Annual Financial Report - 49 of 54

RNS Number : 0592I

HSBC Holdings PLC

20 March 2015

 



Principal subsidiaries of HSBC Holdings

			At 31 December 2014
			Country of     incorporation   or registration		HSBC's interest in equity capital %		Issued equity capital			Share                                              class
Europe
HSBC Asset Finance (UK) Limited			England		100		£265m			Ordinary £1
HSBC Bank A.S.			Turkey		100		TRL652m			A-Common TRL1                    B-Common TRL1
HSBC Bank plc			England		100		£797m			Ordinary £1         Preferred Ordinary £1              Series 2 Third Dollar             Preference US$0.01                               Third Dollar             Preference US$0.01
HSBC France			France		99.99		€337m			Shares €5.00
HSBC Private Banking Holdings (Suisse) SA			Switzerland		100		CHF1,363m			Ordinary CHF1,000
HSBC Trinkaus & Burkhardt AG			Germany		80.65		€75.4m			Shares of no par value
Asia
Hang Seng Bank Limited1			Hong Kong		62.14		HK$9, 658m			Ordinary no par value
HSBC Bank Australia Limited			Australia		100		A$811m			Ordinary no par value
HSBC Bank (China) Company Limited			PRC5		100		RMB15,400m			Ordinary CNY1.00
HSBC Bank Malaysia Berhad			Malaysia		100		RM115m			Ordinary RM0.50
HSBC Bank (Taiwan) Limited			Taiwan		100		TWD34,800m			Ordinary TWD10.00
HSBC Life (International) Limited			Bermuda		100		HK$4,178m			Ordinary HK$1.00
The Hongkong and Shanghai Banking Corporation Limited			Hong Kong		100		HK$96,052m			Ordinary no par value                            CIP2 US$1.00                          CRP3 US$1.00                           NIP4 US$1.00
Middle East and North Africa
HSBC Bank Middle East Limited			Jersey		100		US$931m			Ordinary US$1.00                          CRP3 US$1.00
HSBC Bank Egypt S.A.E.			Egypt		94.53		EGP2,796m			Ordinary EGP84.00
North America
HSBC Bank Canada			Canada		100		C$1,225m			Common shares of no                                   par value
HSBC Bank USA, N.A.			USA		100		US$2m			Common US$100
HSBC Finance Corporation			USA		100		-6			Common US$0.01
HSBC Securities (USA) Inc.			USA		100		-6			Common US$0.05
Latin America
HSBC Bank Argentina S.A.			Argentina		99.99		ARS1,244m			Ordinary-A ARS1.00            Ordinary-B ARS1.00
HSBC Bank Brasil S.A. - Banco Múltiplo			Brazil		100		BRL6,402m			Shares of no par value
HSBC Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC			Mexico		99.99		MXN5,681m			Ordinary MXN2.00
1   Listed in Hong Kong.	4   Non-cumulative Irredeemable Preference shares.
2   Cumulative Irredeemable Preference shares.	5   People's Republic of China.
3   Cumulative Redeemable Preference shares.	6   Issued equity capital is less than US$1m.

Details of the debt, subordinated debt and preference shares issued by the principal subsidiaries to parties external to the Group are included in the Notes 26 'Debt securities in issue', 30 'Subordinated liabilities' and 34 'Non-controlling interests', respectively.

All the above subsidiaries are included in the HSBC consolidated financial statements.

Details of all HSBC subsidiaries, as required under Section 409 of the Companies Act 2006, will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.

The principal countries of operation are the same as the countries of incorporation except for HSBC Bank Middle East Limited, which operates mainly in the Middle East and North Africa, and HSBC Life (International) Limited, which operates mainly in Hong Kong.

HSBC is structured as a network of regional banks and locally incorporated regulated banking entities. Each bank is separately capitalised in accordance with applicable prudential requirements and maintains a capital buffer consistent with the Group's risk appetite for the relevant country or region. Our capital management process culminates in the annual Group capital plan, which is approved by the Board. HSBC Holdings is the primary provider of equity capital to its subsidiaries and also provides them with non-equity capital where necessary. These investments are substantially funded by HSBC Holdings' issuance of equity and non-equity capital and by profit retention. As part of its capital management process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in subsidiaries. Subject to the above, there is no current or foreseen impediment to HSBC Holdings' ability to provide such investments. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other things, their respective local regulatory capital and banking requirements, statutory reserves, and financial and operating performance. During 2014 and 2013, none of the Group's subsidiaries experienced significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged by our subsidiaries on paying dividends or repaying loans and advances.

The amount of guarantees by HSBC Holdings in favour of other HSBC Group entities is set out in Note 37.

Structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights

		Carrying value of total consolidated assets				Nature of SPE
		2014		2013
		US$bn		US$bn
Solitaire Funding Ltd		9.0		10.2		Securities investment conduit
Mazarin Funding Limited		3.9		7.4		Securities investment conduit
Barion Funding Limited		2.0		3.8		Securities investment conduit
Malachite Funding Limited		1.4		3.0		Securities investment conduit
HSBC Home Equity Loan Corporation I		1.9		2.1		Securitisation
HSBC Home Equity Loan Corporation II		0.9		1.6		Securitisation
Regency Assets Limited		11.0		13.5		Conduit
Bryant Park Funding LLC		-		0.4		Conduit

In addition to the above, HSBC consolidates a number of individually insignificant structured entities with total assets of US$22.9bn (2013: US$26.1bn). For further details, see Note 39.

In each of the above cases, HSBC controls and consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

Subsidiaries with significant non-controlling interests

		2014		2013
Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests		37.86%		37.86%
Place of business		Hong Kong		Hong Kong
		US$m		US$m
Profit attributable to non-controlling interests		760		1,332
Accumulated non-controlling interests of the subsidiary		5,765		4,591
Dividends paid to non-controlling interests		513		495
Summarised financial information:
- total assets		160,769		145,380
- total liabilities		144,642		133,253
- net operating income before loan impairment		3,687		4,876
- profit for the year		2,007		3,517
- total comprehensive income for the year		4,460		3,145

23   Prepayments, accrued income and other assets

Accounting policy

Assets held for sale Assets and liabilities of disposal groups and non-current assets are classified as held for sale when their carrying amounts will be recovered principally through sale rather than through continuing use. Held-for-sale assets are generally measured at the lower of their carrying amount and fair value less cost to sell, except for those assets and liabilities that are not within the scope of the measurement requirements of IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations'. Immediately before the initial classification as held for sale, the carrying amounts of the relevant assets and liabilities are measured in accordance with applicable IFRSs. On subsequent remeasurement of a disposal group, the carrying amounts of any assets and liabilities that are not within the scope of the measurement requirements of IFRS 5, but are included in a disposal group classified as held for sale, are remeasured under applicable IFRSs before the fair value less costs to sell of the disposal group is determined. Property, plant and equipment Land and buildings are stated at historical cost, or fair value at the date of transition to IFRSs ('deemed cost'), less impairment losses and depreciation over their estimated useful lives, as follows: ·  freehold land is not depreciated; ·  freehold buildings are depreciated at the greater of 2% per annum on a straight-line basis or over their remaining useful lives; and ·  leasehold land and buildings are depreciated over the shorter of their unexpired terms of the leases or their remaining useful lives. Equipment, fixtures and fittings (including equipment on operating leases where HSBC is the lessor) are stated at cost less impairment losses and depreciation over their useful lives, which are generally between 5 years and 20 years. Property, plant and equipment is subject to an impairment review if their carrying amount may not be recoverable. HSBC holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties are included on balance sheet at fair value.

Prepayments, accrued income and other assets

		2014		2013
		US$m		US$m
Prepayments and accrued income		10,554		11,006
Assets held for sale		7,647		4,050
Bullion		15,726		22,929
Endorsements and acceptances		10,775		11,624
Reinsurers' share of liabilities under insurance contracts (Note 28)		1,032		1,408
Employee benefit assets (Note 6)		5,028		2,140
Other accounts		13,882		12,838
Property, plant and equipment		10,532		10,847
At 31 December		75,176		76,842

Prepayments, accrued income and other assets include US$40,622m (2013: US$37,635m) of financial assets, the majority of which are measured at amortised cost.

Property, plant and equipment - selected information

		2014		2013
		US$m		US$m
Cost or fair value		21,831		21,927
Accumulated depreciation and impairment		11,299		11,080
Net carrying amount at 31 December		10,532		10,847
Additions at cost		1,477		1,980
Disposals at net book value		69		267
Property, plant and equipment1:
Land and buildings		5,234		5,661
- freehold		1,769		2,062
- long leasehold		1,252		1,266
- medium and short leasehold		2,213		2,333
Investment properties2		2,236		1,945

1   Includes nil freehold (2013: nil), US$1,306m long leasehold (2013: US$1,309m), US$2,638m medium leasehold (2013: US$2,472m) and nil short leasehold (2013: US$2m) in Hong Kong.

2   Investment properties are valued on a market value basis as at 31 December each year by independent professional valuers who have recent experience in the location and type of properties. Investment properties in Hong Kong, the Macau Special Administrative Region and mainland China, which represent more than 74% by value of HSBC's investment properties subject to revaluation, were valued by DTZ Debenham Tie Leung Limited whose valuers are members of the Hong Kong Institute of Surveyors. Properties in other countries, which represent 26% by value of HSBC's investment properties, were valued by different independent professionally qualified valuers.

24   Trading liabilities

Accounting policy

Trading liabilities are classified as held for trading if they have been acquired or incurred principally for the purpose of selling or repurchasing in the near term, or form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. They are recognised on trade date, when HSBC enters into contractual arrangements with counterparties, and are normally derecognised when extinguished. They are initially measured at fair value, with subsequent changes in fair value and interest paid recognised in the income statement in 'Net trading income'. The sale of borrowed securities is classified as trading liabilities.

Trading liabilities

		2014 US$m		2013 US$m
Deposits by banks1		41,453		43,130
Customer accounts1		50,600		57,688
Other debt securities in issue (Note 26)		33,602		32,155
Other liabilities - net short positions in securities		64,917		74,052
At 31 December		190,572		207,025

1   Deposits by banks and customer accounts include repos, settlement accounts, stock lending and other amounts.

At 31 December 2014, the cumulative amount of change in fair value attributable to changes in HSBC's credit risk was a loss of US$79m (2013: loss of US$95m).

25    Financial liabilities designated at fair value

Accounting policy

The criteria for designating instruments at fair value and their measurement are described in Note 15. The fair value designation, once made, is irrevocable. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties and are normally derecognised when extinguished. This section provides examples of such designations: ·  Long-term debt issues. The interest payable on certain fixed rate long-term debt securities issued has been matched with the interest on certain interest rate swaps as part of a documented interest rate risk management strategy. An accounting mismatch would arise if the debt securities issued were accounted for at amortised cost, and this mismatch is eliminated through the fair value designation. ·  Financial liabilities under unit-linked and non-linked investment contracts. HSBC issues contracts to customers that contain insurance risk, financial risk or a combination thereof. A contract under which HSBC accepts insignificant insurance risk from another party is not classified as an insurance contract, but is accounted for as a financial liability. See Note 28 for contracts where HSBC accepts significant insurance risk. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries and the corresponding financial assets are designated at fair value. Liabilities are at least equivalent to the surrender or transfer value which is calculated by reference to the value of the relevant underlying funds or indices. Premiums receivable and amounts withdrawn are accounted for as increases or decreases in the liability recorded in respect of investment contracts. The incremental costs directly related to the acquisition of new investment contracts or renewing existing investment contracts are deferred and amortised over the period during which the investment management services are provided.

Financial liabilities designated at fair value - HSBC

		2014		2013
		US$m		US$m
Deposits by banks and customer accounts		160		315
Liabilities to customers under investment contracts		6,312		13,491
Debt securities in issue (Note 26)		46,364		53,363
Subordinated liabilities (Note 30)		21,822		18,230
Preferred securities (Note 30)		1,495		3,685
At 31 December		76,153		89,084

The carrying amount at 31 December 2014 of financial liabilities designated at fair value was US$5,813m more than the contractual amount at maturity (2013: US$4,375m more). The cumulative amount of the change in fair value attributable to changes in credit risk was a loss of US$870m (2013: loss of US$1,334m).

Financial liabilities designated at fair value - HSBC Holdings

		2014		2013
		US$m		US$m
Debt securities in issue (Note 26):
-  owed to third parties		8,185		8,106
Subordinated liabilities (Note 30):
-  owed to third parties		9,513		9,760
-  owed to HSBC undertakings		981		3,161
At 31 December		18,679		21,027

The carrying amount at 31 December 2014 of financial liabilities designated at fair value was US$2,694m more than the contractual amount at maturity (2013: US$2,309m more). The cumulative amount of the change in fair value attributable to changes in credit risk was a loss of US$520m (2013: loss of US$859m).

26    Debt securities in issue

Accounting policy

Financial liabilities for debt securities issued are recognised when HSBC enters into contractual arrangements with counterparties and initially measured at fair value, which is normally the consideration received, net of directly attributable transaction costs incurred. Subsequent measurement of financial liabilities, other than those measured at fair value through profit or loss and financial guarantees, is at amortised cost, using the effective interest method to amortise the difference between proceeds received, net of directly attributable transaction costs incurred, and the redemption amount over the expected life of the instrument.

Debt securities in issue - HSBC

		2014		2013
		US$m		US$m
Bonds and medium-term notes		132,539		146,116
Other debt securities in issue		43,374		43,482
		175,913		189,598
Of which debt securities in issue reported as:
-  trading liabilities (Note 24)		(33,602)		(32,155)
-  financial liabilities designated at fair value (Note 25)		(46,364)		(53,363)
At 31 December		95,947		104,080

Debt securities in issue - HSBC Holdings

		2014		2013
		US$m		US$m
Debt securities		9,194		10,897
Of which debt securities in issue reported as:
-  financial liabilities designated at fair value (Note 25)		(8,185)		(8,106)
At 31 December		1,009		2,791

27    Accruals, deferred income and other liabilities

		2014		2013
		US$m		US$m
Liabilities of disposal groups held for sale		6,934		2,804
Accruals and deferred income		15,075		16,185
Amounts due to investors in funds consolidated by HSBC		782		1,008
Obligations under finance leases		67		252
Endorsements and acceptances		10,760		11,614
Employee benefit liabilities (Note 6)		3,208		2,931
Other liabilities		16,570		17,547
At 31 December		53,396		52,341

Accruals, deferred income and other liabilities include US$43,840m (2013: US$46,258m) of financial liabilities, the majority of which are measured at amortised cost.

28    Liabilities under insurance contracts

Accounting policy

HSBC issues contracts to customers that contain insurance risk, financial risk or a combination thereof. A contract under which HSBC accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. Liabilities under insurance contracts Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value which is calculated by reference to the value of the relevant underlying funds or indices. A liability adequacy test is carried out on insurance liabilities to ensure that the carrying amount of the liabilities is sufficient in the light of current estimates of future cash flows. When performing the liability adequacy test, all contractual cash flows are discounted and compared with the carrying value of the liability. When a shortfall is identified it is charged immediately to the income statement. Future profit participation on insurance contracts with DPF Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect actual performance of the investment portfolio to date and management expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. This benefit may arise from the contractual terms, regulation, or past distribution policy. Investment contracts with DPF While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as permitted by IFRS 4. The Group therefore recognises the premiums for those contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability. In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.

Liabilities under insurance contracts

		Gross		Reinsurers' share		Net
		US$m		US$m		US$m
Non-linked insurance contracts1
At 1 January 2014		33,950		(1,118)		32,832
Claims and benefits paid		(3,575)		175		(3,400)
Increase in liabilities to policyholders		7,764		(409)		7,355
Disposals/transfers to held-for-sale		(589)		527		(62)
Exchange differences and other movements		(577)		53		(524)
At 31 December 2014		36,973		(772)		36,201
Investment contracts with discretionary participation features
At 1 January 2014		26,427		-		26,427
Claims and benefits paid		(2,175)		-		(2,175)
Increase in liabilities to policyholders		3,188		-		3,188
Exchange differences and other movements2		(2,372)		-		(2,372)
At 31 December 2014		25,068		-		25,068
Linked life insurance contracts
At 1 January 2014		13,804		(290)		13,514
Claims and benefits paid		(1,499)		88		(1,411)
Increase in liabilities to policyholders		2,762		33		2,795
Disposals/transfers to held-for-sale		(2,547)		74		(2,473)
Exchange differences and other movements3		(700)		(165)		(865)
At 31 December 2014		11,820		(260)		11,560
Total liabilities to policyholders at 31 December 2014		73,861		(1,032)		72,829

		Gross		Reinsurers' share		Net
		US$m		US$m		US$m
Non-linked insurance contracts1
At 1 January 2013		30,765		(952)		29,813
Claims and benefits paid		(3,014)		164		(2,850)
Increase in liabilities to policyholders		6,892		(367)		6,525
Disposals/transfers to held-for-sale		(52)		13		(39)
Exchange differences and other movements		(641)		24		(617)
At 31 December 2013		33,950		(1,118)		32,832
Investment contracts with discretionary participation features
At 1 January 2013		24,374		-		24,374
Claims and benefits paid		(2,308)		-		(2,308)
Increase in liabilities to policyholders		3,677		-		3,677
Exchange differences and other movements2		684		-		684
At 31 December 2013		26,427		-		26,427
Linked life insurance contracts
At 1 January 2013		13,056		(455)		12,601
Claims and benefits paid		(1,976)		426		(1,550)
Increase in liabilities to policyholders		3,379		111		3,490
Exchange differences and other movements3		(655)		(372)		(1,027)
At 31 December 2013		13,804		(290)		13,514
Total liabilities to policyholders at 31 December 2013		74,181		(1,408)		72,773

1   Includes liabilities under non-life insurance contracts.

2   Includes movement in liabilities relating to discretionary profit participation benefits due to policyholders arising from net unrealised investment gains recognised in other comprehensive income.

3   Includes amounts arising under reinsurance agreements.

The increase in liabilities to policyholders represents the aggregate of all events giving rise to additional liabilities to policyholders in the year. The key factors contributing to the movement in liabilities to policyholders include death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders.

29   Provisions

Accounting policy

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

Critical accounting estimates and judgements

Provisions Judgement is involved in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. Professional expert advice is taken on the assessment of litigation, property (including onerous contracts) 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 judgements and estimates as appropriate. At more advanced stages, it is typically easier to make judgements and estimates around a better defined set of possible outcomes. However, the amount provisioned can remain very sensitive to the assumptions used. There could be a wide 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. Provisions for customer remediation also require significant levels of estimation and judgement. The amounts of provisions recognised depend on a number of different assumptions, for example, the volume of inbound complaints, the projected period of inbound complaint volumes, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint.

 

Provisions

		Restructuring costs		Contractual commitments		Legal proceedings and regulatory matters		Customer remediation		Other provisions		Total
		US$m		US$m		US$m		US$m		US$m		US$m
At 1 January 2014		271		177		1,832		2,382		555		5,217
Additional provisions/increase in provisions		147		136		1,752		1,440		154		3,629
Provisions utilised		(143)		(2)		(1,109)		(1,769)		(112)		(3,135)
Amounts reversed		(43)		(46)		(281)		(184)		(66)		(620)
Unwinding of discounts		-		1		43		10		11		65
Exchange differences and other movements		(35)		(32)		(53)		(48)		10		(158)
At 31 December 2014		197		234		2,184		1,831		552		4,998
At 1 January 2013		251		301		1,667		2,387		646		5,252
Additional provisions/increase in provisions		179		57		1,209		1,536		230		3,211
Provisions utilised		(111)		(5)		(709)		(1,487)		(167)		(2,479)
Amounts reversed		(65)		(66)		(340)		(94)		(126)		(691)
Unwinding of discounts		-		-		38		7		13		58
Exchange differences and other movements		17		(110)		(33)		33		(41)		(134)
At 31 December 2013		271		177		1,832		2,382		555		5,217

Further details of legal proceedings and regulatory matters are set out in Note 40, including the provisions made on foreign exchange rate investigations and litigation. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.

Customer remediation refers to activities carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action.

Payment protection insurance

At 31 December 2014, a provision of US$1,079m (31 December 2013: US$946m) was held relating to the estimated liability for redress in respect of the possible mis-selling of payment protection insurance ('PPI') policies in previous years. An increase in provisions of US$960m was recognised during the year, primarily reflecting an increase in inbound complaints by claims management companies compared to previous forecasts. The current projected trend of inbound complaint volumes implies that the redress programme will be complete by the first quarter of 2018. However, this timing is subject to uncertainty as the trend may change over time based on actual experience.

Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amounted to US$4.2bn of which US$3.2bn had been paid as at 31 December 2014.

The estimated liability for redress is calculated on the basis of total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on historically observed redress per policy.

A total of approximately 5.4m PPI policies have been sold by HSBC since 2000, generating estimated revenues of US$4.3bn at 2014 average exchange rates. The gross written premiums on these polices was approximately US$5.6bn at 2014 average exchange rates. At 31 December 2014, the estimated total complaints expected to be received was 1.9m, representing 36% of total policies sold. It is estimated that contact will be made with regard to 2.3m policies, representing 42% of total policies sold. This estimate includes inbound complaints as well as HSBC's proactive contact exercise on certain policies ('outbound contact').

The following table details the cumulative number of complaints received at 31 December 2014 and the number of claims expected in the future:

		Cumulative to         31 December                          2014		Future                  expected
Inbound complaints1 (000s of policies)		1,215		344
Outbound contact (000s of policies)		448		291
Response rate to outbound contact		51%		51%
Average uphold rate per claim2		77%		71%
Average redress per claim (US$)		2,611		3,115

1   Excludes invalid claims where the complainant has not held a PPI policy.

2   Claims include inbound and responses to outbound contact.

The main assumptions involved in calculating the redress liability are the volume of inbound complaints, the projected period of inbound complaints, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint. The main assumptions are likely to evolve over time as root cause analysis continues, more experience is available regarding customer initiated complaint volumes received, and we handle responses to our ongoing outbound contact.

A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately US$222m at 2014 average exchange rates. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately US$13m.

In addition to these factors and assumptions, the extent of the required redress will also depend on the facts and circumstances of each individual customer's case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress.

Interest rate derivatives

At 31 December 2014, a provision of US$312m (31 December 2013: US$776m) was held relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK. The provision relates to the estimated redress payable to customers in respect of historical payments under derivative contracts, the expected write-off by the bank of open derivative contract balances, and estimated project costs. An increase in the provision of US$288m was recorded during the year, reflecting updated claims experience and the announcement by the FCA on 28 January 2015 of the extension of the scheme to 31 March 2015, and expectation of an additional population who will opt into the scheme following communications to affected customers.

The extent to which HSBC is ultimately required to pay redress depends on the responses of contacted and other customers during the review period and analysis of the facts and circumstances of each individual case, including consequential loss claims received. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress related to this programme.

UK Consumer Credit Act

HSBC has undertaken a review of compliance with the fixed-sum unsecured loan agreement requirements of the UK Consumer Credit Act ('CCA'). US$379m has been recognised at 31 December 2014 within 'Accruals, deferred income and other liabilities' for the repayment of interest to customers, primarily where annual statements did not remind them of their right to partially prepay the loan, notwithstanding that the customer loan documentation did refer to this right. The cumulative liability to date is US$591m, of which payments of US$212m have been made to customers. There is uncertainty as to whether other technical requirements of the CCA have been met, for which we have assessed the contingent liability as up to US$0.9bn.

Brazilian labour, civil and fiscal claims

Within 'Legal proceedings and regulatory matters' above are labour, civil and fiscal litigation provisions of US$501m (2013: US$500m). Of these provisions, US$246m (2013: US$232m) was in respect of labour and overtime litigation claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels and the facts and circumstances of each individual case.

30    Subordinated liabilities

HSBC

		2014		2013
		US$m		US$m
Subordinated liabilities
At amortised cost		26,664		28,976
-    subordinated liabilities		22,355		24,573
-    preferred securities		4,309		4,403
Designated at fair value (Note 25)		23,317		21,915
-    subordinated liabilities		21,822		18,230
-    preferred securities		1,495		3,685
At 31 December		49,981		50,891
Subordinated liabilities
HSBC Holdings		25,277		22,308
Other HSBC		24,704		28,583
At 31 December		49,981		50,891

HSBC's subordinated liabilities

Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. Where applicable, capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may step-up or become floating rate based on interbank rates.

Interest rates on the floating rate capital securities are generally related to interbank offered rates. On the remaining capital securities, interest is payable at fixed rates of up to 10.176%.

The balance sheet amounts disclosed below are presented on an IFRSs basis and do not reflect the amount that the instruments contribute to regulatory capital due to the inclusion of issuance costs, regulatory amortisation and regulatory eligibility limits prescribed in the grandfathering provisions under CRD IV.

HSBC's subordinated liabilities in issue

		First call date		Maturity date		2014 US$m		2013 US$m
Additional tier 1 capital securities guaranteed by HSBC Holdings plc1
€1,400m	5.3687% non-cumulative step-up perpetual preferred securities2	Mar 2014				-		2,022
£500m	8.208% non-cumulative step-up perpetual preferred securities	Jun 2015				779		825
€750m	5.13% non-cumulative step-up perpetual preferred securities	Mar 2016				979		1,129
US$900m	10.176% non-cumulative step-up perpetual preferred securities, series 2	Jun 2030				891		891
						2,649		4,867
Additional tier 1 capital securities guaranteed by HSBC Bank plc1
£300m	5.862% non-cumulative step-up perpetual preferred securities	Apr 2020				515		534
£700m	5.844% non-cumulative step-up perpetual preferred securities	Nov 2031				1,091		1,157
						1,606		1,691
Tier 2 securities issued by HSBC Bank plc
£500m	4.75% callable subordinated notes3	Sep 2015		Sep 2020		802		866
£350m	5.00% callable subordinated notes4	Mar 2018		Mar 2023		605		635
£300m	6.50% subordinated notes	-		Jul 2023		466		494
£350m	5.375% callable subordinated step-up notes5	Nov 2025		Nov 2030		620		602
£500m	5.375% subordinated notes	-		Aug 2033		905		884
£225m	6.25% subordinated notes	-		Jan 2041		349		370
£600m	4.75% subordinated notes	-		Mar 2046		924		980
€500m	Callable subordinated floating rate notes6	Sep 2015		Sep 2020		588		655
US$300m	7.65% subordinated notes	-		May 2025		400		380
US$750m	Undated floating rate primary capital notes	Jun 1990				750		751
US$500m	Undated floating rate primary capital notes	Sep 1990				500		499
US$300m	Undated floating rate primary capital notes, series 3	Jun 1992				300		299
						7,209		7,415

		First call date		Maturity date		2014 US$m		2013 US$m
Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd
US$400m	Primary capital undated floating rate notes	Aug 1990				403		404
US$400m	Primary capital undated floating rate notes (second series)	Dec 1990				401		402
US$400m	Primary capital undated floating rate notes (third series)	Jul 1991				400		400
						1,204		1,206
Tier 2 securities issued by HSBC Bank Australia Limited
AUD200m	Callable subordinated floating rate notes	Nov 2015		Nov 2020		164		179
						164		179
Tier 2 securities issued by HSBC Bank Malaysia Berhad
MYR500m	4.35% subordinated bonds	Jun 2017		Jun 2022		143		152
MYR500m	5.05% subordinated bonds	Nov 2022		Nov 2027		144		154
						287		306
Tier 2 securities issued by HSBC USA Inc.
US$200m	7.808% capital securities	Dec 2006		Dec 2026		200		200
US$200m	8.38% capital securities	May 2007		May 2027		200		200
US$150m	9.50% subordinated debt7	-		Apr 2014		-		151
US$150m	7.75% Capital Trust pass through securities	Nov 2006		Nov 2026		150		150
US$750m	5.00% subordinated notes	-		Sep 2020		738		746
US$250m	7.20% subordinated debentures	-		Jul 2097		216		215
	Other subordinated liabilities each less than US$150m					297		299
						1,801		1,961
Tier 2 securities issued by HSBC Bank USA, N.A.
US$1,000m	4.625% subordinated notes7	-		Apr 2014		-		1,000
US$500m	6.00% subordinated notes	-		Aug 2017		508		513
US$1,250m	4.875% subordinated notes	-		Aug 2020		1,210		1,262
US$1,000m	5.875% subordinated notes	-		Nov 2034		1,245		1,081
US$750m	5.625% subordinated notes	-		Aug 2035		934		811
US$700m	7.00% subordinated notes	-		Jan 2039		676		696
						4,573		5,363
Tier 2 securities issued by HSBC Finance Corporation
US$1,000m	5.911% trust preferred securities8	Nov 2015		Nov 2035		998		996
US$2,939m	6.676% senior subordinated notes9	-		Jan 2021		2,185		2,182
						3,183		3,178
Tier 2 securities issued by HSBC Bank Brazil S.A.
BRL383m	Subordinated certificates of deposit	-		Feb 2015		144		162
BRL500m	Subordinated floating rate certificates of deposit	-		Dec 2016		188		212
	Other subordinated liabilities each less than US$150m10					81		224
						413		598
Tier 2 securities issued by HSBC Bank Canada
CAD400m	4.80% subordinated debentures	Apr 2017		Apr 2022		367		403
CAD200m	4.94% subordinated debentures	Mar 2016		Mar 2021		172		188
CAD39m	Floating rate debentures	Oct 1996		Nov 2083		34		37
						573		628
Securities issued by HSBC Mexico, S.A.
MXN1,818m	Non-convertible subordinated obligations11	Sep 2013		Sep 2018		124		138
MXN2,273m	Non-convertible subordinated obligations11	Dec 2013		Dec 2018		154		173
US$300m	Non-convertible subordinated obligations11,12	Jun 2014		Jun 2019		240		240
						518		551
Securities issued by other HSBC subsidiaries
Other subordinated liabilities each less than US$200m11						524		640
Total of subordinated liabilities issued by HSBC subsidiaries						24,704		28,583

  1   See paragraph below, 'Guaranteed by HSBC Holdings or HSBC Bank'.

  2   In March 2014, HSBC called and redeemed the €1,400m 5.3687% non-cumulative step-up perpetual preferred securities at par.

  3   The interest rate payable after September 2015 is the sum of the three-month sterling Libor plus 0.82%.

  4   The interest rate payable after March 2018 is the sum of the gross redemption yield of the then prevailing five-year UK gilt plus 1.80%.

  5   The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50%.

  6   The interest margin increases by 0.5% from September 2015.

  7   In April 2014, HSBC redeemed the $1,000m 4.625% subordinated notes and the 9.5% subordinated debt security at par.

  8   The distributions change in November 2015 to three-month dollar Libor plus 1.926%.

  9   Approximately 25% of the senior subordinated notes are held by HSBC Holdings.

10   Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with guidance in PRA's GENPRU as applied in 2013 and CRD IV rules as applied in 2014.

11   These securities are ineligible for inclusion in the capital base of HSBC in accordance with guidance in PRA's GENPRU as applied in 2013 and CRD IV rules as applied in 2014.

12   Approximately US$60m of the subordinated obligations are held by HSBC Holdings.

HSBC Holdings

		2014		2013
		US$m		US$m
Subordinated liabilities:
-    at amortised cost		17,255		14,167
-    designated at fair value (Note 25)		10,494		12,921
At 31 December		27,749		27,088

HSBC Holdings' subordinated liabilities

		First call                  date		Maturity                  date		2014 US$m		2013 US$m
Tier 2 securities issued by HSBC Holdings plc
Amounts owed to third parties
US$488m	7.625% subordinated notes1	-		May 2032		538		554
US$222m	7.35% subordinated notes1	-		Nov 2032		278		278
US$2,000m	6.5% subordinated notes1	-		May 2036		2,029		2,029
US$2,500m	6.5% subordinated notes1	-		Sep 2037		3,278		3,039
US$1,500m	6.8% subordinated notes1	-		Jun 2038		1,487		1,487
US$2,000m	4.25% subordinated notes2,5	-		Mar 2024		2,069		-
US$1,500m	5.25% subordinated notes2,5	-		Mar 2044		1,735		-
£900m	6.375% callable subordinated notes1,3	Oct 2017		Oct 2022		1,558		1,672
£650m	5.75% subordinated notes2	-		Dec 2027		1,176		1,158
£650m	6.75% subordinated notes2	-		Sep 2028		1,005		1,066
£750m	7.0% subordinated notes2	-		Apr 2038		1,217		1,288
£900m	6.0% subordinated notes2	-		Mar 2040		1,379		1,464
€1,600m	6.25% subordinated notes2	-		Mar 2018		1,950		2,210
€1,750m	6.0% subordinated notes2	-		Jun 2019		2,623		2,884
€700m	3.625% callable subordinated notes1,4	Jun 2015		Jun 2020		878		1,007
€1,500m	3.375% callable subordinated notes1,2,5	Jan 2019		Jan 2024		1,898		2,075
						25,098		22,211
Amounts owed to HSBC undertakings
€1,400m	5.3687% fixed/floating subordinated notes6	Mar 2014		Dec 2043		-		2,024
£500m	8.208% subordinated step-up cumulative notes	Jun 2015		Jun 2040		779		825
€750m	5.13% fixed/floating subordinated notes	Mar 2016		Dec 2044		981		1,137
US$900m	10.176% subordinated step-up cumulative notes	Jun 2030		Jun 2040		891		891
						2,651		4,877
At 31 December						27,749		27,088

1   Amounts owed to third parties represent securities included in the capital base of HSBC as tier 2 securities in accordance with the grandfathering provisions under CRD IV rules.

2   These securities are included in the capital base of HSBC as fully CRD IV compliant tier 2 securities on an end point basis.

3   The interest rate payable after October 2017 is the sum of the three-month sterling Libor plus 1.3%.

4   The interest rate payable after June 2015 is the sum of the three-month Euribor plus 0.93%.

5   These subordinated notes are measured at amortised cost in HSBC Holdings, where the interest rate risk is hedged using a fair value hedge, while they are measured at fair value in the Group.

6   In March 2014, HSBC Holdings called and redeemed the €1,400m 5.3687% fixed/floating subordinated notes at par.

Additional tier 1 capital securities

Additional tier 1 capital securities are included in HSBC's capital base as tier 1 capital and are perpetual subordinated securities on which investors are entitled, subject to certain conditions, to receive distributions which are non-cumulative. Such securities do not generally carry voting rights but rank above ordinary shares for coupon payments and in the event of a winding-up. The eligibility criteria for tier 1 securities changed on the introduction of CRD IV rules on 1 January 2014. For further guidance on the criteria for additional tier 1 securities, see note 35. Instruments issued before CRD IV comes into effect which do not meet the identifying criteria in full are eligible as regulatory capital subject to grandfathering limits and progressive phase-out. Capital securities that have been issued during 2014 are recognised as fully CRD IV compliant additional tier 1 capital securities on an end point basis and are accounted for as equity and detailed in Note 35.

Guaranteed by HSBC Holdings or HSBC Bank

The six capital securities guaranteed on a subordinated basis by HSBC Holdings or HSBC Bank are non-cumulative step-up perpetual preferred securities issued by Jersey limited partnerships. The proceeds of the issues were on-lent to the respective guarantors by the limited partnerships in the form of subordinated notes. These preferred securities qualify as additional tier 1 capital for HSBC under CRD IV by virtue of application of grandfathering provisions and the two capital securities guaranteed by HSBC Bank also qualify as additional tier 1 capital for HSBC Bank (on a solo and a consolidated basis) under CRD IV by virtue of application of grandfathering provisions.

These preferred securities, together with the guarantee, are intended to provide investors with economic rights equivalent to the rights that they would have had if they had purchased non-cumulative perpetual preference shares of the relevant issuer. There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC's capital adequacy requirements or if HSBC Holdings or HSBC Bank have insufficient distributable reserves (as defined).

HSBC Holdings and HSBC Bank have individually covenanted that if prevented under certain circumstances from paying distributions on the preferred securities in full, they will not pay dividends or other distributions in respect of their ordinary shares, or effect repurchases or redemptions of their ordinary shares, until the distribution on the preferred securities has been paid in full.

With respect to preferred securities guaranteed by HSBC Holdings - if (i) HSBC's total capital ratio falls below the regulatory minimum ratio required, or (ii) the Directors expect, in view of the deteriorating financial condition of HSBC Holdings, that (i) will occur in the near term, then the preferred securities will be substituted by preference shares of HSBC Holdings which have economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together.

With respect to preferred securities guaranteed by HSBC Bank - if (i) any of the two issues of preferred securities are outstanding in April 2049 or November 2048, respectively, or (ii) the total capital ratio of HSBC Bank on a solo and consolidated basis falls below the regulatory minimum ratio required, or (iii) in view of the deteriorating financial condition of HSBC Bank, the Directors expect (ii) to occur in the near term, then the preferred securities will be substituted by preference shares of HSBC Bank having economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together.

Tier 2 capital securities

These capital securities are included within HSBC's capital base as tier 2 capital under CRD IV by virtue of application of grandfathering provisions (with the exception of identified HSBC Holding securities which are compliant with CRD IV end point rules). Tier 2 capital securities are either perpetual subordinated securities or dated securities on which there is an obligation to pay coupons. In accordance with CRD IV, the capital contribution of all tier 2 securities is amortised for regulatory purposes in their final five years before maturity.

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

The table on page 427 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual contractual maturity at the balance sheet date. Asset and liability balances are included in the maturity analysis as follows:

·   except for reverse repos, repos and debt securities in issue, trading assets and liabilities (including trading derivatives) are included in the 'Due not more than 1 month' time bucket, and not by contractual maturity because trading balances are typically held for short periods of time;

·   financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over 5 years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the 'Due over 5 years' time bucket;

·   non-financial assets and liabilities with no contractual maturity (such as property, plant and equipment, goodwill and intangible assets, current and deferred tax assets and liabilities and retirement benefit liabilities) are included in the 'Due over 5 years' time bucket;

·   financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction; and

·   liabilities under insurance contracts are included in the 'Due over 5 years' time bucket. Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are classified based on the contractual notice period investors are entitled to give. Where there is no contractual notice period, undated contracts are included in the 'Due over 5 years' time bucket.

Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.

 

END

 

 

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