2	-	-	-	-	-	-
Total gains/(losses) recognised in other comprehensive income ('OCI')¹	1	-	24	-	-	-	-
- financial investments: fair value gains/(losses)	1	-	-	-	-	-	-
- exchange differences	-	-	24	-	-	-	-
Purchases	-	1,495	-	-	151	-	-
New issuances	-	-	-	-	-	1,682	-
Sales	-	(659)	(12)	-	(120)	-	-
Settlements	-	(323)	(8)	(850)	(392)	(557)	(1,025)
Transfers out	-	(283)	(2)	(541)	(15)	(471)	(606)
Transfers in	15	1,014	-	673	441	202	601
At 31 Dec 2022	71	2,159	272	1,899	403	1,850	1,737
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2022	-	-	-	688	-	19	3,020
- trading income/(expense) excluding net interest income	-	-	-	688	-	-	3,020
- net income from other financial instruments designated at fair value	-	-	-	-	-	19	-

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

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

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

Sensitivity of Level 3 fair values to reasonably possible alternative assumptions
	2023				2022
	Reflected in profit or loss		Reflected in OCI		Reflected in profit or loss		Reflected in OCI
	Favourable changes	Un- favourable changes	Favourable changes	Un- favourable changes	Favourable changes	Un- favourable changes	Favourable changes	Un- favourable changes
The group	£m	£m	£m	£m	£m	£m	£m	£m
Derivatives, trading assets and trading liabilities¹	478	(225)	-	-	201	(261)	-	-
Designated and otherwise mandatorily measured at fair value through profit or loss	193	(194)	-	-	236	(235)	-	-
Financial investments	10	(9)	23	(25)	9	(9)	27	(19)
Year ended 31 Dec	681	(428)	23	(25)	446	(505)	27	(19)

The bank
Derivatives, trading assets and trading liabilities¹	478	(225)	-	-	193	(253)	-	-
Designated and otherwise mandatorily measured at fair value through profit or loss	11	(11)	-	-	45	(45)	-	-
Financial investments	1	-	6	(6)	0	-	14	(6)
Year ended 31 Dec	490	(236)	6	(6)	238	(298)	14	(6)

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

Sensitivity of Level 3 fair values to reasonably possible alternative assumptions by instrument type
	2023				2022
	Reflected in profit or loss		Reflected in OCI		Reflected in profit or loss		Reflected in OCI
	Favourable changes	Un-favourable changes	Favourable changes	Un-favourable changes	Favourable changes	Un-favourable changes	Favourable changes	Un-favourable changes
	£m	£m	£m	£m	£m	£m	£m	£m
Private equity including strategic investments	182	(184)	6	(6)	225	(389)	8	(7)
Asset-backed securities	28	(16)	2	(2)	28	(17)	12	(5)
Structured notes	5	(5)	-	-	5	(5)	-	-
Derivatives	237	(182)	-	-	44	(44)	-	-
Other portfolios	229	(41)	15	(17)	144	(50)	7	(7)
Total	681	(428)	23	(25)	446	(505)	27	(19)

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

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

Key unobservable inputs to Level 3 financial instruments

Quantitative information about significant unobservable inputs in Level 3 valuations
	Fair value				2023		2022
	Assets	Liabilities	Valuation techniques	Key unobservable inputs	Full range of inputs		Full range of inputs
	£m	£m	Valuation techniques	Key unobservable inputs	Lower	Higher	Lower	Higher
Private equity including strategic investments	2,723	9	See below	See below	N/A	N/A	N/A	N/A
Asset-backed securities	263	-
- CLO/CDO¹	34	-	Market proxy	Bid quotes	-	94	-	92
- Other ABSs	229	-	Market proxy	Bid quotes		220	-	99
Structured notes	-	3,490
- equity-linked notes	-	3,050	Model - Option model	Equity Volatility	6%	154%	6%	99%
- equity-linked notes	-	3,050		Equity Correlation	35%	100%	32%	99%
- fund-linked notes	-	-	Model - Option model	Fund Volatility
- FX-linked notes	-	11	Model - Option model	FX Volatility	1%	18%	3%	20%
- other	-	429
Derivatives	1,823	2,335
Interest rate derivatives:	621	616
- securitisation swaps	114	106	Model - Discounted cash flow	Constant Prepayment Rate	5%	10%	5%	10%
- long-dated swaptions	44	54	Model - Option model	IR Volatility	11%	34%	9%	33%
- other	463	456
FX derivatives:	299	358
- FX options	250	311	Model - Option model	FX Volatility	3%	31%	3%	46%
- other	49	47
Equity derivatives:	658	1,044
- long-dated single stock options	305	400	Model - Option model	Equity Volatility	7%	87%	7%	153%
- other²	353	644
Credit derivatives:	245	317
- other	245	317
Other portfolios	2,853	711
- repurchase agreements	553	243	Model - Discounted cash flow	IR Curve	3%	8%	1%	9%
- other³	2,300	468
At 31 Dec	7,662	6,545

1 Collateralised loan obligation/collateralised debt obligation.

2 Other Equity Derivatives consists mainly of Swaps and OTC Options.

3 Other consists of various instruments including investment in funds, repurchase agreement and bonds.

Private equity including strategic investments

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

Prepayment rates

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

Market proxy

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

Volatility

Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option.

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

Correlation

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

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

Credit spread

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

Inter-relationships between key unobservable inputs

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

12	Fair values of financial instruments not carried at fair value

Fair values of financial instruments not carried at fair value and bases of valuation
		Fair value
	Carrying amount	Quoted market price Level 1	Observable inputs Level 2	Significant unobservable inputs Level 3	Total
The group	£m	£m	£m	£m	£m
At 31 Dec 2023
Assets
Loans and advances to banks	14,371	-	14,371	-	14,371
Loans and advances to customers	75,491	-	-	74,904	74,904
Reverse repurchase agreements - non-trading	73,494	-	73,494	-	73,494
Financial investments - at amortised cost	8,861	7,173	1,660	4	8,837
Liabilities
Deposits by banks	22,943	-	22,950	-	22,950
Customer accounts	222,941	-	223,067	-	223,067
Repurchase agreements - non-trading	53,416	-	53,416	-	53,416
Debt securities in issue	13,443	-	13,320	138	13,458
Subordinated liabilities	14,920	-	15,219	-	15,219

At 31 Dec 2022
Assets
Loans and advances to banks	17,109	-	17,112	-	17,112
Loans and advances to customers	72,614	-	-	72,495	72,495
Reverse repurchase agreements - non-trading	53,949	-	53,949	-	53,949
Financial investments - at amortised cost	3,248	2,336	848	8	3,192
Liabilities
Deposits by banks	20,836	-	20,900	-	20,900
Customer accounts	215,948	-	215,955	-	215,955
Repurchase agreements - non-trading	32,901	-	32,901	-	32,901
Debt securities in issue	7,268	-	7,124	132	7,256
Subordinated liabilities	14,528	-	14,434	-	14,434

Fair values of selected financial instruments not carried at fair value and bases of valuation - assets and disposal groups held for sale
		Fair value
	Carrying amount	Quoted market price Level 1	Observable inputs Level 2	Significant unobservable inputs Level 3	Total
	£m	£m	£m	£m	£m
At 31 Dec 2023
Assets
Loans and advances to banks	8,103	-	8,103	-	8,103
Loans and advances to customers	13,345	-	-	12,902	12,902
Reverse repurchase agreements - non-trading	-	-	-	-	-
Liabilities
Deposits by banks	-	-	-	-	-
Customer accounts	17,587	-	17,587	-	17,587
Debt securities in issue	1,080	-	1,066	-	1,066

At 31 Dec 2022
Assets
Loans and advances to banks	127	-	131	-	131
Loans and advances to customers	21,067	-	-	19,481	19,481
Reverse repurchase agreements - non-trading	208	-	208	-	208
Liabilities
Deposits by banks	2	-	2	-	2
Customer accounts	20,478	-	20,393	-	20,393
Debt securities in issue	1,100	-	1,100	-	1,100

Fair values of financial instruments not carried at fair value and bases of valuation
		Fair value
	Carrying amount	Quoted market price Level 1	Observable inputs Level 2	Significant unobservable inputs Level 3	Total
The bank	£m	£m	£m	£m	£m
At 31 Dec 2023
Assets
Loans and advances to banks	11,670	-	11,688	-	11,688
Loans and advances to customers	32,443	-	-	32,359	32,359
Reverse repurchase agreements - non-trading	56,973	-	56,973	-	56,973
Financial investments - at amortised cost	12,029	5,738	6,328	-	12,066
Liabilities
Deposits by banks	18,775	-	18,796	-	18,796
Customer accounts	133,373	-	133,373	-	133,373
Repurchase agreements - non-trading	48,842	-	48,842	-	48,842
Debt securities in issue	7,353	-	7,372	-	7,372
Subordinated liabilities	14,658	-	15,015	-	15,015

At 31 Dec 2022
Assets
Loans and advances to banks	14,486	-	14,508	-	14,508
Loans and advances to customers	36,992	-	-	36,875	36,875
Reverse repurchase agreements - non-trading	43,055	-	43,055	-	43,055
Financial investments - at amortised cost	6,378	1,984	4,305	-	6,289
Liabilities
Deposits by banks	13,594	-	13,594	-	13,594
Customer accounts	141,714	-	141,714	-	141,714
Repurchase agreements - non-trading	29,638	-	29,638	-	29,638
Debt securities in issue	4,656	-	4,656	-	4,656
Subordinated liabilities	14,252	-	14,139	-	14,139

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

Valuation

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

Loans and advances to banks and customers

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

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

Financial investments

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

Deposits by banks and customer accounts

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

Debt securities in issue and subordinated liabilities

Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.

Repurchase and reverse repurchase agreements - non-trading

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

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