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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 2 of 2)

RNS Number : 0258Q
HSBC UK Bank PLC
23 February 2021
 

 

Financial statements


Page

Consolidated income statement

80

Consolidated statement of comprehensive income

81

Consolidated balance sheet

82

Consolidated statement of cash flows

83

Consolidated statement of changes in equity

84

HSBC UK Bank plc balance sheet

85

HSBC UK Bank plc statement of cash flows

86

HSBC UK Bank plc statement of changes in equity

87



Notes on the financial statements

1

Basis of preparation and significant accounting policies

88

2

Net fee income

99

3

Employee compensation and benefits

99

4

Auditors' remuneration

105

5

Tax

105

6

Dividends

107

7

Fair values of financial instruments carried at fair value

107

8

Fair values of financial instruments not carried at fair value

109

9

Derivatives

110

10

Financial investments

113

11

Assets pledged, collateral received and assets transferred

113

12

Interests in joint ventures

115

13

Investments in subsidiaries

115

14

Structured entities

116

15

Goodwill and intangible assets

116

16

Prepayments, accrued income and other assets

117

17

Debt securities in issue

117

18

Accruals, deferred income and other liabilities

117

19

Provisions

118

20

Subordinated liabilities

120

21

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

120

22

Offsetting of financial assets and financial liabilities

125

23

Called up share capital and other equity instruments

126

24

Contingent liabilities, contractual commitments
and guarantees

127

25

Finance lease receivables

127

26

Legal proceedings and regulatory matters

128

27

Related party transactions

129

28

Events after the balance sheet date

132

29

HSBC UK Bank plc's subsidiaries and joint ventures

132

 


Consolidated income statement


for the year ended 31 December




2020

2019


Notes

£m

£m

Net interest income


4,551 


4,752 


-  interest income1,2,3


5,197 


5,696 


-  interest expense4


(646)


(944)


Net fee income

2

1,016 


1,230 


-  fee income


1,191 


1,456 


-  fee expense


(175)


(226)


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


6,031 


6,484 


Change in expected credit losses and other credit impairment charges


(2,115)


(613)


Net operating income


3,916 


5,871 


Employee compensation and benefits

3

(985)


(934)


General and administrative expenses


(2,404)


(3,601)


Depreciation and impairment of property, plant and equipment and right-of-use assets


(181)


(170)


Amortisation and impairment of intangible assets


(183)


(156)


Total operating expenses


(3,753)


(4,861)


Operating profit


163 


1,010 


Profit before tax


163 


1,010 


Tax expense

5

(83)


(494)


Profit for the year


80 


516 


Attributable to:




-  ordinary shareholders of the parent company


76 


512 


-  non-controlling interests




Profit for the year


80 


516 


1  Interest income recognised on financial assets measured at amortised cost is £5,015m (2019: £5,459m).

2  Interest income recognised on financial assets measured at FVOCI is £182m (2019: £237m).

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

4  Interest expense on financial instruments, excluding interest on trading liabilities designated or otherwise mandatorily measured at fair value is £638m (2019: £943m).


Consolidated statement of comprehensive income

for the year ended 31 December


2020

2019


£m

£m

Profit for the year

80 


516 


Other comprehensive income/(expense)



Items that will be reclassified subsequently to profit or loss when specific conditions are met:



Debt instruments at fair value through other comprehensive income

142 


(4)


-  fair value gains

258 


42 


-  fair value gains transferred to the income statement on disposal

(73)


(48)


-  expected credit losses recognised in the income statement



-  income taxes

(49)



Cash flow hedges

13 


34 


-  fair value gains


39 


-  fair value losses reclassified to the income statement

15 



-  income taxes

(4)


(12)


Exchange differences

(5)



-  other exchange differences

(5)



Items that will not be reclassified subsequently to profit or loss:



Remeasurement of defined benefit asset/liability

553 


(207)


-  before income taxes

823 


(268)


-  income taxes

(270)


61 


Other comprehensive income/(expense) for the year, net of tax

703 


(176)


Total comprehensive income for the year

783 


340 


Attributable to:



-  ordinary shareholders of the parent company

779 


336 


-  non-controlling interests



Total comprehensive income for the year

783 


340 


 

 


Consolidated balance sheet

at 31 December



2020

2019


Notes

£m

£m

Assets




Cash and balances at central banks


76,429 


37,030 


Items in the course of collection from other banks


253 


504 


Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

7

26 


66 


Derivatives

9

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

10

19,309 


19,737 


Prepayments, accrued income and other assets

16

9,310 


8,203 


Current tax assets


49 



Interests in joint ventures

12



Goodwill and intangible assets

15

4,093 


3,973 


Total assets


304,864 


257,102 


Liabilities and equity




Liabilities




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 


Derivatives

9

365 


201 


Debt securities in issue

17

866 


3,142 


Accruals, deferred income and other liabilities

18

1,941 


1,834 


Current tax liabilities



409 


Provisions

19

979 


1,325 


Deferred tax liabilities

5

1,677 


1,223 


Subordinated liabilities

20

10,015 


9,533 


Total liabilities


282,006 


234,851 


Equity




Called up share capital

23



Share premium account

23

9,015 


9,015 


Other equity instruments

23

2,196 


2,196 


Other reserves


7,838 


7,688 


Retained earnings


3,749 


3,292 


Total shareholders' equity


22,798 


22,191 


Non-controlling interests


60 


60 


Total equity


22,858 


22,251 


Total liabilities and equity


304,864 


257,102 


 

The accompanying notes on pages 88 to 126, and the audited sections in: the 'Financial Summary' on pages 12 to 16 and the 'Report of the Directors' on pages 19 to 69 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 22 February 2021 and signed on its behalf by:

 

 

 

 

 

 

John David Stuart

Director


Consolidated statement of cash flows

for the year ended 31 December


2020

2019


£m

£m

Profit before tax

163 


1,010 


Adjustments for non-cash items:



Depreciation and amortisation

364 


326 


Net gain from investing activities

(73)


(49)


Change in expected credit losses gross of recoveries and other credit impairment charges

2,180 


697 


Provisions including pensions

28 


1,248 


Share-based payment expense

22 


17 


Elimination of exchange differences1

(85)


255 


Changes in operating assets and liabilities



Change in net trading securities and derivatives

133 


(161)


Change in loans and advances to banks and customers

(10,353)


(8,306)


Change in reverse repurchase agreements - non-trading

529 


408 


Change in financial assets designated and otherwise mandatorily measured at fair value

40 


(31)


Change in other assets

(773)


511 


Change in deposits by banks and customer accounts

43,138 


10,879 


Change in repurchase agreements - non-trading

6,052 


(541)


Change in debt securities in issue

(2,276)


3,142 


Change in other liabilities

93 


(1,621)


Contributions paid to defined benefit plans

(202)


(115)


Tax paid

(404)


(360)


Net cash from operating activities

38,576 


7,309 


Purchase of financial investments

(27,644)


(19,300)


Proceeds from the sale and maturity of financial investments

28,848 


12,629 


Net cash flows from the purchase and sale of property, plant and equipment

(58)


(69)


Net investment in intangible assets

(303)


(319)


Net cash from investing activities

843 


(7,059)


Subordinated loan capital issued2


4,619 


Dividends paid to shareholders of the parent company and non-controlling interests

(226)


(455)


Net cash from financing activities

(226)


4,164 


Net increase in cash and cash equivalents

39,193 


4,414 


Cash and cash equivalents at 1 Jan

38,086 


33,817 


Exchange differences in respect of cash and cash equivalents

143 


(145)


Cash and cash equivalents at 31 Dec3

77,422 


38,086 


Cash and cash equivalents comprise:



-  cash and balances at central banks

76,429 


37,030 


-  items in the course of collection from other banks

253 


504 


-  loans and advances to banks of one month or less

677 


787 


-  treasury bills, other bills and certificates of deposit less than three months


23 


-  cash collateral and net settlement accounts

195 


85 


-  less: items in the course of transmission to other banks

(132)


(343)


Cash and cash equivalents at 31 Dec3

77,422 


38,086 


 

Interest received was £5,204m (2019: £5,648m) and interest paid was £705m (2019: £987m).

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

2  Subordinated liabilities changes during the year are attributable to cash flows from issuance of securities of £nil (2019: £4,619m). Non-cash changes during the year included foreign exchange gains/(losses) of £92m (2019: £(23)m).

3  At 31 December 2020 £nil (2019: £627m) was not available for use by the group, £nil (2019: £627m) related to mandatory deposits at central banks.


Consolidated statement of changes in equity

for the year ended 31 December





Other reserves





Called up
share
capital and
share
premium

Other
equity
instru-ments

Retained
earnings

Financial
assets at
FVOCI
reserve

Cash flow
hedging
reserve

Foreign
exchange
reserve

Group re-organisation

reserve2

Total
share-
holders'
equity

Non-controllinginterests

Total
equity


£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 1 Jan 2020

9,015 


2,196 


3,292 



(12)



7,691 


22,191 


60 


22,251 


Profit for the year



76 






76 



80 


Other comprehensive income
(net of tax)



553 


137 


13 




703 



703 


-  debt instruments at fair value through other comprehensive income




142 





142 



142 


-  cash flow hedges





13 




13 



13 


-  remeasurement of defined benefit asset/liability



553 






553 



553 


-  exchange differences




(5)





(5)



(5)


Total comprehensive income for the year



629 


137 


13 




779 



783 


Dividends to shareholders



(222)






(222)


(4)


(226)


Other movements1



50 






50 



50 


At 31 Dec 2020

9,015 


2,196 


3,749 


146 




7,691 


22,798 


60 


22,858 













At 1 Jan 2019

9,015 


2,196 


3,405 


14 


(46)


(2)


7,691 


22,273 


60 


22,333 


Profit for the year



512 






512 



516 


Other comprehensive income
(net of tax)



(207)


(5)


34 




(176)



(176)


-  debt instruments at fair value through other comprehensive income




(4)





(4)



(4)


-  cash flow hedges





34 




34 



34 


-  remeasurement of defined benefit asset/liability



(207)






(207)



(207)


-  exchange differences




(1)








Total comprehensive income for the year



305 


(5)


34 




336 



340 


Dividends to shareholders



(451)






(451)


(4)


(455)


Other movements1



33 






33 



33 


At 31 Dec 2019

9,015 


2,196 


3,292 



(12)



7,691 


22,191 


60 


22,251 


 1  Relates primarily to £31m pension assets transfer from HSBC Global Services (UK) Limited (2019: £33m) and share based payments costs of £18m in 2020 (2019: £10m).

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

 


HSBC UK Bank plc balance sheet

at 31 December



2020

2019


Notes

£m

£m

Assets




Cash and balances at central banks


76,419 


37,020 


Items in the course of collection from other banks


137 


355 


Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

7

26 


66 


Derivatives

9

155 


118 


Loans and advances to banks


3,790 


4,643 


Loans and advances to customers


186,800 


173,901 


Reverse repurchase agreements - non-trading


2,485 


3,014 


Financial investments

10

19,309 


19,737 


Investments in subsidiaries

13

1,014 


1,600 


Prepayments, accrued income and other assets

16

8,985 


8,216 


Current tax assets


48 



Interests in joint ventures

12



Goodwill and intangible assets

15

1,030 


881 


Total assets


300,203 


249,556 


Liabilities and equity




Liabilities




Deposits by banks


2,161 


4,277 


Customer accounts


256,353 


207,830 


Repurchase agreements - non-trading


6,150 


98 


Items in the course of transmission to other banks


129 


336 


Derivatives

9

365 


197 


Debt securities in issue

17

641 


2,917 


Accruals, deferred income and other liabilities

18

1,809 


2,271 


Current tax liabilities



362 


Provisions

19

870 


1,114 


Deferred tax liabilities

5

1,710 


1,255 


Subordinated liabilities

20

9,936 


9,454 


Total liabilities


280,124 


230,111 


Equity




Called up share capital

23



Share premium account

23

9,015 


9,015 


Other equity instruments

23

2,196 


2,196 


Other reserves


5,395 


5,245 


Retained earnings


3,473 


2,989 


Total equity


20,079 


19,445 


Total liabilities and equity


300,203 


249,556 


 

Profit after tax for the year was £104m (2019: £273m).

The accompanying notes on pages 88 to 126, and the audited sections of the 'Report of the Directors' on pages 19 to 69 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 22 February 2021 and signed on its behalf by:

 

 

 

 

 

 

John David Stuart

Director

 


HSBC UK Bank plc statement of cash flows

for the year ended 31 December


2020

2019


£m

£m

Profit before tax

184 


715 


Adjustments for non-cash items:



Depreciation and amortisation

339 


289 


Net gain/(loss) from investing activities

(69)


435 


Change in expected credit losses gross of recoveries and other credit impairment charges

1,952 


537 


Provisions including pensions

23 


1,005 


Share-based payment expense

21 


14 


Elimination of exchange differences1

(85)


255 


Changes in operating assets and liabilities



Change in net trading securities and derivatives

134 


(162)


Change in loans and advances to banks and customers

(14,010)


(8,392)


Change in reverse repurchase agreements - non-trading

529 


408 


Change in financial assets designated and otherwise mandatorily measured at fair value

40 


(31)


Change in other assets

204 


322 


Change in deposits by banks and customer accounts

46,407 


10,984 


Change in repurchase agreements - non-trading

6,052 


(541)


Change in debt securities in issue

(2,276)


2,917 


Change in other liabilities

(365)


(875)


Contributions paid to defined benefit plans

(202)


(115)


Tax paid

(356)


(286)


Net cash from operating activities

38,522 


7,479 


Purchase of financial investments

(27,644)


(19,300)


Proceeds from the sale and maturity of financial investments

28,848 


12,629 


Net cash flows from the purchase and sale of property, plant and equipment

(39)


(50)


Net investment in intangible assets

(302)


(306)


Net cash from investing activities

863 


(7,027)


Subordinated loan capital issued2


4,619 


Dividends paid to shareholders of the parent company

(222)


(451)


Net cash from financing activities

(222)


4,168 


Net increase in cash and cash equivalents

39,163 


4,620 


Cash and cash equivalents at 1 Jan

38,148 


33,673 


Exchange differences in respect of cash and cash equivalents

143 


(145)


Cash and cash equivalents at 31 Dec3

77,454 


38,148 


Cash and cash equivalents comprise:



-  cash and balances at central banks

76,419 


37,020 


-  items in the course of collection from other banks

137 


355 


-  loans and advances to banks of one month or less

832 


1,001 


-  treasury bills, other bills and certificates of deposit less than three months


23 


-  cash collateral and net settlement accounts

195 


85 


-  less: items in the course of transmission to other banks

(129)


(336)


Cash and cash equivalents at 31 Dec3

77,454 


38,148 


 

Interest received was £4,913m (2019: £5,183m), interest paid was £672m (2019: £971m) and dividends received were £42m (2019:£180m).

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

2  Subordinated liabilities changes during the year are attributable to cash flows from issuance of securities of £nil (2019: £4,619m). Non-cash changes during the year included foreign exchange gains/(losses) of £92m (2019: (£23)m).

3  At 31 December 2020, £nil (2019: £617m) was not available for use by the bank, £nil (2019: £617m) related to mandatory deposits at central banks.

 


HSBC UK Bank plc statement of changes in equity

for the year ended 31 December





Other reserves



Called up
share capital
and share
premium

Other
equity
instruments

Retained
earnings

Financial
assets at
FVOCI reserve

Cash flow
hedging
reserve

Foreign
exchange
reserve

Group re-organisation2

reserve

Total
share-
holders'
equity


£m

£m

£m

£m

£m

£m

£m

£m

At 1 Jan 2020

9,015 


2,196 


2,989 



(12)



5,248 


19,445 


Profit for the year



104 






104 


Other comprehensive income
(net of tax)



553 


137 


13 




703 


-  debt instruments at fair value through other comprehensive income




142 





142 


-  cash flow hedges





13 




13 


-  remeasurement of defined benefit asset/liability



553 






553 


-  exchange differences




(5)





(5)


Total comprehensive income for the year



657 


137 


13 




807 


Dividends to shareholders



(222)






(222)


Other movements1



49 






49 


At 31 Dec 2020

9,015 


2,196 


3,473 


146 




5,248 


20,079 








At 1 Jan 2019

9,015 


2,196 


3,341 


14 


(46)


(2)


5,248 


19,766 


Profit for the year



273 






273 


Other comprehensive income
(net of tax)



(207)


(5)


34 




(176)


-  debt instruments at fair value through other comprehensive income




(4)





(4)


-  cash flow hedges





34 




34 


-  remeasurement of defined benefit asset/liability



(207)






(207)


-  exchange differences




(1)






Total comprehensive income for the year



66 


(5)


34 




97 


Dividends to shareholders



(451)






(451)


Other movements1



33 






33 


At 31 Dec 2019

9,015 


2,196 


2,989 



(12)



5,248 


19,445 


1  Relates primarily to £31m pension assets transfer from HSBC Global Services (UK) Limited in 2020 (2019: £33m) and share based payments costs of £17m in 2020 (2019: £9m).

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


Notes on the financial statements

 


1

Basis of preparation and significant accounting policies

 


1.1  Basis of preparation

(a)  Compliance with International Financial Reporting Standards

The consolidated financial statements of HSBC UK and the separate financial statements of the bank comply with international accounting standards in conformity with the requirements of the Companies Act 2006 and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. These financial statements are also prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB'), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRSs as issued by the IASB for the periods presented. 'Interest Rate Benchmark Reform - Phase 2,' which amends IFRS 9, IAS 39 'Financial Instruments', IFRS 7 'Financial Instruments,' IFRS 4 'Insurance Contracts' and IFRS 16 'Leases', was adopted for use in the UK and EU in January 2021 and has been early adopted as set out below. Therefore, there were no unendorsed standards effective for the year ended 31 December 2020 affecting these consolidated and separate financial statements.

Standards adopted during the year ended 31 December 2020

Interest Rate Benchmark Reform - Phase 2

Interest Rate Benchmark Reform Phase 2: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 issued in August 2020 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 the reform.

Under these amendments, changes made to a financial instrument measured at other than fair value through profit or 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 adopted the amendments from 1 January 2020 and made the additional disclosures as required by the amendments. Further information is included in Note 9 and in 'Financial instruments impacted by Ibor reform' on page 26. 

Other changes

In addition, the group has adopted a number of interpretations and amendments to standards, which have had an insignificant effect on the consolidated financial statements of the group and the separate financial statements of the bank. Other than as noted above, accounting policies have been consistently applied.

(b)  Future accounting developments

Minor amendments to IFRSs

The IASB has not published any minor amendments to IFRSs which are effective from 1 January 2021. However, the IASB has published a number of minor amendments to IFRSs that are effective from 1 January 2022 and 1 January 2023. The group expects they will have an insignificant effect, when adopted, on the consolidated financial statements of the group and the separate financial statements of the bank.

New IFRSs

IFRS 17 'Insurance Contracts'

The IASB has published IFRS 17 'Insurance Contracts'. IFRS 17 has not yet been endorsed but is not expected to have a significant impact on the consolidated financial statements of the group and the separate financial statements of the bank.

(c)  Foreign currencies

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

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

(d)  Presentation of information

Certain disclosures required by IFRSs have been included in the audited sections of this Annual Report and Accounts 2020 as follows:

disclosures concerning the nature and extent of risks relating to financial instruments are included in the 'Report of the Directors | Risk' on pages 19 to 62; and

capital disclosures are included in the 'Report of the Directors | Risk' on pages 55 to 57.

 

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

(e)  Critical accounting estimates and judgements

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

(f)  Segmental analysis

HSBC UK's chief operating decision-maker is the group Chief Executive, supported by the group Executive Committee, and operating segments are reported in a manner consistent with the internal reporting provided to the group Chief Executive and the group Executive Committee.

Measurement of segmental assets, liabilities, income and expenses is in accordance with the group's accounting policies. Segmental income and expenses include transfers between segments and these transfers are conducted at arm's length. Shared costs are included in segments on the basis of the actual recharges made.

The types of products and services from which each reportable segment derives its revenue are discussed in the 'Strategic Report - Products and services'.

(g)  Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the group and bank have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital requirements and capital resources. These considerations include stressed scenarios that reflect the increasing uncertainty that the global Covid-19 outbreak has had on HSBC UK's operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity.


1.2  Summary of significant accounting policies

(a)  Consolidation and related policies

Investments in subsidiaries

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

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

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

Goodwill

Goodwill is allocated to cash-generating units ('CGUs') for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. The group's CGUs are based on the business lines described in the Strategic Report. Impairment testing is performed once a year, or whenever there is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.

Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation within such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the operation disposed of and the portion of the CGU retained.

Critical accounting estimates and judgements

The review of goodwill for impairment reflects management's best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:

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

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

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

Key assumptions used in estimating goodwill impairment are described in Note 15.

 

Interests in associates and joint arrangements

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

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

Investments in associates and joint ventures are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisition of interests in joint ventures and associates is not tested separately for

impairment, but is assessed as part of the carrying amount of the investment.

(b)  Income and expense

Operating income

Interest income and expense

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

Interest on credit-impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Critical accounting estimates and judgements

The effective interest rate applied to interest income recognised on credit card lending includes significant estimates and judgements related to their behavioural life. This life is estimated based on internal models and is reviewed regularly to reflect actual experience. The application of the effective interest rate method to credit card lending has resulted in the recognition of £129m (2019: £147m) within loans and advances to customers at 31 December 2020.

The estimated life is reviewed annually and management has assessed seven years as continuing to be the most appropriate life. The impact of reducing the estimated life to six years would be a reduction in EIR asset of £16m.

A key metric is the stick rate, being the proportion of acquired balances which remain on book after the end of promotional period. Where actual experience differs from forecasts, an adjustment to the carrying value of the asset is required to be recognised in the financial statements.

Management has assessed the sensitivity of balance and interest assumptions by considering the impact of changes as follows:

a decrease in the closing balance stick rate assumption of 5% would decrease the asset value by £6.5m (2019: £7.7m);

similarly, a decrease in the assumed interest yield of 5% would decrease the asset value by £17.8m (2019: £17.0m). (The interest yield assumption is the amount of interest receivable over the life of the account).

 

Non-interest income and expense

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

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

The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement.

Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.

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

The group buys and sells currencies to customers, as principal and presents the results of this activity, including the related gains and losses from changes in foreign exchange rates, as trading.

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

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

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

(c)  Valuation of financial instruments

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

The fair value of financial instruments is generally measured on an individual basis. Financial instruments are classified into one of three fair value hierarchy levels, described in Note 7, 'Fair values of financial instruments carried at fair value'.

(d)  Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs. If the initial fair value is lower than the cash amount advanced, such as in the case of some leveraged finance and syndicated lending activities, the difference is deferred and recognised over the life of the loan through the recognition of interest income.

Non-trading reverse repurchase, repurchase and similar agreements

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

Finance lease receivables

Agreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of assets are classified as finance leases. They are recorded at an amount equal to the net investment in the lease, less any impairment allowance. The net investment in finance leases represents the sum of the minimum payments receivable (gross investment in the lease) discounted at the rate of interest implicit in the lease. Initial direct costs incurred in arranging the lease, less any fee income related to the lease, are included in the initial measurement of the net investment.

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

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

(f)  Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.

Where the derivatives are managed with debt securities issued by the group that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.

Hedge accounting

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

Fair value hedge

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

Cash flow hedge

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

(g)  Impairment of amortised cost and FVOCI financial assets

ECL are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months, or less, where the remaining life is less than 12 months ('12-month ECL'). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where 12-month ECL is recognised are considered to be 'stage 1'; financial assets which are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial

assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in 'stage 3'. Purchased or originated credit-impaired financial assets ('POCI') are treated differently, as set out below.

Credit impaired (stage 3)

The group determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether:

contractual payments of either principal or interest are past due for more than 90 days;

there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and

the loan is otherwise considered to be in default.

If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired.

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

Write-off

Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

Renegotiation

Loans are identified as renegotiated and classified as credit impaired when we modify the contractual payment terms due to significant credit distress of the borrower. Renegotiated loans remain classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity or derecognition.

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

Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any evidence of being credit impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows over the minimum observation period, and there are no other indicators of impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.

Loan modifications other than renegotiated loans

Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that HSBC UK rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates and no payment-related concession has been provided. Mandatory and general offer loan modifications that are not borrower-specific, for example market-wide customer relief programmes, have not been classified as renegotiated loans and generally have not resulted in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy.

Significant increase in credit risk (stage 2)

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

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

0.1-1.2

15bps

2.1-3.3

30 bps

 



 

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

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

0.1

5 notches

1.1-4.2

4 notches

4.3-5.1

3 notches

5.2-7.1

2 notches

7.2-8.2

1 notch

8.3

0 notch

 

Further information about the 23-grade scale used for CRR can be found on page 25 - Risk rating scales.

For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.

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

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

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

Purchased or originated credit impaired

Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes the recognition of a new financial instrument following a renegotiation where concessions have been granted for economic or contractual reasons relating to the borrower's financial difficulty that otherwise would not have been considered. The amount of change-in-lifetime ECL is recognised in profit or loss until the POCI is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.

Movement between stages

Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are not POCI will continue to be in stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that are assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.

Measurement of ECL

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

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

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

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

The group leverages the Basel II IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the following table:

PD

Through the cycle (represents long-run average PD throughout a full economic cycle).

The definition of default includes a backstop of 90+ days past due, although this has been modified to 180+ days past due for some portfolios, particularly UK and US mortgages.

Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD).

Default backstop of 90+ days past due for all portfolios.

EAD

Cannot be lower than current balance.

Amortisation captured for term products.

LGD

Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn).

Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data.

Discounted using cost of capital.

All collection costs included.

Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral).

No floors.

Discounted using the original effective interest rate of the loan.

Only costs associated with obtaining/selling collateral included.

Other


Discounted back from point of default to balance sheet date.

 

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

The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on the credit risk officer's estimates at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on the estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by the group and the judgement of the credit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to the most likely outcome.

Period over which ECL is measured

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

Forward-looking economic inputs

The group applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of our view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in most economic environments. In certain economic environments, additional analysis and may be necessary and result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 36.

Critical accounting estimates and judgements

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

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

Determining the lifetime and point of initial recognition of overdrafts and credit cards.

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

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

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

The sections marked as audited on pages 36 to 41, 'Measurement uncertainty and sensitivity analysis of ECL estimates' set out the assumptions used in determining ECL and provide an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions.

 

(h)  Employee compensation and benefits

Share-based payments

The group enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for the provision of their services.

The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement. Expenses are recognised when the employee starts to render service to which the award relates.

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

Post-employment benefit plans

The group operates a pension plan which provides defined benefit and defined contribution pensions.

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

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

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

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

Critical accounting estimates and judgements

The most significant critical accounting estimates relate to the determination of key assumptions applied in calculating the defined benefit pension obligation.


A range of assumptions could be applied, and different assumptions could significantly alter the defined benefit obligation and the amounts recognised in profit or loss or OCI.

The calculation of the defined benefit pension obligation includes assumptions with regard to the discount rate, inflation rate, pension payments and deferred pensions, pay and mortality. Management determines these assumptions in consultation with the plan's actuaries.

Key assumptions used in calculating the defined benefit pension obligation and the sensitivity of the calculation to different assumptions are described in Note 3.

 

(i)  Tax

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

Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.

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

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

(j)  Provisions, contingent liabilities and guarantees

Provisions

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

Critical accounting estimates and judgements

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

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

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

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

Provisions for customer remediation also require significant levels of estimation. The amounts of provisions recognised depend on a number of different assumptions, the most significant of which are the uphold rate and average redress for complaints yet to be worked. More information about these assumptions is included in Note 19.

 

Contingent liabilities, contractual commitments and guarantees

Contingent liabilities

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

Financial guarantee contracts

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

(k)  Impairment of non-financial assets

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

Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair value less costs of disposal or the value in use.  The carrying amount of a CGU comprises the carrying values of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs (see Note 15).

When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU.

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

(I)  Cash and cash equivalents

Cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months' maturity from the date of acquisition.


2

Net fee income

 


Year ended


31 Dec

31 Dec1


2020

2019

Net fee income by product

 

 

£m

£m

Account services2

263 


357 


Funds under management

105 


88 


Cards2

369 


507 


Credit facilities

121 


103 


Imports/exports

29 


49 


Insurance agency commission

47 


47 


Receivables finance

84 


85 


Other

173 


220 


Fee income

1,191 


1,456 


Less: fee expense

(175)


(226)


Net fee income

1,016 


1,230 


Net fee income by global business



Wealth and Personal Banking

514 


695 


Commercial Banking

682 


725 


Global Banking and Markets

(177)


(180)


Corporate Centre

(3)


(10)


1  A change in reportable segments was made in 2020. Comparative data has been re-presented accordingly. For further guidance, refer to page 13 under Segmental analysis.

2  At 31 December 2020, HSBC UK changed its accounting practice to include certain Account services fee income within Cards. Comparatives have been re-presented. The net effect of these changes reduced Account services and increased Cards by £184m (2019: £226m).

Net fee income includes £977m of fees earned on financial assets that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate) (2019: £1,125m), £133m of fees payable on financial liabilities that are not at fair value through profit of loss (other than amounts included in determining the effective interest rate) (2019: £174m), £13m of fees earned on trust and other fiduciary activities (2019: £69m).

 


3

Employee compensation and benefits

 


2020

2019


£m

£m

Wages and salaries

889 


887 


Social security costs

87 


89 


Post-employment benefits


(42)


Year ended 31 Dec

985 


934 


 


Average number of persons employed by the group during the year


2020

20191

Wealth and Personal Banking

16,856 


17,650 


Commercial Banking

5,102 


5,058 


Global Banking and Markets

55 


54 


Corporate Centre

187 


273 


Year ended 31 Dec

22,200 


23,035 


 


1  A change in reportable segments was made in 2020. Comparative data has been re-presented accordingly. For further guidance, refer to page 13 under Segmental analysis.

Share-based payments

The share-based payment income statement charge is recognised in wages and salaries as follows:


2020

2019


£m

£m

Restricted share awards



Savings-related and other share award option plans

18 


10 


Year ended 31 Dec

22 


16 


 


HSBC Group share awards

Deferred share awards (including annual incentive awards, LTI awards delivered in shares) and GPSP

An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted.

Deferred awards generally require employees to remain in employment over the vesting period and are not subject to performance conditions after the grant date.

Deferred share awards generally vest over a period of three, five or seven years.

Vested shares may be subject to a retention requirement post-vesting. GPSP awards are retained until cessation of employment.

Awards granted from 2010 onwards are subject to a malus provision prior to vesting.

Awards granted to Market Risk Takers from 2015 onwards are subject to clawback post vesting.

International Employee Share Purchase Plan ('ShareMatch')

The plan was first introduced in Hong Kong in 2013 and now includes employees based in 27 jurisdictions.

Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency.

Matching awards are added at a ratio of one free share for every three purchased.

Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months.

 


 

Movement on HSBC Group share awards


2020

2019


Number

Number


(000s)

(000s)

Restricted share awards outstanding at 1 Jan

1,288 


999 


Additions during the year

1,308 


1,156 


Released in the year

(1,008)


(831)


Forfeited in the year

(63)


(36)


Restricted share awards outstanding at 31 Dec

1,525 


1,288 


Weighted average fair value of awards granted (£)

5.21 


5.98 


 


 

HSBC Group share option plans

Savings-related share option plans ('Sharesave')

Eligible employees can save up to £500 per month with the option to use the savings to acquire shares.

Exercisable within six months following either the third or fifth anniversary of the commencement of a three-year or five-year contract, respectively.

The exercise price is set at a 20% (2019: 20%) discount to the market value immediately preceding the date of invitation.

 

Calculation of fair values

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


Movement on HSBC Group share option plans


Savings-related
share option plans


Number

WAEP1


(000s)

£

Outstanding at 1 Jan 2020

28,470 


4.84 


Granted during the year

51,386 


2.63 


Exercised during the year

(787)


4.49 


Expired during the year

(309)


4.59 


Forfeited during the year

(18,945)


4.83 


Outstanding at 31 Dec 2020

59,815 


2.96 


- Of which exercisable

3,460 


4.59 


Weighted average remaining contractual life (years)

3.65 



 

Outstanding at 1 Jan 2019

24,463 


4.97 


Granted during the year

14,125 


4.69 


Exercised during the year

(5,152)


4.43 


Expired during the year

(37)


4.24 


Forfeited during the year

(4,929)


5.45 


Outstanding at 31 Dec 2019

28,470 


4.84 


- Of which exercisable

891 


4.53 


Weighted average remaining contractual life (years)

2.78 



1  Weighted average exercise price.


Post-employment benefit plans

We operate a pension plan for our employees called the HBUK section of the HSBC Bank (UK) Pension Scheme ('the plan'), which has both defined benefit and defined contribution sections. The HSBC Bank (UK) Pension Scheme was fully sectionalised in 2018 to meet the requirements of the Banking Reform Act.

The Pension Risk section on page 54 contains details about the policies and practices associated with the plan.

The defined benefit section was closed to future benefit accrual in 2015, with Group defined benefits earned by employees at that date continuing to be linked to their salary while they remain employed by the HSBC Group. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the operation of the plan. Its assets are held separately from the assets of the group.

The investment strategy of the plan is to hold the majority of assets in bonds, with the remainder in a diverse range of investments. It also includes some interest rate swaps to reduce interest rate risk and inflation swaps to reduce inflation risk. The investment strategy is not static and will evolve to reflect the structure of liabilities within the plan.

The latest funding valuation of the plan at 31 December 2019 was carried out by Colin G Singer, at Willis Towers Watson Limited, who is a Fellow of the UK Institute and Faculty of Actuaries, using the projected unit credit method. At that date, the market value of the plan's assets was £31.1bn and this exceeded the value placed on its liabilities on an ongoing basis by £2.5bn, giving a funding level of 109%. These figures include defined contribution assets amounting to £2.4bn. The main differences between the assumptions used for assessing the liabilities for this funding valuation and those used for IAS19 are more prudent assumptions for discount rate, inflation rate and life expectancy. The next funding valuation will have an effective date of 31 December 2022.

Although the plan was in surplus at the valuation date, an additional contribution of £160m will be made to the plan in 2021 to support a lower-risk investment strategy over the longer term.

The actuary also assessed the value of the liabilities if the HBUK section of the plan were to have been stopped and an insurance company asked to secure all future pension payments. This is generally larger than the amount needed on the ongoing basis described above because an insurance company would use more prudent assumptions and include a more prudent allowance for the future administrative expenses of the plan. Under this approach, the amount of assets needed was estimated to be £33bn at 31 December 2019.

The Trust Deed gives the ability for HSBC UK to take a refund of surplus assets after the plan has been run down such that no further beneficiaries remain. In assessing whether a surplus is recoverable HSBC UK has considered its right to obtain a future refund together with the rights of third parties such as trustees. On this basis, any net surplus in the HBUK section of the plan is recognised in HSBC UK's financial statements.  

Guaranteed Minimum Pension Equalisation

Following a judgement issued by the High Court of Justice of England and Wales in 2018, we estimated the financial effect of equalising benefits in respect of guaranteed minimum pensions ('GMP') equalisation, and any potential conversion of GMPs into non-GMP benefits, to be an approximate 0.9% increase in the plan's liabilities for members of the plan, or £187m. This was recognised in the Income Statement in 2018. A further judgement by the High Court on 20 November 2020 ruled that GMPs should be also equalised for those who had previously transferred benefits from the plan to another arrangement, with an estimated £13m consequently being recognised in 2020. We continue to assess the impact of GMP equalisation.

 


Income statement charge


2020

2019


£m

£m

Defined benefit pension plans

(65)


(115)


Defined contribution pension plans

74 


73 


Pension plans


(42)


Year ended 31 Dec


(42)


 


Defined benefit pension plans


Net asset/(liability) under defined benefit pension plans


Fair value of plan assets

Present value of defined
benefit obligations

Net defined benefit
assets/(liabilities)


£m

£m

£m

At 1 Jan 2020

28,647 


(22,811)


5,836 


Service cost


(38)


(38)


-  current service cost


(7)


(7)


-  past service cost


(31)


(31)


Net interest income/(cost) on the net defined benefit asset/(liability)

566 


(448)


118 


Remeasurement effects recognised in other comprehensive income

2,474 


(1,651)


823 


-  return on plan assets (excluding interest income)

2,474 



2,474 


-  actuarial losses financial assumptions


(2,478)


(2,478)


-  actuarial gain other1


827 


827 


Transfers to/from the scheme

151 


(120)


31 


Benefits paid

(895)


895 



Other movements2

187 



187 


At 31 Dec 2020

31,130 


(24,173)


6,957 


 

At 1 Jan 2019

26,687 


(20,846)


5,841 


Service cost


(26)


(26)


-  current service cost


(7)


(7)


-  past service cost and gains/(losses) from settlements


(19)


(19)


Net interest income/(cost) on the net defined benefit asset/(liability)

736 


(571)


165 


Remeasurement effects recognised in other comprehensive income

1,729 


(1,998)


(269)


-  return on plan assets (excluding interest income)

1,729 



1,729 


-  actuarial losses financial assumptions


(2,392)


(2,392)


-  actuarial gain other1


394 


394 


Transfers to/from the scheme

195 


(162)


33 


Benefits paid

(795)


795 



Other movements2

95 


(3)


92 


At 31 Dec 2019

28,647 


(22,811)


5,836 


1  Actuarial gain other includes gains for demographic assumptions of £67m (2019: £146m).

2  Other movements of Fair value of plan assets includes contributions by HSBC UK of £203m (2019: £116m), less administrative costs £16m (2019: £21m).


HSBC UK expects to make total contributions of £170m to defined benefit pension plans during 2021, including £160m paid to support a lower-risk investment strategy over the longer term. Benefits expected to be paid from the plan to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

Benefits expected to be paid from plan


2021

2022

2023

2024

2025

2026-2030


£m

£m

£m

£m

£m

£m

The plan1

933 


961 


990 


1,020 


1,050 


5,742 


1  The duration of the defined benefit obligation is 17.4 years under the disclosure assumptions adopted (2019:18.1 years).


Fair value of plan assets by asset classes





31 Dec 2020

31 Dec 2019


Value

Quoted market price
in active market

No quoted market
price in active market

Value

Quoted market price in active market

No quoted market price in active market


£m

£m

£m

£m

£m

£m

The plan







Fair value of plan assets

31,130 


27,603 


3,527 


28,647 


25,658 


2,989 


-  equities

196 



191 


501 


236 


265 


-  bonds fixed income1

12,985 


12,459 


526 


12,093 


12,093 



-  bonds index linked

13,526 


13,526 



11,883 


11,883 



-  derivatives

1,445 



1,445 


1,551 



1,551 


-  property

810 



810 


1,173 



1,173 


-  other2

2,168 


1,613 


555 


1,446 


1,446 



1  Bonds fixed income, includes £(1,445)m (2019: £(1,290)m) in relation to repurchase agreements.

2  Other includes £510m (2019: £280m) of quoted pooled investment vehicles and £555m (2019: £nil) of unquoted pooled investment vehicles.


Post-employment defined benefit plan actuarial financial assumptions

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


Key actuarial assumptions for the plan


Discount
rate

Inflation
rate

Rate of increase
for pensions

Rate of pay increase


%

%

%

%

UK





At 31 Dec 2020

1.45 


3.05 


3.00 


2.75 


At 31 Dec 2019

2.00 


3.10 


2.90 


3.65 


 


 

Mortality tables and average life expectancy at age 60 for the plan



Mortality
table

Life expectancy at age 60 for

a male member currently:

Life expectancy at age 60 for

a female member currently:




Aged 60

Aged 40

Aged 60

Aged 40

UK







At 31 Dec 2020


SAPS S31

27.0

28.5

28.1

29.7

At 31 Dec 2019


SAPS S22

28.0

29.4

28.2

29.8

1  Self-administered pension scheme ('SAPS') S3 table (male : 'Normal health pensioners, Light' version and females: 'Normal health pensioners, Heavy' version) with a multiplier of 1 for males and females pensioners. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI') 2019 core projection model with an initial addition to improvements of 0.25% per annum and a long-term rate of improvement of 1.25% per annum.Separate tables have been applied to lower paid pensioners and dependants.

2  Self-administered pension scheme ('SAPS') S2 table (males: 'Normal Health Pensioners' version; females: 'All Pensioners' version) with a multiplier of 0.94 for males and 1.15 for females. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI') 2018 core projection model with a long-term rate of improvement of 1.25% per annum. Separate tables have been applied to lower paid pensioners and dependants.


The effect of changes in key assumptions on the plan


Impact on HSBC Bank (UK) Pension Scheme Obligation


Financial impact of increase

Financial impact of decrease


2020

2019

2020

2019


£m

£m

£m

£m

Discount rate - increase/decrease of 0.25%

(1,014)


(987)


1,082 


1,055 


Inflation rate - increase/decrease of 0.25%

638 


590 


(608)


(559)


Pension payments and deferred pensions - increase/decrease of 0.25%

957 


639 


(895)


(776)


Pay - increase/decrease of 0.25%

44 


54 


(43)


(55)


Change in mortality - increase of 1 year

1,064 


958 


N/A

N/A

 

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this in unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit asset recognised in the balance sheet.

The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period.


 

Directors' emoluments

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



2020

2019


£000

£000

Fees paid to non-executive Directors

1,721 


1,793 


Salaries and other emoluments1

3,171 


3,459 


Annual incentives2

840 


901 


Long-term incentives3

360 


253 


Year ended 31 Dec

6,092 


6,406 


1  Salaries and other emoluments include Fixed Pay Allowances.

2  Discretionary annual incentives for the Executive Directors are based on a combination of individual and corporate performance and are determined by the Remuneration Committee of the Company's ultimate parent company, HSBC Holdings plc. Incentive awards made to Executive Directors are delivered in the form of cash and HSBC Holdings plc shares. The total amount shown is comprised of £419,982 (2019: £450,576) in cash and £419,982  (2019: £450,576) in Restricted Shares, which is the upfront portion of the annual incentive granted in respect of performance year 2020.

3  The amount shown is comprised of £225,569  (2019: £125,505) in deferred cash and £134,035 (2019: £127,395) in deferred Restricted Shares. These amounts relate to the portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2021. The total deferral period of deferred cash and share awards is no less than five years up to a maximum of seven years.  Grants with a five-year deferral vest in five equal tranches on each anniversary of the grant date on a pro-rate basis. Grants with a seven-year deferral vest in five equal tranches on each anniversary from the third anniversary of the grant date on a pro-rata basis.The deferral periods and pro-rata calculations are in line with the requirements set out in the Remuneration rules applicable to Material Risk Takers. The share awards are subject to a retention period of six months to one year upon vesting. Details of the Plans are contained within the Directors' Remuneration Report of HSBC Holdings plc.


No Directors exercised share options over HSBC Holdings plc ordinary shares during the year (2019: no Directors).

Awards were made to three Directors under HSBC Holdings plc long-term incentive plans in respect of qualifying services rendered in 2020 (2019: 3). During 2020, three Directors received shares in respect of awards in HSBC Holdings plc long-term incentive plans that vested during the year (2019: 3).

No retirement benefits accrued to Directors during the year in respect of their qualifying services (2019: no Directors). Three Directors received cash in lieu of pension contributions during the year in respect of their qualifying services (2019: 3). Cash received in lieu of pension is included in the salary and other emoluments disclosure in the table above.

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


2020

2019


£000

£000

Salaries and other emoluments

1,749 


2,104 


Annual incentives1

453 


503 


Long-term incentives2

223 


124 


Year ended 31 Dec

2,425 


2,731 


1  Awards made to the highest paid Director are delivered in the form of cash and HSBC Holdings plc shares. The amount shown is comprised of £226,549 (2019: £251,721) in cash and £226,549 (2019: £251,721) in Restricted Shares.

2  The amount shown is comprised of £136,615 (2019: £60,472) in deferred cash and £86,735 (2019: £63,902) in deferred Restricted Shares.

These amounts represent a portion of the total award that will vest following satisfaction of the vesting condition attached to the 2020 awards. The total period of deferral for these cash and share awards is seven years with pro-rata vesting in five equal tranches between the third and seventh anniversary of the date granted. The vested share awards are then subject to a one-year retention period.

The highest paid Director received shares in respect of qualifying services under an HSBC Holdings plc long term incentive plan.

Pension contributions of £nil were made by the Company in respect of services by the highest paid Director during the year (2019: nil).


4

Auditors' remuneration

 


2020

2019


£m

£m

Audit fees payable to PwC

5.6 


5.1 


Other audit fees payable

2.0 


1.8 


Year ended 31 Dec

7.6 


6.9 


 


Fees payable by the group to PwC


2020

2019


£m

£m

Audit fees for HSBC UK Bank plc's statutory audit1

4.5 


4.0 


Fees for other services provided to the group

3.1 


2.9 


-  audit of the group's subsidiaries2

1.1 


1.1 


-  audit-related assurance services3

2.0 


1.8 


Year ended 31 Dec

7.6 


6.9 


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

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

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

No fees were payable to PwC as principal auditor for the following types of services: internal audit services and services related to litigation, recruitment and remuneration.

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


5

Tax

 


Tax expense


2020

2019


£m

£m

Current tax

(10)


429 


-  for this year

(37)


452 


-  adjustments in respect of prior years

27 


(23)


Deferred tax

93 


65 


-  origination and reversal of temporary differences

36 


71 


-  effect of changes in tax rates

58 


(4)


-  adjustments in respect of prior years

(1)


(2)


Year ended 31 Dec

83 


494 


 

The tax rate applying to HSBC UK Bank plc and its banking subsidiaries was 27%, comprising 19% UK corporation tax rate plus 8% surcharge tax rate on UK banking profits. The tax rate applicable for non-banking entities is 19% (2019:19%).


Tax reconciliation

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


2020

2019


£m

%

£m

%

Profit before tax

163 



1,010 



Tax expense





Taxation at UK corporation tax of 19.00% (2019: 19.00%)

31 


19.0 


192 


19.0 


Items increasing the tax charge in 2020:





-  change in tax rates

58 


35.6 


(4)


(0.4)


-  adjustments in respect of prior period liabilities

26 


16.0 


(25)


(2.4)


non-deductible costs in respect of regulatory and legal matters

16 


9.8 




-  UK banking surcharge


5.5 


73 


7.2 


Items reducing tax charge in 2020:





-  deductions for AT1 coupon payments

(34)


(20.9)


(36)


(3.6)


-  non-deductible UK customer redress

(23)


(14.1)


301 


29.8 


-  other permanent disallowables



(7)


(0.7)


Year ended 31 Dec

83 


50.9 


494 


48.9 


.


 

The effective tax rate for the year was 50.9% (2019: 48.9%). This is higher than the UK rate of corporation tax for banking entities of 27% (2019: 27%), with the largest adjusting item being a charge of £58m (2019: £nil) resulting from the remeasurement of deferred tax balances following cancellation of the planned reduction in the UK rate of corporation tax from 19% to 17% from 1 April 2020. This charge arises on the deferred tax liability associated with the defined benefit pension surplus, partially offset by credits arising on deferred tax assets.


Movement of deferred tax assets and liabilities


Loan
impairment
provisions

Cash flow
hedges

FVOCI
reserves

Defined
benefit
pension

Fixed and
intangible
assets

Other

Total


£m

£m

£m

£m

£m

£m

£m

The group








At 1 Jan 2020

130 



(3)


(1,459)


98 



(1,223)


Income statement

(7)




(109)


20 



(93)


Other comprehensive income


(3)


(49)


(311)




(361)


At 31 Dec 2020

123 



(52)


(1,879)


118 


12 


(1,677)


Assets

123 





118 


12 


254 


Liabilities



(52)


(1,879)




(1,931)


 

At 1 Jan 2019

147 


16 


(4)


(1,460)


99 


13 


(1,189)


Income statement

(17)




(41)


(1)


(6)


(65)


Other comprehensive income


(12)



42 




31 


At 31 Dec 2019

130 



(3)


(1,459)


98 



(1,223)


Assets

130 





98 



239 


Liabilities



(3)


(1,459)




(1,462)


 


The bank








At 1 Jan 2020

121 



(3)


(1,459)


80 



(1,255)


Income statement

(7)




(109)


15 



(92)


Other comprehensive income


(3)


(49)


(311)




(363)


At 31 Dec 2020

114 



(52)


(1,879)


95 


11 


(1,710)


Assets

114 





95 


11 


221 


Liabilities



(52)


(1,879)




(1,931)


 

At 1 Jan 2019

137 


16 


(4)


(1,460)


81 



(1,224)


Income statement

(16)




(41)


(1)


(4)


(62)


Other comprehensive income


(12)



42 




31 


At 31 Dec 2019

121 



(3)


(1,459)


80 



(1,255)


Assets

121 





80 



207 


Liabilities



(3)


(1,459)




(1,462)


 


Management has assessed the likely availability of future taxable profits against which to recover the deferred tax assets of the bank and the group, taking into consideration the reversal of existing taxable temporary differences, past business performance and forecasts of future business performance. Management is satisfied that although the bank and the group recorded a tax loss for the year, as a result of the impacts of Covid-19, the aforementioned evidence is sufficient to support recognition of all deferred tax assets.


6

Dividends

 


Dividends to the shareholder of the parent company




2020

2019


£ per share

£m

£ per share

£m

Dividends paid on ordinary shares





Interim dividend in respect of the previous year

2,000 


100 


4,000 


200 


Interim dividend in respect of the current year



2,400 


120 


Total

2,000 


100 


6,400 


320 


 


 

 


Total coupons on capital securities classified as equity



2020

2019


First call date

£m

£m

Undated Subordinated Additional Tier 1 instruments




-  £1,096m

Dec 2019

60 


65 


-  £1,100m

Dec 2024

62 


66 


Total


122 


131 


 


7

Fair values of financial instruments carried at fair value

 

Control framework

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

Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is used.

For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.

Fair value hierarchy

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

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

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

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

 


Financial instruments carried at fair value and bases of valuation


2020

2019


Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

The group

£m

£m

£m

£m

£m

£m

£m

£m

Recurring fair value measurements at 31 Dec









Assets









Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

26 




26 


65 




66 


Derivatives


150 



155 



119 



121 


Financial investments

19,013 


296 



19,309 


19,285 


452 



19,737 


Liabilities









Derivatives


363 



365 



197 



201 


 

The bank









Recurring fair value measurements at 31 Dec









Assets









Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

26 




26 


65 




66 


Derivatives


150 



155 



116 



118 


Financial investments

19,013 


296 



19,309