Annual Financial Report - 5 of 9

RNS Number : 6505F

HSBC Holdings PLC

11 March 2020

 

Capital
	Page
Capital overview	152
Own funds	153
Risk-weighted assets	153
Leverage ratio	155

Capital overview

Capital ratios1
	At
	31 Dec		31 Dec
	2019		2018
	%		%
Transitional basis
Common equity tier 1 ratio	14.7		14.0
Tier 1 ratio	17.6		17.0
Total capital ratio	20.4		20.0
End point basis
Common equity tier 1 ratio	14.7		14.0
Tier 1 ratio	17.2		16.6
Total capital ratio	18.9		19.4

Total regulatory capital and risk-weighted assets1
	At
	31 Dec		31 Dec
	2019		2018
	$m		$m
Transitional basis
Common equity tier 1 capital	123,966		121,022
Additional tier 1 capital	24,393		26,120
Tier 2 capital	23,791		26,096
Total regulatory capital	172,150		173,238
Risk-weighted assets	843,395		865,318
End point basis
Common equity tier 1 capital	123,966		121,022
Additional tier 1 capital	20,870		22,525
Tier 2 capital	14,473		24,511
Total regulatory capital	159,309		168,058
Risk-weighted assets	843,395		865,318

RWAs by risk types
	RWAs		Capital required2
	$bn		$bn
Credit risk	676.6		54.2
Counterparty credit risk	44.1		3.5
Market risk	29.9		2.4
Operational risk	92.8		7.4
At 31 Dec 2019	843.4		67.5

1  Capital figures and ratios at 31 December 2019 are calculated in accordance with the revised Capital Requirements Regulation, as implemented ('CRR II'). Prior period capital figures are reported under the Capital Requirements Regulation and Directive ('CRD IV'). Unless otherwise stated, all figures are calculated using the EU's regulatory transitional arrangements for IFRS 9 'Financial Instruments' in article 473a of the Capital Requirements Regulation.

2  'Capital required' represents the minimum total capital charge set at 8% of risk-weighted assets by article 92 of the Capital Requirements Regulation.

Capital management

(Audited)

Our objective in the management of Group capital is to maintain appropriate levels to support our business strategy, and meet our regulatory and stress testing-related requirements.

Approach and policy

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

Our policy on capital management is underpinned by a capital management framework and our internal capital adequacy assessment process ('ICAAP'), which helps enable us to manage our capital in a consistent manner. The framework incorporates a number of different capital measures calculated on an economic capital and regulatory capital basis. The ICAAP is an assessment of the Group's capital position, outlining both regulatory and internal capital resources and requirements with HSBC's business model, strategy, performance and planning, risks to capital, and the implications of stress testing to capital.

Our assessment of capital adequacy is aligned to our assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, residual risk and interest rate risk in the banking book.

For further details, please refer to our Pillar 3 Disclosures at 31 December 2019.

Own funds

Own funds disclosure
(Audited)
		At
		31 Dec		31 Dec
		2019		2018
Ref*		$m		$m
	Common equity tier 1 ('CET1') capital: instruments and reserves
1	Capital instruments and the related share premium accounts	22,873		22,384
	-  ordinary shares	22,873		22,384
2	Retained earnings	127,188		121,180
3	Accumulated other comprehensive income (and other reserves)	1,735		3,368
5	Minority interests (amount allowed in consolidated CET1)	4,865		4,854
5a	Independently reviewed interim net profits net of any foreseeable charge or dividend	(3,381	)	3,697
6	Common equity tier 1 capital before regulatory adjustments	153,280		155,483
28	Total regulatory adjustments to common equity tier 1	(29,314	)	(34,461	)
29	Common equity tier 1 capital	123,966		121,022
36	Additional tier 1 capital before regulatory adjustments	24,453		26,180
43	Total regulatory adjustments to additional tier 1 capital	(60	)	(60	)
44	Additional tier 1 capital	24,393		26,120
45	Tier 1 capital	148,359		147,142
51	Tier 2 capital before regulatory adjustments	25,192		26,729
57	Total regulatory adjustments to tier 2 capital	(1,401	)	(633	)
58	Tier 2 capital	23,791		26,096
59	Total capital	172,150		173,238

*  The references identify the lines prescribed in the European Banking Authority ('EBA') template, which are applicable and where there is a value.

Throughout 2019, we complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing.

At 31 December 2019, our common equity tier 1 ('CET1') ratio increased to 14.7% from 14.0% at 31 December 2018.

CET1 capital increased during the year by $2.9bn, mainly as a result of:

•   capital generation of $6.0bn through profits;

•   a fall in the deduction for goodwill and other intangible assets of $4.9bn. This was primarily due to $7.3bn of goodwill impairment, partly offset by an increase in internally generated software;

•   a $1.5bn increase in FVOCI reserve; and

•   favourable foreign currency translation differences of $1.0bn.

These increases were partly offset by:

•   dividends and scrip of $9.0bn;

•   share buy-backs of $1.0bn; and

•   an increase in the deduction for excess expected loss $0.7bn.

Our Pillar 2A requirement at 31 December 2019, as per the PRA's Individual Capital Requirement based on a point-in-time assessment, was 3.0% of RWAs, of which 1.7% was met by CET1.

Risk-weighted assets

Risk-weighted assets ('RWAs') decreased by $21.9bn during the year. The $26.9bn decrease (excluding foreign currency translation differences) comprised the movements described by the following comments.

Asset size

The $9.0bn rise in RWAs due to asset size movements was the result of lending growth largely in CMB, RBWM and GB&M, partly offset by reductions due to active portfolio management in GB&M and CMB. In CMB, a $9.5bn RWA increase arose from growth of $14.4bn principally in Asia and Europe, which was partly offset by active portfolio management measures totalling $4.9bn, largely in Europe. In RBWM, the $7.5bn RWA increase was the result of lending growth, whereas the fall of $1.6bn in GB&M resulted from management actions of $12.3bn, mainly in Europe, Asia and North America, which offset growth of $10.7bn. A $4.0bn decrease in Corporate Centre was primarily due to disposals from the legacy portfolio, and a $2.4bn fall in market risk levels mainly resulted from reduced exposures.

Asset quality

The $3.7bn growth as a result of changes in asset quality included a $3.3bn increase in CMB RWAs, most notably in Asia, and a $0.6bn increase in GB&M RWAs, predominantly in Europe. These movements were primarily due to changes in portfolio mix.

Model updates

The $7.7bn reduction in RWAs from model updates included a $4.8bn fall in GB&M and CMB RWAs, largely due to global corporate model updates, and a $2.3bn decrease in GPB RWAs, reflecting changes to Private Banking models in Asia and North America. The $0.6bn decrease in RBWM RWAs was mainly due to updates to UK retail models.

Methodology and policy

The $32.2bn fall in RWAs due to methodology and policy changes was primarily due to management initiatives of $25.9bn, largely in CMB and GB&M. These included risk parameter refinements and securitisation transactions.

A change to our best estimate of expected loss on corporate exposures further reduced RWAs by $6.3bn, primarily in CMB's UK portfolio. The $3.7bn decrease in market risk RWAs derived mainly from increased diversification benefits following regulatory approval to expand the scope of consolidation. In addition, an approved change to operational risk methodology caused a $0.9bn fall in RWAs across all global businesses.

These decreases were partly offset by a $4.5bn increase in tangible fixed assets within Corporate Centre as a result of implementing IFRS 16 'Leases', recognising right-of-use assets in relation to leases previously classified as 'operating leases'.

RWAs by global business
	RBWM		CMB		GB&M		GPB		Corporate Centre		Total
	$bn		$bn		$bn		$bn		$bn		$bn
Credit risk	103.8		290.8		161.1		11.0		109.9		676.6
Counterparty credit risk	-		-		42.7		0.2		1.2		44.1
Market risk	-		-		23.6		-		6.3		29.9
Operational risk	30.2		25.9		30.8		2.8		3.1		92.8
At 31 Dec 2019	134.0		316.7		258.2		14.0		120.5		843.4
Credit risk	99.6		296.9		172.0		13.8		108.8		691.1
Counterparty credit risk	-		-		45.1		0.2		2.0		47.3
Market risk	-		-		32.4		-		3.4		35.8
Operational risk	27.3		24.3		31.5		2.8		5.2		91.1
At 31 Dec 2018	126.9		321.2		281.0		16.8		119.4		865.3

RWAs by geographical region
		Europe		Asia		MENA		North America		Latin America		Total
	Footnotes	$bn		$bn		$bn		$bn		$bn		$bn
Credit risk		208.3		292.0		48.0		98.4		29.9		676.6
Counterparty credit risk		25.1		8.7		1.3		7.3		1.7		44.1
Market risk	1	23.1		20.5		2.0		4.4		1.8		29.9
Operational risk		24.5		45.2		6.2		11.9		5.0		92.8
At 31 Dec 2019		281.0		366.4		57.5		122.0		38.4		843.4
Credit risk		219.5		291.9		47.0		103.1		29.6		691.1
Counterparty credit risk		27.3		9.2		1.0		8.3		1.5		47.3
Market risk	1	24.0		23.3		1.9		8.5		1.4		35.8
Operational risk		27.3		39.5		6.8		11.7		5.8		91.1
At 31 Dec 2018		298.1		363.9		56.7		131.6		38.3		865.3

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

RWA movement by global business by key driver
	Credit risk, counterparty credit risk and operational risk
	RBWM		CMB		GB&M		GPB		Corporate Centre		Market risk		Total RWAs
	$bn		$bn		$bn		$bn		$bn		$bn		$bn
RWAs at 1 Jan 2019	126.9		321.2		248.6		16.8		116.0		35.8		865.3
Asset size	7.5		9.5		(1.6	)	-		(4.0	)	(2.4	)	9.0
Asset quality	-		3.3		0.6		(0.3	)	(0.1	)	0.2		3.7
Model updates	(0.6	)	(1.9	)	(2.9	)	(2.3	)	-		-		(7.7	)
Methodology and policy	(0.6	)	(18.3	)	(11.0	)	(0.3	)	1.7		(3.7	)	(32.2	)
Acquisitions and disposals	-		-		-		-		0.3		-		0.3
Foreign exchange movements	0.8		2.9		0.9		0.1		0.3		-		5.0
Total RWA movement	7.1		(4.5	)	(14.0	)	(2.8	)	(1.8	)	(5.9	)	(21.9	)
RWAs at 31 Dec 2019	134.0		316.7		234.6		14.0		114.2		29.9		843.4

RWA movement by geographical region by key driver
	Credit risk, counterparty credit risk and operational risk
	Europe		Asia		MENA		North America		Latin America		Market  risk		Total  RWAs
	$bn		$bn		$bn		$bn		$bn		$bn		$bn
RWAs at 1 Jan 2019	274.1		340.6		54.8		123.1		36.9		35.8		865.3
Asset size	(2.0	)	14.9		1.4		(3.8	)	0.9		(2.4	)	9.0
Asset quality	1.9		1.6		-		(0.5	)	0.5		0.2		3.7
Model updates	(2.9	)	(2.4	)	(0.1	)	(2.3	)	-		-		(7.7	)
Methodology and policy	(17.3	)	(9.6	)	(1.0	)	(0.2	)	(0.4	)	(3.7	)	(32.2	)
Acquisitions and disposals	-		-		0.3		-		-		-		0.3
Foreign exchange movements	4.1		0.8		0.1		1.3		(1.3	)	-		5.0
Total RWA movement	(16.2	)	5.3		0.7		(5.5	)	(0.3	)	(5.9	)	(21.9	)
RWAs at 31 Dec 2019	257.9		345.9		55.5		117.6		36.6		29.9		843.4

Leverage ratio

			At
			31 Dec		31 Dec
			2019		2018
Ref*		Footnotes	$bn		$bn
20	Tier 1 capital		144.8		143.5
21	Total leverage ratio exposure		2,726.5		2,614.9
			%		%
22	Leverage ratio		5.3		5.5
EU-23	Choice of transitional arrangements for the definition of the capital measure		Fully phased-in		Fully phased-in
	UK leverage ratio exposure - quarterly average	1	2,535.4		2,464.4
			%		%
	UK leverage ratio - quarterly average	1	5.8		5.8
	UK leverage ratio - quarter end	1	5.7		6.0

*  The references identify the lines prescribed in the EBA template.

1  UK leverage ratio denotes the Group's leverage ratio calculated under the PRA's UK leverage framework and excludes qualifying central bank balances from the calculation of exposure.

Our leverage ratio calculated in accordance with the Capital Requirements Regulation was 5.3% at 31 December 2019, down from 5.5% at 31 December 2018. The increase in exposure was primarily due to growth in customer lending and financial investments.

At 31 December 2019, our UK minimum leverage ratio requirement of 3.25% under the PRA's UK leverage framework was supplemented by an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.2%. These additional buffers translated into capital values of $17.7bn, and $5.4bn respectively. We exceeded these leverage requirements.

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2019 is published on our website, www.hsbc.com/investors.

 

END

 

 

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