Half-year Report - 2022 Interim Report - Part 3

RNS Number : 5083U
HSBC Holdings PLC
01 August 2022
 


Risk


Page

Key developments in the first half of 2022

64

Areas of special interest

64

Credit risk

68

Treasury risk

95

Market risk

106

Insurance manufacturing operations risk

110

We recognise that the primary role of risk management is to protect our customers, business, colleagues, shareholders and the communities that we serve, while ensuring we are able to support our strategy and provide sustainable growth.

The implementation of our business strategy, which includes our business transformation plans, remains a key focus. As we implement change initiatives, we actively manage the execution risks. We also perform periodic risk assessments, including against strategies, to help ensure retention of key personnel for our continued safe operation.

We aim to use a comprehensive risk management approach across the organisation and across all risk types, underpinned by our culture and values. This is outlined in our risk management framework, including the key principles and practices that we employ in managing material risks, both financial and non-financial. The framework fosters continual monitoring, promotes risk awareness and encourages sound operational and strategic decision making. It also supports a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities. We continue to actively review and develop our risk management framework and enhance our approach to managing risk.

All our people are responsible for the management of risk, with the ultimate accountability residing with the Board. Our Group Risk and Compliance function, led by the Group Chief Risk and Compliance Officer, plays an important role in reinforcing our culture and values. We are focused on creating an environment that encourages our people to speak up and do the right thing.

Group Risk and Compliance is independent from the global businesses, including our sales and trading functions, to provide challenge, oversight and appropriate balance in risk/reward decisions.

A summary of our current policies and practices regarding the management of risk is set out in the 'Risk management' section on pages 121 to 124 of the Annual Report and Accounts 2021.

Key developments in the first half of 2022

We actively managed the risks related to the Russia-Ukraine war and broader macroeconomic and geopolitical uncertainties, as well as the continued risks resulting from the Covid-19 pandemic and other key risks described in this section. In addition, we enhanced our risk management in the following areas:

We have continued to improve our risk governance decision making, particularly with regard to the governance of treasury risk to ensure senior executives have appropriate oversight and visibility of macroeconomic trends around inflation and interest rates.

We continued to develop our approach to emerging risk identification and management, including the use of forward-looking indicators to support our analysis.

We enhanced our enterprise risk reporting processes to place a greater focus on our emerging risks, including by capturing the materiality, oversight and individual monitoring of these risks.

We have further strengthened our third-party risk policy and processes to improve control and oversight of our material third parties that are key to maintaining our operational resilience, and to meet new and evolving regulatory requirements.

We made progress with our comprehensive regulatory reporting programme to strengthen our global processes, improve consistency, and enhance controls.

We enhanced, and continued to embed, the governance and oversight around model adjustments and related processes for IFRS 9 models and Sarbanes-Oxley controls.

Our climate risk programme continues to shape our approach to climate risk across four key pillars: governance and risk appetite; risk management; stress testing; and disclosures.

We continued to improve the effectiveness of our financial crime controls, deploying advanced analytics capabilities into new markets. We are refreshing our financial crime policies, ensuring they remain up-to-date and address changing and emerging risks. We continue to monitor regulatory changes.

Areas of special interest

During the first half of 2022, a number of areas were considered as part of our top and emerging risks because of the effect they have on the Group. In this section we have focused on risks related to geopolitical and macroeconomic risk, Covid-19, climate risk and the interbank offered rate ('Ibor') transition.

Geopolitical and macroeconomic risk

The Russia-Ukraine war has had far-reaching geopolitical and economic implications. HSBC is monitoring the direct and indirect impacts of the war, and continues to respond to the extensive sanctions and trade restrictions that have been imposed, noting the challenges that arise in implementing the complex, novel and ambiguous aspects of certain of these sanctions. Numerous sanctions have been imposed against the Russian government and its officials, alongside individuals with close ties to the Russian government and a number of Russian financial institutions and companies. Russia has implemented certain countermeasures in response.

Our business in Russia principally serves multinational corporate clients headquartered in other countries and is not accepting new business or customers, and is consequently on a declining trend. Following a strategic review, HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) has entered into an agreement to sell its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company), subject to regulatory approvals.

Global commodity markets have been significantly impacted by the Russia-Ukraine war and the Covid-19 pandemic, leading to sustained supply chain disruptions. This has resulted in product shortages appearing across several regions, and increased prices for both energy and non-energy commodities, such as food. We do not expect these to ease significantly at least until the end of 2022. In turn, this has had a significant impact on global inflation.

Rising global inflation is also prompting central banks to tighten monetary policy. The US Federal Reserve Board ('FRB') delivered a 75bps increase in the Federal Funds rate in June 2022, and a further 75bps increase in July, with several more rate rises expected in the second half of 2022 and into 2023. Financial markets currently expect the FRB to raise the Federal Funds rate above 3% by the end of 2022, although the pace of rate increases could decline if there is a sustained economic slowdown. The European Central Bank lagged the FRB but has started raising its benchmark rates, with a 0.5% increase in July 2022. Further incremental increases are now anticipated in light of inflation forecasts. Uncertainty over the economic outlook could nevertheless slow the pace of tightening, and keep fiscal policies broadly accommodative for some time. We continue to monitor our risk profile closely in the context of uncertainty over monetary policy.

Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.

The US-China relationship remains complex, with tensions over a number of critical issues. The US has recently articulated its approach to perceived strategic competition with China based on an intent to 'invest, align and compete'. The US, the UK, the EU, Canada and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies. These include the freezing of assets of government officials, and the implementation of investment and import/export restrictions targeting certain Chinese companies.

There is a continued risk of additional sanctions being imposed by the US and other governments in relation to human rights and other issues with China, and this could create a more complex operating environment for the Group and its customers.

China has in turn announced a number of its own sanctions and trade restrictions that target, or provide authority to target, foreign individuals and companies. It has also promulgated laws that provide a legal framework for imposing further sanctions and export restrictions.

These and any future measures and countermeasures that may be taken by the US, China and other countries may affect the Group, its customers and the markets in which the Group operates.

As the geopolitical landscape evolves, compliance by multinational corporations with their legal or regulatory obligations in one jurisdiction may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional compliance, reputational and political risks for the Group. We maintain dialogue with our regulators in various jurisdictions on the impact of legal and regulatory obligations on our business and customers.

The impact of the Covid-19 pandemic and second order impacts from other geopolitical events remain uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. To help mitigate this risk, model outputs and management adjustments are closely monitored and independently reviewed at the Group and country level for reliability and appropriateness. For further details on model risk, see page 209 of the Annual Report and Accounts 2021.

Political disagreements between the UK and the EU, notably over the future operation of the Northern Ireland Protocol, has stalled the creation of a framework for voluntary regulatory cooperation in financial services following the UK's withdrawal from the EU. While negotiations are continuing, it is unclear whether or when an agreement over the Northern Ireland Protocol will be reached, particularly as the UK government is currently in a period of political uncertainty amid a leadership election to replace Boris Johnson as prime minister.

In June 2022, the UK government published proposed legislation that seeks to amend the Protocol in a number of respects. The terms of such proposal may be subject to legal challenge by the EU, and any such dispute, together with any action that the EU may take in response, could further complicate the terms of trade between the UK and the EU and potentially prevent progress in other areas such as financial services. We are monitoring the situation closely, including the potential impacts on our customers. 

Our global presence and diversified customer base should help mitigate the direct impacts on our financial position of the absence of a comprehensive EU-UK agreement on financial services. Our wholesale and markets footprint in the EU provides a strong foundation for us to build upon. Over the medium to long term, the UK's withdrawal from the EU may impact markets and increase economic risk, particularly in the UK, which could adversely impact our profitability and prospects for growth in this market.

Expanding data privacy, national security and cybersecurity laws in a number of markets could pose potential challenges to intra-group data sharing. These developments could increase financial institutions' compliance burdens in respect of cross-border transfers of personal information, and degrade our enterprise-wide financial crime risk management capabilities.

Risks related to Covid-19

Despite the successful roll-out of vaccines around the world, the Covid-19 pandemic and its effect on the global economy have continued to impact our customers and organisation. The emergence of new variants and sub-variants pose a continuing risk. The global vaccination roll-out has helped reduce the social and economic impact of the Covid-19 pandemic, although there continues to be divergence in the speed at which vaccines have been deployed. Countries continue to differ in their approach to restrictions on activity and travel, and if these differences persist, this could prolong or worsen supply chain and international travel disruptions. Most notably, China's government-imposed lockdown restrictions in major cities, which were only eased recently, have impacted China's economy, Asian tourism and global supply chains.

Central banks in major markets - with the exception of mainland China - are raising interest rates, with the speed of such tightening varying across jurisdictions based on specific macroeconomic conditions. Policy tightening in several major emerging markets is also underway in order to counteract rising inflation and the risk of capital outflows. Governments are also expected to make fiscal support more targeted as the appetite for broad lockdowns and public health restrictions decreases. Government debt has risen in most advanced economies, and is expected to remain high into the medium term. High government debt burdens have raised fiscal vulnerabilities, increasing the sensitivity of debt service costs to interest rate increases, and potentially reducing the fiscal space available to address future economic downturns.

Our Central scenario used to calculate credit impairment assumes that economic growth continues in the second half of 2022, with GDP in our key markets surpassing pre-pandemic levels. It is assumed that private sector growth accelerates as pandemic-related fiscal support is withdrawn. However, there is a high degree of uncertainty associated with economic forecasts in the current environment and there are significant risks to our Central scenario. The degree of uncertainty varies by market, depending on exposure to commodity price increases, supply chain constraints, the monetary policy response to inflation and the public health policy response to the Covid-19 pandemic. As a result, our Central scenario for impairment has not been assigned an equal likelihood of occurrence across our key markets.

We continue to monitor the situation closely, and given the significant uncertainties related to the post-pandemic landscape, additional mitigating actions may be required.

For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 67.

Climate risk

The pace of regulatory developments focusing on climate risk management, disclosures, and stress testing and scenario analysis continued to increase in 2022. The Russia-Ukraine war has impacted global commodity markets, with short-term supply concerns driving changes in energy policy in Europe. While these policy changes may affect the near-term climate transition path for HSBC and our customers, we remain committed to our climate ambition to align our own operations and supply chain to net zero by 2030, and the financed emissions from our portfolio of customers to net zero by 2050. As announced in March 2022, we intend to publish a climate transition plan in 2023, and have committed to a science-aligned phase-down of fossil fuel finance, and a review of our wider financing and investment policies critical to achieving net zero by 2050.

Our most material risks in terms of managing climate risk relate to corporate and retail client financing within our banking portfolio, but there are also significant responsibilities in relation to asset ownership by our insurance business and employee pension plans, as well as from the activities of our asset management business. We continue to monitor the impacts of climate risk, and further embed our approach across our key risk areas, priority regions and businesses.

We have refreshed our credit risk policy to further embed climate risk considerations into our corporate credit decisions for new money requests. We also delivered training to select colleagues in the Risk function to raise awareness of the likely impacts that climate risk could have on certain high transition risk sectors, as well as associated credit risk considerations. We continue to develop guidance for our other higher transition risk sectors. To help with risk assessment, our developing client transition and physical risk questionnaire is currently live for select customers in 10 sectors and 31 countries and territories to improve our understanding of transition risk and physical risk exposure.

We are also focused on embedding climate considerations into retail credit risk management processes and are implementing metrics to support monitoring of exposure to properties with heightened physical risk exposure within our mortgage portfolios.

We are considering transition risk by assessing the potential risk to the UK, which is our largest mortgage market, using current and potential energy efficiency ratings for individual properties, sourced from property energy performance certificate ('EPC') data. The UK government has set out policies and proposals that aim to deliver increased economic growth and decreased emissions in its 'Clean growth strategy', including a stated ambition to improve the EPC ratings of housing stock. In line with this, we are working towards improving the proportion of properties within our UK residential mortgage portfolio with an EPC rating of C or above, and on improving the EPC data coverage. We have approximately 54% of properties in our UK portfolio with a valid EPC certificate dated within the last 10 years, as at May 2022.

In addition to financial risks arising in our corporate and retail banking portfolio, we could also face increased reputational, legal and regulatory risks as we make progress towards our net zero ambition, as stakeholders are likely to place a greater focus on our actions, investment decisions and disclosures related to this ambition. We will also face these same risks if we are perceived to mislead stakeholders regarding our climate strategy, the climate impact of a product or service, or regarding the commitments of our customers. We have published internal guidance and established an advisory group to raise awareness and provide advice on these risks to existing governance forums.

We continued to develop our climate stress testing and scenario capabilities, including model development, and delivered regulatory climate stress tests. These are being used to further improve our understanding of our risk exposures for use in risk management and business decision making.

While climate risk reporting - and in particular reporting on financed emissions - has improved over time, we continue to focus on data quality and consistency with the development of our risk appetite and metrics.

Methodologies we have used may develop over time in line with market practice and regulations, as well as owing to developments in climate science. Any developments in data and methodologies could result in revisions to reported data going forward, including on financed emissions, meaning that reported figures may not be reconcilable or comparable year-on-year. We may also have to reevaluate our progress towards our climate-related targets in future and this could result in reputational, legal and regulatory risks.

Ibor transition

The publication of sterling, Swiss franc, euro and Japanese yen Libor interest rate benchmarks, as well as Euro Overnight Index Average ('Eonia'), ceased from the end of 2021. Our interbank offered rate ('Ibor') transition programme - which is tasked with the development of new near risk-free rate ('RFR') products and the transition of legacy Ibor products - has continued to support the transition of a limited number of remaining contracts in these benchmarks to RFRs, or alternative reference rates.

During the first half of 2022, we continued to develop processes, technology and RFR product capabilities throughout our Group, particularly in entities that have US dollar Libor contracts that require transition. We also implemented controls and associated monitoring to help ensure we do not undertake any new US dollar Libor contracts, outside of agreed upon exemptions, to control the related risks. We have begun to engage with our clients to support them through the transition of their US dollar Libor and other demising Ibor contracts, with progress being made on the transition of trade, hedging and uncommitted lending facilities. We continue to actively engage in market and industry discussions around the transition of the remaining demising Ibors, including ceasing the use of 'synthetic' sterling and Japanese yen Libor.

While we have fewer than 50 lending and derivatives contracts remaining in Ibors that demised from the end of 2021, we continue to engage with our clients and industry bodies to help ensure that contracts can be transitioned with fair client outcomes.

For the Group's own debt securities issuances, in 2021 HSBC launched a consent solicitation to remediate Ibor references in five of its English law-governed regulatory capital and MREL sterling and Singapore dollar instruments. The proposed amendments were successfully adopted on all of the sterling instruments, but were not adopted with respect to the Singapore dollar instruments, as the minimum quorum requirements were not met. One of these instruments has since been redeemed. The terms of the remaining instrument provide for an Ibor benchmark being used to reset the coupon rate if HSBC chooses not to redeem it on the call date. We remain mindful of the various factors that impact on the Ibor remediation strategy for our regulatory capital and MREL instruments, including - but not limited to - timescales for cessation of relevant Ibor rates, constraints relating to the governing law of outstanding instruments, the potential relevance of legislative solutions and industry best practice guidance. We remain committed in seeking to remediate or mitigate relevant risks relating to Ibor benchmark demise, as appropriate, on our outstanding regulatory capital and MREL instruments before the relevant calculation dates, which may occur post-cessation of the relevant Ibor rate or rates.

For US dollar Libor and other demising Ibors, we continue to be exposed to, and actively monitor, risks including:

Regulatory compliance and conduct risks: The transition of legacy contracts to RFRs or alternative rates, or sales of products referencing RFRs, may not deliver fair client outcomes.

Resilience and operational risks: Changes to manual and automated processes, made in support of new RFR methodologies, and the transition of large volumes of Ibor contracts may lead to operational issues.

Legal risk: Issues arising from the use of legislative solutions and from legacy contracts that the Group is unable to transition may result in unintended or unfavourable outcomes for clients and market participants. This could potentially increase the risk of disputes.

Model risk: As a result of changes to our models, to replace Ibor-related data, there is a risk that the accuracy of model output is adversely affected.

Market risk: As a result of differences in Libor and RFR interest rates, we are exposed to basis risk resulting from the asymmetric adoption of rates across assets, liabilities and products.

Based on our experience in transitioning contracts referencing Ibors that demised from the end of 2021, and an assessment of the risks that relate to the transition of US dollar Libor contracts, we do not believe that our risk position has materially changed during the first half of 2022. Increased market and industry use of alternative rates, including the Secured Overnight Funding Rate ('SOFR'), have further reduced potential risks related to the transition away from US dollar Libor. We will continue to monitor market initiatives, and have developed controls and plans to help mitigate these risks. We will monitor these risks through the development of our product capabilities and the transition of legacy contracts, with a focus on fair client outcomes.

Throughout the remainder of 2022, and into 2023, we are committed to engaging with our clients and investors to complete an orderly transition of contracts that reference the remaining demising Ibors.

Additionally, following the recent announcement relating to the cessation of the Canadian dollar offered rate ('CDOR') after June 2024, we are assessing the impacts and will take appropriate actions to effect the transition.


Financial instruments impacted by Ibor reform


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


USD Libor

GBP Libor

JPY Libor

Others1

At 30 Jun 2022

$m

$m

$m

$m

Non-derivative financial assets





Loans and advances to customers

  61,768 

  208 

  7 

  6,780 

Other financial assets

  4,131 

  201 

  - 

  1,012 

Total non-derivative financial assets2

  65,899 

  409 

  7 

  7,792 






Non-derivative financial liabilities





Financial liabilities designated at fair value

  18,272 

  1,957 

  1,165 

  - 

Debt securities in issue

  5,254 

  - 

  - 

  185 

Other financial liabilities

  3,001 

  - 

  - 

  - 

Total non-derivative financial liabilities

  26,527 

  1,957 

  1,165 

  185 






Derivative notional contract amount





Foreign exchange

  145,857 

  1,488 

  48 

  7,707 

Interest rate

  2,336,091 

  2,736 

  233 

  171,082 

Others

  - 

  - 

  - 

  - 

Total derivative notional contract amount

  2,481,948 

  4,224 

  281 

  178,789 






 

At 31 Dec 2021





Non-derivative financial assets





Loans and advances to customers

  70,932 

  18,307 

  370

  8,259 

Other financial assets

  5,131 

  1,098 

  - 

  2

Total non-derivative financial assets2

  76,063 

  19,405 

  370

  8,261 






Non-derivative financial liabilities





Financial liabilities designated at fair value

  20,219 

  4,019 

  1,399 

  1

Debt securities in issue

  5,255 

  - 

  - 

  - 

Other financial liabilities

  2,998 

  78

  - 

  - 

Total non-derivative financial liabilities

  28,472 

  4,097 

  1,399 

  1






Derivative notional contract amount





Foreign exchange

  137,188 

  5,157 

  31,470 

  9,652 

Interest rate

  2,318,613 

  284,898 

  72,229 

  133,667 

Others

  - 

  - 

  - 

  - 

Total derivative notional contract amount

  2,455,801 

  290,055 

  103,699 

  143,319 

1  Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (euro Libor, Swiss franc Libor, Eonia, SOR, THBFIX and Sibor). In May 2022, Refinitiv Benchmark Services Limited announced the cessation of the Canadian dollar offered rate ('CDOR'), with the eventual transition to Canadian Overnight Repo Rate Average ('CORRA'). Therefore, CDOR is also included in Others during the current period.

2  Gross carrying amount excluding allowances for expected credit losses.


The amounts in the above table relate to HSBC's main operating entities where HSBC has material exposures impacted by Ibor reform, including in the UK, Hong Kong, France, the US, Mexico, Canada, Singapore, the UAE, Bermuda, Australia, Qatar, Germany, Japan and Thailand. The amounts provide an indication of the extent of the Group's exposure to the Ibor benchmarks that are due to be replaced. Amounts are in respect of financial instruments that:

 


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

have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and

are recognised on HSBC's consolidated balance sheet.



Credit risk

 


Page

Overview

63

Credit risk in the first half of 2022

63

Summary of credit risk

63

Stage 2 decomposition at 30 June 2022

66

Measurement uncertainty and sensitivity analysis of ECL estimates

67

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers

75

Credit quality of financial instruments

77

Personal lending

79

Wholesale lending

81

Supplementary information

85

 

Overview

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

Credit risk in the first half of 2022

There were no material changes to credit risk policy in the first half of 2022.

During 1H22, we adopted the EBA 'Guidelines on the application of definition of default' for our retail portfolios. This did not have a material impact on our retail portfolios. This was undertaken for our wholesale lending portfolios during 2021.

A summary of our current policies and practices for the management of credit risk is set out in 'Credit risk management' on page 137 of the Annual Report and Accounts 2021.

At 30 June 2022, gross loans and advances to customers and banks of $1,136bn decreased by $4.8bn, compared with 31 December 2021. This included adverse foreign exchange movements of $54.7bn.

Excluding foreign exchange movements, the growth was driven by a $22.3bn increase in wholesale loans and advances to customers, a $16.8bn increase in loans and advances to banks and a $10.8bn increase in personal loans and advances to customers.

The increase in wholesale loans and advances to customers was driven mainly in the US (up $4.4bn), the UK (up $3.6bn), Canada (up $3.5bn), India (up $2.3bn), Japan (up $1.8bn), mainland China (up $1.4bn) and UAE (up $1.1bn).

The increase in personal loans and advances to customers was driven largely by mortgage growth of $9.9bn, mainly in the UK (up $5.5bn), Australia (up $2.1bn) and Hong Kong (up $1.5bn).

In addition, other personal lending increased by $0.9bn, compared with 31 December 2021. The increase was largely driven by secured personal lending of $1.5bn, mainly in Hong Kong, and guaranteed loans in respect of residential property of $0.3bn, mainly in France. This was partly offset by a $0.8bn decline in unsecured personal lending, mainly in Hong Kong.

At 30 June 2022, the allowance for ECL of $11.6bn decreased by $0.6bn, compared with 31 December 2021, including favourable foreign exchange movements of $0.6bn. The $11.6bn allowance comprised $11.1bn in respect of assets held at amortised cost, $0.4bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').

Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers decreased by $0.1bn from 31 December 2021. This was attributable to:

a $0.1bn decrease in wholesale loans and advances to customers, which included a $0.4bn decrease driven by stages 1 and 2, offset by a $0.3bn increase driven by stage 3 net of write-offs and purchased or originated credit impaired ('POCI'); and

broadly unchanged allowances for ECL in personal loans and advances to customer, where a $0.2bn decrease driven by stage 3 was offset by a $0.2bn increase in stages 1 and 2.

The ECL charge for the first six months of 2022 was $1.1bn, inclusive of recoveries. This was driven by higher stage 3 charges, heightened economic uncertainty and inflationary pressures, partly offset by a release in Covid-19-related allowances.

The ECL charge comprised: $0.6bn in respect of personal lending, of which the stage 3 charge was $0.3bn; and $0.5bn in respect of wholesale lending, of which the stage 3 and POCI charge was $0.5bn.

At 30 June 2022, net credit exposures mostly related to wholesale loans booked in Russia of $1.2bn ($1.3bn gross carrying amounts and $0.1bn allowance for ECL) were reclassified to assets held for sale as we have entered into an agreement to sell HSBC Bank (RR) (Limited Liability Company), subject to regulatory approvals.

Summary of credit risk

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

The following tables analyse loans by industry sector and represent the concentration of exposures on which credit risk is managed. The allowance for ECL decreased from $12.2bn at 31 December 2021 to $11.6bn at 30 June 2022.


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


At 30 Jun 2022

At 31 Dec 2021


Gross carrying/

nominal amount

Allowance for

ECL1

Gross carrying/

nominal amount

Allowance for

ECL1


$m

$m

$m

$m

Loans and advances to customers at amortised cost

  1,039,130 

  (10,774)

  1,057,231 

  (11,417)

-  personal

  463,621 

  (2,918)

  478,337 

  (3,103)

-  corporate and commercial

  509,566 

  (7,684)

  513,539 

  (8,204)

-  non-bank financial institutions

  65,943 

  (172)

  65,355 

  (110)

Loans and advances to banks at amortised cost

  96,481 

  (52)

  83,153 

  (17)

Other financial assets measured at amortised cost

  950,007 

  (281)

  880,351 

  (193)

-  cash and balances at central banks

  363,613 

  (5)

  403,022 

  (4)

-  items in the course of collection from other banks

  8,073 

  - 

  4,136 

  - 

-  Hong Kong Government certificates of indebtedness

  43,866 

  - 

  42,578 

  - 

-  reverse repurchase agreements - non-trading

  244,451 

  - 

  241,648 

  - 

-  financial investments

  154,294 

  (75)

  97,364 

  (62)

-  prepayments, accrued income and other assets2

  135,710 

  (201)

  91,603 

  (127)

Total gross carrying amount on-balance sheet

  2,085,618 

  (11,107)

  2,020,735 

  (11,627)

Loans and other credit-related commitments

  633,091 

  (337)

  627,637 

  (379)

-  personal

  237,077 

  (30)

  239,685 

  (39)

-  corporate and commercial

  263,452 

  (291)

  283,625 

  (325)

-  financial

  132,562 

  (16)

  104,327 

  (15)

Financial guarantees

  17,586 

  (42)

  27,795 

  (62)

-  personal

  1,120 

  - 

  1,130 

  - 

-  corporate and commercial

  12,393 

  (41)

  22,355 

  (58)

-  financial

  4,073 

  (1)

  4,310 

  (4)

Total nominal amount off-balance sheet3

  650,677 

  (379)

  655,432 

  (441)


  2,736,295 

  (11,486)

  2,676,167 

  (12,068)







Fair

value

Memorandum

allowance for

ECL4

Fair

 value

Memorandum

allowance for

ECL4


$m

$m

$m

$m

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

  274,765 

  (120)

  347,203 

  (96)

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

2  Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets', as presented within the consolidated balance sheet on page 106, includes both financial and non-financial assets. The 30 June 2022 balances include $1,918m gross carrying amounts (31 December 2021: $2,424m) and $133m allowances for ECL (31 December 2021: $39m) related to assets held for sale under business disposals as disclosed in Note 15 'Business acquisitions and disposals' on page 129. 

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

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


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

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

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

Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise credit impaired for which a lifetime ECL is recognised.

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


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

30 June 2022


Gross carrying/nominal amount1

Allowance for ECL

ECL coverage %


Stage 1

Stage 2

Stage 3

POCI2

Total

Stage 1

Stage 2

Stage 3

POCI2

Total

Stage 1

Stage 2

Stage 3

POCI2

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

%

%

%

%

%

Loans and advances to customers at amortised cost

  891,822 

  128,105 

19,086

  117 

1,039,130

  (1,116)

  (2,998)

  (6,617)

  (43)

  (10,774)

  0.1 

  2.3 

  34.7 

  36.8 

  1.0 

-  personal

  431,517 

  28,086 

  4,018

  - 

  463,621 

  (554)

  (1,434)

  (930)

  -

  (2,918)

  0.1 

  5.1 

  23.1 

  - 

  0.6 

-  corporate and commercial

  399,152 

  95,590 

14,707

  117 

  509,566 

  (523)

  (1,525)

  (5,593)

  (43)

  (7,684)

  0.1 

  1.6 

  38.0 

  36.8 

  1.5 

-  non-bank financial institutions

  61,153 

  4,429 

  361 

  - 

  65,943 

  (39)

  (39)

  (94)

  -

  (172)

  0.1 

  0.9 

  26.0 

  - 

  0.3 

Loans and advances to banks at amortised cost

  95,091 

  1,311 

  79 

  - 

  96,481 

  (8)

  (25)

  (19)

  -

  (52)

  - 

  1.9 

  24.1 

  - 

  0.1 

Other financial assets measured at amortised cost

  944,983 

  4,715 

  264 

  45 

  950,007 

  (71)

  (119)

  (85)

  (6)

  (281)

  - 

  2.5 

  32.2 

  13.3 

  - 

Loans and other credit-related commitments

  608,589 

  23,487 

  1,015

  - 

  633,091 

  (124)

  (159)

  (54)

  -

  (337)

  - 

  0.7 

  5.3 

  - 

  0.1 

-  personal

  235,413 

  1,504 

  160 

  - 

  237,077 

  (29)

  (1)

  -

  -

  (30)

  - 

  0.1 

  - 

  - 

  - 

-  corporate and commercial

  242,263 

  20,337 

  852 

  - 

  263,452 

  (90)

  (147)

  (54)

  -

  (291)

  - 

  0.7 

  6.3 

  - 

  0.1 

-  financial

  130,913 

  1,646 

  3 

  - 

  132,562 

  (5)

  (11)

  -

  -

  (16)

  - 

  0.7 

  - 

  - 

  - 

Financial guarantees

  15,198 

  2,208 

  180 

  - 

  17,586 

  (6)

  (19)

  (17)

  -

  (42)

  - 

  0.9 

  9.4 

  - 

  0.2 

-  personal

  1,108 

  11 

  1 

  - 

  1,120 

  -

  -

  -

  -

  - 

  - 

  - 

  - 

  - 

  - 

-  corporate and commercial

  10,521 

  1,696 

  176 

  - 

  12,393 

  (6)

  (18)

  (17)

  -

  (41)

  0.1 

  1.1 

  9.7 

  - 

  0.3 

-  financial

  3,569 

  501 

  3 

  - 

  4,073 

  -

  (1)

  -

  -

  (1)

  - 

  0.2 

  - 

  - 

  - 

At 30 Jun 2022

  2,555,683 

  159,826 

20,624

  162 

2,736,295

  (1,325)

  (3,320)

  (6,792)

  (49)

  (11,486)

  0.1 

  2.1 

  32.9 

  30.2 

  0.4 

 


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


2  Purchased or originated credit-impaired ('POCI').

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


 

stage 2 financial assets by those less than 30 and greater than 30 DPD and therefore presents those financial assets classified as stage 2 due to ageing (30 DPD) and those identified at an earlier stage (less than 30 DPD).


Stage 2 days past due analysis at 30 June 2022


Gross carrying/nominal amount

Allowance for ECL

ECL coverage %


Stage 2

Up-to-date

1 to 29

 DPD1,2

30 and >

DPD1,2

Stage 2

Up-to-date

1 to 29

 DPD1,2

30 and >

DPD1,2

Stage 2

Up-to-date

1 to 29

 DPD1,2

30 and >

DPD1,2


$m

$m

$m

$m

$m

$m

$m

$m

%

%

%

%

Loans and advances to customers at amortised cost

  128,105 

  123,235 

  2,644 

  2,226 

  (2,998)

  (2,587)

  (214)

  (197)

  2.3 

  2.1 

  8.1 

  8.8 

-  personal

  28,086 

  25,756 

  1,548 

  782 

  (1,434)

  (1,093)

  (174)

  (167)

  5.1 

  4.2 

  11.2 

  21.4 

-  corporate and commercial

  95,590 

  93,503 

  1,075 

  1,012 

  (1,525)

  (1,456)

  (40)

  (29)

  1.6 

  1.6 

  3.7 

  2.9 

-  non-bank financial institutions

  4,429 

  3,976 

  21 

  432 

  (39)

  (38)

  - 

  (1)

  0.9 

  1.0 

  - 

  0.2 

Loans and advances to banks at amortised cost

  1,311 

  1,303 

  - 

  8 

  (25)

  (25)

  - 

  - 

  1.9 

  1.9 

  - 

  - 

Other financial assets measured at amortised cost

  4,715 

  4,699 

  9 

  7 

  (119)

  (117)

  - 

  (2)

  2.5 

  2.5 

  - 

  28.6 

1  Days past due ('DPD').

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

 


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

31 December 2021


Gross carrying/nominal amount1

Allowance for ECL

ECL coverage %


Stage 1

Stage 2

Stage 3

POCI2

Total

Stage 1

Stage 2

Stage 3

POCI2

Total

Stage 1

Stage 2

Stage 3

POCI2

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

%

%

%

%

%

Loans and advances to customers at amortised cost

  918,936 

  119,224

  18,797

  274 

  1,057,231

  (1,367)

  (3,119)

  (6,867)

  (64)

  (11,417)

  0.1 

  2.6 

  36.5 

  23.4 

  1.1 

-  personal

  456,956 

  16,439

  4,942

  -

  478,337

  (658)

  (1,219)

  (1,226)

  - 

  (3,103)

  0.1 

  7.4 

  24.8 

  - 

  0.6 

-  corporate and commercial

  400,894 

  98,911

  13,460

  274 

  513,539

  (665)

  (1,874)

  (5,601)

  (64)

  (8,204)

  0.2 

  1.9 

  41.6 

  23.4 

  1.6 

-  non-bank financial institutions

  61,086 

  3,874

  395 

  -

  65,355

  (44)

  (26)

  (40)

  - 

  (110)

  0.1 

  0.7 

  10.1 

  - 

  0.2 

Loans and advances to banks at amortised cost

  81,636 

  1,517

  -

  -

  83,153

  (14)

  (3)

  - 

  - 

  (17)

  - 

  0.2 

  - 

  - 

  - 

Other financial assets

measured at amortised cost

  875,016 

  4,988

  304 

  43 

  880,351

  (91)

  (54)

  (42)

  (6)

  (193)

  - 

  1.1 

  13.8 

  14.0 

  - 

Loans and other credit-related commitments

  594,473 

  32,389

  775 

  -

  627,637

  (165)

  (174)

  (40)

  - 

  (379)

  - 

  0.5 

  5.2 

  - 

  0.1 

-  personal

  237,770 

  1,747

  168 

  -

  239,685

  (37)

  (2)

  - 

  - 

  (39)

  - 

  0.1 

  - 

  - 

  - 

-  corporate and commercial

  254,750 

  28,269

  606 

  -

  283,625

  (120)

  (165)

  (40)

  - 

  (325)

  - 

  0.6 

  6.6 

  - 

  0.1 

-  financial

  101,953 

  2,373

  1 

  -

  104,327

  (8)

  (7)

  - 

  - 

  (15)

  - 

  0.3 

  - 

  - 

  - 

Financial guarantees

  24,932 

  2,638

  225 

  -

  27,795

  (11)

  (30)

  (21)

  - 

  (62)

  - 

  1.1 

  9.3 

  - 

  0.2 

-  personal

  1,114 

  15 

  1 

  -

  1,130

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

-  corporate and commercial

  20,025 

  2,107

  223 

  -

  22,355

  (10)

  (28)

  (20)

  - 

  (58)

  - 

  1.3 

  9.0 

  - 

  0.3 

-  financial

  3,793 

  516 

  1 

  -

  4,310

  (1)

  (2)

  (1)

  - 

  (4)

  - 

  0.4 

  100.0 

  - 

  0.1 

At 31 Dec 2021

  2,494,993 

  160,756

  20,101

  317 

  2,676,167

  (1,648)

  (3,380)

  (6,970)

  (70)

  (12,068)

  0.1 

  2.1 

  34.7 

  22.1 

  0.5 

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

2  Purchased or originated credit impaired ('POCI').


Stage 2 days past due analysis at 31 December 2021


Gross carrying amount

Allowance for ECL

ECL coverage %


Stage 2

Up-to-date

1 to 29

DPD1,2

30 and > DPD1,2

Stage 2

Up-to-date

1 to 29

DPD1,2

30 and > DPD1,2

Stage 2

Up-to-date

1 to 29

DPD1,2

30 and > DPD1,2


$m

$m

$m

$m

$m

$m

$m

$m

%

%

%

%

Loans and advances to customers at amortised cost

  119,224 

  115,350 

  2,193 

  1,681 

  (3,119)

  (2,732)

  (194)

  (193)

  2.6 

  2.4 

  8.8 

  11.5 

-  personal

  16,439 

  14,124 

  1,387 

  928

  (1,219)

  (884)

  (160)

  (175)

  7.4 

  6.3 

  11.5 

  18.9 

-  corporate and commercial

  98,911 

  97,388 

  806

  717

  (1,874)

  (1,822)

  (34)

  (18)

  1.9 

  1.9 

  4.2 

  2.5 

-  non-bank financial institutions

  3,874 

  3,838 

  - 

  36

  (26)

  (26)

  - 

  - 

  0.7 

  0.7 

  - 

  - 

Loans and advances to banks at amortised cost

  1,517 

  1,517 

  - 

  - 

  (3)

  (3)

  - 

  - 

  0.2 

  0.2 

  - 

  - 

Other financial assets measured at amortised cost

  4,988 

  4,935 

  22

  31

  (54)

  (47)

  (4)

  (3)

  1.1 

  1.0 

  18.2 

  9.7 

1  Days past due ('DPD').

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


Stage 2 decomposition at 30 June 2022

The following table presents the stage 2 decomposition of gross carrying amount and allowances for ECL for loans and advances to customers. It also sets out the reasons why an exposure is classified as stage 2 as at 30 June 2022.

The quantitative classification shows gross carrying values and allowances for ECL for which the applicable reporting date probability of default ('PD') measure exceeds defined quantitative thresholds for retail and wholesale exposures, as set out in Note 1.2 'Summary of significant accounting policies', on page 324 of the Annual Report and Accounts 2021.

The qualitative classification primarily accounts for customer risk rating ('CRR') deterioration, watch-and-worry and retail management judgemental adjustments.

A summary of our current policies and practices for the significant increase in credit risk is set out in 'Summary of significant accounting policies' on page 324 of the Annual Report and Accounts 2021.


 

Loans and advances to customers at 30 June 20221


Gross carrying amount

Allowance for ECL

ECL coverage


Personal

Corporate and commercial

Non-bank financial institutions

Total

Personal

Corporate and commercial

Non-bank financial institutions

Total

Total


$m

$m

$m

$m

$m

$m

$m

$m

%

Quantitative

  12,084 

  70,586 

  3,126 

  85,796 

  (1,199)

  (1,152)

  (25)

  (2,376)

  2.8 

Qualitative

  15,872 

  24,312 

  1,085 

  41,269 

  (231)

  (368)

  (13)

  (612)

  1.5 

30 DPD backstop2

  130 

  692 

  218 

  1,040 

  (4)

  (5)

  (1)

  (10)

  1.0 

Total stage 2

  28,086 

  95,590 

  4,429 

  128,105 

  (1,434)

  (1,525)

  (39)

  (2,998)

  2.3 

 

Loans and advances to customers at 31 December 20211


Gross carrying amount

Allowance for ECL

ECL coverage


Personal

Corporate and commercial

Non-bank financial institutions

Total

Personal

Corporate and commercial

Non-bank financial institutions

Total

Total


$m

$m

$m

$m

$m

$m

$m

$m

%

Quantitative

  9,907 

  68,000 

  3,041 

  80,948 

  (1,076)

  (1,347)

  (19)

  (2,442)

  3.0 

Qualitative

  6,329 

  30,326 

  818

  37,473 

  (134)

  (520)

  (7)

  (661)

  1.8 

30 DPD backstop2

  203

  585

  15

  803

  (9)

  (7)

  - 

  (16)

  2.0 

Total stage 2

  16,439 

  98,911 

  3,874 

  119,224 

  (1,219)

  (1,874)

  (26)

  (3,119)

  2.6 

1  Where balances satisfy more than one of the above three criteria for determining a significant increase in credit risk, the corresponding gross exposure and ECL have been assigned in order of categories presented.

2  Days past due ('DPD').


Measurement uncertainty and sensitivity analysis of ECL estimates

There continues to be a high degree of uncertainty in relation to economic scenarios. The increased risks of lower economic growth with higher inflation and unemployment have been exacerbated by the geopolitical environment and the effects of global supply chain disruption. In addition, there are ongoing risks relating to Covid-19 in certain markets. The level and speed of recovery from the global pandemic remains volatile. As a result of this uncertainty, management judgements and estimates continue to reflect a degree of caution both in the selection of economic scenarios and their weightings, and in the use of management judgemental adjustments, described in more detail below. Additional stage 1 and 2 allowances were recorded in respect of the heightened levels of uncertainty. 

The recognition and measurement of ECL involves the use of significant judgement and estimation. We form multiple economic scenarios based on economic forecasts, apply these assumptions to credit risk models to estimate future credit losses, and probability-weight the results to determine an unbiased ECL estimate.

Methodology

Five economic scenarios have been used to capture the current economic environment and to articulate management's view of the range of potential outcomes. Scenarios produced to calculate ECL are aligned to HSBC's top and emerging risks.

Of the four standard scenarios, three are drawn from consensus forecasts and distributional estimates. The fourth scenario, Downside 2, represents management's view of severe downside risks. In 2Q22, management chose to use an additional fifth scenario, known as Downside 1, to ensure that current supply-side risks are sufficiently reflected in forward economic guidance. The scenario is designed to capture the implications of a sustained global supply shock that keeps inflation elevated for a long period, raises unemployment and depresses GDP growth.

The use of an additional scenario is in line with HSBC's forward economic guidance methodology. Management may include additional scenarios when consensus scenarios are determined to inadequately capture the economic risks faced by the Group. Unlike the consensus scenarios, these additional scenarios are driven by narrative assumptions aligned to an identified risk, and may incorporate shocks that drive economic activity permanently away from its long-term trend.

Description of economic scenarios

The economic assumptions presented in this section have been formed by HSBC, with reference to external forecasts specifically for the purpose of calculating ECL.

Economic forecasts are subject to a high degree of uncertainty in the current environment. Risks to the outlook are dominated by the actions of central banks as they raise interest rates to bring inflation back to target and curtail a rise in inflation expectations. The implications of the Russia-Ukraine war and the progression and management of the Covid-19 pandemic in Asia also remain key sources of uncertainty. Other geopolitical risks, such as the evolution of the UK's relationship with the EU and differences between the US and China over a range of strategic issues, also present downside risks.

The five global scenarios used for the purpose of calculating ECL at 30 June 2022 are the consensus Central scenario, the consensus Upside scenario, the consensus Downside scenario, the Downside 1 scenario and the Downside 2 scenario.

The scenarios used to calculate ECL in the Interim Report 2022 are described below.

The consensus Central scenario

HSBC's Central scenario features a gradual slowdown in GDP growth through 2022 and 2023, following a strong recovery in 2021. Unemployment is expected to remain low through this period.

GDP forecasts have been lowered in recent quarters. In Asia, the downward revisions follow from the stringent public health policy responses to the Covid-19 pandemic in some markets. Elsewhere, the sharp rise in inflation, related to supply shortages and rising commodity prices, has started to weigh on growth as costs rise and real income growth stalls.

The Central scenario assumes that inflation peaks in 2022 and, supported by tighter monetary policy, reverts back towards central bank targets by the end of 2023.

Global GDP is expected to grow by 3.3% in 2022 in the Central scenario. The average rate of global GDP growth is expected to be 2.8% over the forecast period, which is in line with the average growth rate over the five-year period prior to the onset of the pandemic.

Across the key markets, the Central scenario assumes the following:

Economic growth is expected to slow in the near term as supply chain disruptions and price inflation diminish purchasing power. Growth is expected to return to the long-term expected trend in later years as supply chain issues are assumed to ease and inflation returns towards their target.

Unemployment is expected to remain close to pre-pandemic levels and labour market conditions remain tight across our key markets.

Inflation is expected to remain elevated in 2022 as commodity, food and goods prices remain high. Inflation is subsequently expected to converge back to central bank targets over the next two years of the forecast.

Policy interest rates in key markets are expected to rise over the first 18 months of the projection period as central banks tighten policy to bring inflation back towards their targets. Thereafter, they settle at higher levels than they were pre-pandemic.

The West Texas Intermediate oil price is expected to average above $100 in the first two years of the forecast, before dropping back as supply constraints ease. Over the entire projection the oil price is expected to average $81 per barrel.

The Central scenario was created from consensus forecasts available in May, and subsequently updated in June. Dispersion between the constituent forecasts of the consensus remains unusually high, suggesting an elevated level of uncertainty. As a consequence, probability weights assigned to the Central scenario vary from 40% to 65% to reflect the uncertainty inherent in economic forecasts across markets.


The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario.

Central scenario 3Q22-2Q27


UK

US

Hong Kong

Mainland China

Canada

France

UAE

Mexico


%

%

%

%

%

%

%

%

GDP growth rate









2022: Annual average growth rate

  3.7 

  2.8 

  1.1 

  4.5 

  4.0 

  2.9 

  5.3 

  1.8 

2023: Annual average growth rate

  1.4 

  2.0 

  3.8 

  5.1 

  2.6 

  1.8 

  4.3 

  2.1 

2024: Annual average growth rate

  1.6 

  1.9 

  2.5 

  5.0 

  1.8 

  1.6 

  3.2 

  2.2 

5-year average

  1.6 

  1.9 

  2.9 

  4.9 

  2.2 

  1.5 

  3.3 

  2.2 

Unemployment rate









2022: Annual average rate

  4.0 

  3.6 

  4.4 

  3.8 

  5.5 

  7.5 

  3.0 

  3.8 

2023: Annual average rate

  4.2 

  3.6 

  3.6 

  3.7 

  5.4 

  7.4 

  2.7 

  3.8 

2024: Annual average rate

  4.1 

  3.6 

  3.5 

  3.7 

  5.6 

  7.3 

  2.6 

  3.8 

5-year average

  4.1 

  3.6 

  3.5 

  3.7 

  5.5 

  7.3 

  2.6 

  3.7 

House price growth









2022: Annual average growth rate

  9.2 

  14.7 

  (1.2)

  (0.5)

  18.9 

  5.8 

  9.4 

  7.2 

2023: Annual average growth rate

  2.9 

  6.4 

  1.2 

  1.3 

  (2.2)

  4.5 

  3.4 

  5.3 

2024: Annual average growth rate

  2.9 

  4.5 

  2.5 

  3.5 

  (0.5)

  4.1 

  2.5 

  4.8 

5-year average

  3.3 

  5.3 

  1.9 

  3.2 

  2.6 

  3.9 

  3.5 

  4.8 

Inflation rate









2022: Annual average rate

  8.3 

  7.0 

  2.3 

  2.2 

  5.4 

  4.5 

  3.2 

  6.8 

2023: Annual average rate

  4.7 

  3.2 

  2.2 

  2.3 

  2.8 

  2.4 

  2.3 

  4.5 

2024: Annual average rate

  2.1 

  2.2 

  2.2 

  2.3 

  2.3 

  2.0 

  2.2 

  4.0 

5-year average

  3.2 

  2.8 

  2.2 

  2.4 

  2.5 

  2.3 

  2.2 

  4.0 

Probability

  50 

  60 

  55 

  55 

  60 

  40 

  65 

  60 

 

The graphs compare the respective Central scenario at year end 2021 with current economic expectations in the second quarter of 2022.

GDP growth: Comparison of Central scenarios


UK

Note: Real GDP shown as year-on-year percentage change.

 

Hong Kong

Note: Real GDP shown as year-on-year percentage change.

US

Note: Real GDP shown as year-on-year percentage change.

 

Mainland China

Note: Real GDP shown as year-on-year percentage change.


The consensus Upside scenario

Compared with the consensus Central scenario, the consensus Upside scenario features a faster rate of GDP growth during the first two years, before converging to long-run expected trends. The scenario is demand-driven and is consistent with a number of key upside risk themes. These include the faster resolution of supply chain issues; a rapid and peaceful conclusion to the Russia-Ukraine war; de-escalation of tensions between the US and China; and improved relations between the UK and the EU.


 

The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario.

Consensus Upside scenario 'best outcome'


UK

US

Hong Kong

Mainland China

Canada

France

UAE

Mexico


%


%


%


%


%


%


%


%


GDP growth rate

  4.3 

(2Q24)

  4.7 

(1Q23)

  12.4 

(1Q23)

  10.2 

(2Q23)

  5.9 

(2Q23)

  3.4 

(2Q23)

  13.4 

(2Q23)

  5.8 

(2Q23)

Unemployment rate

  3.2 

(2Q24)

  3.1 

(3Q22)

  2.8 

(4Q23)

  3.5 

(1Q23)

  4.4 

(1Q23)

  6.4 

(2Q24)

  1.9 

(4Q23)

  3.2 

(3Q23)

House price growth

  9.8 

(3Q22)

  13.2 

(3Q22)

  7.7 

(2Q23)

  6.2 

(2Q23)

  18.2 

(3Q22)

  6.1 

(3Q23)

  15.4 

(2Q23)

  9.3 

(3Q23)

Inflation rate

  10.2 

(3Q22)

  7.8 

(3Q22)

  4.1 

(3Q23)

  5.8 

(1Q23)

  6.8 

(4Q22)

  6.7 

(4Q22)

  4.0 

(4Q23)

  7.6 

(3Q23)

Probability

  10 

  5 

  5 

  5 

  5 

  10 

  5 

  5 

Note: Extreme point in the consensus Upside is 'best outcome' in the scenario, for example the highest GDP growth and the lowest unemployment rate, in the first two years of the scenario. Inflation is positively correlated with GDP in the Upside scenario, and the 'best outcome' also refers to the cyclical high point.


Downside scenarios

Downside scenarios explore the intensification and crystallisation of a number of key economic and financial risks.

Inflation and the monetary policy response to it have become key concerns for global growth. Supply chain disruptions, caused by the Covid-19 pandemic and the Russia-Ukraine war, have led to sharp rises in commodity prices and headline price inflation across many markets. A key concern is that inflation expectations become unanchored from central bank targets, particularly as labour markets and labour supply shortages across some sectors are putting upward pressure on wages. The de-anchoring of inflation expectations would raise the risk that inflation remains elevated for longer, exacerbating cost pressures and the squeeze on household real incomes and corporate margins. In turn, it raises the risk of a more forceful policy response from central banks, a steeper trajectory for interest rates and ultimately, economic recession.

Covid-19-related risks also remain significant. Despite the easing of Covid-19-related restrictions across Europe and North America, the emergence of a new Covid-19 variant with greater vaccine-resistance that necessitates a stringent public health policy


response remains a key risk to the global outlook. In Asia, stringent public health policy responses to the circulation of highly virulent Covid-19 strains present ongoing risks to growth and global supply chains.

The geopolitical environment also present risks, including:

a prolonged Russia-Ukraine war with escalation beyond Ukraine's borders;

the deterioration of the trading relationship between the UK and the EU over the Northern Ireland Protocol; and

continued differences between the US and other countries with China, which could affect sentiment and restrict global economic activity.

The consensus Downside scenario

In the consensus Downside scenario, economic activity is considerably weaker compared with the Central scenario. In this scenario, GDP growth weakens, unemployment rates rise and asset prices fall. The scenario is structured as a demand shock where inflation and commodity prices fall, before gradually recovering towards their long-run expected trends.


 

The following table describes key macroeconomic variables and the probabilities assigned in the consensus Downside scenario.

Consensus Downside scenario 'worst outcome'


UK

US

Hong Kong

Mainland China

Canada

France

UAE

Mexico


%


%


%


%


%


%


%


%


GDP growth rate

  (0.7)

(2Q23)

  (1.7)

(2Q23)

  (2.9)

(4Q23)

  1.3 

(1Q23)

  (0.8)

(2Q23)

  0.1 

(2Q23)

  (0.6)

(2Q23)

  (1.0)

(2Q23)

Unemployment rate

  5.5 

(2Q23)

  5.1 

(1Q23)

  5.4 

(4Q22)

  4.2 

(1Q23)

  6.6 

(2Q24)

  8.5 

(1Q23)

  4.0 

(1Q23)

  4.7 

(1Q23)

House price growth

  (4.1)

(3Q23)

  2.9 

(1Q24)

  (8.3)

(3Q23)

  (4.3)

(2Q23)

  (9.0)

(2Q23)

  2.4 

(2Q23)

  (4.8)

(4Q23)

  2.2 

(3Q23)

Inflation rate

  0.7 

(2Q24)

  0.7 

(2Q23)

  (0.5)

(3Q23)

  (0.7)

(3Q23)

  0.0 

(2Q23)

  (0.6)

(2Q23)

  0.4 

(4Q23)

  2.3 

(3Q23)

Probability

  0 

  15 

  20 

  30 

  15 

  0 

  20 

  10 

Note: Extreme point in the consensus Downside is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. Inflation is positively correlated with GDP in the Downside scenario, and the 'worst outcome' refers to the cyclical low point.


Downside 1 scenario

An additional Downside scenario has been created to explore the implications of a prolonged period of high price inflation, a more aggressive upward path for policy interest rates, higher unemployment and a global recession.

In this scenario, the Russia-Ukraine war leads to a sustained supply shock that keeps inflation elevated above the baseline for a longer period than in the other scenarios.


The scenario assumes that major central banks are slow to respond, but as inflation expectations start to de-anchor from the inflation target, they resort to taking stronger action. The rise in interest rates is expected to cause a severe tightening of financial conditions that ultimately results in a global economic contraction later in the projection period.

 


The following table describes key macroeconomic variables and the probabilities assigned in the Downside 1 scenario.

Downside 1 scenario 'worst outcome'


UK

US

Hong Kong

Mainland China

Canada

France

UAE

Mexico


%


%


%


%


%


%


%


%


GDP growth rate

  (3.7)

(1Q25)

  (4.1)

(4Q24)

  (3.0)

(4Q23)

  (1.2)

(1Q25)

  (0.6)

(4Q23)

  (3.1)

(1Q25)

  (2.5)

(1Q25)

  (5.3)

(1Q25)

Unemployment rate

  6.6 

(1Q24)

  8.8 

(4Q24)

  6.5 

(4Q24)

  4.8 

(1Q25)

  9.9 

(2Q25)

  9.1 

(3Q25)

  3.0 

(3Q22)

  5.2 

(2Q25)

House price growth

  (11.9)

(1Q24)

  (4.2)

(1Q25)

  (7.6)

(2Q25)

  (9.8)

(3Q23)

  (8.2)

(4Q23)

  (2.0)

(4Q24)

  (4.4)

(2Q25)

  2.8 

(4Q25)

Inflation rate

  9.5 

(3Q22)

  6.9 

(3Q22)

  4.2 

(1Q23)

  4.2 

(1Q23)

  6.3 

(4Q22)

  5.0 

(4Q22)

  3.7 

(3Q22)

  6.8 

(3Q22)

Probability

  30 

  10 

  15 

  5 

  10 

  35 

  5 

  15 

Note: Extreme point in the Downside 1 is the 'worst outcome' in the scenario, for example the lowest GDP growth and the highest inflation and unemployment rate.


Downside 2 scenario

The Downside 2 scenario features a deep global recession and reflects management's view of the tail of the economic risk distribution. It incorporates the crystallisation of a number of risks simultaneously, including further escalation of the Russia-Ukraine war, worsening of supply chain disruptions and the emergence of a vaccine-resistant Covid-19 variant that necessitates a stringent public health policy response.

This scenario features an initial supply-side shock that pushes up inflation. This impulse is expected to prove short lived as a large downside demand shock causes commodity prices to correct sharply and global price inflation to slow as a severe and prolonged recession takes hold.


The following table describes key macroeconomic variables and the probabilities assigned in the Downside 2 scenario.

Downside 2 scenario 'worst outcome'


UK

US

Hong Kong

Mainland China

Canada

France

UAE

Mexico


%


%


%


%


%


%


%


%


GDP growth rate

  (6.3)

(2Q23)

  (4.9)

(2Q23)

  (9.3)

(2Q23)

  (5.0)

(2Q23)

  (3.4)

(3Q23)

  (5.5)

(2Q23)

  (6.5)

(4Q23)

  (7.2)

(2Q23)

Unemployment rate

  8.5 

(3Q23)

  9.1 

(1Q24)

  5.9 

(2Q23)

  5.4 

(2Q24)

  11.1 

(4Q23)

  10.2 

(2Q24)

  4.6 

(3Q22)

  5.7 

(4Q23)

House price growth

  (15.2)

(3Q23)

  (10.8)

(2Q23)

  (10.8)

(3Q23)

  (18.7)

(2Q23)

  (30.1)

(3Q23)

  (4.5)

(2Q24)

  (11.3)

(1Q24)

  1.1 

(4Q23)

Inflation rate

  (2.2)

(4Q23)

  1.5 

(2Q24)

  (0.5)

(1Q24)

  1.4 

(2Q24)

  0.9 

(2Q24)

  (2.7)

(4Q23)

  1.7 

(2Q24)

  3.4 

(2Q24)

Probability

  10 

  10 

  5 

  5 

  10 

  15 

  5 

  10 

Note: Extreme point in the Downside 2 is 'worst outcome' in the scenario, for example the lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. After a temporary increase, inflation remains positively correlated with GDP in the Downside 2 scenario, and the 'worst outcome' refers to the scenario low point.


Scenario weightings

In reviewing the economic conjuncture, the level of uncertainty and risk, management has considered both global and country-specific factors. This has led management to assigning scenario probabilities that are tailored to its view of uncertainty in individual markets.

A key consideration in 2Q22 has been the high level of uncertainty attached to the Central scenario projections. These concerns focused on:

the risks of higher inflation given the risks attached to gas supply security in Europe and global oil supply, which raises the possibility of a more significant impact on real incomes and GDP growth;

market interest rate expectations that imply a rapid and significant change to the interest rate environment; and

the progression of the Covid-19 pandemic in Asian countries and the impact of stringent public policy responses on growth in the region and global supply chains.

In mainland China, increased weights have been assigned to Downside scenarios in light of the stringent public health responses to the Covid-19 pandemic, the virulence of current strains, and the observed impact on economic activity of the recent restrictions. In Hong Kong, the recent reopening has increased confidence in the Central scenario since the first quarter. In each market, the combined weighting of the consensus Upside and Central scenarios was 60%.

In the UK and US, the surge in price inflation and a squeeze on household real incomes have led to strong monetary policy responses from central banks. Economic and financial volatility remains elevated due to uncertainty around the implications of higher interest rates. For Canada and Mexico, similar risk themes dominate, and the connectivity to the US has also been a key consideration. For the UK, the consensus Upside and Central scenarios had a combined weighting of 60%. In the other three markets, the combined weighting of the consensus Upside and Central scenarios was 65%.

France faces the greatest economic uncertainties of our key markets. Uncertainties around the outlook remain elevated due to Europe's exposure to the Russia-Ukraine war through the economic costs incurred from the imposition of sanctions, trade disruption and energy dependence on Russia. Additional risks stem from the ECB's exit from a long period of negative interest rate policy. The consensus Upside and Central scenarios had a combined weighting of 50%.

In the UAE, the positive impact from elevated oil prices remains significant and management concluded that the outlook for the UAE was the least uncertain of all our key markets. The consensus Upside and Central scenarios had a combined weighting of 70%.

The following graphs show the historical and forecasted GDP growth rate for the various economic scenarios in our four largest markets.

US



UK

Hong Kong

Mainland China

Note: Real GDP shown as year-on-year percentage change.

Critical accounting estimates and judgements

The calculation of ECL under IFRS 9 involves significant judgements, assumptions and estimates, as set out in the Annual Report and Accounts 2021 under 'Critical accounting estimates and judgements'. The level of estimation uncertainty and judgement has remained high since 31 December 2021, including judgements relating to:


the selection and weighting of economic scenarios, given rapidly changing economic conditions and a wide distribution of economic forecasts. There is judgement in making assumptions about the effects of inflation, supply chain disruption and length of time and severity of the continuing economic effects of the Covid-19 pandemic and health policy responses; and

estimating the economic effects of those scenarios on ECL, particularly as the historical relationship between macroeconomic variables and defaults might not reflect the dynamics of high inflation scenarios.

How economic scenarios are reflected in ECL calculations

The methodologies for the application of forward economic guidance into the calculation of ECL for wholesale and retail loans and portfolios are set out on page 148 of the Annual Report and Accounts 2021. Models are used to reflect economic scenarios on ECL estimates. These models are based largely on historical observations and correlations with default.

Economic forecasts and ECL model responses to these forecasts are subject to a high degree of uncertainty in the current environment, and models continue to be supplemented by management judgemental adjustments where required.

Management judgemental adjustments

In the context of IFRS 9, management judgemental adjustments are typically increases or decreases to the ECL at either a customer, segment or portfolio level to account for late-breaking events, model deficiencies and other assessments applied during management review and challenge.

This includes refining model inputs and outputs and using post-model adjustments based on management judgement and higher level quantitative analysis for impacts that are difficult to model.

The wholesale and retail management judgemental adjustments are presented as part of the global business impairment committees with independent review from Model Risk Management. This is in line with the governance process for IFRS 9 as set out on page 137 of the Annual Report and Accounts 2021.

The drivers of the management judgemental adjustments continue to evolve with the economic environment.

At 30 June 2022, management judgemental adjustments reduced by $0.5bn compared with 31 December 2021. Adjustments related to Covid-19 were reduced, while adjustments for sector-specific risks, and sanction and geopolitical risks were maintained. They were also maintained to account for elevated uncertainty under the high inflation scenarios.

We have internal governance in place to monitor management judgement al adjustments regularly and, where possible, to reduce the reliance on these through model recalibration or redevelopment, as appropriate. Given the level of economic uncertainty and idiosyncratic events, we believe that management judgemental adjustments will continue to be a key component of ECL for the foreseeable future.

Management judgemental adjustments made in estimating the reported ECL at 30 June 2022 are set out in the following table.

 


Management judgemental adjustments to ECL at 30 June 20221


Retail

Wholesale

Total


$bn

$bn

$bn

Banks, sovereigns and government entities


  - 

  - 

Corporate lending adjustments


  0.8 

  0.8 

Inflation-related adjustments

  0.1 


  0.1 

Other macroeconomic-related adjustments

  0.1 


  0.1 

Pandemic-related economic recovery adjustments

  0.1 


  0.1 

Other retail lending adjustments

  0.2 


  0.2 

Total

  0.4 

  0.8 

  1.2 





 

Management judgemental adjustments to ECL at 31 December 20211


Retail

Wholesale

Total


$bn

$bn

$bn

Banks, sovereigns and government entities


  (0.1)

  (0.1)

Corporate lending adjustments


  1.3 

  1.3 

Other macroeconomic-related adjustments



  - 

Pandemic-related economic recovery adjustments

  0.2 


  0.2 

Other retail lending adjustments

  0.3 


  0.3 

Total

  0.5 

  1.2 

  1.7 

1  Management judgemental adjustments presented in the table reflect increases or (decreases) to ECL, respectively.


In the wholesale portfolio, management judgemental adjustments were an ECL increase of $0.8bn (31 December 2021: $1.2bn increase).

Adjustments to corporate exposures increased ECL by $0.8bn at 30 June 2022 (31 December 2021: $1.3bn increase). These principally reflected management judgements for high-risk and vulnerable sectors in some of our key markets, supported by credit experts' input, portfolio risk metrics and quantitative analyses. The highest increase was observed on the real estate sector, including a $0.2bn ECL increase to reflect the uncertainty of the higher risk Chinese commercial real estate exposures, booked in Hong Kong. Adjustments also reflected the risk of exposures to the Russia-Ukraine war and a high degree of macroeconomic uncertainty, sanction risk and geopolitical risk in Europe.

In the retail portfolio, management judgemental adjustments were an ECL increase of $0.4bn at 30 June 2022 (31 December 2021: $0.5bn increase).

Inflation-related adjustments increased ECL by $0.1bn (31 December 2021: $0.0bn). These adjustments addressed where country-specific inflation risks were not fully captured by the modelled output.

Other macroeconomic-related adjustments increased ECL by $0.1bn (31 December 2021: $0.0bn). These adjustments were primarily in relation to model oversensitivity as well as country-specific risks related to future macroeconomic conditions.

Pandemic-related economic recovery adjustments increased ECL by $0.1bn (31 December 2021: $0.2bn). Compared with 31 December 2021, while the rationale for applying the adjustment remained the same, the amount of adjustment decreased as this was made only for markets in Asia where there remain concerns regarding Covid-19.

Other retail lending adjustments increased ECL by $0.2bn (31 December: $0.3bn increase), reflecting those customers who remain in or have recently exited customer support programmes, and all other data and model adjustments.

 


Economic scenarios sensitivity analysis of ECL estimates

Management considered the sensitivity of the ECL outcome against the economic forecasts as part of the ECL governance process by recalculating the ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of a significant increase in credit risk and the measurement of the resulting ECL.

The ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating ECL for loans in stages 1 and 2 at the balance sheet date. The population of stage 3 loans (in default) at the balance sheet date is unchanged in these sensitivity calculations. Stage 3 ECL would only be sensitive to changes in forecasts of future economic conditions if the loss-given default of a particular portfolio was sensitive to these changes.

There is a particularly high degree of estimation uncertainty in numbers representing tail risk scenarios when assigned a 100% weighting.

For wholesale credit risk exposures, the sensitivity analysis excludes ECL for financial instruments related to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios. Therefore, it is impracticable to separate the effect of macroeconomic factors in individual assessments.

For retail credit risk exposures, the sensitivity analysis includes ECL for loans and advances to customers related to defaulted obligors. This is because the retail ECL for secured mortgage portfolios, including loans in all stages, is sensitive to macroeconomic variables.

Wholesale and retail sensitivity

The wholesale and retail sensitivity analysis is stated inclusive of management judgemental adjustments, as appropriate to each scenario. The results tables exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared with personal and wholesale lending presented in other credit risk tables. Additionally, in both the wholesale and retail analysis, the Downside 1 scenario was introduced during 1H22 and therefore was not present at 31 December 2021.


Wholesale analysis

IFRS 9 ECL sensitivity to future economic conditions1,2


Gross carrying amount

Reported

ECL

Consensus Central scenario ECL

Consensus Upside scenario ECL

Consensus Downside scenario ECL

Downside 1 scenario ECL

Downside 2 scenario ECL

By geography at 30 Jun 2022

$m

$m

$m

$m

$m

$m

$m

UK

  432,013 

  730 

  509 

  433 

  613 

  923 

  1,851 

US

  216,976 

  247 

  219 

  198 

  245 

  266 

  371 

Hong Kong

  433,612 

  534 

  415 

  286 

  703 

  640 

  1,313 

Mainland China

  131,552 

  216 

  144 

  62 

  298 

  379 

  729 

Canada

  83,132 

  116 

  28 

  18 

  52 

  86 

  717 

Mexico

  24,919 

  79 

  62 

  48 

  90 

  151 

  223 

UAE

  44,323 

  84 

  71 

  41 

  105 

  115 

  155 

France

  177,515 

  142 

  122 

  109 

  146 

  158 

  182 

 

By geography at 31 Dec 2021








UK

  483,273 

  920

  727

  590

  944


  1,985 

US

  227,817 

  227

  204

  155

  317


  391

Hong Kong

  434,608 

  767

  652

  476

  984


  1,869 

Mainland China

  120,627 

  149

  113

  36

  216


  806

Canada

  85,117 

  151

  98

  61

  150


  1,121 

Mexico

  23,054 

  118

  80

  61

  123


  358

UAE

  44,767 

  158

  122

  73

  214


  711

France

  163,845 

  133

  121

  106

  162


  187

1  ECL sensitivity includes off-balance sheet financial instruments that are subject to significant measurement uncertainty.

2  Includes low credit-risk financial instruments such as debt instruments at FVOCI, which have high carrying amounts but low ECL under all the above scenarios.


At 30 June 2022, the highest level of 100% scenario-weighted ECL was observed in the UK and Hong Kong. This higher ECL impact was largely driven by significant exposure in these regions and downside risks of specific sectors.

Compared with 31 December 2021, the Downside 2 ECL impact was lower across all key markets, mostly driven by a reduction of


adjustments for uncertainty due to the Covid-19 pandemic, and changes to exposure and macroeconomic forecasts. A reduction of ECL was observed in MENA, the US and Canada under the Downside 2 scenario, as some of the sectors in these portfolios benefited from increased oil prices. This was partly offset by the ECL increase in Europe related to sector-specific inflation risk.


Retail analysis

IFRS 9 ECL sensitivity to future economic conditions1


Gross carrying amount

Reported

ECL

Consensus Central scenario ECL

Consensus Upside scenario ECL

Consensus Downside  scenario ECL

Downside 1 scenario ECL

Downside 2 scenario ECL

By geography at 30 Jun 2022

$m

$m

$m

$m

$m

$m

$m

UK








Mortgages

  144,630 

  169 

  156 

  150 

  170 

  186 

  200 

Credit cards

  7,147 

  433 

  336 

  293 

  434 

  495 

  836 

Other

  7,253 

  374 

  305 

  258 

  325 

  471 

  595 

Mexico








Mortgages

  5,560 

  118 

  107 

  96 

  124 

  115 

  160 

Credit cards

  1,303 

  167 

  157 

  143 

  180 

  182 

  216 

Other

  3,119 

  395 

  387 

  371 

  411 

  400 

  471 

Hong Kong








Mortgages

  98,070 

  - 

  - 

  - 

  - 

  - 

  - 

Credit cards

  7,180 

  236 

  208 

  182 

  269 

  310 

  336 

Other

  5,848 

  99 

  91 

  83 

  105 

  111 

  140 

UAE








Mortgages

  2,081 

  37 

  37 

  35 

  37 

  39 

  40 

Credit cards

  427 

  41 

  34 

  20 

  67 

  36 

  70 

Other

  656 

  17 

  15 

  12 

  16 

  17 

  21 

France








Mortgages

  21,384 

  59 

  59 

  59 

  59 

  59 

  60 

Other

  1,438 

  48 

  48 

  47 

  48 

  49 

  50 

US








Mortgages

  13,300 

  11 

  9 

  9 

  11 

  11 

  21 

Credit cards

  224 

  51 

  47 

  39 

  52 

  60 

  70 

Canada








Mortgages

  26,311 

  27 

  25 

  24 

  27 

  27 

  43 

Credit cards

  282 

  10 

  10 

  10 

  10 

  11 

  12 

Other

  1,520 

  14 

  12 

  11 

  14 

  16 

  24 

 

By geography at 31 Dec 2021








UK








Mortgages

  155,084 

  191

  182

  175

  197


  231

Credit cards

  8,084 

  439

  381

  330

  456


  987

Other

  7,902 

  369

  298

  254

  388


  830

Mexico








Mortgages

  4,972 

  123

  116

  106

  130


  164

Credit cards

  1,167 

  141

  134

  122

  150


  176

Other

  2,935 

  366

  360

  350

  374


  401

Hong Kong








Mortgages

  96,697 

  - 

  - 

  - 

  - 


  - 

Credit cards

  7,644 

  218

  206

  154

  231


  359

Other

  5,628 

  109

  101

  88

  128


  180

UAE








Mortgages

  1,982 

  45

  44

  42

  46


  57

Credit cards

  429

  43

  41

  29

  54


  82

Other

  615

  19

  18

  13

  21


  25

France








Mortgages

  23,159 

  63

  62

  62

  63


  64

Other

  1,602 

  61

  61

  60

  61


  63

US








Mortgages

  15,379 

  28

  27

  26

  29


  41

Credit cards

  446

  80

  76

  70

  83


  118

Canada








Mortgages

  26,097 

  28

  27

  26

  29


  48

Credit cards

  279

  9

  9

  9

  10


  13

Other

  1,598 

  19

  18

  17

  19


  27

1  ECL sensitivities exclude portfolios utilising less complex modelling approaches.


At 30 June 2022, the highest level of level of 100% scenario-weighted ECL was observed in the UK, Mexico and Hong Kong. Mortgages reflected the lowest level of ECL across most markets as collateral values remain resilient. Hong Kong mortgages had low levels of reported ECL due to the credit quality of the portfolio, and so ECL under the remaining scenarios were also negligible.

Credit cards and other unsecured lending are more sensitive to economic forecasts, which have reflected improvements during the first half of 2022. Compared with 31 December 2021, the Downside 2 ECL impact was lower in most markets, due to the improvements in the macroeconomic forecast.


Group ECL sensitivity results

The ECL impact of the scenarios and management judgemental adjustments are highly sensitive to movements in economic forecasts. Based upon the sensitivity tables presented above, if the Group ECL balance (excluding wholesale stage 3, which is assessed individually) was estimated solely on the basis of the Central scenario, Upside scenario, Downside 1 scenario or the Downside 2 scenario at 30 June 2022, it would increase/(decrease) as presented in the below table.


Retail1

Wholesale1

Total Group ECL at 30 Jun 2022

$bn

$bn

Reported ECL

  2.8 

  2.6 

Scenarios



100% consensus Central scenario

  (0.3)

  (0.7)

100% consensus Upside scenario

  (0.5)

  (1.1)

100% consensus Downside scenario

  0.1 

  0.2 

100% Downside 1 scenario

  0.3 

  0.6 

100% Downside 2 scenario

  1.4 

  4.2 

 

Total Group ECL at 31 Dec 2021



Reported ECL

  3.0 

  3.1 

Scenarios



100% consensus Central scenario

  (0.2)

  (0.6)

100% consensus Upside scenario

  (0.5)

  (1.2)

100% consensus Downside scenario

  0.2 

  0.6 

100% Downside 1 scenario



100%  Downside 2 scenario

  2.0 

  5.5 

1  On the same basis as retail and wholesale sensitivity analysis.

At 30 June 2022, the Group reported a lower ECL compared with 31 December 2021. The decrease in reported ECL was primarily driven by the release of residual Covid-19-related adjustments, write-offs and foreign exchange movements, partly offset by the increase in ECL for China commercial real estate exposures and other sectors considered as high risk to inflation, mainly in Europe. The Downside 2 ECL impact was lower in some markets due to residual Covid-19-related adjustments in Asia, and wholesale portfolios benefited from increased oil prices in MENA, the US and Canada. This was partly offset by the ECL increase in Europe related to sector-specific inflation risk.

 

 


 

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers

The following disclosure provides a reconciliation by stage of the Group's gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees. Movements are calculated on a quarterly basis and therefore fully capture stage movements between quarters. If movements were calculated on a year-to-date basis they would only reflect the opening and closing position of the financial instrument.

The transfers of financial instruments represent the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL.

The net remeasurement of ECL arising from stage transfers represents the increase or decrease due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying customer risk rating ('CRR')/probability of default ('PD') movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the 'changes in risk parameters - credit quality' line item.

Changes in 'New financial assets originated or purchased', 'assets derecognised (including final repayments)' and 'changes to risk parameters - further lending/repayments' represent the impact from volume movements within the Group's lending portfolio.


Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including

loan commitments and financial guarantees


Non-credit impaired

Credit impaired



Stage 1

Stage 2

Stage 3

POCI

Total


Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2022

  1,577,582 

  (1,557)

  155,742 

  (3,326)

  19,797 

  (6,928)

  274 

  (64)

1,753,395 

  (11,875)

Transfers of financial instruments:

  (31,551)

  (362)

  26,697 

  809 

  4,854 

  (447)

  - 

  - 

  - 

  - 

-  transfers from stage 1 to stage 2

  (85,624)

  192 

  85,624 

  (192)

  - 

  - 

  - 

  - 

  - 

  - 

-  transfers from stage 2 to stage 1

  54,842 

  (531)

  (54,842)

  531 

  - 

  - 

  - 

  - 

  - 

  - 

-  transfers to stage 3

  (1,131)

  6 

  (5,059)

  590 

  6,190 

  (596)

  - 

  - 

  - 

  - 

-  transfers from stage 3

  362 

  (29)

  974 

  (120)

  (1,336)

  149 

  - 

  - 

  - 

  - 

Net remeasurement of ECL arising from transfer of stage

  - 

  304 

  - 

  (379)

  - 

  (61)

  - 

  - 

  - 

  (136)

New financial assets originated or purchased

  208,663 

  (223)

  - 

  - 

  - 

  - 

  1 

  (1)

  208,664 

  (224)

Assets derecognised (including final repayments)

  (123,163)

  72 

  (18,234)

  166 

  (1,391)

  192 

  (98)

  - 

  (142,886)

  430 

Changes to risk parameters - further lending/repayments

  (23,360)

  185 

  (582)

  53 

  (14)

  227 

  (47)

  3 

  (24,003)

  468 

Changes to risk parameters - credit quality

  - 

  255 

  - 

  (700)

  - 

  (1,292)

  - 

  19 

  - 

  (1,718)

Changes to models used for ECL calculation

  - 

  (9)

  - 

  (34)

  - 

  (2)

  - 

  - 

  - 

  (45)

Assets written off

  - 

  - 

  - 

  - 

  (1,270)

  1,271 

  (10)

  9 

  (1,280)

  1,280 

Credit-related modifications that resulted in derecognition

  - 

  - 

  - 

  - 

  (2)

  1 

  - 

  - 

  (2)

  1 

Foreign exchange

  (74,283)

  70 

  (7,897)

  154 

  (1,157)

  307 

  (3)

  1 

  (83,340)

  532 

Other1, 2

  7,228 

  11 

  (615)

  56 

  (457)

  25 

  - 

  (10)

  6,156 

  82 

At 30 Jun 2022

  1,541,116 

  (1,254)

  155,111 

  (3,201)

  20,360 

  (6,707)

  117 

  (43)

1,716,704 

  (11,205)

ECL income statement change for the period


  584 


  (894)


  (936)


  21 


  (1,225)

Recoveries










  158 

Other










  5 

Total ECL income statement change for the period










  (1,062)

 


At 30 Jun 2022

6 months ended 30 Jun 2022


Gross carrying/nominal amount

Allowance for

ECL

ECL release/(charge)


$m

$m

$m

As above

  1,716,704 

  (11,205)

  (1,062)

Other financial assets measured at amortised cost

  950,007 

  (281)

  (20)

Non-trading reverse purchase agreement commitments

  69,584 

  - 

  - 

Performance and other guarantees not considered for IFRS 9

  - 

  - 

  14 

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement

  2,736,295 

  (11,486)

  (1,068)

Debt instruments measured at FVOCI

  274,765 

  (120)

  (22)

Total allowance for ECL/total income statement ECL change for the period

n/a

  (11,606)

  (1,090)

1  Total includes $2.8bn of gross carrying loans and advances, which were classified to assets held for sale and a corresponding allowance for ECL of $147m, reflecting business disposals as disclosed in Note 15 'Business acquisitions and disposals' on page 129.

2  Includes $8.9bn of gross carrying amounts of stage 1 loans and advances to banks, representing the balance maintained with the Bank of England to support Bacs along with Faster Payments and the cheque-processing Image Clearing System in the UK. This balance was previously reported under 'Cash and balances at central banks'. Comparatives have not been restated.


As shown in the previous table, the allowance for ECL for loans and advances to customers and banks and relevant loan commitments and financial guarantees decreased by $670m during the period, from $11,875m at 31 December 2021 to $11,205m at 30 June 2022.

This decrease was primarily driven by:

$1,280m of assets written off;

$674m relating to volume movements, which included the ECL allowance associated with new originations, assets derecognised and further pending repayment; and

foreign exchange and other movements of $614m.

This decrease was offset by:

$1,718m relating to underlying credit quality changes, including the credit quality impact of financial instruments transferring between stages;

$136m relating to the net remeasurement impact of stage transfers; and

$45m relating to changes to models used for ECL calculation.

The ECL charge for the period of $1,225m presented in the previous table consisted of $1,718m relating to underlying credit quality changes, including the credit quality impact of financial

instruments transferring between stages, $136m relating to the net remeasurement impact of stage transfers and $45m relating to


changes to models used for ECL calculation. These were offset by $674m relating to underlying net book volume.


Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including

loan commitments and financial guarantees (continued)


Non-credit impaired

Credit impaired



Stage 1

Stage 2

Stage 3

POCI

Total


Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL

Gross carrying/ nominal amount

Allowance for ECL


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2021

  1,506,451 

  (2,331)

  223,432 

  (5,403)

  20,424 

  (7,544)

  279

  (113)

  1,750,586 

  (15,391)

Transfers of financial instruments:

  21,107 

  (1,792)

  (27,863)

  2,601 

  6,756 

  (809)

  - 

  - 

  - 

  - 

-  transfers from stage 1 to

stage 2

  (159,633)

  527

  159,633 

  (527)

  - 

  - 

  - 

  - 

  - 

  - 

-  transfers from stage 2 to

stage 1

  182,432 

  (2,279)

  (182,432)

  2,279 

  - 

  - 

  - 

  - 

  - 

  - 

-  transfers to stage 3

  (2,345)

  24

  (6,478)

  1,010 

  8,823 

  (1,034)

  - 

  - 

  - 

  - 

-  transfers from stage 3

  653

  (64)

  1,414 

  (161)

  (2,067)

  225

  - 

  - 

  - 

  - 

Net remeasurement of ECL arising from transfer of stage

  - 

  1,225 

  - 

  (596)

  - 

  (34)

  - 

  - 

  - 

  595

New financial assets originated or purchased

  444,070 

  (553)

  - 

  - 

  - 

  - 

  124

  - 

  444,194 

  (553)

Assets derecognised (including final repayments)

  (304,158)

  174

  (31,393)

  489

  (2,750)

  458

  (10)

  6

  (338,311)

  1,127 

Changes to risk parameters - further lending/repayment

  (61,742)

  547

  (3,634)

  498

  (1,268)

  576

  (108)

  12

  (66,752)

  1,633 

Changes to risk parameters - credit quality

  - 

  1,111 

  - 

  (1,012)

  - 

  (2,354)

  - 

  28

  - 

  (2,227)

Changes to models used for ECL calculation

  - 

  (17)

  - 

  (33)

  - 

  1

  - 

  - 

  - 

  (49)

Assets written off

  - 

  - 

  - 

  - 

  (2,610)

  2,605 

  (7)

  7

  (2,617)

  2,612 

Credit-related modifications that resulted in derecognition

  - 

  - 

  - 

  - 

  (125)

  - 

  - 

  - 

  (125)

  - 

Foreign exchange

  (25,231)

  26

  (2,918)

  45

  (479)

  157

  (4)

  1

  (28,632)

  229

Other1

  (2,915)

  53

  (1,882)

  85

  (151)

  16

  - 

  (5)

  (4,948)

  149

At 31 Dec 2021

  1,577,582 

  (1,557)

  155,742 

  (3,326)

  19,797 

  (6,928)

  274

  (64)

  1,753,395 

  (11,875)

ECL income statement change for the period


  2,487 


  (654)


  (1,353)


  46


  526

Recoveries










  409

Other










  (111)

Total ECL income statement change for the period2










  824

 


At 31 Dec 2021

12 months ended 31 Dec 2021


Gross carrying/nominal amount

Allowance for

 ECL

ECL charge


$m

$m

$m

As above

  1,753,395 

  (11,875)

  824

Other financial assets measured at amortised cost

  880,351 

  (193)

  (19)

Non-trading reverse purchase agreement commitments

  42,421 

  - 

  - 

Performance and other guarantees not considered for IFRS 9

  - 

  - 

  75

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement

  2,676,167 

  (12,068)

  880

Debt instruments measured at FVOCI

  347,203 

  (96)

  48

Total allowance for ECL/total income statement ECL change for the period

n/a

  (12,164)

  928

1  Total includes $3.0bn of gross carrying loans and advances to customers, which were classified to assets held for sale and a corresponding allowance for ECL of $123m, reflecting our exit of domestic mass market retail banking in the US.

2  The 31 December 2021 total ECL income statement change of $824m is attributable to $706m for the six months ended 30 June 2021 and $118m to the six months ended 31 December 2021.


Credit quality of financial instruments

We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a point-in-time assessment of PD, whereas stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition. Accordingly, for non-credit-impaired financial instruments, there is no direct relationship between the credit quality assessment and stages 1 and 2, though typically the lower credit quality bands exhibit a higher proportion in stage 2.

The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and personal lending businesses and the external ratings attributed by external agencies to debt securities, as shown in the following table. Personal lending credit quality is disclosed based on a 12-month point-in-time PD adjusted for multiple economic scenarios. The credit quality classifications for wholesale lending are based on internal credit risk ratings.


Credit quality classification


Sovereign debt

securities

and bills

Other debt

securities

and bills

Wholesale lending

and derivatives

Retail lending


External credit

rating

External credit

rating

Internal credit

rating

12-month Basel

probability of

default %

Internal credit

rating

12 month probability- weighted PD %

Quality classification1,2







Strong

BBB and above

A- and above

CRR 1 to CRR 2

0 - 0.169

Band 1 and 2

0.000 - 0.500

Good

BBB- to BB

BBB+ to BBB-

CRR 3

0.170 - 0.740

Band 3

0.501 - 1.500

Satisfactory

BB- to B and unrated

BB+ to B and unrated

CRR 4 to CRR 5

0.741 - 4.914

Band 4 and 5

1.501 - 20.000

Sub-standard

B- to C

B- to C

CRR 6 to CRR 8

4.915 - 99.999

Band 6

20.001 - 99.999

Credit impaired

Default

Default

CRR 9 to CRR 10

100

Band 7

100

1  Customer risk rating ('CRR').

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


Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation


Gross carrying/nominal amount

Allowance

for ECL

Net


Strong

Good

Satisfactory

Sub-standard

Credit

impaired

Total


$m

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers at amortised cost

  524,443 

  239,180 

  227,371 

  28,934 

  19,202 

  1,039,130 

  (10,774)

  1,028,356 

-  stage 1

  511,234 

  208,847 

  166,552 

  5,189 

  - 

  891,822 

  (1,116)

  890,706 

-  stage 2

  13,209 

  30,333 

  60,819 

  23,744 

  - 

  128,105 

  (2,998)

  125,107 

-  stage 3

  - 

  - 

  - 

  - 

  19,086 

  19,086 

  (6,617)

  12,469 

-  POCI

  - 

  - 

  - 

  1 

  116 

  117 

  (43)

  74 

Loans and advances to banks at amortised cost

  87,017 

  4,169 

  4,121 

  1,095 

  79 

  96,481 

  (52)

  96,429 

-  stage 1

  86,906 

  4,088 

  4,096 

  1 

  - 

  95,091 

  (8)

  95,083 

-  stage 2

  111 

  81 

  25 

  1,094 

  - 

  1,311 

  (25)

  1,286 

-  stage 3

  - 

  - 

  - 

  - 

  79 

  79 

  (19)

  60 

-  POCI

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

Other financial assets measured at amortised cost

  832,310 

  72,077 

  44,274 

  1,037 

  309 

  950,007 

  (281)

  949,726 

-  stage 1

  831,582 

  70,175 

  43,167 

  59 

  - 

  944,983 

  (71)

  944,912 

-  stage 2

  728 

  1,902 

  1,107 

  978 

  - 

  4,715 

  (119)

  4,596 

-  stage 3

  - 

  - 

  - 

  - 

  264 

  264 

  (85)

  179 

-  POCI

  - 

  - 

  - 

  - 

  45 

  45 

  (6)

  39 

Loan and other credit-related commitments

  399,238 

  136,087 

  89,993 

  6,758 

  1,015 

  633,091 

  (337)

  632,754 

-  stage 1

  397,945 

  129,260 

  79,384 

  2,000 

  - 

  608,589 

  (124)

  608,465 

-  stage 2

  1,293 

  6,827 

  10,609 

  4,758 

  - 

  23,487 

  (159)

  23,328 

-  stage 3

  - 

  - 

  - 

  - 

  1,015 

  1,015 

  (54)

  961 

-  POCI

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

Financial guarantees

  7,065 

  4,504 

  4,787 

  1,050 

  180 

  17,586 

  (42)

  17,544 

-  stage 1

  7,008 

  4,227 

  3,807 

  156 

  - 

  15,198 

  (6)

  15,192 

-  stage 2

  57 

  277 

  980 

  894 

  - 

  2,208 

  (19)

  2,189 

-  stage 3

  - 

  - 

  - 

  - 

  180 

  180 

  (17)

  163 

-  POCI

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

At 30 Jun 2022

  1,850,073 

  456,017 

  370,546 

  38,874 

  20,785 

  2,736,295 

  (11,486)

  2,724,809 

Debt instruments at FVOCI1









-  stage 1

  262,420 

  10,762 

  8,824 

  - 

  - 

  282,006 

  (63)

  281,943 

-  stage 2

  86 

  28 

  111 

  2,083 

  - 

  2,308 

  (46)

  2,262 

-  stage 3

  - 

  - 

  - 

  - 

  5 

  5 

  (3)

  2 

-  POCI

  - 

  - 

  - 

  - 

  33 

  33 

  (8)

  25 

At 30 Jun 2022

  262,506 

  10,790 

  8,935 

  2,083 

  38 

  284,352 

  (120)

  284,232 

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI will not reconcile to the balance sheet as it excludes fair value gains and losses.


Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation

(continued)


Gross carrying/notional amount




Good

Satisfactory

Sub- standard

Credit impaired

Total


$m

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers at amortised cost

  544,695 

  230,326 

  233,739 

  29,404 

  19,067 

  1,057,231 

  (11,417)

  1,045,814 

-  stage 1

  537,642 

  206,645 

  169,809 

  4,840 

  - 

  918,936 

  (1,367)

  917,569 

-  stage 2

  7,053 

  23,681 

  63,930 

  24,560 

  - 

  119,224 

  (3,119)

  116,105 

-  stage 3

  - 

  - 

  - 

  - 

  18,797 

  18,797 

  (6,867)

  11,930 

-  POCI

  - 

  - 

  - 

  4

  270

  274

  (64)

  210

Loans and advances to banks at amortised cost

  72,978 

  4,037 

  5,020 

  1,118 

  - 

  83,153 

  (17)

  83,136 

-  stage 1

  72,903 

  3,935 

  4,788 

  10

  - 

  81,636 

  (14)

  81,622 

-  stage 2

  75

  102

  232

  1,108 

  - 

  1,517 

  (3)

  1,514 

-  stage 3

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

-  POCI

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

Other financial assets measured at amortised cost

  774,026 

  71,648 

  33,142 

  1,188 

  347

  880,351 

  (193)

  880,158 

-  stage 1

  773,427 

  70,508 

  30,997 

  84

  - 

  875,016 

  (91)

  874,925 

-  stage 2

  599

  1,140 

  2,145 

  1,104 

  - 

  4,988 

  (54)

  4,934 

-  stage 3

  - 

  - 

  - 

  - 

  304

  304

  (42)

  262

-  POCI

  - 

  - 

  - 

  - 

  43

  43

  (6)

  37

Loan and other credit-related commitments

  389,865 

  136,297 

  92,558 

  8,142 

  775

  627,637 

  (379)

  627,258 

-  stage 1

  387,434 

  129,455 

  76,043 

  1,541 

  - 

  594,473 

  (165)

  594,308 

-  stage 2

  2,431 

  6,842 

  16,515 

  6,601 

  - 

  32,389 

  (174)

  32,215 

-  stage 3

  - 

  - 

  - 

  - 

  775

  775

  (40)

  735

-  POCI

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

Financial guarantees

  16,511 

  4,902 

  5,166 

  991

  225

  27,795 

  (62)

  27,733 

-  stage 1

  16,351 

  4,469 

  3,929 

  183

  - 

  24,932 

  (11)

  24,921 

-  stage 2

  160

  433

  1,237 

  808

  - 

  2,638 

  (30)

  2,608 

-  stage 3

  - 

  - 

  - 

  - 

  225

  225

  (21)

  204

-  POCI

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

At 31 Dec 2021

  1,798,075 

  447,210 

  369,625 

  40,843 

  20,414 

  2,676,167 

  (12,068)

  2,664,099 

Debt instruments at FVOCI1









-  stage 1

  319,557 

  12,196 

  11,354 

  - 

  - 

  343,107 

  (67)

  343,040 

-  stage 2

  604

  102

  323

  1,087 

  - 

  2,116 

  (22)

  2,094 

-  stage 3

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

-  POCI

  - 

  - 

  - 

  - 

  46

  46

  (7)

  39

At 31 Dec 2021

  320,161 

  12,298 

  11,677 

  1,087 

  46

  345,269 

  (96)

  345,173 

1  For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such, the gross carrying value of debt instruments at FVOCI will not reconcile to the balance sheet as it excludes fair value gains and losses.


Personal lending

This section provides further details on the regions, countries and products driving the increase in personal loans and advances to customers. Additionally, Hong Kong and UK mortgage book
loan-to-value ('LTV') data are provided.

Further product granularity is also provided by stage, with geographical data presented for loans and advances to customers, loans and other credit-related commitments, and financial guarantees and similar contracts.

At 30 June 2022, total personal lending for loans and advances to customers of $464bn decreased by $14.7bn compared with 31 December 2021. This decrease included adverse foreign exchange movements of $25.5bn. Excluding foreign exchange movements, there was a growth of $10.8bn, mainly driven by $4.9bn in Europe, $3.9bn in Asia and $1.0bn in Latin America.

The allowance for ECL attributable to personal lending, excluding off-balance sheet loan commitments and guarantees, decreased by $0.2bn to $2.9bn at 30 June 2022.

Excluding foreign exchange movements, mortgage lending balances increased by $9.9bn to $360.7bn at 30 June 2022. Mortgages grew $5.5bn in the UK; $3.7bn in Asia, notably $2.1bn in Australia and $1.5bn in Hong Kong; and $0.8bn in Canada.

The allowance for ECL attributable to mortgages, excluding foreign exchange, decreased by $0.1bn to $0.6bn when compared with 31 December 2021.

At 30 June 2022, the increase in stage 2 mortgage lending balances, primarily in the UK, is largely explained by a management adjustment designed to reflect inflation risk in certain segments of our customer base that may be more susceptible to inflationary pressure. While no increase in stress has emerged among this customer group, these have been classified as stage 2 as a recognition of the higher perceived risk to inflationary pressure that may occur. This does not have a material impact on ECL given the low LTV profile of these customers. We will continue to monitor the impact of inflation and update the management judgemental adjustments as the inflationary impacts abate or translate into changes in customer behaviour and performance.

The quality of both our Hong Kong and UK mortgage books remained high, with low levels of impairment allowances. The average LTV ratio on new mortgage lending in Hong Kong was 59%, compared with an estimated 50% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 67%, compared with an estimated 49% for the overall mortgage portfolio.

Excluding foreign exchange movements, other personal lending balances increased by $0.9bn compared with 31 December 2021. The increase was largely driven by secured personal lending of $1.5bn, mainly in Hong Kong, and guaranteed loans in respect of residential property of $0.3bn, mainly in France. This was partly offset by a $0.8bn decline in unsecured personal lending, driven mainly in Hong Kong.

At 30 June 2022, the allowance for ECL attributable to other personal lending remained broadly stable at $2.3bn.


Total personal lending for loans and advances to customers by stage distribution


Gross carrying amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total


$m

$m

$m

$m

$m

$m

$m

$m

By portfolio









First lien residential mortgages

  341,328 

  16,958 

  2,418 

  360,704 

  (89) 

  (172) 

  (312) 

  (573) 

-  of which:

interest only (including offset)

  24,434 

  2,774 

  192 

  27,400 

  (4)

  (30)

  (69)

  (103)

affordability (including US adjustable rate mortgages)

  14,070 

  507 

  300 

  14,877 

  (2)

  (3)

  (3)

  (8)

Other personal lending

  90,189 

  11,128 

  1,600 

  102,917 

  (465) 

  (1,262) 

  (618) 

  (2,345) 

-  second lien residential mortgages

  316 

  31 

  18 

  365 

  (1) 

  (3) 

  (6) 

  (10) 

-  guaranteed loans in respect of residential

property

  18,660 

  1,264 

  284 

  20,208 

  (10) 

  (7) 

  (35) 

  (52) 

-  other personal lending which is secured

  37,477 

  964 

  257 

  38,698 

  (14) 

  (20) 

  (48) 

  (82) 

-  credit cards

  16,455 

  4,626 

  277 

  21,358 

  (214) 

  (754) 

  (158) 

  (1,126) 

-  other personal lending which is unsecured

  15,725 

  4,058 

  757 

  20,540 

  (211) 

  (468) 

  (366) 

  (1,045) 

-  motor vehicle finance

  1,556 

  185 

  7 

  1,748 

  (15) 

  (10) 

  (5) 

  (30) 

At 30 Jun 2022

  431,517 

  28,086 

  4,018 

  463,621 

  (554) 

  (1,434) 

  (930) 

  (2,918) 

By geography









Europe

  187,287 

  15,285 

  1,550 

  204,122 

  (141) 

  (659) 

  (380) 

  (1,180) 

of which: UK

  155,423 

  13,631 

  1,068 

  170,122 

  (121)

  (632)

  (263)

  (1,016)

Asia

  185,481 

  9,543 

  1,324 

  196,348 

  (143) 

  (354) 

  (215) 

  (712) 

of which: Hong Kong

  126,385 

  5,226 

  225 

  131,836 

  (58)

  (243)

  (43)

  (344)

MENA

  5,347 

  284 

  149 

  5,780 

  (28) 

  (43) 

  (79) 

  (150) 

North America

  43,910 

  2,068 

  667 

  46,645 

  (32) 

  (86) 

  (90) 

  (208) 

Latin America

  9,492 

  906 

  328 

  10,726 

  (210) 

  (292) 

  (166) 

  (668) 

At 30 Jun 2022

  431,517 

  28,086 

  4,018 

  463,621 

  (554) 

  (1,434) 

  (930) 

  (2,918) 

 

Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution


Nominal amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total


$m

$m

$m

$m

$m

$m

$m

$m

Europe

  51,245 

  405 

  93 

  51,743 

  (10) 

  - 

  - 

  (10) 

-  of which: UK

  49,102 

  332 

  87 

  49,521 

  (9)

  - 

  - 

  (9)

Asia

  164,874 

  864 

  23 

  165,761 

  - 

  - 

  - 

  - 

-  of which: Hong Kong

  126,512 

  161 

  14 

  126,687 

  - 

  - 

  - 

  - 

MENA

  2,562 

  32 

  1 

  2,595 

  (1) 

  - 

  - 

  (1) 

North America

  13,973 

  187 

  43 

  14,203 

  (11) 

  (1) 

  - 

  (12) 

Latin America

  3,867 

  27 

  1 

  3,895 

  (7) 

  - 

  - 

  (7) 

At 30 Jun 2022

  236,521 

  1,515 

  161 

  238,197 

  (29) 

  (1) 

  - 

  (30) 

 

Total personal lending for loans and advances to customers by stage distribution (continued)


Gross carrying amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total


$m

$m

$m

$m

$m

$m

$m

$m

By portfolio









First lien residential mortgages

  360,686 

  7,637 

  3,045 

  371,368 

  (128) 

  (131) 

  (416) 

  (675) 

-  of which:

interest only (including offset)

  28,506 

  1,795 

  255

  30,556 

  (5)

  (24)

  (81)

  (110)

affordability (including US adjustable rate mortgages)

  13,621 

  712

  452

  14,785 

  (6)

  (6)

  (5)

  (17)

Other personal lending

  96,270 

  8,802 

  1,897 

  106,969 

  (530) 

  (1,088) 

  (810) 

  (2,428) 

-  second lien residential mortgages

  314

  44

  37

  395

  (1) 

  (4) 

  (9) 

  (14) 

-  guaranteed loans in respect of residential

property

  20,643 

  731

  236

  21,610 

  (9) 

  (7) 

  (42) 

  (58) 

-  other personal lending which is secured

  36,533 

  1,096 

  366

  37,995 

  (21) 

  (15) 

  (120) 

  (156) 

-  credit cards

  18,623 

  3,897 

  338

  22,858 

  (246) 

  (675) 

  (214) 

  (1,135) 

-  other personal lending which is unsecured

  18,743 

  2,820 

  915

  22,478 

  (240) 

  (378) 

  (421) 

  (1,039) 

-  motor vehicle finance

  1,414 

  214

  5

  1,633 

  (13) 

  (9) 

  (4) 

  (26) 

At 31 Dec 2021

  456,956 

  16,439 

  4,942 

  478,337 

  (658) 

  (1,219) 

  (1,226) 

  (3,103) 

By geography









Europe

  212,284 

  5,639 

  2,148 

  220,071 

  (199) 

  (499) 

  (637) 

  (1,335) 

-  of which: UK

  176,547 

  4,668 

  1,488 

  182,703 

  (167)

  (480)

  (399)

  (1,046)

Asia

  187,391 

  7,796 

  1,303 

  196,490 

  (158) 

  (381) 

  (226) 

  (765) 

-  of which: Hong Kong

  125,854 

  4,959 

  202

  131,015 

  (65)

  (231)

  (43)

  (339)

MENA

  4,965 

  252

  202

  5,419 

  (38) 

  (40) 

  (94) 

  (172) 

North America

  43,489 

  2,126 

  1,005 

  46,620 

  (43) 

  (67) 

  (118) 

  (228) 

Latin America

  8,827 

  626

  284

  9,737 

  (220) 

  (232) 

  (151) 

  (603) 

At 31 Dec 2021

  456,956 

  16,439 

  4,942 

  478,337 

  (658) 

  (1,219) 

  (1,226) 

  (3,103) 

 

Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution (continued)


Nominal amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

Total

Stage 1

Stage 2

Stage 3

Total


$m

$m

$m

$m

$m

$m

$m

$m

Europe

  57,109 

  558

  107

  57,774 

  (11) 

  (1) 

  - 

  (12) 

-  of which: UK

  54,704 

  407

  104

  55,215 

  (10) 

  (1) 

  - 

  (11) 

Asia

  160,248 

  894

  21

  161,163 

  - 

  - 

  - 

  - 

-  of which: Hong Kong

  121,597 

  292

  19

  121,908 

  - 

  - 

  - 

  - 

MENA

  2,568 

  30

  16

  2,614 

  (5) 

  - 

  - 

  (5) 

North America

  15,039 

  251

  23

  15,313 

  (15) 

  (1) 

  - 

  (16) 

Latin America

  3,920 

  29

  2

  3,951 

  (6) 

  - 

  - 

  (6) 

At 31 Dec 2021

  238,884 

  1,762 

  169

  240,815 

  (37) 

  (2) 

  - 

  (39) 

 


Wholesale lending

This section provides further details on the regions, countries and industries driving the increase in wholesale loans and advances to customers and banks, with the impact of foreign exchange separately identified. Industry granularity is also provided by stage, with geographical data presented for loans and advances to customers, banks, other credit commitments, financial guarantees and similar contracts.

At 30 June 2022, wholesale lending for loans and advances to banks and customers of $672bn increased by $9.9bn since 31 December 2021. This included adverse foreign exchange movements of $29.1bn.

Excluding foreign exchange movements, the total wholesale lending growth was driven by a $19.1bn increase in corporate and commercial balances. This can be attributed to an $8.1bn increase in Asia, notably $2.4bn in mainland China; a $6.1bn increase in North America including $3.2bn in Canada, and $3.0bn in the US; and a $2.3bn increase in Europe.

Further growth in wholesale lending was driven by a $16.8bn increase in loans and advances to banks, including a $9.4bn increase in Asia, notably $3.7bn in Hong Kong, and a $7.6bn increase in Europe.


Loans and advances to non-bank financial institutions grew by $3.2bn, including $2.0bn in Europe and $1.6bn in North America, partly offset by a decline of $0.4bn in Asia.

Loan commitments and financial guarantees declined by $2.1bn since 31 December 2021 to $412bn at 30 June 2022, including a $28bn increase related to unsettled reverse repurchase agreements. Excluding adverse foreign exchange movements of $22bn, loans commitments and financial guarantees increased by $19.9bn.

The allowance for ECL attributable to loans and advances to banks and customers of $7.9bn at 30 June 2022 decreased from $8.3bn at 31 December 2021. This included favourable foreign exchange movements of $0.4bn.

Excluding foreign exchange movements, the total decrease in the wholesale ECL allowance for loans and advances to customers and banks was driven by a $0.1bn fall in corporate and commercial balances. This was mainly attributable to a $0.1bn decline in each of the following sectors: wholesale and retail trade, accommodation and food, and other services, partly offset by an increase of $0.3bn in real estate.

The decline in ECL allowance for loans to corporate and commercial was largely offset by an increase in ECL allowance of $0.1bn for loans to non-bank financial institutions.


Total wholesale lending for loans and advances to banks and customers by stage distribution


Gross carrying amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Corporate and commercial

  399,152 

  95,590 

  14,707 

  117 

  509,566 

  (523)

  (1,525) 

  (5,593) 

  (43)

  (7,684) 

-  agriculture, forestry and fishing

  6,455 

  884 

  366 

  - 

  7,705 

  (13)

  (25) 

  (102) 

  - 

  (140) 

-  mining and quarrying

  7,732 

  1,956 

  336 

  3 

  10,027 

  (7) 

  (28) 

  (151) 

  (1) 

  (187) 

-  manufacturing

  74,788 

  17,584 

  1,922 

  52 

  94,346 

  (77)

  (176) 

  (892) 

  (30)

  (1,175) 

-  electricity, gas, steam and air-conditioning supply

  14,199 

  1,749 

  242 

  - 

  16,190 

  (9) 

  (16) 

  (54) 

  - 

  (79) 

-  water supply, sewerage, waste management and remediation

  3,141 

  358 

  43 

  - 

  3,542 

  (3) 

  (4)

  (17) 

  - 

  (24) 

-  construction

  9,914 

  3,458 

  803 

  1 

  14,176 

  (26)

  (62) 

  (367) 

  (1) 

  (456) 

-  wholesale and retail trade, repair of motor vehicles and motorcycles

  80,879 

  13,641 

  2,813 

  2 

  97,335 

  (76)

  (162) 

  (1,706) 

  (1) 

  (1,945) 

-  transportation and storage

  20,620 

  6,959 

  520 

  8 

  28,107 

  (56)

  (98) 

  (150) 

  - 

  (304) 

-  accommodation and food

  10,997 

  8,225 

  1,217 

  1 

  20,440 

  (26)

  (161) 

  (118) 

  (1) 

  (306) 

-  publishing, audiovisual and broadcasting

  19,953 

  1,925 

  237 

  26 

  22,141 

  (22)

  (29) 

  (82) 

  (8) 

  (141) 

-  real estate

  86,978 

  25,456 

  3,745 

  - 

  116,179 

  (105)

  (557) 

  (1,237) 

  - 

  (1,899) 

-  professional, scientific and technical activities

  15,740 

  2,181 

  499 

  - 

  18,420 

  (23)

  (47) 

  (141) 

  - 

  (211) 

-  administrative and support services

  19,520 

  7,411 

  838 

  24 

  27,793 

  (32)

  (85) 

  (280) 

  (1) 

  (398) 

-  public administration and defence, compulsory social security

  1,204 

  207 

  34 

  - 

  1,445 

  (1) 

  (2)

  - 

  - 

  (3)

-  education

  1,320 

  218 

  60 

  - 

  1,598 

  (4) 

  (8)

  (13) 

  - 

  (25) 

-  health and care

  3,540 

  689 

  140 

  - 

  4,369 

  (7) 

  (12) 

  (23) 

  - 

  (42) 

-  arts, entertainment and recreation

  1,135 

  761 

  135 

  - 

  2,031 

  (5) 

  (15) 

  (30) 

  - 

  (50) 

-  other services

  10,383 

  1,486 

  556 

  - 

  12,425 

  (29)

  (28) 

  (225) 

  - 

  (282) 

-  activities of households

  827 

  30 

  - 

  - 

  857 

  - 

  - 

  - 

  - 

  - 

-  extra-territorial organisations and bodies activities

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

-  government

  9,808 

  399 

  201 

  - 

  10,408 

  (2) 

  - 

  (5)

  - 

  (7)

-  asset-backed securities

  19 

  13 

  - 

  - 

  32 

  - 

  (10) 

  - 

  - 

  (10) 

Non-bank financial institutions

  61,153 

  4,429 

  361 

  - 

  65,943 

  (39)

  (39) 

  (94) 

  - 

  (172) 

Loans and advances to banks

  95,091 

  1,311 

  79 

  - 

  96,481 

  (8) 

  (25) 

  (19) 

  - 

  (52) 

At 30 Jun 2022

  555,396 

  101,330 

  15,147 

  117 

  671,990 

  (570)

  (1,589) 

  (5,706) 

  (43)

  (7,908) 

By geography











Europe

  151,487 

  29,194 

  6,577 

  27 

  187,285 

  (276)

  (581) 

  (1,567) 

  (11)

  (2,435) 

-  of which: UK

  109,746 

  16,645 

  5,048 

  26 

  131,465 

  (226)

  (404)

  (937)

  (8)

  (1,575)

Asia

  305,524 

  52,054 

  5,784 

  73 

  363,435 

  (165)

  (641) 

  (2,795) 

  (22)

  (3,623) 

-  of which: Hong Kong

  171,301 

  24,612 

  3,845 

  48 

  199,806 

  (66)

  (439)

  (1,355)

  (22)

  (1,882)

MENA

  27,567 

  4,432 

  1,545 

  17 

  33,561 

  (22)

  (75) 

  (873) 

  (10)

  (980) 

North America

  58,350 

  12,821 

  495 

  - 

  71,666 

  (41)

  (244) 

  (115) 

  - 

  (400) 

Latin America

  12,468 

  2,829 

  746 

  - 

  16,043 

  (66)

  (48) 

  (356) 

  - 

  (470) 

At 30 Jun 2022

  555,396 

  101,330 

  15,147 

  117 

  671,990 

  (570)

  (1,589) 

  (5,706) 

  (43)

  (7,908) 

 

Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1


Nominal amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Corporate and commercial

  252,784 

  22,033 

  1,028 

  - 

  275,845 

  (96)

  (165) 

  (71)

  - 

  (332) 

Financial

  134,482 

  2,147 

  6 

  - 

  136,635 

  (5) 

  (12) 

  - 

  - 

  (17) 

At 30 Jun 2022

  387,266 

  24,180 

  1,034 

  - 

  412,480 

  (101)

  (177) 

  (71)

  - 

  (349) 

By geography











Europe

  185,084 

  10,421 

  519 

  - 

  196,024 

  (40)

  (78) 

  (44)

  - 

  (162) 

-  of which: UK

  69,386 

  6,407 

  301 

  - 

  76,094 

  (34)

  (50)

  (33)

  - 

  (117)

Asia

  74,588 

  4,721 

  326 

  - 

  79,635 

  (40)

  (36) 

  (6) 

  - 

  (82) 

-  of which: Hong Kong

  27,975 

  1,201 

  309 

  - 

  29,485 

  (11)

  (11)

  (2)

  - 

  (24)

MENA

  7,424 

  707 

  35 

  - 

  8,166 

  (3) 

  (12) 

  (17)

  - 

  (32) 

North America

  117,603 

  8,231 

  145 

  - 

  125,979 

  (17)

  (50) 

  (1) 

  - 

  (68) 

Latin America

  2,567 

  100 

  9 

  - 

  2,676 

  (1) 

  (1)

  (3) 

  - 

  (5)

At 30 Jun 2022

  387,266 

  24,180 

  1,034 

  - 

  412,480 

  (101)

  (177) 

  (71)

  - 

  (349) 

1  Included in loans and other credit-related commitments and financial guarantees is $70bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.

Total wholesale lending for loans and advances to banks and customers by stage distribution (continued)


Gross carrying amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Corporate and commercial

  400,894 

  98,911 

  13,460 

  274

  513,539 

  (665) 

  (1,874) 

  (5,601) 

  (64) 

  (8,204) 

-  agriculture, forestry and fishing

  6,510 

  1,026 

  362

  1

  7,899 

  (10) 

  (23) 

  (104) 

  (1) 

  (138) 

-  mining and quarrying

  7,167 

  2,055 

  447

  16

  9,685 

  (17) 

  (39) 

  (159) 

  (12) 

  (227) 

-  manufacturing

  75,193 

  16,443 

  2,019 

  88

  93,743 

  (110) 

  (176) 

  (931) 

  (31) 

  (1,248) 

-  electricity, gas, steam and air-conditioning supply

  15,255 

  1,285 

  78

  - 

  16,618 

  (16) 

  (21) 

  (31) 

  - 

  (68) 

-  water supply, sewerage, waste management and remediation

  3,376 

  468

  51

  - 

  3,895 

  (5) 

  (4) 

  (20) 

  - 

  (29) 

-  construction

  9,506 

  3,605 

  842

  1

  13,954 

  (24) 

  (44) 

  (439) 

  (1) 

  (508) 

-  wholesale and retail trade, repair of motor vehicles and motorcycles

  79,137 

  12,802 

  3,003 

  2

  94,944 

  (71) 

  (99) 

  (1,936) 

  (1) 

  (2,107) 

-  transportation and storage

  21,199 

  7,726 

  658

  9

  29,592 

  (56) 

  (116) 

  (191) 

  - 

  (363) 

-  accommodation and food

  8,080 

  14,096 

  1,199 

  1

  23,376 

  (67) 

  (245) 

  (110) 

  (1) 

  (423) 

-  publishing, audiovisual and broadcasting

  16,417 

  1,804 

  222

  28

  18,471 

  (37) 

  (47) 

  (94) 

  (6) 

  (184) 

-  real estate

  93,633 

  25,154 

  2,375 

  98

  121,260 

  (132) 

  (737) 

  (775) 

  - 

  (1,644) 

-  professional, scientific and technical activities

  16,160 

  2,888 

  637

  - 

  19,685 

  (26) 

  (40) 

  (172) 

  - 

  (238) 

-  administrative and support services

  23,186 

  4,740 

  719

  30

  28,675 

  (40) 

  (84) 

  (296) 

  (11) 

  (431) 

-  public administration and defence, compulsory social security

  938

  333

  - 

  - 

  1,271 

  (5) 

  (3) 

  - 

  - 

  (8) 

-  education

  1,455 

  273

  65

  - 

  1,793 

  (4) 

  (15) 

  (18) 

  - 

  (37) 

-  health and care

  3,743 

  928

  183

  - 

  4,854 

  (11) 

  (24) 

  (37) 

  - 

  (72) 

-  arts, entertainment and recreation

  1,620 

  826

  152

  - 

  2,598 

  (6) 

  (44) 

  (42) 

  - 

  (92) 

-  other services

  10,123 

  1,726 

  448

  - 

  12,297 

  (26) 

  (101) 

  (246) 

  - 

  (373) 

-  activities of households

  860

  117

  - 

  - 

  977

  - 

  - 

  - 

  - 

  - 

-  extra-territorial organisations and bodies activities

  2

  - 

  - 

  - 

  2

  - 

  - 

  - 

  - 

  - 

-  government

  7,010 

  602

  - 

  - 

  7,612 

  (2) 

  (2) 

  - 

  - 

  (4) 

-  asset-backed securities

  324

  14

  - 

  - 

  338

  - 

  (10) 

  - 

  - 

  (10) 

Non-bank financial institutions

  61,086 

  3,874 

  395

  - 

  65,355 

  (44) 

  (26) 

  (40) 

  - 

  (110) 

Loans and advances to banks

  81,636 

  1,517 

  - 

  - 

  83,153 

  (14) 

  (3) 

  - 

  - 

  (17) 

At 31 Dec 2021

  543,616 

  104,302 

  13,855 

  274

  662,047 

  (723) 

  (1,903) 

  (5,641) 

  (64) 

  (8,331) 

By geography











Europe

  154,575 

  31,871 

  6,741 

  30

  193,217 

  (356) 

  (654) 

  (1,806) 

  (9) 

  (2,825) 

-  of which: UK

  101,029 

  24,461 

  5,126 

  28

  130,644 

  (306)

  (518)

  (1,060)

  (6)

  (1,890)

Asia

  297,423 

  53,993 

  3,997 

  199

  355,612 

  (182) 

  (830) 

  (2,299) 

  (43) 

  (3,354) 

-  of which: Hong Kong

  165,437 

  30,305 

  1,990 

  159

  197,891 

  (85)

  (650)

  (836)

  (21)

  (1,592)

MENA

  26,135 

  5,295 

  1,682 

  22

  33,134 

  (62) 

  (108) 

  (1,028) 

  (11) 

  (1,209) 

North America

  53,513 

  10,397 

  652

  - 

  64,562 

  (57) 

  (215) 

  (169) 

  - 

  (441) 

Latin America

  11,970 

  2,746 

  783

  23

  15,522 

  (66) 

  (96) 

  (339) 

  (1) 

  (502) 

At 31 Dec 2021

  543,616 

  104,302 

  13,855 

  274

  662,047 

  (723) 

  (1,903) 

  (5,641) 

  (64) 

  (8,331) 

 

Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1 (continued)


Nominal amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Corporate and commercial

  274,775 

  30,376 

  829

  - 

  305,980 

  (130) 

  (193) 

  (60) 

  - 

  (383) 

Financial

  105,746 

  2,889 

  2

  - 

  108,637 

  (9) 

  (9) 

  (1) 

  - 

  (19) 

At 31 Dec 2021

  380,521 

  33,265 

  831

  - 

  414,617 

  (139) 

  (202) 

  (61) 

  - 

  (402) 

By geography











Europe

  189,770 

  15,585 

  673

  - 

  206,028 

  (67) 

  (76) 

  (47) 

  - 

  (190) 

-  of which: UK

  68,136 

  8,430 

  389

  - 

  76,955 

  (55)

  (49)

  (28)

  - 

  (132)

Asia

  72,179 

  5,229 

  20

  - 

  77,428 

  (35) 

  (40) 

  (5) 

  - 

  (80) 

-  of which: Hong Kong

  31,314 

  1,517 

  10

  - 

  32,841 

  (11)

  (17)

  (2)

  - 

  (30)

MENA

  6,335 

  1,017 

  19

  - 

  7,371 

  (10) 

  (18) 

  (3) 

  - 

  (31) 

North America

  109,851 

  11,350 

  91

  - 

  121,292 

  (24) 

  (66) 

  (1) 

  - 

  (91) 

Latin America

  2,386 

  84

  28

  - 

  2,498 

  (3) 

  (2) 

  (5) 

  - 

  (10) 

At 31 Dec 2021

  380,521 

  33,265 

  831

  - 

  414,617 

  (139) 

  (202) 

  (61) 

  - 

  (402) 

1  Included in loans and other credit-related commitments and financial guarantees is $42bn relating to unsettled reverse repurchase agreements, which once drawn are classified as 'Reverse repurchase agreements - non-trading'.


The following table presents the Group's total exposure to mainland China commercial real estate at 30 June 2022, by country/territory and credit quality. Mainland China reported real estate exposures comprise exposures booked in mainland China


and offshore where the ultimate parent and beneficial owner is based in mainland China, and all exposures booked on mainland China balance sheets.


Mainland China commercial real estate


Hong Kong

Mainland China

Rest of the Group

Total


$m

$m

$m

$m

Loans and advances to customers1

  9,773 

  6,488 

  441 

  16,702 

Guarantees issued and others2

  1,961 

  1,026 

  94 

  3,081 

Total mainland China commercial real estate exposure at 30 Jun 2022

  11,734 

  7,514 

  535 

  19,783 

Distribution of mainland China commercial real estate exposure by credit quality





- Strong

  2,095 

  2,117 

  145 

  4,357 

- Good

  2,429 

  2,898 

  58 

  5,385 

- Satisfactory

  3,104 

  2,272 

  175 

  5,551 

- Sub-standard

  1,946 

  95 

  157 

  2,198 

- Credit impaired

  2,160 

  132 

  - 

  2,292 

At 30 Jun 2022

  11,734 

  7,514 

  535 

  19,783 

Allowance for ECL

  (884)

  (103)

  (3)

  (990)

 

Loans and advances to customers1

  9,903 

  6,811 

  410

  17,124 

Guarantees issued and others2

  1,747 

  2,376 

  79

  4,202 

Total mainland China commercial real estate exposure at 31 Dec 2021

  11,650 

  9,187 

  489

  21,326 

Distribution of mainland China commercial real estate exposure by credit quality





- Strong

  3,543 

  3,864 

  155

  7,562 

- Good

  2,652 

  2,354 

  73

  5,079 

- Satisfactory

  3,383 

  2,855 

  106

  6,344 

- Sub-standard

  1,570 

  12

  155

  1,737 

- Credit impaired

  502

  102

  - 

  604

At 31 Dec 2021

  11,650 

  9,187 

  489

  21,326 

Allowance for ECL

  (560)

  (49)

  (2)

  (611)

1  Amounts represent gross carrying amount.

2  Amounts represent nominal amount.


At 30 June 2022, the Group had no direct credit exposure to developers in the 'red' category of the Chinese government's 'three red lines' framework. The Group's exposures related to companies whose primary activities are focused on residential, commercial and mixed-use real estate activities. Lending is generally focused on tier 1 and 2 cities.

The Group's exposures related to mainland China commercial real estate that are booked in Hong Kong are generally higher risk exposures to a combination of state and privately owned enterprises.


This portfolio had 77% of exposure booked with a credit quality of 'satisfactory' or above, but had a higher degree of uncertainty due to tightening liquidity and increased refinancing risks. In addition, offshore exposures are typically higher risk than onshore exposures. At 30 June 2022, the Group had allowances for ECL of $884m (31 December 2021: $560m) held against mainland China commercial real estate exposures booked in Hong Kong. We will continue to monitor the situation closely.


Supplementary information

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


Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business


Gross carrying/nominal amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers at amortised cost

  891,822 

  128,105 

  19,086 

  117 

  1,039,130 

  (1,116)

  (2,998)

  (6,617)

  (43)

  (10,774)

-  WPB

  446,321 

  27,960 

  4,176 

  - 

  478,457 

  (564)

  (1,446)

  (981)

  - 

  (2,991)

-  CMB

  269,446 

  73,681 

  11,440 

  95 

  354,662 

  (463)

  (1,297)

  (4,607)

  (43)

  (6,410)

-  GBM

  175,541 

  26,421 

  3,470 

  22 

  205,454 

  (89)

  (239)

  (1,029)

  - 

  (1,357)

-  Corporate Centre

  514 

  43 

  - 

  - 

  557 

  - 

  (16)

  - 

  - 

  (16)

Loans and advances to banks at amortised cost

  95,091 

  1,311 

  79 

  - 

  96,481 

  (8)

  (25)

  (19)

  - 

  (52)

-  WPB

  22,033 

  392 

  - 

  - 

  22,425 

  (1)

  (1)

  - 

  - 

  (2)

-  CMB

  22,322 

  197 

  - 

  - 

  22,519 

  (1)

  - 

  - 

  - 

  (1)

-  GBM

  44,067 

  696 

  79 

  - 

  44,842 

  (5)

  (24)

  (19)

  - 

  (48)

-  Corporate Centre

  6,669 

  26 

  - 

  - 

  6,695 

  (1)

  - 

  - 

  - 

  (1)

Other financial assets measured at amortised cost

  944,983 

  4,715 

  264 

  45 

  950,007 

  (71)

  (119)

  (85)

  (6)

  (281)

-  WPB

  204,810 

  1,717 

  126 

  45 

  206,698 

  (32)

  (34)

  (47)

  (6)

  (119)

-  CMB

  167,534 

  1,823 

  89 

  - 

  169,446 

  (14)

  (18)

  (32)

  - 

  (64)

-  GBM

  481,926 

  1,166 

  43 

  - 

  483,135 

  (25)

  (67)

  (6)

  - 

  (98)

-  Corporate Centre

  90,713 

  9 

  6 

  - 

  90,728 

  - 

  - 

  - 

  - 

  - 

Total gross carrying amount on-balance sheet at 30 Jun 2022

1,931,896 

  134,131 

  19,429 

  162 

  2,085,618 

  (1,195)

  (3,142)

  (6,721)

  (49)

  (11,107)

Loans and other credit-related commitments

  608,589 

  23,487 

  1,015 

  - 

  633,091 

  (124)

  (159)

  (54)

  - 

  (337)

-  WPB

  233,329 

  1,941 

  138 

  - 

  235,408 

  (28)

  (3)

  - 

  - 

  (31)

-  CMB

  126,429 

  11,547 

  530 

  - 

  138,506 

  (62)

  (97)

  (44)

  - 

  (203)

-  GBM

  248,675 

  9,998 

  347 

  - 

  259,020 

  (34)

  (59)

  (10)

  - 

  (103)

-  Corporate Centre

  156 

  1 

  - 

  - 

  157 

  - 

  - 

  - 

  - 

  - 

Financial guarantees

  15,198 

  2,208 

  180 

  - 

  17,586 

  (6)

  (19)

  (17)

  - 

  (42)

-  WPB

  1,268 

  11 

  1 

  - 

  1,280 

  - 

  (1)

  - 

  - 

  (1)

-  CMB

  6,438 

  1,265 

  117 

  - 

  7,820 

  (4)

  (7)

  (13)

  - 

  (24)

-  GBM

  7,492 

  932 

  62 

  - 

  8,486 

  (2)

  (11)

  (4)

  - 

  (17)

-  Corporate Centre

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

  - 

Total nominal amount off-balance sheet at 30 Jun 2022

  623,787 

  25,695 

  1,195 

  - 

  650,677 

  (130)

  (178)

  (71)

  - 

  (379)

WPB

  106,858 

  971 

  1 

  24 

  107,854 

  (17)

  (17)

  (1)

  (7)

  (42)

CMB

  72,335 

  678 

  1 

  8 

  73,022 

  (9)

  (10)

  (1)

  (1)

  (21)

GBM

  90,086 

  308 

  - 

  1 

  90,395 

  (11)

  (3)

  - 

  - 

  (14)

Corporate Centre

  3,195 

  299 

  - 

  - 

  3,494 

  (27)

  (16)

  - 

  - 

  (43)

Debt instruments measured at FVOCI at 30 Jun 2022

  272,474 

  2,256 

  2 

  33 

  274,765 

  (64)

  (46)

  (2)

  (8)

  (120)



 

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied - by global business (continued)


Gross carrying/nominal amount

Allowance for ECL


Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total


$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers at amortised cost

  918,936 

  119,224 

  18,797 

  274

  1,057,231 

  (1,367)

  (3,119)

  (6,867)

  (64)

  (11,417)

-  WPB

  469,477 

  17,285 

  5,211 

  - 

  491,973 

  (664)

  (1,247)

  (1,276)

  - 

  (3,187)

-  CMB

  267,517 

  76,798 

  11,462 

  245

  356,022 

  (571)

  (1,369)

  (4,904)

  (53)

  (6,897)

-  GBM

  181,247 

  25,085 

  2,124 

  29

  208,485 

  (132)

  (493)

  (687)

  (11)

  (1,323)

-  Corporate Centre

  695

  56

  - 

  - 

  751

  - 

  (10)

  - 

  - 

  (10)

Loans and advances to banks at amortised cost

  81,636 

  1,517 

  - 

  - 

  83,153 

  (14)

  (3)

  - 

  - 

  (17)

-  WPB

  20,464 

  481

  - 

  - 

  20,945 

  (1)

  (1)

  - 

  - 

  (2)

-  CMB

  15,269 

  352

  - 

  - 

  15,621 

  (1)

  - 

  - 

  - 

  (1)

-  GBM

  36,875 

  654

  - 

  - 

  37,529 

  (10)

  (2)

  - 

  - 

  (12)

-  Corporate Centre

  9,028 

  30

  - 

  - 

  9,058 

  (2)

  - 

  - 

  - 

  (2)

Other financial assets measured at amortised cost

  875,016 

  4,988 

  304

  43

  880,351 

  (91)

  (54)

  (42)

  (6)

  (193)

-  WPB

  207,335 

  1,407 

  175

  43

  208,960 

  (51)

  (44)

  (14)

  (6)

  (115)

-  CMB

  163,457 

  2,370 

  61

  - 

  165,888 

  (12)

  (8)

  (20)

  - 

  (40)

-  GBM

  409,808 

  1,204 

  62

  - 

  411,074 

  (28)

  (2)

  (8)

  - 

  (38)

-  Corporate Centre

  94,416 

  7

  6

  - 

  94,429 

  - 

  - 

  - 

  - 

  - 

Total gross carrying amount on-balance sheet at 31 Dec 2021

  1,875,588 

  125,729 

  19,101 

  317

  2,020,735 

  (1,472)

  (3,176)

  (6,909)

  (70)

  (11,627)

Loans and other credit-related commitments

  594,473 

  32,389 

  775

  - 

  627,637 

  (165)

  (174)

  (40)

  - 

  (379)

-  WPB

  235,722 

  2,111 

  153

  - 

  237,986 

  (37)

  (3)

  - 

  - 

  (40)

-  CMB

  126,728 

  17,490 

  555

  - 

  144,773 

  (80)

  (118)

  (37)

  - 

  (235)

-  GBM

  231,890 

  12,788 

  67

  - 

  244,745 

  (48)

  (53)

  (3)

  - 

  (104)

-  Corporate Centre

  133

  - 

  - 

  - 

  133

  - 

  - 

  - 

  - 

  - 

Financial guarantees

  24,932 

  2,638 

  225

  - 

  27,795 

  (11)

  (30)

  (21)

  - 

  (62)

-  WPB

  1,295 

  15

  1

  - 

  1,311 

  - 

  (1)

  - 

  - 

  (1)

-  CMB

  6,105 

  1,606 

  126

  - 

  7,837 

  (7)

  (16)

  (17)

  - 

  (40)

-  GBM

  17,531 

  1,017 

  98

  - 

  18,646 

  (4)

  (13)

  (4)

  - 

  (21)

-  Corporate Centre

  1

  - 

  - 

  - 

  1

  - 

  - 

  - 

  - 

  - 

Total nominal amount off-balance sheet at

31 Dec 2021

  619,405 

  35,027 

  1,000 

  - 

  655,432 

  (176)

  (204)

  (61)

  - 

  (441)

WPB

  143,373 

  718

  - 

  35

  144,126 

  (20)

  (7)

  - 

  (5)

  (32)

CMB

  86,247 

  471

  - 

  10

  86,728 

  (11)

  (1)

  - 

  (1)

  (13)

GBM

  111,473 

  526

  - 

  1

  112,000 

  (13)

  (2)

  - 

  - 

  (15)

Corporate Centre

  4,038 

  311

  - 

  - 

  4,349 

  (25)

  (11)

  - 

  - 

  (36)

Debt instruments measured at FVOCI at 31 Dec 2021

  345,131 

  2,026 

  - 

  46

  347,203 

  (69)

  (21)

  - 

  (6)

  (96)

 


Wholesale lending - loans and advances to customers at amortised cost by country/territory


Gross carrying amount

Allowance for ECL


Corporate and commercial

of which: real estate1

Non-bank financial institutions

Total

Corporate and commercial

of which: real estate1

Non-bank financial institutions

Total


$m

$m

$m

$m

$m

$m

$m

$m

Europe

  150,203 

  20,458 

  18,172 

  168,375 

  (2,297)

  (432)

  (96) 

  (2,393)

-  UK

  105,057 

  14,452 

  12,470 

  117,527 

  (1,450)

  (391)

  (85) 

  (1,535)

-  France

  32,009 

  4,743 

  3,737 

  35,746 

  (591)

  (42)

  (5) 

  (596)

-  Germany

  6,728 

  257 

  1,025 

  7,753 

  (100)

  - 

  (2)

  (102)

-  Switzerland

  1,194 

  716 

  441 

  1,635 

  (53)

  - 

  - 

  (53)

-  other

  5,215 

  290 

  499 

  5,714 

  (103)

  1 

  (4) 

  (107)

Asia

  265,508 

  78,749 

  35,014 

  300,522 

  (3,563)

  (1,096)

  (49) 

  (3,612)

-  Hong Kong

  161,966 

  60,728 

  19,204 

  181,170 

  (1,871)

  (971)

  (13) 

  (1,884)

-  Australia

  9,516 

  2,534 

  1,022 

  10,538 

  (99)

  (1)

  - 

  (99)

-  India

  8,958 

  1,761 

  4,877 

  13,835 

  (78)

  (26)

  (3) 

  (81)

-  Indonesia

  3,546 

  87 

  207 

  3,753 

  (231)

  (1)

  - 

  (231)

-  mainland China

  34,239 

  6,488 

  7,959 

  42,198 

  (264)

  (72)

  (30) 

  (294)

-  Malaysia

  6,405 

  1,575 

  187 

  6,592 

  (130)

  (12)

  - 

  (130)

-  Singapore

  16,870 

  4,112 

  542 

  17,412 

  (781)

  (6)

  - 

  (781)

-  Taiwan

  6,129 

  - 

  118 

  6,247 

  - 

  - 

  - 

  - 

-  other

  17,879 

  1,464 

  898 

  18,777 

  (109)

  (7)

  (3) 

  (112)

Middle East and North Africa (excluding Saudi Arabia)

  23,347 

  1,531 

  354 

  23,701 

  (977)

  (139)

  (4) 

  (981)

-  Egypt

  1,794 

  81 

  126 

  1,920 

  (173)

  (9)

  (1) 

  (174)

-  UAE

  13,985 

  1,334 

  214 

  14,199 

  (625)

  (128)

  - 

  (625)

-  other

  7,568 

  116 

  14 

  7,582 

  (179)

  (2)

  (3) 

  (182)

North America

  58,239 

  14,057 

  11,801 

  70,040 

  (380)

  (114)

  (22) 

  (402)

-  US

  30,050 

  5,985 

  9,854 

  39,904 

  (221)

  (78)

  (9) 

  (230)

-  Canada

  27,784 

  7,981 

  1,767 

  29,551 

  (140)

  (28)

  (3) 

  (143)

-  other

  405 

  91 

  180 

  585 

  (19)

  (8)

  (10) 

  (29)

Latin America

  12,269 

  1,384 

  602 

  12,871 

  (467)

  (118)

  (1) 

  (468)

-  Mexico

  9,742 

  1,381 

  571 

  10,313 

  (425)

  (118)

  (1) 

  (426)

-  other

  2,527 

  3 

  31 

  2,558 

  (42)

  - 

  - 

  (42)

At 30 Jun 2022

  509,566 

  116,179 

  65,943 

  575,509 

  (7,684)

  (1,899)

  (172) 

  (7,856)

 

Europe

  163,341 

  23,137 

  17,818 

  181,159 

  (2,770) 

  (546)

  (41)

  (2,811)

-  UK

  115,386 

  16,233 

  11,306 

  126,692 

  (1,855) 

  (489)

  (32)

  (1,887)

-  France

  34,488 

  5,520 

  4,391 

  38,879 

  (654) 

  (47)

  (2)

  (656)

-  Germany

  6,746 

  306

  987

  7,733 

  (120) 

  - 

  (3)

  (123)

-  Switzerland

  1,188 

  731

  688

  1,876 

  (8) 

  - 

  - 

  (8)

-  other

  5,533 

  347

  446

  5,979 

  (133) 

  (10)

  (4)

  (137)

Asia

  263,821 

  81,453 

  36,321 

  300,142 

  (3,297) 

  (731)

  (44)

  (3,341)

-  Hong Kong

  162,684 

  62,792 

  20,182 

  182,866 

  (1,585) 

  (624)

  (7)

  (1,592)

-  Australia

  9,937 

  2,596 

  717

  10,654 

  (108) 

  (3)

  - 

  (108)

-  India

  8,221 

  1,786 

  4,003 

  12,224 

  (84) 

  (29)

  (8)

  (92)

-  Indonesia

  3,436 

  86

  226

  3,662 

  (246) 

  (2)

  (1)

  (247)

-  mainland China

  33,555 

  6,811 

  9,359 

  42,914 

  (198) 

  (41)

  (28)

  (226)

-  Malaysia

  7,229 

  1,741 

  197

  7,426 

  (172) 

  (21)

  - 

  (172)

-  Singapore

  16,401 

  4,158 

  782

  17,183 

  (792) 

  (5)

  - 

  (792)

-  Taiwan

  6,291 

  31

  47

  6,338 

  - 

  - 

  - 

  - 

-  other

  16,067 

  1,452 

  808

  16,875 

  (112) 

  (6)

  - 

  (112)

Middle East and North Africa (excluding

Saudi Arabia)

  21,963 

  1,555 

  376

  22,339 

  (1,207) 

  (158)

  (3)

  (1,210)

-  Egypt

  1,788 

  69

  152

  1,940 

  (161) 

  (7)

  - 

  (161)

-  UAE

  12,942 

  1,370 

  190

  13,132 

  (811) 

  (149)

  - 

  (811)

-  other

  7,233 

  116

  34

  7,267 

  (235) 

  (2)

  (3)

  (238)

North America

  52,577 

  13,639 

  10,197 

  62,774 

  (427) 

  (87)

  (18)

  (445)

-  US

  27,002 

  5,895 

  8,511 

  35,513 

  (207) 

  (64)

  (1)

  (208)

-  Canada

  25,048 

  7,650 

  1,546 

  26,594 

  (198) 

  (15)

  (6)

  (204)

-  other

  527

  94

  140

  667

  (22) 

  (8)

  (11)

  (33)

Latin America

  11,837 

  1,476 

  643

  12,480 

  (503) 

  (122)

  (4)

  (507)

-  Mexico

  9,561 

  1,475 

  618

  10,179 

  (452) 

  (122)

  (4)

  (456)

-  other

  2,276 

  1

  25

  2,301 

  (51) 

  - 

  - 

  (51)

At 31 Dec 2021

  513,539 

  121,260 

  65,355 

  578,894 

  (8,204) 

  (1,644)

  (110)

  (8,314)

1  Real estate lending within this disclosure corresponds solely to the industry of the borrower.

Personal lending - loans and advances to customers at amortised cost by country/territory


Gross carrying amount

Allowance for ECL


First lien residential mortgages

Other personal

of which: credit cards

Total

First lien residential mortgages

Other personal

of which: credit cards

Total


$m

$m

$m

$m

$m

$m

$m

$m

Europe

  158,799 

  45,323 

  7,897 

  204,122 

  (251) 

  (929) 

  (431)

  (1,180) 

-  UK

  152,508 

  17,614 

  7,546 

  170,122 

  (196) 

  (820) 

  (428)

  (1,016) 

-  France1

  2,710 

  21,286 

  318 

  23,996 

  (34) 

  (79) 

  (2)

  (113) 

-  Germany

  - 

  269 

  - 

  269 

  - 

  - 

  - 

  - 

-  Switzerland

  1,208 

  5,309 

  - 

  6,517 

  - 

  (21) 

  - 

  (21) 

-  other

  2,373 

  845 

  33 

  3,218 

  (21) 

  (9) 

  (1)

  (30) 

Asia

  150,221 

  46,127 

  10,421 

  196,348 

  (55) 

  (657) 

  (407)

  (712) 

-  Hong Kong

  98,877 

  32,959 

  7,392 

  131,836 

  (1) 

  (343) 

  (234)

  (344) 

-  Australia

  22,143 

  466 

  397 

  22,609 

  (5) 

  (25) 

  (23)

  (30) 

-  India

  1,049 

  595 

  174 

  1,644 

  (6) 

  (24) 

  (16)

  (30) 

-  Indonesia

  77 

  266 

  138 

  343 

  (1)

  (13) 

  (9)

  (14) 

-  mainland China

  10,055 

  1,037 

  459 

  11,092 

  (4) 

  (70) 

  (60)

  (74) 

-  Malaysia

  2,327 

  2,442 

  767 

  4,769 

  (34) 

  (106) 

  (27)

  (140) 

-  Singapore

  7,542 

  6,372 

  362 

  13,914 

  - 

  (38) 

  (13)

  (38) 

-  Taiwan

  5,463 

  1,133 

  234 

  6,596 

  - 

  (17) 

  (4)

  (17) 

-  other

  2,688 

  857 

  498 

  3,545 

  (4) 

  (21) 

  (21)

  (25) 

Middle East and North Africa (excluding Saudi Arabia)

  2,430 

  3,350 

  736 

  5,780 

  (23) 

  (127) 

  (53)

  (150) 

-  Egypt

  - 

  357 

  91 

  357 

  - 

  (3) 

  (1)

  (3) 

-  UAE

  2,079 

  1,350 

  419 

  3,429 

  (15) 

  (82) 

  (41)

  (97) 

-  other

  351 

  1,643 

  226 

  1,994 

  (8) 

  (42) 

  (11)

  (50) 

North America

  43,666 

  2,979 

  556 

  46,645 

  (128) 

  (80) 

  (51)

  (208) 

-  US

  16,488 

  714 

  214 

  17,202 

  (7) 

  (48) 

  (36)

  (55) 

-  Canada

  26,098 

  2,102 

  301 

  28,200 

  (32) 

  (27) 

  (10)

  (59) 

-  other

  1,080 

  163 

  41 

  1,243 

  (89) 

  (5) 

  (5)

  (94) 

Latin America

  5,588 

  5,138 

  1,748 

  10,726 

  (116) 

  (552) 

  (184)

  (668) 

-  Mexico

  5,387 

  4,352 

  1,364 

  9,739 

  (116) 

  (516) 

  (168)

  (632) 

-  other

  201 

  786 

  384 

  987 

  - 

  (36) 

  (16)

  (36) 

At 30 Jun 2022

  360,704 

  102,917 

  21,358 

  463,621 

  (573) 

  (2,345) 

  (1,126)

  (2,918) 

 

Europe

  170,818 

  49,253 

  8,624 

  220,071 

  (329)

  (1,006)

  (437)

  (1,335)

-  UK

  163,549 

  19,154 

  8,213 

  182,703 

  (223)

  (823)

  (434)

  (1,046)

-  France1

  3,124 

  22,908 

  366

  26,032 

  (38)

  (91)

  (3)

  (129)

-  Germany

  - 

  282

  - 

  282

  - 

  - 

  - 

  - 

-  Switzerland

  1,367 

  6,615 

  - 

  7,982 

  - 

  (75)

  - 

  (75)

-  other

  2,778 

  294

  45

  3,072 

  (68)

  (17)

  - 

  (85)

Asia

  149,709 

  46,781 

  11,413 

  196,490 

  (59)

  (706)

  (428)

  (765)

-  Hong Kong

  98,019 

  32,996 

  8,154 

  131,015 

  (1)

  (338)

  (217)

  (339)

-  Australia

  21,149 

  504

  427

  21,653 

  (5)

  (33)

  (32)

  (38)

-  India

  981

  543

  181

  1,524 

  (10)

  (30)

  (20)

  (40)

-  Indonesia

  76

  272

  147

  348

  (1)

  (20)

  (14)

  (21)

-  mainland China

  10,525 

  1,103 

  563

  11,628 

  (4)

  (72)

  (66)

  (76)

-  Malaysia

  2,532 

  2,657 

  791

  5,189 

  (33)

  (122)

  (34)

  (155)

-  Singapore

  7,811 

  6,649 

  367

  14,460 

  - 

  (40)

  (13)

  (40)

-  Taiwan

  5,672 

  1,188 

  271

  6,860 

  - 

  (17)

  (5)

  (17)

-  other

  2,944 

  869

  512

  3,813 

  (5)

  (34)

  (27)

  (39)

Middle East and North Africa (excluding Saudi Arabia)

  2,262 

  3,157 

  761

  5,419 

  (26)

  (146)

  (60)

  (172)

-  Egypt

  - 

  368

  98

  368

  - 

  (3)

  (1)

  (3)

-  UAE

  1,924 

  1,232 

  417

  3,156 

  (18)

  (88)

  (39)

  (106)

-  other

  338

  1,557 

  246

  1,895 

  (8)

  (55)

  (20)

  (63)

North America

  43,529 

  3,091 

  555

  46,620 

  (141)

  (87)

  (47)

  (228)

-  US

  16,642 

  799

  232

  17,441 

  (12)

  (53)

  (36)

  (65)

-  Canada

  25,773 

  2,123 

  284

  27,896 

  (33)

  (27)

  (8)

  (60)

-  other

  1,114 

  169

  39

  1,283 

  (96)

  (7)

  (3)

  (103)

Latin America

  5,050 

  4,687 

  1,505 

  9,737 

  (120)

  (483)

  (163)

  (603)

-  Mexico

  4,882 

  4,006 

  1,172 

  8,888 

  (119)

  (450)

  (148)

  (569)

-  other

  168

  681

  333

  849

  (1)

  (33)

  (15)

  (34)

At 31 Dec 2021

  371,368 

  106,969 

  22,858 

  478,337 

  (675)

  (2,428)

  (1,135)

  (3,103)

1  Included in other personal lending as at 30 June 2022 is $18,726m (31 December 2021: $19,972m) guaranteed by Crédit Logement.



Treasury risk


Page

Overview

89

Treasury risk management

89

Capital risk in the first half of 2022

91

Liquidity and funding risk in the first half of 2022

94

Sources of funding

95

Interest rate risk in the banking book in the first half of 2022

96

Overview

Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, together with the financial risks arising from the provision of pensions and other post-employment benefits to staff and their dependants. Treasury risk also includes the risk to our earnings or capital due to non-trading book foreign exchange exposures and changes in market interest rates.

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

Approach and policy

Our objective in the management of treasury risk is to maintain appropriate levels of capital, liquidity, funding, foreign exchange and market risk to support our business strategy, and meet our regulatory and stress testing-related requirements.

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

Our policy is underpinned by our risk management framework, our internal capital adequacy assessment process ('ICAAP') and our internal liquidity adequacy assessment process ('ILAAP'). The risk framework incorporates a number of measures aligned to our assessment of risks for both internal and regulatory purposes. These risks include credit, market, operational, pensions, non-trading book foreign exchange risk, and interest rate risk in the banking book.

A summary of our current policies and practices regarding the management of treasury risk is set out on pages 189 to 191 of the Annual Report and Accounts 2021.

Treasury risk management

Key developments in the first half of 2022

Our CET1 position fell from 15.8% at 31 December 2021 to 13.6% at 30 June 2022, as a result of a $16.8bn reduction in CET1 capital and a $13.4bn increase in risk-weighted assets ('RWAs').

During the periods of high market volatility in the first half of 2022, we enhanced the monitoring and forecasting of our capital positions.

The mark-to-market movement in financial instruments that impacted our capital ratio arose from the portfolio of high-quality liquid assets ('HQLA') held by our Markets Treasury business as economic hedges of net interest income. This portfolio is largely accounted for at fair value through other comprehensive income ('FVOCI'), together with any derivative hedges held to offset the duration risk of the assets. During 1H22, we took steps to reduce the duration risk of this portfolio to reduce the capital impact from higher interest rates. The impact of this risk reduction reduced the hold-to-collect-and-sell stressed value at risk ('VaR') exposure from $3.63bn at the end of 2021 to $2.34bn at the end of 1H22. For further details of the calculation of this exposure and the use of this metric in our interest rate risk management framework, see page 91.

Our portfolio of hold-to-collect-and-sell assets forms a material part of our liquid asset buffer, and the duration risk of the portfolio acts as a hedge to our structural interest rate risk. We have recently approved a new hold-to-collect business model, which is currently being implemented at legal entity level, and certain new purchases of securities will be booked under this model. In future, this portfolio of assets will also form a more material part of our structural interest rate hedging. This will allow more flexibility in managing the market risk of the current hold-to-collect-and-sell portfolio to optimise returns from market movements while still safeguarding the Group's capital and future earnings.

All of the Group's material operating entities were above regulatory minimum levels of capital, liquidity and funding at 30 June 2022. The Group and all entities had significant surplus liquidity, and maintained heightened liquidity coverage ratios ('LCR') throughout the first half of 2022.

There have been no material capital or liquidity direct impacts from the inflationary pressures and increased uncertainty on the forward economic outlook exacerbated by the Russia-Ukraine war, although we continue to monitor developments closely.

We continued to improve global consistency and control standards across a number of our processes. We are keeping the Prudential Regulation Authority ('PRA') and other relevant regulators informed of adverse findings from external and internal reviews.

We continued to build our recovery and resolution capabilities in line with the Group's preferred resolution strategy to meet requirements from the Bank of England ('BoE') under its Resolvability Assessment Framework ('RAF'). We met our compliance deadline of 1 January 2022 to develop RAF capabilities. We publicly disclosed a summary of our preparedness for resolution on 10 June 2022, thereby completing the first RAF cycle. We will continue to enhance our capabilities during the second half of 2022 in discussion with the BoE.

For quantitative disclosures on capital ratios, own funds and RWAs, see pages 91 to 93. For quantitative disclosures on liquidity and funding metrics, see pages 94 to 95. For quantitative disclosures on interest rate risk in the banking book, see pages 96 to 97.

Capital, liquidity and funding risk management processes

Assessment and risk appetite

Our capital management policy is underpinned by a global capital management framework and our ICAAP. The framework incorporates key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities ('MREL'), leverage ratio and double leverage. The ICAAP is an assessment of the Group's capital position, outlining both regulatory and internal capital resources and requirements resulting from HSBC's business model, strategy, risk profile and management, performance and planning, risks to capital, and the implications of stress testing. Our assessment of capital adequacy is driven by an assessment of risks. These risks include credit, market, operational, pensions, insurance, structural foreign exchange, interest rate risk in the banking book and Group risk driven by credit concentration risk in HSBC UK. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach. The Group's ICAAP supports the determination of the consolidated capital risk appetite and target ratios, as well as enables the assessment and determination of capital requirements by regulators. Subsidiaries prepare ICAAPs in line with global guidance, while considering their local regulatory regimes to determine their own risk appetites and ratios.

 

HSBC Holdings is the provider of equity capital and MREL-eligible debt to its subsidiaries, and also provides them with non-equity capital where necessary. These investments are funded by HSBC Holdings' own regulatory capital and MREL-eligible debt.

HSBC Holdings seeks to maintain a prudent balance between the composition of its capital and its investments in subsidiaries.

As a matter of long-standing policy, the holding company retains a substantial holdings capital buffer comprising HQLA, which at 30 June 2022 was in excess of $18bn.

We aim to ensure that management has oversight of our liquidity and funding risks at Group and entity level through robust governance, in line with our risk management framework. We manage liquidity and funding risk at an operating entity level, in accordance with globally consistent policies, procedures and reporting standards. This ensures that obligations can be met in a timely manner, in the jurisdiction where they fall due.

Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through the ILAAP, which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively in each major entity. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the Group's policies and controls.

Planning and performance

Capital and RWA plans form part of the annual financial resource plan that is approved by the Board. Capital and RWA forecasts are submitted to the Group Executive Committee on a monthly basis, and capital and RWAs are monitored and managed against the plan. The responsibility for global capital allocation principles rests with the Group Chief Financial Officer, supported by the Group Capital Management Meeting. This is a specialist forum addressing capital management, reporting into the HSBC Holdings Asset and Liability Management Committee ('ALCO').

Through our internal governance processes, we seek to strengthen discipline over our investment and capital allocation decisions, and to ensure that returns on investment meet management's objectives. Our strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified, and in order to meet their regulatory and economic capital needs. We evaluate and manage business returns by using a return on average tangible equity measure.

Funding and liquidity plans form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the LCR together with an internal liquidity metric. In addition, we use a wider set of measures to manage an appropriate funding and liquidity profile, including net stable funding ratio ('NSFR'), legal entity depositor concentration limits, intra-day liquidity, forward-looking funding assessments and other key measures.

Risks to capital and liquidity

Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs, capital and/or liquidity position. Downside and Upside scenarios are assessed against our management objectives, and mitigating actions are assigned as necessary. We closely monitor future regulatory changes, and continue to evaluate the impact of these upon our capital and liquidity requirements, particularly those related to the UK's implementation of the outstanding measures to be implemented from the Basel III reforms ('Basel 3.1').

 


Regulatory developments

Our capital adequacy ratios have been affected by regulatory developments in 2022, including changes to internal-ratings based ('IRB') modelling requirements and the UK's implementation of the revisions to the Capital Requirements Regulation and Directive ('CRR II').

Future changes to our ratios will occur with the implementation of Basel 3.1, with the PRA expected to consult on the UK's implementation in the last quarter of 2022, with an effective date of 1 January 2025. We currently do not foresee a material net impact on our ratios from the initial implementation. The RWA output floor under Basel 3.1 will be subject to a five-year transitional provision. Any impact from the output floor would be towards the end of the transition period.

Disposal of retail banking business in France

In relation to the sale of our retail banking business in France, we expect a reduction in the Group's CET1 ratio of approximately 30 basis points ('bps') in the second half of 2022 when classified as held for sale. This impact will be partly offset by the reduction in RWAs upon the estimated completion in 2023.

Regulatory reporting processes and controls

The quality of regulatory reporting remains a key priority for management and regulators. We are progressing with a comprehensive programme to strengthen our processes, improve consistency, and enhance controls on various aspects of regulatory reporting. We have commissioned a number of independent external reviews, some at the request of our regulators, including one on our credit risk RWA reporting process, which is currently ongoing. These reviews have so far resulted in higher RWAs and changes to LCR through improvements in reporting accuracy. There may be further impacts on some of our regulatory ratios, such as the CET1 and LCR.

Stress testing and recovery and resolution planning

The Group uses stress testing to evaluate the robustness of plans and risk portfolios, and to meet the stress testing requirements set by supervisors. Stress testing also informs the ICAAP and ILAAP, and supports recovery planning in many jurisdictions. It is an important output used to evaluate how much capital and liquidity the Group requires in setting risk appetite for capital and liquidity risk. It is also used to re-evaluate business plans where analysis shows capital, liquidity and/or returns do not meet their target.

In addition to a range of internal stress tests, we are subject to supervisory stress testing in many jurisdictions. These include the programmes of the Bank of England, the US Federal Reserve Board, the European Banking Authority, the European Central Bank and the Hong Kong Monetary Authority, as well as stress tests undertaken in other jurisdictions. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital requirements through the ICAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators feed into the setting of regulatory minimum ratios and buffers.

The Group and subsidiaries have established recovery plans, which set out potential options management could take in a range of stress scenarios that could result in a breach of our capital or liquidity buffers. All entities monitor internal and external triggers that could threaten their capital, liquidity or funding positions. Entities have established recovery plans providing detailed actions that management would consider taking in a stress scenario should their positions deteriorate and threaten to breach risk appetite and regulatory minimum levels. This is to help ensure that our capital and liquidity position can be recovered even in an extreme stress event.

Recovery and resolution plans form part of the integral framework safeguarding the Group's financial stability. The Group is committed to developing its recovery and resolution capabilities further, including in relation to the BoE's Resolvability Assessment Framework.

Measurement of interest rate risk in the banking book processes

Assessment and risk appetite

Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities, specifically loans, deposits and financial instruments that are not held for trading intent or in order to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to the Markets Treasury business. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Markets Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate.

The Global Treasury function uses a number of measures to monitor and control interest rate risk in the banking book, including:

net interest income sensitivity;

economic value of equity sensitivity; and

hold-to-collect-and-sell stressed value at risk.

Net interest income sensitivity

A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected net interest income ('NII') under varying interest rate scenarios (i.e. simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level, where entities calculate both one-year and five-year NII sensitivities across a range of interest rate scenarios.

NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure. The exception to this is where the size of the balances or repricing is deemed interest rate sensitive, for example, early prepayment of mortgages. These sensitivity calculations do not incorporate actions that would be taken by Markets Treasury or in the business that originates the risk to mitigate the effect of interest rate movements.

The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable.

Economic value of equity sensitivity

Economic value of equity ('EVE') represents the present value of the future banking book cash flows that could be distributed to equity holders under a managed run-off scenario. This equates to the current book value of equity plus the present value of future NII in this scenario. EVE can be used to assess the economic capital required to support interest rate risk in the banking book. An EVE sensitivity represents the expected movement in EVE due to pre-specified interest rate shocks, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivities as a percentage of capital resources.

Hold-to-collect-and-sell stressed value at risk

Hold-to-collect-and-sell stressed value at risk ('VaR') is a quantification of the potential losses to a 99% confidence level of the portfolio of high-quality liquid assets held under a hold-to-collect-and-and-sell business model in the Markets Treasury business. The portfolio is accounted for at fair value through other comprehensive income together with the derivatives held in

designated hedging relationships with these securities. The mark-to-market of this portfolio therefore has an impact on CET1.


Stressed VaR is quantified based on the worst losses over a one-year period, using a historical time series stretching back to the beginning of 2007, and the assumed holding period is 60 days. At the end of June 2022, the stressed VaR of the portfolio is $2.34bn (December 2021: $3.63bn). The decrease is primarily due to actions taken to reduce the overall duration risk of the portfolio in order to reduce the potential capital impact from further increases in interest rates.

 

Capital risk in the first half of 2022

Capital overview

Capital adequacy metrics


At


30 Jun

31 Dec


2022

2021

Risk-weighted assets ('RWAs') ($bn)



Credit risk

  697.1 

  680.6 

Counterparty credit risk

  42.8 

  35.9 

Market risk

  27.4 

  32.9 

Operational risk

  84.4 

  88.9 

Total RWAs

  851.7 

  838.3 

Capital on a transitional basis ($bn)



Common equity tier 1 capital

  115.8 

  132.6 

Tier 1 capital

  137.5 

  156.3 

Total capital

  158.5 

  177.8 

Capital ratios on a transitional basis (%)



Common equity tier 1 ratio

  13.6 

  15.8 

Tier 1 ratio

  16.1 

  18.6 

Total capital ratio

  18.6 

  21.2 

Capital on an end point basis ($bn)



Common equity tier 1 capital

  115.8 

  132.6 

Tier 1 capital

  137.5 

  155.0 

Total capital

  150.6 

  167.5 

Capital ratios on an end point basis (%)



Common equity tier 1 ratio

  13.6 

  15.8 

Tier 1 ratio

  16.1 

  18.5 

Total capital ratio

  17.7 

  20.0 

Liquidity coverage ratio ('LCR')



Total high-quality liquid assets ($bn)

  656.6 

  717.0 

Total net cash outflow ($bn)

  491.7 

  518.0 

LCR ratio (%)

  134 

  138




Capital figures and ratios in the table above are calculated in accordance with the revisions to the Capital Requirements Regulation and Directive, as implemented ('CRR II'). The table presents them under the transitional arrangements in CRR II for capital instruments and after their expiry, known as the end point. The end point figures in the table above include the benefit of the regulatory transitional arrangements in CRR II for IFRS 9, which are more fully described in 'Regulatory transitional arrangements for IFRS 9 'Financial Instruments'' on page 94.

Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those subsequently submitted in regulatory filings. Where differences are significant, we will restate comparatives.


Own funds

Own funds disclosure



At



30 Jun

31 Dec



2022

2021

Ref*


$m

$m

6

Common equity tier 1 capital before regulatory adjustments

  154,654 

  162,918 

28

Total regulatory adjustments to common equity tier 1

  (38,874)

  (30,353)

29

Common equity tier 1 capital

  115,780 

  132,565 

36

Additional tier 1 capital before regulatory adjustments

  21,794 

  23,787 

43

Total regulatory adjustments to additional tier 1 capital

  (60)

  (60)

44

Additional tier 1 capital

  21,734 

  23,727 

45

Tier 1 capital

  137,514 

  156,292 

51

Tier 2 capital before regulatory adjustments

  22,278 

  23,018 

57

Total regulatory adjustments to tier 2 capital

  (1,273)

  (1,524)

58

Tier 2 capital

  21,005 

  21,494 

59

Total capital

  158,519 

  177,786 

60

Total risk-weighted assets

  851,743 

  838,263 


Capital ratios

%

%

61

Common equity tier 1 ratio

  13.6 

  15.8 

62

Tier 1 ratio

  16.1 

  18.6 

63

Total capital ratio

  18.6 

  21.2 

*  These are references to lines prescribed in the Pillar 3 'Own funds disclosure' template.


At 30 June 2022, our common equity tier 1 ('CET1') capital ratio decreased to 13.6% from 15.8% at 31 December 2021, reflecting a decrease in CET1 capital of $16.8bn and an increase in RWAs of $13.4bn. The key drivers of the overall fall in our CET1 ratio were:

a 0.8 percentage point impact from the UK's implementation of new regulatory requirements, which decreased CET1 capital by $3.5bn and increased RWAs by $27.1bn. The changes included new internal ratings-based ('IRB') modelling requirements, the deduction of intangible software assets from CET1 capital, and the new standardised approach to counterparty credit risk exposure;

a 0.6 percentage point impact from the $4.8bn post-tax fall in the fair value of securities classified as held to collect and sell;

a 0.3 percentage point impact from other underlying RWA movements (apart from foreign exchange). These are described in the following section; and

a 0.1 percentage point impact from foreign exchange translation movements, which reduced CET1 capital by $5.7bn and RWAs by $34bn.

These movements were accompanied by a 0.5 percentage point fall in the CET1 ratio due to a $3.6bn increase in threshold deductions from CET1 capital, mainly as a result of these changes and increased deductions for significant investments in financial sector entities (including the acquisition of AXA Singapore).

Profits less an associated increase in deductions for deferred tax, dividends accrued and paid, the share buy-back announced in February 2022, and other movements, added $0.8bn to CET1 capital and 0.1 percentage point to the CET1 ratio.

At 30 June 2022, our Pillar 2A requirement, in accordance with the PRA's Individual Capital Requirement based on a point-in-time assessment, was equivalent to 2.6% of RWAs, of which 1.5% was met by CET1 capital. Throughout the first half of 2022, we complied with the PRA's regulatory capital adequacy requirements.


Risk-weighted assets

RWAs by global business


WPB

CMB

GBM

Corporate

Centre

Total


$bn

$bn

$bn

$bn

$bn

Credit risk

  152.6 

  315.7 

  153.3 

  75.5 

  697.1 

Counterparty credit risk

  1.0 

  1.0 

  39.5 

  1.3 

  42.8 

Market risk

  1.3 

  0.6 

  19.4 

  6.1 

  27.4 

Operational risk

  31.2 

  24.6 

  28.9 

  (0.3)

  84.4 

At 30 Jun 2022

  186.1 

  341.9 

  241.1 

  82.6 

  851.7 

At 31 Dec 2021

  178.3 

  332.9 

  236.2 

  90.9 

  838.3 







 

RWAs by geographical region


Europe

Asia

MENA

North

America

Latin

America

Total


$bn

$bn

$bn

$bn

$bn

$bn

Credit risk

  192.7 

  330.9 

  51.1 

  92.4 

  30.0 

  697.1 

Counterparty credit risk

  22.2 

  12.2 

  1.8 

  4.8 

  1.8 

  42.8 

Market risk1

  22.1 

  25.9 

  2.2 

  3.6 

  1.0 

  27.4 

Operational risk

  20.6 

  41.7 

  5.8 

  11.2 

  5.1 

  84.4 

At 30 Jun 2022

  257.6 

  410.7 

  60.9 

  112.0 

  37.9 

  851.7 

At 31 Dec 2021

  261.1 

  396.3 

  60.2 

  110.4 

  35.9 

  838.3 

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

RWA movement by global businesses by key driver


Credit risk, counterparty credit risk and operational risk




WPB

CMB

GBM

Corporate Centre

Market risk

Total RWAs


$bn

$bn

$bn

$bn

$bn

$bn

RWAs at 1 Jan 2022

  176.6 

  332.0 

  215.9 

  80.9 

  32.9 

  838.3 

Asset size

  5.4 

  15.6 

  7.3 

  (2.9)

  (5.5)

  19.9 

Asset quality

  0.3 

  (0.9)

  0.8 

  0.4 

  - 

  0.6 

Model updates

  0.1 

  1.3 

  (1.2)

  (0.1)

  - 

  0.1 

Methodology and policy

  12.3 

  10.1 

  6.8 

  (0.9)

  - 

  28.3 

Acquisitions and disposals

  (1.5)

  - 

  - 

  - 

  - 

  (1.5)

Foreign exchange movements

  (8.4)

  (16.8)

  (7.9)

  (0.9)

  - 

  (34.0)

Total RWA movement

  8.2 

  9.3 

  5.8 

  (4.4)

  (5.5)

  13.4 

RWAs at 30 Jun 2022

  184.8 

  341.3 

  221.7 

  76.5 

  27.4 

  851.7 

 

RWA movement by geographical region by key driver


Credit risk, counterparty credit risk and operational risk




Europe

Asia

MENA

North

America

Latin

America

Market risk

Total RWAs


$bn

$bn

$bn

$bn

$bn

$bn

$bn

RWAs at 1 Jan 2022

  236.5 

  371.0 

  57.9 

  105.1 

  34.9 

  32.9 

  838.3 

Asset size

  6.6 

  8.6 

  1.6 

  5.6 

  3.0 

  (5.5)

  19.9 

Asset quality

  (1.8)

  4.5 

  (0.2)

  (1.6)

  (0.3)

  - 

  0.6 

Model updates

  (1.5)

  1.8 

  - 

  (0.2)

  - 

  - 

  0.1 

Methodology and policy

  15.5 

  9.5 

  1.4 

  1.6 

  0.3 

  - 

  28.3 

Acquisitions and disposals

Foreign exchange movements

  (19.8)

  (10.6)

  (2.0)

  (0.6)

  (1.0)

  - 

  (34.0)

Total RWA movement

  (1.0)

  13.8 

  0.8 

  3.3 

  2.0 

  (5.5)

  13.4 

RWAs at 30 Jun 2022

  235.5 

  384.8 

  58.7 

  108.4 

  36.9 

  27.4 

  851.7 


  RWAs rose by $13.4bn during the first half of the year, net of a decrease of $34.0bn due to foreign currency translation differences. This increase was mainly due to regulatory change and lending growth.

Asset size

CMB and GBM RWAs increased by $22.9bn as a result of corporate loan growth across all our major regions.

Retail term lending and mortgage growth in Asia and the UK led to most of the $5.4bn increase in WPB RWAs.

The $5.5bn fall in market risk RWAs reflected lower structural foreign exchange risk following additional hedging, and reduced value at risk and stressed value at risk.

The $2.9bn fall in Corporate Centre RWAs was mainly due to a decrease in the value of recognised significant investments in financial sector entities.

Asset quality

A $4.5bn RWA increase in Asia was mostly due to credit migration, primarily in CMB and WPB. A further $1.4bn increase, largely in GBM, was due to downgrades on exposures in Russia. This was partly offset by reductions related to improved ratings in Europe and favourable portfolio mix changes in North America, primarily in CMB.

Model updates

A revised commercial property loan model was the main cause of a $1.8bn increase of RWAs in Asia. This was mostly offset by reductions from the introduction of a GBM counterparty credit risk equity model, primarily in Europe.

Acquisitions and disposals

Our exit from mass market retail banking in the US through the sale of retail branches reduced our RWAs by $1.5bn.

Methodology and policy

Regulatory changes caused an RWA increase of $27.1bn. These included revised IRB modelling requirements and the UK's implementation of the CRR II rules.

These increases were partly offset by reductions due to risk parameter refinements in GBM, mostly in Europe and Asia, and the reversal of the beneficial changes to the treatment of software assets in Corporate Centre.

Reporting process improvements and RWA saves

Reporting process improvements and our RWA reduction programme contributed to the movements above.

Reporting process improvements led to an RWA increase of around $12bn during 2022 (2021: $6bn increase). This included an $8bn rise in RWAs from data enhancements related to small and medium-sized enterprises.

At 30 June 2022, our cumulative RWA saves as part of our reduction programme were $114bn. This included accelerated reductions of $9.6bn in 4Q19.


Leverage ratio1


At


30 Jun

31 Dec


2022

2021


$bn

$bn

Tier 1 capital

  137.5 

  155.0 

Total leverage ratio exposure

  2,484.2 

  2,962.7 


%

%

Leverage ratio

  5.5 

  5.2 

1  The CRR II regulatory transitional arrangements for IFRS 9 are applied in the leverage ratio calculation. This calculation is in line with the UK leverage rules that were implemented on 1 January 2022, and excludes central bank claims. Comparatives for 2021 are reported based on the disclosure rules in force at that time, and include claims on central banks.


Our leverage ratio was 5.5% at 30 June 2022, up from 5.2% at 31 December 2021. The improvement was primarily due to the exclusion of central bank claims following the implementation of the UK leverage ratio framework of 1 January 2022. This was partly offset by a decline in tier 1 capital.

At 30 June 2022, our UK minimum leverage ratio requirement of 3.25% was supplemented by a leverage ratio buffer of 0.8%, made up of an additional leverage ratio buffer of 0.7% and a countercyclical leverage ratio buffer of 0.1%.

These additional buffers translated into capital values of $17.4bn and $2.5bn respectively. We exceeded these leverage requirements.

Regulatory transitional arrangements for IFRS 9 'Financial Instruments'

We have adopted the regulatory transitional arrangements in CRR II for IFRS 9, including paragraph four of article 473a. Our capital and ratios are presented under these arrangements throughout the 'Capital adequacy metrics' table on page 91, including in the end point figures. Without their application, our CET1 ratio would be 13.6%.

The IFRS 9 regulatory transitional arrangements allow banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use.

The impact is defined as:

• the increase in loan loss allowances on day one of IFRS 9 adoption; and

• any subsequent increase in ECL in the non-credit-impaired book thereafter.

Any add-back must be tax affected and accompanied by a recalculation of deferred tax, exposure and RWAs. The impact is calculated separately for portfolios using the standardised ('STD') and internal ratings-based ('IRB') approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.

The EU's CRR 'Quick Fix' relief package increased the 2022 scalar from 25% to 75% the relief that banks may take for loan loss allowances recognised since 1 January 2020 on the non-credit-impaired book.


In the current period, the add-back to CET1 capital amounted to $0.5bn under the STD approach with a tax impact of $0.1bn. At 31 December 2021, the add-back to the capital base under the STD approach was $1.0bn with a tax impact of $0.2bn.

Regulatory disclosures

Pillar 3 disclosure requirements

Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 30 June 2022 is expected to be published on or around 9 August 2022 at www.hsbc.com/investors.

Liquidity and funding risk in the first half of 2022

Liquidity metrics

At 30 June 2022, all of the Group's material operating entities were above regulatory minimum levels.

Each entity maintains sufficient unencumbered liquid assets to comply with local and regulatory requirements. The liquidity value of these liquid assets for each entity is shown in the following table along with the individual LCR levels on a PRA basis. This basis may differ from local LCR measures due to differences in the way different regulators have implemented the Basel III standards.

Each entity maintains a sufficient stable funding profile and it is assessed by using the net stable funding ratio ('NSFR') or other appropriate metrics.

In addition to regulatory metrics, HSBC uses a wide set of measures to manage its liquidity and funding profile.

The Group liquidity and funding position at 30 June 2022 is analysed in the following sections.


Operating entities' liquidity


At 30 Jun 2022


LCR

HQLA

Net outflows

NSFR5


%

$bn

$bn

%

HSBC UK Bank plc (ring-fenced bank)1

  228 

  138 

  61 

  165 

HSBC Bank plc (non-ring-fenced bank)2

  157 

  138 

  88 

  120 

The Hongkong and Shanghai Banking Corporation - Hong Kong branch3

  160 

  138 

  86 

  132 

The Hongkong and Shanghai Banking Corporation - Singapore branch3

  168 

  12 

  7 

  133 

Hang Seng Bank

  207 

  48 

  23 

  155 

HSBC Bank China

  153 

  20 

  13 

  133 

HSBC Bank USA

  104 

  85 

  81 

  132 

HSBC Continental Europe4

  145 

  50 

  35 

  126 

HSBC Middle East - UAE branch

  248 

  11 

  4 

  156 

HSBC Canada4

  121 

  19 

  16 

  121 

HSBC Mexico

  132 

  7 

  5 

  127 






 


At 31 Dec 2021

HSBC UK Bank plc (ring-fenced bank)1

  241

  163

  68

  178

HSBC Bank plc (non-ring-fenced bank)2

  150

  135

  90

  107

The Hongkong and Shanghai Banking Corporation - Hong Kong branch3

  154

  145

  94

  135

The Hongkong and Shanghai Banking Corporation - Singapore branch3

  179

  18

  10

  145

Hang Seng Bank

  169

  43

  25

  144

HSBC Bank China

  141

  17

  12

  130

HSBC Bank USA

  119

  98

  83

  140

HSBC Continental Europe4,

  145

  54

  37

  128

HSBC Middle East - UAE branch

  210

  12

  6

  146

HSBC Canada4

  119

  22

  18

  123

HSBC Mexico

  200

  9

  5

  141

1  HSBC UK Bank plc refers to the HSBC UK liquidity group, which comprises four legal entities: HSBC UK Bank plc, Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA.

2  HSBC Bank plc includes overseas branches and special purpose entities consolidated by HSBC for financial statements purposes.

3  The Hongkong and Shanghai Banking Corporation - Hong Kong branch and The Hongkong and Shanghai Banking Corporation - Singapore branch represent the material activities of The Hongkong and Shanghai Banking Corporation. Each branch is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.

4  HSBC Continental Europe and HSBC Canada represent the consolidated banking operations of the Group in France and Canada, respectively. HSBC Continental Europe and HSBC Canada are each managed as single distinct operating entities for liquidity purposes.

5  The calculation of NSFR on 30 June 2022 is based on the PRA rulebook, and the NSFR ratio at 31 December 2021 was following the Capital Requirements Regulation (CRR) regulation (EU) No 575/2013 requirement.


At 30 June 2022, all of the Group's principal operating entities were well above regulatory minimum levels.

The most significant movements in 2022 are explained below:

HSBC UK Bank plc retained a strong liquidity position, although its liquidity ratio reduced to 228%, mainly due to growth in retail mortgages, commercial lending and the impact of foreign exchange movements.

HSBC Bank plc's liquidity ratio increased to 157%, mainly due to growth in customer deposits.

The Hongkong and Shanghai Banking Corporation - Hong Kong branch's liquidity ratio increased to 160%, mainly due to a decline in non-HQLA trading assets, offset by growth in customer loans.

Hang Seng Bank's liquidity ratio increased to 207%, mainly reflecting growth in its commercial surplus.

The Hongkong and Shanghai Banking Corporation - Singapore branch retained a strong liquidity position, although its liquidity ratio decreased to 168%, mainly due to a lower commercial surplus.

HSBC Bank China's liquidity ratio increased to 153%, mainly due to growth in customer deposits and loans.

HSBC Bank USA's liquidity ratio decreased to 104%, mainly due to a decrease in deposits as a result of the exit of domestic mass market retail.

HSBC Continental Europe maintained a strong liquidity position, with the liquidity ratio remaining largely unchanged.

HSBC Bank Middle East - UAE branch retained a strong liquidity position, with a liquidity ratio of 248%.

HSBC Canada maintained a strong liquidity position, with its liquidity ratio increasing to 121%.

Consolidated liquidity metrics

Liquidity coverage ratio

At 30 June 2022, the total HQLA held at entity level amounted to $802bn (31 December 2021: $880bn), a decrease of $78bn. The reduction is mainly due to foreign exchange movements. Since 2021, HSBC has maintained a revised approach to the application of the requirements under the EC Delegated Act and the PRA rulebook. This approach was used to assess the limitations in the fungibility of entity liquidity around the Group and resulted in an adjustment of $145bn to LCR HQLA and $8bn to LCR inflows. The change in methodology was designed to better incorporate local regulatory restrictions on the transferability of liquidity.

As a consequence, the Group LCR was 134% at 30 June 2022 (31 December 2021:138%). The $145bn of HQLA and $8bn of inflows remain available to cover liquidity risk in relevant entities.


At


30 Jun

30 Jun

31 Dec


2022

2021

2021


$bn

$bn

$bn

High-quality liquid assets (in entities)

802

844

880

EC Delegated Act/PRA rulebook adjustment 1

(153)

(189)

(172)

Group LCR HQLA

657

659

717

Net outflows

492

494

518

Liquidity coverage ratio

  134% 

  134% 

  138% 

1  This includes adjustments made to high-quality liquidity assets and inflows in entities to reflect liquidity transfer restrictions.

Liquid assets

After the $145bn adjustment, the Group LCR HQLA of $657bn (31 December 2021: $717bn) was held in a range of asset classes and currencies. Of these, 95% were eligible as level 1 (31 December 2021: 97%).


The following tables reflect the composition of the liquidity pool by asset type and currency at 30 June 2022:

Liquidity pool by asset type


Liquidity pool

Cash

Level 11

Level 21


$bn

$bn

$bn

$bn

Cash and balance at central bank

  350 

  350 

  - 

  - 

Central and local government bonds

  289 

  - 

  263 

  26 

Regional government and public sector entities

  2 

  - 

  2 

  - 

International organisation and multilateral development banks

  10 

  - 

  10 

  - 

Covered bonds

  4 

  - 

  1 

  3 

Other

  2 

  - 

  1 

  1 

Total at 30 Jun 2022

  657 

  350 

  277 

  30 

Total at 31 Dec 2021

717

390

302

25

1  As defined in EU and PRA regulation, level 1 assets means 'assets of extremely high liquidity and credit quality', and level 2 assets means 'assets of high liquidity and credit quality'.

Liquidity pool by currency


$

£

HK$

Other

Total


$bn

$bn

$bn

$bn

$bn

$bn

Liquidity pool at 30 Jun 2022

  156 

  196 

  102 

  54 

  149 

  657 

Liquidity pool at 31 Dec 2021

189

211

104

56

157

717

 

Sources of funding

Our primary sources of funding are customer current accounts and savings deposits payable on demand or at short notice. We issue secured and unsecured wholesale securities to supplement customer deposits, meet regulatory obligations and to change the currency mix, maturity profile or location of our liabilities.

The following 'Funding sources' and 'Funding uses' tables provide a view of how our consolidated balance sheet is funded. In practice, all the principal operating entities are required to manage liquidity and funding risk on a stand-alone basis.

The tables analyse our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented as a net balancing source or deployment of funds.

In 1H22, the level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets.

Funding sources


At


30 Jun

31 Dec


2022

2021


$m

$m

Customer accounts

  1,651,301 

  1,710,574 

Deposits by banks

  105,275 

  101,152 

Repurchase agreements - non-trading

  129,707 

  126,670 

Debt securities in issue

  87,944 

  78,557 

Cash collateral, margin and settlement accounts

  112,180 

  65,452 

Liabilities of disposal groups held for sale

  3,907 

  9,005 

Subordinated liabilities

  20,711 

  20,487 

Financial liabilities designated at fair value

  126,006 

  145,502 

Liabilities under insurance contracts

  113,130 

  112,745 

Trading liabilities

  80,569 

  84,904 

-  repos

  8,257 

  11,004 

-  stock lending

  2,658 

  2,332 

-  other trading liabilities

  69,654 

  71,568 

Total equity

  196,690 

  206,777 

Other balance sheet liabilities

  358,000 

  296,114 


  2,985,420 

  2,957,939 

 

Funding uses


At


30 Jun

31 Dec


2022

2021


$m

$m

Loans and advances to customers

  1,028,356 

  1,045,814 

Loans and advances to banks

  96,429 

  83,136 

Reverse repurchase agreements - non-trading

  244,451 

  241,648 

Cash collateral, margin and settlement accounts

  102,500 

  59,884 

Assets held for sale

  3,989 

  3,411 

Trading assets

  217,350 

  248,842 

-  reverse repos

  15,884 

  14,994 

-  stock borrowing

  11,664 

  8,082 

-  other trading assets

  189,802 

  225,766 

Financial investments

  430,796 

  446,274 

Cash and balances with central banks

  363,608 

  403,018 

Other balance sheet assets

  497,941 

  425,912 


  2,985,420 

  2,957,939 

 

Interest rate risk in the banking book in the first half of 2022

Net interest income sensitivity

The following tables set out the assessed impact to a hypothetical base case projection of our net interest income ('NII'), excluding pensions, insurance and investment in subsidiaries, under the following scenarios:

an immediate shock of 25 basis points ('bps') to the current market-implied path of interest rates across all currencies on 1 July 2022 (effects over one year and five years); and

an immediate shock of 100bps to the current market-implied path of interest rates across all currencies on 1 July 2022 (effects over one year and five years).

Calculations of the NII base case are based on certain assumptions: a static balance sheet, no management actions from the Markets Treasury business and a simplified 50% pass-through assumption applied for material entities as described below.

The calculations also incorporate the effects of interest rate behaviouralisation, hypothetical managed rate product pricing assumptions and customer behaviour, including prepayment of mortgages under the specific interest rate scenarios. The scenarios represent interest rate shocks to the current market implied path of rates.

The NII sensitivity analysis performed in the case of a down-shock does not include floors to market rates. It only includes floors on wholesale customer assets and liabilities when those are embedded in the terms of the contract. Floors have been maintained for retail deposits and loans to customers where this is contractual or where negative rates would not be applied.

As market and policy rates move, the degree to which these changes are passed on to customers will vary based on a number of factors, including the absolute level of market rates, regulatory and contractual frameworks, and competitive dynamics in particular markets. To aid comparability between markets, we have simplified the basis of preparation for our disclosure, and have used a 50% pass-through assumption for major entities on certain interest bearing deposits. The pass-through rates on our key deposit products to date are low and assumed to increase over time. Our pass-through asset assumptions are largely in line with our contractual agreements or established market practice, which typically results in a significant portion of interest rate changes being passed on.

Immediate interest rate rises of 25bps and 100bps would increase projected NII for the 12 months to 30 June 2023 by $1,158m and $4,697m, respectively. Conversely, falls of 25bps and 100bps would decrease projected NII for the 12 months to 30 June 2023 by $1,214m and $5,954m, respectively.

The sensitivity of NII for 12 months decreased by $717m in the plus 100bps parallel shock and increased by $192m in the minus 100bps parallel shock, comparing 30 June 2022 with 31 December 2021.

The decrease in the sensitivity of NII for 12 months and five years in the up-shock scenarios is attributed to multiple drivers, including a change in balance sheet composition, currency depreciation (mainly in pound sterling and euros) and pricing caps on Hong Kong lending products. Given that implied forward rates have reached contractual pricing caps, the whole Hong Kong dollar mortgage portfolio is expected to change its benchmark from HIBOR to HSBC's Hong Kong Dollar Best Lending Rate over the projection horizon.

As implied forward rates have increased, the impact from pricing floors has reduced on assets, and the sensitivity of NII for 12 months has increased in the minus 100bps parallel shock in US dollars and Hong Kong dollars. In pound sterling and euros, the sensitivity has decreased in the minus 100bps parallel shock, driven primarily by lower balance sheet size due to currency depreciation.

The NII sensitivities for 12 months in the minus 25bps parallel shock and for five years in both down-shock scenarios decreased at 30 June 2022 when compared with 31 December 2021. This was driven by the changes in the forecasted yield curves and changes in balance sheet composition and pricing.









NII sensitivity to an instantaneous change in yield curves (12 months) - 1 year NII sensitivity by currency




Currency





US dollar

HK dollar

Sterling

Euro

Other

Total


$m

$m

$m

$m

$m

$m

Change in Jul 2022 to Jun 2023 (based on balance sheet at

30 Jun 2022)







+25bps

  109 

  183 

  356 

  111 

  399 

  1,158 

-25bps

  (120)

  (188)

  (393)

  (104)

  (409)

  (1,214)

+100bps

  433 

  720 

  1,513 

  460 

  1,571 

  4,697 

-100bps

  (881)

  (1,254)

  (1,677)

  (419)

  (1,723)

  (5,954)

Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 Dec 2021)







+25bps

  125

  265

  420

  106

  393

  1,309 

-25bps

  (257) 

  (536) 

  (594) 

  (170) 

  (395) 

  (1,952) 

+100bps

  458

  1,054 

  1,739 

  632

  1,531 

  5,414 

-100bps

  (466) 

  (1,020) 

  (2,070) 

  (595) 

  (1,610) 

  (5,761) 

 

NII sensitivity to an instantaneous change in yield curves (5 years) - cumulative 5 years NII sensitivity by currency




Currency





US dollar

HK dollar

Sterling

Euro

Other

Total


$m

$m

$m

$m

$m

$m

Change in Jul 2022 to Jun 2023 (based on balance sheet at

30 Jun 2022)







+25bps

  850 

  1,011 

  3,002 

  622 

  2,519 

  8,004 

-25bps

  (896)

  (1,017)

  (3,081)

  (606)

  (2,585)

  (8,185)

+100bps

  3,354 

  4,028 

  12,128 

  2,561 

  9,952 

  32,023 

-100bps

  (5,623)

  (6,617)

  (12,483)

  (2,556)

  (10,776)

  (38,055)

Change in Jan 2022 to Dec 2022 (based on balance sheet at 31 Dec 2021)







+25bps

  1,026 

  1,410 

  3,333 

  827

  2,510 

  9,106 

-25bps

  (1,701) 

  (2,887) 

  (4,216) 

  (997) 

  (2,600) 

  (12,401) 

+100bps

  3,922 

  4,870 

  13,389 

  3,919 

  9,841 

  35,941 

-100bps

  (5,060) 

  (7,052) 

  (14,893) 

  (3,571) 

  (10,481) 

  (41,057) 

 

NII sensitivity to an instantaneous change in yield curves (5 years) - NII sensitivity by years


Year 1

Year 2

Year 3

Year 4

Year 5

Total


$m

$m

$m

$m

$m

$m

Change in Jul 2022 to Jun 2027 (based on balance sheet at

30 Jun 2022)







+25bps

  1,158 

  1,491 

  1,675 

  1,799 

  1,881 

  8,004 

-25bps

  (1,214)

  (1,516)

  (1,708)

  (1,830)

  (1,917)

  (8,185)

+100bps

  4,697 

  5,943 

  6,690 

  7,171 

  7,522 

  32,023 

-100bps

  (5,954)

  (7,128)

  (7,875)

  (8,371)

  (8,727)

  (38,055)

Change in Jan 2022 to Dec 2026 (based on balance sheet at 31 Dec 2021)







+25bps

  1,309 

  1,758 

  1,896 

  2,002 

  2,141 

  9,106 

-25bps

  (1,952) 

  (2,324) 

  (2,593) 

  (2,687) 

  (2,845) 

  (12,401) 

+100bps

  5,414 

  6,738 

  7,492 

  7,937 

  8,360 

  35,941 

-100bps

  (5,761) 

  (7,664) 

  (8,675) 

  (9,354) 

  (9,603) 

  (41,057) 








 


 

Market risk

Overview

Market risk is the risk of adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads. Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios.

Market risk in the first half of 2022

There were no material changes to the policies and practices for the management of market risk in the first half of 2022.

A summary of our current policies and practices for the management of market risk is set out in 'Market risk management' on page 203 of the Annual Report and Accounts 2021.

Concerns over high inflation and recession risks increased during 1H22, against the backdrop of the Russia-Ukraine war and continued Covid-19 pandemic restrictions in Asia. High energy, commodity and food prices led to major central banks tightening their monetary policies at a much faster pace than anticipated at the start of the year, in order to counter rising inflation. Bond markets sold off sharply, although the rapid rise in bond yields to multi-year highs was moderated by the prospect that the cycle of rising global interest rates could prove to be short lived. In the second quarter, recession risks and tightening liquidity conditions led to losses in most global equity market sectors. Foreign exchange markets were dominated by a strengthening of the US dollar due to global geopolitical instability and the relatively fast


pace of monetary tightening by the US Federal Reserve Board. Negative investor sentiment in credit markets led to credit spreads in investment-grade and high-yield debt benchmarks reaching their widest levels since the start of the Covid-19 pandemic.

We continued to manage market risk prudently in the first half of 2022. Sensitivity exposures and VaR remained within appetite as the business pursued its core market-making activity in support of our customers. Market risk was managed using a complementary set of risk measures and limits, including stress and scenario analysis.

Trading portfolios

Value at risk of the trading portfolios

Trading VaR was predominantly generated by Markets and Securities Services. Market-making activities in the Global Debt Markets and Foreign Exchange businesses continued to be the key drivers of trading VaR at the end of 1H22. Trading VaR peaked in May 2022 but at 30 June 2022 was lower than at 31 December 2021. The moderate reduction in trading VaR during the first half of the year was due mainly to lower loss contributions from the Foreign Exchange business and greater offsetting gains from the Equity business. These were partly offset by larger losses from dividend risks and interest rates volatility that were captured within the risk not in VaR ('RNIV') framework. The RNIV framework covers risks from exposures in our trading book that are not fully captured by the VaR model. The VaR-based RNIVs are included within the metrics for each asset class.

 


The Group trading VaR for the half-year is shown in the table below.


Trading VaR, 99% 1 day


Foreign exchange

and commodity

Interest

rate

Equity

Credit

spread

Portfolio

diversification1

Total


$m

$m

$m

$m

$m

$m

Half-year to 30 Jun 2022

  11.3 

  26.8 

  14.6 

  16.1 

  (32.5)

  36.3 

Average

  14.2 

  26.3 

  14.5 

  19.1 

  (35.1)

  39.1 

Maximum

  29.2 

  33.9 

  19.2 

  27.9 


  55.6 

Minimum

  5.7 

  20.3 

  11.5 

  12.0 


  29.1 








Half-year to 30 Jun 2021

  13.6 

  33.5 

  15.8 

  18.3 

  (42.5) 

  38.7 

Average

  15.0 

  33.4 

  16.5 

  18.1 

  (46.2) 

  36.8 

Maximum

  31.8 

  50.4 

  24.3 

  29.4 


  48.2 

Minimum

  6.9 

  18.5 

  12.1 

  12.2 


  31.1 








Half-year to 31 Dec 2021

  9.1 

  25.9 

  15.4 

  24.8 

  (36.5) 

  38.8 

Average

  10.9 

  34.2 

  16.8 

  20.2 

  (44.8) 

  37.3 

Maximum

  20.0 

  51.7 

  22.7 

  26.9 


  53.8 

Minimum

  6.7 

  25.2 

  13.3 

  15.6 


  27.7 

1  When VaR is calculated at a portfolio level, natural offsets in risk can occur when compared with aggregating VaR at the asset class level. This difference is called portfolio diversification. The asset class VaR maxima and minima reported in the table occurred on different dates within the reporting period. For this reason, we do not report an implied portfolio diversification measure between the maximum (minimum) asset class VaR measures and the maximum (minimum) total VaR measures in this table.


The table below shows trading VaR at a 99% confidence level compared with trading VaR at a 95% confidence level at 30 June 2022.


This comparison facilitates the benchmarking of the trading VaR, which can be stated at different confidence levels, with financial institution peers. The 95% VaR is unaudited.


Comparison of trading VaR, 99% 1 day vs trading VaR, 95% 1 day





Trading VaR, 99% 1 day

Trading VaR, 95% 1 day


$m

$m

Half-year to 30 Jun 2022

  36.3 

  21.1 

Average

  39.1 

  22.1 

Maximum

  55.6 

  28.4 

Minimum

  29.1 

  17.5 




Half-year to 30 Jun 2021

  38.7 

  26.4 

Average

  36.8 

  24.4 

Maximum

  48.2 

  30.0 

Minimum

  31.1 

  19.6 




Half-year to 31 Dec 2021

  38.8 

  21.6 

Average

  37.3 

  23.7 

Maximum

  53.8 

  28.6 

Minimum

  27.7 

  18.9 


Back-testing

In 1H22, the Group experienced three loss exceptions against hypothetical profit and loss and no exceptions against actual profit and loss.

The hypothetical profit and loss reflects the profit and loss that would be realised if positions were held constant from the end of one trading day to the end of the next. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore necessarily indicative of the actual performance of the business.

The loss back-testing exception against hypothetical profit and loss comprised:

a loss back-testing exception in February, mainly attributable to the effect of tightening credit spreads in benchmark credit indices, sovereigns and corporates on long credit risk protection positions;

a loss exception in March, which was driven primarily by the impact of tightening credit spreads in benchmark credit indices on long credit risk protection, as well as losses from the effect of the US dollar weakening on foreign exchange positions; and

a loss back-testing exception in June, driven mainly by the impact of tightening credit spreads in benchmark credit indices

on long credit risk protection, movements in interest rates, as well as the effect of a temporary one-day US dollar weakening on foreign exchange positions.  

There is an elevated probability of experiencing further VaR back-testing exceptions in the second half of the year, under the current volatile market environment and the shift in interest rate regime.

Non-trading portfolios

Value at risk of the non-trading portfolios

Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments measured at fair value through other comprehensive income, debt instruments measured at amortised cost, and exposures arising from our insurance operations.

The VaR for non-trading activity at 30 June 2022 decreased materially compared with 31 December 2021 to $120.8m from $220.4m. This was primarily due to a reduction in interest rate risk as market interest rates increased, as well as the removal of Covid-19-related scenarios from the two-year VaR calculation window.

Non-trading VaR includes non-trading financial instruments held in portfolios managed by Markets Treasury. The management of interest rate risk in the banking book is described further in 'Net interest income sensitivity' on page 91.


The Group non-trading VaR for the half-year is shown in the following table.


Non-trading VaR, 99% 1 day


Interest rate

Credit spread

Portfolio diversification1

Total


$m

$m

$m

$m

Half-year to 30 Jun 2022

  113.3 

  53.3 

  (45.7)

  120.8 

Average

  148.4 

  61.9 

  (36.7)

  173.7 

Maximum

  225.5 

  84.7 


  265.3 

Minimum

  109.2 

  50.3 


  119.1 






Half-year to 30 Jun 2021

  193.7 

  73.8 

  (18.0) 

  249.5 

Average

  201.1 

  80.5 

  (31.2) 

  250.5 

Maximum

  248.7 

  99.3 


  298.8 

Minimum

  163.3 

  64.7 


  193.5 






Half-year to 31 Dec 2021

  216.4 

  70.3 

  (66.3) 

  220.4 

Average

  200.3 

  73.4 

  (49.1) 

  224.6 

Maximum

  235.7 

  79.9 


  268.4 

Minimum

  179.3 

  68.7 


  194.6 

1  When VaR is calculated at a portfolio level, natural offsets in risk can occur when compared with aggregating VaR at the asset class level. This difference is called portfolio diversification. The asset class VaR maxima and minima reported in the table occurred on different dates within the reporting period. For this reason, we do not report an implied portfolio diversification measure between the maximum (minimum) asset class VaR measures and the maximum (minimum) total VaR measures in this table.


Non-trading VaR excludes equity risk on securities held at fair value, non-trading book foreign exchange risk and the risks managed in HSBC Holdings arising from long-term capital issuance.

HSBC's management of market risk in the non-trading book is described in the Treasury risk section on page 89.

For disclosure of the stressed value at risk of the Markets Treasury hold-to-collect-and-sell portfolio, see page 91. This portfolio of financial instruments is measured at fair value through other comprehensive income and is included in the non-trading VaR above. The stressed VaR quantitative disclosure provides the discrete potential capital impact from this portfolio.

Insurance manufacturing operations risk

Overview

The key risks for our insurance manufacturing operations are market risks, in particular interest rate, growth asset and credit risks, as well as insurance underwriting and operational risks. Liquidity risk, while significant for other parts of the Group, is relatively minor for our insurance operations.

Insurance manufacturing operations risk in the first half of 2022

There have been no material changes to the policies and practices for the management of risks arising in our insurance operations described in the Annual Report and Accounts 2021.

A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture is provided on page 210 of the Annual Report and Accounts 2021.
The risk profile of our insurance manufacturing operations are assessed in the Group's ICAAP based on their financial capacity to support the risks to which they are exposed.

Capital adequacy is assessed on both the Group's economic capital basis, and the relevant local insurance regulatory basis. The Group's economic capital basis is largely aligned to European Solvency II regulations, other than in Hong Kong where it is based on the emerging Hong Kong risk-based capital regulations. Risk appetite buffers are set to ensure that the operations are able to remain solvent on both bases, allowing for business-as-usual volatility and extreme but plausible stress events. In addition, the insurance manufacturing operations manage their market, liquidity, credit, underwriting and non-financial risk exposures to Board-approved risk appetite limits.

Equity values, which are a key risk driver for the financial strength of the insurance operations, in general fell during the first half of the year. This was partly offset by the impact of rising interest rates. Overall, at 30 June 2022, the majority of the capital and financial risk positions of our insurance operations were within risk appetite. However, the impact of changes in market factors, relative to the economic assumptions in place at the start of the year, had a negative impact on reported profit before tax of $680m (1H21: $413m positive). We continue to monitor these risks closely in the current volatile economic climate.

The following table shows the composition of assets and liabilities by contract type.

 


Balance sheet of insurance manufacturing subsidiaries by type of contract


With

DPF

Unit-

linked

Other

contracts1

Shareholder assets

and liabilities

Total


$m

$m

$m

$m

$m

Financial assets

  89,110 

  8,294 

  20,912 

  8,435 

  126,751 

-  trading assets

  - 

  - 

  - 

  - 

  - 

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

  29,688 

  8,073 

  3,752 

  1,395 

  42,908 

-  derivatives

  210 

  - 

  21 

  5 

  236 

-  financial investments - at amortised cost

  44,257 

  57 

  15,683 

  4,410 

  64,407 

-  financial investments - at fair value through other comprehensive income

  8,992 

  - 

  432 

  1,750 

  11,174 

-  other financial assets2

  5,963 

  164 

  1,024 

  875 

  8,026 

Reinsurance assets

  2,270 

  67 

  1,841 

  3 

  4,181 

PVIF3

  - 

  - 

  - 

  10,437 

  10,437 

Other assets and investment properties

  2,498 

  4 

  224 

  964 

  3,690 

Total assets at June 2022

  93,878 

  8,365 

  22,977 

  19,839 

  145,059 

Liabilities under investment contracts designated at fair value

  - 

  2,177 

  3,407 

  - 

  5,584 

Liabilities under insurance contracts

  90,169 

  5,558 

  17,468 

  - 

  113,195 

Deferred tax4

  223 

  5 

  17 

  1,616 

  1,861 

Other liabilities

  - 

  - 

  - 

  7,113 

  7,113 

Total liabilities

  90,392 

  7,740 

  20,892 

  8,729 

  127,753 

Total equity

  - 

  - 

  - 

  17,306 

  17,306 

Total liabilities and equity at June 2022

  90,392 

  7,740 

  20,892 

  26,035 

  145,059 







Financial assets

  88,969 

  8,881 

  19,856 

  9,951 

  127,657 

-  trading assets

  - 

  - 

  - 

  - 

  - 

-  financial assets designated at fair value

  30,669 

  8,605 

  3,581 

  1,827 

  44,682 

-  derivatives

  129

  1

  15

  2

  147

-  financial investments at amortised cost

  42,001 

  61

  14,622 

  4,909 

  61,593 

-  financial investments at fair value through other comprehensive income

  10,858 

  - 

  459

  1,951 

  13,268 

-  other financial assets2

  5,312 

  214

  1,179 

  1,262 

  7,967 

Reinsurance assets

  2,180 

  72

  1,666 

  3

  3,921 

PVIF3

  - 

  - 

  - 

  9,453 

  9,453 

Other assets and investment properties

  2,558 

  1

  206

  820

  3,585 

Total assets at December 2021

  93,707 

  8,954 

  21,728 

  20,227 

  144,616 

Liabilities under investment contracts designated at fair value

  - 

  2,297 

  3,641 

  - 

  5,938 

Liabilities under insurance contracts

  89,492 

  6,558 

  16,757 

  - 

  112,807 

Deferred tax4

  179

  9

  24

  1,418 

  1,630 

Other liabilities

  - 

  - 

  - 

  7,269 

  7,269 

Total liabilities

  89,671 

  8,864 

  20,422 

  8,687 

  127,644 

Total equity

  - 

  - 

  - 

  16,972 

  16,972 

Total liabilities and equity at December 2021

  89,671 

  8,864 

  20,422 

  25,659 

  144,616 

1  Other contracts includes term assurance, credit life insurance, universal life insurance and certain investment contracts not included in the 'Unit-linked' or 'With DPF' columns.

2  Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.

3  Present value of in-force long-term insurance business.

4  Deferred tax includes the deferred tax liabilities arising on recognition of PVIF.


Market risk

Description and exposure

Market risk is the risk of changes in market factors affecting HSBC's capital or profit. Market factors include interest rates, equity and growth assets, and foreign exchange rates.

Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with discretionary participating features ('DPF'). These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns.

DPF products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance.

In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by HSBC. Amounts are held against the cost of such guarantees, calculated by stochastic modelling.

The cost of such guarantees is accounted for as a deduction from the present value of in-force ('PVIF') asset, unless the cost of guarantees is already explicitly allowed for within the insurance contract liabilities.

For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains, as fees earned are related to the market value of the linked assets.

Sensitivities

The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the period and the total equity of our insurance manufacturing subsidiaries.

Where appropriate, the effects of the sensitivity tests on profit after tax and equity incorporate the impact of the stress on the PVIF.

Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the profit and total equity and the risk factors is non-linear, particularly in a low interest-rate environment.

Therefore, the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not necessarily symmetrical on the upside and downside. The sensitivities are stated before allowance for management actions, which may mitigate the effect of changes in the market environment.

The sensitivities presented allow for adverse changes in policyholder behaviour that may arise in response to changes in market rates. The differences between the impacts on profit after


tax and equity are driven by the changes in value of the bonds measured at fair value through other comprehensive income, which are only accounted for in equity.


Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk factors



At 30 Jun 2022

At 31 Dec 2021


Effect on

profit after tax

Effect on

total equity

Effect on

profit after tax

Effect on

total equity


$m

$m

$m

$m

+100 basis point parallel shift in yield curves

  (136)

  (270)

  (2)

  (142)

-100 basis point parallel shift in yield curves

  (47)

  92 

  (154)

  (9)

10% increase in equity prices

  373 

  373 

  369

  369

10% decrease in equity prices

  (388)

  (388)

  (377)

  (377)

10% increase in US dollar exchange rate compared with all currencies

  126 

  126 

  80

  80

10% decrease in US dollar exchange rate compared with all currencies

  (127)

  (127)

  (80)

  (80)


 


Directors' responsibility statement

The Directors1 are required to prepare the condensed consolidated financial statements on a going concern basis unless it is not appropriate. They are satisfied that the Group has the resources to continue in business for the foreseeable future and that the financial statements continue to be prepared on a going concern basis.

The Directors confirm that to the best of their knowledge:

the financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the UK, IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board ('IASB') and IAS 34 'Interim Financial Reporting' as adopted by the European Union, and the Disclosure Guidance and Transparency Rules ('DTR') sourcebook of the UK's Financial Conduct Authority;

this Interim Report 2022 gives a true, fair, balanced and understandable view of the assets, liabilities, financial position and profit or loss of the Company; and

this Interim Report 2022 includes a fair review of the information required by:

-  DTR 4.2.7R, being an indication of: important events that have occurred during the first six months of the financial year ending 31 December 2022 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

-  DTR 4.2.8R, being: related party transactions that have taken place in the first six months of the financial year ending 31 December 2022, which have materially affected the financial position or performance of HSBC during that period; and any changes in the related parties transactions described in the Annual Report and Accounts 2021 that could materially affect the financial position or performance of HSBC during the first six months of the financial year ending 31 December 2022.

 

 

 

 

 

On behalf of the Board

Mark E Tucker

Group Chairman

1 August 2022

 

 

 

 

 

 

 

 

 

 

 

 

 


 1   Mark Tucker*, Geraldine Buckingham, Rachel Duan, Carolyn Julie Fairbairn, James Anthony Forese, Steven Guggenheimer,
José Antonio Meade Kuribreña, Eileen K Murray, David Nish, Noel Quinn, Ewen Stevenson and Jackson Tai
.

*Non-executive Group Chairman Independent non-executive Director 

 

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