REG - HSBC Holdings PLC - Annual Financial Report - Part 9
21/02/2023 16:45
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RNS Number : 5857Q HSBC Holdings PLC 21 February 2023
Financial statements
The financial statements provide detailed information and notes on our income,
balance sheet, cash flows and changes in equity, alongside a report from our
independent auditors.
Contents
313 Report of Independent Registered Public Accounting Firm to the Board of
Directors and Shareholders of HSBC Holdings plc
324 Financial statements
335 Notes on the financial statements
Building on our international connections
We aim to collaborate internationally to make a difference for our customers.
In May 2022, we supported a Hong Kong-based client with its investment in one
of London's tallest skyscrapers. We helped C C Land Holdings Limited with a
£605m refinancing of The Leadenhall Building in the City of London financial
district. The international property development and investment company bought
the 225-metre tall tower in 2017 for £1.15bn, in what was the second biggest
sale of a UK building at the time. The refinancing was co-ordinated by
colleagues from our UK and Hong Kong teams, and incorporated support from
three other banks.
Independent auditors' report to the members of HSBC Holdings plc
Report on the audit of the financial statements
Opinion
In our opinion, HSBC Holdings plc's group financial statements and company
financial statements (the "financial statements")
• give a true and fair view of the state of the group's and of
the company's affairs as at 31 December 2022 and of the group's and company's
profit and the group's and company's cash flows for the year then ended;
• have been properly prepared in accordance with UK-adopted
international accounting standards; and
• have been prepared in accordance with the requirements of the
Companies Act 2006.
We have audited the financial statements, included within the Annual Report
and Accounts 2022 (the "Annual Report"), which comprise: the consolidated and
company balance sheets as at 31 December 2022; the consolidated and company
income statements and the consolidated and company statements of comprehensive
income for the year then ended, the consolidated and company statements of
cash flows for the year then ended, the consolidated and company statements of
changes in equity for the year then ended; and the notes to the financial
statements, which include a description of the significant accounting policies
and other explanatory information. Certain notes to the financial statements
have been presented elsewhere in the Annual Report, rather than in the notes
to the financial statements. These are cross-referenced from the financial
statements and are identified as '(Audited)'. The relevant disclosures are
included in the Risk review section on pages 131 to 238 and the Directors
remuneration report disclosures on pages 276 to 301.
Our opinion is consistent with our reporting to the Group Audit Committee
('GAC').
Separate opinion in relation to international financial reporting standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European
Union
As explained in note 1.1(a) to the financial statements, the group and
company, in addition to applying UK-adopted international accounting
standards, have also applied international financial reporting standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European
Union.
In our opinion, the group and company financial statements have been properly
prepared in accordance with international financial reporting standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European
Union.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in note 1.1(a) to the financial statements, the group and
company, in addition to applying UK-adopted international accounting
standards, have also applied international financial reporting standards
(IFRSs) as issued by the International Accounting Standards Board (IASB).
In our opinion, the group and company financial statements have been properly
prepared in accordance with IFRSs as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) ("ISAs (UK)"), International Standards on Auditing issued by the
International Auditing and Assurance Standards Board ("ISAs") and applicable
law. Our responsibilities under ISAs (UK) and ISAs are further described in
the Auditors' responsibilities for the audit of the financial statements
section of our report. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical
requirements that are relevant to our audit of the financial statements in the
UK, which includes the FRC's Ethical Standard, as applicable to listed public
interest entities, and the International Code of Ethics for Professional
Accountants (including International Independence Standards) issued by the
International Ethics Standards Board for Accountants (IESBA Code), and we have
fulfilled our other ethical responsibilities in accordance with these
requirements.
To the best of our knowledge and belief, we declare that non-audit services
prohibited by either the FRC's Ethical Standard or Article 5(1) of Regulation
(EU) No 537/2014 were not provided to the company or its controlled
undertakings.
Other than those disclosed in note 6, we have provided no non-audit services
to the company or its controlled undertakings in the period under audit.
Our audit approach
Overview
Audit scope
• This was the fourth year that it has been my responsibility to
form this opinion on behalf of PricewaterhouseCoopers LLP, who you first
appointed on 31 March 2015 in relation to that year's audit. In addition to
forming this opinion, in this report we have also provided information on how
we approached the audit, how it changed from the previous year and details of
the significant discussions that we had with the GAC.
Key audit matters
• Expected credit losses - Impairment of loans and advances
(group)
• Impairment of investment in associate - Bank of Communications
Co., Ltd ('BoCom') (group)
• Investments in subsidiaries (company)
• Valuation of defined benefit pension obligations (group)
• Held for sale accounting (group)
Materiality
• Overall group materiality: US$1bn (2021: US$970m) based on 5%
of adjusted profit before tax.
• Overall company materiality: US$950m (2021: US$920) based on
0.75% of total assets. This would result in an overall materiality of US$2bn
and was therefore reduced below the group materiality.
• Performance materiality: US$750m (2021: US$725m) (group) and
US$712m (2021: US$690m) (company).
The scope of our audit
As part of designing our audit, we determined materiality and assessed the
risks of material misstatement in the financial statements.
Key audit matters
Key audit matters are those matters that, in the auditors' professional
judgement, were of most significance in the audit of the financial statements
of the current period and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified by the
auditors, including those which had the greatest effect on: the overall audit
strategy; the allocation of resources in the audit; and directing the efforts
of the engagement team. These matters, and any comments we make on the results
of our procedures thereon, were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
Held for sale accounting (group) is a new key audit matter this year.
Otherwise, the key audit matters below are consistent with last year.
Expected credit losses - Impairment of loans and advances (group)
Determining expected credit losses ('ECL') involves management judgement and
is subject to a high degree of estimation uncertainty.
Management makes various assumptions when estimating ECL. The significant
assumptions that we focused on in our audit included those with greater levels
of management judgement and for which variations had the most significant
impact on ECL. These included assumptions made in determining forward looking
economic scenarios and their probability weightings (specifically the central
and downside scenarios given these have the most material impact on ECL) and
estimating management judgemental adjustments and significant discounted cash
flows for material credit impaired exposures in relation to the China offshore
unsecured commercial real estate portfolio.
The level of estimation uncertainty and judgement has remained high during
2022 as a result of the uncertain macroeconomic and geopolitical environment,
high levels of inflation and a rising global interest rate environment, as
well as developments in China's commercial real estate sector. Macroeconomic
conditions vary between territories and industries, leading to uncertainty
around judgements made in determining the severity and probability weighting
of macroeconomic variable forecasts across the different economic scenarios
used in ECL models.
The modelling methodologies used to estimate ECL are developed using
historical experience. The impact of the prevailing macroeconomic conditions
has also resulted in certain limitations in the reliability of these
methodologies to forecast the extent and timing of future customer defaults
and therefore estimate ECL. In addition, modelling methodologies do not
incorporate all factors that are relevant to estimating ECL, such as
differentiating the impact on industry sectors and economic conditions. These
limitations are addressed with management judgemental adjustments, the
measurement of which is inherently judgemental and subject to a high level of
estimation uncertainty, in particular in relation to the China commercial real
estate offshore portfolio.
Management makes other assumptions which are less judgemental or for which
variations have a less significant impact on ECL. These assumptions include:
• the methodologies used in quantitative scorecards for determining
customer risk ratings ('CRRs');
• estimating expected cash flows and collateral valuations for credit
impaired corporate exposures, other than in relation to the China commercial
real estate offshore portfolio;
• model methodologies themselves; and
• quantitative and qualitative criteria used to assess significant
increases in credit risk.
We held discussions with the GAC covering governance and controls over ECL,
with a significant focus on the uncertain prevailing macroeconomic conditions
and developments in China's commercial real estate sector. We discussed a
number of areas, including:
• the severity of macroeconomic scenarios, and their related
probability weightings, across territories;
• management judgemental adjustments and the nature and extent of
analysis used to support those adjustments;
• significant assumptions used to estimate the discounted cash inflow
projections for defaulted exposures in relation to unsecured offshore China
commercial real estate;
• management's policies, governance and controls over model validation
and monitoring; and
• the disclosures made in relation to ECL, in particular, the impact
of adjustments on determining ECL.
We assessed the design and effectiveness of governance and controls over the
estimation of ECL. We observed management's review and challenge in governance
forums for (1) the determination of macroeconomic scenarios and their
probability weightings, and (2) the assessment of ECL for Retail and Wholesale
portfolios, including the assessment of model limitations and any resulting
management judgemental adjustments.
We also tested controls over:
• model validation and monitoring;
• credit reviews that determine customer risk ratings for wholesale
customers;
• the identification of credit impaired triggers;
• the input of critical data into source systems and the flow and
transformation of critical data from source systems to impairment models and
management judgemental adjustments;
• the calculation and approval of management judgemental adjustments
to modelled outcomes; and
• approval of significant individual impairments.
We involved our economic experts in assessing the significant assumptions made
in determining the severity and probability weighting of macroeconomic
variables ("MEV") forecasts. These assessments considered the sensitivity of
ECL to variations in the severity and probability weighting of MEV forecasts.
We involved our modelling experts in assessing the appropriateness of the
significant assumptions and methodologies used for models and certain
management judgemental adjustments. We independently re-performed the
calculations for a sample of those models and certain management judgemental
adjustments. In respect of unsecured offshore China commercial real estate, we
involved our business recovery experts in assessing certain significant
management judgemental adjustments and discounted cash flows for a sample of
credit impaired exposures. We further considered whether the judgements made
in selecting the significant assumptions would give rise to indicators of
possible management bias.
In addition, we performed substantive testing over:
• the compliance of ECL methodologies and assumptions with the
requirements of IFRS 9;
• the appropriateness and application of the quantitative and
qualitative criteria used to assess significant increases in credit risk;
• a sample of critical data used in ECL models and to estimate
management judgemental adjustments;
• assumptions and critical data for a sample of credit impaired
wholesale exposures; and
• a sample of CRRs applied to the wholesale exposures.
We evaluated and tested the Credit Risk disclosures made in the Annual Report.
• Credit risk disclosures, page 145.
• Group Audit Committee Report, page 262.
• Note 1.2(d):Financial instruments measured at amortised cost, page
340.
• Note 1.2(i): Impairment of amortised cost and FVOCI financial
assets, page 341.
At 31 December 2022, the fair value of the investment in BoCom, based on the
share price, was US$15.2bn lower than the carrying value ('CV') of US$23.3bn.
This is an indicator of potential impairment. An impairment test was performed
by management, with supporting sensitivity analysis, using the higher of fair
value and value in use ('VIU'). The VIU was $0.2bn in excess of the CV. On
this basis, management concluded no impairment was required.
The methodology in the VIU model is dependent on various assumptions, both
short term and long term in nature. These assumptions, which are subject to
estimation uncertainty, are derived from a combination of management's
judgement, analysts' forecasts and market data. The significant assumptions
that we focused our audit on were those with greater levels of management
judgement and for which variations had the most significant impact on the VIU.
Specifically, these included:
• the discount rate;
• short term assumptions for operating income growth rate, cost-income
ratio, and expected credit losses;
• long term assumptions for profit and asset growth rates, expected
credit losses, and effective tax rates; and
• capital related assumptions (risk-weighted assets as a percentage of
total assets, capital adequacy ratio and tier 1 capital adequacy ratio).
We discussed the appropriateness of the VIU methodology and significant
assumptions with the GAC, giving consideration to the macroeconomic
environment, the outlook for the Chinese banking market and the fair value,
which has been lower than the carrying value for approximately 11 years. We
also discussed the disclosures made in relation to BoCom, including reasonably
possible alternatives for the significant assumptions, the use of sensitivity
analysis to explain estimation uncertainty and the changes in certain
assumptions that would result in the VIU being equal to the CV.
We tested controls in place over the significant assumptions and the model
used to determine the VIU. We assessed the appropriateness of the methodology
used, and the mathematical accuracy of the calculations, to estimate the VIU.
In respect of the significant assumptions, our testing included the following:
• challenging the appropriateness of the significant assumptions and,
where relevant, their interrelationships;
• obtaining evidence for data supporting significant assumptions
including historic experience, external market information, third-party
sources including analysts reports, information from BoCom management and
historically available BoCom public information;
• assessing the impact on the VIU of reasonable variations in certain
significant assumptions, both individually and in aggregate;
• determining a reasonable range for the discount rate used within the
model, with the assistance of our valuation experts, and comparing it to the
discount rate used by management; and
• assessing whether the judgements made in deriving the significant
assumptions give rise to indicators of possible management bias.
We observed the meetings between management and BoCom management, held
specifically to identify facts and circumstances impacting assumptions
relevant to the determination of the VIU.
Representations were obtained from management that assumptions used were
consistent with information currently available to the group.
We evaluated and tested the disclosures made in the Annual Report in relation
to BoCom.
• Group Audit Committee Report, page 262.
• Note 1.2(a): Critical accounting estimates and judgements, page 338.
• Note 18: Interests in associates and joint ventures, page 379.
Investments in subsidiaries (company)
Management reviewed investments in subsidiaries for indicators of impairment
and indicators that impairment charges recognised in prior periods may no
longer exist or may have decreased in accordance with IAS 36 as at 31 December
2022. Where indicators have been identified management estimated the
recoverable amount using the higher of value in use ('VIU) or fair value less
cost to sell. Management's assessment resulted in a partial reversal of an
impairment charge of US$2.5bn in relation to the investment in HSBC Overseas
Holdings (UK) Limited ('HOHU'), which is an immediate holding company of
certain businesses in North America. This resulted in investment in
subsidiaries of $US167.5bn at 31 December 2022.
The methodology used to estimate the recoverable amount is dependent on
various assumptions, both short term and long term in nature. These
assumptions, which are subject to estimation uncertainty, are derived from a
combination of management's judgement, experts engaged by management and
market data. The significant assumptions that we focused our audit on were
those with greater levels of management judgement and for which variations had
the most significant impact on the recoverable amount. Specifically, these
included:
• HSBC's business plan for 2023 to 2027 focusing on revenue, cost and
ECL forecasts including the impact of climate change risk;
• regulatory capital requirements;
• long term growth rates; and
• discount rates.
We discussed the partial reversal of the impairment charge for HOHU, the
appropriateness of methodologies used and significant assumptions with the
GAC, giving consideration to the macroeconomic outlook and HSBC's strategy. We
considered reasonable possible alternatives for significant assumptions.
We tested controls in place over significant assumptions and the model used to
determine the recoverable amounts. We assessed the appropriateness of the
methodology used, and tested the mathematical accuracy of the calculations, to
estimate the recoverable amounts. In respect of the significant assumptions,
our testing included the following:
• challenging the achievability of management's business plan and the
prospects for HSBC's businesses, as well as considering the achievement of
historic forecasts;
• obtaining and evaluating evidence relating to significant
assumptions, from a combination of historical experience and external market
and other financial information;
• assessing whether the cash flows included in the model were in
accordance with the relevant accounting standard;
• assessing the sensitivity of the VIU to reasonable variations in
significant assumptions, both individually and in aggregate; and
• determining a reasonable range for the discount rate used within the
model, with the assistance of our valuation experts, and comparing it to the
discount rate used by management.
We evaluated and tested the disclosures made in the Annual Report in relation
to investment in subsidiaries.
• Note 19: Investments in subsidiaries, page 382.
Valuation of defined benefit pensions obligations (group)
The group has a defined benefit obligation of US$25.7bn, of which US$18.8bn
relates to HSBC Bank (UK) pension scheme.
The valuation of the defined benefit obligation for HSBC Bank (UK) pension
scheme is dependent on a number of actuarial assumptions. Management uses an
actuarial expert to determine the valuation of the defined benefit
obligations. The valuation methodology uses a number of market based inputs
and other financial and demographic assumptions. The significant assumptions
that we focused our audit on were those with greater levels of management
judgement and for which variations had the most significant impact on the
liability. Specifically, these included the discount rate, inflation rate and
mortality rate.
We discussed with the GAC the methodologies and significant assumptions used
by management to determine the value of the defined benefit obligation.
We tested governance and controls in place over the methodologies and the
significant assumptions, including those in relation to the use of
management's experts. We also evaluated the objectivity and competence of
management's expert involved in the valuation of the defined benefit
obligation.
We assessed the appropriateness of the methodology used, and tested the
accuracy of the calculation, to estimate the liability. In respect of the
significant assumptions, we used our actuarial experts to understand the
judgements made by management and their actuarial expert in determining the
significant assumptions and compared these assumptions to our independently
compiled expected ranges based on market observable indices and the knowledge
and opinions of our actuarial experts.
We evaluated and tested the disclosures made in the Annual Report in relation
to the defined benefit pension obligation.
• Group Audit Committee Report, page 262.
• Note 1.2(k): Critical accounting estimates and judgements, page 345.
• Note 5: Employee compensation and benefits, page 351.
Held for sale accounting (group)
The group has agreements to sell a number of businesses as part of executing
its strategy. This has resulted in US$115.9bn of assets and US$114.6bn of
liabilities being classified as held for sale as at 31 December 2022, in
relation to businesses in France, Canada, Russia and Greece. In addition to
the assets and liabilities classified as held for sale, a loss of US$2.4bn has
also been recognised in 2022 in relation to the sale of the business in
France. For the assets and liabilities to be classified as held for sale, the
sale needs to be considered highly probable and expected to complete within 12
months of the date of classification. We focused our audit on the areas with
greater levels of management judgement relating to the highly probable
threshold being met including the expected timing of completion, the
appropriateness of disclosures relating to the highly probable assessment and
the loss recognised in relation to the sale of the business in France.
We discussed with the GAC the judgements made by management in determining if
the highly probable thresholds were met as at 31 December 2022. We also
discussed the appropriateness of the disclosure made in the Annual Report
which explained how management had concluded that transactions met the highly
probable threshold as at 31 December 2022.
We tested governance and controls in place over the management process to
determine if the highly probable threshold had been met on assets and
liabilities classified as held for sale.
We assessed the key judgments made by management to determine whether the
highly probable thresholds were met as at 31 December 2022, including their
assessment of remaining actions to complete the transactions, any regulatory
requirements that need to be met, and the likelihood and expected timing of
the transactions being approved by relevant regulators and shareholders.
We also tested the completeness and accuracy of the assets and liabilities
that were classified as held for sale and the loss on sale recognised in
relation to the French business. We evaluated and tested the disclosures made
in the Annual Report in relation to assets and liabilities classified as held
for sale.
• Group Audit Committee Report, page 262.
• Note 1.2(o): Critical accounting estimates and judgements, page 347.
• Note 23: Assets held for sale and liabilities of disposal groups held
for sale, page 389.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to
be able to give an opinion on the financial statements as a whole, taking into
account the structure of the group and the company, the accounting processes
and controls, and the industry in which they operate.
The risks that HSBC faces are diverse, with the interdependencies between them
being numerous and complex. In performing our risk assessment we engaged with
a number of stakeholders to ensure we appropriately understood and considered
these risks and their interrelationships. This includes stakeholders within
HSBC and our own experts within PwC. This engagement covered external factors
across the geopolitical, macroeconomic and regulatory and accounting
landscape, the impact of climate change risk as well as the internal
environment at HSBC, driven by strategy and transformation.
We evaluated and challenged management's assessment of the impact of climate
change risk, which is set out on page 46, including their conclusion that
there is no material impact on the financial statements. In making this
evaluation we considered management's use of stress testing and scenario
analysis to arrive at the conclusion that there is no material impact on the
financial statements. We considered management's assessment on the areas in
the financial statements most likely to be impacted by climate risk,
including:
• the impact on ECL on loans and advances to customers, for both
physical and transition risk;
• the forecast cashflows from management's five year business plan and
long term growth rates used in estimating recoverable amounts as part of
impairment assessments of investments in subsidiaries, goodwill and intangible
assets;
• the impact of climate related terms on the solely payments of
principal and interest test for classification and measurement of loans and
advances to customers; and
• climate risks relating to contingent liabilities as HSBC faces
increased reputational, legal and regulatory risk as it progresses towards its
climate ambition.
HSBC's progress on their ESG targets is not included within the scope of this
audit. We were engaged separately to provide independent limited assurance to
the Directors over the following ESG data:
• the 2019 and 2020 on-balance sheet financed emissions for 6 sectors
in total (page 50);
• the cumulative progress made by HSBC on providing and facilitating
sustainable financing and investments (page 57); and
• HSBC's own operations' scope 1, 2 and 3 (limited to business travel)
greenhouse gas emissions data for 2022 (page 62); and supply chain greenhouse
gas emissions for purchased goods and services, and capital goods for 2021 and
2022 (page 64).
The independent limited assurance reports, which explain the scope of our work
and the procedures undertaken can be found on:
www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre. The
work performed for a limited assurance report is substantially less than the
work performed for our financial audit, which provides reasonable assurance.
Through our risk assessment, we tailored our determination as to which
entities and balances we needed to perform testing over to support our Group
opinion, taking into consideration the complex and disaggregated group
structure, the accounting processes and controls as well as the industry in
which they operate. The risks of material misstatement can be reduced to an
acceptable level by testing the most financially significant entities within
the Group and those that drive particular significant risks identified as part
of our risk assessment. This ensures that sufficient coverage has been
obtained for each financial statement line item (FSLI). We continually
assessed risks and changed the scope of our audit where necessary.
Our risk assessment and scoping identified certain entities (collectively the
Significant Subsidiaries) for which we obtained audit opinions. We obtained
full scope audit opinions for the consolidated financial position and
performance of The Hongkong and Shanghai Banking Corporation Limited, HSBC
Bank plc, and HSBC North America Holdings Inc. We also obtained full scope
audit opinions for the company financial position and performance of HSBC UK
Bank plc, HSBC Bank Canada and HSBC Mexico S.A. Banco. We obtained audit
opinions over specific balances for HSBC Bank Middle East Limited - UAE
Operations. The audits for HSBC Bank plc and HSBC UK Bank plc were performed
by other PwC teams in the UK. All other audits were performed by other PwC
network firms.
We continued to incorporate elements of unpredictability into our audit
scoping, extending the scope of work performed for both
The Hongkong and Shanghai Banking Corporation India Branch, and HSBC Bank
(China) Limited. These entities are also in scope for The Hongkong and
Shanghai Banking Corporation Limited. This was undertaken with consideration
of both the relative profitability of these entities in the region and the
Group's strategy.
Group-wide audit approach
HSBC has entity level controls that have a pervasive influence across the
group, as well as other global and regional governance and controls over
aspects of financial reporting, such as those operated by the Global Risk
function for expected credit losses. A significant amount of IT and
operational processes and controls relevant to financial reporting are
undertaken in operations centres run by Digital Business Services ('DBS').
Whilst these operations centres are not separate components, the IT and
operational processes and controls are relevant to the financial information
of the Significant Subsidiaries. Financial reporting processes and controls
are also performed centrally in HSBC's Group Finance function and finance
operation centres ('Finance Operations'), including the impairment assessment
of goodwill and intangible assets, the consolidation of the group's results,
the preparation of financial statements, and management's oversight controls
relevant to the group's financial reporting.
Group-wide processes or processes in DBS and Finance Operations are subject to
specified audit procedures or an audit over specific FSLIs. These procedures
primarily relate to testing of IT general controls, forward looking economic
scenarios for ECL, operating expenses, intangible assets, valuation of
financial instruments, intercompany eliminations, reconciliations and
consolidation as well as payroll. For these areas, we either performed audit
work ourselves, or directed and provided oversight of the audit work performed
by PwC teams in the UK, Poland, China, Sri Lanka, Malaysia, India, Mexico and
the Philippines. Some of this work was relied upon by the PwC teams auditing
the Significant Subsidiaries. This audit work, together with analytical review
procedures and assessing the outcome of local external audits, also mitigated
the risk of material misstatement for balances in entities that were not part
of a Significant Subsidiary.
Significant Subsidiaries audit approach
In March 2022, we held a meeting in Dubai with the partners and senior staff
from the Group audit team and the PwC teams who undertake audits of the
Significant Subsidiaries and the Operations Centres. The meeting focused
primarily on reconnecting as a team after virtual interactions throughout the
Covid-19 pandemic, reassessing our approach to auditing HSBC's businesses,
changes at HSBC and in our PwC teams, and how we continue to innovate and
improve the quality of the audit. We also discussed our significant audit
risks.
We asked the partners and teams reporting to us on the Significant
Subsidiaries to work to assigned materiality levels reflecting the size of the
operations they audited. The performance materiality levels ranged from
US$712m to US$50m. Certain Significant Subsidiaries were audited to a local
statutory audit materiality that was a lower level than our allocated group
materiality.
We designed global audit approaches for the products and services that
substantially make up HSBC's global businesses, such as lending, deposits and
derivatives. These approaches were provided to the partners and teams
performing audit testing for the Significant Subsidiaries.
We were in active dialogue throughout the year with the partners and teams
responsible for the audits of the Significant Subsidiaries, including
consideration of how they planned and performed their work. Senior members of
our team undertook at least one in-person site visit prior to the year end
where a full scope audit was requested. We attended Audit Committee meetings
for some of the Significant Subsidiaries. We also attended meetings with
management for each of these Significant Subsidiaries at the year-end.
The audit of The Hongkong and Shanghai Banking Corporation Limited in Hong
Kong relied upon work performed by other teams in Hong Kong and the PwC
network firms in India, mainland China and Singapore. Similarly, the audit of
HSBC Bank plc in the UK relied upon work performed by other teams in the UK
and the PwC network firms in France and Germany. We considered how the audit
partners and teams for the Significant Subsidiaries instructed and provided
oversight to the work performed in these locations. Collectively, Significant
Subsidiaries covered 84% of total assets and 69% of total operating income.
Using the work of others
We have increased our use of evidence provided by others through our reliance
on management assurance testing of controls across the group. This included
testing of controls performed by management themselves in certain low risk
areas including reconciliations, footnote disclosure controls and certain
automated controls. We re-performed a portion of the testing to ensure
appropriate quality of testing, as well as assessing the competence and
objectivity of those performing the testing.
We also used the work of PwC experts, for example economic experts for our
work around the severity and probability weighting of macroeconomics variables
as part of the expected credit loss allowance and actuaries on the estimates
used in determining pension liabilities. An increasing number of controls are
operated on behalf of HSBC by third parties. We obtained audit evidence from
work that is scoped and provided by other auditors that are engaged by those
third parties. For example, we obtained a report evidencing the testing of
external systems and controls supporting HSBC's payroll and HR processes.
Materiality
The scope of our audit was influenced by our application of materiality. We
set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and
the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of
misstatements, both individually and in aggregate on the financial statements
as a whole.
Based on our professional judgement, we determined materiality for the
financial statements as a whole as follows:
Overall materiality US$1bn (2021: US$970m). US$950m (2021: US$920).
How we determined it 5% of adjusted profit before tax. 0.75% of total assets. This would result in an overall materiality of US$2bn
and was therefore reduced below the group materiality.
Rationale for benchmark applied We believe a standard benchmark of 5% of adjusted profit before tax is an A benchmark of total assets has been used, as the company's primary purpose is
appropriate qualitative indicator of materiality, although certain items could to act as a holding company with investments in the group's subsidiaries, not
also be material for qualitative reasons. This benchmark is standard for to generate operating profits and therefore a profit based measure is not
listed entities and consistent with the wider industry. We selected adjusted relevant.
profit because, as discussed on page 29, management believes it best reflects
the performance of HSBC and how the group is run. We excluded the adjustments
made by management on page 29 for certain customer redress programmes and fair
value movements of financial instruments, as in our opinion they are recurring
items that form part of ongoing business performance.
We use performance materiality to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements
exceeds overall materiality. Specifically, we use performance materiality in
determining the scope of our audit and the nature and extent of our testing of
account balances, classes of transactions and disclosures, for example in
determining sample sizes. Our performance materiality was 75% (2021: 75%) of
overall materiality, amounting to US$750m (2021: US$725m) for the group
financial statements and US$712m (2021: US$690m) for the company financial
statements.
In determining the performance materiality, we considered a number of factors
- the history of misstatements, risk assessment and aggregation risk and the
effectiveness of controls - and concluded that an amount at the upper end of
our normal range was appropriate.
We agreed with the GAC that we would report to them misstatements identified
during our audit above US$50m (group audit) (2021: US$48m) and US$50m (company
audit) (2021: US$48m) as well as misstatements below those amounts that, in
our view, warranted reporting for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors' assessment of the group's and the company's
ability to continue to adopt the going concern basis of accounting included:
• performing a risk assessment to identify factors that could impact
the going concern basis of accounting, including both internal risks (i.e.
strategy execution) and external risks (i.e. macroeconomic conditions);
• understanding and evaluating the group's financial forecasts and the
group's stress testing of liquidity and regulatory capital, including the
severity of the stress scenarios that were used;
• understanding and evaluating credit rating agency ratings and
actions; and
• reading and evaluating the adequacy of the disclosures made in the
financial statements in relation to going concern.
Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the group's and the company's
ability to continue as a going concern for a period of at least twelve months
from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors'
use of the going concern basis of accounting in the preparation of the
financial statements is appropriate.
However, because not all future events or conditions can be predicted, this
conclusion is not a guarantee as to the group's and the company's ability to
continue as a going concern.
In relation to the directors' reporting on how they have applied the UK
Corporate Governance Code, we have nothing material to add or draw attention
to in relation to the directors' statement in the financial statements about
whether the directors considered it appropriate to adopt the going concern
basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to
going concern are described in the relevant sections of this report.
Reporting on other information
The other information comprises all of the information in the Annual Report
other than the financial statements and our auditors' report thereon. The
directors are responsible for the other information.
Our opinion on the financial statements does not cover the other information
and, accordingly, we do not express an audit opinion or, except to the extent
otherwise explicitly stated in this report, any form of assurance thereon. In
connection with our audit of the financial statements, our responsibility is
to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our
knowledge obtained in the audit, or otherwise appears to be materially
misstated. If we identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to conclude whether there
is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report
based on these responsibilities.
With respect to the Strategic Report and Report of the Directors, we also
considered whether the disclosures required by the UK Companies Act 2006 have
been included.
Based on our work undertaken in the course of the audit, the Companies Act
2006 requires us also to report certain opinions and matters as described
below.
Strategic report and Report of the Directors
In our opinion, based on the work undertaken in the course of the audit, the
information given in the Strategic Report and Report of the Directors for the
year ended 31 December 2022 is consistent with the financial statements and
has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the group and company and their
environment obtained in the course of the audit, we did not identify any
material misstatements in the Strategic Report and Report of the Directors.
Directors' Remuneration
In our opinion, the part of the Directors' Remuneration Report to be audited
has been properly prepared in accordance with the Companies Act 2006.
Corporate governance statement
The Listing Rules require us to review the directors' statements in relation
to going concern, longer-term viability and that part of the corporate
governance statement relating to the company's compliance with the provisions
of the UK Corporate Governance Code specified for our review. Our additional
responsibilities with respect to the corporate governance statement as other
information are described in the Reporting on other information section of
this report.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the corporate governance statement is materially
consistent with the financial statements and our knowledge obtained during the
audit, and we have nothing material to add or draw attention to in relation
to:
• the directors' confirmation that they have carried out an
appropriate assessment of the emerging and principal risks;
• the disclosures in the Annual Report that describe those principal
risks, what procedures are in place to identify emerging risks and an
explanation of how these are being managed or mitigated;
• the directors' statement in the financial statements about whether
they considered it appropriate to adopt the going concern basis of accounting
in preparing them, and their identification of any material uncertainties to
the group's and company's ability to continue to do so over a period of at
least twelve months from the date of approval of the financial statements;
• the directors' explanation as to their assessment of the group's and
company's prospects, the period this assessment covers and why the period is
appropriate; and
• the directors' statement as to whether they have a reasonable
expectation that the company will be able to continue in operation and meet
its liabilities as they fall due over the period of its assessment, including
any related disclosures drawing attention to any necessary qualifications or
assumptions.
Our review of the directors' statement regarding the longer-term viability of
the group and company was substantially less in scope than an audit and only
consisted of making inquiries and considering the directors' process
supporting their statement; checking that the statement is in alignment with
the relevant provisions of the UK Corporate Governance Code; and considering
whether the statement is consistent with the financial statements and our
knowledge and understanding of the group and company and their environment
obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the corporate governance
statement is materially consistent with the financial statements and our
knowledge obtained during the audit:
• the directors' statement that they consider the Annual Report, taken
as a whole, is fair, balanced and understandable, and provides the information
necessary for the members to assess the group's and company's position,
performance, business model and strategy;
• the section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems; and
• the section of the Annual Report describing the work of the GAC.
We have nothing to report in respect of our responsibility to report when the
directors' statement relating to the company's compliance with the Code does
not properly disclose a departure from a relevant provision of the Code
specified under the Listing Rules for review by the auditors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors' responsibility statement, the
directors are responsible for the preparation of the financial statements in
accordance with the applicable framework and for being satisfied that they
give a true and fair view. The directors are also responsible for such
internal control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the group's and the company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to
liquidate the group or the company or to cease operations, or have no
realistic alternative but to do so.
Auditors' responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditors' report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) and ISAs will always detect a
material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of irregularities,
including fraud. The extent to which our procedures are capable of detecting
irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we identified that the
principal risks of non-compliance with laws and regulations related to
breaches of financial crime laws and regulations and regulatory compliance,
including regulatory reporting requirements and conduct of business, and we
considered the extent to which non-compliance might have a material effect on
the financial statements. We also considered those laws and regulations that
have a direct impact on the financial statements such as the Companies Act
2006. We evaluated management's incentives and opportunities for fraudulent
manipulation of the financial statements (including the risk of override of
controls), and determined that the principal risks were related to posting
inappropriate journal entries in relation to cost targets, and management bias
in accounting estimates. The group engagement team shared this risk assessment
with the component auditors so that they could include appropriate audit
procedures in response to such risks in their work. Audit procedures performed
by the group engagement team and/or component auditors included:
• review of correspondence with and reports from regulators, including
the Prudential Regulation Authority ('PRA') and Financial Conduct Authority
('FCA');
• reviewed reporting to the GAC and GRC in respect of compliance and
legal matters;
• enquiries of management and review of internal audit reports,
insofar as they related to the financial statements;
• obtain legal confirmations from legal advisors relating to material
litigation and compliance matters;
• assessment of matters reported on the group's whistleblowing
programmes and the results of management's investigation of such matters,
insofar as they related to the financial statements;
• challenging assumptions and judgements made by management in its
significant accounting estimates, in particular in relation to the
determination of expected credit losses, the impairment assessment of the
investment in BoCom, valuation of defined benefit pensions obligations,
investment in subsidiaries and valuation of financial instruments;
• obtaining confirmations from third parties to confirm the existence
of a sample of transactions and balances; and
• identifying and testing journal entries, including those posted with
certain descriptions, posted and approved by the same individual, backdated
journals or posted by infrequent and unexpected users.
There are inherent limitations in the audit procedures described above. We are
less likely to become aware of instances of non-compliance with laws and
regulations that are not closely related to events and transactions reflected
in the financial statements. Also, the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one
resulting from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through collusion.
Our audit testing might include testing complete populations of certain
transactions and balances, possibly using data auditing techniques. However,
it typically involves selecting a limited number of items for testing, rather
than testing complete populations. We will often seek to target particular
items for testing based on their size or risk characteristics. In other cases,
we will use audit sampling to enable us to draw a conclusion about the
population from which the sample is selected.
A further description of our responsibilities for the audit of the financial
statements in accordance with ISAs (UK) is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditors' report.
As part of an audit in accordance with ISAs, we exercise professional
judgement and maintain professional scepticism throughout the audit. We also:
• identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinion. The
risk of not detecting a material misstatement resulting from fraud is higher
than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal
control;
• obtain an understanding of internal controls relevant to the audit
in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Group's and company's internal controls;
• evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management;
• conclude on the appropriateness of management's use of the going
concern basis of accounting and, based on the audit evidence obtained, whether
a material uncertainty exists related to events or conditions that may cast
significant doubt on the Group's and company's ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to
draw attention in our auditor's report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor's report. However, future events or conditions
may cause the Group to cease to continue as a going concern;
• evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and
events in a manner that achieves fair presentation; and
• obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the Group and
company to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the Group and
company audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, actions taken to
eliminate threats or safeguards applied.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the consolidated
financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
Use of this report
This report, including the opinions, has been prepared for and only for the
company's members as a body in accordance with Chapter 3 of Part 16 of the
Companies Act 2006 and for no other purpose. We do not, in giving these
opinions, accept or assume responsibility for any other purpose or to any
other person to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our
opinion:
• we have not obtained all the information and explanations we require
for our audit; or
• adequate accounting records have not been kept by the company, or
returns adequate for our audit have not been received from branches not
visited by us; or
• certain disclosures of directors' remuneration specified by law are
not made; or
• the company financial statements and the part of the Directors'
Remuneration Report to be audited are not in agreement with the accounting
records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Group Audit Committee ('GAC'), we were
appointed by the members on 31 March 2015 to audit the financial statements
for the year ended 31 December 2015 and subsequent financial periods. The
period of total uninterrupted engagement is eight years, covering the years
ended 31 December 2015 to 31 December 2022.
Other matter
As required by the Financial Conduct Authority Disclosure Guidance and
Transparency Rule 4.1.14R, these financial statements form part of the
ESEF-prepared annual financial report filed on the National Storage Mechanism
of the Financial Conduct Authority in accordance with the ESEF Regulatory
Technical Standard ('ESEF RTS'). This auditors' report provides no assurance
over whether the annual financial report has been prepared using the single
electronic format specified in the ESEF RTS.
Scott Berryman (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
21 February 2023
Financial statements
Contents
324 Consolidated income statement
325 Consolidated statement of comprehensive income
326 Consolidated balance sheet
327 Consolidated statement of cash flows
328 Consolidated statement of changes in equity
331 HSBC Holdings income statement
331 HSBC Holdings statement of comprehensive income
332 HSBC Holdings balance sheet
333 HSBC Holdings statement of cash flows
334 HSBC Holdings statement of changes in equity
Consolidated income statement
for the year ended 31 December
2022 2021 2020
Notes* $m $m $m
Net interest income 32,610 26,489 27,578
- interest income(1,2) 55,059 36,188 41,756
- interest expense(3) (22,449) (9,699) (14,178)
Net fee income 2 11,451 13,097 11,874
- fee income 15,213 16,788 15,051
- fee expense (3,762) (3,691) (3,177)
Net income from financial instruments held for trading or managed on a fair 3 10,469 7,744 9,582
value basis
Net income/(expense) from assets and liabilities of insurance businesses, 3 (3,394) 4,053 2,081
including related derivatives, measured at fair value through profit or loss
Changes in fair value of designated debt and related derivatives(4) 3 (77) (182) 231
Changes in fair value of other financial instruments mandatorily measured at 3 226 798 455
fair value through profit or loss
Gains less losses from financial investments (3) 569 653
Net insurance premium income 4 12,825 10,870 10,093
Impairment loss relating to the planned sale of our retail banking operations (2,378) - -
in France(5)
Other operating income/(loss)(6) (133) 502 527
Total operating income 61,596 63,940 63,074
Net insurance claims and benefits paid and movement in liabilities to 4 (9,869) (14,388) (12,645)
policyholders
Net operating income before change in expected credit losses and other credit 51,727 49,552 50,429
impairment charges
Change in expected credit losses and other credit impairment charges (3,592) 928 (8,817)
Net operating income 48,135 50,480 41,612
Employee compensation and benefits 5 (18,366) (18,742) (18,076)
General and administrative expenses (11,091) (11,592) (11,115)
Depreciation and impairment of property, plant and equipment and right-of-use (2,157) (2,261) (2,681)
assets(7)
Amortisation and impairment of intangible assets (1,716) (1,438) (2,519)
Goodwill impairment 21 - (587) (41)
Total operating expenses (33,330) (34,620) (34,432)
Operating profit 14,805 15,860 7,180
Share of profit in associates and joint ventures 18 2,723 3,046 1,597
Profit before tax 17,528 18,906 8,777
Tax expense 7 (858) (4,213) (2,678)
Profit for the year 16,670 14,693 6,099
Attributable to:
- ordinary shareholders of the parent company 14,822 12,607 3,898
- preference shareholders of the parent company - 7 90
- other equity holders 1,213 1,303 1,241
- non-controlling interests 635 776 870
Profit for the year 16,670 14,693 6,099
$ $ $
Basic earnings per ordinary share 9 0.75 0.62 0.19
Diluted earnings per ordinary share 9 0.74 0.62 0.19
* For Notes on the financial statements, see page 335.
1 Interest income includes $48,134m (2021: $30,916m; 2020: $35,293m)
of interest recognised on financial assets measured at amortised cost and
$6,386m (2021: $4,337m; 2020: $5,614m) of interest recognised on financial
assets measured at fair value through other comprehensive income.
2 Interest income is calculated using the effective interest method
and comprises interest recognised on financial assets measured at either
amortised cost or fair value through other comprehensive income.
3 Interest expense includes $20,798m (2021: $8,227m; 2020: $12,426m)
of interest on financial instruments, excluding interest on financial
liabilities held for trading or designated or otherwise mandatorily measured
at fair value.
4 The debt instruments, issued for funding purposes, are designated
under the fair value option to reduce an accounting mismatch.
5 Includes impairment of goodwill of $425m.
6 Other operating income includes a loss on net monetary positions of
$678m (2021: $224m, 2020: $128m) as a result of applying IAS 29 'Financial
Reporting in Hyperinflationary Economies'.
7 Includes depreciation of the right-of-use assets of $723m (2021:
$878m; 2020: $1,029m).
Consolidated statement of comprehensive income
for the year ended 31 December
2022 2021 2020
$m $m $m
Profit for the year 16,670 14,693 6,099
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 (5,468) (2,139) 1,750
- fair value gains/(losses) (7,261) (2,270) 2,947
- fair value gains transferred to the income statement on disposal (20) (464) (668)
- expected credit (recoveries)/losses recognised in the income statement 67 (49) 48
- income taxes 1,746 644 (577)
Cash flow hedges (3,655) (664) 471
- fair value gains/(losses) (4,207) 595 (157)
- fair value (gains)/losses reclassified to the income statement (758) (1,514) 769
- fair value (gains)/losses reclassified to the income statement
- income taxes 1,310 255 (141)
Share of other comprehensive income/(expense) of associates and joint ventures (367) 103 (73)
- share for the year (367) 103 (73)
Exchange differences (9,931) (2,393) 4,855
Items that will not be reclassified subsequently to profit or loss:
Fair value gains on property revaluation 280 - -
Remeasurement of defined benefit asset/liability (1,031) (274) 834
- before income taxes (1,723) (107) 1,223
- income taxes 692 (167) (389)
Changes in fair value of financial liabilities designated at fair value upon 1,922 531 167
initial recognition arising from changes in own credit risk
- before income taxes 2,573 512 190
- before income taxes
- income taxes (651) 19 (23)
- income taxes
Equity instruments designated at fair value through other comprehensive income 107 (446) 212
- fair value gains/(losses) 107 (443) 212
- income taxes - (3) -
Effects of hyperinflation 842 315 193
Other comprehensive income/(expense) for the year, net of tax (17,301) (4,967) 8,409
Total comprehensive income/(expense) for the year (631) 9,726 14,508
Attributable to:
- ordinary shareholders of the parent company (2,393) 7,765 12,146
- preference shareholders of the parent company - 7 90
- other equity holders 1,213 1,303 1,241
- non-controlling interests 549 651 1,031
Total comprehensive income/(expense) for the year (631) 9,726 14,508
Consolidated balance sheet
At
31 Dec 31 Dec
2022 2021
Notes* $m $m
Assets
Cash and balances at central banks 327,002 403,018
Items in the course of collection from other banks 7,297 4,136
Hong Kong Government certificates of indebtedness 43,787 42,578
Trading assets 11 218,093 248,842
Financial assets designated and otherwise mandatorily measured at fair value 14 45,063 49,804
through profit or loss
Derivatives 15 284,146 196,882
Loans and advances to banks 104,882 83,136
Loans and advances to customers 924,854 1,045,814
Reverse repurchase agreements - non-trading 253,754 241,648
Financial investments 16 425,564 446,274
Assets held for sale(1) 23 115,919 3,411
Prepayments, accrued income and other assets 22 156,866 136,571
Current tax assets 1,230 970
Interests in associates and joint ventures 18 29,254 29,609
Goodwill and intangible assets 21 21,321 20,622
Deferred tax assets 7 7,498 4,624
Total assets 2,966,530 2,957,939
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation 43,787 42,578
Deposits by banks 66,722 101,152
Customer accounts 1,570,303 1,710,574
Repurchase agreements - non-trading 127,747 126,670
Items in the course of transmission to other banks 7,864 5,214
Trading liabilities 24 72,353 84,904
Financial liabilities designated at fair value 25 127,327 145,502
Derivatives 15 285,764 191,064
Debt securities in issue 26 78,149 78,557
Liabilities of disposal groups held for sale(1) 23 114,597 9,005
Accruals, deferred income and other liabilities 27 133,240 114,773
Current tax liabilities 1,135 698
Liabilities under insurance contracts 4 114,844 112,745
Provisions 28 1,958 2,566
Deferred tax liabilities 7 2,422 4,673
Subordinated liabilities 29 22,290 20,487
Total liabilities 2,770,502 2,751,162
Equity
Called up share capital 32 10,147 10,316
Share premium account 32 14,664 14,602
Other equity instruments 19,746 22,414
Other reserves (9,141) 6,460
Retained earnings 152,068 144,458
Total shareholders' equity 187,484 198,250
Non-controlling interests 19 8,544 8,527
Total equity 196,028 206,777
Total liabilities and equity 2,966,530 2,957,939
1 'Assets held for sale' in 2021, including $2.4bn of loans and
advances to customers in relation to our exit of mass market retail banking
business in the US, were reported within 'Prepayments, accrued income and
other assets' in the Annual Report and Accounts 2021. Similarly, $8.8bn of
customer accounts classified as 'Liabilities of disposal groups' were
previously presented within 'Accruals, deferred income and other liabilities'.
* For Notes on the financial statements, see page 335.
The accompanying notes on pages 335 to 417 and the audited sections in the
Risk review on pages 131 to 238 (including 'Measurement uncertainty and
sensitivity analysis of ECL estimates' on pages 153 to 162, and 'Directors'
remuneration report' on pages 276 to 301 form an integral part of these
financial statements.
These financial statements were approved by the Board of Directors on 21
February 2023 and signed on its behalf by:
Mark E Tucker Georges Elhedery
Group Chairman Group Chief Financial Officer
Consolidated statement of cash flows
for the year ended 31 December
2022 2021 2020
$m $m $m
Profit before tax 17,528 18,906 8,777
Adjustments for non-cash items:
Depreciation, amortisation and impairment 3,873 4,286 5,241
Net loss/(gain) from investing activities 11 (647) (541)
Share of profits in associates and joint ventures (2,723) (3,046) (1,597)
Loss on disposal of subsidiaries, businesses, associates and joint ventures 2,639 - -
Change in expected credit losses gross of recoveries and other credit 3,907 (519) 9,096
impairment charges
Provisions including pensions 635 1,063 1,164
Share-based payment expense 400 467 433
Other non-cash items included in profit before tax (1,084) 510 (906)
Elimination of exchange differences(1) 49,127 18,937 (25,749)
Changes in operating assets and liabilities
Change in net trading securities and derivatives 20,181 (9,226) 13,150
Change in loans and advances to banks and customers 31,799 (11,014) (14,131)
Change in reverse repurchase agreements - non-trading (23,405) 552 9,950
Change in financial assets designated and otherwise mandatorily measured at 8,344 (4,254) (1,962)
fair value
Change in other assets (10,771) 19,899 (19,610)
Change in deposits by banks and customer accounts (91,194) 95,703 226,723
Change in repurchase agreements - non-trading 4,344 14,769 (28,443)
Change in debt securities in issue 12,518 (16,936) (9,075)
Change in financial liabilities designated at fair value (13,647) (11,425) (6,630)
Change in other liabilities 15,978 (10,935) 20,323
Dividends received from associates 944 808 761
Contributions paid to defined benefit plans (194) (509) (495)
Tax paid (2,776) (3,077) (4,259)
Net cash from operating activities 26,434 104,312 182,220
Purchase of financial investments (520,600) (493,042) (496,669)
Proceeds from the sale and maturity of financial investments 495,049 521,190 476,990
Net cash flows from the purchase and sale of property, plant and equipment (1,285) (1,086) (1,446)
Net cash flows from purchase/(disposal) of customer and loan portfolios (3,530) 3,059 1,362
Net investment in intangible assets (3,125) (2,479) (2,064)
Net cash flow from acquisition and disposal of subsidiaries, businesses, (989) (106) (603)
associates and joint ventures
Net cash from investing activities (34,480) 27,536 (22,430)
Issue of ordinary share capital and other equity instruments - 1,996 1,497
Cancellation of shares (2,285) (707) -
Net purchases of own shares for market-making and investment purposes (91) (1,386) (181)
Net cash flow from change in stake of subsidiaries (197) - -
Redemption of preference shares and other equity instruments (2,266) (3,450) (398)
Subordinated loan capital issued 7,300 - -
Subordinated loan capital repaid(2) (1,777) (864) (3,538)
Dividends paid to shareholders of the parent company and non-controlling (6,970) (6,383) (2,023)
interests
Net cash from financing activities (6,286) (10,794) (4,643)
Net increase/(decrease) in cash and cash equivalents (14,332) 121,054 155,147
Cash and cash equivalents at 1 Jan 574,032 468,323 293,742
Exchange differences in respect of cash and cash equivalents (38,029) (15,345) 19,434
Cash and cash equivalents at 31 Dec(3) 521,671 574,032 468,323
Cash and cash equivalents comprise:
- cash and balances at central banks 327,002 403,018 304,481
- items in the course of collection from other banks 7,297 4,136 4,094
- loans and advances to banks of one month or less 72,295 55,705 51,788
- reverse repurchase agreements with banks of one month or less 68,682 76,658 65,086
- treasury bills, other bills and certificates of deposit less than three 26,727 28,488 30,023
months
- cash collateral and net settlement accounts 19,445 11,241 17,194
- cash and cash equivalents held for sale(4) 8,087 - -
- less: items in the course of transmission to other banks (7,864) (5,214) (4,343)
Cash and cash equivalents at 31 Dec(3) 521,671 574,032 468,323
Interest received was $55,664m (2021: $40,175m; 2020: $45,578m), interest paid
was $22,856m (2021: $12,695m; 2020: $17,440m) and dividends received
(excluding dividends received from associates, which are presented separately
above) were $1,638m (2021: $1,898m; 2020: $1,158m).
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
repayments of $(1.8)bn (2021: $(0.9)bn; 2020: $(3.5)bn) of securities.
Non-cash changes during the year included foreign exchange gains/(losses) of
$(1.1)bn (2021: $(0.3)bn; 2020: $0.5bn) and fair value gains/(losses) of
$(3.1)bn (2021: $(1.0)bn; 2020: $1.1bn).
3 At 31 December 2022, $59.3bn (2021: $33.6bn; 2020: $41.9bn) was not
available for use by HSBC, due to a range of restrictions, including currency
exchange and other restrictions, of which $22.1bn (2021: $15.4bn; 2020:
$16.9bn) related to mandatory deposits at central banks.
4 Includes $6.5bn of cash and balances at central banks (excluding the
expected cash contribution as part of the planned sale of our retail banking
operations in France. For further details, see Note 23); $1.3bn of reverse
repurchase agreements with banks of one month or less and $0.2bn of loans and
advances to banks of one month or less.
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves
Called up Other Retained Financial Cash Foreign Merger Total Non- Total
share equity earnings(3,4) assets flow exchange and other share- controlling equity
capital instru-ments at hedging reserve reserves(4,5) holders' interests
and FVOCI reserve equity
share reserve
premium
$m $m $m $m $m $m $m $m $m $m
At 1 Jan 2022 24,918 22,414 144,458 (634) (197) (22,769) 30,060 198,250 8,527 206,777
Profit for the year - - 16,035 - - - - 16,035 635 16,670
Other comprehensive income (net of tax) - - 1,368 (5,325) (3,613) (9,819) 174 (17,215) (86) (17,301)
- debt instruments at fair value through other comprehensive - - - (5,417) - - - (5,417) (51) (5,468)
income
- equity instruments designated at fair value through other - - - 92 - - - 92 15 107
comprehensive
income
- cash flow hedges - - - - (3,613) - - (3,613) (42) (3,655)
- changes in fair value of financial liabilities designated at - - 1,922 - - - - 1,922 - 1,922
fair value
upon initial recognition arising from changes in own credit risk
- property revaluation - - - - - - 174 174 106 280
- remeasurement of defined benefit asset/liability - - (1,029) - - - - (1,029) (2) (1,031)
- share of other comprehensive income of associates and joint - - (367) - - - - (367) - (367)
ventures
- effects of hyperinflation - - 842 - - - - 842 - 842
- exchange differences - - - - - (9,819) - (9,819) (112) (9,931)
Total comprehensive income for the year - - 17,403 (5,325) (3,613) (9,819) 174 (1,180) 549 (631)
Shares issued under employee remuneration and share plans 67 - (67) - - - - - - -
Dividends to shareholders - - (6,544) - - - - (6,544) (426) (6,970)
Redemption of securities(2) - (2,668) 402 - - - - (2,266) - (2,266)
Transfers(6) - - (2,499) - - - 2,499 - - -
Cost of share-based payment arrangements - - 400 - - - - 400 - 400
Cancellation of shares(7) (174) - (1,000) - - - 174 (1,000) - (1,000)
Other movements - - (485) 3 2 - 304 (176) (106) (282)
At 31 Dec 2022 24,811 19,746 152,068 (5,956) (3,808) (32,588) 33,211 187,484 8,544 196,028
Consolidated statement of changes in equity (continued)
for the year ended 31 December
Other reserves
Called up share capital and share premium Other Retained Financial assets at FVOCI reserve Cash flow Foreign Merger Total Non- Total
earnings(3,4)
equity hedging exchange and other reserves(4,5) share- controlling equity
instru-ments reserve reserve holders' interests
equity
$m $m $m $m $m $m $m $m $m $m
At 1 Jan 2021 24,624 22,414 140,572 1,816 457 (20,375) 26,935 196,443 8,552 204,995
Profit for the year - - 13,917 - - - - 13,917 776 14,693
Other comprehensive income (net of tax) - - 661 (2,455) (654) (2,394) - (4,842) (125) (4,967)
- debt instruments at fair value through other comprehensive - - - (2,105) - - - (2,105) (34) (2,139)
income
- equity instruments designated at fair value through other - - - (350) - - - (350) (96) (446)
comprehensive
income
- cash flow hedges - - - - (654) - - (654) (10) (664)
- changes in fair value of financial liabilities designated at - - 531 - - - - 531 - 531
fair value
upon initial recognition arising from changes in own credit risk
- remeasurement of defined benefit asset/liability - - (288) - - - - (288) 14 (274)
- share of other comprehensive income of associates and joint - - 103 - - - - 103 - 103
ventures
- effects of hyperinflation - - 315 - - - - 315 - 315
- exchange differences - - - - - (2,394) - (2,394) 1 (2,393)
Total comprehensive income for the year - - 14,578 (2,455) (654) (2,394) - 9,075 651 9,726
Shares issued under employee remuneration and share plans 354 - (336) - - - - 18 - 18
Capital securities issued(1) - 2,000 - - - - 1,996 - 1,996
(4)
Dividends to shareholders - - (5,790) - - - - (5,790) (593) (6,383)
Redemption of securities(2) - (2,000) - - - - - (2,000) - (2,000)
Transfers(6) - - (3,065) - - - 3,065 - - -
Cost of share-based payment arrangements - - 467 - - - - 467 - 467
Cancellation of shares(7) (60) - (2,004) - - - 60 (2,004) - (2,004)
Other movements - - 40 5 - - - 45 (83) (38)
At 31 Dec 2021 24,918 22,414 144,458 (634) (197) (22,769) 30,060 198,250 8,527 206,777
Consolidated statement of changes in equity (continued)
for the year ended 31 December
Other reserves
Called up Other Retained Financial Cash Foreign Merger Total Non- Total
share equity earnings(3,4) assets at flow exchange and other share- controlling equity
capital and instru-ments FVOCI hedging reserve reserves(4,5) holders' interests
share reserve reserve equity
premium
$m $m $m $m $m $m $m $m $m $m
At 1 Jan 2020 24,278 20,871 136,679 (108) (2) (25,133) 27,370 183,955 8,713 192,668
Profit for the year - - 5,229 - - - - 5,229 870 6,099
Other comprehensive income (net of tax) - - 1,118 1,913 459 4,758 - 8,248 161 8,409
- debt instruments at fair value through other comprehensive - - - 1,746 - - - 1,746 4 1,750
income
- equity instruments designated at fair value through other - - - 167 - - 167 45 212
comprehensive
income
- cash flow hedges - - - - 459 - - 459 12 471
- changes in fair value of financial liabilities designated at - - 167 - - - - 167 - 167
fair value
due to movement in own credit risk
- remeasurement of defined benefit asset/liability - - 831 - - - - 831 3 834
- share of other comprehensive income of associates and joint - - (73) - - - - (73) - (73)
ventures
- effects of hyperinflation - - 193 - - - - 193 - 193
- exchange differences - - - - - 4,758 - 4,758 97 4,855
Total comprehensive income for the year - - 6,347 1,913 459 4,758 - 13,477 1,031 14,508
Shares issued under employee remuneration and share plans 346 - (339) - - - - 7 - 7
Capital securities issued(1) - 1,500 - - - - 1,497 - 1,497
(3)
Dividends to shareholders - - (1,331) - - - - (1,331) (692) (2,023)
Redemption of securities(2) - - (1,450) - - - - (1,450) - (1,450)
Transfers(6) - - 435 - - - (435) - - -
Cost of share-based payment arrangements - - 434 - - - - 434 - 434
Other movements - 43 (200) 11 - - - (146) (500) (646)
At 31 Dec 2020 24,624 22,414 140,572 1,816 457 (20,375) 26,935 196,443 8,552 204,995
1 In 2021, HSBC Holdings issued $2,000m of additional tier 1
instruments on which there were $4m of external issue costs. In 2020, HSBC
Holdings issued $1,500m of additional tier 1 instruments.
2 During 2022, HSBC Holdings redeemed €1,500m 5.250% perpetual
subordinated contingent convertible capital securities and SGD1,000m 5.875%
perpetual subordinated contingent convertible capital securities. For further
details, see Note 32. In 2021, HSBC Holdings redeemed $2,000m 6.875% perpetual
subordinated contingent convertible capital securities. In 2020, HSBC Holdings
called and later redeemed $1,450m 6.20% non-cumulative US dollar preference
shares.
3 At 31 December 2022, retained earnings included 554,452,437 treasury
shares (2021: 558,397,704; 2020: 509,825,249). These include treasury shares
held within HSBC's insurance business's retirement funds for the benefit of
policyholders or beneficiaries within employee trusts for the settlement of
shares expected to be delivered under employee share schemes or bonus plans,
and the market-making activities in Markets and Securities Services.
4 Cumulative goodwill amounting to $5,138m has been charged against
reserves in respect of acquisitions of subsidiaries prior to 1 January 1998,
including $3,469m charged against the merger reserve arising on the
acquisition of HSBC Bank plc. The balance of $1,669m has been charged against
retained earnings.
5 Statutory share premium relief under section 131 of the Companies
Act 1985 was taken in respect of the acquisition of HSBC Bank plc in 1992,
HSBC Continental Europe in 2000 and HSBC Finance Corporation in 2003, and the
shares issued were recorded at their nominal value only. In HSBC's
consolidated financial statements, the fair value differences of $8,290m in
respect of HSBC Continental Europe and $12,768m in respect of HSBC Finance
Corporation were recognised in the merger reserve. The merger reserve created
on the acquisition of HSBC Finance Corporation subsequently became attached
to HSBC Overseas Holdings (UK) Limited, following a number of intra-Group
reorganisations. During 2009, pursuant to section 131 of the Companies Act
1985, statutory share premium relief was taken in respect of the rights issue
and $15,796m was recognised in the merger reserve.
6 Permitted transfers from the merger reserve to retained earnings
were made when the investment in HSBC Overseas Holdings (UK) Limited was
previously impaired. In 2020, an impairment of $435m was recognised and a
permitted transfer of this amount was made from the merger reserve to retained
earnings. During 2022 and 2021, part-reversals of these impairments resulted
in transfers from retained earnings back to the merger reserve of $2,499m and
$3,065m respectively.
7 For further details, see Note 32. In October 2021, HSBC announced a
share buy-back of up to $2.0bn, which was completed in April 2022.
Additionally, HSBC announced a share buy-back of up to $1.0bn in February
2022, which concluded on 28 July 2022.
HSBC Holdings income statement
for the year ended 31 December
2022 2021 2020
Notes* $m $m $m
Net interest expense (3,074) (2,367) (2,632)
- interest income 937 380 473
- interest expense (4,011) (2,747) (3,105)
Fee (expense)/income (3) (5) (12)
Net income from financial instruments held for trading or managed on a fair 3 2,129 110 801
value basis
Changes in fair value of designated debt and related derivatives(1) 3 2,144 349 (326)
Changes in fair value of other financial instruments mandatorily measured at 3 (2,409) (420) 1,141
fair value through profit or loss
Gains less losses from financial investments 58 - -
Dividend income from subsidiaries 9,478 11,404 8,156
Other operating income 91 230 1,889
Total operating income 8,414 9,301 9,017
Employee compensation and benefits 5 (41) (30) (56)
General and administrative expenses (1,586) (1,845) (4,276)
Reversal of impairment/(impairment) of subsidiaries 2,493 3,065 (435)
Total operating expenses 866 1,190 (4,767)
Profit before tax 9,280 10,491 4,250
Tax (charge)/credit(2) 3,077 343 (165)
Profit for the year 12,357 10,834 4,085
* For Notes on the financial statements, see page 335.
1 The debt instruments, issued for funding purposes, are designated
under the fair value option to reduce an accounting mismatch.
2 The tax credit includes $2.2bn arising from the recognition of a
deferred tax asset from historical tax losses in HSBC Holdings. This was a
result of improved profit forecasts for the UK tax group, which accelerated
the expected utilisation of these losses and reduced uncertainty regarding
their recoverability. The amounts recorded within profit before tax with
respect to dividend income from subsidiaries and reversal of impairment of
subsidiaries are not subject to tax.
HSBC Holdings statement of comprehensive income
for the year ended 31 December
2022 2021 2020
$m $m $m
Profit for the year 12,357 10,834 4,085
Other comprehensive income/(expense)
Items that will not be reclassified subsequently to profit or loss:
Changes in fair value of financial liabilities designated at fair value upon 326 267 176
initial recognition arising from changes in own credit risk
- before income taxes 435 259 176
- income taxes (109) 8 -
Other comprehensive income/(expense) for the year, net of tax 326 267 176
Total comprehensive income for the year 12,683 11,101 4,261
HSBC Holdings balance sheet
31 Dec 2022 31 Dec 2021
Notes* $m $m
Assets
Cash and balances with HSBC undertakings 3,210 2,590
Financial assets with HSBC undertakings designated and otherwise mandatorily 52,322 51,408
measured at fair value
Derivatives 15 3,801 2,811
Loans and advances to HSBC undertakings 26,765 25,108
Financial investments 19,466 26,194
Prepayments, accrued income and other assets 5,242 1,513
Current tax assets 464 122
Investments in subsidiaries 167,542 163,211
Intangible assets 189 215
Deferred tax assets 2,100 -
Total assets at 31 Dec 281,101 273,172
Liabilities and equity
Liabilities
Amounts owed to HSBC undertakings 314 111
Financial liabilities designated at fair value 25 32,123 32,418
Derivatives 15 6,922 1,220
Debt securities in issue 26 66,938 67,483
Accruals, deferred income and other liabilities 1,969 4,240
Subordinated liabilities 29 19,727 17,059
Deferred tax liabilities - 311
Total liabilities 127,993 122,842
Equity
Called up share capital 32 10,147 10,316
Share premium account 14,664 14,602
Other equity instruments 19,746 22,414
Merger and other reserves 40,555 37,882
Retained earnings 67,996 65,116
Total equity 153,108 150,330
Total liabilities and equity at 31 Dec 281,101 273,172
* For Notes on the financial statements, see page 335.
The accompanying notes on pages 335 to 417 and the audited sections in the
Risk review on pages 131 to 238 (including 'Measurement uncertainty and
sensitivity analysis of ECL estimates' on pages 153 to 162), and 'Directors'
remuneration report' on pages 276 to 301 form an integral part of these
financial statements.
These financial statements were approved by the Board of Directors on 21
February 2023 and signed on its behalf by:
Mark E Tucker Georges Elhedery
Group Chairman Group Chief Financial Officer
HSBC Holdings statement of cash flows
for the year ended 31 December
2022 2021 2020
$m $m $m
Profit before tax 9,280 10,491 4,250
Adjustments for non-cash items (2,500) (2,954) 442
- depreciation, amortisation and impairment/expected credit losses (2,428) (2,976) 87
- share-based payment expense 1 2 1
- other non-cash items included in profit before tax (73) 20 354
Changes in operating assets and liabilities
Change in loans to HSBC undertakings (1,657) 3,364 (327)
Change in financial assets with HSBC undertakings designated and otherwise (914) (4,409) (3,289)
mandatorily measured at fair value
Change in net trading securities and net derivatives 4,712 47 (1,657)
Change in other assets 51 (226) (633)
Change in financial investments 196 20 449
Change in debt securities in issue (5,625) (2,833) 3,063
Change in financial liabilities designated at fair value (4,755) (1,396) 1,258
Change in other liabilities (3,394) (691) 1,366
Tax received 215 32 270
Net cash from operating activities (4,391) 1,445 5,192
Purchase of financial investments (21,481) (16,966) (11,652)
Proceeds from the sale and maturity of financial investments 17,165 16,074 9,342
Net cash outflow from acquisition of or increase in stake of subsidiaries (5,696) (1,337) (2,558)
Repayment of capital from subsidiaries 3,860 2,000 1,516
Net investment in intangible assets (39) (26) (33)
Net cash from investing activities (6,191) (255) (3,385)
Issue of ordinary share capital and other equity instruments 67 2,334 1,846
Redemption of preference shares and other equity instruments (2,266) (3,450) -
Purchase of treasury shares (438) (28) -
Cancellation of shares (2,298) (707) -
Subordinated loan capital issued 7,300 - -
Subordinated loan capital repaid - - (1,500)
Debt securities issued 18,076 19,379 15,951
Debt securities repaid (10,094) (5,569) (16,577)
Dividends paid on ordinary shares (5,330) (4,480) -
Dividends paid to holders of other equity instruments (1,214) (1,310) (1,331)
Net cash from financing activities 3,803 6,169 (1,611)
Net increase/(decrease) in cash and cash equivalents (6,779) 7,359 196
Cash and cash equivalents at 1 January 13,535 6,176 5,980
Cash and cash equivalents at 31 Dec 6,756 13,535 6,176
Cash and cash equivalents comprise:
- cash at bank with HSBC undertakings 3,210 2,590 2,913
- cash collateral and net settlement accounts 3,544 93 249
- treasury and other eligible bills 2 10,852 3,014
Interest received was $2,410m (2021: $1,636m; 2020: $1,952m), interest paid
was $3,813m (2021: $2,724m; 2020: $3,166m) and dividends received were $9,478m
(2021: $11,404m; 2020: $8,156m).
HSBC Holdings statement of changes in equity
for the year ended 31 December
Other reserves
Called up Share Other Retained Merger and other Total
share premium equity earnings(1) reserves shareholders'
capital instruments equity
$m $m $m $m $m $m
At 1 Jan 2022 10,316 14,602 22,414 65,116 37,882 150,330
Profit for the year - - - 12,357 - 12,357
Other comprehensive income (net of tax) - - - 326 - 326
- changes in fair value of financial liabilities designated at fair value - - - 326 - 326
due to movement in own credit risk
Total comprehensive income for the year - - - 12,683 - 12,683
Shares issued under employee share plans 5 62 - (161) - (94)
Capital securities issued - - - - - -
Cancellation of shares(2,3) (174) - - (1,001) 174 (1,001)
Dividends to shareholders - - - (6,544) - (6,544)
Redemption of capital securities - - (2,668) 402 - (2,266)
Transfers(4) - - - (2,499) 2,499 -
Other movements - - - - - -
At 31 Dec 2022 10,147 14,664 19,746 67,996 40,555 153,108
At 1 Jan 2021 10,347 14,277 22,414 65,005 34,757 146,800
Profit for the year - - - 10,834 - 10,834
Other comprehensive income (net of tax) - - - 267 - 267
- changes in fair value of financial liabilities designated at fair value - - - 267 - 267
due to movement in own credit risk
Total comprehensive income for the year - - - 11,101 - 11,101
Shares issued under employee share plans 29 325 - (103) - 251
Capital securities issued - - 2,000 (20) - 1,980
Cancellation of shares(2) (60) - - (2,004) 60
(2,004)
Dividends to shareholders - - - (5,790) -
(5,790)
Redemption of capital securities - - (2,000) - -
(2,000)
Transfers(4) - - - (3,065) 3,065 -
Other movements - - - (8) -
(8)
At 31 Dec 2021 10,316 14,602 22,414 65,116 37,882 150,330
At 1 Jan 2020 10,319 13,959 20,743 62,484 37,539 145,044
Profit for the year - - - 4,085 - 4,085
Other comprehensive income (net of tax) - - - 176 - 176
- changes in fair value of financial liabilities designated at fair value - - - 176 - 176
due to movement in own credit risk
Total comprehensive income for the year - - - 4,261 - 4,261
Shares issued under employee share plans 28 318 - 2,540 (2,347) 539
Capital securities issued - - 1,500 (15) - 1,485
Dividends to shareholders - - - (1,331) -
(1,331)
Redemption of capital securities - - - (1,450) -
(1,450)
Transfers(4) - - - 435 (435) -
Other movements(5) - - 171 (1,919) -
(1,748)
At 31 Dec 2020 10,347 14,277 22,414 65,005 34,757 146,800
Dividends per ordinary share at 31 December 2022 were $0.27 (2021: $0.22;
2020: nil).
1 At 31 December 2022, retained earnings included 331,874,221
($2,615m) treasury shares (2021: 329,871,829 ($2,542m); 2020: 326,766,253
($2,521m)).
2 On 26 October 2021, HSBC announced a share buy-back of up to $2.0bn,
which was completed on 20 April 2022.
3 On 3 May 2022, HSBC announced a share buy-back of up to $1.0bn,
which was completed on 28 July 2022.
4 Permitted transfers from the merger reserve to retained earnings
were made when the investment in HSBC Overseas Holdings (UK) Limited was
previously impaired. In 2022, a part-reversal of this impairment resulted in a
transfer from retained earnings back to the merger reserve of $2,499m (2021:
$3,065m). At 31 December 2020, an additional impairment of $435m was
recognised and a permitted transfer of this amount was made from the merger
reserve to retained earnings.
5 Includes an adjustment to retained earnings for a repayment of
capital by a subsidiary of $1,650m, which had been recognised as dividend
income in 2019.
Notes on the financial statements
Contents
337 1 Basis of preparation and significant accounting 396 21 Goodwill and intangible assets
policies Goodwill and intangible assets
399 22 Prepayments, accrued income and other assets
350 2 Net fee income 399 23 Assets held for sale and liabilities of disposal groups held for sale
352 3 Net income from financial instruments measured at fair value through profit or 401 24 Trading liabilities
loss
401 25 Financial liabilities designated at fair value
352 4 Insurance business 402 26 Debt securities in issue
354 5 Employee compensation and benefits 402 27 Accruals, deferred income and other liabilities
361 6 Auditors' remuneration 402 28 Provisions
362 7 Tax 403 29 Subordinated liabilities
364 8 Dividends 407 30 Maturity analysis of assets, liabilities and off-balance sheet commitments
365 9 Earnings per share
365 10 Segmental analysis 413 31 Offsetting of financial assets and financial liabilities
369 11 Trading assets 414 32 Called up share capital and other equity instruments
369 12 Fair values of financial instruments carried at fair value 417 33 Contingent liabilities, contractual commitments and guarantees
376 13 Fair values of financial instruments not carried at fair value 418 34 Finance lease receivables
377 14 Financial assets designated and otherwise mandatorily measured at fair value 418 35 Legal proceedings and regulatory matters
through profit or loss
421 36 Related party transactions
378 15 Derivatives 423 37 Events after the balance sheet date
383 16 Financial investments 423 38 HSBC Holdings' subsidiaries, joint ventures and associates
386 17 Assets pledged, collateral received and assets
transferred
388 18 Interests in associates and joint ventures
391 19 Investments in subsidiaries
393 20 Structured entities
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 and the separate financial
statements of HSBC Holdings comply with UK-adopted international accounting
standards and 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. There were no
unendorsed standards effective for the year ended 31 December 2022 affecting
these consolidated and separate financial statements.
Standards adopted during the year ended 31 December 2022
There were no new accounting standards or interpretations that had a
significant effect on HSBC in 2022. Accounting policies have been consistently
applied.
(b) Differences between IFRSs and Hong Kong Financial Reporting
Standards
There are no significant differences between IFRSs and Hong Kong Financial
Reporting Standards in terms of their application to HSBC, and consequently
there would be no significant differences had the financial statements been
prepared in accordance with Hong Kong Financial Reporting Standards. The
'Notes on the financial statements', taken together with the 'Report of the
Directors', include the aggregate of all disclosures necessary to satisfy
IFRSs and Hong Kong reporting requirements.
(c) Future accounting developments
Minor amendments to IFRSs
The IASB has not published any minor amendments effective from 1 January 2022
that are applicable to HSBC. However, the IASB has published a number of minor
amendments to IFRSs that are effective from 1 January 2023 and 1 January 2024.
HSBC expects they will have an insignificant effect, when adopted, on the
consolidated financial statements of HSBC and the separate financial
statements of HSBC Holdings.
New IFRSs
IFRS 17 'Insurance Contracts'
IFRS 17 'Insurance Contracts' was issued in May 2017, with amendments to the
standard issued in June 2020 and December 2021. Following the amendments, IFRS
17 is effective for annual reporting periods beginning on or after 1 January
2023 and is applied retrospectively, with comparatives restated from 1 January
2022. IFRS 17 has been adopted in its entirety for use in the UK while it has
been adopted by the EU subject to certain optional exemptions.
IFRS 17 sets out the requirements that the Group will apply in accounting for
insurance contracts it issues, reinsurance contracts it holds, and investment
contracts with discretionary participation features.
The Group is at an advanced stage in the implementation of IFRS 17, having put
in place accounting policies, data and models, and made progress with
preparing 2022 comparative data. We set out below our expectations of the
impact of IFRS 17 compared with our current accounting policy for insurance
contracts, which is set out in Note 1.2(j) on page 344.
Under IFRS 17, no present value of in-force business ('PVIF') asset is
recognised. Instead, the measurement of the insurance contracts liability is
based on groups of insurance contracts and will include fulfilment cash flows,
as well as the contractual service margin ('CSM'), which represents the
unearned profit.
To identify groups of insurance contracts, individual contracts subject to
similar dominant risk and managed together are identified as a portfolio of
insurance contracts. Each portfolio is further separated by profitability
group and issue date into periodic cohorts.
The fulfilment cash flows comprise:
• the best estimates of future cash flows, including amounts expected
to be collected from premiums and payouts for claims, benefits and expenses,
which are projected using assumptions based on demographic and operating
experience;
• an adjustment for the time value of money and financial risks
associated with the future cash flows; and
• an adjustment for non-financial risk that reflects the uncertainty
about the amount and timing of future cash flows.
In contrast to the Group's IFRS 4 accounting where profits are recognised
upfront, the CSM will be systematically recognised in revenue, as services are
provided over the expected coverage period of the group of contracts without
any change to the overall profit of the contracts. Losses resulting from the
recognition of onerous contracts are recognised in the income statement
immediately.
The CSM is adjusted depending on the measurement model of the group of
insurance contracts. While the general measurement model ('GMM') is the
default measurement model under IFRS 17, the Group expects that the majority
of its contracts will be accounted for under the variable fee approach
('VFA'), which is mandatory to apply for insurance contracts with direct
participation features upon meeting the eligibility criteria.
IFRS 17 requires entities to apply the standard retrospectively as if it had
always applied, using the full retrospective approach ('FRA') unless it is
impracticable. When the FRA is impracticable such as when there is a lack of
sufficient and reliable data, an entity has an accounting policy choice to use
either the modified retrospective approach ('MRA') or the fair value approach
('FVA'). HSBC will apply the FRA for new business from 2018 at the earliest,
subject to practicability, and the FVA for the majority of contracts for which
the FRA is impracticable. Where the FVA is used, the measurement takes into
account the cost of capital that a market participant within the jurisdiction
would be expected to hold based on the asset and liability positions on the
transition date.
The Group will make use of the option to re-designate eligible financial
assets held to support insurance liabilities, currently measured at amortised
cost, as financial assets measured at fair value through profit or loss.
Following re-designation, interest income earned on these financial assets
will no longer be shown in 'net interest income', and will instead form part
of 'net income/(expense) from assets and liabilities of insurance businesses,
including related derivatives, measured at fair value through profit or loss'
in accordance with HSBC's income and expense policy set out in Note 1.2(b) on
page 339.
The Group will also make use of the risk mitigation option for a number of
economic offsets between the VFA contracts and reinsurance contracts held that
meet the requirements, and the other comprehensive income ('OCI') option to a
limited extent for some contracts.
Impact of IFRS 17
Changes to equity on transition are driven by the elimination of the PVIF
asset, the re-designation of certain eligible financial assets in the scope of
IFRS 9, the remeasurement of insurance liabilities and assets under IFRS 17,
and the recognition of the CSM.
IFRS 17 requires the use of current market values for the measurement of
insurance liabilities. The shareholder's share of the investment experience
and assumption changes will be absorbed by the CSM and released over time to
profit or loss under the VFA. For contracts measured under GMM, the
shareholder's share of the investment volatility is recorded in profit or loss
as it arises. Under IFRS 17, operating expenses will be lower as directly
attributable costs will be incorporated in the CSM and recognised in the
insurance service result.
While the profit over the life of an individual contract will be unchanged,
its emergence will be later under IFRS 17.
All of these impacts will be subject to deferred tax.
Estimates of the opening balance sheet as at 1 January 2022 have been
calculated and are presented below, showing separately the impact on the total
assets, liabilities and equity of our insurance manufacturing operations and
Group equity. These estimates are based on accounting policies, assumptions,
judgements and estimation techniques that remain subject to change.
Impact of transition to IFRS 17, at 1 January 2022 Insurance manufacturing operations Group
Assets Liabilities Equity Equity
$bn $bn $bn $bn
Balance sheet values at 1 January 2022 under IFRS 4 144.6 127.6 17.0 206.8
Removal of PVIF (9.5) - (9.5) (9.5)
Replacement of IFRS 4 liabilities with IFRS 17 (0.4) 7.3 (7.7) (8.1)
Removal of IFRS 4 liabilities and recording of IFRS 17 fulfilment cash (0.3) (2.2) 1.9 1.9
IFRS 17 contractual service margin (0.1) 9.5 (9.6) (10.0)
Remeasurement effect of IFRS 9 re-designations 4.9 - 4.9 4.9
Tax effect 0.6 (1.6) 2.2 2.2
Estimated balance sheet values at 1 January 2022 under IFRS 17 140.2 133.3 6.9 196.3
PVIF of $9.5bn less deferred tax of $1.7bn constitute the overall estimated
reduction in intangible assets, after tax, of $7.8bn on transition to IFRS 17.
The Group's accounting for insurance contracts considers a broader set of cash
flows than those arising within the insurance manufacturing entities. This
includes the effect of eliminating intra-Group fees associated with
distribution of policies through the Group's banking channels and directly
attributable costs incurred by other Group entities. These factors lead to an
increase to the Group CSM after inclusion of distribution activities of
approximately $0.4bn, with a consequential reduction to Group's equity of
approximately $0.4bn after the inclusion of deferred tax.
(d) Foreign currencies
HSBC's consolidated financial statements are presented in US dollars because
the US dollar and currencies linked to it form the major currency bloc in
which HSBC transacts and funds its business. The US dollar is also HSBC
Holdings' functional currency because the US dollar and currencies linked to
it are the most significant currencies relevant to the underlying
transactions, events and conditions of its subsidiaries, as well as
representing a significant proportion of its funds generated from financing
activities.
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. Except for subsidiaries operating in hyperinflationary economies
(see Note 1.2(p)), in the consolidated financial statements, the assets and
liabilities of branches, subsidiaries, joint ventures and associates whose
functional currency is not US dollars are translated into the Group's
presentation currency at the rate of exchange at the balance sheet date, while
their results are translated into US dollars at the average rates of exchange
for the reporting period. Exchange differences arising are recognised in other
comprehensive income. On disposal of a foreign operation, exchange differences
previously recognised in other comprehensive income are reclassified to the
income statement.
(e) Presentation of information
Certain disclosures required by IFRSs have been included in the sections
marked as ('Audited') in the Annual Report and Accounts 2022 as follows:
• Disclosures concerning the nature and extent of risks relating to
insurance contracts and financial instruments are included in the 'Risk
review' on pages 131 to 238.
• The 'Own funds disclosure' is included in the 'Risk review' on page
206.
• Disclosures relating to HSBC's securitisation activities and
structured products are included in the 'Risk review' on pages 131 to238.
HSBC follows the UK Finance Disclosure Code. The UK Finance Disclosure Code
aims to increase the quality and comparability of UK banks' disclosures and
sets out five disclosure principles together with supporting guidance agreed
in 2010. In line with the principles of the UK Finance Disclosure Code, HSBC
assesses good practice recommendations issued from time to time by relevant
regulators and standard setters, and will assess the applicability and
relevance of such guidance, enhancing disclosures where appropriate.
(f) 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 HSBC'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.
Management has considered the impact of climate-related risks on HSBC's
financial position and performance. While the effects of climate change are a
source of uncertainty, as at 31 December 2022 management do not consider there
to be a material impact on our critical judgements and estimates from the
physical, transition and other climate-related risks in the short to medium
term. In particular management has considered the known and observable
potential impact of climate-related risks of associated judgements and
estimates in our value in use calculations.
(g) Segmental analysis
HSBC's Chief Operating Decision Maker is the Group Chief Executive, who is
supported by the rest of the Group Executive Committee ('GEC'), which operates
as a general management committee under the direct authority of the Board.
Operating segments are reported in a manner consistent with the internal
reporting provided to the Group Chief Executive and the GEC.
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.
(h) Going concern
The financial statements are prepared on a going concern basis, as the
Directors are satisfied that the Group and parent company have the resources
to continue in business for the foreseeable future. In making this assessment,
the Directors have considered a wide range of information relating to present
and future conditions, including future projections of profitability, cash
flows, capital requirements and capital resources. These considerations
include stressed scenarios that reflect the uncertainty in structural changes
from the Covid-19 pandemic, the Russia-Ukraine war, disrupted supply chains
globally, slower Chinese economic activity, climate change and other top and
emerging risks, as well as from the related impacts 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, HSBC 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. This election is made for each business combination. HSBC
Holdings' investments in subsidiaries are stated at cost less impairment
losses.
Impairment testing is performed where there is an indication of impairment, by
comparing the recoverable amount of the relevant investment to its carrying
amount.
Critical accounting estimates and judgements
Investments in subsidiaries are tested for impairment when there is an
indication that the investment may be impaired, which involves estimations of
value in use reflecting management's best estimate of the future cash flows of
the investment 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 • The future cash flows of each investment are sensitive to the cash
uncertainty in volatile market conditions. Where such circumstances are flows projected for the periods for which detailed forecasts are available and
determined to exist, management re-tests for impairment more frequently than to assumptions regarding the long-term pattern of sustainable cash flows
once a year when indicators of impairment exist. This ensures that the thereafter. Forecasts are compared with actual performance and verifiable
assumptions on which the cash flow forecasts are based continue to reflect economic data, but they reflect management's view of future business prospects
current market conditions and management's best estimate of future business at the time of the assessment.
prospects.
• The rates used to discount future expected cash flows can have a
significant effect on their valuation, and are based on the costs of equity
assigned to the investment. The cost of equity percentage is generally derived
from a capital asset pricing model and the market implied cost of equity,
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 impairment in subsidiaries are
described in Note 19.
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. HSBC's CGUs are based on
geographical regions subdivided by global business, except for Global Banking
and Markets, for which goodwill is monitored on a global basis.
Impairment testing is performed at least 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 and non-financial assets (see Note 1.2(n)) 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 • The future cash flows of the CGUs are sensitive to the cash flows
uncertainty in volatile market conditions. Where such circumstances are projected for the periods for which detailed forecasts are available and to
determined to exist, management re-tests goodwill for impairment more assumptions regarding the long-term pattern of sustainable cash flows
frequently than once a year when indicators of impairment exist. This ensures thereafter. Forecasts are compared with actual performance and verifiable
that the assumptions on which the cash flow forecasts are based continue to economic data, but they reflect management's view of future business prospects
reflect current market conditions and management's best estimate of future at the time of the assessment.
business prospects.
• The rates used to discount future expected cash flows can have a
significant effect on their valuation, and are based on the costs of equity
assigned to individual CGUs. The cost of equity percentage is generally
derived from a capital asset pricing model and market implied cost of equity,
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 and non-financial asset
impairment are described in Note 21.
HSBC sponsored structured entities
HSBC is considered to sponsor another entity if, in addition to ongoing
involvement with the entity, it had a key role in establishing that entity or
in bringing together relevant counterparties so the transaction that is the
purpose of the entity could occur. HSBC is generally not considered a sponsor
if the only involvement with the entity is merely administrative.
Interests in associates and joint arrangements
Joint arrangements are investments in which HSBC, together with one or more
parties, has joint control. Depending on HSBC's rights and obligations, the
joint arrangement is classified as either a joint operation or a joint
venture.
HSBC classifies investments in entities over which it has significant
influence, and that are neither subsidiaries nor joint arrangements, as
associates.
HSBC 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 is included in the consolidated
financial statements of HSBC 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 acquisitions 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.
Critical accounting estimates and judgements
The most significant critical accounting estimates relate to the assessment of
impairment of our investment in Bank of Communications Co. Limited ('BoCom'),
which involves estimations of value in use:
• Management's best estimate of BoCom's earnings is based on
management's explicit forecasts over the short to medium term and the capital
maintenance charge, which is management's forecast of the earnings that need
to be withheld in order for BoCom to meet capital requirements over the
forecast period, both of which are subject to uncertain factors.
• Key assumptions used in estimating BoCom's value in use, the
sensitivity of the value in use calculations to different assumptions and a
sensitivity analysis that shows the changes in key assumptions that would
reduce the excess of value in use over the carrying amount (the 'headroom') to
nil are described in Note 18.
(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 HSBC 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.
Non-interest income and expense
HSBC generates fee income from services provided at a fixed price over time,
such as account service and card fees, or when HSBC delivers a specific
transaction at a point in time, such as broking services and import/export
services. With the exception of certain fund management and 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
HSBC'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.
HSBC acts as principal in the majority of contracts with customers, with the
exception of broking services. For most brokerage trades, HSBC acts as agent
in the transaction and recognises broking income net of fees payable to other
parties in the arrangement.
HSBC 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 HSBC 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.
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.
• 'Net income/(expense) from assets and liabilities of insurance
businesses, including related derivatives, measured at fair value through
profit or loss': This includes interest income, interest expense and dividend
income in respect of financial assets and liabilities measured at fair value
through profit or loss; and those derivatives managed in conjunction with the
above that can be separately identifiable from other trading derivatives.
• 'Changes in fair value of designated debt instruments and related
derivatives': Interest paid on debt instruments and interest cash flows on
related derivatives is presented in interest expense where doing so reduces an
accounting mismatch.
• '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 test, see
(d) below.
The accounting policies for insurance premium income are disclosed in Note
1.2(j).
(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, HSBC 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 until the transaction matures, is
closed out, the valuation inputs become observable or HSBC enters into an
offsetting transaction. The fair value of financial instruments is generally
measured on an individual basis. However, in cases where HSBC manages a group
of financial assets and liabilities according to its net market or credit risk
exposure, the fair value of the group of financial instruments is measured on
a net basis but the underlying financial assets and liabilities are presented
separately in the financial statements, unless they satisfy the IFRS
offsetting criteria.
Critical accounting estimates and judgements
The majority of valuation techniques employ only observable market data.
However, certain financial instruments are classified on the basis of
valuation techniques that feature one or more significant market inputs that
are unobservable, and for them, the measurement of fair value is more
judgemental:
• An instrument in its entirety is classified as valued using • Details on the Group's level 3 financial instruments and the
significant unobservable inputs if, in the opinion of management, greater than sensitivity of their valuation to the effect of applying reasonably possible
5% of the instrument's valuation is driven by unobservable inputs. alternative assumptions in determining their fair value are set out in Note
12.
• 'Unobservable' in this context means that there is little or no
current market data available from which to determine the price at which an
arm's length transaction would be likely to occur. It generally does not mean
that there is no data available at all upon which to base a determination of
fair value (consensus pricing data may, for example, be used).
(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. HSBC 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.
HSBC may commit to underwriting loans on fixed contractual terms for specified
periods of time. When the loan arising from the lending commitment is expected
to be sold shortly after origination, the commitment to lend is recorded as a
derivative. When HSBC intends to hold the loan, the loan commitment is
included in the impairment calculations set out below.
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.
Contracts that are economically equivalent to reverse repo or repo agreements
(such as sales or purchases of debt securities entered into together with
total return swaps with the same counterparty) are accounted for similarly to,
and presented together with, reverse repo or repo agreements.
(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 HSBC 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) Equity securities measured at fair value with fair value
movements presented in other comprehensive income
The equity securities for which fair value movements are shown in other
comprehensive income are business facilitation and other similar investments
where HSBC holds the investments other than to generate a capital return.
Dividends from such investments are recognised in profit or loss. Gains or
losses on the derecognition of these equity securities are not transferred to
profit or loss. Otherwise, equity securities are measured at fair value
through profit or loss.
(g) Financial instruments designated at fair value through
profit or loss
Financial instruments, other than those held for trading, are classified in
this category if they meet one or more of the criteria set out below and are
so designated irrevocably at inception:
• The use of the designation removes or significantly reduces an
accounting mismatch.
• A group of financial assets and liabilities or a group of financial
liabilities is managed and its performance is evaluated on a fair value basis,
in accordance with a documented risk management or investment strategy.
• The financial liability contains one or more non-closely related
embedded derivatives.
Designated financial assets are recognised when HSBC enters into contracts
with counterparties, which is generally on trade date, and are normally
derecognised when the rights to the cash flows expire or are transferred.
Designated financial liabilities are recognised when HSBC enters into
contracts with counterparties, which is generally on settlement date, and are
normally derecognised when extinguished. Subsequent changes in fair values are
recognised in the income statement in 'Net income from financial instruments
held for trading or managed on a fair value basis' or 'Net income/(expense)
from assets and liabilities of insurance businesses, including related
derivatives, measured at fair value through profit or loss' or 'Changes in
fair value of designated debt and related derivatives' except for the effect
of changes in the liabilities' credit risk, which is presented in 'Other
comprehensive income', unless that treatment would create or enlarge an
accounting mismatch in profit or loss.
Under the above criteria, the main classes of financial instruments designated
by HSBC are:
• Debt instruments for funding purposes that are designated to reduce
an accounting mismatch: The interest and/or foreign exchange exposure on
certain fixed-rate debt securities issued has been matched with the interest
and/or foreign exchange exposure on certain swaps as part of a documented risk
management strategy.
• Financial assets and financial liabilities under unit-linked and
non-linked investment contracts: A contract under which HSBC does not accept
significant insurance risk from another party is not classified as an
insurance contract, other than investment contracts with discretionary
participation features ('DPF'), but is accounted for as a financial liability.
Customer liabilities under linked and certain non-linked investment contracts
issued by insurance subsidiaries are determined based on the fair value of the
assets held in the linked funds. If no fair value designation was made for the
related assets, at least some of the assets would otherwise be measured at
either fair value through other comprehensive income or amortised cost. The
related financial assets and liabilities are managed and reported to
management on a fair value basis. Designation at fair value of the financial
assets and related liabilities allows changes in fair values to be recorded in
the income statement and presented in the same line.
• Financial liabilities that contain both deposit and derivative
components: These financial liabilities are managed and their performance
evaluated on a fair value basis.
(h) 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 HSBC that are
designated at fair value where doing so reduces an accounting mismatch, 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. HSBC uses these derivatives or, where allowed, other
non-derivative hedging instruments in fair value hedges, cash flow hedges or
hedges of net investments in foreign operations 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.
Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar
way to cash flow hedges. The effective portion of gains and losses on the
hedging instrument is recognised in other comprehensive income and other gains
and losses are recognised immediately in the income statement. Gains and
losses previously recognised in other comprehensive income are reclassified to
the income statement on the disposal, or part-disposal, of the foreign
operation.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic hedges of
assets and liabilities for which hedge accounting was not applied.
(i) Impairment of amortised cost and FVOCI financial assets
Expected credit losses ('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 fair value through
other comprehensive income ('FVOCI'), and certain loan commitments and
financial guarantee contracts. At initial recognition, an 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, an
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)
HSBC 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 that
a concession has been granted to the borrower for economic or legal reasons
relating to the borrower's financial condition, or 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.
Forbearance
Loans are identified as forborne and classified as either performing or
non-performing when HSBC modifies the contractual terms due to financial
difficulty of the borrower. Non-performing forborne loans are stage 3 and
classified as non-performing until they meet the cure criteria, as specified
by applicable credit risk policy (for example, when the loan is no longer in
default and no other indicators of default have been present for at least 12
months). Any amount written off as a result of any modification of contractual
terms upon entering forbearance would not be reversed.
In 2022, the Group adopted the EBA Guidelines on the application of definition
of default for our retail portfolios, which affect credit risk policies and
our reporting in respect of the status of loans as credit impaired principally
due to forbearance (or curing thereof). Further details are provided under
'Forborne loans and advances' on page 146.
Performing forborne loans are initially stage 2 and remain classified as
forborne until they meet applicable cure criteria (for example, they continue
to not be in default and no other indicators of default are present for a
period of at least 24 months). At this point, the loan is either stage 1 or
stage 2 as determined 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).
A forborne loan 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 forborne loan is a substantially
different financial instrument. Any new loans that arise following
derecognition events in these circumstances would generally be classified as
POCI and will continue to be disclosed as forborne.
Loan modifications other than forborne loans
Loan modifications that are not identified as forborne are considered to be
commercial restructurings. 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's 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. Modifications of certain
higher credit risk wholesale loans are assessed for derecognition, having
regard to changes in contractual terms that either individually or in
combination are judged to result in a substantially different financial
instrument. Mandatory and general offer loan modifications that are not
borrower specific, for example market-wide customer relief programmes
generally do not result in derecognition, but their stage allocation is
determined considering all available and supportable information under our ECL
impairment policy. Changes made to these financial instruments 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 of the interest rate benchmark.
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 compared 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, and the
geographical region. 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 30bps
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 PDs and through-the-cycle 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
146.
For retail portfolios, default risk is assessed using a reporting date
12-month PD derived from credit scores, which incorporate 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 homogenous 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 therefore identifies loans with a PD higher
than would be expected from loans that are performing as originally expected
and higher than that which would have been acceptable at origination. It
therefore approximates a comparison of origination to reporting date PDs.
As additional data becomes available, the retail transfer criteria approach
continues to be refined to utilise a more relative approach for certain
portfolios. These enhancements take advantage of the increase in
origination-related data in the assessment of significant increases in credit
risk by comparing remaining lifetime PD to the comparable remaining term
lifetime PD at origination based on portfolio-specific origination segments.
These enhancements resulted in significant migrations of loans to customers
gross carrying amounts from stage 1 to stage 2, but did not have a significant
impact on the overall ECL for these portfolios in 2022 due to low
loan-to-value ratios.
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 new financial instruments recognised in most cases following the
derecognition of forborne loans. The amount of change in lifetime ECL for a
POCI loan is recognised in profit or loss until the POCI loan 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. In the case of
non-performing forborne loans, such financial instruments are transferred out
of stage 3 when they no longer exhibit any evidence of credit impairment and
meet the curing criteria as described above.
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and
probability-weighted, and incorporate all available information which 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 and considers other factors
such as climate-related risks.
In general, HSBC calculates ECL using three main components: a probability of
default ('PD'), 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.
HSBC makes use of 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 • Point in time (based on current conditions, adjusted to take into
economic cycle) account estimates of future conditions that will impact PD)
• The definition of default includes a backstop of 90+ days past due, • Default backstop of 90+ days past due for all portfolios
although this has been modified to 180+ days past due for some portfolios,
particularly UK and US mortgages
EAD • Cannot be lower than current balance • Amortisation captured for term products
LGD • Downturn LGD (consistent losses expected to be suffered during a severe • Expected LGD (based on estimate of loss given default including the
but plausible economic downturn) expected impact of future economic conditions such as changes in value of
collateral)
• Regulatory floors may apply to mitigate risk of underestimating downturn
LGD due to lack of historical data • No floors
• Discounted using cost of capital • Discounted using the original effective interest rate of the loan
• All collection costs included • 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 as of 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 its
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 work-out 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 HSBC is exposed to
credit risk. 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 HSBC'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 HSBC
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. For wholesale overdraft facilities, credit risk management
actions are taken no less frequently than on an annual basis.
Forward-looking economic inputs
HSBC applies multiple forward-looking global economic scenarios determined
with reference to external forecast distributions representative of its view
of forecast economic conditions. This approach is considered sufficient to
calculate unbiased expected credit losses in most economic environments. In
certain economic environments, additional analysis may be necessary and may
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 153.
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 • The section 'Measurement uncertainty and sensitivity analysis of ECL
risk estimates', marked as audited from page 153, sets out the assumptions used in
determining ECL, and provides an indication of the sensitivity of the result
• Determining the lifetime and point of initial recognition of to the application of different weightings being applied to different economic
overdrafts and credit cards assumptions
• 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 adjustments to account for late-breaking events,
model and data limitations and deficiencies, and expert credit judgements
• Selecting applicable recovery strategies for certain wholesale
credit-impaired loans
(j) Insurance contracts
A contract is classified as an insurance contract where HSBC accepts
significant insurance risk from another party by agreeing to compensate that
party on the occurrence of a specified uncertain future event. An insurance
contract may also transfer financial risk, but is accounted for as an
insurance contract if the insurance risk is significant. In addition, HSBC
issues investment contracts with discretionary participation features ('DPF'),
which are also accounted for as insurance contracts as required by IFRS 4
'Insurance Contracts'.
Net insurance premium income
Premiums for life insurance contracts are accounted for when receivable,
except in unit-linked insurance contracts where premiums are accounted for
when liabilities are established. Reinsurance premiums are accounted for in
the same accounting period as the premiums for the direct insurance contracts
to which they relate.
Net insurance claims and benefits paid and movements in liabilities to
policyholders
Gross insurance claims for life insurance contracts reflect the total cost of
claims arising during the year, including claim handling costs and any
policyholder bonuses allocated in anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders are recognised
when paid or at an earlier date on which, following notification, the policy
ceases to be included within the calculation of the related insurance
liabilities. Death claims are recognised when notified.
Reinsurance recoveries are accounted for in the same period as the related
claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are calculated by each
life insurance operation based on local actuarial principles. Liabilities
under unit-linked life insurance contracts are at least equivalent to the
surrender or transfer value, which is calculated by reference to the value of
the relevant underlying funds or indices.
Future profit participation on insurance contracts with DPF
Where contracts provide discretionary profit participation benefits to
policyholders, liabilities for these contracts include provisions for the
future discretionary benefits to policyholders. These provisions reflect the
actual performance of the investment portfolio to date and management's
expectation of the future performance of the assets backing the contracts, as
well as other experience factors such as mortality, lapses and operational
efficiency, where appropriate. The benefits to policyholders may be determined
by the contractual terms, regulation, or past distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments, they continue
to be treated as insurance contracts as required by IFRS 4. The Group
therefore recognises the premiums for these contracts as revenue and
recognises as an expense the resulting increase in the carrying amount of the
liability.
In the case of net unrealised investment gains on these contracts, whose
discretionary benefits principally reflect the actual performance of the
investment portfolio, the corresponding increase in the liabilities is
recognised in either the income statement or other comprehensive income,
following the treatment of the unrealised gains on the relevant assets. In the
case of net unrealised losses, a deferred participating asset is recognised
only to the extent that its recoverability is highly probable. Movements in
the liabilities arising from realised gains and losses on relevant assets are
recognised in the income statement.
Present value of in-force long-term insurance business
HSBC recognises the value placed on insurance contracts and investment
contracts with DPF, which are classified as long-term and in-force at the
balance sheet date, as an asset. The asset represents the present value of the
equity holders' interest in the issuing insurance companies' profits expected
to emerge from these contracts written at the balance sheet date. The present
value of in-force business ('PVIF') is determined by discounting those
expected future profits using appropriate assumptions in assessing factors
such as future mortality, lapse rates and levels of expenses, and a risk
discount rate that reflects the risk premium attributable to the respective
contracts. The PVIF incorporates allowances for both non-market risk and the
value of financial options and guarantees. The PVIF asset is presented gross
of attributable tax in the balance sheet and movements in the PVIF asset are
included in 'Other operating income' on a gross of tax basis.
(k) Employee compensation and benefits
Share-based payments
HSBC 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
HSBC operates a number of pension schemes including defined benefit, defined
contribution and post-employment benefit schemes.
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 Note 1.2 (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 costs 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 for the principal plan.
• 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 for the principal plan and the sensitivity of the calculation to
different assumptions are described in Note 5.
(l) 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 as 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. HSBC
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 in which the
assets will be realised or the liabilities settled.
In assessing the probability and sufficiency of future taxable profit,
management considers the availability of evidence to support the recognition
of deferred tax assets, taking into account the inherent risks in long-term
forecasting, including climate change-related, and drivers of recent history
of tax losses where applicable. Management also considers the future reversal
of existing taxable temporary differences and tax planning strategies,
including corporate reorganisations.
Current and deferred tax are calculated based on tax rates and laws enacted,
or substantively enacted, by the balance sheet date.
Critical accounting estimates and judgements
The recognition of deferred tax assets depends on judgements and estimates.
• Specific judgements supporting deferred tax assets are described in • The recognition of deferred tax assets is sensitive to estimates
Note 7. of future cash flows projected for periods for which detailed forecasts are
available and to assumptions regarding the long-term pattern of cash flows
thereafter, on which forecasts of future taxable profit are based, and which
affect the expected recovery periods and the pattern of utilisation of tax
losses and tax credits. See Note 7 for further detail.
The Group does not consider there to be a significant risk of a material
adjustment to the carrying amount of deferred tax assets in the next financial
year but does consider this to be an area that is inherently judgemental.
(m) 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 • Provisions for legal proceedings and regulatory matters remain very
is taken on the assessment of litigation and similar obligations. sensitive to the assumptions used in the estimate. There could be a wider
range of possible outcomes for any pending legal proceedings, investigations
• Provisions for legal proceedings and regulatory matters typically or inquiries. As a result it is often not practicable to quantify a range of
require a higher degree of judgement than other types of provisions. When possible outcomes for individual matters. It is also not practicable to
matters are at an early stage, accounting judgements can be difficult because meaningfully quantify ranges of potential outcomes in aggregate for these
of the high degree of uncertainty associated with determining whether a types of provisions because of the diverse nature and circumstances of such
present obligation exists, and estimating the probability and amount of any matters and the wide range of uncertainties involved.
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.
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.
HSBC Holdings has issued financial guarantees and similar contracts to other
Group entities. HSBC elects to account for certain guarantees as insurance
contracts in HSBC Holdings' financial statements, in which case they are
measured and recognised as insurance liabilities. This election is made on a
contract-by-contract basis, and is irrevocable.
(n) 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 value 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 21).
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 losses 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.
Critical accounting estimates and judgements
The review of goodwill and other non-financial assets 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 described in the Critical accounting estimates and judgements in
Note 1.2(a).
(o) Non-current assets and disposal groups held for sale
HSBC classifies non-current assets or disposal groups (including assets and
liabilities) as held for sale when their carrying amounts will be recovered
principally through sale rather than through continuing use. To be classified
as held for sale, the non-current asset or disposal group must be available
for immediate sale in its present condition subject only to terms that are
usual and customary for sales of such assets (or disposal groups), and the
sale must be highly probable. For a sale to be highly probable, the
appropriate level of management must be committed to a plan to sell the asset
(or disposal group) and an active programme to locate a buyer and complete the
plan must have been initiated. Further, the asset (or disposal group) must be
actively marketed for sale at a price that is reasonable in relation to its
current fair value. In addition, the sale should be expected to qualify as a
completed sale within one year from the date of classification and actions
required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn.
Held for sale assets and disposal groups are measured at the lower of their
carrying amount and fair value less costs to sell except for those assets and
liabilities that are not within the scope of the measurement requirements of
IFRS 5. If the carrying amount of the non-current asset (or disposal group) is
greater than the fair value less costs to sell, an impairment loss for any
initial or subsequent write down of the asset or disposal group to fair value
less costs to sell is recognised. Any such impairment loss is first allocated
against the non-current assets that are in scope of IFRS 5 for measurement.
This first reduces the carrying amount of any goodwill allocated to the
disposal group, and then to the other non-current assets of the disposal group
pro rata on the basis of the carrying amount of each asset in the disposal
group. Thereafter, any impairment loss in excess of the carrying value of the
non-current assets in scope of IFRS 5 for measurement is recognised against
the total assets of the disposal group.
Critical accounting judgements
The classification as held for sale depends on certain judgements:
Management judgement is required in determining whether the IFRS 5 held for
sale criteria are met, including whether a sale is highly probable and
expected to complete within one year of classification. The exercise of
judgement will normally consider the likelihood of successfully securing any
necessary regulatory or political approvals which are almost always required
for sales of banking businesses. For large and complex plans judgement will
also include an assessment of the enforceability of any binding sale
agreement, the nature and magnitude of any disincentives for non-performance,
and the ability of the counterparty to undertake necessary pre-completion
preparatory work, comply with conditions precedent, and otherwise be able to
comply with contractual undertakings to achieve completion within the expected
timescale. Once classified as held for sale, judgement is required to be
applied on a continuous basis to ensure that classification remains
appropriate in future accounting periods.
(p) Hyperinflationary accounting
Hyperinflationary accounting is applied to those subsidiary operations in
countries where the three-year cumulative inflation rate is approaching or
exceeding 100%. In 2022, this affected the Group's operations in Argentina and
Türkiye. The Group applies IAS 29 to the underlying financial information of
relevant subsidiaries to restate their local currency results and financial
position so as to be stated in terms of the measuring unit current at the end
of the reporting period. Those restated results are translated into the
Group's presentation currency of US dollars for consolidation at the closing
rate at the balance sheet date. Group comparatives are not restated for
inflation and consequential adjustments to the opening balance sheet in
relation to hyperinflationary subsidiaries are presented in other
comprehensive income. The hyperinflationary gain or loss in respect of the net
monetary position of the relevant subsidiary is included in profit or loss.
When applying hyperinflation accounting for the first time, the underlying
financial information is restated in terms of the measuring unit current at
the end of the reporting period as if the relevant economy had always been
hyperinflationary. Group comparatives are not restated for such historic
adjustments.
2 Net fee income
Net fee income by global business
2022
Wealth and Commercial Banking Global Banking and Markets Corporate Centre Total
Personal
Banking
$m $m $m $m $m
Funds under management 1,769 105 503 - 2,377
Cards 2,146 313 32 - 2,491
Credit facilities 100 776 598 - 1,474
Broking income 575 40 634 - 1,249
Account services 337 718 356 1 1,412
Unit trusts 682 14 - - 696
Underwriting 1 2 443 (5) 441
Global custody 140 14 767 - 921
Remittances 72 378 348 1 799
Imports/exports - 475 159 - 634
Insurance agency commission 283 16 1 - 300
Other 1,423 1,082 2,382 (2,468) 2,419
Fee income 7,528 3,933 6,223 (2,471) 15,213
Less: fee expense (2,497) (240) (3,464) 2,439 (3,762)
Net fee income 5,031 3,693 2,759 (32) 11,451
2021
Wealth and Commercial Global Corporate Total
Personal Banking Banking Banking and Centre
Markets
$m $m $m $m $m
Funds under management 1,984 126 546 - 2,656
Cards 1,949 240 23 1 2,213
Credit facilities 103 833 690 1 1,627
Broking income 863 69 669 - 1,601
Account services 429 677 340 6 1,452
Unit trusts 1,065 23 - - 1,088
Underwriting 4 6 1,009 (2) 1,017
Global custody 167 24 787 - 978
Remittances 75 357 343 - 775
Imports/exports 1 474 145 - 620
Insurance agency commission 324 17 - - 341
Other 1,305 1,077 2,503 (2,465) 2,420
Fee income 8,269 3,923 7,055 (2,459) 16,788
Less: fee expense (2,375) (284) (3,452) 2,420 (3,691)
Net fee income 5,894 3,639 3,603 (39) 13,097
2020
Wealth and Commercial Global Corporate Total
Personal Banking Banking Banking and Centre
Markets
$m $m $m $m $m
Funds under management 1,686 126 477 - 2,289
Cards 1,564 360 25 - 1,949
Credit facilities 93 740 626 - 1,459
Broking income 862 61 616 - 1,539
Account services 431 598 264 - 1,293
Unit trusts 881 18 - - 899
Underwriting 5 9 1,002 (1) 1,015
Global custody 189 22 723 - 934
Remittances 77 313 288 (1) 677
Imports/exports - 417 160 - 577
Insurance agency commission 307 17 1 - 325
Other 1,123 893 2,369 (2,290) 2,095
Fee income 7,218 3,574 6,551 (2,292) 15,051
Less: fee expense (1,810) (349) (3,284) 2,266 (3,177)
Net fee income 5,408 3,225 3,267 (26) 11,874
Net fee income included $6,410m of fees earned on financial assets that were
not at fair value through profit or loss, other than amounts included in
determining the effective interest rate (2021: $6,742m; 2020: $5,858m),
$1,613m of fees payable on financial liabilities that were not at fair value
through profit or loss, other than amounts included in determining the
effective interest rate (2021: $1,520m; 2020: $1,260m), $3,506m of fees
earned on trust and other fiduciary activities (2021: $3,849m; 2020: $3,426m)
and $422m of fees payable relating to trust and other fiduciary activities
(2021: $305m; 2020: $267m).
3 Net income from financial instruments measured at fair value through profit or
loss
2022 2021 2020
$m $m $m
Net income/(expense) arising on:
Net trading activities 2,576 6,668 11,074
Other instruments managed on a fair value basis 7,893 1,076 (1,492)
Net income from financial instruments held for trading or managed on a fair 10,469 7,744 9,582
value basis
Financial assets held to meet liabilities under insurance and investment (3,720) 4,134 2,481
contracts
Liabilities to customers under investment contracts 326 (81) (400)
Net income/(expense) from assets and liabilities of insurance businesses, (3,394) 4,053 2,081
including related derivatives, measured at fair value through profit or loss
Derivatives managed in conjunction with HSBC's issued debt securities (7,086) (2,811) 2,619
Other changes in fair value 7,009 2,629 (2,388)
Changes in fair value of designated debt and related derivatives(1) (77) (182) 231
Changes in fair value of other financial instruments mandatorily measured at 226 798 455
fair value through profit or loss
Year ended 31 Dec 7,224 12,413 12,349
1 The debt instruments, issued for funding purposes, are designated
under the fair value option to reduce an accounting mismatch.
HSBC Holdings
2022 2021 2020
$m $m $m
Net income/(expense) arising on:
- trading activities 2,094 87 (336)
- other instruments managed on a fair value basis 35 23 1,137
Net income from financial instruments held for trading or managed on a fair 2,129 110 801
value basis
Derivatives managed in conjunction with HSBC Holdings-issued debt securities (1,529) (625) 694
Other changes in fair value 3,673 974 (1,020)
Changes in fair value of designated debt and related derivatives 2,144 349 (326)
Changes in fair value of other financial instruments mandatorily measured at (2,409) (420) 1,141
fair value through profit or loss
Year ended 31 Dec 1,864 39 1,616
4 Insurance business
Net insurance premium income(1)
Non-linked Linked life Investment Total
insurance insurance contracts with DPF(2)
$m $m $m $m
Gross insurance premium income 11,685 824 1,547 14,056
Reinsurers' share of gross insurance premium income (1,226) (5) - (1,231)
Year ended 31 Dec 2022 10,459 819 1,547 12,825
Gross insurance premium income 8,529 1,027 1,873 11,429
Reinsurers' share of gross insurance premium income -
(555) (4) (559)
Year ended 31 Dec 2021 7,974 1,023 1,873 10,870
Gross insurance premium income 8,321 579 1,563 10,463
Reinsurers' share of gross insurance premium income -
(362) (8) (370)
Year ended 31 Dec 2020 7,959 571 1,563 10,093
1 This table is presented after elimination of inter-company
transactions between our insurance manufacturing operations and other Group
entities.
2 Discretionary participation features.
Net insurance claims and benefits paid and movement in liabilities to
policyholders(1)
Non-linked Linked life Investment Total
insurance insurance contracts with DPF(2)
$m $m $m $m
Gross claims and benefits paid and movement in liabilities 11,008 (124) 183 11,067
- claims, benefits and surrenders paid 4,032 680 1,845 6,557
- movement in liabilities 6,976 (804) (1,662) 4,510
Reinsurers' share of claims and benefits paid and movement in liabilities (1,206) 8 - (1,198)
- claims, benefits and surrenders paid (1,005) (7) - (1,012)
- movement in liabilities (201) 15 - (186)
Year ended 31 Dec 2022 9,802 (116) 183 9,869
Gross claims and benefits paid and movement in liabilities 10,474 1,134 3,332 14,940
- claims, benefits and surrenders paid 2,929 1,023 2,142 6,094
- movement in liabilities 7,545 111 1,190 8,846
Reinsurers' share of claims and benefits paid and movement in liabilities -
(543) (9) (552)
- claims, benefits and surrenders paid -
(343) (7) (350)
- movement in liabilities -
(200) (2) (202)
Year ended 31 Dec 2021 9,931 1,125 3,332 14,388
Gross claims and benefits paid and movement in liabilities 10,050 1,112 1,853 13,015
- claims, benefits and surrenders paid 3,695 900 2,083 6,678
- movement in liabilities 6,355 212 6,337
(230)
Reinsurers' share of claims and benefits paid and movement in liabilities -
(366) (4) (370)
- claims, benefits and surrenders paid -
(430) (10) (440)
- movement in liabilities 64 6 - 70
Year ended 31 Dec 2020 9,684 1,108 1,853 12,645
1 This table is presented after elimination of inter-company transactions
between our insurance manufacturing operations and other Group entities.
2 Discretionary participation features.
2
Liabilities under insurance contracts(1)
Non-linked Linked life Investment Total
insurance insurance contracts with DPF(2)
$m $m $m $m
Gross liabilities under insurance contracts at 1 Jan 2022 79,475 6,513 26,757 112,745
Claims and benefits paid (4,032) (680) (1,845) (6,557)
Increase in liabilities to policyholders 11,008 (124) 183 11,067
Exchange differences and other movements(2) 2,004 (313) (4,102) (2,411)
Gross liabilities under insurance contracts at 31 Dec 2022 88,455 5,396 20,993 114,844
Reinsurers' share of liabilities under insurance contracts (4,247) (10) - (4,257)
Net liabilities under insurance contracts at 31 Dec 2022 84,208 5,386 20,993 110,587
Gross liabilities under insurance contracts at 1 Jan 2021 72,464 6,449 28,278 107,191
Claims and benefits paid
(2,929) (1,023) (2,142) (6,094)
Increase in liabilities to policyholders 10,474 1,134 3,332 14,940
Exchange differences and other movements(3)
(534) (47) (2,711) (3,292)
Gross liabilities under insurance contracts at 31 Dec 2021 79,475 6,513 26,757 112,745
Reinsurers' share of liabilities under insurance contracts -
(3,638) (30) (3,668)
Net liabilities under insurance contracts at 31 Dec 2021 75,837 6,483 26,757 109,077
1 This table is presented after elimination of inter-company transactions
between our insurance manufacturing operations and other Group entities.
2 Discretionary participation features.
3 'Exchange differences and other movements' includes movements in
liabilities arising from net unrealised investment gains recognised in other
comprehensive income.
The key factors contributing to the movement in liabilities to policyholders
included movements in the market value of assets supporting policyholder
liabilities, death claims, surrenders, lapses, new business, the declaration
of bonuses and other amounts attributable to policyholders.
5 Employee compensation and benefits
2022 2021 2020
$m $m $m
Employee compensation and benefits(1) 18,366 18,742 18,076
Capitalised wages and salaries 922 870 1,320
Gross employee compensation and benefits for the year ended 31 Dec 19,288 19,612 19,396
Consists of:
Wages and salaries 16,954 17,072 17,072
Social security costs 1,413 1,503 1,378
Post-employment benefits 921 1,037 946
Year ended 31 Dec 19,288 19,612 19,396
1 Employee compensation and benefits are presented net of software
capitalisation costs in the income statement.
Average number of persons employed by HSBC during the year by global
business(1)
2022 2021 2020
Wealth and Personal Banking 135,676 138,026 144,615
Commercial Banking 48,004 44,992 45,631
Global Banking and Markets 48,597 48,179 49,055
Corporate Centre 365 359 411
Year ended 31 Dec 232,642 231,556 239,712
1 Average number of persons employed represents the number of persons with
contracts of service with the Group.
Average number of persons employed by HSBC during the year by geographical
region(1)
2022 2021 2020
Europe 58,145 60,919 64,886
Asia 132,257 127,673 129,923
Middle East and North Africa 9,541 9,329 9,550
North America 12,242 13,845 15,430
Latin America 20,457 19,790 19,923
Year ended 31 Dec 232,642 231,556 239,712
1 Average number of persons employed represents the number of persons with
contracts of service with the Group.
Reconciliation of total incentive awards granted to income statement charge
2022 2021 2020
$m $m $m
Total incentive awards approved for the current year 3,359 3,495 2,659
Less: deferred bonuses awarded, expected to be recognised in future periods (343) (379) (239)
Total incentives awarded and recognised in the current year 3,016 3,116 2,420
Add: current year charges for deferred bonuses from previous years 239 270 286
Other (22) 4 2
Income statement charge for incentive awards 3,233 3,390 2,708
Share-based payments
'Wages and salaries' includes the effect of share-based payments arrangements,
of which $400m was equity settled (2021: $467m; 2020: $434m), as follows:
2022 2021 2020
$m $m $m
Conditional share awards 402 479 411
Savings-related and other share award option plans 22 27 51
Year ended 31 Dec 424 506 462
HSBC share awards
Deferred share awards (including annual incentive awards, long-term incentive An assessment of performance over the relevant period ending on 31 December is
('LTI') awards delivered in shares) and Group Performance Share Plans used to determine the amount of the award to be granted.
('GPSP')
• Deferred awards generally require employees to remain in employment over
the vesting period and are generally not subject to performance conditions
after the grant date. An exception to these are LTI awards, which are subject
to performance conditions.
• Deferred share awards generally vest over a period of three, four, five
or seven years.
• Vested shares may be subject to a retention requirement post-vesting.
• Awards are subject to malus and clawback provisions.
International Employee Share Purchase Plan ('ShareMatch') The plan was first introduced in Hong Kong in 2013 and now includes employees
based in 31 jurisdictions.
• Shares are purchased in the market each quarter up to a maximum value of
£750, or the equivalent in local currency.
• Matching awards are added at a ratio of one free share for every three
purchased. In mainland China, matching awards are settled in cash.
• Matching awards vest subject to continued employment and the retention
of the purchased shares for a maximum period of two years and nine months.
Movement on HSBC share awards
2022 2021
Number Number
(000s) (000s)
Conditional share awards outstanding at 1 Jan 109,364 103,473
Additions during the year 90,190 75,549
Released in the year (67,718) (63,635)
Forfeited in the year (5,590) (6,023)
Conditional share awards outstanding at 31 Dec 126,246 109,364
Weighted average fair value of awards granted ($) 5.60 6.49
HSBC share option plans
Savings-related share option plans ('Sharesave') • From 2014, employees eligible for the UK plan could save up to £500
per month with the option to use the savings to acquire shares.
• These are generally 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% (2021: 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 share option plans
Savings-related
share option plans
Number WAEP(1)
(000s) £
Outstanding at 1 Jan 2022 123,197 2.85
Granted during the year(2) 8,928 4.24
Exercised during the year(3) (3,483) 3.49
Expired during the year (9,047) 3.55
Forfeited during the year (3,944) 2.79
Outstanding at 31 Dec 2022 115,651 2.89
- of which exercisable 4,029 4.11
Weighted average remaining contractual life (years) 2.26
Outstanding at 1 Jan 2021 130,953 2.97
Granted during the year(2) 15,410 3.15
Exercised during the year(3) 3.80
(3,878)
Expired during the year (11,502) 3.53
Forfeited during the year 3.97
(7,786)
Outstanding at 31 Dec 2021 123,197 2.85
- of which exercisable 4,949 4.05
Weighted average remaining contractual life (years) 3.02
1 Weighted average exercise price.
2 The weighted average fair value of options granted during the year
was $1.45 (2021: $0.85).
3 The weighted average share price at the date the options were
exercised was $6.22 (2021: $5.87).
Post-employment benefit plans
The Group operates pension plans throughout the world for its employees.
'Pension risk management processes' on page 205 contains details of the
policies and practices associated with these pension plans, some of which are
defined benefit plans. The largest defined benefit plan is the HBUK section of
the HSBC Bank (UK) Pension Scheme ('the principal plan'), created as a result
of the HSBC Bank (UK) Pension Scheme being fully sectionalised in 2018 to meet
the requirements of the Banking Reform Act. For further details of how the
trustee of the HSBC Bank (UK) Pension Scheme manages climate risk, see
'Managing risk for our stakeholders' on page 64.
HSBC holds on its balance sheet the net surplus or deficit, which is the
difference between the fair value of plan assets and the discounted value of
scheme liabilities at the balance sheet date for each plan. Surpluses are only
recognised to the extent that they are recoverable through reduced
contributions in the future or through potential future refunds from the
schemes. In assessing whether a surplus is recoverable, HSBC has considered
its current right to obtain a future refund or a reduction in future
contributions together with the rights of third parties such as trustees.
The principal plan
The principal plan has a defined benefit section and a defined contribution
section. The defined benefit section was closed to future benefit accrual in
2015, with defined benefits earned by employees at that date continuing to be
linked to their salary while they remain employed by HSBC. 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, inflation swaps to
reduce inflation risk and longevity swaps to reduce the impact of longer life
expectancy.
The principal plan is subject to the statutory funding objective requirements
of the UK Pensions Act 2004, which requires that it be funded to at least the
level of technical provisions (an actuarial estimate of the assets needed to
provide for the benefits already built up under the plan). Where a funding
valuation is carried out and identifies a deficit, the employer and trustee
are required to agree to a deficit recovery plan.
The latest funding valuation of the plan at 31 December 2019 was carried out
by Colin G Singer of 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 ($41.1bn) and
this exceeded the value placed on its liabilities on an ongoing basis by
£2.5bn ($3.3bn), giving a funding level of 109%. These figures include
defined contribution assets amounting to £2.4bn ($3.2bn). The main
differences between the assumptions used for assessing the defined benefit
liabilities for this funding valuation and those used for IAS 19 are that an
element of prudence is contained in the funding valuation assumptions for
discount rate, inflation rate and life expectancy. The funding valuation is
used to judge the amount of cash contributions the Group needs to put into the
pension scheme. It will always be different to the IAS 19 accounting surplus,
which is an accounting rule concerning employee benefits and shown on the
balance sheet of our financial statements. The next funding valuation will be
performed in 2023, with an effective date of 31 December 2022. The plan is
estimated to remain in a comfortable surplus relative to the funding
liabilities as at the end of 2022, based on assumptions consistent with those
used to determine the funding liabilities for the 2019 valuation.
The actuary also assessed the value of the liabilities if 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 assumption
which allow for reserves and include an explicit allowance for the future
administrative expenses of the plan. Under this approach, the amount of
assets needed was estimated to be £33bn ($44bn) 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 and the Group's financial statements,
Guaranteed minimum pension equalisation
Following a judgment 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 pension ('GMP') equalisation, and any potential
conversion of GMPs into non-GMP benefits, to be an approximate 0.9% increase
in the principal plan's liabilities, or £187m ($239m). This was recognised in
the income statement in 2018. A further judgment by the High Court on 20
November 2020 ruled that GMPs should also be equalised for those who had
previously transferred benefits from the principal plan to another
arrangement, with £13m ($17m) consequently being recognised in 2020. We
continue to assess the impact of GMP equalisation. In 2022, the trustee and
HSBC UK agreed to adopt a simplified approach for all members to implement GMP
equalisation. This resulted in an increase to the liabilities of £5m ($6m)
and has been recognised as a past service cost through profit and loss.
Income statement charge
2022 2021 2020
$m $m $m
Defined benefit pension plans 42 243 146
Defined contribution pension plans 852 767 775
Pension plans 894 1,010 921
Defined benefit and contribution healthcare plans 27 27 25
Year ended 31 Dec 921 1,037 946
Net assets/(liabilities) recognised on the balance sheet in respect of defined
benefit plans
Fair value of Present value of Effect of Total
plan assets defined benefit limit on plan
obligations surpluses
$m $m $m $m
Defined benefit pension plans 32,171 (25,693) - 6,478
Defined benefit healthcare plans 96 (388) - (292)
At 31 Dec 2022 32,267 (26,081) - 6,186
Total employee benefit liabilities (within Note 27 'Accruals, deferred income (1,096)
and other liabilities')
Total employee benefit assets (within Note 22 'Prepayments, accrued income and 7,282
other assets')
Defined benefit pension plans 51,431 9,131
(42,277) (23)
Defined benefit healthcare plans 103 -
(572) (469)
At 31 Dec 2021 51,534 8,662
(42,849) (23)
Total employee benefit liabilities (within Note 27 'Accruals, deferred income
and other liabilities') (1,607)
Total employee benefit assets (within Note 22 'Prepayments, accrued income and 10,269
other assets')
HSBC Holdings
Employee compensation and benefit expense in respect of HSBC Holdings'
employees in 2022 amounted to $41m (2021: $30m). The average number of persons
employed during 2022 was 42 (2021: 54). A small number of employees are
members of defined benefit pension plans. These employees are members of the
HSBC Bank (UK) Pension Scheme. HSBC Holdings pays contributions to such plan
for its own employees in accordance with the schedules of contributions
determined by the trustees of the plan and recognises these contributions as
an expense as they fall due.
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value of plan assets Present value of defined benefit obligations Effect of the asset ceiling Net defined benefit asset/(liability)
Principal(1) Other Principal(1) Other Principal(1) Other Principal(1) Other
plans
plans
plans
plans
plan plan plan plan
$m $m $m $m $m $m $m $m
At 1 Jan 2022 41,384 10,047 (32,255) (10,022) - (23) 9,129 2
Service cost - - (30) (170) - - (30) (170)
- current service cost - - (12) (161) - - (12) (161)
- past service cost and gains/(losses) from settlements - - (18) (9) - - (18) (9)
Net interest income/(cost) on the net defined benefit 703 198 (546) (202) - (1) 157 (5)
asset/(liability)
Remeasurement effects recognised in other comprehensive (11,505) (2,181) 9,532 2,360 - (3) (1,973) 176
income
- return on plan assets (excluding interest income) (11,505) (2,181) - - - - (11,505) (2,181)
- actuarial gains/(losses) financial assumptions - - 10,543 2,383 - - 10,543 2,383
- actuarial gains/(losses) demographic assumptions - - (123) 24 - - (123) 24
- actuarial gains/(losses) experience adjustments - - (888) (47) - - (888) (47)
- other changes - - - - - (3) - (3)
Exchange differences (4,288) (180) 3,325 35 - 2 (963) (143)
Benefits paid (1,222) (616) 1,222 686 - - - 70
Other movements(2) 49 (218) (35) 407 - 25 14 214
At 31 Dec 2022 25,121 7,050 (18,787) (6,906) - - 6,334 144
At 1 Jan 2021 42,505 10,485 (33,005) (10,990) - (44) 9,500 (549)
Service cost - - (55) (276) - - (55) (276)
- current service cost - - (14) (206) - - (14) (206)
- past service cost and losses from settlements - - (41) (70) - - (41) (70)
Net interest income/(cost) on the net defined benefit 613 172 (473) (174) - (1) 140 (3)
asset/(liability)
Remeasurement effects recognised in other comprehensive (377) 7 (271) 471 - 22 (648) 500
income
- return on plan assets (excluding interest income) (377) 7 - - - - (377) 7
- actuarial gains/(losses) financial assumptions - - 611 315 - - 611 315
- actuarial gains/(losses) demographic assumptions - - (447) 64 - - (447) 64
- actuarial gains/(losses) experience adjustments - - (435) 92 - - (435) 92
- other changes - - - - - 22 - 22
Exchange differences (361) (94) 283 138 - - (78) 44
Benefits paid (1,396) (645) 1,396 712 - - - 67
Other movements(2) 400 122 (130) 97 - - 270 219
At 31 Dec 2021 41,384 10,047 (32,255) (10,022) - (23) 9,129 2
1 For further details of the principal plan, see page 352.
2 Other movements include contributions by HSBC, contributions by
employees, administrative costs and taxes paid by plan.
HSBC expects to make $129m of contributions to defined benefit pension plans
during 2023, consisting of $13m for the principal plan and $116m for other
plans. Benefits expected to be paid from the plans 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 plans
2023 2024 2025 2026 2027 2028-2032
$m $m $m $m $m $m
The principal plan(1,2) 1,234 1,275 1,317 1,359 1,403 7,737
Other plans(1) 433 439 445 428 452 2,231
1 The duration of the defined benefit obligation is 13.2 years for the
principal plan under the disclosure assumptions adopted (2021: 17.3 years) and
10.2 years for all other plans combined (2021: 12.7 years).
2 For further details of the principal plan, see page 352.
Fair value of plan assets by asset classes
31 Dec 2022 31 Dec 2021
Value Quoted No quoted Thereof Value Quoted No quoted Thereof
HSBC(1)
HSBC(1)
market price market price market price market price
in active in active in active in active
market market market market
$m $m $m $m $m $m $m $m
The principal plan(2)
Fair value of plan assets 25,121 13,915 11,206 510 41,384 36,270 5,114 1,037
- equities(3) 112 - 112 - 197 5 192 -
- bonds(4) 14,764 14,301 463 - 36,295 35,612 683 -
- derivatives 1,203 - 1,203 510 1,864 - 1,864 1,037
- property 842 - 842 - 1,094 - 1,094 -
- other(5) 8,200 (386) 8,586 - 1,934 653 1,281 -
Other plans
Fair value of plan assets 7,050 5,848 1,202 37 10,047 8,248 1,799 52
- equities 639 486 153 2 892 668 224 5
- bonds 4,986 4,537 449 4 7,080 6,490 590 5
- derivatives 4 (1) 5 - 7 (13) 20 -
- property 109 104 5 - 123 119 4 -
- other 1,312 722 590 31 1,945 984 961 42
1 The fair value of plan assets includes derivatives entered into with
HSBC Bank plc as detailed in Note 36.
2 For further details on the principal plan, see page 352.
3 Includes $112m (2021: $192m) in relation to private equities.
4 Principal plan bonds includes fixed income bonds of $5,285m (2021:
$18,315m) and index-linked bonds of $9,479m (2021: $18,160m).
5 Other assets within the principal plan includes $8,586m (2021: $1,281m)
of unquoted pooled investment vehicles, of which the majority of the
underlying assets are invested in bonds.
Post-employment defined benefit plans' principal actuarial financial
assumptions
HSBC determines the discount rates to be applied to its obligations in
consultation with the plans' 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 principal plan(1)
Discount rate Inflation rate (RPI) Inflation rate (CPI) Rate of increase for pensions Rate of pay increase
% % % % %
UK
At 31 Dec 2022 4.93 3.39 2.84 3.27 3.34
At 31 Dec 2021 1.90 3.45 3.20 3.30 3.45
1 For further details on the principal plan, see page 352.
Mortality tables and average life expectancy at age 60 ( )for the principal
plan(1)
Mortality Life expectancy at age 60 for Life expectancy at age 60 for
table a male member currently: a female member currently:
Aged 60 Aged 40 Aged 60 Aged 40
UK
At 31 Dec 2022 SAPS S3(2) 27.1 28.6 28.4 29.9
At 31 Dec 2021 SAPS S3 27.3 28.8 28.5 30.1
1 For further details of the principal plan, see page 352.
2 Self-administered pension scheme ('SAPS') S3 table, with different
tables and multipliers adopted based on gender, pension amount and member
status, reflecting the Scheme's actual mortality experience. Improvements are
projected in accordance with the Continuous Mortality Investigation's CMI 2021
core projection model with an initial addition to improvement of 0.25% per
annum, a long-term rate of improvement of 1.25% per annum, and a 5% weighting
to 2020 and 2021 mortality experience reflecting updated long-term view on
mortality improvements post-pandemic.
The effect of changes in key assumptions on the principal plan(1)
Impact on HBUK section of the
HSBC Bank (UK) Pension Scheme obligation(2)
Financial impact of increase Financial impact of decrease
2022 2021 2022 2021
$m $m $m $m
Discount rate - increase/decrease of 0.25% (582) (1,337) 612 1,425
Inflation rate (RPI and CPI) - increase/decrease of 0.25% 466 1,211 (446) (980)
Pension payments and deferred pensions - increase/decrease of 0.25% 551 1,267 (519) (1,177)
Pay - increase/decrease of 0.25% 10 20 (10) (20)
Change in mortality - increase of 1 year 470 1,387 N/A N/A
1 For further details of the principal plan, see page 352.
2 Sensitivities allow for HSBC UK's convention of rounding pension
assumptions during 2022 to the nearest 0.01% (2021: 0.05%). The degree of
rounding has been increased to align with market practice.
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is 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 with the
prior period.
Directors' emoluments
Details of Directors' emoluments, pensions and their interests are disclosed
in the Directors' remuneration report on page 276.
6 Auditor's remuneration
2022 2021 2020
$m $m $m
Audit fees payable to PwC(1) 97.6 88.1 92.9
Other audit fees payable 1.6 2.0 1.0
Year ended 31 Dec 99.2 90.1 93.9
Fees payable by HSBC to PwC
2022 2021 2020
$m $m $m
Fees for HSBC Holdings' statutory audit(2) 21.9 19.5 21.9
Fees for other services provided to HSBC 126.2 109.9 108.3
- audit of HSBC's subsidiaries 75.7 68.6 71.0
- audit-related assurance services(3) 26.4 18.7 17.2
- other assurance services(4,5) 24.1 22.6 20.1
Year ended 31 Dec 148.1 129.4 130.2
1 Audit fees payable to PwC in 2022 included adjustments made to the prior
year audit fee after finalisation of the 2021 financial statements.
2 Fees payable to PwC for the statutory audit of the consolidated
financial statements of HSBC and the separate financial statements of HSBC
Holdings. They include amounts payable for services relating to the
consolidation returns of HSBC Holdings' subsidiaries, which are clearly
identifiable as being in support of the Group audit opinion.
3 Including services for assurance and other services that relate to
statutory and regulatory filings, including interim reviews.
4 Including permitted services relating to attestation reports on internal
controls of a service organisation primarily prepared for and used by
third-party end user, including comfort letters.
5 Includes reviews of PRA regulatory reporting
returns.
No fees were payable by HSBC to PwC as principal auditor for the following
types of services: internal audit services and services related to litigation,
recruitment and remuneration.
Fees payable by HSBC's associated pension schemes to PwC
2022 2021 2020
$000 $000 $000
Audit of HSBC's associated pension schemes 480 382 316
Year ended 31 Dec 480 382 316
No fees were payable by HSBC's associated pension schemes to PwC as principal
auditor for the following types of services: internal audit services, other
assurance services, services related to corporate finance transactions,
valuation and actuarial services, litigation, recruitment and remuneration,
and information technology.
In addition to the above, the estimated fees paid to PwC by third parties
associated with HSBC amounted to $13.1m (2021: $6.3m; 2020: $12.3m). In these
cases, HSBC was connected with the contracting party and may therefore have
been involved in appointing PwC. These fees arose from services such as
auditing mutual funds managed by HSBC and reviewing the financial position of
corporate concerns that borrow from HSBC.
Fees payable for non-audit services for HSBC Holdings are not disclosed
separately because such fees are disclosed on a consolidated basis for the
Group.
7 Tax
Tax expense
2022 2021 2020
$m $m $m
Current tax(1) 2,991 3,250 2,700
- for this year 3,271 3,182 2,883
- adjustments in respect of prior years (280) 68 (183)
Deferred tax (2,133) 963 (22)
- origination and reversal of temporary differences (2,236) 874 (341)
- effect of changes in tax rates (293) 132 58
- adjustments in respect of prior years 396 (43) 261
Year ended 31 Dec(2) 858 4,213 2,678
1 Current tax included Hong Kong profits tax of $604m (2021: $813m;
2020: $888m). The Hong Kong tax rate applying to the profits of subsidiaries
assessable in Hong Kong was 16.5% (2021: 16.5%; 2020: 16.5%).
2 In addition to amounts recorded in the income statement, a tax
credit of $145m (2021: charge of $7m) was recorded directly to equity.
Tax reconciliation
The tax charged to the income statement differs from the tax charge that would
apply if all profits had been taxed at the UK corporation tax rate as follows:
2022 2021 2020
$m % $m % $m %
Profit before tax 17,528 18,906 8,777
Tax expense
Taxation at UK corporation tax rate of 19.00% 3,329 19.0 3,592 19.0 1,668 19.0
Impact of differently taxed overseas profits in overseas locations 374 2.1 280 1.5 178 2.0
UK banking surcharge 283 1.6 332 1.8 (113) (1.3)
Items increasing tax charge in 2022:
- local taxes and overseas withholding taxes 550 3.1 360 1.9 228 2.6
- other permanent disallowables 202 1.2 236 1.2 333 3.8
- impacts of hyperinflation 171 1.0 68 0.4 65 0.7
- adjustments in respect of prior period liabilities 116 0.7 25 0.1 78 0.9
- tax impact of planned sale of French retail banking business 115 0.7 (434) (2.3) - -
- bank levy 59 0.3 93 0.5 202 2.3
- movements in provisions for uncertain tax positions 27 0.2 15 0.1 4 -
- non-deductible goodwill write-down 3 - 178 0.9 - -
- impact of differences between French tax basis and IFRSs - - 434 2.3 - -
Items reducing tax charge in 2022:
- movements in unrecognised UK deferred tax (2,191) (12.5) 294 1.6 444 5.1
- non-taxable income and gains (825) (4.7) (641) (3.4) (515) (5.8)
- effect of profits in associates and joint ventures (504) (2.9) (414) (2.2) (250) (2.8)
- non-UK movements in unrecognised deferred tax (312) (1.8) (67) (0.4) 608 6.9
- impact of changes in tax rates (293) (1.7) 132 0.7 58 0.6
- deductions for AT1 coupon payments (246) (1.4) (270) (1.4) (310) (3.5)
Year ended 31 December 2022 858 4.9 4,213 22.3 2,678 30.5
The Group's profits are taxed at different rates depending on the country or
territory in which the profits arise. The key applicable tax rates for 2022
include Hong Kong (16.5%), the US (21%) and the UK (19%). If the Group's
profits were taxed at the statutory rates of the countries in which the
profits arose, then the tax rate for the year would have been 22.7% (2021:
22.3%).
The effective tax rate for the year of 4.9% was lower than in the previous
year (2021: 22.3%). The effective tax rate for the year reduced by 14.3% as a
result of the recognition of previously unrecognised losses in the UK of
$2.2bn and France of $0.3bn, in light of improved forecast profitability.
During 2022, legislation was enacted to reduce the rate of the UK banking
surcharge from 8% to 3% from 1 April 2023, decreasing the Group's 2022 tax
charge by $173m due to the remeasurement of deferred tax balances. The main
rate of UK corporation tax will increase from 19% to 25% from 1 April
2023.
Accounting for taxes involves some estimation because tax law is uncertain and
its application requires a degree of judgement, which authorities may dispute.
Liabilities are recognised based on best estimates of the probable outcome,
taking into account external advice where appropriate. Exposures relating to
legacy tax cases were reassessed during 2022, resulting in a charge of $27m to
the income statement. We do not expect significant liabilities to arise in
excess of the amounts provided. HSBC only recognises current and deferred tax
assets where recovery is probable.
Movement of deferred tax assets and liabilities
Loan Unused tax Financial assets at FVOCI Insurance Cash flow hedges Retirement obligations Other Total
impairment losses and business
provisions tax credits
$m $m $m $m $m $m $m $m
Assets 1,162 2,001 84 - 176 109 1,690 5,222
Liabilities - - (254) (1,640) (22) (2,928) (427) (5,271)
At 1 Jan 2022 1,162 2,001 (170) (1,640) 154 (2,819) 1,263 (49)
Income statement 6 2,425 - 170 - 217 (685) 2,133
Other comprehensive income - - 1,679 - 1,159 692 (642) 2,888
Foreign exchange and other adjustments 7 (36) (79) 35 (42) 237 (18) 104
At 31 Dec 2022 1,175 4,390 1,430 (1,435) 1,271 (1,673) (82) 5,076
Assets(1) 1,175 4,390 1,430 - 1,271 - 1,571 9,837
Liabilities(1) - - - (1,435) - (1,673) (1,653) (4,761)
Assets 1,242 1,821 99 - 25 - 2,850 6,037
Liabilities - - (896) (1,622) (2,306) (973) (5,867)
(70)
At 1 Jan 2021 1,242 1,821 (797) (1,622) (2,306) 1,877 170
(45)
Income statement 161 - - (336) (656) (963)
(89) (43)
Other comprehensive income 33 634 - 212 (205) 115 784
(5)
Foreign exchange and other adjustments 14 25 28
(14) (7) (13) (73) (40)
At 31 Dec 2021 1,162 2,001 (170) (1,640) 154 (2,819) 1,263
(49)
Assets(1) 1,162 2,001 84 - 176 109 1,690 5,222
Liabilities(1) - - (254) (1,640) (2,928) (427) (5,271)
(22)
1 After netting off balances within countries, the balances as
disclosed in the accounts are as follows: deferred tax assets of $7,498m
(2021: $4,624m) and deferred tax liabilities of $2,422m (2021: $4,673m).
In applying judgement in recognising deferred tax assets, management has
assessed all available information, including future business profit
projections and the track record of meeting forecasts. Management's assessment
of the likely availability of future taxable profits against which to recover
deferred tax assets is based on the most recent financial forecasts approved
by management, which cover a five-year period and are extrapolated where
necessary, and takes into consideration the reversal of existing taxable
temporary differences and past business performance. When forecasts are
extrapolated beyond five years, a number of different scenarios are
considered, reflecting difference downward risk adjustments, in order to
assess the sensitivity of our recognition and measurement conclusions in the
context of such longer-term forecasts.
The Group's deferred tax asset of $7.5bn (2021: $4.6bn) included $3.9bn (2021:
$0.8bn) of deferred tax assets relating to the UK, $3.3bn (2021: $2.6bn) of
deferred tax assets relating to the US and a net deferred asset of $0.7bn
(2021: $0.0bn) in France.
The net UK deferred tax asset of $3.9bn excluded a $1.8bn deferred tax
liability arising on the UK pension scheme surplus, the reversal of which is
not taken into account when estimating future taxable profits. The UK deferred
tax assets are supported by forecasts of taxable profit, also taking into
consideration the history of profitability in the relevant businesses. The
majority of the deferred tax asset relates to tax attributes which do not
expire and are forecast to be recovered within five years and as such are less
sensitive to changes in long-term profit forecasts. The net UK deferred tax
asset includes $2.2bn of previously unrecognised losses that were recognised
in the UK in the period in light of improved forecast profitability in the UK
group. Sensitivity regarding the recognition and measurement of that deferred
tax asset relates to ongoing experience outcome of UK profitability versus
forecast, taking into account the non-expiring nature of the underlying
attributes.
The net US deferred tax asset of $3.3bn included $1.3bn related to US tax
losses, of which $1.1bn expire in 10 to 15 years. Management expects the US
deferred tax asset to be substantially recovered within 14 years, with the
majority recovered in the first eight years.
The net deferred tax asset in France of $0.7bn included $0.7bn related to tax
losses, which are expected to be substantially recovered within nine to 18
years. Following recognition of $0.3bn of previously unrecognised deferred tax
asset on losses, deferred tax is now recognised in full in respect of France.
Unrecognised deferred tax
The amount of gross temporary differences, unused tax losses and tax credits
for which no deferred tax asset is recognised in the balance sheet was $9.2bn
(2021: $16.9bn). This amount included unused UK tax losses of $3.5bn (2021:
$10.5bn), which arose prior to 1 April 2017 and can only be recovered against
future taxable profits of HSBC Holdings. No deferred tax was recognised on
these losses due to the absence of convincing evidence regarding the
availability of sufficient future taxable profits against which to recover
them. Deferred tax asset recognition is reassessed at each balance sheet date
based on the available evidence. Of the total amounts unrecognised, $3.6bn
(2021: $10.9bn) had no expiry date, $1.2bn (2021: $0.7bn) was scheduled to
expire within 10 years and the remaining balance is expected to expire after
ten years.
Deferred tax is not recognised in respect of the Group's investments in
subsidiaries and branches where HSBC is able to control the timing of
remittance or other realisation and where remittance or realisation is not
probable in the foreseeable future. The aggregate temporary differences
relating to unrecognised deferred tax liabilities arising on investments in
subsidiaries and branches is $11.7bn (2021: $12.7bn) and the corresponding
unrecognised deferred tax liability was $0.7bn (2021: $0.8bn).
8 Dividends
Dividends to shareholders of the parent company
2022 2021 2020
Per Total Per Total Per Total
share share share
$ $m $ $m $ $m
Dividends paid on ordinary shares
In respect of previous year:
- second interim dividend 0.18 3,576 0.15 3,059 - -
In respect of current year:
- first interim dividend 0.09 1,754 0.07 1,421 - -
Total 0.27 5,330 0.22 4,480 - -
Total dividends on preference shares classified as equity (paid quarterly)(1) - - 4.99 7 62.00 90
Total coupons on capital securities classified as equity 1,214 1,303 1,241
Dividends to shareholders 6,544 5,790 1,331
1 HSBC Holdings called $1,450m 6.20% non-cumulative US dollar preference
shares on 10 December 2020. The security was redeemed and cancelled on 13
January 2021.
Total coupons on capital securities classified as equity
2022 2021 2020
Total Total Total
First call date Per security $m $m $m
Perpetual subordinated contingent convertible securities(1)
$2,000m issued at 6.875%(2) Jun 2021 $68.750 - 69 138
$2,250m issued at 6.375% Sep 2024 $63.750 143 143 143
$2,450m issued at 6.375% Mar 2025 $63.750 156 156 156
$3,000m issued at 6.000% May 2027 $60.000 180 180 180
$2,350m issued at 6.250%(3) Mar 2023 $62.500 147 147 147
$1,800m issued at 6.500% Mar 2028 $65.000 117 117 117
$1,500m issued at 4.600%(4) Jun 2031 $46.000 69 69 -
$1,000m issued at 4.000%(5) Mar 2026 $40.000 40 20 -
$1,000m issued at 4.700%(6) Mar 2031 $47.000 47 24 -
€1,500m issued at 5.250%(7) Sep 2022 €52.500 76 93 90
€1,000m issued at 6.000% Sep 2023 €60.000 63 70 67
€1,250m issued at 4.750% Jul 2029 €47.500 65 72 67
£1,000m issued at 5.875% Sep 2026 £58.750 70 80 74
SGD1,000m issued at 4.700%(8) Jun 2022 SGD47.000 14 35 35
SGD750m issued at 5.000% Sep 2023 SGD50.000 27 28 27
Total 1,214 1,303 1,241
1 Discretionary coupons are paid semi-annually on the perpetual
subordinated contingent convertible securities, in denominations of each
security's issuance currency 1,000 per security.
2 This security was called by HSBC Holdings on 15 April 2021 and was
redeemed and cancelled on 1 June 2021.
3 This security was called by HSBC Holdings on 30 January 2023 and is
expected to be redeemed and cancelled on 23 March 2023.
4 This security was issued by HSBC Holdings on 17 December 2020. The first
call date commences six calendar months prior to the reset date of
17 June 2031.
5 This security was issued by HSBC Holdings on 9 March 2021. The first
call date commences six calendar months prior to the reset date of
9 September 2026.
6 This security was issued by HSBC Holdings on 9 March 2021. The first
call date commences six calendar months prior to the reset date of
9 September 2031.
7 This security was called by HSBC Holdings on 9 August 2022 and was
redeemed and cancelled on 16 September 2022.
8 This security was called by HSBC Holdings on 4 May 2022 and was redeemed
and cancelled on 8 June 2022.
8
After the end of the year, the Directors approved a second interim dividend in
respect of the financial year ended 31 December 2022 of $0.23 per ordinary
share, a distribution of approximately $4,593m. The second interim dividend
for 2022 will be payable on 27 April 2023 to holders on the Principal Register
in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas
Branch Register on 3 March 2023. No liability was recorded in the financial
statements in respect of the second interim dividend for 2022.
On 4 January 2023, HSBC paid a coupon on its €1,250m subordinated capital
securities, representing a total distribution of €30m ($31m). No liability
was recorded in the balance sheet at 31 December 2022 in respect of this
coupon payment.
9 Earnings per share
Basic earnings per ordinary share is calculated by dividing the profit
attributable to ordinary shareholders of the parent company by the weighted
average number of ordinary shares outstanding, excluding own shares held.
Diluted earnings per ordinary share is calculated by dividing the basic
earnings, which require no adjustment for the effects of dilutive potential
ordinary shares, by the weighted average number of ordinary shares
outstanding, excluding own shares held, plus the weighted average number of
ordinary shares that would be issued on conversion of dilutive potential
ordinary shares.
Profit attributable to the ordinary shareholders of the parent company
2022 2021 2020
$m $m $m
Profit attributable to shareholders of the parent company 16,035 13,917 5,229
Dividend payable on preference shares classified as equity - (7) (90)
Coupon payable on capital securities classified as equity (1,213) (1,303) (1,241)
Year ended 31 Dec 14,822 12,607 3,898
Basic and diluted earnings per share
2022 2021 2020
Profit Number Per Profit Number Per Profit Number Per
of shares share of shares share of shares share
$m (millions) $ $m (millions) $ $m (millions) $
Basic(1) 14,822 19,849 0.75 12,607 20,197 0.62 3,898 20,169 0.19
Effect of dilutive potential ordinary shares 137 105 73
Diluted(1) 14,822 19,986 0.74 12,607 20,302 0.62 3,898 20,242 0.19
1 Weighted average number of ordinary shares outstanding (basic) or
assuming dilution (diluted).
The number of anti-dilutive employee share options excluded from the weighted
average number of dilutive potential ordinary shares is 9.4 million (2021:
8.6 million; 2020: 14.6 million).
10 Segmental analysis
The Group Chief Executive, supported by the rest of the Group Executive
Committee ('GEC'), is considered the Chief Operating Decision Maker ('CODM')
for the purposes of identifying the Group's reportable segments. Global
business results are assessed by the CODM on the basis of adjusted performance
that removes the effects of significant items and currency translation from
reported results. Therefore, we present these results on an adjusted basis as
required by IFRSs. The 2021 and 2020 adjusted performance information is
presented on a constant currency basis. The 2021 and 2020 income statements
are converted at the average rates of exchange for 2022, and the balance
sheets at 31 December 2021 and 31 December 2020 at the prevailing rates of
exchange on 31 December 2022.
Our operations are closely integrated and, accordingly, the presentation of
data includes internal allocations of certain items of income and expense.
These allocations include the costs of certain support services and global
functions to the extent that they can be meaningfully attributed to global
businesses. While such allocations have been made on a systematic and
consistent basis, they necessarily involve a degree of subjectivity. Costs
that are not allocated to global businesses are included in Corporate Centre.
Where relevant, income and expense amounts presented include the results of
inter-segment funding along with inter-company and inter-business line
transactions. All such transactions are undertaken on arm's length terms. The
intra-Group elimination items for the global businesses are presented in
Corporate Centre.
Our global businesses
We provide a comprehensive range of banking and related financial services to
our customers in our three global businesses. The products and services
offered to customers are organised by these global businesses.
• Wealth and Personal Banking ('WPB') provides a full range of retail
banking and wealth products to our customers from personal banking to ultra
high net worth individuals. Typically, customer offerings include retail
banking products, such as current and savings accounts, mortgages and personal
loans, credit cards, debit cards and local and international payment services.
We also provide wealth management services, including insurance and investment
products, global asset management services, investment management and private
wealth solutions for customers with more sophisticated and international
requirements.
• Commercial Banking ('CMB') offers a broad range of products and
services to serve the needs of our commercial customers, including small and
medium-sized enterprises, mid-market enterprises and corporates. These include
credit and lending, international trade and receivables finance, treasury
management and liquidity solutions (payments and cash management and
commercial cards), commercial insurance and investments. CMB also offers
customers access to products and services offered by other global businesses,
such as Global Banking and Markets, which include foreign exchange products,
raising capital on debt and equity markets and advisory services.
• Global Banking and Markets ('GBM') provides tailored financial
solutions to major government, corporate and institutional clients and private
investors worldwide. The client-focused business lines deliver a full range of
banking capabilities including financing, advisory and transaction services, a
markets business that provides services in credit, rates, foreign exchange,
equities, money markets and securities services, and principal investment
activities.
HSBC adjusted profit before tax and balance sheet data
2022
Wealth and Personal Banking Commercial Global Corporate Centre Total
Banking Banking and
Markets
$m $m $m $m $m
Net operating income/(expense) before change in expected credit losses and 24,367 16,215 15,359 (596) 55,345
other credit impairment charges(1)
- external 21,753 16,715 19,598 (2,721) 55,345
- inter-segment 2,614 (500) (4,239) 2,125 -
- of which: net interest income/(expense) 18,137 11,867 5,303 (2,706) 32,601
Change in expected credit losses and other credit impairment recoveries (1,137) (1,858) (587) (10) (3,592)
Net operating income/(expense) 23,230 14,357 14,772 (606) 51,753
Total operating expenses (14,726) (6,642) (9,325) 227 (30,466)
Operating profit/(loss) 8,504 7,715 5,447 (379) 21,287
Share of profit in associates and joint ventures 29 1 (2) 2,695 2,723
Adjusted profit before tax 8,533 7,716 5,445 2,316 24,010
% % % % %
Share of HSBC's adjusted profit before tax 35.5 32.1 22.7 9.7 100.0
Adjusted cost efficiency ratio 60.4 41.0 60.7 38.1 55.0
Adjusted balance sheet data $m $m $m $m $m
Loans and advances to customers (net) 423,553 308,094 192,852 355 924,854
Interests in associates and joint ventures 508 15 108 28,623 29,254
Total external assets 889,450 606,698 1,321,076 149,306 2,966,530
Customer accounts 779,310 458,714 331,844 435 1,570,303
2021
Net operating income/(expense) before change in expected credit losses and 20,963 12,538 13,982 (463) 47,020
other credit impairment charges(1)
- external 20,725 12,423 15,590 (1,718) 47,020
- inter-segment 238 115 (1,608) 1,255 -
- of which: net interest income/(expense) 13,458 8,308 3,844 (716) 24,894
Change in expected credit losses and other credit impairment 213 225 313 3 754
(charges)/recoveries
Net operating income/(expense) 21,176 12,763 14,295 (460) 47,774
Total operating expenses (14,489) (6,554) (9,250) 189 (30,104)
Operating profit/(loss) 6,687 6,209 5,045 (271) 17,670
Share of profit in associates and joint ventures 34 1 - 2,898 2,933
Adjusted profit before tax 6,721 6,210 5,045 2,627 20,603
% % % % %
Share of HSBC's adjusted profit before tax 32.6 30.1 24.5 12.8 100.0
Adjusted cost efficiency ratio 69.1 52.3 66.2 40.8 64.0
Adjusted balance sheet data $m $m $m $m $m
Loans and advances to customers (net) 461,047 330,683 198,779 688 991,197
Interests in associates and joint ventures 489 12 116 27,469 28,086
Total external assets 888,028 586,392 1,157,327 174,073 2,805,820
Customer accounts 819,319 480,201 322,435 592 1,622,547
2020
Net operating income/(expense) before change in expected credit losses and 21,481 12,889 14,696 (218) 48,848
other credit impairment charges(1)
- external 19,521 13,278 17,635 (1,586) 48,848
- inter-segment 1,960 (389) (2,939) 1,368 -
- of which: net interest income/(expense) 14,752 8,997 4,314 (1,324) 26,739
Change in expected credit losses and other credit impairment (2,878) (4,710) (1,227) - (8,815)
(charges)/recoveries
Net operating income/(expense) 18,603 8,179 13,469 (218) 40,033
Total operating expenses (14,536) (6,475) (8,895) (539) (30,445)
Operating profit/(loss) 4,067 1,704 4,574 (757) 9,588
Share of profit in associates and joint ventures 6 (1) - 2,102 2,107
Adjusted profit before tax 4,073 1,703 4,574 1,345 11,695
% % % % %
Share of HSBC's adjusted profit before tax 34.8 14.6 39.1 11.5 100.0
Adjusted cost efficiency ratio 67.7 50.2 60.5 (247.2) 62.3
Adjusted balance sheet data $m $m $m $m $m
Loans and advances to customers (net) 436,105 320,084 211,510 1,151 968,850
Interests in associates and joint ventures 437 15 128 25,142 25,722
Total external assets 828,309 530,203 1,238,781 184,030 2,781,323
Customer accounts 788,043 439,889 310,757 540 1,539,229
1 Net operating income before change in expected credit losses and other
credit impairment charges, also referred to as revenue.
Reported external net operating income is attributed to countries and
territories on the basis of the location of the branch responsible for
reporting the results or advancing the funds:
2022 2021 2020
$m $m $m
Reported external net operating income by country/territory(1) 51,727 49,552 50,429
- UK 11,767 10,909 9,163
- Hong Kong 15,894 14,245 15,783
- US 3,893 3,795 4,474
- France 136 2,179 1,753
- other countries 20,037 18,424 19,256
1 Net operating income before change in expected credit losses and
other credit impairment charges, also referred to as revenue.
Adjusted results reconciliation
2022 2021 2020
Adjusted Significant Reported Adjusted Currency Significant Reported Adjusted Currency Significant Reported
items translation items translation items
$m $m $m $m $m $m $m $m $m $m $m
Revenue(1) 55,345 (3,618) 51,727 47,020 3,074 (542) 49,552 48,848 1,523 58 50,429
ECL (3,592) - (3,592) 754 174 - 928 (8,815) (2) - (8,817)
Operating expenses (30,466) (2,864) (33,330) (30,104) (2,181) (2,335) (34,620) (30,445) (1,170) (2,817) (34,432)
Share of profit in associates and joint ventures 2,723 - 2,723 2,933 113 - 3,046 2,107 (48) (462) 1,597
Profit/(loss) before tax 24,010 (6,482) 17,528 20,603 1,180 (2,877) 18,906 11,695 303 (3,221) 8,777
1 Net operating income before change in expected credit losses and other
credit impairment charges, also referred to as revenue.
Adjusted balance sheet reconciliation
2022 2021 2020
Reported and Adjusted Currency translation Reported Adjusted Currency translation Reported
adjusted
$m $m $m $m $m $m $m
Loans and advances to customers (net) 924,854 991,197 54,617 1,045,814 968,850 69,137 1,037,987
Interests in associates and joint ventures 29,254 28,086 1,523 29,609 25,722 962 26,684
Total external assets 2,966,530 2,805,820 152,119 2,957,939 2,781,323 202,841 2,984,164
Customer accounts 1,570,303 1,622,547 88,027 1,710,574 1,539,229 103,551 1,642,780
Adjusted profit reconciliation
2022 2021 2020
$m $m $m
Year ended 31 Dec
Adjusted profit before tax 24,010 20,603 11,695
Significant items (6,482) (2,877) (3,221)
- customer redress programmes (revenue) 8 11 (21)
- disposals, acquisitions and investment in new businesses (revenue)(1) (2,799) - (10)
- fair value movements on financial instruments(2) (579) (242) 264
- restructuring and other related costs (revenue)(3) (248) (307) (170)
- customer redress programmes (operating expenses) 31 (49) 54
- disposals, acquisitions and investment in new businesses (operating (18) - -
expenses)
- impairment of goodwill and other intangible assets 4 (587) (1,090)
- past service costs of guaranteed minimum pension benefits equalisation - - (17)
- restructuring and other related costs (operating expenses)(4) (2,881) (1,836) (1,908)
- settlements and provisions in connection with legal and other regulatory - - (12)
matters
- impairment of goodwill (share of profit in associates and joint - - (462)
ventures)(5)
- currency translation on significant items 133 151
Currency translation 1,180 303
Reported profit before tax 17,528 18,906 8,777
1 Includes losses from classifying businesses as held for sale as part
of the broader restructuring of our European business, of which $2.4bn relates
to the planned sale of the retail banking operations in France in
2022.
2 Includes fair value movements on non-qualifying hedges and debit
valuation adjustments on derivatives.
3 Comprises gains and losses relating to the business update in
February 2020, including losses associated with the RWA reduction programme.
4 Includes impairment of software intangible assets of $128m (2021:
$21m, 2020: $189m) of the total software intangible asset impairment of $147m
(2021: $146m, 2020: $1,347m) and impairment of tangible assets of $332m (2021:
$75m, 2020: $197m).
5 During 2020, The Saudi British Bank ('SABB'), an associate of HSBC,
impaired the goodwill that arose following the merger with Alawwal bank in
2020. HSBC's post-tax share of the goodwill impairment was $462m.
11 Trading assets
2022 2021
$m $m
Treasury and other eligible bills 22,897 23,110
Debt securities 78,126 89,944
Equity securities 88,026 109,614
Trading securities 189,049 222,668
Loans and advances to banks(1) 8,769 7,767
Loans and advances to customers(1) 20,275 18,407
Year ended 31 Dec 218,093 248,842
1 Loans and advances to banks and customers include reverse repos,
stock borrowing and other accounts.
12 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 inactive markets, HSBC sources alternative market
information, with greater weight given to information that is considered to be
more relevant and reliable. Examples of the factors considered are price
observability, instrument comparability, consistency of data sources,
underlying data accuracy and timing of prices.
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.
The majority of financial instruments measured at fair value are in GBM. GBM's
fair value governance structure comprises its Finance function, Valuation
Committees and a Valuation Committee Review Group. Finance is responsible for
establishing procedures governing valuation and ensuring fair values are in
compliance with accounting standards. The fair values are reviewed by the
Valuation Committees, which consist of independent support functions. These
committees are overseen by the Valuation Committee Review Group, which
considers all material subjective valuations.
Financial liabilities measured at fair value
In certain circumstances, HSBC records its own debt in issue at fair value,
based on quoted prices in an active market for the specific instrument. When
quoted market prices are unavailable, the own debt in issue is valued using
valuation techniques, the inputs for which are either based on quoted prices
in an inactive market for the instrument or are estimated by comparison with
quoted prices in an active market for similar instruments. In both cases, the
fair value includes the effect of applying the credit spread that is
appropriate to HSBC's liabilities. The change in fair value of issued debt
securities attributable to the Group's own credit spread is computed as
follows: for each security at each reporting date, an externally verifiable
price is obtained or a price is derived using credit spreads for similar
securities for the same issuer. Then, using discounted cash flow, each
security is valued using an appropriate market discount curve. The difference
in the valuations is attributable to the Group's own credit spread. This
methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments are reported as
financial liabilities designated at fair value. The credit spread applied to
these instruments is derived from the spreads at which HSBC issues structured
notes.
Gains and losses arising from changes in the credit spread of liabilities
issued by HSBC, recorded in other comprehensive income, reverse over the
contractual life of the debt, provided that the debt is not repaid at a
premium or a discount.
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. These are
financial instruments with quoted prices for identical instruments in active
markets that HSBC can access at the measurement date.
• Level 2 - valuation technique using observable inputs. These are
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.
These are financial instruments valued using valuation techniques where one or
more significant inputs are unobservable.
•
Financial instruments carried at fair value and bases of valuation
2022 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
$m $m $m $m $m $m $m $m
Recurring fair value measurements at 31 Dec
Assets
Trading assets 148,592 64,684 4,817 218,093 180,423 65,757 2,662 248,842
Financial assets designated and otherwise mandatorily measured at fair value 15,978 13,019 16,066 45,063 17,937 17,629 14,238 49,804
through profit or loss
Derivatives 2,917 279,265 1,964 284,146 2,783 191,621 2,478 196,882
Financial investments 182,231 71,621 2,965 256,817 247,745 97,838 3,389 348,972
Liabilities
Trading liabilities 44,787 27,092 474 72,353 63,437 20,682 785 84,904
Financial liabilities designated at fair value 1,130 115,765 10,432 127,327 1,379 136,243 7,880 145,502
Derivatives 2,400 280,444 2,920 285,764 1,686 186,290 3,088 191,064
The table below provides the fair value levelling of assets held for sale and
liabilities of disposal groups that have been classified as held for sale in
accordance with IFRS 5. For further details, see Note 23.
Financial instruments carried at fair value and bases of valuation - assets
and liabilities held for sale
2022 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
$m $m $m $m $m $m $m $m
Recurring fair value measurements at 31 Dec
Assets
Trading assets 2,932 244 - 3,176 - - - -
Financial assets designated and otherwise mandatorily measured at fair value - 14 47 61 - - - -
through profit or loss
Derivatives - 866 - 866 - - - -
Financial investments 11,184 - - 11,184 - - - -
Liabilities
Trading liabilities 2,572 182 - 2,754 - - - -
Financial liabilities designated at fair value - 3,523 - 3,523 - - - -
Derivatives - 813 - 813 - - - -
Transfers between Level 1 and Level 2 fair values
Assets Liabilities
Financial Trading Designated and otherwise Derivatives Trading Designated Derivatives
investments assets mandatorily measured liabilities at fair value
at fair value
$m $m $m $m $m $m $m
At 31 Dec 2022
Transfers from Level 1 to Level 2 4,721 5,284 - 113 - -
743
Transfers from Level 2 to Level 1 8,208 5,964 - 233 - -
1,214
At 31 Dec 2021
Transfers from Level 1 to Level 2 8,477 6,553 103 181 - 212
1,277
Transfers from Level 2 to Level 1 6,007 4,132 - 638 - -
768
Transfers between levels of the fair value hierarchy are deemed to occur at
the end of each quarterly reporting period. Transfers into and out of levels
of the fair value hierarchy are primarily attributable to observability of
valuation inputs and price transparency.
Fair value adjustments
We adopt the use of fair value adjustments when we take into consideration
additional factors not incorporated within the valuation model that would
otherwise be considered by a market participant. We classify fair value
adjustments as either 'risk-related' or 'model-related'. The majority of these
adjustments relate to GBM. Movements in the level of fair value adjustments do
not necessarily result in the recognition of profits or losses within the
income statement. For example, as models are enhanced, fair value adjustments
may no longer be required. Similarly, fair value adjustments will decrease
when the related positions are unwound, but this may not result in profit or
loss.
Global Banking and Markets fair value adjustments
2022 2021
GBM Corporate GBM Corporate
Centre Centre
$m $m $m $m
Type of adjustment
Risk-related 650 40 868 42
- bid-offer 426 - 412 -
- uncertainty 86 - 66 1
- credit valuation adjustment 245 35 228 35
- debit valuation adjustment (175) - (92) -
- funding fair value adjustment 68 5 254 6
Model-related 61 - 57 -
- model limitation 61 - 57 -
Inception profit (Day 1 P&L reserves) 97 - 106 -
At 31 Dec 808 40 1,031 42
The reduction in fair value adjustments was driven by changes to derivative
exposures and the credit environment, including HSBC's own credit.
Bid-offer
IFRS 13 'Fair Value Measurement' requires the use of the price within the
bid-offer spread that is most representative of fair value. Valuation models
will typically generate mid-market values. The bid-offer adjustment reflects
the extent to which bid-offer costs would be incurred if substantially all
residual net portfolio market risks were closed using available hedging
instruments or by disposing of or unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable from market data and/or
the choice of model itself may be more subjective. In these circumstances, an
adjustment may be necessary to reflect the likelihood that market participants
would adopt more conservative values for uncertain parameters and/or model
assumptions than those used in HSBC's valuation model.
Credit and debit valuation adjustments
The credit valuation adjustment ('CVA') is an adjustment to the valuation of
over-the-counter ('OTC') derivative contracts to reflect the possibility that
the counterparty may default and that HSBC may not receive the full market
value of the transactions.
The debit valuation adjustment ('DVA') is an adjustment to the valuation of
OTC derivative contracts to reflect the possibility that HSBC may default, and
that it may not pay the full market value of the transactions.
HSBC calculates a separate CVA and DVA for each legal entity, and for each
counterparty to which the entity has exposure. With the exception of central
clearing parties, all third-party counterparties are included in the CVA and
DVA calculations, and these adjustments are not netted across Group entities.
HSBC calculates the CVA by applying the probability of default ('PD') of the
counterparty, conditional on the non-default of HSBC, to HSBC's expected
positive exposure to the counterparty and multiplying the result by the loss
expected in the event of default. Conversely, HSBC calculates the DVA by
applying the PD of HSBC, conditional on the non-default of the counterparty,
to the expected positive exposure of the counterparty to HSBC and multiplying
the result by the loss expected in the event of default. Both calculations
are performed over the life of the potential exposure.
For most products HSBC uses a simulation methodology, which incorporates a
range of potential exposures over the life of the portfolio, to calculate the
expected positive exposure to a counterparty. The simulation methodology
includes credit mitigants, such as counterparty netting agreements and
collateral agreements with the counterparty.
The methodologies do not, in general, account for 'wrong-way risk'. Wrong-way
risk is an adverse correlation between the counterparty's probability of
default and the mark-to-market value of the underlying transaction. The risk
can either be general, perhaps related to the currency of the issuer country,
or specific to the transaction concerned. When there is significant wrong-way
risk, a trade-specific approach is applied to reflect this risk in the
valuation.
Funding fair value adjustment
The funding fair value adjustment ('FFVA') is calculated by applying future
market funding spreads to the expected future funding exposure of any
uncollateralised component of the OTC derivative portfolio. The expected
future funding exposure is calculated by a simulation methodology, where
available, and is adjusted for events that may terminate the exposure, such as
the default of HSBC or the counterparty. The FFVA and DVA are calculated
independently.
Model limitation
Models used for portfolio valuation purposes may be based upon a simplified
set of assumptions that do not capture all current and future material market
characteristics. In these circumstances, model limitation adjustments are
adopted.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted when the fair value estimated by a
valuation model is based on one or more significant unobservable inputs. The
accounting for inception profit adjustments is discussed in Note 1.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with
significant unobservable inputs - Level 3
Assets Liabilities
Financial investments Trading assets Designated and otherwise mandatorily measured at fair value through profit or Derivatives Total Trading liabilities Designated at fair value Derivatives Total
loss
$m $m $m $m $m $m $m $m $m
Private equity including strategic investments 647 19 15,652 - 16,318 92 - - 92
Asset-backed securities 438 208 95 - 741 - - - -
Structured notes - - - - - - 10,432 - 10,432
Other derivatives - - - 1,964 1,964 - - 2,920 2,920
Other portfolios 1,880 4,590 319 - 6,789 382 - - 382
At 31 Dec 2022 2,965 4,817 16,066 1,964 25,812 474 10,432 2,920 13,826
Private equity including strategic investments 544 2 13,732 - 14,278 9 - - 9
Asset-backed securities 1,008 132 1 - 1,141 - - - -
Structured notes - - - - - - 7,879 - 7,879
Other derivatives - - - 2,478 2,478 - - 3,088 3,088
Other portfolios 1,837 2,528 505 - 4,870 776 1 - 777
At 31 Dec 2021 3,389 2,662 14,238 2,478 22,767 785 7,880 3,088 11,753
Level 3 instruments are present in both ongoing and legacy businesses. Loans
held for securitisation, derivatives with monolines, certain 'other
derivatives' and predominantly all Level 3 asset-backed securities are legacy
positions. HSBC has the capability to hold these positions.
Private equity including strategic investments
The fair value of a private equity investment (including strategic
investments) is estimated on the basis of an analysis of the investee's
financial position and results, risk profile, prospects and other factors; by
reference to market valuations for similar entities quoted in an active
market; the price at which similar companies have changed ownership; or from
published net asset values ('NAV') received. If necessary, adjustments are
made to the NAV of funds to obtain the best estimate of fair value.
Asset-backed securities
While quoted market prices are generally used to determine the fair value of
the asset-backed securities ('ABSs'), valuation models are used to
substantiate the reliability of the limited market data available and to
identify whether any adjustments to quoted market prices are required. For
certain ABSs, such as residential mortgage-backed securities, the valuation
uses an industry standard model with assumptions relating to prepayment
speeds, default rates and loss severity based on collateral type, and
performance, as appropriate. The valuations output is benchmarked for
consistency against observable data for securities of a similar nature.
Structured notes
The fair value of Level 3 structured notes is derived from the fair value of
the underlying debt security, and the fair value of the embedded derivative is
determined as described in the paragraph below on derivatives. These
structured notes comprise principally equity-linked notes issued by HSBC,
which provide the counterparty with a return linked to the performance of
equity securities and other portfolios.
Examples of the unobservable parameters include long-dated equity volatilities
and correlations between equity prices, and interest and foreign exchange
rates.
Derivatives
OTC derivative valuation models calculate the present value of expected future
cash flows, based upon 'no arbitrage' principles. For many vanilla derivative
products, the modelling approaches used are standard across the industry. For
more complex derivative products, there may be some differences in market
practice. Inputs to valuation models are determined from observable market
data wherever possible, including prices available from exchanges, dealers,
brokers or providers of consensus pricing. Certain inputs may not be
observable in the market directly, but can be determined from observable
prices via model calibration procedures or estimated from historical data or
other sources.
Reconciliation of fair value measurements in Level 3 of the fair value
hierarchy
Movement in Level 3 financial instruments
Assets Liabilities
Financial investments Trading assets Designated and otherwise mandatorily measured at fair value through profit or Derivatives Trading liabilities Designated at fair value Derivatives
loss
$m $m $m $m $m $m $m
At 1 Jan 2022 3,389 2,662 14,238 2,478 785 7,880 3,088
Total gains/(losses) recognised in profit or loss (4) (245) 159 390 (52) (1,334) 1,014
- net income/(losses) from financial instruments held for trading or managed - (245) - 390 (52) - 1,014
on a fair value basis
- changes in fair value of other financial instruments mandatorily measured - - 159 - - (1,334) -
at fair value through profit or loss
- gains less losses from financial investments at fair value through other (4) - - - - - -
comprehensive income
Total gains/(losses) recognised in other comprehensive income ('OCI')(1) (325) (137) (217) (219) (11) (345) (226)
- financial investments: fair value gains/ (losses) (203) - - - - 82 -
- exchange differences (122) (137) (217) (219) (11) (427) (226)
Purchases 1,048 3,436 4,330 - 178 - -
New issuances 1 - - - 8 4,183 -
Sales (245) (1,102) (783) - (152) (94) -
Settlements (463) (1,273) (1,729) (918) (644) 182 (993)
Transfers out (523) (442) (39) (409) (18) (1,296) (632)
Transfers in 87 1,918 107 642 380 1,256 669
At 31 Dec 2022 2,965 4,817 16,066 1,964 474 10,432 2,920
Unrealised gains/(losses) recognised in profit or loss relating to assets and - (100) (148) 707 2 100 2,779
liabilities held at 31 Dec 2021
- net income/(losses) from financial instruments held for trading or managed - (100) - 707 2 - 2,779
on a fair value basis
- changes in fair value of other financial instruments mandatorily measured - - (148) - - 100 -
at fair value through profit or loss
At 1 Jan 2021 3,654 2,499 11,477 2,670 162 5,306 4,188
Total gains/(losses) recognised in profit or loss (10) (378) 1,753 2,237 16 (836) 2,583
- net income/(losses) from financial instruments held for trading or managed - (378) - 2,237 16 - 2,583
on a fair value basis
- changes in fair value of other financial instruments mandatorily measured - - 1,753 - - (836) -
at fair value through profit or loss
- gains less losses from financial investments at fair value through other (10) - - - - - -
comprehensive income
Total gains/(losses) recognised in other comprehensive income ('OCI')(1) (521) (18) (285) (27) (8) (61) (26)
- financial investments: fair value gains/ (losses) (428) - - - - - -
- exchange differences (93) (18) (285) (27) (8) (61) (26)
Purchases 1,025 1,988 3,692 - 1,014 1 -
New issuances - - - - 35 5,969 -
Sales (580) (473) (1,216) - (4) (27) -
Settlements (336) (747) (1,049) (2,347) (681) (2,922) (3,962)
Transfers out (383) (1,027) (184) (418) (7) (704) (734)
Transfers in 540 818 50 363 258 1,154 1,039
At 31 Dec 2021 3,389 2,662 14,238 2,478 785 7,880 3,088
Unrealised gains/(losses) recognised in profit or loss relating to assets and - (309) 1,509 1,298 - 166 (969)
liabilities held at 31 Dec 2020
- net income/(losses) from financial instruments held for trading or managed - (309) - 1,298 - - (969)
on a fair value basis
- changes in fair value of other financial instruments mandatorily measured - - 1,509 - - 166 -
at fair value through profit or loss
1 Included in 'financial investments: fair value gains/(losses)' in
the current year and 'exchange differences' in the consolidated statement of
comprehensive income.
Transfers between levels of the fair value hierarchy are deemed to occur at
the end of each quarterly reporting period. Transfers into and out of levels
of the fair value hierarchy are primarily attributable to observability of
valuation inputs and price transparency.
Effect of changes in significant unobservable assumptions to reasonably
possible alternatives
Sensitivity of fair values to reasonably possible alternative assumptions
2022 2021
Reflected in profit or loss Reflected in OCI Reflected in profit or loss Reflected in OCI
Favourable Un- Favourable Un- Favourable Un- Favourable Un-
changes favourable changes favourable changes favourable changes favourable
changes changes changes changes
$m $m $m $m $m $m $m $m
Derivatives, trading assets and trading liabilities(1) 264 (291) - - 143 (146) - -
Financial assets and liabilities designated and otherwise mandatorily measured 914 (911) - - 849 (868) - -
at fair value through profit or loss
Financial investments 11 (11) 65 (55) 20 (20) 113 (112)
At 31 Dec 1,189 (1,213) 65 (55) 1,012 (1,034) 113 (112)
1 'Derivatives, trading assets and trading liabilities' are presented
as one category to reflect the manner in which these instruments are
risk-managed.
The sensitivity analysis aims to measure a range of fair values consistent
with the application of a 95% confidence interval. Methodologies take account
of the nature of the valuation technique employed, as well as the availability
and reliability of observable proxy and historical data.
When the fair value of a financial instrument is affected by more than one
unobservable assumption, the above table reflects the most favourable or the
most unfavourable change from varying the assumptions individually.
Key unobservable inputs to Level 3 financial instruments
The following table lists key unobservable inputs to Level 3 financial
instruments and provides the range of those inputs at 31 December 2022.
Quantitative information about significant unobservable inputs in Level 3
valuations
Fair value 2022 2021
Assets Liabilities Valuation Key unobservable Full range Full range
techniques inputs of inputs of inputs
$m $m Lower Higher Lower Higher
Private equity including strategic investments 16,318 92 See below See below
Asset-backed securities 741 -
- collateralised loan/debt obligation 188 - Market proxy Bid quotes - 92 - 100
- other ABSs 553 - Market proxy Bid quotes - 99 - 100
Structured notes - 10,432
- equity-linked notes - 6,833 Model - Option model Equity volatility 6% 142% 6% 124%
Model - Option model Equity correlation 32% 99% 22% 99%
- Foreign exchange-linked notes - 2,694 Model - Option model Foreign exchange volatility 3% 37% 1% 99%
- other - 905
Derivatives 1,964 2,920
- interest rate derivatives 560 710
securitisation swaps 259 209 Model - Discounted cash flow Prepayment rate 5% 10% 5% 10%
long-dated swaptions 53 67 Model - Option model Interest rate volatility 8% 53% 15% 35%
other 248 434
- Foreign exchange derivatives 445 304
Foreign exchange options 404 274 Model - Option model Foreign exchange volatility 1% 46% 1% 99%
other 41 30
- equity derivatives 850 1,658
long-dated single stock options 415 502 Model - Option model Equity volatility 7% 153% 4% 138%
other 435 1,156
- credit derivatives 109 248
Other portfolios 6,789 382
- repurchase agreements 750 328 Model - Discounted cash flow Interest rate curve 1% 9% 1% 5%
- other(1) 6,039 54
At 31 Dec 2022 25,812 13,826
1 'Other' includes a range of smaller asset holdings.
Private equity including strategic investments
Given the bespoke nature of the analysis in respect of each private equity
holding, it is not practical to quote a range of key unobservable inputs. The
key unobservable inputs would be price and correlation. The valuation approach
includes using a range of inputs that include company specific financials,
traded comparable companies multiples, published net asset values and
qualitative assumptions, which are not directly comparable or quantifiable.
Prepayment rates
Prepayment rates are a measure of the anticipated future speed at which a loan
portfolio will be repaid in advance of the due date. They vary according to
the nature of the loan portfolio and expectations of future market conditions,
and may be estimated using a variety of evidence, such as prepayment rates
implied from proxy observable security prices, current or historical
prepayment rates and macroeconomic modelling.
Market proxy
Market proxy pricing may be used for an instrument when specific market
pricing is not available but there is evidence from instruments with common
characteristics. In some cases it might be possible to identify a specific
proxy, but more generally evidence across a wider range of instruments will be
used to understand the factors that influence current market pricing and the
manner of that influence.
Volatility
Volatility is a measure of the anticipated future variability of a market
price. It varies by underlying reference market price, and by strike and
maturity of the option. Certain volatilities, typically those of a
longer-dated nature, are unobservable and are estimated from observable data.
The range of unobservable volatilities reflects the wide variation in
volatility inputs by reference market price. The core range is significantly
narrower than the full range because these examples with extreme volatilities
occur relatively rarely within the HSBC portfolio.
Correlation
Correlation is a measure of the inter-relationship between two market prices
and is expressed as a number between minus one and one. It is used to value
more complex instruments where the payout is dependent upon more than one
market price. There is a wide range of instruments for which correlation is an
input, and consequently a wide range of both same-asset correlations and
cross-asset correlations is used. In general, the range of same-asset
correlations will be narrower than the range of cross-asset correlations.
Unobservable correlations may be estimated based upon a range of evidence,
including consensus pricing services, HSBC trade prices, proxy correlations
and examination of historical price relationships. The range of unobservable
correlations quoted in the table reflects the wide variation in correlation
inputs by market price pair.
Credit spread
Credit spread is the premium over a benchmark interest rate required by the
market to accept lower credit quality. In a discounted cash flow model, the
credit spread increases the discount factors applied to future cash flows,
thereby reducing the value of an asset. Credit spreads may be implied from
market prices and may not be observable in more illiquid markets.
Inter-relationships between key unobservable inputs
Key unobservable inputs to Level 3 financial instruments may not be
independent of each other. As described above, market variables may be
correlated. This correlation typically reflects the manner in which different
markets tend to react to macroeconomic or other events. Furthermore, the
effect of changing market variables on the HSBC portfolio will depend on
HSBC's net risk position in respect of each variable.
HSBC Holdings
Basis of valuing HSBC Holdings' financial assets and liabilities measured at
fair value
2022 2021
$m $m
Valuation technique using observable inputs: Level 2
Assets at 31 Dec
- derivatives 3,801 2,811
- designated and otherwise mandatorily measured at fair value through profit 52,322 51,408
or loss
Liabilities at 31 Dec
- designated at fair value 32,123 32,418
- derivatives 6,922 1,220
13 Fair values of financial instruments not carried at fair value
Fair values of financial instruments not carried at fair value and bases of
valuation
Fair value
Carrying Quoted market Observable Significant Total
amount price Level 1 inputs Level 2 unobservable
inputs Level 3
$m $m $m $m $m
At 31 Dec 2022
Assets
Loans and advances to banks 104,882 - 104,074 814 104,888
Loans and advances to customers 924,854 - 8,768 904,288 913,056
Reverse repurchase agreements - non-trading 253,754 - 253,668 - 253,668
Financial investments - at amortised cost 168,746 90,629 67,419 626 158,674
Liabilities
Deposits by banks 66,722 - 66,831 - 66,831
Customer accounts 1,570,303 - 1,570,209 - 1,570,209
Repurchase agreements - non-trading 127,747 - 127,500 - 127,500
Debt securities in issue 78,149 - 76,640 381 77,021
Subordinated liabilities 22,290 - 22,723 - 22,723
At 31 Dec 2021
Assets
Loans and advances to banks 83,136 - 82,220 1,073 83,293
Loans and advances to customers 1,045,814 - 10,287 1,034,288 1,044,575
Reverse repurchase agreements - non-trading 241,648 - 241,531 121 241,652
Financial investments - at amortised cost 97,302 38,722 63,022 523 102,267
Liabilities
Deposits by banks 101,152 - 101,149 - 101,149
Customer accounts 1,710,574 - 1,710,733 - 1,710,733
Repurchase agreements - non-trading 126,670 - 126,670 - 126,670
Debt securities in issue 78,557 - 78,754 489 79,243
Subordinated liabilities 20,487 - 26,206 - 26,206
Fair values of financial instruments not carried at fair value and bases of
valuation - assets and disposal groups held for sale
Fair value
Carrying amount Quoted market price Level 1 Observable inputs Level 2 Significant unobservable inputs Level 3 Total
$m $m $m $m $m
At 31 Dec 2022
Assets
Loans and advances to banks 253 - 257 - 257
Loans and advances to customers 80,687 - 111 78,048 78,159
Reverse repurchase agreements - non-trading 4,646 - 4,646 - 4,646
Financial investments - at amortised cost 6,165 6,042 - - 6,042
Liabilities
Deposits by banks 64 - 64 - 64
Customer accounts 85,274 - 85,303 - 85,303
Repurchase agreements - non-trading 3,266 - 3,266 - 3,266
Debt securities in issue 12,928 - 12,575 - 12,575
Subordinated liabilities 8 - 7 - 7
At 31 Dec 2021
Assets
Loans and advances to banks 3 - 3 - 3
Loans and advances to customers 3,056 - 363 2,808 3,171
Liabilities
Deposits by banks 87 - 87 - 87
Customer accounts 8,750 - 8,750 - 8,750
Other financial instruments not carried at fair value are typically short term
in nature and reprice to current market rates frequently. Accordingly, their
carrying amount is a reasonable approximation of fair value. They include cash
and balances at central banks, items in the course of collection from and
transmission to other banks, Hong Kong Government certificates of indebtedness
and Hong Kong currency notes in circulation, all of which are measured at
amortised cost.
Valuation
Fair value is an estimate of 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. It does not reflect the economic
benefits and costs that HSBC expects to flow from an instrument's cash flow
over its expected future life. Our valuation methodologies and assumptions in
determining fair values for which no observable market prices are available
may differ from those of other companies.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and customers,
loans are segregated, as far as possible, into portfolios of similar
characteristics. Fair values are based on observable market transactions, when
available. When they are unavailable, fair values are estimated using
valuation models incorporating a range of input assumptions. These assumptions
may include: value estimates from third-party brokers reflecting
over-the-counter trading activity; forward-looking discounted cash flow
models, taking account of expected customer prepayment rates, using
assumptions that HSBC believes are consistent with those that would be used by
market participants in valuing such loans; new business rates estimates for
similar loans; and trading inputs from other market participants including
observed primary and secondary trades. From time to time, we may engage a
third-party valuation specialist to measure the fair value of a pool of loans.
The fair value of loans reflects expected credit losses at the balance sheet
date and estimates of market participants' expectations of credit losses over
the life of the loans, and the fair value effect of repricing between
origination and the balance sheet date. For credit-impaired loans, fair value
is estimated by discounting the future cash flows over the time period they
are expected to be recovered.
Financial investments
The fair values of listed financial investments are determined using bid
market prices. The fair values of unlisted financial investments are
determined using valuation techniques that incorporate the prices and future
earnings streams of equivalent quoted securities.
Deposits by banks and customer accounts
The fair values of on-demand deposits are approximated by their carrying
value. For deposits with longer-term maturities, fair values are estimated
using discounted cash flows, applying current rates offered for deposits of
similar remaining maturities.
Debt securities in issue and subordinated liabilities
Fair values in debt securities in issue and subordinated liabilities are
determined using quoted market prices at the balance sheet date where
available, or by reference to quoted market prices for similar instruments.
Repurchase and reverse repurchase agreements - non-trading
Fair values of repurchase and reverse repurchase agreements that are held on a
non-trading basis provide approximate carrying amounts. This is due to the
fact that balances are generally short dated.
HSBC Holdings
The methods used by HSBC Holdings to determine fair values of financial
instruments for the purposes of measurement and disclosure are described
above.
Fair values of HSBC Holdings' financial instruments not carried at fair value
on the balance sheet
2022 2021
Carrying amount Fair value(1) Carrying amount Fair value(1)
$m $m $m $m
Assets at 31 Dec
Loans and advances to HSBC undertakings 26,765 26,962 25,108 25,671
Financial investments - at amortised cost 19,466 19,314 26,194 26,176
Liabilities at 31 Dec
Debt securities in issue 66,938 65,364 67,483 69,719
Subordinated liabilities 19,727 20,644 17,059 21,066
1 Fair values (other than Level 1 financial investments) were
determined using valuation techniques with observable inputs (Level 2).
14 Financial assets designated and otherwise mandatorily measured at fair value
through profit or loss
2022 2021
Designated at fair value Mandatorily measured at fair value Total Designated at fair value Mandatorily measured at Total
fair value
$m $m $m $m $m $m
Securities 3,079 38,529 41,608 2,251 42,062 44,313
- treasury and other eligible bills 649 95 744 599 630
31
- debt securities 2,430 3,969 6,399 1,652 5,177 6,829
- equity securities - 34,465 34,465 - 36,854 36,854
Loans and advances to banks and customers - 1,841 1,841 - 4,307 4,307
Other - 1,614 1,614 - 1,184 1,184
At 31 Dec 3,079 41,984 45,063 2,251 47,553 49,804
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