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HSBC UK Bank PLC (32BG)

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Tuesday 23 February, 2021

HSBC UK Bank PLC

Annual Financial Report (Part 1 of 2)

RNS Number : 0248Q
HSBC UK Bank PLC
23 February 2021
 

HSBC UK Bank plc 2020 Annual Report and Accounts

In fulfilment of its obligations under section 4.1.3 and 6.3.5(1) of the Disclosure Guidance and Transparency Rules, HSBC UK Bank plc (the "Company") hereby releases the unedited full text of its 2020 Annual Report and Accounts (the "document") for the year ended 31 December 2020.

 

The document is now available on the Company's website at:

 

http://www.hsbc.com/investor-relations/subsidiary-company-reporting

 

The document has also been submitted to the Financial Conduct Authority's National Storage Mechanism and will shortly be available for viewing at:   https://data.fca.org.uk/#/nsm/nationalstoragemechanism

 

 

 

 

HSBC UK Bank plc

Annual Report and Accounts 2020

 

 

 

 

Contents

 

Page

Strategic report

 

Highlights

2

Key financial metrics

4

About us

5

Purpose and values

5

What we do

5

Our competitive advantages

5

Our strategy

6

Becoming a net zero bank

8

How we do business

9

Section 172 statement

12

Economic background and outlook

14

Key performance indicators

15

Financial summary

16

Risk overview

22

Report of the Directors

 

Risk

25

Corporate governance report

89

Disclosure of information to the auditors and Statement of Directors' Responsibilities

97

Financial statements

 

Independent auditors' report to the member of HSBC UK Bank plc

98

Financial statements

80

Notes on the financial statements

88

Reconciliation of Non-GAAP Financial Measures

127

 

 

 

 

 

 

 

 

Presentation of information

This document comprises the Annual Report and Accounts 2020 for HSBC UK Bank plc ('the bank' or 'the Company') and its subsidiaries (together 'HSBC UK' or 'the group'). 'We', 'us' and 'our' refer to HSBC UK Bank plc together with its subsidiaries. It contains the Strategic Report, the Report of the Directors, the Statement of Directors' Responsibilities and Financial Statements, together with the Independent Auditors' Report, as required by the UK Companies Act 2006. References to 'HSBC Group' or 'the Group' within this document mean HSBC Holdings plc together with its subsidiaries.

HSBC UK is exempt from publishing information required by The Capital Requirements Country-by-Country Reporting Regulations 2013, as this information is published by its ultimate parent, HSBC Holdings plc. This information is available on the Group's website: www.hsbc.com.

Pillar 3 disclosures for HSBC UK are also available on www.hsbc.com, under Investor Relations.

All narrative disclosures, tables and graphs within the Strategic Report and Report of the Directors are unaudited unless otherwise stated.

Our reporting currency is £ sterling. Unless otherwise specified, all £ symbols represent £ sterling and $ symbols represent US dollars. The abbreviations '£m' and '£bn' represents millions and billions (thousands of millions) of £ sterling.

This Annual Report and Accounts 2020 contains certain forward-looking statements with respect to the financial condition, results of operations and business of the group.

Statements that are not historical facts, including statements about the group's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC UK makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statement.

Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement.

 

 

 

Highlights

For the year ended 31 December 2020

Reported profit before tax

£0.2bn  ↓84%

(2019: £1.0bn )

 

Reported revenue

£6.0bn  ↓7%

(2019: £6.5bn)

 

Loans and advances to customers

£191.2bn  ↑4%

(2019: £183.1bn)

 

Risk-weighted assets ('RWAs')

£85.5bn 

(2019: £85.9 bn)

 

 

 

 

 

 

Adjusted profit before tax

£0.3bn   ↓85%

(2019: £2.3bn )

 

Expected credit losses and other credit impairment charges ('ECL')

£2.1bn  ↑245%

(2019: £0.6bn)

 

Customer accounts

£259.3bn  ↑20%

(2019: £216.2bn)

 

Common equity tier 1 capital ratio ('CET1')

15.2% 

 (2019: 13.0%)

 

 

Key financial metrics

 

Year ended

 

31 Dec 2020

31 Dec 2019

Reported results

 

 

Reported revenue (£m)

6,031 

 

6,484 

 

Reported profit before tax (£m)2

163 

 

1,010 

 

Reported profit after tax (£m)

80 

 

516 

 

Profit attributable to the shareholders of the parent company (£m)

76 

 

512 

 

Return on average tangible equity ('RoTE') (%)2

(0.1)

 

2.4 

 

Net interest margin (%)

1.71 

 

2.05 

 

Expected credit losses and other credit impairment charges as % of average gross loans and advances to customers (%)

1.12 

 

0.34 

 

Adjusted results

 

 

Adjusted revenue (£m)

6,047 

 

6,613 

 

Adjusted profit before tax (£m)2

334 

 

2,263 

 

Cost efficiency ratio (%)2

59.5 

 

56.5 

 

Adjusted return on average tangible equity ('Adjusted RoTE') (%)1,2

0.5 

 

9.9 

 

Balance sheet

 

 

Total assets (£m)

304,864 

 

257,102 

 

Net loans and advances to customers (£m)

191,233 

 

183,056 

 

Customer accounts (£m)

259,341 

 

216,214 

 

Average interest-earning assets (£m)

265,891 

 

231,701 

 

Loans and advances to customers as % of customer accounts (%)

73.7 

 

84.7 

 

Total shareholders' equity (£m)

22,798 

 

22,191 

 

Tangible ordinary shareholders equity (£m)

16,485 

 

16,001 

 

Capital, leverage and liquidity

 

 

Common equity tier 1 capital ratio (%)2,3

15.2 

 

13.0 

 

Total capital ratio (%)3

21.3 

 

19.2 

 

Risk-weighted assets 3 (£m)

85,477 

 

85,881 

 

Leverage ratio3 (%)

4.8 

 

5.0 

 

High-quality liquid assets (liquidity value) (£m)

88,838 

 

56,822 

 

Liquidity coverage ratio (%)

198 

 

165 

 

1  In the event that the current IAS 19 Pension fund surplus was zero Adjusted RoTE would be (0.1)% (2019: 11.3%). Further detail is on page 127.

2  These metrics are tracked as Key Performance Indicators of the group.

3  Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force in the European Union ('EU') at the time. These include the regulatory transitional arrangements for IFRS 9 'Financial Instruments' which are explained further on page 55. Leverage ratios are calculated using the end point definition of capital and IFRS 9 regulatory transitional arrangements. Following the end of the transition period following the UK's withdrawal from the EU, any reference to EU regulations and directive (including technical standards) should be read as a reference to the UK's version of that regulation and/or directive, as onshored into UK law under the EU.

 

 

Presentation of non-GAAP measures

In measuring our performance, the financial measures that we use include those derived from our reported results to eliminate factors that distort period-on-period comparisons. Such measures are referred to as adjusted performance. A reconciliation of reported to adjusted performance is provided on pages 14 to 16.

RoTE is computed by adjusting the reported equity for goodwill and intangibles. A reconciliation is provided on page 127, which details the adjustments made to the reported results and equity in calculating RoTE.

 

 

 

 

 

 

 

About us

HSBC UK comprises: Wealth and Personal Banking ('WPB'), Commercial Banking ('CMB'), a restricted Global Banking and Markets ('GBM') business, and a Corporate Centre.

HSBC UK is strongly connected to the rest of HSBC Group and leverages this network to support customers and grow revenue across key trade corridors around the world.

.

Purpose and values

As set out in the HSBC Group Annual Report and Accounts 2020, the HSBC Group purpose and values have been revised. These are planned for a formal launch to employees and other stakeholders in March 2021.

HSBC Group's purpose

Opening up a world of opportunity.

.

HSBC Group's values

We value difference: Seeking out different perspectives.

We succeed together: Collaborating across boundaries.

We take responsibility: Holding ourselves accountable and taking the long view.

We get it done: Moving at pace and making things happen.

 

 

 

 

What we do

HSBC UK, headquartered in Birmingham, h as over 15 million active customers, with over 19,000 Full Time Equivalent ('FTE') employees across the country, supported by a further 9,000 FTE based in our service company HSBC Global Services (UK) Limited, who provide services to HSBC UK and the wider HSBC Group.

 

Wealth and Personal Banking

Customers

In 2Q20, we combined our Retail Banking and Wealth Management and Private Banking businesses to form Wealth and Personal Banking.

WPB helps millions of our customers manage their day-to-day finances and manage, protect and grow their wealth. We serve over 14.15 million active customers under four brands: HSBC UK, first direct, Marks and Spencer Financial Services, and John Lewis Financial Services. As well as catering for the mass retail market, we also provide services for emerging affluent, mass affluent and affluent individuals under the following HSBC UK propositions: Advance, Premier, and Jade.

Products and services

We offer a comprehensive set of banking products and services to support retail customers' everyday banking needs including: current and savings accounts, mortgages, unsecured lending, wealth solutions and general insurance.

 

Commercial Banking

Customers

CMB serves over 848,000 active customers across the UK, ranging from start-ups to multi-national corporates, through four customer groups: Small Business Banking; Business Banking; Mid-Market Enterprises; and Large Corporates.

Products and services

We support customers with tailored financial products and services to allow them to operate efficiently and grow, with a strong relationship focus. These include credit and lending, global liquidity and cash management, and global trade and receivables finance.  

Global Banking and Markets

Within HSBC UK we offer products to enable commercial hedging by HSBC UK customers in permitted products under UK legislation, whilst also supporting the foreign currency payments and transaction banking offering for HSBC UK customers. Through close collaboration with HSBC Group we offer other GBM products required by our clients that are not available within HSBC UK.

 

Corporate Centre

Corporate Centre comprises Markets Treasury, interests in a joint venture, and central stewardship costs that support our businesses.

 

Our competitive advantages

 

Full banking capability

We serve customers ranging from individual savers through to multi-national corporates with the support of our three businesses. Our full banking capability assists us in seeking to meet our customers' diverse financial needs, reduce our risk profile and volatility, and generate returns for shareholders.

 

Value of our network

Within the UK we provide products and services digitally, by phone and face-to-face through 622 branches, bureaux and offices, 60 commercial centres, and four contact centres.

 

Access to HSBC Group's global network and business synergies

For customers with international interests, we are intrinsically connected with HSBC Group's wider global network, enabling our customers to seize international growth opportunities. This helps us build deeper and more enduring relationships with businesses and individuals. HSBC Group's geographic reach and network of customers also allows greater insight into the trade and capital flows across supply chains.

We share resources and product capabilities across our businesses and leverage these synergies when serving our customers.

 

 

 

Our strategy

Our 2020 UK strategy was built around four key strategic priorities: customer experience, employee engagement, shareholder value and simplification, enabling our ambition to be simple, safe and sustainable.

Progress in 2020

Customer experience

In 2020, we have seen more of our customers move towards using digital channels. In WPB[1], there has been a 13%[2] Year-on-Year ('YoY') increase in the number of active mobile banking app users, a 42% YoY increase in mobile app logons, and a 42%[3] YoY growth in mobile payments. Additionally, we now have five million WPB customers who are paperless on all of their accounts and a further 1.5 million customers who are paperless for at least one of their accounts. As at the end of December 2020, HSBC UK's mobile app on the Apple app store had a rating of 4.8, and on the Android play store had a rating of 3.8.

WPB's[4] complaint volumes have declined by 45% in FY20 (vs. FY19). This was driven in part by the end of the Payment Protection Insurance ('PPI') complaints programme in 2019. When excluding mass complaints (PPI and Packaged Bank Accounts), complaint volumes in WPB4 have declined 26% in FY20 (vs FY19).

In the Competition and Markets Authority ('CMA') Service Quality Indicators, HSBC UK was ranked 10th in the February 2020 publication for overall service quality, with a score of 58%. This was a decline of one percentage point and an increase in one ranking position compared to the August 2020 release. first direct climbed one place to second position, and maintained a score of 83%. first direct continue to lead the market in the Customer Recommendation Index, with a score of 92 for 2020, a one-point decline vs. 2019.

In 2020, WPB won several awards including the 'Lender Recognition Award' at the Legal & General awards, for our support to the broker market throughout the pandemic. Our Private Bank won several awards including 'Best Ultra High Net Worth Team' and 'Best UK-based International clients team' in the UK Private Banking categories at the 2020 Wealth Briefing European Awards.

In CMB, our digital business banking active users grew by 10.2% in 2020 to over 546,000, and app downloads surpassed 367,000; a 46% increase since the start of 2020. We introduced the Mobile Cheque Deposit service in May 2020 and have processed over 168,000 cheques totalling £17m in value. In June 2020, we launched Kinetic, our digital small-and medium-sized enterprise ('SME') banking app, and as at the end of December 2020, over 2,800 accounts have been onboarded.

CMB has seen continued progress in the satisfaction of its customers, as measured by Savanta, and is now one of the leading banks for Net Promoter Score within the £2m+ turnover market[5]. CMB continues to be ranked the number one bank in the Savanta Survey for being able to support UK businesses trading internationally.

In 2020, CMB won the 'Best in service for trade finance in the United Kingdom' in the Euromoney Trade Finance Survey 2020. In addition, CMB won the 2020 Greenwich Quality Leader in the United Kingdom for 'Large Corporate Cash Management Quality', 'Corporates FX Service Quality' and 'Large Corporate Banking Quality'.

 

 

Employee engagement

According to our bi-annual HSBC UK employee survey, employee engagement improved in 2020, with the metric "I would recommend HSBC UK as a great place to work" increasing by 4 percentage points to 66% (vs. FY19). 50% of UK employees took part in the FY20 Snapshot survey vs. 53% in FY19.

With an increased focus on mental health and well-being during the pandemic, we held a number of well-being events throughout the year, including a wellbeing month in May and a further well-being week in October. Over 60 pieces of content were provided during our well-being month via webcasts, interactive guides and bite sized pre-recorded content. These were made available on our new HSBC UK well-being hub.

Shareholder value

Despite pausing marketing for new customers in 2020, in order to support our existing customers through the Covid-19 pandemic, we continued to attract new personal customers, with around 110,000 customers switching to one of our brands from another provider. We have also increased the number of active CMB customers to over 848,000 (+3.2% vs. FY19).

We continued to focus on our mortgage and commercial lending market share; achieving a 10.3% share of gross mortgage lending[6] (FY19: 8.1%) and increasing mortgage stock share to 7.4% (FY19: 7.0%) as at December 2020. This has seen our mortgage book surpass £110bn, as we continue to help our WPB customers purchase their homes. In 2020, our UK CMB total net lending market share[7] grew from 9.8% to 10.3%.

We have also grown our customer deposits by £43bn to £259bn, with retail deposits increasing in line with reduced customer spending, while commercial deposits have been benefited from government lending schemes remaining on deposit.

Reported Profit Before Tax has been impacted by the Covid-19 pandemic, with a significant increase in ECLs. Adjusted RoTE was 0.5% (Pension Adjusted RoTE was (0.1)%).

For more information on our financial performance in 2020, please refer to pages 12 to 16.

Simplification

We continued to simplify our organisation in 2020, focusing on streamlining business functions, consolidating our technology landscape and optimising internal governance. This helped us to meet our customers' changing needs, save time for our employees and support growth.

We have accelerated the roll-out of digital capabilities and functionality to support customers during the Covid-19 pandemic. This includes enabling customers to complete identification and address verification and access documents and correspondence digitally. Additionally, in August 2020, we launched our new Private Banking platform, Avaloq, which further digitised the onboarding journey for Private Banking customers.

Future focus

In line with the HSBC Group, our strategy will now focus on four key areas:

Focus on our strengths

Using our strengths to play a vital role in the economic and societal recovery.

Digitise at scale

Using technology to deliver fast, easy and secure banking.

Energise for growth

Inspiring an inclusive and customer-focused culture where employees can make an impact, learn and grow.

Transition to net zero

Realising the net zero transition opportunity.

 

 

Becoming a net zero bank

Providing the finance to help our customers transition to a low or net zero carbon economy is one of HSBC Group's key sustainable finance ambitions. In October 2020, HSBC Group set out a three-part plan to help accelerate the transition to net zero through finance.

Net zero bank

HSBC Group aims to align its financed emissions to achieve net zero by 2050 or sooner and be net zero in its operations and supply chain by 2030 or sooner.

The aim is to achieve this by:

The use of the Paris Agreement Capital Transition Assessment Tool ('PACTA') to develop clear, measurable pathways to net zero.

Regular, transparent disclosures to communicate our progress in line with the Taskforce on Climate-Related Financial Disclosures ('TCFD') guidelines. More information on HSBC Group's 2020 transition risk assessment is available on: www.hsbc.com/esg

Collaborating to establish globally consistent standards for financed emissions and carbon offsets.

 

Sustainable operations

HSBC UK supports the Group's commitment to achieve net zero in our own operations by 2030 or sooner. To achieve this, we continue to work towards our Renewable Electricity commitment ('RE100') to source 100% of our electricity from renewables through power purchase agreements by 2030. Currently around 70% of our UK building portfolio electricity comes from two wind farms and one solar farm.

The Reduce Programme

HSBC Group has committed to globally reduce CO2 emissions by 2 tonnes per FTE by 2020 from 3.5 tonnes per FTE in 2011. By the end of 2020, HSBC Group reached 1.76 tonnes per FTE. Across HSBC Group's UK operations, including HSBC UK, the total carbon emissions in 2020 was 0.51 tonnes per FTE. This is mainly attributed to our ongoing renewable electricity power purchase agreements, along with travel restrictions due to the Covid-19 pandemic.

Wealth and Personal Banking

Sustainable wealth investments at HSBC UK aim to generate long-term financial returns while contributing positively to society. Sustainable investing actively selects companies that have a positive impact on the world. This could be anything from green technology to social initiatives in developing countries/regions. There is no industry-standard definition. We currently follow the Global Sustainable Investing Alliance classification for Sustainable Investment.

Global Sustainable Multi-Asset Portfolios are designed to provide capital growth through investment in assets that meet sustainable investment principles. We currently offer five risk profiled portfolios - 'Cautious', 'Conservative', 'Balanced', 'Dynamic' and 'Adventurous' - which offer global diversification with a higher Environmental, Social and Governance ('ESG') score and a lower carbon intensity than the market. The ESG portfolios are available through both advised and non-advised channels. Performance was strong over 2020 for all portfolios, with 8.4% Balanced portfolio, delivering 1st quartile performance. Flows into the range have been strong with over £212m raised across the ESG portfolios in 2020, reaching a total of £316m across WPB as of December 2020.

Commercial Banking

In 2020, CMB provided more than 937m of sustainable finance lending, which includes Green Loans, Sustainability Linked Loans, and Sustainable Bonds. HSBC UK played a significant role in HSBC Group winning the Euromoney award for 'Western Europe's Best Bank for Sustainable Finance 2020' for the first time.

Building on the success of the launch of our Green Loan proposition in 2019, in 2020 we announced two new sustainable finance products:

Sustainability Linked Loan: which is aligned to the Loan Market Association's Sustainability Linked Loan Principles ('SLLP'). The facility incentivises customers to achieve ambitious, pre-determined sustainability performance targets. It is available under term loan facilities and revolving credit facilities.

Green Deposits: whereby our customers' excess liquidity is allocated towards financing green projects, such as renewable energy and energy efficiency projects.  Available to all corporate customers, we have seen strong and growing demand throughout the year.

In November 2020, we announced the establishment of our Sustainable Finance Ambassador Network, which aims to fully equip our frontline employees with a deep understanding of the opportunities and risks faced by our clients as a result of the movement towards a more sustainable economy. This network consists of more than 260 employees from all divisions and regions of CMB. Members have access to a fast-track learning programme dedicated to sustainable finance, including the ability to gain a professional qualification.

We have also established the UK Sustainable Finance Forum, which approves all sustainable finance lending in CMB. This ensures all Green and Sustainability Linked Loans meet our product criteria, and adhere to the market standards we align to; the Green Loan Principles and SLLP.

Providing innovative green products - Volution Group plc ('Volution') Case Study

In December 2020, HSBC UK participated in the £150m Sustainability Linked revolving credit facility Volution. Volution are a leading designer and manufacturer of energy efficient indoor air quality solutions. The margin of the facility is linked to annual performance against two sustainability targets that have been identified as core to Volution's strategy to deliver 'Healthy indoor air, sustainably'. The margin of the facility will reduce if Volution is successful in meeting these sustainability targets, with the discount to be invested in further sustainability initiatives and programmes.

Supporting customers expand their portfolio through green financing - Downing Case Study

In July 2020, HSBC UK supported one of the UK's leading developers of purpose-built student accommodation in significantly expanding its rental portfolio with a £57m Green Loan. The sustainable finance funding package has enabled Downing to retain the 24-storey Holbrook building, one of its latest flagship developments, as an investment asset, adding it to their emerging portfolio of rental student accommodation.

The Green Term Loan to Downing to fund Holbrook, which was built to a Building Research Establishment Environmental Assessment Method ('BREEAM') rating of 'Very Good', follows the Europe, the Middle East and Africa ('EMEA') and Asia-Pacific Loan Market Association's Green Loan Principles published in March 2018 to encourage and facilitate environmentally friendly economic activity.

Training and Engagement

HSBC Group relaunched the  flagship Sustainability Learning programme in November 2020  to reflect the  new Group Climate

Ambition and the changing environment we live and operate in. Over 7,000 HSBC UK employees completed Sustainability modules between November 2018 and October 2020. Following on from launching the Global Climate Action Network in 2019, we saw an increase in engagement across our employees. We now have 20 Climate Action Teams led by advocates across the UK  with a reach of around 8,000 employees.

Engaging through research

In 2020, HSBC UK co-funded a report by the Grantham Research Institute at the London School of Economics on the socio-economic challenges associated with achieving a net zero economy for vulnerable regions in the UK. The report contained analysis and recommendations on managing the transition in a fair and equitable way, referred to as a 'Just Transition'. Since the launch of the report, HSBC UK has joined the 'Just Transition Alliance' which is a group of industry stakeholders and leaders seeking to help facilitate a 'Just Transition'.

HSBC UK is also funding open research from University College London on achieving net zero pathways for the commercial agricultural, commercial real estate, manufacturing and transport sectors due to be published over the course of 2021.

 

 

How we do business

 

Our approach

We conduct our business intent on supporting the sustained success of our customers, employees and other stakeholders. This helps us deliver our strategy and operate our business in a way that is sustainable.

In 2020, our ability to help our stakeholders was more important than ever. We define conduct as delivering fair outcomes for our customers and not disrupting the orderly and transparent operation of financial markets. This is central to our long-term success and ability to serve customers. HSBC Group has clear policies, frameworks and governance in place to protect our customers, which encompass the way we behave, design products and services, train and incentivise employees, and interact with customers and each other. Details on our Conduct Framework are available at: www.hsbc.com/who-we-are/esg-and- responsible-business/our-conduct

 

Supporting our stakeholders

The Covid-19 pandemic has created a great deal of uncertainty and disruption for the people, businesses and communities we serve and it is affecting everyone in different ways. We are tailoring our response to the different circumstances and situations in which our stakeholders find themselves. To support our customers and the communities we serve, we have provided a series of support packages in the UK, including both government lending schemes and non-government lending schemes, totalling in excess of £14.1bn.

We are continuing to evaluate our longer term strategy in light of the Covid-19 pandemic and the low interest rate environment, considering our office footprint and supporting our employees with a shift to a more location agnostic working model. We are accelerating the roll-out of digital capabilities and functionality that help our customers to self-serve and continue to focus on targeted growth areas, such as mortgages and commercial lending.

Our customers

We have actively supported our customers through government schemes and non-government scheme lending, as well as flexibility in our existing products. As at the end of December 2020, these support measures included:

Providing payment holidays to our personal banking customers: Mortgages: 68,000, Personal Loans: 100,000 and Credit Cards: 73,000.

Supporting our SME customers with 225,400 applications approved through the Bounce Back Loan Scheme ('BBLS') worth £6.9bn, which included BBLS top-up applications.

Approving 13,386 applications through the Coronavirus Business Interruption Loan Scheme ('CBILS') worth £3.2bn, which included our innovative CBILS Receivables Finance product.

Helping our larger business customers with 158 applications approved through the Coronavirus Large Business Interruption Loan Scheme ('CLBILS') worth £1.1bn.

Outside of the government schemes, approving £2.8bn of Covid-19 related lending to our business customers and providing 9,256 capital repayment holidays and 19,988 trade loan extensions.

Accelerating the roll-out of digital technology to provide faster processing and enable more functionality to be accessed remotely.

We put additional measures in place to better enable our customers, particularly those that were vulnerable or potentially in financial distress, to contact us during the Covid-19 pandemic, including:

Supporting and prioritising the calls of over 1.6 million WPB customers through the Vulnerable & Key Worker customer line.

Proactively contacting over 0.6 million WPB customers to see what support they needed, including those that were most vulnerable and those that cancelled mortgage payment direct debits.

Establishing and maintaining a dedicated Covid-19 helpline for CMB customers.

CMB Relationship Managers proactively contacting their customers to see what help their businesses needed.

On average, 97% of our HSBC UK branch network remained open throughout 2020.

Our employees' well-being

Our employees continued to show great resilience despite the challenging environment. We thank all our employees for their dedicated commitment and hard work throughout 2020 in the most challenging of circumstances.

We had a strong focus on managing the impacts of the Covid-19 pandemic on our employees' safety and well-being, including:

The transition to remote working at scale, to help employees remain safe and productive. This has been embedded wherever possible.

Deploying an interim employee survey in March and April, alongside our usual employee surveys, called, 'Well-being Pulse'. This was designed to check in with employees about how they were feeling and the challenges they were facing.

Establishing a new branch network operating rhythm to ensure customer areas are managed to maintain social distancing, whilst also improving the supply of hygiene products and personal protective equipment.

Launching a well-being toolkit and providing regular communications, advice and support, with a particular focus on physical, mental and financial well-being.

Reviewing and expanding our employee support offering, including healthcare benefits.

Providing flexibility and support, such as daily online classes, to support our employees with home-schooling.

We have a structured communications approach that uses leadership communications, campaigns and a regular flow of news to help employees to serve our customers better, make sense of our strategy, focus on our commercial priorities and provide clarity on issues. We have adapted our communications to better support our employees in the current working environment, utilising weekly Chief Executive Officer ('CEO') vlogs to ensure we continue to communicate in a way that works for our employees.

It's critical to address mental health issues to enable all employees to thrive. In 2019, mental health awareness training was made available to colleagues globally. This year, we are proud to have joined other companies in founding The Global Business Collaboration for Better Workplace Mental Health. This is a collaboration calling all business leaders to join us with a simple six-point leadership pledge to make mental health in the workplace a priority.

We have built a sense of pride and purpose by recognising our employees' contributions to our business and celebrating the achievements of HSBC UK. In 2020, we held our Annual Spotlight awards virtually with 13,200 nominations and 6,011 winners.

Listening to our employees

It is vital we understand how our employees feel as it helps us give them the right support to thrive and serve our customers well. We capture their views on a range of topics, such as our strategy, culture, behaviour, well-being and working environment, through our internal employee survey, Snapshot, which runs twice yearly. Results are presented to the HSBC UK Executive Committee, the Members of the Board of Directors of HSBC UK ('the Board') and other relevant committees of the functions and businesses. This ensures the attitudes and sentiments of our employees inform decision-making at all levels of HSBC UK, and action can then be taken to tackle areas of concern. Additionally, we also participate in the external Banking Standards Board Annual assessment, comprising an employee survey and qualitative assessment where our employees can also have their say.

Empowering a speak up culture

Having a culture where our employees feel able to speak up is critical. Individuals are actively encouraged to raise concerns about wrongdoing or unethical conduct or unfair treatment. We have multiple channels to enable employees to speak up including whistleblowing, our Human Resources ('HR') Direct platform, our CEO's monthly 'Ask Ian Anything' webcasts, through line manager interaction and suggestion schemes where our employees can propose new ways of working.

Our HSBC Confidential whistleblowing offering provides a platform that enables all employees to raise concerns on any issues outside of the usual escalation channels; in confidence and without fear of retaliation. Concerns raised are investigated thoroughly and independently. HSBC UK does not condone or tolerate any acts of retaliation against anyone who raises a concern.

Our communities

In 2020, HSBC UK donated £7.4m to charities and non-profit organisations running programmes and projects in the UK. In addition, our Everyday Banking team gifted £9m to charities supporting Covid-19 emergency response, our national giving partners and our future skills strategy.

We are committed to helping our employees contribute to their communities, and we encourage volunteering through paid volunteering days.

Charitable funding

At the beginning of the Covid-19 pandemic, HSBC UK made a £1m donation to the National Emergencies Trust Coronavirus Appeal and the British Red Cross. HSBC UK and our customers also raised over £1.4m for 'The Big Night In' appeal working with BBC Children in Need and Comic Relief.

In 2020, our employee-led projects supported 13,100 people across 39 local charities. HSBC UK employees fundraised £1.4m for causes that mattered the most to them and HSBC UK contributed over £1m to compliment employee fundraising efforts. Despite needing to restrict face to face volunteering to safe alternatives, 2,712 employees took paid volunteering leave through activities such as, virtual mentoring and remote support for charities. Employees also gave over 19,782 hours of Covid-19 kindness to support those most in need; from collecting prescriptions, to writing letters to care home residents. We provided additional support through the 'Devices Dot Now' appeal, where we gifted 700 reconditioned laptops to the Good Things Foundation. We also repurposed our Beckenham site to support NHS blood donors and surrendered the remainder of our lease on our Carlisle Commercial Centre to allow the landlord to grant the NHS a lease on the space to set up a Covid-19 Call Centre.

 

Future skills

We are passionate about giving young people from all walks of life the chance to thrive in the modern world, concentrating on the following areas:

Employability

The Prince's Trust

HSBC UK is The Prince's Trust's largest financial services corporate partner for their employability programmes, which help young people access valuable training and work experience. In 2020, our support enabled over 1,000 young people to take part in these programmes, giving them access to work, education or training. Our work with The Prince's Trust includes the HSBC UK Traineeship Programme, which offers job opportunities in the bank to young people who otherwise may not have considered working in financial services. During the Covid-19 pandemic, we redirected £200,000 of our funding to The Trust's Young Person Relief Fund to enable them to reach and support more young people.

Entrepreneurship skills

Young Enterprise Company Programme

HSBC UK supports Young Enterprise's work to help young people  earn and manage money through the Company Programme. The programme aims to empower young people across the UK to set up and run their own student company by creating a product or service of their own. Our 2020 funding has supported 4,125 young people from the most deprived areas of the UK to take part in the Company Programme. We were the headline sponsor for the Company Programme National Final and sponsored an additional Sustainable Business Award.

Financial capability 

Money Heroes

In November 2020, HSBC UK announced a 3-year partnership with Young Money to help provide financial education to 1 million young people across the UK. This partnership enabled the creation of Money Heroes, a new programme that brings together teachers and parents to help develop a child's knowledge, skills and attitudes towards money.

Education and financial well-being 

The HSBC UK education team has been delivering remote lessons in schools, charities and youth organisations. In 2020, the team  delivered sessions attended by 11,633 children with thousands accessing materials on the HSBC UK financial education hub. 'Level Up', a series of financial life lessons for young people aged 16-25, was also added to the education portfolio, providing support to charities, colleges and universities. The financial well-being team delivered over 700 webinars to more than 19,500 employees of corporate clients, providing support and guidance around all aspects of finances.

 

Our approach to diversity

HSBC UK is focused on developing an inclusive culture where employees from diverse backgrounds can thrive. We expect our employees to treat each other with respect, and we are creating an inclusive culture to support equal opportunities.

As a UK bank with strong connections to markets around the world, we understand the benefits that diversity brings to our customers, our business and our employees. A connected workforce that reflects the communities where we operate helps us meet the needs of our diverse customer-base.

We do not tolerate discrimination, bullying, harassment and victimisation on any ground, including age, race, ethnic or national

origin, colour, mental or physical health conditions, disability, pregnancy, gender, gender expression, gender identity, sexual orientation, marital status or other domestic circumstances, employment status, working hours or other flexible working arrangements, or religion or belief.

To drive this culture, we embed inclusion within employee practices, deliver training, and assess behaviours through performance reviews.

We want to understand the day-to-day experiences of our employees and have introduced practices to understand the diverse employee voice. We track our employee sentiment by diversity group, through our bi-annual internal employee survey. Our 17 Employee Resource Groups ('ERGs') regularly hold focus groups with members and share outputs with the wider business. For many employees, the opportunity to network, participate in events, and gain support with people like themselves is invaluable. For employees looking to learn more about diverse cultures, our ERG's provide a source of education.

We have been working towards a 2020 target for female representation in our most senior roles to be 30% and in HSBC UK we achieved 33.7% as of 31 December 2020.

For more information about diversity and inclusion in HSBC UK, please see section titled 'Diversity and inclusion' on page 67.

Maintaining a responsible business culture

HSBC UK is a leading UK financial institution that aims to be simple, safe and sustainable; this reflects our responsibility to protect our customers, our communities and the integrity of the financial system.

Supporting financial inclusion

We aim to deliver products and services that address financial barriers. We invest in financial education to help customers, employees and people in our communities be confident users of financial services. In 2020, we won the 'Thomas Reuters Foundation's Stop Slavery Innovation Award', in recognition of HSBC's Survivor Bank Programme in the UK.

HSBC UK conceived and piloted the Survivor Bank initiative which is aimed at supporting survivors of Modern Slavery in their efforts to be re-integrated into society and to gain access to banking.  We also offer a No Fixed Address service where people without a fixed address can open a bank account with their caseworker using the address of the supporting charity. This service makes it easier and safer to receive benefits and salary, and serves an important building block for financial independence and security.

Respecting human rights

HSBC UK's commitment to respecting human rights, principally as they apply to our employees, our suppliers and through our lending, is set out in the HSBC Group statement on Human Rights. This statement, along with the ESG updates and the statements under the UK's Modern Slavery Act, are available on www.hsbc.com/our-approach/measuring-our-impact

Anti-bribery and anti-corruption

HSBC UK is committed to high standards of ethical behaviour and operates a zero-tolerance approach to bribery and corruption. We consider such activity unethical and contrary to good corporate governance. HSBC Group has a global Anti-Bribery and Corruption ('AB&C') Policy which sets the framework for HSBC UK to comply with AB&C legislation in the UK.

Protecting data

We are committed to protecting the information we hold and process in accordance with the relevant laws and regulations. We continue to strengthen our controls to prevent, detect and react to cyber threats.

Safeguarding the financial system

We remain committed in our efforts to combat financial crime by continuing to invest in new technology to protect our customers and organisation, while supporting key industry initiatives. Fraudulent activity is often more prevalent in times of crisis and we are strengthening and investing in our fraud controls, in order to protect both customers and the bank. Further information can be found in section 'Financial crime and fraud risk' on page 21.

In addition, our CEO is on the Economic Crime Strategic Board, which is chaired by the Home Office Secretary and the Chancellor. Further information can be found in section 'Financial crime risk management' on page 61.

Our approach with our suppliers

HSBC Group's ethical code of conduct for suppliers of goods and services, which must be complied with by all suppliers, sets out minimum standards for economic, environmental and social impacts.

A responsible approach to tax

We seek to pay our fair share of tax and to minimise the possibility of customers using our products and services to evade tax.

Restoring trust

We have sought to learn from past mistakes and we are seeking  to develop and implement specific measures designed to prevent recurrence of similar events in the future.

 

 

Section 172 statement

 

Engagement with stakeholders and Board decision making

This section, from pages 9 to 11, forms our section 172 disclosure and addresses the Companies (Miscellaneous Reporting) Regulations 2018.

Stakeholder engagement

There were no changes to the Board's identified key stakeholders during the year. These remain customers, employees, shareholder and debt investors, communities, suppliers, regulators and government. In overseeing the business and performing its duty to promote the long-term success of the bank for the benefit of its stakeholders as a whole, the Board sought to understand, and have appropriate regard to, the interests and priorities of these stakeholders, arising from the likely consequences and potential impact of material decisions that were taken during the course of the year.

For further details on the role of the Board and the way it makes decisions, please see page 64 in the 'Report of the Directors'.

As noted in the Strategic Report, 2020 was an unprecedented year due to the Covid-19 pandemic. The Board was required to take decisions in the context of an extremely uncertain and evolving external environment. Despite logistical challenges, the Board continued to engage directly with many stakeholders and was kept informed indirectly about relevant stakeholder matters through management reports. The ways in which the Board engaged with, and received views from, its key stakeholders during the year included:

Customers

Customers needs continue to be at the core of the bank's business model. The better their needs and challenges are understood the better HSBC UK can support them. Examples of Board engagement in 2020 included:

CEO Board reports, which included key customer related metrics and performance indicators, such as customer survey feedback and net promoter scores.

Reports to the Board (including a bespoke dashboard) on the support provided by the bank to help mitigate the immediate impacts of Covid-19 on its customers, including rapid access to internal and Government-sponsored support measures, maintaining service in branches and contact centres and prioritising vulnerable customers.

Further details are provided below under the heading 'Our customers' on page 7.

Employees

Employees are critical to the successful operation of the bank and its long-term future. Examples of Board engagement in 2020 included:

CEO Board reports, which included updates on employee-related activities and events, such as health and well-being initiatives, as well as metrics on employee attrition, gender diversity and personal conduct cases.

Results and analysis on bi-annual internal employee surveys (Snapshot) to assess employment sentiment and well-being and updates on the annual external Banking Standards Board survey on bank culture.

Reports to the Board on the steps taken by the bank to help mitigate the immediate impacts of Covid-19 on its people, adapt and place for the future.

For more details on the bank's employee initiatives and engagement please refer to the 'Our employees' section on pages 7 to 8.

Shareholder and investors

The bank is a wholly owned subsidiary in the HSBC Group, and therefore considers the impact and implications of its decisions with regard to its ultimate shareholder, HSBC Holdings plc, as well as its debt security investors. Examples of Board engagement in 2020 included:

Presenting to the bank's shareholder on the UK's withdrawal form the European Union ('EU') and HSBC UK's strategy.

Chairs of the Board's Audit and Risk committees regularly engaged with their HSBC Group counterparts and attended HSBC Group Audit and Risk Committee Conferences together with Executive Directors.

The Chairman attended the monthly HSBC Group Chairman's Forum, which provided opportunities to engage on common issues and strategic priorities.

Under the formal escalation process, a number of matters were escalated to the HSBC Group for specific consideration.

Suppliers

Suppliers provide critical support to the infrastructure and operations of the business. Examples of Board engagement in 2020 included:

Updates from the Chief Operating Officer on third-party suppliers matters such as relationship management, material outsourcing, performance and operational resilience.

Management papers which considered the potential impact to suppliers and the supply chain, from the UK's withdrawal from the EU and Covid-19.

Communities

The bank has an important role in supporting the communities in which it operates. Examples of the Board engagement in 2020 included:

Briefings and reports on climate strategy and climate risk.

Reports on initiatives to deliver the bank's sustainability programme.

Reports on charitable funding and community support programmes, such as supporting young enterprise schemes and providing financial education to children and young adults.

Further details on these initiatives are set out in 'Our communities' section in the Strategic Report on page 8.

Regulators and Government

Constructive dialogue and relations with the bank's regulators and government are critical to the success of the bank. Examples of Board engagement in 2020 included:

Meetings between Directors and the bank's regulators, either as part of continuous assessment or on specific issues, such as the PRA's annual presentation to discuss the matters arising from its Periodic Summary Meeting letter.

Representation on government and regulatory consultations.

Participation in regulatory or government led industry fora and round table events.

Principal decisions and discussions

Events during 2020 required careful consideration of the needs and interests of the bank's stakeholders. Set out below are examples of principal decisions and discussions that illustrate how Directors had regard to the bank's stakeholders during 2020:

Covid-19 pandemic

The Board oversaw management's response to the Covid-19 pandemic to mitigate the impact of the business, support customers and emerge from the crisis well-positioned for the future.

Management's top priority was the safety and well-being of employees whilst maintaining critical services for customers by providing support proactively, highlighting available digital channels and showing forbearance to those in a position to recover. As the pandemic continued to spread, the Board monitored the impact of colleagues' mental and physical health through internal employee surveys and from discussions with senior management on the well-being of their teams. The Board also monitored management's mitigation of supplier resilience risk which included measures such as early payment of sums due to vulnerable suppliers.

The Board had to respond to increasing regulatory pressure on the banking sector to make available at pace a package of facilities to support customers. This included changes to the bank's short term pricing and product structures, particularly in relation to overdrafts. The Board considered the imperative to support customers in the short term but was mindful of the economic and unintended consequences of such changes in the medium and longer term. The Board supported intense and constructive engagement with our regulators as the pandemic unfolded.

Review of HSBC UK Strategy

The need to assess the appropriateness of the bank's strategy arose from the severity and implications of the Covid-19 pandemic as well as the Government's ongoing trade deal negotiations arising from the UK's withdrawal from the EU. The Board convened additional Board meetings to evaluate the impacts of both for HSBC UK's strategy.

Insights on the UK political and economic environment were gathered from internal experts and advisors, which helped inform the Board's view of the possible wider medium to long-term implications and customer and societal shifts arising from the Covid-19 pandemic. The Board's priority was to ensure HSBC UK remains a sustainable source of economic profit for its shareholder and a critical part of the HSBC Group's international banking network. This would ensure that the bank was able to play its part in supporting the recovery of the UK economy; its customers, communities and employees.

The Board actively engaged with senior management to consider three strategic options, each dependent on the type of economic recovery. Having determined its preferred option, the Board provided constructive challenge to and support of the strategic management actions proposed to deliver the growth plans and reduce the bank's cost base. The Board perceived the need for more radical options to adapt HSBC UK's operating model and cost base in response to likely economic, political and societal challenges. In supporting management actions, the Board remained sensitive to the potential impact of cost reduction measures on its employees and communities and the importance of spreading these across all areas of the bank's operations.

Sustainability Strategy

During the year the Board considered HSBC UK's sustainability strategy in light of Covid-19, the UK's withdrawal from the EU and the HSBC Group's approach to managing climate risk. It took into account reports from management, presentations from subject matter experts in the HSBC Group and external advisers.

The Board saw sustainability as a priority for HSBC UK, given the need to transition to net-zero and support vulnerable communities. The Board encouraged support for the banks' customers on their transition to lower carbon emissions and a stronger focus from management on natural capital related activities. The Board recognised that supporting the government's climate change ambitions, HSBC Group targets and regulatory expectations, would benefit many stakeholders. However, the costs to achieve these could have negative repercussions for its shareholder, customers and suppliers in certain business sectors.

For further details, please refer to the 'Net zero bank'section on page 6.

 

 

 

 

Economic background and outlook

 

UK economic outlook

Real UK GDP fell 21.5% over the first half of 2020, before rising 17% over the second half, to give a full year contraction of 9.9% in 2020. The level of GDP remained 6.3% below its pre-pandemic peak at the end of the year[8].

The impact of the Covid-19 pandemic on unemployment has started to be felt, with the headline rate rising from 3.9% in January 2020 to 5.0% in November 20207. However, the true picture remains clouded by the Job Retention Scheme ('JRS'), which 2.4 million people were registered for as of 31 October 2020. HSBC Global Research expects the unemployment rate to rise to 6.7% in the middle of 2021, before starting to fall back slowly.

Wages fell in the early stages of the first lockdown, partly reflecting the pay cut taken by those on furlough. Total pay has since rebounded and was up 3.6% YoY in the three months to November 2020, though a significant part of this was accounted for by a 'composition effect' - i.e. lower paid workers losing their jobs and dropping out of the calculation of the average.

The annual rate of inflation according to the Consumer Price Index ('CPI'), stood at 0.7% in January 2021. The 'core' CPI inflation rate, which strips out food and energy prices, was 1.4%.

Following the spread of a new strain of the Covid-19 virus, England and Scotland announced full national lockdowns on 4 January 2021, while Wales and Northern Ireland implemented lockdowns on 20 December and 26 December 2020 respectively. The lockdowns applied to hospitality, non-essential retail and schools. In response, the UK government has extended the JRS until the end of April 2021, and announced a £4.6bn package of business support.

These announcements come on top of the £280bn worth of measures since March 2020, according to costings published by the Office for Budget Responsibility alongside the Spending Review on 25 November 2020. HSBC Global Research forecasts a budget deficit of 17.7% of GDP in the fiscal year 2020/21, taking public sector net debt to GDP to over 100% of GDP.

Meanwhile, the BoE Bank Rate was cut from 0.75% to 0.10% in March 2020, and the BoE announced an additional £200bn of quantitative easing. It then announced another £100bn of government bond purchases in June 2020 and another £150bn in November 2020. The latter programme is expected to last until the end of 2021, but HSBC Global Research expect another £100bn of purchases to be announced in May 2021.

The UK left the EU on 31 January 2020 and entered a transition period until 31 December 2020. During the transition period, the UK continued to be bound by EU laws and regulations. A Trade and Cooperation Agreement between the EU and the UK was agreed on 24 December 2020 and ratified by the UK on
30 December 2020. It includes a joint declaration of cooperation, and, in the coming months, both parties are expected to enter discussions with the aim of agreeing a Memorandum of Understanding establishing the framework for this cooperation. The exit of the UK from the EU is likely to increase market volatility and economic risk, which could adversely impact our profitability and prospects for growth.

Considerable uncertainty remains as to the trajectory for the remainder of the year, with much depending on the speed and efficacy of the vaccine rollout and lifting of restrictions. The full impact from the Covid-19 pandemic and disruption related to the UK's withdrawal from the EU could be partially offset by pent-up demand, with households having saved money due to the restrictions. After the fall of 9.9% in 2020, HSBC Global Research expects UK GDP to rise 4.7% in 2021 and then 5.4% in 2022. Additionally, the BoE Bank Rate is also expected to remain on hold at 0.10% at least through this year and next.

For more information about the UK's withdrawal from the EU, please refer to the 'Process of UK withdrawal from the EU' in the Report of Directors on page 25.

 

 

Key Performance Indicators

The Board tracks HSBC UK's progress in implementing its strategy with a range of financial and non-financial measures or KPIs.

Progress is assessed by comparison with the group strategic priorities, operating plan targets and historical performance.

HSBC UK reviews its KPIs regularly in light of its strategic objectives and may adopt new or refined measures to better align the KPIs to HSBC Group's strategy and strategic priorities.

 

 

Financial KPIs

Financial KPIs are included in the summary of Key Financial Metrics on page 3 and a review of these are detailed in the Financial Summary sections on pages 12 to 16 and the Capital section on pages 52 to 55.

 

 

 

 

Non-Financial KPIs

We also monitor a range of non-financial KPIs focusing on our strategic priorities of customer experience, employee engagement, shareholder value growth and simplification, which can be found on page 5. For internal risk metrics, please refer to the risk report on pages 19 to 61 and for diversity, inclusion and employee development, please refer to the corporate governance report on pages 62 to 68.

 

 

Financial summary

 

Summary consolidated income statement for the year ended

 

Year ended

 

Audited

 

31 Dec 2020

31 Dec 2019

 

£m

£m

Net interest income

4,551 

 

4,752 

 

Net fee income

1,016 

 

1,230 

 

Net income from financial instruments held for trading or managed on a fair value basis

357 

 

400 

 

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

(1)

 

 

Gains less losses from financial investments

73 

 

48 

 

Other operating income

35 

 

52 

 

Net operating income before change in expected credit losses and other credit impairment charges 1

6,031 

 

6,484 

 

Change in expected credit losses and other credit impairment charges

(2,115)

 

(613)

 

Net operating income

3,916 

 

5,871 

 

Total operating expenses1

(3,753)

 

(4,861)

 

Operating profit

163 

 

1,010 

 

Profit before tax

163 

 

1,010 

 

Tax expense

(83)

 

(494)

 

Profit for the year

80 

 

516 

 

Profit attributable to shareholders of the parent company

76 

 

512 

 

Profit attributable to non-controlling interests

 

 

Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue and it includes significant items as detailed on pages 14 to 15.

 

 

 

 

Reported performance

2020 Full Year ('FY') reported profit before tax of £163m, £847m lower than 2019 FY reported profit before tax of £1,010m, driven by higher ECL and lower revenue offset by lower operating expenses.

Net interest income ('NII') decreased by £201m, or 4%, due to the impact of lower UK interest rates from March 2020.

Net fee income ('NFI') decreased by £214m, or 17%, due to FCA rule changes to overdraft pricing from March 2020, where overdraft fees are no longer charged, reduction in consumer spending and lower volumes of CMB fee based revenue due to volume reductions, both as a result of Covid-19.

Net income from financial instruments held for trading or managed on a fair value basis decreased by £43m, principally due to the reduction in foreign exchange income due to adverse market conditions impacting commercial customer foreign exchange payment volumes and reduced demand for foreign currency from retail customers due to Covid-19 travel restrictions.

Gains less losses from financial investments increased by £25m due to higher disposal gains realised by the Markets Treasury desk to protect increases in the value of the portfolio in volatile markets.

Other operating income decreased by £17m, due to adjustment reflecting changes in contractual cash flows relating to unsecured lending payment holidays in WPB in 2020.

ECL increased by £1,502m in 2020, due to the expected future credit losses resulting from the deteriorating UK forward economic outlook for 2021 due to the Covid-19 pandemic, and increased actual defaults in CMB.

Total operating expenses decreased by £1,108m or 23%, driven by the following significant items:

UK customer redress provisions, including payment protection insurance ('PPI') provisions, decreased by £1,050m from £1,013m in 2019, to a release of £37m in 2020.

Offset by:

Restructuring and other related costs increased by £68m from £111m in 2019 to £179m in 2020.

Guaranteed Minimum Pension equalisation ('GMP') cost of £13m in 2020.

Excluding significant items, operating expenses decreased by £139m or 4%.

For further details of significant items affecting revenue and costs, please refer to significant revenue/cost items by business segment on pages 14 to 15.

Net interest income

 

Year ended

 

31 Dec 2020

31 Dec 2019

 

£m

£m

Interest income

5,197 

 

5,696 

 

Interest expense

(646)

 

(944)

 

Net interest income

4,551 

 

4,752 

 

Average interest-earning assets

265,891 

 

231,701 

 

 

%

%

Gross interest yield1

1.95 

 

2.46 

 

Less: Gross interest payable1

(0.32)

 

(0.53)

 

Net interest spread2

1.63 

 

1.93 

 

Net interest margin3, 4

1.71 

 

2.05 

 

1  Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA'). Gross interest payable is the average annualised interest cost as a percentage of average interest-bearing liabilities.

2  Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing funds.

3  Net interest margin is net interest income expressed as an annualised percentage of AIEA.

4  Net interest margin of 1.71% includes a reduction of 1bps (2019: 5bps) due to significant items.

Net interest margin ('NIM') decreased from 2.05% in 2019 to 1.71% in 2020. This was driven from the UK interest rate reductions in March 2020.

Return on average tangible equity ('RoTE') (%)

RoTE (%) is measured as the profit attributable to the ordinary shareholders divided by the reported equity adjusted for goodwill and intangibles. The 2020 RoTE of (0.1%) was 2.5% lower than the 2019 RoTE of 2.4%, driven by lower reported profit before tax

 

Non-GAAP financial measures

Our reported results are prepared in accordance with IFRSs, as detailed in the financial statements starting on page 79. In measuring our performance, the financial measures that we use include those derived from our reported results to eliminate factors that distort YoY comparisons. These are considered non-GAAP financial measures.

Within the Strategic Report we present performance on an adjusted basis, which is our segment measure for our reportable segments under IFRS 8 but constitutes a non-GAAP financial measure when otherwise presented.

Adjusted performance

Adjusted performance is computed by adjusting reported results for the effects of significant items that distort YoY comparisons.

We use significant items to describe collectively the group of individual adjustments excluded from the results when arriving at adjusted performance. An item might be deemed significant if the item is not incurred as part of the normal operational activities of the individual segment, separate identification and explanation of the item is necessary for users to gain a proper understanding of the performance of the business, and it is quantitatively and qualitatively material to the group's consolidated financial statements. Customer remediation and redress programmes, (which constitute the majority of the group's significant items), are considered and assessed separately against the above criteria prior to recognition as a significant item. Significant items, which are detailed on pages 14 to 15, are ones that management and investors would ordinarily identify and consider separately when assessing performance to understand better the underlying trends in the business. We consider adjusted performance to provide useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant and providing insight into how management assesses YoY performance.

 

 

Segmental reporting

Global businesses are our reportable segments under IFRS 8.

The HSBC Group Chief Executive, supported by the rest of the Group Management Board, is considered the Chief Operating Decision Maker ('CODM') for the purposes of identifying the HSBC Group's, and therefore HSBC UK's, reportable segments. HSBC UK's CODM is the HSBC UK Chief Executive, supported by the HSBC UK Executive Committee. The global business results are assessed by the CODM on the basis of adjusted performance that removes the effects of significant items from results. We therefore present HSBC UK global business results on an adjusted basis.

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

Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-group elimination items are presented in the Corporate Centre.

Change in reportable segments

During 2020, we made the following realignments within our internal reporting to the CODM:

We simplified our matrix organisational structure by combining GPB and RBWM to form WPB.

We reallocated our reporting of Markets Treasury, formerly Balance Sheet Management function, from Corporate Centre to the global businesses.

Comparative data has been re-presented accordingly.

A description of the global businesses is provided in the Strategic Report, page 4.

 

Adjusted profit before tax and balance sheet data for the year ended (audited)

31 Dec 2020

WPB

CMB

GBM

Corporate
Centre

Total

£m

£m

£m

£m

£m

Net operating income/(expense) before change in expected credit losses and other credit impairment charges

3,276 

 

2,621 

 

156 

 

(6)

 

6,047 

 

-  external

3,191 

 

2,573 

 

346 

 

(63)

 

6,047 

 

-  inter-segment

85 

 

48 

 

(190)

 

57 

 

 

-  of which: net interest income/(expense)

2,703 

 

1,871 

 

 

(7)

 

4,567 

 

Change in expected credit losses and other credit impairment charges

(843)

 

(1,272)

 

 

 

(2,115)

 

Net operating income/(expense)

2,433 

 

1,349 

 

156 

 

(6)

 

3,932 

 

Total operating income/(expenses)

(2,328)

 

(1,196)

 

(86)

 

12 

 

(3,598)

 

Operating profit

105 

 

153 

 

70 

 

 

334 

 

Adjusted profit before tax

105 

 

153 

 

70 

 

 

334 

 

 

%

%

%

%

%

Adjusted cost efficiency ratio

71.1 

 

45.6 

 

55.1 

 

(200.0)

 

59.5 

 

Balance sheet information

£m

£m

£m

£m

£m

Loans and advances to customers (net)

124,041 

 

66,930 

 

 

262 

 

191,233 

 

Customer accounts

160,190 

 

99,434 

 

 

(283)

 

259,341 

 

 

31 Dec 20191

 

 

 

 

 

Net operating income/(expense) before change in expected credit losses and other credit impairment charges

3,691 

 

2,758 

 

176 

 

(12)

 

6,613 

 

-  external

3,684 

 

2,785 

 

173 

 

(29)

 

6,613 

 

-  inter-segment

 

(27)

 

 

17 

 

 

-  of which: net interest income/(expense)

2,903 

 

1,976 

 

 

(2)

 

4,878 

 

Change in expected credit losses and other credit impairment charges

(314)

 

(299)

 

 

 

(613)

 

Net operating income/(expense)

3,377 

 

2,459 

 

176 

 

(12)

 

6,000 

 

Total operating (expenses)/income

 

(2,469)

 

(1,213)

 

(122)

 

67 

 

(3,737)

 

Operating profit

908 

 

1,246 

 

54 

 

55 

 

2,263 

 

Adjusted profit before tax

908 

 

1,246 

 

54 

 

55 

 

2,263 

 

 

%

%

%

%

%

Adjusted cost efficiency ratio

66.9

44.0 

 

69.3 

 

(558.3)

 

56.5 

 

Balance sheet information

£m

£m

£m

£m

£m

Loans and advances to customers (net)

118,025 

 

64,772 

 

 

259 

 

183,056 

 

Customer accounts

140,658 

 

75,758 

 

 

(202)

 

216,214 

 

1  A change in reportable segments was made in 2020. Comparative data has been re-presented accordingly.

 

Significant revenue items by business segment - (gains)/losses for the year ended (audited)

31 Dec 2020

WPB

CMB

GBM

Corporate
Centre

Total

£m

£m

£m

£m

£m

Revenue

3,273 

 

2,608 

 

156 

 

(6)

 

6,031 

 

Significant revenue items

 

13 

 

 

 

16 

 

- customer remediation and related matters

 

12 

 

 

 

15 

 

- restructuring and other related costs

 

 

 

 

 

Adjusted revenue/(expense)

3,276 

 

2,621 

 

156 

 

(6)

 

6,047 

 

 

31 Dec 20191

 

 

 

 

 

Revenue

3,567 

 

2,753 

 

176 

 

(12)

 

6,484 

 

Significant revenue items

124 

 

 

 

 

129 

 

- customer remediation and related matters

124 

 

 

 

 

129 

 

- restructuring and other related costs

 

 

 

 

 

Adjusted revenue/(expense)

3,691 

 

2,758 

 

176 

 

(12)

 

6,613 

 

1  A change in reportable segments was made in 2020. Comparative data has been re-presented accordingly.

 

 

 

 

 

 

 

 

Significant cost items by business segment - recoveries/(charges) for the year ended (audited)

31 Dec 2020

WPB

CMB

GBM

Corporate
Centre

Total

£m

£m

£m

£m

£m

Operating expenses

(2,355)

 

(1,223)

 

(86)

 

(89)

 

(3,753)

 

Significant cost items

27 

 

27 

 

 

101 

 

155 

 

-  restructuring and other related costs2

73 

 

25 

 

 

81 

 

179 

 

-  customer remediation and related matters

(46)

 

 

 

 

(37)

 

-  guaranteed minimum pension benefits equalisation

 

 

 

13 

 

13 

 

Adjusted operating (expenses)/income

(2,328)

 

(1,196)

 

(86)

 

12 

 

(3,598)

 

 

Significant cost items by business segment - recoveries/(charges) for the year ended (audited) (continued)

 

WPB

CMB

GBM

Corporate
Centre

Total

31 Dec 20191

£m

£m

£m

£m

£m

Operating expenses

(3,525)

 

(1,238)

 

(122)

 

24 

 

(4,861)

 

Significant cost items

1,056 

 

25 

 

 

43 

 

1,124 

 

-  restructuring and other related costs2

57 

 

11 

 

 

43 

 

111 

 

-  customer remediation and related matters

999 

 

14 

 

 

 

1,013 

 

-  guaranteed minimum pension benefits equalisation

 

 

 

 

 

Adjusted operating (expenses)/income

(2,469)

 

(1,213)

 

(122)

 

67 

 

(3,737)

 

A change in reportable segments was made in 2020. Comparative data has been re-presented accordingly.

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

Net impact on profit before tax by business segment for the year ended (audited)

31 Dec 2020

WPB

CMB

GBM

Corporate
Centre

Total

£m

£m

£m

£m

£m

Profit/(loss) before tax

75 

 

113 

 

70 

 

(95)

 

163 

 

Net Impact on reported profit and loss

30 

 

40 

 

 

101 

 

171 

 

-  significant revenue items

 

13 

 

 

 

16 

 

-  significant cost items

27 

 

27 

 

 

101 

 

155 

 

Adjusted profit before tax

105 

 

153 

 

70 

 

 

334 

 

 

31 Dec 20191

 

 

 

 

 

Profit/(loss) before tax

(272)

 

1,216 

 

54 

 

12 

 

1,010 

 

Net Impact on reported profit and loss

1,180 

 

30 

 

 

43 

 

1,253 

 

-  significant revenue items

124 

 

 

 

 

129 

 

-  significant cost items

1,056 

 

25 

 

 

43 

 

1,124 

 

Adjusted profit before tax

908 

 

1,246 

 

54 

 

55 

 

2,263 

 

A change in reportable segments was made in 2020. Comparative data has been re-presented accordingly.

 

 

 

Adjusted performance

Our adjusted profit before tax in 2020 decreased by £1,929m compared with 2019, to a profit of £334m. This reflected higher ECL, lower revenue offset by lower operating expenses.

Adjusted revenue decreased by £566m or 9%, with decreases in WPB and CMB due to lower UK interest rates and other impacts of Covid-19, including overdraft pricing and reduced activity. This has been partially offset by increased mortgage and CMB lending revenue.

ECL increased by £1,502m, due to amounts recognised to reflect UK economic uncertainty in 2020 and the forward expected future credit losses resulting from the deteriorating UK forward economic outlook for 2021 due to the Covid-19 pandemic, and increased actual defaults in CMB.

Adjusted operating expenses decreased by £139m or 4%, due to cost savings in WPB and back office operations and lower costs in GBM foreign currency exchange services. Offset by additional HSBC Holdings plc costs recharges to HSBC UK in 2020 and a lower benefit arising from our material pension surplus as discount rates fell.

The 2020 adjusted RoTE of 0.5% was 9.4% lower than the 2019 adjusted RoTE of 9.9% driven by lower adjusted profit before tax.

Adjusted cost efficiency ratio is measured as total adjusted operating expenses divided by adjusted net operating income before ECL. The adjusted cost efficiency ratio in 2020 increased by 3.0% vs. 2019, from 56.5% to 59.5%

 

Wealth and Personal Banking

Adjusted profit before tax of £105m in 2020 was £803m lower than the adjusted profit before tax of £908m in 2019, driven by higher ECL, lower revenue, offset by lower operating expenses.

Revenue decreased by £415m or 11%, primarily due to lower UK interest rates and other impacts of Covid-19, including overdraft pricing, partially offset by an increase in mortgage revenue.

ECL increased by £529m, due to amounts recognised to reflect the deteriorating UK forward economic outlook for 2021 due to the Covid-19 pandemic.

Operating expenses decreased by £141m or 6%, due to actions taken to reduce the direct costs of the business including lower staff, travel and entertaining and digital business service costs.

 

Commercial Banking

Adjusted profit before tax of £153m in 2020 was £1,093m lower than the adjusted profit before tax of £1,246m in 2019, due to lower revenue and higher ECL.

Revenue decreased by £137m or 5%, driven by the impact of lower UK interest rates and lower volumes of fee based revenue as a result of Covid-19, partially offset by revenue from lending growth.

ECL increased by £973m, due to amounts recognised to reflect the deteriorating UK forward economic outlook for 2021 due to the Covid-19 pandemic, and increased actual defaults.

Operating expenses decreased by £17m or 1%, driven by the non repeat of redress costs in 2019, lower travel and entertainment, marketing, training and investment costs. This was partially offset by additional costs incurred in relation to the administration of Covid-19 related lending products.

 

Global Banking and Markets

Adjusted profit before tax of £70m in 2020 was £16m, or 30%, higher than the profit before tax of £54m in 2019.

Revenue decreased by £20m or 11%, principally due to reduced foreign currency payment flows due to the adverse market conditions.

Operating expenses decreased by £36m or 30%.

Corporate Centre

Adjusted profit before tax of £6m in 2020 was £49m lower than the profit before tax of £55m in 2019, driven by higher operating expenses caused by the reduced benefit arising from our material pension surplus as discount rates fell.

 

 

Dividends

The consolidated reported profit for the year attributable to the shareholders of the bank was £76m.

 

 

An interim dividend of £100m, in lieu of a final dividend in respect of the previous financial year, was paid on the ordinary share capital during the year.

Further information regarding dividends is given in Note 6.

 

Summary consolidated balance sheet as at

 

31 Dec

31 Dec

 

2020

2019

 

£m

£m

Total assets

304,864 

 

257,102 

 

-  cash and balances at central banks

76,429 

 

37,030 

 

-  items in the course of collections from other banks

253 

 

504 

 

-  financial assets designated and otherwise mandatory measured at fair value

26 

 

66 

 

-  derivative assets

155 

 

121 

 

-  loans and advances to banks

1,514 

 

1,389 

 

-  loans and advances to customers

191,233 

 

183,056 

 

-  reverse repurchase agreements - non trading

2,485 

 

3,014 

 

-  financial investments

19,309 

 

19,737 

 

-  prepayment, accrued income and other assets

9,318 

 

8,212 

 

-  current and deferred tax assets

49 

 

 

-  goodwill and intangible assets

4,093 

 

3,973 

 

Total liabilities

282,006 

 

234,851 

 

-  deposits by banks

540 

 

529 

 

-  customer accounts

259,341 

 

216,214 

 

-  repurchase agreements - non trading

6,150 

 

98 

 

-  items in the course of transmission to other banks

132 

 

343 

 

-  derivative liabilities

365 

 

201 

 

-  debt securities in issue

866 

 

3,142 

 

-  accruals, deferred income and other liabilities

1,941 

 

1,834 

 

-  current and deferred tax liabilities

1,677 

 

1,632 

 

-  provisions

979 

 

1,325 

 

-  subordinated liabilities

10,015 

 

9,533 

 

Total equity

22,858 

 

22,251 

 

-  total shareholders' equity1

22,798 

 

22,191 

 

-  non-controlling interests

60 

 

60 

 

1  Total shareholders' equity includes share capital, share premium, additional Tier 1 instruments and reserves.

 

 

The group maintained a strong and liquid balance sheet. The ratio of customer advances to customer accounts decreased to 73.7% compared to 84.7% at 31 December 2019 driven from a 20% increase on customer accounts.

Assets

Cash and balances at central banks increased by £39.4bn due to a growth in customer account balances.

Loans and advances to customers increased by £8.2bn due to growth in retail and commercial lending, particularly in retail mortgages and Covid-19 related products (Bounce Back Loans ('BBLS'), Coronavirus Business Interruption Loans ('CBILs') and Coronavirus Large Business Interruption Loans ('CLBILs')).

Liabilities

Customer accounts increased by £43.1bn due to growth in commercial and retail current and savings accounts. The growth reflected customers spending less during lockdown and the depositing of loans from government backed schemes.

Repurchase agreements - non trading has increased by £6.1bn, and Debt securities in issue has decreased by £2.3bn as part of balance sheet management activities to proactively manage liquidity and margin.

Equity

Total shareholders' equity increased by £0.6bn.

.

 

 

Risk overview

We continuously identify and monitor risks. This process, which is informed by our risk factors and the results of the stress testing programme, gives rise to the classification of certain financial and non-financial banking risks. Changes in the assessment of these risks may result in adjustments to our business strategy and, potentially, our risk appetite.

Our banking risks include credit risk, treasury risk, market risk, resilience risk, regulatory compliance risk, financial crime and fraud risk and model risk.

In addition to these banking risks, we have identified top and emerging risks with the potential to have a material impact on our financial results or reputation and the sustainability of our long-term business model.

The exposure to our risks and risk management of these are explained in more detail in the Risk section of the Report of the Directors on pages 17 to 51.

During 2020, a number of changes to our top and emerging risks have been made, to reflect the revised assessment of their effect on HSBC UK.

A new risk has been added in 2020 for the Covid-19 outbreak.

 

Risk

 

Mitigants

Externally driven

Covid-19 outbreak

Since the Covid-19 outbreak in the UK, we have worked with the UK Government, regulators and our customers to implement measures to mitigate the financial and non-financial impacts of the outbreak on our clients and the UK economy. We have successfully invoked business continuity plans to effectively manage our operations under the constraints imposed by the UK Government in response to the outbreak, and have introduced measures to enable our people to work safely and flexibly during the outbreak.

Financial crime and fraud risk

We continue to support the business and our customers throughout the Covid-19 outbreak, while ensuring that our controls remain effective to manage financial crime risk. We progressed with our plans to improve our fraud controls and we continue to invest in both advanced analytics and artificial intelligence, which remain key components of our next generation of tools to fight financial crime.

 

 

 

Geopolitical risk

We continually assess the impact of geopolitical events on our businesses and exposures across HSBC UK, and take steps to mitigate them, where required and possible, to help ensure we remain within our risk appetite. A new trading relationship between the UK and the EU commenced on 1 January 2021. We will continue to work with regulators, governments and our customers to manage the risks created by the UK's exit from the EU as they arise, particularly across those industry sectors most impacted.

Turning of the credit cycle

We regularly undertake detailed reviews of our portfolios and proactively manage credit facilities to customers and sectors likely to come under stress as a result of macroeconomic and geopolitical events including the UK's exit from the EU. Covid-19 has resulted in an unprecedented global economic slowdown with a significant increase in credit stress across our portfolios. We have increased the frequency and depth of our monitoring activities with Covid-19 vulnerability assessments performed as part of customer reviews. The government support schemes may delay the full impacts of the outbreak on some of these businesses in the short term, but we are mindful of potential increasing impairments as time progresses. Stress tests and other sectoral reviews were performed to identify portfolios or customers who were experiencing or were likely to experience financial difficulty as a result of Covid-19. Particular emphasis has been maintained on the housing market, Real Estate and Retail industry sectors as particularly vulnerable. We are also increasing resources to help address the increased level of credit defaults in the current environment.

Regulatory developments

We monitor closely for regulatory developments and engage with regulators, as appropriate, to help ensure that new regulatory requirements are implemented effectively and in a timely way. In addition to developments driven by the Covid-19 outbreak, we are keeping abreast of the emerging regulatory agenda, which is increasingly focused on diversity, sustainable development, climate change, operational resilience, digital services, and innovation. Covid-19 has driven some medium-term reprioritisation by regulators, with a renewed and currently increased focus on customers and vulnerabilities.

Information security risk and cyber crime

We endeavour to protect HSBC UK and our customers by continuing to strengthen our cyber defences, helping enable the safe execution of our business priorities and the security of our customers' information. Our data-driven approach, grounded in strong controls that mitigate advanced cyber threats, enhances our capability in threat detection, access controls and resiliency.

Ibor transition

We remain focused on providing alternative rate products and making them available to our customers, along with updating the supporting processes and systems, to replace Ibors. We continue to engage with industry participants and regulatory working groups to support an orderly transition.

 

Climate-related risks

We continue to enhance identification, oversight and management of climate-related risks. Following the publication of the HSBC Group's climate ambition, we are developing business plans and capabilities to execute it, and are participating in the Group's dedicated climate risk programme. Our climate risk management framework and approach, developed over 2020, will further mature throughout 2021 and we will further develop our risk appetite and key indicators. We also participated in the HSBC Group climate stress test pilot to build deeper climate risk insights and expertise.

Internally driven

People risk

We continue to monitor workforce capacity and capability requirements in line with our strategy and any emerging issues. We have also put in place measures to ensure that our people are properly supported and able to work safely during the Covid-19 outbreak. We are monitoring people risks that may arise due to business transformation to help ensure that we sensitively manage any redundancies and support impacted employees.

IT systems infrastructure and resilience

We actively monitor and improve service resilience across our technology infrastructure to minimise service disruption to our customers, and enhance our service management disciplines and change execution capabilities.  We continued to adapt our IT systems during 2020 to support our customers and operations during the Covid-19 outbreak.

Execution risk

We continue to strengthen our prioritisation and governance processes for significant strategic, regulatory and compliance projects. With business continuity plans in place and significant remote working in place, the impact of Covid-19 on major change programmes continues to be closely monitored. 

Model risk

We continue to strengthen oversight of models and the second line of defence Model Risk Management function. We are embedding a new model risk policy, which includes updated controls around use and monitoring of models. New Model Risk Appetite measures have been developed for implementation in 1Q 2021. Potential revisions to capital models to reflect the current extreme economic shocks and various government support measures resulting from Covid-19 are under way.

Conduct and customer detriment

We continue to enhance our management of conduct in a number of areas, including the treatment of potentially vulnerable customers, governance of product arrangements, and encouragement of a 'Speak Up' culture. At the forefront of current conduct risk considerations is the fair treatment of customers in financial difficulty.

Data management

We continue to enhance and advance our insights, data aggregation, reporting and decisions through ongoing improvement and investments in data governance, data quality, data privacy, data architecture, and analytics (including machine learning and artificial intelligence capabilities). Our work to modernise our data infrastructure also continues, building on the Cloud to increase flexibility and scalability and improve our fit-for-purpose data while also respecting the evolving regulatory landscape regarding the localisation of data. This is a crucial component of effectively managing our risk.

Third party risk  management

We continue to enhance our third-party risk management programme to help ensure compliance with our third party risk policy and required standards. We work closely with our third parties to monitor performance and, as a result of the Covid-19 outbreak, their financial stability. In 2021, we will continue to strengthen our third-party risk framework and improve our technology, process and people capabilities.

 

 

Risk has heightened during 2020

Risk remains at the same level as 2019

New Risk introduced during 2020

 

The Strategic Report comprising pages 2 to 16 was approved by the Board on 22 February 2021 and is signed on its behalf by

 

 

 

 

John David Stuart

Director

HSBC UK Bank plc

Registered number: 9928412

 

 

 

Risk

 

Page

Our risk appetite

25

Risk management

27

Key developments and risk profile

27

Top and emerging risks

27

Externally driven

27

Internally driven

31

Areas of special interest

34

Process of UK withdrawal from the European Union

34

Ibor transition

34

Our material banking risks

37

Credit risk

38

Treasury Risk Management

72

Liquidity and funding risk management

72

Market risk

81

Resilience risk

84

Regulatory compliance risk management

86

Financial crime and risk management

87

Model risk

89

Our risk appetite

We recognise the importance of a strong culture, which refers to our shared attitudes, values and standards that shape behaviours related to risk awareness, risk taking and risk management. All our people are responsible for the management of risk, with the ultimate accountability residing with the Board.

We seek to build our business for the long term by balancing social, environmental and economic considerations in the decisions we make. Our strategic priorities are underpinned by our endeavour to operate in a sustainable way. This helps us to carry out our social responsibility and manage the risk profile of the business. We are committed to managing and mitigating climate-related risks, both physical and transition, and continue to incorporate consideration of these into how we manage and oversee risks internally and with our customers.

The following principles guide HSBC UK's overarching risk appetite and determine how its businesses and risks are managed:

 

Financial position

We aim to maintain a strong capital position, defined by regulatory and internal capital ratios.

We carry out liquidity and funding management for each operating entity, on a stand-alone basis.

Operating model

We seek to generate returns in line with a conservative risk appetite and strong risk management capability.

We aim to deliver sustainable earnings and consistent returns for shareholders.

Business practice

We have zero tolerance for any of our people knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and/or mitigated.

We have no appetite for deliberately or knowingly causing detriment to consumers, or incurring a breach of the letter or spirit of regulatory requirements.

We have no appetite for inappropriate market conduct by any member of staff or by any HSBC UK business.

Enterprise-wide application

Our risk appetite encapsulates the consideration of financial and non-financial risks. We define financial risk as the risk of a financial loss as a result of business activities. We actively take these types of risks to maximise shareholder value and profits. Non-financial risk is defined as the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems, or from external events Our risk management framework

An established risk governance framework and ownership structure ensures oversight of, and accountability for, the effective management of risk. Our Risk Management Framework ('RMF') fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. Integral to our risk management framework are risk appetite, stress testing and the identification of emerging risks.

Our Risk Committee focuses on risk governance and provides a forward-looking view of risks and their mitigation. The Risk Committee is a committee of the Board and has responsibility for oversight and advice to the Board on, amongst other things, the bank's risk appetite, tolerance and strategy, systems of risk management, internal control and compliance. Additionally, members of the Risk Committee attend meetings of the Chairman's Nominations and Remuneration Committee at which the alignment of the reward structures to risk appetite is considered.

In carrying out its responsibilities, the Risk Committee is closely supported by the Chief Risk Officer, the Chief Financial Officer, the Head of Internal Audit and the Head of Compliance, together with other business functions on risks within their respective areas of responsibility.

Responsibility for managing both financial and non-financial risk lies with our people. They are required to manage the risks of the business and operational activities for which they are responsible. We maintain oversight of our risks through our various specialist Risk Stewards, as well as the accountability held by the Chief Risk Officer.

Non-financial risk includes some of the most material risks HSBC UK faces, such as cyber attacks, poor customer outcomes, loss of data and the current Covid-19 pandemic. Actively managing non-financial risk is crucial to serving our customers effectively and having a positive impact on society. During 2020, we continued to strengthen the control environment and our approach to the management of non-financial risk, as broadly set out in our risk management framework. The management of non-financial risk focuses on governance and risk appetite, providing a single view of the non-financial risks that matter most, and associated controls. It incorporates a risk management system designed to enable the active management of non-financial risk. Our ongoing focus is on simplifying our approach to non-financial risk management, while driving more effective oversight and better end-to-end identification and management of risks. This is overseen by the Operational and Resilience Risk function, headed by the HSBC UK Head of Operational and Resilience Risk.

Three lines of defence

To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment.

The model underpins our approach to risk management by clarifying responsibility and encouraging collaboration, as well as enabling efficient coordination of risk and control activities. The three lines of defence are summarised below:

The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing them in line with risk appetite, and ensuring that the right controls and assessments are in place to mitigate them.

The second line of defence challenges the first line of defence on effective risk management, and provides advice and guidance in relation to the risk.The third line of defence is our Global Internal Audit function, which provides independent assurance that our risk management approach and processes are designed and operating effectively. Risk appetite

We formally articulate our risk appetite through our risk appetite statement ('RAS'), which is approved by the Board on the recommendation of the Risk Committee. Setting out our risk appetite ensures that planned business activities provide an appropriate balance of return for the risk we are taking, and that we agree a suitable level of risk for our strategy. In this way, risk appetite informs our financial planning process and helps senior management to allocate capital to business activities, services and products.

The RAS consists of qualitative statements and quantitative metrics, covering financial and non-financial risks. It is fundamental to the development of business line strategies, strategic and business planning and senior management balanced scorecards. Performance against the RAS is reported to the Risk Management Meeting ('RMM') so that any actual performance that falls outside the approved risk appetite is discussed and appropriate mitigating actions are determined. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture.

Our RAS and business activities are guided and underpinned by qualitative principles and/or quantitative metrics. 

 

Risk management

We recognise that the primary role of risk management is to protect our customers, business, employees, shareholders and the communities that we serve, while ensuring we are able to support our strategy and provide sustainable growth. This is supported through our three lines of defence model.

We use a comprehensive risk management framework across the organisation and across all risk types, underpinned by the HSBC Group's culture and values. This outlines the key principles, policies and practices that we employ in managing material risks, both financial and non-financial.

The framework fosters continual monitoring, promotes risk awareness and encourages sound operational and strategic decision making. It also ensures a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities.

 

Stress testing

Stress testing is an important tool for banks and regulators to assess vulnerabilities in individual banks and/or the financial banking sector under hypothetical adverse scenarios. The results of stress testing are used to assess banks' resilience and capital adequacy to a range of adverse shocks.

A number of internal macroeconomic and event-driven stress scenarios specific to the UK or the global economy were considered and reported to senior management during the course of the year. These stress scenarios included highly adverse outcomes in relation to the UK's withdrawal from the EU and also the continuing impact of Covid-19 and associated lockdowns in the UK. HSBC UK also conducted Reverse Stress Testing. This exercise required HSBC UK to assess scenarios and circumstances that would render its business model non-viable, thereby identifying potential business vulnerabilities.

Furthermore, HSBC UK is subject to regulatory stress testing and the requirements are increasing in frequency and granularity. The assessment by the regulators is on both a quantitative and qualitative basis, the latter focusing on our portfolio quality, data provision, stress testing capability and capital planning processes.

Although the annual Bank of England ('BoE') concurrent stress testing exercise was cancelled in 2020, the BoE expects firms to consider and develop appropriate internal stress scenarios for their own use.

Both the 2019 concurrent stress test and the 2020 internal stress tests confirm that HSBC UK is well positioned to withstand potential shocks.

 

Key developments and risk profile

Key developments in 2020

We have actively managed the risks resulting from the Covid-19 outbreak and its impacts on our customers and operations during 2020, as well as other key risks described in this section.

In addition, we enhanced our risk management in the following areas:

In January 2020, we simplified our approach and articulation of risk management through the combination of our enterprise risk management framework and our operational risk management framework.

A new model risk policy is being progressively implemented to  improve how we manage model risk and meet enhanced external expectations.

We continued to focus on simplifying our approach to non-financial risk management. We are driving more effective oversight and better end-to-end identification and management of non-financial risks.

We established the Treasury Risk Management function. This function is a dedicated second line of defence, providing independent oversight of treasury activities across capital risk, liquidity and funding risk, structural foreign exchange risk, interest rate in the banking book together with pension risk.

We continue to support the business and our customers throughout the global pandemic, while continuing to manage financial crime risk. We continued to invest in both advanced analytics and artificial intelligence, which remain key components of our next generation of tools to fight financial crime.

We formed a new Operational and Resilience Risk combined sub-function. The sub-function provides robust oversight over the first line of defence and the risk stewards, supported by clear plans and evidenced by effective and timely independent challenge. The sub-function helps ensure that the first line of defence are focused firmly on priority tasks. By bringing the two teams together, we expect to benefit from improved stewardship, better risk management capabilities and better outcomes for our customers.

 

Top and emerging risks

Top and emerging risks are those that may impact on our financial results, reputation or business model. If these risks were to occur, they could have a material effect on HSBC UK.

The exposure to these risks and our risk management approach are explained in more detail below.

Externally driven

Covid-19

The Covid-19 outbreak continues to dominate the political and economic landscape as it did throughout much of 2020. The twin shocks of a public health emergency and the resultant economic fallout have been felt around the world, and hit both advanced and emerging markets. The closure of borders threatened medical and food supplies for many markets, and there is the potential for countries and territories to focus efforts on building resilient supply chains closer to home to be less vulnerable to global shocks.

After an initial decrease in levels of Covid-19 in the third quarter of 2020, the UK Government returned to more stringent measures in the fourth quarter to tackle a second wave of Covid-19. The emergence of a new variant in the UK during December 2020, necessitated the introduction of a third national lockdown on 4 January 2021. However, the development of Covid-19 vaccines has raised hopes of widespread immunisations being achieved by the end of 2021 and UK Government measures to restrict mobility being eased.

Mitigating actions

We have successfully invoked business continuity plans to effectively manage our operations under the constraints posed by the UK Government in response to the outbreak.

We have built up our operational capacity rapidly in response to UK Government support measures aimed at combating the impacts of the Covid-19 outbreak and have been responding to complex conduct considerations and heightened risk of fraud related to these programmes.

Financial crime and fraud risk

Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. Financial crime threats continue to evolve, often in tandem with increased geopolitical developments, posing challenges for financial institutions to keep abreast of developments and manage conflicting laws. The global economic slowdown as a result of the Covid-19 outbreak is resulting in an increase in fraud risk, as fraudulent activity is often more prevalent in times of crisis. Ongoing digital developments around virtual currencies, stablecoins and central bank digital currencies have continued, with the industry's financial crime risk assessment and management frameworks in the early stages of development. The evolving regulatory environment continues to present an execution challenge. The HSBC Group continues to see increasing challenges presented by national data privacy requirements in a global organisation, which may affect its ability to effectively manage financial crime risks. There has also been an increase in media and public scrutiny on how financial crime is managed within financial institutions.

In December 2012, among other agreements, HSBC Holdings plc ('HSBC Holdings') agreed to an undertaking with the UK Financial Services Authority, which was replaced by a Direction issued by the UK Financial Conduct Authority ('FCA') in 2013, and consented to a cease-and-desist consent order with the US Federal Reserve Board ('FRB'), both of which contained certain forward-looking anti-money laundering ('AML') and sanctions-related obligations. The HSBC Group also agreed to retain an independent compliance monitor (who is, for FCA purposes, a 'Skilled Person' under section 166 of the Financial Services and Markets Act and, for FRB purposes, an 'Independent Consultant') to produce periodic assessments of the Group's AML and sanctions compliance programme (the 'Skilled Person/Independent Consultant'). This had applicability to HSBC UK. Reflective of our significant progress in strengthening financial crime risk management capabilities, our engagement with the Skilled Person was terminated in first quarter of 2020 and, in second quarter of 2020, a new Skilled Person with a narrower mandate was appointed to assess the remaining areas that require further work for us to transition fully to business-as-usual financial crime risk management. Thereafter, in 2020, the FCA issued a new, more tailored Direction that replaces the previous Direction issued in 2013. The Independent Consultant will continue to carry out an annual OFAC compliance review at the FRB's discretion. The role of the Skilled Person/Independent Consultant is discussed on page 21.

Mitigating actions

We continue to enhance our financial crime risk management capabilities. We are investing in next generation capabilities to fight financial crime through the application of advanced analytics and artificial intelligence.

We are strengthening and investing in our fraud controls, to introduce next generation anti-fraud capabilities to protect both customers and the bank.

We continue to educate our staff and our customers on emerging digital products and associated risks.

We have developed procedures and controls to manage the risks associated with direct and indirect exposure to virtual currencies, and we continue to monitor external developments.

We continue to work with government and law enforcement agencies to address data privacy challenges through international standards, guidance, and legislation to enable effective management of financial crime risk.

We continue to take steps designed to ensure that the reforms we have put in place are both effective and sustainable over the long term.

We continue to work closely with our regulators and engage in Public Private Partnerships, such as the Joint Money Laundering Intelligence Taskforce, playing an active role in shaping the industry's financial crime controls for the future.

Geopolitical risk

We continually assess the impact of geopolitical events on our businesses and exposures across HSBC UK, and take steps to mitigate them, where required and possible, to help ensure we remain within our risk appetite.

The UK left the EU on 31 January 2020 and entered a transition period until 31 December 2020. A Trade and Cooperation Agreement between the EU and the UK was agreed on
24 December 2020 and ratified on 30 December 2020 and with respect to Financial Services, it includes a joint declaration of cooperation and both parties are expected in the coming months to enter discussions with the aim of agreeing a Memorandum of Understanding establishing the framework for this cooperation. As expected, the passport arrangement expired at the end of the transition period, and therefore HSBC UK has lost its existing EU regulatory permissions to continue servicing clients in the European Economic Area ('EEA') from 1 January 2021.

Clients: the UK's departure from the EU is likely to impact our clients operating models, including their supply chains, working capital requirements, investment decisions and financial markets infrastructure access. The vast majority of our EEA incorporated clients have already been migrated from the UK to HSBC Continental Europe (or another EEA entity) and we are in the process of following-up with the residual population. 

People: our priority is to ensure that we continue to support our clients and people under the new Trade and Cooperation Agreement, and help minimise any disruption.

 

Mitigating actions

We continue to track and close the remaining actions including client migrations, resolution of any potential product restrictions for our customers.

We are undertaking a comprehensive impact assessment of the Trade and Cooperation Agreement to understand the range of potential implications for our customers, our products and our business.

We actively monitor our portfolio to identify areas of stress, supported by stress testing analyses. Vulnerable sectors or asset classes, third party dependencies are subject to additional management review to determine if any adjustments to risk policy or appetite are required.

We will actively participate in external discussions in relation to the development of an appropriate Equivalence framework

We continue to stay very close to our clients, via proactive communications and dedicated channels to respond to customer queries, and will monitor for any operational and/or other impacts as a consequence of the Trade and Cooperation Agreement, in particular Trade clients due to the increased documentation requirement to comply with import/export licence procedures as well as rules of origin.

We are supporting our EEA employees resident in the UK with their settlement applications.

We will continue to work with regulators, governments and our clients in an effort to manage risks as they arise, particularly across the most impacted sectors.

Turning of the credit cycle

The credit cycle in the UK has now turned, driven chiefly by the impacts and uncertainty caused by the Covid-19 pandemic across the globe. The UK saw a decline in GDP of 9.9% in 2020 and the impacts of the pandemic on economic activity will continue to be seen in 2021, following the introduction of a third national lockdown in the UK. The mortgage market rebounded extremely well in 2020, following closure of the market due to government restrictions. Both house price and completed property transactions indices continue to record increases, likely driven by pent up demand during the first enforced lockdown and the introduction of stamp duty rule changes. There remains uncertainty concerning the impact of the UK's withdrawal from the EU, with the new barriers to the movements of goods, services and people from the EU, representing ongoing headwinds to economic growth. 

Mitigating actions

We closely monitor economic developments in key markets and sectors and undertake scenario analysis. This enables us to take portfolio actions where necessary, including enhanced monitoring, amending our risk appetite and/or reducing limits and exposures. We also continue to monitor certain high risk portfolios such as Retail, Construction, Commercial Real Estate and service companies within Oil and Gas. Government support schemes e.g. CBILS, CLBILS and BBL's have been implemented to support customers impacted by Covid-19.

We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions being taken to rebalance exposures and manage risk appetite where necessary.

Reviews of key portfolios are undertaken regularly to ensure that individual customer or portfolio risks are understood and our ability to manage the level of facilities offered through any downturn are appropriate. In 2020, we have undertaken specific reviews of portfolios in sectors showing vulnerability such as Retail, Commercial Real Estate, Hotels, Hospitality, Oil and Gas, Automotive, and Construction and Contracting. Detailed performance monitoring is reviewed on a monthly basis, which includes early warning indicators and a view of concentration risks. Portfolio limits (industry, product and country) governing wholesale credit have been re-assessed and reductions implemented where appropriate.

Regulatory developments

Financial service providers continue to face stringent regulatory and supervisory requirements, particularly in the areas of capital and liquidity management, conduct of business, financial crime, internal control frameworks, the use of models, the integrity of financial services delivery and financial and operational resilience. The competitive landscape in which HSBC UK operates may be significantly altered by future regulatory changes and government intervention. Regulatory changes, including those resulting from UK's exit from the EU, may affect our activities.

Mitigating actions

We have an active programme in place to identify and assess the impact of new and amended regulation impacting on HSBC UK. This includes active engagement with government, regulatory and industry bodies in the UK to feedback on key proposals to ensure that new requirements are considered properly by regulators and the financial sector and can be implemented effectively.

We have engaged proactively with regulators and the government regarding the policy changes issued in response to the Covid-19 outbreak to help our customers and to contribute to an economic recovery. We are also actively engaged in the HM Treasury review of the Future Regulatory Framework which is designed to ensure that the shape of the regulatory framework is fit for purpose following the UK's exit from the EU.

Information security risk and cyber crime

HSBC UK and other organisations continue to operate in an increasingly hostile cyber threat environment, which requires  ongoing investment in business and technical controls to defend against these threats. Key threats include unauthorised access to online customers, advanced malware attacks, attacks on third-party suppliers and security vulnerabilities being exploited..

Mitigating actions

We continually evaluate threat levels for the most prevalent attack types and their potential outcomes. To further protect HSBC UK and our customers we strengthened our controls to reduce the likelihood and impact of advanced malware, data leakage, infiltration of payment systems and denial of service attacks.

We continue to enhance our cybersecurity capabilities, including threat detection, access control as well as back-up and recovery. An important part of our defence strategy is ensuring our people remain aware of cybersecurity issues and know how to report incidents.

Cyber risk is a priority area for the Board. We report and review cyber risk and control effectiveness quarterly at executive and non-executive Board level. We also report it across our businesses and functions, to help ensure appropriate visibility and governance of the risk and mitigating actions.

We participate in law enforcement and industry schemes to share information about tactics employed by cyber-crime groups and to collaborate in fighting, detecting and preventing cyber-attacks on financial organisations.

Ibor transition

Throughout 2020, our interbank offered rate ('Ibor') transition programme, which is tasked with the development of new replacement near risk-free rate ('RFR') products and transition from legacy Ibor contracts, has continued to implement the required IT and operational changes necessary to facilitate an orderly transition from Ibors to RFRs, or alternative benchmarks, such as policy interest rates.

These changes have enabled HSBC UK to meet regulatory endorsed milestones related to product readiness and the clearing house led transition to RFR discounting. Additionally, to further support our business and our customers, our programme's scope has widened to include additional interest rate benchmarks, which now have a plan for demise in the near future.

We have identified financial and non-financial risks related to the transition and developed key actions to mitigate the identified risks. These risks include those associated with the continued sale of products referencing Ibor through 2020. HSBC UK has, however, actively removed certain Ibor referencing products from sale, and implemented processes and controls to manage the continued sale of Ibor products to meet our clients' needs. As products referencing Ibor continue to be sold, and RFR products are developed, considerations relating to the enforceability of fallback provisions and the evolution of RFR market conventions have potentially increased legal and compliance risks.

Furthermore, the impact of the Covid-19 outbreak has compressed timelines for client engagement and potentially increased the resilience risks associated with the rollout of new products, transition of legacy contracts, and new RFR sales.

Mitigating actions

HSBC UK is part of the HSBC Group's global programme to facilitate an orderly transition from Ibors for our business and our clients. The UK is a lead market for the required transition activity. In HSBC UK, programme activity is sponsored by the UK Chief Risk Officer, who chairs the UK Ibor Transition Project Steering Committee ('PSC'). 

We have dedicated teams in place to support the development of and transition to alternative rate and replacement RFR products.

We have and continue to carry out extensive training, communication and client engagement to facilitate appropriate selection of products.

We are implementing IT and operational changes to enable a longer transition window.

We met the third quarter 2020 regulatory endorsed milestones for implementing changes to contractual documentation,

We assess, monitor and dynamically manage risks, and implement specific mitigating controls when required.

We continue to engage with regulatory and industry bodies actively to mitigate risks relating to hedge accounting changes, multiple RFR market conventions, and so-called 'tough legacy' contracts that have no appropriate replacements or no likelihood of renegotiation to transition. This includes providing feedback and responses on recent IBA and FCA consultations.

Climate-related risks

Climate change can impact a number of our risk types:

Transition Risk, arising from the move to a low-carbon economy, such as through policy, regulatory and technological changes.

Physical Risk, through increasing severity and/or frequency of severe weather events or other climatic events (e.g. sea level rise, flooding).

These have potential to cause both idiosyncratic and systemic risks, resulting, over time, in potential financial and non-financial impacts for HSBC UK. Financial impacts could materialise, for example, through greater transactional losses and/or increased capital requirements. Non-financial impacts could materialise, for example, if our own assets or operations are impacted by extreme weather or chronic changes in weather patterns, or as a result of business decisions to achieve our Climate Ambition. Climate-related risks have increased over 2020, primarily as a result of the pace and volume of policy and regulatory changes. This impacts the bank both directly and indirectly through impacts on our customers.

Mitigating actions

The Chief Risk Officer is responsible for climate financial risks under the UK Senior Managers Regime. The Chief Risk Officer is a member of the Board and the Executive Committee and, where appropriate, provides verbal or written updates on climate risk.

Our Board manages climate-related risks that our outside of our risk appetite, and is supported by a dedicated Climate Risk Management Meeting where oversight and shaping of our approach for managing climate risk takes place. We have also established a Climate Risk Programme to drive the delivery of our plans relating to the enhancement of our risk management approach.

The HSBC Group Risk Committee endorsed risk appetite statement has been enhanced with quantitative metrics to articulate the risks from climate change, and we plan to iteratively develop our risk appetite and key indicators through 2021.

In 2020, we formalised our overall approach to climate risk management and introduced policies, process and controls. For example, we have established a Transition Risk Framework to better understand our exposure to the highest transition risk sectors and we continue to engage with our customers to understand and support their low-carbon strategies. In response to our stress testing scenario based risk assessments, we are in the process of implementing policy changes to manage the physical risk facing our retail mortgage portfolio where properties are particularly vulnerable geographically to natural hazard risk, such as flooding. We will continue to assess what data are available and required to further develop metrics to improve our assessment and management of climate risks and opportunities in line with strategy and risk appetite.

HSBC UK implements HSBC Group sustainability risk policies as part of its broader reputational risk framework. We focus our policies on sensitive sectors which may have a high adverse impact on people or on the environment and in which we have a significant number of customers. This includes sectors with potentially high carbon impacts including power generation, mining, agricultural commodities and forestry. Future policy reviews will be informed by our Climate Ambition and risk appetite.

HSBC UK has participated in the HSBC Group climate stress test pilot to enhance our knowledge of climate risk and to inform the development of our approach to climate risk management, including the continuous enhancement of our risk appetite statement. This Group stress test pilot included the UK residential mortgage portfolio, Corporate Real Estate portfolio and some of the Commercial Banking portfolio, particularly those in high risk sectors. This pilot is also aimed to help us prepare and build the necessary capabilities to execute the Bank of England's BES Climate Scenario in 2021.

Internally driven

People risk

Our success in delivering our strategic priorities and proactively managing the regulatory and legislative environment depends on the development and retention of our leadership and high-performing employees. The ability to continue to attract, develop and retain competent individuals in an employment market impacted by the Covid-19 outbreak proves challenging. Changed working arrangements and differing levels of local Covid-19 restrictions and health concerns have impacted employee mental health and well-being. We are also monitoring potential people risks that could arise due to organisational restructuring to help ensure that we sensitively manage redundancies and support impacted employees.

Mitigating actions

We have put in place measures to ensure that our people are  supported and able to work safely and flexibly during the Covid-19 outbreak.

We promote a diverse and inclusive workforce and provide active support across a wide range of health and well-being activities.

Launch of the Future Skills Curriculum in HSBC University identifying through research the critical skills that will enable employees and HSBC UK to be successful in the future.

We continue to develop succession plans for key management roles, with actions agreed and reviewed on a regular basis by the HSBC UK Executive Committee.

Political, legislative and regulatory challenges are closely monitored to minimise the impact on the attraction and retention of talent and key performers.

We have robust plans in place driven by senior management to mitigate the effect of external factors that may impact our employment practices.

IT systems infrastructure and resilience

The HSBC Group is committed to investing in the reliability and resilience of its IT systems and critical services, many of which are relied upon by HSBC UK. The HSBC Group does so to protect its customers and ensure they do not receive disruption to services, which could result in reputational and regulatory damage.

Mitigating actions

We continue to invest in transforming how software solutions are developed, delivered and maintained, with a particular focus on providing high-quality, stable and secure services. As part of this, we are concentrating on improving system resilience and service continuity testing. We have enhanced the security features of our software development life cycle and improved our testing processes and tools. During 2020, we have upgraded many of our IT systems, simplified our service provision and replaced older IT infrastructure and applications. These enhancements led to continued global improvements in service availability during 2020 for both our customers and employees. Execution risk

To deliver our strategic objectives and meet mandatory regulatory requirements, it is important for the bank to maintain a strong focus on execution risk. This requires robust management of significant resource-intensive and time-sensitive programmes. Risks arising from the magnitude and complexity of change may include regulatory censure, reputational damage or financial losses. Current major initiatives include managing the operational impacts from the UK leaving the EU on HSBC UK; our business transformation programme, Ibor transition and the continued development of Open Banking.

Mitigating actions

Our prioritisation and governance processes for significant projects are monitored by the HSBC UK Executive Committee.

In 2020, we continued to manage execution risk through closely monitoring the punctual delivery of critical initiatives, internal and external dependencies, and key risks, to allow better portfolio management.

Model risk

Model risk arises whenever business decision-making includes reliance on models. We use models in both financial and non-financial contexts and in a range of business applications such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Assessing model performance is a continuous undertaking; models can need redevelopment as market conditions change, as evidenced in 2020 by the model redevelopment required for estimating credit losses post Covid-19. This is due to the dramatic change to inputs to these models such as GDP, unemployment rates and housing prices as a result of Covid-19 impacts on the global economies.

Mitigating actions

We enhanced the monitoring and review of loss model performance through our Model Risk Management function as part of a broader quarterly process to determine loss levels. The Model Risk Management team aims to provide strong and effective review and challenge of any future redevelopment of these models.

The Risk Steward is providing close monitoring of changes in model behaviour working closely with business and function model owners and sponsors.

We updated the model risk policy and introduced model risk standards to enable a more risk-based approach to model risk management whilst retaining a consistent approach.

We worked with the model owners of internal-ratings-based models to increase our engagement on management of model risk with the PRA.

We refreshed model risk controls through the Risk Control Assessment process and businesses and functions completed testing of these new enhanced controls to assess and understand model risk.

We developed new Risk Appetite measures focused on forward looking model risk supported by upgrades to the Model Inventory System to provide more granular measurement and management of model risk for multiple applications of a single model.

Conduct and customer detriment

We continually enhance our management of conduct, learning from the past, including supporting our people in their management of potentially vulnerable customers, product governance arrangements, and encouraging our 'Speak Up' culture. We introduced a number of measures throughout the Covid-19 crisis to support our customers and to implement government support schemes effectively. At the forefront of current conduct risk considerations is the fair treatment of customers in financial difficulty. We are fully focused in providing appropriate customer outcomes in all circumstances.

Mitigating actions

We have continued to enhance our management of conduct including our product governance arrangements, the treatment of potentially vulnerable customers and management of related third party risks.

We have enhanced our conduct training to support our people, including how to recognise potential vulnerabilities and we encourage and support a 'Speak Up' Culture.

We have revised our conduct risk framework and enhanced our management information. Covid-19's impact, indicates a likelihood of increasing future conduct risk and as a result we continue to actively monitor non-financial risk profiles across all business areas.

We have adapted our controls and risk management processes to reflect our conduct outcomes, ensuring that those risks that have the greatest impact on our customers are given heightened focus.

Data management

HSBC UK uses a large number of systems and applications to support key business processes and operations. As a result, we often need to reconcile multiple data sources, including customer data sources, to reduce the risk of error. We, along with other organisations, also need to meet external/regulatory obligations such as the General Data Protection Regulation ('GDPR'), Basel Committee for Banking Supervision ('BCBS') 239, and Basel III.

Mitigating actions

We are progressively improving data quality across a large number of systems globally. Our data management, aggregation and oversight continues to strengthen and enhance the effectiveness of internal systems and processes. We are implementing data controls for end-to-end critical processes to improve our data capture at the point of entry and throughout the data lifecycle. 

Through our global data management framework we are expanding and enhancing our data governance to proactively monitor the quality of critical customer product, reference and transaction data and resolving associated data issues in a timely manner.

We continue to modernise our data and analytics infrastructure through investments in advanced capabilities in cloud visualisation, machine learning and artificial intelligence platforms.

We continue to help protect customer data via our global data privacy framework that establishes data privacy practices, design principles and guidelines that enable us to demonstrate compliance with data privacy laws and regulations where HSBC UK operates.

To help our employees keep abreast of data privacy laws and regulations we continue to hold data privacy awareness training highlighting our commitment to protect personal data for customers, employees and stakeholders.

Third-party risk management

We utilise third parties for the provision of a range of services, in common with other financial service providers. Risks arising from the use of third-party service providers may be less transparent and therefore more challenging to manage or influence. It is critical that we ensure we have appropriate risk management policies, processes and practices. These should include adequate control over the selection, governance and oversight of third parties, particularly for key processes and controls that could affect operational resilience. Any deficiency in our management of risks arising from the use of third parties could affect our ability to meet strategic, regulatory or customer expectations.

Mitigating actions

We continued to embed our third-party management framework in the first line of defence through a dedicated team. Processes, controls and technology to asses third-party service providers against key criteria and associated control monitoring testing and assurance have been deployed. 

We have worked closely with our third-party providers, which have faced constraints and enhanced oversight on their operations during the Covid-19 outbreak.  

 

 

 

Areas of special interest

During 2020, a number of areas have been identified and considered as part of our top and emerging risks because of the effect they may have on HSBC UK.  

 

Process of UK withdrawal from the European-Union

The UK left the EU on 31 January 2020 and entered a transition period until 31 December 2020. A Trade and Cooperation Agreement between the EU and the UK was agreed on 24 December 2020 and ratified by the UK on 30 December 2020. It includes a joint declaration of cooperation, and, in the coming months, both parties are expected to enter discussions with the aim of agreeing a Memorandum of Understanding establishing the framework for this cooperation. As expected, the current passport arrangement expired at the end of the transition period, and therefore financial Institutions in the UK including HSBC UK lost their existing EU regulatory permissions or 'passporting rights' to continue servicing clients in the European Economic Area ('EEA') from 1 January 2021. The Trade and Cooperation Agreement mainly focused on goods and services but also covered a wide range of other areas, including competition, state aid, tax, fishery, transport, data and security. However, it included limited elements on financial services, and, as a result, did not change HSBC UK's planning in relation to the UK's withdrawal from the EU.

Our programme to manage the impact of the UK leaving the EU has now been largely completed. It was based on the assumption of a scenario whereby the UK exits the transition period without the financial passporting or regulatory equivalence framework that supports cross-border business.  

Legal entity restructuring

Changes in legal entity structure are likely to be minor and limited to our existing branch in Ireland. We previously used our Irish branch, that relied on passporting out of the UK, for the placement of excess Euro deposits. This is no longer possible. To mitigate this, we have on-boarded appropriate counterparties for foreign exchange swaps and repos, which will enable the Markets Treasury team in HSBC UK to manage the euro position in line with how other non-Sterling currencies are managed.  

Customer migrations

The UK's departure from the EU was likely to have an impact on our CMB clients' operating models, including their working capital requirements, investment decisions and financial markets infrastructure access. The vast majority of our impacted EEA incorporated clients have already been migrated from the UK to HSBC Continental Europe (or another EEA entity) and we are in the process of following-up with the residual population.  

Employees

We are supporting our EEA staff resident in the UK with their settlement applications. We have carried out detailed reviews of our credit portfolios to determine those sectors and customers most vulnerable to the UK's exit from the EU and will continue to monitor any implications for our clients in adhering to the new requirements under the agreement. For further details, please see 'Impact of UK economic uncertainty on ECL' on page 36.

 

Ibor transition

Interbank offered rates ('Ibors') are used to set interest rates on hundreds of trillions of US dollars of different types of financial transactions and are used extensively for valuation purposes, risk measurement and performance benchmarking.

The FCA announced in July 2017 that it would no longer continue to persuade or require panel banks to submit rates for the London interbank offered rate ('Libor') after 2021. In addition, the 2016 EU Benchmark Regulation, which aims to ensure the accuracy, robustness and integrity of interest rate benchmarks, has resulted in other regulatory bodies' reassessment of their national benchmarks, including the Euro Overnight Index Average ('Eonia'). As a result, in the UK, an industry-led national working group, the RFRWG is actively discussing the mechanisms for an orderly transition of Libor currencies

The transition process away from Ibors, including the transition of legacy contracts that reference Ibors, exposes HSBC UK to material execution risks, and increases some financial and non-financial risks.

As our Ibor transition programme progresses into the execution phase, resilience and operational risks, are heightened. This is due to an expected increase in the number of new near risk-free rate ('RFR') products being rolled out, compressed timelines for the transition of legacy Ibor contracts and the extensive systems and process changes required to facilitate both new products and the transition. This is being exacerbated by the current interest rate environment where low Libor rates, in comparison with replacement RFR, could affect decisions to transition contracts early, further compressing transition timelines. Regulatory compliance, legal and conduct risks may also increase as a result of both the continued sale of products referencing Ibors, and the sale of new products referencing RFRs, principally due to the lack of established market conventions, and the timelines for transition. 

Financial risks resulting from the discontinuation of Ibors and the development of market liquidity in RFRs will also affect HSBC UK throughout transition. The differences in Ibor and RFR interest rates will create a basis risk that we need to actively manage through appropriate financial hedging. Basis risk in the banking book may arise out of the asymmetric adoption of RFRs across assets and liabilities and across currencies and products. In addition, this may limit the ability to hedge effectively.

The continued orderly transition from Ibors continues to be the programme's key objective through 2021 and can be broadly grouped into two workstreams: the development of alternative rate and RFR product capabilities and the transition of legacy Ibor contracts.

Development of alternative rate and RFR product capabilities

All global businesses have actively developed and implemented system and operational capabilities for alternative rates, such as policy interest rates, and replacement RFR products during 2020. The offering of RFR products is expected to be expanded, with further releases for products referencing the Sterling Overnight Index Average ('Sonia') and the Secured Overnight Financing Rate ('SOFR') set for the first half of 2021, in addition to products linked to other RFRs set to be released throughout 2021.

These developments and the reduced suitability of Ibor products have enabled HSBC UK to cease selling certain Ibor linked products. Notably, Libor-linked loan products have been demised for Business Banking and mid-market enterprise segments.

While Ibor sales do continue, Ibor exposures that have post-2021 maturities are reducing, aided by market compression of Ibor trades, and undertaking new transactions in alternative rate and replacement RFR products, as market liquidity builds.

Transition legacy contracts

In addition to offering alternative rate and replacement RFR products, the development of new product capabilities will also help facilitate the transition of legacy Ibor and Eonia products. HSBC UK has begun to engage clients to determine their ability to transition in line with the readiness of alternative rate and replacement RFR products. The Covid-19 outbreak and the interest rate environment may have affected clients' abilities to transition early, and has resulted in compressed timelines for the transition of legacy Ibor contracts. However, for some US dollar Libor legacy contracts, this timing risk may be mitigated in part by the recent announcement by the Libor benchmark administrator, ICE Benchmark Administration Limited, to consult on extending the publication of overnight and one, three, six and 12 month US dollar Libor settings to 30 June 2023. Despite the proposed extension, regulatory and industry guidance has been clear that market participants should cease writing new US dollar Libor contracts as soon as is practicable, and in any event by the end of 2021. While the extended deadline will result in additional US dollar Libor transactions maturing before cessation, not all of them will, so it is possible that other proposed solutions, including legislative relief, will still be needed. The FCA continues to consult with the industry about how best to manage 'tough legacy' scenarios, including possibly using a synthetic Libor.

For HSBC UK's loan book, our global businesses have developed commercial strategies that include active client engagement and communication, providing detailed information on RFR products to determine our clients' abilities to transition to a suitable alternative rate or replacement RFR product, before Ibor cessation.

Financial instruments impacted by Ibor reforms

(Audited)

Amendments to IFRSs issued in August 2020 (Interest Rate

 

Benchmark Reform Phase 2) represents the second phase of the IASB's project on the effects of interest rate benchmark reform, addressing issues affecting financial statements when changes are made to contractual cash flows and hedging relationships as a result of reform.

Under these amendments, changes made to a financial instrument measured at other than fair value through profit and loss that are economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change in the interest rate benchmark. In addition, hedge accounting will not be discontinued solely because of the replacement of the interest rate benchmark if the hedge meets other hedge accounting criteria. These amendments apply from 1 January 2021 with early adoption permitted. HSBC UK has adopted the amendments from 1 January 2020.

 

 

 

 

 

 

 

Financial instruments yet to transition to alternative benchmarks, by main benchmark

 

USD Libor

GBP Libor

Eonia

Others1

At 31 Dec 2020

£m

£m

£m

£m

Non-derivative financial assets2

1,717 

 

24,900 

 

 

25 

 

Non-derivative financial liabilities2

615 

 

2,279 

 

 

 

Derivative notional contract amount

2,565 

 

5,728 

 

1,264 

 

 

1  Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks: five London interbank offered rates ('Libor'), the Euro Overnight Index Average ('Eonia') and the Singapore Interbank Offered Rate ('Sibor').

2  Gross carrying amount excluding allowances for expected credit losses.

 

The amounts in the above table provide an indication of the extent of HSBC UK's exposure to the Ibor benchmarks which are due to be replaced. Amounts are in respect of financial instruments that:

contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark;

have a contractual maturity date after 31 December 2021, the date by which Libor is expected to cease;

are recognised on HSBC UK's consolidated balance sheet.

The administrator of Libor, ICE Benchmark Administration ('IBA'), has announced a proposal to extend the publication date of most USD Libor tenors until 30 June 2023. Publication of one-week and two-month tenors will cease after 31 December 2021. This proposal, if endorsed, would reduce the amounts presented in the above table as some financial instruments included will reach their contractual maturity date prior to 30 June 2023.

 

Risks related to Covid-19

The Covid-19 pandemic and its effect on the global economy have impacted HSBC UK's customers and our performance, and the future effects of the pandemic are uncertain. There remains a risk of subsequent waves of infection, as evidenced by recently emerged  new, more transmissible variants of the virus. Renewed outbreaks emphasise the ongoing threat of Covid-19 even in countries that have recorded lower than average cases so far.

Government restrictions imposed around the world to limit the spread of Covid-19 resulted in a sharp contraction in global economic activity during 2020, including in the UK. The extent of any recovery in economic activity and reduction in the UK's  unemployment rate in 2021 will be dependent upon successful rollout of the vaccination programme, coupled with effective non-pharmacological measures to contain the virus, such as the 'track and trace' system and restrictions to mobility that will lead to a decline in infections across over the course of the year. There is a high degree of uncertainty associated with economic forecasts in the current environment and the degree of uncertainty for the UK will be influenced by the evolution of the pandemic, associated policy responses and any impacts felt from the new Trade and Cooperation Agreement in place between the UK and the EU from 1 January 2021.

The UK Government has deployed extensive measures to support households and corporates. Measures implemented include income support to households and funding support to corporates, while measures taken by the Bank of England include cuts to interest rates, support to funding markets and asset purchases. These measures are expected to be unwound gradually as government restrictions ease and as economic activity increases. The Bank of England is expected to maintain record-low interest rates for a considerable period of time and the debt burden of the UK Government is expected to rise significantly.

HSBC UK has initiated numerous measures to support our personal and business customers through these challenging times, including mortgage assistance, payment holidays, the waiving of certain fees and charges, and liquidity relief for businesses facing market uncertainty and supply chain disruption. We are also working closely with the UK Government and its supporting schemes that focus on the parts of the UK economy most impacted by Covid-19. We have been a provider of the UK Government's Coronavirus Business Interruption Loan Scheme from the beginning. For details of our customer relief programmes see pages 30.

It is recognised that above measures expose HSBC UK to heightened risks. The rapid introduction and varying nature of the UK Government support schemes, as well as customer expectations, has led to increased operational risks for HSBC UK with large-scale changes implemented in a short period of time. These risks have included complex conduct considerations, increased reputational risk and increased risk of fraud, which are likely to be heightened further as and when the UK Government support schemes are unwound. We are focused upon avoiding and mitigating any conduct risks that may arise from the implementation decisions we have had to make and also those that may be created if our customers find themselves in financial difficulties as a result of Covid-19. 

At 31 December 2020, our CET1 ratio was 15.2% compared with 13.0% at 31 December 2019, and our liquidity coverage ratio ('LCR') was 198% compared with 165% at 31 December 2019. Our capital, funding and liquidity position is expected to help us to continue supporting our customers throughout the Covid-19 outbreak.

The Covid-19 outbreak has led to a weakening in UK GDP, a key input used for calculating ECL, and there remains the risk of more adverse economic scenarios given its ongoing impact. Furthermore, ECL will also arise from parts of our business impacted by the disruption to supply chains. The impact will vary by sectors of the UK economy, with retail, transport, hospitality and commercial real estate among those facing distress. The impact of the outbreak on the long-term prospects of businesses in these sectors is uncertain and may lead to significant ECL charges on specific exposures, which may not be fully captured in current ECL estimates. In addition, in times of crisis, fraudulent activity is often more prevalent, leading to potentially significant ECL charges or operational losses. The significant changes in economic and market drivers, customer behaviours and government actions caused by Covid-19 have materially impacted the performance of financial models. IFRS 9 model performance has been dramatically impacted over the course of 2020 which has increased reliance on management judgment in determining the appropriate level of ECL estimates. These models are driven by forecasts of economic factors such as GDP and unemployment. Many of these models were not able to deliver reliable outputs given the dramatic volatility in these forecasts, many of which significantly exceeded observed historic extremes, as a consequence of the global economic crisis. There has also been extensive support measures deployed by the UK Government to support livelihoods and businesses which could not be predicted by models.

In order to address some model limitations and performance issues, we have redeveloped key models used to calculate ECL estimates. These models have been independently validated by the Model Risk Management team and have been assessed as having the ability to deliver reliable credit loss estimates. While this has reduced the reliance on management judgement for determining ECL estimates in some portfolios, the current uncertain economic outlook coupled with the expected end to government support schemes has led to management judgemental adjustments still being required. 

The Model Risk Management team is reviewing IFRS 9 model performance on a quarterly basis to assess whether or not the models in place can deliver reliable outputs. These assessments provide the credit teams with a view of model reliability. IFRS 9 model redevelopment will continue as the economic consequences of the Covid-19 outbreak become clearer over time as economic conditions normalise and actual credit losses occur.

As a result of the Covid-19 outbreak, business continuity responses have been implemented and the majority of service level agreements have been maintained. We have not experienced any major impacts to the supply chain from our third-party service providers due to Covid-19. The risk of damage or theft to HSBC UK's physical assets or criminal injury to our employees remains unchanged and no significant incidents have impacted our buildings or people.

There remain significant uncertainties in assessing the duration of the Covid-19 outbreak and its impact. The actions taken by the UK Government and the BoE, provide an indication of the potential severity of the downturn and post-recovery environment, which from a commercial, regulatory and risk perspective could be significantly different to past crises and persist for a prolonged period. A continued prolonged period of significantly reduced economic activity as a result of the impact of the outbreak would have a materially adverse effect on our financial condition, results of operations, prospects, liquidity, capital position and credit ratings. We continue to monitor the situation closely, and given the novel or prolonged nature of the outbreak, additional mitigating actions may be required.

 

 

Interest rate environment

The Bank Rate in the UK has been further reduced by the  BoE since the timelines and path for economic recovery has been adversely impacted and the likelihood of negative rates in the UK has increased. This raises a number of risks and concerns.

We have a programme of work that is confirming our operational capabilities for negative rates and improving our readiness where required. This programme is focused upon ensuring that our systems and processes can accommodate zero, near zero or negative rates and determining the resulting impacts on our customers, while being fully mindful of all regulatory constraints.  For some products, deposit or asset rates can be floored at zero, or decisions may be made not to pass through the negative rates to customers. This approach results in our commercial margins being compressed, which will be reflected in our profitability. The pricing of this risk will need to be carefully considered, given the significant impact that prolonged low interest rates are likely to have on our net interest income. If there is a rebalancing of portfolios toward fee-generating business and trading activities to offset reduced profits, we may become exposed once rates start rising again. These factors may challenge the long-term profitability of the banking sector, including HSBC UK.

 

 

 

 

 

Our material banking risks

The material risk types associated with our banking operations are described in the following tables.

Description of risks - banking operations

Risk

Arising from

Measurement, monitoring and management of risk

Credit risk (see page 28)

 

The risk of financial loss if a customer or counterparty fails to meet an obligation under a contract.

Credit risk arises principally from direct lending, trade finance and leasing business, but also from certain other products such as guarantees and derivatives.

Credit risk is:

measured as the amount that could be lost if a customer or counterparty fails to make repayments;

monitored using various internal risk management measures and within limits approved by individuals within a framework of delegated authorities; and

managed through a robust risk control framework that outlines clear and consistent policies, principles and guidance for risk managers.

Treasury Risk (see page 52)

 

The risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural foreign exchange exposures and changes in market interest rates, and including the financial risks arising from historic and current provision of pensions and other post-employment benefits to staff and their dependants.

Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment.

Treasury risk is:

measured through appetites set as target and ratios; 

monitored and projected through appetites and using stress and scenario testing and;

managed through control resources in conjunction with risk profiles and cashflows.

Market risk (see page 57)

 

The risk that movements in market factors, including but not limited to interest rates, credit spreads and foreign exchange rates will reduce our income or the value of our portfolios.

 

Exposure to market risk is separated into two portfolios:

trading portfolios; and

non-trading portfolios.

Market risk is:

measured using sensitivities, value at risk ('VaR') and stress testing, giving a detailed picture of potential gains and losses for a range of market movements and scenarios, as well as tail risks over specified time horizons;

monitored using VaR sensitivities, stress testing and other measures, including the sensitivity of net interest income and the sensitivity of structural foreign exchange; and

managed using risk limits approved by the risk management meeting ('RMM').

Resilience risk (see page 59)

 

Resilience risk is the risk that we are unable  to provide critical services to our customers, affiliates, and counterparties as a result of sustained and significant operational disruption.

Resilience risk arises from failures or inadequacies in processes, people, systems or external events. These may be driven by rapid technological innovation, changing behaviours of our consumers, cyber threats and attacks, cross border dependencies, and third party relationships.

Resilience risk is:

measured through a range of metrics with defined maximum acceptable impact tolerances and against our agreed risk appetite; 

monitored through oversight of enterprise processes, risks, controls and strategic change programmes; and

managed by continuous monitoring and thematic review.

Regulatory compliance risk (see page 60)

 

The risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice, and incur fines and penalties and suffer damage to our business.

Regulatory compliance risk arises from the risks associated with breaching our duty to our customers and other counterparties, inappropriate market conduct and breaching other regulatory requirements.

Regulatory compliance risk is:

measured by reference to identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our regulatory compliance teams;

monitored against the first line of defence risk and control assessments, the results of the monitoring and control activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and

managed by establishing and communicating appropriate policies and procedures, training employees in them, and monitoring activity to assure their observance. Proactive risk control and/or remediation work is undertaken where required.

Financial crime and fraud risk (see page 61)

The risk that we knowingly or unknowingly help parties to commit or to further potentially illegal activity including both internal and external fraud.

Financial crime and fraud risk  arises from day-to-day banking operations.

Financial crime and fraud risk is:

measured by reference to identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our financial crime risk teams;

monitored against our financial crime  risk appetite statement and metrics, the results of the monitoring and control activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and

managed by establishing and communicating appropriate policies and procedures, training employees in them, and monitoring activity to ensure their observance. Proactive risk control and/or remediation work is undertaken where required.

Model risk (see page 62)

Model risk is the potential for adverse consequences from business decisions informed by models, which can be exacerbated by errors in methodology, design or the way they are used.

Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models. 

 

Model risk is:

measured by reference to model performance tracking and the output of detailed technical reviews, with key metrics including model review statuses and findings;

monitored against model risk appetite statements, insight from the independent review function, feedback from internal and external audits, and regulatory reviews;

managed by creating and communicating appropriate policies, procedures and guidance, training employees in their application, and supervising their adoption to ensure operational effectiveness.

 

Credit risk overview

Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from other products such as guarantees and credit derivatives.

 

Credit risk management

(Audited)

Of the risks in which we engage, credit risk generates the largest regulatory capital requirements.

The principal objectives of our credit risk management are:

to maintain across HSBC UK a strong culture of responsible lending and a robust risk policy and control framework;

to both partner and challenge the businesses in defining, implementing, and continually re-evaluating our risk appetite under actual and scenario conditions; and

to ensure there is independent, expert scrutiny of credit risks, their costs and mitigation.

Within HSBC UK, the Credit Risk function is headed by the Chief Risk Officer who reports to the Chief Executive Officer, with a functional reporting line to the Group Chief Risk Officer.

Its responsibilities are:

• to formulate credit policy. Compliance, subject to approved dispensations, is mandatory for all operating companies which must develop local credit policies consistent with group policies that very closely reflect HSBC Group policy;

• to guide operating companies on the group's appetite for credit risk exposure to specified market sectors, activities and banking products and controlling exposures to certain higher-risk sectors;

• to undertake an independent review and objective assessment of risk. Credit risk assesses all credit facilities and exposures over designated limits, prior to the facilities being committed to customers or transactions being undertaken;

to monitor the performance and management of portfolios across the group;

• to control exposure to sovereign entities, banks and other financial institutions, as well as debt securities which are not held solely for the purpose of trading;

to set policy on large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography do not become excessive in relation to the group's capital base, and remain within internal and regulatory limits;

to maintain and develop the risk rating framework, systems and models through appropriate governance;

to report on retail portfolio performance, high risk portfolios, risk concentrations, large impaired accounts, impairment allowances and stress testing results and recommendations to HSBC UK's RMM, Risk Committee and Board; and

to act on behalf of the group as the primary interface, for credit-related issues, with the BoE, the PRA, the FCA, rating agencies, analysts and counterparts in major banks and
non-bank financial institutions.

 

Concentration of credit risk exposure

(Audited)

Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or are engaged in similar activities, or operate in the same geographical areas/industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. A number of controls and measures are used to minimise undue concentration of exposure in the portfolios across industry, country and customer groups. These include portfolio and counterparty limits, approval and review controls, and stress testing.

 

Credit quality of financial instruments

(Audited)

Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the group to support the calculation of our minimum credit regulatory capital requirement.

The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and retail lending businesses, and the external ratings attributed by external agencies to debt securities.

For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related customer risk rating ('CRR') to external credit rating.  

 

Wholesale lending

The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default ('PD'). All corporate customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the Basel approach adopted for the exposure. Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. This mapping between internal and external ratings is indicative and may vary over time.

Retail lending

Retail lending credit quality is based on a 12-month point-in-time probability-weighted probability of default ('PD').

 

 

Credit quality classification

 

 

Debt securities and other bills

Wholesale lending

Retail lending

 

Footnotes

External
credit rating

Internal
credit rating

12-month Basel
probability of
default %

Internal
credit rating

12-month
probability-
weighted PD %

Quality classification

1, 2

 

 

 

 

 

Strong

 

A- and above

CRR1 to CRR2

0.000-0.169

Band 1 and 2

0.000-0.500

Good

 

BBB+ to BBB-

CRR3

0.170-0.740

Band 3

0.501-1.500

Satisfactory

 

BB+ to B and unrated

CRR4 to CRR5

0.741-4.914

Band 4 and 5

1.501-20.000

Sub-standard

 

B- to C

CRR6 to CRR8

4.915-99.999

Band 6

20.001-99.999

Credit-impaired

 

Default

CRR9 to CRR10

100.000 

 

Band 7

100.000 

 

                 

1  Customer risk rating ('CRR').

2  12-month point-in-time probability-weighted probability of default ('PD').

 

Quality classification definitions

'Strong' exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default.

'Good' exposures demonstrate a good capacity to meet financial commitments, with low default risk.

'Satisfactory' exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate
default risk.

'Sub-standard' exposures require varying degrees of special attention and default risk is of greater concern.

'Credit-impaired' exposures have been assessed as described on Note 1.2(g) on the financial statements.

 

Renegotiated loans and forbearance

(Audited)

'Forbearance' describes concessions made on the contractual terms of a loan in response to an obligor's financial difficulties.

A loan is classed as 'renegotiated' when we modify the contractual payment terms on concessionary terms because we have significant concerns about the borrowers' ability to meet contractual payments when due. Non-payment-related concessions (e.g. covenant waivers), while potential indicators of impairment, do not trigger identification as renegotiated loans.

Where customers are in (or approaching) financial difficulty, due consideration is given to provide assistance to customers (either on a temporary or permanent basis) to help them meet the contractual commitments relating to their account. The HSBC UK Customer in Financial Difficulty policy provides guidance on when customers are considered to be in financial difficulty and the various forbearance tools that are available to assist them. It is recognised that customers find themselves in financial difficulties as a result of many different situations and Financial Support staff speaking with customers will often be best placed to understand the individual circumstances and needs of specific customers. Prior to agreeing a forbearance an appropriate level of assessment on a customer's affordability is completed to ensure any solution agreed with the customer is suitable, sustainable  and will achieve a fair outcome for the customer.

 

Refinance risk

Personal lending

Interest only mortgages incorporate bullet payments at the point of final maturity. To reduce refinance risk, an initial on-boarding assessment of customers' affordability is made on a capital repayment basis and every customer has a credible defined repayment strategy. Additionally, the customer is contacted  during the mortgage term to check the status of the repayment strategy. In situations where it is identified that a borrower is expected not to be able to repay a bullet/balloon payment, the customer is offered advice and options to help them repay the loan in accordance with their loan agreement. In the event that this is not possible, the customer will either default on the repayment or it is likely that the bank may need to apply forbearance to the loan. In either circumstance this gives rise to a loss event and an impairment allowance will be considered where appropriate.  

Wholesale lending

Many types of wholesale lending incorporate bullet/balloon payments at the point of final maturity; often, the intention or assumption is that the borrower will take out a new loan to settle the existing debt. Where this is true the term refinance risk refers generally to the possibility that, at the point that such a repayment is due, a borrower cannot refinance by borrowing to repay existing debt. In situations where it is identified that a borrower is expected not to be able either to repay a bullet/balloon payment or to be capable of refinancing their existing debt on commercial terms then the customer will either default on the repayment or it is likely that the bank may need to refinance the loan on terms it would not normally offer in the ordinary course of business. In either circumstance this gives rise to a loss event and the loan will be considered impaired.  

 

Impairment assessment

(Audited)

For details of our impairment policies on loans and advances and financial investments, see Note 1.2(g) on the Financial Statements.

 

Write-off of loans and advances

(Audited)

For details of our policy on the write-off of loans and advances, see Note 1.2(g) on the Financial Statements.

Personal lending

Property collateral for residential mortgages is repossessed and sold on behalf of the borrower only when all normal debt recovery procedures have been unsuccessful. Any portion of the balance not covered following the realisation of security is written-off. Unsecured personal lending products are normally written off, when there is no realistic prospect of full recovery.

Wholesale lending

Wholesale loans and advances are written off where normal collection procedures have been unsuccessful to the extent that there appears no realistic prospect of repayment. These procedures may include a referral of the business relationship to a debt recovery company. Debt reorganisation will be considered at all times and may involve, in exceptional circumstances and in the absence of any viable alternative, a partial write-off in exchange for a commitment to repay the remaining balance.

In the event of bankruptcy or similar proceedings, write-off for both personal and wholesale lending may occur earlier than at the periods stated above. Collections procedures may continue after write-off.

 

Customer relief programmes

In response to the Covid-19 outbreak, governments and regulators around the world have introduced a number of support measures for both personal and wholesale customers (market-wide schemes). The following table presents the number of personal accounts/wholesale customers and the associated drawn loan values of customers under these schemes and HSBC UK specific measures at 31 December 2020.

Personal lending

 

 

At 31 Dec 2020

Personal lending market-wide schemes

 

 

Number of accounts granted mortgage customer relief

000s

 

Drawn loan value of customers granted mortgage customer relief

£m

1,026 

 

Number of accounts granted other personal lending customer relief

000s

15 

 

Drawn loan value of customers granted other personal lending customer relief

£m

102 

 

Market-wide schemes and bank-specific measure mortgage relief as a proportion of total mortgage loans and advances

%

0.9 

 

Market-wide schemes and bank-specific measures other personal lending relief as a proportion of total other personal lending loans and advances

%

0.8 

 

 

 

 

Wholesale lending

Wholesale lending market-wide schemes

 

 

Number of customers under market-wide measures

000s

226 

 

Drawn loan value of customers under market-wide schemes

£m

9,899 

 

Wholesale lending bank-specific measures

 

 

Number of customers under bank-specific measures

000s

 

Drawn loan value of customers under bank-specific measures

£m

255 

 

Total wholesale lending to major markets under market-wide schemes and bank-specific measures

 

 

Number of customers

000s

226 

 

Drawn loan value

£m

10,154 

 

Total gross carrying amount for wholesale lending

£m

70,181

Market-wide schemes as a proportion of total wholesale loans and advances

%

14.1 

 

Bank-specific measures as a proportion of total wholesale lending loans and advances

%

0.4 

 

Market-wide schemes and bank-specific measures as a proportion of total wholesale lending loans and advances

%

14.5 

 

 initial granting of customer relief does not automatically trigger a migration to Stage 2 or 3. However information provided by payment deferrals are considered in the context of other reasonable and supportable information, as part of the overall assessment for significant increase in credit risk ('SICR') and for credit impairment, to identify loans for which lifetime ECL is appropriate. An extension in payment deferral does not automatically result in Stage 2 or Stage 3. The key accounting and credit risk judgement is whether the economic effects of Covid-19 on the customer are likely to be temporary, so that they do not result in an SICR over the lifetime of the loan, and do not indicate that a concession is being made in respect of financial difficulty that would be consistent with Stage 3. The following narrative provides further details on the schemes offered:

Market-wide schemes

Personal Lending

Mortgages

Customer relief granted on mortgages primarily consists of payment holidays or partial payment deferrals. Relief is offered for an initial period of three months and can be further extended for up to a further three months in certain circumstances. No payment is required from the customer during this period (though with a partial payment deferral the customer has expressed a desire to make a contribution) and interest continues to be charged as usual. The customers' arrears status is not worsened from utilisation of these schemes.

Other personal lending payment holidays

Customer relief is granted for an initial period of three months and can be extended for a further three months. The maximum relief value is up to the due payment amount during the period.

Wholesale Lending

The primary relief granted under government schemes consists of the Bounce Back Loan Scheme, Coronavirus Business Interruption Loan Scheme and Coronavirus Large Business Interruption Loan Scheme. Since their initial launch, the application deadline for these schemes has been extended until 31 March 2021. The key features of these schemes are as follows:

 

The Bounce Back Loan Scheme provides SME with loans of up to £50,000 for a maximum period of six years. Interest is charged at 2.5% and the government pay the fees and interest for the first 12 months. No capital repayment is required by the customer for the first 12 months of the scheme. A government guarantee of 100% is provided under the scheme. Before their first payment is due customers can extend the term of the loan to 10 years, move to interest-only repayments for a period of six months (customers can use this option up to three times) and/or pause repayments for a period of six months (customers can use this option once).

The Coronavirus Business Interruption Loan Scheme provides SME that have a turnover of less than £45m with loans of up to £5m for a maximum period of six years. Interest is charged between 3.49% and 3.99% above the UK base rate and no capital repayment is required by the customer for the first 12 months of the scheme. A government guarantee of up to 80% is provided under the scheme.

The Coronavirus Large Business Interruption Loan Scheme provides medium- and large-sized enterprises that have a turnover in excess of £45m with loans of up to £200m. The interest rate and tenor of the loan are negotiated on commercial terms. A government guarantee of 80% is provided under the scheme.

 

 

HSBC UK specific measures

Wholesale lending

In addition to the above market-wide schemes, HSBC UK is offering capital repayment holidays to CMB customers. Relief is offered on a preferred term of six months. However, some are granted for three months with the option of an extension. Interest continues to be paid as usual. 

Credit risk in 2020

The credit risk effects of the Covid-19 outbreak and the UK withdrawal from the EU continue to be carefully followed by the group. Certain industry segments have found themselves challenged and this trend is likely to continue, with some customers having been obliged to take on additional balance sheet leverage.

Following a temporary pause in the issuance of default notices in WPB this activity has now recommenced.

More details analysis of ECL can be found on pages 36 and 41.

A summary of our current policies and practices regarding credit risk is set out on pages 28 and 29.

Summary of credit risk

The disclosure below presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL.

The following table provides an overview of the group and bank's credit risk exposure. As the majority of the group's financial instruments are held by the bank, the remaining IFRS 7 credit disclosures are provided on a group only basis.

 

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied

(Audited)

 

 

 

 

The group

31 Dec 2020

31 Dec 2019

Gross carrying/nominal amount

Allowance for

ECL1

Gross carrying/nominal amount

Allowance for

ECL1

£m

£m

£m

£m

Loans and advances to customers at amortised cost

194,426 

 

(3,193)

 

184,734 

 

(1,678)

 

-  personal

124,245 

 

(1,449)

 

117,669 

 

(738)

 

-  corporate and commercial

67,354 

 

(1,701)

 

64,537 

 

(933)

 

-  non-bank financial institutions

2,827 

 

(43)

 

2,528 

 

(7)

 

Loans and advances to banks at amortised cost

1,515 

 

(1)

 

1,390 

 

(1)

 

Other financial assets measured at amortised cost

80,486 

 

(2)

 

41,871 

 

 

-  cash and balances at central banks

76,429 

 

 

37,030 

 

 

-  items in the course of collection from other banks

253 

 

 

504 

 

 

-  reverse repurchase agreements - non-trading

2,485 

 

 

3,014 

 

 

-  prepayments, accrued income and other assets2

1,319 

 

(2)

 

1,323 

 

 

Total gross carrying amount on-balance sheet

276,427 

 

(3,196)

 

227,995 

 

(1,679)

 

Loans and other credit related commitments

70,215 

 

(190)

 

63,858 

 

(60)

 

-  personal

39,715 

 

(16)

 

37,422 

 

(6)

 

-  corporate and commercial

29,568 

 

(172)

 

25,599 

 

(54)

 

-  non-bank financial institutions

932 

 

(2)

 

837 

 

 

Financial guarantees

935 

 

(17)

 

1,077 

 

(5)

 

-  personal

118 

 

 

25 

 

 

-  corporate and commercial

573 

 

(17)

 

685 

 

(5)

 

-  non-bank financial institutions

244 

 

 

367 

 

 

Total nominal amount off-balance sheet3
 

71,150 

 

(207)

 

64,935 

 

(65)

 

At 31 Dec
 

347,577 

 

(3,403)

 

292,930 

 

(1,744)

 

 

 

 

 

 

 

Fair value

Memorandum

allowance

for ECL4

Fair value

Memorandum allowance for
ECL4

 

£m

£m

£m

£m

Debt instruments measured at fair value through other comprehensive income ('FVOCI')

19,309 

 

(6)

 

19,737 

 

(1)

 

1  The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

2  Includes only those financial instruments which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 82 includes both financial and non-financial assets.

3  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

4  Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the income statement.

 

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied

(Audited)

 

 

 

 

 

31 Dec 2020

31 Dec 2019

 

Gross carrying/
nominal amount

Allowance for

ECL1

Gross carrying/nominal amount

Allowance for ECL1

The bank

£m

£m

£m

£m

Loans and advances to customers at amortised cost

189,632 

 

(2,832)

 

175,301 

 

(1,400)

 

-  personal

120,765 

 

(1,208)

 

110,274 

 

(581)

 

-  corporate and commercial

60,079 

 

(1,581)

 

54,691 

 

(813)

 

-  non-bank financial institutions

8,788 

 

(43)

 

10,336 

 

(6)

 

Loans and advances to banks at amortised cost

3,791 

 

(1)

 

4,644 

 

(1)

 

Other financial assets measured at amortised cost

80,221 

 

(2)

 

41,874 

 

 

-  cash and balances at central banks

76,419 

 

 

37,020 

 

 

-  items in the course of collection from other banks

137 

 

 

355 

 

 

-  reverse repurchase agreements - non-trading

2,485 

 

 

3,014 

 

 

-  prepayments, accrued income and other assets2

1,180 

 

(2)

 

1,485 

 

 

Total gross carrying amount on-balance sheet

273,644 

 

(2,835)

 

221,819 

 

(1,401)

 

Loans and other credit related commitments

55,496 

 

(182)

 

49,432 

 

(57)

 

-  personal

28,107 

 

(12)

 

25,891 

 

(5)

 

-  corporate and commercial

26,546 

 

(168)

 

23,041 

 

(52)

 

-  non-bank financial institutions

843 

 

(2)

 

500 

 

 

Financial guarantees

935 

 

(17)

 

1,066 

 

(5)

 

-  personal

118 

 

 

15 

 

 

-  corporate and commercial

573 

 

(17)

 

684 

 

(5)

 

-  non-bank financial institutions

244 

 

 

367 

 

 

Total nominal amount off-balance sheet3

56,431 

 

(199)

 

50,498 

 

(62)

 

At 31 Dec

330,075 

 

(3,034)

 

272,317 

 

(1,463)

 

 

 

 

 

 

 

Fair value

Memorandum

allowance

for ECL4

Fair value

Memorandum allowance for
ECL4

 

£m

£m

£m

£m

Debt instruments measured at fair value through other comprehensive income ('FVOCI')

19,309 

 

(6)

 

19,737 

 

(1)

 

The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

Includes only those financial instruments which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the bank's balance sheet on page 85 includes both financial and non-financial assets.

Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the income statement.

 

 

The following table provides an overview of the group's credit risk by stage and industry, and the associated ECL coverage. The financial assets recorded in each stage have the following characteristics:

Stage 1: unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is recognised.

Stage 2: a significant increase in credit risk has been experienced since initial recognition on which a lifetime ECL is recognised.

 


Stage 3: objective evidence of impairment, and are therefore considered to be in default or otherwise credit-impaired on which a lifetime ECL is recognised.

POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime ECL is recognised.

 

 

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at

31 December 2020

(Audited)

 

Gross carrying/nominal amount1

 

Allowance for ECL

 

ECL coverage %

 

 

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

%

%

%

%

Loans and advances to customers at amortised cost

162,033 

 

28,802 

 

3,555 

 

36 

 

194,426 

 

(467)

 

(1,651)

 

(1,053)

 

(22)

 

(3,193)

 

0.3 

 

5.7 

 

29.6 

 

61.1 

 

1.6 

 

-  personal

116,171 

 

6,871 

 

1,203 

 

 

124,245 

 

(161)

 

(893)

 

(395)

 

 

(1,449)

 

0.1 

 

13.0 

 

32.8 

 

 

1.2 

 

-  corporate and commercial

43,844 

 

21,152 

 

2,322 

 

36 

 

67,354 

 

(300)

 

(728)

 

(651)

 

(22)

 

(1,701)

 

0.7 

 

3.4 

 

28.0 

 

61.1 

 

2.5 

 

-  non-bank financial institutions

2,018 

 

779 

 

30 

 

 

2,827 

 

(6)

 

(30)

 

(7)

 

 

(43)

 

0.3 

 

3.9 

 

23.3 

 

 

1.5 

 

Loans and advances to banks at amortised cost

1,514 

 

 

 

 

1,515 

 

(1)

 

 

 

 

(1)

 

0.1 

 

 

 

 

0.1 

 

Other financial assets measured at amortised cost

80,411 

 

54 

 

20 

 

 

80,486 

 

(2)

 

 

 

 

(2)

 

 

 

 

 

 

Loan and other credit-related commitments

63,443 

 

6,486 

 

285 

 

 

70,215 

 

(81)

 

(70)

 

(38)

 

(1)

 

(190)

 

0.1 

 

1.1 

 

13.3 

 

100.0 

 

0.3 

 

-  personal

39,358 

 

290 

 

67 

 

 

39,715 

 

(15)

 

(1)

 

 

 

(16)

 

 

0.3 

 

 

 

 

 - corporate and commercial

23,223 

 

6,138 

 

206 

 

 

29,568 

 

(65)

 

(68)

 

(38)

 

(1)

 

(172)

 

0.3 

 

1.1 

 

18.4 

 

100.0 

 

0.6 

 

-  financial

862 

 

58 

 

12 

 

 

932 

 

(1)

 

(1)

 

 

 

(2)

 

0.1 

 

1.7 

 

 

 

0.2 

 

Financial guarantee and similar contracts

674 

 

236 

 

25 

 

 

935 

 

(7)

 

(7)

 

(3)

 

 

(17)

 

1.0 

 

3.0 

 

12.0 

 

 

1.8 

 

-  personal

106 

 

12 

 

 

 

118 

 

 

 

 

 

 

 

 

 

 

 

 - corporate and commercial

350 

 

198 

 

25 

 

 

573 

 

(7)

 

(7)

 

(3)

 

 

(17)

 

2.0 

 

3.5 

 

12.0 

 

 

3.0 

 

-  financial

218 

 

26 

 

 

 

244 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec 2020

308,075 

 

35,579 

 

3,885 

 

38 

 

347,577 

 

(558)

 

(1,728)

 

(1,094)

 

(23)

 

(3,403)

 

0.2 

 

4.9 

 

28.2 

 

60.5 

 

1.0 

 

1  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

 

Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due ('DPD') and are transferred from Stage 1 to Stage 2. The following disclosure below presents the ageing of Stage 2 financial assets. It distinguishes those assets that are

 

classified as Stage 2 when they are less than 30 days past due (1-29 DPD) from those that are due to ageing and are more than 30 DPD (30 and >DPD). Past due financial instrument are those loans where customers have failed to make payments in accordance with the contractual terms of their facilities.

 

 

Stage 2 days past due analysis at 31 December 2020

(Audited)

 

 

Gross  carrying amount

Allowance for ECL

ECL coverage %

 

Stage 2

Of which:

Of which:

Of which:

Stage 2

Of which:

Of which:

Of which:

Stage 2

Of which:

Of which:

Of which:

 

 

Up-to-

date1

1 to 29

DPD2,3

30 and > DPD2,3

 

Up-to-

date1

1 to 29

DPD2,3

30 and > DPD2,3

 

Up-to-

date1

1 to 29

DPD2,3

30 and > DPD2,3

 

£m

£m

£m

£m

£m

£m

£m

£m

%

%

%

%

Loans and advances to customers at amortised cost:

28,802 

 

28,307 

 

334 

 

161 

 

(1,651)

 

(1,520)

 

(71)

 

(60)

 

5.7 

 

5.4 

 

21.3 

 

37.3 

 

-  personal

6,871 

 

6,428 

 

298 

 

145 

 

(893)

 

(783)

 

(59)

 

(51)

 

13.0 

 

12.2 

 

19.8 

 

35.2 

 

-  corporate and commercial

21,152 

 

21,100 

 

36 

 

16 

 

(728)

 

(707)

 

(12)

 

(9)

 

3.4 

 

3.4 

 

33.3 

 

56.3 

 

-  non-bank financial institutions

779 

 

779 

 

 

 

(30)

 

(30)

 

 

 

3.9 

 

3.9 

 

 

 

Loans and advances to banks at amortised cost

 

 

 

 

 

 

 

 

 

 

 

 

Other financial assets measured at amortised cost

54 

 

54 

 

 

 

 

 

 

 

 

 

 

 

1  Wholesale portfolios are included under Up-to-date.  

2  Days past due ('DPD').

3  The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.
 

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at

31 December 2019  (continued)

(Audited)

 

Gross carrying/nominal amount1

 

Allowance for ECL

 

 

ECL coverage %

 

 

 

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

%

%

%

%

Loans and advances to customers at amortised cost

168,351 

 

13,177 

 

3,179 

 

27 

 

184,734 

 

(214)

 

(626)

 

(838)

 

 

(1,678)

 

0.1 

 

4.8 

 

26.4 

 

1.2 

 

0.9 

 

-  personal

112,398 

 

4,069 

 

1,202 

 

 

117,669 

 

(76)

 

(385)

 

(277)

 

 

(738)

 

0.1 

 

9.5 

 

23.0 

 

 

0.6 

 

 - corporate and commercial

53,843 

 

8,710 

 

1,957 

 

27 

 

64,537 

 

(135)

 

(238)

 

(560)

 

 

(933)

 

0.3 

 

2.7 

 

28.6 

 

1.2 

 

1.4 

 

-  non-bank financial institutions

2,110 

 

398 

 

20 

 

 

2,528 

 

(3)

 

(3)

 

(1)

 

 

(7)

 

0.1 

 

0.8 

 

5.0 

 

 

0.3 

 

Loans and advances to banks at amortised cost

1,390 

 

 

 

 

1,390 

 

(1)

 

 

 

 

(1)

 

0.1 

 

 

 

 

0.1 

 

Other financial assets measured at amortised cost

41,834 

 

28 

 

 

 

41,871 

 

 

 

 

 

 

 

 

 

 

 

Loan and other credit-related commitments

61,059 

 

2,456 

 

341 

 

 

63,858 

 

(27)

 

(14)

 

(19)

 

 

(60)

 

0.1 

 

0.6 

 

5.6 

 

0.9 

 

0.1 

 

-  personal

36,974 

 

369 

 

79 

 

 

37,422 

 

(6)

 

 

 

 

(6)

 

 

 

 

 

 

 - corporate and commercial

23,323 

 

2,013 

 

261 

 

 

25,599 

 

(21)

 

(14)

 

(19)

 

 

(54)

 

0.1 

 

0.7 

 

7.3 

 

0.9 

 

0.2 

 

-  financial

762 

 

74 

 

 

 

837 

 

 

 

 

 

 

 

 

 

 

 

Financial guarantee and similar contracts

898 

 

142 

 

37 

 

 

1,077 

 

(2)

 

(2)

 

(1)

 

 

(5)

 

0.2 

 

1.4 

 

2.7 

 

 

0.5 

 

-  personal

25 

 

 

 

 

25 

 

 

 

 

 

 

 

 

 

 

 

 - corporate and commercial

534 

 

114 

 

37 

 

 

685 

 

(2)

 

(2)

 

(1)

 

 

(5)

 

0.4 

 

1.8 

 

2.7 

 

 

0.7 

 

-  financial

339 

 

28 

 

 

 

367 

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec 2019

273,532 

 

15,803 

 

3,566 

 

29 

 

292,930 

 

(244)

 

(642)

 

(858)

 

 

(1,744)

 

0.1 

 

4.1 

 

24.1 

 

1.2 

 

0.6 

 

1  Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

Stage 2 days past due analysis at 31 December 2019  (continued)

(Audited)

 

Gross  carrying amount1

Allowance for ECL

ECL coverage %

 

Stage 2

Of which:

Of which:

Of which:

Stage 2

Of which:

Of which:

Of which:

Stage 2

Of which:

Of which:

 

 

Up-to-date

1 to 29 DPD

30 and > DPD

 

Up-to-date

1 to 29 DPD

30 and > DPD

 

1 to 29 DPD

30 and > DPD

 

£m

£m

£m

£m

£m

£m

£m

%

%

%

Loans and advances to customers at amortised cost:

13,177 

 

12,601 

 

364 

 

212 

 

(626)

 

(535)

 

(43)

 

(48)

 

4.8 

 

11.8 

 

22.6 

 

-  personal

4,069 

 

3,678 

 

242 

 

149 

 

(385)

 

(309)

 

(35)

 

(41)

 

9.5 

 

14.5 

 

27.5 

 

-  corporate and commercial

8,710 

 

8,525 

 

122 

 

63 

 

(238)

 

(223)

 

(8)

 

(7)

 

2.7 

 

6.6 

 

11.1 

 

-  non-bank financial institutions

398 

 

398 

 

 

 

(3)

 

(3)

 

 

 

0.8 

 

 

 

Loans and advances to banks at amortised cost

 

 

 

 

 

 

 

 

 

 

 

Other financial assets measured at amortised cost

28 

 

28 

 

 

 

 

 

 

 

 

 

 

1  Days past due ('DPD'). Up to date accounts in Stage 2 are not shown in amounts presented above.

 

 

Credit exposure

Maximum exposure to credit risk

(Audited)

'Maximum exposure to credit risk' table
The following table presents our maximum exposure before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net exposure to credit risk; and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount; for financial guarantees and similar contracts granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of the committed facilities. The offset in the table relates to amounts where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. No offset has been applied to off-balance sheet collateral. In the case of derivatives the offset column also includes collateral received in cash and other financial assets.

The following table provides information on balance sheet items, offsets, and loan and other credit-related commitments.

The offset on derivatives remains in line with the movements in maximum exposure amounts.

Other credit risk mitigants

While not disclosed as an offset in the following 'Maximum exposure to credit risk' table, other arrangements are in place which reduce our maximum exposure to credit risk. These include a charge over collateral on borrowers' specific assets such as residential properties and collateral held in the form of financial instruments that are not held on balance sheet. See Note 22 for further details of collateral in respect of certain loans and advances and derivatives.

 

 

 

Maximum exposure to credit risk

(Audited)

 

31 Dec 2020

31 Dec 2019

 

Maximum
exposure

Offset

Net

Maximum
exposure

Offset

Net

The group

£m

£m

£m

£m

£m

£m

Loans and advances to customers held at amortised cost

191,233 

 

(3,330)

 

187,903 

 

183,056 

 

(3,804)

 

179,252 

 

-  personal

122,796 

 

 

122,796 

 

116,931 

 

(26)

 

116,905 

 

-  corporate and commercial

65,653 

 

(3,200)

 

62,453 

 

63,604 

 

(3,594)

 

60,010 

 

-  non-bank financial institutions

2,784