Half-year Report (part 2 of 2)

HSBC UK Bank PLC

01 August 2023

 

Condensed financial statements

Contents

34	Consolidated income statement
35	Consolidated statement of comprehensive income
36	Consolidated balance sheet
37	Consolidated statement of changes in equity
38	Consolidated statement of cash flows

Consolidated income statement

		Half-year to
		30 Jun	30 Jun
		2023	2022
	Notes	£m	£m
Net interest income		3,871	2,752
-  interest income		6,012	3,113
-  interest expense		(2,141)	(361)
Net fee income	2	649	597
-  fee income		782	737
-  fee expense		(133)	(140)
Net income from financial instruments held for trading or managed on a fair value basis		190	173
Change in fair value of other financial instruments mandatorily measured at fair value through profit or loss		7	32
Gains less losses from financial investments		36	21
Gain on acquisition of subsidiary1		1,240	-
Other operating income		11	21
Net operating income before change in expected credit losses and other credit impairment charges		6,004	3,596
Change in expected credit losses and other credit impairment charges		(337)	(42)
Net operating income		5,667	3,554
Employee compensation and benefits		(487)	(498)
General and administrative expenses		(1,068)	(1,063)
Depreciation and impairment of property, plant and equipment and right-of-use assets		(59)	(94)
Amortisation and impairment of intangible assets		(151)	(149)
Total operating expenses		(1,765)	(1,804)
Operating profit		3,902	1,750
Profit before tax		3,902	1,750
Tax expense	4	(699)	(281)
Profit for the period		3,203	1,469
Attributable to:
-  ordinary shareholders of the parent company		3,200	1,466
-  non-controlling interests		3	3
Profit for the period		3,203	1,469

1   Provisional gain of £1,240m recognised in respect of the acquisition of SVB UK.

The accompanying notes on pages 39 to 45, 'Profit /(loss) before tax and balance sheet data for the period' in the 'Financial summary' section on pages 8 to 11, and the following disclosures in the Risk section on pages 11 to 31 form an integral part of these condensed financial statements: 'Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation' and 'Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees'.

Consolidated statement of comprehensive income

	Half-year to
	30 Jun	30 Jun
	2023	2022
	£m	£m
Profit for the period	3,203	1,469
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	19	(273)
-  fair value gains/(losses)	61	(364)
-  fair value gains transferred to the income statement on disposal	(37)	(21)
-  expected credit recoveries recognised in the income statement	-	(1)
-  income taxes	(5)	113
Cash flow hedges	(567)	(609)
-  fair value losses	(1,300)	(815)
-  fair value (gains)/losses reclassified to the income statement	513	(21)
-  income taxes	220	227
Exchange differences	7	(2)
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit asset/liability	(16)	(53)
-  before income taxes	(20)	(256)
-  income taxes1	4	203
Other comprehensive income/(expense) for the period, net of tax	(557)	(937)
Total comprehensive income for the period	2,646	532
Attributable to:
-  ordinary shareholders of the parent company	2,643	529
-  non-controlling interests	3	3
Total comprehensive income for the period	2,646	532

1   There is an income tax credit of £4m (1H22: credit £203m). 1H22 includes an income tax credit of £136m, arising upon the remeasurement of deferred tax following the substantive enactment of legislation to reduce the UK banking surcharge rate from 8% to 3% with effect from 1 April 2023.

Consolidated balance sheet

		At
		30 Jun	31 Dec
		2023	2022
	Notes	£m	£m
Assets
Cash and balances at central banks		76,666	94,407
Items in the course of collection from other banks		327	353
Financial assets mandatorily measured at fair value through profit or loss	6	118	108
Derivatives		422	546
Loans and advances to banks		7,324	6,357
Loans and advances to customers		209,566	204,143
Reverse repurchase agreements - non-trading		6,781	7,406
Financial investments		22,129	16,092
Prepayments, accrued income and other assets		8,164	8,762
Interests in joint ventures		8	9
Goodwill and intangible assets	8	4,265	4,258
Total assets		335,770	342,441
Liabilities and equity
Liabilities
Deposits by banks		10,844	10,721
Customer accounts		273,785	281,095
Repurchase agreements - non-trading		7,659	9,333
Items in the course of transmission to other banks		156	308
Derivatives		206	304
Debt securities in issue		1,257	1,299
Accruals, deferred income and other liabilities		3,330	3,543
Current tax liabilities		681	173
Provisions	9	375	424
Deferred tax liabilities		441	666
Subordinated liabilities		13,066	12,349
Total liabilities		311,800	320,215
Equity
Called up share capital		-	-
Share premium account		9,015	9,015
Other equity instruments		2,196	2,196
Other reserves		5,580	6,121
Retained earnings		7,119	4,834
Total shareholders' equity		23,910	22,166
Non-controlling interests		60	60
Total equity		23,970	22,226
Total liabilities and equity		335,770	342,441

Consolidated statement of changes in equity

	Called up share capital and share premium	Other equity instruments	Retained earnings	Financial assets at FVOCI reserve	Cash flow hedging reserve	Group re-organisation reserve2	Total share- holders' equity	Non- controlling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 Jan 2023	9,015	2,196	4,834	(246)	(1,324)	7,691	22,166	60	22,226
Profit for the period	-	-	3,200	-	-	-	3,200	3	3,203
Other comprehensive income (net of tax)	-	-	(16)	26	(567)	-	(557)	-	(557)
-  debt instruments at fair value through other comprehensive income	-	-	-	19	-	-	19	-	19
-  cash flow hedges	-	-	-	-	(567)	-	(567)	-	(567)
-  remeasurement of defined benefit asset/liability	-	-	(16)	-	-	-	(16)	-	(16)
-  exchange differences	-	-	-	7	-	-	7	-	7
Total comprehensive income for the period	-	-	3,184	26	(567)	-	2,643	3	2,646
Dividends to shareholders	-	-	(908)	-	-	-	(908)	(3)	(911)
Other movements1	-	-	9	-	-	-	9	-	9
At 30 Jun 2023	9,015	2,196	7,119	(220)	(1,891)	7,691	23,910	60	23,970
At 1 Jan 2022	9,015	2,196	4,877	56	(90)	7,691	23,745	60	23,805
Profit for the period	-	-	1,466	-	-	-	1,466	3	1,469
Other comprehensive income (net of tax)	-	-	(53)	(275)	(609)	-	(937)	-	(937)
-  debt instruments at fair value through other comprehensive income	-	-	-	(273)	-	-	(273)	-	(273)
-  cash flow hedges	-	-	-	-	(609)	-	(609)	-	(609)
-  remeasurement of defined benefit asset/liability	-	-	(53)	-	-	-	(53)	-	(53)
-  exchange differences	-	-	-	(2)	-	-	(2)	-	(2)
Total comprehensive income for the period	-	-	1,413	(275)	(609)	-	529	3	532
Dividends to shareholders	-	-	(729)	-	-	-	(729)	(3)	(732)
Other movements1	-	-	12	-	-	-	12	-	12
At 30 Jun 2022	9,015	2,196	5,573	(219)	(699)	7,691	23,557	60	23,617

1   Relates primarily to £6m of pension assets transferred from HSBC Global Services (UK) Limited and HSBC Bank plc (1H22: £8m).

2   The Group reorganisation reserve is an equity reserve which was used to recognise the contribution of equity reserves associated with the
ring-fenced businesses that were transferred from HSBC Bank plc.

Consolidated statement of cash flows

	Half-year to
	30 Jun	30 Jun
	2023	2022
	£m	£m
Profit before tax	3,902	1,750
Adjustments for non-cash items:
Depreciation, amortisation and impairment	210	243
Net gain from investing activities	(23)	(21)
Gain on acquisition of SVB UK	(1,240)	-
Change in expected credit losses gross of recoveries and other credit impairment charges	367	86
Provisions including pensions	(122)	(27)
Share-based payment expense	9	7
Other non-cash items included in profit before tax	(42)	(6)
Elimination of exchange differences1	438	955
Changes in operating assets	1,372	(12,068)
Changes in operating liabilities	(17,239)	2,968
Contributions paid to defined benefit plans	(5)	(11)
Tax (paid)	(119)	(1,088)
Net cash from operating activities	(12,492)	(7,212)
Purchase of financial investments	(6,825)	(6,577)
Proceeds from the sale and maturity of financial investments	3,521	6,245
Net cash flows from the purchase and sale of property, plant and equipment	49	(20)
Net investment in intangible assets	(158)	(163)
Net cash flow from acquisition of SVB UK	1,023	-
Net cash from investing activities	(2,390)	(515)
Subordinated loan capital issued2	1,000	-
Dividends paid to shareholders of the parent company and non-controlling interests	(911)	(732)
Net cash from financing activities	89	(732)
Net decrease in cash and cash equivalents	(14,793)	(8,459)
Cash and cash equivalents at the beginning of the period	100,319	114,134
Exchange differences in respect of cash and cash equivalents	(177)	27
Cash and cash equivalents at the end of the period	85,349	105,702

Interest received was £5,775m (1H 2022: £2,964m) and interest paid was £1,920m (1H 2022: £281m).

1   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.

2   Subordinated liabilities changes during the period are attributable to cash flows from issuance of securities £1,000m (2022: £nil) and repayments of £nil (2022: £nil). Non-cash changes during the period included foreign exchange gains/(losses) of £273m (2022: £(494)m).

Notes on the interim condensed financial statements

Contents

39	1	Basis of preparation and material accounting policies		42	9	Provisions
40	2	Net fee income		43	10	Contingent liabilities, contractual commitments, guarantees and contingent assets
40	3	Post-employment benefit plans
41	4	Tax		43	11	Legal proceedings and regulatory matters
41	5	Dividends		44	12	Transactions with related parties
41	6	Fair values of financial instruments carried at fair value		44	13	Business acquisitions
42	7	Fair values of financial instruments not carried at fair value		45	14	Events after the balance sheet date
42	8	Goodwill		45	15	Interim Report 2023 and statutory accounts

1	Basis of preparation and material accounting policies

(a)    Compliance with International Financial Reporting Standards

The interim condensed consolidated financial statements of HSBC UK have been prepared in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority and IAS 34 'Interim Financial Reporting', as issued by the International Accounting Standards Board ('IASB') and as adopted by the UK. Therefore, they include an explanation of events and transactions that are significant to an understanding of the changes in HSBC UK's financial position and performance since the end of 2022.

These financial statements should be read in conjunction with the Annual Report and Accounts 2022, which was prepared in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006. These financial statements were also prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee.

At 30 June 2023, there were no unendorsed standards effective for the half-year to 30 June 2023 affecting these financial statements, and there was no difference between IFRSs as adopted by the UK and IFRSs issued by the IASB in terms of their application to HSBC UK.

Standards applied during the half-year to 30 June 2023

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

On 23 May 2023, the IASB issued its amendments to IAS 12 'International Tax Reform - Pillar Two Model Rules', which became effective immediately with disclosure requirements effective for annual reporting periods beginning on or after 1 January 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 exception 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 interim condensed financial statements.

(b)   Use of estimates and judgements

Management believes that our critical accounting estimates and judgements are those that relate to impairment of amortised cost and FVOCI debt financial assets, provisions for liabilities, impairment of goodwill and defined benefit pension obligations. Apart from estimates relating to ECL impairment there were no material changes in the current period to any of the other critical accounting estimates and judgements disclosed in 2022, which are stated on pages 87 to 94 of the Annual Report and Accounts 2022.

(c)    Composition of the group

On 13 March 2023, HSBC UK acquired Silicon Valley Bank UK Limited which was subsequently renamed to HSBC Innovation Bank Limited. HSBC Innovation Bank Limited is a fully owned subsidiary of HSBC UK and is fully consolidated. There were no other material changes in the composition of the group in the half-year to 30 June 2023.

(d)   Going concern

The financial statements are prepared on a going concern basis as the Directors are satisfied that the group and bank 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 as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity.

(e)    Accounting policies

The accounting policies applied by the group for these interim condensed consolidated financial statements are consistent with those described on pages 87 to 94 of the Annual Report and Accounts 2022, as are the methods of computation, with the exception of those relating to amendments to IAS 12 and as described below.

New material accounting policies

Business combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured at the fair value of the consideration, including contingent consideration, given at the date of exchange. Acquisition-related costs are recognised as an expense in the income statement in the period in which they are incurred. The acquired identifiable assets, liabilities and contingent liabilities are generally measured at their fair values at the date of acquisition.

Goodwill is measured as the excess of the aggregate of the consideration transferred, the amount of non-controlling interest and the fair value of HSBC UK's previously held equity interest, if any, over the net of the amounts of the identifiable assets acquired and the liabilities assumed. Any gain resulting from a bargain purchase is recognised in the income statement.

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. This election is made for each business combination.

2	Net fee income

	Half-year to
	30 Jun	30 Jun
	2023	2022
Net fee income by product	£m	£m
Account services	137	132
Funds under management	59	58
Cards	290	278
Credit facilities	69	67
Imports/exports	15	15
Insurance agency commission	5	12
Receivables finance	44	49
Other	163	126
Fee income	782	737
Less: fee expense	(133)	(140)
Net fee income	649	597
Net fee income by global business
Wealth and Personal Banking	293	282
Commercial Banking	464	422
Global Banking and Markets	(108)	(106)
Corporate Centre	-	(1)

3	Post-employment benefit plans

We operate a pension plan for our employees called the HSBC Bank (UK) Pension Scheme ('the plan'). Details of the plan are explained on pages 96 and 97 of the Annual Report and Accounts 2022, and details of the policies and practices associated with the plan on page 58 of the Annual Report and Accounts 2022.

Net assets/(liabilities) under defined benefit pension plans
	Fair value of plan assets	Present value of defined benefit obligations	Net defined benefit assets/(liabilities)
	£m	£m	£m
At 30 Jun 2023	20,174	(14,815)	5,359
At 31 Dec 2022	20,853	(15,596)	5,257

Post-employment defined benefit plan actuarial financial assumptions

Key actuarial assumptions for the plan
	Discount rate	Inflation rate (RPI)	Inflation rate (CPI)	Rate of increase for pensions	Rate of pay increase
	%	%	%	%	%
At 30 Jun 2023	5.40	3.44	3.01	3.32	3.51
At 31 Dec 2022	4.93	3.39	2.84	3.27	3.34

Mortality tables and average life expectancy at age 60 for the plan
	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
At 30 Jun 2023	SAPS S31	26.8	28.3	28.0	29.6
At 31 Dec 2022	SAPS S31	27.1	28.6	28.4	29.9

1   Self-administered pension scheme ('SAPS') S3 table, with different tables and multipliers adopted based on gender, pension amount and member status, reflecting the Scheme's actual mortality experience. Improvements are projected in accordance with the Continuous Mortality Investigation's CMI 2022 core projection model with an initial addition to improvement of 0.25% per annum and a long-term rate of improvement of 1.25% per annum and a 25% weighting to 2022 mortality experience reflecting updated long-term view on mortality improvements post-pandemic.

4

Tax

Tax charge

The effective tax rate is 17.9% (1H22: 16.1%). The effective tax rate is reduced by 8.5% due to non-taxable provisional gain arising on the acquisition of SVB UK in the period. The effective tax rate excluding this item is 26.4% and reflects the statutory blended tax rate of 27.75% (post main rate of UK corporation tax increasing from 19% to 25% and surcharge rate decreasing from 8% to 3% as of 1 April 2023), tax relief on AT1 coupon payments and a tax credit from the release of provisions for uncertain tax positions. The effective tax rate for 1H22 was reduced by 9.8% by a credit arising from the remeasurement of the group's deferred tax balances following the substantive enactment of legislation to reduce the UK banking surcharge rate from 8% to 3%. The effective tax rate excluding this item in 1H22 was 25.9%.

5

Dividends

On 19 July, 2023, the Directors resolved to pay an interim dividend of £948m to the ordinary shareholder of the parent company in respect of the financial year ending 31 December 2023. No liability is recognised in the financial statements in respect of this dividend.

Dividends to the shareholder of the parent company
	Half-year to
	30 Jun 2023		30 Jun 2022
	£ per share	£m	£ per share	£m
Dividends paid on ordinary shares
Interim dividend in respect of the previous year	10,780	539	9,820	491
Interim dividend in respect of the current year	5,360	268	3,500	175
Total	16,140	807	13,320	666

Total coupons on capital securities classified as equity
		Half-year to
		30 Jun 2023	30 Jun 2022
	First call date	£m	£m
Undated Subordinated Additional Tier 1 instruments
-  £1,096m	Dec 2019	50	31
-  £1,100m	Dec 2024	51	32
Total		101	63

6	Fair values of financial instruments carried at fair value

The accounting policies, control framework and the hierarchy used to determine fair values are consistent with those applied for the Annual Report and Accounts 2022.

Financial instruments carried at fair value and bases of valuation
	At 30 Jun 2023				At 31 Dec 2022
	Valuation techniques				Valuation techniques
	Quoted market  price	Using observable inputs	With significant unobservable input		Quoted market  price	Using observable inputs	With significant unobservable input
	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Recurring fair value measurements
Assets
Financial assets mandatorily measured at fair value through profit or loss	85	-	33	118	72	-	36	108
Derivatives	-	422	-	422	14	532	-	546
Financial investments	13,788	587	-	14,375	10,757	175	-	10,932
Liabilities
Derivatives	-	206	-	206	-	304	-	304

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. There were no transfers between Level 1 and Level 2 during 2023 and 2022.

7	Fair values of financial instruments not carried at fair value

The bases for measuring the fair values of loans and advances to banks and customers, deposits by banks, customer accounts, debt securities in issue, subordinated liabilities, non-trading repurchase and reverse repurchase agreements and financial investments are explained on pages 103 and 104 of the Annual Report and Accounts 2022.

Fair values of financial instruments not carried at fair value and bases of valuation
	At 30 Jun 2023		At 31 Dec 2022
	Carrying amount	Fair value	Carrying amount	Fair value
	£m	£m	£m	£m
Assets
Loans and advances to banks	7,324	7,324	6,357	6,357
Loans and advances to customers	209,566	204,896	204,143	199,957
Reverse repurchase agreements - non-trading	6,781	6,781	7,406	7,406
Financial investments - at amortised cost	7,754	7,134	5,160	4,772
Liabilities
Deposits by banks	10,844	10,844	10,721	10,721
Customer accounts	273,785	273,785	281,095	281,095
Repurchase agreements - non-trading	7,659	7,659	9,333	9,333
Debt securities in issue	1,257	1,243	1,299	1,279
Subordinated liabilities	13,066	13,050	12,349	11,765

Other financial instruments not carried at fair value are typically short term in nature and repriced 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.

8

Goodwill

Impairment testing

As described on page 109 of the Annual Report and Accounts 2022, we test goodwill for impairment at 1 October each year and whenever there is an indication that goodwill may be impaired. At 30 June 2023, we reviewed the inputs used in our most recent impairment test in the light of current economic and market conditions and there was no indication of goodwill impairment.

9	Provisions

	Restructuring costs2	Legal proceedings and regulatory matters	Customer remediation	Other provisions	Total
	£m	£m	£m	£m	£m
Provisions (excluding contractual commitments)
At 1 Jan 2023	63	32	142	82	319
Additions	22	1	6	5	34
Amounts utilised	(16)	(2)	(22)	(2)	(42)
Unused amounts reversed	(13)	-	(23)	(9)	(45)
Exchange and other movements	5	-	-	(5)	-
At 30 Jun 2023	61	31	103	71	266
Contractual commitments1
At 1 Jan 2023					105
Net change in expected credit loss provision					4
At 30 Jun 2023					109
Total provisions
At 1 Jan 2023					424
At 30 Jun 2023					375

1   Contractual commitments include the provision for contingent liabilities measured under IFRS 9 Financial Instruments in respect of financial guarantees and the expected credit loss provision on off-balance sheet guarantees and commitments.

2   Restructuring costs include charges received from HSBC Global Services (UK) Limited, which do not form part of the balance sheet provision movement.

Customer remediation

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

Restructuring costs

The restructuring costs provision is for costs associated with the group's restructuring programmes.

Legal proceedings and regulatory matters

Further details of 'Legal proceedings and regulatory matters' are set out in Note 11. Legal proceedings include civil court, arbitration or tribunal proceedings brought against the group (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, regulatory or law enforcement agencies in connection with alleged wrongdoing.

10	Contingent liabilities, contractual commitments, guarantees and contingent assets

	At
	30 Jun	31 Dec
	2023	2022
	£m	£m
Guarantees and other contingent liabilities:
-  financial guarantees:1	1,076	1,148
-  performance and other guarantees	2,419	2,530
At the end of the period	3,495	3,678
Commitments:2
-  documentary credits and short-term trade-related transactions	65	52
-  forward asset purchases and forward deposits placed	330	327
-  standby facilities, credit lines and other commitments to lend	73,294	70,104
At the end of the period	73,689	70,483

1   Financial guarantees contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due, in accordance with the original or modified terms of a debt instrument. The amounts in the above table are nominal principal amounts.

2   Includes £71bn of commitments at 30 June 2023 (31 December 2022: £68bn), to which the impairment requirements in IFRS 9 are applied where HSBC UK has become party to an irrevocable commitment.

The preceding table discloses the nominal principal amounts of off-balance sheet liabilities and commitments for the group, which represents the maximum amounts at risk should the contracts be fully drawn upon and clients default. As a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements. The expected credit loss provision relating to guarantees and commitments under IFRS 9 is disclosed in Note 9. The majority of the guarantees have a term of less than one year, while guarantees with terms of more than one year are subject to the group's annual credit review process.

Contingent liabilities arising from legal proceedings and regulatory and other matters against group companies are excluded from this note but are disclosed in Note 11.

Financial Services Compensation Scheme

The FSCS provides compensation, up to certain limits, to eligible customers of financial services firms that are unable, or likely to be unable, to pay claims against them. The FSCS may impose a further levy on HSBC UK to the extent the industry levies imposed to date are not sufficient to cover the compensation due to customers in any future possible collapse. The ultimate FSCS levy to the industry as a result of a collapse cannot be estimated reliably. It is dependent on various uncertain factors including the potential recovery of assets by the FSCS, changes in the level of protected products (including deposits and investments) and the population of FSCS members at the time. The FCA is currently reviewing the FSCS Framework with the intention to consult on any changes in 2023/24. The FCA's goal is to ensure that the compensation framework continues to provide appropriate and proportionate consumer protection, with costs distributed across industry levy payers in a fair and sustainable way. Focus points of the review will include, the compensation limits, the funding class threshold and improving the FCA's understanding of how the scheme impacts consumer and firm behaviour.

UK branches of HSBC overseas entities

In December 2017, HMRC challenged the VAT status of certain UK branches of HSBC overseas entities. In Q1 2019, HMRC reaffirmed its assessment that the UK branches are ineligible to be members of the UK VAT group and HSBC filed appeals. In February 2022, the Upper Tribunal issued a judgment addressing several preliminary legal issues, which was partially in favour of HMRC and partially in favour of HSBC. The case will now return to the First Tier Tax Tribunal for full trial and we await confirmation of the trial window. Since January 2018, HSBC's returns have been prepared on the basis that the UK branches are not in the UK VAT group. In the event that HSBC is successful, HSBC will seek a refund of this VAT, of which £170m is estimated to be attributable to HSBC UK Bank plc.

11	Legal proceedings and regulatory matters

The group is party to legal proceedings and regulatory matters arising out of its normal business operations. Apart from the matters described below, the group considers that none of these matters are material:

-   litigation in respect of historic PPI sales notwithstanding the FCA deadline for bringing PPI complaints has passed;

-   claims issued by two separate investor groups against HSBC UK (as successor to HSBC Private Bank (UK) Limited ('PBGB')) in the High Court of England and Wales in connection with PBGB's role in the development of Eclipse film finance schemes;

-   an investigation by the FCA in connection with collections and recoveries operations in the UK;

-   an investigation by the PRA in connection with depositor protection arrangements in the UK; and

-   a lawsuit brought in the US District Court for the Northern District of California, by First-Citizens Bank & Trust Company ('First Citizens') against various HSBC companies and seven HSBC US employees who had previously worked for Silicon Valley Bank ('SVB') alleging, among other things, that HSBC conspired with the individual defendants to solicit employees from First Citizens and that the individual defendants took confidential information belonging to SVB and/or First Citizens.

There are many factors that may affect the range of outcomes, and the resulting financial impact, of the pending matters, which could be significant.

The recognition of provisions is determined in accordance with the accounting policies set out in Note 1 of the Annual Report and Accounts 2022. While the outcomes of legal proceedings and regulatory matters are inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters at 30 June 2023. Where an individual provision is material, the fact that a provision has been made is stated and quantified. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.

12	Transactions with related parties

There were no changes to the related party transactions described in the Annual Report and Accounts 2022 that have had a material effect on the financial position or performance of the group in the half-year to 30 June 2023. All other related party transactions that took place in the half-year to 30 June 2023 were similar in nature to those disclosed in the Annual Report and Accounts 2022.

13	Business acquisitions

Silicon Valley Bank UK Limited (now HSBC Innovation Bank Limited)

On 13 March 2023, HSBC UK acquired SVB UK for £1, acquiring 100% of the equity and thereby obtaining control. The acquisition was funded from existing resources and brought the staff, assets and liabilities of SVB UK into the HSBC UK portfolio.

The acquisition of SVB UK made strategic sense for our business. We expect the acquisition to strengthen our commercial banking franchise and enhance our ability to serve innovative and fast-growing firms. The acquisition accelerates our future innovation sector plans by 3 to 4 years by bringing in capabilities immediately, such as the deep industry sector knowledge and the depth of embedded industry ecosystem relationships with founders and funders.

On acquisition, we performed a preliminary assessment of the fair value of the assets and liabilities purchased. We established a provisional opening balance sheet on 13 March 2023 and applied the result of the fair value assessment, which resulted in a reduction in net assets of £207m. The provisional gain on acquisition of £1,240m represents the difference between the consideration paid of £1 and the net assets acquired. This gain could change as further due diligence is performed within 12 months of the acquisition, as allowed by IFRS 3 'Business Combinations'.

HSBC Innovation Bank Limited contributed £119m of revenue and £54m to the consolidated profit of HSBC UK for the period from                    13 March 2023 to 30 June 2023. As per the disclosure requirements set out in IFRS 3 (Business Combinations), if HSBC Innovation Bank Limited had been acquired on 1 January 2023, management estimates that for the six months to 30 June 2023 consolidated revenue would have been £6,124m and consolidated profit after tax £3,266m. In determining these amounts, management has assumed that the fair value adjustments, determined previously, that arose on acquisition would have been the same if the acquisition had occurred on 1 January 2023.

The details of the business combination as follows:

		£m
Fair value of consideration transferred		-
Recognised fair value of identifiable assets acquired and liabilities assumed at the acquisition date
Assets
Cash and balances at central banks		589
Items in course of collection from other banks		302
Loans and advances to banks		147
Loans and advances to customers		5,369
Financial investments		2,540
Other assets		344
Total assets		9,291
Liabilities
Customer accounts		7,400
Repurchase agreements		403
Other liabilities		248
Total liabilities		8,051
Fair value of identifiable net assets acquired		1,240
Provisional gain on acquisition		1,240
Consideration transferred settled in cash		-
Cash and cash equivalents acquired		1,023
Net cash inflow on acquisition		1,023
Acquisition costs charged to expenses		6
14	Events after the balance sheet date

In its assessment of events after the balance sheet date, HSBC UK has considered and concluded that no material events have occurred resulting in adjustments to the financial statements.

On 19 July 2023, the Directors resolved to pay an interim dividend to the ordinary shareholder of the parent company of £948m in respect of the financial year ending 31 December 2023. No liability is recognised in the financial statements in respect of this dividend as described in Note 5.

15	Interim Report 2023 and statutory accounts

The information in this Interim Report 2023 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The Interim Report 2023 was approved by the Board of Directors on 31 July 2023. The statutory accounts of HSBC UK Bank plc for the year ended 31 December 2022 have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The group's auditor, PricewaterhouseCoopers LLP, has reported on those accounts. Its report was unqualified, did not include a reference to any matters to which PwC drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Reconciliation of alternative performance measures

Return on equity and return on tangible equity

RoTE is computed as reported profit, divided by average reported equity adjusted for goodwill and intangibles impairment for the period. The adjustment to reported results and reported equity excludes amounts attributable to non-controlling interests. We provide RoTE in addition to RoE as a way of assessing our performance, which is closely aligned to our capital position. The measures are calculated in US dollars in line with the standard HSBC Group-wide calculation methodology.

The following table details the adjustments made to the reported results and equity:

Return on Equity and Return on Tangible Equity
	Half-year to
	30 Jun	30 Jun
	2023	2022
	$m	$m
Profit
Profit  attributable to the ordinary shareholders of the parent company	3,801	1,827
Profit attributable to the ordinary shareholders, excluding goodwill and other intangible assets impairment	3,801	1,827
Impact of provisional gain on acquisition of SVB UK	(1,582)	-
Profit attributable to the ordinary shareholders, excluding goodwill, other intangible assets impairment and acquisition of SVB UK	2,219	1,827
Equity
Average total shareholders' equity	29,064	30,755
Effect of average preference shares, additional Tier 1 and other equity instruments	(2,719)	(2,842)
Average ordinary shareholders' equity	26,345	27,913
Effect of goodwill and other intangibles (net of deferred tax)	(5,291)	(5,463)
Average tangible ordinary shareholders' equity	21,054	22,450
Average impact of acquisition of SVB UK	(1,177)	-
Average tangible ordinary shareholders' equity excluding acquisition of SVB UK	19,877	22,450
Ratio	%	%
Return on equity (annualised)	29.1	13.2
Return on average tangible equity (annualised)1	36.4	16.4
Return on average tangible equity excluding the acquisition of SVB UK (annualised)1	22.5	16.4

1   Under IAS 19, HSBC UK holds a pension fund surplus, and records pension income in the Income Statement. The IAS 19 pension fund surplus increases Tangible Equity but not CET1. In the event that the IAS 19 Pension fund surplus was zero, RoTE would be 42.4% (1H22: 16.7%), we refer to this as Pension Adjusted RoTE. Pension Adjusted RoTE excluding the acquisition of SVB UK would be 25.8% (1H22: 16.7%).

Abbreviations

Currencies
£	British pound sterling
$	United States dollar
Abbreviations
1H23	First half of 2023
1H22	First half of 2022
4Q24	Fourth quarter of 2024
2Q23	Second quarter of 2023
A
AI	Artificial Intelligence
AIEA	Average interest-earning assets
ALCO	Asset and Liability Management Committee
AT1	Additional tier 1
B
BACS	Bankers' Automated Clearing System
Basel	Basel Committee on Banking Supervision
Basel III	Basel Committee's reforms to strengthen global capital and liquidity rules
BB	Business Banking
BoE	Bank of England
C
CBDC	Central Bank Digital Currency
CET1	Common equity tier 1
CMB	Commercial Banking
CODM	Chief Operating Decision Maker
CRR	Customer risk rating
CRR II	Revised Capital Requirements Regulation and Directive, as implemented
CPI	Consumer Price Index
D
DTR	Disclosure Guidance and Transparency Rules
E
ECL	Expected credit losses. In the income statement, ECL is recorded as a change in expected credit losses and other credit impairment charges. In the balance sheet, ECL is recorded as an allowance for financial instruments to which only the impairment requirements in IFRS 9 are applied
ESG	Environmental, social and governance
EU	European Union
EVE	Economic value of equity
F
FCA	Financial Conduct Authority (UK)
FTE	Full-time equivalent staff
FVOCI	Fair value through other comprehensive income
FY	Full Year
FY22	Full Year 2022
G
GBM	Global Banking and Markets
GDP	Gross domestic product
group	HSBC UK Bank plc together with its subsidiary undertakings
Group	HSBC Holdings together with its subsidiary undertakings
H
HMRC	HM Revenue & Customs
HMT	His Majesty's Treasury
HR	Human Resources
HSBC Group	HSBC Holdings together with its subsidiary undertakings
HSBC Holdings	HSBC Holdings plc
I
IAS	International Accounting Standards
IASB	International Accounting Standards Board
Ibor	Interbank offered rate
ICAAP	Internal capital adequacy assessment process
IFRSs	International Financial Reporting Standards
ILAAP	Internal liquidity adequacy assessment process
L
LCR	Liquidity coverage ratio
LFRF	Liquidity and Funding Risk Management Framework
LTV	Loan to value
M
MREL	EU minimum requirements for own funds and eligible liabilities
N
NII	Net interest income
NPS	Net Promoter Score
NSFR	Net stable funding ratio
O
OCI	Other comprehensive income
P
PD	Probability of default
POCI	Purchased or originated credit impaired
PPI	Payment protection insurance
PRA	Prudential Regulation Authority
PSR	Payment Systems Regulator
PwC	PricewaterhouseCoopers LLP and its network of firms
R
Revenue	Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit provisions, also referred to as revenue
RoE	Return on average ordinary shareholders' equity
RoTE	Return on average tangible equity
RWA	Risk-weighted asset
S
SBB	Small Business Banking
SME	Small and medium-sized enterprise
SVB UK	Silicon Valley Bank UK Limited
U
UK	United Kingdom
US	United States of America
V
VaR	Value at risk
VAT	Value-added tax
W
WPB	Wealth and Personal Banking

 

END